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

For the quarterly period ~~September~~June 30, ~~2017~~2018

☐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) 987-1795

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 and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted 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 and post 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 ☐
(Do not check if a 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 ~~October~~July 31, ~~2017: 2,971,611.~~2018: 2,978,344.

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 ~~and Comprehensive Income~~	4

	Consolidated ~~Statement~~Statements of ~~Changes in Stockholders’ Equity~~Comprehensive Income	5

	Consolidated Statement of ~~Cash Flows~~Changes in Stockholders’ Equity	6

	~~Notes to~~ Consolidated ~~Financial Statements~~Statement of Cash Flows	7

~~Item 2.~~Notes to Consolidated Financial Statements	8

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations	3332

Item 3.	Quantitative and Qualitative Disclosures About Market Risk	4542

Item 4.	Controls and Procedures	4643

Part II - Other Information	4644

Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	4644

Item 6. Exhibits	~~Exhibits~~	4745

Signatures	4846

Table of Contents

Item 1 – Financial Statements

KENTUCKY BANCSHARES, INC.

CONSOLIDATED BALANCE SHEETS (unaudited)

(Dollar amounts in thousands except per share ~~amounts)~~data)


	9/30/2017		12/31/2016		6/30/2018		12/31/2017
ASSETS
Cash and due from banks	$	18,426	$	42,052	$	28,765	$	38,851
Federal funds sold		186		1,198		5		321
Cash and cash equivalents		18,612		43,250		28,770		39,172
Interest bearing time deposits		1,830		5,029		1,785		1,830
Securities available for sale		289,956		273,770		290,504		318,177
Trading Assets		5,714		5,592
Loans held for sale		1,316		724		2,005		1,231
Loans		648,965		656,007		668,778		648,535
Allowance for loan losses		(7,755)		(7,541)		(8,184)		(7,720)
Net loans		641,210		648,466		660,594		640,815
Federal Home Loan Bank stock		7,034		7,034		7,034		7,034
Real estate owned, net		2,669		1,824		1,404		2,404
Assets held for sale		—		969
Bank premises and equipment, net		16,265		14,781		17,728		16,539
Interest receivable		3,785		3,715		3,733		3,951
Mortgage servicing rights		1,485		1,321		1,606		1,511
Goodwill		14,001		14,001		14,001		14,001
Other intangible assets		405		529		298		369
Bank owned life insurance						10,075		—
Other assets		6,476		7,442		7,570		6,159
Total assets	$	1,010,758	$	1,028,447	$	1,047,107	$	1,053,193

LIABILITIES AND STOCKHOLDERS’ EQUITY
Deposits
Non-interest bearing	$	220,518	$	219,556	$	238,033	$	230,241
Time deposits, $250,000 and over		68,528		74,302		49,198		79,578
Other interest bearing		459,333		509,123		515,251		505,454
Total deposits		748,379		802,981		802,482		815,273
Repurchase agreements		24,070		20,873		9,120		19,900
Federal funds purchased		17,302		—		15,717		—
Short-term Federal Home Loan Bank advances		8,530		—		16,000		8,400
Long-term Federal Home Loan Bank advances		93,665		92,500		86,683		90,332
Note payable		3,762		4,090		2,963		3,321
Subordinated debentures		7,217		7,217		7,217		7,217
Interest payable		796		692		645		838
Other liabilities		6,768		7,122		5,791		7,583
Total liabilities		910,489		935,475		946,618		952,864

Stockholders’ equity
Preferred stock, 300,000 shares authorized and unissued		—		—		—		—
Common stock, no par value; 10,000,000 shares authorized; 2,971,611 and 2,973,232 shares issued and outstanding at September 30, 2017 and December 31, 2016		20,889		20,767
Common stock, no par value; 10,000,000 shares authorized; 2,978,386 and 2,971,522 shares issued and outstanding at June 30, 2018 and December 31, 2017						21,085		20,931
Retained earnings		78,515		73,161		84,764		80,395
Accumulated other comprehensive income (loss)		865		(956)
Accumulated other comprehensive loss						(5,360)		(997)
Total stockholders’ equity		100,269		92,972		100,489		100,329
Total liabilities and stockholders’ equity	$	1,010,758	$	1,028,447	$	1,047,107	$	1,053,193

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				Six Months Ended
	6/30/2018		6/30/2017		6/30/2018		6/30/2017
INTEREST INCOME:
Loans, including fees	$	8,421	$	7,712	$	16,433	$	15,206
Securities
Taxable		1,549		1,135		3,051		2,197
Tax exempt		436		568		949		1,176
Trading assets		—		25		—		59
Other		144		144		337		322
Total interest income		10,550		9,584		20,770		18,960
INTEREST EXPENSE:
Deposits		904		684		1,751		1,329
Repurchase agreements and federal funds purchased		41		25		64		51
Federal Home Loan Bank advances		441		388		876		785
Note payable		26		49		62		99
Subordinated debentures		105		77		190		157
Total interest expense		1,517		1,223		2,943		2,421
Net interest income		9,033		8,361		17,827		16,539
Provision for loan losses		250		200		250		550
Net interest income after provision		8,783		8,161		17,577		15,989
NON-INTEREST INCOME:
Service charges		1,326		1,302		2,614		2,525
Loan service fee income, net		96		60		148		174
Trust department income		320		287		635		575
Gain (loss) on sale of available for sale securities, net		(30)		43		(74)		43
Gain (loss) on trading assets		—		34		—		51
Gain on sale of loans		445		491		819		1,041
Brokerage income		141		181		350		374
Debit card interchange income		837		780		1,600		1,511
Gain on bank premises		—		6		—		1,200
Other		173		111		267		151
Total other income		3,308		3,295		6,359		7,645
NON-INTEREST EXPENSE:
Salaries and employee benefits		4,717		4,508		9,210		8,953
Occupancy expenses		1,084		984		2,064		1,949
Repossession expenses, net		42		106		57		185
FDIC Insurance		77		94		156		188
Legal and professional fees		196		194		425		477
Data processing		463		494		932		900
Debit card expenses		432		443		866		818
Amortization expense of intangible assets, excluding mortgage servicing right		35		43		71		86
Advertising and marketing		221		212		440		424
Taxes other than payroll, property and income		313		300		625		600
Telephone		119		137		198		259
Postage		87		85		172		178
Loan fees		17		48		57		111
Other		781		901		1,601		1,607
Total other expenses		8,584		8,549		16,874		16,735
Income before income taxes		3,507		2,907		7,062		6,899
Provision for income taxes		439		497		846		1,352
Net income	$	3,068	$	2,410	$	6,216	$	5,547
Earnings per share
Basic	$	1.03	$	0.81	$	2.09	$	1.87
Diluted		1.03		0.81		2.09		1.87
Dividends per share		0.31		0.29		0.62		0.58

See Accompanying Notes

Table of Contents

KENTUCKY BANCSHARES, INC.

CONSOLIDATED STATEMENTS OF ~~INCOME AND~~ COMPREHENSIVE INCOME (unaudited)

(Dollar amounts in ~~thousands, except per share amounts)~~thousands)

Three Months Ended

Nine Months Ended


9/30/2017

9/30/2016

9/30/2017

9/30/2016

INTEREST INCOME:

Loans, including fees

$
7,779

$
7,630

$
22,985

$
22,432

Securities

Taxable

1,156

782

3,353

2,555

Tax exempt

625

649

1,801

1,967

Trading assets

27

44

86

117

Other

132

101

454

319

Total interest income

9,719

9,206

28,679

27,390

INTEREST EXPENSE:

Deposits

668

555

1,997

1,667

Repurchase agreements and federal funds purchased

38

30

89

83

Federal Home Loan Bank advances

466

428

1,251

1,205

Note payable

48

57

147

177

Subordinated debentures

75

70

232

198

Total interest expense

1,295

1,140

3,716

3,330

Net interest income

8,424

8,066

24,963

24,060

Provision for loan losses

100

175

650

775

Net interest income after provision

8,324

7,891

24,313

23,285

NON-INTEREST INCOME:

Service charges

1,281

1,401

3,806

3,782

Loan service fee income, net

60

(26)

234

23

Trust department income

304

272

879

796

Gain on sale of available for sale securities, net

60

40

103

317

Gain (loss) on trading assets

(15)

(52)

36

48

Gain on sale of loans

415

533

1,456

1,289

Brokerage income

215

168

589

602

Debit card interchange income

763

699

2,274

2,053

Gain on bank premises

—

—

1,200

4

Other

88

201

239

218

Total other income

3,171

3,236

10,816

9,132

NON-INTEREST EXPENSE:

Salaries and employee benefits

4,592

4,540

13,545

13,472

Occupancy expenses

935

974

2,884

2,831

Repossession expenses, net

104

79

289

222

FDIC Insurance

86

106

274

444

Legal and professional fees

285

423

762

1,314

Data processing

409

396

1,309

1,249

Debit card expenses

486

391

1,304

1,078

Amortization expense of intangible assets, excluding mortgage servicing right

38

45

124

201

Advertising and marketing

212

225

636

675

Taxes other than payroll, property and income

304

282

904

836

Telephone

83

77

342

262

Postage

92

88

270

278

Loan fees

40

64

151

155

Other

669

1,064

2,276

2,536

Total other expenses

8,335

8,754

25,070

25,553

Income before taxes

3,160

2,373

10,059

6,864

Income taxes

568

8

1,920

580

Net income

$
2,592

$
2,365

$
8,139

$
6,284

Other comprehensive income, net of tax:

Change in unrealized gains on securities, net of tax

(348)

(800)

1,821

3,243

Comprehensive Income

$
2,244

$
1,565

$
9,960

$
9,527

Earnings per share

Basic

$
0.87

$
0.79

$
2.74

$
2.10

Diluted

0.87

0.79

2.74

2.10

Dividends per share

0.29

0.27

0.87

0.81


		Three Months Ended				Six Months Ended
	6/30/2018		6/30/2017		6/30/2018		6/30/2017

Net income	$	3,068	$	2,410	$	6,216	$	5,547

Other comprehensive income (loss)
Unrealized gains (losses) on securities arising during the period		(1,253)		2,214		(5,596)		3,330
Reclassification of realized amount		30		(43)		74		(43)
Net change in unrealized gain (loss) on securities		(1,223)		2,171		(5,522)		3,287
Less: Tax impact		257		(738)		1,159		(1,118)
Other comprehensive income (loss)		(966)		1,433		(4,363)		2,169

Comprehensive income	$	2,102	$	3,843	$	1,853	$	7,716

See Accompanying Notes

Table of Contents

KENTUCKY BANCSHARES, INC.

CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY (unaudited)

(Dollar amounts in thousands except per share ~~information)~~data)

Accumulated


Other

Total

Common Stock

Retained

Comprehensive

Stockholders’

(Dollars in thousands)

Shares

Amount

Earnings

Income

Equity

Balances, January 1, 2017

2,973,232

$
20,767

$
73,161

$
(956)

$
92,972

Common stock issued (employee stock grants of  5,423 shares, net of 1,152 shares forfeited, director stock awards of 1,386 shares and director stock options exercised of 600 shares)

7,409

64

—

—

64

Stock compensation expense

—

121

—

—

121

Common stock purchased and retired

(9,030)

(63)

(200)

—

(263)

Other comprehensive income

—

—

—

1,821

1,821

Net income

—

—

8,139

—

8,139

Dividends declared - $0.87 per share

—

—

(2,585)

—

(2,585)

Balances, September 30, 2017

2,971,611

$
20,889

$
78,515

$
865

$
100,269


							Accumulated
							Other		Total
	Common Stock				Retained		Comprehensive		Stockholders’
	Shares		Amount		Earnings		Loss		Equity
Balances, December 31, 2017	2,971,522		$	20,931	$	80,395	$	(997)	$	100,329
Common stock issued (employee stock grants of 5,283 shares, net of 437 shares forfeited, director stock grants of 981 shares and director stock options exercised of 600 shares)	6,864			64		—		—		64
Stock compensation expense	—	��		90		—		—		90
Other comprehensive loss	—			—		—		(4,363)		(4,363)
Net income	—			—		6,216		—		6,216
Dividends declared - $0.62 per share	—			—		(1,847)		—		(1,847)
Balances, June 30, 2018	2,978,386		$	21,085	$	84,764	$	(5,360)	$	100,489

(1)

Common Stock has no 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, except share information)~~thousands)


	Nine Months Ended				Six Months Ended
	9/30/2017		9/30/2016		6/30/2018		6/30/2017
Cash Flows From Operating Activities
Net Income	$	8,139	$	6,284	$	6,216	$	5,547
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization		514		985
Depreciation						630		586
Amortization (accretion), net						(249)		(263)
Securities amortization (accretion), net		794		854		461		500
Stock based compensation expense		121		117		90		80
Provision for loan losses		650		775		250		550
Securities available for sale gains, net		(103)		(317)
Securities losses (gains) available for sale gains, net						74		(43)
Net change in trading assets		(122)		(165)		—		(110)
Net increase in cash surrender value of bank-owned life insurance						(75)		—
Originations of loans held for sale		(46,559)		(43,331)		(29,092)		(32,957)
Proceeds from sale of loans		47,423		42,345		29,137		32,805
Losses (gains) on sale of bank premises and equipment		(1,200)		(4)		—		(1,200)
Losses (gains) on other real estate		(11)		(163)		(115)		(17)
Gain on sale of loans		(1,456)		(1,289)		(819)		(1,041)
Write-downs of other real estate, net		141		131		—		38
Changes in:
Interest receivable		(70)		(6)		218		101
Other assets		4		461		(248)		(181)
Interest payable		104		81		(193)		(30)
Deferred taxes		12		1,663		(25)		260
Other liabilities		(354)		(2,425)		(1,792)		(1,374)
Net cash from operating activities		8,027		5,996		4,468		3,251
Cash Flows From Investing Activities
Net change in interest bearing time deposits		3,199		(155)		45		20
Purchases of securities available for sale		(59,235)		(61,876)		(18,631)		(37,702)
Purchase of bank owned life insurance						(10,000)		—
Proceeds from sales of securities available for sale		14,559		23,888		14,715		4,017
Proceeds from principal payments, maturities and calls securities available for sale		30,570		50,987		25,553		20,131
Net change in loans		5,048		(35,688)		(19,925)		3,533
Purchases of bank premises and equipment		(2,270)		(667)		(1,819)		(1,692)
Proceeds from the sale of bank premises and equipment		2,062		4		—		2,174
Capitalized expenditures for other real estate						(74)		—
Proceeds from the sale of other real estate		922		734		1,310		918
Net cash used in investing activities		(5,145)		(22,773)		(8,826)		(8,601)
Cash Flows From Financing Activities:
Net change in deposits		(54,602)		(24,783)		(12,791)		(19,009)
Net change in federal funds purchased						15,717		—
Net change in repurchase agreements		3,197		5,037		(10,780)		3,077
Net change in federal funds purchased		17,302		10,517
Net change in short-term Federal Home Loan Bank advances		8,530		10,000		7,600		5,000
Proceeds from long-term Federal Home Loan Bank advances		13,000		15,000
Repayment of long-term Federal Home Loan Bank advances		(11,835)		(6,660)		(3,649)		(8,691)
Repayment of note payable		(328)		(600)		(358)		(217)
Proceeds from issuance of common stock		64		49		64		64
Purchase of common stock		(263)		(296)		—		(263)
Dividends paid		(2,585)		(2,426)		(1,847)		(1,724)
Net cash (used in) from financing activities		(27,520)		5,838		(6,044)		(21,763)
Net change in cash and cash equivalents		(24,638)		(10,939)		(10,402)		(27,113)
Cash and cash equivalents at beginning of period		43,250		28,048		39,172		43,250
Cash and cash equivalents at end of period	$	18,612	$	17,109	$	28,770	$	16,137
Supplemental disclosures of cash flow information Cash paid during the year for:
Interest expense	$	3,612	$	3,249	$	3,136	$	2,451
Income taxes		1,600		800
Supplemental disclosures of non-cash investing activities
Securities transactions in process, payable						—		7,642
Real estate acquired through foreclosure	$	1,897	$	235		121		1,897

See Accompanying Notes

Table of Contents

~~NOTES TO CONSOLIDATED FINANCIAL STATEMENTS~~

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, ~~2016.~~2017. 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, ~~2016.~~2017.

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

Nature of Operations: 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. is a subsidiary of Kentucky Bancshares, Inc. and is located in Las Vegas, Nevada. It is a captive insurance subsidiary which provides various liability and property damage insurance policies for Kentucky Bancshares, Inc. and its related subsidiaries. KBI Insurance Company, Inc. 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 and such differences could be material to the financial statements.

~~Trading Assets~~Bank Owned Life Insurance: The Company ~~engages in trading activities~~has purchased life insurance policies on certain key executives. 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 ~~its own account. Securities~~other charges or other amounts due that are ~~held principally for resale in the near term are recorded~~probable at ~~fair value with changes in fair value included in earnings. Interest and dividends are included in net interest income.~~settlement.

Loss Contingencies: Loss contingencies, including claims and legal actions arising in the ordinary course of business, are recorded as liabilities when the likelihood of loss is probable and an amount or range of loss can be reasonably estimated.

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

Adoption of New Accounting Standards

~~ASU 2016-15, “Statement of Cash Flows (Topic 230): Classification of Certain Cash Receipts and Cash Payments.”~~ Issued in August 2016, ASU 2016-15 provides guidance to reduce the diversity in practice of how certain cash receipts and cash payments are presented and classified in the statement of cash flows. The amendments of ASU 2016-15 provide guidance on eight specific cash flow: (i) debt prepayment or debt extinguishment costs; (ii) settlement of zero-coupon bonds; (iii) contingent consideration payments made after a business combination; (iv) proceeds from the settlement of insurance claims; (v) proceeds from the settlement of corporate-owned life insurance policies, including bank-owned life insurance policies; (vi) distributions received from equity method investees; (vii) beneficial interests in securitization

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transactions and (viii) separately identifiable cash flows and application of the predominance principle. The amendments of ASU 2016-15 are effective for interim and annual periods beginning after December 15, 2017. Management has evaluated the amendments of ASU 2016-15 and does not believe that adoption of this ASU will impact Kentucky Bancshares existing presentation of the applicable cash receipts and cash payments on its consolidated statement of cash flows.

ASU 2016-13, “Financial Instruments-Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments.” Issued in June 2016, ASU 2016-13 will add Financial Accounting Standards Board “FASB” ASC Topic 326, “Financial Instruments-Credit Losses” and finalizes 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.

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The amendments of ASU 2016-13 eliminate the probable initial recognition threshold and, in turn, reflect an entity’s current estimate of all expected credit losses. ASU 2016-13 does not specify the method for measuring expected credit losses, and an entity is allowed to apply methods that reasonably reflect its expectations of the credit loss estimate. Additionally, the amendments of ASU 2016-13 require that credit losses on available for sale debt securities be presented as an allowance rather than as a writedown.

The amendments of ASU 2016-13 are effective for interim and annual periods beginning after December 15, 2019. Earlier application is permitted for interim and annual periods beginning after December 15, 2018. Kentucky Bancshares plans to adopt the amendments of ASU 2016-13 during the first quarter of 2020. Kentucky Bancshares has established a steering committee which includes the appropriate members of management to evaluate the impact this ASU will have on the Company’s financial position, results of operations and financial statement disclosures and determine the most appropriate method of implementing the amendments in this ASU as well as any resources needed to implement the amendments.

