10-Q

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C.  20549

FORM 10-Q

(Mark One)

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

For the quarterly period March 31, 2017

or

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

For the transition period from                         to                         

Commission File Number:  000-52598

KENTUCKY BANCSHARES, INC.

(Exact name of registrant as specified in its charter)

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

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

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

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

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

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

Large accelerated filer ☐	Accelerated filer ☐
Non-accelerated filer   ☒	Smaller reporting company ☐
(Do not check if a smaller reporting company)
	Emerging growth company ☐

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

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

Number of shares of Common Stock outstanding as of April 30, 2017:  2,972,763.

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	41
Item 4.	Controls and Procedures	42
Part II - Other Information		42
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	42
Item 6.	Exhibits	43
Signatures		44

2

Item 1 – Financial Statements

KENTUCKY BANCSHARES, INC.

CONSOLIDATED BALANCE SHEETS (unaudited)

(in thousands, except per share amounts)

	3/31/2017		12/31/2016
ASSETS
Cash and due from banks	$	36,135	$	42,052
Federal funds sold		1,113		1,198
Cash and cash equivalents		37,248		43,250
Interest bearing time deposits		4,659		5,029
Securities available for sale		301,927		273,770
Trading Assets		5,644		5,592
Loans held for sale		1,189		724
Loans		657,566		656,007
Allowance for loan losses		(7,876)		(7,541)
Net loans		649,690		648,466
Federal Home Loan Bank stock		7,034		7,034
Real estate owned, net		1,373		1,824
Assets held for sale		—		969
Bank premises and equipment, net		15,004		14,781
Interest receivable		3,649		3,715
Mortgage servicing rights		1,405		1,321
Goodwill		14,001		14,001
Other intangible assets		485		529
Other assets		6,460		7,442
Total assets	$	1,049,768	$	1,028,447
LIABILITIES AND STOCKHOLDERS’ EQUITY
Deposits
Non-interest bearing	$	218,379	$	219,556
Time deposits, $250,000 and over		84,353		74,302
Other interest bearing		521,613		509,123
Total deposits		824,345		802,981
Repurchase agreements		21,811		20,873
Long-term Federal Home Loan Bank advances		90,612		92,500
Note payable		3,983		4,090
Subordinated debentures		7,217		7,217
Interest payable		667		692
Other liabilities		5,309		7,122
Total liabilities		953,944		935,475
Stockholders’ equity
Preferred stock, 300,000 shares authorized and unissued		—		—
Common stock, no par value; 10,000,000 shares authorized; 2,972,763 and 2,973,232 shares issued and outstanding at March 31, 2017 and December 31, 2016		20,808		20,767
Retained earnings		75,236		73,161
Accumulated other comprehensive loss		(220)		(956)
Total stockholders’ equity		95,824		92,972
Total liabilities and stockholders’ equity	$	1,049,768	$	1,028,447

See Accompanying Notes

3

KENTUCKY BANCSHARES, INC.

CONSOLIDATED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME (unaudited)

(in thousands, except per share amounts)

	Three Months Ended
	3/31/2017		3/31/2016
INTEREST INCOME:
Loans, including fees	$	7,494	$	7,379
Securities
Taxable		1,062		907
Tax exempt		608		657
Trading assets		34		42
Other		178		113
Total interest income		9,376		9,098
INTEREST EXPENSE:
Deposits		645		557
Repurchase agreements		26		26
Federal Home Loan Bank advances		397		384
Note payable		50		61
Subordinated debentures		80		61
Total interest expense		1,198		1,089
Net interest income		8,178		8,009
Provision for loan losses		350		375
Net interest income after provision		7,828		7,634
NON-INTEREST INCOME:
Service charges		1,223		1,117
Loan service fee income, net		114		51
Trust department income		288		263
Gain on sale of available for sale securities, net		—		126
Gain (loss) on trading assets		17		40
Gain on sale of loans		550		299
Brokerage income		193		184
Debit card interchange income		731		644
Gain on bank premises		1,194		—
Other		40		23
Total other income		4,350		2,747
NON-INTEREST EXPENSE:
Salaries and employee benefits		4,445		4,370
Occupancy expenses		965		918
Repossession expenses, net		79		112
FDIC Insurance		94		174
Legal and professional fees		283		378
Data processing		406		426
Debit card expenses		375		319
Amortization expense of intangible assets, excluding mortgage servicing right		43		79
Advertising and marketing		212		225
Taxes other than payroll, property and income		300		275
Telephone		122		91
Postage		93		89
Loan fees		63		45
Other		706		827
Total other expenses		8,186		8,328
Income before taxes		3,992		2,053
Income taxes		855		216
Net income	$	3,137	$	1,837
Other Comprehensive Income, net of tax:
Change in Unrealized Gains on Securities		736		2,387
Comprehensive Income	$	3,873	$	4,224
Earnings per share
Basic	$	1.06	$	0.61
Diluted		1.06		0.61
Dividends per share		0.29		0.27

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			Preferred Stock			Retained		Comprehensive		Stockholders’
(Dollars in thousands)	Shares	Amount		Shares		Amount	Earnings		Loss		Equity
Balances, January 1, 2017	2,973,232	$	20,767	—	$	—	$	73,161	$	(956)	$	92,972
Common stock issued; employee stock grants of  6,575 shares, director stock awards of 1,386 shares and director stock options exercised of 600 shares	8,561		64	—		—		—		—		64
Stock compensation expense	—		40	—		—		—		—		40
Common stock purchased and retired	(9,030)		(63)	—		—		(200)		—		(263)
Other comprehensive income	—		—	—		—		—		736		736
Net income	—		—	—		—		3,137		—		3,137
Dividends declared - $0.29 per share	—		—	—		—		(862)		—		(862)
Balances, March 31, 2017	2,972,763	$	20,808	—	$	—	$	75,236	$	(220)	$	95,824

(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 Ended
	3/31/2017		3/31/2016
Cash Flows From Operating Activities
Net Income	$	3,137	$	1,837
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization		154		365
Securities amortization (accretion), net		231		241
Stock based compensation expense		40		39
Provision for loan losses		350		375
Securities available for sale gains, net		—		(126)
Net change in trading assets		(52)		(81)
Originations of loans held for sale		(12,296)		(7,302)
Proceeds from sale of loans		12,381		6,591
Gain on sale of bank premises and equipment		(1,194)		—
Gain on other real estate		(46)		—
Gain on sale of loans		(550)		(299)
Write-downs of other real estate, net		—		85
Changes in:
Interest receivable		66		(21)
Other assets		312		124
Interest payable		(25)		49
Deferred taxes		320		644
Other liabilities		(1,813)		(1,734)
Net cash from operating activities		1,015		787
Cash Flows From Investing Activities
Net change in interest bearing time deposits		370		245
Purchases of securities available for sale		(37,701)		(23,679)
Proceeds from sales of securities		—		9,250
Proceeds from principal payments, maturities and calls of securities		10,399		11,764
Net change in loans		(1,593)		(11,483)
Purchases of bank premises and equipment		(454)		(237)
Proceeds from the sale of bank premises and equipment		2,093		—
Proceeds from the sale of other real estate		623		—
Net cash from investing activities		(26,263)		(14,140)
Cash Flows From Financing Activities:
Net change in deposits		21,364		6,961
Net change in repurchase agreements		938		7,782
Repayment of long-term Federal Home Loan Bank advances		(1,888)		(1,601)
Repayment of note payable		(107)		—
Proceeds from issuance of common stock		64		49
Purchase of common stock		(263)		(23)
Dividends paid		(862)		(809)
Net cash from financing activities		19,246		12,359
Net change in cash and cash equivalents		(6,002)		(994)
Cash and cash equivalents at beginning of period		43,250		28,048
Cash and cash equivalents at end of period	$	37,248	$	27,054
Supplemental disclosures of cash flow information Cash paid during the year for:
Interest expense	$	1,223	$	1,040
Supplemental disclosures of non-cash investing activities
Real estate acquired through foreclosure	$	126	$	163

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, 2016. In the opinion of management, all adjustments, consisting of normal recurring adjustments, necessary for a fair presentation of such financial statements, have been included. The results of operations for the interim periods are not necessarily indicative of the results to be expected for the full year. For further information, refer to the consolidated financial statements and footnotes thereto included in the Company's Annual Report on Form 10-K for the year ended December 31, 2016.

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

Nature of Operations: As a state bank, the Bank is subject to regulation by the Kentucky Department of Financial Institutions and the Federal Deposit Insurance Corporation (“FDIC”). The Company, a bank holding company, is regulated by the Federal Reserve.

KBI Insurance Company, Inc. is a subsidiary of Kentucky Bancshares, Inc. and is located in Las Vegas, Nevada. It is a captive insurance subsidiary which provides various liability and property damage insurance policies for Kentucky Bancshares, Inc. and its related subsidiaries. KBI Insurance Company, Inc. is regulated by the State of Nevada Division of Insurance.

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

Trading Assets: 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.

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

Adoption of New Accounting Standards

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

7

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

ASU 2016-13, “Financial Instruments-Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments.” Issued in June 2016, ASU 2016-13 will add FASB ASC Topic 326, “Financial Instruments-Credit Losses” and finalizes amendments to FASB ASC Subtopic 825-15, “Financial Instruments-Credit Losses.” The amendments of ASU 2016-13 are intended to provide financial statement users with more decision-useful information related to expected credit losses on financial instruments and other commitments to extend credit by replacing the current incurred loss impairment methodology with a methodology that reflects expected credit losses and requires consideration of a broader range of reasonable and supportable information to determine credit loss estimates. The amendments of ASU 2016-13 eliminate the probable initial recognition threshold and, in turn, reflect an entity’s current estimate of all expected credit losses. ASU 2016-13 does not specify the method for measuring expected credit losses, and an entity is allowed to apply methods that reasonably reflect its expectations of the credit loss estimate. Additionally, the amendments of ASU 2016-13 require that credit losses on available for sale debt securities be presented as an allowance rather than as a writedown.  The amendments of ASU 2016-13 are effective for interim and annual periods beginning after December 15, 2019. Earlier application is permitted for interim and annual periods beginning after December 15, 2018. Kentucky Bancshares plans to adopt the amendments of ASU 2016-13 during the first quarter of 2020. Kentucky Bancshares has established a steering committee which includes the appropriate members of Management to evaluate the impact this ASU will have on the Company’s financial position, results of operations and financial statement disclosures and determine the most appropriate method of implementing the amendments in this ASU as well as any resources needed to implement the amendments.

ASU 2016-09, “Compensation-Stock Compensation (Topic 718): Improvements to Employee Share-Based Payment Accounting.” Issued in March 2016, ASU 2016-09 seeks to reduce complexity in accounting standards by simplifying several aspects of the accounting for share-based payment transactions. The amendments of ASU 2016-09 include: (i) requiring all excess tax benefits and tax deficiencies to be recognized as income tax expense or benefit in the income statement; (ii) requiring excess tax benefits to be classified along with other income tax cash flows as an operating activity on the statement of cash flow; (iii) allowing an entity to make an entity-wide accounting policy election to either estimate the number of awards that expect to vest or account for forfeitures when they occur; (iv) change the threshold to qualify for equity classification to permit withholding up to the maximum statutory tax rates in the applicable jurisdictions; and (v) requiring that cash paid by an employer when directly withholding shares for tax-withholding purposes to be classified as a financing activity on the statement of cash flows. The amendments of ASU 2016-09 became effective for Kentucky Bancshares on January 1, 2017 and did not have a material impact on Kentucky Bancshares consolidated financial statements. The Company has made an entity-wide accounting policy election to account for forfeitures of stock awards as they occur. Changes to Kentucky Bancshares consolidated statement of cash flows required by the amendments of ASU 2016-09 are incorporated into the presentation in the Quarterly Report on Form 10-Q for the three month period ending March 31, 2017.

ASU 2016-02, “Leases (Topic 842).” Issued in February 2016, ASU 2016-02 was issued by the FASB to increase transparency and comparability among organizations by recognizing lease assets and lease liabilities on the balance sheet and by disclosing key information about leasing arrangements. ASU 2016-02 will, among other things, require lessees to recognize a lease liability, which is a lessee’s obligation to make lease payments arising from a lease, measured on a discounted basis; and a right-of-use asset, which is an asset that represents the lessee’s right to use, or control the use of, a specified asset for the lease term.

ASU 2016-02 does not significantly change lease accounting requirements applicable to lessors; however, the ASU contains some targeted improvements that are intended to align, where necessary, lessor accounting with the lessee accounting model and with the updated revenue recognition guidance issued in 2014. The amendments of ASU 2016-02 are effective for interim and annual periods beginning after December 15, 2018. Kentucky Bancshares plans to adopt the amendments of ASU 2016-02 beginning in the first quarter of 2019. At adoption, Kentucky Bancshares will recognize a lease asset and a corresponding lease liability on its consolidated balance sheet for its total lease obligation measured on a discounted basis. As of March 31, 2017, all leases in which Kentucky Bancshares was the lessee were classified as operating leases. Kentucky Bancshares does not anticipant any material impact to its consolidated statements of income as a result of the adoption of this ASU. The Company has an immaterial amount of leases in which it is the lessor.

8

Based on Management’s evaluation to date, the Company does not expect the amendments of ASU 2016-02 to have any material impact to these leases or the related income. Management will continue to evaluate the impact this ASU will have on the Company’s consolidated financial statements; however, the adoption of ASU 2016-02 is not expected to have a material impact on Kentucky Bancshares consolidated financial statements.

ASU 2016-01, “Financial Instruments-Overall (Subtopic 825-10): Recognition and Measurement of Financial Assets and Financial Liabilities (An Amendment of the FASB Accounting Standards Codification).” Issued in January 2016, ASU 2016-01 is intended to enhance the reporting model for financial instruments to provide users of financial statements with improved decision-making information. The amendments of ASU 2016-01 include: (i) requiring equity investments, except those accounted for under the equity method of accounting or those that result in the consolidation of an investee, to be measured at fair value with changes in fair value recognized in net income; (ii) requiring a qualitative assessment to identify impairment of equity investments without readily determinable fair values; (iii) eliminating the requirement to disclose the method and significant assumptions used to estimate the fair value for financial instruments measured at amortized cost on the balance sheet; (iv) requiring the use of the exit price notion when measuring the fair value of financial instruments for disclosure purposes; (v) requiring an entity that has elected the fair value option to measure the fair value of a liability to present separately in other comprehensive income the portion of the change in the fair value resulting from a change in the instrument-specific credit risk; (vi) requiring separate presentation of financial assets and financial liabilities by measurement category and form of financial asset on the balance sheet or the accompanying notes to the financial statements and (vii) clarifying that an entity should evaluate the need for a valuation allowance on a deferred tax asset related to available for sale securities in combination with the entity’s other deferred tax assets. The amendments of ASU 2016-01 are effective for interim and annual periods beginning after December 15, 2017. Kentucky Bancshares plans to adopt the amendments of ASU 2016-01 during the first quarter of 2018. Management has evaluated the impact this ASU will have on the Company’s consolidated financial statements. Through this evaluation, Management has determined that the principal areas impacted by the amendments of ASU 2016-01 will be Kentucky Bancshares investment in member bank stock, which are equity securities that do not have readily determinable fair values, and various fair value related disclosures. See Note 1 – Significant Accounting Policies, “Federal Home Loan Bank (FHLB): for information regarding Kentucky Bancshares investment in member bank stock. The adoption of ASU 2016-01 is not expected to have a material impact on the Company’s consolidated financial statements.

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

The amendments of ASU 2014-09 may be applied either retrospectively to each prior reporting period presented or retrospectively with the cumulative effect of initially applying ASU 2014-09 recognized at the date of initial application. If the transition method of application is elected, the entity should also provide the additional disclosures in reporting periods that include the date of initial application of (1) the amount by which each financial statement line item is affected in the current reporting period, as compared to the guidance that was in effect before the change, and (2) an explanation of the reasons for significant changes. ASU 2015-14, “Revenue from Contracts with Customers (Topic 606)-Deferral of the Effective Date,” issued in August 2015, defers the effective date of ASU 2014-09 by one year. ASU 2015-14 provides that the amendments of ASU 2014-09 become effective for interim and annual periods beginning after December 15, 2017. All subsequently issued ASUs which provide additional guidance and clarifications to various aspects of FASB ASC Topic 606 will become effective when the amendments of ASU 2014-09 become effective.

9

Kentucky Bancshares plans to adopt these amendments during the first quarter of 2018. Management is continuing to evaluate the impact ASU 2014-09 will have on Kentucky Bancshares consolidated financial statements as well as the most appropriate transition method of application. Based on this evaluation to date, Management has determined that the majority of the revenues earned by Kentucky Bancshares are not within the scope of ASU 2014-09. Management also believes that for most revenue streams within the scope of ASU 2014-09, the amendments will not change the timing of when the revenue is recognized. Management will continue to evaluate the impact the adoption of ASU 2014-09 will have on Kentucky Bancshares consolidated financial statements, focusing on noninterest income sources within the scope of ASU 2014-09 as well as new disclosures required by these amendments; however, the adoption of ASU 2014-09 is not expected to have a material impact on Kentucky Bancshares consolidated financial statements.

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

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

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

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

10

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, 2017
U. S. government agencies	$	46,077	$	386	$	(265)	$	46,198
States and political subdivisions		91,389		1,928		(381)		92,936
Mortgage-backed - residential		164,475		149		(2,171)		162,453
Equity securities		320		20		—		340
Total	$	302,261	$	2,483	$	(2,817)	$	301,927
December 31, 2016
U. S. government agencies	$	36,454	$	373	$	(299)	$	36,528
States and political subdivisions		90,117		1,731		(716)		91,132
Mortgage-backed - residential		148,327		120		(2,677)		145,770
Equity securities		320		20		—		340
Total	$	275,218	$	2,244	$	(3,692)	$	273,770

The amortized cost and fair value of securities at March 31, 2017 by contractual maturity are shown below.  Expected maturities will differ from contractual maturities because borrowers may have the right to call or prepay obligations with or without call or prepayment penalties.  Securities not due at a single maturity are shown separately.  Further discussion concerning Fair Value Measurements can be found in Note 9.

	Amortized		Fair
	Cost		Value
Due in one year or less	$	300	$	301
Due after one year through five years		34,432		34,951
Due after five years through ten years		49,420		49,811
Due after ten years		53,314		54,071
		137,466		139,134
Mortgage-backed - residential		164,475		162,453
Equity		320		340
Total	$	302,261	$	301,927

Proceeds from sales of securities during the first three months of 2017 and 2016 were $0 and $9.3 million.  Gross gains of $0 and $126 thousand and gross losses of $0 and $0 were realized on those sales, respectively.  The tax provision related to these realized net gains was $0 and $43 thousand, respectively. 

11

Securities with unrealized losses March 31, 2017 and at December 31, 2016 not recognized in income are as follows:

March 31, 2017

	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	$	24,754	$	(265)	$	—	$	—	$	24,754	$	(265)
States and municipals		21,189		(381)		—		—		21,189		(381)
Mortgage-backed - residential		125,783		(1,600)		13,366		(571)		139,149		(2,171)
Total temporarily impaired	$	171,726	$	(2,246)	$	13,366	$	(571)	$	185,092	$	(2,817)

December 31, 2016

	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	$	28,202	$	(299)	$	—	$	—	$	28,202	$	(299)
States and municipals		27,834		(716)		—		—		27,834		(716)
Mortgage-backed - residential		119,802		(1,938)		13,652		(739)		133,454		(2,677)
Total temporarily impaired	$	175,838	$	(2,953)	$	13,652	$	(739)	$	189,490	$	(3,692)

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

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

TRADING ASSETS

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

12

3.LOANS

Loans at period-end are as follows:

(in thousands)

	3/31/2017		12/31/2016
Commercial	$	76,040	$	77,436
Real estate construction		28,257		29,169
Real estate mortgage:
1-4 family residential		248,132		244,638
Multi-family residential		44,330		47,199
Non-farm & non-residential		182,417		176,024
Agricultural		61,035		62,491
Consumer		17,239		18,867
Other		116		183
Total	$	657,566	$	656,007

On July 24, 2015, the Company acquired Madison Financial Corporation and its wholly-owned subsidiary, Madison

Bank.  The above loan balances include loans purchased in the Madison Financial Corporation acquisition. Loan balances acquired in the Madison Financial Corporation acquisition have no allocated allowance for loan losses.  The composition of loans acquired as of March 31, 2017 is as follows:

	3/31/2017		12/31/2016
Commercial	$	1,078	$	1,113
Real estate construction		394		398
Real estate mortgage:
1-4 family residential		10,618		11,462
Multi-family residential		3,463		5,043
Non-farm & non-residential		11,591		13,024
Agricultural		1,239		1,940
Consumer		80		107
Total	$	28,463	$	33,087

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

	Three Months Ended March 31, 2017
	(in thousands)
	Beginning								Ending
	Balance		Charge-offs		Recoveries		Provision		Balance
Commercial	$	789	$	(2)	$	8	$	76	$	871
Real estate Construction		564		—		—		(19)		545
Real estate mortgage:
1-4 family residential		2,301		(11)		1		84		2,375
Multi-family residential		581		—		3		82		666
Non-farm & non-residential		1,203		—		—		108		1,311
Agricultural		856		—		10		(4)		862
Consumer		547		(37)		4		20		534
Other		60		(225)		234		(9)		60
Unallocated		640		—		—		12		652
	$	7,541	$	(275)	$	260	$	350	$	7,876

13

	Three Months Ended March 31, 2016
	(in thousands)
	Beginning								Ending
	Balance		Charge-offs		Recoveries		Provision		Balance
Commercial	$	486	$	—	$	31	$	(9)	$	508
Real estate Construction		411		—		6		459		876
Real estate mortgage:										—
1-4 family residential		2,081		(12)		5		102		2,176
Multi-family residential		458		—		3		11		472
Non-farm & non-residential		1,213		—		266		(298)		1,181
Agricultural		678		—		11		38		727
Consumer		525		(110)		57		59		531
Other		60		(303)		297		6		60
Unallocated		609		—		—		7		616
	$	6,521	$	(425)	$	676	$	375	$	7,147

Purchased Credit Impaired Loans:

The Company has purchased loans, for which there was, at acquisition, evidence of deterioration of credit quality since origination and it was probable, at acquisition, that all contractually required payments would not be collected. The carrying amount of those loans is as follows:

	3/31/2017		12/31/2016
Real estate mortgage:
1-4 family residential	$	850	$	1,028
Multi-family		534		562
Non-farm & non-residential		135		145
Agricultural		169		178
	$	1,688	$	1,913

There was no associated allowance for loan losses as of March 31, 2017 or December 31, 2016 for purchased credit impaired loans.  The contractual principal balance of these loans was $2.4 million at March 31, 2017 and $2.6 million at December 31, 2016.

Accretable yield, or income expected to be collected, is as follows.  There was no accretion recorded in income related to purchased credit impaired loans for the three months ended March 31, 2017 or March 31, 2016.

