UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

(Mark One)

☒

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

☒~~QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934~~

For the quarterly period March 31, ~~2020~~2021

☐

TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

☐~~TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934~~

For the transition period from to

Commission File Number: 000-52598

KENTUCKY BANCSHARES, INC.

(Exact name of registrant as specified in its charter)


Kentucky		61-0993464
(State or other jurisdiction of		(I.R.S. Employer Identification No.)
incorporation or organization)


P.O. Box 157, Paris, Kentucky		40362-0157
(Address of principal executive offices)		(Zip Code)

Registrant’s telephone number, including area code: ~~(859)~~ (859) 987-1795

Securities registered pursuant to Section 12(b) of the Act:


Title of each class	Trading Symbol(s)	Name of each exchange on which registered
Common Stock	KTYB	OTCQX

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☒ No ☐

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (Section 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes ☒ No ☐

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

Large accelerated filer ☐	Accelerated filer ☒☐

Non-accelerated filer ☐☒	Smaller reporting company ☒


	Emerging growth company ☐

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No ☒

Number of shares of Common Stock outstanding as of April 30, ~~2020: 5,946,998.~~2021: 5,960,696.

Table of Contents

KENTUCKY BANCSHARES, INC.

Table of Contents

Part I - Financial Information

Item 1. Financial Statements

Consolidated Balance Sheets	3

Consolidated Statements of Income	4

Consolidated Statements of Comprehensive Income (Loss)	5

Consolidated Statement of Changes in Stockholders’ Equity	6

Consolidated Statement of Cash Flows	7

Notes to Consolidated Financial Statements	8

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations	35

Item 4. Controls and Procedures	45 46

Part II - Other Information	46

Item 1. Legal Proceedings	46

Item 1 A. Risk Factors	46 47

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds	48 47

Item 6. Exhibits	49 48

Signatures	49 48

Table of Contents

Item 1 – Financial Statements

KENTUCKY BANCSHARES, INC.

CONSOLIDATED BALANCE SHEETS (unaudited)

(Dollar amounts in thousands)

3/31/2020

12/31/2019

ASSETS

Cash and due from banks

$
37,474

$
21,922

Federal funds sold

292

260

Cash and cash equivalents

37,766

22,182

Interest bearing time deposits

2,375

2,375

Securities available for sale

247,187

265,330

Loans held for sale

4,990

2,144

Loans

778,327

744,313

Allowance for loan losses

(9,916)

(8,460)

Net loans

768,411

735,853

Federal Home Loan Bank stock

7,034

7,034

Real estate owned, net

2,110

2,148

Bank premises and equipment, net

19,999

19,429

Interest receivable

4,010

4,166

Mortgage servicing rights

1,504

1,573

Goodwill

14,001

14,001

Other intangible assets

114

136

  Bank owned life insurance

18,308

18,165

  Operating lease right of use asset

8,022

8,195

Other assets

7,547

8,059

Total assets

$
1,143,378

$
1,110,790

LIABILITIES AND STOCKHOLDERS’ EQUITY

Deposits

Non-interest bearing

$
243,073

$
235,268

Time deposits, $250,000 and over

45,741

43,345

Other interest bearing

564,403

564,040

Total deposits

853,217

842,653

Repurchase agreements

5,410

5,994

Short-term Federal Home Loan Bank advances

54,000

25,000

Long-term Federal Home Loan Bank advances

84,925

91,418

Subordinated debentures

7,217

7,217

Interest payable

1,217

1,170

Operating lease liability

8,210

8,350

Other liabilities

11,395

9,725

Total liabilities

1,025,591

991,527

Stockholders’ equity

Preferred stock, 300,000 shares authorized and unissued

—

—

Common stock, no par value; 20,000,000 shares authorized; 5,946,998 and 5,913,922 shares issued and outstanding at March 31, 2020 and December 31, 2019

21,771

21,447

Retained earnings

97,584

96,903

Accumulated other comprehensive income (loss)

(1,568)

913

Total stockholders’ equity

117,787

119,263

Total liabilities and stockholders’ equity

$
1,143,378

$
1,110,790


	3/31/2021		12/31/2020
ASSETS
Cash and due from banks	$	81,536	$	38,579
Federal funds sold		383		395
Cash and cash equivalents		81,919		38,974
Interest bearing time deposits		2,070		2,470
Securities available for sale		349,564		353,494
Loans held for sale		2,695		4,427
Loans		765,095		766,871
Allowance for loan losses		(9,460)		(9,897)
Net loans		755,635		756,974
Federal Home Loan Bank stock		7,072		7,072
Real estate owned, net		735		876
Bank premises and equipment, net		20,171		20,375
Interest receivable		4,706		5,227
Mortgage servicing rights		1,671		1,612
Goodwill		14,001		14,001
Other intangible assets		48		62
Bank owned life insurance		18,832		18,713
Operating lease right of use asset		7,564		7,670
Other assets		7,575		7,558
Total assets	$	1,274,258	$	1,239,505

LIABILITIES AND STOCKHOLDERS’ EQUITY
Deposits
Non-interest bearing	$	363,608	$	313,285
Time deposits, $250,000 and over		25,698		36,192
Other interest bearing		636,389		629,127
Total deposits		1,025,695		978,604
Repurchase agreements		8,437		9,129
Short-term Federal Home Loan Bank advances		5,500		10,500
Long-term Federal Home Loan Bank advances		84,264		86,032
Subordinated debentures		7,217		7,217
Interest payable		531		775
Operating lease liability		7,735		7,850
Other liabilities		7,671		11,056
Total liabilities		1,147,050		1,111,163

Stockholders’ equity
Preferred stock, 300,000 shares authorized and unissued		—		—
Common stock, 0 par value; 20,000,000 shares authorized; 5,961,004 and 5,946,306 shares issued and outstanding at March 31, 2021 and December 31, 2020		22,351		21,996
Retained earnings		105,644		104,319
Accumulated other comprehensive income (loss)		(787)		2,027
Total stockholders’ equity		127,208		128,342
Total liabilities and stockholders’ equity	$	1,274,258	$	1,239,505

See Accompanying Notes

Table of Contents

KENTUCKY BANCSHARES, INC.

CONSOLIDATED STATEMENTS OF INCOME (unaudited)

(Dollar amounts in thousands except per share data)

Three Months Ended

3/31/2020

3/31/2019

INTEREST INCOME:

Loans, including fees
$
9,380

$
8,800

Securities

Taxable

1,469

1,829

Tax exempt

176

333

Other

110

217

Total interest income

11,135

11,179

INTEREST EXPENSE:

Deposits

1,468

1,537

Repurchase agreements and federal funds purchased

8

24

Federal Home Loan Bank advances

582

543

Note payable

—

34

Subordinated debentures

85

102

Total interest expense

2,143

2,240

Net interest income

8,992

8,939

Provision for loan losses

1,625

125

Net interest income after provision

7,367

8,814

NON-INTEREST INCOME:

Service charges

1,289

1,194

Loan service fee income (loss), net

(83)

73

Trust department income

370

328

Gain (loss) on sale of available for sale securities, net

112

94

Gain on sale of loans

683

207

Brokerage income

127

136

Debit card interchange income

812

790

Other

252

178

Total other income

3,562

3,000

NON-INTEREST EXPENSE:

Salaries and employee benefits

4,965

4,690

Occupancy expenses

1,094

981

Legal and professional fees

245

216

Data processing

579

601

Debit card expenses

507

530

Advertising and marketing

267

234

Taxes other than payroll, property and income

337

324

Loss on limited partnership

293

159

Other

943

1,030

Total other expenses

9,230

8,765

Income before income taxes

1,699

3,049

Provision for income taxes

(52)

238

Net income
$
1,751

$
2,811

Earnings per share

Basic
$
0.30

$
0.47

Diluted

0.30

0.47


	Three Months Ended
	3/31/2021		3/31/2020
INTEREST INCOME:
Loans, including fees	$	8,338	$	9,380
Securities
Taxable		1,150		1,469
Tax exempt		306		176
Other		53		110
Total interest income		9,847		11,135
INTEREST EXPENSE:
Deposits		661		1,468
Repurchase agreements and federal funds purchased		5		8
Federal Home Loan Bank advances		426		582
Subordinated debentures		56		85
Total interest expense		1,148		2,143
Net interest income		8,699		8,992
Provision for loan losses		100		1,625
Net interest income after provision		8,599		7,367
NON-INTEREST INCOME:
Service charges		1,081		1,289
Loan service fee income (loss), net		7		(83)
Trust department income		462		370
Gain (loss) on sale of available for sale securities, net		—		112
Gain on sale of loans		1,147		683
Brokerage income		195		127
Debit card interchange income		1,010		812
Other		266		252
Total other income		4,168		3,562
NON-INTEREST EXPENSE:
Salaries and employee benefits		5,111		4,965
Occupancy expenses		993		1,094
Legal and professional fees		995		245
Data processing		665		579
Debit card expenses		500		507
Advertising and marketing		213		267
Taxes other than payroll, property and income		83		337
Loss on limited partnership		119		293
Other		1,138		943
Total other expenses		9,817		9,230
Income before income taxes		2,950		1,699
Provision for income taxes		492		(52)
Net income	$	2,458	$	1,751

Earnings per share
Basic	$	0.41	$	0.30
Diluted		0.41		0.30

See Accompanying Notes

Table of Contents

KENTUCKY BANCSHARES, INC.

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS) (unaudited)

(Dollar amounts in thousands)

Three Months Ended

3/31/2020

3/31/2019
Net income
$
1,751

$
2,811

Other comprehensive income (loss)

Unrealized gains on securities arising during the period

354

3,599
Reclassification of realized amount

(112)

(94)
Net change in unrealized gain (loss) on securities

242

3,505
Less: Tax impact

(52)

(736)
  Net of tax

190

2,769

Unrealized gains (losses) on cashflow hedges

  Unrealized holding loss

(2,671)

—

Total other comprehensive income (loss)

(2,481)

2,769

Comprehensive income (loss)
$
(730)

$
5,580


		Three Months Ended
	3/31/2021		3/31/2020

Net income	$	2,458	$	1,751

Other comprehensive income (loss)
Unrealized gains and losses on securities arising during the period		(4,771)		354
Reclassification of realized amount		—		(112)
Net change in unrealized gain (loss) on securities		(4,771)		242
Less: Tax impact		1,190		(52)
Net of tax		(3,581)		190

Unrealized gains (losses) on cashflow hedges arising during the period		907		(2,671)
Reclassification of realized amount		114		—
Net change in unrealized gain (loss) on cashflow hedges		1,021		(2,671)
Less: Tax impact		(254)		—
Net of tax		767		(2,671)

Total other comprehensive (loss)		(2,814)		(2,481)

Comprehensive loss	$	(356)	$	(730)

See Accompanying Notes

Table of Contents

KENTUCKY BANCSHARES, INC.

CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY (unaudited)

(Dollar amounts in thousands except per share data)


						Accumulated
						Other		Total
	Common Stock			Retained		Comprehensive		Stockholders’
	Shares	Amount		Earnings		Income (Loss)		Equity
Balances, December 31, 2019	5,955,242	$	21,170	$	89,101	$	(3,478)	$	106,793
Common stock issued (employee stock grants of 29,242 shares, net of 788 shares for net settlement for income taxes and director stock grants of 3,834 shares)	33,076		263		—		—		263
Stock compensation expense	—		61		—		—		61
Other comprehensive income	—		—		—		(2,481)		(2,481)
Net income	—		—		1,751		—		1,751
Dividends declared - $0.18 per share	—		—		(1,070)		—		(1,070)
Balances, March 31, 2020	5,946,998	$	21,771	$	97,584	$	(1,568)	$	117,787


Balances, December 31, 2020	5,946,306	$	21,996	$	104,319	$	2,027	$	128,342
Common stock issued (employee stock grants of 9,850 shares and director stock grants of 5,220 shares)	15,070		295		—		—		295
Shares forfeited	(372)		—		—		—		—
Stock compensation expense	—		60		—		—		60
Other comprehensive loss	—		—		—		(2,814)		(2,814)
Net income	—		—		2,458		—		2,458
Dividends declared - $0.19 per share	—		—		(1,133)		—		(1,133)
Balances, March 31, 2021	5,961,004	$	22,351	$	105,644	$	(787)	$	127,208

Accumulated


Other

Total

Common Stock

Retained

Comprehensive

Stockholders’

Shares

Amount

Earnings

Income (Loss)

Equity

Balances, December 31, 2018

5,955,242

$
21,170

$
89,101

$
(3,478)

$
106,793

Common stock issued (employee stock grants of 23,260 shares, net of 120 shares forfeited, and director stock grants of 2,824 shares)

26,084

295

—

—

295

Stock compensation expense

—

56

—

—

56

Other comprehensive income

—

—

—

2,769

2,769

Net income

—

—

2,811

—

2,811

Dividends declared - $0.17 per share

—

—

(1,015)

—

(1,015)

Balances, March 31, 2019

5,981,326

$
21,521

$
90,897

$
(709)

$
111,709

Balances, December 31, 2019

5,913,922

$
21,447

$
96,903

$
913

$
119,263

Common stock issued (employee stock grants of 29,242 shares, net of 788 shares for net settlement for income taxes and director stock grants of 3,834 shares)

33,076

263

—

—

263

Stock compensation expense

—

61

—

—

61

Other comprehensive loss

—

—

—

(2,481)

(2,481)

Net income

—

—

1,751

—

1,751

Dividends declared - $0.18 per share

—

—

(1,070)

—

(1,070)

Balances, March 31, 2020

5,946,998

$
21,771

$
97,584

$
(1,568)

$
117,787

(1) Common Stock has no0 par value; amount includes Additional Paid-in Capital

See Accompanying Notes

Table of Contents

KENTUCKY BANCSHARES, INC.

CONSOLIDATED STATEMENT OF CASH FLOWS (unaudited)

(Dollar amounts in thousands)

Three Months Ended

3/31/2020

3/31/2019
Cash Flows From Operating Activities

Net Income

$
1,751

$
2,811
Adjustments to reconcile net income to net cash provided by operating activities:

Depreciation

334

300
Amortization (accretion), net

91

(31)
Securities amortization (accretion), net

247

174
Stock based compensation expense

61

56
Provision for loan losses

1,625

125
Securities losses (gains) available for sale gains, net

(112)

(94)
Net increase in cash surrender value of bank-owned life insurance

(143)

(84)
Originations of loans held for sale

(23,496)

(8,435)
Proceeds from sale of loans

21,333

8,563
Gain on sale of loans

(683)

(207)
Write-downs of other real estate, net

38

38
Changes in:

Interest receivable

156

(27)
Other assets

1,017

664
Interest payable

47

9
Deferred taxes

(523)

5
Other liabilities

(1,296)

(3,618)
Net cash from operating activities

447

249
Cash Flows From Investing Activities

Purchases of securities available for sale

(448)

(8,022)
Proceeds from sales of securities available for sale

2,094

16,318
Proceeds from principal payments, maturities and calls securities available for sale

16,898

12,529
Net change in loans

(34,183)

(1,670)
Purchases of bank premises and equipment

(904)

(283)
Proceeds from the sale of other real estate

—

12
Net cash from (used in) investing activities

(16,543)

18,884
Cash Flows From Financing Activities:

Net change in deposits

10,564

(6,304)
Net change in repurchase agreements

(584)

(1,473)
Net change in short-term Federal Home Loan Bank advances

29,000

(200)
Proceeds from long-term Federal Home Loan Bank advances

—

5,000
Repayment of long-term Federal Home Loan Bank advances

(6,493)

(3,505)
Repayment of note payable

—

(126)
Proceeds from issuance of common stock

263

295
Dividends paid

(1,070)

(1,015)
Net cash used in financing activities

31,680

(7,328)
Net change in cash and cash equivalents

15,584

11,805
Cash and cash equivalents at beginning of period

22,182

26,101
Cash and cash equivalents at end of period

$
37,766

$
37,906
Supplemental disclosures of cash flow information Cash paid during the year for:

     Interest expense

$
2,096

$
2,231
Supplemental disclosures of non-cash investing activities

     Securities transactions in process, payable

294

—
     Real estate acquired through foreclosure


—

72


	Three Months Ended
	3/31/2021		3/31/2020
Cash Flows From Operating Activities
Net Income	$	2,458	$	1,751
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation		328		334
Amortization (accretion), net		(45)		91
Securities amortization (accretion), net		484		247
Stock based compensation expense		60		61
Provision for loan losses		100		1,625
Gain on sale of available for sale securities, net		—		(112)
Net increase in cash surrender value of bank-owned life insurance		(119)		(143)
Originations of loans held for sale		(29,221)		(23,496)
Proceeds from sale of loans		32,100		21,333
Gain on sale of loans		(1,147)		(683)
(Gain) loss on sale of other real estate		(35)		—
Write-downs of other real estate, net		12		38
Amortization of operating leases		(9)		—
Changes in:
Interest receivable		521		156
Other assets		858		1,017
Interest payable		(244)		47
Deferred taxes		60		(523)
Other liabilities		(2,363)		(1,296)
Net cash from operating activities		3,798		447
Cash Flows From Investing Activities
Net change in interest bearing time deposits		400		—
Purchases of securities available for sale		(26,782)		(448)
Proceeds from sales of securities available for sale		—		2,094
Proceeds from principal payments, maturities and calls securities available for sale		25,457		16,898
Net change in loans		1,168		(34,183)
Purchases of bank premises and equipment		(124)		(904)
Proceeds from the sale of other real estate		235		—
Net cash from (used in) investing activities		354		(16,543)
Cash Flows From Financing Activities:
Net change in deposits		47,091		10,564
Net change in repurchase agreements		(692)		(584)
Net change in short-term Federal Home Loan Bank advances		(5,000)		29,000
Repayment of long-term Federal Home Loan Bank advances		(1,768)		(6,493)
Proceeds from issuance of common stock		295		263
Dividends paid		(1,133)		(1,070)
Net cash used in financing activities		38,793		31,680
Net change in cash and cash equivalents		42,945		15,584
Cash and cash equivalents at beginning of period		38,974		22,182
Cash and cash equivalents at end of period	$	81,919	$	37,766
Supplemental disclosures of cash flow information Cash paid during the year for:
Interest expense	$	1,392	$	2,096
Supplemental disclosures of non-cash investing activities
Securities transactions in process, payable		—		294
Real estate acquired through foreclosure		71		—

See Accompanying Notes

Table of Contents

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited)

1.NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

The financial information presented as of any date other than December 31 has been prepared from the Company’s books and records without audit. The accompanying consolidated financial statements have been prepared in accordance with the instructions to Form 10-Q and Rule 10-01 of Regulation S-X. Certain financial information that is normally included in annual financial statements prepared in accordance with accounting principles generally accepted in the United States of America, but is not required for interim reporting purposes, has been condensed or omitted. There have been no significant changes to the Company’s accounting and reporting policies as disclosed in the Company’s Annual Report on Form 10-K for the year ended December 31, ~~2019.~~2020. In the opinion of management, all adjustments, consisting of normal recurring adjustments, necessary for a fair presentation of such financial statements, have been included. The results of operations for the interim periods are not necessarily indicative of the results to be expected for the full year. For further information, refer to the consolidated financial statements and footnotes thereto included in the Company's Annual Report on Form 10-K for the year ended December 31, ~~2019.~~2020.

Basis of Presentation: The consolidated financial statements include the accounts of Kentucky Bancshares, Inc. (the Company), its wholly-owned subsidiaries, Kentucky Bank (the Bank) and KBI Insurance Company, Inc., a captive insurance subsidiary, and the Bank’s wholly-owned subsidiary, KB Special Assets Unit, LLC. Intercompany transactions and balances have been eliminated in consolidation.

Nature of Operations: The Bank operates under a state bank charter and provides full banking services, including trust services, to customers located in Bourbon, Clark, Elliot, Fayette, Harrison, Jessamine, Madison, Rowan, Scott, Woodford and adjoining counties in Kentucky. As a state bank, the Bank is subject to regulation by the Kentucky Department of Financial Institutions and the Federal Deposit Insurance Corporation (FDIC). The Company, a bank holding company, is regulated by the Federal Reserve. KBI Insurance Company, Inc., a captive insurance subsidiary, is regulated by the State of Nevada Division of Insurance.

Estimates in the Financial Statements: The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.

~~In December 2019, a novel strain of coronavirus,~~ COVID-19 ~~was reported in Wuhan, China.~~: The COVID-19 virus continues to aggressively spread globally and has spread to over 185 countries, including all 50 states in the United States. A prolonged COVID-19 outbreak, or any other epidemic that harms the global economy, U.S. economy, or the economies in which we operate could adversely affect our operations. While the spreadimpact of the COVID-19 ~~virus has minimally impacted our operations as of March 31, 2020, it has caused significant economic disruption throughout the United States as state~~pandemic remains fluid and ~~local governments issued “shelter at home” orders along with the closing of non-essential businesses.~~continues to evolve. The potential financial impact ~~is unknown~~continues involve some uncertainty at this time. However, ~~if these~~ actions ~~are sustained, it~~that have been taken or will be taken in response may still adversely impact several industries within our geographic footprint and impair the ability of our customers to fulfill their contractual obligations to the Company. This could cause Kentucky Bancshares to experience a material adverse effect on our business operations, asset valuations, financial condition, and results of operations. Material adverse impacts may include all or a combination of valuation impairments on Kentucky Bancshares’s intangible assets, investments, loans, loan servicing rights, deferred tax assets, or counter-party risk derivatives.

Cash Flows: For purposes of reporting cash flows, cash and cash equivalents include cash on hand, amounts due from banks, federal funds sold, and certain short-term investments with maturities of less than three months. Generally, federal funds are sold for ~~one-day~~one-day periods. Net cash flows are reported for loan, deposit and short-term borrowing transactions.

Interest Bearing Time Deposits: Interest bearing time deposits in other financial institutions have original maturities between one and three years and are carried at cost.

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Securities: The Company is required to classify its securities portfolio into one of three categories: trading securities, securities available for sale and securities held to maturity. Fair value adjustments are made to the securities based on their classification with the exception of the held to maturity category. The Company has no investments classified as trading securities or held to maturity. Securities available for sale are carried at fair value. Unrealized holding gains and losses for securities which are classified as available for sale are reported in other comprehensive income, net of deferred tax.

Interest income includes amortization of purchase premium or discount. Premiums and discounts on securities are amortized on the level-yield method without anticipating prepayments, except for mortgage backed securities where prepayments are anticipated. Premiums on purchased callable debt securities are amortized to the earliest call date. Gains and losses on sales are recorded on the settlement date and determined using the specific identification method.

Equity investments with readily determinable fair values are included in other assets with changes in fair value recorded in other income.

Management evaluates securities for other-than-temporary impairment (“OTTI”) at least on a quarterly basis, and more frequently when economic or market conditions warrant such an evaluation. For securities in an unrealized loss position, management considers the extent and duration of the unrealized loss, and the financial condition and near-term prospects of the issuer. Management also assesses whether it intends to sell, or it is more likely than not that it will be required to sell, a security in an unrealized loss position before recovery of its amortized cost basis.

If either of the criteria regarding intent or requirement to sell is met, the entire difference between amortized cost and fair value is recognized as impairment through earnings.

For debt securities that do not meet the aforementioned criteria, the amount of impairment is split into two components as follows: 1) OTTI related to credit loss, which must be recognized in the income statement and 2) OTTI related to other factors, which is recognized in other comprehensive income. The credit loss is defined as the difference between the present value of the cash flows expected to be collected and the amortized cost basis.

Loans Held for Sale: Loans held for sale are carried at the lower of cost or fair value as determined by outstanding commitments from investors or current secondary market prices, calculated on the aggregate loan basis. The Company also provides for any losses on uncovered commitments to lend or sell. The Company sells loans with servicing rights retained.

Loans: Loans that management has the intent and ability to hold for the foreseeable future or until maturity are stated at the amount of unpaid principal, net of deferred loan origination fees and costs and acquired purchase premiums and discounts, reduced by an allowance for loan losses. Interest income on loans is recognized on the accrual basis except for those loans on a nonaccrual status. Interest income on real estate mortgage (1-4 family residential and multi-family residential) and consumer loans is discontinued at the time the loan is 90 days delinquent, and interest income on real estate construction, non-farm and non-residential mortgage, agricultural and commercial loans is discontinued at the time the loan is 120 days delinquent, unless the loan is well-secured and in process of collection. Past due status is based on the contractual terms of the loan. In all cases, loans are placed on nonaccrual or charged-off at an earlier date if collection of principal or interest is considered doubtful. Nonaccrual loans and loans past due 90 days still on accrual include both smaller balance homogeneous loans that are collectively evaluated for impairment and individually classified impaired loans. Loan origination fees and certain direct origination costs are capitalized and recognized as an adjustment of the yield on the related loan. Recorded investment is the outstanding loan balance, excluding accrued interest receivable.

When interest accrual is discontinued, interest income received on such loans is accounted for on the cash-basis or cost-recovery method, until qualifying for return to accrual. Loans are returned to accrual status when all the principal and interest amounts contractually due are brought current and future payments are reasonably assured.

Typically, the Company seeks to establish a payment history of at least ~~six~~6 consecutive payments made on a timely basis before returning a loan to accrual status. Consumer and credit card loans are typically charged off no later than 120 days past due. Loans are placed on nonaccrual or charged-off at an earlier date if collection of principal or interest is considered doubtful.

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Concentration of Credit Risk: Most of the Company’s business activity is with customers located within Bourbon, Clark, Elliott, Fayette, Harrison, Jessamine, Madison, Rowan, Scott, Woodford and surrounding counties located in Kentucky. Therefore, the Company’s exposure to credit risk is significantly affected by changes in the economy in these counties.

