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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, 2021

☐

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

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


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

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

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

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

Large accelerated filer ☐	Accelerated filer ☐

Non-accelerated filer ☒	Smaller reporting company ☒

	Emerging growth company ☐

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

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

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

Table of Contents

KENTUCKY BANCSHARES, INC.

Table of Contents

Part I - Financial Information

Item 1. Financial Statements

Consolidated Balance Sheets	3

Consolidated Statements of Income	4

Consolidated Statements of Comprehensive Income (Loss)	5

Consolidated Statement of Changes in Stockholders’ Equity	6

Consolidated Statement of Cash Flows	7

Notes to Consolidated Financial Statements	8

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

Item 4. Controls and Procedures	46

Part II - Other Information	46

Item 1. Legal Proceedings	46

Item 1 A. Risk Factors	47

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

Item 6. Exhibits	48

Signatures	48

Table of Contents

Item 1 – Financial Statements

KENTUCKY BANCSHARES, INC.

CONSOLIDATED BALANCE SHEETS (unaudited)

(Dollar amounts in thousands)


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

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

Stockholders’ equity
Preferred stock, 300,000 shares authorized and unissued		—		—
Common stock, no par value; 20,000,000 shares authorized; 5,961,004 and 5,946,306 shares issued and outstanding at March 31, 2021 and December 31, 2020		22,351		21,996
Retained earnings		105,644		104,319
Accumulated other comprehensive income (loss)		(787)		2,027
Total stockholders’ equity		127,208		128,342
Total liabilities and stockholders’ equity	$	1,274,258	$	1,239,505

See Accompanying Notes

Table of Contents

KENTUCKY BANCSHARES, INC.

CONSOLIDATED STATEMENTS OF INCOME (unaudited)

(Dollar amounts in thousands except per share data)


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

Earnings per share
Basic	$	0.41	$	0.30
Diluted		0.41		0.30

See Accompanying Notes

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KENTUCKY BANCSHARES, INC.

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS) (unaudited)

(Dollar amounts in thousands)


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

Net income	$	2,458	$	1,751

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

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

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

Comprehensive loss	$	(356)	$	(730)

See Accompanying Notes

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KENTUCKY BANCSHARES, INC.

CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY (unaudited)

(Dollar amounts in thousands except per share data)


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


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

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

See Accompanying Notes

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KENTUCKY BANCSHARES, INC.

CONSOLIDATED STATEMENT OF CASH FLOWS (unaudited)

(Dollar amounts in thousands)


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

See Accompanying Notes

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited)

NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

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

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

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

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

COVID-19: The impact of the COVID-19 pandemic remains fluid and continues to evolve. The potential financial impact continues involve some uncertainty at this time. However, actions that have been taken or will be taken in response may still adversely impact several industries within our geographic footprint and impair the ability of our customers to fulfill their contractual obligations to the Company. This could cause Kentucky Bancshares to experience a material adverse effect on our business operations, asset valuations, financial condition, and results of operations. Material adverse impacts may include all or a combination of valuation impairments on Kentucky Bancshares’s intangible assets, investments, loans, loan servicing rights, deferred tax assets, or counter-party risk derivatives.

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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Real Estate Mortgage:

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

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

Non-farm & non-residential: Loans secured by non-farm non-residential real estate consist of loans secured by commercial real estate that is not owner occupied. These loans generally consist of loans collateralized by property whereby rents received from commercial tenants of the borrower are the source of repayment. These loans generally present a higher level of risk than loans secured by owner occupied commercial real estate because repayment risk is expanded to be dependent on the success of multiple businesses which are paying rent to the borrower. If multiple businesses fail due to deteriorating economic conditions or poor business management skills, the borrower may not have enough rents to cover their monthly payment. Repayment risk is also increased depending on the level of surplus available commercial lease space in the local market area.

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

Consumer: Consumer loans are generally loans to borrowers for non-business purposes. They can be either secured or unsecured. Consumer loans are generally small in the individual amount of principal outstanding and are repaid from the borrower’s private funds earned from employment. Consumer lending risk is very susceptible to local economic trends. If there is a consumer loan default, any collateral that may be repossessed is generally not well maintained and has a diminished value. For this reason, consumer loans tend to have higher overall interest rates to cover the higher cost of repossession and charge-offs. However, due to their smaller average balance per borrower, consumer loans are collectively evaluated for impairment in determining the appropriate allowance for loan losses.