	Three Months Ended
	3/31/2017		3/31/2016
Balance, beginning of period	$	240	$	408
New loans purchased		—		—
Accretion of income		46		69
Balance, end of period	$	194	$	339

14

The following tables present the balance in the allowance for loan losses and the recorded investment (excluding accrued interest receivable amounting to $2.3 million as of March 31, 2017 and $2.4 million at December 31, 2016) in loans by portfolio segment and based on impairment method as of March 31, 2017 and December 31, 2016:

	Individually		Collectively		Purchased
As of March 31, 2017	Evaluated for		Evaluated for		Credit
(in thousands)	Impairment		Impairment		Impaired		Total
Allowance for Loan Losses:
Commercial	$	—	$	871	$	—	$	871
Real estate construction		—		545		—		545
Real estate mortgage:
1-4 family residential		75		2,300		—		2,375
Multi-family residential		—		666		—		666
Non-farm & non-residential		8		1,303		—		1,311
Agricultural		396		466		—		862
Consumer		—		534		—		534
Other		—		60		—		60
Unallocated		—		652		—		652
	$	479	$	7,397	$	—	$	7,876
Loans:
Commercial	$	—	$	76,040	$	—	$	76,040
Real estate construction		—		28,257		—		28,257
Real estate mortgage:
1-4 family residential		637		246,467		850		248,132
Multi-family residential		—		43,768		534		44,330
Non-farm & non-residential		2,609		179,663		135		182,417
Agricultural		3,142		57,715		169		61,035
Consumer		—		17,239		—		17,239
Other		—		116		—		116
	$	6,388	$	649,265	$	1,688	$	657,566

15

	Individually		Collectively		Purchased
As of December 31, 2016	Evaluated for		Evaluated for		Credit
(in thousands)	Impairment		Impairment		Impaired		Total
Allowance for Loan Losses:
Commercial	$	—	$	789	$	—	$	789
Real estate construction		—		564		—		564
Real estate mortgage:
1-4 family residential		99		2,202		—		2,301
Multi-family residential		—		581		—		581
Non-farm & non-residential		15		1,188		—		1,203
Agricultural		427		429		—		856
Consumer		—		547		—		547
Other		—		60		—		60
Unallocated		—		640		—		640
	$	541	$	7,000	$	—	$	7,541
Loans:
Commercial	$	97	$	77,339	$	—		77,436
Real estate construction		153		29,016		—		29,169
Real estate mortgage:
1-4 family residential		2,704		240,906		1,028		244,638
Multi-family residential		—		46,637		562		47,199
Non-farm & non-residential		1,725		174,154		145		176,024
Agricultural		3,315		58,998		178		62,491
Consumer		—		18,867		—		18,867
Other		—		183		—		183
Total	$	7,994	$	646,100	$	1,913	$	656,007

The following table presents loans individually evaluated for impairment by class of loans as of and for the three months ended March 31, 2017 (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:
Commerical	$	—	$	—	$	—	$	49	$	12	$	12
Real estate mortgage:
Construction		—		—		—		77		11		11
1-4 family residential		307		307		—		457		5		5
Agricultural		898		898		—		776		—		—
With an allowance recorded:
Real estate mortgage:
1-4 family residential		330		330		75		1,214		23		23
Non-farm & non-residential		1,711		1,711		8		1,718		23		23
Agricultural		3,142		3,142		396		2,902		3		3
Total	$	6,388	$	6,388	$	479	$	7,193	$	77	$	77

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

16

The following table presents loans individually evaluated for impairment by class of loans for the three months ended March 31,2016:

			Year to Date		Year to Date
	Average		Interest		Cash Basis
	Recorded		Income		Interest
(in thousands):	Investment		Recognized		Recognized
With no related allowance recorded:
Real estate mortgage:
1-4 family residential	$	370	$	2	$	2
Agricultural		346		3		3
With an allowance recorded:
Real estate mortgage:
Construction		1,197		32		32
1-4 family residential		1,077		5		5
Non-farm & non-residential		2,441		18		18
Agricultural		3,420		—		—
Total	$	8,851	$	60	$	60

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

The following table presents loans individually evaluated for impairment by class of loans as of and for the year ended December 31, 2016 (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	$	97	$	97	$	—	$	48	$	30	$	30
Real estate construction		153		153		—		494		9		9
Real estate mortgage:
1-4 family residential		606		606		—		488		—		—
Agricultural		654		654		—		561		—		—
With an allowance recorded:
Real estate mortgage
1-4 family residential		2,098		2,098		99		1,590		56		56
Non-farm & non-residential		1,725		1,725		15		2,303		71		71
Agricultural		2,661		2,661		427		3,309		25		25
Total	$	7,994	$	7,994	$	541	$	8,793	$	191	$	191

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

17

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, 2017 and December 31, 2016:

			Loans Past Due
			Over 90 Days
As of March 31, 2017			Still		Troubled Debt
(in thousands)	Nonaccrual		Accruing		Restructurings
Commercial	$	12	$	34	$	—
Real estate construction		—		—		—
Real estate mortgage:
1-4 family residential		2,285		249		—
Multi-family residential		—		—		—
Non-farm & non-residential		272		61		1,711
Agricultural		940		405		—
Consumer		13		8		—
Total	$	3,522	$	757	$	1,711
Loans included in totals above acquired from Madison Financial Corporation	$	635	$	22	$	—

			Loans Past Due
			Over 90 Days
As of December 31, 2016			Still		Troubled Debt
(in thousands)	Nonaccrual		Accruing		Restructurings
Commercial	$	3	$	11	$	—
Real estate construction		—		153		—
Real estate mortgage:
1-4 family residential		2,725		31		338
Multi-family residential		25		—		—
Non-farm & non-residential		272		—		1,725
Agricultural		1,541		724		—
Consumer		—		8		—
Other		—		—		—
Total	$	4,566	$	927	$	2,063
Loans included in totals above acquired from Madison Financial Corporation	$	578	$	22	$	—

Nonaccrual loans secured by real estate make up 99.3% of the total nonaccrual loan balances at March 31, 2017.

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

18

are current or less than 90 days past due with respect to principal and interest and for which we anticipate full payment of principal and interest but not in accordance with contractual terms.

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

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

	30–59		60–89		Greater than				Total
As of March 31, 2017	Days		Days		90 Days				Past Due &		Loans Not
(in thousands)	Past Due		Past Due		Past Due		Non-accrual		Non-accrual		Past Due
Commercial	$	25	$	235	$	34	$	12	$	306	$	75,734
Real estate construction		1,172		—		—		—		1,172		27,085
Real estate mortgage:
1-4 family residential		2,767		128		249		2,285		5,429		242,703
Multi-family residential		—				—		—		—		44,330
Non-farm & non-residential		223		64		61		272		620		181,797
Agricultural		256		156		405		940		1,757		59,278
Consumer		65		85		8		13		171		17,068
Other		—		—		—		—		—		116
Total	$	4,508	$	668	$	757	$	3,522	$	9,455	$	648,111
Loans included in totals above acquired from Madison Financial Corp.	$	125	$	—	$	—	$	635	$	760	$	27,703

	30–59		60–89		Greater than				Total
As of December 31, 2016	Days		Days		90 Days				Past Due &		Loans Not
(in thousands)	Past Due		Past Due		Past Due		Non-accrual		Non-accrual		Past Due
Commercial	$	54	$	45	$	11	$	3	$	113	$	77,323
Real estate construction		—		—		153		—		153		29,016
Real estate mortgage:
1-4 family residential		2,310		228		31		2,725		5,294		239,344
Multi-family residential		391		3		—		25		419		46,780
Non-farm & non-residential		159		61		—		272		492		175,532
Agricultural		647		61		724		1,541		2,973		59,518
Consumer		97		37		8		—		142		18,725
Other		—		—		—		—		—		183
Total	$	3,658	$	435	$	927	$	4,566	$	9,586	$	646,421
Loans included in totals above acquired from Madison Financial Corp.	$	155	$	—	$	22	$	578	$	755	$	32,332

Troubled Debt Restructurings:

The Company has allocated $8 thousand in specific reserves to customers whose loan terms have been modified in troubled debt restructurings as of March 31, 2017.  The Company allocated $40 thousand for specific reserves to customers whose loan terms had been modified in troubled debt restructuring as of December 31, 2016. 

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

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

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

As of March 31, 2017			Special
(in thousands)	Pass		Mention		Substandard		Doubtful
Commercial	$	74,976	$	1,002	$	62	$	—
Real estate construction		28,257		—		—		—
Real estate mortgage:
1-4 family residential		237,512		3,752		6,856		12
Multi-family residential		40,970		2,600		760		—
Non-farm & non-residential		172,511		8,142		1,764		—
Agricultural		57,646		1,748		1,641		—
Total	$	611,872	$	17,244	$	11,083	$	12
Loans included in totals above acquired from Madison Financial Corporation	$	25,992	$	438	$	2,033	$	—

20

As of December 31, 2016			Special
(in thousands)	Pass		Mention		Substandard		Doubtful
Commercial	$	76,346	$	1,078	$	12	$	—
Real estate construction		28,577		—		592		—
Real estate mortgage:
1-4 family residential		232,969		4,031		7,627		11
Multi-family residential		43,681		2,617		901		—
Non-farm & non-residential		167,451		8,185		388		—
Agricultural		58,155		1,367		2,969		—
Total	$	607,179	$	17,278	$	12,489	$	11
Loans included in totals above acquired from Madison Financial Corporation	$	30,359	$	480	$	2,248	$	—

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 $21 thousand at March 31, 2017 and $8 thousand at December 31, 2016.

4.REAL ESTATE OWNED

Activity in real estate owned, net was as follows:

	Three Months Ended
	March 31,
	2017		2016
Beginning of year	$	1,824	$	2,347
Additions		126		121
Sales		(577)		—
(Additions) subtractions to valuation allowance, net		—		(85)
End of period	$	1,373	$	2,383

Activity in the valuation allowance was as follows:

	2017		2016
Beginning of year	$	803	$	616
Write-downs of other real estate, net		—		85
Reductions from sale		—		—
End of Period	$	803	$	701

Expenses related to foreclosed assets include:

	Three Months Ended
	March 31,
	2017		2016
		(in thousands)
Net (gain) loss on sales, included in other income on income statement	$	(46)	$	—
Additions to valuation allowance, net		—		85
Operating expenses, net of rental income		79		27
Repossession expenses, net		79		112
Net expense, net of gain or loss on sales, for the period	$	33	$	112

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5.EARNINGS PER SHARE

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

The factors used in the earnings per share computation follow:

	Three Months Ended
	March 31,
	2017		2016
	(in thousands)
Basic Earnings Per Share
Net Income	$	3,137	$	1,837
Weighted average common shares outstanding		2,954		2,977
Basic earnings per share	$	1.06	$	0.61
Diluted Earnings Per Share
Net Income	$	3,137	$	1,837
Weighted average common shares outstanding		2,954		2,977
Weighted average common and dilutive potential common shares outstanding		2,954		2,977
Diluted earnings per share	$	1.06	$	0.61

Stock options for 600 shares of common stock for three months ended March 31, 2017 and 1,200 shares of common stock for the three months ended March 31, 2016 were excluded from diluted earnings per share because their impact was antidilutive.

6.STOCK COMPENSATION

We have four stock based compensation plans as described below.

Two Stock Option Plans

Under its expired 1999 Employee Stock Option Plan, the Company has granted certain officers and key employees stock option awards which vest and become fully exercisable at the end of five years and provided for issuance of up to 100,000 options.

Under the expired 1993 Non-Employee Directors Stock Ownership Incentive Plan, the Company also granted certain directors stock option awards which vest and become fully exercisable immediately and provided 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 the Company’s stock on the date of grant.

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Summary of activity in the stock option plan for the first three months of 2017 follows:

				Weighted
		Weighted		Average
		Average		Remaining	Aggregate
		Exercise		Contractual	Intrinsic
	Shares	Price		Term	Value (1)
Outstanding, beginning of year	1,200	$	31.00
Granted	—		—
Forfeited or expired	—		—
Exercised	(600)		31.00
Outstanding, end of period	600	$	31.00	11 months	$	4
Vested and expected to vest	600	$	31.00	11 months	$	4
Exercisable, end of period	600	$	31.00	11 months	$	4

(1) Aggregate intrinsic value in thousands

As of March 31, 2017, there was $0 of total unrecognized compensation cost related to nonvested stock options granted under the Plan.  Since both stock option plans have expired, neither plan allows for additional options to be issued.

2005 Restricted Stock Grant Plan

On May 10, 2005, the Company’s stockholders approved a restricted stock grant plan.  Total shares issuable under the plan were 50,000. There were no shares issued during the first three months of 2017 or 2016.  The plan is now expired and no additional shares will be issued from the 2005 plan.  There were no shares forfeited during the first three months of 2017 or 2016.

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, 2017	10,636	$	254	$	23.84
Granted	—		—		—
Vested	(4,192)		(76)		18.18
Forfeited	—		—		—
Nonvested at March 31, 2017	6,444	$	178	$	27.52

(1) Grant date fair value in thousands

As of March 31, 2017, there was $141 thousand of total unrecognized compensation cost related to nonvested shares granted under the restricted stock grant plan.  The cost is expected to be recognized over a weighted-average period of 2.2 years. As March 31, 2017, no additional shares are available for issuance under the restricted stock grant plan.

2009 Stock Award Plan

On May 13, 2009, the Company’s stockholders approved a stock award plan that provides for the granting of both incentive and nonqualified stock options and other share based awards.  Total shares issuable under the plan are 150,000.  There were 6,575 shares issued during the first three months of 2017 and 6,170 shares were issued during the first three months of 2016. There were no shares forfeited during the first three months of 2017 and no shares forfeited during the first three months of 2016.

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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 (1)		Per Share
Nonvested at January 1, 2017	7,297	$	214	$	29.31
Granted	6,575		214		32.50
Vested	(1,414)		(41)		28.77
Forfeited	—		—		—
Nonvested at March 31, 2017	12,458	$	387	$	31.05

(1) Grant date fair value in thousands

As of March 31, 2017, there was $364 thousand of total unrecognized compensation cost related to nonvested shares granted under the restricted stock grant plan.  The cost is expected to be recognized over a weighted-average period of  4.2 years. As of March 31, 2017, 132,417 shares are still available for issuance.

7.REPURCHASE AGREEMENTS

Repurchase agreements totaled $21.8 million at March 31, 2017. Of this, $15.8 million were overnight obligations and $6.0 million had terms extending through May 2020 and a weighted remaining average life of 1.5 years. The Company pledged agencies and mortgage-backed securities with a carrying amount of $28.5 million to secure repurchase agreements as of March 31, 2017.

8.OTHER BORROWINGS

On July 20, 2015, the Company borrowed $5 million which had an outstanding balance of $4.0 million at March 31, 2017. The term loan has a fixed interest rate of 5.02%, requires quarterly principal and interest payments, matures July 20, 2025 and is collateralized by Kentucky Bank stock.  The maturity schedule for the term loan as of March 31, 2017 is as follows (in thousands):

2017	$	288
2018		401
2019		421
2020		442
2021		465
Thereafter		1,966
	$	3,983

9.FAIR VALUE MEASUREMENTS

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

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

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

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

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

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

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

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

No adjustments were made for the first three months of 2017 or 2016 and resulted in a Level 3 classification of the inputs for determining fair value. 

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

Other Real Estate Owned:  Assets acquired through or instead of loan foreclosure and classified as other real estate owned (OREO) are initially recorded at fair value less costs to sell when acquired, establishing a new cost basis.  These assets are subsequently accounted for at lower of cost or fair value less estimated costs to sell.  Fair value is commonly based on recent real estate appraisals which are updated no less frequently than annually.  These appraisals may utilize a single valuation approach or a combination of approaches including comparable sales and the income approach with data from comparable properties.  Adjustments are routinely made in the appraisal process by the independent appraisers to adjust for differences between the comparable sales and income data available. Such adjustments were $0 for the three months ended March 31, 2017 and $85 thousand for the three months ended March 31, 2016 and resulted in a Level 3 classification of the inputs for determining fair value.  Real estate owned properties are evaluated on a quarterly basis for additional impairment and adjusted accordingly.

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

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.

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Fair Value Measurements at March 31, 2017 (in thousands):

			Quoted Prices
			In Active
			Markets for		Significant Other		Significant
			Identical		Observable		Unobservable
	Carrying		Assets		Inputs		Inputs
Description	Value		(Level 1)		(Level 2)		(Level 3)
U. S. government agencies	$	46,198	$	—	$	46,198	$	—
States and municipals		92,936		—		92,936		—
Mortgage-backed - residential		162,453		—		162,453		—
Equity securities		340		340		—		—
Trading Assets		5,644		2,384		3,260		—
Total	$	307,571	$	2,724	$	304,847	$	—

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

			Quoted Prices
			In Active
			Markets for		Significant Other		Significant
			Identical		Observable		Unobservable
	Carrying		Assets		Inputs		Inputs
Description	Value		(Level 1)		(Level 2)		(Level 3)
U. S. government agencies	$	36,528	$	—	$	36,528	$	—
States and municipals		91,132		—		91,132		—
Mortgage-backed - residential		145,770		—		145,770		—
Equity securities		340		340		—		—
Trading Assets		5,592		1,608		3,984		—
Total	$	279,362	$	1,948	$	277,414	$	—

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

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

	Fair Value Measurements at March 31, 2017 Using :
			Quoted Prices
			In Active
			Markets for	Significant Other	Significant
			Identical	Observable	Unobservable
	Carrying		Assets	Inputs	Inputs
(In thousands)	Value		(Level 1)	(Level 2)	(Level 3)
Description
Impaired loans:
Real Estate Mortgage:
1-4 family Residential		255	—	—		255
Agricultural		2,746	—	—		2,746
Other real estate owned, net:
Residential		956				956
Commercial		57	—	—		57
Loan servicing rights		1,152	—	—		1,152

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	Fair Value Measurements at December 31, 2016 Using :
			Quoted Prices
			In Active
			Markets for	Significant Other	Significant
			Identical	Observable	Unobservable
	Carrying		Assets	Inputs	Inputs
(In thousands)	Value		(Level 1)	(Level 2)	(Level 3)
Description
Impaired loans:
Real Estate Mortgage:
1-4 family residential		1,685	—	—	$	1,685
Agricultural		2,234	—	—		2,234
Other real estate owned, net:
Residential		956	—	—		956
Commercial		272	—			272
Loan servicing rights		1,083	—	—		1,083

Impaired loans, which are measured for impairment using the fair value of the collateral for collateral dependent loans, had a carrying amount of $3.0 million, which includes a valuation allowance of $471 thousand at March 31, 2017.  No new loans became impaired during the three month period ended March 31, 2017 which resulted in no additional provision for loan losses for impaired loans. 

Other real estate owned, which is measured at fair value less costs to sell, had a net carrying amount of $1.0 million, which is made up of the outstanding balance of 1.8 million, net of a valuation allowance of $803 thousand at March 31, 2017.  The Company recorded $0 in write-downs of other real estate owned properties for the three months ended March 31, 2017. The Company recorded $85 thousand in net write-downs of other real estate owned properties during the three months ended March 31, 2016. 

Impaired loan servicing rights, which are carried at the lower of cost or fair value, were carried at their fair value of $1.15 million, which is made up of the outstanding balance of $1.24 million, net of a valuation allowance of $86 thousand at March 31, 2017. For the first three months of 2017, the Company recorded a net recovery of prior write-downs of $39 thousand and a net recovery of prior write-downs of $3 thousand for the three months ended March 31, 2016.  At December 31, 2016, impaired loan servicing rights were carried at their fair value of $1.1 million, which is made up of the outstanding balance of $1.2 million, net of a valuation allowance of $125 thousand.

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

				Range
March 31, 2017	Fair	Valuation	Unobservable	(Weighted
(In thousands)	Value	Technique(s)	Input(s)	Average)
Impaired loans
Real estate mortgage:
1-4 family residential	255	sales comparison	adjustment for differences between the comparable sales	0%-12%	(6)%
Agricultural	2,746	sales comparison	adjustment for differences between the comparable sales	8%-64%	(33)%
Other real estate owned:
Residential	956	sales comparison	adjustment for differences between the comparable sales	1%-16%	(9)%
Commercial	57	income approach	capitalization rate	10%-10%	(10)%
Loan Servicing Rights	1,152	discounted cash flow	constant prepayment rates	8%-50%	(11)%

				Range
December 31, 2016	Fair	Valuation	Unobservable	(Weighted
(In thousands)	Value	Technique(s)	Input(s)	Average)
Impaired loans
Real estate mortgage:
1-4 family residential	1,685	sales comparison	adjustment for differences between the comparable sales	0%-21%	(10)%
Agricultural	2,234	sales comparison	adjustment for differences between the comparable sales	2%-75%	(9)%
Other real estate owned:
Residential	956	sales comparison	adjustment for differences between the comparable sales	1%-16%	(9)%
Commercial	272	income approach	capitalization rate	10%-10%	(10)%
Loan Servicing Rights	1083	discounted cash flow	constant prepayment rates	8%-45%	(13)%

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Fair Value of Financial Instruments

The carrying amounts and estimated fair values of financial instruments, at March 31, 2017 and December 31, 2016 are as follows:

March 31, 2017:

	Carrying
(in thousands)	Value		Level 1		Level 2		Level 3		Total
Financial assets
Cash and cash equivalents	$	37,248	$	37,248	$	—	$	—	$	37,248
Interest bearing deposits		4,659		4,659		—		—		4,659
Securities		301,927		340		301,587		—		301,927
Trading assets		5,644		2,384		3,260		—		5,644
Loans held for sale		1,189		—		1,229		—		1,229
Loans, net		649,690		—		—		647,847		647,847
FHLB Stock		7,034		—		—		—		N/A
Interest receivable		3,649		—		1,355		2,294		3,649
Financial liabilities
Deposits	$	824,345	$	613,975	$	209,399	$	—	$	823,374
Securities sold under agreements to repurchase		21,811		—		21,916		—		21,916
Long-term Federal Home Loan Bank advances		90,612		—		86,023		—		86,023
Note payable		3,983		—		4,438		—		4,438
Subordinated debentures		7,217		—		—		7,211		7,211
Interest payable		667		—		605		62		667

December 31, 2016:

	Carrying
(in thousands)	Value		Level 1		Level 2		Level 3		Total
Financial assets
Cash and cash equivalents	$	43,250	$	43,250	$	—	$	—	$	43,250
Interest bearing deposits		5,029		5,029		—		—		5,029
Securities		273,770		340		273,430		—		273,770
Trading assets		5,592		1,608		3,984		—		5,592
Mortgage loans held for sale		724		—		750		—		750
Loans, net		648,466		—		—		648,234		648,234
FHLB Stock		7,034		—		—		—		N/A
Interest receivable		3,715		—		1,334		2,381		3,715
Financial liabilities
Deposits	$	802,981	$	607,617	$	195,528	$	—	$	803,145
Securities sold under agreements to repurchase		20,873		—		21,006		—		21,006
FHLB advances		92,500		—		91,015		—		91,015
Note payable		4,090		—		4,564		—		4,564
Subordinated debentures		7,217		—		—		7,210		7,210
Interest payable		692		—		639		53		692

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

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

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

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

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

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

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

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

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

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

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

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

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10.CHANGES IN ACCUMULATED OTHER COMPREHENSIVE INCOME BY COMPONENT

Changes in Accumulated Other Comprehensive Income by Component (unaudited)

(in thousands)

	Unrealized
	Gains and Losses on
	Available for Sale
	Securities
	For the Three Months Ended March 31,
	2017		2016
Beginning Balance	$	(956)	$	359
Unrealized holding gains (losses) for the period, net of tax		736		2,470
Reclassification adjustment for:
Securities gains realized in income		—		126
Income taxes		—		(43)
		—		83
Net current period other comprehensive income		736		2,387
Ending balance	$	(220)	$	2,746

The following is significant amounts reclassified out of each component of accumulated other comprehensive income (loss) for the three months ended March 31, 2017 and 2016:

March 31, 2017

Details about	Amount		Affected Line Item
Accumulated Other	Reclassified From		in the Statement
Comprehensive	Accumulated Other		Where Net
Income Components	Comprehensive Income		Income is Presented
Unrealized gains and losses on available-for-sale securities	$	—	Gain on sale of available for sale securities, net
		—	Income taxes
		—	Net income

March 31, 2016

Details about	Amount		Affected Line Item
Accumulated Other	Reclassified From		in the Statement
Comprehensive	Accumulated Other		Where Net
Income Components	Comprehensive Income		Income is Presented
Unrealized gains and losses on available-for-sale securities	$	126	Gain on sale of available for sale securities, net
		43	Income taxes
		83	Net income

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

Forward-Looking Statements

The following discussion provides information about the financial condition and results of operations of the Company and its subsidiaries as of the dates and periods indicated.  This discussion and analysis should be read in conjunction with the unaudited consolidated financial statements and Notes thereto appearing elsewhere in this report and the Management’s Discussion and Analysis in the Company’s Annual Report on Form 10-K for the year ended December 31, 2016.

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 the report, and we undertake no obligation to republish revised forward-looking statements to reflect events or circumstances after the date hereof or to reflect the occurrence of unanticipated events.

Summary

The Company recorded net income of $3.1 million, or $1.06 basic earnings and diluted earnings per share for the first three months ended March 31, 2017 compared to $1.8 million or $0.61 basic earnings and diluted earnings per share for the three month period ended March 31, 2016.  The first three months net earnings reflect an increase of $1.3 million, or 70.8%, compared to the same time period in 2016.  The increase in net earnings is mostly attributed to an increase of $169 thousand, or 2.1%, in net interest income, an increase of $1.6 million, or 58.4%, in non-interest income, a decrease of $142 thousand, or 1.7%, in non-interest expense, and a decrease of $25 thousand, or 6.7%, for the provision for loan losses.  The increase in non-interest income is mostly attributed to the sale of a branch building located in Winchester, Kentucky, to a non-banking real estate investor.  The sale was solely for the building and not for the loans or deposits associated with the branch. The sale of the building resulted in a pre-tax gain of approximately $1.2 million.  Absent the sale of the building, net income would have been up approximately $500 thousand or 27%, compared to the same period last year.

For the three months ended March 31, 2017 and compared to the three months ended March 31, 2016, service charges increased $106 thousand, debit card interchange income increased $87 thousand and gains on the sale of loans increased $251 thousand. 

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For the three months ended March 31, 2017 and compared to the the three months ended March 31, 2016, salaries and benefits expense increased $75 thousand, legal and professional fees decreased $95 thousand, data processing expense decreased $20 thousand, debit card expense increased $56 thousand and other expenses decreased $121 thousand.  For the same three month comparision, repossession expense decreased $33 thousand.

Return on average assets was 1.20% for the three months ended March 31, 2017 and 0.74% for the three months ended March 31, 2016.  Return on average equity was 13.34% for the three month period ended March 31, 2017 and 8.07% for the three month period ended March 31, 2016. 

Securities available for sale increased $28.1 million from $273.8 million at December 31, 2016 to $301.9 million at March 31, 2017.  Trading assets increased by $52 thousand, or 0.9%, totaled $5.6 million at both March 31, 2017 and December 31, 2016, and includes income on the investment totaling $34 thousand during the first three months of 2017 compared to $42 thousand for the three months ended March 31, 2016. 

Gross Loans increased $1.6 million from $656.0 million on December 31, 2016 to $657.6  million at March 31, 2017.  Loans acquired with Madison Financial Corporation had outstanding loan balances of $28.5 million at March 31, 2017 compared to $33.1 million at December 31, 2016.