Allowance for Loan Losses: The allowance for loan losses is a valuation allowance for probable incurred credit losses. Loan losses are charged against the allowance when management believes the uncollectibility of a loan balance is confirmed. Subsequent recoveries, if any, are credited to the allowance.

Adjustments are made to the historical loss experience ratios based on the qualitative factors as outlined in the regulatory Interagency Policy Statement on the Allowance for Loan and Lease Losses. These qualitative factors include the nature and volume of portfolio, economic and business conditions, classification, past due and non-accrual trends.

Management estimates the allowance balance required using past loan loss experience, the nature and volume of the portfolio, information about specific borrower situations and estimated collateral values, economic conditions, and other factors. Allocations of the allowance may be made for specific loans, but the entire allowance is available for any loan that, in management’s judgment, should be charged off.

The allowance for loan losses is evaluated at the portfolio segment level using the same methodology for each segment. The recent historical actual net losses isare the basis for the general reserve for each segment which is then adjusted for qualitative factors as outlined above (i.e., nature and volume of portfolio, economic and business conditions, classification, past due and non-accrual trends) specifically evaluated at individual segment levels.

The allowance consists of specific and general components. The specific component relates to loans that are individually classified as impaired. The general component covers non-classified loans and is based on historical loss experience adjusted for current factors for non-classified loans and a migration analysis for classified loans.

A loan is impaired when, based on current information and events, it is probable that the Company will be unable to collect all amounts due according to the contractual terms of the loan agreement. Loans, for which the terms have been modified, and for which the borrower is experiencing financial difficulties and has been granted a concession, are considered troubled debt restructurings and classified as impaired.

Loans are charged off when available information confirms that loans, or portions thereof, are uncollectible. While management considers the number of days a loan is past due in its evaluation process, we also consider a variety of other factors.

Factors considered by management in evaluating the charge-off decision include collateral value, availability of current financial information for both borrower and guarantor, ~~(if any),~~ and the probability of collecting contractual principal and interest payments. These considerations may result in loans being charged off before they are 90 days or more past due. This evaluation framework for determining charge-offs is consistently applied to each segment.

From time to time, the Company will charge-off a portion of impaired and non-performing loans. Loans that meet the criteria under ASC 310 are evaluated individually for impairment. Management considers payment status, collateral value, availability of current financial information for the borrower and guarantor, actual and expected cash flows, and probability of collecting amounts due. If a loan’s collection status is deemed to be collateral dependent or foreclosure is imminent, the loan is charged down to the fair value of the collateral, less selling costs. In circumstances where the loan is not deemed to be collateral dependent, but we believe, after completing our evaluation process, that probable loss has been incurred, we will provide a specific allocation on that loan.

The impact of recording partial charge-offs is a reduction of gross loans and a reduction of the loan loss reserve. The net loan balance is unchanged in instances where the loan had a specific allocation as a component of the allowance for loan losses. The allowance as a percentage of total loans may be lower as the allowance no longer needs to include a component for the loss, which has now been recorded, and net charge-off amounts are increased as partial charge-offs are recorded.

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Factors considered by management in determining impairment include payment status, collateral value, and the probability of collecting scheduled principal and interest payments when due. Loans that experience insignificant payment delays and payment shortfalls generally are not classified as impaired. Management determines the significance of payment delays and payment shortfalls on case-by-case basis, taking into consideration all of the circumstances surrounding the loan and the borrower, including the length of the delay, the reasons for the delay, the borrower’s prior payment record, and the amount of the shortfall in relation to the principal and interest owed.

Commercial and real estate construction and real estate mortgage loans (multi-family residential, and non-farm and non-residential mortgage) over $200 thousand are individually evaluated for impairment. If a loan is impaired, a portion of the allowance is allocated so that the loan is reported, net, at the present value of estimated future cash flows using the loan’s existing rate or at the fair value of collateral if repayment is expected solely from the collateral. Large groups of smaller balance homogeneous loans, such as consumer and 1-4 family residential real estate loans, are collectively evaluated for impairment, and accordingly, they are not separately identified for impairment disclosures.

Troubled debt restructurings are separately identified for impairment disclosures and are measured at the present value of estimated future cash flows using the loan’s effective rate at inception.

If a troubled debt restructuring is considered to be a collateral dependent loan, the loan is reported, net, at the fair value of the collateral. For troubled debt restructurings that subsequently default, the Company determines the amount of reserve in accordance with the accounting policy for the allowance for loan losses.

The general component covers non-impaired loans and is based on historical loss experience adjusted for current factors. The historical loss experience is determined by portfolio segment and is based on the actual loss history experienced by the Company over the most recent 5 years. This actual loss experience is supplemented with other economic factors based on the risks present for each portfolio segment.

These economic factors include consideration of the following: levels of and trends in delinquencies and impaired loans; levels of and trends in charge-offs and recoveries; trends in volume and terms of loans; effects of any changes in risk selection and underwriting standards; other changes in lending policies, procedures, and practices; experience, ability, and depth of lending management and other relevant staff; national and local economic trends and conditions; industry conditions; and effects of changes in credit concentrations.

A “portfolio segment” is defined as the level at which an entity develops and documents a systematic methodology to determine its allowance for loan losses. The Company has identified the following portfolio segments: commercial, real estate construction, real estate mortgage, agricultural, consumer (credit cards and other consumer) and other (overdrafts).

Commercial: These loans to businesses do not have real estate as the underlying collateral. Instead of real estate, collateral could be business assets such as equipment or accounts receivable or the personal guarantee of one or more guarantors. These loans generally present a higher level of risk than loans secured by commercial real estate because in the event of default by the borrower, the business assets must be liquidated and/or guarantors pursued for deficit funds. Business assets are worth more while they are in use to produce income for the business and worth significantly less if the business is no longer in operation. Within the commercial portfolio, risk analysis is performed primarily based on the individual loan type.

Real estate construction: Real estate construction consists of loans secured by real estate for additions or alterations to existing structures, as well as constructing new structures. They include fixed and floating rate loans. Real estate construction loans generally present a higher level of risk than loans secured by 1-4 family residential real estate primarily because of the length of the construction period, potential change in prices of construction, the incomplete status of the collateral and economic cycles. Because of these factors, real estate construction loans generally have higher qualitative adjustments.

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Real Estate Mortgage:

1-4 family residential: Loans secured by 1-4 family residential real estate represent the lowest risk of loans for the Company. They include fixed and floating rate loans as well as loans for commercial purposes or consumer purposes. The Company generally does not hold subprime residential mortgages. Borrowers with loans in this category, whether for commercial or consumer purposes, tend to make their payments timely as they do not want to risk foreclosure and loss of property.

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Multifamily residential: Loans secured by multifamily residential real estate consist primarily of loans secured by apartment buildings and can be either fixed or floating rate loans. Multi-family residential real estate loans generally present a higher level of risk than loans secured by 1-4 family residential real estate because the borrower’s repayment ability typically comes from rents from tenants. Local economic and employment fluctuations impact rent rolls and potentially the borrower’s repayment ability.

Non-farm & non-residential: Loans secured by non-farm non-residential real estate consist of loans secured by commercial real estate that is not owner occupied. These loans generally consist of loans collateralized by property whereby rents received from commercial tenants of the borrower are the source of repayment. These loans generally present a higher level of risk than loans secured by owner occupied commercial real estate because repayment risk is expanded to be dependent on the success of multiple businesses which are paying rent to the borrower.

If multiple businesses fail due to deteriorating economic conditions or poor business management skills, the borrower may not have enough rents to cover their monthly payment. Repayment risk is also increased depending on the level of surplus available commercial lease space in the local market area.

Agricultural: These loans to agricultural businesses do not have real estate as the underlying collateral. Instead of real estate, collateral could be assets such as equipment or accounts receivable or the personal guarantee of one or more guarantors. These loans generally present a higher level of risk than loans secured by real estate because in the event of default by the borrower, the assets must be liquidated and/or guarantors pursued for deficit funds. Farm assets are worth more while they are in use to produce income and worth significantly less if the farm is no longer in operation.

Consumer: Consumer loans are generally loans to borrowers for non-business purposes. They can be either secured or unsecured. Consumer loans are generally small in the individual amount of principal outstanding and are repaid from the borrower’s private funds earned from employment. Consumer lending risk is very susceptible to local economic trends.

If there is a consumer loan default, any collateral that may be repossessed is generally not well maintained and has a diminished value. For this reason, consumer loans tend to have higher overall interest rates to cover the higher cost of repossession and charge-offs. However, due to their smaller average balance per borrower, consumer loans are collectively evaluated for impairment in determining the appropriate allowance for loan losses.

Other: All other loan types are aggregated together for credit risk evaluation due to the varying nature but small number of the remaining types of loans in the Company’s loan portfolio. Loans in this segment include but are not limited to overdrafts. Due to their smaller balance, other loans are collectively evaluated for impairment in determining the appropriate allowance for loan losses.

Due to the overall high level of real estate mortgage loans within the loan portfolio as a whole, as compared to other portfolio segments, for risk assessment and allowance purposes this segment was segregated into more granular pools by collateral property type.

The non-farm non-residential and the multi-family real estate mortgage loan portfolio segments had the next highest level of qualitative adjustments due to the effects of local markets and economies on the underlying collateral property values, as well as for industry concentrations and risks related to the this type of property.

Derivatives: At the inception of a derivative contract, the Company designates the derivative as one of three types based on the Company’s intentions and belief as to likely effectiveness as a hedge. These three types are (1) a hedge of the fair value of a recognized asset or liability or of an unrecognized firm commitment (“fair value hedge”), (2) a hedge of a forecasted transaction or the variability of cash flows to be received or paid related to a recognized asset or liability (“cash flow hedge”), or (3) an instrument with no hedging designation (“stand-alone derivative”).

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For a fair value hedge, the gain or loss on the derivative, as well as the offsetting loss or gain on the hedged item, are recognized in current earnings and included in interest and fee income on loans as fair value changes.

For a cashflow hedge, the gain or loss on the derivative is reported in other comprehensive income and is reclassified into earnings and included in interest and fee income on loans in the same periods during which the hedged transaction affects earnings. Changes in the fair value of derivatives that do not qualify for hedge accounting are reported currently in earnings, as non-interest income.

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Net cash settlements on derivatives that qualify for hedge accounting are recorded in interest income or interest expense, based on the item being hedged. Net cash settlements on derivatives that do not qualify for hedge accounting are reported in non-interest income. Cash flows on hedges are classified in the cash flow statement the same as the cash flows of the items being hedged.

The Company formally documents the relationship between derivatives and hedged items, as well as the risk-management objective and the strategy for undertaking hedge transactions at the inception of the hedging relationship. This documentation includes linking both fair value hedges and cash flow hedges to specific assets and liabilities on the balance sheet or to specific firm commitments or forecasted transactions.

The Company also formally assesses, both at the hedge’s inception and on an ongoing basis, whether the derivative instruments that are used are highly effective in offsetting changes in fair values or cash flows of the hedged items. The Company discontinues hedge accounting when it determines that the derivative is no longer effective in offsetting changes in the fair value or cash flows of the hedged item, the derivative is settled or terminates, a hedged forecasted transaction is no longer probable, a hedged firm commitment is no longer firm, or treatment of the derivative as a hedge is no longer appropriate or intended.

When hedge accounting is discontinued, subsequent changes in fair value of the derivative are recorded as non-interest income. When a fair value hedge is discontinued, the hedged asset or liability is no longer adjusted for changes in fair value and the existing basis adjustment is amortized or accreted over the remaining life of the asset or liability. When a cash flow hedge is discontinued but the hedged cash flows or forecasted transactions are still expected to occur, gains or losses that were accumulated in other comprehensive income are amortized into earnings over the same periods which the hedged transactions will affect earnings.

Mortgage Banking Derivatives: Commitments to fund mortgage loans (interest rate locks) to be sold into the secondary market and forward commitments for the future delivery of these mortgage loans are accounted for as free standing derivatives. The fair value of the interest rate lock is recorded at the time the commitment to fund the mortgage loan is executed and is adjusted for the expected exercise of the commitment before the loan is funded. In order to hedge the change in interest rates resulting from its commitments to fund the loans, the Company enters into forward commitments for the future delivery of the mortgage loans when interest rate locks are entered into. Fair values of these mortgage derivatives are estimated based on changes in mortgage interest rates from the date the interest on the loan is locked. Changes in the fair values of these derivatives are included in net gains on the sales of loans.

Mortgage Servicing Rights: The Bank has sold certain residential mortgage loans to the Federal Home Loan Mortgage Corporation (FHLMC) while retaining the servicing rights. Servicing rights are recognized separately when they are acquired through sales of loans. When mortgage loans are sold, servicing rights are initially recorded at fair value with the income statement effect recorded in gain on sale of mortgage loans. Fair value is based on market prices for comparable mortgage servicing contracts, when available, or alternatively, is based on a valuation model that calculates the present value of estimated future net servicing income.

The valuation model incorporates assumptions that market participants would use in estimating future net servicing income, such as the cost to service, the discount rate, the custodial earnings rate, an inflation rate, ancillary income, prepayment speeds and default rates and losses. All classes of servicing assets are subsequently measured using the amortization method which requires servicing rights to be amortized into loan service fee income, net, included in non-interest income in proportion to, and over the period of, the estimated future net servicing income of the underlying loans.

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Servicing assets are evaluated for impairment based upon the fair value of the rights as compared to carrying amount. Impairment is determined by stratifying rights into groupings based on predominant risk characteristics, such as interest rate, loan type and investor type. Impairment is recognized through a valuation allowance for an individual grouping, to the extent that fair value is less than the carrying amount. If the Company later determines that all or a portion of the impairment no longer exists for a particular grouping, a reduction of the allowance may be recorded as an increase to income. The fair values of servicing rights are subject to significant fluctuations as a result of changes in estimated and actual prepayment speeds and default rates and losses.

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Servicing fee income, which is reported on the income statement as loan service income, net, is recorded for fees earned for servicing loans. The fees are based on a contractual percentage of the outstanding principal or a fixed amount per loan and are recorded as income when earned. The amortization of mortgage servicing rights and valuation allowance are netted against loan servicing fee income. Servicing fees totaled $176 thousand and $145 thousand for the three months ended March 31, ~~2020 compared to $134 thousand for the three months ended~~2021 and March 31, ~~2019~~2020 and are included in loan service fee income, net in the income statement. Late fees and ancillary fees related to loan servicing are not material.

Federal Home Loan Bank (FHLB) Stock: The Bank is a member of the FHLB system. Members are required to own a certain amount of stock based on the level of borrowings and other factors, and may invest in additional amounts. FHLB stock is carried at cost, classified as a restricted security, and periodically evaluated for impairment based on ultimate recovery of par value. Both cash and stock dividends are reported as income.

Bank-Owned Life Insurance: The Company has purchased life insurance policies on certain key employees. Bank- owned life insurance is recorded at the amount that can be realized under the insurance contract at the balance sheet date, which is the cash surrender value adjusted for other charges or other amounts due that are probable at settlement.

Bank Premises and Equipment: Land is carried at cost. Bank premises and equipment are stated at cost less accumulated depreciation. Buildings and related components are depreciated using the straight-line method with useful lives ranging from 5 to 40 years. Furniture, fixtures and equipment are depreciated using the straight-line (or accelerated) method with useful lives ranging from 3 to 10 years.

Real Estate Owned: Physical possession of residential real estate property collateralizing a consumer mortgage loan occurs when legal title is obtained upon completion of foreclosure or when the borrower conveys all interest in the property to satisfy the loan through completion of a deed in lieu of foreclosure or similar legal agreement. Real estate acquired through foreclosure is initially recorded at fair value less costs to sell when acquired, establishing a new cost basis. These assets are subsequently accounted for at the lower of cost or fair value less estimated costs to sell.

The value of the underlying loan is written down to the fair value of the real estate to be acquired by a charge to the allowance for loan losses, if necessary. Any subsequent write-downs are charged to operating expenses. Operating expenses of such properties, net of related income, and gains and losses on their disposition are included in other ~~expenses~~. expenses.

Investments in Limited Partnerships: Investments in limited partnerships represent the Company’s investments in affordable housing projects for the primary purpose of available tax benefits. The Company is a limited partner in these investments and as such, the Company is not involved in the management or operation of such investments. These investments are amortized over the period that the Company expects to receive the tax benefits. These investments are evaluated for impairment when events indicate the carrying amount may not be recoverable.

The investment recorded at March 31, ~~2020~~2021 was ~~$3.9~~$2.9 million, ~~and $4.0~~compared to $3.1 million at ~~March~~ December 31, ~~2019, respectively,~~2020, and is included with other assets in the balance sheet. During the ~~quarters ended March 31,~~first three months of 2021 and 2020, ~~and 2019,~~ the Company

recognized amortization expense of ~~$293~~$119 thousand and ~~$159~~$293 thousand, respectively, which was included within

other noninterest expense on the consolidated statements of income.

Leases: Lessees are required to recognize assets and liabilities on the balance sheet for leases with original lease terms greater than 12 months. The Company recorded an operating lease right of use asset of ~~$8.0~~$7.6 million and an operating lease liability of ~~$8.2~~$7.7 million, as of March 31, ~~2020, as a result~~2021. No new leases were recorded during the three months ended March 31, 2021.

Table of ~~recording operating lease contracts where the Company is lessee.~~ Contents

Repurchase Agreements: Substantially all repurchase agreement liabilities represent amounts advanced by various customers. Securities are pledged to cover these liabilities, which are not covered by federal deposit insurance.

Stock-Based Compensation: Compensation cost is recognized for stock options and restricted stock awards issued to employees, based on the fair value of these awards at the date of grant. A Black-Scholes model is utilized to estimate the fair value of stock options, while the market price of the Company’s common stock at the date of grant is used for restricted stock awards. Compensation cost is recognized over the required service period, generally defined as the

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vesting period. For awards with graded vesting, compensation cost is recognized on a straight-line basis over the requisite service period for the entire award.

Revenue Recognition: The Company’s services that fall within the scope of ASC 606 are presented within Non-Interest Income and are recognized as revenue as the Company satisfies its obligation to the customer. Services within the scope of ASC 606 include trust department income, service charges, debit card interchange income and brokerage income.

Income Taxes: Income tax expense is the total of the current year income tax due or refundable and the change in deferred tax assets and liabilities. Deferred tax assets and liabilities are the expected future tax amounts for the temporary differences between carrying amounts and tax bases of assets and liabilities, computed using enacted tax rates. A valuation allowance, if needed, reduces deferred tax assets to the amount expected to be realized.

A tax position is recognized as a benefit only if it is “more likely than not” that the tax position would be sustained in a tax examination, with a tax examination being presumed to occur. The amount recognized is the largest amount of tax benefit that is greater than 50% likely of being realized on examination. For tax positions not meeting the “more likely than not” test, no0 tax benefit is recorded.

The Company recognizes interest related to income tax matters as interest expense and penalties related to income tax matters as other expense.

Retirement Plans: Employee 401(k) and profit sharing plan expense is the amount of matching contributions.

Goodwill and Intangible Assets: Goodwill and intangible assets acquired in a purchase business combination and determined to have an indefinite useful life are not amortized, but tested for impairment at least annually. The Company has selected December 31 as the date to perform the annual impairment test. Intangible assets with definite useful lives are amortized over their estimated useful lives to their estimated residual values. Goodwill is the only intangible asset with an indefinite life on our balance sheet. ~~Management believes no~~The Company tests goodwill for impairment ~~exists to Goodwill~~annually or more frequently if circumstances warrant. The Company’s annual step one impairment test as of ~~March~~December 31, 2020 ~~due to~~concluded that its goodwill was not impaired. The Company concluded there were no triggering events during the ~~recent economic downturn associated with the COVID-19 pandemic.~~first three months of 2021 that required an interim goodwill impairment test.

Intangible assets consist of core deposit intangible assets arising from whole bank and branch acquisitions. They are initially measured at fair value and then are amortized on either an accelerated or straight-line basis, over ~~ten~~10 or ~~fifteen~~15 years.

Loan Commitments and Related Financial Instruments: Financial instruments include off-balance sheet credit instruments, such as commitments to make loans and commercial letters of credit, issued to meet customer financing needs. The face amount for these items represents the exposure to loss, before considering customer collateral or ability to repay. Such financial instruments are recorded when they are funded.

Earnings Per Common ~~Share:~~Share: Basic earnings per common share is net income divided by the weighted average number of common shares outstanding during the period. Diluted earnings per common share include the dilutive effect of additional potential common shares issuable under stock options. Earnings and dividends per share have been adjusted in all periods presented to give effect to all stock splits and dividends through the date of issuance of the financial statements.

Comprehensive Income (Loss): Comprehensive income consists of net income and other comprehensive income. Other comprehensive income (loss) includes unrealized gains and losses on securities available for sale, and unrealized gains and losses on cash flow hedges, which are also recognized as a separate component of equity.

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Fair Value of Financial Instruments: Fair values of financial instruments are estimated using relevant market information and other assumptions, as more fully disclosed in a separate note. Fair value estimates involve uncertainties and matters of significant judgment regarding interest rates, credit risk, prepayments, and other factors, especially in the absence of broad markets for particular items. Changes in assumptions or in market conditions could significantly affect the estimates.

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Operating Segments: While the Company’s chief decision makers monitor the revenue streams of the various Company products and services, operations are managed and financial performance is evaluated on a Company-wide basis. Accordingly, all of the Company’s operations are considered by management to be aggregated into ~~one~~1 reportable operating segment: banking.

Reclassifications: Some items in the prior year financial statements were reclassified to conform to the current presentation. Reclassifications had no effect on prior year net income or stockholders’ equity.

Adoption of New Accounting Standards

~~FASB ASC 326, 815, and 825 –~~ ASU 2019-12 Income Taxes (Topic 740), Simplifying the Accounting for Income Taxes:In ~~April~~December 2019, the FASB issued ~~ASU No. 2019-04,~~ ~~Codification Improvements~~this Update as part of its Simplification Initiative. The amendments in this Update affect entities within the scope of Topic 740, Income Taxes. The amendments in this Update simplify the accounting for income taxes by removing certain exceptions to the general principles in Topic ~~326, Financial Instruments—Credit Losses,~~740. The amendments also improve consistent application of and simplify GAAP for other areas of Topic ~~815, Derivatives~~740 by clarifying and ~~Hedging, and Topic 825, Financial Instruments.~~ amending existing guidance.

The amendments in this Update related to separate financial statements of legal entities that are not subject to tax should be applied on a retrospective basis for all periods presented. The amendments related to ~~Topic 326 address accrued interest, transfers between classifications~~changes in ownership of foreign equity method investments or categories for loans and debt securities, recoveries, vintage disclosures, and contractual extensions and renewal options and became effective for annual periods and interim periods within those annual periodsforeign subsidiaries should be applied on a modified retrospective basis through a cumulative-effect adjustment to retained earnings as of the beginning ~~after December 15, 2019. The improvements and clarifications related to Topic 815 address partial-term fair value hedges~~ of ~~interest-rate risk, amortization, and disclosure~~the fiscal year of fair value hedge basis adjustments and consideration of hedged contractually specified interest rate under the hypothetical method and became effective for the annual reporting period beginning January 1, 2020.adoption. The amendments related to Topic 825 contain various improvements to ASU 2016-01, including scope; held-to-maturity debt securities fair value disclosures; and remeasurement of equity securities at historical exchange rates and became effective for fiscal years and interim periods beginning after December 15, 2019. The amendments in this update did not have a material impactfranchise taxes that are partially based on ~~the financial statements~~

~~FASB ASC 350 –~~ ~~In January 2017, the FASB issued ASU No. 2017-04,~~ ~~Intangibles: Goodwill and Other: Simplifying the Test for Goodwill Impairment~~. To simplify the subsequent measurement of goodwill, the amendments eliminate Step 2 from the goodwill impairment test. The annual, or interim, goodwill impairment test is performed by comparing the fair value of a reporting unit with its carrying amount. An impairment chargeincome should be ~~recognized~~applied on either a retrospective basis for ~~the amount by which the carrying amount exceeds the reporting unit’s fair value; however, the loss recognized should not exceed the total amount of goodwill allocated~~all periods presented or a modified retrospective basis through a cumulative-effect adjustment to ~~that reporting unit. In addition, the income tax effects of tax deductible goodwill on the carrying amount~~retained earnings as of the reporting unit should be considered when measuring the goodwill impairment loss, if applicable. The amendments also eliminate the requirements for any reporting unit with a zero or negative carrying amount to perform Step 2beginning of the ~~goodwill impairment test. An entity still has the option to perform the qualitative assessment for a reporting unit to determine if the quantitative impairment test is necessary. The~~fiscal year of adoption. All other amendments should be applied on a prospective basis. ~~The nature of and reason for the change in accounting principle should be disclosed upon transition. The~~

These amendments ~~in this update became~~were effective for ~~annual or any interim goodwill impairment tests in~~public business entities for fiscal years beginning after December 15, ~~2019 and did not have a material impact on the financial statements.~~

~~FASB ASC 820~~ ~~– In August 2018, the FASB issued ASU No. 2018-13,~~ ~~Fair Value Measurement (Topic 820): Disclosure Framework – Changes to the Disclosure Requirements for Fair Value Measurement~~. The updated guidance improves the disclosure requirements on fair value measurements. The ASU removes certain disclosures required by Topic 820 related to transfers between Level 1 and Level 2 of the fair value hierarchy; the policy for timing of transfers between levels; the valuation processes for Level 3 fair value measurements; and for nonpublic entities, the changes in unrealized gains and losses for the period included in earnings for recurring Level 3 fair value measurements held at the end of the reporting period. The ASU modifies certain disclosures required by Topic 820 related to disclosure of transfers into and out of Level 3 of the fair value hierarchy and purchases and issues of Level 3 assets and liabilities for nonpublic entities; the requirement to disclose the timing of liquidation of an investee’s assets and the date when restrictions from redemption might lapse only if the investee has communicated the timing to the entity or announced the timing publicly for investments in certain entities that calculate net asset value; and clarification that the measurement uncertainty disclosure is to communicate information about the uncertainty in measurement as of the reporting date. The ASU adds certain disclosure requirements related to changes in unrealized gains and losses for the period included in other comprehensive income for recurring Level 3 fair value measurements held at the end of the reporting period and the range and weighted average of significant unobservable inputs used to develop Level 3 fair value measurements. For certain unobservable inputs, an entity may disclose other quantitative information in lieu of the weighted average if the entity determines that other quantitative information would be a more reasonable and rational method to reflect the distribution of unobservable inputs used to develop Level 3 fair value measurements. The amendments in this update

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~~became effective for fiscal years,~~2020, and interim periods within those fiscal ~~years beginning after December 15, 2019 and~~years. The adoption of this standard did not have a material ~~impact~~effect on the Company’s operating results or financial ~~statements.~~condition.