~~ASU 2016-09, “Compensation-Stock Compensation (Topic 718): Improvements to Employee Share-Based Payment Accounting.”~~ Issued in March 2016, ASU 2016-09 seeks to reduce complexity in accounting standards by simplifying several aspects of the accounting for share-based payment transactions. The amendments of ASU 2016-09 include: (i) requiring all excess tax benefits and tax deficiencies to be recognized as income tax expense or benefit in the income statement; (ii) requiring excess tax benefits to be classified along with other income tax cash flows as an operating activity on the statement of cash flow; (iii) allowing an entity to make an entity-wide accounting policy election to either estimate the number of awards that expect to vest or account for forfeitures when they occur; (iv) change the threshold to qualify for equity classification to permit withholding up to the maximum statutory tax rates in the applicable jurisdictions; and (v) requiring that cash paid by an employer when directly withholding shares for tax-withholding purposes to be classified as a financing activity on the statement of cash flows. The amendments of ASU 2016-09 became effective for Kentucky Bancshares on January 1, 2017 and did not have a material impact on Kentucky Bancshares consolidated financial statements. The Company has made an entity-wide accounting policy election to account for forfeitures of stock awards as they occur. Changes to Kentucky Bancshares consolidated statement of cash flows required by the amendments of ASU 2016-09 are incorporated into the presentation in the Quarterly Report on Form 10-Q for the three month and nine month periods ending September 30, 2017.

ASU 2016-02, “Leases (Topic 842).” Issued in February 2016, ASU 2016-02 was issued by the FASB to increase transparency and comparability among organizations by recognizing lease assets and lease liabilities on the balance sheet and by disclosing key information about leasing arrangements. ASU 2016-02 will, among other things, require lessees to recognize a lease liability, which is a lessee’s obligation to make lease payments arising from a lease, measured on a discounted basis; and a right-of-use asset, which is an asset that represents the lessee’s right to use, or control the use of, a specified asset for the lease term. ASU 2016-02 does not significantly change lease accounting requirements applicable to lessors; however, the ASU contains some targeted improvements that are intended to align, where necessary, lessor accounting with the lessee accounting model and with the updated revenue recognition guidance issued in 2014. The amendments of ASU 2016-02 are effective for interim and annual periods beginning after December 15, 2018. Kentucky Bancshares plans to adopt the amendments of ASU 2016-02 beginning in the first quarter of 2019. At adoption, Kentucky Bancshares will recognize a lease asset and a corresponding lease liability on its consolidated balance sheet for its total lease obligation measured on a discounted basis. As of ~~September~~June 30, ~~2017,~~2018, all leases in which Kentucky Bancshares was the lessee were classified as operating leases.

~~Table~~ The adoption of ~~Contents~~

~~Kentucky Bancshares does~~this standard will not ~~anticipate any~~have a material impact ~~to its~~on the Company’s consolidated statements of income, balance sheet or regulatory capital ~~as a result of the adoption of this ASU~~ as the Company has an immaterial amount of leases in which it is the lessee.

ASU 2016-01, “Financial Instruments-Overall (Subtopic 825-10): Recognition and Measurement of Financial Assets and Financial Liabilities (An Amendment of the FASB Accounting Standards Codification).” Issued in January 2016, ASU 2016-01 is intended to enhance the reporting model for financial instruments to provide users of financial statements with improved decision-making information. The amendments of ASU 2016-01 include: (i) requiring equity investments, except those accounted for under the equity method of accounting or those that result in the consolidation of an investee, to be measured at fair value with changes in fair value recognized in net income; (ii) requiring a qualitative assessment to identify impairment of equity investments without readily determinable fair values; (iii) eliminating the requirement to disclose the method and significant assumptions used to estimate the fair value for financial instruments measured at amortized cost on the balance sheet; (iv) requiring the use of the exit price notion when measuring the fair value of financial instruments for disclosure purposes; (v) requiring an entity that has elected the fair value option to measure the fair value of a liability to present separately in other comprehensive income the portion of the change in the fair value resulting from a change in the instrument-specific credit risk; (vi) requiring separate presentation of financial assets and financial liabilities by measurement category and form of financial asset on the balance sheet or the accompanying notes to the financial statements and (vii) clarifying that an entity should evaluate the need for a valuation allowance on a deferred tax asset related to available for sale securities in combination with the entity’s other deferred tax assets. The amendments of ASU 2016-01 are effective for interim and annual periods beginning after December 15, 2017. Kentucky Bancshares ~~plans to adopt~~adopted the amendments of ASU 2016-01 during the first quarter of 2018. ~~Management has evaluated the impact this ASU will have on the Company’s consolidated financial statements and does not expect the~~The adoption of this ~~ASU to~~amendment did not have a material impact on the Company’s consolidated ~~financials~~financial statements.

ASU 2018-02, “Income Statement-Reporting Comprehensive Income (Topic 220) – Reclassification of Certain Tax Effects from Accumulated Other Comprehenisve Income.” On December 22, 2017, the U.S. federal government enacted a tax bill, H.R.1, An Act to Provide for Reconciliation Pursuant to Titles II and V of the Concurrent Resolution on the Budget for Fiscal Year 2018 (“Tax Cuts and Jobs Act”). Stakeholders in the banking and insurance industries submitted unsolicited comment letters to the FASB about a narrow-scope financial reporting issue that arose as a consequence of the Tax Cuts and Jobs Act.

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Specifically, stakeholders expressed concern about the guidance in current generally accepted accounting principles (GAAP) that requires deferred tax liabilities and assets to be adjusted for the effect of a change in tax laws or rates with the effect included in income from continuing operations in the reporting period that includes the enactment date. That guidance is applicable even in situations in which the related income tax effects of items in accumulated other comprehensive income were originally recognized in other comprehensive income (rather than in income from continuing operations).

Those stakeholders asserted that because the adjustment of deferred taxes due to the reduction of the historical corporate income tax rate to the newly enacted corporate income tax rate is required to be included in income from continuing operations, the tax effects of items within accumulated other comprehensive income (referred to as stranded tax effects for purposes of ASU 2018-02) do not reflect the appropriate tax rate.

The amendments in ASU 2018-02 allowed a reclassification from accumulated other comprehensive income to retained earnings for stranded tax effects resulting from the Tax Cuts and Jobs Act. Consequently, the amendments eliminate the stranded tax effects resulting from the Tax Cuts and Jobs Act and will improve the usefulness of information reported to financial statement users. However, because the amendments only relate to the reclassification of the income tax effects of the Tax Cuts and Jobs Act, the underlying guidance that requires that the effect of a change in tax laws or rates be included in income from continuing operations is not affected. The amendments in ASU 2018-02 also require certain disclosures about stranded tax effects.

The amendments in ASU 2018-02 are effective for all entities for fiscal years beginning after December 15, 2018, and interim periods within those fiscal years. Early adoption of the amendments in ASU 2018-02 is permitted, including adoption in any interim period, (1) for public business entities for reporting periods for which financial statements have not yet been issued and (2) for all other entities for reporting periods for which financial statements have not yet been made available for issuance. The Company chose to early adopt the amendments in ASU 2018-02 as of December 31, 2017.

ASU 2014-09, “Revenue from Contracts with Customers (Topic 606).” Issued in May 2014, ASU 2014-09 will add FASB ASC Topic 606, “Revenue from Contracts with Customers,” and will supersede revenue recognition requirements in FASB ASC Topic 605, “Revenue Recognition,” as well as certain cost guidance in FASB ASC Topic 605-35, “Revenue Recognition – Construction-Type and Production-Type Contracts.” ASU 2014-09 provides a framework for revenue recognition that replaces the existing industry and transaction specific requirements under the existing standards. ASU 2014-09 requires an entity to apply a five-step model to determine when to recognize revenue and at what amount. The model specifies that revenue should be recognized when (or as) an entity transfers control of goods or services to a customer at the amount in which the entity expects to be entitled. Depending on whether certain criteria are met, revenue should be recognized either over time, in a manner that depicts the entity’s performance, or at a point in time, when control of the goods or services are transferred to the customer. ASU 2014-09 provides that an entity should apply the following steps: (1) identify the contract(s) with a customer; (2) identify the performance obligations in the contract; (3) determine the transaction price; (4) allocate the transaction price to the performance obligations in the contract; and (5) recognize revenue when (or as) the entity satisfies a performance obligation. In addition, the existing requirements for the recognition of a gain or loss on the transfer of non-financial assets that are not in a contract with a customer are amended to be consistent with the guidance on recognition and measurement in ASU 2014-09.

The amendments of ASU 2014-09 may be applied either retrospectively to each prior reporting period presented or retrospectively with the cumulative effect of initially applying ASU 2014-09 recognized at the date of initial application. If the transition method of application is elected, the entity should also provide the additional disclosures in reporting periods that include the date of initial application of (1) the amount by which each financial statement line item is affected in the current reporting period, as compared to the guidance that was in effect before the change, and (2) an explanation of the reasons for significant changes. ASU 2015-14, “Revenue from Contracts with Customers (Topic 606)-Deferral of the Effective Date,” issued in August 2015, defers the effective date of ASU 2014-09 by one year. ASU 2015-14 provides that the amendments of ASU 2014-09 become effective for interim and annual periods beginning after December 15, 2017. All subsequently issued ASUs which provide additional guidance and clarifications to various aspects of FASB ASC Topic 606 will become effective when the amendments of ASU 2014-09 become effective. Kentucky Bancshares ~~plans to adopt~~adopted these amendments during the first quarter of 2018. Management is continuing to evaluate the impact ASU 2014-09 will have on Kentucky Bancshares consolidated financial statements as well as the most appropriate transition method of application. Based on this evaluation to date, Management has determined that the majority of the revenues earned by Kentucky Bancshares are not within the scope of ASU 2014-09. Management also believes that for most revenue streams within the scope of ASU 2014-09, the amendments will not change the timing of when the revenue is recognized.

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Management will continue to evaluate the impact the adoption of ASU 2014-09 will have on Kentucky Bancshares consolidated financial statements, focusing on noninterest income sources within the scope of ASU 2014-09 as well as new disclosures required by these amendments; however, the adoption of ASU 2014‑09 is not expected to have a2018 and there was no material impact ~~on Kentucky Bancshares consolidated~~to the Company’s financial statements.

~~ASU 2017-04 - Intangibles - Goodwill and Other (Topic 350): Simplifying the Test for Goodwill Impairment:~~ In January 2017, the FASB issued ASU 2017-04, Intangibles - Goodwill and Other (Topic 350): Simplifying the Test for Goodwill Impairment. This ASU eliminates Step 2 from the goodwill impairment test. Instead, under the new guidance, an entity is to perform its annual goodwill impairment test by comparing the fair value of a reporting unit with its carrying amount. An impairment charge would be recognized for the amount by which the carrying amount exceeds the reporting unit's fair value. The new guidance is effective for annual reporting periods, and interim reporting periods within those annual periods, beginning after December 15, 2019, which for Kentucky Bancshares will be effective for the fiscal year beginning January 1, 2020. Early adoption is permitted for interim or annual goodwill impairment tests performed on testing dates after January 1, 2017. The adoption of this guidance is not expected to have an impact on the Company’s consolidated financial statements.

~~ASU 2017-08 - Receivables - Nonrefundable Fees and Other Costs (Subtopic 310-20): Premium Amortization on Purchased Callable Debt Securities~~: ~~In March 2017, the FASB issued ASU 2017-08 - Receivables - Nonrefundable Fees and Other Costs (Subtopic 310-20): Premium Amortization on Purchased Callable Debt Securities.~~ This ASU amends the amortization period for certain purchased callable debt securities held at a premium. It shortens the amortization period for the premium to the earliest call date. Under current U.S. GAAP, premiums on callable debt securities generally are amortized to the maturity date. The new guidance is effective for annual reporting periods, and interim reporting periods within those annual periods, beginning after December 15, 2018, which for Kentucky Bancshares will be the fiscal year beginning January 1, 2019. Early adoption is permitted for interim or annual periods. The adoption of this guidance is not expected to have a material impact on the Company’s consolidated financial statements.

~~ASU 2016-18 - Statement of Cash Flows (Topic 230):~~ ~~Restricted Cash~~ ~~(a consensus of the FASB Emerging Issues Task Force):~~ Effective for public business entities for fiscal years beginning after December 15, 2017, and interim periods within those fiscal years. For all other entities, the amendments are effective for fiscal years beginning after December 15, 2018, and interim periods within fiscal years beginning after December 15, 2019. Early adoption is permitted, including adoption in an interim period. If an entity early adopts the amendments in an interim period, any adjustments should be reflected as of the beginning of the fiscal year that includes that interim period. ~~The adoption of this guidance is not expected to have a material impact on the Company’s consolidated financial statements.~~

~~Update 2017-01 -~~ ~~Business Combinations (Topic 805): Clarifying the Definition of a Business:~~ ~~The amendments in this ASU are intended to help companies and other organizations evaluate whether transactions should be accounted for as acquisitions (or disposals) of assets or businesses.~~Public business entities should apply the amendments in this Update to annual periods beginning after December 15, 2017, which for Kentucky Bancshares will be the fiscal year beginning January 1, 2018, including interim periods within those periods. All other entities should apply the amendments to annual periods beginning after December 15, 2018, and interim periods within annual periods beginning after December 15, 2019.

~~ASU 2017-09 - Compensation - Stock Compensation (Topic 718): Scope of Modification Accounting: In May 2017, the FASB issued~~ ~~ASU 2017-09 - Compensation - Stock Compensation (Topic 718): Scope of Modification Accounting.~~ This ASU amends the guidance about which changes to the terms or conditions of a share-based payment award require an entity to apply modification accounting in Topic 718. The new guidance is effective for annual reporting periods, and interim reporting periods within those annual periods, beginning after December 15, 2017. Early adoption is permitted for interim or annual periods. The adoption of this guidance is not expected to have a material impact on Kentucky Bancshares consolidated financial statements.

ASU 2017-12, "Derivatives and Hedging (Topic 815): Targeted Improvements to Accounting for Hedging Activities." Issued in August 2017, ASU 2017-12 aims to improve the financial reporting of hedging relationships to better portray the economic results of an entity's risk management activities in its financial statements. The amendments in ASU 2017-12 aim to better align an entity's risk management activities and financial reporting for hedging relationships by expanding and refining hedge accounting for both non-financial and financial risk components and aligning the recognition and presentation of the effects of the hedging instrument and the hedged item in the financial statements.

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In March 2016, the FASB issued ASU No. 2016-08, Revenue from Contracts with Customers (Topic 606): Principal versus Agent Considerations (Reporting Revenue Gross versus Net). The amendments relate to when another party, along with the entity, is involved in providing a good or service to a customer. Topic 606 requires an entity to determine whether the nature of its promise is to provide that good or service to the customer (that is, the entity is a principal) or to arrange for the good or service to be provided to the customer by the other party (that is, the entity is an agent). This determination is based upon whether the entity controls the good or the service before it is transferred to the customer. Topic 606 includes indicators to assist in this evaluation. The amendments in this update affect the guidance in ASU ~~2017-12 (i) permit hedge accounting~~No. 2014-09 above. The effective date is the same as the effective date of ASU No. 2014-09.

In April 2016, the FASB issued ASU No. 2016-10, Revenue from Contracts with Customers (Topic 606): Identifying Performance Obligations and Licensing. The amendments clarify the following two aspects of Topic 606: identifying performance obligations, and the licensing implementation guidance. Before an entity can identify its performance obligations in a contract with a customer, the entity first identifies the promised goods or services in the contract. The amendments in this update are expected to reduce the cost and complexity of applying the guidance on identifying promised goods or services. To identify performance obligations in a contract, an entity evaluates whether promised goods and services are distinct. Topic 606 includes two criteria for ~~risk components~~assessing whether promises to transfer goods or services are distinct. One of those criteria is that the promises are separately identifiable. This update will improve the guidance on assessing that criterion. Topic 606 also includes implementation guidance on determining whether as entity’s promise to grant a license provides a customer with either a right to use the entity’s intellectual property, which is satisfied at a point in ~~hedging relationships involving nonfinancial risk~~time, or a right to access the entity’s intellectual property, which is satisfied over time. The amendments in this update are intended to improve the operability and ~~interest rate risk; (ii)~~understandability of the licensing implementation guidance. The amendments in this update affect the guidance in ASU No. 2014-09 above. The effective date is the same as the effective date of ASU No. 2014-09.

In May 2016, the FASB issued ASU No. 2016-12, Revenue from Contracts with Customers (Topic 606): Narrow-Scope Improvements and Practical Expedients. The amendments do not change the core revenue recognition principle in Topic 606. The amendments provide clarifying guidance in certain narrow areas and add some practical expedients.

In December 2016, the FASB issued ASU No. 2016-20, Revenue from Contracts with Customers (Topic 606): Technical Corrections and Improvements. The FASB board decided to issue a separate update for ~~designating fair value hedges of interest rate risk~~technical corrections and ~~for measuring the change in fair value~~improvements to Topic 606 and other Topics amended by ASU No. 2014-09 to increase awareness of the ~~hedged item in fair value hedges of interest rate risk; (iii) continue~~proposals and to ~~allow an entity~~expedite improvements to ~~exclude option premiums and forward points from the assessment of hedge effectiveness; and (iv) permit an entity to exclude the portion~~ASU No. 2014-09. The amendment affects narrow aspects of the ~~change~~guidance issued in ~~fair value of a currency swap that is attributable to a cross-country basis spread from the assessment of hedge effectiveness. The amendments of~~ ASU 2017-12 also include targeted improvements intended to simplify the application of hedge accounting. The amendments of ASU 2017-12 are effective for fiscal years, and interim periods within those years, beginning after December 15, 2018, which for Kentucky Bancshares isNo. 2014-09.

On January 1, ~~2019. All transition requirements~~2018, we adopted ASU 2014-09, Revenue from Contracts with Customers and ~~elections must be applied~~all subsequent amendments to ~~all hedging relationships existing at~~ the ~~date of adoption. Kentucky Bancshares plans~~ASU (collectively, “Topic 606”). We elected to ~~adopt ASU 2017-12 during the first quarter of 2019~~implement using the ~~required~~ modified retrospective ~~transition method. Kentucky Bancshares is currently not impacted by ASU 2017-12. However, if the Company does become involved~~application, with ~~derivatives or hedge accounting, the Company will recognize~~ the cumulative effect ~~of the change, if any, in the beginning balance of each affected component of equity~~recorded as ofan adjustment to opening retained earnings at January 1, ~~2019. The adoption~~2018. Due to immateriality, we had no cumulative effect to record. Since interest income on loans and securities are both excluded from this topic, a significant majority of ~~ASU 2017-12 is~~our revenues are not ~~expected~~subject to ~~have a material impact on~~ the ~~Company’s consolidated financial statements.~~new guidance. Our services that fall within the scope of Topic 606 are presented within noninterest income and are recognized as revenue as we satisfy our obligation to the customer. Services within the scope of Topic 606 include trust department income, service charges, debit card interchange income, and brokerage income.

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.

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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.