The overall increase in loan balances from December 31, 2016 to March 31, 2017 is comprised of the following: an increase of $3.5 million in 1-4 family residential loans, a decrease of $1.4 million in commercial loans, a decrease of $2.9 million in multi-family residential loans, a decrease of $1.5 million in agricultural loans, an increase of $6.4 million in non-farm and non-residential loans, a decrease of $1.6 million in consumer loans, and a decrease of $912 thousand in real-estate construction loans.  Other loan balances decreased $67 thousand from December 31, 2016 to March 31, 2017.

Total deposits increased from $803.0 million on December 31, 2016 to $824.3 million on March 31, 2017, an increase of $21.3 million.  Non-interest bearing demand deposit accounts decreased $1.2 million from December 31, 2016 to March 31, 2017 while time deposits $250 thousand and over increased $10 thousand and other interest bearing deposit accounts increased $12.5 million from December 31, 2016 to March 31, 2017.

Public fund account balances decreased $18 million from December 31, 2016 to March 31, 2017.  Public fund accounts typically decrease during the first three quarters of the year and increase during the last quarter of the year due to tax payments collected during the fourth quarter and then withdrawn from the Bank during the following months.

Borrowings from the Federal Home Loan Bank decreased $1.9 million from December 31, 2016 to March 31, 2017, all of which were long-term borrowings, repurchase agreements increased $938 thousand and the note payable decreased $107 thousand.

Net Interest Income

Net interest income is the difference between interest income earned on interest-earning assets and the interest expense paid on interest-bearing liabilities.

Net interest income was $8.2 million for the three months ended March 31, 2017 compared to $8.0 million for the three months ended March 31, 2016, an increase of 2.1%.  

The interest spread, excluding tax equivalent adjustments, was 3.25% for the first three months of 2017 compared to 3.34% for the first three months of 2016.  For the first three months in 2017, the yield on assets decreased from 3.88% in 2016 to 3.77% in 2017, excluding tax equivalent adjustments. 

The yield on loans decreased three basis points compared to the three months ended March 31, 2016 from 4.68% to 4.65% for the three months ended March 31, 2017.  The yield on securities, excluding tax equivalent adjustments, decreased five basis points during the first three months of 2017 compared to 2016 from 2.39% in 2016 to 2.34% in 2017.  The cost of liabilities was 0.51% for the first three months in 2017 compared to 0.49% in 2016.

Year to date average loans, excluding overdrafts, increased $23.4 million, or 3.7% for the three months ended March 31, 2017 compared to the three months ended March 31, 2016.  Loan interest income increased $115 thousand during the first three months of 2017 compared to the first three months of 2016.  Year to date average total deposits increased from

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March 31, 2016 to March 31, 2017 by $50.3 million or 6.5%.  Year to date average interest bearing deposits increased $70 thousand, or 10.2%, from March 31, 2016 to March 31, 2017.  Deposit interest expense increased $88 thousand for the first three months of 2017 compared to the same period in 2016.  Year to date average borrowings, including repurchase agreements, increased $3.9 million, or 3.3%, from March 31, 2016 to March 31, 2017.  Interest expense on borrowed funds, including repurchase agreements, increased $21 thousand for the first three months of 2017 compared to the same period in 2016. 

The volume rate analysis for the three months ended March 31, 2017 indicates that $860 thousand of the increase in loan interest income is attributable to an increase in loan volume and $326 thousand of the increase in securities interest income is attributable to an increase in the volume of our security portfolio.  Further, a decrease in loan rates caused a decrease of $745 thousand in interest income and a decrease in rates in our security portfolio contributed a decrease of $231 thousand in securities interest income.  The net effect to interest income was an increase of $278 thousand for the first three months of 2017 compared to the same time period in 2016.

Also based on the following volume rate analysis for the three months ended March 31, 2017, an increase in demand deposit interest rates resulted in $29 thousand additional interest expense, a decrease in interest rates paid for savings deposits resulted in a reduction of $2 thousand in interest expense, and increases in interest rates paid for time deposits resulted in an addition of $20 thousand in interest expense. The change in volume in deposits and borrowings was responsible for a $75 thousand increase in interest expense, of which an increase in demand deposits resulted in an increase of $39 thousand in interest expense, an increase in time deposits resulted in an increase of $2 thousand in interest expense, a decrease in repurchase agreements resulted in a decrease of $15 thousand in interest expense, and an increase in other borrowings resulted in an increase of $49 thousand in interest expense.  The net effect to interest expense was an increase of $109 thousand.  As a result, the increase in net interest income for the first three months in 2017 is mostly attributed to growth in the Company’s loan and security portfolios.

Changes in Interest Income and Expense

	Three Months Ended
	2017 vs. 2016
	Increase (Decrease) Due to Change in
(in thousands)	Volume		Rate		Net Change
INTEREST INCOME
Loans	$	860	$	(745)	$	115
Investment Securities		326		(231)		95
Other		11		57		68
Total Interest Income		1,197		(919)		278
INTEREST EXPENSE
Deposits
Demand		39		29		68
Savings		—		(2)		(2)
Negotiable Certificates of Deposit and Other Time Deposits		2		20		22
Securities sold under agreements to repurchase and other borrowings		(15)		23		8
Federal Home Loan						—
Bank advances		49		(36)		13
Total Interest Expense		75		34		109
Net Interest Income	$	1,122	$	(953)	$	169

Non-Interest Income

Non-interest income increased $1.6 million for the three months ended March 31, 2017, compared to the same period in 2016, to $4.4 million. 

As previously noted, non-interest income increased $1.6 million for the three months ended March 31, 2017 in comparison to the three months ended March 31, 2016. 

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Favorable variances to non-interest income for the first three months of 2017 include an increase of $106 thousand in service charges, an increase of $63 thousand in loan net service fee income, an increase of $25 thousand in trust department income, an increase of $9 thousand in brokerage fee income, an increase of $87 thousand in debit card interchange income and an increase of $251 thousand in gains on the sale of loans.  The largest favorable variance to non-interest income for the first three months of 2017 is an increase of $1.2 million in gain on bank premises due to the sale of a bank building located in Winchester, Kentucky.  Decreases to non-interest income for the three months ended March 31, 2017 compared to the three months ended March 31, 2016 include a decrease of $126 thousand in gains on the sale of securities and a decrease of $23 thousand in gain on trading assets.    

The gain on the sale of  loans increased from $299 thousand during the first three months of 2016 to $550 thousand during the first three months of 2017, an increase of $251 thousand. 

The volume of loans originated to sell during the first three months of 2017 increased $5.0 million compared to the same time period in 2016.  The volume of mortgage loan originations and sales is generally inverse to rate changes.  A change in the mortgage loan rate environment can have a significant impact on the related gain on sale of mortgage loans.  Loan service fee income, net of amortization and impairment expense, was $114 thousand for the three months ended March 31, 2017 compared to $51 thousand for the three months ended March 31, 2016, an increase of $63 thousand.  During the first three months of 2017, the market value adjustment to the carrying value of the mortgage servicing right was a net recovery of prior-writedowns of $39 thousand, as the fair value of this asset increased.  During the first three months of 2016, the market value adjustment to the carrying value of the mortgage servicing right asset was a positive valuation adjustment of $3 thousand as the fair value of the mortgage servicing asset increased. 

Non-Interest Expense

Total non-interest expense decreased $142 thousand for the three month period ended March 31, 2017 compared to the same period in 2016.  Management continues to consider opportunities for branch expansion, and will also consider acquisition opportunities that help advance its strategic objectives, which would result in additional future non-interest expense.

For the comparable three month periods, salaries and employees benefits expense increased $75 thousand, an increase of 1.7%.  The number of full-time employee equivalent employees decreased from 247 at March 31, 2016 to 243 at March 31, 2017, a decrease of four full-time employee equivalent employees. 

Occupancy expense increased $47 thousand to $965 thousand for the first three months of 2017 compared to the same time period in 2016.  Building rent expense increased $30 thousand  mostly due to rent expense being lower in 2016 due to the Company recovering $20 thousand in accrued expense for a former branch leased in Richmond, KY.  Depreciation expense decreased $37 thousand for the three months ended March 31, 2017 compared to March 31, 2016.  Expenses incurred for assets not depreciated increased $30 thousand during the first three months of 2017 compared to the first three months of 2016.  This increase is attributed to purchasing additional equipment during the first quarter of 2017 and increasing the threshold for which we depreciate assets.  Building repairs and maintenance decreased $42 thousand due to fewer maintetenance projects in 2017.

Legal and professional fees decreased $95 thousand for the three months ended March 31, 2017 compared to the first three months in 2016.  The reduction in legal and professional fees is attributed to expenses being higher for the three months ended March 31, 2016 due to the Company incurring $195 thousand in additional expense related to acquiring the services of an outside firm to help the Company identify ways to become more efficient and profitable.

Debit card expenses increased $56 thousand for the three months ended March 31, 2017 compared to the first three months of 2016.  The increase in debit card expense is attributed to an increase in debit card interchange activity which also resulted in increases in debit card interchange income as shown on the income statement.

Repossession expense decreased $33 thousand for the first three months ended March 31, 2017 compared to the same time period in 2016.  Repossession expenses are reported net of rental income earned on repossessed properties.  Net repossession expenses were lower during the first three months of 2017 when compared to 2016 due to net write-downs totaling $0 in 2017 compared to net write-downs of $85 thousand in 2016. 

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Income Taxes

The effective tax rate for the three months ended March 31, 2017 was 21.4% compared to 10.5% in 2016.  The effective tax rate is higher in 2017 due to taxable income increasing, largely due to the $1.2 million gain on the sale of the branch building.  These effective tax rates are less than the statutory rate as a result of the Company investing in tax-free securities, loans and other investments which generate tax credits for the Company. 

The Company also has a captive insurance subsidiary which contributes to reducing taxable income.  Income tax expense increased $639 thousand for the three months ended March 31, 2017 compared to the first three months in 2016.  Tax-exempt interest income increased $27 thousand for the first three months of 2017 compared to the first three months of 2016.  Further, for the first three months of 2017, the Company had tax credits totaling $154 thousand for investments made in low income housing projects compared to similar tax credits of $172 for the first three months of 2016.

As part of normal business, the Bank typically makes tax free loans to select municipalities in our market and invests in selected tax free securities, primarily in the Commonwealth of Kentucky.  In making these investments, the Company considers the overall impact to managing our net interest margin, credit worthiness of the underlying issuer and the favorable impact on our tax position.  For the three months ended March 31, 2017, the Company averaged $86.9 million in tax free securities and $40.7 million in tax free loans.  As of March 31, 2017, the weighted average remaining maturity for the tax free securities is 98 months, while the weighted average remaining maturity for the tax free loans is 141 months.

Liquidity and Funding

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

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

Cash and cash equivalents were $37.2 million as of March 31, 2017 compared to $43.2 million at December 31, 2016.  The decrease in cash and cash equivalents is attributed to a decrease of $5.9 million in cash and due from banks and a decrease of $85 thousand in federal funds sold.

In addition to cash and cash equivalents, the securities portfolio provides an important source of liquidity.  Securities available for sale totaled $301.9 million at March 31, 2017 compared to $273.8 million at December 31, 2016.  Securities classified as trading assets totaled $5.6 million at March 31, 2017 compared to $5.6 million at December 31, 2016.

The securities available for sale and trading assets are available to meet liquidity needs on a continuing basis.  However, we expect our customers’ deposits to be adequate to meet our funding demands.

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

For the first three months of 2017, deposits increased $21.4 million compared to December 31, 2016.  The Company’s borrowed funds from the Federal Home Loan Bank decreased $1.9 million from December 31, 2016 to March 31, 2017, federal funds purchased remained at zero, and total repurchase agreements increased $938 thousand from December 31, 2016 to March 31, 2017.

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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, 2017, we have sufficient collateral to borrow an additional $90 million from the Federal Home Loan Bank. 

In addition, as of March 31, 2017, $49 million is available in overnight borrowing through various correspondent banks and the Company has access to an additional $300 million in brokered deposits.  In light of this, management believes there is sufficient liquidity to meet all reasonable borrower, depositor and creditor needs in the present economic environment.

Capital Requirements

The Company and the Bank are subject to various regulatory capital requirements administered by the federal banking agencies.  Failure to meet minimum capital requirements can initiate certain mandatory and possible additional discretionary actions by regulators that, if undertaken, could have a direct material effect on the Company’s financial statements.

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

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

The most recent notification from the FDIC categorized the Bank as well capitalized under the regulatory framework for prompt corrective action.  To be categorized as well capitalized, the Bank must maintain minimum Total risk-based, Tier I risk-based, Common Equity Tier 1 risk based and Tier I leverage ratios as set forth in the following table.  There are no conditions or events since that notification that management believes have changed the institution’s category.

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

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

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. 

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The capital conservation buffer was 1.25% at March 31, 2017 and the Company is in compliance with the capital conservation buffer.  The final rule became effective for the Bank on January 1, 2016.  In accordance with the final rule, the capital conservation buffer requirement began being phased in beginning January 1, 2016 and will continue through January 1, 2019, when the full capital conservation buffer requirement will be effective. The Company’s and the Bank’s actual amounts and ratios, exclusive of the capital conservation buffer, are presented in the table below:

									To Be Well
									Capitalized
									Under Prompt
					For Capital				Corrective
	Actual				Adequacy Purposes				Action Provisions
	Amount		Ratio		Amount		Ratio		Amount		Ratio
	(Dollars in Thousands)
March 31, 2017
Consolidated
Total Capital (to Risk-Weighted Assets)	$	96,746	14.1	%	$	54,824	8.0	%		N/A	N/A
Tier I Capital (to Risk-Weighted Assets)		88,786	13.0			41,118	6.0			N/A	N/A
Common Equity Tier 1 Capital (to Risk-Weighted Assets)		81,786	11.9			30,839	4.5			N/A	N/A
Tier I Capital (to Average Assets)		88,786	8.6			41,321	4.0			N/A	N/A
Bank Only
Total Capital (to Risk-Weighted Assets)	$	95,118	14.0	%	$	54,246	8.0	%	$	67,808	10.0	%
Tier I Capital (to Risk-Weighted Assets)		87,493	12.9			40,685	6.0			54,246	8.0
Common Equity Tier 1 Capital (to Risk-Weighted Assets)		87,493	12.9			30,513	4.5			44,075	6.5
Tier I Capital (to Average Assets)		87,493	8.8			39,671	4.0			49,588	5.0
December 31, 2016
Consolidated
Total Capital (to Risk-Weighted Assets)	$	94,343	13.9	%	$	54,280	8.0	%		N/A	N/A
Tier I Capital (to Risk-Weighted Assets)		86,718	12.8			40,710	6.0			N/A	N/A
Common Equity Tier 1 Capital (to Risk-Weighted Assets)		79,718	11.8			30,533	4.5			N/A	N/A
Tier I Capital (to Average Assets)		86,718	8.7			39,795	4.0			N/A	N/A
Bank Only
Total Capital (to Risk-Weighted Assets)	$	95,118	14.0	%	$	54,246	8.0	%	$	67,808	10.0	%
Tier I Capital (to Risk-Weighted Assets)		87,493	12.9			40,685	6.0			54,246	8.0
Common Equity Tier 1 Capital (to Risk-Weighted Assets)		87,493	12.9			30,513	4.5			44,075	6.5
Tier I Capital (to Average Assets)		87,493	8.8			39,671	4.0			49,588	5.0

Non-Performing Assets

As of March 31, 2017, our non-performing assets totaled $7.4 million or 0.70% of assets compared to $9.4 million or 0.91% of assets at December 31, 2016 (See table below.)  The Company experienced a decrease of $1.04 million in non-accrual loans from December 31, 2016 to March 31, 2017.  As of March 31, 2017, non-accrual loans include $940 thousand in loans secured by farmland, $2.3 million in loans secured by 1-4 family properties, $272 thousand in loans secured by non-farm and non-residential properties, $11 thousand in commercial loans and $13 thousand in consumer loans. 

Loans secured by real estate composed 99.3% of the non-performing loans as of March 31, 2017 and 96.9% as of December 31, 2016.  Forgone interest income on non-accrual loans totaled $59 thousand for the first three months of 2017 compared to forgone interest of $26 thousand for the same time period in 2016. 

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Accruing loans that are contractually 90 days or more past due as of March 31, 2017 totaled $927 thousand compared to $1.0 million at December 31, 2016, a decrease of $73 thousand.

Total nonperforming and restructured loans decreased $2.0 million from December 31, 2016 to March 31, 2017.  The decrease in non-performing loan balances contributed to the decrease in the ratio of nonperforming and restructured loans to loans which decreased 24 basis points to 0.91% from December 31, 2016 to March 31, 2017.

In addition, the amount the Company has recorded as other real estate owned decreased $451 thousand from December 31, 2016 to March 31, 2017.  As of March 31, 2017, the amount recorded as other real estate owned totaled $1.4 million compared to $1.8 million at December 31, 2016.  During the first three months of 2017, $126 thousand in loan balances were foreclosed upon and added to other real estate properties while $577 thousand in other real estate properties were sold.  The allowance as a percentage of non-performing and restructured loans and other real estate owned increased from 80% at December 31, 2016 to 107% at March 31, 2017.

Nonperforming and Restructured Assets

	3/31/2017			12/31/2016
	(in thousands)
Non-accrual Loans	$	3,522		$	4,566
Accruing Loans which are Contractually past due 90 days or more		757			927
Accruing Troubled Debt Restructurings		1,711			2,063
Total Nonperforming and Restructured Loans		5,990			7,556
Other Real Estate		1,373			1,824
Total Nonperforming and Restructured Loans and Other Real Estate	$	7,363		$	9,380
Nonperforming and Restructured Loans as a Percentage of Loans		0.91	%		1.15	%
Nonperforming and Restructured Loans and Other Real Estate as a Percentage of Total Assets		0.70	%		0.91	%
Allowance as a Percentage of Period-end Loans		1.20	%		1.15	%
Allowance as a Percentage of Non-performing and Restructured Loans and Other Real Estate		107	%		80	%

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 2017 was $350 thousand compared to $375 thousand for the first three months of 2016.  The decrease in the total loan loss provision during the first three months of 2017 compared to the same time period in 2016 is attributed to improved loan quality.  The allowace for loan losses as a percentage of loans was 1.20%  at March 31, 2017 compared to 1.15% at March 31, 2016. 

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.

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As this analysis, or any similar analysis, is an imprecise measure of loss, the allowance is subject to ongoing adjustments.  Therefore, management will often take into account other significant factors that may be necessary or prudent in order to reflect probable incurred losses in the total loan portfolio.

Nonperforming loans and restructured loans decreased $1.6 million from December 31, 2016 to $6.0 million at March 31, 2017.  The Company recorded net charge-offs of $15 thousand for the three months ended March 31, 2017 compared to net recoveries of $251 thousand for the three months ended March 31, 2016.  During the first quarter of 2016, the Company recorded a recovery of $259 for one loan which was charged-off in a prior year.  Future levels of charge-offs will be determined by the particular facts and circumstances surrounding individual loans.

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

Loan Losses

	Three Months Ended March 31,
	(in thousands)
		2017			2016
Balance at Beginning of Period Amounts Charged-off:	$	7,541		$	6,521
Commercial		2			—
1-4 family residential		11			—
Multi-family residential		—			12
Agricultural		—			—
Consumer and other		262			413
Total Charged-off Loans		275			425
Recoveries on Amounts Previously Charged-off:
Commercial		8			31
Real estate construction		—			6
1-4 family residential		1			5
Multi-family residential		3			3
Non-farm & non-residential		—			266
Agricultural		10			11
Consumer and other		238			354
Total Recoveries		260			676
Net Charge-offs (Recoveries)		15			(251)
Provision for Loan Losses		350			375
Balance at End of Period		7,876			7,147
Loans
Average		653,006			629,122
At March 31,		657,565			635,783
As a Percentage of Average Loans:
Net Charge-offs (Recoveries) for the period		0.00	%		(0.04)	%
Provision for Loan Losses for the period		0.05	%		0.06	%
Allowance as a Multiple of Net Charge-offs (Recoveries) annualized		131.3			(7.1)

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Item 3 - QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

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

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

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

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

The projections are based on balance sheet growth assumptions and repricing opportunities for new, maturing and adjustable rate amounts.  As of March 31, 2017, 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 lower 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, 2017 is as follows:

PROJECTED NET INTEREST INCOME

(dollars in thousands)

	Level
Change in basis points:	- 100			Rates		+ 100			+ 300
Year One (4/17 - 3/18)
Net interest income	$	32,848		$	33,630	$	33,397		$	33,148
Net interest income dollar change		(782)			N/A		(233)			(482)
Net interest income percentage change		(2.3)	%		N/A		(0.7)	%		(1.4)	%
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, 2016 is as follows:

PROJECTED NET INTEREST INCOME

(dollars in thousands)

	Level
Change in basis points:	- 100			Rates		+ 100			+ 300
Year One (4/16-3/17)
Net interest income	$	31,284		$	31,994	$	31,996		$	31,787
Net interest income dollar change		(709)			N/A		2			(207)
Net interest income percentage change		(2.2)	%		N/A		0.0	%		(0.7)	%
Board approved limit		>(4.0)	%		N/A		>(4.0)	%		>(10.0)	%

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Projections from March 31, 2017 and March 31, 2016, year one reflected declines of 2.3% and 2.2% in net interest income assuming rates were to decline 100 basis points.  The 100 basis point increase in rates reflected a 0.7% decrease in net interest income in 2017 compared to an increase of 0.0% in 2016.

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, 2017, balance sheet, a 100 basis point decrease in rates results in a 3.0% decrease in EVE.  A 100 basis point decrease in rates results in a 10.7% 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, and pursuant to Rule 13a-15(b) of the Securities Exchange Act of 1934 (“Exchange Act”), our management, including the Chief Executive Officer and the Chief Financial Officer, carried out an evaluation of the effectiveness of the design and operation of our disclosure controls and procedures (as that term is defined in Rule 13a-15(e) of the Exchange Act).  Based on the foregoing, our Chief Executive Officer and Chief Financial Officer concluded that the Company’s disclosure controls and procedures were effective, in all material respects, to ensure that information required to be disclosed in the reports the Company files and submits under the Exchange Act is recorded, processed, summarized and reported as and when required.

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

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

Part II - Other Information

Item 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
1/1/17-1/31/17	9,030	$	29.07	9,030	100,912	shares
2/1/17-2/28/17	—		—	—	100,912	shares
3/1/17-3/31/17	—		—	—	100,912	shares
Total	9,030	$	29.07	9,030	100,912	shares

On October 25, 2000, we announced that our Board approved a stock repurchase program and authorized the Company to purchase up to 100,000 shares of its outstanding common stock.  On November 11, 2002, the Board approved and authorized the Company’s repurchase of an additional 100,000 shares.  On May 20, 2008, the Board of Directors approved and authorized the Company to purchase an additional 100,000 shares.  On May 17, 2011, the Board approved and authorized the Company’s repurchase of an additional 100,000 shares.  On November 18, 2016, the Board of Directors approved and authorized the Company’s repurchase of an additional 50,000 shares.  Shares will be purchased from time to time in the open market depending on market prices and other considerations.  Through March 31, 2017, 349,088 shares have been purchased.

42

Item 6.     Exhibits

Ay
2.1	Agreement and Plan of Merger with Peoples Bancorp of Sandy Hook is incorporated by reference to Exhibit 2.1 of the Registrant’s Current Report on Form 8-K dated and filed February 24, 2006.
2.2	Agreement and Plan of Share Exchange with Madison Financial Corporation is incorporated by reference to Exhibit 2.1 of the Registrant’s Current Report on Form 8-K dated and filed January 21, 2015.
3.1	Amended and Restated Articles of Incorporation of the Registrant are incorporated by reference to Exhibit 3.1 of the Registrant’s Quarterly Report on Form 10-Q for the quarterly period ended March 31, 2000 and filed May 15, 2000.
3.2	Bylaws of the Registrant are incorporated by reference to Exhibit 3.1 of the Registrant’s Current Report on Form 8-K dated and filed November 21, 2007.
3.3	Articles of Amendment to Amended and Restated Articles of Incorporation of the Registrant are incorporated by reference to Exhibit 3.3 of the Registrant’s Annual Report of Form 10-K for the period ended December 31, 2005 and filed March 29, 2006.
31.1	Certifications of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
31.2	Certifications of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
32	Certifications of Chief Executive Officer and Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
101	The following financial information from Kentucky Bancshares, Inc. Quarterly Report on Form 10-Q for the period ended March 31, 2017, filed with the SEC May 15, 2017, formatted in Extensible Business Reporting Language (XBRL): (i) Consolidated Balance Sheets at March 31, 2017,and December 31, 2016, (ii) Consolidated Statements of Income and Comprehensive Income (Loss) for the three months ended March 31, 2017 and March 31, 2016, (iii) Consolidated Statement of Stockholders’ Equity for the three months ended March 31, 2017, (iv) Consolidated Statements of Cash Flows for the three months ended March 31, 2017 and March 31, 2016 and (v) Notes to Consolidated Financial Statements.

