10-Q

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C.  20549

FORM 10-Q

(Mark One)

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

For the quarterly period ended March 31, 2014

or

o  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 x No o

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 x No o

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

Large accelerated filer o	Accelerated filer o
Non-accelerated filer x	Smaller reporting company o
(Do not check if a smaller reporting company)

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

Number of shares of Common Stock outstanding as of April 30, 2014:  2,721,142.

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 of Changes in Stockholders’ Equity	5
			Consolidated Statements of Cash Flows	6
			Notes to Consolidated Financial Statements	7
Item	2.		Management’s Discussion and Analysis of Financial Condition and Results of Operations	32
Item	3.		Quantitative and Qualitative Disclosures About Market Risk	42
Item	4.		Controls and Procedures	43
Part	II	-	Other Information	43
Item	6.		Exhibits	44
Signatures				45

2

Item 1 - Financial Statements

KENTUCKY BANCSHARES, INC.

CONSOLIDATED BALANCE SHEETS  (unaudited)

(in thousands, except per share data)

	3/31/2014			12/31/2013
Assets
Cash and due from banks	$	21,508		$	22,650
Federal funds sold	369			510
Cash and cash equivalents	21,877			23,160
Securities available for sale	236,364			230,396
Trading Assets	5,108			—
Mortgage loans held for sale	149			223
Loans	474,012			468,655
Allowance for loan losses	(5,616		)	(5,441		)
Net loans	468,396			463,214
Federal Home Loan Bank stock	5,981			6,731
Real estate owned, net	3,256			3,379
Bank premises and equipment, net	16,710			16,709
Interest receivable	3,484			3,618
Mortgage servicing rights	1,303			1,344
Goodwill	13,117			13,117
Other intangible assets	279			317
Other assets	6,630			8,371
Total assets	$	782,654		$	770,579
Liabilities and Stockholders’ Equity
Deposits
Non-interest bearing	$	165,675		$	152,052
Time deposits, $100,000 and over	96,553			96,264
Other interest bearing	365,776			369,084
Total deposits	628,004			617,400
Repurchase agreements and other borrowings	11,402			12,867
Long-term Federal Home Loan Bank advances	57,380			57,847
Subordinated debentures	7,217			7,217
Interest payable	709			736
Other liabilities	5,992			6,839
Total liabilities	710,704			702,906
Stockholders’ equity
Preferred stock, 300,000 shares authorized and unissued	—			—
Common stock, no par value; 10,000,000 shares authorized; 2,721,114 and 2,717,434 shares issued and outstanding on March 31, 2014 and December 31, 2013	12,580			12,570
Retained earnings	61,245			60,229
Accumulated other comprehensive income/(loss)	(1,875		)	(5,126		)
Total stockholders’ equity	71,950			67,673
Total liabilities & stockholders’ equity	$	782,654		$	770,579

See Accompanying Notes

3

KENTUCKY BANCSHARES, INC.

CONSOLIDATED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME (unaudited)

(in thousands, except per share amounts)

	Three Months Ending
	3/31/2014			3/31/2013
INTEREST INCOME:
Loans, including fees	$	5,761		$	5,726
Securities
Taxable	675			479
Tax exempt	733			668
Trading assets	37			—
Other	76			83
Total interest income	7,282			6,956
INTEREST EXPENSE:
Deposits	539			590
Repurchase agreements and other borrowings	23			7
Federal Home Loan Bank advances	314			166
Subordinated debentures	57			59
Total interest expense	933			822
Net interest income	6,349			6,134
Provision for loan losses	100			450
Net interest income after provision	6,249			5,684
NON-INTEREST INCOME:
Service charges	1,011			1,020
Loan service fee income, net	29			(52		)
Trust department income	222			177
Gain on sale of available for sale securities, net	188			289
Gain on trading assets	71			—
Gain on sale of mortgage loans	157			626
Brokerage income	80			68
Debit card interchange income	479			448
Other	32			27
Total other income	2,269			2,603
NON-INTEREST EXPENSE:
Salaries and employee benefits	3,602			3,290
Occupancy expenses	848			718
Repossession expenses, net	(2		)	67
FDIC Insurance	128			132
Legal and professional fees	136			153
Data processing	337			348
Debit card expenses	234			223
Amortization	37			57
Advertising and marketing	209			184
Taxes other than payroll, property and income	225			225
Telephone	89			67
Postage	72			75
Loan fees	77			123
Other	462			514
Total other expenses	6,454			6,176
Income before taxes	2,064			2,111
Income taxes	293			402
Net income	$	1,771		$	1,709
Other Comprehensive Income, net of tax:
Change in Unrealized Gains (losses) on Securities	3,251			(1,252		)
Comprehensive Income	$	5,022		$	457
Earnings per share
Basic	$	0.66		$	0.63
Diluted	0.66			0.63
Dividends per share	0.25			0.24

See Accompanying Notes

4

KENTUCKY BANCSHARES, INC.

CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS’ EQUITY  (unaudited)

(in thousands, except share information)

									Accumulated
									Other			Total
	—Common Stock(1)—					Retained			Comprehensive			Stockholders’
	Shares		Amount			Earnings			Income/(Loss)			Equity
Balances, January 1, 2014	2,717,434		$	12,570		$	60,229		$	(5,126	)	$	67,673
Common stock issued, including tax benefit, net	7,475		—			—			—			—
Stock based compensation expense	—		27			—			—			27
Common stock purchased and retired	(3,795	)	(17		)	(74		)	—			(91		)
Net change in unrealized gain (loss) on securities available for sale, net of tax and reclassifications	—		—			—			3,251			3,251
Net income	—		—			1,771			—			1,771
Dividends declared - $0.25 per share	—		—			(681		)	—			(681		)
Balances, March 31, 2014	2,721,114		$	12,580		$	61,245		$	(1,875	)	$	71,950

(1)Common Stock has no par value; amount includes Additional Paid-in Capital

See Accompanying Notes

5

KENTUCKY BANCSHARES, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS (unaudited)

(in thousands)

	Three Months Ending
	3/31/2014			3/31/2013
Cash Flows From Operating Activities
Net Income	$	1,771		$	1,709
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization	441			513
Securities amortization (accretion), net	150			319
Stock based compensation expense	27			24
Provision for loan losses	100			450
Securities available for sale gains, net	(188		)	(289		)
Trading assets gains, net	(71		)	—
Interest income earned on trading assets	(37		)	—
Originations of loans held for sale	(5,715		)	(16,075		)
Proceeds from sale of loans	5,946			17,053
Losses (gains) on other real estate	(46		)	(5		)
Gain on sale of mortgage loans	(157		)	(626		)
Changes in:
Interest receivable	134			100
Other assets	1,694			87
Interest payable	(27		)	—
Other liabilities	(2,522		)	197
Net cash from operating activities	1,500			3,457
Cash Flows From Investing Activities
Purchases of securities available for sale	(20,089		)	(48,776		)
Proceeds from principal payments, sales, maturities and calls of securities	19,086			16,625
Initial purchase of trading assets	(5,000		)	—
Net change in loans	(5,423		)	6,716
Proceeds from sale of Federal Home Loan Bank stock	750			—
Purchases of bank premises and equipment	(316		)	(378		)
Proceeds from the sale of other real estate	309			33
Net cash from investing activities	(10,683		)	(25,780		)
Cash Flows From Financing Activities:
Net change in deposits	10,604			3,928
Net change in repurchase agreements and other borrowings	(1,465		)	4,647
Short-term advances from Federal Home Loan Bank	10,000			—
Payment on short-term Federal Home Loan Bank advances	(10,000		)	—
Long-term advances from Federal Home Loan Bank	1,635			—
Payments on long-term Federal Home Loan Bank advances	(2,102		)	(1,611		)
Payments on note payable	—			(200		)
Purchase of common stock	(91		)	(38		)
Dividends paid	(681		)	(654		)
Net cash from financing activities	7,900			6,072
Net change in cash and cash equivalents	(1,283		)	(16,251		)
Cash and cash equivalents at beginning of period	23,160			31,764
Cash and cash equivalents at end of period	$	21,877		$	15,513
Supplemental disclosures of cash flow information
Cash paid during the year for:
Interest expense	$	960		$	822
Income taxes	—			375
Supplemental disclosures of non-cash investing activities
Real estate acquired through foreclosure	$	141		$	65

See Accompanying Notes

6

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, 2013.  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, 2013.

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

Nature of Operations:  The Bank operates under a state bank charter and provides full banking services, including trust services, to customers located in Bourbon, Clark, Elliott, Fayette, Harrison, Jessamine, Rowan, Madison, Scott, Woodford and adjoining counties in Kentucky.  Management continues to consider opportunities for branch expansion and will also consider acquisition opportunities that help advance its strategic objectives.  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.

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.  The allowance for loan losses, loss contingencies, mortgage servicing rights, real estate owned, goodwill and fair value of financial instruments are particularly subject to change.

Trading Assets:  The Company engages in trading activities for its own account.  Securities that are held principally for resale in the near term are recorded at fair value with changes in fair value included in earnings.  Interest and dividends are included in net interest income.

7

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.

Pension Matter:  The Company terminated the Kentucky Bancshares, Inc. Retirement Plan and Trust (the “Plan”) in a standard termination, with a termination date of December 31, 2008.  Prior to such termination, the Pension Protection Act of 2006 (“PPA”) had amended Internal Revenue Code (“IRC”) Section 417(e)(3) in part by changing the definition of “applicable interest rate” in a manner that in most cases (when combined with other changes to IRC Section 417(e)(3)) would result in a decrease in the value of a participant’s or beneficiary’s plan benefits under pension plans such as the Company’s Plan with the new definition applicable (for most plans, including the Plan) to lump sums with annuity starting dates in or after the 2008 plan year.  The Plan had determined in mid-2008 to comply with IRC Section 417(e)(3), as amended by PPA, by using the assumptions governing minimum lump sums, rather than by using the pre-PPA minimum lump sum assumptions, and operated the Plan in compliance with that decision.  As permitted by the IRC, the Plan was amended on February 24, 2009 (after the termination of the Plan on December 31, 2008) to formalize that decision in accordance with Section 1107 of PPA.

The Internal Revenue Service issued a favorable determination as to the Plan termination in July 2010.  Subsequent to Plan termination and distributions to Plan participants, the Plan was selected for audit by the Pension Benefit Guaranty Corporation (“PBGC”).  The PBGC asserted that the February, 2009 amendment to the Plan violated PBGC Regulation Section 4041.8(a) because the amendment served to lower benefits to Plan beneficiaries.  The PBGC filed a Complaint in May 2013 in United States District Court (Eastern District of Kentucky) to require the Company to make additional distributions to Plan beneficiaries.  On March 17, 2014, the United States District Court (Eastern District of Kentucky) issued an Opinion and Order entering judgment in favor of the PBGC and ruling that the Company must comply with the PBGC’s determination respecting the Plan.  The Company is appraising its options with respect to this judgment, including an appeal of the decision.  However, in light of the court’s opinion, the Company accrued approximately $1.6 million as of December 31, 2013 for this matter.  The accrued balance for this matter remains $1.6 million at March 31, 2014.    Moreover, in the event the subject court decision is not overturned, the Company believes it has claims for further contribution towards payment of this liability from professionals who assisted the Company in the termination of the Plan.

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.

8

Adoption of New Accounting Standards

ASU 2014-01- Investments—Equity Method and Joint Ventures (Topic 323): Accounting for Investments in Qualified Affordable Housing Projects (a consensus of the FASB Emerging Issues Task Force): In January 2014, Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update 2014-01, Equity Method and Joint Ventures (Topic 323): Accounting for Investments in Qualified Affordable Housing Projects (a consensus of the FASB Emerging Issues Task Force). The ASU permits reporting entities to make an accounting policy election to account for their investments in qualified affordable housing projects using the proportional amortization method if certain conditions are met. Under the proportional amortization method, an entity amortizes the initial cost of the investment in proportion to the tax credits and other tax benefits received and recognize the net investment performance in the income statement as a component of income tax expense. Additionally, a reporting entity should disclose information that enables users of its financial statement to understand the nature of its investments in qualified affordable housing projects, and the effect of the measurement of its investments in qualified affordable housing projects and the related tax credits on its financial position and results of operations. The new guidance is effective for annual periods, and interim reporting periods within those annual periods, beginning after December 15, 2014. The adoption of this guidance will not have a material impact on the Company’s consolidated financial statements, but may impact the presentation of the Company’s investments in qualified affordable housing projects. Additionally, the adoption of this guidance will require additional disclosures.

2.SECURITIES

SECURITIES AVAILABLE FOR SALE

Period-end securities are as follows:

(in thousands)

			Gross		Gross
	Amortized		Unrealized		Unrealized			Fair
	Cost		Gains		Losses			Value
Available for Sale
March 31, 2014
U.S. government agencies	$	74,612	$	14	$	(3,264	)	$	71,362
States and political subdivisions	91,008		2,805		(1,138		)	92,675
Mortgage-backed - residential	73,315		118		(1,397		)	72,036
Equity securities	270		21		—			291
Total	$	239,205	$	2,958	$	(5,799	)	$	236,364
December 31, 2013
U.S. government agencies	$	73,930	$	51	$	(4,695	)	$	69,286
States and political subdivisions	91,043		1,614		(2,474		)	90,183
Mortgage-backed - residential	72,920		44		(2,326		)	70,638
Equity securities	270		19		—			289
Total	$	238,163	$	1,728	$	(9,495	)	$	230,396

The amortized cost and fair value of securities at March 31, 2014 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 Measurement can be found in Note 8.

9

(in thousands)

	Amortized		Fair
	Cost		Value
Due in one year or less	$	623	$	625
Due after one year through five years	8,638		8,714
Due after five years through ten years	84,800		83,131
Due after ten years	71,559		71,567
	165,620		164,037
Mortgage-backed - residential	73,315		72,036
Equity	270		291
Total	$	239,205	$	236,364

Proceeds from sales of securities during the first three months of 2014 and 2013 were $16.5 million and $10.5 million.  Gross gains of $309 thousand and $289 thousand and gross losses of $121 thousand and $0 were realized on those sales, respectively.  The tax provision related to these realized net gains was $64 thousand and $98 thousand, respectively.

Securities with unrealized losses March 31, 2014 and at December 31, 2013 not recognized in income are as follows:

March 31, 2014

	Less than 12 Months					12 Months or More					Total
	Fair		Unrealized			Fair		Unrealized			Fair		Unrealized
Description of Securities	Value		Loss			Value		Loss			Value		Loss
U.S. Government agencies	$	46,111	$	(1,908	)	$	19,524	$	(1,356	)	$	65,635	$	(3,264	)
States and municipals	12,701		(459		)	7,763		(679		)	20,464		(1,138		)
Mortgage-backed - residential	45,918		(1,017		)	6,737		(380		)	52,655		(1,397		)
Total temporarily impaired	$	104,730	$	(3,384	)	$	34,024	$	(2,415	)	$	138,754	$	(5,799	)

December 31, 2013

	Less than 12 Months					12 Months or More					Total
	Fair		Unrealized			Fair		Unrealized			Fair		Unrealized
Description of Securities	Value		Loss			Value		Loss			Value		Loss
U.S. Government agencies	$	57,203	$	(3,813	)	$	8,117	$	(883	)	$	65,320	$	(4,695	)
States and municipals	32,289		(2,106		)	2,879		(368		)	35,168		(2,474		)
Mortgage-backed - residential	62,126		(2,326		)	—		—			62,126		(2,326		)
Total temporarily impaired	$	151,618	$	(8,244	)	$	10,997	$	(1,251	)	$	162,614	$	(9,495	)

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 is expected to recover as the securities approach maturity.

TRADING ASSETS

The trading assets of $5.1 million are primarily comprised of municipal securities which are held for a very short period of time.

10

3. LOANS

Loans at period-end are as follows:

(in thousands)

	3/31/14		12/31/13
Commercial	$	31,774	$	34,654
Real estate construction	11,837		11,177
Real estate mortgage:
1-4 family residential	195,957		194,388
Multi-family residential	19,028		16,420
Non-farm & non-residential	129,952		126,791
Agricultural	68,476		68,002
Consumer	16,788		17,065
Other	200		158
Total	$	474,012	$	468,655

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

	Three Months Ended March 31, 2014
	(in thousands)
	Beginning									Ending
	Balance		Charge-offs		Recoveries		Provision			Balance
Commercial	$	230	$	200	$	—	$	178		$	208
Real estate Construction	358		—		4		(33		)	329
Real estate mortgage:
1-4 family residential	2,169		63		12		(7		)	2,111
Multi-family residential	427		—		—		(26		)	401
Non-farm & non-residential	564		—		367		(1		)	930
Agricultural	578		—		24		(49		)	553
Consumer	548		77		18		61			550
Other	51		97		87		(30		)	11
Unallocated	516		—		—		7			523
	$	5,441	$	437	$	512	$	100		$	5,616

	Three Months Ended March 31, 2013
	(in thousands)
	Beginning									Ending
	Balance		Charge-offs		Recoveries		Provision			Balance
Commercial	$	150	$	6	$	28	$	(37	)	$	135
Real estate Construction	918		578		5		152			497
Real estate mortgage:
1-4 family residential	1,989		125		26		84			1,974
Multi-family residential	414		—		—		79			493
Non-farm & non-residential	628		—		8		(25		)	611
Agricultural	845		86		2		(14		)	747
Consumer	517		148		11		131			511
Other	54		137		126		56			99
Unallocated	532		—		—		24			556
	$	6,047	$	1,080	$	206	$	450		$	5,623

The following tables present the balance in the allowance for loan losses and the recorded investment (excluding accrued interest receivable amounting to $2.0 million as of March 31, 2014 and $2.3 million at December 31, 2013) in loans by portfolio segment and based on impairment method as of March 31, 2014 and December 31, 2013:

11

As of March 31, 2014

(in thousands)

	Individually		Collectively
	Evaluated for		Evaluated for
	Impairment		Impairment		Total
Allowance for Loan Losses:
Commercial	$	—	$	208	$	208
Real estate construction	—		329		329
Real estate mortgage:
1-4 family residential	130		1,981		2,111
Multi-family residential	76		325		401
Non-farm & non-residential	380		550		930
Agricultural	260		293		553
Consumer	—		550		550
Other	—		11		11
Unallocated	—		523		523
	$	846	$	4,770	$	5,616
Loans:
Commercial	$	—	$	31,774	$	31,774
Real estate construction	—		11,837		11,837
Real estate mortgage:
1-4 family residential	1,771		194,186		195,957
Multi-family residential	275		18,753		19,028
Non-farm & non-residential	3,169		126,783		129,952
Agricultural	5,201		63,275		68,476
Consumer	—		16,788		16,788
Other	—		200		200
	$	10,416	$	463,596	$	474,012

As of December 31, 2013

(in thousands)

	Individually		Collectively
	Evaluated for		Evaluated for
	Impairment		Impairment		Total
Allowance for Loan Losses:
Commercial	$	—	$	230	$	230
Real estate construction	—		358		358
Real estate mortgage:
1-4 family residential	228		1,941		2,169
Multi-family residential	76		351		427
Non-farm & non-residential	110		454		564
Agricultural	298		280		578
Consumer	—		548		548
Other	—		51		51
Unallocated	—		516		516
	$	712	$	4,729	$	5,441
Loans:
Commercial	$	—	$	34,654	$	34,654
Real estate construction	—		11,177		11,177
Real estate mortgage:
1-4 family residential	2,873		191,515		194,388
Multi-family residential	274		16,146		16,420
Non-farm & non-residential	2,716		124,075		126,791
Agricultural	7,673		60,329		68,002
Consumer	—		17,065		17,065
Other	—		158		158
	$	13,536	$	455,119	$	468,655

12

The following table presents loans individually evaluated for impairment by class of loans as of March 31, 2014 (in thousands):

									Year to Date		Year to Date
	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:
Commercial	$	—	$	—	$	—	$	—	$	—	$	—
Real estate construction	—		—		—		—		—		—
Real estate mortgage:
1-4 family residential	911		911		—		396		—		—
Multi-family residential	—		—		—		—		—		—
Non-farm & non-residential	—		—		—		401		—		—
Agricultural	446		446		—		1,413		4		4
Consumer	—		—		—		—		—		—
Other	—		—		—		—		—		—
With an allowance recorded:
Commercial	—		—		—		—		—		—
Real estate construction	—		—		—		—		—		—
Real estate mortgage:
1-4 family residential	860		860		130		1,470		6		6
Multi-family residential	275		275		76		275		4		4
Non-farm & non-residential	3,169		3,169		380		2,541		25		25
Agricultural	4,755		4,755		260		4,801		—		—
Consumer	—		—		—		—		—		—
Other	—		—		—		—		—		—
Total	$	10,416	$	10,416	$	846	$	11,297	$	39	$	39

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

13

The following table presents loans individually evaluated for impairment by class of loans as of December 31, 2013 (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:
Commercial	$	—	$	—	$	—	$	—	$	—	$	—
Real estate construction	—		—		—		—		—		—
Real estate mortgage:
1-4 family residential	824		793		—		1,217		28		28
Multi-family residential	—		—		—		—		—		—
Non-farm & non-residential	1,650		803		—		1,471		81		81
Agricultural	2,912		2,826		—		2,802		123		123
Consumer	—		—		—		—		—		—
Other	—		—		—		—		—		—
With an allowance recorded:
Commercial	—		—		—		—		—		—
Real estate construction	—		—		—		607		—		—
Real estate mortgage
1-4 family residential	2,080		2,080		228		1,349		96		96
Multi-family residential	274		274		76		443		3		3
Non-farm & non-residential	1,913		1,913		110		1,938		79		79
Agricultural	4,847		4,847		298		4,864		287		287
Consumer	—		—		—		—		—		—
Other	—		—		—		—		—		—
Total	$	14,501	$	13,536	$	712	$	14,691	$	697	$	697

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

14

The following table presents loans individually evaluated for impairment by class of loans as of March 31, 2013 (in thousands):

			Year to Date		Year to Date
	Average		Interest		Cash Basis
	Recorded		Income		Interest
	Investment		Recognized		Recognized
With no related allowance recorded:
Commercial	$	—	$	—	$	—
Real estate construction	—		—		—
Real estate mortgage:
1-4 family residential	1,570		19		19
Multi-family residential	—		—		—
Non-farm & non-residential	2,044		20		20
Agricultural	2,789		5		5
Consumer	—		—		—
Other	—		—		—
With an allowance recorded:
Commercial	—		—		—
Real estate construction	1,517		—
Real estate mortgage:
1-4 family residential	1,263		14		14
Multi-family residential	570		3		3
Non-farm & non-residential	2,188		20		20
Agricultural	5,082		50		50
Consumer	—		—		—
Other	—		—		—
Total	$	17,023	$	131	$	131

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

15

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 March 31, 2014 and December 31, 2013:

			Loans Past Due
			Over 90 Days		Accruing
As of March 31, 2014			Still		Troubled Debt
(in thousands)	Nonaccrual		Accruing		Restructurings
Commercial	$	299	$	—	$	—
Real estate construction	—		—		—
Real estate mortgage:
1-4 family residential	2,059		634		490
Multi-family residential	274		—		—
Non-farm & non-residential	970		—		1,865
Agricultural	217		232		4,530
Consumer	1		1		—
Total	$	3,820	$	867	$	6,885

			Loans Past Due
			Over 90 Days		Accruing
As of December 31, 2013			Still		Troubled Debt
(in thousands)	Nonaccrual		Accruing		Restructurings
Commercial	$	—	$	—	$	—
Real estate construction	—		—		—
Real estate mortgage:
1-4 family residential	1,171		314		493
Multi-family residential	275		—		—
Non-farm & non-residential	803		—		1,878
Agricultural	717		232		4,530
Consumer	8		8		—
Total	$	2,974	$	554	$	6,901

Nonaccrual loans secured by real estate make up 92.1% of the total nonaccruals at March 31, 2014.