On March 22, 2020, the federal banking agencies issued an “Interagency Statement on Loan Modifications and Reporting for Financial Institutions Working with Customers Affected by the Coronavirus”. This guidance encourages financial institutions to work prudently with borrowers that may be unable to meet their contractual obligations because of the effects of COVID-19. The guidance goes on to explain that in consultation with the FASB staff that the federal banking agencies conclude that short-term modifications (e.g. six months) made on a good faith basis to borrowers who were current as of the implementation date of a relief program are not Troubled Debt Restructurings (“TDRs”). The Coronavirus Aid, Relief and Economic Security (“CARES”) Act was passed by Congress on March 27, 2020. Section 4013 of the CARES Act also addressed COVID-19 related modifications and specified that COVID-19 related modifications on loans that were current as of December 31, 2019 are not TDRs. Modifications are likely to be executed in the second quarter of 2020. The majority of these modifications will involve three to six month forbearance payments which will be added to the end of the note. As of April 30, 2020, we had approved modifications on $105.4 million of loans.

Accounting Standards Issued But Not Yet Adopted

ASU 2016-13, “Financial Instruments-Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments.” Issued in June 2016, ASU 2016-13 added Financial Accounting Standards Board “FASB” ASC Topic 326, “Financial Instruments-Credit Losses” and finalized amendments to FASB ASC Subtopic 825-15, “Financial Instruments-Credit Losses.” The amendments of ASU 2016-13 are intended to provide financial statement users with more decision-useful information related to expected credit losses on financial instruments and other commitments to extend credit by replacing the current incurred loss impairment methodology with a methodology that reflects expected credit losses and requires consideration of a broader range of reasonable and supportable information to determine credit loss estimates.

The amendment requires the measurement of all expected credit losses for financial assets held at the reporting date based on historical experience, current conditions, and reasonable and supportable forecasts. Financial institutions and other organizations will now use forward-looking information to enhance their credit loss estimates. The amendment requires enhanced disclosures to help investors and other financial statement users better understand significant estimates and judgments used in estimating credit losses, as well as the credit quality and underwriting standards of an organization’s portfolio. In addition, the ASU amends the accounting for credit losses on available-for-sale debt securities and purchased financial assets with credit deterioration.

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As of the beginning of the first reporting period in which the new standard is effective, the Company expects to recognize a one-time cumulative effect adjustment increasing the allowance for loan losses, if any, since the ASU covers credit losses over the expected life of a loan as well as considering future changes in macroeconomic conditions. The magnitude of any such one-time adjustment or the overall impact of the new guidance on the consolidated financial statements cannot yet be reasonably estimated, however, we expect to run multiple parallel models before finalizing the adjustment.

In December 2018, the OCC, the Board of Governors of the Federal Reserve System, and the FDIC approved a final rule to address changes to credit loss accounting under GAAP, including banking organizations’ implementation of CECL. The final rule provides banking organizations the option to phase in over a three-year period the day-one adverse effects on regulatory capital that may result from the adoption of the new accounting standard.

In 2019, the Financial Accounting Standards Board approved a delay for the implementation of the current expected credit loss standard until January 2023 for certain companies. The delay would apply to smaller reporting companies (as defined by the SEC), non-SEC public companies and private companies. The delayed implementation date of January 2023 applies to Kentucky Bancshares and the Company does not intend to early adopt.

As previously disclosed, the Company formed a steering committee to oversee the adoption of the ASU at the effective date. Appropriate members of Senior Management have developed a plan focused on understanding the ASU, researching issues, identifying data needs for modeling inputs, technology requirements, and modeling considerations. The Company is focused on the completion of its model, refining assumptions, and continued review of the model. Concurrent with this, the Company is also focused on researching and resolving interpretive accounting issues in the ASU, contemplating various related accounting policies, developing processes and related controls, and considering various reporting disclosures.

AsIn May 2020, the FASB issued ASU 2020-04, Reference Rate Reform (Topic 848): Facilitation of the ~~beginning~~Effects of Reference Rate Reform on Financial Reporting. Reference rate reform relates to the ~~first reporting period in which~~effects undertaken to eliminate certain reference rates such as the London Interbank Offered Rate (“LIBOR”) and introduce new ~~standard is effective,~~reference rates that may be based on larger or more liquid observations and transactions. ASU 2020-04 provides optional expedients and exceptions for applying GAAP to contracts, hedging relationships and other contracts. Generally, ASU 2020-04 would allow entities to consider contract modifications due to reference rate reform to be a continuation of an existing contract; thus, the Company ~~expects~~would not have to ~~recognize~~determine if the modification is considered insignificant. The Company is in the process of reviewing loan documentation, along with the transition procedures it will need in order to implement reference rate reform. While the Company has yet to adopt ASU 2020-04, the standard was effective upon issuance and terminates December 31, 2022 such that changes made to contracts beginning on or after January 1, 2023 would not apply. The adoption of ASU 2020-04 is not expected to have a ~~one-time cumulative~~material effect adjustment increasing the allowance for loan losses, if any, since the ASU covers credit losses over the expected life of a loan as well as considering future changes in macroeconomic conditions. The magnitude of any such one-time adjustment or the overall impact of the new guidance on the ~~consolidated~~Company’s operating results or financial ~~statements cannot yet be reasonably estimated, however, we expect to run multiple parallel models before finalizing the adjustment amount by December 31, 2022.~~condition.

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January 2023 for certain companies. The delay would apply to smaller reporting companies (as defined by the SEC), non-SEC public companies and private companies. The delayed implementation date of January 2023 will apply to Kentucky Bancshares and the Company does not intend to early adopt.

2.	SECURITIES

~~2.SECURITIES~~

SECURITIES AVAILABLE FOR SALE

Period-end securities are as follows:

(in thousands)


			Gross		Gross
	Amortized		Unrealized		Unrealized		Fair
	Cost		Gains		Losses		Value

											Gross		Gross
									Amortized		Unrealized		Unrealized		Fair
									Cost		Gains		Losses		Value
Available for Sale
March 31, 2020
March 31, 2021
U.S. treasury notes	$	9,142	$	194	$	—	$	9,336	$	9,052	$	83	$	—	$	9,135
U.S. government agencies		17,732		202		(14)		17,920		27,367		67		(588)		26,846
States and political subdivisions		28,286		602		(12)		28,876		65,419		1,248		(389)		66,278
Mortgage-backed - residential		106,857		3,133		—		109,990		115,914		1,453		(1,692)		115,675
Mortgage-backed - commercial		48,436		320		(513)		48,243		82,266		1,005		(1,415)		81,856
Asset-backed		35,396		37		(2,611)		32,822		48,938		152		(314)		48,776
Other										1,000		—		(2)		998
Total	$	245,849	$	4,488	$	(3,150)	$	247,187	$	349,956	$	4,008	$	(4,400)	$	349,564

December 31, 2019

December 31, 2020
U.S. treasury notes	$	9,165	$	3	$	—	$	9,168	$	9,075	$	113	$	—	$	9,188
U.S. government agencies		23,716		60		(41)		23,735		23,185		144		(31)		23,298
States and political subdivisions		31,950		661		(22)		32,589		65,665		1,977		(3)		67,639
Mortgage-backed - residential		113,629		634		(272)		113,991		124,941		1,728		(187)		126,482
Mortgage-backed - commercial		50,092		406		(147)		50,351		73,573		1,179		(201)		74,551
Asset-backed		35,682		55		(241)		35,496		51,676		90		(455)		51,311
Other										1,000		25		—		1,025
Total	$	264,234	$	1,819	$	(723)	$	265,330	$	349,115	$	5,256	$	(877)	$	353,494

The amortized cost and fair value of securities as of March 31, ~~2020~~2021 by contractual maturity are shown below. Expected maturities will differ from contractual maturities because borrowers may have the right to call or prepay obligations with or without call or prepayment penalties. Securities not due at a single maturity are shown separately. Further discussion concerning Fair Value Measurements can be found in Note 7.


	Amortized		Fair
	Cost		Value

					Amortized		Fair
					Cost		Value
Due in one year or less	$	8,314	$	8,391	$	9,601	$	9,686
Due after one year through five years		17,129		17,389		16,043		16,188
Due after five years through ten years		14,040		14,298		40,074		39,988
Due after ten years		15,677		16,054		37,120		37,395
		55,160		56,132
						102,838		103,257
Mortgage-backed - residential		106,857		109,990		115,914		115,675
Mortgage-backed - commercial		48,436		48,243		82,266		81,856
Asset-backed		35,396		32,822		48,938		48,776
Total	$	245,849	$	247,187	$	349,956	$	349,564

Proceeds from the sale of available for sale securities for the first three months of 2021 and 2020 were $0 and ~~2019 were~~ $2.1 ~~million and $16.3~~ million. Gross gains of ~~$118 thousand~~$0 and ~~$109~~$118 thousand and gross losses of $0 and $6 thousand ~~and $15~~ were realized on those sales, respectively. The tax provision related to these realized net gains was $0 and $23 thousand, ~~and $20 thousand,~~ respectively.

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Securities with unrealized losses at March 31, ~~2020~~2021 and at December 31, ~~2019~~2020 not recognized in income are as follows:

March 31, ~~2020~~2021 (in thousands)


	Less than 12 Months				12 Months or More				Total
	Fair		Unrealized		Fair		Unrealized		Fair		Unrealized

													Less than 12 Months				12 Months or More				Total
													Fair		Unrealized		Fair		Unrealized		Fair		Unrealized
Description of Securities	Value		Loss		Value		Loss		Value		Loss		Value		Loss		Value		Loss		Value		Loss
U.S. government agencies	$	—	$	—	$	1,295	$	(14)	$	1,295	$	(14)	$	22,002	$	(576)	$	809	$	(12)	$	22,811	$	(588)
States and political subdivisions		1,208		(12)		—		—		1,208		(12)		26,353		(389)		—		—		26,353		(389)
Mortgage-backed - residential														59,977		(1,692)		—		—		59,977		(1,692)
Mortgage-backed - commercial		23,420		(463)		6,237		(50)		29,657		(513)		41,233		(1,405)		3,893		(10)		45,126		(1,415)
Asset-backed		23,785		(1,895)		6,336		(716)		30,121		(2,611)		14,153		(185)		12,946		(129)		27,099		(314)
Other														998		(2)		—		—		998		(2)
Total temporarily impaired	$	48,413	$	(2,370)	$	13,868	$	(780)	$	62,281	$	(3,150)	$	164,716	$	(4,249)	$	17,648	$	(151)	$	182,364	$	(4,400)

December 31, ~~2019~~2020 (in thousands)


	Less than 12 Months				12 Months or More				Total
	Fair		Unrealized		Fair		Unrealized		Fair		Unrealized

													Less than 12 Months				12 Months or More				Total
													Fair		Unrealized		Fair		Unrealized		Fair		Unrealized
Description of Securities	Value		Loss		Value		Loss		Value		Loss		Value		Loss		Value		Loss		Value		Loss
U.S. government agencies	$	6,171	$	(18)	$	4,396	$	(23)	$	10,567	$	(41)	$	8,432	$	(18)	$	851	$	(13)	$	9,283	$	(31)
States and political subdivisions		859		(3)		1,199		(19)		2,058		(22)		333		(3)		—		—		333		(3)
Mortgage-backed - residential		32,718		(129)		14,583		(143)		47,301		(272)		32,440		(187)		—		—		32,440		(187)
Mortgage-backed - commercial		5,760		(25)		10,625		(122)		16,385		(147)		19,852		(189)		5,087		(12)		24,939		(201)
Asset-backed		21,786		(150)		6,962		(91)		28,748		(241)		15,948		(236)		22,565		(219)		38,513		(455)
Total temporarily impaired	$	67,294	$	(325)	$	37,765	$	(398)	$	105,059	$	(723)	$	77,005	$	(633)	$	28,503	$	(244)	$	105,508	$	(877)

The Company evaluates securities for other-than-temporary impairment at least on a quarterly basis, and more frequently when economic or market concerns warrant such evaluation. In analyzing an issuer’s financial condition, we may consider many factors including, (1) whether the securities are issued by the federal government or its agencies, (2) whether downgrades by bond rating agencies have occurred, (3) the results of reviews of the issuer’s financial condition and near-term prospects, (4) the length of time and the extent to which the fair value has been less than cost, and (5) whether we intend to sell the investment security or more likely than not will be required to sell the investment security before its anticipated recovery.

Unrealized losses on securities included in the tables above have not been recognized into income because (1) all rated securities are investment grade and are of high credit quality, (2) management does not intend to sell and it is more likely than not that management would not be required to sell the securities prior to their anticipated recovery, (3) management believes the decline in fair value is largely due to changes in interest rates and (4) management believes the declines in fair value are temporary. The Company believes the fair value will recover as the securities approach maturity.

~~3.LOANS~~19

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LOANS

Loans at period-end are as follows:

(in thousands)


	3/31/2020		12/31/2019

					3/31/2021		12/31/2020
Commercial	$	82,793	$	86,552	$	112,546	$	117,425
Real estate construction		34,180		32,219		15,136		14,571
Real estate mortgage:
1-4 family residential		299,873		291,419		287,664		293,136
Multi-family residential		55,511		48,622		45,736		47,854
Non-farm & non-residential		223,208		204,908		231,845		218,998
Agricultural		60,013		57,166		50,152		52,239
Consumer		22,598		23,122		21,920		22,532
Other		151		305		96		116
Total	$	778,327	$	744,313	$	765,095	$	766,871

~~Table~~The Company had outstanding loan balances of ~~Contents~~$36.3 million as of March 31, 2021 and $41.4 million as of December 31, 2020 for loans made as part of the Paycheck Protection Program (PPP) established under the CARES Act which were included in commercial loans in the table above. These loans required 0 allowance for loan losses as of March 31, 2021 or December 31, 2020.

Activity in the allowance for loan losses for the three month period indicated was as follows:


	Three Months Ended March 31, 2020
	(in thousands)
	Beginning								Ending
	Balance		Charge-offs		Recoveries		Provision		Balance

											Three Months Ended March 31, 2021
											(in thousands)
											Beginning								Ending
											Balance		Charge-offs		Recoveries		Provision		Balance

Commercial	$	920	$	(25)	$	6	$	102	$	1,003	$	926	$	(3)	$	1	$	(28)	$	896
Real estate Construction		551		—		—		80		631
Real estate construction												277		—		4		(1)		280
Real estate mortgage:
1-4 family residential		2,901		(35)		15		540		3,421		3,210		—		3		(171)		3,042
Multi-family residential		807		—		—		217		1,024		890		(500)		—		375		765
Non-farm & non-residential		1,643		—		—		461		2,104		2,946		(19)		—		44		2,971
Agricultural		389		—		2		72		463		449		—		6		(105)		350
Consumer		506		(110)		9		128		533		525		(47)		10		5		493
Other		43		(237)		206		19		31		44		(242)		250		(8)		44
Unallocated		700		—		—		6		706		630		—		—		(11)		619
	$	8,460	$	(407)	$	238	$	1,625	$	9,916
											$	9,897	$	(811)	$	274	$	100	$	9,460

Three Months Ended March 31, 2019

(in thousands)

Beginning

Ending


Balance

Charge-offs

Recoveries

Provision

Balance

Commercial

$
1,159

$
(191)

$
7

$
(32)

$
943

Real estate Construction

414

—

—

(63)

351

Real estate mortgage:

1-4 family residential

2,605

(99)

8

146

2,660

Multi-family residential

733

—

—

(10)

723

Non-farm & non-residential

1,649

(17)

—

(23)

1,609

Agricultural

420

—

1

(15)

406

Consumer

410

(61)

14

26

389

Other

58

(241)

209

44

70

Unallocated

679

—

—

52

731

$
8,127

$
(609)

$
239

$
125

$
7,882

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Individually

Collectively


As of March 31, 2020

Evaluated for

Evaluated for

(in thousands)

Impairment

Impairment

Total

Allowance for Loan Losses:

Commercial

$
—

$
1,003

$
1,003

Real estate construction

—

631

631

Real estate mortgage:

1-4 family residential

—

3,421

3,421

Multi-family residential

75

949

1,024

Non-farm & non-residential

—

2,104

2,104

Agricultural

—

463

463

Consumer

—

533

533

Other

—

31

31

Unallocated

—

706

706

$
75

$
9,841

$
9,916

Loans:

Commercial

$
—

$
82,793

$
82,793

Real estate construction

374

33,806

34,180

Real estate mortgage:

1-4 family residential

519

299,354

299,873

Multi-family residential

1,292

54,219

55,511

Non-farm & non-residential

1,799

221,409

223,208

Agricultural

1,532

58,481

60,013

Consumer

—

22,598

22,598

Other

—

151

151

        Total

$
5,516

$
772,811

$
778,327


	Three Months Ended March 31, 2020
	(in thousands)
	Beginning								Ending
	Balance		Charge-offs		Recoveries		Provision		Balance

Commercial	$	920	$	(25)	$	6	$	102	$	1,003
Real estate Construction		551		—		—		80		631
Real estate mortgage:
1-4 family residential		2,901		(35)		15		540		3,421
Multi-family residential		807		—		—		217		1,024
Non-farm & non-residential		1,643		—		—		461		2,104
Agricultural		389		—		2		72		463
Consumer		506		(110)		9		128		533
Other		43		(237)		206		19		31
Unallocated		700		—		—		6		706
	$	8,460	$	(407)	$	238	$	1,625	$	9,916

Individually

Collectively


As of December 31, 2019

Evaluated for

Evaluated for

(in thousands)

Impairment

Impairment

Total

Allowance for Loan Losses:

Commercial

$
—

$
920

$
920

Real estate construction

—

551

551

Real estate mortgage:

1-4 family residential

2

2,899

2,901

Multi-family residential

50

757

807

Non-farm & non-residential

—

1,643

1,643

Agricultural

—

389

389

Consumer

—

506

506

Other

—

43

43

Unallocated

—

700

700

$
52

$
8,408

$
8,460

Loans:

Commercial

$
—

$
86,552

$
86,552

Real estate construction

374

31,845

32,219

Real estate mortgage:

1-4 family residential

202

291,217

291,419

Multi-family residential

1,292

47,330

48,622

Non-farm & non-residential

1,799

203,109

204,908

Agricultural

842

56,324

57,166

Consumer

—

23,122

23,122

Other

—

305

305

        Total

$
4,509

$
739,804

$
744,313

The following tables present the balance in the allowance for loan losses and the recorded investment (excluding accrued interest receivable amounting to $3.5 million as of March 31, 2021 and $4.1 million at December 31, 2020) in loans by portfolio segment and based on impairment method as of March 31, 2021 and December 31, 2020:


	Individually		Collectively
As of March 31, 2021	Evaluated for		Evaluated for
(in thousands)	Impairment		Impairment		Total
Allowance for Loan Losses:
Commercial	$	—	$	896	$	896
Real estate construction		—		280		280
Real estate mortgage:
1-4 family residential		6		3,036		3,042
Multi-family residential		—		765		765
Non-farm & non-residential		900		2,071		2,971
Agricultural		—		350		350
Consumer		—		493		493
Other		—		44		44
Unallocated		—		619		619
	$	906	$	8,554	$	9,460
Loans:
Commercial	$	62	$	112,484	$	112,546
Real estate construction		—		15,136		15,136
Real estate mortgage:
1-4 family residential		805		286,859		287,664
Multi-family residential		800		44,936		45,736
Non-farm & non-residential		1,799		230,046		231,845
Agricultural		2,575		47,577		50,152
Consumer		—		21,920		21,920
Other		—		96		96
Total	$	6,041	$	759,054	$	765,095

Table of Contents


	Individually		Collectively
As of December 31, 2020	Evaluated for		Evaluated for
(in thousands)	Impairment		Impairment		Total
Allowance for Loan Losses:
Commercial	$	—	$	926	$	926
Real estate construction		—		277		277
Real estate mortgage:
1-4 family residential		5		3,205		3,210
Multi-family residential		75		815		890
Non-farm & non-residential		900		2,046		2,946
Agricultural		50		399		449
Consumer		—		525		525
Other		—		44		44
Unallocated		—		630		630
	$	1,030	$	8,867	$	9,897
Loans:
Commercial	$	—	$	117,425	$	117,425
Real estate construction		—		14,571		14,571
Real estate mortgage:
1-4 family residential		804		292,332		293,136
Multi-family residential		1,292		46,562		47,854
Non-farm & non-residential		3,654		215,344		218,998
Agricultural		3,759		48,480		52,239
Consumer		—		22,532		22,532
Other		—		116		116
Total	$	9,509	$	757,362	$	766,871

The following ~~table presents~~tables present loans individually evaluated for impairment by class of loans as of and for the three months ended March 31, 2021 and March 31, 2020 (in thousands):. The recorded investment in loans excludes accrued interest receivable and loan origination fees, net, due to immateriality.


	Unpaid				Allowance for		Average		Interest		Cash Basis
	Principal		Recorded		Loan Losses		Recorded		Income		Interest
	Balance		Investment		Allocated		Investment		Recognized		Recognized

													Unpaid				Allowance for		Average		Interest		Cash Basis
													Principal		Recorded		Loan Losses		Recorded		Income		Interest
													Balance		Investment		Allocated		Investment		Recognized		Recognized
With no related allowance recorded:
Real estate construction	$	374	$	374	$	-	$	374	$	-	$	-
Commercial													$	62	$	62	$	—	$	31	$	—	$	—
Real estate mortgage:
Multi-family residential														800		800		—		1,046		—		—
Agricultural														2,575		2,575		—		2,570		10		10

With an allowance recorded:
Real estate mortgage:
1-4 family residential		519		519		-		361		6		6	$	805	$	805	$	6	$	805	$	—	$	—
Non-farm and non-residential		1,799		1,799		-		1,799		-		-		1,799		1,799		900		1,799		—		—
Agricultural		1,532		1,532		-		1,187		11		11

With an allowance recorded:
Real estate mortgage:
Multi-family residential	$	1,292	$	1,292	$	75	$	1,292	$	-	$	-
Total	$	5,516	$	5,516	$	75	$	5,013	$	17	$	17	$	6,041	$	6,041	$	906	$	6,251	$	10	$	10

The recorded investment in loans excludes accrued interest receivable and loan origination fees, net due to immateriality.

Table of Contents

As of March 31, 2020


			Year to Date		Year to Date
	Average		Interest		Cash Basis
	Recorded		Income		Interest
(in thousands):	Investment		Recognized		Recognized
With no related allowance recorded:
Real-estate construction	$	374	$	374	$	—
Real estate mortgage:
1-4 family residential		519		519		6
Multi-family residential				—		—
Non-farm and non-residential		1,799		1,799		—
Agricultural		1,532		1,532		11

With an allowance recorded:
Commercial	$	—	$	—	$	—
Real estate mortgage:
Multi-family residential	$	1,292	$	1,292	$	—
Total	$	5,516	$	5,516	$	17

The following table presents loans individually evaluated for impairment by class of loans as of and for the year ended December 31, ~~2019~~2020 (in thousands):. The recorded investment in loans excludes accrued interest receivable and loan origination fees, net, due to immateriality.


	Unpaid				Allowance for		Average		Interest		Cash Basis
	Principal		Recorded		Loan Losses		Recorded		Income		Interest
	Balance		Investment		Allocated		Investment		Recognized		Recognized

													Unpaid				Allowance for		Average		Interest		Cash Basis
													Principal		Recorded		Loan Losses		Recorded		Income		Interest
													Balance		Investment		Allocated		Investment		Recognized		Recognized
With no related allowance recorded:
Real-estate construction	$	374	$	374	$	—	$	374	$	—	$	—
Real-estate mortgage:
Non-farm & non-residential		1,799		1,799		—		1,013		17		17	$	1,855	$	1,855	$	—	$	928	$	44	$	44
Agricultural		842		842		—		1,003		18		18		3,709		3,709		—		2,276		137		137


With an allowance recorded:
Real estate mortgage
1-4 family residential	$	202	$	202	$	2	$	603	$	35	$	35	$	804	$	804	$	5	$	503	$	7	$	7
Multi-family residential		1,292		1,292		50		646		54		54		1,292		1,292		75		1,292		—		—
Non-farm & non-residential														1,799		1,799		900		1,799		—		—
Agricultural														50		50		50		25		—		—
Total	$	4,509	$	4,509	$	52	$	3,639	$	124	$	124	$	9,509	$	9,509	$	1,030	$	6,823	$	188	$	188

The following tables present the recorded investment in nonaccrual, loans past due over 89 days still on accrual and accruing troubled debt restructurings by class of loans as of March 31, ~~2020~~2021 and December 31, ~~2019:~~2020:


			Loans Past Due
			Over 89 Days
As of March 31, 2020			Still		Troubled Debt

									Loans Past Due
									Over 89 Days
As of March 31, 2021									Still		Troubled Debt
(in thousands)	Nonaccrual		Accruing		Restructurings		Nonaccrual		Accruing		Restructurings
Commercial	$	—	$	267	$	—	$	—	$	91	$	—
Real estate construction		374		—		—		124		—		—
Real estate mortgage:
1-4 family residential		744		126		—		1,199		—		—
Multi-family residential		1,292		—		—		800		—		—
Non-farm & non-residential		1,799		—		—		1,799		—		—
Agricultural		—		75		—		—		—		—
Consumer		27		6		—		49		10		—
Total	$	4,236	$	474	$	—	$	3,971	$	101	$	—

2223

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Loans Past Due


Over 89 Days

As of December 31, 2019

Still

Troubled Debt

(in thousands)

Nonaccrual

Accruing

Restructurings

Real estate construction

$
374

$
—

$
—

Real estate mortgage:

1-4 family residential

845

47

—

Multi-family residential

—

1,292

—

Non-farm & non-residential

1,799

121

—

Agricultural

—

7

—

Consumer

63

32

—

Total

$
3,081

$
1,499

$
—


			Loans Past Due
			Over 89 Days
As of December 31, 2020			Still		Troubled Debt
(in thousands)	Nonaccrual		Accruing		Restructurings
Commercial	$	56	$	47	$	—
Real estate construction		124		—		—
Real estate mortgage:
1-4 family residential		638		—		—
Multi-family residential		1,292		—		—
Non-farm & non-residential		1,813		—		—
Agricultural		110		—		1,145
Consumer		18		28		—
Total	$	4,051	$	75	$	1,145

Nonaccrual loans secured by real estate make up ~~98.0%~~98.8% of the total nonaccrual loan balances at March 31, ~~2020.~~2021.