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

The investment recorded at March 31, 2021 was $2.9 million, compared to $3.1 million at December 31, 2020, and is included with other assets in the balance sheet. During the first three months of 2021 and 2020, the Company recognized amortization expense of $119 thousand and $293 thousand, respectively, which was included within other noninterest expense on the consolidated statements of income.

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

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

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

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

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

A tax position is recognized as a benefit only if it is “more likely than not” that the tax position would be sustained in a tax examination, with a tax examination being presumed to occur. The amount recognized is the largest amount of tax benefit that is greater than 50% likely of being realized on examination. For tax positions not meeting the “more likely than not” test, no tax benefit is recorded. The Company recognizes interest related to income tax matters as interest expense and penalties related to income tax matters as other expense.

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

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

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

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

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

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

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

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

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

Adoption of New Accounting Standards

ASU 2019-12 Income Taxes (Topic 740), Simplifying the Accounting for Income Taxes: In December 2019, the FASB issued this Update as part of its Simplification Initiative. The amendments in this Update affect entities within the scope of Topic 740, Income Taxes. The amendments in this Update simplify the accounting for income taxes by removing certain exceptions to the general principles in Topic 740. The amendments also improve consistent application of and simplify GAAP for other areas of Topic 740 by clarifying and amending existing guidance.

The amendments in this Update related to separate financial statements of legal entities that are not subject to tax should be applied on a retrospective basis for all periods presented. The amendments related to changes in ownership of foreign equity method investments or foreign subsidiaries should be applied on a modified retrospective basis through a cumulative-effect adjustment to retained earnings as of the beginning of the fiscal year of adoption. The amendments related to franchise taxes that are partially based on income should be applied on either a retrospective basis for all periods presented or a modified retrospective basis through a cumulative-effect adjustment to retained earnings as of the beginning of the fiscal year of adoption. All other amendments should be applied on a prospective basis.

These amendments were effective for public business entities for fiscal years beginning after December 15, 2020, and interim periods within those fiscal years. The adoption of this standard did not have a material effect on the Company’s operating results or financial condition.

Accounting Standards Issued But Not Yet Adopted

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

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

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

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

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

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

In May 2020, the FASB issued ASU 2020-04, Reference Rate Reform (Topic 848): Facilitation of the Effects of Reference Rate Reform on Financial Reporting. Reference rate reform relates to the effects undertaken to eliminate certain reference rates such as the London Interbank Offered Rate (“LIBOR”) and introduce new reference rates that may be based on larger or more liquid observations and transactions. ASU 2020-04 provides optional expedients and exceptions for applying GAAP to contracts, hedging relationships and other contracts. Generally, ASU 2020-04 would allow entities to consider contract modifications due to reference rate reform to be a continuation of an existing contract; thus, the Company would not have to determine if the modification is considered insignificant. The Company is in the process of reviewing loan documentation, along with the transition procedures it will need in order to implement reference rate reform. While the Company has yet to adopt ASU 2020-04, the standard was effective upon issuance and terminates December 31, 2022 such that changes made to contracts beginning on or after January 1, 2023 would not apply. The adoption of ASU 2020-04 is not expected to have a material effect on the Company’s operating results or financial condition.

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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, 2021
U.S. treasury notes	$	9,052	$	83	$	—	$	9,135
U.S. government agencies		27,367		67		(588)		26,846
States and political subdivisions		65,419		1,248		(389)		66,278
Mortgage-backed - residential		115,914		1,453		(1,692)		115,675
Mortgage-backed - commercial		82,266		1,005		(1,415)		81,856
Asset-backed		48,938		152		(314)		48,776
Other		1,000		—		(2)		998
Total	$	349,956	$	4,008	$	(4,400)	$	349,564

December 31, 2020
U.S. treasury notes	$	9,075	$	113	$	—	$	9,188
U.S. government agencies		23,185		144		(31)		23,298
States and political subdivisions		65,665		1,977		(3)		67,639
Mortgage-backed - residential		124,941		1,728		(187)		126,482
Mortgage-backed - commercial		73,573		1,179		(201)		74,551
Asset-backed		51,676		90		(455)		51,311
Other		1,000		25		—		1,025
Total	$	349,115	$	5,256	$	(877)	$	353,494

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


	Amortized		Fair
	Cost		Value
Due in one year or less	$	9,601	$	9,686
Due after one year through five years		16,043		16,188
Due after five years through ten years		40,074		39,988
Due after ten years		37,120		37,395
		102,838		103,257
Mortgage-backed - residential		115,914		115,675
Mortgage-backed - commercial		82,266		81,856
Asset-backed		48,938		48,776
Total	$	349,956	$	349,564

