10-Q

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

Washington, D.C.  20549

FORM 10-Q

(Mark One)

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

For the quarterly period June 30, 2015

or

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

For the transition period from                      to                     

Commission File Number:  000-52598

KENTUCKY BANCSHARES, INC.

(Exact name of registrant as specified in its charter)

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

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

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

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

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

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

Large accelerated filer o

Accelerated filer o

Non-accelerated filer x  (Do not check if a smaller reporting company)

Smaller reporting company o

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

Number of shares of Common Stock outstanding as of July 31, 2015:  2,988,205.

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	6
	Consolidated Statements 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 3.	Quantitative and Qualitative Disclosures About Market Risk	48
Item 4.	Controls and Procedures	50
Part II - Other Information		50
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	50
Item 6.	Exhibits	51
Signatures		52

2

Item 1 - Financial Statements

KENTUCKY BANCSHARES, INC.

CONSOLIDATED BALANCE SHEETS (unaudited)

(in thousands, except per share data)

	6/30/2015			12/31/2014
Assets
Cash and due from banks	$	16,143		$	16,771
Federal funds sold	205			398
Cash and cash equivalents	16,348			17,169
Interest bearing time deposits	1,280			1,280
Securities available for sale	237,476			246,861
Trading Assets	5,400			5,370
Mortgage loans held for sale	1,719			776
Loans	546,085			538,305
Allowance for loan losses	(5,950		)	(6,012		)
Net loans	540,135			532,293
Federal Home Loan Bank stock	5,981			5,981
Real estate owned, net	3,595			4,603
Bank premises and equipment, net	16,270			16,479
Interest receivable	3,661			3,299
Mortgage servicing rights	1,261			1,209
Goodwill	13,117			13,117
Other intangible assets	116			177
Other assets	6,595			6,595
Total assets	$	852,954		$	855,209
Liabilities and Stockholders’ Equity
Deposits
Non-interest bearing	$	179,909		$	176,743
Time deposits, $250,000 and over	55,229			52,913
Other interest bearing	408,878			425,213
Total deposits	644,016			654,869
Repurchase agreements and other borrowings	13,690			12,457
Federal funds purchased	2,456			—
Short-term Federal Home Loan Bank advances	15,000			10,000
Long-term Federal Home Loan Bank advances	85,417			83,785
Subordinated debentures	7,217			7,217
Interest payable	658			642
Other liabilities	5,503			8,297
Total liabilities	773,957			777,267
Stockholders’ equity
Preferred stock, 300,000 shares authorized and unissued	—			—
Common stock, no par value; 10,000,000 shares authorized; 2,725,631 and 2,720,098 shares issued and outstanding on June 30, 2015 and December 31, 2014	12,728			12,662
Retained earnings	66,701			64,489
Accumulated other comprehensive income (loss)	(432		)	791
Total stockholders’ equity	78,997			77,942
Total liabilities & stockholders’ equity	$	852,954		$	855,209

See Accompanying Notes

3

KENTUCKY BANCSHARES, INC.

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

(in thousands, except per share amounts)

	Six Months Ending
	6/30/2015			6/30/2014
INTEREST INCOME:
Loans, including fees	$	12,555		$	11,657
Securities
Taxable	1,425			1,355
Tax exempt	1,366			1,451
Trading assets	83			80
Other	137			145
Total interest income	15,566			14,688
INTEREST EXPENSE:
Deposits	979			1,074
Repurchase agreements and other borrowings	47			48
Federal Home Loan Bank advances	799			623
Subordinated debentures	115			115
Total interest expense	1,940			1,860
Net interest income	13,626			12,828
Provision for loan losses	650			200
Net interest income after provision	12,976			12,628
NON-INTEREST INCOME:
Service charges	1,995			2,073
Loan service fee income, net	108			34
Trust department income	536			461
Gain on sale of available for sale securities, net	251			433
Gain (loss) on trading assets	(53		)	162
Gain on sale of mortgage loans	768			398
Brokerage income	242			290
Debit card interchange income	1,164			1,009
Other	881			77
Total other income	5,892			4,937
NON-INTEREST EXPENSE:
Salaries and employee benefits	7,944			7,263
Occupancy expenses	1,786			1,678
Repossession expenses, net	282			23
FDIC Insurance	301			268
Legal and professional fees	578			458
Data processing	753			668
Debit card expenses	549			496
Amortization	61			74
Advertising and marketing	425			441
Taxes other than payroll, property and income	459			422
Telephone	145			176
Postage	171			157
Loan fees	197			160
Other	1,274			945
Total other expenses	14,925			13,229
Income before taxes	3,943			4,336
Income taxes	306			661
Net income	$	3,637		$	3,675
Other Comprehensive Income (Loss), net of tax:
Change in Unrealized Gains on Securities	(1,223		)	4,981
Comprehensive Income (Loss)	$	2,414		$	8,656
Earnings per share
Basic	$	1.33		$	1.36
Diluted	1.33			1.36
Dividends per share	0.52			0.50

See Accompanying Notes

4

KENTUCKY BANCSHARES, INC.

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

(in thousands, except per share amounts)

	Three Months Ending
	6/30/2015			6/30/2014
INTEREST INCOME:
Loans, including fees	$	6,346		$	5,896
Securities
Taxable	692			680
Tax exempt	690			718
Trading assets	39			43
Other	68			69
Total interest income	7,835			7,406
INTEREST EXPENSE:
Deposits	493			535
Repurchase agreements and other borrowings	24			25
Federal Home Loan Bank advances	397			309
Subordinated debentures	58			58
Total interest expense	972			927
Net interest income	6,863			6,479
Provision for loan losses	350			100
Net interest income after provision	6,513			6,379
NON-INTEREST INCOME:
Service charges	1,091			1,062
Loan service fee income, net	55			5
Trust department income	259			239
Gain on sale of available for sale securities, net	243			245
Gain (loss) on trading assets	(48		)	91
Gain on sale of mortgage loans	441			241
Brokerage income	136			210
Debit card interchange income	623			530
Other	822			45
Total other income	3,622			2,668
NON-INTEREST EXPENSE:
Salaries and employee benefits	4,150			3,661
Occupancy expenses	854			830
Repossession expenses, net	237			25
FDIC Insurance	145			140
Legal and professional fees	293			322
Data processing	386			331
Debit card expenses	293			262
Amortization	30			37
Advertising and marketing	212			232
Taxes other than payroll, property and income	229			197
Telephone	77			87
Postage	90			85
Loan fees	104			83
Other	608			483
Total other expenses	7,708			6,775
Income before taxes	2,427			2,272
Income taxes	305			368
Net income	$	2,122		$	1,904
Other Comprehensive Income (Loss), net of tax:
Change in Unrealized Gains on Securities	(2,160		)	1,730
Comprehensive Income (Loss)	$	(38	)	$	3,634
Earnings per share
Basic	$	0.77		$	0.70
Diluted	0.77			0.70
Dividends per share	0.26			0.25

See Accompanying Notes

5

KENTUCKY BANCSHARES, INC.

CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS’ EQUITY (unaudited)

(in thousands, except share information)

									Accumulated
									Other			Total
	—Common Stock(1)—					Retained			Comprehensive			Stockholders’
	Shares		Amount			Earnings			Income/(Loss)			Equity
Balances, January 1, 2015	2,720,098		$	12,662		$	64,489		$	791		$	77,942
Common stock issued, net of forfeitures	5,872		2			—			—			2
Stock based compensation expense	—		66			—			—			66
Common stock purchased and retired	(339	)	(2		)	(8		)	—			(10		)
Net change in unrealized gain (loss) on securities available for sale, net of tax and reclassifications	—		—			—			(1,223		)	(1,223		)
Net income	—		—			3,637			—			3,637
Dividends declared - $0.52 per share	—		—			(1,417		)	—			(1,417		)
Balances, June 30, 2015	2,725,631		$	12,728		$	66,701		$	(432	)	$	78,997

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

See Accompanying Notes

6

KENTUCKY BANCSHARES, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS (unaudited)

(in thousands)

	Six Months Ending
	6/30/2015			6/30/2014
Cash Flows From Operating Activities
Net Income	$	3,637		$	3,675
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization	843			904
Securities amortization (accretion), net	494			303
Stock based compensation expense	66			55
Provision for loan losses	650			200
Securities available for sale gains, net	(251		)	(433		)
Net change in trading assets	(30		)	(5,242		)
Originations of loans held for sale	(24,562		)	(13,757		)
Proceeds from sale of loans	24,387			13,883
Losses (gains) on other real estate	59			(70		)
Gain on sale of mortgage loans	(768		)	(398		)
Write-downs of other real estate, net	227			10
Changes in:
Interest receivable	(362		)	364
Other assets	(469		)	1,369
Interest payable	16			(57		)
Other liabilities	(2,165		)	(1,707		)
Net cash from operating activities	1,772			(901		)
Cash Flows From Investing Activities
Purchases of securities available for sale	(20,074		)	(34,977		)
Proceeds from sales of securities	9,051			40,030
Proceeds from principal payments, sales, maturities and calls of securities	18,313			8,853
Net change in loans	(11,543		)	(27,925		)
Proceeds from redemption of Federal Home Loan Bank stock	—			750
Purchases of bank premises and equipment	(440		)	(705		)
Proceeds from the sale of other real estate	4,057			1,551
Net cash from investing activities	(636		)	(12,423		)
Cash Flows From Financing Activities:
Net change in deposits	(10,853		)	(19,991		)
Net change in repurchase agreements and other borrowings	3,689			3,079
Short-term advances from Federal Home Loan Bank	15,000			105,000
Payment on short-term Federal Home Loan Bank advances	(10,000		)	(85,000		)
Long-term advances from Federal Home Loan Bank	4,682			6,538
Payments on long-term Federal Home Loan Bank advances	(3,050		)	(2,971		)
Proceeds from issuance of common stock	2			—
Purchase of common stock	(10		)	(91		)
Dividends paid	(1,417		)	(1,361		)
Net cash from financing activities	(1,957		)	5,203
Net change in cash and cash equivalents	(821		)	(8,121		)
Cash and cash equivalents at beginning of period	17,169			23,160
Cash and cash equivalents at end of period	$	16,348		$	15,039
Supplemental disclosures of cash flow information
Cash paid during the year for:
Interest expense	$	1,924		$	1,917
Income taxes	—			700
Supplemental disclosures of non-cash investing activities
Real estate acquired through foreclosure	$	3,334		$	419

See Accompanying Notes

7

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, 2014.  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, 2014.

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:  The Bank operates under a state bank charter and provides full banking services, including trust services, to customers located in Bourbon, Clark, Elliott, Fayette, Harrison, Jessamine, Madison, Rowan, Scott, Woodford and adjoining counties in Kentucky.  Management continues to consider opportunities for branch expansion and will also consider acquisition opportunities that help advance its strategic objectives.  As a state bank, the Bank is subject to regulation by the Kentucky Department of Financial Institutions and the Federal Deposit Insurance Corporation (“FDIC”).  The Company, a bank holding company, is regulated by the Federal Reserve. 

On July 9, 2014, a new subsidiary of the Company was incorporated under the name KBI Insurance Company, Inc.  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. 

Our transfer, registrar and dividend agent, Registrar and Transfer Company, was recently acquired by Computershare.  The migration to Computershare occurred October 31, 2014.

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.

8

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

In January 2014, FASB issued Accounting Standards Update 2014-04, Receivables—Troubled Debt Restructurings by Creditors (Subtopic 310-40): Reclassification of Residential Real Estate Collateralized Consumer Mortgage Loans upon Foreclosure (a consensus of the FASB Emerging Issues Task Force). The ASU clarifies when an insubstance repossession or foreclosure occurs and a creditor is considered to have received physical possession of real estate property collateralizing a consumer mortgage loan. Specifically, the new ASU requires a creditor to reclassify a collateralized consumer mortgage loan to real estate property upon obtaining legal title to the real estate collateral, or the borrower voluntarily conveying all interest in the real estate property to the lender to satisfy the loan through a deed in lieu of foreclosure or similar legal agreement. Additional disclosures are required detailing the amount of foreclosed residential real estate property held by the creditor and the recorded investment in consumer mortgages collateralized by real estate property that are in the process of foreclosure. The new guidance is effective for annual periods, and interim reporting periods within those annual periods, beginning after December 15, 2014. The adoption of this guidance did not have a material impact on the Company’s consolidated financial statements, but will result in additional disclosures.

In May 2014, FASB issued Accounting Standards Update 2014-09, Revenue from Contracts with Customers (Topic 606). The ASU creates a new topic, Topic 606, to provide guidance on revenue recognition for entities that enter into contracts with customers to transfer goods or services or enter into contracts for the transfer of nonfinancial assets. The core principle of the guidance is that an entity should recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. Additional disclosures are required to provide quantitative and qualitative information regarding the nature, amount, timing, and uncertainty of revenue and cash flows arising from contracts with customers. The new guidance is effective for annual reporting periods, and interim reporting periods within those annual periods, beginning after December 15, 2016. Early adoption is not permitted. Management is currently evaluating the impact of the adoption of this guidance on the Company’s financial statements.  However, in April 2015, the FASB voted to defer the effective date of ASU 2014-09 by one year making the amendments effective for public entities for annual reporting periods beginning after December 15, 2017, including interim periods within those reporting periods.  Companies have the option to apply ASU 2014-09 as of the original effective date.

In June 2014, FASB issued Accounting Standards Update 2014-11, Transfers and Servicing (Topic 860): Repurchase-to-Maturity Transactions, Repurchase Financings, and Disclosures.  The amendments in this update require two accounting changes.  First, the amendments in this update change the accounting for repurchase-to-maturity transactions to secured borrowing accounting.