Nonaccrual loans and loans past due over 89 days and still accruing include both smaller balance homogeneous loans that are collectively evaluated for impairment and individually classified impaired loans.

A loan is considered impaired when, based on current information and events, it is probable that a creditor will be unable to collect all amounts due according to the contractual terms of the loan agreement. All amounts due according to the contractual terms means that both the contractual interest payments and the contractual principal payments of a loan will be collected as scheduled in the loan agreement.

Nonaccrual loans are loans for which payments in full of principal or interest is not expected or which principal or interest has been in default for a period of 90 days or more unless the asset is both well secured and in the process of collection. Other impaired loans may be loans showing signs of weakness or interruptions in cash flow, but ultimately are current or less than 90 days past due with respect to principal and interest and for which we anticipate full payment of principal and interest but not in accordance with contractual terms.

Additional factors considered by management in determining impairment and non-accrual status include payment status, collateral value, availability of current financial information, and the probability of collecting all contractual principal and interest payments.

The following tables present the aging of the recorded investment in past due and non-accrual loans as March 31, ~~2020~~2021 and December 31, ~~2019~~2020 by class of loans:


	30–59		60–89		Greater than				Total
As of March 31, 2020	Days		Days		89 Days				Past Due &		Loans Not

													30–59		60–89		Greater than				Total
As of March 31, 2021													Days		Days		89 Days				Past Due &		Loans Not
(in thousands)	Past Due		Past Due		Past Due		Non-accrual		Non-accrual		Past Due		Past Due		Past Due		Past Due		Non-accrual		Non-accrual		Past Due

Commercial	$	655	$	260	$	267	$	—	$	1,182	$	81,611	$	293	$	479	$	91	$	—	$	863	$	111,683
Real estate construction		31		—		—		374		405		33,775		—		—		—		124		124		15,012
Real estate mortgage:
1-4 family residential		1,374		346		126		744		2,590		297,283		953		362		—		1,199		2,514		285,150
Multi-family residential		—		—		—		1,292		1,292		54,219		—		117		—		800		917		44,819
Non-farm & non-residential		1,380		—		—		1,799		3,179		220,029		91		—		—		1,799		1,890		229,955
Agricultural		52		82		75		—		209		59,804		153		49		—		—		202		49,950
Consumer		170		112		6		27		315		22,283		123		26		10		49		208		21,712
Other		—		—		—		—		—		151		—		—		—		—		—		96
Total	$	3,662	$	800	$	474	$	4,236	$	9,172	$	769,155	$	1,613	$	1,033	$	101	$	3,971	$	6,718	$	758,377

2324

Table of Contents

30–59

60–89

Greater than



Total



As of December 31, 2019

Days

Days

89 Days

  Past Due &

Loans Not

(in thousands)

Past Due

Past Due

Past Due

Non-accrual

Non-accrual

Past Due

Commercial

$
326

$
25

$
—

$
—

$
351

$
86,201

Real estate construction

—

—

—

374

374

31,845

Real estate mortgage:

1-4 family residential

2,734

274

47

845

3,900

287,519

Multi-family residential

—

—

1,292

—

1,292

47,330

Non-farm & non-residential

302

19

121

1,799

2,241

202,667

Agricultural

704

—

7

—

711

56,455

Consumer

158

17

32

63

270

22,852

Other

—

—

—

—

—

305

Total

$
4,224

$
335

$
1,499

$
3,081

$
9,139

$
735,174


	30–59		60–89		Greater than				Total
As of December 31, 2020	Days		Days		89 Days				Past Due &		Loans Not
(in thousands)	Past Due		Past Due		Past Due		Non-accrual		Non-accrual		Past Due
Commercial	$	352	$	3	$	47	$	56	$	458	$	116,967
Real estate construction		—		—		—		124		124		14,447
Real estate mortgage:
1-4 family residential		1,360		859		—		638		2,857		290,279
Multi-family residential		—		—		—		1,292		1,292		46,562
Non-farm & non-residential		194		107		—		1,813		2,114		216,884
Agricultural		203		—		—		110		313		51,926
Consumer		140		42		28		18		228		22,304
Other		—		—		—		—		—		116
Total	$	2,249	$	1,011	$	75	$	4,051	$	7,386	$	759,485

Troubled Debt Restructurings:

Management periodically reviews renewals and modifications of previously identified troubled debt restructurings (TDR), for which there was no principal forgiveness, to consider if it is appropriate to remove the TDR classification. If the borrower is no longer experiencing financial difficulty and the renewal/modification did not contain a concessionary interest rate or other concessionary terms, management considers the potential removal of the TDR classification. If deemed appropriate based upon current underwriting, the TDR classification is removed as the borrower has complied with the terms of the loan at the date of renewal/modification and there was a reasonable expectation that the borrower will continue to comply with the terms of the loan after the date of the renewal/modification.

Additionally, TDR classification can be removed in circumstances in which the Company performs a non-concessionary re-modification of the loan at terms considered to be at market for loans with comparable risk and management expects the borrower will continue to perform under the re-modified terms based on the borrower's past history of performance.

On March 22, 2020, ~~federal~~the Interagency Statement was issued by our banking regulators ~~issued an interagency statement,~~that encourages financial institutions to work prudently with borrowers who are or may be unable to meet their contractual payment obligations due to the effects of COVID-19. Additionally, Section 4013 of the CARES Act further provides that a qualified loan modification is exempt by law from classification as a TDR as defined by GAAP, from the period beginning March 1, 2020 until the earlier of December 31, 2020 or the date that is 60 days after the date on which the national emergency concerning the COVID-19 outbreak declared by the President of the United States under the National Emergencies Act (50 U.S.C. 1601 et seq.) terminates. The Interagency Statement was subsequently ~~clarified and~~ revised ~~by an interagency statement issued on~~in April 7, 2020 ~~that included guidance on their approach for~~to clarify the ~~accounting of loan modifications in light~~interaction of the ~~economic impact~~original guidance with Section 4013 of the ~~Coronavirus Disease 2019 (COVID-19) pandemic. The~~CARES Act, as well as setting forth the banking regulators’ views on consumer protection considerations. Section 541 of the Consolidated Appropriations Act (CAA) was passed in December 2020 and extended relief under the CARES Act to suspend TDR accounting through January 2022. In accordance with such guidance ~~interprets current accounting standards and indicates that a lender can conclude that a borrower is not experiencing financial difficulty if short-term~~we made modifications ~~are made~~ in response to COVID-19 such as payment deferrals, fee waivers, extensions of repayment terms, or other delays in payment that are insignificant related to the loans in which the borrower is less than 30 days past due on its contractual payments at the time a modification program is implemented. The agencies confirmed in working with the staff of the FASB that short-term modifications made on a good faith basis in response to COVID-19 toimpacted borrowers who were ~~current prior~~not past due and met criteria for modification.

This ability to ~~any relief are not TDRs.~~ exclude COVID-19-related modifications as troubled debt restructurings, which was set to expire on December 31, 2020, was extended under the Consolidated Appropriations Act 2021 to the earlier of 60 days after the national emergency concerning the COVID-19 outbreak terminates, or, January 1, 2022. The majority of ~~these~~the loan modifications ~~will involve~~we made for customers involved three to six month forbearance payments which ~~will be~~were added to the end of the note.As of ~~April 30,~~December 31, 2020, ~~we had~~ approved modifications ~~on $105.4~~to loan balances were approximately $130.1 million, of ~~loans.~~which, an approximate $1.7 million were still in deferment as of December 31, 2020. Loan balances still in deferment as of March 31, 2021 totaled $1.2 million.

The Company had no0 loans classified as troubled debt restructurings as of March 31, ~~2020 or~~2021. At December 31, ~~2019.~~2020, the Company had 1 loan in the amount of $1.1 million that was deemed to be a troubled debt restructuring. This note was paid in full during the first quarter of 2021.

Table of Contents

Credit Quality Indicators:

The Company categorizes loans into risk categories based on relevant information about the ability of borrowers to service their debt such as: current financial information, historical payment experience, credit documentation, public information, and current economic trends, among other factors. The Company analyzes loans individually by classifying the loans as to credit risk. This analysis is performed on a quarterly basis. The Company uses the following definitions for risk ratings:

Special Mention. Loans classified as special mention have one or more potential weaknesses that deserve management's close attention. If left uncorrected, these potential weaknesses may result in deterioration of the repayment prospects for the loan or of the institution's credit position at some future date.

Substandard. Loans classified as substandard are inadequately protected by the current net worth and paying capacity of the obligor or of the collateral pledged, if any. Loans so classified have a well-defined and documented weakness or

~~Table of Contents~~

weaknesses that jeopardize the liquidation of the debt. They are characterized by the distinct possibility that the institution will sustain some loss if the deficiencies are not corrected.

Doubtful. Loans classified as doubtful have all the weaknesses inherent in those classified as substandard, with the added characteristic that the weaknesses make collection or liquidation in full, on the basis of currently existing facts, conditions, and values, highly questionable and improbable.

Loans not meeting the criteria above that are analyzed individually as part of the above described process are considered to be pass rated loans.

As of March 31, ~~2020~~2021 and December 31, ~~2019,~~2020, and based on the most recent analysis performed, the risk category of loans by class of loans is as follows:


As of March 31, 2020			Special

As of March 31, 2021											Special
(in thousands)	Pass		Mention		Substandard		Doubtful		Pass		Mention		Substandard		Doubtful

Commercial	$	79,839	$	2,860	$	94	$	—	$	108,675	$	3,835	$	36	$	—
Real estate construction		32,285		1,501		394		—		15,012		—		124		—
Real estate mortgage:
1-4 family residential		291,414		3,037		5,422		—		280,972		2,962		3,695		35
Multi-family residential		53,605		614		1,292		—		44,467		469		800		—
Non-farm & non-residential		214,304		7,086		1,818		—		217,053		12,979		14		1,799
Agricultural		54,213		3,774		2,026		—		45,148		2,049		2,955		—
Total	$	725,660	$	18,872	$	11,046	$	—	$	711,327	$	22,294	$	7,624	$	1,834


As of December 31, 2019			Special

As of December 31, 2020											Special
(in thousands)	Pass		Mention		Substandard		Doubtful		Pass		Mention		Substandard		Doubtful
Commercial	$	83,515	$	2,785	$	252	$	—	$	113,402	$	3,896	$	127	$	—
Real estate construction		30,462		1,363		394		—		14,447		—		124		—
Real estate mortgage:
1-4 family residential		283,048		3,435		4,932		4		286,925		2,309		3,902		—
Multi-family residential		43,193		4,137		1,292		—		45,974		588		1,292		—
Non-farm & non-residential		195,800		7,169		1,939		—		207,050		8,261		1,888		1,799
Agricultural		51,352		4,459		1,355		—		45,649		3,288		3,302		—
Total	$	687,370	$	23,348	$	10,164	$	4	$	713,447	$	18,342	$	10,635	$	1,799

For consumer loans, the Company evaluates the credit quality based on the aging of the recorded investment in loans, which was previously presented. Non-performing consumer loans are loans which are greater than 89 days past due or on non-accrual status, and total ~~$33~~$59 thousand at March 31, ~~2020~~2021 and ~~$95~~$46 thousand at December 31, ~~2019.~~2020.

Table of Contents

Non-consumer loans with an outstanding balance less than $200 thousand are evaluated similarly to consumer loans. Loan performance is evaluated based on delinquency status. Both are reviewed at least quarterly and credit quality grades are updated as needed.

4.	EARNINGS PER SHARE

~~Table of Contents~~

~~4.EARNINGS PER SHARE~~

Basic earnings per common share is net income divided by the weighted average number of common shares outstanding during the period. Diluted earnings per common share includes the dilutive effect of additional potential common shares issuable under stock based compensation agreements.

The factors used in the earnings per share computation follow:

Three Months Ended

March 31,

2020

2019

(in thousands)
Basic and Diluted Earnings Per Share

Net Income

$
1,751

$
2,811
Weighted average common shares outstanding

5,880

5,929
Basic and diluted earnings per share

$
0.30

$
0.47


	Three Months Ended
	March 31,
	2021		2020

	(in thousands)
Basic and Diluted Earnings Per Share
Net Income	$	2,458	$	1,751
Weighted average common shares outstanding		5,914		5,880
Basic and diluted earnings per share	$	0.41	$	0.30

~~Restricted stock grants were excluded in shares outstanding for purposes of computing basic and diluted earnings per share for the both the three months ended March 31, 2020 and March 31, 2019.~~

5.	STOCK COMPENSATION

~~5.STOCK COMPENSATION~~

We have ~~three~~2 stock based compensation plans as described below.

~~2005 Restricted Stock Grant Plan~~

On May 10, 2005, the Company’s stockholders approved a restricted stock grant plan. Total shares issuable under the plan were 100,000. There were no shares issued during 2020 or 2019. The plan is now expired and no additional shares will be issued from the 2005 plan. There were 0 shares forfeited during the three months ended March 31, 2020 and 12 shares were forfeited during the three months ended March 31, 2019.

~~A summary of changes in the Company’s nonvested shares for the year follows (in thousands, except per share data):~~

Grant-Date

Shares

Fair Value
Nonvested at January 1, 2020

1,580

$
13.67
Vested

(1,580)

13.67
Nonvested at March 31, 2020

—

$
—

~~As of March 31, 2020, there was no unrecognized compensation cost related to nonvested shares granted under the 2005 Restricted Stock Grant due to their being no nonvested shares outstanding.~~

~~Table of Contents~~

2009 Stock Award Plan

On May 13, 2009, the Company’s stockholders approved a stock award plan that provides for the granting of both incentive and nonqualified stock options and other share based awards. Total shares issuable under the plan were 300,000. There were 0 shares issued during both the three months ended March 31, ~~2020~~2021 and ~~23,380 shares were issued during the three months ended~~ March 31, ~~2019.~~2020. The plan ~~is now~~has expired and no0 additional shares will be issued from the 2009 plan. There were 0228 shares forfeited during the three months ended March 31, ~~2020~~2021 and ~~108~~0 shares were forfeited during the three months ended March 31, ~~2019.~~2020.

A summary of changes in the Company’s nonvested shares for the year follows (in thousands, except per share data):



			Weighted-Average	Fair
			Grant-Date	Value
Nonvested Shares	Shares		Fair Value	Per Share
Nonvested at January 1, 2021	23,187	$	501,451	$	21.63
Vested	(11,189)		(233,894)		20.90
Forfeited	(228)		(5,030)		22.06
Nonvested at March 31, 2021	11,770	$	262,527	$	22.30

Weighted-Average

Grant-Date

Shares

Fair Value
Nonvested at January 1, 2020

38,482

$
21.46
Vested

(12,855)

20.98
Nonvested at March 31, 2020

25,627

$
21.70

2019 Stock Award Plan

On May 21, 2019, the Company’s stockholders approved a stock award plan that provides for the granting of both incentive and nonqualified stock options and other share based awards. Total shares issuable under the plan are 300,000. There were ~~30,030~~9,850 shares issued during the three months ended March 31, ~~2020~~2021 and 030,030 shares were issued during the three months ended March 31, ~~2019.~~2020. There were 0144 shares forfeited during ~~both~~ the three months ended March 31, ~~2020~~2021 and 0 shares forfeited during the three months ended March 31, ~~2019.~~2020.


			Weighted-Average
			Grant-Date
Nonvested Shares	Shares		Fair Value
Nonvested at January 1, 2021	27,330	$	631,596
Granted	9,850		187,249
Vested	(7,488)		(173,048)
Forfeited	(144)		(3,328)
Nonvested at March 31, 2021	29,548	$	642,469

Weighted-Average

Grant-Date
Nonvested Shares

Shares

   Fair Value
Nonvested at January 1, 2020

—

$
—
Granted

30,030

23.11
Nonvested at March 31, 2020

30,030

$
23.11

Table of Contents

6. REPURCHASE AGREEMENTS

Repurchase agreements totaled ~~$5.4~~$8.4 million as of March 31, 2021 and $9.1 million as of December 31, 2020. ~~Of this, $3.4~~As of March 31, 2021, $7.4 million of balances were overnight obligations and ~~$2.0~~$1.0 million of balances had terms extending through May 2021 with a weighted remaining average life of ~~0.6~~0.2 years. The Company pledged both U.S. treasury securities and U.S. government agency securities with a combined total carrying amount of ~~$11.9~~$14.7 million to secure repurchase agreements as of March 31, ~~2020.~~2021.

7.	FAIR VALUE MEASUREMENTS

~~7.FAIR VALUE MEASUREMENTS~~

ASC Topic 820, “Fair Value Measurements and Disclosures”, defines fair value, establishes a framework for measuring fair value, and sets forth disclosures about fair value measurements. ASC Topic 825, “Financial Instruments”, allows entities to choose to measure certain financial assets and liabilities at fair value. The Company has not elected the fair value option for any financial assets or liabilities.

~~Table of Contents~~

ASC Topic 820 defines fair value as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. It also establishes a fair value hierarchy which requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value. This Topic describes three levels of inputs that may be used to measure fair value:

Level 1 – Quoted prices (unadjusted) for identical assets or liabilities in active markets that the entity has the ability to access as of the measurement date.

Level 2 – Significant other observable inputs other than Level 1 prices such as quoted prices for similar assets or liabilities; quoted prices in markets that are not active; or other inputs that are observable or can be corroborated by observable market data.

Level 3 – Significant unobservable inputs that reflect a company’s own assumptions about the assumptions that market participants would use in pricing an asset or liability.

The Company used the following methods and significant assumptions to estimate the fair value:

Investment Securities: The fair values for available for sale investment securities are determined by quoted market prices, if available (Level 1). For securities where quoted prices are not available, fair values are calculated based on market prices of similar securities (Level 2). For securities where quoted prices or market prices of similar securities are not available, fair values are calculated using discounted cash flows or other market indicators (Level 3).

Impaired Loans: The fair value of impaired loans with specific allocations of the allowance for loan losses is generally based on recent third party real estate appraisals. These appraisals may utilize a single valuation approach or a combination of approaches including comparable sales and the income approach. Adjustments are routinely made in the appraisal process by the appraisers to adjust for differences between the comparable sales and income data available for similar loans and collateral underlying such loans.

~~Net adjustments totaled $23 thousand the first three months of 2020 and $(182) thousand for the first three months of 2019 and~~ Impaired loans resulted in a Level 3 classification of the inputs for determining fair value.

Non-real estate collateral may be valued using an appraisal, net book value per the borrower’s financial statements, or aging reports, adjusted or discounted based on management’s historical knowledge, changes in market conditions from the time of the valuation, and management’s expertise and knowledge of the client and client’s business, resulting in a Level 3 fair value classification. Impaired loans are evaluated on a quarterly basis for additional impairment and adjusted in accordance with the allowance policy.

Mortgage Servicing Rights: Fair value is based on market prices for comparable mortgage servicing contracts, when available, or alternatively based on a valuation model that calculates the present value of estimated future net servicing income, resulting in a Level 3 classification.

Table of Contents

Derivatives and Financial Instruments: The fair values of derivative financial instruments are based on derivative valuation models using market data inputs as of the valuation date (Level 2).

~~Table of Contents~~

Assets and Liabilities Measured on a Recurring Basis:

Available for sale investment securities, derivatives and other financial instrument assets and equity securities included in other assets are the Company’s only balance sheet items that meet the disclosure requirements for instruments measured at fair value on a recurring basis. Disclosures are as follows in the tables below.

Fair Value Measurements at March 31, ~~2020~~2021 (in thousands):


			Quoted Prices
			In Active
			Markets for		Significant Other		Significant
			Identical		Observable		Unobservable
	Carrying		Assets		Inputs		Inputs

									Fair Value Measurements at March 31, 2021 Using:
											Quoted Prices
											In Active
											Markets for		Significant Other		Significant
											Identical		Observable		Unobservable
									Carrying		Assets		Inputs		Inputs
Description	Value		(Level 1)		(Level 2)		(Level 3)		Value		(Level 1)		(Level 2)		(Level 3)
Financial Assets
U.S. treasury notes	$	9,336	$	—	$	9,336	$	—	$	9,135	$	—	$	9,135	$	—
U. S. government agencies		17,920		—		17,920		—		26,846		—		26,846		—
States and political subdivisions		28,876		—		28,876		—		66,278		—		66,278		—
Mortgage-backed - residential		109,990		—		109,990		—		115,675		—		115,675		—
Mortgage-backed-commercial		48,243		—		48,243		—		81,856		—		81,856		—
Asset-backed		32,822		—		32,822		—		48,776		—		48,776		—
Derivatives and financial instrument assets		237		—		237		—
Other Assets		296		296		—		—
Other										998				998
Derivatives										455		—		455		—
Equity Securities										293		293		—		—
Total	$	247,720	$	296	$	247,424	$	—	$	350,312	$	293	$	350,019	$	—


Financial Liabilities
Derivatives and financial instrument liabilities	$	3,525	$	—	$	3,525	$	—
Derivatives									$	1,083	$	—	$	1,083	$	—

Fair Value Measurements at December 31, ~~2019~~2020 (in thousands):


			Quoted Prices
			In Active
			Markets for		Significant Other		Significant
			Identical		Observable		Unobservable
	Carrying		Assets		Inputs		Inputs

									Fair Value Measurements at December 31, 2020 Using:
											Quoted Prices
											In Active
											Markets for		Significant Other		Significant
											Identical		Observable		Unobservable
									Carrying		Assets		Inputs		Inputs
Description	Value		(Level 1)		(Level 2)		(Level 3)		Value		(Level 1)		(Level 2)		(Level 3)
U.S. treasury notes	$	9,168	$	—	$	9,168	$	—	$	9,188	$	—	$	9,188	$	—
U. S. government agencies		23,735		—		23,735		—		23,298		—		23,298		—
States and political subdivisions		32,589		—		32,589		—		67,639		—		67,639		—
Mortgage-backed - residential		113,991		—		113,991		—		126,482		—		126,482		—
Mortgage-backed - commercial		50,351		—		50,351		—		74,551		—		74,551		—
Asset-backed		35,496		—		35,496		—		51,311		—		51,311		—
Derivatives and financial instrument assets		94				94
Other Assets		292		292		—		—
Other										1,025		—		1,025		—
Derivatives										501		—		501		—
Equity Securities										298		298		—		—
Total	$	265,716	$	292	$	265,424	$	—	$	354,293	$	298	$	353,995	$	—


Financial Liabilities
Derivatives and financial instrument liabilities	$	212	$	—	$	212	$	—
Derivatives									$	2,350	$	—	$	2,350	$	—

~~There were no transfers between level 1 and level 2 during 2020 or 2019.~~

Table of Contents

Assets measured at fair value on a non-recurring basis are summarized below (in thousands):


	Fair Value Measurements at March 31, 2020 Using :
				Quoted Prices
				In Active
				Markets for		Significant Other		Significant
				Identical		Observable		Unobservable
	Carrying			Assets		Inputs		Inputs

										Fair Value Measurements at March 31, 2021 Using :
												Quoted Prices
												In Active
												Markets for		Significant Other		Significant
												Identical		Observable		Unobservable
										Carrying		Assets		Inputs		Inputs
(In thousands)	Value			(Level 1)		(Level 2)		(Level 3)		Value		(Level 1)		(Level 2)		(Level 3)
Description
Impaired loans:
Real estate mortgage:
1-4 family residential										$	799	—	$	—	$		799
Multi-family residential	$	1,217	$	—	$	—	$		1,217		792	—		—			792
Non-farm & non- residential											899	—		—			899
Other real estate owned, net:
Real estate mortgage:
1-4 family residential		132		—		—			132		61	—		—			61
Commercial		246		—		—			246
Agricultural		233		—		—			233		233	—		—			233
Mortgage servicing rights		1,023		—		—			1,023		1,370	—		—			1,370


	Fair Value Measurements at December 31, 2019 Using :
				Quoted Prices
				In Active
				Markets for		Significant Other	Significant
				Identical		Observable	Unobservable
	Carrying			Assets		Inputs	Inputs

									Fair Value Measurements at December 31, 2020 Using :
												Quoted Prices
												In Active
												Markets for		Significant Other	Significant
												Identical		Observable	Unobservable
									Carrying			Assets		Inputs	Inputs
(In thousands)	Value			(Level 1)		(Level 2)	(Level 3)		Value			(Level 1)		(Level 2)	(Level 3)
Description
Impaired loans:
Real Estate Mortgage:
1-4 family residential	$	200	$	—	$	—	$	200	$	799	$	—	$	—	$	799
Multi-family residential		1,242		—		—		1,242		1,217		—		—		1,217
Non-farm & non - residential										899		—		—		899
Agricultural										694		—		—		694
Other real estate owned, net:
Real Estate Mortgage:
1-4 family residential		40		—		—		40		73		—		—		73
Commercial		246		—		—		246		145		—		—		145
Agriculturual		233		—		—		233		233		—		—		233
Mortgage servicing rights		1,107		—		—		1,107		1,459		—		—		1,459

Impaired loans measured for impairment using the fair value of the collateral for collateral dependent loans had a net carrying amount of $1.2 million, which includes a valuation allowance of $75 thousand as of March 31, 2020. Impaired loans measured for impairment using the fair value of the collateral for collateral dependent loans had a net carrying amount of $1.4 million, with a valuation allowance of $52 thousand at December 31, 2019.