43

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	5/15/17	/s/Louis Prichard
		Louis Prichard, President and C.E.O.
Date	5/15/17	/s/Gregory J. Dawson
		Gregory J. Dawson, Chief Financial Officer

44

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 15, 2017
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 15, 2017
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, 2017, 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 15, 2017	By	/s/ Louis Prichard
		Louis Prichard
		President & Chief Executive Officer
Date:	May 15, 2017	By	/s/ Gregory J. Dawson
		Gregory J. Dawson
		Chief Financial Officer

XML

Document and Entity Information - shares	3 Months Ended
	Mar. 31, 2017	Apr. 30, 2017
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, 2017
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		2,972,763
Document Fiscal Year Focus	2017
Document Fiscal Period Focus	Q1

XML

CONSOLIDATED BALANCE SHEETS - USD ($) $ in Thousands	Mar. 31, 2017	Dec. 31, 2016
ASSETS
Cash and due from banks	$ 36,135	$ 42,052
Federal funds sold	1,113	1,198
Cash and cash equivalents	37,248	43,250
Interest bearing time deposits	4,659	5,029
Securities available for sale	301,927	273,770
Trading Assets	5,644	5,592
Loans held for sale	1,189	724
Loans	657,566	656,007
Allowance for loan losses	(7,876)	(7,541)
Net loans	649,690	648,466
Federal Home Loan Bank stock	7,034	7,034
Real estate owned, net	1,373	1,824
Assets held for sale		969
Bank premises and equipment, net	15,004	14,781
Interest receivable	3,649	3,715
Mortgage servicing rights	1,405	1,321
Goodwill	14,001	14,001
Other intangible assets	485	529
Other assets	6,460	7,442
Total assets	1,049,768	1,028,447
Deposits
Non-interest bearing	218,379	219,556
Time deposits, $250,000 and over	84,353	74,302
Other interest bearing	521,613	509,123
Total deposits	824,345	802,981
Repurchase agreements	21,811	20,873
Long-term Federal Home Loan Bank advances	90,612	92,500
Note payable	3,983	4,090
Subordinated debentures	7,217	7,217
Interest payable	667	692
Other liabilities	5,309	7,122
Total liabilities	953,944	935,475
Stockholders' equity
Preferred stock, 300,000 shares authorized and unissued
Common stock, no par value; 10,000,000 shares authorized; 2,972,763 and 2,973,232 shares issued and outstanding at March 31, 2017 and December 31, 2016	20,808	20,767
Retained earnings	75,236	73,161
Accumulated other comprehensive loss	(220)	(956)
Total stockholders' equity	95,824	92,972
Total liabilities and stockholders’ equity	$ 1,049,768	$ 1,028,447

XML

CONSOLIDATED BALANCE SHEETS (Parenthetical) - $ / shares	Mar. 31, 2017	Dec. 31, 2016
CONSOLIDATED BALANCE SHEETS
Preferred stock, shares authorized	300,000	300,000
Preferred stock, shares issued	0	0
Common stock, par value (in dollars per share)	$ 0	$ 0
Common stock, shares authorized	10,000,000	10,000,000
Common stock, shares issued	2,972,763	2,973,232
Common stock, shares outstanding	2,972,763	2,973,232

XML

CONSOLIDATED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME (unaudited) - USD ($) $ in Thousands	3 Months Ended
	Mar. 31, 2017	Mar. 31, 2016
INTEREST INCOME:
Loans, including fees	$ 7,494	$ 7,379
Securities
Taxable	1,062	907
Tax exempt	608	657
Trading Assets	34	42
Other	178	113
Total interest income	9,376	9,098
INTEREST EXPENSE:
Deposits	645	557
Repurchase agreements	26	26
Federal Home Loan Bank advances	397	384
Note payable	50	61
Subordinated debentures	80	61
Total interest expense	1,198	1,089
Net interest income	8,178	8,009
Provision for loan losses	350	375
Net interest income after provision	7,828	7,634
NON-INTEREST INCOME:
Service charges	1,223	1,117
Loan service fee income, net	114	51
Trust department income	288	263
Gain on sale of available for sale securities, net		126
Gain (loss) on trading assets	17	40
Gain on sale of loans	550	299
Brokerage income	193	184
Debit card interchange income	731	644
Gain on bank premises	1,194
Other	40	23
Total other income	4,350	2,747
NON-INTEREST EXPENSE:
Salaries and employee benefits	4,445	4,370
Occupancy expenses	965	918
Repossession expenses, net	79	112
FDIC insurance	94	174
Legal and professional fees	283	378
Data processing	406	426
Debit card expenses	375	319
Amortization expense of intangible assets, excluding mortgage servicing right	43	79
Advertising and marketing	212	225
Taxes other than payroll, property and income	300	275
Telephone	122	91
Postage	93	89
Loan fees	63	45
Other	706	827
Total other expenses	8,186	8,328
Income before taxes	3,992	2,053
income taxes	855	216
Net income	3,137	1,837
Other Comprehensive Income, net of tax:
Change in Unrealized Gains on Securities	736	2,387
Comprehensive income	$ 3,873	$ 4,224
Earnings per share:
Basic (in dollars per share)	$ 1.06	$ 0.61
Diluted (in dollars per share)	1.06	0.61
Dividends per share (in dollars per share)	$ 0.29	$ 0.27

XML

CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY - USD ($) $ in Thousands	Common Stock	Retained Earnings	Accumulated Other Comprehensive Income	Total
Beginning Balance at Dec. 31, 2015			$ 359
Increase (Decrease) in Stockholders' Equity
Net income				$ 1,837
Ending Balance at Mar. 31, 2016			2,746
Beginning Balance at Dec. 31, 2016	$ 20,767	$ 73,161	(956)	92,972
Balances (in shares) at Dec. 31, 2016	2,973,232
Increase (Decrease) in Stockholders' Equity
Common stock issued	$ 64			64
Common stock issued (in shares)	8,561
Stock compensation expense	$ 40			40
Common stock purchased and retired	$ (63)	(200)		(263)
Common stock purchased and retired (in shares)	(9,030)
Other comprehensive income			736	736
Net income		3,137		3,137
Dividends declared		(862)		(862)
Ending Balance at Mar. 31, 2017	$ 20,808	$ 75,236	$ (220)	$ 95,824
Balances (in shares) at Mar. 31, 2017	2,972,763

XML

CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY (Parenthetical)	3 Months Ended
	Mar. 31, 2017 USD ($) $ / shares shares
CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS’ EQUITY
Common stock issued - employee stock grants (in shares)	6,575
Common stock issued - director stock awards (in shares)	1,386
Common stock issued - director stock options exercised (in shares) | $	$ 600
Dividends per share (in dollars per share) | $ / shares	$ 0.29

XML

CONSOLIDATED STATEMENTS OF CASH FLOWS - USD ($) $ in Thousands	3 Months Ended
	Mar. 31, 2017	Mar. 31, 2016
Cash Flows From Operating Activities
Net income	$ 3,137	$ 1,837
Adjustments to reconcile net income to net cash from operating activities:
Depreciation and amortization	154	365
Securities amortization (accretion), net	231	241
Stock based compensation expense	40	39
Provision for loan losses	350	375
Securities available for sale gains, net		(126)
Net change in trading assets	(52)	(81)
Originations of loans held for sale	(12,296)	(7,302)
Proceeds from sale of loans	12,381	6,591
Gains on sale of bank premises and equipment	(1,194)
Gains on other real estate	(46)
Gain on sale of loans	(550)	(299)
Write-downs of other real estate, net		85
Changes in:
Interest receivable	66	(21)
Other assets	312	124
Interest payable	(25)	49
Deferred taxes	320	644
Other liabilities	(1,813)	(1,734)
Net cash from operating activities	1,015	787
Cash Flows From Investing Activities
Net change in interest bearing time deposits	370	245
Purchases of securities, available for sale	(37,701)	(23,679)
Proceeds from sales of securities	0	9,250
Proceeds from principal payments, maturities and calls of securities	10,399	11,764
Net change in loans	(1,593)	(11,483)
Purchases of bank premises and equipment	(454)	(237)
Proceeds from sale of bank premises and equipment	2,093
Proceeds from sale of other real estate	623
Net cash from investing activities	(26,263)	(14,140)
Cash Flows From Financing Activities:
Net change in deposits	21,364	6,961
Net change in repurchase agreements	938	7,782
Repayment of long-term Federal Home Loan Bank advances	(1,888)	(1,601)
Repayment of note payable	(107)
Proceeds from issuance of common stock	64	49
Purchase of common stock	(263)	(23)
Dividends paid	(862)	(809)
Net cash from financing activities	19,246	12,359
Net change in cash and cash equivalents	(6,002)	(994)
Cash and cash equivalents at beginning of period	43,250	28,048
Cash and cash equivalents at end of period	37,248	27,054
Supplemental disclosures of cash flow information Cash paid during the year for:
Interest expense	1,223	1,040
Supplemental disclosures of non-cash investing activities
Real estate acquired through foreclosure	$ 126	$ 163

XML

SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

3 Months Ended

Mar. 31, 2017

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, 2016. In the opinion of management, all adjustments, consisting of normal recurring adjustments, necessary for a fair presentation of such financial statements, have been included. The results of operations for the interim periods are not necessarily indicative of the results to be expected for the full year. For further information, refer to the consolidated financial statements and footnotes thereto included in the Company's Annual Report on Form 10-K for the year ended December 31, 2016.

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

Nature of Operations: As a state bank, the Bank is subject to regulation by the Kentucky Department of Financial Institutions and the Federal Deposit Insurance Corporation (“FDIC”). The Company, a bank holding company, is regulated by the Federal Reserve.

KBI Insurance Company, Inc. is a subsidiary of Kentucky Bancshares, Inc. and is located in Las Vegas, Nevada. It is a captive insurance subsidiary which provides various liability and property damage insurance policies for Kentucky Bancshares, Inc. and its related subsidiaries. KBI Insurance Company, Inc. is regulated by the State of Nevada Division of Insurance.

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

Trading Assets: 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.

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

Adoption of New Accounting Standards

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

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

ASU 2016-13, “Financial Instruments-Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments.” Issued in June 2016, ASU 2016-13 will add FASB ASC Topic 326, “Financial Instruments-Credit Losses” and finalizes amendments to FASB ASC Subtopic 825-15, “Financial Instruments-Credit Losses.” The amendments of ASU 2016-13 are intended to provide financial statement users with more decision-useful information related to expected credit losses on financial instruments and other commitments to extend credit by replacing the current incurred loss impairment methodology with a methodology that reflects expected credit losses and requires consideration of a broader range of reasonable and supportable information to determine credit loss estimates. The amendments of ASU 2016-13 eliminate the probable initial recognition threshold and, in turn, reflect an entity’s current estimate of all expected credit losses. ASU 2016-13 does not specify the method for measuring expected credit losses, and an entity is allowed to apply methods that reasonably reflect its expectations of the credit loss estimate. Additionally, the amendments of ASU 2016-13 require that credit losses on available for sale debt securities be presented as an allowance rather than as a writedown.  The amendments of ASU 2016-13 are effective for interim and annual periods beginning after December 15, 2019. Earlier application is permitted for interim and annual periods beginning after December 15, 2018. Kentucky Bancshares plans to adopt the amendments of ASU 2016-13 during the first quarter of 2020. Kentucky Bancshares has established a steering committee which includes the appropriate members of Management to evaluate the impact this ASU will have on the Company’s financial position, results of operations and financial statement disclosures and determine the most appropriate method of implementing the amendments in this ASU as well as any resources needed to implement the amendments.

ASU 2016-09, “Compensation-Stock Compensation (Topic 718): Improvements to Employee Share-Based Payment Accounting.” Issued in March 2016, ASU 2016-09 seeks to reduce complexity in accounting standards by simplifying several aspects of the accounting for share-based payment transactions. The amendments of ASU 2016-09 include: (i) requiring all excess tax benefits and tax deficiencies to be recognized as income tax expense or benefit in the income statement; (ii) requiring excess tax benefits to be classified along with other income tax cash flows as an operating activity on the statement of cash flow; (iii) allowing an entity to make an entity-wide accounting policy election to either estimate the number of awards that expect to vest or account for forfeitures when they occur; (iv) change the threshold to qualify for equity classification to permit withholding up to the maximum statutory tax rates in the applicable jurisdictions; and (v) requiring that cash paid by an employer when directly withholding shares for tax-withholding purposes to be classified as a financing activity on the statement of cash flows. The amendments of ASU 2016-09 became effective for Kentucky Bancshares on January 1, 2017 and did not have a material impact on Kentucky Bancshares consolidated financial statements. The Company has made an entity-wide accounting policy election to account for forfeitures of stock awards as they occur. Changes to Kentucky Bancshares consolidated statement of cash flows required by the amendments of ASU 2016-09 are incorporated into the presentation in the Quarterly Report on Form 10-Q for the three month period ending March 31, 2017.

ASU 2016-02, “Leases (Topic 842).” Issued in February 2016, ASU 2016-02 was issued by the FASB to increase transparency and comparability among organizations by recognizing lease assets and lease liabilities on the balance sheet and by disclosing key information about leasing arrangements. ASU 2016-02 will, among other things, require lessees to recognize a lease liability, which is a lessee’s obligation to make lease payments arising from a lease, measured on a discounted basis; and a right-of-use asset, which is an asset that represents the lessee’s right to use, or control the use of, a specified asset for the lease term.

ASU 2016-02 does not significantly change lease accounting requirements applicable to lessors; however, the ASU contains some targeted improvements that are intended to align, where necessary, lessor accounting with the lessee accounting model and with the updated revenue recognition guidance issued in 2014. The amendments of ASU 2016-02 are effective for interim and annual periods beginning after December 15, 2018. Kentucky Bancshares plans to adopt the amendments of ASU 2016-02 beginning in the first quarter of 2019. At adoption, Kentucky Bancshares will recognize a lease asset and a corresponding lease liability on its consolidated balance sheet for its total lease obligation measured on a discounted basis. As of March 31, 2017, all leases in which Kentucky Bancshares was the lessee were classified as operating leases. Kentucky Bancshares does not anticipant any material impact to its consolidated statements of income as a result of the adoption of this ASU. The Company has an immaterial amount of leases in which it is the lessor.

Based on Management’s evaluation to date, the Company does not expect the amendments of ASU 2016-02 to have any material impact to these leases or the related income. Management will continue to evaluate the impact this ASU will have on the Company’s consolidated financial statements; however, the adoption of ASU 2016-02 is not expected to have a material impact on Kentucky Bancshares consolidated financial statements.

ASU 2016-01, “Financial Instruments-Overall (Subtopic 825-10): Recognition and Measurement of Financial Assets and Financial Liabilities (An Amendment of the FASB Accounting Standards Codification).” Issued in January 2016, ASU 2016-01 is intended to enhance the reporting model for financial instruments to provide users of financial statements with improved decision-making information. The amendments of ASU 2016-01 include: (i) requiring equity investments, except those accounted for under the equity method of accounting or those that result in the consolidation of an investee, to be measured at fair value with changes in fair value recognized in net income; (ii) requiring a qualitative assessment to identify impairment of equity investments without readily determinable fair values; (iii) eliminating the requirement to disclose the method and significant assumptions used to estimate the fair value for financial instruments measured at amortized cost on the balance sheet; (iv) requiring the use of the exit price notion when measuring the fair value of financial instruments for disclosure purposes; (v) requiring an entity that has elected the fair value option to measure the fair value of a liability to present separately in other comprehensive income the portion of the change in the fair value resulting from a change in the instrument-specific credit risk; (vi) requiring separate presentation of financial assets and financial liabilities by measurement category and form of financial asset on the balance sheet or the accompanying notes to the financial statements and (vii) clarifying that an entity should evaluate the need for a valuation allowance on a deferred tax asset related to available for sale securities in combination with the entity’s other deferred tax assets. The amendments of ASU 2016-01 are effective for interim and annual periods beginning after December 15, 2017. Kentucky Bancshares plans to adopt the amendments of ASU 2016-01 during the first quarter of 2018. Management has evaluated the impact this ASU will have on the Company’s consolidated financial statements. Through this evaluation, Management has determined that the principal areas impacted by the amendments of ASU 2016-01 will be Kentucky Bancshares investment in member bank stock, which are equity securities that do not have readily determinable fair values, and various fair value related disclosures. See Note 1 – Significant Accounting Policies, “Federal Home Loan Bank (FHLB): for information regarding Kentucky Bancshares investment in member bank stock. The adoption of ASU 2016-01 is not expected to have a material impact on the Company’s consolidated financial statements.

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

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

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

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

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

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

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SECURITIES

3 Months Ended

Mar. 31, 2017

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, 2017
U. S. government agencies	$	46,077	$	386	$	(265)	$	46,198
States and political subdivisions		91,389		1,928		(381)		92,936
Mortgage-backed - residential		164,475		149		(2,171)		162,453
Equity securities		320		20		—		340
Total	$	302,261	$	2,483	$	(2,817)	$	301,927
December 31, 2016
U. S. government agencies	$	36,454	$	373	$	(299)	$	36,528
States and political subdivisions		90,117		1,731		(716)		91,132
Mortgage-backed - residential		148,327		120		(2,677)		145,770
Equity securities		320		20		—		340
Total	$	275,218	$	2,244	$	(3,692)	$	273,770

The amortized cost and fair value of securities at March 31, 2017 by contractual maturity are shown below.  Expected maturities will differ from contractual maturities because borrowers may have the right to call or prepay obligations with or without call or prepayment penalties.  Securities not due at a single maturity are shown separately.  Further discussion concerning Fair Value Measurements can be found in Note 9.

	Amortized		Fair
	Cost		Value
Due in one year or less	$	300	$	301
Due after one year through five years		34,432		34,951
Due after five years through ten years		49,420		49,811
Due after ten years		53,314		54,071
		137,466		139,134
Mortgage-backed - residential		164,475		162,453
Equity		320		340
Total	$	302,261	$	301,927

Proceeds from sales of securities during the first three months of 2017 and 2016 were $0 and $9.3 million.  Gross gains of $0 and $126 thousand and gross losses of $0 and $0 were realized on those sales, respectively.  The tax provision related to these realized net gains was $0 and $43 thousand, respectively. 

Securities with unrealized losses March 31, 2017 and at December 31, 2016 not recognized in income are as follows:

March 31, 2017

	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	$	24,754	$	(265)	$	—	$	—	$	24,754	$	(265)
States and municipals		21,189		(381)		—		—		21,189		(381)
Mortgage-backed - residential		125,783		(1,600)		13,366		(571)		139,149		(2,171)
Total temporarily impaired	$	171,726	$	(2,246)	$	13,366	$	(571)	$	185,092	$	(2,817)

December 31, 2016

	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	$	28,202	$	(299)	$	—	$	—	$	28,202	$	(299)
States and municipals		27,834		(716)		—		—		27,834		(716)
Mortgage-backed - residential		119,802		(1,938)		13,652		(739)		133,454		(2,677)
Total temporarily impaired	$	175,838	$	(2,953)	$	13,652	$	(739)	$	189,490	$	(3,692)

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

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

TRADING ASSETS

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

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LOANS

3 Months Ended

Mar. 31, 2017

LOANS

LOANS

3.LOANS

Loans at period-end are as follows:

(in thousands)

	3/31/2017		12/31/2016
Commercial	$	76,040	$	77,436
Real estate construction		28,257		29,169
Real estate mortgage:
1-4 family residential		248,132		244,638
Multi-family residential		44,330		47,199
Non-farm & non-residential		182,417		176,024
Agricultural		61,035		62,491
Consumer		17,239		18,867
Other		116		183
Total	$	657,566	$	656,007

On July 24, 2015, the Company acquired Madison Financial Corporation and its wholly-owned subsidiary, Madison

Bank.  The above loan balances include loans purchased in the Madison Financial Corporation acquisition. Loan balances acquired in the Madison Financial Corporation acquisition have no allocated allowance for loan losses.  The composition of loans acquired as of March 31, 2017 is as follows:

	3/31/2017		12/31/2016
Commercial	$	1,078	$	1,113
Real estate construction		394		398
Real estate mortgage:
1-4 family residential		10,618		11,462
Multi-family residential		3,463		5,043
Non-farm & non-residential		11,591		13,024
Agricultural		1,239		1,940
Consumer		80		107
Total	$	28,463	$	33,087

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

	Three Months Ended March 31, 2017
	(in thousands)
	Beginning								Ending
	Balance		Charge-offs		Recoveries		Provision		Balance
Commercial	$	789	$	(2)	$	8	$	76	$	871
Real estate Construction		564		—		—		(19)		545
Real estate mortgage:
1-4 family residential		2,301		(11)		1		84		2,375
Multi-family residential		581		—		3		82		666
Non-farm & non-residential		1,203		—		—		108		1,311
Agricultural		856		—		10		(4)		862
Consumer		547		(37)		4		20		534
Other		60		(225)		234		(9)		60
Unallocated		640		—		—		12		652
	$	7,541	$	(275)	$	260	$	350	$	7,876

	Three Months Ended March 31, 2016
	(in thousands)
	Beginning								Ending
	Balance		Charge-offs		Recoveries		Provision		Balance
Commercial	$	486	$	—	$	31	$	(9)	$	508
Real estate Construction		411		—		6		459		876
Real estate mortgage:										—
1-4 family residential		2,081		(12)		5		102		2,176
Multi-family residential		458		—		3		11		472
Non-farm & non-residential		1,213		—		266		(298)		1,181
Agricultural		678		—		11		38		727
Consumer		525		(110)		57		59		531
Other		60		(303)		297		6		60
Unallocated		609		—		—		7		616
	$	6,521	$	(425)	$	676	$	375	$	7,147

Purchased Credit Impaired Loans:

The Company has purchased loans, for which there was, at acquisition, evidence of deterioration of credit quality since origination and it was probable, at acquisition, that all contractually required payments would not be collected. The carrying amount of those loans is as follows:

	3/31/2017		12/31/2016
Real estate mortgage:
1-4 family residential	$	850	$	1,028
Multi-family		534		562
Non-farm & non-residential		135		145
Agricultural		169		178
	$	1,688	$	1,913

There was no associated allowance for loan losses as of March 31, 2017 or December 31, 2016 for purchased credit impaired loans.  The contractual principal balance of these loans was $2.4 million at March 31, 2017 and $2.6 million at December 31, 2016.

Accretable yield, or income expected to be collected, is as follows.  There was no accretion recorded in income related to purchased credit impaired loans for the three months ended March 31, 2017 or March 31, 2016.

	Three Months Ended
	3/31/2017		3/31/2016
Balance, beginning of period	$	240	$	408
New loans purchased		—		—
Accretion of income		46		69
Balance, end of period	$	194	$	339

The following tables present the balance in the allowance for loan losses and the recorded investment (excluding accrued interest receivable amounting to $2.3 million as of March 31, 2017 and $2.4 million at December 31, 2016) in loans by portfolio segment and based on impairment method as of March 31, 2017 and December 31, 2016:

	Individually		Collectively		Purchased
As of March 31, 2017	Evaluated for		Evaluated for		Credit
(in thousands)	Impairment		Impairment		Impaired		Total
Allowance for Loan Losses:
Commercial	$	—	$	871	$	—	$	871
Real estate construction		—		545		—		545
Real estate mortgage:
1-4 family residential		75		2,300		—		2,375
Multi-family residential		—		666		—		666
Non-farm & non-residential		8		1,303		—		1,311
Agricultural		396		466		—		862
Consumer		—		534		—		534
Other		—		60		—		60
Unallocated		—		652		—		652
	$	479	$	7,397	$	—	$	7,876
Loans:
Commercial	$	—	$	76,040	$	—	$	76,040
Real estate construction		—		28,257		—		28,257
Real estate mortgage:
1-4 family residential		637		246,467		850		248,132
Multi-family residential		—		43,768		534		44,330
Non-farm & non-residential		2,609		179,663		135		182,417
Agricultural		3,142		57,715		169		61,035
Consumer		—		17,239		—		17,239
Other		—		116		—		116
	$	6,388	$	649,265	$	1,688	$	657,566

	Individually		Collectively		Purchased
As of December 31, 2016	Evaluated for		Evaluated for		Credit
(in thousands)	Impairment		Impairment		Impaired		Total
Allowance for Loan Losses:
Commercial	$	—	$	789	$	—	$	789
Real estate construction		—		564		—		564
Real estate mortgage:
1-4 family residential		99		2,202		—		2,301
Multi-family residential		—		581		—		581
Non-farm & non-residential		15		1,188		—		1,203
Agricultural		427		429		—		856
Consumer		—		547		—		547
Other		—		60		—		60
Unallocated		—		640		—		640
	$	541	$	7,000	$	—	$	7,541
Loans:
Commercial	$	97	$	77,339	$	—		77,436
Real estate construction		153		29,016		—		29,169
Real estate mortgage:
1-4 family residential		2,704		240,906		1,028		244,638
Multi-family residential		—		46,637		562		47,199
Non-farm & non-residential		1,725		174,154		145		176,024
Agricultural		3,315		58,998		178		62,491
Consumer		—		18,867		—		18,867
Other		—		183		—		183
Total	$	7,994	$	646,100	$	1,913	$	656,007

The following table presents loans individually evaluated for impairment by class of loans as of and for the three months ended March 31, 2017 (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:
Commerical	$	—	$	—	$	—	$	49	$	12	$	12
Real estate mortgage:
Construction		—		—		—		77		11		11
1-4 family residential		307		307		—		457		5		5
Agricultural		898		898		—		776		—		—
With an allowance recorded:
Real estate mortgage:
1-4 family residential		330		330		75		1,214		23		23
Non-farm & non-residential		1,711		1,711		8		1,718		23		23
Agricultural		3,142		3,142		396		2,902		3		3
Total	$	6,388	$	6,388	$	479	$	7,193	$	77	$	77

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

The following table presents loans individually evaluated for impairment by class of loans for the three months ended March 31,2016:

			Year to Date		Year to Date
	Average		Interest		Cash Basis
	Recorded		Income		Interest
(in thousands):	Investment		Recognized		Recognized
With no related allowance recorded:
Real estate mortgage:
1-4 family residential	$	370	$	2	$	2
Agricultural		346		3		3
With an allowance recorded:
Real estate mortgage:
Construction		1,197		32		32
1-4 family residential		1,077		5		5
Non-farm & non-residential		2,441		18		18
Agricultural		3,420		—		—
Total	$	8,851	$	60	$	60

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

The following table presents loans individually evaluated for impairment by class of loans as of and for the year ended December 31, 2016 (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	$	97	$	97	$	—	$	48	$	30	$	30
Real estate construction		153		153		—		494		9		9
Real estate mortgage:
1-4 family residential		606		606		—		488		—		—
Agricultural		654		654		—		561		—		—
With an allowance recorded:
Real estate mortgage
1-4 family residential		2,098		2,098		99		1,590		56		56
Non-farm & non-residential		1,725		1,725		15		2,303		71		71
Agricultural		2,661		2,661		427		3,309		25		25
Total	$	7,994	$	7,994	$	541	$	8,793	$	191	$	191

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, 2017 and December 31, 2016:

			Loans Past Due
			Over 90 Days
As of March 31, 2017			Still		Troubled Debt
(in thousands)	Nonaccrual		Accruing		Restructurings
Commercial	$	12	$	34	$	—
Real estate construction		—		—		—
Real estate mortgage:
1-4 family residential		2,285		249		—
Multi-family residential		—		—		—
Non-farm & non-residential		272		61		1,711
Agricultural		940		405		—
Consumer		13		8		—
Total	$	3,522	$	757	$	1,711
Loans included in totals above acquired from Madison Financial Corporation	$	635	$	22	$	—

			Loans Past Due
			Over 90 Days
As of December 31, 2016			Still		Troubled Debt
(in thousands)	Nonaccrual		Accruing		Restructurings
Commercial	$	3	$	11	$	—
Real estate construction		—		153		—
Real estate mortgage:
1-4 family residential		2,725		31		338
Multi-family residential		25		—		—
Non-farm & non-residential		272		—		1,725
Agricultural		1,541		724		—
Consumer		—		8		—
Other		—		—		—
Total	$	4,566	$	927	$	2,063
Loans included in totals above acquired from Madison Financial Corporation	$	578	$	22	$	—

Nonaccrual loans secured by real estate make up 99.3% of the total nonaccrual loan balances at March 31, 2017.