9

Second, for repurchase financing arrangements, the amendments require separate accounting for a transfer of a financial asset executed contemporaneously with a repurchase agreement with the same counter-party, which will result in secured borrowing accounting for the repurchase agreement.  This update also requires certain disclosures for these types of transactions.  This ASU became effective for the Company on January 1, 2015.  The adoption of ASU 2014-11 did not have a material impact on the Company’s financial statements.

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
June 30, 2015
U.S. government agencies	$	55,817	$	27	$	(766	)	$	55,078
States and political subdivisions	87,055		2,105		(965		)	88,195
Mortgage-backed - residential	94,988		176		(1,256		)	93,908
Equity securities	270		25		—			295
Total	$	238,130	$	2,333	$	(2,987	)	$	237,476
December 31, 2014
U.S. government agencies	$	61,721	$	1	$	(1,136	)	$	60,586
States and political subdivisions	86,322		3,234		(275		)	89,281
Mortgage-backed - residential	97,349		267		(918		)	96,698
Equity securities	270		26		—			296
Total	$	245,662	$	3,528	$	(2,329	)	$	246,861

The amortized cost and fair value of securities at June 30, 2015 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 8.

(in thousands)

	Amortized		Fair
	Cost		Value
Due in one year or less	$	40	$	40
Due after one year through five years	17,392		17,299
Due after five years through ten years	75,717		75,588
Due after ten years	49,723		50,346
	142,872		143,273
Mortgage-backed - residential	94,988		93,908
Equity	270		295
Total	$	238,130	$	237,476

Proceeds from sales of securities during the first six months of 2015 and 2014 were $9.1 million and $40.0 million.  Gross gains of $251 thousand and $785 thousand and gross losses of $0 and $352 thousand were realized on those sales, respectively.  The tax provision related to these realized net gains was $85 and $147 thousand, respectively.

10

Proceeds from sales of securities during the three months ending June 30, 2015 and June 30, 2014 were $9.1 million and $23.5 million.  Gross gains of $243 thousand and $477 thousand and gross losses of $0 and $232 were realized on those sales, respectively.  The tax provision related to these realized gains and losses was $83 thousand for both periods, respectively.

Securities with unrealized losses June 30, 2015 and at December 31, 2014 not recognized in income are as follows:

June 30, 2015

	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	$	8,873	$	(66	)	$	36,854	$	(700	)	$	45,727	$	(766	)
States and municipals	19,875		(414		)	9,126		(551		)	29,001		(965		)
Mortgage-backed - residential	59,964		(772		)	14,788		(484		)	74,752		(1,256		)
Total temporarily impaired	$	88,712	$	(1,252	)	$	60,768	$	(1,735	)	$	149,480	$	(2,987	)

December 31, 2014

	Less than 12 Months					12 Months or More					Total
	Fair		Unrealized			Fair		Unrealized			Fair		Unrealized
Description of Securities	Value		Loss			Value		Loss			Value		Loss
U.S. Government agencies	$	12,528	$	(176	)	$	45,066	$	(960	)	$	57,594	$	(1,136	)
States and municipals	5,011		(27		)	9,738		(248		)	14,749		(275		)
Mortgage-backed - residential	46,685		(572		)	18,747		(346		)	65,432		(918		)
Total temporarily impaired	$	64,224	$	(775	)	$	73,551	$	(1,554	)	$	137,775	$	(2,329	)

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

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

TRADING ASSETS

The trading assets of $5.4 million are primarily comprised of municipal securities which are held for a minimal period of time.

11

3. LOANS

Loans at period-end are as follows:

(in thousands)

	6/30/15		12/31/14
Commercial	$	50,236	$	47,185
Real estate construction	21,320		16,938
Real estate mortgage:
1-4 family residential	196,215		189,458
Multi-family residential	34,121		34,415
Non-farm & non-residential	158,041		161,822
Agricultural	68,921		71,345
Consumer	17,031		16,863
Other	200		279
Total	$	546,085	$	538,305

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

	Six Months Ended June 30, 2015
	(in thousands)
	Beginning									Ending
	Balance		Charge-offs		Recoveries		Provision			Balance
Commercial	$	339	$	25	$	—	$	85		$	399
Real estate Construction	446		—		2		28			476
Real estate mortgage:
1-4 family residential	1,829		152		5		125			1,807
Multi-family residential	495		94		2		39			442
Non-farm & non-residential	813		—		—		261			1,074
Agricultural	998		242		12		(190		)	578
Consumer	520		163		27		150			534
Other	32		493		409		107			55
Unallocated	540		—		—		45			585
	$	6,012	$	1,169	$	457	$	650		$	5,950

	Three Months Ended June 30, 2015
	(in thousands)
	Beginning									Ending
	Balance		Charge-offs		Recoveries		Provision			Balance
Commercial	$	340	$	—	$	—	$	59		$	399
Real estate Construction	438		—		—		38			476
Real estate mortgage:
1-4 family residential	1,825		120		2		100			1,807
Multi-family residential	499		94		2		35			442
Non-farm & non-residential	1,030		—		—		44			1,074
Agricultural	723		—		11		(156		)	578
Consumer	497		82		12		107			534
Other	34		251		200		72			55
Unallocated	534		—		—		51			585
	$	5,920	$	547	$	227	$	350		$	5,950

12

	Six Months Ended June 30, 2014
	(in thousands)
	Beginning									Ending
	Balance		Charge-offs		Recoveries		Provision			Balance
Commercial	$	230	$	200	$	—	$	201		$	231
Real estate Construction	358		—		8		(7		)	359
Real estate mortgage:
1-4 family residential	2,169		88		16		227			2,324
Multi-family residential	427		—		—		(100		)	327
Non-farm & non-residential	564		—		367		(197		)	734
Agricultural	578		—		25		(57		)	546
Consumer	548		153		41		107			543
Other	51		202		159		25			33
Unallocated	516		—		—		1			517
	$	5,441	$	643	$	616	$	200		$	5,614

	Three Months Ended June 30, 2014
	(in thousands)
	Beginning									Ending
	Balance		Charge-offs		Recoveries		Provision			Balance
Commercial	$	208	$	—	$	—	$	23		$	231
Real estate Construction	329		—		4		26			359
Real estate mortgage:
1-4 family residential	2,111		25		4		234			2,324
Multi-family residential	401		—		—		(74		)	327
Non-farm & non-residential	930		—		—		(196		)	734
Agricultural	553		—		1		(8		)	546
Consumer	550		76		23		46			543
Other	11		105		72		55			33
Unallocated	523		—		—		(6		)	517
	$	5,616	$	206	$	104	$	100		$	5,614

The following tables present the balance in the allowance for loan losses and the recorded investment (excluding accrued interest receivable amounting to $2.4 million as of June 30, 2015 and $2.0 million at December 31, 2014) in loans by portfolio segment and based on impairment method as of June 30, 2015 and December 31, 2014:

13

As of June 30, 2015

(in thousands)