ASU 2018-07, Compensation – Stock Compensation (Topic 718): Improvements to Nonemployee Share-Based Payment Accounting. Issued in June 2018, the amendments in ASU 2018-07 to Topic 718, Compensation-Stock Compensation, are intended to align the accounting for share-based payment awards issued to employees and nonemployees. Changes to the accounting for nonemployee awards include: 1) equity classified share-based payment awards issued to nonemployees will now be measured on the grant date, instead of the previous requirement to remeasure the awards through the performance completion date; 2) for performance conditions, compensation cost associated with the award will be recognized when achievement of the performance condition is probable, rather than upon achievement of the performance condition; and 3) the current requirement to reassess the classification (equity or liability) for nonemployee awards upon vesting will be eliminated, except for awards in the form of convertible instruments. The new guidance also clarifies that any share-based payment awards issued to customers should be evaluated under ASC 606, Revenue from Contracts with Customers. The amendments in this ASU are effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2018.

The Company's share-based payment awards to nonemployees consist only of grants made to the Company's Board of Directors as compensation solely related to the individual's role as a Director. As such, in accordance with ASC 718, the Company accounts for these share-based payment awards to its Directors in the same manner as share-based payment awards for its employees. Accordingly, the amendments in this guidance will not have an effect on the accounting for the Company's share-based payment awards to its Directors.

ASU 2018-09, Codification Improvements. Issued in July 2018, the amendments in ASU 2018-09 are intended to clarify or correct unintended guidance in the FASB Codification and affect a wide variety of Topics in the Codification. The topics that are applicable to the Company include: 1) debt modifications and extinguishments and 2) stock compensation. For debt modifications and extinguishments, the amendment clarifies that, in an early extinguishment of debt for which the fair value option has been elected, the net carrying amount of the extinguished debt is equal to its fair value at the reacquisition date, and upon extinguishment, the cumulative amount of the gain or loss on the extinguished debt that resulted from changes in instrument-specific credit risk should be presented in net income. The Company has subordinated debentures. Accordingly, if in the future, the Company chooses to repay this debt prior to its contractual maturity, this amendment would be applicable. For stock compensation, the amendment clarifies that excess tax benefits or tax deficiencies should be recognized in the period in which the amount of the tax deduction is determined, which is typically when an award is exercised (in the case of stock options) or vests (in the case of non-vested stock grants or awards). The Company already records excess tax benefits or tax deficiencies in the periods in which the tax deduction is determined. Therefore, this amendment will not have an effect on the Company's accounting for excess tax benefits or tax deficiencies.

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2.SECURITIES

SECURITIES AVAILABLE FOR SALE

Period-end securities are as follows:

(in thousands)


			Gross		Gross						Gross		Gross
	Amortized		Unrealized		Unrealized		Fair		Amortized		Unrealized		Unrealized		Fair
	Cost		Gains		Losses		Value		Cost		Gains		Losses		Value
Available for Sale
September 30, 2017
June 30, 2018
U.S. treasury notes									$	4,039	$	—	$	(77)	$	3,962
U. S. government agencies	$	30,391	$	448	$	(179)	$	30,660		33,948		368		(786)		33,530
States and political subdivisions		100,195		2,254		(158)		102,291		74,323		641		(883)		74,081
Mortgage-backed - residential		157,739		330		(1,406)		156,663		135,510		20		(4,559)		130,971
Mortgage-backed - commercial										49,199		—		(1,522)		47,677
Equity securities		320		22		—		342		270		13		—		283
Total	$	288,645	$	3,054	$	(1,743)	$	289,956	$	297,289	$	1,042	$	(7,827)	$	290,504

December 31, 2016
December 31, 2017
U.S. treasury notes									$	4,046	$	—	$	(22)	$	4,024
U. S. government agencies	$	36,454	$	373	$	(299)	$	36,528		41,658		405		(358)		41,705
States and political subdivisions		90,117		1,731		(716)		91,132		88,485		1,783		(133)		90,135
Mortgage-backed - residential		148,327		120		(2,677)		145,770		132,664		43		(2,330)		130,377
Mortgage-backed - commercial										52,267		18		(689)		51,596
Equity securities		320		20		—		340		320		20		—		340
Total	$	275,218	$	2,244	$	(3,692)	$	273,770	$	319,440	$	2,269	$	(3,532)	$	318,177

The amortized cost and fair value of securities ~~September~~as of June 30, ~~2017~~2018 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 9.


	Amortized		Fair		Amortized		Fair
	Cost		Value		Cost		Value
Due in one year or less	$	384	$	384	$	84	$	84
Due after one year through five years		25,963		26,669		32,424		32,322
Due after five years through ten years		40,893		41,554		25,508		25,211
Due after ten years		63,346		64,344		54,294		53,956
		130,586		132,951		112,310		111,573
Mortgage-backed - residential		157,739		156,663		135,510		130,971
Mortgage-backed - commercial						49,199		47,677
Equity		320		342		270		283
Total	$	288,645	$	289,956	$	297,289	$	290,504

Proceeds from sales of securities during the first ~~nine~~six months of 2018 and 2017 were $14.7 million and ~~2016 were $14.6 and $23.9~~$4.0 million. Gross gains of ~~$105~~$66 thousand and ~~$317~~$43 thousand and gross losses of $2$114 thousand and $0 were realized on those sales, respectively. The tax provision related to these realized net gains or losses was ~~$35~~$(10) thousand and ~~$108~~$15 thousand, respectively.

Proceeds from sales of securities during the three months ended ~~September~~June 30, 2018 and June 30, 2017 ~~and September 30, 2016~~ were ~~$10.5~~$10.8 million and ~~$2.5~~$4.0 million. Gross gains of ~~$60~~$32 thousand and ~~$40~~$43 thousand and gross losses of $2$36 thousand and $0 were realized on those sales, respectively. The tax provision related to these realized net gains or losses was ~~$20~~$(1) thousand and ~~$14~~$15 thousand, respectively.

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Securities with unrealized losses at ~~September~~June 30, ~~2017~~2018 and at December 31, ~~2016~~2017 not recognized in income are as follows:

~~September~~June 30, ~~2017~~2018


	Less than 12 Months				12 Months or More				Total				Less than 12 Months				12 Months or More				Total
	Fair		Unrealized		Fair		Unrealized		Fair		Unrealized		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	$	15,617	$	(79)	$	6,056	$	(100)	$	21,673	$	(179)
U.S. treasury notes													$	3,962	$	(77)	$	—	$	—	$	3,962	$	(77)
U.S. government agencies														23,798		(464)		7,925		(322)		31,723		(786)
States and municipals		16,449		(110)		2,271		(48)		18,720		(158)		38,547		(774)		2,688		(109)		41,235		(883)
Mortgage-backed - residential		54,303		(385)		44,469		(1,021)		98,772		(1,406)		70,430		(2,075)		53,567		(2,484)		123,997		(4,559)
Mortgage-backed - commercial														38,069		(1,135)		6,768		(387)		44,837		(1,522)
Total temporarily impaired	$	86,369	$	(574)	$	52,796	$	(1,169)	$	139,165	$	(1,743)	$	174,807	$	(4,525)	$	70,948	$	(3,302)	$	245,755	$	(7,827)

December 31, ~~2016~~

2017

			��
	Less than 12 Months				12 Months or More				Total				Less than 12 Months				12 Months or More				Total
	Fair		Unrealized		Fair		Unrealized		Fair		Unrealized		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	$	28,202	$	(299)	$	—	$	—	$	28,202	$	(299)
U.S. treasury notes													$	4,024	$	(22)	$	—	$	—	$	4,024	$	(22)
U.S. government agencies														18,405		(130)		12,692		(228)		31,097		(358)
States and municipals		27,834		(716)		—		—		27,834		(716)		15,442		(97)		2,769		(36)		18,211		(133)
Mortgage-backed - residential		119,802		(1,938)		13,652		(739)		133,454		(2,677)		70,646		(817)		54,760		(1,513)		125,406		(2,330)
Mortgage-backed - commercial														39,394		(409)		7,371		(280)		46,765		(689)
Total temporarily impaired	$	175,838	$	(2,953)	$	13,652	$	(739)	$	189,490	$	(3,692)	$	147,911	$	(1,475)	$	77,592	$	(2,057)	$	225,503	$	(3,532)

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.

~~TRADING ASSETS~~

The trading assets, which totaled $5.7 million at September 30, 2017 and $5.6 million at December 31, 2016, are primarily comprised of cash and cash equivalents and municipal securities which are generally held for 60 days or less.

1314

Table of Contents

3.LOANS

Loans at period-end are as follows:

(in thousands)


	9/30/2017		12/31/2016		6/30/2018		12/31/2017
Commercial	$	75,061	$	77,436	$	80,677	$	80,070
Real estate construction		34,289		29,169		22,729		20,816
Real estate mortgage:
1-4 family residential		242,152		244,638		245,724		238,121
Multi-family residential		41,498		47,199		46,015		39,926
Non-farm & non-residential		179,399		176,024		190,543		192,074
Agricultural		58,930		62,491		63,711		59,176
Consumer		17,520		18,867		19,241		18,182
Other		116		183		138		170
Total	$	648,965	$	656,007	$	668,778	$	648,535

Activity in the allowance for loan losses for the ~~nine~~six month and three month periods indicated was as follows:


	Nine Months Ended September 30, 2017										Six Months Ended June 30, 2018
	(in thousands)										(in thousands)
	Beginning								Ending		Beginning								Ending
	Balance		Charge-offs		Recoveries		Provision		Balance		Balance		Charge-offs		Recoveries		Provision		Balance
					��
Commercial	$	789	$	(35)	$	17	$	161	$	932	$	975	$	—	$	6	$	202	$	1,183
Real estate Construction		564		—		1		120		685		462		—		—		(64)		398
Real estate mortgage:
1-4 family residential		2,301		(203)		8		248		2,354		2,316		(63)		262		(62)		2,453
Multi-family residential		581		—		10		39		630		640		—		6		91		737
Non-farm & non-residential		1,203		(78)		—		304		1,429		1,554		—		—		50		1,604
Agricultural		856		—		47		(420)		483		494		—		146		(165)		475
Consumer		547		(128)		34		80		533		582		(93)		22		71		582
Other		60		(682)		573		91		42		18		(413)		341		103		49
Unallocated		640		—		—		27		667		679		—		—		24		703
	$	7,541	$	(1,126)	$	690	$	650	$	7,755	$	7,720	$	(569)	$	783	$	250	$	8,184


	Three Months Ended September 30, 2017										Three Months Ended June 30, 2018
	(in thousands)										(in thousands)
	Beginning								Ending		Beginning								Ending
	Balance		Charge-offs		Recoveries		Provision		Balance		Balance		Charge-offs		Recoveries		Provision		Balance

Commercial	$	1,006	$	(20)	$	2	$	(56)	$	932	$	959	$	—	$	6	$	218	$	1,183
Real estate construction		584		—		—		101		685		392		—		—		6		398
Real estate mortgage:														—		—		—
1-4 family residential		2,575		(170)		3		(54)		2,354		2,499		(1)		5		(50)		2,453
Multi-family residential		645		—		3		(18)		630		776		—		3		(42)		737
Non-farm & non-residential		1,322		(78)		—		185		1,429		1,554		—		—		50		1,604
Agricultural		504		—		19		(40)		483		484		—		123		(132)		475
Consumer		561		(26)		6		(8)		533		561		(65)		6		80		582
Other		76		(214)		172		8		42		24		(199)		151		73		49
Unallocated		685		—		—		(18)		667		656		—		—		47		703
	$	7,958	$	(508)	$	205	$	100	$	7,755	$	7,905	$	(265)	$	294	$	250	$	8,184

1415

Table of Contents


	Nine Months Ended September 30, 2016										Six Months Ended June 30, 2017
	(in thousands)										(in thousands)
	Beginning								Ending		Beginning								Ending
	Balance		Charge-offs		Recoveries		Provision		Balance		Balance		Charge-offs		Recoveries		Provision		Balance

Commercial	$	486	$	—	$	37	$	164	$	687	$	789	$	(15)	$	15	$	217	$	1,006
Real estate Construction		411		—		15		153		579		564		—		1		19		584
Real estate mortgage:
1-4 family residential		2,081		(90)		8		252		2,251		2,301		(33)		5		302		2,575
Multi-family residential		458		—		7		111		576		581		—		7		57		645
Non-farm & non-residential		1,213		—		355		(355)		1,213		1,203		—		—		119		1,322
Agricultural		678		(3)		35		118		828		856		—		28		(380)		504
Consumer		525		(210)		77		163		555		547		(102)		28		88		561
Other		60		(705)		583		124		62		60		(468)		401		83		76
Unallocated		609		—		—		45		654		640		—		—		45		685
	$	6,521	$	(1,008)	$	1,117	$	775	$	7,405	$	7,541	$	(618)	$	485	$	550	$	7,958


	Three Months Ended September 30, 2016										Three Months Ended June 30, 2017
	(in thousands)										(in thousands)
	Beginning								Ending		Beginning								Ending
	Balance		Charge-offs		Recoveries		Provision		Balance		Balance		Charge-offs		Recoveries		Provision		Balance

Commercial	$	666	$	—	$	3	$	18	$	687	$	871	$	(13)	$	7	$	141	$	1,006
Real estate Construction		552		—		2		25		579		545		—		1		38		584
Real estate mortgage:
1-4 family residential		2,304		(26)		1		(28)		2,251		2,375		(22)		4		218		2,575
Multi-family residential		507		—		3		66		576		666		—		4		(25)		645
Non-farm & non-residential		1,158		—		82		(27)		1,213		1,311		—		—		11		1,322
Agricultural		801		(3)		12		18		828		862		—		18		(376)		504
Consumer		550		(47)		7		45		555		534		(65)		24		68		561
Other		50		(206)		143		75		62		60		(243)		167		92		76
Unallocated		671		—		—		(17)		654		652		—		—		33		685
	$	7,259	$	(282)	$	253	$	175	$	7,405	$	7,876	$	(343)	$	225	$	200	$	7,958

1516

Table of Contents

The following tables present the balance in the allowance for loan losses and the recorded investment (excluding accrued interest receivable amounting to ~~$2.4~~$2.5 million as of ~~September~~June 30, ~~2017~~2018 and ~~$2.4~~$2.6 million at December 31, ~~2016)~~2017) in loans by portfolio segment and based on impairment method as of ~~September~~June 30, ~~2017~~2018 and December 31, ~~2016:~~2017:


	Individually		Collectively		Purchased				Individually		Collectively
As of September 30, 2017	Evaluated for		Evaluated for		Credit
As of June 30, 2018									Evaluated for		Evaluated for
(in thousands)	Impairment		Impairment		Impaired		Total		Impairment		Impairment		Total
Allowance for Loan Losses:
Commercial	$	—	$	932	$	—	$	932	$	200	$	983	$	1,183
Real estate construction		—		685		—		685		—		398		398
Real estate mortgage:				—
1-4 family residential		68		2,286		—		2,354		32		2,421		2,453
Multi-family residential		—		630		—		630		—		737		737
Non-farm & non-residential		—		1,429		—		1,429		—		1,604		1,604
Agricultural		—		483		—		483		—		475		475
Consumer		—		533		—		533		—		582		582
Other		—		42		—		42		—		49		49
Unallocated		—		667		—		667		—		703		703
	$	68	$	7,687	$	—	$	7,755	$	232	$	7,952	$	8,184
Loans:
Commercial	$	—	$	75,061	$	—	$	75,061	$	323	$	80,354	$	80,677
Real estate construction		—		34,289		—		34,289		—		22,729		22,729
Real estate mortgage:
1-4 family residential		420		240,836		896		242,152		420		245,304		245,724
Multi-family residential		—		40,924		574		41,498		697		45,318		46,015
Non-farm & non-residential		1,133		178,263		3		179,399		1,380		189,163		190,543
Agricultural		286		58,460		184		58,930		279		63,432		63,711
Consumer		—		17,520		—		17,520		—		19,241		19,241
Other		—		116		—		116		—		138		138
	$	1,839	$	645,469	$	1,657	$	648,965	$	3,099	$	665,679	$	668,778

Individually

Collectively

Purchased


As of December 31, 2016

Evaluated for

Evaluated for

Credit

(in thousands)

Impairment

Impairment

Impaired

Total

Allowance for Loan Losses:

Commercial

$
—

$
789

$
—

$
789

Real estate construction

—

564

—

564

Real estate mortgage:

1-4 family residential

99

2,202

—

2,301

Multi-family residential

—

581

—

581

Non-farm & non-residential

15

1,188

—

1,203

Agricultural

427

429

—

856

Consumer

—

547

—

547

Other

—

60

—

60

Unallocated

—

640

—

640

$
541

$
7,000

$
—

$
7,541

Loans:

Commercial

$
97

$
77,339

$
—

77,436

Real estate construction

153

29,016

—

29,169

Real estate mortgage:

1-4 family residential

2,704

240,906

1,028

244,638

Multi-family residential

—

46,637

562

47,199

Non-farm & non-residential

1,725

174,154

145

176,024

Agricultural

3,315

58,998

178

62,491

Consumer

—

18,867

—

18,867

Other

—

183

—

183

        Total

$
7,994

$
646,100

$
1,913

$
656,007

Table of Contents


	Individually		Collectively
As of December 31, 2017	Evaluated for		Evaluated for
(in thousands)	Impairment		Impairment			Total
Allowance for Loan Losses:
Commercial	$	—	$	975		$	975
Real estate construction		—		462			462
Real estate mortgage:
1-4 family residential		23		2,293			2,316
Multi-family residential		—		640			640
Non-farm & non-residential		—		1,554			1,554
Agricultural		—		494			494
Consumer		—		582			582
Other		—		18			18
Unallocated		—		679			679
	$	23	$	7,697		$	7,720
Loans:					��
Commercial	$	—	$	80,070		$	80,070
Real estate construction		—		20,816			20,816
Real estate mortgage:
1-4 family residential		206		237,915			238,121
Multi-family residential		—		39,926			39,926
Non-farm & non-residential		1,130		190,944			192,074
Agricultural		284		58,892			59,176
Consumer		—		18,182			18,182
Other		—		170			170
Total	$	1,620	$	646,915		$	648,535

The following table presents loans individually evaluated for impairment by class of loans as of and for the six months ended June 30, 2018 (in thousands):


	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 mortgage:
Multi-family residential	$	697	$	697	$	-	$	709	$	24	$	24
Non-farm & non-residential		1,380		1,380		-		1,397		35		35
Agricultural		279		279		-		282		8		8


With an allowance recorded:
Commercial		323		323		200		350		18		18
Real estate mortgage:
1-4 family residential		420		420		32		420		10		10
Total	$	3,099	$	3,099	$	232	$	3,158	$	95	$	95

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

1618

Table of Contents

The following table presents loans individually evaluated for impairment by class of loans ~~as of and~~ for the ~~nine~~six months ended ~~September~~June 30, ~~2017 (in thousands):~~2017:


	Unpaid				Allowance for		Average		Interest		Cash Basis				Year to Date		Year to Date
	Principal		Recorded		Loan Losses		Recorded		Income		Interest		Average		Interest		Cash Basis
	Balance		Investment		Allocated		Investment		Recognized		Recognized		Recorded		Income		Interest
(in thousands):													Investment		Recognized		Recognized
With no related allowance recorded:
Real estate mortgage:
Non-farm & non-residential	$	1,133	$	1,133	$	—	$	1,243	$	42	$	42
1-4 family residential													$	311	$	—	$	—
Non-farm and non-residential														2,595		53		53
Agricultural		286		286		—		410		9		9		472		7		7