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.

16

A loan is considered impaired when, based on current information and events, it is probable that a creditor will be unable to collect all amounts due according to the contractual terms of the loan agreement.  All amounts due according to the contractual terms means that both the contractual interest payments and the contractual principal payments of a loan will be collected as scheduled in the loan agreement.  Nonaccrual loans are loans for which payments in full of principal or interest is not expected or which principal or interest has been in default for a period of 90 days or more unless the asset is both well secured and in the process of collection.  Other impaired loans may be loans showing signs of weakness or interruptions in cash flow, but ultimately are current or less than 90 days past due with respect to principal and interest and for which we anticipate full payment of principal and interest but not in accordance with contractual terms.

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

During the first three months of 2014, $141 thousand in impaired loans were transferred to other real estate owned.  Additionally, $437 thousand in loan balances were charged off during the first three months of 2014 and $512 thousand in prior-year loan charge offs were recovered.

The following tables present the aging of the recorded investment in past due and non-accrual loans as of March 31, 2014 and December 31, 2013 by class of loans:

	30-59		60-89		Loans Past Due				Total
As of March 31, 2014	Days		Days		Over 90 Days				Past Due &		Loans Not
(in thousands)	Past Due		Past Due		Still Accruing		Non-accrual		Non-accrual		Past Due
Commercial	$	147	$	—	$	—	$	299	$	446	$	31,328
Real estate construction	—		—		—		—		—		11,837
Real estate mortgage:
1-4 family residential	2,328		49		634		2,059		5,070		190,887
Multi-family residential	—		—		—		274		274		18,754
Non-farm & non-residential	194		—		—		970		1,164		128,788
Agricultural	340		—		232		217		789		67,687
Consumer	82		26		1		1		110		16,678
Other	—		—		—		—		—		200
Total	$	3,091	$	75	$	867	$	3,820	$	7,853	$	466,159

	30-59		60-89		Greater than				Total
As of December 31, 2013	Days		Days		90 Days				Past Due &		Loans Not
(in thousands)	Past Due		Past Due		Past Due		Non-accrual		Non-accrual		Past Due
Commercial	$	49	$	—	$	—	$	—	$	49	$	34,605
Real estate construction	175		—		—		—		175		11,002
Real estate mortgage:
1-4 family residential	1,981		1,285		314		1,171		4,751		189,637
Multi-family residential	—		—		—		275		275		16,145
Non-farm & non-residential	503		—		—		803		1,306		125,485
Agricultural	155		—		232		717		1,104		66,898
Consumer	102		27		8		8		145		16,920
Other	—		—		—		—		—		158
Total	$	2,965	$	1,312	$	554	$	2,974	$	7,805	$	460,850

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Troubled Debt Restructurings:

The Company has allocated $413 thousand in specific reserves to customers whose loan terms have been modified in troubled debt restructurings as of March 31, 2014.  The Company allocated $428 thousand for specific reserves to customers whose loan terms had been modified in troubled debt restructuring as of December 31, 2013.  The Company has not committed to lend additional amounts as of March 31, 2014 and December 31, 2013 to customers with outstanding loans that are classified as troubled debt restructurings.  There were no troubled debt restructuring for which there was a payment default within twelve months following the modification during the periods ending March 31, 2014 and 2013.

No loans were modified as troubled debt restructurings during the three months ending March 31, 2014 and 2013.

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.

18

As of March 31, 2014 and December 31, 2013, and based on the most recent analysis performed, the risk category of loans by class of loans is as follows:

As of March 31, 2014			Special
(in thousands)	Pass		Mention		Substandard		Doubtful
Commercial	$	29,977	$	1,241	$	556	$	—
Real estate construction	10,360		1,477		—		—
Real estate mortgage:
1-4 family residential	178,074		10,372		7,486		25
Multi-family residential	17,018		1,564		446		—
Non-farm & non-residential	124,648		3,872		1,432		—
Agricultural	54,631		12,290		1,555		—
Total	$	414,708	$	30,816	$	11,475	$	25

As of December 31, 2013			Special
(in thousands)	Pass		Mention		Substandard		Doubtful
Commercial	$	32,771	$	1,587	$	296	$	—
Real estate construction	9,660		1,517		—		—
Real estate mortgage:
1-4 family residential	176,553		10,346		7,489		—
Multi-family residential	14,392		1,579		449		—
Non-farm & non-residential	120,195		5,327		1,269		—
Agricultural	56,713		7,297		3,992		—
Total	$	410,284	$	27,653	$	13,495	$	—

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 $2 thousand at March 31, 2014 and $16 thousand at December 31, 2013.

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4.  REAL ESTATE OWNED

Activity in real estate owned, net was as follows:

	Three Months Ended
	2014			2013
	(in thousands)
Beginning of year	$	3,379		$	4,168
Additions	141			82
Sales	(277		)	(28		)
Additions to valuation allowance, net	—			—
Recovery from sale in valuation allowance	13			—
End of period	$	3,256		$	4,222

Activity in the valuation allowance was as follows:

	Three Months Ended
	2014			2013
	(in thousands)
Beginning of year	$	1,524		$	1,668
Additions to valuation allowance, net	—			—
Recovery from sale	(13		)	—
End of period	$	1,511		$	1,668

Expenses related to foreclosed assets include:

	Three Months Ended
	2014			2013
	(in thousands)
Net loss (gain) on sales	$	(46	)	$	(5	)
Additions to valuation allowance, net	—			—
Operating expenses (receipts), net of rental income	(2		)	67
Repossession expenses, net	(2		)	67
End of period	$	(48	)	$	62

20

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 options.

The factors used in the earnings per share computation follow:

	Three Months Ended
	March 31
	2014		2013
	(in thousands)
Basic Earnings Per Share
Net Income	$	1,771	$	1,709
Weighted average common shares outstanding	2,702		2,703
Basic earnings per share	$	0.66	$	0.63
Diluted Earnings Per Share
Net Income	$	1,771	$	1,709
Weighted average common shares outstanding	2,702		2,703
Add dilutive effects of assumed vesting of stock grants	—		—
Weighted average common and dilutive potential common shares outstanding	2,702		2,703
Diluted earnings per share	$	0.66	$	0.63

Stock options for 12,725 shares of common stock for the three months ended March 31, 2014 and 19,500 shares of common stock for three months ended March 31, 2013 were excluded from diluted earnings per share because their impact was antidilutive.

21

6.  STOCK COMPENSATION

We have four stock based compensation plans as described below.

Two Stock Option Plans

Under our now expired 1999 Employee Stock Option Plan (the “1999 Plan”), we granted certain officers and key employees stock option awards which vest and become fully exercisable at the end of five years and provide for issuance of up to 100,000 options.  Under the now expired 1993 Non-Employee Directors Stock Ownership Incentive Plan (together with the 1999 Plan, the “Stock Option Plans”), we also granted certain directors stock option awards which vest and become fully exercisable immediately and provide for issuance of up to 20,000 options.  For each Stock Option Plan, the exercise price of each option, which has a ten year life, was equal to the market price of our stock on the date of grant.

The combined summary of activity for 2014 in the expired Stock Option Plans follows:

					Weighted
			Weighted		Average
			Average		Remaining	Aggregate
			Exercise		Contractual	Intrinsic
	Shares		Price		Term	Value
Outstanding, beginning of year	19,100		$	31.50
Granted	—		—
Forfeited or expired	(6,375	)	33.56
Exercised	—		—
Outstanding, end of period	12,725		$	30.46	13.9 months	$	—
Vested and expected to vest	12,725		$	30.46	13.9 months	$	—
Exercisable, end of period	12,725		$	30.46	13.9 months	$	—

As of March 31, 2014, there was no unrecognized compensation cost related to nonvested stock options granted under either Stock Option Plan.  Since both Stock Option Plans have expired, no additional options can be granted under either of these plans.

2005 Restricted Stock Grant Plan

On May 10, 2005, our stockholders approved a restricted stock grant plan.  Total shares issuable under the plan are 50,000.  We issued 7,475 shares during 2014 and 6,065 shares during 2013.  There were no shares forfeited during the first three months of 2014 or 2013.  As of March 31, 2014, the restricted stock grant plan allows for additional restricted stock share awards of up to 4,995 shares.

22

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

			Weighted-Average			Fair
			Grant-Date			Value
Nonvested Shares	Shares		Fair Value			Per Share
Nonvested at January 1, 2014	15,565		$	280,016		$	17.99
Granted	7,475		181,194			24.24
Vested	(4,756	)	(84,518		)	17.77
Forfeited	—		—			—
Nonvested at March 31, 2014	18,284		$	376,692		$	20.60

As of March 31, 2014, there was $353,484 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 5 years.

2009 Stock Award Plan

On May 13, 2009, our 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.  We issued no stock grants during the first three months of 2014 and 900 shares during the first three months of 2013.  As of March 31, 2014, 149,100 shares are still available for issuance.

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

			Weighted-Average			Fair
			Grant-Date			Value
Nonvested Shares	Shares		Fair Value			Per Share
Nonvested at January 1, 2014	900		$	20,880		$	23.20
Granted	—		—			—
Vested	(180	)	(4,176		)	23.20
Forfeited	—		—			—
Nonvested at March 31, 2014	720		$	16,704		$	23.20

As of March 31, 2014, there was $16,356 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 5 years.

7.  OTHER BORROWINGS

The Company has a $5 million revolving promissory note which is scheduled to mature July 27, 2014.  The Company has no outstanding balances related to this promissory note at March 31, 2014.

23

8.  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.

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

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

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

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

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

Investment Securities 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.  Such adjustments are usually significant and typically result in a Level 3 classification of the inputs for determining fair value.

Other Real Estate Owned:  The fair value of certain commercial and residential real estate properties classified as other real estate owned (OREO) are generally based on third party appraisals of the property, resulting in a Level 3 classification.  In cases where the carrying amount exceeds the fair value, less costs to sell, an impairment loss is recognized.

24

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.

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 March 31, 2014 Using (In thousands):

			Quoted Prices
			In Active
			Markets for		Significant Other		Significant
			Identical		Observable		Unobservable
	Fair		Assets		Inputs		Inputs
Description	Value		(Level 1)		(Level 2)		(Level 3)
U. S. government agencies	$	71,362	$	—	$	71,362	$	—
States and municipals	92,675		—		92,675		—
Mortgage-backed - residential	72,036		—		72,036		—
Equity securities	291		291		—		—
Trading Assets	5,108		5,108		—		—
Total	$	241,472	$	5,399	$	236,073	$	—

Available for Sale Investment Securities Fair Value Measurements at December 31, 2013 Using (In thousands):

			Quoted Prices
			In Active
			Markets for		Significant Other		Significant
			Identical		Observable		Unobservable
	Fair		Assets		Inputs		Inputs
Description	Value		(Level 1)		(Level 2)		(Level 3)
U. S. government agencies	$	69,286	$	—	$	69,286	$	—
States and municipals	90,183		—		90,183		—
Mortgage-backed - residential	70,638		—		70,638		—
Equity securities	289		289		—		—
Total	$	230,396	$	289	$	230,107	$	—

The Company held no trading assets at December 31, 2013.  Also, there were no transfers between level 1 and level 2 during 2014 or 2013.

25

Assets measured at fair value on a non-recurring basis are summarized below:

(In thousands)

	Fair Value Measurements at March 31, 2014 Using:
			Quoted Prices
			In Active		Other
			Markets for	Significant	Significant
			Identical	Observable	Unobservable
	Carrying		Assets	Inputs	Inputs
Description	Value		(Level 1)	(Level 2)	(Level 3)
Impaired loans:
Real Estate Mortgage:
1-4 family residential	$	300	—	—	$	300
Multi-family residential	199		—	—	199
Non-farm & non-residential	1,022		—	—	1,022
Agricultural	220				220
Other real estate owned:
Residential	1,246		—	—	1,246
Loan servicing rights	175		—	—	175

(In thousands)

	Fair Value Measurements at December 31, 2013 Using:
			Quoted Prices
			In Active		Other
			Markets for	Significant	Significant
			Identical	Observable	Unobservable
	Carrying		Assets	Inputs	Inputs
Description	Value		(Level 1)	(Level 2)	(Level 3)
Impaired loans:
Real Estate Mortgage:
1-4 family residential	$	1,420	—	—	$	1,420
Multi-family residential	199		—	—	199
Non-farm & non-residential	36		—	—	36
Agricultural	275		—	—	275
Other real estate owned:
Residential	1,361		—	—	1,361
Loan servicing rights	201		—	—	201

26

Impaired loans, which are measured for impairment using the fair value of the collateral for collateral dependent loans, had a carrying amount of $1.7 million, which includes a valuation allowance of $555 thousand at March 31, 2014.  During the first three months of 2014, one new loan became impaired resulting in an additional provision for loan losses of $282 thousand.  The total allowance for specific impaired loans increased $134 thousand for the three months ending March 31, 2014 and decreased $454 thousand for the three months ending March 31, 2013.

Other real estate owned, which is measured at fair value less costs to sell, had a net carrying amount of $1.2 million, which is made up of the outstanding balance of $2.7 million, net of a valuation allowance of $1.5 million at March 31, 2014.  The Company recorded no write-downs of other real estate owned properties for the three months ending both March 31, 2014 and 2013.

Loan servicing rights, which are carried at the lower of cost or fair value, were carried at their fair value of $175 thousand, which is made up of the outstanding balance of $229 thousand, net of a valuation allowance of $54 thousand at March 31, 2014, resulting in a net recovery of prior write-downs of $5 thousand for the three months ending March 31, 2014 and write-downs of $73 thousand for the three months ending March 31, 2013.  At December 31, 2013, loan servicing rights were carried at their fair value of $201 thousand, which is made up of the outstanding balance of $260 thousand, net of a valuation allowance of $59 thousand.

The following table presents quantitative information about level 3 fair value measurements for financial instruments measured at fair value on a non-recurring basis at March 31, 2014 and December 31, 2013:

March 31, 2014

(In thousands)

				Range
	Fair	Valuation	Unobservable	(Weighted
	Value	Technique(s)	Input(s)	Average)
Impaired loans
Real estate mortgage:
1-4 family residential	300	sales comparison	adjustment for	0%-99%
			differences	(11%)
			between the
			comparable sales
Multi-family residential	199	sales comparison	adjustment for	12%-32%
			differences	(16%)
			between the
			comparable sales
Non-farm & non-residential	1,022	sales comparison	adjustment for	0%-61%
			differences	(20%)
			between the
			comparable sales
Agricultural:	220	sales comparison	adjustment for	5%-44%
			differences	(24%)
			between the
			comparable sales
Other real estate owned:
Residential	1,246	sales comparison	adjustment for	0%-17%
			differences	(6%)
			between the
			comparable sales
		income approach	capitalization rate	8%-8%
				(8%)
Loan Servicing Rights	175	discounted cash flow	constant prepayment	7%-19%
			rates	(9%)

27

December 31, 2013

(In thousands)

				Range
	Fair	Valuation	Unobservable	(Weighted
	Value	Technique(s)	Input(s)	Average)
Impaired loans
Real estate mortgage:
1-4 family residential	1,420	sales comparison	adjustment for	0%-99%
			differences	(14%)
			between the
			comparable sales
Multi-family residential	199	sales comparison	adjustment for	12%-32%
			differences	(22%)
			between the
			comparable sales
Non-farm & non-residential	36	sales comparison	adjustment for	0%-61%
			differences	(31%)
			between the
			comparable sales
Agricultural	275	sales comparison	adjustment for	5%-44%
			differences	(20%)
			between the
			comparable sales
Other real estate owned:
Residential	1,361	sales comparison	adjustment for	0%-33%
			differences	(4%)
			between the
			comparable sales
		income approach	capitalization rate	8%-8%
				(8%)
Loan Servicing Rights	201	discounted cash	constant prepayment	7%-23%
		flow	rates	(10%)

Fair Value of Financial Instruments

The carrying amounts and estimated fair values of financial instruments, at March 31, 2014 and December 31, 2013 are as follows:

March 31, 2014:

(in thousands)

	Carrying
	Value		Level 1		Level 2		Level 3		Total
Financial assets
Cash and cash equivalents	$	21,877	$	21,877	$	—	$	—	$	21,877
Securities	236,364		291		236,073		—		236,364
Trading Assets	5,108		5,108		—				5,108
Mortgage loans held for sale	149		—		151		—		151
Loans, net	468,396		—		—		468,085		468,085
FHLB Stock	5,981		—		—		—		N/A
Interest receivable	3,484		—		1,464		2,020		3,484
Financial liabilities
Deposits	$	628,004	$	442,065	$	187,894	$	—	$	629,959
Securities sold under agreements to repurchase and other borrowings	11,402		—		11,546		—		11,546
FHLB advances	57,380		—		53,066		—		53,066
Subordinated Debentures	7,217		—		—		7,217		7,217
Interest payable	709		—		700		9		709

28

December 31, 2013:

(in thousands)

	Carrying
	Value		Level 1		Level 2		Level 3		Total
Financial assets
Cash and cash equivalents	$	23,160	$	23,160	$	—	$	—	$	23,160
Securities	230,396		289		230,107		—		230,396
Mortgage loans held for sale	223		—		229		—		229
Loans, net	463,214		—		—		459,796		459,796
FHLB Stock	6,731		—		—		—		N/A
Interest receivable	3,618		—		1,315		2,303		3,618
Financial liabilities
Deposits	$	617,400	$	428,239	$	191,523	$	—	$	619,762
Securities sold under agreements to repurchase and other borrowings	12,867		—		13,013		—		13,013
FHLB advances	57,847		—		52,220		—		52,220
Subordinated Debentures	7,217		—		—		7,217		7,217
Interest Payable	736				727		9		736

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 short-term instruments 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 as follows:  For variable rate loans that reprice frequently and with no significant change in credit risk, fair values 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 borrowers 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. The methods used to estimate the fair value of loans do not necessarily represent an exit price.

The fair value of 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.

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.

29

FHLB Advances and Subordinated Debentures - The fair values of the Company’s FHLB advances 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.

9.     CHANGES IN ACCUMULATED OTHER COMPREHENSIVE INCOME BY COMPONENT

Changes in Accumulated Other Comprehensive Income by Component (1)  (unaudited)

(in thousands)

	Unrealized
	Gains and Losses on
	Available for Sale
	Securities
	For the Three Months Ending March 31
	2014			2013
Beginning Balance	$	(5,126	)	$	4,283
Unrealized holding gains (losses) for the period, net of tax	3,375			(1,061		)
Reclassification adjustment for:
Securities gains realized in income, net	(188		)	(289		)
Income taxes	(64		)	(98		)
	(124		)	(191		)
Net current period other comprehensive income	3,251			(1,252		)
Ending balance	$	(1,875	)	$	3,031

(1)All amounts are net of tax.

30

The following is significant amounts reclassified out of each component of accumulated other comprehensive Income (Loss) for the three months ending March 31, 2014 and 2013:

March 31, 2014

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	$	(188	)	Securities gains, net
	64			Provision for income taxes
	(124		)	Net of tax

March 31, 2013

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	$	(289	)	Securities gains, net
	98			Provision for income taxes
	(191		)	Net of tax

31

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, 2013.

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); 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 for losses on loans; and other risks detailed in our filings with the Securities and Exchange Commission, all of which are difficult to predict and many of which are beyond our control.

As a result of the uncertainties and the assumptions on which this discussion and the forward-looking statements are based, actual future operations and results in the future may differ materially from those indicated herein.

You should not place undue reliance on any forward-looking statements made by us or on our behalf. Our forward-looking statements are made as of the date of this 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.

32

Summary

The Company recorded net income of $1.77 million, or $0.66 basic earnings and diluted earnings per share for the first three months ending March 31, 2014 compared to $1.70 million or $0.63 basic earnings and diluted earnings per share for the three month period ended March 31, 2013.  The first three months earnings reflect an increase of 3.6% compared to the same time period in 2013.  The increase in earnings is mostly attributed to a decrease of $350 thousand in the provision for loan losses, an increase of $215 thousand in net interest income, a decrease of $109 thousand in income tax expense, an increase of $81 thousand in loan service fee income, an increase of $71 thousand in the gains on securities held for trading and a decrease of $69 thousand in net repossession expense. These positive changes to net income during 2014 were partially offset by a decrease of $469 thousand in the gains on the sale of mortgage loans, a decrease of $101 thousand in the gains on the sale of securities, an increase of $312 thousand in salaries & benefits expense and an increase of $130 thousand in occupancy expense.

Return on average assets was 0.91% for the three months ending March 31, 2014 and 0.96% for the three months ending March 31, 2013.  Return on average equity was 10.0% for the three month period ending March 31, 2014 and 9.2% for the three month period ending March 31, 2013.

In January 2014, the Bank invested $5.0 million in trading securities which are shown as trading assets on the balance sheet. This is the first quarter in which the Bank has held trading assets. The decision was made to invest in these assets after much due diligence and consideration to the fact that management believed the Company could earn a higher return on this investment, compared to other investments, with minimized additional risk due to the short-term attributes of the assets. The assets are primarily comprised of municipal securities which are held for a very short period of time and generate additional profits primarily by taking gains on short-term differences in price. At March 31, 2014, trading assets totaled $5.1 million, which represents income on the investment of $108 thousand during the first quarter of 2014.

Gross Loans increased $5.3 million from $468.7 million on December 31, 2013 to $474.0 million on March 31, 2014.  The overall increase in loans is attributed to an increase of $1.6 million in 1-4 family residential properties, an increase of $3.2 million in non-farm and non-residential properties, an increase of $2.6 million in multi-family residential properties, an increase of $660 thousand in real estate construction loans and an increase of $474 thousand in agricultural loans.  Commercial loan balances decreased $2.9 million and consumer loan balances decreased $277 thousand.