	Individually		Collectively
	Evaluated for		Evaluated for
	Impairment		Impairment		Total
Allowance for Loan Losses:
Commercial	$	—	$	399	$	399
Real estate construction	—		476		476
Real estate mortgage
1-4 family residential	170		1,637		1,807
Multi-family residential	—		442		442
Non-farm & non-residential	259		815		1,074
Agricultural	269		309		578
Consumer	—		534		534
Other	—		55		55
Unallocated	—		585		585
	$	698	$	5,252	$	5,950
Loans:
Commercial	$	—	$	50,236	$	50,236
Real estate construction	—		21,320		21,320
Real estate mortgage:
1-4 family residential	1,979		194,236		196,215
Multi-family residential	—		34,121		34,121
Non-farm & non-residential	2,922		155,119		158,041
Agricultural	4,265		64,656		68,921
Consumer	—		17,031		17,031
Other	—		200		200
	$	9,166	$	536,919	$	546,085

As of December 31, 2014

(in thousands)

	Individually		Collectively
	Evaluated for		Evaluated for
	Impairment		Impairment		Total
Allowance for Loan Losses:
Commercial	$	—	$	339	$	339
Real estate construction	—		446		446
Real estate mortgage:
1-4 family residential	56		1,773		1,829
Multi-family residential	94		401		495
Non-farm & non-residential	136		677		813
Agricultural	712		286		998
Consumer	—		520		520
Other	—		32		32
Unallocated	—		540		540
	$	998	$	5,014	$	6,012
Loans:
Commercial	$	—	$	47,185	$	47,185
Real estate construction	—		16,938		16,938
Real estate mortgage:
1-4 family residential	2,098		187,360		189,458
Multi-family residential	264		34,151		34,415
Non-farm & non-residential	2,958		158,864		161,822
Agricultural	8,479		62,866		71,345
Consumer	—		16,863		16,863
Other	—		279		279
	$	13,799	$	524,506	$	538,305

14

The following table presents loans individually evaluated for impairment by class of loans as of and for the six months ended June 30, 2015 (in thousands):

	Unpaid				Allowance for		Average		Interest		Cash Basis
	Principal		Recorded		Loan Losses		Recorded		Income		Interest
	Balance		Investment		Allocated		Investment		Recognized		Recognized
With no related allowance recorded:
Real estate mortgage:
1-4 family residential	1,345		1,345		—		1,524		42		42
Agricultural	205		205		—		362		27		27
With an allowance recorded:
Real estate mortgage:
1-4 family residential	634		634		170		556		10		10
Non-farm & non-residential	2,922		2,922		259		2,940		59		59
Multi-family residential	—		—		—		119		—		—
Agricultural	4,060		4,060		269		5,215		—		—
Consumer	—		—		—		—		—		—
Other	—		—		—		—				—
Total	$	9,166	$	9,166	$	698	$	10,716	$	138	$	138

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

15

The following table presents loans individually evaluated for impairment by class of loans for the six months ended June 30, 2014 (in thousands):

			Year to Date		Year to Date
	Average		Interest		Cash Basis
	Recorded		Income		Interest
	Investment		Recognized		Recognized
With no related allowance recorded:
Real estate mortgage:
1-4 family residential	1,002		—		—
Non-farm & non-residential	267				—
Agricultural	2,684		80		80
With an allowance recorded:
Real estate mortgage:
1-4 family residential	1,991		44		44
Multi-family residential	323		5		5
Non-farm & non-residential	3,043		73		73
Agricultural	5,034		19		19
Total	$	14,344	$	221	$	221

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 as of and for the year ended December 31, 2014 (in thousands):

	Unpaid				Allowance for		Average		Interest		Cash Basis
	Principal		Recorded		Loan Losses		Recorded		Income		Interest
	Balance		Investment		Allocated		Investment		Recognized		Recognized
With no related allowance recorded:
Real estate mortgage:
1-4 family residential	$	1,618	$	1,618	$	—	$	1,147	$	25	$	25
Non-farm & non-residential	—		—		—		552		—		—
Agricultural	442		442		—		2,696		29		29
With an allowance recorded:
Real estate mortgage
1-4 family residential	480		480		56		990		18		18
Multi-family residential	264		264		94		284		5		5
Non-farm & non-residential	2,958		2,958		136		3,173		115		115
Agricultural	8,037		8,037		712		5,341		116		116
Total	$	13,799	$	13,799	$	998	$	14,183	$	308	$	308

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

17

The following tables present loans individually evaluated for impairment by class of loans for the three months ending June 30, 2015 and June 30, 2014 (in thousands):

	Three Months Ending June 30, 2015
	Average		Interest		Cash Basis
	Recorded		Income		Interest
	Investment		Recognized		Recognized
With no related allowance recorded:
Real estate mortgage:
1-4 family residential	$	1,476	$	28	$	28
Agricultural	322		17		17
With an allowance recorded:
Real estate mortgage:
1-4 family residential	556		5		5
Multi-family residential	47		—		—
Non-farm & non-residential	2,931		30		30
Agricultural	4,025		—		—
Consumer	—		—		—
Other	—		—		—
Total	$	9,357	$	80	$	80

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

	Three Months Ending June 30, 2014
	Average		Interest		Cash Basis
	Recorded		Income		Interest
	Investment		Recognized		Recognized
With no related allowance recorded:
Real estate mortgage:
1-4 family residential	$	1,562	$	—	$	—
Agricultural	2,836		77		77
With an allowance recorded:
Real estate mortgage:
1-4 family residential	1,377		38		38
Multi-family residential	310		1		1
Non-farm & non-residential	3,553		48		48
Agricultural	4,755		19		19
Total	$	14,393	$	183	$	183

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

18

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 June 30, 2015 and December 31, 2014:

As of June 30, 2015

(in thousands)

			Loans Past Due
			Over 90 Days		Accruing
			Still		Troubled Debt
	Nonaccrual		Accruing		Restructurings
Real estate construction	$	138	$	—	$	—
Real estate mortgage:
1-4 family residential	834		99		474
Multi-family residential	—		131		—
Non-farm & non-residential	380		—		1,803
Agricultural	—		32		3,829
Consumer	15		5		—
Total	$	1,367	$	267	$	6,106

As of December 31, 2014

(in thousands)

			Loans Past Due
			Over 90 Days		Accruing
			Still		Troubled Debt
	Nonaccrual		Accruing		Restructurings
Commercial	$	25	$	—	$	—
Real estate construction	142		—		—
Real estate mortgage:
1-4 family residential	1,390		23		480
Multi-family residential	264		—		—
Non-farm & non-residential	380		—		1,829
Agricultural	4,371		—		3,829
Consumer	5		1		—
Total	$	6,577	$	24	$	6,138

Nonaccrual loans secured by real estate make up 98.9% of the total nonaccruals at June 30, 2015.

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.