With an allowance recorded:
Real estate mortgage:
1-4 family residential		420		420		68		1,045		8		8		1,358		—		—
Total	$	1,839	$	1,839	$	68	$	2,699	$	59	$	59	$	4,736	$	60	$	60

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

The following table presents loans individually evaluated for impairment by class of loans ~~for the nine months ended September 30, 2016:~~

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 mortgage:

Construction

$
171

$
37

$
37

Agricultural

436

21

21

With an allowance recorded:

Real estate mortgage:

1-4 family residential

989

47

47

Non-farm & non-residential

1,983

70

70

Agricultural

3,868

—

—

Total

$
7,447

$
175

$
175

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

~~Table of Contents~~

~~The following table presents loans individually evaluated for impairment by class of loans~~ as of and for the year ended December 31, ~~2016~~2017 (in thousands):


	Unpaid				Allowance for		Average		Interest		Cash Basis		Unpaid				Allowance for		Average		Interest		Cash Basis
	Principal		Recorded		Loan Losses		Recorded		Income		Interest		Principal		Recorded		Loan Losses		Recorded		Income		Interest
	Balance		Investment		Allocated		Investment		Recognized		Recognized		Balance		Investment		Allocated		Investment		Recognized		Recognized
With no related allowance recorded:
Commercial	$	97	$	97	$	—	$	48	$	30	$	30
Real-estate construction		153		153				494		9		9
Real-estate mortgage:
1-4 family residential
Non-farm & non-residential		606		606		—		488		—		—	$	1,130	$	1,130	$	—	$	1,140	$	68	$	68
Agricultural		654		654		—		561		—		—		284		284		—		289		11		11

With an allowance recorded:
Real estate mortgage
1-4 family residential		2,098		2,098		99		1,590		56		56		206		206		23		208		8		8
Non-farm & non-residential		1,725		1,725		15		2,303		71		71
Agricultural		2,661		2,661		427		3,309		25		25
Total	$	7,994	$	7,994	$	541	$	8,793	$	191	$	191	$	1,620	$	1,620	$	23	$	1,637	$	87	$	87

~~The recorded investment in loans excludes accrued interest receivable and loan origination fees, net due to immateriality.~~ The following tables present loans individually evaluated for impairment by class of loans for the three months ended ~~September~~June 30, ~~2017~~2018 and ~~September~~June 30, ~~2016:~~2017:

Three Months Ending September 30, 2017

Average

Interest

Cash Basis

Recorded

Income

Interest

(in thousands):

Investment

Recognized

Recognized

With no related allowance recorded:

Real estate mortgage:

Non-farm & non-residential

$
2,431

$
17

$
17

Agricultural

491

2

2

With an allowance recorded:

Real estate mortgage:

1-4 family residential

455

1

1

$
3,377

$
20

$
20


	Three Months Ending September 30, 2016						Three Months Ending June 30, 2018
	Average		Interest		Cash Basis		Average		Interest		Cash Basis
	Recorded		Income		Interest		Recorded		Income		Interest
	Investment		Recognized		Recognized
(in thousands):							Investment		Recognized		Recognized
With no related allowance recorded:
Real estate mortgage:
Construction	$	167	$	10	$	10
Multi-family residential							$	703	$	12	$	12
Non-farm & non-residential								1,385		16		16
Agricultural		654		—		—		280		2		2


With an allowance recorded:
Commercial								342		—		—
Real estate mortgage:
1-4 family residential		949		17		17		422		5		5
Non-farm & non-residential		2,094		21		21
Agricultural		3,824		—		—
Total	$	7,688	$	48	$	48
							$	3,132	$	35	$	35

1819

Table of Contents


	Three Months Ending June 30, 2017
	Average		Interest		Cash Basis
	Recorded		Income		Interest
	Investment		Recognized		Recognized
With no related allowance recorded:
Real estate mortgage:
1-4 family residential	$	947	$	40	$	40
Non-farm and non-residential		292		47		47
Agricultural
With an allowance recorded:
Real estate mortgage:
Construction		2,394		—		—
1-4 family residential		720		1		1
Non-farm and non-resdiential		2,070		23		23
Agricultural		3,957		—		—
Total	$	10,380	$	111	$	111

The following tables present the recorded investment in nonaccrual, loans past due over 90 days still on accrual and accruing troubled debt restructurings by class of loans as of ~~September~~June 30, ~~2017~~2018 and December 31, ~~2016:~~2017:


			Loans Past Due						Loans Past Due
			Over 90 Days						Over 90 Days
As of September 30, 2017			Still		Troubled Debt
As of June 30, 2018									Still		Troubled Debt
(in thousands)	Nonaccrual		Accruing		Restructurings		Nonaccrual		Accruing		Restructurings
Commercial	$	—	$	32	$	—	$	322	$	324	$	—
Real estate construction		—		67		—		—		374
Real estate mortgage:
1-4 family residential		1,213		47		—		568		8		—
Non-farm & non-residential		—		—		—		226		—		—
Agricultural		150		—		—		92		—		—
Consumer		30		5		—		42		11		—
Total	$	1,393	$	151	$	—	$	1,250	$	717	$	—


			Loans Past Due						Loans Past Due
			Over 90 Days						Over 90 Days
As of December 31, 2016			Still		Troubled Debt
As of December 31, 2017									Still		Troubled Debt		��
(in thousands)	Nonaccrual		Accruing		Restructurings		Nonaccrual		Accruing		Restructurings
Commercial	$	3	$	11	$	—	$	—	$	32	$	—
Real estate construction		—		153		—
Real estate mortgage:
1-4 family residential		2,725		31		338		1,086		184		—
Multi-family residential		25		—		—
Non-farm & non-residential		272		—		1,725
Agricultural		1,541		724		—		96		—		—
Consumer		—		8		—		11		15		—
Total	$	4,566	$	927	$	2,063	$	1,193	$	231	$	—

Nonaccrual loans secured by real estate make up ~~97.0%~~70.8% of the total nonaccrual loan balances at ~~September~~June 30, ~~2017.~~2018.

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.

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.

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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.

~~Table of Contents~~

The following tables present the aging of the recorded investment in past due and non-accrual loans as of ~~September~~June 30, ~~2017~~2018 and December 31, ~~2016~~2017 by class of loans:


	30–59		60–89		Greater than				Total				30–59		60–89		Greater than				Total
As of September 30, 2017	Days		Days		90 Days				Past Due &		Loans Not
As of June 30, 2018													Days		Days		90 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	$	95	$	—	$	32	$	—	$	127	$	74,934	$	21	$	55	$	324	$	322	$	722	$	79,955
Real estate construction		—		—		67		—		67		34,222		—		—		374		—		374		22,355
Real estate mortgage:
1-4 family residential		1,512		706		47		1,213		3,478		238,674		1,154		347		8		568		2,077		243,647
Multi-family residential		—		—		—		—		—		41,498		—		—		—		—		—		46,015
Non-farm & non-residential		192		—		—		—		192		179,207		325		184		—		226		735		189,808
Agricultural		151		—		—		150		301		58,629		96		—		—		92		188		63,523
Consumer		95		10		5		30		140		17,380		147		16		11		42		216		19,025
Other		—		—		—		—		—		116		—		—		—		—		—		138
Total	$	2,045	$	716	$	151	$	1,393	$	4,305	$	644,660	$	1,743	$	602	$	717	$	1,250	$	4,312	$	664,466


	30–59		60–89		Greater than				Total				30–59		60–89		Greater than				Total
As of December 31, 2016	Days		Days		90 Days				Past Due &		Loans Not
As of December 31, 2017													Days		Days		90 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	$	54	$	45	$	11	$	3	$	113	$	77,323	$	678	$	44	$	32	$	—	$	754	$	79,316
Real estate construction		—		—		153		—		153		29,016		—		—		—		—		—		20,816
Real estate mortgage:
1-4 family residential		2,310		228		31		2,725		5,294		239,344		2,222		321		184		1,086		3,813		234,308
Multi-family residential		391		3		—		25		419		46,780		—		—		—		—		—		39,926
Non-farm & non-residential		159		61		—		272		492		175,532		162		—		—		—		162		191,912
Agricultural		647		61		724		1,541		2,973		59,518		249		—		—		96		345		58,831
Consumer		97		37		8		—		142		18,725		132		14		15		11		172		18,010
Other		—		—		—		—		—		183		—		—		—		—		—		170
Total	$	3,658	$	435	$	927	$	4,566	$	9,586	$	646,421	$	3,443	$	379	$	231	$	1,193	$	5,246	$	643,289

Troubled Debt Restructurings:

Management periodically reviews renewals and modifications of previously identified ~~TDRs,~~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. In July 2017, the TDR classification was removed from one loan that met the requirements as discussed above. This loans totaled $1.7 million at December 31, 2016. This loan is no longer evaluated individually for impairment.

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The Company had no loans classified as troubled debt restructurings as of ~~September~~June 30, ~~2017. The Company allocated $40 thousand for specific reserves to customers whose loan terms had been modified in troubled debt restructuring as of~~2018 or December 31, ~~2016.~~

~~The Company has not committed to lend additional amounts as of September 30, 2017 and December 31, 2016 to customers with outstanding loans that are classified as troubled debt restructurings.~~

~~Table of Contents~~

~~No loans were modified as troubled debt restructurings during the first nine months ended of 2017 or 2016.~~2017.

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 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 ~~September~~June 30, ~~2017~~2018 and December 31, ~~2016,~~2017, and based on the most recent analysis performed, the risk category of loans by class of loans is as follows:


As of September 30, 2017			Special
As of June 30, 2018											Special
(in thousands)	Pass		Mention		Substandard		Doubtful		Pass		Mention		Substandard		Doubtful

Commercial	$	73,482	$	1,537	$	42	$	—	$	79,433	$	887	$	357	$	—
Real estate construction		34,289		—		—		—		22,729		—		—		—
Real estate mortgage:
1-4 family residential		233,723		3,806		4,577		46		238,377		2,877		4,470		—
Multi-family residential		38,195		3,303		—		—		42,801		2,517		697		—
Non-farm & non-residential		171,052		7,275		1,072		—		180,534		8,233		1,776		—
Agricultural		55,865		2,258		807		—		56,612		6,385		714		—

Total	$	606,606	$	18,179	$	6,498	$	46	$	620,486	$	20,899	$	8,014	$	—


As of December 31, 2016			Special
As of December 31, 2017											Special
(in thousands)	Pass		Mention		Substandard		Doubtful		Pass		Mention		Substandard		Doubtful

Commercial	$	76,346	$	1,078	$	12	$	—	$	78,326	$	1,703	$	41	$	—
Real estate construction		28,577		—		592		—		20,816		—		—		—
Real estate mortgage:
1-4 family residential		232,969		4,031		7,627		11		230,103		3,522		4,496		—
Multi-family residential		43,681		2,617		901		—		36,654		2,551		721		—
Non-farm & non-residential		167,451		8,185		388		—		183,230		7,240		1,604		—
Agricultural		58,155		1,367		2,969		—		54,765		3,682		729		—

Total	$	607,179	$	17,278	$	12,489	$	11	$	603,894	$	18,698	$	7,591	$	—

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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 90 days past due or on non-accrual status, and total ~~$35~~$53 thousand at ~~September~~June 30, ~~2017~~2018 and $8$26 thousand at December 31, ~~2016.~~2017.

4.REAL ESTATE OWNED

Activity in real estate owned, net was as ~~follows:~~follows (in thousands):


	Nine Months Ended				Six Months Ended
	September 30,				June 30,
	2017		2016		2018		2017
Beginning of year	$	1,824	$	2,347	$	2,404	$	1,824
Additions		1,897		193		121		1,897
Capitalized Expenditures						74		—
Sales		(911)		(571)		(1,195)		(901)
Fair value adjustments		(141)		(131)		—		(38)
End of period	$	2,669	$	1,838	$	1,404	$	2,782

Activity in the valuation allowance was as ~~follows:~~follows (in thousands):


					Six Months Ended
					June 30,
	2017		2016		2018		2017
Beginning of year	$	803	$	616	$	777	$	803
Fair value adjustments		141		131		—		38
Reductions from sale		(46)		—		(364)		(46)

End of Period	$	898	$	747	$	413	$	795

Expenses related to foreclosed assets ~~include:~~include (in thousands):


	Nine Months Ended				Six Months Ended
	September 30,				June 30,
	2017		2016			2018		2017
		(in thousands)
Net (gain) loss on sales, included in other income on income statement	$	(11)	$	(163)
Net gains on sales, included in other income on income statement					$	(115)	$	(17)

Fair value adjustments		141		131		—		38
Operating expenses, net of rental income		148		91		57		147
Repossession expense, net		289		222		57		185

Net expense, net of gain or loss on sales, for the period	$	278	$	59	$	(58)	$	168


	Three Months Ended				Three Months Ended
	September 30,				June 30,
	2017		2016			2018		2017
		(in thousands)
Net (gain) loss on sales, included in other income on income statement	$	6	$	(163)
Net gains on sales, included in other income on income statement					$	(117)	$	28

Fair value adjustments		103		46		—		38
Operating expenses, net of rental income		1		33		42		68
Repossession expense, net		104		79		42		106

Net expense, net of gain or loss on sales, for the period	$	110	$	(84)	$	(75)	$	134

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5.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:

Nine Months Ended

September 30,

2017

2016

(in thousands)
Basic Earnings Per Share

Net Income

$
8,139

$
6,284
Weighted average common shares outstanding

2,955

2,975
Basic earnings per share

$
2.74

$
2.10

Diluted Earnings Per Share

Net Income

$
8,139

$
6,284
Weighted average common shares outstanding

2,955

2,975
Weighted average common and dilutive potential common shares outstanding

2,956

2,975
Diluted earnings per share

$
2.74

$
2.10


	Six Months Ended
	June 30,
	2018		2017
	(in thousands)
Basic and Diluted Earnings Per Share
Net Income	$	6,216	$	5,547
Weighted average common shares outstanding		2,962		2,954
Basic and diluted earnings per share	$	2.09	$	1.87

Three Months Ended

September 30,

2017

2016

(in thousands)
Basic Earnings Per Share

Net Income

$
2,592

$
2,365
Weighted average common shares outstanding

2,955

2,976
Basic earnings per share

$
0.87

$
0.79

Diluted Earnings Per Share

Net Income

$
2,592

$
2,365
Weighted average common shares outstanding

2,955

2,976
Weighted average common and dilutive potential common shares outstanding

2,956

2,976
Diluted earnings per share

$
0.87

$
0.79


	Three Months Ended
	June 30,
	2018		2017
	(in thousands)
Basic and Diluted Earnings Per Share
Net Income	$	3,068	$	2,410
Weighted average common shares outstanding		2,962		2,954
Basic and diluted earnings per share	$	1.03	$	0.81

Stock options for 0 shares of common stock for the ~~nine~~six months and three months ended ~~September~~June 30, ~~2017~~2018 and ~~1,200~~0 shares of common stock for the ~~nine~~six months and three months ended ~~September~~June 30, ~~2016~~2017 were excluded from diluted earnings per share because their impact was antidilutive.

6.STOCK COMPENSATION

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

~~Two~~ Stock Option ~~Plans~~Plan

Under its expired 1999 Employee Stock Option Plan, the Company has granted certain officers and key employees stock option awards which vest and become fully exercisable at the end of five years and provided for issuance of up to 100,000 options. Under the expired 1993 Non-Employee Directors Stock Ownership Incentive Plan, the Company ~~also~~ granted certain directors stock option awards which ~~vest~~vested and ~~become~~became fully exercisable immediately and provided for issuance of up to 20,000 options. ~~For each Stock Option Plan, the~~The exercise price of each option which has a ten year life, was equal to the market price of the Company’s stock on the date of grant.

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Summary of activity in the stock option plan for the first ~~nine~~six months of ~~2017~~2018 follows:

Weighted


Weighted

Average

Aggregate

Average

Remaining

Intrinsic

Exercise

Contractual

Value

Shares

Price

Term

(in thousands)
Outstanding, beginning of year

1,200

$
31.00

Granted

—

—

—
Forfeited or expired

—

—

—
Exercised

(600)

31.00

Outstanding, end of period

600

$
31.00

5 months

$
6
Vested and expected to vest

600

$
31.00

5 months

$
6
Exercisable, end of period

600

$
31.00

5 months

$
6

~~(1)~~

~~Aggregate intrinsic value in thousands~~


				Weighted
		Weighted		Average	Aggregate
		Average		Remaining	Intrinsic
		Exercise		Contractual	Value
	Shares	Price		Term	(in thousands)
Outstanding, beginning of year	600	$	31.00
Granted	—		—			—
Forfeited or expired	—		—			—
Exercised	(600)		31.00
Outstanding, end of period	—	$	—	0 months	$	—
Vested and expected to vest	—	$	—	0 months	$	—
Exercisable, end of period	—	$	—	0 months	$	—

As of ~~September~~June 30, ~~2017,~~2018, there was $0 of total unrecognized compensation cost related to nonvested stock options granted under the Plan. Since ~~both~~the stock option ~~plans have~~plan has expired, ~~neither plan allows for~~no additional options towill be issued.

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 50,000. There were no shares issued during the first ~~nine~~six months of ~~2017~~2018 or ~~2016.~~2017. The plan is now expired and no additional shares will be issued from the 2005 plan. There were ~~117~~71 shares forfeited during the ~~first nine~~six months ~~of 2017~~ and ~~639~~three months ending June 30, 2018 and no shares were forfeited during the first ~~nine~~six months ~~2016.~~and three months ending June 30, 2017.

A summary of changes in the Company’s nonvested shares for the year follows:


		Weighted-Average		Fair			Weighted-Average		Fair
		Grant-Date		Value			Grant-Date		Value
Nonvested Shares	Shares	Fair Value		Per Share		Shares	Fair Value		Per Share
Nonvested at January 1, 2017	10,636	$	253,518	$	23.84
Granted	—		—		—
Nonvested at January 1, 2018						6,141	$	151,984	$	24.75
Vested	(4,348)		(97,747)		22.48	(3,090)		(72,224)		23.37
Forfeited	(117)		(3,004)		—	(71)		(1,883)		26.52
Nonvested at September 30, 2017	6,171	$	152,767	$	24.76
Nonvested at June 30, 2018						2,980	$	77,877	$	26.13

(1) Grant date fair value in thousands

As of ~~September~~June 30, ~~2017,~~2018, there was ~~$99~~$51 thousand of total unrecognized compensation cost related to nonvested shares granted under the 2005 restricted stock grant plan. The cost is expected to be recognized over a weighted-average period of ~~1.8~~1.2 years. As of ~~September~~June 30, ~~2017,~~2018, no additional shares are available for issuance under the restricted stock grant plan.

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 are 150,000. There were ~~6,575~~5,720 shares issued during the ~~first nine~~six months ~~of 2017~~ended June 30, 2018 and ~~6,170~~6,575 shares were issued during the first ~~nine~~six months of ~~2016.~~2017. There were ~~951~~366 shares forfeited during the ~~first nine~~six months ~~of 2017~~ended June 30, 2018 and ~~360~~600 shares were forfeited during the ~~first nine~~six months ~~of 2016.~~ended June 30, 2017.