Total deposits increased from $617.4 million on December 31, 2013 to $628.0 million on March 31, 2014, an increase of $10.6 million.  Non-interest bearing demand deposit accounts increased $13.6 million from December 31, 2013 to March 31, 2014.  Time deposits $100 thousand and over increased $289 thousand and other interest bearing deposit accounts decreased $3.3 million from December 31, 2013 to March 31, 2014.  Public fund accounts decreased $9.4 million from December 31, 2013 to March 31, 2014.  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 monies collected during the fourth quarter and then withdrawn from the Bank in the following months.

Borrowings from the Federal Home Loan Bank decreased $467 thousand from December 31, 2013 to March 31, 2014.

33

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 $6.3 million for the three months ending March 31, 2014 compared to $6.1 million for the three months ending March 31, 2013, an increase of 3.5%.  The interest spread, excluding tax equivalent adjustments was 3.41% for the first three months of 2014 and down from 3.97% reported for the same period in 2013, a decrease of 56 basis points.  Rates have remained fairly low in the past year.  For the first three months ending March 31, 2014, the cost of total deposits was 0.35% compared to 0.40% for the same time period in 2013.  Increasing non-interest bearing deposit accounts and lower rates on certificates of deposit accounts have helped to lower the cost of deposits.

For the first three months, the yield on assets decreased from 4.24% in 2013 to 3.94% in 2014, excluding tax equivalent adjustments.  The yield on loans decreased 52 basis points in the first three months of 2014 compared to 2013 from 5.44% to 4.92%.  The yield on securities increased 11 basis points in the first three months of 2014 compared to 2013 from 2.29% in 2013 to 2.40% in 2014.  The cost of liabilities was 0.53% both in 2013 and 2014.  Year to date average loans, excluding overdrafts, increased $48.0 million, or 11.3% from March 31, 2013 to March 31, 2014.  Loan interest income increased $35 thousand for the first three months of 2014 compared to the first three months of 2013.  Year to date average total deposits increased from March 31, 2013 to March 31, 2014, up $27.2 million or 4.5%.  Year to date average interest bearing deposits increased $14.9 million, or 3.3%, from March 31, 2013 to March 31, 2014.  Deposit interest expense decreased $51 thousand for the first three months of 2014 compared to the same period in 2013.  Year to date average borrowings increased $48.7 million, or 63.8% from March 31, 2013 to March 31, 2014.  Interest expense on borrowed funds increased $162 thousand for the first three months of 2014 compared to the same period in 2013.

The volume rate analysis for the three months ending March 31, 2014 which follows indicates that $2.4 million of the increase in interest income is attributable to an increase in loan volume and $203 thousand of the increase in interest income is attributable to an increase in the volume of our security portfolio.  Further, a decrease in loan rates caused a decrease of $2.4 million to interest income while an increase in rates in our security portfolio contributed an increase of $95 thousand to interest income.  The net effect to interest income was an increase of $326 thousand for the first three months of 2014 compared to the same time period in 2013.  The average rate of the Company’s total outstanding deposits and borrowing liabilities decreased from 0.68% in 2013 to 0.35% in 2014.  Based on the volume rate analysis that follows, the lower level of interest rates contributed to a decrease of $670 thousand in interest expense, while the change in volume was responsible for a $781 thousand increase in interest expense.  As a result, the increase in net interest income for the first three months in 2014 is mostly attributed to growth in the Company’s loan and security portfolios.

The accompanying analysis of changes in net interest income in the following table shows the relationships of the volume and rate portions of these changes in 2014.  Changes in interest income and expenses due to both rate and volume are allocated on a pro rata basis.

34

Changes in Interest Income and Expense

(in thousands)

	Three Months Ending
	2014 vs. 2013
	Increase (Decrease) Due to Change in
	Volume			Rate			Net Change
INTEREST INCOME
Loans	$	2,396		$	(2,361	)	$	35
Investment Securities	203			95			298
Other	(4		)	(3		)	(7		)
Total Interest Income	2,595			(2,269		)	326
INTEREST EXPENSE
Deposits
Demand	26			(46		)	(20		)
Savings	28			(25		)	3
Negotiable Certificates of
Deposit and Other
Time Deposits	(7		)	(27		)	(34		)
Securities sold under agreements to repurchase and other borrowings	82			(68		)	14
Federal Home Loan
Bank advances	652			(504		)	148
Total Interest Expense	781			(670		)	111
Net Interest Income	$	1,814		$	(1,599	)	$	215

Non-Interest Income

Non-interest income decreased $334 thousand for the three months ending March 31, 2014, compared to the same period in 2013, to $2.3 million.    The decrease for the three month period ending March 31, 2014 was primarily due to a decrease of $469 thousand in gains on the sale of mortgage loans and a decrease of $101 thousand in gains on the sale of securities.  Favorable variances to non-interest income included an increase of $81 thousand in loan service fee income and an increase of $71 thousand in gains on trading assets.

The gain on the sale of mortgage loans decreased from $626 thousand in the first three months of 2013 to $157 thousand during the first three months of 2014, a decrease of $469 thousand.  The volume of loans originated to sell during the first three months of 2014 decreased $10.4 million compared to the same time period in 2013.  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 expense, was $29 thousand for the three months ending March 31, 2014 compared to $(52) thousand for the three months ending March 31, 2013, an increase of $81 thousand.  During the first three months of 2014, the adjustment to the carrying value of the mortgage servicing right was a positive net amount of $5 thousand, as the fair value of this asset increased.  For the three months ending March 31, 2013, the carrying value of the mortgage servicing right was written down a net amount of $73 thousand, as the fair value of this asset decreased.

35

Non-Interest Expense

Total non-interest expenses increased $278 thousand for the three month period ending March 31, 2014 compared to the same period in 2013.

For the comparable three month periods, salaries and benefits increased $312 thousand, an increase of 9.5%.  The increase is attributed to additional personnel hired during 2013 for expanding into two new markets and normal pay increases at the beginning of 2014.  The number of full time equivalent employees at March 31, 2014 was 207 compared to 205 one year ago.

Occupancy expenses increased $130 thousand to $848 million for the first three months of 2014 compared to the same time period in 2013.  Rent expense increased $46 thousand due to entering two new markets within the past year and leasing branch facilities in both markets.  Depreciation expense increased $37 thousand during the first three months ending March 31, 2014 compared to the same time period one year ago.  In addition, computer maintenance expense increased $24 thousand and building maintenance expense increased $21 thousand for the first three months ending March 31, 2014 compared to the same time period in 2013.

Legal and professional fees decreased $17 thousand for the first three months ending March 31, 2014 compared to the same time period in 2013.  Repossession expenses decreased $69 thousand for the first three months ending March 31, 2014 compared to the same time period in 2013.  Repossession expenses are reported net of rental income earned on repossessed properties.  Repossession expenses were lower in the first three months of 2014 when compared to the same time period in 2013 due to the Company selling many of the properties included in other real estate owned.  FDIC insurance expense decreased $4 thousand for the three months ending March 31, 2014 compared to the same time period in 2013.

Income Taxes

The effective tax rate for the three months ending March 31, 2014 was 14.2% compared to 19.0% in 2013.  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.    Tax-exempt interest income increased $28 thousand for the first three months of 2014 compared to the first three months of 2013.  Also, for the first three months of 2014, the Company had tax credits totaling $139 thousand for investments made in low income housing projects which represented an increase of $94 thousand compared to similar tax credits for the first three months of 2013.

As part of normal business, the Bank typically makes tax free loans to select municipalities in our market and invests in selected tax free securities, primarily in the Commonwealth of Kentucky.  In making these investments, the Company considers the overall impact to managing our net interest margin, credit worthiness of the underlying issuer and the favorable impact on our tax position.  For the three months ending March 31, 2014, the Company averaged $89.0 million in tax free securities and $16.5 million in tax free loans.  As of March 31, 2014, the weighted average remaining maturity for the tax free securities is 132 months, while the weighted average remaining maturity for the tax free loans is 175 months.

36

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 FHLB 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 $21.9 million as of March 31, 2014 compared to $23.2 million at December 31, 2013.  The decrease in cash and cash equivalents is attributed to a decrease of $1.1 million in cash and due from banks.  In addition to cash and cash equivalents, the securities portfolio provides an important source of liquidity.  Securities available for sale totaled $236.4 million at March 31, 2014 compared to $230.4 million at December 31, 2013.  Securities classified as trading assets totaled $5.1 million at March 31, 2014 and $0 at December 31,2013.  The securities available for sale and those which are considered to be 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.

For the first three months of 2014, deposits increased $10.6 million. The Company’s investment portfolio increased $11.1 million and the Company’s loan portfolio increased $5.4 million.  The borrowed funds the Company have with the Federal Home Loan Bank decreased $467 thousand and the Company had no outstanding federal funds purchased at March 31, 2014 or December 31, 2013.

Management is aware of the challenge of funding sustained loan growth.  Therefore, in addition to deposits, other sources of funds, such as Federal Home Loan Bank advances, may be used.  We rely on Federal Home Loan Bank advances for both liquidity and asset/liability management purposes.  These advances are used primarily to fund long-term fixed rate residential mortgage loans.  As of March 31, 2014, we have sufficient collateral to borrow an additional $79 million from the Federal Home Loan Bank.  In addition, as of March 31, 2014, $31 million is available in overnight borrowing through various correspondent banks and the Company has access to $267 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.

37

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 (as defined in the applicable banking regulations) to risk-weighted assets (as defined), and of Tier I capital to average assets (as defined).  Management believes, as of March 31, 2014 and December 31, 2013, 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 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 will revise 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. 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. The final rule becomes effective for the Bank on January 1, 2015. In accordance with the final rule, the capital conservation buffer requirement will be phased in beginning January 1, 2016 and ending January 1, 2019, when the full capital conservation buffer requirement will be effective.

38

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

									To Be Well
									Capitalized
									Under Prompt
					For Capital				Corrective
	Actual				Adequacy Purposes				Action Provisions
	Amount		Ratio		Amount		Ratio		Amount		Ratio
	(Dollars in Thousands)
March 31, 2014
Consolidated
Total Capital (to Risk-Weighted Assets)	$	73,217	14.1	%	$	41,584	8	%	$	N/A	N/A
Tier I Capital (to Risk-Weighted Assets)	67,520		13.0		20,792		4		N/A		N/A
Tier I Capital (to Average Assets)	67,520		8.7		31,012		4		N/A		N/A
Bank Only
Total Capital (to Risk-Weighted Assets)	$	72,083	13.9	%	$	41,561	8	%	$	51,951	10	%
Tier I Capital (to Risk-Weighted Assets)	66,386		12.8		20,781		4		31,171		6
Tier I Capital (to Average Assets)	66,386		8.6		31,002		4		38,753		5
December 31, 2013
Consolidated
Total Capital (to Risk-Weighted Assets)	$	71,993	14.1	%	$	40,872	8	%	N/A		N/A
Tier I Capital (to Risk-Weighted Assets)	66,468		13.0		20,436		4		N/A		N/A
Tier I Capital (to Average Assets)	66,468		8.8		30,079		4		N/A		N/A
Bank Only
Total Capital (to Risk-Weighted Assets)	$	70,827	13.9	%	$	40,859	8	%	$	51,073	10	%
Tier I Capital (to Risk-Weighted Assets)	65,302		12.8		20,429		4		30,644		6
Tier I Capital (to Average Assets)	65,302		8.7		30,070		4		37,588		5

Non-Performing Assets

As of March 31, 2014, our non-performing assets totaled $14.8 million or 1.89% of assets compared to $13.8 million or 1.79% of assets at December 31, 2013 (See table below.)  The Company experienced an increase of $846 thousand in non-accrual loans from December 31, 2013 to March 31, 2014.  As of March 31, 2014, non-accrual loans include $2.1 million in loans secured by 1-4 family properties, $970 thousand in loans secured by non-farm and non-residential properties, $299 thousand in commercial loans, $275 thousand in loans secured by multi-family residential properties, $217 thousand in loans secured by agricultural properties and $1 thousand in consumer loans.   Real estate loans composed 92.3% of the non-performing loans as of March 31, 2014 and 99.8% as of December 31, 2013.  Forgone interest income on non-accrual loans totaled $59 thousand for the first three months of 2014 compared to forgone interest of $273 thousand for the same time period in 2013.  Accruing loans that are contractually 90 days or more past due as of March 31, 2014 totaled $867 thousand compared to $554 thousand at December 31, 2013, an increase of $313 thousand.  The total nonperforming and restructured loans increased $1.1 million from December 31, 2013 to March 31, 2014, resulting in an increase in the ratio of nonperforming and restructured loans to loans of 22 basis points to 2.44%.  In addition, the amount the Company has recorded as other real estate owned decreased $123 thousand from December 31, 2013 to March 31, 2014.  As of March 31, 2014, the amount recorded as other real estate owned totaled $3.3 million compared to $3.4 million at December 31, 2013.  During the first three months of 2014, $141 thousand was added to Other Real Estate properties while $264 thousand in other real estate properties were sold.  The allowance as a percentage of non-performing and restructured loans and other real estate owned decreased slightly from 39% at December 31, 2013 to 38% at March 31, 2014.

39

Nonperforming and Restructured Assets

	3/31/14			12/31/13
	(in thousands)
Non-accrual Loans	$	3,820		$	2,974
Accruing Loans which are Contractually past due 90 days or more	867			554
Accruing Troubled Debt Restructurings	6,885			6,901
Total Nonperforming and Restructured Loans	11,572			10,429
Other Real Estate	3,256			3,379
Total Nonperforming and Restructured Loans and Other Real Estate	$	14,828		$	13,808
Nonperforming and Restructured Loans as a Percentage of Loans	2.44		%	2.22		%
Nonperforming and Restructured Loans and Other Real Estate as a Percentage of Total Assets	1.89		%	1.79		%
Allowance as a Percentage of Period-end Loans	1.18		%	1.16		%
Allowance as a Percentage of Non-performing and Restructured Loans and Other Real Estate	38		%	39		%

We maintain a “watch list” of agricultural, commercial, real estate mortgage, and real estate construction loans and review those loans on a regular basis.  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 three months of 2014 was $100 thousand compared to $450 thousand for the first three months of 2013.  The decrease in the total loan loss provision during the first three months of 2014 compared to the same time period in 2013 is attributed to overall improved quality of the Bank’s loan portfolio and having a significant recovery of $367 thousand for a loan that was charged off in a prior year.  Management evaluates the loan portfolio by reviewing the historical loss rate for each respective loan type and assigns risk multiples to certain categories to account for qualitative factors including current economic conditions.  The average loss rates are reviewed for trends in the analysis, as well as comparisons to peer group loss rates.  Management makes allocations within the allowance for loan losses for specifically classified loans regardless of loan amount, collateral or loan type.  Loan categories are evaluated utilizing subjective factors in addition to the historical loss calculations to determine a loss allocation for each of those types.  As this analysis, or any similar analysis, is an imprecise measure of loss, the allowance is subject to ongoing adjustments.  Therefore, management will often take into account other significant factors that may be necessary or prudent in order to reflect probable incurred losses in the total loan portfolio.

Nonperforming loans and restructured loans increased $1.1 million since December 31, 2013 to $11.6 million as of March 31, 2014.  Other real estate properties owned decreased $123 thousand over this same time period.  Additions to Other real estate properties totaled $141 thousand while sales totaled $264 thousand.

40

The March 31, 2014 unallocated allowance of $523 thousand increased slightly from the December 31, 2013 balance of $516 thousand.

Net charge-offs were $(75) thousand for the three months ending March 31, 2014 and $874 thousand for the three months ending March 31, 2013.  During the first quarter of 2014, the Company recorded a recovery of $367 for one loan which was previously charged-off.  Future levels of charge-offs will be determined by the particular facts and circumstances surrounding individual loans.  Further, the growth the Company has experienced in our loan portfolio, particularly in 1-4 family residential loans,  is attributed to passing grade loans and do not require additional reserves as of March 31, 2014.  Based on the above information, management believes the current loan loss allowance is sufficient to meet probable incurred loan losses.

	Three Months Ended March 31
	(in thousands)
Loan Losses	2014			2013
Balance at Beginning of Period	$	5,441		$	6,047
Amounts Charged-off:
Commercial	200			6
Real Estate Construction	—			578
1-4 family residential	63			125
Multi-family residential	—			—
Non-farm & non-residential	—			—
Agricultural	—			86
Consumer and other	174			285
Total Charged-off Loans	437			1,080
Recoveries on Amounts Previously Charged-off:
Commercial	—			28
Real Estate Construction	4			5
1-4 family residential	12			26
Multi-family residential	—			—
Non-farm & non-residential	367			8
Agricultural	24			2
Consumer and other	105			137
Total Recoveries	512			206
Net Charge-offs (Recoveries)	(75		)	874
Provision for Loan Losses	100			450
Balance at End of Period	5,616			5,623
Loans
Average	474,505			426,333
At March 31	474,012			422,320
As a Percentage of Average Loans:
Net Charge-offs (Recoveries) for the period	(0.02		)%	0.21		%
Provision for Loan Losses for the period	0.02		%	0.11		%
Allowance as a Multiple of Net Charge-offs (Recoveries) annualized	(18.7		)	1.6

41

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 $5.1 million in market risk sensitive instruments which are held for trading purposes.  These assets are held for a very short period of time and are used to generate profits on short-term differences in price.  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 March 31, 2014, 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 slightly higher in each rate shock simulation when compared to the same period a year ago.  The projected net interest income report summarizing our interest rate sensitivity as of March 31, 2014 is as follows:

PROJECTED NET INTEREST INCOME

(dollars in thousands)

				Level
Change in basis points:	- 100			Rates		+ 100			+ 300
Year One (4/14 - 3/15)
Net interest income	$	24,497		$	25,298	$	25,517		$	25,483
Net interest income dollar change	(801		)	N/A		219			186
Net interest income percentage change	-3.2		%	N/A		0.9		%	0.7		%
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 March 31, 2013 is as follows:

PROJECTED NET INTEREST INCOME

(dollars in thousands)

				Level
Change in basis points:	- 100			Rates		+ 100			+ 300
Year One (4/13 - 3/14)
Net interest income	$	23,436		$	24,450	$	24,903		$	25,049
Net interest income dollar change	(1,014		)	N/A		453			598
Net interest income percentage change	-4.1		%	N/A		1.9		%	2.4		%
Board approved limit	>-4.0		%	N/A		>-4.0		%	>-10.0		%

42

Projections from March 31, 2014, year one reflected a decline in net interest income of 3.2% with a 100 basis point decline compared to the 4.1% decline in 2013.  The 100 basis point increase in rates reflected a 0.9% increase in net interest income in 2014 compared to an increase of 1.9% in 2013.

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 March 31, 2014 balance sheet, a 100 basis point increase in rates results in a 9.4% decrease in EVE.  A 100 basis point decrease in rates results in a 2.9% decrease 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, 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.  Based on the foregoing, our Chief Executive Officer and Chief Financial Officer concluded that the Company’s disclosure controls and procedures were effective, in all material respects, to ensure that information required to be disclosed in the reports the Company files and submits under the Exchange Act is recorded, processed, summarized and reported as and when required.

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

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

Part II - Other Information

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

ISSUER PURCHASES OF EQUITY SECURITIES

	(a)			(c) Total Number	(d) Maximum Number
	Total	(b)		of Shares (or Units)	(or Approximate Dollar
	Number of	Average		Purchased as Part	Value) of Shares (or
	Shares (or	Price Paid		of Publicly	Units) that May Yet Be
	Units)	Per Share		Announced Plans	Purchased Under the
Period	Purchased	(or Unit)		Or Programs	Plans or Programs
1/1/14 – 1/31/14	165	$	24.00	165	87,559 shares
2/1/14 – 2/28/14	3,630	24.21		3,630	83,929 shares
3/1/14 – 3/31/14	—	—		—	83,929 shares
Total	3,795	$	24.20	3,795	83,929 shares

43

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.  Shares will be purchased from time to time in the open market depending on market prices and other considerations.  Through March 31, 2014, 316,071 shares have been purchased.

Item 6.     Exhibits

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 of Form 8-K dated and filed February 24, 2006.
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 ending 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 Quarterly Report of Form 10-Q for the quarterly period ending June 30, 2000 and filed August 14, 2000.
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 ending 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 March 31, 2014, filed with the SEC on April 13, 2014, formatted in Extensible Business Reporting Language (XBRL): (i) Consolidated Balance Sheets at March 31, 2014 and December 31, 2013, (ii) Consolidated Statements of Income and Comprehensive Income for the three months ended March 31, 2014 and March 31, 2013, (iii) Consolidated Statement of Stockholders’ Equity for the three months ended March 31, 2014, (iv) Consolidated Statements of Cash Flows for the three months ended March 31, 2014 and March 31, 2013 and (v) Notes to Consolidated Financial Statements.

44

*Pursuant to Rule 406T of Regulation S-T, the XBRL related information in Exhibit 101 to this Quarterly Report on Form 10-Q shall not be deemed to be “filed” for purposes of Sections 11 and 12 of the Securities Act of 1933 and Section 18 of the Exchange Act of 1934, or otherwise subject to the liability of those sections, and shall not be deemed part of a registration statement, prospectus or other document filed under the Securities Act of 1933 or the Exchange Act of 1934, except as shall be expressly set forth by specific reference in such filings.

SIGNATURES

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

		KENTUCKY BANCSHARES, INC.
Date	5/13/14	/s/Louis Prichard
		Louis Prichard, President and C.E.O.
Date	5/13/14	/s/Gregory J. Dawson
		Gregory J. Dawson, Chief Financial Officer

45

EX-31.1

Exhibit 31.1

CERTIFICATIONS OF CHIEF EXECUTIVE OFFICER

PURSUANT TO SECTION 302 OF SARBANES-OXLEY ACT

I,Louis Prichard, certify that:

1.I have reviewed this quarterly report on Form 10-Q of Kentucky Bancshares, Inc.;

2.Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

3.Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

4.The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:

a)  Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

b)  Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

c)  Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

d)  Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

5.The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of registrant’s board of directors (or persons performing the equivalent functions):

a)  All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

b)  Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal controls over financial reporting.

Date:  May 13, 2014
BY	/s/ Louis Prichard
Louis Prichard
President & Chief Executive Officer

EX-31.2

Exhibit 31.2

CERTIFICATIONS OF CHIEF FINANCIAL OFFICER

PURSUANT TO SECTION 302 OF SARBANES-OXLEY ACT

I,Gregory J. Dawson, certify that:

1.I have reviewed this quarterly report on Form 10-Q of Kentucky Bancshares, Inc.;

2.Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

3.Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

4.The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:

a)  Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

b)  Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

c)  Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

d)  Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

5.The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of registrant’s board of directors (or persons performing the equivalent functions):

a)  All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

b)  Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal controls over financial reporting.

Date:  May 13, 2014
BY	/s/ Gregory J. Dawson
Gregory J. Dawson
Chief Financial Officer

EX-32

Exhibit 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)

In connection with the Quarterly Report of Kentucky Bancshares, Inc. (the “Company”) on Form 10-Q for the period ended March 31, 2014, as filed with the Securities and Exchange Commission on the date hereof (the “Report”), the undersigned, the Chief Executive Officer and Chief Financial Officer of the Company, certify, pursuant to 18 U.S.C. Section 1350, that:

(1)     The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and

(2)     The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.