19

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 June 30, 2015 and December 31, 2014 by class of loans:

As of June 30, 2015

(in thousands)

	30—59		60—89		Loans Past Due				Total
	Days		Days		Over 90 Days				Past Due &		Loans Not
	Past Due		Past Due		Still Accruing		Non-accrual		Non-accrual		Past Due
Commercial	$	365	$	—	$	—	$	—	$	365	$	49,871
Real estate construction	—		—		—		138		138		21,182
Real estate mortgage:
1-4 family residential	1,570		381		99		834		2,884		193,331
Multi-family residential	—		—		131		—		131		33,990
Non-farm & non-residential	—		—		—		380		380		157,661
Agricultural	17		6		32		—		55		68,866
Consumer	69		19		5		15		108		16,923
Other	—		—		—		—		—		200
Total	$	2,021	$	406	$	267	$	1,367	$	4,061	$	542,024

As of December 31, 2014

(in thousands)

	30—59		60—89		Greater than				Total
	Days		Days		90 Days				Past Due &		Loans Not
	Past Due		Past Due		Past Due		Non-accrual		Non-accrual		Past Due
Commercial	$	92	$	—	$	—	$	25	$	117	$	47,068
Real estate construction	—		—		—		142		142		16,796
Real estate mortgage:
1-4 family residential	1,531		232		23		1,390		3,176		186,282
Multi-family residential	—		131		—		264		395		34,020
Non-farm & non-residential	67		—		—		380		447		161,375
Agricultural	7		11		—		4,371		4,389		66,956
Consumer	130		25		1		5		161		16,702
Other	—		—		—		—		—		279
Total	$	1,827	$	399	$	24	$	6,577	$	8,827	$	529,478

Troubled Debt Restructurings:

The Company has allocated $387 thousand in specific reserves to customers whose loan terms have been modified in troubled debt restructurings as of June 30, 2015.  The Company allocated $369 thousand for specific reserves to customers whose loan terms had been modified in troubled debt restructuring as of December 31, 2014.  The Company has not committed to lend additional amounts as of June 30, 2015 and December 31, 2014 to customers with outstanding loans that are classified as troubled debt restructurings.  All loans which have undergone a troubled debt restructuring modification are performing.  Further, there were no troubled debt restructurings for which there was a payment default within twelve months following the modification during the periods ending June 30, 2015 and 2014.

No loans were modified as troubled debt restructurings during the six or three months ending June 30, 2015 and 2014.

20

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 June 30, 2015 and December 31, 2014, and based on the most recent analysis performed, the risk category of loans by class of loans is as follows:

As of June 30, 2015

(in thousands)

			Special
	Pass		Mention		Substandard		Doubtful
Commercial	$	48,623	$	1,396	$	217	$	—
Real estate construction	19,843		1,242		235		—
Real estate mortgage:
1-4 family residential	183,844		6,194		6,121		56
Multi-family residential	33,966		—		155		—
Non-farm & non-residential	151,237		6,074		732		—
Agricultural	60,532		7,605		784		—
Total	$	498,045	$	22,511	$	8,244	$	56

21

As of December 31, 2014

(in thousands)

			Special
	Pass		Mention		Substandard		Doubtful
Commercial	$	45,602	$	1,307	$	275	$	—
Real estate construction	15,529		1,267		142		—
Real estate mortgage:
1-4 family residential	176,791		5,439		7,068		160
Multi-family residential	33,990		—		425		—
Non-farm & non-residential	154,857		5,178		1,787		—
Agricultural	58,110		7,653		5,581		—
Total	$	484,879	$	20,844	$	15,278	$	160

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 $20 thousand at June 30, 2015 and $6 thousand at December 31, 2014.

4.  REAL ESTATE OWNED

Activity in real estate owned, net was as follows:

	Six Months Ended
	June 30
	2015			2014
	(in thousands)
Beginning of year	$	4,603		$	3,379
Additions	3,334			419
Sales	(4,727		)	(1,540		)
(Additions) subtractions to valuation allowance, net	385			48
End of period	$	3,595		$	2,306

Activity in the valuation allowance was as follows:

	Six Months Ended
	June 30
	2015			2014
	(in thousands)
Beginning of year	$	1,583		$	1,524
Write-downs of other real estate, net	227			10
Reduction from sale	(612		)	(58		)
End of period	$	1,198		$	1,476

22

Expenses related to foreclosed assets include:

	Six Months Ended
	June 30
	2015		2014
	(in thousands)
Net loss (gain) on sales reported in other income	$	59	$	(70	)
Write-downs of other real estate, net	227		10
Operating expenses (receipts), net of rental income	55		13
Repossession expenses, net	282		23
For the period	$	341	$	(47	)

	Three Months Ended
	June 30
	2015		2014
	(in thousands)
Net loss (gain) on sales reported in other income	$	20	$	(24	)
Write-downs of other real estate, net	201		10
Operating expenses (receipts), net of rental income	36		15
Repossession expenses, net	237		25
For the period	$	257	$	1

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:

	Six Months Ended
	June 30
	2015		2014
	(in thousands)
Basic Earnings Per Share
Net Income	$	3,637	$	3,675
Weighted average common shares outstanding	2,707		2,708
Basic earnings per share	$	1.33	$	1.36
Diluted Earnings Per Share
Net Income	$	3,637	$	3,675
Weighted average common shares outstanding	2,707		2,708
Weighted average common and dilutive potential common shares outstanding	2,707		2,708
Diluted earnings per share	$	1.33	$	1.36

23

	Three Months Ended
	June 30
	2015		2014
	(in thousands)
Basic Earnings Per Share
Net Income	$	2,122	$	1,904
Weighted average common shares outstanding	2,707		2,708
Basic earnings per share	$	0.77	$	0.70
Diluted Earnings Per Share
Net Income	$	2,122	$	1,904
Weighted average common shares outstanding	2,707		2,708
Weighted average common and dilutive potential common shares outstanding	2,707		2,708
Diluted earnings per share	$	0.77	$	0.70

Stock options for 2,400 shares of common stock for the six and three months ended June 30, 2015 and 12,725 shares of common stock for the six and three months ended June 30, 2014 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.

Summary of activity in the stock option plan for the first six months of 2015 follows:

					Weighted
			Weighted		Average
			Average		Remaining	Aggregate
			Exercise		Contractual	Intrinsic
	Shares		Price		Term	Value
Outstanding, beginning of year	12,625		$	30.46
Granted	—		—
Forfeited or expired	(10,225	)	30.48
Exercised	—		—
Outstanding, end of period	2,400		$	30.38	18.5 months	$	—
Vested and expected to vest	2,400		$	30.38	18.5 months	$	—
Exercisable, end of period	2,400		$	30.38	18.5 months	$	—

24

As of June 30, 2015, 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 are 50,000.  There were 5,385 shares issued during the first six months of 2015 and 7,475 shares issued during the first six months of 2014.  There were no shares forfeited during the first six months of 2015 or 2014.

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, 2015	17,694		$	365,586		$	20.66
Granted	5,385		147,280			27.35
Vested	(5,175	)	(101,767		)	19.67
Forfeited	—		—			—
Nonvested at June 30, 2015	17,904		$	411,099		$	22.96

As of June 30, 2015, there was $349,393 of total unrecognized compensation cost related to nonvested shares granted under the restricted stock grant plan.  The cost is expected to be recognized over a weighted-average period of 3.1 years.  As of June 30, 2015, no additional shares are available for issue 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 465 shares issued during the first six months of 2015 and none in 2014.  There were no shares forfeited during the first six months of 2015 or 2014.