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.

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

	30–59		60–89		Greater than				Total
As of March 31, 2017	Days		Days		90 Days				Past Due &		Loans Not
(in thousands)	Past Due		Past Due		Past Due		Non-accrual		Non-accrual		Past Due
Commercial	$	25	$	235	$	34	$	12	$	306	$	75,734
Real estate construction		1,172		—		—		—		1,172		27,085
Real estate mortgage:
1-4 family residential		2,767		128		249		2,285		5,429		242,703
Multi-family residential		—				—		—		—		44,330
Non-farm & non-residential		223		64		61		272		620		181,797
Agricultural		256		156		405		940		1,757		59,278
Consumer		65		85		8		13		171		17,068
Other		—		—		—		—		—		116
Total	$	4,508	$	668	$	757	$	3,522	$	9,455	$	648,111
Loans included in totals above acquired from Madison Financial Corp.	$	125	$	—	$	—	$	635	$	760	$	27,703

	30–59		60–89		Greater than				Total
As of December 31, 2016	Days		Days		90 Days				Past Due &		Loans Not
(in thousands)	Past Due		Past Due		Past Due		Non-accrual		Non-accrual		Past Due
Commercial	$	54	$	45	$	11	$	3	$	113	$	77,323
Real estate construction		—		—		153		—		153		29,016
Real estate mortgage:
1-4 family residential		2,310		228		31		2,725		5,294		239,344
Multi-family residential		391		3		—		25		419		46,780
Non-farm & non-residential		159		61		—		272		492		175,532
Agricultural		647		61		724		1,541		2,973		59,518
Consumer		97		37		8		—		142		18,725
Other		—		—		—		—		—		183
Total	$	3,658	$	435	$	927	$	4,566	$	9,586	$	646,421
Loans included in totals above acquired from Madison Financial Corp.	$	155	$	—	$	22	$	578	$	755	$	32,332

Troubled Debt Restructurings:

The Company has allocated $8 thousand in specific reserves to customers whose loan terms have been modified in troubled debt restructurings as of March 31, 2017.  The Company allocated $40 thousand for specific reserves to customers whose loan terms had been modified in troubled debt restructuring as of December 31, 2016. 

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

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

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

As of March 31, 2017			Special
(in thousands)	Pass		Mention		Substandard		Doubtful
Commercial	$	74,976	$	1,002	$	62	$	—
Real estate construction		28,257		—		—		—
Real estate mortgage:
1-4 family residential		237,512		3,752		6,856		12
Multi-family residential		40,970		2,600		760		—
Non-farm & non-residential		172,511		8,142		1,764		—
Agricultural		57,646		1,748		1,641		—
Total	$	611,872	$	17,244	$	11,083	$	12
Loans included in totals above acquired from Madison Financial Corporation	$	25,992	$	438	$	2,033	$	—

As of December 31, 2016			Special
(in thousands)	Pass		Mention		Substandard		Doubtful
Commercial	$	76,346	$	1,078	$	12	$	—
Real estate construction		28,577		—		592		—
Real estate mortgage:
1-4 family residential		232,969		4,031		7,627		11
Multi-family residential		43,681		2,617		901		—
Non-farm & non-residential		167,451		8,185		388		—
Agricultural		58,155		1,367		2,969		—
Total	$	607,179	$	17,278	$	12,489	$	11
Loans included in totals above acquired from Madison Financial Corporation	$	30,359	$	480	$	2,248	$	—

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 $21 thousand at March 31, 2017 and $8 thousand at December 31, 2016.

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REAL ESTATE OWNED

3 Months Ended

Mar. 31, 2017

REAL ESTATE OWNED

REAL ESTATE OWNED

4.REAL ESTATE OWNED

Activity in real estate owned, net was as follows:

	Three Months Ended
	March 31,
	2017		2016
Beginning of year	$	1,824	$	2,347
Additions		126		121
Sales		(577)		—
(Additions) subtractions to valuation allowance, net		—		(85)
End of period	$	1,373	$	2,383

Activity in the valuation allowance was as follows:

	2017		2016
Beginning of year	$	803	$	616
Write-downs of other real estate, net		—		85
Reductions from sale		—		—
End of Period	$	803	$	701

Expenses related to foreclosed assets include:

	Three Months Ended
	March 31,
	2017		2016
		(in thousands)
Net (gain) loss on sales, included in other income on income statement	$	(46)	$	—
Additions to valuation allowance, net		—		85
Operating expenses, net of rental income		79		27
Repossession expenses, net		79		112
Net expense, net of gain or loss on sales, for the period	$	33	$	112

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EARNINGS PER SHARE

3 Months Ended

Mar. 31, 2017

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 based compensation agreements.

The factors used in the earnings per share computation follow:

	Three Months Ended
	March 31,
	2017		2016
	(in thousands)
Basic Earnings Per Share
Net Income	$	3,137	$	1,837
Weighted average common shares outstanding		2,954		2,977
Basic earnings per share	$	1.06	$	0.61
Diluted Earnings Per Share
Net Income	$	3,137	$	1,837
Weighted average common shares outstanding		2,954		2,977
Weighted average common and dilutive potential common shares outstanding		2,954		2,977
Diluted earnings per share	$	1.06	$	0.61

Stock options for 600 shares of common stock for three months ended March 31, 2017 and 1,200 shares of common stock for the three months ended March 31, 2016 were excluded from diluted earnings per share because their impact was antidilutive.

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STOCK BASED COMPENSATION

3 Months Ended

Mar. 31, 2017

STOCK BASED COMPENSATION

STOCK BASED COMPENSATION

6.STOCK COMPENSATION

We have four stock based compensation plans as described below.

Two Stock Option Plans

Under its expired 1999 Employee Stock Option Plan, the Company has granted certain officers and key employees stock option awards which vest and become fully exercisable at the end of five years and provided for issuance of up to 100,000 options.

Under the expired 1993 Non-Employee Directors Stock Ownership Incentive Plan, the Company also granted certain directors stock option awards which vest and become fully exercisable immediately and provided 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 the Company’s stock on the date of grant.

Summary of activity in the stock option plan for the first three months of 2017 follows:

				Weighted
		Weighted		Average
		Average		Remaining	Aggregate
		Exercise		Contractual	Intrinsic
	Shares	Price		Term	Value (1)
Outstanding, beginning of year	1,200	$	31.00
Granted	—		—
Forfeited or expired	—		—
Exercised	(600)		31.00
Outstanding, end of period	600	$	31.00	11 months	$	4
Vested and expected to vest	600	$	31.00	11 months	$	4
Exercisable, end of period	600	$	31.00	11 months	$	4

(1) Aggregate intrinsic value in thousands

As of March 31, 2017, there was $0 of total unrecognized compensation cost related to nonvested stock options granted under the Plan.  Since both stock option plans have expired, neither plan allows for additional options to be issued.

2005 Restricted Stock Grant Plan

On May 10, 2005, the Company’s stockholders approved a restricted stock grant plan.  Total shares issuable under the plan were 50,000. There were no shares issued during the first three months of 2017 or 2016.  The plan is now expired and no additional shares will be issued from the 2005 plan.  There were no shares forfeited during the first three months of 2017 or 2016.

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, 2017	10,636	$	254	$	23.84
Granted	—		—		—
Vested	(4,192)		(76)		18.18
Forfeited	—		—		—
Nonvested at March 31, 2017	6,444	$	178	$	27.52

(1) Grant date fair value in thousands

As of March 31, 2017, there was $141 thousand of total unrecognized compensation cost related to nonvested shares granted under the restricted stock grant plan.  The cost is expected to be recognized over a weighted-average period of 2.2 years. As March 31, 2017, no additional shares are available for issuance under the restricted stock grant plan.

2009 Stock Award Plan

On May 13, 2009, the Company’s stockholders approved a stock award plan that provides for the granting of both incentive and nonqualified stock options and other share based awards.  Total shares issuable under the plan are 150,000.  There were 6,575 shares issued during the first three months of 2017 and 6,170 shares were issued during the first three months of 2016. There were no shares forfeited during the first three months of 2017 and no shares forfeited during the first three months of 2016.

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 (1)		Per Share
Nonvested at January 1, 2017	7,297	$	214	$	29.31
Granted	6,575		214		32.50
Vested	(1,414)		(41)		28.77
Forfeited	—		—		—
Nonvested at March 31, 2017	12,458	$	387	$	31.05

(1) Grant date fair value in thousands

As of March 31, 2017, there was $364 thousand of total unrecognized compensation cost related to nonvested shares granted under the restricted stock grant plan.  The cost is expected to be recognized over a weighted-average period of 4.2 years. As of March 31, 2017, 132,417 shares are still available for issuance.

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REPURCHASE AGREEMENTS

3 Months Ended

Mar. 31, 2017

REPURCHASE AGREEMENTS.

REPURCHASE AGREEMENTS AND OTHER BORROWINGS

7.REPURCHASE AGREEMENTS

Repurchase agreements totaled $21.8 million at March 31, 2017. Of this, $15.8 million were overnight obligations and $6.0 million had terms extending through May 2020 and a weighted remaining average life of 1.5 years. The Company pledged agencies and mortgage-backed securities with a carrying amount of $28.5 million to secure repurchase agreements as of March 31, 2017.

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OTHER BORROWINGS

3 Months Ended

Mar. 31, 2017

OTHER BORROWINGS

OTHER BORROWINGS

8.OTHER BORROWINGS

On July 20, 2015, the Company borrowed $5 million which had an outstanding balance of $4.0 million at March 31, 2017. The term loan has a fixed interest rate of 5.02%, requires quarterly principal and interest payments, matures July 20, 2025 and is collateralized by Kentucky Bank stock.  The maturity schedule for the term loan as of March 31, 2017 is as follows (in thousands):

2017	$	288
2018		401
2019		421
2020		442
2021		465
Thereafter		1,966
	$	3,983

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FAIR VALUE MEASUREMENTS

3 Months Ended

Mar. 31, 2017

FAIR VALUE MEASUREMENTS.

FAIR VALUE MEASUREMENTS

9.FAIR VALUE MEASUREMENTS

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

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 for similar loans and collateral underlying such loans.

No adjustments were made for the first three months of 2017 or 2016 and resulted in a Level 3 classification of the inputs for determining fair value. 

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

Other Real Estate Owned:  Assets acquired through or instead of loan foreclosure and classified as other real estate owned (OREO) are initially recorded at fair value less costs to sell when acquired, establishing a new cost basis.  These assets are subsequently accounted for at lower of cost or fair value less estimated costs to sell.  Fair value is commonly based on recent real estate appraisals which are updated no less frequently than annually.  These appraisals may utilize a single valuation approach or a combination of approaches including comparable sales and the income approach with data from comparable properties.  Adjustments are routinely made in the appraisal process by the independent appraisers to adjust for differences between the comparable sales and income data available. Such adjustments were $0 for the three months ended March 31, 2017 and $85 thousand for the three months ended March 31, 2016 and resulted in a Level 3 classification of the inputs for determining fair value.  Real estate owned properties are evaluated on a quarterly basis for additional impairment and adjusted accordingly.

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

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, 2017 (in thousands):

			Quoted Prices
			In Active
			Markets for		Significant Other		Significant
			Identical		Observable		Unobservable
	Carrying		Assets		Inputs		Inputs
Description	Value		(Level 1)		(Level 2)		(Level 3)
U. S. government agencies	$	46,198	$	—	$	46,198	$	—
States and municipals		92,936		—		92,936		—
Mortgage-backed - residential		162,453		—		162,453		—
Equity securities		340		340		—		—
Trading Assets		5,644		2,384		3,260		—
Total	$	307,571	$	2,724	$	304,847	$	—

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

			Quoted Prices
			In Active
			Markets for		Significant Other		Significant
			Identical		Observable		Unobservable
	Carrying		Assets		Inputs		Inputs
Description	Value		(Level 1)		(Level 2)		(Level 3)
U. S. government agencies	$	36,528	$	—	$	36,528	$	—
States and municipals		91,132		—		91,132		—
Mortgage-backed - residential		145,770		—		145,770		—
Equity securities		340		340		—		—
Trading Assets		5,592		1,608		3,984		—
Total	$	279,362	$	1,948	$	277,414	$	—

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

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

	Fair Value Measurements at March 31, 2017 Using :
			Quoted Prices
			In Active
			Markets for	Significant Other	Significant
			Identical	Observable	Unobservable
	Carrying		Assets	Inputs	Inputs
(In thousands)	Value		(Level 1)	(Level 2)	(Level 3)
Description
Impaired loans:
Real Estate Mortgage:
1-4 family Residential		255	—	—		255
Agricultural		2,746	—	—		2,746
Other real estate owned, net:
Residential		956				956
Commercial		57	—	—		57
Loan servicing rights		1,152	—	—		1,152

	Fair Value Measurements at December 31, 2016 Using :
			Quoted Prices
			In Active
			Markets for	Significant Other	Significant
			Identical	Observable	Unobservable
	Carrying		Assets	Inputs	Inputs
(In thousands)	Value		(Level 1)	(Level 2)	(Level 3)
Description
Impaired loans:
Real Estate Mortgage:
1-4 family residential		1,685	—	—	$	1,685
Agricultural		2,234	—	—		2,234
Other real estate owned, net:
Residential		956	—	—		956
Commercial		272	—			272
Loan servicing rights		1,083	—	—		1,083

Impaired loans, which are measured for impairment using the fair value of the collateral for collateral dependent loans, had a carrying amount of $3.0 million, which includes a valuation allowance of $471 thousand at March 31, 2017.  No new loans became impaired during the three month period ended March 31, 2017 which resulted in no additional provision for loan losses for impaired loans. 

Other real estate owned, which is measured at fair value less costs to sell, had a net carrying amount of $1.0 million, which is made up of the outstanding balance of 1.8 million, net of a valuation allowance of $803 thousand at March 31, 2017.  The Company recorded $0 in write-downs of other real estate owned properties for the three months ended March 31, 2017. The Company recorded $85 thousand in net write-downs of other real estate owned properties during the three months ended March 31, 2016. 

Impaired loan servicing rights, which are carried at the lower of cost or fair value, were carried at their fair value of $1.15 million, which is made up of the outstanding balance of $1.24 million, net of a valuation allowance of $86 thousand at March 31, 2017. For the first three months of 2017, the Company recorded a net recovery of prior write-downs of $39 thousand and a net recovery of prior write-downs of $3 thousand for the three months ended March 31, 2016.  At December 31, 2016, impaired loan servicing rights were carried at their fair value of $1.1 million, which is made up of the outstanding balance of $1.2 million, net of a valuation allowance of $125 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, 2017 and December 31, 2016:

				Range
March 31, 2017	Fair	Valuation	Unobservable	(Weighted
(In thousands)	Value	Technique(s)	Input(s)	Average)
Impaired loans
Real estate mortgage:
1-4 family residential	255	sales comparison	adjustment for differences between the comparable sales	0%-12%	(6)%
Agricultural	2,746	sales comparison	adjustment for differences between the comparable sales	8%-64%	(33)%
Other real estate owned:
Residential	956	sales comparison	adjustment for differences between the comparable sales	1%-16%	(9)%
Commercial	57	income approach	capitalization rate	10%-10%	(10)%
Loan Servicing Rights	1,152	discounted cash flow	constant prepayment rates	8%-50%	(11)%

				Range
December 31, 2016	Fair	Valuation	Unobservable	(Weighted
(In thousands)	Value	Technique(s)	Input(s)	Average)
Impaired loans
Real estate mortgage:
1-4 family residential	1,685	sales comparison	adjustment for differences between the comparable sales	0%-21%	(10)%
Agricultural	2,234	sales comparison	adjustment for differences between the comparable sales	2%-75%	(9)%
Other real estate owned:
Residential	956	sales comparison	adjustment for differences between the comparable sales	1%-16%	(9)%
Commercial	272	income approach	capitalization rate	10%-10%	(10)%
Loan Servicing Rights	1083	discounted cash flow	constant prepayment rates	8%-45%	(13)%

Fair Value of Financial Instruments

The carrying amounts and estimated fair values of financial instruments, at March 31, 2017 and December 31, 2016 are as follows:

March 31, 2017:

	Carrying
(in thousands)	Value		Level 1		Level 2		Level 3		Total
Financial assets
Cash and cash equivalents	$	37,248	$	37,248	$	—	$	—	$	37,248
Interest bearing deposits		4,659		4,659		—		—		4,659
Securities		301,927		340		301,587		—		301,927
Trading assets		5,644		2,384		3,260		—		5,644
Loans held for sale		1,189		—		1,229		—		1,229
Loans, net		649,690		—		—		647,847		647,847
FHLB Stock		7,034		—		—		—		N/A
Interest receivable		3,649		—		1,355		2,294		3,649
Financial liabilities
Deposits	$	824,345	$	613,975	$	209,399	$	—	$	823,374
Securities sold under agreements to repurchase		21,811		—		21,916		—		21,916
Long-term Federal Home Loan Bank advances		90,612		—		86,023		—		86,023
Note payable		3,983		—		4,438		—		4,438
Subordinated debentures		7,217		—		—		7,211		7,211
Interest payable		667		—		605		62		667

December 31, 2016:

	Carrying
(in thousands)	Value		Level 1		Level 2		Level 3		Total
Financial assets
Cash and cash equivalents	$	43,250	$	43,250	$	—	$	—	$	43,250
Interest bearing deposits		5,029		5,029		—		—		5,029
Securities		273,770		340		273,430		—		273,770
Trading assets		5,592		1,608		3,984		—		5,592
Mortgage loans held for sale		724		—		750		—		750
Loans, net		648,466		—		—		648,234		648,234
FHLB Stock		7,034		—		—		—		N/A
Interest receivable		3,715		—		1,334		2,381		3,715
Financial liabilities
Deposits	$	802,981	$	607,617	$	195,528	$	—	$	803,145
Securities sold under agreements to repurchase		20,873		—		21,006		—		21,006
FHLB advances		92,500		—		91,015		—		91,015
Note payable		4,090		—		4,564		—		4,564
Subordinated debentures		7,217		—		—		7,210		7,210
Interest payable		692		—		639		53		692

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

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

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

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

Loans - Fair values of loans, excluding loans held for sale, are estimated 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 mortgage loans held for sale is estimated based upon binding contracts and quotes from third party investors resulting in a Level 2 classification.

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

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

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

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

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

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

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

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

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CHANGES IN ACCUMULATED OTHER COMPREHENSIVE INCOME BY COMPONENT (LOSS)

3 Months Ended

Mar. 31, 2017

CHANGES IN ACCUMULATED OTHER COMPREHENSIVE INCOME BY COMPONENT

CHANGES IN ACCUMULATED OTHER COMPREHENSIVE INCOME BY COMPONENT

10.CHANGES IN ACCUMULATED OTHER COMPREHENSIVE INCOME BY COMPONENT

Changes in Accumulated Other Comprehensive Income by Component (unaudited)

(in thousands)

	Unrealized
	Gains and Losses on
	Available for Sale
	Securities
	For the Three Months Ended March 31,
	2017		2016
Beginning Balance	$	(956)	$	359
Unrealized holding gains (losses) for the period, net of tax		736		2,470
Reclassification adjustment for:
Securities gains realized in income		—		126
Income taxes		—		(43)
		—		83
Net current period other comprehensive income		736		2,387
Ending balance	$	(220)	$	2,746

The following is significant amounts reclassified out of each component of accumulated other comprehensive income (loss) for the three months ended March 31, 2017 and 2016:

March 31, 2017

Details about	Amount		Affected Line Item
Accumulated Other	Reclassified From		in the Statement
Comprehensive	Accumulated Other		Where Net
Income Components	Comprehensive Income		Income is Presented
Unrealized gains and losses on available-for-sale securities	$	—	Gain on sale of available for sale securities, net
		—	Income taxes
		—	Net income

March 31, 2016

Details about	Amount		Affected Line Item
Accumulated Other	Reclassified From		in the Statement
Comprehensive	Accumulated Other		Where Net
Income Components	Comprehensive Income		Income is Presented
Unrealized gains and losses on available-for-sale securities	$	126	Gain on sale of available for sale securities, net
		43	Income taxes
		83	Net income

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SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Policies)

3 Months Ended

Mar. 31, 2017

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 subsidiaries, Kentucky Bank (the “Bank”) and KBI Insurance Company, Inc., and the Bank’s wholly-owned subsidiary, KB Special Assets Unit, LLC. Intercompany transactions and balances have been eliminated in consolidation.

Nature of Operations

Nature of Operations: As a state bank, the Bank is subject to regulation by the Kentucky Department of Financial Institutions and the Federal Deposit Insurance Corporation (“FDIC”). The Company, a bank holding company, is regulated by the Federal Reserve.

KBI Insurance Company, Inc. is a subsidiary of Kentucky Bancshares, Inc. and is located in Las Vegas, Nevada. It is a captive insurance subsidiary which provides various liability and property damage insurance policies for Kentucky Bancshares, Inc. and its related subsidiaries. KBI Insurance Company, Inc. is regulated by the State of Nevada Division of Insurance.

Estimates in the Financial Statements

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

Trading Assets

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.

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

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

ASU 2016-13, “Financial Instruments-Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments.” Issued in June 2016, ASU 2016-13 will add FASB ASC Topic 326, “Financial Instruments-Credit Losses” and finalizes amendments to FASB ASC Subtopic 825-15, “Financial Instruments-Credit Losses.” The amendments of ASU 2016-13 are intended to provide financial statement users with more decision-useful information related to expected credit losses on financial instruments and other commitments to extend credit by replacing the current incurred loss impairment methodology with a methodology that reflects expected credit losses and requires consideration of a broader range of reasonable and supportable information to determine credit loss estimates. The amendments of ASU 2016-13 eliminate the probable initial recognition threshold and, in turn, reflect an entity’s current estimate of all expected credit losses. ASU 2016-13 does not specify the method for measuring expected credit losses, and an entity is allowed to apply methods that reasonably reflect its expectations of the credit loss estimate. Additionally, the amendments of ASU 2016-13 require that credit losses on available for sale debt securities be presented as an allowance rather than as a writedown.  The amendments of ASU 2016-13 are effective for interim and annual periods beginning after December 15, 2019. Earlier application is permitted for interim and annual periods beginning after December 15, 2018. Kentucky Bancshares plans to adopt the amendments of ASU 2016-13 during the first quarter of 2020. Kentucky Bancshares has established a steering committee which includes the appropriate members of Management to evaluate the impact this ASU will have on the Company’s financial position, results of operations and financial statement disclosures and determine the most appropriate method of implementing the amendments in this ASU as well as any resources needed to implement the amendments.