Date:	May 13, 2014	By	/s/ Louis Prichard
		Louis Prichard
		President & Chief Executive Officer
Date:	May 13, 2014	By	/s/ Gregory J. Dawson
		Gregory J. Dawson
		Chief Financial Officer

XML

EARNINGS PER SHARE (Details 2) (Stock options)	3 Months Ended
	Mar. 31, 2014	Mar. 31, 2013
Stock options
Antidilutive securities
Antidilutive shares excluded from computation of diluted earnings per share	12,725	19,500

XML

FAIR VALUE MEASUREMENTS (Details 4) (USD $) In Thousands, unless otherwise specified	Mar. 31, 2014	Dec. 31, 2013
Financial Assets
Securities	$ 236,364	$ 230,396
Trading Assets	5,108	0
Mortgage loans held for sale	149	223
Interest receivable	3,484	3,618
Financial liabilities
Interest payable	709	736
Quoted Prices In Active Markets for Identical Assets (Level 1)
Financial Assets
Cash and cash equivalents	21,877	23,160
Securities	291	289
Trading Assets	5,108
Financial liabilities
Deposits	442,065	428,239
Significant Other Observable Inputs (Level 2)
Financial Assets
Securities	236,073	230,107
Mortgage loans held for sale	151	229
Interest receivable	1,464	1,315
Financial liabilities
Deposits	187,894	191,523
Securities sold under agreements to repurchase and other borrowings	11,546	13,013
FHLB advances	53,066	52,220
Interest payable	700	727
Significant Unobservable Inputs (Level 3)
Financial Assets
Loans, net	468,085	459,796
Interest receivable	2,020	2,303
Financial liabilities
Subordinated debentures	7,217	7,217
Interest payable	9	9
Carrying Value
Financial Assets
Cash and cash equivalents	21,877	23,160
Securities	236,364	230,396
Trading Assets	5,108
Mortgage loans held for sale	149	223
Loans, net	468,396	463,214
FHLB stock	5,981	6,731
Interest receivable	3,484	3,618
Financial liabilities
Deposits	628,004	617,400
Securities sold under agreements to repurchase and other borrowings	11,402	12,867
FHLB advances	57,380	57,847
Subordinated debentures	7,217	7,217
Interest payable	709	736
Fair Value
Financial Assets
Cash and cash equivalents	21,877	23,160
Securities	236,364	230,396
Trading Assets	5,108
Mortgage loans held for sale	151	229
Loans, net	468,085	459,796
Interest receivable	3,484	3,618
Financial liabilities
Deposits	629,959	619,762
Securities sold under agreements to repurchase and other borrowings	11,546	13,013
FHLB advances	53,066	52,220
Subordinated debentures	7,217	7,217
Interest payable	$ 709	$ 736

XML

FAIR VALUE MEASUREMENTS (Details 2) (USD $) In Thousands, unless otherwise specified					3 Months Ended
	Mar. 31, 2014	Dec. 31, 2013	Mar. 31, 2013	Dec. 31, 2012	Mar. 31, 2014 Non-recurring item	Mar. 31, 2013 Non-recurring	Dec. 31, 2013 Non-recurring	Mar. 31, 2014 Non-recurring Carrying Value	Dec. 31, 2013 Non-recurring Carrying Value	Mar. 31, 2014 Non-recurring Significant Unobservable Inputs (Level 3)	Dec. 31, 2013 Non-recurring Significant Unobservable Inputs (Level 3)	Mar. 31, 2014 1-4 family residential Non-recurring Carrying Value	Dec. 31, 2013 1-4 family residential Non-recurring Carrying Value	Mar. 31, 2014 1-4 family residential Non-recurring Significant Unobservable Inputs (Level 3)	Dec. 31, 2013 1-4 family residential Non-recurring Significant Unobservable Inputs (Level 3)	Mar. 31, 2014 Multi-family residential Non-recurring Carrying Value	Dec. 31, 2013 Multi-family residential Non-recurring Carrying Value	Mar. 31, 2014 Multi-family residential Non-recurring Significant Unobservable Inputs (Level 3)	Dec. 31, 2013 Multi-family residential Non-recurring Significant Unobservable Inputs (Level 3)	Mar. 31, 2014 Non-farm & non-residential Non-recurring Carrying Value	Dec. 31, 2013 Non-farm & non-residential Non-recurring Carrying Value	Mar. 31, 2014 Non-farm & non-residential Non-recurring Significant Unobservable Inputs (Level 3)	Dec. 31, 2013 Non-farm & non-residential Non-recurring Significant Unobservable Inputs (Level 3)	Mar. 31, 2014 Agricultural Non-recurring Carrying Value	Dec. 31, 2013 Agricultural Non-recurring Carrying Value	Mar. 31, 2014 Agricultural Non-recurring Significant Unobservable Inputs (Level 3)	Dec. 31, 2013 Agricultural Non-recurring Significant Unobservable Inputs (Level 3)	Mar. 31, 2014 Residential Non-recurring Carrying Value	Dec. 31, 2013 Residential Non-recurring Carrying Value	Mar. 31, 2014 Residential Non-recurring Significant Unobservable Inputs (Level 3)	Dec. 31, 2013 Residential Non-recurring Significant Unobservable Inputs (Level 3)
Impaired Loans
Impaired loans, at fair value					$ 1,700							$ 300	$ 1,420	$ 300	$ 1,420	$ 199	$ 199	$ 199	$ 199	$ 1,022	$ 36	$ 1,022	$ 36	$ 220	$ 275	$ 220	$ 275
Valuation allowance of impaired loans	846	712			555
Number of impaired loans					1
Total provision for loan losses					282
Increase (decrease) in allowance for specific impaired loans					134	(454)
Other real estate owned, net:
Other real estate owned					1,200																							1,246	1,361	1,246	1,361
Outstanding balance of other real estate owned	3,256	3,379	4,222	4,168	2,700
Valuation allowance of other real estate owned	1,511	1,524	1,668	1,668	1,500
Write downs of other real estate owned					0	0
Loan servicing rights
Loan servicing rights, at fair value	1,303	1,344			175		201	175	201	175	201
Outstanding balance of loan servicing rights					229		260
Valuation allowance of loan servicing rights					54		59
Recovery (write-down) of loan servicing rights					$ 5	$ 73

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LOANS (Details 5) (USD $) In Thousands, unless otherwise specified	3 Months Ended
	Mar. 31, 2014	Mar. 31, 2013	Dec. 31, 2013
Loans
Nonaccrual	$ 3,820		$ 2,974
Loans Past Due Over 90 Days Still Accruing	867		554
Accruing Troubled Debt Restructurings	6,885		6,901
Percentage of nonaccrual loans secured by real estate	92.10%
Minimum period for which principal or interest is in default for loans to be considered as nonaccrual	90 days
Maximum period past due for loans to be considered as impaired	90 days
Impaired loans transferred to other real estate owned	141	65
Amount recorded in charge offs which contributed to a reduction in nonaccrual loan balances	437	1,080
Commercial
Loans
Nonaccrual	299
Amount recorded in charge offs which contributed to a reduction in nonaccrual loan balances	200	6
Real estate construction
Loans
Amount recorded in charge offs which contributed to a reduction in nonaccrual loan balances	437	578
Prior-year loan charge offs recovered	512
1-4 family residential
Loans
Nonaccrual	2,059		1,171
Loans Past Due Over 90 Days Still Accruing	634		314
Accruing Troubled Debt Restructurings	490		493
Amount recorded in charge offs which contributed to a reduction in nonaccrual loan balances	63	125
Multi-family residential
Loans
Nonaccrual	274		275
Non-farm & non-residential
Loans
Nonaccrual	970		803
Accruing Troubled Debt Restructurings	1,865		1,878
Agricultural
Loans
Nonaccrual	217		717
Loans Past Due Over 90 Days Still Accruing	232		232
Accruing Troubled Debt Restructurings	4,530		4,530
Amount recorded in charge offs which contributed to a reduction in nonaccrual loan balances		86
Consumer
Loans
Nonaccrual	1		8
Loans Past Due Over 90 Days Still Accruing	1		8
Amount recorded in charge offs which contributed to a reduction in nonaccrual loan balances	$ 77	$ 148

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SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Details) (Termination of defined benefit plan, USD $) In Millions, unless otherwise specified	Mar. 31, 2014	Dec. 31, 2013
Termination of defined benefit plan
Loss Contingencies
Accrued contingent liability	$ 1.6	$ 1.6

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CHANGES IN ACCUMULATED OTHER COMPREHENSIVE INCOME BY COMPONENT (Details 2) (USD $) In Thousands, unless otherwise specified	3 Months Ended
	Mar. 31, 2014	Mar. 31, 2013
Reclassifications out of AOCI by component
Securities gains, net	$ (188)	$ (289)
Provision for income taxes	293	402
Net of tax	(1,771)	(1,709)
Unrealized Gains and Losses on Available for Sale Securities | Amount Reclassified From Accumulated Other Comprehensive Income
Reclassifications out of AOCI by component
Securities gains, net	(188)	(289)
Provision for income taxes	64	98
Net of tax	$ (124)	$ (191)

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STOCK COMPENSATION (Details 3) (Stock Option Plans, USD $)	3 Months Ended
	Mar. 31, 2014
Stock Option Plans
Shares
Outstanding, beginning of year (in shares)	19,100
Forfeited or expired (in shares)	(6,375)
Outstanding, end of period (in shares)	12,725
Vested and expected to vest (in shares)	12,725
Exercisable, end of period (in shares)	12,725
Weighted Average Exercise Price
Outstanding, beginning of year (in dollars per share)	$ 31.50
Forfeited or expired (in dollars per share)	$ 33.56
Outstanding, end of period (in dollars per share)	$ 30.46
Vested and expected to vest (in dollars per share)	$ 30.46
Exercisable, end of period (in dollars per share)	$ 30.46
Weighted Average Remaining Contractual Term
Outstanding, end of period	13 months 27 days
Vested and expected to vest	13 months 27 days
Exercisable, end of period	13 months 27 days
Additional disclosures
Unrecognized compensation cost related to nonvested stock options granted	$ 0
Additional options to be granted under the plans (in shares)	0

XML

REAL ESTATE OWNED (Details) (USD $) In Thousands, unless otherwise specified	3 Months Ended
	Mar. 31, 2014	Mar. 31, 2013
Activity in real estate owned
Beginning of year	$ 3,379	$ 4,168
Additions	141	82
Sales	(277)	(28)
Recovery from sale in valuation allowance	13
End of period	3,256	4,222
Activity in the valuation allowance
Beginning of year	1,524	1,668
Recovery from sale	(13)
End of period	1,511	1,668
Expenses related to foreclosed assets
Net loss (gain) on sales	(46)	(5)
Operating expenses (receipts), net of rental income	(2)	67
Repossession expenses, net	(2)	67
End of period	$ (48)	$ 62

XML

FAIR VALUE MEASUREMENTS (Details 3) (USD $) In Thousands, unless otherwise specified	3 Months Ended	12 Months Ended
	Mar. 31, 2014	Dec. 31, 2013
Fair Value Measurements
Loan servicing rights	$ 1,303	$ 1,344
Non-recurring
Fair Value Measurements
Impaired loans, at fair value	1,700
Other real estate owned	1,200
Loan servicing rights	175	201
Non-recurring | Level 3
Fair Value Measurements
Loan servicing rights	175	201
Non-recurring | Discounted cash flow | Level 3
Fair Value Measurements
Loan servicing rights	175	201
Non-recurring | Minimum | Discounted cash flow | Level 3
Fair Value Measurements
constant prepayment rates (as a percent)	7.00%	7.00%
Non-recurring | Maximum | Discounted cash flow | Level 3
Fair Value Measurements
constant prepayment rates (as a percent)	19.00%	23.00%
Non-recurring | Weighted average | Discounted cash flow | Level 3
Fair Value Measurements
constant prepayment rates (as a percent)	9.00%	10.00%
Non-recurring | 1-4 family residential | Level 3
Fair Value Measurements
Impaired loans, at fair value	300	1,420
Non-recurring | 1-4 family residential | Sales comparison | Level 3
Fair Value Measurements
Impaired loans, at fair value	300	1,420
Other real estate owned	1,246	1,361
Non-recurring | 1-4 family residential | Minimum | Sales comparison | Level 3
Fair Value Measurements
Adjustment for differences between the comparable sales and income data available (as a percent)	0.00%	0.00%
Non-recurring | 1-4 family residential | Maximum | Sales comparison | Level 3
Fair Value Measurements
Adjustment for differences between the comparable sales and income data available (as a percent)	99.00%	99.00%
Non-recurring | 1-4 family residential | Weighted average | Sales comparison | Level 3
Fair Value Measurements
Adjustment for differences between the comparable sales and income data available (as a percent)	11.00%	14.00%
Non-recurring | Multi-family residential | Level 3
Fair Value Measurements
Impaired loans, at fair value	199	199
Non-recurring | Multi-family residential | Sales comparison | Level 3
Fair Value Measurements
Impaired loans, at fair value	199	199
Non-recurring | Multi-family residential | Minimum | Sales comparison | Level 3
Fair Value Measurements
Adjustment for differences between the comparable sales and income data available (as a percent)	12.00%	12.00%
Non-recurring | Multi-family residential | Maximum | Sales comparison | Level 3
Fair Value Measurements
Adjustment for differences between the comparable sales and income data available (as a percent)	32.00%	32.00%
Non-recurring | Multi-family residential | Weighted average | Sales comparison | Level 3
Fair Value Measurements
Adjustment for differences between the comparable sales and income data available (as a percent)	16.00%	22.00%
Non-recurring | Non-farm & non-residential | Level 3
Fair Value Measurements
Impaired loans, at fair value	1,022	36
Non-recurring | Non-farm & non-residential | Sales comparison | Level 3
Fair Value Measurements
Impaired loans, at fair value	1,022	36
Non-recurring | Non-farm & non-residential | Minimum | Sales comparison | Level 3
Fair Value Measurements
Adjustment for differences between the comparable sales and income data available (as a percent)	0.00%	0.00%
Non-recurring | Non-farm & non-residential | Maximum | Sales comparison | Level 3
Fair Value Measurements
Adjustment for differences between the comparable sales and income data available (as a percent)	61.00%	61.00%
Non-recurring | Non-farm & non-residential | Weighted average | Sales comparison | Level 3
Fair Value Measurements
Adjustment for differences between the comparable sales and income data available (as a percent)	20.00%	31.00%
Non-recurring | Agricultural | Level 3
Fair Value Measurements
Impaired loans, at fair value	220	275
Non-recurring | Agricultural | Sales comparison | Level 3
Fair Value Measurements
Impaired loans, at fair value	220	275
Non-recurring | Agricultural | Minimum | Sales comparison | Level 3
Fair Value Measurements
Adjustment for differences between the comparable sales and income data available (as a percent)	5.00%	5.00%
Non-recurring | Agricultural | Maximum | Sales comparison | Level 3
Fair Value Measurements
Adjustment for differences between the comparable sales and income data available (as a percent)	44.00%	44.00%
Non-recurring | Agricultural | Weighted average | Sales comparison | Level 3
Fair Value Measurements
Adjustment for differences between the comparable sales and income data available (as a percent)	24.00%	20.00%
Non-recurring | Residential | Level 3
Fair Value Measurements
Other real estate owned	$ 1,246	$ 1,361
Non-recurring | Residential | Minimum | Sales comparison | Level 3
Fair Value Measurements
Adjustment for differences between the comparable sales and income data available (as a percent)	0.00%	0.00%
Non-recurring | Residential | Minimum | Income approach | Level 3
Fair Value Measurements
capitalization rate (as a percent)	8.00%	8.00%
Non-recurring | Residential | Maximum | Sales comparison | Level 3
Fair Value Measurements
Adjustment for differences between the comparable sales and income data available (as a percent)	17.00%	33.00%
Non-recurring | Residential | Maximum | Income approach | Level 3
Fair Value Measurements
capitalization rate (as a percent)	8.00%	8.00%
Non-recurring | Residential | Weighted average | Sales comparison | Level 3
Fair Value Measurements
Adjustment for differences between the comparable sales and income data available (as a percent)	6.00%	4.00%
Non-recurring | Residential | Weighted average | Income approach | Level 3
Fair Value Measurements
capitalization rate (as a percent)	8.00%	8.00%

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SECURITIES

3 Months Ended

Mar. 31, 2014

SECURITIES

SECURITIES

2. SECURITIES

SECURITIES AVAILABLE FOR SALE

Period-end securities are as follows:

(in thousands)

			Gross		Gross
	Amortized		Unrealized		Unrealized			Fair
	Cost		Gains		Losses			Value
Available for Sale
March 31, 2014
U.S. government agencies	$	74,612	$	14	$	(3,264	)	$	71,362
States and political subdivisions	91,008		2,805		(1,138		)	92,675
Mortgage-backed - residential	73,315		118		(1,397		)	72,036
Equity securities	270		21		—			291
Total	$	239,205	$	2,958	$	(5,799	)	$	236,364
December 31, 2013
U.S. government agencies	$	73,930	$	51	$	(4,695	)	$	69,286
States and political subdivisions	91,043		1,614		(2,474		)	90,183
Mortgage-backed - residential	72,920		44		(2,326		)	70,638
Equity securities	270		19		—			289
Total	$	238,163	$	1,728	$	(9,495	)	$	230,396

The amortized cost and fair value of securities at March 31, 2014 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 Measurement can be found in Note 8.

(in thousands)

	Amortized		Fair
	Cost		Value
Due in one year or less	$	623	$	625
Due after one year through five years	8,638		8,714
Due after five years through ten years	84,800		83,131
Due after ten years	71,559		71,567
	165,620		164,037
Mortgage-backed - residential	73,315		72,036
Equity	270		291
Total	$	239,205	$	236,364

Proceeds from sales of securities during the first three months of 2014 and 2013 were $16.5 million and $10.5 million.  Gross gains of $309 thousand and $289 thousand and gross losses of $121 thousand and $0 were realized on those sales, respectively.  The tax provision related to these realized net gains was $64 thousand and $98 thousand, respectively.

Securities with unrealized losses March 31, 2014 and at December 31, 2013 not recognized in income are as follows:

March 31, 2014

	Less than 12 Months					12 Months or More					Total
	Fair		Unrealized			Fair		Unrealized			Fair		Unrealized
Description of Securities	Value		Loss			Value		Loss			Value		Loss
U.S. Government agencies	$	46,111	$	(1,908	)	$	19,524	$	(1,356	)	$	65,635	$	(3,264	)
States and municipals	12,701		(459		)	7,763		(679		)	20,464		(1,138		)
Mortgage-backed - residential	45,918		(1,017		)	6,737		(380		)	52,655		(1,397		)
Total temporarily impaired	$	104,730	$	(3,384	)	$	34,024	$	(2,415	)	$	138,754	$	(5,799	)

December 31, 2013

	Less than 12 Months					12 Months or More					Total
	Fair		Unrealized			Fair		Unrealized			Fair		Unrealized
Description of Securities	Value		Loss			Value		Loss			Value		Loss
U.S. Government agencies	$	57,203	$	(3,813	)	$	8,117	$	(883	)	$	65,320	$	(4,695	)
States and municipals	32,289		(2,106		)	2,879		(368		)	35,168		(2,474		)
Mortgage-backed - residential	62,126		(2,326		)	—		—			62,126		(2,326		)
Total temporarily impaired	$	151,618	$	(8,244	)	$	10,997	$	(1,251	)	$	162,614	$	(9,495	)

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 is expected to recover as the securities approach maturity.

TRADING ASSETS

The trading assets of $5.1 million are primarily comprised of municipal securities which are held for a very short period of time.