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, 2015	720		$	16,704		$	23.20
Granted	465		12,718			27.35
Vested	(180	)	(4,176		)	23.20
Forfeited	—		—			—
Nonvested at June 30, 2015	1,005		$	25,246		$	25.12

As of June 30, 2015, there was $22,582 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 2.9 years.  As of June 30, 2015, 148,635 shares are still available for issuance.

25

7.  OTHER BORROWINGS

At December 31, 2014 the Company had a $5 million revolving promissory note with a maturity date of July 26, 2015.  The Company has no outstanding balances related to this promissory note at June 30, 2015 or December 31, 2014. Upon maturity, the Company renewed the revolving promissory note. The new note has similar terms as the original note and matures July 19, 2016.

On July 20, 2015, the Company borrowed $5 million. The term loan has a fixed interest rate of 5.02%, requires quarterly principal and interest payments and matures July 20, 2025.

8.  FAIR VALUE MEASUREMENTS

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

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

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

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

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

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

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

Impaired Loans:  The fair value of impaired loans with specific allocations of the allowance for loan losses is generally based on recent third party real estate appraisals.  These appraisals may utilize a single valuation approach or a combination of approaches including comparable sales and the income approach. Adjustments are routinely made in the appraisal process by the appraisers to adjust for differences between the comparable sales and income data available for similar loans and collateral underlying such loans.  Such adjustments were $14 thousand for 2015 and $387 for 2014 and resulted in a Level 3 classification of the inputs for determining fair value.

26

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 $372 thousand as of June 30, 2015 and $25 thousand as of June 30, 2014 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 June 30, 2015 Using (In thousands):

			Quoted Prices
			In Active
			Markets for		Significant Other		Significant
			Identical		Observable		Unobservable
	Fair		Assets		Inputs		Inputs
Description	Value		(Level 1)		(Level 2)		(Level 3)
U. S. government agencies	$	55,078	$	—	$	55,078	$	—
States and municipals	88,195		—		88,195		—
Mortgage-backed - residential	93,908		—		93,908		—
Equity securities	295		295		—		—
Trading Assets	5,400		5,400		—		—
Total	$	242,876	$	5,695	$	237,181	$	—

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

			Quoted Prices
			In Active
			Markets for		Significant Other		Significant
			Identical		Observable		Unobservable
	Fair		Assets		Inputs		Inputs
Description	Value		(Level 1)		(Level 2)		(Level 3)
U. S. government agencies	$	60,586	$	—	$	60,586	$	—
States and municipals	89,281		—		89,281		—
Mortgage-backed - residential	96,698		—		96,698		—
Equity securities	296		296		—		—
Trading Assets	5,370		5,370		—		—
Total	$	252,231	$	5,666	$	246,565	$	—

There were no transfers between level 1 and level 2 during 2015 or 2014.

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

	Fair Value Measurements at June 30, 2015 Using:
		Quoted Prices
		In Active		Other
		Markets for	Significant	Significant
		Identical	Observable	Unobservable
(In thousands)	Carrying	Assets	Inputs	Inputs
Description	Value	(Level 1)	(Level 2)	(Level 3)
Impaired loans:
Real Estate Mortgage:
Non-farm & non-residential	226	—	—	226
Agricultural	44	—	—	44
Other real estate owned:
Residential	1,651	—	—	1,651
Commercial	347			347
Loan servicing rights	277	—	—	277

	Fair Value Measurements at December 31, 2014 Using:
		Quoted Prices
		In Active		Other
		Markets for	Significant	Significant
		Identical	Observable	Unobservable
(In thousands)	Carrying	Assets	Inputs	Inputs
Description	Value	(Level 1)	(Level 2)	(Level 3)
Impaired loans:
Real Estate Mortgage:
Multi-family residential	169	—	—	169
Non-farm & non-residential	366	—	—	366
Agricultural	3,729	—	—	3,729
Other real estate owned:
Residential	1,670	—	—	1,670
Loan servicing rights	292	—	—	292

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Impaired loans, which are measured for impairment using the fair value of the collateral for collateral dependent loans, had a carrying amount of $270 thousand, which includes a valuation allowance of $270 thousand at June 30, 2015.  During the first six months of 2015, no new loans became impaired.  The total allowance for specific impaired loans decreased $301 thousand for the six months ending June 30, 2015 and decreased $101 thousand for the three months ending June 30, 2015.  During the first six months of 2014, five new loans became impaired resulting in an additional provision for loan losses of $536 thousand.  The total allowance for specific impaired loans increased $106 thousand for the six months ending June 30, 2014 and decreased $28 thousand for the three months ending June 30, 2014.

Other real estate owned, which is measured at fair value less costs to sell, had a net carrying amount of $2.0 million, which is made up of the outstanding balance of $3.2 million, net of a valuation allowance of $1.2 million at June 30, 2015.  The Company recorded $227 thousand in write-downs of other real estate owned properties for the six months ending June 30, 2015 and $201 thousand for the three months ending June 30, 2015.  The Company recorded $10 thousand in write-downs of other real estate owned properties for the six months and three months ending June 30, 2014.

Loan servicing rights, which are carried at the lower of cost or fair value, were carried at their fair value of $277 thousand, which is made up of the outstanding balance of $322 thousand, net of a valuation allowance of $45 thousand at June 30, 2015.  The Company recorded a net recovery of prior write-downs of $34 thousand for the six months ending June 30, 2015 and a recovery of prior write-downs totaling $20 thousand for the three months ending June 30, 2015.  For the first six months of 2014, the Company recorded net write-downs of $12 thousand and write-downs totaling $17 thousand for the three months ending June 30, 2014.  At December 31, 2014, loan servicing rights were carried at their fair value of $292 thousand, which is made up of the outstanding balance of $371 thousand, net of a valuation allowance of $79 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 June 30, 2015 and December 31, 2014:

				Range
June 30, 2015	Fair	Valuation	Unobservable	(Weighted
(In thousands)	Value	Technique(s)	Input(s)	Average)
Impaired loans
Non-farm & non-residential	226	sales approach	adjustment for differences between the comparable sales	0%-0% (0%)
Agricultural	44	sales approach	adjustment for differences between the comparable sales	5%-44% (24%)
Other real estate owned:
Residential	1,651	sales comparison	adjustment for differences between the comparable sales	0%-28% (16%)
		income approach	capitalization rate	8%-8%
				(8%)
Commercial	347	income approach	capitalization rate	10%-10%
				(10%)
Loan Servicing Rights	277	discounted cash flow	discount rates	(12%-12%) (12%)