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A summary of changes in the Company’s nonvested shares for the year follows:


		Weighted-Average		Fair			Weighted-Average		Fair
		Grant-Date		Value			Grant-Date		Value
Nonvested Shares	Shares	Fair Value		Per Share		Shares	Fair Value		Per Share
Nonvested at January 1, 2017	7,297	$	213,853	$	29.31
Nonvested at January 1, 2018						10,930	$	338,545	$	30.97
Granted	6,575		213,688		32.50	5,720		263,406		46.05
Vested	(1,648)		(47,988)		29.12	(2,448)		(74,504)		30.43
Forfeited	(951)		(30,463)		32.03	(366)		(13,841)		37.82
Nonvested at September 30, 2017	11,273	$	349,090	$	30.97
Nonvested at June 30, 2018						13,836	$	513,606	$	37.12

(1)

Grant date fair value in thousands

As of ~~September~~June 30, ~~2017,~~2018, there was ~~$292~~$449 thousand of total unrecognized compensation cost related to nonvested shares granted under the restricted stock grant plan. The cost is expected to be recognized over a weighted-average period of ~~3.7~~3.8 years. As of ~~September~~June 30, ~~2017, 133,368,~~2018, 127,166, shares are still available for issuance.

7.REPURCHASE AGREEMENTS

Repurchase agreements totaled ~~$24.1~~$9.1 million at ~~September~~June 30, ~~2017.~~2018. Of this, ~~$18.1~~$6.1 million were overnight obligations and ~~$6.0~~$3.0 million had terms extending through May 2021 and a weighted remaining average life of ~~1.6~~1.9 years. The Company pledged ~~agencies~~agency and mortgage-backed securities with a carrying amount of ~~$30.5~~$15.2 million to secure repurchase agreements as of ~~September~~June 30, ~~2017.~~2018.

8.OTHER BORROWINGS

On July 20, 2015, the Company borrowed $5$5.0 million which had an outstanding balance of ~~$3.8~~$3.0 million at ~~September~~June 30, ~~2017.~~2018. The term loan has a fixed interest rate of 5.02%, requires quarterly principal and interest payments, matures July 20, 2025 and is collateralized by Kentucky Bank stock. The maturity schedule for the term loan as of ~~September~~June 30, ~~2017~~2018 is as follows (in thousands):


2017	$	81
2018		399	$	246
2019		419		511
2020		441		537
2021		463		564
2022				593
Thereafter		1,959		512
	$	3,762	$	2,963

~~In addition, the Company also had $17.3 million in federal funds purchased at September 30, 2017.~~

9.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.

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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.

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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 ~~and Trading Assets~~: The fair values for available for sale investment securities ~~and trading assets~~ 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.

~~Adjustments~~Net adjustments totaled ~~$68~~$209 thousand the first ~~nine~~six months of ~~2017~~2018 and $0 for the first ~~nine~~six months of ~~2016~~2017 and resulted in a Level 3 classification of the inputs for determining fair value. Net adjustments totaled $167 thousand the three months June 30, 2018 and $0 for the three months ending June 30, 2017 and 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.

Other Real Estate Owned: Assets acquired through or instead of loan foreclosure and classified as other real estate owned ~~(OREO)~~“OREO” are initially recorded at fair value less costs to sell when acquired, establishing a new cost basis. These assets are subsequently accounted for at lower of cost or fair value less estimated costs to sell. Fair value is commonly based on recent real estate appraisals which are updated no less frequently than annually. These appraisals may utilize a single valuation approach or a combination of approaches including comparable sales and the income approach with data from comparable properties. Adjustments are routinely made in the appraisal process by the independent appraisers to adjust for differences between the comparable sales and income data available. Such adjustments were ~~$141~~$0 for both the six months and three months ended June 30, 2018 and $38 thousand for the ~~nine~~six months ~~ended September 30, 2017~~ and ~~$131 thousand for the nine months ended September 30, 2016, and $103 thousand for the~~ three months ended ~~September~~June 30, 2017, ~~and $46 thousand for the three months ended September 30, 2016,~~ and resulted in a Level 3 classification of the inputs for determining fair value. Real estate owned properties are evaluated on a quarterly basis for additional impairment and adjusted accordingly.

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.

2627

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Assets and Liabilities Measured on a Recurring Basis:

Available for sale investment securities and trading 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 ~~September~~June 30, ~~2017~~2018 (in thousands):


			Quoted Prices								Quoted Prices
			In Active								In Active
			Markets for		Significant Other		Significant				Markets for		Significant Other		Significant
			Identical		Observable		Unobservable				Identical		Observable		Unobservable
	Carrying		Assets		Inputs		Inputs		Carrying		Assets		Inputs		Inputs
Description	Value		(Level 1)		(Level 2)		(Level 3)		Value		(Level 1)		(Level 2)		(Level 3)
U.S. treasury notes									$	3,962	$	—	$	3,962	$	—
U. S. government agencies	$	30,660	$	—	$	30,660	$	—		33,530		—		33,530		—
States and municipals		102,291		—		102,291		—		74,081		—		74,081		—
Mortgage-backed - residential		156,663		—		156,663		—		130,971		—		130,971		—
Mortgage-backed-commercial										47,677		—		47,677		—
Equity securities		342		342		—		—		283		283		—		—
Trading Assets		5,714		1,959		3,755		—
Total	$	295,670	$	2,301	$	293,369	$	—	$	290,504	$	283	$	290,221	$	—

Fair Value Measurements at December 31, ~~2016~~2017 (in thousands):


			Quoted Prices								Quoted Prices
			In Active								In Active
			Markets for		Significant Other		Significant				Markets for		Significant Other		Significant
			Identical		Observable		Unobservable				Identical		Observable		Unobservable
	Carrying		Assets		Inputs		Inputs		Carrying		Assets		Inputs		Inputs
Description	Value		(Level 1)		(Level 2)		(Level 3)		Value		(Level 1)		(Level 2)		(Level 3)
U.S. treasury notes									$	4,024	$	—	$	4,024	$	—
U. S. government agencies	$	36,528	$	—	$	36,528	$	—		41,705		—		41,705		—
States and municipals		91,132		—		91,132		—		90,135		—		90,135		—
Mortgage-backed - residential		145,770		—		145,770		—		130,377		—		130,377		—
Mortgage-backed - commercial										51,596		—		51,596		—
Equity securities		340		340		—		—		340		340		—		—
Trading Assets		5,592		1,608		3,984		—
Total	$	279,362	$	1,948	$	277,414	$	—	$	318,177	$	340	$	317,837	$	—

There were no transfers between level 1 and level 2 during ~~2017~~2018 or ~~2016.~~2017.

Table of Contents

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


	Fair Value Measurements at September 30, 2017 Using :								Fair Value Measurements at June 30, 2018 Using :
				Quoted Prices								Quoted Prices
				In Active								In Active
				Markets for		Significant Other	Significant					Markets for		Significant Other	Significant
				Identical		Observable	Unobservable					Identical		Observable	Unobservable
	Carrying			Assets		Inputs	Inputs		Carrying			Assets		Inputs	Inputs
(In thousands)	Value			(Level 1)		(Level 2)	(Level 3)		Value			(Level 1)		(Level 2)	(Level 3)
Description
Impaired loans:
Commercial									$	123	$	—	$	123	$	—
Real Estate Mortgage:
1-4 family Residential	$	353	$	—	$	—	$	353		310		—		—		310

Other real estate owned, net:
Residential		611		—		—		611		93		—		—		93
Commercial		57		—		—		57		246		—		—		246
Mortgage servicing rights		1,310		—		—		1,310

~~Table of Contents~~


	Fair Value Measurements at December 31, 2016 Using :								Fair Value Measurements at December 31, 2017 Using :
				Quoted Prices								Quoted Prices
				In Active								In Active
				Markets for		Significant Other	Significant					Markets for		Significant Other	Significant
				Identical		Observable	Unobservable					Identical		Observable	Unobservable
	Carrying			Assets		Inputs	Inputs		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	$	1,685	$	—	$	—	$	1,685	$	183	$	—	$	—	$	183
Agricultural		2,234		—		—		2,234
Other real estate owned, net:
Residential		956		—		—		956		910		—		—		910
Commercial		272		—				272		200		—				200
Mortgage servicing rights		1,083		—		—		1,083		1,323		—		—		1,323

Impaired loans measured for impairment using the fair value of the collateral for collateral dependent loans had a carrying amount of $353 thousand, which includes a valuation allowance of $68 thousand at September 30, 2017. Impaired loans measured for impairment using the fair value of the collateral for collateral dependent loans had a net carrying amount of ~~$3.9 million,~~$433 thousand, which includes a valuation allowance of $232 thousand at June 30, 2018. Impaired loans measured for impairment using the fair value of the collateral for collateral dependent loans had a net carrying amount of $183 thousand, with a valuation allowance of ~~$502~~$23 thousand at December 31, ~~2016. One new loan became~~2017. Four additional loans were impaired ~~during the nine month~~at June 30, 2018 when compared to December 31, 2017 and ~~three month period ended September 30, 2017 which~~ resulted ~~in $68 thousand~~ in additional provision for loan ~~losses~~loss expense of $211 thousand for ~~impaired loans.~~the six months ended June 30, 2018 and $167 thousand for the three months ended June 30, 2018. For the ~~nine~~six months and three months ended ~~September~~June 30, ~~2016,~~2017, no loans ~~which~~ became ~~impaired during 2016, resulted in additional loan loss provision expense.~~ impaired.

Other real estate owned measured at fair value less costs to sell had a net carrying amount of ~~$668~~$339 thousand, which is made up of the outstanding balance of ~~$1.6 million,~~$752 thousand, net of a valuation allowance of ~~$898~~$413 thousand at ~~September~~June 30, ~~2017.~~2018. Other real estate owned which was measured at fair value less costs to sell, had a net carrying amount of ~~$1.6~~$1.1 million, which was made up of the outstanding balance of ~~$2.4~~$1.9 million, net of a valuation allowance of ~~$803~~$777 thousand at December 31, ~~2016.~~2017. The Company recorded ~~$141 thousand~~$0 in write-downs of other real estate owned properties for the ~~nine~~six months and three months ended ~~September~~June 30, ~~2017~~2018 and ~~$103~~$38 thousand for the six months and three months ended ~~September~~June 30, 2017. ~~The Company recorded $131 thousand and $46 thousand in net write-downs of other real estate owned properties during the nine months and the three months ended September 30, 2016.~~

~~Impaired~~At December 31 , 2017, impaired mortgage servicing rights, which are carried at the lower of cost or fair value, were carried at their fair value of $1.3 million, which iswas made up of the outstanding balance of $1.4 million, net of a valuation allowance of ~~$86 thousand at September 30, 2017. At December 31, 2016,~~$56 thousand. There were no impaired ~~loan~~mortgage servicing rights ~~were carried at their fair value~~as of ~~$1.1 million, which is made up of the outstanding balance of $1.2 million, net of a valuation allowance of $125 thousand.~~June 30, 2018. For the first ~~nine~~six months of ~~2017,~~2018, the Company recorded a net recovery of prior write-downs of ~~$40~~$56 thousand and ~~net write-downs of $106 thousand~~$0 for ~~the nine months ended September 30, 2016. For~~ the three months ended ~~September~~June 30, 2018. For the six months ended June 30, 2017, the Company recorded a net recovery of prior write-downs of $6$34 thousand ~~compared to~~and net write-downs of ~~$64~~$5 thousand for the three months ended ~~September~~June 30, ~~2016.~~ 2017.

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The following table presents quantitative information about level 3 fair value measurements for financial instruments measured at fair value on a non-recurring basis at ~~September~~June 30, ~~2017~~2018 and December 31, ~~2016:~~2017:

Range

September 30, 2017

Fair

Valuation

Unobservable

(Weighted

June 30, 2018

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

353

sales comparison

adjustment for differences between the comparable sales

0%-12%

(6)%

310

sales comparison

adjustment for differences between the comparable sales

0%-27%

(2)%

Other real estate owned:

Residential

611

sales comparison

adjustment for differences between the comparable sales

1%-16%

(9)%

sales comparison

adjustment for differences between the comparable sales

0%-16%

(6)%

Commercial

income approach

capitalization rate

10%-10%

(10)%

246

income approach

capitalization rate

10%-10%

(10)%

Mortgage Servicing Rights

1,310

discounted cash flow

constant prepayment rates

8%-50%

(11)%

Range

December 31, 2016

Fair

Valuation

Unobservable

(Weighted

December 31, 2017

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

1,685

sales comparison

adjustment for differences between the comparable sales

0%-21%

(10)%

183

sales comparison

adjustment for differences between the comparable sales

3%-27%

(15)%

Agricultural

2,234

sales comparison

adjustment for differences between the comparable sales

2%-75%

(9)%

Other real estate owned:

Residential

956

sales comparison

adjustment for differences between the comparable sales

1%-16%

(9)%

910

sales comparison

adjustment for differences between the comparable sales

0%-16%

(6)%

Commercial

272

income approach

capitalization rate

10%-10%

(10)%

200

income approach

capitalization rate

10%-10%

(10)%

Mortgage Servicing Rights

1,083

discounted cash flow

constant prepayment rates

8%-45%

(13)%

1,323

discounted cash flow

constant prepayment rates

7%-25%

(10)%

~~Table of Contents~~

Fair Value of Financial Instruments

The carrying amounts and estimated fair values of financial instruments, at ~~September~~June 30, ~~2017~~2018 and December 31, ~~2016~~2017 are as follows:

~~September~~June 30, ~~2017:~~2018:

Carrying








(in thousands)

Value

Level 1

Level 2

Level 3

Total

Financial assets

Cash and cash equivalents

$
18,612

$
18,612

$
—

$
—

$
18,612

Interest bearing time deposits

1,830

1,830

—

—

1,830

Securities available for sale

289,956

342

289,614

—

289,956

Trading assets

5,714

1,959

3,755

—

5,714

Loans held for sale

1,316

—

1,350

—

1,350

Net Loans

641,210

—

—

640,915

640,915

Federal Home Loan Bank stock

7,034

—

—

—

N/A

Interest receivable

3,785

—

1,338

2,447

3,785

Financial liabilities

Total deposits

$
748,379

$
559,820

$
189,475

$
—

$
749,295

Federal funds purchased

17,302

17,302

—

—

17,302

Repurchase agreements

24,070

—

24,125

—

24,125

Short-term Federal Home Loan Bank advances

8,530

—

8,532

—

8,532

Long-term Federal Home Loan Bank advances

93,665

—

88,557

—

88,557

Note payable

3,762

4,208

4,208

Subordinated debentures

7,217

—

—

7,213

7,213

Interest payable

796

—

736

60

796

~~December 31, 2016:~~


	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	$	43,250	$	43,250	$	—	$	—	$	43,250	$	28,770	$	28,770	$	—	$	—	$	28,770
Interest bearing time deposits		5,029		5,029		—		—		5,029		1,785		1,785		—		—		1,785
Securities available for sale		273,770		340		273,430		—		273,770		290,504		283		290,221		—		290,504
Trading assets		5,592		1,608		3,984		—		5,592
Loans held for sale		724		—		750		—		750		2,005		—		2,037		—		2,037
Net Loans		648,466		—		—		648,234		648,234		660,594		—		123		656,405		656,528
Federal Home Loan Bank stock		7,034		—		—		—		N/A		7,034		—		—		—		N/A
Interest receivable		3,715		—		1,334		2,381		3,715		3,733		—		1,244		2,489		3,733
Financial liabilities
Total deposits	$	802,981	$	607,617	$	195,528	$	—	$	803,145	$	802,482	$	643,404	$	159,975	$	—	$	803,379
Federal Funds Purchased												15,717		15,717		—				15,717
Repurchase agreements		20,873		—		21,006		—		21,006		9,120		—		9,152		—		9,152
Short-term Federal Home Loan Bank advances												16,000		—		16,002		—		16,002
Long-term Federal Home Loan Bank advances		92,500		—		91,015		—		91,015		86,683		—		82,158		—		82,158
Note payable		4,090		—		4,564		—		4,564		2,963				3,180				3,180
Subordinated debentures		7,217		—		—		7,210		7,210		7,217		—		—		7,210		7,210
Interest payable		692		—		639		53		692		645		—		632		13		645

Table of Contents

December 31, 2017:


	Carrying
(in thousands)	Value		Level 1		Level 2		Level 3		Total
Financial assets
Cash and cash equivalents	$	39,172	$	39,172	$	—	$	—	$	39,172
Interest bearing time deposits		1,830		1,830		—		—		1,830
Securities available for sale		318,177		340		317,837		—		318,177
Loans held for sale		1,231		—		1,269		—		1,269
Net Loans		640,815		—		—		639,421		639,421
Federal Home Loan Bank stock		7,034		—		—		—		—
Interest receivable		3,951		—		1,378		2,573		3,951
Financial liabilities
Total deposits	$	815,273	$	621,139	$	195,143	$	—	$	816,282
Repurchase agreements		19,900		—		19,968		—		19,968
Short-term Federal Home Loan Bank advances		8,400		—		8,393		—		8,393
Long-term Federal Home Loan Bank advances		90,332		—		86,899		—		86,899
Note payable		3,321		—		3,560		—		3,560
Subordinated debentures		7,217		—		—		7,212		7,212
Interest payable		838		—		825		13		838

The methods and assumptions, not previously presented, used to estimate fair values are described as follows:

Cash and Cash Equivalents - The carrying amounts of cash and cash equivalents approximate fair values and are classified as Level 1.

Interest Bearing Deposits - The carrying amounts of interest bearing deposits approximate fair values and are classified as Level 1.

FHLB Stock - It is not practical to determine the fair value of FHLB stock due to restrictions placed on its transferability.

Loans - Fair values of loans ~~excluding loans held for sale,~~ are estimated based on discounted cash flows of portfolios of loans with similar credit quality and financial characteristics including the type of loan, interest terms and repayment history. The Company calculates a fair value by using a net present value of scheduled cash flows methodology incorporating estimated maturities using estimated market discount rates. Estimated market discount rates are reflective of market rates for similarly offered products, market interest rate projections, credit spreads and prepayment assumptions. In accordance with ASU 2016-01, the fair value of loans as ~~follows: For variable rate loans that reprice frequently and with no significant change in credit risk, fair values~~of June 30, 2018 are based on carrying values resulting in a Level 3 classification. Fair values for other loans are estimated using discounted cash flow analyses, using interest rates currently being offered for loans with similar terms to borrowersthe notion of ~~similar credit quality resulting in a Level 3 classification. Impaired loans are valued at the lower of cost or fair value as described previously.~~ exit price.

The methods ~~used~~utilized to estimate the fair value of loans ~~do not necessarily represent~~as of December 31, 2017 was measured using an ~~exit price.~~entry price notion.

The fair value of mortgage loans held for sale is estimated based upon binding contracts and quotes from third party investors resulting in a Level 2 classification.

Deposits - The fair values disclosed for demand deposits (e.g., interest and non-interest checking, passbook savings, and certain types of money market accounts) are, by definition, equal to the amount payable on demand at the reporting date (i.e., their carrying amount) resulting in a Level 1 classification. The carrying amounts of variable rate, fixed-term money market accounts and certificates of deposit approximate their fair values at the reporting date resulting in a Level 1 classification. Fair values for fixed rate certificates of deposit are estimated using a discounted cash flows calculation that applies interest rates currently being offered on certificates to a schedule of aggregated expected monthly maturities on time deposits resulting in a Level 2 classification.

Table of Contents

Securities Sold Under Agreements to Repurchase and Other Borrowings - The carrying amounts of borrowings under repurchase agreements approximate their fair values resulting in a Level 2 classification.