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STOCK COMPENSATION (Details 4) (USD $)	3 Months Ended
	Mar. 31, 2014	Mar. 31, 2013
2005 Restricted Stock Grant Plan | Restricted stock
Stock Based Compensation
Number of shares authorized for issuance	50,000
Shares available for issuance	4,995
Shares
Nonvested at the beginning of the period (in shares)	15,565
Granted (in shares)	7,475	6,065
Vested (in shares)	(4,756)
Forfeited (in shares)	0	0
Nonvested at the end of the period (in shares)	18,284
Weighted-Average Grant-Date Fair Value
Nonvested shares, balance at the beginning of the period (in dollars)	$ 280,016
Granted (in dollars)	181,194
Vested (in dollars)	(84,518)
Nonvested shares, balance at the end of the period (in dollars)	376,692
Fair Value Per Share
Nonvested shares, balance at the beginning of the period (in dollars per share)	$ 17.99
Granted (in dollars per share)	$ 24.24
Vested (in dollars per share)	$ 17.77
Nonvested shares, balance at the end of the period (in dollars per share)	$ 20.60
Additional disclosures
Total unrecognized compensation cost related to nonvested shares granted	353,484
Period over which cost is expected to be recognized	5 years
2009 Stock Award Plan
Stock Based Compensation
Number of shares authorized for issuance	150,000
Shares available for issuance	149,100
2009 Stock Award Plan | Restricted stock
Shares
Nonvested at the beginning of the period (in shares)	900
Granted (in shares)	0	900
Vested (in shares)	(180)
Nonvested at the end of the period (in shares)	720
Weighted-Average Grant-Date Fair Value
Nonvested shares, balance at the beginning of the period (in dollars)	20,880
Vested (in dollars)	(4,176)
Nonvested shares, balance at the end of the period (in dollars)	16,704
Fair Value Per Share
Nonvested shares, balance at the beginning of the period (in dollars per share)	$ 23.20
Vested (in dollars per share)	$ 23.20
Nonvested shares, balance at the end of the period (in dollars per share)	$ 23.20
Additional disclosures
Total unrecognized compensation cost related to nonvested shares granted	$ 16,356
Period over which cost is expected to be recognized	5 years

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LOANS (Details) (USD $) In Thousands, unless otherwise specified	Mar. 31, 2014	Dec. 31, 2013
Loans
Loans	$ 474,012	$ 468,655
Commercial
Loans
Loans	31,774	34,654
Real estate construction
Loans
Loans	11,837	11,177
1-4 family residential
Loans
Loans	195,957	194,388
Multi-family residential
Loans
Loans	19,028	16,420
Non-farm & non-residential
Loans
Loans	129,952	126,791
Agricultural
Loans
Loans	68,476	68,002
Consumer
Loans
Loans	16,788	17,065
Other
Loans
Loans	$ 200	$ 158

XML

SECURITIES (Details 3) (USD $) In Thousands, unless otherwise specified	Mar. 31, 2014	Dec. 31, 2013
Securities with unrealized losses
Less than 12 Months, Fair Value	$ 104,730	$ 151,618
Less than 12 Months, Unrealized Loss	(3,384)	(8,244)
12 Months or More, Fair Value	34,024	10,997
12 Months or More, Unrealized Loss	(2,415)	(1,251)
Total, Fair Value	138,754	162,614
Total, Unrealized Loss	(5,799)	(9,495)
Trading Assets
Trading Assets	5,108	0
U.S. Government agencies
Securities with unrealized losses
Less than 12 Months, Fair Value	46,111	57,203
Less than 12 Months, Unrealized Loss	(1,908)	(3,813)
12 Months or More, Fair Value	19,524	8,117
12 Months or More, Unrealized Loss	(1,356)	(883)
Total, Fair Value	65,635	65,320
Total, Unrealized Loss	(3,264)	(4,695)
States and municipals
Securities with unrealized losses
Less than 12 Months, Fair Value	12,701	32,289
Less than 12 Months, Unrealized Loss	(459)	(2,106)
12 Months or More, Fair Value	7,763	2,879
12 Months or More, Unrealized Loss	(679)	(368)
Total, Fair Value	20,464	35,168
Total, Unrealized Loss	(1,138)	(2,474)
Mortgage-backed - residential
Securities with unrealized losses
Less than 12 Months, Fair Value	45,918	62,126
Less than 12 Months, Unrealized Loss	(1,017)	(2,326)
12 Months or More, Fair Value	6,737
12 Months or More, Unrealized Loss	(380)
Total, Fair Value	52,655	62,126
Total, Unrealized Loss	$ (1,397)	$ (2,326)

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OTHER BORROWINGS (Details) (Revolving promissory note, USD $) In Millions, unless otherwise specified	Mar. 31, 2014
Revolving promissory note
OTHER BORROWINGS
Maximum borrowing capacity	$ 5
Outstanding balance	$ 0

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LOANS (Details 2) (USD $) In Thousands, unless otherwise specified	3 Months Ended
	Mar. 31, 2014	Mar. 31, 2013
Activity in allowance for loan losses
Beginning Balance	$ 5,441	$ 6,047
Charge-offs	437	1,080
Recoveries	512	206
Provision	100	450
Ending Balance	5,616	5,623
Commercial
Activity in allowance for loan losses
Beginning Balance	230	150
Charge-offs	200	6
Recoveries		28
Provision	178	(37)
Ending Balance	208	135
Real estate construction
Activity in allowance for loan losses
Beginning Balance	358	918
Charge-offs	437	578
Recoveries	4	5
Provision	(33)	152
Ending Balance	329	497
1-4 family residential
Activity in allowance for loan losses
Beginning Balance	2,169	1,989
Charge-offs	63	125
Recoveries	12	26
Provision	(7)	84
Ending Balance	2,111	1,974
Multi-family residential
Activity in allowance for loan losses
Beginning Balance	427	414
Provision	(26)	79
Ending Balance	401	493
Non-farm & non-residential
Activity in allowance for loan losses
Beginning Balance	564	628
Recoveries	367	8
Provision	(1)	(25)
Ending Balance	930	611
Agricultural
Activity in allowance for loan losses
Beginning Balance	578	845
Charge-offs		86
Recoveries	24	2
Provision	(49)	(14)
Ending Balance	553	747
Consumer
Activity in allowance for loan losses
Beginning Balance	548	517
Charge-offs	77	148
Recoveries	18	11
Provision	61	131
Ending Balance	550	511
Other
Activity in allowance for loan losses
Beginning Balance	51	54
Charge-offs	97	137
Recoveries	87	126
Provision	(30)	56
Ending Balance	11	99
Unallocated
Activity in allowance for loan losses
Beginning Balance	516	532
Provision	7	24
Ending Balance	$ 523	$ 556

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LOANS (Details 3) (USD $)	Mar. 31, 2014	Dec. 31, 2013	Mar. 31, 2013	Dec. 31, 2012
Loans
Accrued interest receivable	$ 2,000,000	$ 2,300,000
Allowance for Loan Losses:
Individually Evaluated for Impairment	846,000	712,000
Collectively Evaluated for Impairment	4,770,000	4,729,000
Total	5,616,000	5,441,000	5,623,000	6,047,000
Loans:
Individually Evaluated for Impairment	10,416,000	13,536,000
Collectively Evaluated for Impairment	463,596,000	455,119,000
Total	474,012,000	468,655,000
Commercial
Allowance for Loan Losses:
Collectively Evaluated for Impairment	208,000	230,000
Total	208,000	230,000	135,000	150,000
Loans:
Collectively Evaluated for Impairment	31,774,000	34,654,000
Total	31,774,000	34,654,000
Real estate construction
Allowance for Loan Losses:
Collectively Evaluated for Impairment	329,000	358,000
Total	329,000	358,000	497,000	918,000
Loans:
Collectively Evaluated for Impairment	11,837,000	11,177,000
Total	11,837,000	11,177,000
1-4 family residential
Allowance for Loan Losses:
Individually Evaluated for Impairment	130,000	228,000
Collectively Evaluated for Impairment	1,981,000	1,941,000
Total	2,111,000	2,169,000	1,974,000	1,989,000
Loans:
Individually Evaluated for Impairment	1,771,000	2,873,000
Collectively Evaluated for Impairment	194,186,000	191,515,000
Total	195,957,000	194,388,000
Multi-family residential
Allowance for Loan Losses:
Individually Evaluated for Impairment	76,000	76,000
Collectively Evaluated for Impairment	325,000	351,000
Total	401,000	427,000	493,000	414,000
Loans:
Individually Evaluated for Impairment	275,000	274,000
Collectively Evaluated for Impairment	18,753,000	16,146,000
Total	19,028,000	16,420,000
Non-farm & non-residential
Allowance for Loan Losses:
Individually Evaluated for Impairment	380,000	110,000
Collectively Evaluated for Impairment	550,000	454,000
Total	930,000	564,000	611,000	628,000
Loans:
Individually Evaluated for Impairment	3,169,000	2,716,000
Collectively Evaluated for Impairment	126,783,000	124,075,000
Total	129,952,000	126,791,000
Agricultural
Allowance for Loan Losses:
Individually Evaluated for Impairment	260,000	298,000
Collectively Evaluated for Impairment	293,000	280,000
Total	553,000	578,000	747,000	845,000
Loans:
Individually Evaluated for Impairment	5,201,000	7,673,000
Collectively Evaluated for Impairment	63,275,000	60,329,000
Total	68,476,000	68,002,000
Consumer
Allowance for Loan Losses:
Collectively Evaluated for Impairment	550,000	548,000
Total	550,000	548,000	511,000	517,000
Loans:
Collectively Evaluated for Impairment	16,788,000	17,065,000
Total	16,788,000	17,065,000
Other
Allowance for Loan Losses:
Collectively Evaluated for Impairment	11,000	51,000
Total	11,000	51,000	99,000	54,000
Loans:
Collectively Evaluated for Impairment	200,000	158,000
Total	200,000	158,000
Unallocated
Allowance for Loan Losses:
Collectively Evaluated for Impairment	523,000	516,000
Total	$ 523,000	$ 516,000	$ 556,000	$ 532,000

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SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

3 Months Ended

Mar. 31, 2014

SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

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, 2013.  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, 2013.

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

Nature of Operations:  The Bank operates under a state bank charter and provides full banking services, including trust services, to customers located in Bourbon, Clark, Elliott, Fayette, Harrison, Jessamine, Rowan, Madison, Scott, Woodford and adjoining counties in Kentucky.  Management continues to consider opportunities for branch expansion and will also consider acquisition opportunities that help advance its strategic objectives.  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.

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.  The allowance for loan losses, loss contingencies, mortgage servicing rights, real estate owned, goodwill and fair value of financial instruments are particularly subject to change.

Trading Assets:  The Company engages in trading activities for its own account.  Securities that are held principally for resale in the near term are recorded at fair value with changes in fair value included in earnings.  Interest and dividends are included in net interest income.

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.

Pension Matter:  The Company terminated the Kentucky Bancshares, Inc. Retirement Plan and Trust (the “Plan”) in a standard termination, with a termination date of December 31, 2008.  Prior to such termination, the Pension Protection Act of 2006 (“PPA”) had amended Internal Revenue Code (“IRC”) Section 417(e)(3) in part by changing the definition of “applicable interest rate” in a manner that in most cases (when combined with other changes to IRC Section 417(e)(3)) would result in a decrease in the value of a participant’s or beneficiary’s plan benefits under pension plans such as the Company’s Plan with the new definition applicable (for most plans, including the Plan) to lump sums with annuity starting dates in or after the 2008 plan year.  The Plan had determined in mid-2008 to comply with IRC Section 417(e)(3), as amended by PPA, by using the assumptions governing minimum lump sums, rather than by using the pre-PPA minimum lump sum assumptions, and operated the Plan in compliance with that decision.  As permitted by the IRC, the Plan was amended on February 24, 2009 (after the termination of the Plan on December 31, 2008) to formalize that decision in accordance with Section 1107 of PPA.

The Internal Revenue Service issued a favorable determination as to the Plan termination in July 2010.  Subsequent to Plan termination and distributions to Plan participants, the Plan was selected for audit by the Pension Benefit Guaranty Corporation (“PBGC”).  The PBGC asserted that the February, 2009 amendment to the Plan violated PBGC Regulation Section 4041.8(a) because the amendment served to lower benefits to Plan beneficiaries.  The PBGC filed a Complaint in May 2013 in United States District Court (Eastern District of Kentucky) to require the Company to make additional distributions to Plan beneficiaries.  On March 17, 2014, the United States District Court (Eastern District of Kentucky) issued an Opinion and Order entering judgment in favor of the PBGC and ruling that the Company must comply with the PBGC’s determination respecting the Plan.  The Company is appraising its options with respect to this judgment, including an appeal of the decision.  However, in light of the court’s opinion, the Company accrued approximately $1.6 million as of December 31, 2013 for this matter.  The accrued balance for this matter remains $1.6 million at March 31, 2014.    Moreover, in the event the subject court decision is not overturned, the Company believes it has claims for further contribution towards payment of this liability from professionals who assisted the Company in the termination of the Plan.

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 2014-01- Investments—Equity Method and Joint Ventures (Topic 323): Accounting for Investments in Qualified Affordable Housing Projects (a consensus of the FASB Emerging Issues Task Force): In January 2014, Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update 2014-01, Equity Method and Joint Ventures (Topic 323): Accounting for Investments in Qualified Affordable Housing Projects (a consensus of the FASB Emerging Issues Task Force). The ASU permits reporting entities to make an accounting policy election to account for their investments in qualified affordable housing projects using the proportional amortization method if certain conditions are met. Under the proportional amortization method, an entity amortizes the initial cost of the investment in proportion to the tax credits and other tax benefits received and recognize the net investment performance in the income statement as a component of income tax expense. Additionally, a reporting entity should disclose information that enables users of its financial statement to understand the nature of its investments in qualified affordable housing projects, and the effect of the measurement of its investments in qualified affordable housing projects and the related tax credits on its financial position and results of operations. The new guidance is effective for annual periods, and interim reporting periods within those annual periods, beginning after December 15, 2014. The adoption of this guidance will not have a material impact on the Company’s consolidated financial statements, but may impact the presentation of the Company’s investments in qualified affordable housing projects. Additionally, the adoption of this guidance will require additional disclosures.

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LOANS (Details 4) (USD $) In Thousands, unless otherwise specified	3 Months Ended		12 Months Ended
	Mar. 31, 2014	Mar. 31, 2013	Dec. 31, 2013
Unpaid Principal Balance
Total	$ 10,416		$ 14,501
Recorded Investment
Total	10,416		13,536
Allowance for Loan Losses Allocated	846		712
Average Recorded Investment
Total	11,297	17,023	14,691
Interest Income Recognized
Total	39	131	697
Cash Basis Interest Recognized
Total	39	131	697
Real estate construction
Average Recorded Investment
With an allowance recorded		1,517	607
1-4 family residential
Unpaid Principal Balance
With no related allowance recorded	911		824
With an allowance recorded	860		2,080
Recorded Investment
With no related allowance recorded	911		793
With an allowance recorded	860		2,080
Allowance for Loan Losses Allocated	130		228
Average Recorded Investment
With no related allowance recorded	396	1,570	1,217
With an allowance recorded	1,470	1,263	1,349
Interest Income Recognized
With no related allowance recorded		19	28
With an allowance recorded	6	14	96
Cash Basis Interest Recognized
With no related allowance recorded		19	28
With an allowance recorded	6	14	96
Multi-family residential
Unpaid Principal Balance
With an allowance recorded	275		274
Recorded Investment
With an allowance recorded	275		274
Allowance for Loan Losses Allocated	76		76
Average Recorded Investment
With an allowance recorded	275	570	443
Interest Income Recognized
With an allowance recorded	4	3	3
Cash Basis Interest Recognized
With an allowance recorded	4	3	3
Non-farm & non-residential
Unpaid Principal Balance
With no related allowance recorded			1,650
With an allowance recorded	3,169		1,913
Recorded Investment
With no related allowance recorded			803
With an allowance recorded	3,169		1,913
Allowance for Loan Losses Allocated	380		110
Average Recorded Investment
With no related allowance recorded	401	2,044	1,471
With an allowance recorded	2,541	2,188	1,938
Interest Income Recognized
With no related allowance recorded		20	81
With an allowance recorded	25	20	79
Cash Basis Interest Recognized
With no related allowance recorded		20	81
With an allowance recorded	25	20	79
Agricultural
Unpaid Principal Balance
With no related allowance recorded	446		2,912
With an allowance recorded	4,755		4,847
Recorded Investment
With no related allowance recorded	446		2,826
With an allowance recorded	4,755		4,847
Allowance for Loan Losses Allocated	260		298
Average Recorded Investment
With no related allowance recorded	1,413	2,789	2,802
With an allowance recorded	4,801	5,082	4,864
Interest Income Recognized
With no related allowance recorded	4	5	123
With an allowance recorded		50	287
Cash Basis Interest Recognized
With no related allowance recorded	4	5	123
With an allowance recorded		$ 50	$ 287

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STOCK COMPENSATION (Details)	3 Months Ended
	Mar. 31, 2014 item
STOCK COMPENSATION
Number of share based compensation plans	4

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CONSOLIDATED BALANCE SHEETS (USD $) In Thousands, unless otherwise specified	Mar. 31, 2014	Dec. 31, 2013
Assets
Cash and due from banks	$ 21,508	$ 22,650
Federal funds sold	369	510
Cash and cash equivalents	21,877	23,160
Securities available for sale	236,364	230,396
Trading Assets	5,108	0
Mortgage loans held for sale	149	223
Loans	474,012	468,655
Allowance for loan losses	(5,616)	(5,441)
Net loans	468,396	463,214
Federal Home Loan Bank stock	5,981	6,731
Real estate owned, net	3,256	3,379
Bank premises and equipment, net	16,710	16,709
Interest receivable	3,484	3,618
Mortgage servicing rights	1,303	1,344
Goodwill	13,117	13,117
Other intangible assets	279	317
Other assets	6,630	8,371
Total assets	782,654	770,579
Deposits
Non-interest bearing	165,675	152,052
Time deposits, $100,000 and over	96,553	96,264
Other interest bearing	365,776	369,084
Total deposits	628,004	617,400
Repurchase agreements and other borrowings	11,402	12,867
Long-term Federal Home Loan Bank advances	57,380	57,847
Subordinated debentures	7,217	7,217
Interest payable	709	736
Other liabilities	5,992	6,839
Total liabilities	710,704	702,906
Stockholders' equity
Preferred stock, 300,000 shares authorized and unissued
Common stock, no par value; 10,000,000 shares authorized; 2,721,114 and 2,717,434 shares issued and outstanding on March 31, 2014 and December 31, 2013	12,580	12,570
Retained earnings	61,245	60,229
Accumulated other comprehensive income/(loss)	(1,875)	(5,126)
Total stockholders' equity	71,950	67,673
Total liabilities & stockholders' equity	$ 782,654	$ 770,579

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FAIR VALUE MEASUREMENTS (Details) (USD $) In Thousands, unless otherwise specified	Mar. 31, 2014	Dec. 31, 2013
Fair value on instruments on recurring basis
Available for sale investment securities	$ 236,364	$ 230,396
Trading Assets	5,108	0
Transfers from Level 1 to Level 2	0	0
Transfers from Level 2 to Level 1	0	0
Carrying Value
Fair value on instruments on recurring basis
Available for sale investment securities	236,364	230,396
Trading Assets	5,108
Fair Value
Fair value on instruments on recurring basis
Available for sale investment securities	210,341	230,396
Quoted Prices In Active Markets for Identical Assets (Level 1)
Fair value on instruments on recurring basis
Available for sale investment securities	291	289
Trading Assets	5,108
Significant Other Observable Inputs (Level 2)
Fair value on instruments on recurring basis
Available for sale investment securities	236,073	230,107
Recurring | Fair Value
Fair value on instruments on recurring basis
Available for sale investment securities	241,472	230,396
Trading Assets	5,108
Recurring | Quoted Prices In Active Markets for Identical Assets (Level 1)
Fair value on instruments on recurring basis
Available for sale investment securities	5,399	289
Trading Assets	5,108
Recurring | Significant Other Observable Inputs (Level 2)
Fair value on instruments on recurring basis
Available for sale investment securities	236,073	230,107
U.S. government agencies
Fair value on instruments on recurring basis
Available for sale investment securities	71,362	69,286
U.S. government agencies | Recurring | Fair Value
Fair value on instruments on recurring basis
Available for sale investment securities	71,362	69,286
U.S. government agencies | Recurring | Significant Other Observable Inputs (Level 2)
Fair value on instruments on recurring basis
Available for sale investment securities	71,362	69,286
States and municipals
Fair value on instruments on recurring basis
Available for sale investment securities	92,675	90,183
States and municipals | Recurring | Fair Value
Fair value on instruments on recurring basis
Available for sale investment securities	92,675	90,183
States and municipals | Recurring | Significant Other Observable Inputs (Level 2)
Fair value on instruments on recurring basis
Available for sale investment securities	92,675	90,183
Mortgage-backed - residential
Fair value on instruments on recurring basis
Available for sale investment securities	72,036	70,638
Mortgage-backed - residential | Recurring | Fair Value
Fair value on instruments on recurring basis
Available for sale investment securities	72,036	70,638
Mortgage-backed - residential | Recurring | Significant Other Observable Inputs (Level 2)
Fair value on instruments on recurring basis
Available for sale investment securities	72,036	70,638
Equity securities
Fair value on instruments on recurring basis
Available for sale investment securities	291	289
Equity securities | Recurring | Fair Value
Fair value on instruments on recurring basis
Available for sale investment securities	291	289
Equity securities | Recurring | Quoted Prices In Active Markets for Identical Assets (Level 1)
Fair value on instruments on recurring basis
Available for sale investment securities	$ 291	$ 289

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CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY (Parenthetical) (USD $)	3 Months Ended
	Mar. 31, 2014	Mar. 31, 2013
CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY
Dividends per share (in dollars per share)	$ 0.25	$ 0.24

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LOANS (Details 7) (USD $) In Thousands, unless otherwise specified	3 Months Ended
	Mar. 31, 2014	Mar. 31, 2013	Dec. 31, 2013
LOANS
Reserves to customers whose loan terms have been modified in troubled debt restructurings	$ 413		$ 428
Trouble debt restructuring defaulted on payment	0	0
Number of loans modified	$ 0	$ 0

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STOCK COMPENSATION (Tables)

3 Months Ended

Mar. 31, 2014

STOCK COMPENSATION

Summary of activity for the expired Stock Option Plans

					Weighted
			Weighted		Average
			Average		Remaining	Aggregate
			Exercise		Contractual	Intrinsic
	Shares		Price		Term	Value
Outstanding, beginning of year	19,100		$	31.50
Granted	—		—
Forfeited or expired	(6,375	)	33.56
Exercised	—		—
Outstanding, end of period	12,725		$	30.46	13.9 months	$	—
Vested and expected to vest	12,725		$	30.46	13.9 months	$	—
Exercisable, end of period	12,725		$	30.46	13.9 months	$	—

2005 Restricted Stock Grant Plan

Stock Based Compensation

Summary of changes in the Company's nonvested shares

			Weighted-Average			Fair
			Grant-Date			Value
Nonvested Shares	Shares		Fair Value			Per Share
Nonvested at January 1, 2014	15,565		$	280,016		$	17.99
Granted	7,475		181,194			24.24
Vested	(4,756	)	(84,518		)	17.77
Forfeited	—		—			—
Nonvested at March 31, 2014	18,284		$	376,692		$	20.60

2009 Stock Award Plan

Stock Based Compensation

Summary of changes in the Company's nonvested shares

			Weighted-Average			Fair
			Grant-Date			Value
Nonvested Shares	Shares		Fair Value			Per Share
Nonvested at January 1, 2014	900		$	20,880		$	23.20
Granted	—		—			—
Vested	(180	)	(4,176		)	23.20
Forfeited	—		—			—
Nonvested at March 31, 2014	720		$	16,704		$	23.20

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LOANS (Details 8) (USD $) In Thousands, unless otherwise specified	3 Months Ended
	Mar. 31, 2014	Dec. 31, 2013
Credit Quality Indicators
Loans	$ 474,012	$ 468,655
Pass
Credit Quality Indicators
Loans	414,708	410,284
Special Mention
Credit Quality Indicators
Loans	30,816	27,653
Substandard
Credit Quality Indicators
Loans	11,475	13,495
Doubtful
Credit Quality Indicators
Loans	25
Commercial
Credit Quality Indicators
Loans	31,774	34,654
Commercial | Pass
Credit Quality Indicators
Loans	29,977	32,771
Commercial | Special Mention
Credit Quality Indicators
Loans	1,241	1,587
Commercial | Substandard
Credit Quality Indicators
Loans	556	296
Real estate construction
Credit Quality Indicators
Loans	11,837	11,177
Real estate construction | Pass
Credit Quality Indicators
Loans	10,360	9,660
Real estate construction | Special Mention
Credit Quality Indicators
Loans	1,477	1,517
1-4 family residential
Credit Quality Indicators
Loans	195,957	194,388
1-4 family residential | Pass
Credit Quality Indicators
Loans	178,074	176,553
1-4 family residential | Special Mention
Credit Quality Indicators
Loans	10,372	10,346
1-4 family residential | Substandard
Credit Quality Indicators
Loans	7,486	7,489
1-4 family residential | Doubtful
Credit Quality Indicators
Loans	25
Multi-family residential
Credit Quality Indicators
Loans	19,028	16,420
Multi-family residential | Pass
Credit Quality Indicators
Loans	17,018	14,392
Multi-family residential | Special Mention
Credit Quality Indicators
Loans	1,564	1,579
Multi-family residential | Substandard
Credit Quality Indicators
Loans	446	449
Non-farm & non-residential
Credit Quality Indicators
Loans	129,952	126,791
Non-farm & non-residential | Pass
Credit Quality Indicators
Loans	124,648	120,195
Non-farm & non-residential | Special Mention
Credit Quality Indicators
Loans	3,872	5,327
Non-farm & non-residential | Substandard
Credit Quality Indicators
Loans	1,432	1,269
Agricultural
Credit Quality Indicators
Loans	68,476	68,002
Agricultural | Pass
Credit Quality Indicators
Loans	54,631	56,713
Agricultural | Special Mention
Credit Quality Indicators
Loans	12,290	7,297
Agricultural | Substandard
Credit Quality Indicators
Loans	1,555	3,992
Consumer
Credit Quality Indicators
Loans	16,788	17,065
Consumer | Non-performing
Credit Quality Indicators
Loans	$ 2	$ 16
Minimum period past due for loans to be considered as non-performing	90 days

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CHANGES IN ACCUMULATED OTHER COMPREHENSIVE INCOME BY COMPONENT (Tables)

3 Months Ended

Mar. 31, 2014

CHANGES IN ACCUMULATED OTHER COMPREHENSIVE INCOME BY COMPONENT

Schedule of changes in Accumulated Other Comprehensive Income (Loss) by Component

Changes in Accumulated Other Comprehensive Income by Component (1)  (unaudited)

(in thousands)

	Unrealized
	Gains and Losses on
	Available for Sale
	Securities
	For the Three Months Ending March 31
	2014			2013
Beginning Balance	$	(5,126	)	$	4,283
Unrealized holding gains (losses) for the period, net of tax	3,375			(1,061		)
Reclassification adjustment for:
Securities gains realized in income, net	(188		)	(289		)
Income taxes	(64		)	(98		)
	(124		)	(191		)
Net current period other comprehensive income	3,251			(1,252		)
Ending balance	$	(1,875	)	$	3,031

(1) All amounts are net of tax.