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				Range
December 31, 2014	Fair	Valuation	Unobservable	(Weighted
(In thousands)	Value	Technique(s)	Input(s)	Average)
Impaired loans
Real estate mortgage:
Multi-family residential	169	sales comparison	adjustment for differences between the comparable sales	10%-10% (10%)
Non-farm & non-residential	366	sales comparison	adjustment for differences between the comparable sales	0%-0% (0%)
Agricultural	3,729	sales comparison	adjustment for differences between the comparable sales	5%-53% (43%)
Other real estate owned:
Residential	1,670	sales comparison	adjustment for differences between the comparable sales	0%-48% (11%)
		income approach	capitalization rate	8%-10%
				(9%)
Loan Servicing Rights	292	discounted cash flow	discount rates	12%-12% (12%)

Fair Value of Financial Instruments

The carrying amounts and estimated fair values of financial instruments, at June 30, 2015 and December 31, 2014 are as follows:

June 30, 2015:

	Carrying
(in thousands)	Value		Level 1		Level 2		Level 3		Total
Financial assets
Cash and cash equivalents	$	16,348	$	16,348	$	—	$	—	$	16,348
Interest bearing deposits	1,280		1,280		—		—		1,280
Securities	237,476		295		237,181		—		237,476
Trading Assets	5,400		5,400		—				5,400
Mortgage loans held for sale	1,719		—		1,733		—		1,733
Loans, net	540,135		—		—		537,951		537,951
FHLB Stock	5,981		N/A		N/A		N/A		N/A
Interest receivable	3,661		3		1,296		2,362		3,661
Financial liabilities
Deposits	$	644,016	$	461,492	$	183,880	$	—	$	645,372
Securities sold under agreements to repurchase and other borrowings	13,690		—		13,697		—		13,697
Federal Funds Purchased	2,456		2,456		—		—		2,456
FHLB advances	100,417		—		95,450		—		95,450
Subordinated Debentures	7,217		—		—		7,204		7,204
Interest payable	658		—		648		10		658

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December 31, 2014:

	Carrying
(in thousands)	Value		Level 1		Level 2		Level 3		Total
Financial assets
Cash and cash equivalents	$	17,169	$	17,169	$	—	$	—	$	17,169
Interest bearing deposits	1,280		1,280						1,280
Securities	246,861		296		246,565		—		246,861
Trading assets	5,370		5,370						5,370
Mortgage loans held for sale	776		—		782		—		782
Loans, net	532,293		—		—		535,213		535,213
FHLB Stock	5,981		N/A		N/A		N/A		N/A
Interest receivable	3,299		—		1,274		2,025		3,299
Financial liabilities
Deposits	$	654,869	$	470,912	$	185,429	$	—	$	656,341
Securities sold under agreements to repurchase and other borrowings	12,457		—		12,620		—		12,620
FHLB advances	93,785		—		88,373		—		88,373
Subordinated Debentures	7,217		—		—		7,209		7,209
Interest Payable	642				633		9		642

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

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

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

Loans - Fair values of loans, excluding loans held for sale, are estimated as follows:  For variable rate loans that reprice frequently and with no significant change in credit risk, fair values are based on carrying values resulting in a Level 3 classification.  Fair values for other loans are estimated using discounted cash flow analyses, using interest rates currently being offered for loans with similar terms to borrowers of similar credit quality resulting in a Level 3 classification.  Impaired loans are valued at the lower of cost or fair value as described previously.  The methods used to estimate the fair value of loans do not necessarily represent an exit price.

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

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

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

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

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

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

9.  CHANGES IN ACCUMULATED OTHER COMPREHENSIVE INCOME BY COMPONENT

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

	Unrealized
	Gains and Losses on
	Available for Sale
	Securities
	For the Six Months Ending June 30
	2015			2014
Beginning Balance	$	791		$	(5,126	)
Unrealized holding gains (losses) for the period, net of tax	(1,057		)	5,267
Reclassification adjustment for:
Securities gains realized in income	(251		)	(433		)
Income taxes	(85		)	(147		)
Securities gains realized in income, net	(166		)	(286		)
Net current period other comprehensive income	(1,223		)	4,981
Ending balance	$	(432	)	$	(145	)

(1)All amounts are net of tax.

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	Unrealized
	Gains and Losses on
	Available for Sale
	Securities
	For the Three Months Ending June 30
	2015			2014
Beginning Balance	$	1,728		$	(1,875	)
Unrealized holding gains (losses) for the period, net of tax	(2,000		)	1,892
Reclassification adjustment for:
Securities gains realized in income, net	(243		)	(245		)
Income taxes	(83		)	(83		)
	(160		)	(162		)
Net current period other comprehensive income	(2,160		)	1,730
Ending balance	$	(432	)	$	(145	)

(2)All amounts are net of tax.

The following is significant amounts reclassified out of each component of accumulated other comprehensive Income (Loss) for the six months ending June 30, 2015 and 2014:

June 30, 2015

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	$	(251	)	Securities gains realized in income, net
	85			Provision for income taxes
	(166		)	Net of tax

June 30, 2014

Details about	Amount			Affected Line Item
Accumulated Other	Reclassified From			in the Statement
Comprehensive	Accumulated Other			Where Net
Income Components	Comprehensive Income			Income is Presented
Unrealized gains and losses on available-for-sale securities	$	(433	)	Securities gains realized in income, net
	147			Provision for income taxes
	(286		)	Net of tax

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The following is significant amounts reclassified out of each component of accumulated other comprehensive Income (Loss) for the three months ending June 30, 2015 and 2014:

June 30, 2015

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	$	(243	)	Securities gains realized in income, net
	83			Provision for income taxes
	(160		)	Net of tax

June 30, 2014

Details about	Amount			Affected Line Item
Accumulated Other	Reclassified From			in the Statement
Comprehensive	Accumulated Other			Where Net
Income Components	Comprehensive Income			Income is Presented
Unrealized gains and losses on available-for-sale securities	$	(245	)	Securities gains realized in income, net
	83			Provision for income taxes
	(162		)	Net of tax

10.  SUBSEQUENT EVENT

Effective with the close of business on July 24, 2015, Kentucky Bancshares completed its purchase of Madison Financial Corporation and its wholly-owned subsidiary Madison Bank, both of which were headquartered in Richmond, Kentucky.  Under terms of an agreement and plan of share exchange dated January 21, 2015, the Company paid 1.1927 shares of Kentucky Bancshares common stock for each issued and outstanding share of Madison Financial Corporation stock.  The transaction was valued at approximately $7.2 million.  Following the acquisition, Madison Bank and its three branch locations, were merged into Kentucky Bank.  At June 30, 2015, Madison Bank had total assets of $119 million, total loans of $81 million and total deposits of $95 million.  Management has not yet completed all of the analyses needed to estimate the fair value of the assets and liabilities acquired, both tangible and intangible.

11.  REPURCHASE AGREEMENTS

Repurchase agreements totaled $13.7 million as of June 30, 2015. Of this, $7.7 million were overnight obligations and $6.0 million had terms extending through May 2019 and an average weighted life of 2.5 years. The Company pledged agency-backed securities with a carrying amount of $16.6 million to secure repurchase agreements as of June 30, 2015.