No additional loans were impaired at March 31, 2020 when compared to December 31, 2019. One loan relationship which was impaired at December 31, 2019 required additional provision for loan loss expense of $25 thousand for the three months ended March 31, 2020.

Other real estate owned measured at fair value less costs to sell had a net carrying amount of $611 thousand, which is made up of the outstanding balance of $1.1 million, net of a valuation allowance of $500 thousand as of March 31, 2020. Other real estate owned which was measured at fair value less costs to sell, had a net carrying amount of $519 thousand, which was made up of the outstanding balance of $980 thousand, net of a valuation allowance of $461 thousand at December 31, 2019. The Company recorded $38 thousand in write-downs of other real estate owned properties for the three months ended both March 31, 2020 and March 31, 2019.

Impaired mortgage servicing rights are carried at the lower of cost or fair value. At March 31 2020, impaired mortgage servicing rights totaled $1.3 million, less a valuation allowance of $252 thousand, resulting in a net carrying value of $1.0 million.

Table of Contents

At December 31, 2019, impaired mortgage servicing rights totaled $1.2 million, less a valuation allowance of $110 thousand, resulting in a carrying value of $1.1 million. For the three months ended March 31, 2020, the Company recorded net writedowns of $142 thousand. For the three months ended March 31,019, the Company recorded net write-downs of $6 thousand.

The following table presents quantitative information about level 3 fair value measurements for financial instruments measured at fair value on a non-recurring basis as of March 31, ~~2020~~2021 and December 31, ~~2019:~~2020:

Range

March 31, 2020

Fair

Valuation

Unobservable

(Weighted

Range

March 31, 2021

Fair

Valuation

Unobservable

(Weighted

(In thousands)

Value

Technique(s)

Input(s)

Average)

Value

Technique(s)

Input(s)

Average)

Impaired loans

Real estate mortgage:

1-4 family residential

799

sales comparison

adjustment for differences between the comparable sales

15%-15%

(15%)

Multi-family residential

1,217

income approach

capitalization rate

7% - 7%

(7)%

792

sales price

adjustment for difference between book value and sales price

39%-39%

(39%)

Non-farm and non-residential

899

sales comparison

adjustment for differences between the comparable sales

50% -50%

(50)%

Other real estate owned:

Real estate mortgage:

1-4 family residential

132

sales comparison

adjustment for differences between the comparable sales

(23)% - (28)%

(30)%

sales comparison

adjustment for differences between the comparable sales

23% - 27%

(30)%

Commercial

246

income approach

capitalization rate

(6)% - 8%

(62)%

Agricultural

233

sales comparison

adjustment for differences between the comparable sales

(0)% - 26%

(14)%

233

sales comparison

adjustment for differences between the comparable sales

0% - 26%

(14)%

Mortgage servicing rights

1,023

discounted cash flow

constant prepayment rates

(8)% - (23)%

(13)%

1,370

discounted cash flow

constant prepayment rates

8% - 40%

(21)%


					Range
December 31, 2018		Fair	Valuation	Unobservable	(Weighted

										Range
December 31, 2020							Fair	Valuation	Unobservable	(Weighted
(In thousands)		Value	Technique(s)	Input(s)	Average)		Value	Technique(s)	Input(s)	Average)

Impaired loans
Real estate mortgage:
1-4 family residential	$	200	sales comparison	adjustment for differences between the comparable sales	(1)% - 21%	(1)%
1-4 family-residential							799	sales comparison	adjustment for differences between the comparable sales	15% -15%	(15)%
Multi-family residential		1,242	income approach	capitalization rate	7% - 7%	(7)%	1,217	income approach	capitalization rate	7% - 7%	(7)%
Non-farm and non-residential							899	sales comparison	adjust for differences between the comparable sales	50% - 50%	(50)%
Agricultural							694	sales comparison	adjustment for differences between the comparable sales	100% - 100%	(100)%
Other real estate owned:
Real estate mortgage:
1-4 family residential		40	sales comparison	adjustment for differences between the comparable sales	(4%) - 11%	(29%)	73	sales comparison	adjustment for differences between the comparable sales	23% - 27%	(30)%
Commercial		246	sales comparison	capitalization rate	(6%) - 8%	(62)%	145	sales comparison	adjustment for differences between the comparable sales	15%-15%	(15)%
Agriculturual		233	sales comparison	adjustment for differences between the comparable sales	0% - 26%	(14)%
Agricultural							233	sales comparison	adjustment for differences between the comparable sales	0% - 26%	(14)%
Mortgage servicing rights		1,107	discounted cash flow	constant prepayment rates	9% - 20%	(12)%	1,459	discounted cash flow	constant prepayment rates	12% - 29%	(19)%

Table of Contents

Fair Value of Financial Instruments

The carrying amounts and estimated fair values of financial instruments, as of March 31, ~~2020~~2021 and December 31, ~~2019~~2020 are as follows:

March 31, ~~2020~~2021


	Carrying

											Carrying
(in thousands)	Value		Level 1		Level 2		Level 3		Total		Value		Level 1		Level 2		Level 3		Total
Financial assets
Cash and cash equivalents	$	37,766	$	37,766	$	—	$	—	$	37,766	$	81,919	$	81,919	$	—	$	—	$	81,919
Interest bearing time deposits		2,375		2,375		—		—		2,375		2,070		2,070		—		—		2,070
Securities available for sale		247,187		—		247,187		—		247,187		349,564		—		349,564		—		349,564
Loans held for sale		4,990		—		5,065		—		5,065		2,695		—		2,759		—		2,759
Net Loans		768,411		—		—		742,213		742,213		755,635		—		—		762,575		762,575
Federal Home Loan Bank stock		7,034		—		—		—		N/A		7,072		—		—		—		N/A
Interest receivable		4,010		—		894		3,116		4,010		4,706		—		1,057		3,649		4,706
Derivative and financial instruments		237		—		237		—		237		455		—		455		—		455
Other assets		296		296		—		—		296

Equity securities												293		293		—		—		293

Financial liabilities
Total deposits	$	853,217	$	637,199	$	217,638	$	—	$	854,837	$	1,025,695	$	854,474	$	171,892	$	—	$	1,026,366
Repurchase agreements		5,410		—		5,410		—		5,410		8,437		—		8,437		—		8,437
Short-term Federal Home Loan Bank advances		54,000		—		54,000		—		54,000		5,500		—		5,500		—		5,500
Long-term Federal Home Loan Bank advances		84,925		—		87,678		—		87,678		84,264		—		86,564		—		86,564
Subordinated debentures		7,217		—		—		6,785		6,785		7,217		—		—		7,214		7,214
Interest payable		1,217		—		1,205		12		1,217		531		—		521		10		531
Derivative and financial instruments		3,525		—		3,525		—		3,525		1,083		—		1,083		—		1,083

December 31, ~~2019~~2020


	Carrying

											Carrying
(in thousands)	Value		Level 1		Level 2		Level 3		Total		Value		Level 1		Level 2		Level 3		Total
Financial assets
Cash and cash equivalents	$	22,182	$	22,182	$	—	$	—	$	22,182	$	81,819	$	81,819	$	—	$	—	$	81,819
Interest bearing time deposits		2,375		2,375		—		—		2,375		2,070		2,070		—		—		2,070
Securities available for sale		265,330		—		265,330		—		265,330		349,564		—		349,564		—		349,564
Loans held for sale		2,144		—		2,171		—		2,171		2,695		—		2,752		—		2,752
Net Loans		735,853		—		—		735,060		735,060		755,635		—		—		756,908		756,908
Federal Home Loan Bank stock		7,034		—		—		—		N/A		7,072		—		—		—		N/A
Interest receivable		4,166		—		1,035		3,131		4,166		4,706		—		1,026		3,680		4,706
Derivatives and financial instruments		94		—		94		—		94
Other assets		292		292		—		—		292

Derivative and financial instruments												455		—		455		—		455
Equity securities												293		293		—		—		292

Financial liabilities
Total deposits	$	842,653	$	630,948	$	210,892	$	—	$	841,840	$	1,025,695	$	898,303	$	127,916	$	—	$	1,026,219
Repurchase agreements		5,994		—		5,993		—		5,993		8,437		—		8,437		—		8,437
Short-term Federal Home Loan Bank advances		25,000		—		25,000		—		25,000		5,500		—		5,500		—		5,500
Long-term Federal Home Loan Bank advances		91,418		—		91,397		—		91,397		84,264		—		86,214		—		86,214
Subordinated debentures		7,217		—		—		7,213		7,213		7,217		—		—		7,212		7,212
Interest payable		1,170		—		1,156		14		1,170		531		—		521		10		531
Derivatives and financial instruments		212		—		212		—		212		1,083		—		1,083		—		164

Table of Contents

LEASES


	Statement of
	Consolidated
	Balance Sheet		3/31/2021		12/31/2020

			(in thousands)
Operating Lease Right of Use Asset:
Gross Carrying Amount		$	8,631	$	8,631
Accumulated Amortization			(1,067)		(961)
Net Book Value	Operating lease right of use asset	$	7,564	$	7,670

Operating Lease Liabilities
Right of use lease obligations	Operating lease liability	$	7,735	$	7,850

~~8.LEASES~~

Statement of

Financial Condition

Location

3/31/2020

12/31/2019

(in thousands)
Operating Lease Right of Use Asset:

Gross Carrying Amount

$

8,824
$
8,857
Accumulated Amortization

(802)

(662)
Net Book Value

Operating lease right of use asset

$

8,022
$
8,195

Operating Lease Liabilities

Right of use lease obligations

Operating lease liability

$

8,210
$
8,350

As of March 31, ~~2020,~~2021, the weighted-average remaining lease term for operating leases was ~~35.2~~34.4 years and the weighted- average discount rate used in the measurement of operating lease liabilities was ~~4.13%~~4.14%. The Company utilized the FHLB fixed rate advance rate as of December 31, 2018 for the term most closely aligning with the remaining lease term for lease obligations in existence as of December 31, 2018. The Company utilized the FHLB fixed rate advance rate as of April 30, 2019 as a basis for determining the discount rate for one contract which was entered into during April 2019.

Three Months Ended

3/31/2020

3/31/2019

(in thousands)
Lease Cost:

Operating lease cost

$

140
$
111
Total lease cost

$

140
$
111

Other information

Cash paid for amounts included in the measurement of lease liabilities:

Operating cash flows from operating leases

$

102
$
130


	Three Months Ended
		3/31/2021		3/31/2020

		(in thousands)
Lease Cost:
Operating lease cost	$	140	$	140
Total lease cost	$	140	$	140

Other information
Cash paid for amounts included in the measurement of lease liabilities:
Operating cash flows from operating leases	$	148	$	102

Maturity analysis of liabilities under operating leases with terms longer than 12 months, are as follows at March 31, ~~2020:~~

As of March 31, 2020

(in thousands)
Twelve months ended March 31,

2020

$

533
2021

521
2022

527
2023

531
2024

545
Thereafter

18,847
Total undiscounted lease payments

$

21,504
Amounts representing interest

(13,294)
Lease liability

$

8,210

2021:




		(in thousands)
Twelve months ended March 31,
2022	$	522
2023		532
2024		534
2025		536
2026		511
Thereafter		18,207
Total undiscounted lease payments	$	20,842
Amounts representing interest		(13,107)
Lease liability	$	7,735

Table of Contents

9.REVENUE FROM CONTRACTS WITH CUSTOMERS

The Company’s revenue from contracts with customers in the scope of Topic 606 is recognized within noninterest income. The consolidated statements of income include all categories of noninterest income. There are no significant individual items included in other non-interest income within the scope of Topic 606. The following table reflects only the categories of noninterest income that are within the scope of Topic 606:

Three Months Ended

3/31/2020

3/31/2019
Service charges

$
1,289

$
1,194
Trust department income

370

328
Brokerage income

127

136
Debit card interchange income

812

790
Total

$
2,598

$
2,448


	Three Months Ended
	3/31/2021		3/31/2020
Service charges	$	1,081	$	1,289
Trust department income		462		370
Brokerage income		195		127
Debit card interchange income		1,010		812
Total	$	2,748	$	2,598

Trust department income: We earn wealth management fees based upon asset custody, investment management, trust, and estate services provided to customers. Most of these customers receive monthly billings for services rendered based upon the market value of assets and/or income generated. Fees that are transaction based are recognized at the point in time that the transaction is executed

Service charges: We earn fees from our deposit customers for transaction-based, account maintenance, and overdraft services. Transaction-based fees and overdraft fees are recognized at a point in time, since the customer generally has a right to cancel the depository arrangement at any time. The arrangement is considered a day-to-day contract with ongoing renewals and optional purchases, so the duration of the contract does not extend beyond the services already performed. Account maintenance fees, which relate primarily to monthly maintenance, are earned over the course of a month representing the period over which we satisfy our performance obligation.

Debit card interchange income: As with the transaction-based fees on deposit accounts, debit card interchange income is recognized at the point in time that we fulfill the customer’s request. We earn interchange fees from cardholder transactions processed through card association networks. Interchange rates are generally set by the card associations based upon purchase volumes and other factors. Interchange fees represent a percentage of the underlying transaction value and are recognized daily, concurrently with the transaction processing services provided to the cardholder

Brokerage income: Brokerage income fees are the commissions and fees received from a registered broker/dealer and investment adviser that provide those services to our customers. We act as an agent in arranging the relationship between the customer and the third-party service provider. These fees are recognized monthly from the third-party broker based upon services already performed.

~~NOTE 10 –~~10. DERIVATIVES AND FINANCIAL INSTRUMENTS

As part of our overall interest rate risk management, the Company uses derivative instruments, including interest rate swaps. The notional amount does not represent amounts exchanged by the parties. The amount exchanged is determined by reference to the notional amount and the other terms of the individual agreements.

Cash Flow Hedges: Interest rate swaps with notional amounts totaling ~~$23~~$23 million and ~~$10~~$23 million as of March 31, ~~2020~~2021 and December 31, ~~2019,~~2020, were designated as cash flow hedges of certain rolling three month term FHLB advances and were determined to be effective during all periods presented. The Company expects the hedges to remain effective during the remaining terms of the swaps. The carrying value of the cash flow hedge was a liability of ~~$2.6 million~~$704 thousand as of March 31, ~~2020~~2021 and ~~an asset of $46 thousand~~$1.7 million as of December 31, ~~2019.~~2020.

Fair Value Hedges: Interest rate swaps with notional amounts totaling $7 million and $7 million as of March 31, ~~2020~~2021 and December 31, ~~2019~~2020 were designated as fair value last of layer hedges of certain fixed rate prepayable ~~loans.~~loans with an outstanding balance of $51.3 million as of March 31, 2021. The hedges were determined to be effective during all periods presented. The Company expects the hedges to remain effective during the remaining terms of the swaps.

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The carrying value of the fair value hedge asset was $395 thousand and $626 thousand as of March 31, 2021 and December 31, 2020 and included in loans on the Company’s balance sheet. The carrying value of the fair value hedge liability was ~~$664~~$379 thousand and ~~$164~~$625 thousand as of March 31, ~~2020~~2021 and December 31, ~~2019~~2020 and was included in other liabilities on the Company’s balance sheet.

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Derivatives Not Designated as Hedges: Commitments to fund mortgage loans (interest rate locks) to be sold into the secondary market commitments for the future delivery of these mortgage loans are accounted for as free standing derivatives. The ~~Company also enters into~~fair value of the interest rate lock is recorded at the time the commitment to fund the mortgage loan is executed and is adjusted for the expected exercise of the commitment before the loan is funded. Fair values of these mortgage derivatives are estimated based on changes in mortgage interest rates ~~swaps with its~~from the date the interest on the loan ~~customers. The notional amounts~~is locked. Changes in the fair values of interest rate swaps with its loan customer as of March 31, 2020 and December 31, 2019 were $26.7 million and $7.4 million. The Company enters into corresponding offsetting derivatives with third parties. While these derivatives ~~represent economic hedges, they do not qualify as hedges for accounting purposes.~~are included in net gains on the sales of loans. The carrying value of the fair value asset ~~and liability~~related to the mortgage banking derivatives was ~~$237~~$455 thousand and ~~$48~~$501 thousand as of March 31, ~~2020~~2021 and December 31, ~~2019~~2020 and was included in other assets ~~and other liabilities~~ on the Company’s balance sheet. The notional amounts of these transactions as of March 31, 2021 and December 31, 2020 were $30.2 million and $24.2 million.

11. PENDING MERGER

On January 27, 2021, the Company and Stock Yards Bancorp announced the execution of an Agreement and Plan of Merger (the “Merger Agreement”), providing the merger of the Company and Stock Yards, subject to the terms and conditions set forth therein. Under the terms of the merger agreement, which was unamiously approved by the Boards of Directors of both companies, the Company’s shareholders will receive 0.64 shares of Stock Yards common stock and cash of $4.75 for each share of Kentucky Bank common stock they own. The transaction is expected to close in the second quarter of 2021 subject to customary closing conditions, including receipt of all applicable regulatory approvals and shareholder approval of Kentucky Bancshares.

Item 2 - MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Forward-Looking Statements

The following discussion provides information about the financial condition and results of operations of the Company and its subsidiaries as of the dates and periods indicated. This discussion and analysis should be read in conjunction with the unaudited consolidated financial statements and Notes thereto appearing elsewhere in this report and the Management’s Discussion and Analysis in the Company’s Annual Report on Form 10-K for the year ended December 31, ~~2019.~~

~~This discussion contains forward-looking statements under~~2020. Results for the Private Securities Litigation Reform Act of 1995 that involve risks and uncertainties. We intend such forward-looking statements to be covered by the safe harbor provisions for forward-looking statements containedprior periods indicated in ~~the federal securities laws. These statements~~this report are not ~~historical facts, but rather statements based on our current expectations regarding our business strategies and their intended~~necessarily indicative of the results ~~and our~~for the year ending December 31, 2021 or any future performance. Forward-looking statements are preceded by terms such as “future”, “expects,” “believes,” “anticipates,” “intends,” “estimates,” “potential,” “may,” and similar expressions.period.

~~Forward looking statements are neither historical facts nor assurances of future performance. Instead, they are based on only our current beliefs, expectations and assumptions regarding~~Although the ~~future of our business, future plans and strategies, projections, anticipated events and trends, the economy and other future conditions. Although we believe~~Company believes that the assumptions underlying the forward-looking statements contained herein are reasonable, any of the assumptions could be inaccurate, and therefore, there can be no assurance that the forward-looking statements included herein will prove to be accurate. Factors that could cause actual results to differ from the results discussed in the forward-looking statements include, but are not limited to: economic conditions (both generally and more specifically in the markets in which we operate); negative impacts of current COVID-19 pandemic, current or future volatility in market conditions; competition for our subsidiary’s customers from other providers of financial and mortgage services; government legislation, regulation and monetary policy (which changes from time to time and over which we have no control);

•

the magnitude and duration of the COVID-19 pandemic and its impact on the global economy and financial market conditions and the business, results of operations and financial condition of the Company

•

economic conditions (both generally and more specifically in the markets, including the cattle market, the thoroughbred horse industry and the automobile industry relating to Toyota vehicles, in which the Company and its bank operate);

•

competition for the Company’s customers from other providers of financial and mortgage services;

•

government legislation, regulation and monetary policy (which changes from time to time and over which the Company has no control);

• changes in interest rates (both generally and more specifically mortgage interest rates); ~~ability to successfully gain regulatory approval when required;~~

material unforeseen changes in the liquidity, results of operations, or financial condition of ~~our subsidiary’s~~the Company’s customers; ~~adequacy~~and

•

other risks detailed in Part 1, Item 1A “Risk Factors” in this report and other risks detailed in the Company’s filings with the Securities and Exchange Commission, all of which are difficult to predict and many of which are beyond the control of the Company.

Table of the allowance for losses on loans and the level of future provisions for losses on loans; future acquisitions, changes in technology, information security breaches or cyber security attacks involving theContents

The Company its subsidiaries, or third-party service providers; and other risks detailed in our filings with the Securities and Exchange Commission, all of which are difficult to predict and many of which are beyond our control.

As a result of the uncertainties and the assumptions on which this discussion and the forward-looking statements are based, actual future operations and results in the future may differ materially from those indicated herein. You should not place undue reliance on any forward-looking statements made by us or on our behalf. Our forward-looking statements are made as of the date of the report, and we undertakeundertakes no obligation to republish revised forward-looking statements to reflect events or circumstances after the date hereof or to reflect the occurrence of unanticipated events. There is no assurance that any list of risks and uncertainties or risk factors is complete.

~~Summary~~Forward-looking statements involve known and unknown risks, uncertainties, and other factors that may cause actual results, performance, or achievements to be materially different from future results, performance, or achievements expressed or implied by the statement. These statements are often, but not always, made through the use of words or phrases such as “anticipate,” “believe,” “aim,” “can,” “conclude,” “continue,” “could,” “estimate,” “expect,” “foresee,” “goal,” “intend,” “may,” “might,” “outlook,” “possible,” “plan,” “predict,” “project,” “potential,” “seek,” “should,”

“target,” “will,” “will likely,” “would,” or other similar expressions.

~~Policy~~These forward-looking statements are not historical facts and ~~Regulatory Developments~~are based on current expectations, estimates and projections about our industry, management’s beliefs and certain assumptions made by management, many of which, by their nature, are inherently uncertain and beyond our control, particularly with regard to developments related to the COVID-19 pandemic. Forward-looking statements detail management’s expectations regarding the future and are based on information known to management only as of the date the statements are made and management undertakes no obligation to update forward-looking statements to reflect events or circumstances that occur after the date forward-looking statements are made, except as required by applicable law.

The Company executed a definitive Agreement and Plan of Merger (“agreement”) dated as of January 27, 2021, with Stock Yards Bancorp. This document also contains statements regarding the proposed acquisition transaction that are not statements of historical fact and are considered forward-looking statements within the criteria described above. These statements are likewise subject to various risks and uncertainties that may cause actual results and outcomes of the proposed transaction to differ, possibly materially, from the anticipated results or outcomes expressed or implied in these forward-looking statements. In addition to factors disclosed in reports filed by Stock Yards and Kentucky Bancshares with the SEC, risks and uncertainties for Stock Yards, Kentucky Bancshares and the combined company include, but are not limited to: the possibility that any of the anticipated benefits of the proposed merger will not be realized or will not be realized within the expected time period; the risk that integration of Kentucky Bancshares’ operations with those of Stock Yards will be materially delayed or will be more costly or difficult than expected; the parties’ inability to meet expectations regarding the timing, completion and accounting and tax treatments of the merger; the inability to complete the merger due to the failure of Kentucky Bancshares’ shareholders to adopt the merger agreement; the failure to satisfy other conditions to completion of the merger, including receipt of required regulatory and other approvals; the failure of the proposed transaction to close for any other reason; diversion of management's attention from ongoing business operations and opportunities due to the merger; the challenges of integrating and retaining key employees; the effect of the announcement of the merger on Stock Yards’, Kentucky Bancshares’ or the combined company's respective customer and employee relationships and operating results; the possibility that the merger may be more expensive to complete than anticipated, including as a result of unexpected factors or events; dilution caused by Stock Yards’ issuance of additional shares of Stock Yards common stock in connection with the merger; the magnitude and duration of the COVID-19 pandemic and its impact on the global economy and financial market conditions and the business, results of operations and financial condition of Stock Yards, Kentucky Bancshares and the combined company; and general competitive, economic, political and market conditions and fluctuations.

The merger agreement should not be read alone, but should instead be read in conjunction with the other information regarding Stock Yards Bancorp, Kentucky Bancshares, their respective affiliates or their respective businesses, the merger agreement and the mergers is contained in, or incorporated by reference into, the registration statement on Form S-4 that includes a proxy statement of Kentucky Bancshares and a prospectus of Stock Yards Bancorp, as well as in the Forms 10-K, Forms 10-Q, Forms 8-K and other filings that each of Stock Yards Bancorp and Kentucky Bancshares make with the Securities and Exchange Commission (“SEC”).

This quarterly report is not a substitute for the proxy statement/prospectus or registration statement or any other document that Stock Yards Bancorp or Kentucky Bancshares may file with the SEC. KENTUCKY BANCSHARES’ SHAREHOLDERS ARE ADVISED TO READ THE REGISTRATION STATEMENT ON FORM S-4 AND THE RELATED PROXY STATEMENT/PROSPECTUS, AS WELL AS ANY AMENDMENTS OR SUPPLEMENTS TO THOSE DOCUMENTS AND ANY OTHER RELEVANT DOCUMENTS FILED OR TO BE FILED WITH THE SEC IN CONNECTION WITH THE PROPOSED MERGER TRANSACTION.