The carrying amount of the Company’s variable rate borrowings approximate their fair values resulting in a Level 2 classification.

Federal Funds Purchased - The carrying amounts of federal funds purchased approximate fair values and are classified as Level 1.

FHLB Advances, Borrowings and Subordinated Debentures - The fair values of the Company’s FHLB advances and other borrowings are estimated using discounted cash flow analyses based on the current borrowing rates for similar types of borrowing arrangements resulting in a Level 2 classification.

The fair values of the Company’s Subordinated Debentures are estimated using discounted cash flow analyses based on the current borrowing rates for similar types of borrowing arrangements resulting in a Level 3 classification.

Accrued Interest Receivable/Payable - The carrying amounts of accrued interest approximate fair value resulting in a Level 2 or Level 3 classification based on the level of the related asset/liability.

Off-balance Sheet Instruments - Fair values for off-balance sheet, credit-related financial instruments are based on fees currently charged to enter into similar agreements, taking into account the remaining terms of the agreements and the counterparties’ credit standing. The fair value of off-balance sheet instruments is not material.

~~Table of Contents~~

~~10.CHANGES IN ACCUMULATED OTHER COMPREHENSIVE INCOME BY COMPONENT~~

~~Changes in Accumulated Other Comprehensive Income by Component (unaudited)~~

~~(in thousands)~~

Unrealized

Gains and Losses on

Available for Sale

Securities

For the Nine Months Ended September 30,

2017

2016

Beginning Balance

$
(956)

$
359

Unrealized holding gains (losses) for the period, net of tax

1,889

3,452

Reclassification adjustment for:

Securities gains realized in income

103

317

Income taxes

(35)

(108)

68

209

Net current period other comprehensive income

1,821

3,243

Ending balance

$
865

$
3,602

Unrealized

Gains and Losses on

Available for Sale

Securities

For the Three Months Ended September 30,

2017

2016

Beginning Balance

$
1,213

$
4,402

Unrealized holding gains (losses) for the period, net of tax

(308)

(774)

Reclassification adjustment for:

Securities gains realized in income, net

60

40

Income taxes

(20)

(14)

40

26

Net current period other comprehensive income (loss)

(348)

(800)

Ending balance

$
865

$
3,602

~~Table of Contents~~

~~The following is significant amounts reclassified out of each component of accumulated other comprehensive income (loss) for the nine months ended September 30, 2017 and September 30, 2016:~~

~~September 30, 2017~~

Details about

Amount

Affected Line Item

Accumulated Other

Reclassified From

in the Statement

Comprehensive

Accumulated Other

Where Net

Income Components

Comprehensive Income

Income is Presented

Unrealized gains and losses on available-for-sale securities

$
103

Gain on sale of available for sale securities, net

35

Income taxes

68

Net income

~~September 30, 2016~~

Details about

Amount

Affected Line Item

Accumulated Other

Reclassified From

in the Statement

Comprehensive

Accumulated Other

Where Net

Income Components

Comprehensive Income

Income is Presented

Unrealized gains and losses on available-for-sale securities

$
317

Gain on sale of available for sale securities, net

108

Income taxes

209

Net income

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, ~~2016.~~2017.

This discussion contains forward-looking statements under 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 contained in the federal securities laws. These statements are not historical facts, but rather statements based on our current expectations regarding our business strategies and their intended results and our future performance. Forward-looking statements are preceded by terms such as “expects,” “believes,” “anticipates,” “intends,” “estimates,” “potential,” “may,” and similar expressions.

Although we believe 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, including the tobacco market and the thoroughbred horse industry, in which we and our Bank operate); 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); 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 customers; adequacy of the allowance for losses on loans and the level of future provisions

~~Table of Contents~~

for losses on loans; future acquisitions, changes in technology, information security breaches or cyber security attacks involving the Company, it 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.

Table of Contents

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 undertake 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.

Summary

The Company recorded net income of ~~$8.1~~$6.2 million, or ~~$2.74~~$2.09 basic earnings and diluted earnings per share for the first ~~nine~~six months ended ~~September~~June 30, ~~2017~~2018 compared to ~~$6.3~~$5.5 million or ~~$2.10~~$1.87 basic earnings and diluted earnings per share for the ~~nine~~six month period ended ~~September~~June 30, ~~2016.~~2017. The first ~~nine~~six months net earnings reflect an increase of ~~$1.9 million,~~$669 thousand, or ~~29.5%~~12.1%, compared to the same time period in ~~2016.~~2017. The increase in net earnings is mostly attributed to an increase of ~~$903 thousand,~~$1.3 million, or ~~3.8%~~7.8%, in net interest income, ~~an increase~~a decrease of ~~$1.7~~$1.3 million, or ~~18.4%~~16.8%, in non-interest income, ~~a decrease~~an increase of ~~$483~~$139 thousand, or ~~1.9%~~0.8%, in non-interest expense, and a decrease of ~~$125~~$300 thousand, or ~~16.1%~~54.6%, for the provision for loan losses. The ~~increase~~decrease in non-interest income is mostly attributed to the sale of a branch building located in Winchester, Kentucky, to a non-banking real estate ~~investor.~~investor that was recorded in 2017. The sale was solely for the building and not for the loans or deposits associated with the branch. The sale of the building resulted in a pre-tax gain of approximately $1.2 million. Absent the sale of the building, ~~net~~non-interest income would have ~~been up approximately $1.1 million or 16.9%, net of tax, compared to~~decreased $86 thousand from the same period ~~last year.~~ one year ago.

The earnings for the three months ended ~~September~~June 30, ~~2017~~2018 were ~~$2.6~~$3.1 million or ~~$0.87~~$1.03 basic and diluted earnings per share compared to $2.4 million or ~~$0.79~~$0.81 basic and diluted earnings per share for the three month period ended ~~September~~June 30, ~~2016.~~2017. The earnings for the three month period in ~~2017~~2018 reflect an increase of ~~9.6%~~27.3% compared to the same time period in ~~2016.~~2017.

For the ~~nine~~six months ended ~~September~~June 30, ~~2017~~2018 and compared to the ~~nine~~six months ended ~~September~~June 30, ~~2016,~~2017, service charges increased ~~$24~~$89 thousand, gain on the sale of loans ~~increased $167~~decreased $222 thousand, and debit card interchange income increased ~~$221~~$89 thousand. Salaries and benefits expense increased ~~$73~~$257 thousand, legal and professional fees decreased ~~$552~~$52 thousand, ~~and~~ debit card expenses increased ~~$226~~$48 thousand and repossession expenses decreased $128 thousand. For the three months ended ~~September~~June 30, ~~2017~~2018 and compared to the three months ended ~~September~~June 30, ~~2016,~~2017, service charges ~~decreased $120~~increased $24 thousand, debit card interchange income increased ~~$64~~$57 thousand, and gains on the sale of loans decreased ~~$118~~$46 thousand.

For the three months ended ~~September~~June 30, ~~2017~~2018 and compared to the ~~the~~ three months ended ~~September~~June 30, ~~2016,~~2017, salaries and benefits expense increased ~~$52 thousand, legal and professional fees decreased $138~~$209 thousand, data processing expense ~~increased $13~~decreased $31 thousand, debit card expense ~~increased $95~~decreased $11 thousand and other expenses decreased ~~$298~~$120 thousand. For the same three month ~~comparision,~~comparison, repossession expense decreased $64 thousand and occupancy expense increased ~~$25~~$100 thousand.

Return on average assets was ~~1.05%~~1.19% for the ~~nine~~six months ended ~~September~~June 30, ~~2017~~2018 and ~~0.84%~~1.06% for the ~~nine~~six months ended ~~September~~

June 30, ~~2016.~~2017. Return on average assets was ~~1.01%~~1.17% for the three months ended ~~September~~June 30, ~~2017~~2018 and ~~0.94%~~0.93% for the three months ended ~~September~~June 30, ~~2016.~~2017. Return on average equity was ~~11.16%~~12.53% for the ~~nine~~six month period ended ~~September~~June 30, ~~2017~~2018 and ~~8.94%~~11.57% for the ~~nine~~six month period ended ~~September~~June 30, ~~2016.~~2017. Return on average equity was ~~10.33%~~12.34% for the three month period ended ~~September~~June 30, ~~2017~~2018 and ~~9.83%~~9.81% for the three month period ended ~~September~~June 30, ~~2016.~~ 2017.

Securities available for sale ~~increased $16.2~~decreased $27.7 million from ~~$273.8~~$318.2 million at December 31, ~~2016~~2017 to ~~$290.0~~$290.5 million at

June 30, 2018.

Gross Loans increased $20.3 million from $648.5 million on December 31, 2017 to $668.8 million at ~~September~~June 30, ~~2017. Trading assets increased by $122 thousand, or 2.20%, and totaled $5.7 million at September 30, 2017 compared to $5.6 million at~~2018.

The overall increase in loan balances from December 31, ~~2016,~~2017 to June 30, 2018 is comprised of the following: an increase of $7.6 million in 1-4 family residential loans, an increase of $607 thousand in commercial loans, an increase of $6.1 million in multi-family residential loans, an increase of $4.5 million in agricultural loans, a decrease of $1.5 million in non-farm and ~~includes income on the investment totaling $86~~non-residential loans, an increase of $1.1 million in consumer loans and an increase of $1.9 million in real-estate construction loans. Other loan balances decreased $32 thousand ~~during the first nine months of~~from December 31, 2017 ~~compared~~ to ~~$117 thousand for the nine months ended September~~June 30, ~~2016. Income (loss) on the trading account totaled $27 thousand for the three months ended September 30, 2017 compared to $44 thousand for the three months ended September 30, 2016.~~2018.

3433

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~~Gross Loans~~Total deposits decreased ~~$7.0 million~~ from ~~$656.0~~$815.3 million on December 31, ~~2016~~2017 to ~~$649.0~~$802.5 million ~~at September~~on June 30, ~~2017. The overall decrease in loan balances from December 31, 2016 to September 30, 2017 is comprised of the following:~~2018, a decrease of $2.5 million in 1-4 family residential loans, a decrease of $2.4 million in commercial loans, a decrease of $5.7 million in multi-family residential loans, a decrease of $3.6 million in agricultural loans, an increase of $3.4 million in non-farm and non-residential loans, a decrease of $1.3 million in consumer loans, and an increase of $5.1 million in real-estate construction loans. Other loan balances decreased $67 thousand from December 31, 2016 to September 30, 2017.

~~Total deposits decreased from $803.0 million on December 31, 2016 to $748.0 million on September 30, 2017, a decrease of $55.0~~$12.8 million. Non-interest bearing demand deposit accounts increased ~~$962 thousand~~$7.8 million from December 31, ~~2016~~2017 to ~~September~~June 30, ~~2017~~2018 while time deposits $250 thousand and over decreased ~~$5.8~~$30.3 million and other interest bearing deposit accounts ~~decreased $49.8~~increased $9.8 million from December 31, ~~2016~~2017 to ~~September~~June 30, ~~2017.~~2018.

Public fund account balances decreased ~~$41.2~~$12.1 million from December 31, ~~2016~~2017 to ~~September~~June 30, ~~2017.~~2018. 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 the following months.

Borrowings from the Federal Home Loan Bank increased ~~$9.7~~$4.0 million from December 31, ~~2016~~2017 to ~~September~~June 30, ~~2017, repurchase~~2018. Long-term borrowings decreased $3.6 million while short-term borrowings increased $7.6 million during the six month period. Repurchase agreements ~~increased $3.2~~decreased $10.8 million and the note payable decreased ~~$328~~$358 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 ~~$25.0~~$17.8 million for the ~~nine~~six months ended ~~September~~June 30, ~~2017~~2018 compared to ~~$24.1~~$16.5 million for the ~~nine~~ six

months ended ~~September~~June 30, ~~2016,~~2017, an increase of ~~3.8%~~7.8%. Net interest income was $9.0 million for the three months ended

June 30, 2018 compared to $8.4 million for the three months ended ~~September~~June 30, 2017, ~~compared to $8.1 million for the three months ended September 30, 2016,~~ an increase of ~~4.4%~~8.0%.

The interest spread, excluding tax equivalent adjustments, was ~~3.33%~~3.59% for the first ~~nine~~six months of 2017 compared to ~~3.37%~~

3.30% for the first ~~nine~~six months of ~~2016.~~2017. For the first ~~nine~~six months in ~~2017,~~2018, the yield on assets increased from ~~3.86%~~3.82% in ~~2016~~2017 to ~~3.87%~~4.18% in ~~2017,~~2018, excluding tax equivalent adjustments. The yield on loans ~~decreased three~~increased 35 basis points compared to the ~~nine~~six months ended ~~September~~June 30, ~~2016~~2017 from ~~4.74%~~4.67% to ~~4.71%~~5.02% for the ~~nine~~six months ended ~~September~~June 30, ~~2017.~~2018. The yield on securities, excluding tax equivalent adjustments, increased from ~~2.30% during the first nine months of 2016~~2.33% at June 30, 2017 to ~~2.35% during the first nine months of 2017.~~2.55% at June 30, 2018. The cost of liabilities was ~~0.53%~~0.83% for the first ~~nine~~six months in ~~2017~~2018 compared to ~~0.49%~~0.52% in ~~2016.~~ 2017.

Year to date average loans, excluding overdrafts, increased ~~$8.9~~$3.1 million, or ~~1.4%~~0.47% for the ~~nine~~six months ended ~~September~~June 30, ~~2017~~

2018 compared to the ~~nine~~six months ended ~~September~~June 30, ~~2016.~~2017. Loan interest income increased ~~$553 thousand~~$1.2 million during the first ~~nine~~six months of ~~2017~~2018 compared to the first ~~nine~~six months of ~~2016.~~2017. Year to date total average ~~total deposits increased~~interest bearing liabilities decreased from ~~September 30, 2016 to September~~June 30, 2017 to June 30, 2018 by ~~$36.3~~$21.7 million or ~~4.7%~~3.0%. Year to date average interest bearing deposits ~~increased $38.7~~decreased $20.0 million, or ~~7.0%~~3.3%, from ~~September~~June 30, ~~2016~~2017 to ~~September~~June 30, ~~2017.~~2018. Deposit interest expense increased ~~$330~~$422 thousand for the first ~~nine~~six months of ~~2017~~2018 compared to the same period in ~~2016.~~2017. Year to date average borrowings, including repurchase agreements, ~~increased $1.4~~decreased $1.7 million, or ~~1.1%~~1.4%, from ~~September~~June 30, ~~2016~~2017 to ~~September~~June 30, ~~2017.~~2018. Interest expense on borrowed funds, including repurchase agreements, increased ~~$57~~$99 thousand for the first ~~nine~~six months of ~~2017~~2018 compared to the same period in ~~2016. Year to date average federal funds purchased increased $864 thousand.~~ 2017.

The volume rate analysis for the ~~nine~~six months ended ~~September~~June 30, ~~2017~~2018 indicates that ~~$313~~$72 thousand of the increase in loan interest income is attributable to an increase in loan volume and ~~$611~~$198 thousand of the increase in securities interest income is attributable to an increase in the volume of our security portfolio. Further, an increase in loan rates caused an increase of ~~$240 thousand~~$1.2 million in interest income and ~~a decrease~~an increase in rates in our security portfolio contributed to ~~a decrease~~an increase of ~~$10~~$370 thousand in securities interest income. The net effect to interest income was an increase of ~~$1.3~~$1.8 million for the first ~~nine~~six months of ~~2017~~2018 compared to the same time period in ~~2016.~~2017.

Also based on the following volume rate analysis for the six months ended June 30, 2018, an increase in demand deposit interest rates resulted in $388 thousand additional interest expense, an increase in interest rates paid for savings deposits resulted in an additional $6 thousand in interest expense, and increases in interest rates paid for time deposits resulted in an addition of $252 thousand in interest expense.

The change in volume in deposits and borrowings was responsible for a $356 thousand decrease in interest expense, of which a decrease in demand deposits resulted in a decrease of $24 thousand in interest expense, a decrease in time deposits resulted in a decrease of $200 thousand in interest expense, a decrease in repurchase agreements resulted in a decrease of $195 thousand in interest expense, and an increase in other borrowings resulted in an increase of $63 thousand in interest expense. The net effect to interest expense was an increase of $522 thousand.

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As a result, the increase in net interest income for the first six months in 2018 is mostly attributed to increasing rates in the loan portfolio.

The volume rate analysis for the three months ended June 30, 2018 indicates that the $672 thousand increase in net interest income is attributable to an increase of $268 thousand due to change in growth in the Company’s balance sheet and an increase of $404 thousand is a result of changes in rates.

Changes in Interest Income and Expense


	Six Months Ended
	2018 vs. 2017
	Increase (Decrease) Due to Change in
(in thousands)	Volume		Rate		Net Change
INTEREST INCOME
Loans	$	72	$	1,155	$	1,227
Investment Securities		198		370		568
Other		(157)		172		15
Total Interest Income		113		1,697		1,810
INTEREST EXPENSE
Deposits
Demand		(24)		388		364
Savings		—		6		6
Negotiable Certificates of Deposit and Other Time Deposits		(200)		252		52
Securities sold under agreements to repurchase and other borrowings		(195)		204		9
Federal Home Loan
Bank advances		63		28		91
Total Interest Expense		(356)		878		522
Net Interest Income	$	469	$	819	$	1,288


	Three Months Ended
	2018 vs. 2017
	Increase (Decrease) Due to Change in
	Volume		Rate		Net Change
INTEREST INCOME
Loans	$	191	$	518	$	709
Investment Securities		63		193		256
Other		23		(22)		1
Total Interest Income		277		689		966
INTEREST EXPENSE
Deposits
Demand		36		160		196
Savings		—		3		3
Negotiable Certificates of Deposit and Other Time Deposits		(65)		86		21
Securities sold under agreements to repurchase and other borrowings		(23)		44		21
Federal Home Loan
Bank advances		61		(8)		53
Total Interest Expense		9		285		294
Net Interest Income	$	268	$	404	$	672

Non-Interest Income

Non-interest income decreased $1.3 million for the six months ended June 30, 2018, compared to the same period in

2017, to $6.4 million. Non-interest income increased $13 thousand for the three months ended June 30, 2018, compared to the three months ended June 30 2017, to remain at $3.3 million.

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Also based on the following volume rate analysis for the nine months ended September 30, 2017, an increase in demand deposit interest rates resulted in $196 thousand additional interest expense, a decrease in interest rates paid for savings deposits resulted in a reduction of $4 thousand in interest expense, and increases in interest rates for time deposits resulted in an increase of $94 thousand in interest expense. Further, an increase in rates for repurchase agreements and other borrowings resulted in $47 thousand additional expense.

The change in volume in deposits and borrowings was responsible for a $52 thousand increase in interest expense, of which an increase in demand deposits resulted in an increase of $69 thousand in interest expense, a decrease in time deposits resulted in a decrease of $25 thousand in interest expense, a decrease in repurchase agreements and other borrwings resulted in a decrease of $37 thousand in interest expense, and a decrease in other borrowings resulted in a decrease of $45 thousand in interest expense. The net effect to interest expense was an increase of $386 thousand. As a result, the increase in net interest income for the first nine months in 2017 is mostly attributed to growth in the Company’s loan and security portfolios.

The volume rate analysis for the three months ended September 30, 2017 indicates that $166 thousand of the increase in net interest income is attributable to growth in the Company’s balance sheet and an increase of $192 thousand is a result of changes in rates.