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

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

March 31, 2021 (in thousands)


	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	$	22,002	$	(576)	$	809	$	(12)	$	22,811	$	(588)
States and political subdivisions		26,353		(389)		—		—		26,353		(389)
Mortgage-backed - residential		59,977		(1,692)		—		—		59,977		(1,692)
Mortgage-backed - commercial		41,233		(1,405)		3,893		(10)		45,126		(1,415)
Asset-backed		14,153		(185)		12,946		(129)		27,099		(314)
Other		998		(2)		—		—		998		(2)
Total temporarily impaired	$	164,716	$	(4,249)	$	17,648	$	(151)	$	182,364	$	(4,400)

December 31, 2020 (in thousands)


	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	$	8,432	$	(18)	$	851	$	(13)	$	9,283	$	(31)
States and political subdivisions		333		(3)		—		—		333		(3)
Mortgage-backed - residential		32,440		(187)		—		—		32,440		(187)
Mortgage-backed - commercial		19,852		(189)		5,087		(12)		24,939		(201)
Asset-backed		15,948		(236)		22,565		(219)		38,513		(455)
Total temporarily impaired	$	77,005	$	(633)	$	28,503	$	(244)	$	105,508	$	(877)

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

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

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LOANS

Loans at period-end are as follows:

(in thousands)


	3/31/2021		12/31/2020
Commercial	$	112,546	$	117,425
Real estate construction		15,136		14,571
Real estate mortgage:
1-4 family residential		287,664		293,136
Multi-family residential		45,736		47,854
Non-farm & non-residential		231,845		218,998
Agricultural		50,152		52,239
Consumer		21,920		22,532
Other		96		116
Total	$	765,095	$	766,871

The Company had outstanding loan balances of $36.3 million as of March 31, 2021 and $41.4 million as of December 31, 2020 for loans made as part of the Paycheck Protection Program (PPP) established under the CARES Act which were included in commercial loans in the table above. These loans required no allowance for loan losses as of March 31, 2021 or December 31, 2020.

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


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

Commercial	$	926	$	(3)	$	1	$	(28)	$	896
Real estate construction		277		—		4		(1)		280
Real estate mortgage:
1-4 family residential		3,210		—		3		(171)		3,042
Multi-family residential		890		(500)		—		375		765
Non-farm & non-residential		2,946		(19)		—		44		2,971
Agricultural		449		—		6		(105)		350
Consumer		525		(47)		10		5		493
Other		44		(242)		250		(8)		44
Unallocated		630		—		—		(11)		619
	$	9,897	$	(811)	$	274	$	100	$	9,460

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

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

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


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

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

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


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

With an allowance recorded:
Real estate mortgage:
1-4 family residential	$	805	$	805	$	6	$	805	$	—	$	—
Non-farm and non-residential		1,799		1,799		900		1,799		—		—
Total	$	6,041	$	6,041	$	906	$	6,251	$	10	$	10

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

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As of March 31, 2020


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

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

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


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

With an allowance recorded:
Real estate mortgage
1-4 family residential	$	804	$	804	$	5	$	503	$	7	$	7
Multi-family residential		1,292		1,292		75		1,292		—		—
Non-farm & non-residential		1,799		1,799		900		1,799		—		—
Agricultural		50		50		50		25		—		—
Total	$	9,509	$	9,509	$	1,030	$	6,823	$	188	$	188

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


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

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

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

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

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

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

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

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


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

Commercial	$	293	$	479	$	91	$	—	$	863	$	111,683
Real estate construction		—		—		—		124		124		15,012
Real estate mortgage:
1-4 family residential		953		362		—		1,199		2,514		285,150
Multi-family residential		—		117		—		800		917		44,819
Non-farm & non-residential		91		—		—		1,799		1,890		229,955
Agricultural		153		49		—		—		202		49,950
Consumer		123		26		10		49		208		21,712
Other		—		—		—		—		—		96
Total	$	1,613	$	1,033	$	101	$	3,971	$	6,718	$	758,377

Table of Contents


	30–59		60–89		Greater than				Total
As of December 31, 2020	Days		Days		89 Days				Past Due &		Loans Not
(in thousands)	Past Due		Past Due		Past Due		Non-accrual		Non-accrual		Past Due
Commercial	$	352	$	3	$	47	$	56	$	458	$	116,967
Real estate construction		—		—		—		124		124		14,447
Real estate mortgage:

KENTUCKY BANCSHARES INC /KY/ 10-Q