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The definitive proxy statement/prospectus and other documents relating to the merger transaction filed by Stock Yards Bancorp and Kentucky Bancshares can be obtained free of charge from the SEC’s website at www.sec.gov. These documents also can be obtained free of charge by accessing Stock Yard Bancorp’s website at www.syb.com under the tab “Investor Relations” and then under “SEC Filings.” Alternative, these documents, when available, can be obtained free of charge from Stock Yards Bancorp upon written request to Stock Yards Bancorp, Attention: Chief Financial Officer, 1040 East Main Street, Louisville, Kentucky 40206 or by calling (502) 582-2571, or to Kentucky Bancshares, Attention: Chief Financial Officer, 339 Main Street, Paris, Kentucky 40361 or by calling (859) 987-1795.

This quarterly report is not intended to and shall not constitute an offer to sell or the solicitation of an offer to buy securities nor shall there be any sale of securities in any jurisdiction in which such offer, solicitation or sale would be unlawful prior to registration or qualification under the securities laws of such jurisdiction. This quarterly report is also not a solicitation of any vote in any jurisdiction pursuant to the proposed transactions or otherwise. No offer of securities or solicitation will be made except by means of a prospectus meeting the requirements of Section 10 of the Securities Act of 1933, as amended.

Recent Events

Pending Merger with Stock Yards Bancorp, Inc.

Effective January 27, 2021, Kentucky Bancshares, Stock Yards Bancorp, Inc., a Kentucky corporation (“Stock Yards Bancorp”), and H. Meyer Merger Subsidiary, Inc., a Kentucky corporation and a direct, wholly owned subsidiary of Stock Yards Bancorp (“Merger Sub”), entered into an Agreement and Plan of Merger (the “merger agreement”), pursuant to which, on the terms and subject to the conditions set forth therein, Merger Sub will merge with and into Kentucky Bancshares (the “merger”), with Kentucky Bancshares as the surviving entity and a wholly owned subsidiary of Stock Yards Bancorp. Following the merger, the surviving company will merge with and into Stock Yards Bancorp (the “combined company”), and thereafter Kentucky Bank will merge with and into Stock Yards Bancorp’s bank subsidiary, Stock Yards Bank & Trust Company, a Kentucky banking corporation (“Stock Yards Bank”), with Stock Yards Bank as the surviving banking corporation. The acquisition is expected to close during the second quarter of 2021, subject to customary regulatory approval, approval by Kentucky Bancshares’ shareholders and completion of other customary closing conditions.

Impact of COVID-19

On January 30, 2020, the World Health Organization (“WHO”) announced that the outbreak of the novel coronavirus disease 2019 (COVID-19) constituted a public health emergency of international concern. On March 11, 2020, WHO declared COVID-19 to be a global pandemic. On March 13, 2020, the President of the United States declared the COVID-19 outbreak a national emergency. The health concerns relating to the COVID-19 outbreak and related governmental actions taken to reduce the spread of the virus have had a significant adverse impact on the economy, the banking industry and the Company. While quarantine and lock-down orders have been lifted and vaccination efforts are underway, COVID-19 has not yet been fully contained and commercial activity has not yet returned to the levels existing prior to the pandemic outbreak. As a result, the demand for the Company’s products and services has been, and will continue to be, significantly impacted.

On March 27, 2020, the Coronavirus Aid, Relief and Economic Security Act (the “CARES Act”) was signed into law, providing an approximately $2 trillion stimulus package that includes direct payments to individual taxpayers, economic stimulus to significantly impacted industry sectors, emergency funding for hospitals and providers, small business loans, increased unemployment benefits, and a variety of tax incentives.

For small businesses, eligible nonprofits and certain others, the CARES Act established a Paycheck Protection Program (“PPP”), which is administered by the Small Business Administration (“SBA”). ~~Federal,~~On April 24, 2020, the Paycheck Protection Program and Health Care Enhancement Act was enacted. Among other things, this legislation amended the initial CARES Act program by raising the appropriation level for PPP loans from $349 billion to $670 billion.

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The PPP was further modified on June 5, 2020 with the adoption of the Paycheck Protection Program Flexibility Act (the “Flexibility Act”), which extended the maturity date for PPP loans from two years to five years for loans disbursed on or after the date of enactment of the Flexibility Act. For PPP loans disbursed prior to such enactment, the Flexibility Act permits the borrower and lender to mutually agree to extend the term of the loan to five years. The vast majority of the Company's PPP loans have two-year maturities. PPP loans earn interest at a fixed rate of 1% and are fully guaranteed by the U.S. government.

On December 27, 2020, a $900 billion COVID-19 relief package, as passed by the U.S. Congress, was signed into law as part of the 2021 Consolidated Appropriations Act (“CAA”). In addition to providing direct stimulus payments to certain individuals, an increase in unemployment insurance benefits, an extension of the eviction moratorium, relief to the healthcare industry, and additional aid to various other businesses, the COVID-19-related provisions of the CAA also established an additional $284 billion in funding for the PPP through May 31, 2021. The Company is also participating in this phase of the PPP.

As the health and safety of our employees and customers is of primary importance, throughout the COVID-19 pandemic, the Company has enforced mask policies and maintained social distancing precautions for all employees in the office and customer conducting business in our branches, to the fullest extent possible and pursuant to guidance issued by the Centers for Disease Control and state and local ~~governments~~authorities. While COVID-19 cases have begun to ease during the first quarter of 2021 and ~~regulatory authorities have enacted and issued a range of policy responses~~progress has been made related to vaccination efforts, our management team continues to monitor the ongoing situation related to the COVID-19 pandemic ~~including the following:~~in order to anticipate and respond to ongoing COVID-19 related developments.

Summary

The ~~Federal Reserve decreased the range for the federal funds target rate by 50 basis points on March 3, 2020, and by another 100 basis points on March 16, 2020, reaching a current range of 0.0% - 0.25 %.~~

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On March 27, 2020, President Trump signed the Coronavirus Aid, Relief and Economic Security Act (CARES Act), which established a $2 trillion economic stimulus package, including cash payments to individuals, supplemental unemployment insurance benefits and a $349 billion loan program administered through the U.S. Small Business Administration (SBA), referred to as the paycheck protection program (PPP). Under the PPP, small businesses, sole proprietorships, independent contractors and self-employed individuals may apply for loans from existing SBA lenders and other approved regulated lenders that enroll in the program, subject to numerous limitations and eligibility criteria. The Bank is participating as a lender in the PPP. In addition, the CARES Act provides financial institutions the option to temporarily suspend certain requirements under GAAP related to TDRs for a limited period of time to account for the effects of COVID-19.

On April 7, 2020, federal banking regulators issued a revised Interagency Statement on Loan Modifications and Reporting for Financial Institutions, which, among other things, encouraged financial institutions to work prudently with borrowers who are or may be unable to meet their contractual payment obligations because of the effects of COVID-19, and stated that institutions generally do not need to categorize COVID-19-related modifications as TDRs and that the agencies will not direct supervised institutions to automatically categorize all COVID-19 related loan modifications as TDRs.

On April 9, 2020, the Federal Reserve announced additional measures aimed at supporting small and mid-sized businesses, as well as state and local governments impacted by COVID-19. The Federal Reserve announced the Main Street Business Lending Program, which establishes two new loan facilities intended to facilitate lending to small and mid-sized businesses: (1) the Main Street New Loan Facility, or MSNLF, and (2) the Main Street Expanded Loan Facility, or MSELF. MSNLF loans are unsecured term loans originated on or after April 8, 2020, while MSELF loans are provided as upsized tranches of existing loans originated beforeApril 8, 2020. The combined size of the program will be up to $600 billion. The program is designed for businesses with up to 10,000 employees or $2.5 billion in 2019 revenues. To obtain a loan, borrowers must confirm that they are seeking financial support because of COVID-19 and that they will not use proceeds from the loan to pay off debt. The Federal Reserve also stated that it would provide additional funding to banks offering PPP loans to struggling small businesses. Lenders participating in the PPP will be able to exclude loans financed by the facility from their leverage ratio. In addition, the Federal Reserve created a Municipal Liquidity Facility to support state and local governments with up to $500 billion in lending, with the Treasury Department backing $35 billion for the facility using funds appropriated by the CARES Act. The facility will make short-term financing available to cities with a population of more than one million or counties with a population of greater than two million. The Federal Reserve expanded both the size and scope its Primary and Secondary Market Corporate Credit Facilities to support up to $750 billion in credit to corporate debt issuers. This will allow companies that were investment grade before the onset of COVID-19 but then subsequently downgraded after March 22, 2020 to gain access to the facility. Finally, the Federal Reserve announced that its Term Asset-Backed Securities Loan Facility will be scaled up in scope to include the triple A-rated tranche of commercial mortgage-backed securities and newly issued collateralized loan obligations. The size of the facility is $100 billion.

~~Effects on Our Business.~~ We currently expect that the COVID-19 pandemic and the specific developments referred to above could have a significant impact on our business. In particular, we anticipate that a significant portion of the Bank’s borrowers in various segments will continue to endure significant economic distress, which has caused, and may continue to cause, them to draw on their existing lines of credit and adversely affect their ability to repay existing indebtedness, and is expected to adversely impact the value of collateral.

These developments, together with economic conditions generally, are also expected to impact our commercial real estate portfolio, particularly with respect to real estate with exposure to these industries, and the value of certain collateral securing our loans. As a result, we anticipate that our financial condition, capital levels and results of operations could be adversely affected, as described in further detail below.

~~Our Response. We have taken numerous steps in response to the COVID-19 pandemic, including the following:~~

~~We are actively working with loan customers to evaluate prudent loan modification terms.~~

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We continue to promote our digital banking options through our website. Customers are encouraged to utilize online and mobile banking tools, and our customer service and retail departments are fully staffed and available to assist customers remotely.

We are a participating lender in the PPP. We believe it is our responsibility as a community bank to assist the SBA in the distribution of funds authorized under the CARES Act to our customers and communities, which we are carrying out in a prudent and responsible manner.

We have limited all branches to drive-up and appointment only services. We continue to pay all employees according to their normal work schedule, even if their work has been reduced. No employees have been furloughed. Employees whose job responsibilities can be effectively carried out remotely are working from home. Employees whose critical duties require their continued presence on-site are observing social distancing and cleaning protocols.

~~The~~ Company recorded net income of ~~$1.8~~$2.5 million, or ~~$0.30~~$0.41 basic earnings and diluted earnings per share for the first three months ended March 31, ~~2020~~2021 compared to ~~$2.8~~$1.8 million or ~~$0.47~~$0.30 basic earnings and diluted earnings per share for the three month period ended March 31, ~~2019. The first three months net earnings reflect a decrease when compared to the same time period in 2019 although net interest income increased.~~2020. Net interest income ~~increased $53~~decreased $293 thousand, or ~~0.6%~~3.3%, and the provision for loan losses ~~increased~~decreased $1.5 million. Non-interest income increased ~~$562~~$606 thousand, or ~~18.7%~~17.0%, for the three months ended March 31, ~~2020~~2021 compared to the same three month period in ~~2019.~~2020. The increase in non-interest income is mostly attributed to an increase in gain on sale of loans.

For the three months ended March 31, ~~2020~~2021 and compared to the three months ended March 31, ~~2019,~~2020, service charges ~~increased $95~~decreased $208 thousand, gain on the sale of loans increased ~~$476~~$464 thousand, gain on the sale of available for sale securities ~~increased $18~~decreased $112 thousand and salaries and benefits expense increased ~~$275~~$146 thousand. Data processing fees ~~decreased $22~~increased $86 thousand and debit card expenses decreased ~~$23~~$7 thousand.

Return on average assets was 0.78% for the three months ended March 31, 2021 and 0.62% for the three months ended March 31, ~~2020 and 1.04% for the three months ended March 31, 2019.~~2020. Return on average equity was 7.66% for the three month period ended March 31, 2021 and 5.77% for the three month period ended March 31, ~~2020 and 10.39% for the three month period ended March 31, 2019.~~2020.

Securities available for sale decreased ~~$18.1~~$3.9 million from ~~$265.3~~$353.5 million at December 31, ~~2019~~2020 to ~~$247.2~~$349.6 million at March 31, ~~2020.~~2021.

Gross Loans ~~increased $34.0~~decreased $1.8 million from ~~$744.3~~$766.9 million on December 31, ~~2019~~2020 to ~~$778.3~~$765.1 million at March 31, ~~2020.~~

2021.

The overall ~~increase~~decrease in loan balances from December 31, ~~2019~~2020 to March 31, ~~2020~~2021 is comprised of the following: ~~an increase~~a decrease of ~~$8.5~~$5.5 million in 1-4 family residential loans, a decrease of ~~$3.8~~$4.9 million in commercial loans, ~~an increase~~a decrease of ~~$6.9~~$2.1 million in multi-family residential loans, ~~an increase~~a decrease of ~~$2.8~~$2.1 million in agricultural loans, an increase of ~~$18.3~~$12.8 million in non-farm and non-residential loans, a decrease of ~~$524~~$612 thousand in consumer loans, and an increase of ~~$2.0 million~~$565 thousand in real-estate construction loans. Other loan balances decreased ~~$154~~$20 thousand from December 31, ~~2019~~2020 to March 31, ~~2020.~~2021.

Total deposits increased from ~~$842.7~~$978.6 million on December 31, ~~2019~~2020 to ~~$853.2 million~~$1.0 billion on March 31, ~~2020,~~2021, an increase of ~~$10.6~~$47.1 million. Time deposits $250 thousand and over ~~increased $2.4~~decreased $10.5 million from December 31, ~~2019~~2020 to March 31, ~~2020~~2021 while non-interest bearing demand deposit accounts increased ~~$7.8~~$50.3 million and other interest bearing deposit accounts increased ~~$363 thousand~~$7.3 million from December 31, ~~2019~~2020 to March 31, ~~2020.~~2021.

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Public fund account balances decreased ~~$3.6~~$16.7 million from December 31, ~~2019~~2020 to March 31, ~~2020.~~2021. Public fund accounts typically decrease during the first three quarters of the year and increase during the last quarter of the year due to tax payments collected during the fourth quarter and then withdrawn from the Bank during subsequent months.

Borrowings from the Federal Home Loan Bank ~~increased $22.5~~decreased $6.8 million from December 31, ~~2019~~2020 to March 31, ~~2020~~2021 and repurchase agreements decreased ~~$584~~$692 thousand.

Net Interest Income

Net interest income is the difference between interest income earned on interest-earning assets and the interest expense paid on interest-bearing liabilities. Net interest income was $8.7 million for the three months ended March 31, 2021 compared to $9.0 million for the three months ended March 31, 2020, a decrease of 3.3%.

The interest spread, excluding tax equivalent adjustments, was 2.83% for the first three months of 2021 compared to 3.10% for the first three months of 2020. For the first three months in 2021, the yield on interest earning assets decreased from 4.30% in 2020 to 3.41% in 2021, excluding tax equivalent adjustments.

The yield on loans, excluding tax equivalent adjustments, decreased sixty-one basis points for the three months ended March 31, 2021 compared to the three months ended March 31, 2020 from 4.95% to 4.34%. The yield on securities, excluding tax equivalent adjustments, decreased ninety basis points during the first three months of 2021 compared to 2020 from 2.54% in 2020 to 1.64% in 2021. The cost of liabilities was 0.59% for the first three months in 2021 compared to 1.14% in 2020.

Year to date average loans, excluding overdrafts, increased $10.1 million, or 1.3% for the three months ended March 31, 2021 compared to the three months ended March 31, 2020. Loan interest income decreased $1.0 million during the first three months of 2021 compared to the first three months of2020.

Year to date average total deposits increased from March 31, 2020 to March 31, 2021 by $142.2 million or 16.4%. Year to date average interest bearing deposits increased $49.9 million, or 8.0%, from March 31, 2020 to March 31, 2021. Deposit interest expense decreased $807 thousand for the first three months of 2021 compared to the same period in 2020. Year to date average borrowings, including repurchase agreements, decreased $21.4 million, or 16.4%, from March 31, 2020 to March 31, 2021. Interest expense on borrowed funds, including repurchase agreements, decreased $186 thousand for the first three months of 2021 compared to the same period in 2020.

The volume rate analysis for the three months ended March 31, 2021 indicates loan interest income decreased $1.0 million when compared to the same time period in 2020. An increase of $800 thousand attributed to increased loan volume was offset by a decrease of $1.8 million in loan interest income attributed to a decrease in loan rates. Much of the decrease in loan income is attributed to variable rate loans repricing at lower rates. The decrease of $195 thousand in securities interest income is attributable to decreases in rates of our security portfolio.

Also based on the following volume rate analysis for the three months ended March 31, 2021, a decrease in demand deposit interest rates resulted in a $773 thousand reduction to interest expense, interest paid for savings deposits remained fairly flat, and decreases in interest rates paid for time deposits resulted in a reduction of interest expense of $438 thousand. The change in volume in deposits and borrowings was responsible for a $427 thousand increase in interest expense, of which an increase in demand deposits resulted in an increase of $577 thousand in interest expense, a decrease in time deposits resulted in a decrease of $176 thousand in interest expense, an increase in repurchase agreements resulted in an increase of $82 thousand in interest expense, and a decrease in other borrowings resulted in a decrease of $112 thousand in interest expense. The net effect to interest expense was a decrease of $993 thousand. As a result, the decrease in net interest income for the first three months in 2021 is mostly attributed to decreasing rates paid on deposits.

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Changes in Interest Income and Expense

Three Months Ended

2021 vs. 2020

Increase (Decrease) Due to Change in

(in thousands)

Volume

Rate

Net Change

INTEREST INCOME

Loans

800

(1,842)

(1,042)

Investment Securities

2,253

(2,448)

(195)

Other

164

(213)

(49)

Total Interest Income

3,217

(4,503)

(1,286)

INTEREST EXPENSE

Deposits

Demand

577

(773)

(196)

Savings

(53)

Negotiable Certificates of Deposit and Other Time Deposits

(176)

(438)

(614)

Securities sold under agreements to repurchase and other borrowings

(112)

(30)

Federal Home Loan Bank advances

(112)

(44)

(156)

Total Interest Expense

427

(1,420)

(993)

Net Interest Income

Net interest income is the difference between interest income earned on interest-earning assets and the interest expense paid on interest-bearing liabilities. Net interest income was $9.0 million for the three months ended March 31, 2020 compared to $8.9 million for the three months ended March 31, 2019, an increase of 0.6%.$

2,790

The interest spread, excluding tax equivalent adjustments, was 3.10% for the first three months of 2020 compared to 3.27% for the first three months of 2019. For the first three months in 2020, the yield on interest earning assets decreased from 4.49% in 2019 to 4.24% in 2020, excluding tax equivalent adjustments.$

(3,083)

The yield on loans, excluding tax equivalent adjustments, decreased twenty basis points for the three months ended March 31, 2020 compared to the three months ended March 31, 2019 from 5.15% to 4.95%. The yield on securities, excluding tax equivalent adjustments, decreased thirty-seven basis points during the first three months of 2020 compared to 2019 from 2.91% in 2019 to 2.54% in 2020. The cost of liabilities was 1.14% for the first three months in 2020 compared to 1.22% in 2019.$

(293)

Year to date average loans, excluding overdrafts, increased $76.5 million, or 11.2% for the three months ended March 31, 2020 compared to the three months ended March 31, 2019. Loan interest income increased $580 thousand during the first three months of 2020 compared to the first three months of 2019.

Year to date average total deposits increased from March 31, 2019 to March 31, 2020 by $17.2 million or 2.0%. Year to date average interest bearing deposits increased $11.8 million, or 1.9%, from March 31, 2019 to March 31, 2020. Deposit interest expense decreased $69 thousand for the first three months of 2020 compared to the same period in 2019. Year to date average borrowings, including repurchase agreements, increased $11.3 million, or 10.1%, from March 31, 2019 to March 31, 2020. Interest expense on borrowed funds, including repurchase agreements, decreased $28 thousand for the first three months of 2020 compared to the same period in 2019. This decrease is mostly attributed to the Bank paying the note payable in full in 2019.

The volume rate analysis for the three months ended March 31, 2020 indicates loan interest income increased $580 thousand when compared to the same time period in 2019. An increase of $2.4 million attributed to increased loan volume was offset by a decrease of $1.8 million in loan interest income attributed to a decrease in loan rates. Much of the decrease in loan income is attributed to variable rate loans repricing at lower rates. The decrease of $515 thousand in securities interest income is attributable to both decreases in rates and volume of our security portfolio.

Also based on the following volume rate analysis for the three months ended March 31, 2020, a decrease in demand deposit interest rates resulted in a $243 thousand reduction to interest expense, interest paid for savings deposits remained fairly flat, and increases in interest rates paid for time deposits resulted in additional interest expense of $82 thousand.

The change in volume in deposits and borrowings was responsible for a $265 thousand increase in interest expense, of which a decrease in demand deposits resulted in a decrease of $55 thousand in interest expense, an increase in time deposits resulted in an increase of $149 thousand in interest expense, a decrease in repurchase agreements resulted in a decrease of $43 thousand in interest expense, and an increase in other borrowings resulted in an increase of $214 thousand in interest expense. The net effect to interest expense was a decrease of $97 thousand. As a result, the increase in net interest income for the first three months in 2020 is mostly attributed to decreasing rates paid on deposits.

~~Table of Contents~~

~~Changes in Interest Income and Expense~~

Three Months Ended

2020 vs. 2019

Increase (Decrease) Due to Change in

(in thousands)

Volume

Rate

Net Change

INTEREST INCOME

Loans

$
2,427

$
(1,847)

$
580

Investment Securities

(257)

(258)

(515)

Other

146

(255)

(109)

Total Interest Income

2,316

(2,360)

(44)

INTEREST EXPENSE

Deposits

Demand

(55)

(243)

(298)

Savings

—

(2)

(2)

Negotiable Certificates of Deposit and Other Time Deposits

149

82

231

Securities sold under agreements to repurchase and other borrowings

(43)

(24)

(67)

Federal Home Loan Bank advances

214

(175)

39

Total Interest Expense

265

(362)

(97)

Net Interest Income

$
2,051

$
(1,998)

$
53

~~Non-Interest Income~~

~~Non-interest income increased $562 thousand for the three months ended March 31, 2020, compared to the same period in 2019, to $3.6 million.~~

Favorable variances to non-interest income for the first three months of 2020 include an increase of $18 thousand in gain on sale of available for sale securities, an increase of $42 thousand in trust department income, an increase of $95 thousand in service charges, an increase of $476 thousand in gains on the sale of loans, an increase of $22 thousand in debit card interchange income and an increase of $74 thousand in other income. Decreases to non-interest income for the three months ended March 31, 2020 compared to the three months ended March 31, 2019 include a decrease of $156 thousand in net loan service fee income and a decrease of $9 thousand in brokerage income.

~~The gain on the sale of loans increased from $207 thousand during the first three months of 2019 to $683 thousand during the first three months of 2020, an increase of $476 thousand.~~

The volume of loans originated to sell during the first three months of 2020 increased $15.1 million compared to the same time period in 2019. The increase in the volume of loans originated to sell during 2019 is largely attributed to an increase in customers choosing to refinance existing mortgages due to the decrease in mortgage rates. The volume of mortgage loan originations and sales is generally inverse to rate changes. A change in the mortgage loan rate environment can have a significant impact on the related gain on sale of mortgage loans. Loan service fee income, net of amortization and impairment expense, was $(83) thousand for the three months ended March 31, 2020 compared to $73 thousand for the three months ended March 31, 2019, a decrease of $156 thousand. During the first three months of 2020, the market value adjustment to the carrying value of the mortgage servicing right was a net writedown of $142 thousand, as the fair value of this asset decreased. During the first three months of 2019, the market value adjustment to the carrying value of the mortgage servicing right asset was a net writedown of $6 thousand, as the fair value of the asset decreased.

~~Non-Interest Expense~~

Total non-interest expense increased $465 thousand, or 5.3%, for the three month period ended March 31, 2020 compared to the same period in 2019. Management continues to consider opportunities for branch expansion and will also consider acquisition opportunities that help advance its strategic objectives, which would result in additional future non-interest expense. Our most recent expansion involves constructing a new branch in Lexington, KY in Tates Creek Centre. We anticipate the new branch to be open by the end of the second quarter or early third quarter of 2020.

~~Table of Contents~~

For the comparable three month periods, salaries and employees benefits expense increased $275 thousand, an increase of 5.9%. The number of full-time employee equivalent employees increased from 230 at March 31, 2019 to 235 at March 31, 2020, an increase of five full-time equivalent employees.

~~Occupancy expense increased $113 thousand to $1.1 million for the first three months of 2020 compared to the same time period in 2019.~~

Loss on limited partnership expense increased $134 thousand for the first three months ended March 31, 2020 compared to the same time period in 2019. The increase is attributed to accelerating the amortization of one our tax credit investments. However, this was offset through reduced income tax expense.

~~Income Taxes~~

The effective tax rate for the three months ended March 31, 2020 was (3.1)% compared to 7.8% in 2019. These effective tax rates are less than the statutory rate of 21% as a result of the Company investing in tax-free securities, loans and other investments which generate tax credits for the Company. The Company also has a captive insurance subsidiary which contributes to reducing taxable income. The effective tax rate was lower for the three months ended March 31, 2020 when compared to the three months ended March 31, 2019 due to tax credits associated with low income housing investments increasing from $138 thousand for the three months ended March 31, 2019 to $304 thousand for the three months ended March 31, 2020; an increase of $165 thousand. Tax- exempt interest income increased $127 thousand for the first three months of 2020 compared to the first three months of 2019. Further, income before income taxes for the three months ended March 31, 2020 decreased $1.4 million when compared to the three months ended March 31, 2019.

As part of normal business, the Bank typically makes tax free loans to select municipalities in our market and invests in selected tax free securities, primarily in the Commonwealth of Kentucky. In making these investments, the Company considers the overall impact to managing our net interest margin, credit worthiness of the underlying issuer and the favorable impact on our tax position. For the three months ended March 31, 2020, the Company averaged $24.8 million in tax free securities and $56.1 million in tax free loans. As of March 31, 2020, the weighted average remaining maturity for the tax free securities is 41 months, while the weighted average remaining maturity for the tax free loans is 170 months.