Significant amounts reclassified out of each component of AOCI

March 31, 2014

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	$	(188	)	Securities gains, net
	64			Provision for income taxes
	(124		)	Net of tax

March 31, 2013

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	$	(289	)	Securities gains, net
	98			Provision for income taxes
	(191		)	Net of tax

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CONSOLIDATED STATEMENTS OF CASH FLOWS (USD $) In Thousands, unless otherwise specified	3 Months Ended
	Mar. 31, 2014	Mar. 31, 2013
Cash Flows From Operating Activities
Net Income	$ 1,771	$ 1,709
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization	441	513
Securities amortization (accretion), net	150	319
Stock based compensation expense	27	24
Provision for loan losses	100	450
Securities available for sale gains, net	(188)	(289)
Trading assets gains, net	(71)
Interest income earned on trading assets	(37)
Originations of loans held for sale	(5,715)	(16,075)
Proceeds from sale of loans	5,946	17,053
Losses (gains) on other real estate	(46)	(5)
Gain on sale of mortgage loans	(157)	(626)
Changes in:
Interest receivable	134	100
Other assets	1,694	87
Interest payable	(27)
Other liabilities	(2,522)	197
Net cash from operating activities	1,500	3,457
Cash Flows From Investing Activities
Purchases of securities available for sale	(20,089)	(48,776)
Proceeds from principal payments, sales, maturities and calls of securities	19,086	16,625
Initial purchase of trading assets	(5,000)
Net change in loans	(5,423)	6,716
Proceeds from sale of Federal Home Loan Bank stock	750
Purchases of bank premises and equipment	(316)	(378)
Proceeds from the sale of other real estate	309	33
Net cash from investing activities	(10,683)	(25,780)
Cash Flows From Financing Activities:
Net change in deposits	10,604	3,928
Net change in repurchase agreements and other borrowings	(1,465)	4,647
Short-term advances from Federal Home Loan Bank	10,000
Payment on short-term Federal Home Loan Bank advances	(10,000)
Long-term advances from Federal Home Loan Bank	1,635
Payments on long-term Federal Home Loan Bank advances	(2,102)	(1,611)
Payments on note payable		(200)
Purchase of common stock	(91)	(38)
Dividends paid	(681)	(654)
Net cash from financing activities	7,900	6,072
Net change in cash and cash equivalents	(1,283)	(16,251)
Cash and cash equivalents at beginning of period	23,160	31,764
Cash and cash equivalents at end of period	21,877	15,513
Cash paid during the year for:
Interest expense	960	822
Income taxes		375
Supplemental disclosures of non-cash investing activities
Real estate acquired through foreclosure	$ 141	$ 65

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CONSOLIDATED BALANCE SHEETS (Parenthetical) (USD $)	Mar. 31, 2014	Dec. 31, 2013
CONSOLIDATED BALANCE SHEETS
Preferred stock, shares authorized	300,000	300,000
Preferred stock, shares unissued	300,000	300,000
Common stock, par value (in dollars per share)	$ 0	$ 0
Common stock, shares authorized	10,000,000	10,000,000
Common stock, shares issued	2,721,114	2,717,434
Common stock, shares outstanding	2,721,114	2,717,434

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SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Policies)

3 Months Ended

Mar. 31, 2014

SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Basis of Presentation

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

Nature of Operations

Nature of Operations:  The Bank operates under a state bank charter and provides full banking services, including trust services, to customers located in Bourbon, Clark, Elliott, Fayette, Harrison, Jessamine, Rowan, Madison, Scott, Woodford and adjoining counties in Kentucky.  Management continues to consider opportunities for branch expansion and will also consider acquisition opportunities that help advance its strategic objectives.  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.

Estimates in the Financial Statements

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.  The allowance for loan losses, loss contingencies, mortgage servicing rights, real estate owned, goodwill and fair value of financial instruments are particularly subject to change.

Trading Assets

Trading Assets:  The Company engages in trading activities for its own account.  Securities that are held principally for resale in the near term are recorded at fair value with changes in fair value included in earnings.  Interest and dividends are included in net interest income.

Loss Contingencies

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.

Pension Matter

Pension Matter:  The Company terminated the Kentucky Bancshares, Inc. Retirement Plan and Trust (the “Plan”) in a standard termination, with a termination date of December 31, 2008.  Prior to such termination, the Pension Protection Act of 2006 (“PPA”) had amended Internal Revenue Code (“IRC”) Section 417(e)(3) in part by changing the definition of “applicable interest rate” in a manner that in most cases (when combined with other changes to IRC Section 417(e)(3)) would result in a decrease in the value of a participant’s or beneficiary’s plan benefits under pension plans such as the Company’s Plan with the new definition applicable (for most plans, including the Plan) to lump sums with annuity starting dates in or after the 2008 plan year.  The Plan had determined in mid-2008 to comply with IRC Section 417(e)(3), as amended by PPA, by using the assumptions governing minimum lump sums, rather than by using the pre-PPA minimum lump sum assumptions, and operated the Plan in compliance with that decision.  As permitted by the IRC, the Plan was amended on February 24, 2009 (after the termination of the Plan on December 31, 2008) to formalize that decision in accordance with Section 1107 of PPA.

The Internal Revenue Service issued a favorable determination as to the Plan termination in July 2010.  Subsequent to Plan termination and distributions to Plan participants, the Plan was selected for audit by the Pension Benefit Guaranty Corporation (“PBGC”).  The PBGC asserted that the February, 2009 amendment to the Plan violated PBGC Regulation Section 4041.8(a) because the amendment served to lower benefits to Plan beneficiaries.  The PBGC filed a Complaint in May 2013 in United States District Court (Eastern District of Kentucky) to require the Company to make additional distributions to Plan beneficiaries.  On March 17, 2014, the United States District Court (Eastern District of Kentucky) issued an Opinion and Order entering judgment in favor of the PBGC and ruling that the Company must comply with the PBGC’s determination respecting the Plan.  The Company is appraising its options with respect to this judgment, including an appeal of the decision.  However, in light of the court’s opinion, the Company accrued approximately $1.6 million as of December 31, 2013 for this matter.  The accrued balance for this matter remains $1.6 million at March 31, 2014.    Moreover, in the event the subject court decision is not overturned, the Company believes it has claims for further contribution towards payment of this liability from professionals who assisted the Company in the termination of the Plan.

Reclassifications

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

Adoption of New Accounting Standards

ASU 2014-01- Investments—Equity Method and Joint Ventures (Topic 323): Accounting for Investments in Qualified Affordable Housing Projects (a consensus of the FASB Emerging Issues Task Force): In January 2014, Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update 2014-01, Equity Method and Joint Ventures (Topic 323): Accounting for Investments in Qualified Affordable Housing Projects (a consensus of the FASB Emerging Issues Task Force). The ASU permits reporting entities to make an accounting policy election to account for their investments in qualified affordable housing projects using the proportional amortization method if certain conditions are met. Under the proportional amortization method, an entity amortizes the initial cost of the investment in proportion to the tax credits and other tax benefits received and recognize the net investment performance in the income statement as a component of income tax expense. Additionally, a reporting entity should disclose information that enables users of its financial statement to understand the nature of its investments in qualified affordable housing projects, and the effect of the measurement of its investments in qualified affordable housing projects and the related tax credits on its financial position and results of operations. The new guidance is effective for annual periods, and interim reporting periods within those annual periods, beginning after December 15, 2014. The adoption of this guidance will not have a material impact on the Company’s consolidated financial statements, but may impact the presentation of the Company’s investments in qualified affordable housing projects. Additionally, the adoption of this guidance will require additional disclosures.

XML

Document and Entity Information	3 Months Ended
	Mar. 31, 2014	Apr. 30, 2014
Document and Entity Information
Entity Registrant Name	KENTUCKY BANCSHARES INC /KY/
Entity Central Index Key	0001000232
Document Type	10-Q
Document Period End Date	Mar. 31, 2014
Amendment Flag	false
Current Fiscal Year End Date	--12-31
Entity Current Reporting Status	Yes
Entity Filer Category	Non-accelerated Filer
Entity Common Stock, Shares Outstanding		2,721,142
Document Fiscal Year Focus	2014
Document Fiscal Period Focus	Q1

XML

SECURITIES (Tables)

3 Months Ended

Mar. 31, 2014

SECURITIES

Schedule of securities available for sale

(in thousands)

			Gross		Gross
	Amortized		Unrealized		Unrealized			Fair
	Cost		Gains		Losses			Value
Available for Sale
March 31, 2014
U.S. government agencies	$	74,612	$	14	$	(3,264	)	$	71,362
States and political subdivisions	91,008		2,805		(1,138		)	92,675
Mortgage-backed - residential	73,315		118		(1,397		)	72,036
Equity securities	270		21		—			291
Total	$	239,205	$	2,958	$	(5,799	)	$	236,364
December 31, 2013
U.S. government agencies	$	73,930	$	51	$	(4,695	)	$	69,286
States and political subdivisions	91,043		1,614		(2,474		)	90,183
Mortgage-backed - residential	72,920		44		(2,326		)	70,638
Equity securities	270		19		—			289
Total	$	238,163	$	1,728	$	(9,495	)	$	230,396

Schedule of amortized cost and fair value of securities by contractual maturity

(in thousands)

	Amortized		Fair
	Cost		Value
Due in one year or less	$	623	$	625
Due after one year through five years	8,638		8,714
Due after five years through ten years	84,800		83,131
Due after ten years	71,559		71,567
	165,620		164,037
Mortgage-backed - residential	73,315		72,036
Equity	270		291
Total	$	239,205	$	236,364

Schedule of securities with unrealized losses not recognized in income

March 31, 2014

	Less than 12 Months					12 Months or More					Total
	Fair		Unrealized			Fair		Unrealized			Fair		Unrealized
Description of Securities	Value		Loss			Value		Loss			Value		Loss
U.S. Government agencies	$	46,111	$	(1,908	)	$	19,524	$	(1,356	)	$	65,635	$	(3,264	)
States and municipals	12,701		(459		)	7,763		(679		)	20,464		(1,138		)
Mortgage-backed - residential	45,918		(1,017		)	6,737		(380		)	52,655		(1,397		)
Total temporarily impaired	$	104,730	$	(3,384	)	$	34,024	$	(2,415	)	$	138,754	$	(5,799	)

December 31, 2013

	Less than 12 Months					12 Months or More					Total
	Fair		Unrealized			Fair		Unrealized			Fair		Unrealized
Description of Securities	Value		Loss			Value		Loss			Value		Loss
U.S. Government agencies	$	57,203	$	(3,813	)	$	8,117	$	(883	)	$	65,320	$	(4,695	)
States and municipals	32,289		(2,106		)	2,879		(368		)	35,168		(2,474		)
Mortgage-backed - residential	62,126		(2,326		)	—		—			62,126		(2,326		)
Total temporarily impaired	$	151,618	$	(8,244	)	$	10,997	$	(1,251	)	$	162,614	$	(9,495	)

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CONSOLIDATED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME (USD $) In Thousands, except Per Share data, unless otherwise specified	3 Months Ended
	Mar. 31, 2014	Mar. 31, 2013
INTEREST INCOME:
Loans, including fees	$ 5,761	$ 5,726
Securities
Taxable	675	479
Tax exempt	733	668
Trading assets	37
Other	76	83
Total interest income	7,282	6,956
INTEREST EXPENSE:
Deposits	539	590
Repurchase agreements and other borrowings	23	7
Federal Home Loan Bank advances	314	166
Subordinated debentures	57	59
Total interest expense	933	822
Net interest income	6,349	6,134
Provision for loan losses	100	450
Net interest income after provision	6,249	5,684
NON-INTEREST INCOME:
Service charges	1,011	1,020
Loan service fee income, net	29	(52)
Trust department income	222	177
Gain on sale of available for sale securities, net	188	289
Gain on trading assets	71
Gain on sale of mortgage loans	157	626
Brokerage income	80	68
Debit card interchange income	479	448
Other	32	27
Total other income	2,269	2,603
NON-INTEREST EXPENSE:
Salaries and employee benefits	3,602	3,290
Occupancy expenses	848	718
Repossession expenses, net	(2)	67
FDIC Insurance	128	132
Legal and professional fees	136	153
Data processing	337	348
Debit card expenses	234	223
Amortization	37	57
Advertising and marketing	209	184
Taxes other than payroll, property and income	225	225
Telephone	89	67
Postage	72	75
Loan fees	77	123
Other	462	514
Total other expenses	6,454	6,176
Income before taxes	2,064	2,111
Income taxes	293	402
Net income	1,771	1,709
Other Comprehensive Income, net of tax:
Change in Unrealized Gains (losses) on Securities	3,251	(1,252)
Comprehensive Income	$ 5,022	$ 457
Earnings per share
Basic (in dollars per share)	$ 0.66	$ 0.63
Diluted (in dollars per share)	$ 0.66	$ 0.63
Dividends per share (in dollars per share)	$ 0.25	$ 0.24

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EARNINGS PER SHARE

3 Months Ended

Mar. 31, 2014

EARNINGS PER SHARE

EARNINGS PER SHARE

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 options.

The factors used in the earnings per share computation follow:

	Three Months Ended
	March 31
	2014		2013
	(in thousands)
Basic Earnings Per Share
Net Income	$	1,771	$	1,709
Weighted average common shares outstanding	2,702		2,703
Basic earnings per share	$	0.66	$	0.63
Diluted Earnings Per Share
Net Income	$	1,771	$	1,709
Weighted average common shares outstanding	2,702		2,703
Add dilutive effects of assumed vesting of stock grants	—		—
Weighted average common and dilutive potential common shares outstanding	2,702		2,703
Diluted earnings per share	$	0.66	$	0.63

Stock options for 12,725 shares of common stock for the three months ended March 31, 2014 and 19,500 shares of common stock for three months ended March 31, 2013 were excluded from diluted earnings per share because their impact was antidilutive.

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REAL ESTATE OWNED

3 Months Ended

Mar. 31, 2014

REAL ESTATE OWNED

REAL ESTATE OWNED

4.  REAL ESTATE OWNED

Activity in real estate owned, net was as follows:

	Three Months Ended
	2014			2013
	(in thousands)
Beginning of year	$	3,379		$	4,168
Additions	141			82
Sales	(277		)	(28		)
Additions to valuation allowance, net	—			—
Recovery from sale in valuation allowance	13			—
End of period	$	3,256		$	4,222

Activity in the valuation allowance was as follows:

	Three Months Ended
	2014			2013
	(in thousands)
Beginning of year	$	1,524		$	1,668
Additions to valuation allowance, net	—			—
Recovery from sale	(13		)	—
End of period	$	1,511		$	1,668

Expenses related to foreclosed assets include:

	Three Months Ended
	2014			2013
	(in thousands)
Net loss (gain) on sales	$	(46	)	$	(5	)
Additions to valuation allowance, net	—			—
Operating expenses (receipts), net of rental income	(2		)	67
Repossession expenses, net	(2		)	67
End of period	$	(48	)	$	62

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FAIR VALUE MEASUREMENTS (Tables)

3 Months Ended

Mar. 31, 2014

FAIR VALUE MEASUREMENTS

Schedule of assets measured at fair value on a recurring basis

Fair Value Measurements at March 31, 2014 Using (In thousands):

			Quoted Prices
			In Active
			Markets for		Significant Other		Significant
			Identical		Observable		Unobservable
	Fair		Assets		Inputs		Inputs
Description	Value		(Level 1)		(Level 2)		(Level 3)
U. S. government agencies	$	71,362	$	—	$	71,362	$	—
States and municipals	92,675		—		92,675		—
Mortgage-backed - residential	72,036		—		72,036		—
Equity securities	291		291		—		—
Trading Assets	5,108		5,108		—		—
Total	$	241,472	$	5,399	$	236,073	$	—

Available for Sale Investment Securities Fair Value Measurements at December 31, 2013 Using (In thousands):

			Quoted Prices
			In Active
			Markets for		Significant Other		Significant
			Identical		Observable		Unobservable
	Fair		Assets		Inputs		Inputs
Description	Value		(Level 1)		(Level 2)		(Level 3)
U. S. government agencies	$	69,286	$	—	$	69,286	$	—
States and municipals	90,183		—		90,183		—
Mortgage-backed - residential	70,638		—		70,638		—
Equity securities	289		289		—		—
Total	$	230,396	$	289	$	230,107	$	—

Schedule of assets measured at fair value on a non-recurring basis

(In thousands)

	Fair Value Measurements at March 31, 2014 Using:
			Quoted Prices
			In Active		Other
			Markets for	Significant	Significant
			Identical	Observable	Unobservable
	Carrying		Assets	Inputs	Inputs
Description	Value		(Level 1)	(Level 2)	(Level 3)
Impaired loans:
Real Estate Mortgage:
1-4 family residential	$	300	—	—	$	300
Multi-family residential	199		—	—	199
Non-farm & non-residential	1,022		—	—	1,022
Agricultural	220				220
Other real estate owned:
Residential	1,246		—	—	1,246
Loan servicing rights	175		—	—	175

(In thousands)

	Fair Value Measurements at December 31, 2013 Using:
			Quoted Prices
			In Active		Other
			Markets for	Significant	Significant
			Identical	Observable	Unobservable
	Carrying		Assets	Inputs	Inputs
Description	Value		(Level 1)	(Level 2)	(Level 3)
Impaired loans:
Real Estate Mortgage:
1-4 family residential	$	1,420	—	—	$	1,420
Multi-family residential	199		—	—	199
Non-farm & non-residential	36		—	—	36
Agricultural	275		—	—	275
Other real estate owned:
Residential	1,361		—	—	1,361
Loan servicing rights	201		—	—	201

Schedule of quantitative information about level 3 fair value measurements for financial instruments measured at fair value on a non-recurring basis

March 31, 2014

(In thousands)

				Range
	Fair	Valuation	Unobservable	(Weighted
	Value	Technique(s)	Input(s)	Average)
Impaired loans
Real estate mortgage:
1-4 family residential	300	sales comparison	adjustment for	0%-99%
			differences	(11%)
			between the
			comparable sales
Multi-family residential	199	sales comparison	adjustment for	12%-32%
			differences	(16%)
			between the
			comparable sales
Non-farm & non-residential	1,022	sales comparison	adjustment for	0%-61%
			differences	(20%)
			between the
			comparable sales
Agricultural:	220	sales comparison	adjustment for	5%-44%
			differences	(24%)
			between the
			comparable sales
Other real estate owned:
Residential	1,246	sales comparison	adjustment for	0%-17%
			differences	(6%)
			between the
			comparable sales
		income approach	capitalization rate	8%-8%
				(8%)
Loan Servicing Rights	175	discounted cash flow	constant prepayment	7%-19%
			rates	(9%)

December 31, 2013

(In thousands)

				Range
	Fair	Valuation	Unobservable	(Weighted
	Value	Technique(s)	Input(s)	Average)
Impaired loans
Real estate mortgage:
1-4 family residential	1,420	sales comparison	adjustment for	0%-99%
			differences	(14%)
			between the
			comparable sales
Multi-family residential	199	sales comparison	adjustment for	12%-32%
			differences	(22%)
			between the
			comparable sales
Non-farm & non-residential	36	sales comparison	adjustment for	0%-61%
			differences	(31%)
			between the
			comparable sales
Agricultural	275	sales comparison	adjustment for	5%-44%
			differences	(20%)
			between the
			comparable sales
Other real estate owned:
Residential	1,361	sales comparison	adjustment for	0%-33%
			differences	(4%)
			between the
			comparable sales
		income approach	capitalization rate	8%-8%
				(8%)
Loan Servicing Rights	201	discounted cash	constant prepayment	7%-23%
		flow	rates	(10%)

Schedule of carrying amounts and estimated fair values of financial instruments

March 31, 2014:

(in thousands)

	Carrying
	Value		Level 1		Level 2		Level 3		Total
Financial assets
Cash and cash equivalents	$	21,877	$	21,877	$	—	$	—	$	21,877
Securities	236,364		291		236,073		—		236,364
Trading Assets	5,108		5,108		—				5,108
Mortgage loans held for sale	149		—		151		—		151
Loans, net	468,396		—		—		468,085		468,085
FHLB Stock	5,981		—		—		—		N/A
Interest receivable	3,484		—		1,464		2,020		3,484
Financial liabilities
Deposits	$	628,004	$	442,065	$	187,894	$	—	$	629,959
Securities sold under agreements to repurchase and other borrowings	11,402		—		11,546		—		11,546
FHLB advances	57,380		—		53,066		—		53,066
Subordinated Debentures	7,217		—		—		7,217		7,217
Interest payable	709		—		700		9		709

December 31, 2013:

(in thousands)

	Carrying
	Value		Level 1		Level 2		Level 3		Total
Financial assets
Cash and cash equivalents	$	23,160	$	23,160	$	—	$	—	$	23,160
Securities	230,396		289		230,107		—		230,396
Mortgage loans held for sale	223		—		229		—		229
Loans, net	463,214		—		—		459,796		459,796
FHLB Stock	6,731		—		—		—		N/A
Interest receivable	3,618		—		1,315		2,303		3,618
Financial liabilities
Deposits	$	617,400	$	428,239	$	191,523	$	—	$	619,762
Securities sold under agreements to repurchase and other borrowings	12,867		—		13,013		—		13,013
FHLB advances	57,847		—		52,220		—		52,220
Subordinated Debentures	7,217		—		—		7,217		7,217
Interest Payable	736				727		9		736