~~Changes in Interest Income and Expense~~

Nine Months Ended September 30

2017 vs. 2016

Increase (Decrease) Due to Change in

(in thousands)

Volume

Rate

Net Change

INTEREST INCOME

Loans

$
313

$
240

$
553

Investment Securities

611

(10)

601

Other

14

121

135

Total Interest Income

938

351

1,289

INTEREST EXPENSE

Deposits

Demand

69

196

265

Savings

—

(4)

(4)

Negotiable Certificates of Deposit and Other Time Deposits

(25)

94

69

Securities sold under agreements to repurchase and other borrowings

(37)

47

10

Federal Home Loan

Bank advances

45

1

46

Total Interest Expense

52

334

386

Net Interest Income

$
886

$
17

$
903

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Three Months Ended September 30

2017 vs. 2016

Increase (Decrease) Due to Change in


Volume

Rate

Net Change

INTEREST INCOME

Loans

$
(50)

$
199

$
149

Investment Securities

290

43

333

Other

(19)

50

31

Total Interest Income

221

292

513

INTEREST EXPENSE

Deposits

Demand

12

80

92

Savings

—

(1)

(1)

Negotiable Certificates of Deposit and Other Time Deposits

(11)

33

22

Securities sold under agreements to repurchase and other borrowings

26

(22)

4

Federal Home Loan

Bank advances

28

10

38

Total Interest Expense

55

100

155

Net Interest Income

$
166

$
192

$
358

~~Non-Interest Income~~

Non-interest income increased $1.7 million for the nine months ended September 30, 2017, compared to the same period in 2016, to $10.8 million. Non-interest income increased $79 thousand for the three months ended September 30, 2017, compared to the thee months ended September 30 2016, to $3.2 million.

As previously noted, non-interest income increased $1.7 million for the nine months ended September 30, 2017 in comparison to the nine months ended September 30, 2016. Favorable variances to non-interest income for the first nine months of 2017 include an increase of $24 thousand in service charges, an increase of $211 thousand in loan net service fee income, an increase of $83 thousand in trust department income, an increase of $221 thousand in debit card interchange income, and an increase of $167 thousand in gains on the sale of loans.

The largest favorable variance to non-interest income for the first nine months of 2017 is an increase of $1.2 million in gains on bank premises due to the sale of a bank building located in Winchester, Kentucky. The sale was solely for the building and not for the loans or deposits associated with the branch.

Decreases to non-interest income for the ~~nine~~six months ended ~~September~~June 30, ~~2017~~2018 compared to the ~~nine~~six months ended ~~September~~June 30, ~~2016~~

2017 include a decrease of ~~$214~~$117 thousand in gains on the sale of securities, a decrease of ~~$13~~$26 thousand in loan servicing fees, a decrease of $51 thousand in trading securities, a decrease of $24 thousand in brokerage income, and a decrease of ~~$12 thousand~~$1.2 million in ~~gains~~gain on ~~trading assets.~~bank premises which relates to the 2017 sale of a branch building.

The gain on the sale of loans ~~increased~~decreased from ~~$1.3~~$1.0 million during the first ~~nine~~six months of ~~2016~~2017 to ~~$1.5 million~~$819 thousand during the first ~~nine~~six months of ~~2017, an increase~~2018, a decrease of ~~$167~~$222 thousand. For the three months ended ~~September~~June 30, the gain on the sale of loans decreased from ~~$533~~$491 thousand in ~~2016~~2017 to ~~$415~~$445 thousand in ~~2017.~~2018.

The volume of loans originated to sell during the first ~~nine~~six months of ~~2017 increased $3.2~~2018 decreased $3.9 million compared to the same time period in ~~2016. The volume of loans originated to sell the during the three months ended September 30, 2017 compared to the nine months ended September 30, 2016 decreased $5.8 million.~~2017. 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 ~~$234~~$148 thousand for the ~~nine~~six months ended ~~September~~June 30, ~~2017~~2018 compared to ~~$23~~$174 thousand for the ~~nine~~six months ended ~~September~~June 30, ~~2016, an increase~~2017, a decrease of ~~$211~~$26 thousand. During the first ~~nine~~six months of ~~2017,~~2018, the market value adjustment to the carrying value of the mortgage servicing right was a net recovery of prior-writedowns of ~~$40~~$56 thousand for the six months ended June 30, 2018, as the fair value of this asset ~~increased.~~increased, and no adjustments were made during the three months ended June 30, 2018. During the ~~first nine~~six months ~~of 2016,~~ended June 30 2017, the market value adjustment to the carrying value of the mortgage servicing right asset was a net ~~write-down~~recovery of ~~$106~~$34 thousand as the fair value of the mortgage servicing asset ~~decreased.~~

~~Table~~increased, and a net write-down of ~~Contents~~

~~For~~$5 thousand for the three months ended ~~September~~June 30, 2017, the market value adjustment to the carrying value of the mortgage serving right asset was a net recovery of prior write-downs of $6 thousand compared to a net write-down of $64 thousand during the third quarter of 2016.2017.

Non-Interest Expense

Total non-interest expense ~~decreased $476~~increased $139 thousand for the ~~nine~~six month period ended ~~September~~June 30, ~~2017~~2018 compared to the same period in ~~2016.~~2017. Total non-interest expense ~~decreased $275~~increased $35 thousand for the three month period ended ~~September~~June 30, ~~2017~~2018 compared to the three months ended ~~September~~June 30, ~~2016.~~2017. 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.

For the comparable ~~nine~~six month periods, salaries and employees benefits expense increased ~~$73~~$257 thousand, an increase of ~~0.5%~~2.9%. The number of full-time employee equivalent employees decreased from ~~247~~243 at ~~September~~June 30, ~~2016~~2017 to ~~236~~234 at ~~September~~June 30, ~~2017,~~2018, a decrease of 11nine full-time employee equivalent employees. For the three months ended ~~September~~June 30, ~~2017~~2018 compared to the three months ended ~~September~~June 30, ~~2016,~~2017, salaries and employee benefits expense ~~decreased $52~~increased $209 thousand, or ~~1.1%~~4.6%.

Occupancy expense increased ~~$53~~$115 thousand to ~~$2.9~~$2.1 million for the first ~~nine~~six months of ~~2017~~2018 compared to the same time period in 2016. Building rent expense increased $76 thousand mostly due to rent expense being lower in 2016 due to the Company recovering $20 thousand in accrued expense for a former branch leased in Richmond, KY. In addition, the Company incurred an additional $42 thousand in building rents during the first nine months of 2017, compared to the same time period in 2016, due to rent expense associated with leasing back the branch building that was sold in Winchester, KY during the first quarter of 2017. ~~The Company is leasing back the formerly owned building until a new building is contructed which is expected to be completed in 2018.~~

Depreciation expense decreased $107 thousand for the nine months ended September 30, 2017 compared to September 30, 2016. Expenses incurred for assets not depreciated increased $121 thousand during the first nine months of 2017 compared to the first nine months of 2016. This increase is attributed to purchasing additional equipment during the first quarter of 2017 and increasing the threshold for which we depreciate assets. The capitalization policy, during the first nine months of 2016, stated assets purchased with a cost of $1,000 or greater would be capitalized and depreciated. This policy was changed during the last half of 2016 and now states the minimum threshold for an asset to be capitalized is $2,500.

Occupancy expense was ~~$935~~$1.1 million for the three months ended June 30, 2018 compared to $984 thousand for the three months ended ~~September~~June 30, 2017, ~~compared to $974 thousand for the three months ended September 30, 2016, a decrease~~an increase of ~~$39 thousand.~~10.2%.

Legal and professional fees decreased ~~$505~~$52 thousand for the ~~nine~~six months ended ~~September~~June 30, ~~2017~~2018 compared to the first ~~nine~~six months in ~~2016 and decreased $91 thousand for the three months ended September 30, 2017 compared to the three months ended September 30, 2016.~~2017. The reduction in legal and professional fees is ~~mostly~~ attributed to expenses being higher for the ~~nine~~six months ended ~~September~~June 30, ~~2016~~2017 due to the Company incurring ~~$625 thousand for expenses~~additional expense related to acquiring the services of an outside firm to help the Company identify ways to become more efficient and profitable. ~~Similar expenses totaled $198 thousand for the nine months ended September 30, 2017, a decrease of $427 thousand.~~

Debit card expenses increased ~~$226~~$48 thousand for the ~~nine~~six months ended ~~September~~June 30, ~~2017~~2018 compared to the first ~~nine~~six months of ~~2016~~2017 and ~~increased $95~~decreased $11 thousand for the three months ended ~~September~~June 30, ~~2017~~2018 compared to the three months ended ~~September~~June 30, ~~2016.~~2017. The year to date increase in debit card expense is attributed to an increase in debit card interchange activity which also resulted in increases in debit card interchange income as shown on the income statement. ~~Debit card expenses have also increased during 2017 due to issuing new debit cards.~~

Repossession expense ~~increased $67~~decreased $128 thousand for the first ~~nine~~six months ended ~~September~~June 30, ~~2017~~2018 compared to the same time period in ~~2016~~2017 and ~~increased $25~~decreased $64 thousand for the three month period ended ~~September~~June 30, ~~2017~~2018 compared to the three months ended ~~September~~June 30, ~~2016.~~2017. Repossession expenses are reported net of rental income earned on repossessed properties. ~~Net repossession expenses were higher during the first nine months of 2017 when compared to 2016 due to net write-downs totaling $141 in 2017 compared to net write-downs of $131 thousand in 2016.~~

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Income Taxes

The effective tax rate for the ~~nine~~six months ended ~~September~~June 30, ~~2017~~2018 was ~~19.1%~~12.0% compared to ~~8.5%~~19.6% in ~~2016.~~2017. The effective tax rate for the three months ended ~~September~~June 30, ~~2017~~2018 was ~~18.0%~~12.5% compared to ~~0.3%~~17.1% in ~~2016.~~2017. The effective tax rate iswas higher in 2017 due to ~~an increase~~lower tax rates in ~~taxable income, largely due~~2018. On December 22, 2017, the “Tax Cuts and Jobs Act” was enacted into legislation. As a result, the 2018 statutory tax rate for the Company is 21% compared to ~~the $1.2 million gain on the sale of the branch building.~~ 34% in recent prior years.

These effective tax rates are less than the statutory rate 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. Income tax expense ~~increased $1.3 million~~decreased $506 thousand for the ~~nine~~six months ended ~~September~~June 30, ~~2017~~2018 compared to the first ~~nine~~six months in ~~2016.~~2017. Tax-exempt interest income decreased ~~$166~~$241 thousand for the first ~~nine~~six months of ~~2017~~2018 compared to the first ~~nine~~six months of ~~2016.~~2017. Further, for the first ~~nine~~six months of ~~2017,~~2018, the Company had tax credits totaling ~~$416~~$277 thousand for investments made in low income housing projects compared to similar tax credits of ~~$836 thousand~~$277 for the first ~~nine~~six months of ~~2016.~~2017.

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 ~~nine~~six months ended ~~September~~June 30, ~~2017,~~2018, the Company averaged ~~$92~~$64.2 million in tax free securities and ~~$40~~$38.5 million in tax free loans. As of ~~September~~June 30, ~~2017,~~2018, the weighted average remaining maturity for the tax free securities is ~~112~~82 months, while the weighted average remaining maturity for the tax free loans is ~~138~~136 months.

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.

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 ~~$18.6~~$28.8 million as of ~~September~~June 30, ~~2017~~2018 compared to ~~$43.2~~$39.2 million at December 31, ~~2016.~~ 2017.

The decrease in cash and cash equivalents is attributed to a decrease of ~~$23.6~~$10.1 million in cash and due from banks and a decrease of ~~$1.0 million~~$316 thousand in federal funds sold. The decrease in cash and cash equivalents is mostly attributed to ~~deposit~~deposits balances being greater at December 31 for our public entity depositors due to the recent collection of tax revenues. As the tax dollars are ~~dispursed~~dispersed throughout the year, the balances for these depositors will decrease resulting in a decrease in the Company’s cash and cash equivalents.

In addition to cash and cash equivalents, the securities portfolio provides an important source of liquidity. Securities available for sale totaled ~~$290.0~~$290.5 million at ~~September~~June 30, ~~2017~~2018 compared to ~~$273.8~~$318.2 million at December 31, ~~2016. Securities classified as trading assets totaled $5.7 million at September 30, 2017 compared to $5.6 million at December 31, 2016.~~2017. The securities available for sale ~~and trading assets~~ 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.

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For the first ~~nine~~six months of ~~2017,~~2018, deposits decreased ~~$54.6~~$12.8 million compared to December 31, ~~2016.~~2017. The Company’s borrowed funds from the Federal Home Loan Bank increased ~~$9.7~~$4.0 million from December 31, ~~2016~~2017 to ~~September~~June 30, ~~2017,~~2018, federal funds purchased increased ~~$17.3~~$15.7 million, and total repurchase agreements ~~increased $3.2~~decreased $10.8 million from December 31, ~~2016~~2017 to ~~September~~June 30, ~~2017.~~2018.

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 ~~September~~June 30, ~~2017,~~2018, we have sufficient collateral to borrow an additional ~~$69~~$67 million from the Federal Home Loan Bank.

In addition, as of ~~September~~June 30, ~~2017, $30~~2018, $38 million is available in overnight borrowing through various correspondent banks and the Company has access to an additional ~~$289~~$202 million 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.

Capital Requirements

The Company and the Bank are 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 Company and the Bank must meet specific capital guidelines that involve quantitative measures of the Company’s and the Bank’s assets, liabilities, and certain off-balance sheet items as calculated under regulatory accounting practices. The Company and Bank capital amounts and classifications are also subject to qualitative judgments by regulators about components, risk weightings, and other factors.

Quantitative measures established by regulation to ensure capital adequacy require the Company and the Bank to maintain minimum amounts and ratios (set forth in the following table) of Total and Tier I capital, including Common Equity Tier 1 Capital, (as defined in the applicable banking regulations) to risk-weighted assets (as defined), and of Tier I1 capital to average assets (as defined). Management believes, as of ~~September~~June 30, ~~2017~~2018 and December 31, ~~2016,~~2017, that the Company and the Bank meet all capital adequacy requirements to which they are subject.

The most recent notification from the FDIC 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 Total risk-based, Tier I risk-based, Common Equity Tier 1 ~~risk based~~risk-based and 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.

In July 2013, the FDIC and the other federal bank regulatory agencies issued a final rule that revised their leverage and risk-based capital requirements and the method of calculating risk-weighted assets to make them consistent with agreements that were reached by the Basel Committee on Banking Supervision and certain provisions of the Dodd-Frank Act.

Among other things, the rule establishes a new common equity Tier 1 minimum capital requirement (4.5% of risk-weighted assets), increases the minimum Tier 1 capital to risk-based assets requirement (from 4% to 6% of risk-weighted assets) and assigns a higher risk weight (150%) to exposures that are more than 90 days past due or are on nonaccrual status and to certain commercial real estate facilities that finance the acquisition, development or construction of real property. The final rule also requires unrealized gains and losses on certain “available-for-sale” securities holdings to be included for purposes of calculating regulatory capital requirement unless a one-time opt-in or opt-out is exercised, which the Company did opt-out of.

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The rule limits a banking organization’s capital distributions and certain discretionary bonus payments if the banking organization does not hold a “capital conservation buffer” consisting of 2.5% of common equity Tier 1 capital to risk-weighted assets in addition to the amount necessary to meet its minimum risk-based capital requirements.

~~Table of Contents~~

The capital conservation buffer was ~~1.25%~~1.875% at ~~September~~June 30, ~~2017~~2018 and the Company is in compliance with the capital conservation buffer. The final rule became effective for the Bank on January 1, 2016. In accordance with the final rule, the capital conservation buffer requirement began being phased in beginning January 1, 2016 and will continue through January 1, 2019, when the full capital conservation buffer requirement will be effective. The Company’s and the Bank’s actual amounts and ratios, exclusive of the capital conservation buffer, are presented in the table below:


									To Be Well												To Be Well
									Capitalized												Capitalized
									Under Prompt												Under Prompt
					For Capital				Corrective								For Capital				Corrective
	Actual				Adequacy Purposes				Action Provisions				Actual				Adequacy Purposes				Action Provisions
	Amount		Ratio		Amount		Ratio		Amount		Ratio		Amount		Ratio		Amount		Ratio		Amount		Ratio
	(Dollars in Thousands)												(Dollars in Thousands)
September 30, 2017
June 30, 2018
Consolidated
Total Capital (to Risk-Weighted Assets)	$	100,029	14.2	%	$	56,479	8.0	%		N/A	N/A		$	106,877	15.4	%	$	55,355	8.0	%		N/A		N/A
Tier I Capital (to Risk-Weighted Assets)		92,189	13.1			42,359	6.0			N/A	N/A			98,613	14.3			41,516	6.0			N/A		N/A
Common Equity Tier 1 Capital (to Risk-Weighted Assets)		85,189	12.1			31,770	4.5			N/A	N/A			91,613	13.2			31,137	4.5			N/A		N/A
Tier I Capital (to Average Assets)		92,189	9.1			40,607	4.0			N/A	N/A			98,613	9.5			41,543	4.0			N/A		N/A

Bank Only
Total Capital (to Risk-Weighted Assets)	$	98,654	14.7	%	$	53,759	8.0	%	$	67,198	10.0	%	$	102,923	14.8	%	$	55,794	8.0	%	$	69,742		10.0	%
Tier I Capital (to Risk-Weighted Assets)		90,814	13.5			40,319	6.0			53,759	8.0			94,658	13.6			41,845	6.0			55,794		8.0
Common Equity Tier 1 Capital (to Risk-Weighted Assets)		90,814	13.5			30,239	4.5			43,679	6.5			94,658	13.6			31,384	4.5			45,332		6.5
Tier I Capital (to Average Assets)		90,814	9.0			40,469	4.0			50,587	5.0			94,658	9.1			41,453	4.0			51,817		5.0

December 31, 2016
December 31, 2017
Consolidated
Total Capital (to Risk-Weighted Assets)	$	94,343	13.9	%	$	54,280	8.0	%		N/A	N/A		$	101,896	14.9	%	$	54,599	8.0	%		N/A		N/A
Tier I Capital (to Risk-Weighted Assets)		86,718	12.8			40,710	6.0			N/A	N/A			94,092	13.8			40,949	6.0			N/A		N/A
Common Equity Tier 1 Capital (to Risk-Weighted Assets)		79,718	11.8			30,533	4.5			N/A	N/A			87,092	12.8			30,712	4.5			N/A		N/A
Tier I Capital (to Average Assets)		86,718	8.7			39,795	4.0			N/A	N/A			94,092	9.2			40,754	4.0			N/A		N/A

Bank Only
Total Capital (to Risk-Weighted Assets)	$	95,118	14.0	%	$	54,246	8.0	%	$	67,808	10.0	%	$	99,688	14.6	%	$	54,581	8.0	%	$	68,226		10.0	%
Tier I Capital (to Risk-Weighted Assets)		87,493	12.9			40,685	6.0			54,246	8.0			91,884	13.5			40,936	6.0			54,581		8.0
Common Equity Tier 1 Capital (to Risk-Weighted Assets)		87,493	12.9			30,513	4.5			44,075	6.5			91,884	13.5			30,702	4.5			44,347		6.5
Tier I Capital (to Average Assets)		87,493	8.8			39,671	4.0			49,588	5.0			91,884	9.0			40,669	4.0			50,836		5.0

Non-Performing Assets

As of ~~September~~June 30, ~~2017,~~2018, our non-performing assets totaled ~~$4.2~~$3.4 million or ~~0.42%~~0.32% of assets compared to ~~$9.4~~$3.8 million or ~~0.91%~~

0.36% of assets at December 31, ~~2016~~2017 (See table below.) The Company experienced ~~a decrease~~an increase of ~~$3.2 million~~$57 thousand in ~~non-accrual~~nonaccrual loans from December 31, ~~2016~~2017 to ~~September~~June 30, ~~2017.~~2018. As of ~~September~~June 30, ~~2017,~~2018, non-accrual loans include ~~$150~~$322 thousand in loans secured by commercial properties, $92 thousand in loans secured by farmland, ~~$1.2 million~~$568 thousand in loans secured by 1-4 family properties, $226 thousand in loans secured by non-farm and ~~$30~~non-residential properties and $42 thousand in consumer loans.