ASU 2016-09, “Compensation-Stock Compensation (Topic 718): Improvements to Employee Share-Based Payment Accounting.” Issued in March 2016, ASU 2016-09 seeks to reduce complexity in accounting standards by simplifying several aspects of the accounting for share-based payment transactions. The amendments of ASU 2016-09 include: (i) requiring all excess tax benefits and tax deficiencies to be recognized as income tax expense or benefit in the income statement; (ii) requiring excess tax benefits to be classified along with other income tax cash flows as an operating activity on the statement of cash flow; (iii) allowing an entity to make an entity-wide accounting policy election to either estimate the number of awards that expect to vest or account for forfeitures when they occur; (iv) change the threshold to qualify for equity classification to permit withholding up to the maximum statutory tax rates in the applicable jurisdictions; and (v) requiring that cash paid by an employer when directly withholding shares for tax-withholding purposes to be classified as a financing activity on the statement of cash flows. The amendments of ASU 2016-09 became effective for Kentucky Bancshares on January 1, 2017 and did not have a material impact on Kentucky Bancshares consolidated financial statements. The Company has made an entity-wide accounting policy election to account for forfeitures of stock awards as they occur. Changes to Kentucky Bancshares consolidated statement of cash flows required by the amendments of ASU 2016-09 are incorporated into the presentation in the Quarterly Report on Form 10-Q for the three month period ending March 31, 2017.

ASU 2016-02, “Leases (Topic 842).” Issued in February 2016, ASU 2016-02 was issued by the FASB to increase transparency and comparability among organizations by recognizing lease assets and lease liabilities on the balance sheet and by disclosing key information about leasing arrangements. ASU 2016-02 will, among other things, require lessees to recognize a lease liability, which is a lessee’s obligation to make lease payments arising from a lease, measured on a discounted basis; and a right-of-use asset, which is an asset that represents the lessee’s right to use, or control the use of, a specified asset for the lease term.

ASU 2016-02 does not significantly change lease accounting requirements applicable to lessors; however, the ASU contains some targeted improvements that are intended to align, where necessary, lessor accounting with the lessee accounting model and with the updated revenue recognition guidance issued in 2014. The amendments of ASU 2016-02 are effective for interim and annual periods beginning after December 15, 2018. Kentucky Bancshares plans to adopt the amendments of ASU 2016-02 beginning in the first quarter of 2019. At adoption, Kentucky Bancshares will recognize a lease asset and a corresponding lease liability on its consolidated balance sheet for its total lease obligation measured on a discounted basis. As of March 31, 2017, all leases in which Kentucky Bancshares was the lessee were classified as operating leases. Kentucky Bancshares does not anticipant any material impact to its consolidated statements of income as a result of the adoption of this ASU. The Company has an immaterial amount of leases in which it is the lessor.

Based on Management’s evaluation to date, the Company does not expect the amendments of ASU 2016-02 to have any material impact to these leases or the related income. Management will continue to evaluate the impact this ASU will have on the Company’s consolidated financial statements; however, the adoption of ASU 2016-02 is not expected to have a material impact on Kentucky Bancshares consolidated financial statements.

ASU 2016-01, “Financial Instruments-Overall (Subtopic 825-10): Recognition and Measurement of Financial Assets and Financial Liabilities (An Amendment of the FASB Accounting Standards Codification).” Issued in January 2016, ASU 2016-01 is intended to enhance the reporting model for financial instruments to provide users of financial statements with improved decision-making information. The amendments of ASU 2016-01 include: (i) requiring equity investments, except those accounted for under the equity method of accounting or those that result in the consolidation of an investee, to be measured at fair value with changes in fair value recognized in net income; (ii) requiring a qualitative assessment to identify impairment of equity investments without readily determinable fair values; (iii) eliminating the requirement to disclose the method and significant assumptions used to estimate the fair value for financial instruments measured at amortized cost on the balance sheet; (iv) requiring the use of the exit price notion when measuring the fair value of financial instruments for disclosure purposes; (v) requiring an entity that has elected the fair value option to measure the fair value of a liability to present separately in other comprehensive income the portion of the change in the fair value resulting from a change in the instrument-specific credit risk; (vi) requiring separate presentation of financial assets and financial liabilities by measurement category and form of financial asset on the balance sheet or the accompanying notes to the financial statements and (vii) clarifying that an entity should evaluate the need for a valuation allowance on a deferred tax asset related to available for sale securities in combination with the entity’s other deferred tax assets. The amendments of ASU 2016-01 are effective for interim and annual periods beginning after December 15, 2017. Kentucky Bancshares plans to adopt the amendments of ASU 2016-01 during the first quarter of 2018. Management has evaluated the impact this ASU will have on the Company’s consolidated financial statements. Through this evaluation, Management has determined that the principal areas impacted by the amendments of ASU 2016-01 will be Kentucky Bancshares investment in member bank stock, which are equity securities that do not have readily determinable fair values, and various fair value related disclosures. See Note 1 – Significant Accounting Policies, “Federal Home Loan Bank (FHLB): for information regarding Kentucky Bancshares investment in member bank stock. The adoption of ASU 2016-01 is not expected to have a material impact on the Company’s consolidated financial statements.

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

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

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

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

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

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

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SECURITIES (Tables)

3 Months Ended

Mar. 31, 2017

SECURITIES

Schedule of 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, 2017
U. S. government agencies	$	46,077	$	386	$	(265)	$	46,198
States and political subdivisions		91,389		1,928		(381)		92,936
Mortgage-backed - residential		164,475		149		(2,171)		162,453
Equity securities		320		20		—		340
Total	$	302,261	$	2,483	$	(2,817)	$	301,927
December 31, 2016
U. S. government agencies	$	36,454	$	373	$	(299)	$	36,528
States and political subdivisions		90,117		1,731		(716)		91,132
Mortgage-backed - residential		148,327		120		(2,677)		145,770
Equity securities		320		20		—		340
Total	$	275,218	$	2,244	$	(3,692)	$	273,770

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

	Amortized		Fair
	Cost		Value
Due in one year or less	$	300	$	301
Due after one year through five years		34,432		34,951
Due after five years through ten years		49,420		49,811
Due after ten years		53,314		54,071
		137,466		139,134
Mortgage-backed - residential		164,475		162,453
Equity		320		340
Total	$	302,261	$	301,927

Schedule of securities with unrealized losses not recognized in income

March 31, 2017

	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	$	24,754	$	(265)	$	—	$	—	$	24,754	$	(265)
States and municipals		21,189		(381)		—		—		21,189		(381)
Mortgage-backed - residential		125,783		(1,600)		13,366		(571)		139,149		(2,171)
Total temporarily impaired	$	171,726	$	(2,246)	$	13,366	$	(571)	$	185,092	$	(2,817)

December 31, 2016

	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	$	28,202	$	(299)	$	—	$	—	$	28,202	$	(299)
States and municipals		27,834		(716)		—		—		27,834		(716)
Mortgage-backed - residential		119,802		(1,938)		13,652		(739)		133,454		(2,677)
Total temporarily impaired	$	175,838	$	(2,953)	$	13,652	$	(739)	$	189,490	$	(3,692)

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LOANS (Tables)

3 Months Ended

Mar. 31, 2017

LOANS

Schedule of loans

(in thousands)

	3/31/2017		12/31/2016
Commercial	$	76,040	$	77,436
Real estate construction		28,257		29,169
Real estate mortgage:
1-4 family residential		248,132		244,638
Multi-family residential		44,330		47,199
Non-farm & non-residential		182,417		176,024
Agricultural		61,035		62,491
Consumer		17,239		18,867
Other		116		183
Total	$	657,566	$	656,007

Schedule of activity in the allowance for loan losses

	Three Months Ended March 31, 2017
	(in thousands)
	Beginning								Ending
	Balance		Charge-offs		Recoveries		Provision		Balance
Commercial	$	789	$	(2)	$	8	$	76	$	871
Real estate Construction		564		—		—		(19)		545
Real estate mortgage:
1-4 family residential		2,301		(11)		1		84		2,375
Multi-family residential		581		—		3		82		666
Non-farm & non-residential		1,203		—		—		108		1,311
Agricultural		856		—		10		(4)		862
Consumer		547		(37)		4		20		534
Other		60		(225)		234		(9)		60
Unallocated		640		—		—		12		652
	$	7,541	$	(275)	$	260	$	350	$	7,876

	Three Months Ended March 31, 2016
	(in thousands)
	Beginning								Ending
	Balance		Charge-offs		Recoveries		Provision		Balance
Commercial	$	486	$	—	$	31	$	(9)	$	508
Real estate Construction		411		—		6		459		876
Real estate mortgage:										—
1-4 family residential		2,081		(12)		5		102		2,176
Multi-family residential		458		—		3		11		472
Non-farm & non-residential		1,213		—		266		(298)		1,181
Agricultural		678		—		11		38		727
Consumer		525		(110)		57		59		531
Other		60		(303)		297		6		60
Unallocated		609		—		—		7		616
	$	6,521	$	(425)	$	676	$	375	$	7,147

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

	Individually		Collectively		Purchased
As of March 31, 2017	Evaluated for		Evaluated for		Credit
(in thousands)	Impairment		Impairment		Impaired		Total
Allowance for Loan Losses:
Commercial	$	—	$	871	$	—	$	871
Real estate construction		—		545		—		545
Real estate mortgage:
1-4 family residential		75		2,300		—		2,375
Multi-family residential		—		666		—		666
Non-farm & non-residential		8		1,303		—		1,311
Agricultural		396		466		—		862
Consumer		—		534		—		534
Other		—		60		—		60
Unallocated		—		652		—		652
	$	479	$	7,397	$	—	$	7,876
Loans:
Commercial	$	—	$	76,040	$	—	$	76,040
Real estate construction		—		28,257		—		28,257
Real estate mortgage:
1-4 family residential		637		246,467		850		248,132
Multi-family residential		—		43,768		534		44,330
Non-farm & non-residential		2,609		179,663		135		182,417
Agricultural		3,142		57,715		169		61,035
Consumer		—		17,239		—		17,239
Other		—		116		—		116
	$	6,388	$	649,265	$	1,688	$	657,566

	Individually		Collectively		Purchased
As of December 31, 2016	Evaluated for		Evaluated for		Credit
(in thousands)	Impairment		Impairment		Impaired		Total
Allowance for Loan Losses:
Commercial	$	—	$	789	$	—	$	789
Real estate construction		—		564		—		564
Real estate mortgage:
1-4 family residential		99		2,202		—		2,301
Multi-family residential		—		581		—		581
Non-farm & non-residential		15		1,188		—		1,203
Agricultural		427		429		—		856
Consumer		—		547		—		547
Other		—		60		—		60
Unallocated		—		640		—		640
	$	541	$	7,000	$	—	$	7,541
Loans:
Commercial	$	97	$	77,339	$	—		77,436
Real estate construction		153		29,016		—		29,169
Real estate mortgage:
1-4 family residential		2,704		240,906		1,028		244,638
Multi-family residential		—		46,637		562		47,199
Non-farm & non-residential		1,725		174,154		145		176,024
Agricultural		3,315		58,998		178		62,491
Consumer		—		18,867		—		18,867
Other		—		183		—		183
Total	$	7,994	$	646,100	$	1,913	$	656,007

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 and for the three months ended March 31, 2017 (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:
Commerical	$	—	$	—	$	—	$	49	$	12	$	12
Real estate mortgage:
Construction		—		—		—		77		11		11
1-4 family residential		307		307		—		457		5		5
Agricultural		898		898		—		776		—		—
With an allowance recorded:
Real estate mortgage:
1-4 family residential		330		330		75		1,214		23		23
Non-farm & non-residential		1,711		1,711		8		1,718		23		23
Agricultural		3,142		3,142		396		2,902		3		3
Total	$	6,388	$	6,388	$	479	$	7,193	$	77	$	77

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

The following table presents loans individually evaluated for impairment by class of loans for the three months ended March 31,2016:

			Year to Date		Year to Date
	Average		Interest		Cash Basis
	Recorded		Income		Interest
(in thousands):	Investment		Recognized		Recognized
With no related allowance recorded:
Real estate mortgage:
1-4 family residential	$	370	$	2	$	2
Agricultural		346		3		3
With an allowance recorded:
Real estate mortgage:
Construction		1,197		32		32
1-4 family residential		1,077		5		5
Non-farm & non-residential		2,441		18		18
Agricultural		3,420		—		—
Total	$	8,851	$	60	$	60

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

The following table presents loans individually evaluated for impairment by class of loans as of and for the year ended December 31, 2016 (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	$	97	$	97	$	—	$	48	$	30	$	30
Real estate construction		153		153		—		494		9		9
Real estate mortgage:
1-4 family residential		606		606		—		488		—		—
Agricultural		654		654		—		561		—		—
With an allowance recorded:
Real estate mortgage
1-4 family residential		2,098		2,098		99		1,590		56		56
Non-farm & non-residential		1,725		1,725		15		2,303		71		71
Agricultural		2,661		2,661		427		3,309		25		25
Total	$	7,994	$	7,994	$	541	$	8,793	$	191	$	191

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
As of March 31, 2017			Still		Troubled Debt
(in thousands)	Nonaccrual		Accruing		Restructurings
Commercial	$	12	$	34	$	—
Real estate construction		—		—		—
Real estate mortgage:
1-4 family residential		2,285		249		—
Multi-family residential		—		—		—
Non-farm & non-residential		272		61		1,711
Agricultural		940		405		—
Consumer		13		8		—
Total	$	3,522	$	757	$	1,711
Loans included in totals above acquired from Madison Financial Corporation	$	635	$	22	$	—

			Loans Past Due
			Over 90 Days
As of December 31, 2016			Still		Troubled Debt
(in thousands)	Nonaccrual		Accruing		Restructurings
Commercial	$	3	$	11	$	—
Real estate construction		—		153		—
Real estate mortgage:
1-4 family residential		2,725		31		338
Multi-family residential		25		—		—
Non-farm & non-residential		272		—		1,725
Agricultural		1,541		724		—
Consumer		—		8		—
Other		—		—		—
Total	$	4,566	$	927	$	2,063
Loans included in totals above acquired from Madison Financial Corporation	$	578	$	22	$	—

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

	30–59		60–89		Greater than				Total
As of March 31, 2017	Days		Days		90 Days				Past Due &		Loans Not
(in thousands)	Past Due		Past Due		Past Due		Non-accrual		Non-accrual		Past Due
Commercial	$	25	$	235	$	34	$	12	$	306	$	75,734
Real estate construction		1,172		—		—		—		1,172		27,085
Real estate mortgage:
1-4 family residential		2,767		128		249		2,285		5,429		242,703
Multi-family residential		—				—		—		—		44,330
Non-farm & non-residential		223		64		61		272		620		181,797
Agricultural		256		156		405		940		1,757		59,278
Consumer		65		85		8		13		171		17,068
Other		—		—		—		—		—		116
Total	$	4,508	$	668	$	757	$	3,522	$	9,455	$	648,111
Loans included in totals above acquired from Madison Financial Corp.	$	125	$	—	$	—	$	635	$	760	$	27,703

	30–59		60–89		Greater than				Total
As of December 31, 2016	Days		Days		90 Days				Past Due &		Loans Not
(in thousands)	Past Due		Past Due		Past Due		Non-accrual		Non-accrual		Past Due
Commercial	$	54	$	45	$	11	$	3	$	113	$	77,323
Real estate construction		—		—		153		—		153		29,016
Real estate mortgage:
1-4 family residential		2,310		228		31		2,725		5,294		239,344
Multi-family residential		391		3		—		25		419		46,780
Non-farm & non-residential		159		61		—		272		492		175,532
Agricultural		647		61		724		1,541		2,973		59,518
Consumer		97		37		8		—		142		18,725
Other		—		—		—		—		—		183
Total	$	3,658	$	435	$	927	$	4,566	$	9,586	$	646,421
Loans included in totals above acquired from Madison Financial Corp.	$	155	$	—	$	22	$	578	$	755	$	32,332

Schedule of risk category of loans by class of loans

As of March 31, 2017			Special
(in thousands)	Pass		Mention		Substandard		Doubtful
Commercial	$	74,976	$	1,002	$	62	$	—
Real estate construction		28,257		—		—		—
Real estate mortgage:
1-4 family residential		237,512		3,752		6,856		12
Multi-family residential		40,970		2,600		760		—
Non-farm & non-residential		172,511		8,142		1,764		—
Agricultural		57,646		1,748		1,641		—
Total	$	611,872	$	17,244	$	11,083	$	12
Loans included in totals above acquired from Madison Financial Corporation	$	25,992	$	438	$	2,033	$	—

As of December 31, 2016			Special
(in thousands)	Pass		Mention		Substandard		Doubtful
Commercial	$	76,346	$	1,078	$	12	$	—
Real estate construction		28,577		—		592		—
Real estate mortgage:
1-4 family residential		232,969		4,031		7,627		11
Multi-family residential		43,681		2,617		901		—
Non-farm & non-residential		167,451		8,185		388		—
Agricultural		58,155		1,367		2,969		—
Total	$	607,179	$	17,278	$	12,489	$	11
Loans included in totals above acquired from Madison Financial Corporation	$	30,359	$	480	$	2,248	$	—

Madison Financial Corp

LOANS

Schedule of loans

	3/31/2017		12/31/2016
Commercial	$	1,078	$	1,113
Real estate construction		394		398
Real estate mortgage:
1-4 family residential		10,618		11,462
Multi-family residential		3,463		5,043
Non-farm & non-residential		11,591		13,024
Agricultural		1,239		1,940
Consumer		80		107
Total	$	28,463	$	33,087

Schedule of carrying amount of purchased credit impaired loans

	3/31/2017		12/31/2016
Real estate mortgage:
1-4 family residential	$	850	$	1,028
Multi-family		534		562
Non-farm & non-residential		135		145
Agricultural		169		178
	$	1,688	$	1,913

Schedule of accretable yield or income expected to be collected

	Three Months Ended
	3/31/2017		3/31/2016
Balance, beginning of period	$	240	$	408
New loans purchased		—		—
Accretion of income		46		69
Balance, end of period	$	194	$	339

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REAL ESTATE OWNED (Tables)

3 Months Ended

Mar. 31, 2017

REAL ESTATE OWNED

Schedule of activity in real estate owned

	Three Months Ended
	March 31,
	2017		2016
Beginning of year	$	1,824	$	2,347
Additions		126		121
Sales		(577)		—
(Additions) subtractions to valuation allowance, net		—		(85)
End of period	$	1,373	$	2,383

Schedule of activity in the valuation allowance

	2017		2016
Beginning of year	$	803	$	616
Write-downs of other real estate, net		—		85
Reductions from sale		—		—
End of Period	$	803	$	701

Schedule of expenses related to foreclosed assets

	Three Months Ended
	March 31,
	2017		2016
		(in thousands)
Net (gain) loss on sales, included in other income on income statement	$	(46)	$	—
Additions to valuation allowance, net		—		85
Operating expenses, net of rental income		79		27
Repossession expenses, net		79		112
Net expense, net of gain or loss on sales, for the period	$	33	$	112

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EARNINGS PER SHARE (Tables)

3 Months Ended

Mar. 31, 2017

EARNINGS PER SHARE

Schedule of factors used in the earnings per share computation

	Three Months Ended
	March 31,
	2017		2016
	(in thousands)
Basic Earnings Per Share
Net Income	$	3,137	$	1,837
Weighted average common shares outstanding		2,954		2,977
Basic earnings per share	$	1.06	$	0.61
Diluted Earnings Per Share
Net Income	$	3,137	$	1,837
Weighted average common shares outstanding		2,954		2,977
Weighted average common and dilutive potential common shares outstanding		2,954		2,977
Diluted earnings per share	$	1.06	$	0.61

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STOCK BASED COMPENSATION (Tables)

3 Months Ended

Mar. 31, 2017

Stock Based Compensation

Summary of activity for the Stock Option Plans

				Weighted
		Weighted		Average
		Average		Remaining	Aggregate
		Exercise		Contractual	Intrinsic
	Shares	Price		Term	Value (1)
Outstanding, beginning of year	1,200	$	31.00
Granted	—		—
Forfeited or expired	—		—
Exercised	(600)		31.00
Outstanding, end of period	600	$	31.00	11 months	$	4
Vested and expected to vest	600	$	31.00	11 months	$	4
Exercisable, end of period	600	$	31.00	11 months	$	4

(1) Aggregate intrinsic value in thousands

2005 Restricted Stock Grant Plan

Stock Based Compensation

Summary of changes in nonvested shares of restricted stock

		Weighted-Average		Fair
		Grant-Date		Value
Nonvested Shares	Shares	Fair Value		Per Share
Nonvested at January 1, 2017	10,636	$	254	$	23.84
Granted	—		—		—
Vested	(4,192)		(76)		18.18
Forfeited	—		—		—
Nonvested at March 31, 2017	6,444	$	178	$	27.52

(1) Grant date fair value in thousands

2009 Stock Award Plan

Stock Based Compensation

Summary of changes in nonvested shares of restricted stock

		Weighted-Average		Fair
		Grant-Date		Value
Nonvested Shares	Shares	Fair Value (1)		Per Share
Nonvested at January 1, 2017	7,297	$	214	$	29.31
Granted	6,575		214		32.50
Vested	(1,414)		(41)		28.77
Forfeited	—		—		—
Nonvested at March 31, 2017	12,458	$	387	$	31.05

(1) Grant date fair value in thousands

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OTHER BORROWINGS (Tables)

3 Months Ended

Mar. 31, 2017

OTHER BORROWINGS

Maturity schedule for the term loan

2017	$	288
2018		401
2019		421
2020		442
2021		465
Thereafter		1,966
	$	3,983

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FAIR VALUE MEASUREMENTS (Tables)

3 Months Ended

Mar. 31, 2017

FAIR VALUE MEASUREMENTS.

Schedule of assets measured at fair value on a recurring basis

Fair Value Measurements at March 31, 2017 (in thousands):

			Quoted Prices
			In Active
			Markets for		Significant Other		Significant
			Identical		Observable		Unobservable
	Carrying		Assets		Inputs		Inputs
Description	Value		(Level 1)		(Level 2)		(Level 3)
U. S. government agencies	$	46,198	$	—	$	46,198	$	—
States and municipals		92,936		—		92,936		—
Mortgage-backed - residential		162,453		—		162,453		—
Equity securities		340		340		—		—
Trading Assets		5,644		2,384		3,260		—
Total	$	307,571	$	2,724	$	304,847	$	—

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

			Quoted Prices
			In Active
			Markets for		Significant Other		Significant
			Identical		Observable		Unobservable
	Carrying		Assets		Inputs		Inputs
Description	Value		(Level 1)		(Level 2)		(Level 3)
U. S. government agencies	$	36,528	$	—	$	36,528	$	—
States and municipals		91,132		—		91,132		—
Mortgage-backed - residential		145,770		—		145,770		—
Equity securities		340		340		—		—
Trading Assets		5,592		1,608		3,984		—
Total	$	279,362	$	1,948	$	277,414	$	—

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

	Fair Value Measurements at March 31, 2017 Using :
			Quoted Prices
			In Active
			Markets for	Significant Other	Significant
			Identical	Observable	Unobservable
	Carrying		Assets	Inputs	Inputs
(In thousands)	Value		(Level 1)	(Level 2)	(Level 3)
Description
Impaired loans:
Real Estate Mortgage:
1-4 family Residential		255	—	—		255
Agricultural		2,746	—	—		2,746
Other real estate owned, net:
Residential		956				956
Commercial		57	—	—		57
Loan servicing rights		1,152	—	—		1,152

	Fair Value Measurements at December 31, 2016 Using :
			Quoted Prices
			In Active
			Markets for	Significant Other	Significant
			Identical	Observable	Unobservable
	Carrying		Assets	Inputs	Inputs
(In thousands)	Value		(Level 1)	(Level 2)	(Level 3)
Description
Impaired loans:
Real Estate Mortgage:
1-4 family residential		1,685	—	—	$	1,685
Agricultural		2,234	—	—		2,234
Other real estate owned, net:
Residential		956	—	—		956
Commercial		272	—			272
Loan servicing rights		1,083	—	—		1,083

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

				Range
March 31, 2017	Fair	Valuation	Unobservable	(Weighted
(In thousands)	Value	Technique(s)	Input(s)	Average)
Impaired loans
Real estate mortgage:
1-4 family residential	255	sales comparison	adjustment for differences between the comparable sales	0%-12%	(6)%
Agricultural	2,746	sales comparison	adjustment for differences between the comparable sales	8%-64%	(33)%
Other real estate owned:
Residential	956	sales comparison	adjustment for differences between the comparable sales	1%-16%	(9)%
Commercial	57	income approach	capitalization rate	10%-10%	(10)%
Loan Servicing Rights	1,152	discounted cash flow	constant prepayment rates	8%-50%	(11)%

				Range
December 31, 2016	Fair	Valuation	Unobservable	(Weighted
(In thousands)	Value	Technique(s)	Input(s)	Average)
Impaired loans
Real estate mortgage:
1-4 family residential	1,685	sales comparison	adjustment for differences between the comparable sales	0%-21%	(10)%
Agricultural	2,234	sales comparison	adjustment for differences between the comparable sales	2%-75%	(9)%
Other real estate owned:
Residential	956	sales comparison	adjustment for differences between the comparable sales	1%-16%	(9)%
Commercial	272	income approach	capitalization rate	10%-10%	(10)%
Loan Servicing Rights	1083	discounted cash flow	constant prepayment rates	8%-45%	(13)%

Schedule of carrying amounts and estimated fair values of financial instruments

March 31, 2017:

	Carrying
(in thousands)	Value		Level 1		Level 2		Level 3		Total
Financial assets
Cash and cash equivalents	$	37,248	$	37,248	$	—	$	—	$	37,248
Interest bearing deposits		4,659		4,659		—		—		4,659
Securities		301,927		340		301,587		—		301,927
Trading assets		5,644		2,384		3,260		—		5,644
Loans held for sale		1,189		—		1,229		—		1,229
Loans, net		649,690		—		—		647,847		647,847
FHLB Stock		7,034		—		—		—		N/A
Interest receivable		3,649		—		1,355		2,294		3,649
Financial liabilities
Deposits	$	824,345	$	613,975	$	209,399	$	—	$	823,374
Securities sold under agreements to repurchase		21,811		—		21,916		—		21,916
Long-term Federal Home Loan Bank advances		90,612		—		86,023		—		86,023
Note payable		3,983		—		4,438		—		4,438
Subordinated debentures		7,217		—		—		7,211		7,211
Interest payable		667		—		605		62		667

December 31, 2016:

	Carrying
(in thousands)	Value		Level 1		Level 2		Level 3		Total
Financial assets
Cash and cash equivalents	$	43,250	$	43,250	$	—	$	—	$	43,250
Interest bearing deposits		5,029		5,029		—		—		5,029
Securities		273,770		340		273,430		—		273,770
Trading assets		5,592		1,608		3,984		—		5,592
Mortgage loans held for sale		724		—		750		—		750
Loans, net		648,466		—		—		648,234		648,234
FHLB Stock		7,034		—		—		—		N/A
Interest receivable		3,715		—		1,334		2,381		3,715
Financial liabilities
Deposits	$	802,981	$	607,617	$	195,528	$	—	$	803,145
Securities sold under agreements to repurchase		20,873		—		21,006		—		21,006
FHLB advances		92,500		—		91,015		—		91,015
Note payable		4,090		—		4,564		—		4,564
Subordinated debentures		7,217		—		—		7,210		7,210
Interest payable		692		—		639		53		692

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CHANGES IN ACCUMULATED OTHER COMPREHENSIVE INCOME BY COMPONENT (Tables)

3 Months Ended

Mar. 31, 2017

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 (unaudited)

(in thousands)

	Unrealized
	Gains and Losses on
	Available for Sale
	Securities
	For the Three Months Ended March 31,
	2017		2016
Beginning Balance	$	(956)	$	359
Unrealized holding gains (losses) for the period, net of tax		736		2,470
Reclassification adjustment for:
Securities gains realized in income		—		126
Income taxes		—		(43)
		—		83
Net current period other comprehensive income		736		2,387
Ending balance	$	(220)	$	2,746

Significant amounts reclassified out of each component of AOCI

March 31, 2017

Details about	Amount		Affected Line Item
Accumulated Other	Reclassified From		in the Statement
Comprehensive	Accumulated Other		Where Net
Income Components	Comprehensive Income		Income is Presented
Unrealized gains and losses on available-for-sale securities	$	—	Gain on sale of available for sale securities, net
		—	Income taxes
		—	Net income

March 31, 2016

Details about	Amount		Affected Line Item
Accumulated Other	Reclassified From		in the Statement
Comprehensive	Accumulated Other		Where Net
Income Components	Comprehensive Income		Income is Presented
Unrealized gains and losses on available-for-sale securities	$	126	Gain on sale of available for sale securities, net
		43	Income taxes
		83	Net income

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SECURITIES (Details) - USD ($) $ in Thousands	Mar. 31, 2017	Dec. 31, 2016
Securities Available for Sale
Amortized Cost	$ 302,261	$ 275,218
Gross Unrealized Gains	2,483	2,244
Gross Unrealized Losses	(2,817)	(3,692)
Fair Value	301,927	273,770
U.S. government agencies
Securities Available for Sale
Amortized Cost	46,077	36,454
Gross Unrealized Gains	386	373
Gross Unrealized Losses	(265)	(299)
Fair Value	46,198	36,528
States and municipals
Securities Available for Sale
Amortized Cost	91,389	90,117
Gross Unrealized Gains	1,928	1,731
Gross Unrealized Losses	(381)	(716)
Fair Value	92,936	91,132
Mortgage-backed - residential
Securities Available for Sale
Amortized Cost	164,475	148,327
Gross Unrealized Gains	149	120
Gross Unrealized Losses	(2,171)	(2,677)
Fair Value	162,453	145,770
Equity securities
Securities Available for Sale
Amortized Cost	320	320
Gross Unrealized Gains	20	20
Fair Value	$ 340	$ 340

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SECURITIES - AMORTIZED COST AND FAIR VALUE BY CONTRACTUAL MATURITY (Details) - USD ($) $ in Thousands	3 Months Ended
	Mar. 31, 2017	Mar. 31, 2016	Dec. 31, 2016
Amortized Cost
Due in one year or less	$ 300
Due after one year through five years	34,432
Due after five years through ten years	49,420
Due after ten years	53,314
Securities due at a single maturity date	137,466
Amortized Cost	302,261		$ 275,218
Fair Value
Due in one year or less	301
Due after one year through five years	34,951
Due after five years through ten years	49,811
Due after ten years	54,071
Securities due at a single maturity date	139,134
Fair Value	301,927		273,770
Sales of securities
Proceeds from sales of securities	0	$ 9,250
Gross gains realized on sales of securities	0	126
Gross losses realized on sales of securities	0	0
Tax provision related to realized gains	0	$ 43
Mortgage-backed - residential
Amortized Cost
Amortized Cost	164,475		148,327
Fair Value
Fair Value	162,453		145,770
Equity securities
Amortized Cost
Amortized Cost	320		320
Fair Value
Fair Value	$ 340		$ 340

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SECURITIES - UNREALIZED LOSSES (Details) - USD ($) $ in Thousands	Mar. 31, 2017	Dec. 31, 2016
Securities with unrealized losses
Less than 12 Months, Fair Value	$ 171,726	$ 175,838
Less than 12 Months, Unrealized Loss	(2,246)	(2,953)
12 Months or More, Fair Value	13,366	13,652
12 Months or More, Unrealized Loss	(571)	(739)
Total, Fair Value	185,092	189,490
Total, Unrealized Loss	(2,817)	(3,692)
Trading Assets
Trading Assets	5,644	5,592
U.S. government agencies
Securities with unrealized losses
Less than 12 Months, Fair Value	24,754	28,202
Less than 12 Months, Unrealized Loss	(265)	(299)
Total, Fair Value	24,754	28,202
Total, Unrealized Loss	(265)	(299)
States and municipals
Securities with unrealized losses
Less than 12 Months, Fair Value	21,189	27,834
Less than 12 Months, Unrealized Loss	(381)	(716)
Total, Fair Value	21,189	27,834
Total, Unrealized Loss	(381)	(716)
Mortgage-backed - residential
Securities with unrealized losses
Less than 12 Months, Fair Value	125,783	119,802
Less than 12 Months, Unrealized Loss	(1,600)	(1,938)
12 Months or More, Fair Value	13,366	13,652
12 Months or More, Unrealized Loss	(571)	(739)
Total, Fair Value	139,149	133,454
Total, Unrealized Loss	$ (2,171)	$ (2,677)

XML

LOANS (Details) - USD ($) $ in Thousands	Mar. 31, 2017	Dec. 31, 2016
Loans
Loans	$ 657,566	$ 656,007
Allowance for loan losses	0	0
Madison Financial Corp
Loans
Loans	28,463	33,087
Allowance for loan losses	0
Commercial
Loans
Loans	76,040	77,436
Commercial | Madison Financial Corp
Loans
Loans	1,078	1,113
Real estate construction
Loans
Loans	28,257	29,169
Real estate construction | Madison Financial Corp
Loans
Loans	394	398
1-4 family residential
Loans
Loans	248,132	244,638
1-4 family residential | Madison Financial Corp
Loans
Loans	10,618	11,462
Multi-family residential
Loans
Loans	44,330	47,199
Multi-family residential | Madison Financial Corp
Loans
Loans	3,463	5,043
Non-farm & non-residential
Loans
Loans	182,417	176,024
Non-farm & non-residential | Madison Financial Corp
Loans
Loans	11,591	13,024
Agricultural
Loans
Loans	61,035	62,491
Agricultural | Madison Financial Corp
Loans
Loans	1,239	1,940
Consumer
Loans
Loans	17,239	18,867
Consumer | Madison Financial Corp
Loans
Loans	80	107
Other
Loans
Loans	$ 116	$ 183

XML

LOANS - ACTIVITY IN ALLOWANCE (Details) - USD ($) $ in Thousands	3 Months Ended
	Mar. 31, 2017	Mar. 31, 2016	Dec. 31, 2016
Activity in allowance for loan losses
Beginning Balance	$ 7,541	$ 6,521
Charge-offs	(275)	(425)
Recoveries	260	676
Provision	350	375
Ending Balance	7,876	7,147
Allowance for loan losses	0		$ 0
Contractual fair value of purchased credit impaired loans	2,400		2,600
Accretable yield, or income expected to be collected
Balance, beginning of period	240	408
Accretion of income	46	69
Balance, end of period	194	339
Commercial
Activity in allowance for loan losses
Beginning Balance	789	486
Charge-offs	(2)
Recoveries	8	31
Provision	76	(9)
Ending Balance	871	508
Real estate construction
Activity in allowance for loan losses
Beginning Balance	564	411
Recoveries		6
Provision	(19)	459
Ending Balance	545	876
1-4 family residential
Activity in allowance for loan losses
Beginning Balance	2,301	2,081
Charge-offs	(11)	(12)
Recoveries	1	5
Provision	84	102
Ending Balance	2,375	2,176
Multi-family residential
Activity in allowance for loan losses
Beginning Balance	581	458
Recoveries	3	3
Provision	82	11
Ending Balance	666	472
Non-farm & non-residential
Activity in allowance for loan losses
Beginning Balance	1,203	1,213
Recoveries		266
Provision	108	(298)
Ending Balance	1,311	1,181
Agricultural
Activity in allowance for loan losses
Beginning Balance	856	678
Recoveries	10	11
Provision	(4)	38
Ending Balance	862	727
Consumer
Activity in allowance for loan losses
Beginning Balance	547	525
Charge-offs	(37)	(110)
Recoveries	4	57
Provision	20	59
Ending Balance	534	531
Other
Activity in allowance for loan losses
Beginning Balance	60	60
Charge-offs	(225)	(303)
Recoveries	234	297
Provision	(9)	6
Ending Balance	60	60
Unallocated
Activity in allowance for loan losses
Beginning Balance	640	609
Provision	12	7
Ending Balance	652	616
Madison Financial Corp
Activity in allowance for loan losses
Allowance for loan losses	0
Receivables Acquired with Deteriorated Credit Quality
Activity in allowance for loan losses
Carrying amount	1,688		1,913
Accretable yield, or income expected to be collected
Certain Loans Acquired in Transfer Not Accounted for as Debt Securities, Acquired During Period, Not Accounted for Using Income Recognition Model, at Acquisition	0	0
Accretion recorded in income	0	$ 0
Receivables Acquired with Deteriorated Credit Quality | 1-4 family residential
Activity in allowance for loan losses
Carrying amount	850		1,028
Receivables Acquired with Deteriorated Credit Quality | Multi-family residential
Activity in allowance for loan losses
Carrying amount	534		562
Receivables Acquired with Deteriorated Credit Quality | Non-farm & non-residential
Activity in allowance for loan losses
Carrying amount	135		145
Receivables Acquired with Deteriorated Credit Quality | Agricultural
Activity in allowance for loan losses
Carrying amount	$ 169		$ 178

XML

LOANS - ALLOWANCE FOR LOAN LOSSES AND RECORDED INVESTMENT (Details) - USD ($) $ in Thousands	Mar. 31, 2017	Dec. 31, 2016	Mar. 31, 2016	Dec. 31, 2015
Loans
Accrued interest receivable	$ 2,300	$ 2,400
Allowance for Loan Losses:
Individually Evaluated for Impairment	479	541
Collectively Evaluated for Impairment	7,397	7,000
Total	7,876	7,541	$ 7,147	$ 6,521
Loans:
Individually Evaluated for Impairment	6,388	7,994
Collectively Evaluated for Impairment	649,265	646,100
Total	657,566	656,007
Commercial
Allowance for Loan Losses:
Collectively Evaluated for Impairment	871	789
Total	871	789	508	486
Loans:
Individually Evaluated for Impairment		97
Collectively Evaluated for Impairment	76,040	77,339
Total	76,040	77,436
Real estate construction
Allowance for Loan Losses:
Collectively Evaluated for Impairment	545	564
Total	545	564	876	411
Loans:
Individually Evaluated for Impairment		153
Collectively Evaluated for Impairment	28,257	29,016
Total	28,257	29,169
1-4 family residential
Allowance for Loan Losses:
Individually Evaluated for Impairment	75	99
Collectively Evaluated for Impairment	2,300	2,202
Total	2,375	2,301	2,176	2,081
Loans:
Individually Evaluated for Impairment	637	2,704
Collectively Evaluated for Impairment	246,467	240,906
Total	248,132	244,638
Multi-family residential
Allowance for Loan Losses:
Collectively Evaluated for Impairment	666	581
Total	666	581	472	458
Loans:
Collectively Evaluated for Impairment	43,768	46,637
Total	44,330	47,199
Non-farm & non-residential
Allowance for Loan Losses:
Individually Evaluated for Impairment	8	15
Collectively Evaluated for Impairment	1,303	1,188
Total	1,311	1,203	1,181	1,213
Loans:
Individually Evaluated for Impairment	2,609	1,725
Collectively Evaluated for Impairment	179,663	174,154
Total	182,417	176,024
Agricultural
Allowance for Loan Losses:
Individually Evaluated for Impairment	396	427
Collectively Evaluated for Impairment	466	429
Total	862	856	727	678
Loans:
Individually Evaluated for Impairment	3,142	3,315
Collectively Evaluated for Impairment	57,715	58,998
Total	61,035	62,491
Consumer
Allowance for Loan Losses:
Collectively Evaluated for Impairment	534	547
Total	534	547	531	525
Loans:
Collectively Evaluated for Impairment	17,239	18,867
Total	17,239	18,867
Other
Allowance for Loan Losses:
Collectively Evaluated for Impairment	60	60
Total	60	60	60	60
Loans:
Collectively Evaluated for Impairment	116	183
Total	116	183
Unallocated
Allowance for Loan Losses:
Collectively Evaluated for Impairment	652	640
Total	652	640	$ 616	$ 609
Receivables Acquired with Deteriorated Credit Quality
Loans:
Purchased Credit Impairment	1,688	1,913
Receivables Acquired with Deteriorated Credit Quality | 1-4 family residential
Loans:
Purchased Credit Impairment	850	1,028
Receivables Acquired with Deteriorated Credit Quality | Multi-family residential
Loans:
Purchased Credit Impairment	534	562
Receivables Acquired with Deteriorated Credit Quality | Non-farm & non-residential
Loans:
Purchased Credit Impairment	135	145
Receivables Acquired with Deteriorated Credit Quality | Agricultural
Loans:
Purchased Credit Impairment	$ 169	$ 178

XML

LOANS - INDIVIDUALLY EVALUATED FOR IMPAIRMENT (Details) - USD ($) $ in Thousands	3 Months Ended		12 Months Ended
	Mar. 31, 2017	Mar. 31, 2016	Dec. 31, 2016
Unpaid Principal Balance
Total	$ 6,388		$ 7,994
Recorded Investment
Total	6,388		7,994
Allowance for Loan Losses Allocated.	479		541
Average Recorded Investment
Total	7,193	$ 8,851	8,793
Interest Income Recognized
Total	77	60	191
Cash Basis Interest Recognized
Total	77	60	191
Commercial
Unpaid Principal Balance
With no related allowance recorded			97
Recorded Investment
With no related allowance recorded			97
Average Recorded Investment
With no related allowance recorded	49		48
Interest Income Recognized
With no related allowance recorded	12		30
Cash Basis Interest Recognized
With no related allowance recorded	12		30
Real estate construction
Unpaid Principal Balance
With no related allowance recorded			153
Recorded Investment
With no related allowance recorded			153
Average Recorded Investment
With no related allowance recorded			494
Interest Income Recognized
With no related allowance recorded			9
Cash Basis Interest Recognized
With no related allowance recorded			9
1-4 family residential
Unpaid Principal Balance
With no related allowance recorded	307		606
With an allowance recorded	330		2,098
Recorded Investment
With no related allowance recorded	307		606
With an allowance recorded	330		2,098
Allowance for Loan Losses Allocated.	75		99
Average Recorded Investment
With no related allowance recorded	457	370	488
With an allowance recorded	1,214	1,077	1,590
Interest Income Recognized
With no related allowance recorded	5	2
With an allowance recorded	23	5	56
Cash Basis Interest Recognized
With no related allowance recorded	5	2
With an allowance recorded	23	5	56
Agricultural
Unpaid Principal Balance
With no related allowance recorded	898		654
With an allowance recorded	3,142		2,661
Recorded Investment
With no related allowance recorded	898		654
With an allowance recorded	3,142		2,661
Allowance for Loan Losses Allocated.	396		427
Average Recorded Investment
With no related allowance recorded	776	346	561
With an allowance recorded	2,902	3,420	3,309
Interest Income Recognized
With no related allowance recorded		3
With an allowance recorded	3		25
Cash Basis Interest Recognized
With no related allowance recorded		3
With an allowance recorded	3		25
Non-farm & non-residential
Unpaid Principal Balance
With an allowance recorded	1,711		1,725
Recorded Investment
With an allowance recorded	1,711		1,725
Allowance for Loan Losses Allocated.	8		15
Average Recorded Investment
With an allowance recorded	1,718	2,441	2,303
Interest Income Recognized
With an allowance recorded	23	18	71
Cash Basis Interest Recognized
With an allowance recorded	23	18	$ 71
Construction
Average Recorded Investment
With no related allowance recorded	77
With an allowance recorded		1,197
Interest Income Recognized
With no related allowance recorded	11
With an allowance recorded		32
Cash Basis Interest Recognized
With no related allowance recorded	$ 11
With an allowance recorded		$ 32

XML

LOANS - NONACCRUAL, LOANS PAST DUE OVER 90 DAYS STILL ACCRUING AND TDR (Details) - USD ($) $ in Thousands	3 Months Ended
	Mar. 31, 2017	Dec. 31, 2016
Loans
Nonaccrual	$ 3,522	$ 4,566
Loans Past Due Over 90 Days Still Accruing	757	927
Troubled Debt Restructurings	$ 1,711	2,063
Percentage of nonaccrual loans secured by real estate	99.30%
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
Madison Financial Corp
Loans
Nonaccrual	$ 635	578
Loans Past Due Over 90 Days Still Accruing	22	22
Commercial
Loans
Nonaccrual	12	3
Loans Past Due Over 90 Days Still Accruing	34	11
Real estate construction
Loans
Loans Past Due Over 90 Days Still Accruing		153
1-4 family residential
Loans
Nonaccrual	2,285	2,725
Loans Past Due Over 90 Days Still Accruing	249	31
Troubled Debt Restructurings		338
Multi-family residential
Loans
Nonaccrual		25
Non-farm & non-residential
Loans
Nonaccrual	272	272
Loans Past Due Over 90 Days Still Accruing	61
Troubled Debt Restructurings	1,711	1,725
Agricultural
Loans
Nonaccrual	940	1,541
Loans Past Due Over 90 Days Still Accruing	405	724
Consumer
Loans
Nonaccrual	13
Loans Past Due Over 90 Days Still Accruing	$ 8	$ 8

XML

LOANS - AGING OF RECORDED INVESTMENT IN PAST DUE AND NON-ACCRUAL LOANS (Details) - USD ($) $ in Thousands	Mar. 31, 2017	Dec. 31, 2016
Aging of recorded investment in past due and non-accrual loans
Greater than 90 Days Past Due	$ 757	$ 927
Non-accrual	3,522	4,566
Total Past Due and Non-accrual	9,455	9,586
Loans Not Past Due	648,111	646,421
30 to 59 Days Past Due
Aging of recorded investment in past due and non-accrual loans
Recorded Investment Past Due	4,508	3,658
60 to 89 Days Past Due
Aging of recorded investment in past due and non-accrual loans
Recorded Investment Past Due	668	435
Madison Financial Corp
Aging of recorded investment in past due and non-accrual loans
Greater than 90 Days Past Due	22	22
Non-accrual	635	578
Total Past Due and Non-accrual	760	755
Loans Not Past Due	27,703	32,332
Madison Financial Corp | 30 to 59 Days Past Due
Aging of recorded investment in past due and non-accrual loans
Recorded Investment Past Due	125	155
Commercial
Aging of recorded investment in past due and non-accrual loans
Greater than 90 Days Past Due	34	11
Non-accrual	12	3
Total Past Due and Non-accrual	306	113
Loans Not Past Due	75,734	77,323
Commercial | 30 to 59 Days Past Due
Aging of recorded investment in past due and non-accrual loans
Recorded Investment Past Due	25	54
Commercial | 60 to 89 Days Past Due
Aging of recorded investment in past due and non-accrual loans
Recorded Investment Past Due	235	45
Real estate construction
Aging of recorded investment in past due and non-accrual loans
Greater than 90 Days Past Due		153
Total Past Due and Non-accrual	1,172	153
Loans Not Past Due	27,085	29,016
Real estate construction | 30 to 59 Days Past Due
Aging of recorded investment in past due and non-accrual loans
Recorded Investment Past Due	1,172
1-4 family residential
Aging of recorded investment in past due and non-accrual loans
Greater than 90 Days Past Due	249	31
Non-accrual	2,285	2,725
Total Past Due and Non-accrual	5,429	5,294
Loans Not Past Due	242,703	239,344
1-4 family residential | 30 to 59 Days Past Due
Aging of recorded investment in past due and non-accrual loans
Recorded Investment Past Due	2,767	2,310
1-4 family residential | 60 to 89 Days Past Due
Aging of recorded investment in past due and non-accrual loans
Recorded Investment Past Due	128	228
Multi-family residential
Aging of recorded investment in past due and non-accrual loans
Non-accrual		25
Total Past Due and Non-accrual		419
Loans Not Past Due	44,330	46,780
Multi-family residential | 30 to 59 Days Past Due
Aging of recorded investment in past due and non-accrual loans
Recorded Investment Past Due		391
Multi-family residential | 60 to 89 Days Past Due
Aging of recorded investment in past due and non-accrual loans
Recorded Investment Past Due		3
Non-farm & non-residential
Aging of recorded investment in past due and non-accrual loans
Greater than 90 Days Past Due	61
Non-accrual	272	272
Total Past Due and Non-accrual	620	492
Loans Not Past Due	181,797	175,532
Non-farm & non-residential | 30 to 59 Days Past Due
Aging of recorded investment in past due and non-accrual loans
Recorded Investment Past Due	223	159
Non-farm & non-residential | 60 to 89 Days Past Due
Aging of recorded investment in past due and non-accrual loans
Recorded Investment Past Due	64	61
Agricultural
Aging of recorded investment in past due and non-accrual loans
Greater than 90 Days Past Due	405	724
Non-accrual	940	1,541
Total Past Due and Non-accrual	1,757	2,973
Loans Not Past Due	59,278	59,518
Agricultural | 30 to 59 Days Past Due
Aging of recorded investment in past due and non-accrual loans
Recorded Investment Past Due	256	647
Agricultural | 60 to 89 Days Past Due
Aging of recorded investment in past due and non-accrual loans
Recorded Investment Past Due	156	61
Consumer
Aging of recorded investment in past due and non-accrual loans
Greater than 90 Days Past Due	8	8
Non-accrual	13
Total Past Due and Non-accrual	171	142
Loans Not Past Due	17,068	18,725
Consumer | 30 to 59 Days Past Due
Aging of recorded investment in past due and non-accrual loans
Recorded Investment Past Due	65	97
Consumer | 60 to 89 Days Past Due
Aging of recorded investment in past due and non-accrual loans
Recorded Investment Past Due	85	37
Other
Aging of recorded investment in past due and non-accrual loans
Loans Not Past Due	$ 116	$ 183

XML

LOANS - TROUBLED DEBT RESTRUCTURINGS (Details) $ in Thousands	3 Months Ended
	Mar. 31, 2017 USD ($) loan	Mar. 31, 2016 loan	Dec. 31, 2016 USD ($)
LOANS
Reserves to customers whose loan terms have been modified in troubled debt restructurings | $	$ 8		$ 40
Number of loans that met the definition of troubled debt restructurings | loan	0	0