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LOANS (Tables)

3 Months Ended

Mar. 31, 2014

LOANS

Schedule of loans

(in thousands)

	3/31/14		12/31/13
Commercial	$	31,774	$	34,654
Real estate construction	11,837		11,177
Real estate mortgage:
1-4 family residential	195,957		194,388
Multi-family residential	19,028		16,420
Non-farm & non-residential	129,952		126,791
Agricultural	68,476		68,002
Consumer	16,788		17,065
Other	200		158
Total	$	474,012	$	468,655

Schedule of activity in the allowance for loan losses

	Three Months Ended March 31, 2014
	(in thousands)
	Beginning									Ending
	Balance		Charge-offs		Recoveries		Provision			Balance
Commercial	$	230	$	200	$	—	$	178		$	208
Real estate Construction	358		—		4		(33		)	329
Real estate mortgage:
1-4 family residential	2,169		63		12		(7		)	2,111
Multi-family residential	427		—		—		(26		)	401
Non-farm & non-residential	564		—		367		(1		)	930
Agricultural	578		—		24		(49		)	553
Consumer	548		77		18		61			550
Other	51		97		87		(30		)	11
Unallocated	516		—		—		7			523
	$	5,441	$	437	$	512	$	100		$	5,616

	Three Months Ended March 31, 2013
	(in thousands)
	Beginning									Ending
	Balance		Charge-offs		Recoveries		Provision			Balance
Commercial	$	150	$	6	$	28	$	(37	)	$	135
Real estate Construction	918		578		5		152			497
Real estate mortgage:
1-4 family residential	1,989		125		26		84			1,974
Multi-family residential	414		—		—		79			493
Non-farm & non-residential	628		—		8		(25		)	611
Agricultural	845		86		2		(14		)	747
Consumer	517		148		11		131			511
Other	54		137		126		56			99
Unallocated	532		—		—		24			556
	$	6,047	$	1,080	$	206	$	450		$	5,623

Schedule of allowance for loan losses and the recorded investment in loans by portfolio segment and based on impairment method

As of March 31, 2014

(in thousands)

	Individually		Collectively
	Evaluated for		Evaluated for
	Impairment		Impairment		Total
Allowance for Loan Losses:
Commercial	$	—	$	208	$	208
Real estate construction	—		329		329
Real estate mortgage:
1-4 family residential	130		1,981		2,111
Multi-family residential	76		325		401
Non-farm & non-residential	380		550		930
Agricultural	260		293		553
Consumer	—		550		550
Other	—		11		11
Unallocated	—		523		523
	$	846	$	4,770	$	5,616
Loans:
Commercial	$	—	$	31,774	$	31,774
Real estate construction	—		11,837		11,837
Real estate mortgage:
1-4 family residential	1,771		194,186		195,957
Multi-family residential	275		18,753		19,028
Non-farm & non-residential	3,169		126,783		129,952
Agricultural	5,201		63,275		68,476
Consumer	—		16,788		16,788
Other	—		200		200
	$	10,416	$	463,596	$	474,012

As of December 31, 2013

(in thousands)

	Individually		Collectively
	Evaluated for		Evaluated for
	Impairment		Impairment		Total
Allowance for Loan Losses:
Commercial	$	—	$	230	$	230
Real estate construction	—		358		358
Real estate mortgage:
1-4 family residential	228		1,941		2,169
Multi-family residential	76		351		427
Non-farm & non-residential	110		454		564
Agricultural	298		280		578
Consumer	—		548		548
Other	—		51		51
Unallocated	—		516		516
	$	712	$	4,729	$	5,441
Loans:
Commercial	$	—	$	34,654	$	34,654
Real estate construction	—		11,177		11,177
Real estate mortgage:
1-4 family residential	2,873		191,515		194,388
Multi-family residential	274		16,146		16,420
Non-farm & non-residential	2,716		124,075		126,791
Agricultural	7,673		60,329		68,002
Consumer	—		17,065		17,065
Other	—		158		158
	$	13,536	$	455,119	$	468,655

Schedule of loans individually evaluated for impairment by class of loans

The following table presents loans individually evaluated for impairment by class of loans as of March 31, 2014 (in thousands):

									Year to Date		Year to Date
	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:
Commercial	$	—	$	—	$	—	$	—	$	—	$	—
Real estate construction	—		—		—		—		—		—
Real estate mortgage:
1-4 family residential	911		911		—		396		—		—
Multi-family residential	—		—		—		—		—		—
Non-farm & non-residential	—		—		—		401		—		—
Agricultural	446		446		—		1,413		4		4
Consumer	—		—		—		—		—		—
Other	—		—		—		—		—		—
With an allowance recorded:
Commercial	—		—		—		—		—		—
Real estate construction	—		—		—		—		—		—
Real estate mortgage:
1-4 family residential	860		860		130		1,470		6		6
Multi-family residential	275		275		76		275		4		4
Non-farm & non-residential	3,169		3,169		380		2,541		25		25
Agricultural	4,755		4,755		260		4,801		—		—
Consumer	—		—		—		—		—		—
Other	—		—		—		—		—		—
Total	$	10,416	$	10,416	$	846	$	11,297	$	39	$	39

The following table presents loans individually evaluated for impairment by class of loans as of December 31, 2013 (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:
Commercial	$	—	$	—	$	—	$	—	$	—	$	—
Real estate construction	—		—		—		—		—		—
Real estate mortgage:
1-4 family residential	824		793		—		1,217		28		28
Multi-family residential	—		—		—		—		—		—
Non-farm & non-residential	1,650		803		—		1,471		81		81
Agricultural	2,912		2,826		—		2,802		123		123
Consumer	—		—		—		—		—		—
Other	—		—		—		—		—		—
With an allowance recorded:
Commercial	—		—		—		—		—		—
Real estate construction	—		—		—		607		—		—
Real estate mortgage
1-4 family residential	2,080		2,080		228		1,349		96		96
Multi-family residential	274		274		76		443		3		3
Non-farm & non-residential	1,913		1,913		110		1,938		79		79
Agricultural	4,847		4,847		298		4,864		287		287
Consumer	—		—		—		—		—		—
Other	—		—		—		—		—		—
Total	$	14,501	$	13,536	$	712	$	14,691	$	697	$	697

The following table presents loans individually evaluated for impairment by class of loans as of March 31, 2013 (in thousands):

			Year to Date		Year to Date
	Average		Interest		Cash Basis
	Recorded		Income		Interest
	Investment		Recognized		Recognized
With no related allowance recorded:
Commercial	$	—	$	—	$	—
Real estate construction	—		—		—
Real estate mortgage:
1-4 family residential	1,570		19		19
Multi-family residential	—		—		—
Non-farm & non-residential	2,044		20		20
Agricultural	2,789		5		5
Consumer	—		—		—
Other	—		—		—
With an allowance recorded:
Commercial	—		—		—
Real estate construction	1,517		—
Real estate mortgage:
1-4 family residential	1,263		14		14
Multi-family residential	570		3		3
Non-farm & non-residential	2,188		20		20
Agricultural	5,082		50		50
Consumer	—		—		—
Other	—		—		—
Total	$	17,023	$	131	$	131

Schedule of recorded investment in nonaccrual, loans past due over 90 days still on accrual and accruing troubled debt restructurings by class of loans

			Loans Past Due
			Over 90 Days		Accruing
As of March 31, 2014			Still		Troubled Debt
(in thousands)	Nonaccrual		Accruing		Restructurings
Commercial	$	299	$	—	$	—
Real estate construction	—		—		—
Real estate mortgage:
1-4 family residential	2,059		634		490
Multi-family residential	274		—		—
Non-farm & non-residential	970		—		1,865
Agricultural	217		232		4,530
Consumer	1		1		—
Total	$	3,820	$	867	$	6,885

			Loans Past Due
			Over 90 Days		Accruing
As of December 31, 2013			Still		Troubled Debt
(in thousands)	Nonaccrual		Accruing		Restructurings
Commercial	$	—	$	—	$	—
Real estate construction	—		—		—
Real estate mortgage:
1-4 family residential	1,171		314		493
Multi-family residential	275		—		—
Non-farm & non-residential	803		—		1,878
Agricultural	717		232		4,530
Consumer	8		8		—
Total	$	2,974	$	554	$	6,901

Schedule of aging of the recorded investment in past due and non-accrual loans

	30-59		60-89		Loans Past Due				Total
As of March 31, 2014	Days		Days		Over 90 Days				Past Due &		Loans Not
(in thousands)	Past Due		Past Due		Still Accruing		Non-accrual		Non-accrual		Past Due
Commercial	$	147	$	—	$	—	$	299	$	446	$	31,328
Real estate construction	—		—		—		—		—		11,837
Real estate mortgage:
1-4 family residential	2,328		49		634		2,059		5,070		190,887
Multi-family residential	—		—		—		274		274		18,754
Non-farm & non-residential	194		—		—		970		1,164		128,788
Agricultural	340		—		232		217		789		67,687
Consumer	82		26		1		1		110		16,678
Other	—		—		—		—		—		200
Total	$	3,091	$	75	$	867	$	3,820	$	7,853	$	466,159

	30-59		60-89		Greater than				Total
As of December 31, 2013	Days		Days		90 Days				Past Due &		Loans Not
(in thousands)	Past Due		Past Due		Past Due		Non-accrual		Non-accrual		Past Due
Commercial	$	49	$	—	$	—	$	—	$	49	$	34,605
Real estate construction	175		—		—		—		175		11,002
Real estate mortgage:
1-4 family residential	1,981		1,285		314		1,171		4,751		189,637
Multi-family residential	—		—		—		275		275		16,145
Non-farm & non-residential	503		—		—		803		1,306		125,485
Agricultural	155		—		232		717		1,104		66,898
Consumer	102		27		8		8		145		16,920
Other	—		—		—		—		—		158
Total	$	2,965	$	1,312	$	554	$	2,974	$	7,805	$	460,850

Schedule of risk category of loans by class of loans

As of March 31, 2014			Special
(in thousands)	Pass		Mention		Substandard		Doubtful
Commercial	$	29,977	$	1,241	$	556	$	—
Real estate construction	10,360		1,477		—		—
Real estate mortgage:
1-4 family residential	178,074		10,372		7,486		25
Multi-family residential	17,018		1,564		446		—
Non-farm & non-residential	124,648		3,872		1,432		—
Agricultural	54,631		12,290		1,555		—
Total	$	414,708	$	30,816	$	11,475	$	25

As of December 31, 2013			Special
(in thousands)	Pass		Mention		Substandard		Doubtful
Commercial	$	32,771	$	1,587	$	296	$	—
Real estate construction	9,660		1,517		—		—
Real estate mortgage:
1-4 family residential	176,553		10,346		7,489		—
Multi-family residential	14,392		1,579		449		—
Non-farm & non-residential	120,195		5,327		1,269		—
Agricultural	56,713		7,297		3,992		—
Total	$	410,284	$	27,653	$	13,495	$	—

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FAIR VALUE MEASUREMENTS

3 Months Ended

Mar. 31, 2014

FAIR VALUE MEASUREMENTS

FAIR VALUE MEASUREMENTS

8.  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.

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

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

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

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

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

Investment Securities 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.  Such adjustments are usually significant and typically result in a Level 3 classification of the inputs for determining fair value.

Other Real Estate Owned:  The fair value of certain commercial and residential real estate properties classified as other real estate owned (OREO) are generally based on third party appraisals of the property, resulting in a Level 3 classification.  In cases where the carrying amount exceeds the fair value, less costs to sell, an impairment loss is recognized.

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.

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 March 31, 2014 Using (In thousands):

			Quoted Prices
			In Active
			Markets for		Significant Other		Significant
			Identical		Observable		Unobservable
	Fair		Assets		Inputs		Inputs
Description	Value		(Level 1)		(Level 2)		(Level 3)
U. S. government agencies	$	71,362	$	—	$	71,362	$	—
States and municipals	92,675		—		92,675		—
Mortgage-backed - residential	72,036		—		72,036		—
Equity securities	291		291		—		—
Trading Assets	5,108		5,108		—		—
Total	$	241,472	$	5,399	$	236,073	$	—

Available for Sale Investment Securities Fair Value Measurements at December 31, 2013 Using (In thousands):

			Quoted Prices
			In Active
			Markets for		Significant Other		Significant
			Identical		Observable		Unobservable
	Fair		Assets		Inputs		Inputs
Description	Value		(Level 1)		(Level 2)		(Level 3)
U. S. government agencies	$	69,286	$	—	$	69,286	$	—
States and municipals	90,183		—		90,183		—
Mortgage-backed - residential	70,638		—		70,638		—
Equity securities	289		289		—		—
Total	$	230,396	$	289	$	230,107	$	—

The Company held no trading assets at December 31, 2013.  Also, there were no transfers between level 1 and level 2 during 2014 or 2013.

Assets measured at fair value on a non-recurring basis are summarized below:

(In thousands)

	Fair Value Measurements at March 31, 2014 Using:
			Quoted Prices
			In Active		Other
			Markets for	Significant	Significant
			Identical	Observable	Unobservable
	Carrying		Assets	Inputs	Inputs
Description	Value		(Level 1)	(Level 2)	(Level 3)
Impaired loans:
Real Estate Mortgage:
1-4 family residential	$	300	—	—	$	300
Multi-family residential	199		—	—	199
Non-farm & non-residential	1,022		—	—	1,022
Agricultural	220				220
Other real estate owned:
Residential	1,246		—	—	1,246
Loan servicing rights	175		—	—	175

(In thousands)

	Fair Value Measurements at December 31, 2013 Using:
			Quoted Prices
			In Active		Other
			Markets for	Significant	Significant
			Identical	Observable	Unobservable
	Carrying		Assets	Inputs	Inputs
Description	Value		(Level 1)	(Level 2)	(Level 3)
Impaired loans:
Real Estate Mortgage:
1-4 family residential	$	1,420	—	—	$	1,420
Multi-family residential	199		—	—	199
Non-farm & non-residential	36		—	—	36
Agricultural	275		—	—	275
Other real estate owned:
Residential	1,361		—	—	1,361
Loan servicing rights	201		—	—	201

Impaired loans, which are measured for impairment using the fair value of the collateral for collateral dependent loans, had a carrying amount of $1.7 million, which includes a valuation allowance of $555 thousand at March 31, 2014.  During the first three months of 2014, one new loan became impaired resulting in an additional provision for loan losses of $282 thousand.  The total allowance for specific impaired loans increased $134 thousand for the three months ending March 31, 2014 and decreased $454 thousand for the three months ending March 31, 2013.

Other real estate owned, which is measured at fair value less costs to sell, had a net carrying amount of $1.2 million, which is made up of the outstanding balance of $2.7 million, net of a valuation allowance of $1.5 million at March 31, 2014.  The Company recorded no write-downs of other real estate owned properties for the three months ending both March 31, 2014 and 2013.

Loan servicing rights, which are carried at the lower of cost or fair value, were carried at their fair value of $175 thousand, which is made up of the outstanding balance of $229 thousand, net of a valuation allowance of $54 thousand at March 31, 2014, resulting in a net recovery of prior write-downs of $5 thousand for the three months ending March 31, 2014 and write-downs of $73 thousand for the three months ending March 31, 2013.  At December 31, 2013, loan servicing rights were carried at their fair value of $201 thousand, which is made up of the outstanding balance of $260 thousand, net of a valuation allowance of $59 thousand.

The following table presents quantitative information about level 3 fair value measurements for financial instruments measured at fair value on a non-recurring basis at March 31, 2014 and December 31, 2013:

March 31, 2014

(In thousands)

				Range
	Fair	Valuation	Unobservable	(Weighted
	Value	Technique(s)	Input(s)	Average)
Impaired loans
Real estate mortgage:
1-4 family residential	300	sales comparison	adjustment for	0%-99%
			differences	(11%)
			between the
			comparable sales
Multi-family residential	199	sales comparison	adjustment for	12%-32%
			differences	(16%)
			between the
			comparable sales
Non-farm & non-residential	1,022	sales comparison	adjustment for	0%-61%
			differences	(20%)
			between the
			comparable sales
Agricultural:	220	sales comparison	adjustment for	5%-44%
			differences	(24%)
			between the
			comparable sales
Other real estate owned:
Residential	1,246	sales comparison	adjustment for	0%-17%
			differences	(6%)
			between the
			comparable sales
		income approach	capitalization rate	8%-8%
				(8%)
Loan Servicing Rights	175	discounted cash flow	constant prepayment	7%-19%
			rates	(9%)

December 31, 2013

(In thousands)

				Range
	Fair	Valuation	Unobservable	(Weighted
	Value	Technique(s)	Input(s)	Average)
Impaired loans
Real estate mortgage:
1-4 family residential	1,420	sales comparison	adjustment for	0%-99%
			differences	(14%)
			between the
			comparable sales
Multi-family residential	199	sales comparison	adjustment for	12%-32%
			differences	(22%)
			between the
			comparable sales
Non-farm & non-residential	36	sales comparison	adjustment for	0%-61%
			differences	(31%)
			between the
			comparable sales
Agricultural	275	sales comparison	adjustment for	5%-44%
			differences	(20%)
			between the
			comparable sales
Other real estate owned:
Residential	1,361	sales comparison	adjustment for	0%-33%
			differences	(4%)
			between the
			comparable sales
		income approach	capitalization rate	8%-8%
				(8%)
Loan Servicing Rights	201	discounted cash	constant prepayment	7%-23%
		flow	rates	(10%)

Fair Value of Financial Instruments

The carrying amounts and estimated fair values of financial instruments, at March 31, 2014 and December 31, 2013 are as follows:

March 31, 2014:

(in thousands)

	Carrying
	Value		Level 1		Level 2		Level 3		Total
Financial assets
Cash and cash equivalents	$	21,877	$	21,877	$	—	$	—	$	21,877
Securities	236,364		291		236,073		—		236,364
Trading Assets	5,108		5,108		—				5,108
Mortgage loans held for sale	149		—		151		—		151
Loans, net	468,396		—		—		468,085		468,085
FHLB Stock	5,981		—		—		—		N/A
Interest receivable	3,484		—		1,464		2,020		3,484
Financial liabilities
Deposits	$	628,004	$	442,065	$	187,894	$	—	$	629,959
Securities sold under agreements to repurchase and other borrowings	11,402		—		11,546		—		11,546
FHLB advances	57,380		—		53,066		—		53,066
Subordinated Debentures	7,217		—		—		7,217		7,217
Interest payable	709		—		700		9		709

December 31, 2013:

(in thousands)

	Carrying
	Value		Level 1		Level 2		Level 3		Total
Financial assets
Cash and cash equivalents	$	23,160	$	23,160	$	—	$	—	$	23,160
Securities	230,396		289		230,107		—		230,396
Mortgage loans held for sale	223		—		229		—		229
Loans, net	463,214		—		—		459,796		459,796
FHLB Stock	6,731		—		—		—		N/A
Interest receivable	3,618		—		1,315		2,303		3,618
Financial liabilities
Deposits	$	617,400	$	428,239	$	191,523	$	—	$	619,762
Securities sold under agreements to repurchase and other borrowings	12,867		—		13,013		—		13,013
FHLB advances	57,847		—		52,220		—		52,220
Subordinated Debentures	7,217		—		—		7,217		7,217
Interest Payable	736				727		9		736

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 short-term instruments 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 as follows:  For variable rate loans that reprice frequently and with no significant change in credit risk, fair values 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 borrowers 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. The methods used to estimate the fair value of loans do not necessarily represent an exit price.

The fair value of 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.

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.

FHLB Advances and Subordinated Debentures - The fair values of the Company’s FHLB advances 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.

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STOCK COMPENSATION

3 Months Ended

Mar. 31, 2014

STOCK COMPENSATION

STOCK COMPENSATION

6.  STOCK COMPENSATION

We have four stock based compensation plans as described below.

Two Stock Option Plans

Under our now expired 1999 Employee Stock Option Plan (the “1999 Plan”), we granted certain officers and key employees stock option awards which vest and become fully exercisable at the end of five years and provide for issuance of up to 100,000 options.  Under the now expired 1993 Non-Employee Directors Stock Ownership Incentive Plan (together with the 1999 Plan, the “Stock Option Plans”), we also granted certain directors stock option awards which vest and become fully exercisable immediately and provide for issuance of up to 20,000 options.  For each Stock Option Plan, the exercise price of each option, which has a ten year life, was equal to the market price of our stock on the date of grant.

The combined summary of activity for 2014 in the expired Stock Option Plans follows:

					Weighted
			Weighted		Average
			Average		Remaining	Aggregate
			Exercise		Contractual	Intrinsic
	Shares		Price		Term	Value
Outstanding, beginning of year	19,100		$	31.50
Granted	—		—
Forfeited or expired	(6,375	)	33.56
Exercised	—		—
Outstanding, end of period	12,725		$	30.46	13.9 months	$	—
Vested and expected to vest	12,725		$	30.46	13.9 months	$	—
Exercisable, end of period	12,725		$	30.46	13.9 months	$	—

As of March 31, 2014, there was no unrecognized compensation cost related to nonvested stock options granted under either Stock Option Plan.  Since both Stock Option Plans have expired, no additional options can be granted under either of these plans.

2005 Restricted Stock Grant Plan

On May 10, 2005, our stockholders approved a restricted stock grant plan.  Total shares issuable under the plan are 50,000.  We issued 7,475 shares during 2014 and 6,065 shares during 2013.  There were no shares forfeited during the first three months of 2014 or 2013.  As of March 31, 2014, the restricted stock grant plan allows for additional restricted stock share awards of up to 4,995 shares.

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

			Weighted-Average			Fair
			Grant-Date			Value
Nonvested Shares	Shares		Fair Value			Per Share
Nonvested at January 1, 2014	15,565		$	280,016		$	17.99
Granted	7,475		181,194			24.24
Vested	(4,756	)	(84,518		)	17.77
Forfeited	—		—			—
Nonvested at March 31, 2014	18,284		$	376,692		$	20.60

As of March 31, 2014, there was $353,484 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 5 years.

2009 Stock Award Plan

On May 13, 2009, our 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.  We issued no stock grants during the first three months of 2014 and 900 shares during the first three months of 2013.  As of March 31, 2014, 149,100 shares are still available for issuance.

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

			Weighted-Average			Fair
			Grant-Date			Value
Nonvested Shares	Shares		Fair Value			Per Share
Nonvested at January 1, 2014	900		$	20,880		$	23.20
Granted	—		—			—
Vested	(180	)	(4,176		)	23.20
Forfeited	—		—			—
Nonvested at March 31, 2014	720		$	16,704		$	23.20

As of March 31, 2014, there was $16,356 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 5 years.