For the year ended December 31, 2019, the Company averaged $36.3 million in tax free securities, and $42.8 million in tax free loans. As of December 31, 2019, the weighted average remaining maturity for the tax free securities was 103 months, while the weighted average remaining maturity for the tax free loans was 131 months.

On March 26, 2019, Governor Bevin signed House Bill 354 into law which, among other things, repealed the bank franchise tax structure in Kentucky. The capital based franchise tax structure will be replaced with the state-wide corporate income tax structure starting in 2021. Kentucky Bancshares, Inc. has historically filed a separate return in Kentucky, and has generated a Kentucky net operating loss (“NOL”) carryforward, given the nature of its operations. Given House Bill 354, Kentucky Bancshares, Inc. will file a combined return in 2021, unless the Company decides to timely elect to file on a consolidated basis.

On April 9, 2019, Governor Bevin signed House Bill 458 into law which, among other things, allows a taxpayer to utilize certain net operating loss (“NOL”) carryforwards to offset other members in the combined filing group starting in 2021.

~~As a result of these tax law changes, the Company had a deferred tax asset of $563 thousand as of March 31, 2020 and $606 thousand as of December 31, 2019.~~

~~Liquidity and Funding~~

Liquidity is the ability to meet current and future financial obligations. The Company’s primary sources of funds consist of deposit inflows, loan repayments, maturities and sales of investment securities and Federal Home Loan Bank borrowings.

~~Table of Contents~~

Liquidity risk is the possibility that we may not be able to meet our cash requirements in an orderly manner. Management of liquidity risk includes maintenance of adequate cash and sources of cash to fund operations and to meet the needs of borrowers, depositors and creditors. Excess liquidity has a negative impact on earnings as a result of the lower yields on short-term assets.

Cash and cash equivalents were $37.8 million as of March 31, 2020 compared to $22.2 million at December 31, 2019. The increase in cash and cash equivalents is attributed to an increase of $15.6 million in cash and due from banks.

In addition to cash and cash equivalents, the securities portfolio provides an important source of liquidity. Securities available for sale totaled $247.2 million at March 31, 2020 compared to $265.3 million at December 31, 2019. The securities available for sale are available to meet liquidity needs on a continuing basis. However, we expect our customers’ deposits to be adequate to meet our funding demands.

Generally, we rely upon net cash inflows from financing activities, supplemented by net cash inflows from operating activities, to provide cash used in our investing activities. As is typical of many financial institutions, significant financing activities include deposit gathering and the use of short-term borrowings, such as federal funds purchased and securities sold under repurchase agreements along with long-term debt. Our primary investing activities include purchasing investment securities and loan originations.

For the first three months of 2020, deposits increased $10.6 million compared to December 31, 2019. The Company’s borrowed funds from the Federal Home Loan Bank increased $22.5 million from December 31, 2019 to March 31, 2020, federal funds purchased remained at zero, and total repurchase agreements decreased $584 thousand from December 31, 2019 to March 31, 2020.

Management is aware of the challenge of funding sustained loan growth. Therefore, in addition to deposits, other sources of funds, such as Federal Home Loan Bank advances, may be used. We rely on Federal Home Loan Bank advances for both liquidity and asset/liability management purposes. These advances are used primarily to fund long- term fixed rate residential mortgage loans. As of March 31, 2020, we have sufficient collateral to borrow an additional $75.6 million from the Federal Home Loan Bank. In addition, as of March 31, 2020, $33 million is available in overnight borrowing through various correspondent banks and $273 million is available in brokered deposits. In light of this, management believes there is sufficient liquidity to meet all reasonable borrower, depositor and creditor needs in the present economic environment. In addition, the Federal Reserve has implemented a liquidity facility available to financial institutions participating in the PPP. As such, the Bank believes it has sufficient liquidity sources to fund all pending PPP loans and to continue to provide this important service to local businesses.

~~Capital Requirements~~

In August 2018, the Federal Reserve Board issued an interim final ruling that holding companies with assets less than $3 billion are not subject to minimum capital requirements. As a result, only Bank capital data and capital ratios are presented as of March 31, 2020 and December 31, 2019.

The Bank is subject to various regulatory capital requirements administered by the federal banking agencies. Failure to meet minimum capital requirements can initiate certain mandatory and possible additional discretionary actions by regulators that, if undertaken, could have a direct material effect on the Company’s financial statements. Under capital adequacy guidelines and the regulatory framework for prompt corrective action, the Bank must meet specific capital guidelines that involve quantitative measures of the Bank’s assets, liabilities, and certain off-balance sheet items as calculated under regulatory accounting practices. The Bank capital amounts and classifications are also subject to qualitative judgments by regulators about components, risk weightings, and other factors.

The final rules implementing the Basel Committee on Banking Supervision’s capital guidelines for US banks (Basel III rules) became effective for the Company on January 1, 2015 with full compliance with all of the requirements being phased in over a multi-year schedule, and was fully phased in on January 1, 2019. The net unrealized gain or loss on available for sale securities and holding gains or losses on cash flow hedges are not included in computing regulatory capital.

~~Table of Contents~~

The federal banking agencies jointly issued a final rule that provides for an optional, simplified measure of capital adequacy, the community bank leverage ratio framework, for qualifying community banking organizations, consistent with Section 201 of the ~~Economic Growth, Regulatory Relief, and Consumer Protection Act~~. The final rule became effective on January 1, 2020. This final rule is applicable to all non-advanced approaches FDIC-supervised institutions with less than $10 billion in total consolidated assets. Highlights of the Community Bank Leverage Ratio Framework follow:

The community bank leverage ratio (CBLR) final rule will be effective on January 1, 2020, and will allow qualifying community banking organizations to calculate a leverage ratio to measure capital adequacy. Banks opting into the CBLR framework (CBLR banks) will not be required to calculate or report risk-based capital.

Non-Interest Income

Non-interest income increased $606 thousand for the three months ended March 31, 2021, compared to the same period in 2020, to $4.2 million.

Favorable variances to non-interest income for the first three months of 2021 include an increase of $90 thousand in loan service fee income (net), an increase of $92 thousand in trust department income, an increase of $68 thousand in brokerage income, an increase of $464 thousand in gains on the sale of loans, an increase of $198 thousand in debit card interchange income and an increase of $14 thousand in other income. Decreases to non-interest income for the three months ended March 31, 2021 compared to the three months ended March 31, 2020 include a decrease of $208 thousand in service charges and a decrease of $112 thousand in gain on sale of available for sale securities.

The gain on the sale of loans increased from $683 thousand during the first three months of 2020 to $1.1 million during the first three months of 2021, an increase of $464 thousand.

The volume of loans originated to sell during the first three months of 2021 increased $5.7 million compared to the same time period in 2020. The volume of mortgage loan originations and sales is generally inverse to rate changes. A change in the mortgage loan rate environment can have a significant impact on the related gain on sale of mortgage loans. Loan service fee income, net of amortization and impairment expense, was $7 thousand for the three months ended March 31, 2021 compared to $(83) thousand for the three months ended March 31, 2020, an increase of $90 thousand. During the first three months of 2021, the market value adjustment to the carrying value of the mortgage servicing right was a net writedown of $2 thousand. During the first three months of 2020, the market value adjustment to the carrying value of the mortgage servicing right asset was a net writedown of $142 thousand, as the fair value of the asset decreased.

Non-Interest Expense

Total non-interest expense increased $587 thousand, or 6.4%, for the three month period ended March 31, 2021 compared to the same period in 2020.

For the comparable three month periods, salaries and employees benefits expense increased $146 thousand, an increase of 2.9%. The number of full-time employee equivalent employees decreased from 235 at March 31, 2020 to 222 at March 31, 2021, a decrease of thirteen full-time equivalentemployees. Much of the decrease in full-time equivalent employees occurred near the end of the quarter. Therefore, salaries and benefits were recorded for these employees for much of the quarter.

A qualifying community banking organization is defined as having less than $10 billion in total consolidated assets, a leverage ratio greater than 9%, off-balance sheet exposures of 25% or less of total consolidated assets, and trading assets and liabilities of 5% or less of total consolidated assets. It also cannot be an advanced approaches institution.

The final rule adopts tier 1 capital and the existing leverage ratio into the community bank leverage ratio framework. The tier 1 numerator takes into account the modifications made in relation to the capital simplifications and current expected credit losses methodology (CECL) transitions rules as of the compliance dates of those rules.

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A CBLR bank will not be subject to other capital and leverage requirements. It will be deemed to have met the "well capitalized" ratio requirements and be in compliance with the generally applicable capital rule.

Occupancy expense decreased $101 thousand to $993 thousand for the first three months of 2021 compared to the same time period in 2020.

Legal and professional fees increased $750 thousand for the three months ended March 31, 2021 compared to the three months ended March 31, 2020 due to fees incurred during the first quarter of 2021 related to the merger with Stock Yards Bank and Trust.

Taxes other than payroll, property and income decreased $254 thousand during the three months ended March 31, 2021 compared to the three months ended March 31, 2020. The decrease was due to the elimination of the bank franchise tax in 2021. However, this was partially offset by an increase in the provision for income taxes as a newly implemented Kentucky state income tax replaced the bank franchise tax.

Loss on limited partnership expense decreased $174 thousand for the three months ended March 31, 2021 compared to the three months ended March 31, 2020. The decrease in loss on limited partnership expense during 2021 is attributed to increased amortization expense for one of our tax credit investments during 2020.

Income Taxes

The effective tax rate for the three months ended March 31, 2021 was 16.7% compared to (3.1)% in 2020. These effective tax rates are less than the statutory rate of 21% as a result of the Company investing in tax-free securities, loans and other investments which generate tax credits for the Company. The Company also has a captive insurance subsidiary which contributes to reducing taxable income. The effective tax rate was higher for the three months ended March 31, 2021 when compared to the three months ended March 31, 2020 largely due to tax credits associated with low income housing investments decreasing from $304 thousand for the three months ended March 31, 2020 to $119 thousand for the three months ended March 31, 2021; a decrease of $185 thousand. Also, the Company is now subject to a state income tax. This replaces the franchise tax the Bank was subject to in prior years. This change resulted in an increase of $52 thousand in recorded income tax expense for the three months ended March 31, 2021 compared to the three months ended March 31, 2020. Further, income before income taxes for the three months ended March 31, 2021 increased $1.3 million when compared to the three months ended March 31,2020 which also contributed to the increase in recorded income tax expense. Tax- exempt interest income increased $111 thousand for the first three months of 2021 compared to the first three months of 2020.

As part of normal business, the Bank typically makes tax free loans to select municipalities in our market and invests in selected tax free securities, primarily in the Commonwealth of Kentucky. In making these investments, the Company considers the overall impact to managing our net interest margin, credit worthiness of the underlying issuer and the favorable impact on our tax position. For the three months ended March 31, 2021, the Company averaged $53.9 million in tax free securities and $46.5 million in tax free loans. As of March 31, 2021, the weighted average remaining maturity for the tax free securities is 65 months, while the weighted average remaining maturity for the tax free loans was 158 months.

For the year ended December 31, 2020, the Company averaged $36.9 million in tax free securities, and $69.2 million in tax free loans. As of December 31, 2020, the weighted average remaining maturity for the tax free securities was 62 months, while the weighted average remaining maturity for the tax free loans was 158 months.

Liquidity and Funding

Liquidity risk is the possibility that we may not be able to meet our cash requirements in an orderly manner. Management of liquidity risk includes maintenance of adequate cash and sources of cash to fund operations and to meet the needs of borrowers, depositors and creditors. Excess liquidity may have a negative impact on earnings as a result of the lower yields on short-term assets.

A CBLR bank that ceases to meet any qualifying criteria in a future period and that has a leverage ratio greater than 8% will be allowed a grace period of two reporting periods to satisfy the CBLR qualifying criteria or comply with the generally applicable capital requirements.

~~A CBLR may opt out of the framework at any time, without restriction, by reverting to the generally applicable risk-based capital rule.~~

Management believes as of March 31, 2020, the Bank meets all capital adequacy requirements to which it is subject. Quantitative measures established by regulation to ensure capital adequacy require the Bank to maintain minimum amounts and ratios (set forth in the following table) and Tier I capital (as defined in the regulations) to average assets (as defined).

Prompt corrective action regulations provide five classifications: well capitalized, adequately capitalized, undercapitalized, significantly undercapitalized, and critically undercapitalized, although these terms are not used to represent overall financial condition. If adequately capitalized, regulatory approval is required to accept brokered deposits. If undercapitalized, capital distributions are limited, as is asset growth and expansion, and capital restoration plans are required.

At March 31, 2020 and at December 31, 2019, the most recent regulatory notifications categorized the Bank as well capitalized under the regulatory framework for prompt corrective action. To be categorized as well capitalized, the Bank must maintain minimum Tier I leverage ratios as set forth in the following table. There are no conditions or events since that notification that management believes have changed the institution’s category.

~~Table of Contents~~

~~The Bank’s actual amounts and ratios are presented in the following table:~~

To Be Well

Capitalized

Under Prompt

For Capital

Corrective

Actual

Adequacy Purposes

Action Provisions


Amount

Ratio

Amount

Ratio

Amount

Ratio

(Dollars in Thousands)

March 31, 2020

Bank Only

Tier I Capital (to Average Assets)

103,101

9.3

100,111

9.0

100,111

9.0

December 31, 2019

Bank Only

Tier I Capital (to Average Assets)

102,759

9.3

44,164

4.0

55,206

5.0

~~Non-Performing Assets~~

As of March 31, 2020, our non-performing assets, including other real estate, totaled $6.8 million or 0.60% of assets compared to $6.7 million or 0.61% of assets at December 31, 2019 (see the following table). The Company experienced an increase of $1.2 million in non-accrual loans from December 31, 2019 to March 31, 2020. As of March 31, 2020, non-accrual loans include $374 thousand in loans secured by construction real estate, $1.3 million in loans secured by multi-family residential property, $1.8 million in loans secured by non-farm non-residential property, $744 thousand in loans secured by 1-4 family properties and $27 thousand in consumer loans.

Loans secured by real estate composed 92.0% of the non-performing loans as of March 31, 2020 and 97.8% as of December 31, 2019. Forgone interest income on non-accrual loans totaled $101 thousand for the first three months of 2020 compared to forgone interest of $31 thousand for the same time period in 2019. Accruing loans that are contractually 90 days or more past due as of March 31, 2019 totaled $474 thousand compared to $1.5 million at December 31, 2019, a decrease of $1.0 million. Total nonperforming and restructured loans increased $130 thousand from December 31, 2019 to March 31, 2020. The ratio of nonperforming and restructured loans to loans remained the same at 0.61% from December 31, 2019 to March 31, 2020.

In addition, the amount the Company has recorded as other real estate owned decreased $38 thousand from December 31, 2019 to March 31, 2020. As of March 31, 2020 and December 31, 2019, the amount recorded as other real estate owned totaled $2.1 million. During the first three months of 2020, no new additions were added to other real estate properties and no sales occurred. The allowance as a percentage of non-performing and restructured loans and other real estate owned increased from 126% at December 31, 2019 to 145% at March 31, 2020.

~~The economic downturn experienced as a result of the COVID-19 pandemic is expected to result in increased non-performing assets.~~ Loan modifications are likely to be executed in the second quarter of 2020. The majority of these modifications will involve three to six month forbearance payments which will be added to the end of the note. These modification and econcomic stimulus packages offered by the government will help loan customers meet debt obligations but it is unknown to what extent at this time.

~~Table of Contents~~

~~Nonperforming and Restructured Assets~~

3/31/2020

12/31/2019

(in thousands)

Non-accrual Loans

$
4,236

$
3,081

Accruing Loans which are Contractually past due over 89 days

474

1,499

Accruing Troubled Debt Restructurings

—

—

Total Nonperforming and Restructured Loans

4,710

4,580

Other Real Estate

2,110

2,148

Total Nonperforming and Restructured Loans and Other Real Estate

$
6,820

$
6,728

Nonperforming and Restructured Loans as a Percentage of Loans

0.61
%

0.61
%
Nonperforming and Restructured Loans and Other Real Estate as a Percentage of Total Assets

0.60
%

0.61
%
Allowance as a Percentage of Period-end Loans

1.27
%

1.14
%
Allowance as a Percentage of Non-performing and Restructured Loans and Other Real Estate

145
%

126
%

We maintain a “watch list” of agricultural, commercial, real estate mortgage, and real estate construction loans and review those loans at least quarterly but more often if needed. Generally, assets are designated as “watch list” loans to ensure more frequent monitoring. If we determine that there is serious doubt as to performance in accordance with original terms of the contract, then the loan is generally downgraded and often placed on non-accrual status.

We review and evaluate nonaccrual loans, past due loans, and loans graded substandard or worse on a regular basis to determine if the loan should be evaluated for impairment and whether specific allocations are needed.

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Cash and cash equivalents were $81.9 million as of March 31, 2021 compared to $39.0 million at December 31, 2020. The increase in cash and cash equivalents is attributed to an increase of $43.0 million in cash and due from banks.

In addition to cash and cash equivalents, the securities portfolio provides an important source of liquidity. Securities available for sale totaled $349.6 million at March 31, 2021 compared to $353.5 million at December 31, 2020. The securities available for sale are available to meet liquidity needs on a continuing basis. However, we expect our customers’ deposits to be adequate to meet our funding demands.

For the first three months of 2021, deposits increased $47.1 million compared to December 31, 2020. The Company’s borrowed funds from the Federal Home Loan Bank decreased $6.8 million from December 31, 2020 to March 31, 2021, federal funds purchased remained at zero, and total repurchase agreements decreased $692 thousand from December 31, 2020 to March 31, 2021.

Management is aware of the challenge of funding sustained loan growth. Therefore, in addition to deposits, other sources of funds, such as Federal Home Loan Bank advances, may be used. We rely on Federal Home Loan Bank advances for both liquidity and asset/liability management purposes. These advances are used primarily to fund long- term fixed rate residential mortgage loans. As of March 31, 2021, we have sufficient collateral to borrow an additional $118.4 million from the Federal Home Loan Bank. In addition, as of March 31, 2021, $45 million is available in overnight borrowing through various correspondent banks and $315 million is available in brokered deposits. In light of this, management believes there is sufficient liquidity to meet all reasonable borrower, depositor and creditor needs in the present economic environment. In addition, the Federal Reserve has implemented a liquidity facility available to financial institutions participating in the PPP. As such, the Bank believes it has sufficient liquidity sources to fund all pending PPP loans and to continue to provide this important service to local businesses.

Capital Requirements

The federal banking agencies jointly issued a final rule that provides for an optional, simplified measure of capital adequacy, the community bank leverage ratio framework, for qualifying community banking organizations, consistent with Section 201 of the Economic Growth, Regulatory Relief, and Consumer Protection Act. The final rule became effective on January 1, 2020. This final rule is applicable to all non-advanced approaches FDIC-supervised institutions with less than $10 billion in total consolidated assets.

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The Bank has elected to use the CBLR framework. The community bank leverage ratio removes the requirement for qualifying banking organizations to calculate and report risk-based capital but rather only requires a Tier 1 to average assets (leverage) ratio. Qualifying banking organizations that elect to use the community bank leverage ratio framework and that maintain a leverage ratio of greater than required minimums will be considered to have satisfied the generally applicable risk based and leverage capital requirements in the agencies’ capital rules (generally applicable rule) and, if applicable, will be considered to have met the well capitalized ratio requirements for purposes of section 38 of the Federal Deposit Insurance Act. Under the interim final rules the community bank leverage ratio minimum requirement was 8% as of December 31, 2020, 8.5% for calendar year 2021, and 9% for calendar year 2022 and beyond. The interim rules allows for a two-quarter grace period to correct a ratio that falls below the required amount, provided that the bank maintained a leverage ratio of 7% as of December 31, 2020, and maintains a leverage ratio of 7.5% for calendar year 2021, and 8% for calendar year 2022 and beyond.

At March 31, 2021, the Bank’s CBLR was 8.8%. Management believes as of March 31, 2021, the Bank meets all capital adequacy requirements to which it is subject. Quantitative measures established by regulation to ensure capital adequacy require the Bank to maintain minimum amounts and ratios (set forth in the following table) and Tier I capital (as defined in the regulations) to average assets (as defined).

At March 31, 2021 and at December 31, 2020, the most recent regulatory notifications categorized the Bank as well capitalized under the regulatory framework for prompt corrective action. To be categorized as well capitalized, the Bank must maintain minimum Tier I leverage ratios as set forth in the following table. There are no conditions or events since that notification that management believes have changed the institution’s category.

The Bank’s actual amounts and ratios are presented in the following table:


							To Be Well
							Capitalized
							Under Prompt
				For Capital			Corrective
	Actual			Adequacy Purposes			Action Provisions
	Amount		Ratio	Amount		Ratio	Amount		Ratio

	(Dollars in Thousands)
March 31, 2021
Bank Only
Tier I Capital (to Average Assets)	$	109,439	8.8	$	98,999	8.5	$	98,999	8.5

December 31, 2020
Bank Only
Tier I Capital (to Average Assets)		107,805	9.0		96,258	8.0		96,258	8.0

Non-Performing Assets

As of March 31, 2021, our non-performing assets, including other real estate, totaled $4.8 million or 0.38% of assets compared to $6.1 million or 0.50% of assets at December 31, 2020 (see the following table). The Company experienced a decrease of $80 thousand in non-accrual loans from December 31, 2020 to March 31, 2021. As of March 31, 2021, non-accrual loans include $124 thousand in loans secured by construction real estate, $800 thousand in loans secured by multi-family residential property, $1.8 million in loans secured by non-farm non-residential property, $1.2 million in loans secured by 1-4 family properties and $49 thousand in consumer loans.

Loans secured by real estate composed 96.7% of the non-performing loans as of March 31, 2021 and 96.4% as of December 31, 2020. Forgone interest income on non-accrual loans totaled $236 thousand for the first three months of 2021 compared to forgone interest of $101 thousand for the same time period in 2020.

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Accruing loans that are contractually 90 days or more past due as of March 31, 2021 totaled $101 thousand compared to $75 thousand at December 31, 2020, a decrease of $26 thousand. Total nonperforming and restructured loans decreased $1.2 million from December 31, 2020 to March 31, 2021. The decrease was mostly attributed to one loan paying off during the first quarter of 2021 which had an outstanding balance of $1.1 million and was classified as an accruing troubled debt restructuring as of December 31, 2020. The ratio of nonperforming and restructured loans to loans decreased from 0.69% at December 31, 2020 to 0.53% at March 31, 2021.

In addition, the amount the Company has recorded as other real estate owned decreased $141 thousand from December 31, 2020 to March 31, 2021. As of March 31, 2021 and December 31, 2020, the amount recorded as other real estate owned totaled $735 thousand and $876 thousand, respectively. During the first three months of 2021, one addition was made to other real estate properties and one sale occurred. The allowance as a percentage of non-performing and restructured loans and other real estate owned increased from 161% at December 31, 2020 to 197% at March 31, 2021.

Nonperforming and Restructured Assets


	3/31/2021			12/31/2020

	(in thousands)
Non-accrual Loans	$	3,971		$	4,051
Accruing Loans which are Contractually past due over 89 days		101			75
Accruing Troubled Debt Restructurings		—			1,145
Total Nonperforming and Restructured Loans		4,072			5,271
Other Real Estate		735			876
Total Nonperforming and Restructured Loans and Other Real Estate	$	4,807		$	6,147
Nonperforming and Restructured Loans as a Percentage of Loans		0.53	%		0.69	%
Nonperforming and Restructured Loans and Other Real Estate as a Percentage of Total Assets		0.38	%		0.50	%
Allowance as a Percentage of Period-end Loans		1.24	%		1.29	%
Allowance as a Percentage of Non-performing and Restructured Loans and Other Real Estate		197	%		161	%

Provision for Loan Losses

The loan loss provision for the first three months of 2021 was $100 thousand compared to $1.6 million for the first three months of 2020. The decrease in the total loan loss provision during the first three months of 2021 compared to the same time period in 2020 was attributed mostly to uncertainties surrounding the COVID-19 pandemic in 2020. For the three months ended March 31,2020, the Company recorded additional provision for loan losses as a result of these uncertainties. For the three months ended March 31, 2021, the Company reversed a portion of the additional provision for loan losses recorded during 2020 due to recording few charge offs thus far as a result of the pandemic. However, these reductions were partially offset by one loan which had a partial charge off totaling $500 thousand during the three months ended March 31, 2021. It is possible the Company will have additional provision for loan losses expense in future quarters as a result of the economic downturn associated with the COVID-19 pandemic. The allowance for loan losses as a percentage of loans was 1.24% at March 31, 2021 compared to 1.29% at December 31, 2020.

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Management evaluates the loan portfolio by reviewing the historical loss rate for each respective loan type and assigns risk multiples to certain categories to account for qualitative factors including current economic conditions. The average loss rates are reviewed for trends in the analysis, as well as comparisons to peer group loss rates.

Management makes allocations within the allowance for loan losses for specifically classified loans regardless of loan amount, collateral or loan type. Loan categories are evaluated utilizing subjective factors in addition to the historical loss calculations to determine a loss allocation for each of those types. As this analysis, or any similar analysis, is an imprecise measure of loss, the allowance is subject to ongoing adjustments. Therefore, management will often take into account other significant factors that may be necessary or prudent in order to reflect probable incurred losses in the total loanportfolio.

Nonperforming loans and restructured loans decreased $1.2 million from December 31, 2020 to $4.1 million at March 31, 2021. The Company recorded net charge-offs of $537 thousand for the three months ended March 31, 2021 compared to net charge-offs of $169 thousand for the three months ended March 31, 2020. Future levels of charge-offs will be determined by the particular facts and circumstances surrounding individual loans.