XML

LOANS - RISK CATEGORY OF LOANS (Details) - USD ($) $ in Thousands	3 Months Ended
	Mar. 31, 2017	Dec. 31, 2016
Credit Quality Indicators
Loans	$ 657,566	$ 656,007
Madison Financial Corp
Credit Quality Indicators
Loans	28,463	33,087
Pass
Credit Quality Indicators
Loans	611,872	607,179
Pass | Madison Financial Corp
Credit Quality Indicators
Loans	25,992	30,359
Special Mention
Credit Quality Indicators
Loans	17,244	17,278
Special Mention | Madison Financial Corp
Credit Quality Indicators
Loans	438	480
Substandard
Credit Quality Indicators
Loans	11,083	12,489
Substandard | Madison Financial Corp
Credit Quality Indicators
Loans	2,033	2,248
Doubtful
Credit Quality Indicators
Loans	12	11
Commercial
Credit Quality Indicators
Loans	76,040	77,436
Commercial | Madison Financial Corp
Credit Quality Indicators
Loans	1,078	1,113
Commercial | Pass
Credit Quality Indicators
Loans	74,976	76,346
Commercial | Special Mention
Credit Quality Indicators
Loans	1,002	1,078
Commercial | Substandard
Credit Quality Indicators
Loans	62	12
Real estate construction
Credit Quality Indicators
Loans	28,257	29,169
Real estate construction | Madison Financial Corp
Credit Quality Indicators
Loans	394	398
Real estate construction | Pass
Credit Quality Indicators
Loans	28,257	28,577
Real estate construction | Substandard
Credit Quality Indicators
Loans		592
1-4 family residential
Credit Quality Indicators
Loans	248,132	244,638
1-4 family residential | Madison Financial Corp
Credit Quality Indicators
Loans	10,618	11,462
1-4 family residential | Pass
Credit Quality Indicators
Loans	237,512	232,969
1-4 family residential | Special Mention
Credit Quality Indicators
Loans	3,752	4,031
1-4 family residential | Substandard
Credit Quality Indicators
Loans	6,856	7,627
1-4 family residential | Doubtful
Credit Quality Indicators
Loans	12	11
Multi-family residential
Credit Quality Indicators
Loans	44,330	47,199
Multi-family residential | Madison Financial Corp
Credit Quality Indicators
Loans	3,463	5,043
Multi-family residential | Pass
Credit Quality Indicators
Loans	40,970	43,681
Multi-family residential | Special Mention
Credit Quality Indicators
Loans	2,600	2,617
Multi-family residential | Substandard
Credit Quality Indicators
Loans	760	901
Non-farm & non-residential
Credit Quality Indicators
Loans	182,417	176,024
Non-farm & non-residential | Madison Financial Corp
Credit Quality Indicators
Loans	11,591	13,024
Non-farm & non-residential | Pass
Credit Quality Indicators
Loans	172,511	167,451
Non-farm & non-residential | Special Mention
Credit Quality Indicators
Loans	8,142	8,185
Non-farm & non-residential | Substandard
Credit Quality Indicators
Loans	1,764	388
Agricultural
Credit Quality Indicators
Loans	61,035	62,491
Agricultural | Madison Financial Corp
Credit Quality Indicators
Loans	1,239	1,940
Agricultural | Pass
Credit Quality Indicators
Loans	57,646	58,155
Agricultural | Special Mention
Credit Quality Indicators
Loans	1,748	1,367
Agricultural | Substandard
Credit Quality Indicators
Loans	1,641	2,969
Consumer
Credit Quality Indicators
Loans	17,239	18,867
Consumer | Madison Financial Corp
Credit Quality Indicators
Loans	80	107
Consumer | Non-performing
Credit Quality Indicators
Loans	$ 21	$ 8
Minimum period past due for loans to be considered as non-performing	90 days

XML

REAL ESTATE OWNED (Details) - USD ($) $ in Thousands	3 Months Ended		12 Months Ended
	Mar. 31, 2017	Mar. 31, 2016	Dec. 31, 2016	Dec. 31, 2015
Activity in real estate owned
Beginning of year, net	$ 1,824	$ 2,347	$ 2,347
Additions	126	121
Sales	(577)
(Additions) subtractions to valuation allowance, net		(85)
End of period, net	1,373	2,383	1,824	$ 2,347
Activity in the valuation allowance
Beginning of year	803	616	616
Write-downs of other real estate, net				85
End of period	803	701	803	$ 616
Expenses related to foreclosed assets
Net (gain) loss on sales, included in other income on income statement	(46)
Additions to valuation allowance, net			85
Operating expenses, net of rental income	79		27
Repossession expenses, net	79	$ 112	112
Net expense, net of gain or loss on sales, for the period	$ 33		$ 112

XML

EARNINGS PER SHARE (Details) - USD ($) $ / shares in Units, shares in Thousands, $ in Thousands	3 Months Ended
	Mar. 31, 2017	Mar. 31, 2016
Basic Earnings Per Share
Net income	$ 3,137	$ 1,837
Weighted average common shares outstanding	2,954	2,977
Basic earnings per share (in dollars per share)	$ 1.06	$ 0.61
Diluted Earnings Per Share
Weighted average common shares outstanding	2,954	2,977
Weighted average common and dilutive potential common shares outstanding	2,954	2,977
Diluted earnings per share (in dollars per share)	$ 1.06	$ 0.61

XML

EARNINGS PER SHARE - ANTIDILUTIVE SECURITIES (Details) - shares	3 Months Ended
	Mar. 31, 2017	Mar. 31, 2016
Stock options
Antidilutive securities
Antidilutive shares excluded from computation of diluted earnings per share	600	1,200

XML

STOCK BASED COMPENSATION - VESTING PERIOD (Details)	3 Months Ended
	Mar. 31, 2017 plan shares
Stock Based Compensation
Number of stock based compensation plans | plan	4
Stock options
Stock Based Compensation
Number of stock based compensation plans | plan	2
Stock Option Plans | Stock options
Stock Based Compensation
Life of awards	10 years
1999 Plan | Stock options
Stock Based Compensation
Vesting period	5 years
Number of shares authorized for issuance | shares	100,000
1993 Non-Employee Directors Stock Ownership Incentive Plan | Stock options
Stock Based Compensation
Number of shares authorized for issuance | shares	20,000

XML

STOCK BASED COMPENSATION - ACTIVITY (Details) - Stock Option Plans $ / shares in Units, $ in Thousands	3 Months Ended
	Mar. 31, 2017 USD ($) $ / shares shares
Shares
Outstanding, beginning of year (in shares) | shares	1,200
Exercised (in shares) | shares	(600)
Outstanding, end of year (in shares) | shares	600
Vested and expected to vest (in shares) | shares	600
Exercisable, end of period (in shares) | shares	600
Weighted Average Exercise Price
Outstanding, beginning of year (in dollars per share) | $ / shares	$ 31.00
Exercised (in dollars per share) | $ / shares	31.00
Outstanding, end of year (in dollars per share) | $ / shares	31.00
Vested and expected to vest (in dollars per share) | $ / shares	31.00
Exercisable, end of period (in dollars per share) | $ / shares	$ 31.00
Weighted Average Remaining Contractual Term
Outstanding, end of period	11 months
Vested and expected to vest	11 months
Exercisable, end of period	11 months
Additional disclosures
Total unrecognized compensation cost related to nonvested stock options granted | $	$ 0
Aggregate Intrinsic Value
Outstanding, end of period | $	4
Vested and expected to vest | $	4
Exercisable, end of period | $	$ 4

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STOCK BASED COMPENSATION - NONVESTED SHARES (Details) - USD ($)	3 Months Ended
	Mar. 31, 2017	Mar. 31, 2016
2005 Restricted Stock Grant Plan | Restricted stock
Stock Based Compensation
Number of shares authorized for issuance	50,000
Shares available for issuance	0
Shares
Nonvested at the beginning of the period (in shares)	10,636
Vested (in shares)	(4,192)
Nonvested at the end of the period (in shares)	6,444
Weighted-Average Grant-Date Fair Value
Nonvested shares, balance at the beginning of the period (in dollars)	$ 254
Vested (in dollars)	(76)
Nonvested shares, balance at the end of the period (in dollars)	$ 178
Fair Value Per Share
Nonvested shares, balance at the beginning of the period (in dollars per share)	$ 23.84
Vested (in dollars per share)	18.18
Nonvested shares, balance at the end of the period (in dollars per share)	$ 27.52
Additional disclosures
Total unrecognized compensation cost related to nonvested shares granted	$ 141,000
Period over which cost is expected to be recognized	2 years 2 months 12 days
2009 Stock Award Plan
Stock Based Compensation
Number of shares authorized for issuance	150,000
Shares available for issuance	132,417
Shares
Nonvested at the beginning of the period (in shares)	7,297
Granted (in shares)	6,575	6,170
Vested (in shares)	(1,414)
Nonvested at the end of the period (in shares)	12,458
Weighted-Average Grant-Date Fair Value
Nonvested shares, balance at the beginning of the period (in dollars)	$ 214
Granted (in dollars)	214
Vested (in dollars)	(41)
Nonvested shares, balance at the end of the period (in dollars)	$ 387
Fair Value Per Share
Nonvested shares, balance at the beginning of the period (in dollars per share)	$ 29.31
Granted (in dollars per share)	32.50
Vested (in dollars per share)	28.77
Nonvested shares, balance at the end of the period (in dollars per share)	$ 31.05
Additional disclosures
Total unrecognized compensation cost related to nonvested shares granted	$ 364,000
2009 Stock Award Plan | Restricted stock
Additional disclosures
Period over which cost is expected to be recognized	4 years 2 months 12 days

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REPURCHASE AGREEMENTS (Details) - USD ($) $ in Thousands	3 Months Ended
	Mar. 31, 2017	Dec. 31, 2016
REPURCHASE AGREEMENTS
Repurchase agreements	$ 21,811	$ 20,873
Carrying amount of agency-backed securities pledged to secure repurchase agreements	28,500
Overnight obligations
REPURCHASE AGREEMENTS
Repurchase agreements	15,800
Maturity terms extending
REPURCHASE AGREEMENTS
Repurchase agreements	$ 6,000
Average weighted remaining life	1 year 6 months

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OTHER BORROWINGS (Details) - USD ($) $ in Thousands	Mar. 31, 2017	Dec. 31, 2016	Jul. 20, 2015
OTHER BORROWINGS
Amount outstanding	$ 3,983	$ 4,090
Term loan
OTHER BORROWINGS
Debt instrument, face amount			$ 5,000
Amount outstanding	4,000
Fixed interest rate			5.02%
Maturity schedule of term loan
2017	288
2018	401
2019	421
2020	442
2021	465
Thereafter	1,966
Total term loan maturities	$ 3,983

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FAIR VALUE MEASUREMENTS (Details) - USD ($) $ in Thousands	3 Months Ended
	Mar. 31, 2017	Mar. 31, 2016	Dec. 31, 2016
Fair value on instruments on recurring basis
Securities available for sale	$ 301,927		$ 273,770
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
Securities available for sale	301,927		273,770
Recurring | Carrying Value
Fair value on instruments on recurring basis
Securities available for sale	307,571		279,362
Recurring | Quoted Prices In Active Markets for Identical Assets (Level 1)
Fair value on instruments on recurring basis
Securities available for sale	2,724		1,948
Recurring | Significant Other Observable Inputs (Level 2)
Fair value on instruments on recurring basis
Securities available for sale	304,847		277,414
Impaired Loans
Fair value on instruments on recurring basis
Adjustments for differences between the comparable sales and income data available	0
Other Real Estate Owned | Significant Unobservable Inputs (Level 3)
Fair value on instruments on recurring basis
Adjustments for differences between the comparable sales and income data available	0	$ 85
U.S. government agencies
Fair value on instruments on recurring basis
Securities available for sale	46,198		36,528
U.S. government agencies | Recurring | Carrying Value
Fair value on instruments on recurring basis
Securities available for sale	46,198		36,528
U.S. government agencies | Recurring | Significant Other Observable Inputs (Level 2)
Fair value on instruments on recurring basis
Securities available for sale	46,198		36,528
States and municipals
Fair value on instruments on recurring basis
Securities available for sale	92,936		91,132
States and municipals | Recurring | Carrying Value
Fair value on instruments on recurring basis
Securities available for sale	92,936		91,132
States and municipals | Recurring | Significant Other Observable Inputs (Level 2)
Fair value on instruments on recurring basis
Securities available for sale	92,936		91,132
Mortgage-backed - residential
Fair value on instruments on recurring basis
Securities available for sale	162,453		145,770
Mortgage-backed - residential | Recurring | Carrying Value
Fair value on instruments on recurring basis
Securities available for sale	162,453		145,770
Mortgage-backed - residential | Recurring | Significant Other Observable Inputs (Level 2)
Fair value on instruments on recurring basis
Securities available for sale	162,453		145,770
Equity securities
Fair value on instruments on recurring basis
Securities available for sale	340		340
Equity securities | Recurring | Carrying Value
Fair value on instruments on recurring basis
Securities available for sale	340		340
Equity securities | Recurring | Quoted Prices In Active Markets for Identical Assets (Level 1)
Fair value on instruments on recurring basis
Securities available for sale	340		340
Trading Assets | Recurring | Carrying Value
Fair value on instruments on recurring basis
Securities available for sale	5,644		5,592
Trading Assets | Recurring | Quoted Prices In Active Markets for Identical Assets (Level 1)
Fair value on instruments on recurring basis
Securities available for sale	2,384		1,608
Trading Assets | Recurring | Significant Other Observable Inputs (Level 2)
Fair value on instruments on recurring basis
Securities available for sale	$ 3,260		$ 3,984

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FAIR VALUE MEASUREMENTS - FAIR VALUE ON NON-RECURRING (Details) $ in Thousands	3 Months Ended
	Mar. 31, 2017 USD ($) loan	Mar. 31, 2016 USD ($)	Dec. 31, 2016 USD ($)	Dec. 31, 2015 USD ($)
Impaired Loans
Valuation allowance of impaired loans	$ 479		$ 541
Loan loss provision expense for impaired loans	0
Other real estate owned, net:
Outstanding balance of other real estate owned	1,373	$ 2,383	1,824	$ 2,347
Valuation allowance of other real estate owned	803	701	803	$ 616
Loan servicing rights
Mortgage servicing rights	1,405		1,321
Non-recurring
Impaired Loans
Impaired loans, at fair value	3,000
Valuation allowance of impaired loans	$ 471
Number of impaired loans. | loan	0
Other real estate owned, net:
Other real estate owned	$ 1,000
Outstanding balance of other real estate owned	1,800
Valuation allowance of other real estate owned	803
Write downs of other real estate owned	0	85
Loan servicing rights
Mortgage servicing rights	1,150		1,100
Balance of loan servicing rights	1,240		1,200
Valuation allowance of loan servicing rights	86		125
Write-downs of loan servicing rights		$ 39
Recovery of prior write-downs	3
Non-recurring | Carrying Value
Loan servicing rights
Mortgage servicing rights	1,152		1,083
Non-recurring | Significant Unobservable Inputs (Level 3)
Loan servicing rights
Mortgage servicing rights	1,152		1,083
Non-recurring | 1-4 family residential | Carrying Value
Impaired Loans
Impaired loans, at fair value	255		1,685
Non-recurring | 1-4 family residential | Significant Unobservable Inputs (Level 3)
Impaired Loans
Impaired loans, at fair value	255		1,685
Non-recurring | Agricultural | Carrying Value
Impaired Loans
Impaired loans, at fair value	2,746		2,234
Non-recurring | Agricultural | Significant Unobservable Inputs (Level 3)
Impaired Loans
Impaired loans, at fair value	2,746		2,234
Non-recurring | Residential | Carrying Value
Other real estate owned, net:
Other real estate owned	956		956
Non-recurring | Residential | Significant Unobservable Inputs (Level 3)
Other real estate owned, net:
Other real estate owned	956		956
Non-recurring | Commercial | Carrying Value
Other real estate owned, net:
Other real estate owned	57		272
Non-recurring | Commercial | Significant Unobservable Inputs (Level 3)
Other real estate owned, net:
Other real estate owned	$ 57		$ 272

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FAIR VALUE MEASUREMENTS - QUANTITATIVE INFORMATION (Details) - USD ($) $ in Thousands	3 Months Ended	12 Months Ended
	Mar. 31, 2017	Dec. 31, 2016
Fair Value Measurements
Loan servicing rights	$ 1,405	$ 1,321
Non-recurring
Fair Value Measurements
Impaired loans, at fair value	3,000
Other real estate owned	1,000
Loan servicing rights	1,150	1,100
Non-recurring | Significant Unobservable Inputs (Level 3)
Fair Value Measurements
Loan servicing rights	1,152	1,083
Non-recurring | Discounted cash flow | Significant Unobservable Inputs (Level 3)
Fair Value Measurements
Loan servicing rights	1,152	1,083
Non-recurring | 1-4 family residential | Significant Unobservable Inputs (Level 3)
Fair Value Measurements
Impaired loans, at fair value	255	1,685
Non-recurring | 1-4 family residential | Sales comparison | Significant Unobservable Inputs (Level 3)
Fair Value Measurements
Impaired loans, at fair value	255	1,685
Non-recurring | Non-farm & non-residential | Sales comparison | Significant Unobservable Inputs (Level 3)
Fair Value Measurements
Impaired loans, at fair value		2,234
Non-recurring | Agricultural | Significant Unobservable Inputs (Level 3)
Fair Value Measurements
Impaired loans, at fair value	2,746	2,234
Non-recurring | Agricultural | Sales comparison | Significant Unobservable Inputs (Level 3)
Fair Value Measurements
Impaired loans, at fair value	2,746
Non-recurring | Residential | Significant Unobservable Inputs (Level 3)
Fair Value Measurements
Other real estate owned	956	956
Non-recurring | Residential | Sales comparison | Significant Unobservable Inputs (Level 3)
Fair Value Measurements
Other real estate owned	956	956
Non-recurring | Residential | Income approach | Significant Unobservable Inputs (Level 3)
Fair Value Measurements
Other real estate owned	57
Non-recurring | Commercial | Significant Unobservable Inputs (Level 3)
Fair Value Measurements
Other real estate owned	$ 57	272
Non-recurring | Commercial | Discounted cash flow | Significant Unobservable Inputs (Level 3)
Fair Value Measurements
Loan servicing rights		$ 272
Non-recurring | Minimum | Discounted cash flow | Significant Unobservable Inputs (Level 3)
Fair Value Measurements
Discount rate	8.00%	8.00%
Non-recurring | Minimum | 1-4 family residential | Sales comparison | Significant Unobservable Inputs (Level 3)
Fair Value Measurements
Adjustment for differences between the comparable sales (as a percent)	0.00%	0.00%
Non-recurring | Minimum | Non-farm & non-residential | Sales comparison | Significant Unobservable Inputs (Level 3)
Fair Value Measurements
Adjustment for differences between the comparable sales (as a percent)		2.00%
Non-recurring | Minimum | Agricultural | Sales comparison | Significant Unobservable Inputs (Level 3)
Fair Value Measurements
Adjustment for differences between the comparable sales (as a percent)	8.00%
Non-recurring | Minimum | Residential | Sales comparison | Significant Unobservable Inputs (Level 3)
Fair Value Measurements
Adjustment for differences between the comparable sales (as a percent)	1.00%	1.00%
Non-recurring | Minimum | Commercial | Income approach | Significant Unobservable Inputs (Level 3)
Fair Value Measurements
Capitalization rate (as a percent)	10.00%
Non-recurring | Minimum | Commercial | Discounted cash flow | Significant Unobservable Inputs (Level 3)
Fair Value Measurements
Capitalization rate (as a percent)		10.00%
Non-recurring | Maximum | Discounted cash flow | Significant Unobservable Inputs (Level 3)
Fair Value Measurements
Discount rate	50.00%	45.00%
Non-recurring | Maximum | 1-4 family residential | Sales comparison | Significant Unobservable Inputs (Level 3)
Fair Value Measurements
Adjustment for differences between the comparable sales (as a percent)	12.00%	21.00%
Non-recurring | Maximum | Agricultural | Sales comparison | Significant Unobservable Inputs (Level 3)
Fair Value Measurements
Adjustment for differences between the comparable sales (as a percent)	64.00%	75.00%
Non-recurring | Maximum | Residential | Sales comparison | Significant Unobservable Inputs (Level 3)
Fair Value Measurements
Adjustment for differences between the comparable sales (as a percent)	16.00%	16.00%
Non-recurring | Maximum | Commercial | Income approach | Significant Unobservable Inputs (Level 3)
Fair Value Measurements
Capitalization rate (as a percent)	10.00%	10.00%
Non-recurring | Weighted average | Discounted cash flow | Significant Unobservable Inputs (Level 3)
Fair Value Measurements
Discount rate	11.00%	13.00%
Non-recurring | Weighted average | 1-4 family residential | Sales comparison | Significant Unobservable Inputs (Level 3)
Fair Value Measurements
Adjustment for differences between the comparable sales (as a percent)	6.00%	10.00%
Non-recurring | Weighted average | Non-farm & non-residential | Sales comparison | Significant Unobservable Inputs (Level 3)
Fair Value Measurements
Adjustment for differences between the comparable sales (as a percent)		9.00%
Non-recurring | Weighted average | Agricultural | Sales comparison | Significant Unobservable Inputs (Level 3)
Fair Value Measurements
Adjustment for differences between the comparable sales (as a percent)	(33.00%)
Non-recurring | Weighted average | Residential | Sales comparison | Significant Unobservable Inputs (Level 3)
Fair Value Measurements
Adjustment for differences between the comparable sales (as a percent)	9.00%	9.00%
Non-recurring | Weighted average | Residential | Income approach | Significant Unobservable Inputs (Level 3)
Fair Value Measurements
Capitalization rate (as a percent)	10.00%	10.00%

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FAIR VALUE MEASUREMENTS - FAIR VALUE OF FINANCIAL INSTRUMENTS (Details) - USD ($) $ in Thousands	Mar. 31, 2017	Dec. 31, 2016
Financial assets
Interest bearing time deposits	$ 4,659	$ 5,029
Securities	301,927	273,770
Trading assets	5,644	5,592
Loans held for sale	1,189	724
Interest receivable	3,649	3,715
Financial liabilities
Long-term Federal Home Loan Bank advances	90,612	92,500
Interest payable	667	692
Carrying Value
Financial assets
Cash and cash equivalents	37,248	43,250
Interest bearing time deposits	4,659	5,029
Securities	301,927	273,770
Trading assets	5,644	5,592
Loans held for sale	1,189
Mortgage loans held for sale		724
Loans, net	649,690	648,466
FHLB stock	7,034	7,034
Interest receivable	3,649	3,715
Financial liabilities
Deposits	824,345	802,981
Securities sold under agreements to repurchase and other borrowings	21,811	20,873
Long-term Federal Home Loan Bank advances	90,612
Federal Home Loan Bank advances		92,500
Note payable	3,983	4,090
Subordinated debentures	7,217	7,217
Interest payable	667	692
Fair Value
Financial assets
Cash and cash equivalents	37,248	43,250
Interest bearing time deposits	4,659	5,029
Securities	301,927	273,770
Trading assets	5,644	5,592
Loans held for sale	1,229
Mortgage loans held for sale		750
Loans, net	647,847	648,234
Interest receivable	3,649	3,715
Financial liabilities
Deposits	823,374	803,145
Securities sold under agreements to repurchase and other borrowings	21,916	21,006
Long-term Federal Home Loan Bank advances	86,023
Federal Home Loan Bank advances		91,015
Note payable	4,438	4,564
Subordinated debentures	7,211	7,210
Interest payable	667	692
Quoted Prices In Active Markets for Identical Assets (Level 1) | Fair Value
Financial assets
Cash and cash equivalents	37,248	43,250
Interest bearing time deposits	4,659	5,029
Securities	340	340
Trading assets	2,384	1,608
Financial liabilities
Deposits	613,975	607,617
Significant Other Observable Inputs (Level 2) | Fair Value
Financial assets
Securities	301,587	273,430
Trading assets	3,260	3,984
Loans held for sale	1,229
Mortgage loans held for sale		750
Interest receivable	1,355	1,334
Financial liabilities
Deposits	209,399	195,528
Securities sold under agreements to repurchase and other borrowings	21,916	21,006
Long-term Federal Home Loan Bank advances	86,023
Federal Home Loan Bank advances		91,015
Note payable	4,438	4,564
Interest payable	605	639
Significant Unobservable Inputs (Level 3) | Fair Value
Financial assets
Loans, net	647,847	648,234
Interest receivable	2,294	2,381
Financial liabilities
Subordinated debentures	7,211	7,210
Interest payable	$ 62	$ 53

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CHANGES IN ACCUMULATED OTHER COMPREHENSIVE INCOME BY COMPONENT (Details) - USD ($) $ in Thousands	3 Months Ended
	Mar. 31, 2017	Mar. 31, 2016
Changes in accumulated other comprehensive income (loss) by component
Beginning Balance	$ 92,972
Less reclassification adjustment for:
Net current period other comprehensive income (loss)	736	$ 2,387
Ending Balance	95,824
Accumulated Other Comprehensive Income
Changes in accumulated other comprehensive income (loss) by component
Beginning Balance	(956)	359
Less reclassification adjustment for:
Ending Balance	(220)	2,746
Unrealized Gains and Losses on Available for Sale Securities
Changes in accumulated other comprehensive income (loss) by component
Unrealized holding gains (losses) for the period, net of tax	736	2,470
Less reclassification adjustment for:
Securities gains realized in income		126
Income taxes		(43)
Reclassification, net of tax		83
Net current period other comprehensive income (loss)	$ 736	$ 2,387

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CHANGES IN ACCUMULATED OTHER COMPREHENSIVE INCOME BY COMPONENT - RECLASSIFIED (Details) - USD ($) $ in Thousands	3 Months Ended
	Mar. 31, 2017	Mar. 31, 2016
Reclassifications out of AOCI by component
Gain on sale of available for sale securities, net		$ 126
income taxes	$ 855	216
Net income	$ 3,137	1,837
Unrealized Gains and Losses on Available for Sale Securities | Amount Reclassified From Accumulated Other Comprehensive Income
Reclassifications out of AOCI by component
Gain on sale of available for sale securities, net		126
income taxes		43
Net income		$ 83