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OTHER BORROWINGS

3 Months Ended

Mar. 31, 2014

OTHER BORROWINGS

OTHER BORROWINGS

7.  OTHER BORROWINGS

The Company has a $5 million revolving promissory note which is scheduled to mature July 27, 2014.  The Company has no outstanding balances related to this promissory note at March 31, 2014.

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CHANGES IN ACCUMULATED OTHER COMPREHENSIVE INCOME BY COMPONENT

3 Months Ended

Mar. 31, 2014

CHANGES IN ACCUMULATED OTHER COMPREHENSIVE INCOME BY COMPONENT

CHANGES IN ACCUMULATED OTHER COMPREHENSIVE INCOME BY COMPONENT

9.     CHANGES IN ACCUMULATED OTHER COMPREHENSIVE INCOME BY COMPONENT

Changes in Accumulated Other Comprehensive Income by Component (1)  (unaudited)

(in thousands)

	Unrealized
	Gains and Losses on
	Available for Sale
	Securities
	For the Three Months Ending March 31
	2014			2013
Beginning Balance	$	(5,126	)	$	4,283
Unrealized holding gains (losses) for the period, net of tax	3,375			(1,061		)
Reclassification adjustment for:
Securities gains realized in income, net	(188		)	(289		)
Income taxes	(64		)	(98		)
	(124		)	(191		)
Net current period other comprehensive income	3,251			(1,252		)
Ending balance	$	(1,875	)	$	3,031

(1) All amounts are net of tax.

The following is significant amounts reclassified out of each component of accumulated other comprehensive Income (Loss) for the three months ending March 31, 2014 and 2013:

March 31, 2014

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	$	(188	)	Securities gains, net
	64			Provision for income taxes
	(124		)	Net of tax

March 31, 2013

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	$	(289	)	Securities gains, net
	98			Provision for income taxes
	(191		)	Net of tax

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LOANS (Details 6) (USD $) In Thousands, unless otherwise specified	Mar. 31, 2014	Dec. 31, 2013
Aging of recorded investment in past due and non-accrual loans
30-59 Days Past Due	$ 3,091	$ 2,965
60-89 Days Past Due	75	1,312
Greater than 90 Days Past Due	867	554
Non-accrual	3,820	2,974
Total Past Due and Non-accrual	7,853	7,805
Loans Not Past Due	466,159	460,850
Commercial
Aging of recorded investment in past due and non-accrual loans
30-59 Days Past Due	147	49
Non-accrual	299
Total Past Due and Non-accrual	446	49
Loans Not Past Due	31,328	34,605
Real estate construction
Aging of recorded investment in past due and non-accrual loans
30-59 Days Past Due		175
Total Past Due and Non-accrual		175
Loans Not Past Due	11,837	11,002
1-4 family residential
Aging of recorded investment in past due and non-accrual loans
30-59 Days Past Due	2,328	1,981
60-89 Days Past Due	49	1,285
Greater than 90 Days Past Due	634	314
Non-accrual	2,059	1,171
Total Past Due and Non-accrual	5,070	4,751
Loans Not Past Due	190,887	189,637
Multi-family residential
Aging of recorded investment in past due and non-accrual loans
Non-accrual	274	275
Total Past Due and Non-accrual	274	275
Loans Not Past Due	18,754	16,145
Non-farm & non-residential
Aging of recorded investment in past due and non-accrual loans
30-59 Days Past Due	194	503
Non-accrual	970	803
Total Past Due and Non-accrual	1,164	1,306
Loans Not Past Due	128,788	125,485
Agricultural
Aging of recorded investment in past due and non-accrual loans
30-59 Days Past Due	340	155
Greater than 90 Days Past Due	232	232
Non-accrual	217	717
Total Past Due and Non-accrual	789	1,104
Loans Not Past Due	67,687	66,898
Consumer
Aging of recorded investment in past due and non-accrual loans
30-59 Days Past Due	82	102
60-89 Days Past Due	26	27
Greater than 90 Days Past Due	1	8
Non-accrual	1	8
Total Past Due and Non-accrual	110	145
Loans Not Past Due	16,678	16,920
Other
Aging of recorded investment in past due and non-accrual loans
Loans Not Past Due	$ 200	$ 158

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EARNINGS PER SHARE (Tables)

3 Months Ended

Mar. 31, 2014

EARNINGS PER SHARE

Schedule of factors used in the earnings per share computation

	Three Months Ended
	March 31
	2014		2013
	(in thousands)
Basic Earnings Per Share
Net Income	$	1,771	$	1,709
Weighted average common shares outstanding	2,702		2,703
Basic earnings per share	$	0.66	$	0.63
Diluted Earnings Per Share
Net Income	$	1,771	$	1,709
Weighted average common shares outstanding	2,702		2,703
Add dilutive effects of assumed vesting of stock grants	—		—
Weighted average common and dilutive potential common shares outstanding	2,702		2,703
Diluted earnings per share	$	0.66	$	0.63

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SECURITIES (Details) (USD $) In Thousands, unless otherwise specified	Mar. 31, 2014	Dec. 31, 2013
Securities Available for Sale
Amortized Cost	$ 239,205	$ 238,163
Gross Unrealized Gains	2,958	1,728
Gross Unrealized Losses	(5,799)	(9,495)
Fair Value	236,364	230,396
U.S. government agencies
Securities Available for Sale
Amortized Cost	74,612	73,930
Gross Unrealized Gains	14	51
Gross Unrealized Losses	(3,264)	(4,695)
Fair Value	71,362	69,286
States and political subdivisions
Securities Available for Sale
Amortized Cost	91,008	91,043
Gross Unrealized Gains	2,805	1,614
Gross Unrealized Losses	(1,138)	(2,474)
Fair Value	92,675	90,183
Mortgage-backed - residential
Securities Available for Sale
Amortized Cost	73,315	72,920
Gross Unrealized Gains	118	44
Gross Unrealized Losses	(1,397)	(2,326)
Fair Value	72,036	70,638
Equity securities
Securities Available for Sale
Amortized Cost	270	270
Gross Unrealized Gains	21	19
Fair Value	$ 291	$ 289

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CHANGES IN ACCUMULATED OTHER COMPREHENSIVE INCOME BY COMPONENT (Details) (USD $) In Thousands, unless otherwise specified	3 Months Ended
	Mar. 31, 2014	Mar. 31, 2013
Changes in accumulated other comprehensive income (loss) by component
Beginning Balance	$ (5,126)	$ 4,283
Unrealized holding gains (losses)for the period, net of tax	3,375	(1,061)
Reclassification adjustment for:
Securities gains realized in income, net	(188)	(289)
Income taxes	(64)	(98)
Securities gains realized in income, net of income taxes	(124)	(191)
Net current period other comprehensive income	3,251	(1,252)
Ending Balance	$ (1,875)	$ 3,031

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STOCK COMPENSATION (Details 2) (Stock Options)	3 Months Ended
	Mar. 31, 2014
Stock Option Plans
Stock Based Compensation
Life of awards	10 years
1999 Plan
Stock Based Compensation
Vesting period	5 years
Number of shares authorized for issuance	100,000
1993 Non-Employee Directors Stock Ownership Incentive Plan
Stock Based Compensation
Number of shares authorized for issuance	20,000

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CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY (USD $) In Thousands, except Share data, unless otherwise specified		Total	Common Stock		Retained Earnings	Accumulated Other Comprehensive Income/(Loss)
Balances at Dec. 31, 2013		$ 67,673	$ 12,570	[1]	$ 60,229	$ (5,126)
Balances (in shares) at Dec. 31, 2013	[1]		2,717,434
Increase (Decrease) in Stockholders' Equity
Common stock issued, including tax benefit, net (in shares)	[1]		7,475
Stock based compensation expense		27	27	[1]
Common stock purchased and retired		(91)	(17)	[1]	(74)
Common stock purchased and retired (in shares)	[1]		(3,795)
Net change in unrealized gain (loss) on securities available for sale, net of tax and reclassifications		3,251				3,251
Net income		1,771			1,771
Dividends declared - $0.25 per share		(681)			(681)
Balances at Mar. 31, 2014		$ 71,950	$ 12,580	[1]	$ 61,245	$ (1,875)
Balances (in shares) at Mar. 31, 2014	[1]		2,721,114

[1] Common Stock has no par value; amount includes Additional Paid-in Capital

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LOANS

3 Months Ended

Mar. 31, 2014

LOANS

LOANS

3. LOANS

Loans at period-end are as follows:

(in thousands)

	3/31/14		12/31/13
Commercial	$	31,774	$	34,654
Real estate construction	11,837		11,177
Real estate mortgage:
1-4 family residential	195,957		194,388
Multi-family residential	19,028		16,420
Non-farm & non-residential	129,952		126,791
Agricultural	68,476		68,002
Consumer	16,788		17,065
Other	200		158
Total	$	474,012	$	468,655

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

	Three Months Ended March 31, 2014
	(in thousands)
	Beginning									Ending
	Balance		Charge-offs		Recoveries		Provision			Balance
Commercial	$	230	$	200	$	—	$	178		$	208
Real estate Construction	358		—		4		(33		)	329
Real estate mortgage:
1-4 family residential	2,169		63		12		(7		)	2,111
Multi-family residential	427		—		—		(26		)	401
Non-farm & non-residential	564		—		367		(1		)	930
Agricultural	578		—		24		(49		)	553
Consumer	548		77		18		61			550
Other	51		97		87		(30		)	11
Unallocated	516		—		—		7			523
	$	5,441	$	437	$	512	$	100		$	5,616

	Three Months Ended March 31, 2013
	(in thousands)
	Beginning									Ending
	Balance		Charge-offs		Recoveries		Provision			Balance
Commercial	$	150	$	6	$	28	$	(37	)	$	135
Real estate Construction	918		578		5		152			497
Real estate mortgage:
1-4 family residential	1,989		125		26		84			1,974
Multi-family residential	414		—		—		79			493
Non-farm & non-residential	628		—		8		(25		)	611
Agricultural	845		86		2		(14		)	747
Consumer	517		148		11		131			511
Other	54		137		126		56			99
Unallocated	532		—		—		24			556
	$	6,047	$	1,080	$	206	$	450		$	5,623

The following tables present the balance in the allowance for loan losses and the recorded investment (excluding accrued interest receivable amounting to $2.0 million as of March 31, 2014 and $2.3 million at December 31, 2013) in loans by portfolio segment and based on impairment method as of March 31, 2014 and December 31, 2013:

As of March 31, 2014

(in thousands)

	Individually		Collectively
	Evaluated for		Evaluated for
	Impairment		Impairment		Total
Allowance for Loan Losses:
Commercial	$	—	$	208	$	208
Real estate construction	—		329		329
Real estate mortgage:
1-4 family residential	130		1,981		2,111
Multi-family residential	76		325		401
Non-farm & non-residential	380		550		930
Agricultural	260		293		553
Consumer	—		550		550
Other	—		11		11
Unallocated	—		523		523
	$	846	$	4,770	$	5,616
Loans:
Commercial	$	—	$	31,774	$	31,774
Real estate construction	—		11,837		11,837
Real estate mortgage:
1-4 family residential	1,771		194,186		195,957
Multi-family residential	275		18,753		19,028
Non-farm & non-residential	3,169		126,783		129,952
Agricultural	5,201		63,275		68,476
Consumer	—		16,788		16,788
Other	—		200		200
	$	10,416	$	463,596	$	474,012

As of December 31, 2013

(in thousands)

	Individually		Collectively
	Evaluated for		Evaluated for
	Impairment		Impairment		Total
Allowance for Loan Losses:
Commercial	$	—	$	230	$	230
Real estate construction	—		358		358
Real estate mortgage:
1-4 family residential	228		1,941		2,169
Multi-family residential	76		351		427
Non-farm & non-residential	110		454		564
Agricultural	298		280		578
Consumer	—		548		548
Other	—		51		51
Unallocated	—		516		516
	$	712	$	4,729	$	5,441
Loans:
Commercial	$	—	$	34,654	$	34,654
Real estate construction	—		11,177		11,177
Real estate mortgage:
1-4 family residential	2,873		191,515		194,388
Multi-family residential	274		16,146		16,420
Non-farm & non-residential	2,716		124,075		126,791
Agricultural	7,673		60,329		68,002
Consumer	—		17,065		17,065
Other	—		158		158
	$	13,536	$	455,119	$	468,655

The following table presents loans individually evaluated for impairment by class of loans as of March 31, 2014 (in thousands):

									Year to Date		Year to Date
	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:
Commercial	$	—	$	—	$	—	$	—	$	—	$	—
Real estate construction	—		—		—		—		—		—
Real estate mortgage:
1-4 family residential	911		911		—		396		—		—
Multi-family residential	—		—		—		—		—		—
Non-farm & non-residential	—		—		—		401		—		—
Agricultural	446		446		—		1,413		4		4
Consumer	—		—		—		—		—		—
Other	—		—		—		—		—		—
With an allowance recorded:
Commercial	—		—		—		—		—		—
Real estate construction	—		—		—		—		—		—
Real estate mortgage:
1-4 family residential	860		860		130		1,470		6		6
Multi-family residential	275		275		76		275		4		4
Non-farm & non-residential	3,169		3,169		380		2,541		25		25
Agricultural	4,755		4,755		260		4,801		—		—
Consumer	—		—		—		—		—		—
Other	—		—		—		—		—		—
Total	$	10,416	$	10,416	$	846	$	11,297	$	39	$	39

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 as of December 31, 2013 (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:
Commercial	$	—	$	—	$	—	$	—	$	—	$	—
Real estate construction	—		—		—		—		—		—
Real estate mortgage:
1-4 family residential	824		793		—		1,217		28		28
Multi-family residential	—		—		—		—		—		—
Non-farm & non-residential	1,650		803		—		1,471		81		81
Agricultural	2,912		2,826		—		2,802		123		123
Consumer	—		—		—		—		—		—
Other	—		—		—		—		—		—
With an allowance recorded:
Commercial	—		—		—		—		—		—
Real estate construction	—		—		—		607		—		—
Real estate mortgage
1-4 family residential	2,080		2,080		228		1,349		96		96
Multi-family residential	274		274		76		443		3		3
Non-farm & non-residential	1,913		1,913		110		1,938		79		79
Agricultural	4,847		4,847		298		4,864		287		287
Consumer	—		—		—		—		—		—
Other	—		—		—		—		—		—
Total	$	14,501	$	13,536	$	712	$	14,691	$	697	$	697

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 as of March 31, 2013 (in thousands):

			Year to Date		Year to Date
	Average		Interest		Cash Basis
	Recorded		Income		Interest
	Investment		Recognized		Recognized
With no related allowance recorded:
Commercial	$	—	$	—	$	—
Real estate construction	—		—		—
Real estate mortgage:
1-4 family residential	1,570		19		19
Multi-family residential	—		—		—
Non-farm & non-residential	2,044		20		20
Agricultural	2,789		5		5
Consumer	—		—		—
Other	—		—		—
With an allowance recorded:
Commercial	—		—		—
Real estate construction	1,517		—
Real estate mortgage:
1-4 family residential	1,263		14		14
Multi-family residential	570		3		3
Non-farm & non-residential	2,188		20		20
Agricultural	5,082		50		50
Consumer	—		—		—
Other	—		—		—
Total	$	17,023	$	131	$	131

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

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 March 31, 2014 and December 31, 2013:

			Loans Past Due
			Over 90 Days		Accruing
As of March 31, 2014			Still		Troubled Debt
(in thousands)	Nonaccrual		Accruing		Restructurings
Commercial	$	299	$	—	$	—
Real estate construction	—		—		—
Real estate mortgage:
1-4 family residential	2,059		634		490
Multi-family residential	274		—		—
Non-farm & non-residential	970		—		1,865
Agricultural	217		232		4,530
Consumer	1		1		—
Total	$	3,820	$	867	$	6,885

			Loans Past Due
			Over 90 Days		Accruing
As of December 31, 2013			Still		Troubled Debt
(in thousands)	Nonaccrual		Accruing		Restructurings
Commercial	$	—	$	—	$	—
Real estate construction	—		—		—
Real estate mortgage:
1-4 family residential	1,171		314		493
Multi-family residential	275		—		—
Non-farm & non-residential	803		—		1,878
Agricultural	717		232		4,530
Consumer	8		8		—
Total	$	2,974	$	554	$	6,901

Nonaccrual loans secured by real estate make up 92.1% of the total nonaccruals at March 31, 2014.

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.  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.

During the first three months of 2014, $141 thousand in impaired loans were transferred to other real estate owned.  Additionally, $437 thousand in loan balances were charged off during the first three months of 2014 and $512 thousand in prior-year loan charge offs were recovered.

The following tables present the aging of the recorded investment in past due and non-accrual loans as of March 31, 2014 and December 31, 2013 by class of loans:

	30-59		60-89		Loans Past Due				Total
As of March 31, 2014	Days		Days		Over 90 Days				Past Due &		Loans Not
(in thousands)	Past Due		Past Due		Still Accruing		Non-accrual		Non-accrual		Past Due
Commercial	$	147	$	—	$	—	$	299	$	446	$	31,328
Real estate construction	—		—		—		—		—		11,837
Real estate mortgage:
1-4 family residential	2,328		49		634		2,059		5,070		190,887
Multi-family residential	—		—		—		274		274		18,754
Non-farm & non-residential	194		—		—		970		1,164		128,788
Agricultural	340		—		232		217		789		67,687
Consumer	82		26		1		1		110		16,678
Other	—		—		—		—		—		200
Total	$	3,091	$	75	$	867	$	3,820	$	7,853	$	466,159

	30-59		60-89		Greater than				Total
As of December 31, 2013	Days		Days		90 Days				Past Due &		Loans Not
(in thousands)	Past Due		Past Due		Past Due		Non-accrual		Non-accrual		Past Due
Commercial	$	49	$	—	$	—	$	—	$	49	$	34,605
Real estate construction	175		—		—		—		175		11,002
Real estate mortgage:
1-4 family residential	1,981		1,285		314		1,171		4,751		189,637
Multi-family residential	—		—		—		275		275		16,145
Non-farm & non-residential	503		—		—		803		1,306		125,485
Agricultural	155		—		232		717		1,104		66,898
Consumer	102		27		8		8		145		16,920
Other	—		—		—		—		—		158
Total	$	2,965	$	1,312	$	554	$	2,974	$	7,805	$	460,850

Troubled Debt Restructurings:

The Company has allocated $413 thousand in specific reserves to customers whose loan terms have been modified in troubled debt restructurings as of March 31, 2014.  The Company allocated $428 thousand for specific reserves to customers whose loan terms had been modified in troubled debt restructuring as of December 31, 2013.  The Company has not committed to lend additional amounts as of March 31, 2014 and December 31, 2013 to customers with outstanding loans that are classified as troubled debt restructurings.  There were no troubled debt restructuring for which there was a payment default within twelve months following the modification during the periods ending March 31, 2014 and 2013.

No loans were modified as troubled debt restructurings during the three months ending March 31, 2014 and 2013.

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 March 31, 2014 and December 31, 2013, and based on the most recent analysis performed, the risk category of loans by class of loans is as follows:

As of March 31, 2014			Special
(in thousands)	Pass		Mention		Substandard		Doubtful
Commercial	$	29,977	$	1,241	$	556	$	—
Real estate construction	10,360		1,477		—		—
Real estate mortgage:
1-4 family residential	178,074		10,372		7,486		25
Multi-family residential	17,018		1,564		446		—
Non-farm & non-residential	124,648		3,872		1,432		—
Agricultural	54,631		12,290		1,555		—
Total	$	414,708	$	30,816	$	11,475	$	25

As of December 31, 2013			Special
(in thousands)	Pass		Mention		Substandard		Doubtful
Commercial	$	32,771	$	1,587	$	296	$	—
Real estate construction	9,660		1,517		—		—
Real estate mortgage:
1-4 family residential	176,553		10,346		7,489		—
Multi-family residential	14,392		1,579		449		—
Non-farm & non-residential	120,195		5,327		1,269		—
Agricultural	56,713		7,297		3,992		—
Total	$	410,284	$	27,653	$	13,495	$	—

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 $2 thousand at March 31, 2014 and $16 thousand at December 31, 2013.

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SECURITIES (Details 2) (USD $)	3 Months Ended
	Mar. 31, 2014	Mar. 31, 2013	Dec. 31, 2013
Amortized Cost
Due in one year or less	$ 623,000
Due after one year through five years	8,638,000
Due after five years through ten years	84,800,000
Due after ten years	71,559,000
Securities due at a single maturity date	165,620,000
Total	239,205,000		238,163,000
Fair Value
Due in one year or less	625,000
Due after one year through five years	8,714,000
Due after five years through ten years	83,131,000
Due after ten years	71,567,000
Securities due at a single maturity date	164,037,000
Fair Value	236,364,000		230,396,000
Proceeds from sales of securities	16,500,000	10,500,000
Gross gains realized on sales of securities	309,000	289,000
Gross losses realized on sales of securities	121,000	0
Tax provision related to realized gains	64,000	98,000
Mortgage-backed - residential
Amortized Cost
Total	73,315,000		72,920,000
Fair Value
Fair Value	72,036,000		70,638,000
Equity
Amortized Cost
Total	270,000		270,000
Fair Value
Fair Value	$ 291,000		$ 289,000

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EARNINGS PER SHARE (Details) (USD $) In Thousands, except Per Share data, unless otherwise specified	3 Months Ended
	Mar. 31, 2014	Mar. 31, 2013
Basic Earnings Per Share
Net Income	$ 1,771	$ 1,709
Weighted average common shares outstanding	2,702	2,703
Basic earnings per share (in dollars per share)	$ 0.66	$ 0.63
Diluted Earnings Per Share
Net income	$ 1,771	$ 1,709
Weighted average common shares outstanding	2,702	2,703
Weighted average common and dilutive potential common shares outstanding	2,702	2,703
Diluted earnings per share (in dollars per share)	$ 0.66	$ 0.63

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REAL ESTATE OWNED (Tables)

3 Months Ended

Mar. 31, 2014

REAL ESTATE OWNED

Schedule of activity in real estate owned, net

	Three Months Ended
	2014			2013
	(in thousands)
Beginning of year	$	3,379		$	4,168
Additions	141			82
Sales	(277		)	(28		)
Additions to valuation allowance, net	—			—
Recovery from sale in valuation allowance	13			—
End of period	$	3,256		$	4,222

Schedule of activity in the valuation allowance

	Three Months Ended
	2014			2013
	(in thousands)
Beginning of year	$	1,524		$	1,668
Additions to valuation allowance, net	—			—
Recovery from sale	(13		)	—
End of period	$	1,511		$	1,668

Schedule of expenses related to foreclosed assets

	Three Months Ended
	2014			2013
	(in thousands)
Net loss (gain) on sales	$	(46	)	$	(5	)
Additions to valuation allowance, net	—			—
Operating expenses (receipts), net of rental income	(2		)	67
Repossession expenses, net	(2		)	67
End of period	$	(48	)	$	62