Loans secured by real estate composed 97.8% of the non-performing loans as of September 30, 2017 and 96.9% as of December 31, 2016. Forgone interest income on non-accrual loans totaled $63 thousand for the first nine months of 2017 compared to forgone interest of $65 thousand for the same time period in 2016.

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Loans secured by real estate composed 70.9% of the non-performing, nonaccrual loans as of June 30, 2018 and 99.1% as of December 31, 2017. Forgone interest income on non-accrual loans totaled $55 thousand for the first six months of 2018 compared to forgone interest of $102 thousand for the same time period in 2017. Accruing loans that are contractually 90 days or more past due as of ~~September~~June 30, ~~2017~~2018 totaled ~~$151~~$717 thousand compared to ~~$757~~$231 thousand at December 31, ~~2016, a decrease~~2017, an increase of ~~$606~~$486 thousand.

Total nonperforming and restructured loans ~~decreased $6.0 million~~increased $543 thousand from December 31, ~~2016~~2017 to ~~September~~June 30, ~~2017.~~2018. The ~~decrease~~increase in non-performing loan balances contributed to the ~~decrease~~increase in the ratio of nonperforming and restructured loans ~~to loans which decreased 91~~of seven basis points to ~~0.24%~~0.29% from December 31, ~~2016~~2017 to ~~September~~June 30, ~~2017.~~2018.

In addition, the amount the Company has recorded as other real estate owned ~~increased $845 thousand~~decreased $1.0 million from December 31, ~~2016~~2017 to ~~September~~June 30, ~~2017.~~2018. As of ~~September~~June 30, ~~2017,~~2018, the amount recorded as other real estate owned totaled ~~$2.7~~$1.4 million compared to ~~$1.8~~$2.4 million at December 31, ~~2016.~~2017. During the first ~~nine~~six months of ~~2017, $1.9 million~~2018, $121 thousand in loan balances were foreclosed upon and added to other real estate properties while ~~$911 thousand~~$1.2 million in other real estate properties were sold. The allowance as a percentage of non-performing and restructured loans and other real estate owned increased from ~~80%~~202% at December 31, ~~2016~~2017 to ~~184%~~329% at ~~September~~June 30, ~~2017.~~2018.

Nonperforming and Restructured Assets


	9/30/2017			12/31/2016			6/30/2018			12/31/2017
	(in thousands)						(in thousands)
Non-accrual Loans	$	1,393		$	4,566		$	1,250		$	1,193
Accruing Loans which are Contractually past due 90 days or more		151			927			717			231
Accruing Troubled Debt Restructurings		—			2,063			—			—
Total Nonperforming and Restructured Loans		1,544			7,556			1,967			1,424
Other Real Estate		2,669			1,824			1,404			2,404
Total Nonperforming and Restructured Loans and Other Real Estate	$	4,213		$	9,380		$	3,371		$	3,828
Nonperforming and Restructured Loans as a Percentage of Loans		0.24	%		1.15	%		0.29	%		0.22	%
Nonperforming and Restructured Loans and Other Real Estate as a Percentage of Total Assets		0.42	%		0.91	%		0.32	%		0.36	%
Allowance as a Percentage of Period-end Loans		1.19	%		1.15	%		1.22	%		1.19	%
Allowance as a Percentage of Non-performing and Restructured Loans and Other Real Estate		184	%		80	%		243	%		202	%

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.

Provision for Loan Losses

The loan loss provision for the first ~~nine~~six months of ~~2017~~2018 was ~~$650~~$250 thousand compared to ~~$775~~$550 thousand for the first ~~nine~~six months of ~~2016.~~2017. The loan loss provision for the three months ended ~~September~~June 30, ~~2017~~2018 was ~~$100~~$250 thousand compared to ~~$175~~$200 thousand for the three months ended ~~September~~June 30, ~~2016.~~2017. The decrease in the total loan loss provision during the first ~~nine~~six months of ~~2017~~2018 compared to the same time period in ~~2016~~2017 is ~~mostly~~largely attributed to ~~improved loan credit quality.~~recording net recoveries of prior charge-offs of $214 thousand during the six months ended June 30, 2018. The ~~allowace~~allowance for loan losses as a percentage of loans was ~~1.19%~~1.22% at ~~September~~June 30, ~~2017~~2018 compared to ~~1.15%~~1.22% at ~~September~~June 30, ~~2016.~~ 2017.

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.

Table of Contents

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.

~~Table of Contents~~

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.

Nonperforming loans and restructured loans decreased $337 thousand from December 31, 2017 to $1.1 million at June 30, 2018. The Company recorded net ~~charge-offs~~recoveries of ~~$436~~$214 thousand for the ~~nine~~six months ended ~~September~~June 30, ~~2017~~2018 compared to net ~~recoveries~~charge-offs of ~~$109~~$133 thousand for the ~~nine~~six months ended ~~September~~June 30, ~~2016.~~2017. During the first ~~quarter~~six months of ~~2016,~~2018, the Company recorded ~~a recovery~~recoveries of ~~$259 thousand~~$368 for ~~one loan~~two loans which ~~was~~were charged-off in a prior year. 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.

Loan Losses


	Nine Months Ended September 30,						Six Months Ended June 30,
	(in thousands)						(in thousands)
		2017			2016			2018			2017
Balance at Beginning of Period	$	7,541		$	6,521		$	7,720		$	7,541
Amounts Charged-Off:
Commercial		35			—			—			15
1-4 family residential		203			90			63			33
Multi-family residential		—			—
Non-farm & non-residential		78			—
Agricultural		—			3
Consumer and other		810			915			506			570
Total Charged-off Loans		1,126			1,008			569			618
Recoveries on Amounts Previously Charged-off:
Commercial		17			37			6			15
Real Estate Construction		1			15			—			1
1-4 family residential		8			8			262			5
Multi-family residential		10			7			6			7
Non-farm & non-residential		—			355
Agricultural		47			35			146			28
Consumer and other		607			660			363			429
Total Recoveries		690			1,117			783			485
Net Charge-offs (Recoveries)		436			(109)			(214)			133
Provision for Loan Losses		650			775			250			550
Balance at End of Period		7,755			7,405			8,184			7,958
Loans
Average		652,387			642,998			656,515			655,491
At September 30,		648,965			659,970
At June 30,								668,778			650,657
As a Percentage of Average Loans:
Net Charge-offs for the period		0.07	%		(0.02)	%		(0.03)	%		0.02	%
Provision for Loan Losses for the period		0.10	%		0.12	%		0.04	%		0.08	%
Allowance as a Multiple of Net Charge-offs annualized		13.3			(51.0)			(19.1)			29.9

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	Three Months Ended September 30,						Three Months Ended June 30,
	(in thousands)						(in thousands)
	2017			2016			2018			2017
Balance at Beginning of Period:	$	7,958		$	7,259		$	7,905		$	7,876
Amounts Charged-Off:
Commercial		20			—			—			13
1-4 family residential		170			26			1			22
Non-farm & non-residential		78			—
Agricultural		—			3
Consumer and other		240			253			264			308
Total Charged-off Loans		508			282			265			343
Recoveries on Amounts Previously Charged-off:
Commercial		2			3			6			7
Real Estate Construction		0			2			—			1
1-4 family residential		3			1			5			4
Multi-family residential		3			3			3			4
Non-farm & non-residential		0			82
Agricultural		19			12			123			18
Consumer and other		178			150			157			191
Total Recoveries		205			253			294			225
Net Charge-offs		303			29			(29)			118
Provision for Loan Losses		100			175			250			200
Balance at End of Period		7,755			7,405			8,184			7,958
Loans
Average		647,103			657,336			661,220			655,665
At September 30,		648,965			659,970
At June 30,								668,778			650,657
As a Percentage of Average Loans:
Net Charge-offs (Recoveries) for the period		0.05	%		0.00	%		(0.00)	%		0.02	%
Provision for Loan Losses for the period		0.02	%		0.03	%		0.04	%		0.03	%
Allowance as a Multiple of Net Charge-offs annualized		6.4			63.8			(70.6)			16.9

~~Table of Contents~~

Item 3 - QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

Asset/Liability management control is designed to ensure safety and soundness, maintain liquidity and regulatory capital standards, and achieve acceptable net interest income. Management considers interest rate risk to be the most significant market risk since a bank’s net income is largely dependent on net interest income. Our exposure to market risk is reviewed on a regular basis by the Asset/Liability Committee. Interest rate risk is the potential of economic losses due to future interest rate changes.

These economic losses can be reflected as a loss of future net interest income and/or a loss of current fair market values. The objective is to measure the effect on net interest income and to adjust the balance sheet to minimize the inherent risk, while at the same time, maximize income.

Management realizes certain risks are inherent and that the goal is to identify and minimize the risks. The primary tools used by management are interest rate shock and economic value of equity (EVE) simulations. The Company has $5.7 million in market risk sensitive instruments which are held for trading purposes. These assets are held for a minimal period of time and are used to generate profits on short-term differences in price while earning interest for the time they are held.

Using interest rate shock simulations, the following table depicts the change in net interest income resulting from 100 and 300 basis point changes in rates on the Company’s interest earning assets and interest bearing liabilities.

The projections are based on balance sheet growth assumptions and repricing opportunities for new, maturing and adjustable rate amounts. As of ~~September~~June 30, ~~2017,~~2018, the projected percentage changes are within limits approved by our Board of Directors (“Board”).

Although management does analyze and monitor the projected percentage change in a declining interest rate environment, due to the current rate environment many of the current deposit rates cannot decline an additional 100 basis points. Therefore, management places more emphasis in the rising rate environment scenarios. Similar to prior periods, this period’s volatility is comparable in each rate shock simulation when compared to the same period a year ago.

Table of Contents

The projected net interest income report summarizing our interest rate sensitivity as of ~~September~~June 30, 2018 is as follows:

PROJECTED NET INTEREST INCOME

(dollars in thousands)



Change in basis points:	- 100			Level Rates		+ 100		+ 300
Year One (7/18-6/19)
Net interest income percentage change		(2.1)	%		N/A	0.5	%		0.6	%
Board approved limit		>(4.0)	%		N/A	>(4.0)	%		>(10.0)	%

The projected net interest income report summarizing the Company’s interest rate sensitivity as of June 30, 2017 is as follows:

PROJECTED NET INTEREST INCOME

(dollars in thousands)

Level

Change in basis points:

- 100

Rates

+ 100

+ 300

Year One (10/17 - 9/18)

Net interest income

$
32,881

$
33,724

$
33,658

$
33,547

Net interest income dollar change

(843)

N/A

(66)

(177)

Net interest income percentage change

(2.5)
%

N/A

(0.2)
%

(0.5)
%
Board approved limit

>(4.0)
%

N/A

>(4.0)
%

>(10.0)
%

~~The projected net interest income report summarizing the Company’s interest rate sensitivity as of September 30, 2016 is as follows:~~

~~PROJECTED NET INTEREST INCOME~~

~~(dollars in thousands)~~


	Level															Level
Change in basis points:	- 100			Rates		+ 100			+ 300			- 100			Rates		+ 100		+ 300
Year One (10/16-9/17)
Net interest income	$	31,479		$	32,176	$	32,120		$	32,038
Net interest income dollar change		(697)			N/A		(56)			(138)
Year One (7/17-6/18)
Net interest income percentage change		(2.2)	%		N/A		(0.2)	%		(0.4)	%		(2.7)	%		N/A	0.4	%		0.1	%
Board approved limit		>(4.0)	%		N/A		>(4.0)	%		>(10.0)	%		>(4.0)	%		N/A	>(4.0)	%		>(10.0)	%

Projections from ~~September~~June 30, ~~2017~~2018 and ~~September~~June 30, ~~2016,~~2017, year one reflected declines of ~~2.5%~~2.1% and ~~2.2%~~2.7% in net interest income assuming rates were to decline 100 basis points. Assuming an increase in rates of 100 basis points, projections reflected a ~~0.2% decrease~~0.5% increase in net interest income ~~for both periods.~~as of June 30, 2018 and a 0.4% increase as of June 30, 2017.

~~Table of Contents~~

EVE applies discounting techniques to future cash flows to determine the present value of assets, liabilities, and therefore equity. Based upon applying these techniques to the ~~September~~June 30, ~~2017,~~2018, balance sheet, a 100 basis point decrease in rates results in ~~an 11.1%~~a 5.6% decrease in EVE. A 100 basis point increase in rates results in a ~~0.4% decrease~~0.1% increase in EVE. These are within the Board approved limits.

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.

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Part II - Other Information

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
7/4/1/~~17-7/31/17~~18-4/30/18	—	$	—	—	100,912	shares

8/5/1/~~17-8/31/17~~18-5/31-18	—		—	—	100,912	shares

9/6/1/~~17-9/~~18-6/30/1718	—		—	—	100,912	shares

Total	—	$	—	—	100,912	shares

On October 25, 2000, we announced that our Board approved a stock repurchase program and authorized the Company to purchase up to 100,000 shares of its outstanding common stock. On November 11, 2002, the Board approved and authorized the Company’s repurchase of an additional 100,000 shares. On May 20, 2008, the Board of Directors approved and authorized the Company to purchase an additional 100,000 shares. On May 17, 2011, the Board approved and authorized the Company’s repurchase of an additional 100,000 shares. On November 18, 2016, the Board of Directors approved and authorized the Company’s repurchase of an additional 50,000 shares. Shares will be purchased from time to time in the open market depending on market prices and other considerations. Through ~~September~~June 30, ~~2017,~~2018, 349,088 shares have been purchased.

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Item 6. Exhibits

Ay
2.1		Agreement and Plan of Merger with Peoples Bancorp of Sandy Hook is incorporated by reference to Exhibit 2.1 of the Registrant’s Current Report on Form 8-K dated and filed February 24, 2006.

2.2		Agreement and Plan of Share Exchange with Madison Financial Corporation is incorporated by reference to Exhibit 2.1 of the Registrant’s Current Report on Form 8-K dated and filed January 21, 2015.

3.1		Amended and Restated Articles of Incorporation of the Registrant are incorporated by reference to Exhibit 3.1 of the Registrant’s Quarterly Report on Form 10-Q for the quarterly period ended March 31, 2000 and filed May 15, 2000.

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.

3.3		Articles of Amendment to Amended and Restated Articles of Incorporation of the Registrant are incorporated by reference to Exhibit 3.3 of the Registrant’s Annual Report of Form 10-K for the period ended December 31, 2005 and filed March 29, 2006.

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~~		The following financial information from Kentucky Bancshares, Inc. Quarterly Report on Form 10-Q for the period ended September 30, 2017, filed with the SEC November 13, 2017, formatted in Extensible Business Reporting Language (XBRL): (i) Consolidated Balance Sheets at September 30, 2017,and December 31, 2016, (ii) Consolidated Statements of Income and Comprehensive Income (Loss) for the nine months and three months ended September 30, 2017 and September 30, 2016, (iii) Consolidated Statement of Stockholders’ Equity for the nine months ended September 30, 2017, (iv) Consolidated Statements of Cash Flows for the nine months ended September 30, 2017 and September 30, 2016 and (v) Notes to Consolidated Financial Statements.

101 INS XBRL Instance Document

101 SCH XBRL Taxonomy Extension Scheme Document

101 CAL XBRL Taxonomy Extension Calculation Linkbase Document

101 DEF XBRL Taxonomy Extension Definition Linkbase Document

101 LAB XBRL Taxonomy Extension Label Linkbase Document

101 PRE XBRL Taxonomy Extension Presentation Linkbase Document

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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	~~11/13/17~~8/8/18	/s/Louis Prichard
		Louis Prichard, President and C.E.O.

Date	~~11/13/17~~8/8/18	/s/Gregory J. Dawson
		Gregory J. Dawson, Chief Financial Officer

4846


	Three Months Ending September 30, 2017
	Average		Interest		Cash Basis
	Recorded		Income		Interest
(in thousands):	Investment		Recognized		Recognized
With no related allowance recorded:
Real estate mortgage:
Non-farm & non-residential	$	2,431	$	17	$	17
Agricultural		491		2		2


With an allowance recorded:
Real estate mortgage:
1-4 family residential		455		1		1
	$	3,377	$	20	$	20


	Unrealized
	Gains and Losses on
	Available for Sale
	Securities
	For the Nine Months Ended September 30,
	2017		2016
Beginning Balance	$	(956)	$	359

Unrealized holding gains (losses) for the period, net of tax		1,889		3,452

Reclassification adjustment for:

Securities gains realized in income		103		317
Income taxes		(35)		(108)
		68		209

Net current period other comprehensive income		1,821		3,243

Ending balance	$	865	$	3,602


Details about	Amount		Affected Line Item
Accumulated Other	Reclassified From		in the Statement
Comprehensive	Accumulated Other		Where Net
Income Components	Comprehensive Income		Income is Presented

Unrealized gains and losses on available-for-sale securities	$	103	Gain on sale of available for sale securities, net
		35	Income taxes
		68	Net income


	Nine Months Ended September 30
	2017 vs. 2016
	Increase (Decrease) Due to Change in
(in thousands)	Volume		Rate		Net Change
INTEREST INCOME
Loans	$	313	$	240	$	553
Investment Securities		611		(10)		601
Other		14		121		135
Total Interest Income		938		351		1,289
INTEREST EXPENSE
Deposits
Demand		69		196		265
Savings		—		(4)		(4)
Negotiable Certificates of Deposit and Other Time Deposits		(25)		94		69
Securities sold under agreements to repurchase and other borrowings		(37)		47		10
Federal Home Loan
Bank advances		45		1		46
Total Interest Expense		52		334		386
Net Interest Income	$	886	$	17	$	903


	Three Months Ended September 30
	2017 vs. 2016
	Increase (Decrease) Due to Change in
	Volume		Rate		Net Change
INTEREST INCOME
Loans	$	(50)	$	199	$	149
Investment Securities		290		43		333
Other		(19)		50		31
Total Interest Income		221		292		513
INTEREST EXPENSE
Deposits
Demand		12		80		92
Savings		—		(1)		(1)
Negotiable Certificates of Deposit and Other Time Deposits		(11)		33		22
Securities sold under agreements to repurchase and other borrowings		26		(22)		4
Federal Home Loan
Bank advances		28		10		38
Total Interest Expense		55		100		155
Net Interest Income	$	166	$	192	$	358