Based on the above information, management believes the current loan loss allowance is sufficient to meet probable incurred loan losses.


	Three Months Ended March 31,
	(in thousands)
	2021			2020
Balance at Beginning of Period:	$	9,897		$	8,460
Amounts Charged-Off:
Commercial		3			25
Real estate mortgage:
1-4 family residential		—			35
Multi-family residential		500			—
Non-farm & non-residential		19			—
Consumer and other		289			347
Total Charged-off Loans		811			407
Recoveries on Amounts Previously Charged-off:
Commercial		1			6
Real Estate Construction		4			—
Real estate mortgage:
1-4 family residential		3			15
Agricultural		6			2
Consumer and other		260			215
Total Recoveries		274			238
Net Charge-offs		537			169
Provision for Loan Losses		~~The loan loss provision~~100			1,625
Balance at End of Period		9,460			9,916
Loans
Average		768,491			762,389
At March 31,		765,095			778,327
As a Percentage of Average Loans:
Net Charge-offs (Recoveries) for the ~~first three months of 2020 was $1.6 million compared to $125 thousand~~period		0.07	%		0.02	%
Provision for Loan Losses for the ~~first three months of 2019. The increase in the total loan loss provision during the first three months of 2020 compared to the same time~~ period ~~in 2019 was attributed mostly to uncertainties surrounding the COVID-19 pandemic. It is possible the Company will have additional provision for loan losses expense in future quarters~~		0.01	%		0.21	%
Allowance as a ~~result~~Multiple of the economic downturn associated with the COVID-19 pandemic. Strong loan growth during the first quarter of 2020 also contributed to the increase in loan loss provision expense. The allowance for loan losses as a percentage of loans was 1.27% at March 31, 2020 compared to 1.15% at March 31, 2019.Net Charge-offs annualized		Management evaluates the loan portfolio by reviewing the historical loss rate for each respective loan type and assigns risk multiples to certain categories to account for qualitative factors including current economic conditions. The average loss rates are reviewed for trends in the analysis, as well as comparisons to peer group loss rates.4.4			Management makes allocations within the allowance for loan losses for specifically classified loans regardless of loan amount, collateral or loan type. Loan categories are evaluated utilizing subjective factors in addition to the historical loss calculations to determine a loss allocation for each of those types. As this analysis, or any similar analysis, is an imprecise measure of loss, the allowance is subject to ongoing adjustments. Therefore, management will often take into account other significant factors that may be necessary or prudent in order to reflect probable incurred losses in the total loan portfolio.14.7	Nonperforming loans and restructured loans increased $130 thousand from December 31, 2019 to $4.7 million at March 31, 2020. The Company recorded net charge-offs of $169 thousand for the three months ended March 31, 2020 compared to net charge-offs of $370 thousand for the three months ended March 31, 2019.

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Item 4 - CONTROLS AND PROCEDURES

As of the end of the period covered by this report, and pursuant to Rule 13a-15(b) of the Securities Exchange Act of 1934 (“Exchange Act”), our management, including the Chief Executive Officer and the Chief Financial Officer, carried out an evaluation of the effectiveness of the design and operation of our disclosure controls and procedures (as that term is defined in Rule 13a-15(e) of the Exchange Act). Based on the foregoing, our Chief Executive Officer and Chief Financial Officer concluded that the Company’s disclosure controls and procedures were effective, in all material respects, to ensure that information required to be disclosed in the reports the Company files and submits under the Exchange Act is recorded, processed, summarized and reported as and when required.

We also conducted an evaluation of internal control over financial reporting to determine whether any changes occurred during the quarter covered by this report that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting. Based on this evaluation, there has been no such change during the quarter covered by this report.

Our management recognizes that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives.

Part II - Other Information

Item 1. Legal Proceedings

On April 9, 2021, a lawsuit was filed by a purported shareholder of the Company in the Circuit Court of Bourbon County, Kentucky challenging our proposed merger with Stock Yards Bancorp, Inc. The complaint, captioned Paul Parshall v. Kentucky Bancshares, Inc. et al. (Case No. 21-CI-00109), names as defendants the Company, the Company’s board of directors, Stock Yards Bancorp, Inc. (“Stock Yards Bancorp”) and H. Meyer Merger Subsidiary, Inc., a wholly-owned subsidiary of Stock Yards Bancorp (“Merger Sub”). The complaint alleges, among other things, that the individual defendants breached their fiduciary duties as directors of the Company in connection with their consideration and approval of the proposed merger transaction and caused materially misleading and incomplete information regarding the proposed transaction to be disseminated to the Company shareholders in violation of their fiduciary duty of disclosure. The complaint further asserts that the Company, Stock Yards Bancorp and Merger Sub aided and abetted the alleged breaches of fiduciary duty by the directors of the Company in connection with the proposed transaction. The complaint seeks, among other relief, preliminary and permanent injunctions preventing the defendants from proceeding with, consummating or closing the proposed transaction unless and until the Company provides all material information to the Company shareholders to allow them to make a fully informed voting or appraisal decision with respect to the proposed transaction and adopts and implements a procedure or process to obtain a merger agreement providing the best available terms for the Company shareholders. Stock Yards Bancorp, the Company and the Company’s board of directors believe the claims asserted in the lawsuit are without merit. On April 28, 2021, Stock Yards Bancorp and Merger Sub, with the consent of the other defendants, filed a Notice of Removal with the U.S. District Court for the Eastern District of Kentucky, Central Division, to remove the case from Bourbon Circuit Court to the U.S. District Court (Case No. 5:21-CV-00108-REW) for all further proceedings.

On April 30, 2021, a lawsuit was filed by a purported shareholder of the Company in the U.S. District Court for the Southern District of New York challenging our proposed merger with Stock Yards Bancorp. The complaint, captioned Alex Ciccotelli v. Kentucky Bancshares, Inc. et al. (Case No. 1:21-CV-03865-LAP), names as defendants the Company, the Company’s board of directors, Stock Yards Bancorp and Merger Sub. The complaint alleges, among other things, that the individual defendants violated Section 14(a) of the Securities Exchange Act of 1934 (the “1934 Act”) and Rule 14a-9 promulgated thereunder by disseminating a proxy statement/prospectus to the shareholders of the Company in connection with the proposed transaction that contains material misstatements and omissions and that the Company is liable as the issuer of those statements. The complaint further asserts that the individual defendants and Stock Yards Bancorp are liable for the alleged misstatements and omissions in the proxy statement/prospectus by virtue of their actions as controlling persons of the Company within the meaning of Section 20(a) of the 1934 Act.

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The complaint seeks, among other relief, preliminary and permanent injunctions preventing the defendants from proceeding with, consummating or closing the proposed transaction, an order directing the individual defendants to disseminate a proxy statement/prospectus that does not contain any material misstatements or omissions and, in the event defendants consummate the proposed transaction, an award of rescissionary damages. Stock Yards Bancorp, the Company and the Company’s board of directors believe the claims asserted in the lawsuit are without merit.

Item 1 A. Risk Factors

There are factors, many beyond our control, which may significantly affect the Company’s financial position and results of operations. In addition to the other information set forth in this Form 10-Q document, you should consider the factors discussed in Part I, Item 1A. “Risk Factors” in our 2020 Form 10-K, as updated in our subsequent quarterly reports. These risks are not totally independent of each other; some factors affect more than one type of risk. These include regulatory, economic, and competitive environments. There have been no material changes to the risk factors previously disclosed in the Company’s 2020 Form 10-K.

As part of the annual internal audit plan, our risk management department meets with management to assess these risks throughout the Company. Many risks are further addressed in other sections of this Form 10-Q document. Additional risks and uncertainties that management is not aware of or focused on or that management currently deems immaterial may also impair the Company’s business operations. This report is qualified in its entirety by these risk factors.

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds

Net charge-offs of $370 thousand recorded during the first three months of 2019 were mostly attributed to one loan which had a charged-off balance of $191 thousand during the first quarter of 2019. This loan had a specific reserve of $191 thousand at December 31, 2018; thus, this charged-off balance did not result in additional loan loss provision expense for the three months ended March 31, 2019. Future levels of charge-offs will be determined by the particular facts and circumstances surrounding individual loans.

~~Table of Contents~~

~~Based on the above information, management believes the current loan loss allowance is sufficient to meet probable incurred loan losses.~~

Three Months Ended March 31,

(in thousands)



2020


2019

Balance at Beginning of Period

$
8,460

$
8,127

Amounts Charged-Off:

Commercial

25

191

1-4 family residential

35

99

Non-farm & non-residential

—

17

Consumer and other

347

302

Total Charged-off Loans

407

609

Recoveries on Amounts Previously Charged-off:

    Commercial

6

7

1-4 family residential

15

8

Agricultural

2

1

Consumer and other

215

223

Total Recoveries

238

239

Net Charge-offs (Recoveries)

169

370

Provision for Loan Losses

1,625

125

Balance at End of Period

9,916

7,882

Loans

Average

762,389

685,928

At March 31,

778,327

687,484

As a Percentage of Average Loans:

Net Charge-offs for the period

0.02
%

0.05
%
Provision for Loan Losses for the period

0.21
%

0.02
%
Allowance as a Multiple of Net Charge-offs annualized

14.7

5.3

~~Item 4 - CONTROLS AND PROCEDURES~~

~~Our management recognizes that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives.~~

~~Table of Contents~~

~~Part II - Other Information~~

~~Item 1. Legal Proceedings~~

In the ordinary course of operations, the Company and the Bank may be involved in various legal proceedings that the Company believes is of such types common to our industry. There is no proceeding pending, or to the knowledge of management, threatened in which an adverse decision could result in a material adverse change in the business or consolidated financial position of the Company or the Bank.

~~Item 1 A. Risk Factors~~

There are factors, many beyond our control, which may significantly affect the Company’s financial position and results of operations. Some of these factors are described below in the sections titled financial risk, business risk and operational risk. These risks are not totally independent of each other; some factors affect more than one type of risk. These include regulatory, economic, and competitive environments.

The outbreak of Coronavirus Disease 2019 (“COVID-19”) has adversely impacted, and an outbreak of other highly infectious or contagious diseases could adversely impact, certain industries in which the Company’s customers operate and could impair their ability to fulfill their obligations to the Company. Further, the spread of the outbreak is expected to lead to an economic recession and other severe disruptions in the U.S. economy and may disrupt banking and other financial activity in the areas in which the Company operates and could potentially create widespread issues for the Company.

The spread of highly infectious or contagious diseases could cause, and the spread of COVID-19 has caused, severe disruptions in the U.S. economy at large, and for small businesses in particular, which could disrupt the Company’s operations. We are starting to see the impact from COVID-19 on our business, and we believe that it could be significant, adverse and potentially material. Currently, COVID-19 is spreading through the United States and the world. The resulting concerns on the part of the U.S. and global populations have created the threat of a recession, reduced economic activity and caused a significant correction in the global stock markets. We expect that we could experience significant disruptions across our business due to these effects, possibly leading to decreased earnings, significant slowdowns in our loan collections or increased loan defaults. We also may experience financial losses due to increased cyber and payment fraud risk, as cybercriminals attempt to profit from the disruptions, given increased only and remote activity.

The Company relies upon its third-party vendors to conduct business and to process, record, and monitor transactions. If any of these vendors are unable to continue to provide the Company with these services, it could negatively impact the Company’s ability to serve its customers. Furthermore, the outbreak could negatively impact the ability of the Company’s employees and customers to engage in banking and other financial transactions in the geographic areas in which the Company operates and could create widespread issues for the Company.

The Company also could be adversely affected if key personnel or a significant number of employees were to become unavailable due to the effects and restrictions of a COVID-19 outbreak in our market areas. Although the Company has business continuity plans and other safeguards in place, there is no assurance that such plans and safeguards will be effective. We believe that the economic impact from COVID-19 could have an adverse impact on our business and could result in losses in our loan portfolio, all of which would impact our earnings and capital.

COVID-19 may impact businesses’ and consumers’ desire or financial ability to borrow money, which would negatively impact loan volumes. In addition, certain of our borrowers are in or have exposure to the various industries impacted by COVID-19 and/or are located in areas that are quarantined or under stay-at-home orders, and COVID-19 may also have an adverse effect on our commercial real estate and consumer loan portfolios. A prolonged quarantine or stay-at-home

~~Table of Contents~~

~~order would have a negative adverse impact on these borrowers and their revenue streams, which consequently impacts their ability to meet their financial obligations and could result in loan defaults.~~

The outbreak of COVID-19 or an outbreak of other highly infectious or contagious diseases has resulted in or may result in a decrease in our customers’ businesses, a decrease in consumer confidence and business generally, an increase in unemployment or a disruption in the services provided by the Company’s vendors. Disruptions to our customers could result in increased risk of delinquencies, defaults, foreclosures and losses on our loans, negatively impact regional economic conditions, result in declines in local loan demand, liquidity of loan guarantors, loan collateral (particularly in real estate), loan originations and deposit availability and negatively impact the implementation of our growth strategy.

As a participating lender in the U.S. Small Business Administration (“SBA”) Paycheck Protection Program (“PPP”), the Company and the Bank are subject to additional risks of litigation from the Bank’s customers or other parties regarding the Bank’s processing of loans for the PPP and risks that the SBA may not fund some or all PPP loan guaranties.

On March 27, 2020, President Trump signed the Coronavirus Aid, Relief, and Economic Security Act (“CARES Act”), which included a $349 billion loan program administered through the SBA referred to as the PPP. Under the PPP, small businesses and other entities and individuals can apply for loans from existing SBA lenders and other approved regulated lenders that enroll in the program, subject to numerous limitations and eligibility criteria. The Bank is participating as a lender in the PPP. The PPP opened on April 3, 2020; however, because of the short timeframe between the passing of the CARES Act and the opening of the PPP, there is some ambiguity in the laws, rules and guidance regarding the operation of the PPP, which exposes the Company to risks relating to noncompliance with the PPP. On or about April 16, 2020, the SBA notified lenders that the $349 billion earmarked for the PPP was exhausted. On our about April 23, 2020, Congress approved an $310 billion in new funding for the PPP, including $30 billion that was reserved for lenders with less than $10 billion in assets such as the Company.

Since the opening of the PPP, several other larger banks have been subject to litigation regarding the process and procedures that such banks used in processing applications for the PPP. The Company and the Bank may be exposed to the risk of similar litigation, from both customers and non‑customers that approached the Bank regarding PPP loans, regarding its process and procedures used in processing applications for the PPP. If any such litigation is filed against the Company or the Bank and is not resolved in a manner favorable to the Company or the Bank, it may result in significant financial liability or adversely affect the Company’s reputation. In addition, litigation can be costly, regardless of outcome. Any financial liability, litigation costs or reputational damage caused by PPP related litigation could have a material adverse impact on our business, financial condition and results of operations.

The Bank also has credit risk on PPP loans if a determination is made by the SBA that there is a deficiency in the manner in which the loan was originated, funded, or serviced by the Bank, such as an issue with the eligibility of a borrower to receive a PPP loan, which may or may not be related to the ambiguity in the laws, rules and guidance regarding the operation of the PPP.

In the event of a loss resulting from a default on a PPP loan and a determination by the SBA that there was a deficiency in the manner in which the PPP loan was originated, funded, or serviced by the Company, the SBA may deny its liability under the guaranty, reduce the amount of the guaranty, or, if it has already paid under the guaranty, seek recovery of any loss related to the deficiency from the Company.

Even after the COVID-19 outbreak has subsided, we may continue to experience adverse impacts to our business as a result of the virus’s global economic impact, including the availability of credit, adverse impacts on our liquidity and any recession that has occurred or may occur in the future. There are no comparable recent events that provide guidance as to the effect the spread of COVID-19 as a global pandemic may have, and as a result, the ultimate impact of the outbreak is highly uncertain and subject to change.

To the extent the COVID-19 pandemic adversely affects our business, financial position, results of operations and/or cash flows, it may also have the effect of heightening many of the other risks we face, including the risks described in the section entitled “Risk Factors” in our 2019 Form 10-K and any subsequent Quarterly Report on Form 10-Q.

~~Table of Contents~~

~~We continue to work with our management to assess, address and mitigate the impact of this global pandemic. However, we cannot predict the length and impact of the COVID-19 pandemic at this time.~~

The risks described in our 2019 Form 10-K are not the only risks that we encounter. Additional risks and uncertainties not currently known to us or that we currently deem to be immaterial also may materially adversely affect our business, results of operations, financial condition and/or liquidity.

~~Item 2. Unregistered Sales of Equity Securities and Use of Proceeds~~

ISSUER PURCHASES OF EQUITY SECURITIES


	(a)			(c) Total Number	(d) Maximum Number
	Total	(b)		of Shares (or Units)	(or Approximate Dollar
	Number of	Average		Purchased as Part	Value) of Shares (or
	Shares (or	Price Paid		of Publicly	Units) that May Yet Be
	Units)	Per Share		Announced Plans	Purchased Under the
Period	Purchased	(or Unit)		Or Programs	Plans or Programs
1/1/2021 - 1/31/2021	—	$	—	—	135,824	shares

2/1/21 - 2/28/21	—		—	—
~~2/1/20 - 2/29/20~~	—		—	—	135,824	shares

3/1/21 - 3/31/21	—		—	—
~~3/1/20 - 3/31/20~~	—		—	—	135,824	shares

Total	—	$	—	—	135,824	shares

On October 25, 2000, we announced that our Board approved a stock repurchase program and authorized the Company to purchase up to 200,000 shares of its outstanding common stock. On November 11, 2002, the Board approved and authorized the Company’s repurchase of an additional 200,000 shares. On May 20, 2008, the Board of Directors approved and authorized the Company to purchase an additional 200,000 shares. On May 17, 2011, the Board approved and authorized the Company’s repurchase of an additional 200,000 shares. On November 18, 2016, the Board of Directors approved and authorized the Company’s repurchase of an additional 100,000 shares. Shares will be purchased from time to time in the open market depending on market prices and other considerations. Through March 31, ~~2020,~~ 2021

764,176 shares have been purchased.

4847

Table of Contents

Item 6. Exhibits

Ay


~~3.1~~		~~Second Amended and Restated Articles of Incorporation of the Registrant are incorporated by reference to Annex A of the Registrant’s Schedule 14A Proxy Statement and filed April 15, 2019.~~
31.1
~~3.2~~		~~Bylaws of the Registrant are incorporated by reference to Exhibit 3.1 of the Registrant’s Current Report on Form 8-K dated and filed November 21, 2007~~.

~~31.1~~		Certifications of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

31.2		Certifications of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

32		Certifications of Chief Executive Officer and Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

101 INS		XBRL Instance Document (the instance document does not appear in the Interactive Data File because its XBRL tags are embedded withing the Inline XBRL document)

101 SCH		Inline XBRL Taxonomy Extension Scheme Document

101 CAL		Inline XBRL Taxonomy Extension Calculation Linkbase Document

101 DEF		Inline XBRL Taxonomy Extension Definition Linkbase Document

101 LAB		Inline XBRL Taxonomy Extension Label Linkbase Document

101 PRE		Inline XBRL Taxonomy Extension Presentation Linkbase Document

104.1		Cover page Interactive Data File (Formatted as Inline XBRL and contained in Exhibit 101.1)

~~101 INS XBRL Instance Document~~

~~101 SCH XBRL Taxonomy Extension Scheme Document~~

~~101 CAL XBRL Taxonomy Extension Calculation Linkbase Document~~

SIGNATURES

~~101 DEF XBRL Taxonomy Extension Definition Linkbase Document~~

~~101 LAB XBRL Taxonomy Extension Label Linkbase Document~~

~~101 PRE XBRL Taxonomy Extension Presentation Linkbase Document~~

~~SIGNATURES~~

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

		KENTUCKY BANCSHARES, INC.

Date	5/11/2021	/s/Louis Prichard
		Louis Prichard, President and C.E.O.

Date	5/11/2021	/s/Gregory J. Dawson
		Gregory J. Dawson, Chief Financial Officer

4948


	Three Months Ended
	3/31/2020		3/31/2019
INTEREST INCOME:
Loans, including fees	$	9,380	$	8,800
Securities
Taxable		1,469		1,829
Tax exempt		176		333
Other		110		217
Total interest income		11,135		11,179
INTEREST EXPENSE:
Deposits		1,468		1,537
Repurchase agreements and federal funds purchased		8		24
Federal Home Loan Bank advances		582		543
Note payable		—		34
Subordinated debentures		85		102
Total interest expense		2,143		2,240
Net interest income		8,992		8,939
Provision for loan losses		1,625		125
Net interest income after provision		7,367		8,814
NON-INTEREST INCOME:
Service charges		1,289		1,194
Loan service fee income (loss), net		(83)		73
Trust department income		370		328
Gain (loss) on sale of available for sale securities, net		112		94
Gain on sale of loans		683		207
Brokerage income		127		136
Debit card interchange income		812		790
Other		252		178
Total other income		3,562		3,000
NON-INTEREST EXPENSE:
Salaries and employee benefits		4,965		4,690
Occupancy expenses		1,094		981
Legal and professional fees		245		216
Data processing		579		601
Debit card expenses		507		530
Advertising and marketing		267		234
Taxes other than payroll, property and income		337		324
Loss on limited partnership		293		159
Other		943		1,030
Total other expenses		9,230		8,765
Income before income taxes		1,699		3,049
Provision for income taxes		(52)		238
Net income	$	1,751	$	2,811
Earnings per share
Basic	$	0.30	$	0.47
Diluted		0.30		0.47


						Accumulated
						Other		Total
	Common Stock			Retained		Comprehensive		Stockholders’
	Shares	Amount		Earnings		Income (Loss)		Equity
Balances, December 31, 2018	5,955,242	$	21,170	$	89,101	$	(3,478)	$	106,793

Common stock issued (employee stock grants of 23,260 shares, net of 120 shares forfeited, and director stock grants of 2,824 shares)	26,084		295		—		—		295
Stock compensation expense	—		56		—		—		56
Other comprehensive income	—		—		—		2,769		2,769
Net income	—		—		2,811		—		2,811
Dividends declared - $0.17 per share	—		—		(1,015)		—		(1,015)
Balances, March 31, 2019	5,981,326	$	21,521	$	90,897	$	(709)	$	111,709


Balances, December 31, 2019	5,913,922	$	21,447	$	96,903	$	913	$	119,263
Common stock issued (employee stock grants of 29,242 shares, net of 788 shares for net settlement for income taxes and director stock grants of 3,834 shares)	33,076		263		—		—		263
Stock compensation expense	—		61		—		—		61
Other comprehensive loss	—		—		—		(2,481)		(2,481)
Net income	—		—		1,751		—		1,751
Dividends declared - $0.18 per share	—		—		(1,070)		—		(1,070)
Balances, March 31, 2020	5,946,998	$	21,771	$	97,584	$	(1,568)	$	117,787


	Three Months Ended March 31, 2019
	(in thousands)
	Beginning								Ending
	Balance		Charge-offs		Recoveries		Provision		Balance
Commercial	$	1,159	$	(191)	$	7	$	(32)	$	943
Real estate Construction		414		—		—		(63)		351
Real estate mortgage:
1-4 family residential		2,605		(99)		8		146		2,660
Multi-family residential		733		—		—		(10)		723
Non-farm & non-residential		1,649		(17)		—		(23)		1,609
Agricultural		420		—		1		(15)		406
Consumer		410		(61)		14		26		389
Other		58		(241)		209		44		70
Unallocated		679		—		—		52		731
	$	8,127	$	(609)	$	239	$	125	$	7,882


	Individually		Collectively
As of March 31, 2020	Evaluated for		Evaluated for
(in thousands)	Impairment		Impairment		Total
Allowance for Loan Losses:
Commercial	$	—	$	1,003	$	1,003
Real estate construction		—		631		631
Real estate mortgage:
1-4 family residential		—		3,421		3,421
Multi-family residential		75		949		1,024
Non-farm & non-residential		—		2,104		2,104
Agricultural		—		463		463
Consumer		—		533		533
Other		—		31		31
Unallocated		—		706		706
	$	75	$	9,841	$	9,916
Loans:
Commercial	$	—	$	82,793	$	82,793
Real estate construction		374		33,806		34,180
Real estate mortgage:
1-4 family residential		519		299,354		299,873
Multi-family residential		1,292		54,219		55,511
Non-farm & non-residential		1,799		221,409		223,208
Agricultural		1,532		58,481		60,013
Consumer		—		22,598		22,598
Other		—		151		151
Total	$	5,516	$	772,811	$	778,327


	Three Months Ended
	March 31,
	2020		2019
	(in thousands)
Basic and Diluted Earnings Per Share
Net Income	$	1,751	$	2,811
Weighted average common shares outstanding		5,880		5,929
Basic and diluted earnings per share	$	0.30	$	0.47


			Grant-Date
	Shares		Fair Value
Nonvested at January 1, 2020	1,580	$	13.67
Vested	(1,580)		13.67
Nonvested at March 31, 2020	—	$	—



			Weighted-Average
			Grant-Date
	Shares		Fair Value
Nonvested at January 1, 2020	38,482	$	21.46
Vested	(12,855)		20.98
Nonvested at March 31, 2020	25,627	$	21.70


		Weighted-Average
		Grant-Date
Nonvested Shares	Shares	Fair Value
Nonvested at January 1, 2020	—	$	—
Granted	30,030		23.11
Nonvested at March 31, 2020	30,030	$	23.11


	Statement of
	Financial Condition
	Location		3/31/2020		12/31/2019
			(in thousands)
Operating Lease Right of Use Asset:
Gross Carrying Amount		$	8,824	$	8,857
Accumulated Amortization			(802)		(662)
Net Book Value	Operating lease right of use asset	$	8,022	$	8,195

Operating Lease Liabilities
Right of use lease obligations	Operating lease liability	$	8,210	$	8,350