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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, 2014.

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.

35

Summary

The Company recorded net income of $3.6 million, or $1.33 basic earnings and diluted earnings per share for the first six months ending June 30, 2015 compared to $3.7 million or $1.36 basic earnings and diluted earnings per share for the six month period ended June 30, 2014.  The first six months earnings reflect a decrease of 1.0% compared to the same time period in 2014.  The decrease in earnings is mostly attributed to an increase of $450 thousand in the provision for loan losses, an increase of $681 thousand in salaries & benefits expense, an increase of $259 thousand in repossession expense due to write-downs of other real estate owned properties secured by real estate totaling $227 thousand, an increase of $120 thousand in legal and professional fees, an increase of $108 thousand in occupancy expense, and an increase of $329 thousand in various other expenses.  Increases in other expenses were primarily attributed to an increase of $129 thousand in losses on other real estate properties and an increase of $77 thousand in credit card interchange expense.  Further, increases in non-interest expenses, particularly legal and professional fees and data processing, are partially attributed to the Company recording nearly $150 thousand in non-interest expense during the first six months of 2015 for expenses related to the acquisition of Madison Financial Corporation. The acquisition was completed on July 24, 2015.  Also contributing to the decrease in income was a decrease of $182 thousand in gains on securities, a decrease of $215 thousand in gains on trading assets and a decrease of $78 thousand in service charges which was primarily overdraft fees. These negative changes to net income during 2015 were partially offset by an increase of $798 thousand in net interest income, an increase of $370 thousand in gains on the sale of mortgage loans, an increase of $155 thousand in debit card interchange income, an increase of $804 thousand in other income and a decrease of $355 thousand in income tax expense.  The increase in other income for the first six months of 2015 was attributed to the Company receiving $747 thousand in June 2015 for restitution related to the settlement of the pension dispute disclosed in prior filings.  The earnings for the three months ending June 30, 2015 were $2.1 million or $0.77 basic and diluted earnings per share compared to $1.9 million or $0.70 basic and diluted earnings per share for the three month period ending June 30, 2014.  The earnings for the three month period in 2015 reflect an increase of 11.5% compared to the same time period in 2014.

Return on average assets was 0.84% for the six months ending June 30, 2015 and 0.94% for the six months ending June 30, 2014.  Return on average assets was 0.99% for the three months ending June 30, 2015 and 0.97% for the three months ending June 30, 2014.  Return on average equity was 9.14% for the six month period ending June 30, 2015 and 10.18% for the six month period ending June 30, 2014.  Return on average equity was 10.64% for the three months ending June 30, 2015 and 10.33% for the same time period in 2014.

Securities available for sale decreased $9.4 million from $246.9 million at December 31, 2014 to $237.5 million at June 30, 2015.  Trading assets totaled $5.4 million both at June 30, 2015 and December 31, 2014 and includes income on the investment totaling $30 thousand during the first six months of 2015 compared to $242 thousand for the six months ending June 30, 2014.  Income (losses) on trading assets totaled $(9) thousand for the three months ending June 30, 2015 compared to $134 thousand for the three months ending June 30, 2014.

Gross Loans increased $7.8 million from $538.3 million on December 31, 2014 to $546.1 million June 30, 2015.  The overall increase in loans is attributed to an increase of $6.8 million in 1-4 family residential loans, an increase of $4.4 million in real estate construction loans and an increase of $3.0 million in commercial loan balances.  Agricultural loan balances decreased $2.4 million.

36

Total deposits decreased from $654.9 million on December 31, 2014 to $644.0 million on June 30, 2015, a decrease of $10.9 million.  Non-interest bearing demand deposit accounts increased $3.2 million from December 31, 2014 to June 30, 2015.  Time deposits $250 thousand and over increased $2.3 million and other interest bearing deposit accounts decreased $16.3 million from December 31, 2014 to June 30, 2015.

Public fund account balances decreased $32.0 million from December 31, 2014 to June 30, 2015.  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.  In addition, during the third quarter of 2015, the Company will be lose a school board account which had total balances with the Company of $23.2 million at June 30, 2015.

Borrowings from the Federal Home Loan Bank increased $6.6 million from December 31, 2014 to June 30, 2015.

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 $13.6 million for the six months ending June 30, 2015 compared to $12.8 million for the six months ending June 30, 2014, an increase of 6.2%.  The interest spread, excluding tax equivalent adjustments was 3.35% for the first six months of 2015 and down from 3.44% reported for the same period in 2014, a decrease of 9 basis points.  Rates have remained low during the past year.  For the first six months ending June 30, 2015, the cost of total deposits was 0.30% compared to 0.35% for the same time period in 2014.  Increasing non-interest bearing deposit accounts and lowering rates on certificates of deposit accounts have helped to lower the cost of deposits.  Net interest income was $6.9 million for the three months ending June 30, 2015 compared to $6.5 million for the three months ending June 30, 2014, an increase of 5.9%.  The interest spread, excluding tax equivalent adjustments, was 3.37% for the three month period ending June 30, 2015 compared to 3.47% for the three month period in 2013, a decrease of 10 basis points.

For the first six months, the yield on assets decreased from 3.97% in 2014 to 3.86% in 2015, excluding tax equivalent adjustments.  The yield on loans decreased 21 basis points in the first six months of 2015 compared to 2014 from 4.89% to 4.68%.  The yield on securities decreased 11 basis points in the first six months of 2015 compared to 2014 from 2.41% in 2014 to 2.30% in 2015.  The cost of liabilities was 0.50% for the first six months in 2015 compared to 0.53% in 2014.  Year to date average loans, excluding overdrafts, increased $60.4 million, or 12.6% from June 30, 2014 to June 30, 2015.  Loan interest income increased $898 thousand for the first six months of 2015 compared to the first six months of 2014.  Year to date average total deposits increased from June 30, 2014 to June 30, 2015, up $40.6 million or 6.5%.  Year to date average interest bearing deposits increased $17.3 million, or 3.7%, from June 30, 2014 to June 30, 2015.  Deposit interest expense decreased $95 thousand for the first six months of 2015 compared to the same period in 2014.  Year to date average borrowings increased $25.9 million, or 31.6% from June 30, 2014 to June 30, 2015.  Interest expense on borrowed funds increased $175 thousand for the first six months of 2015 compared to the same period in 2014.

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The volume rate analysis for the six months ending June 30, 2015 indicates that $2.2 million of the increase in interest income is attributable to an increase in loan volume and $220 thousand of the increase in interest income is attributable to an increase in the volume of our security portfolio.  Further, a decrease in loan rates caused a decrease of $1.3 million in interest income and a decrease in rates in our security portfolio contributed a decrease of $233 thousand in interest income.  The net effect to interest income was an increase of $878 thousand for the first six months of 2015 compared to the same time period in 2014.

Also based on the following volume rate analysis, the lower level of interest rates contributed to a decrease of $287 thousand in interest expense for the comparable six months, while the change in volume in deposits and borrowings, mostly Federal Home Loan Bank advances, was responsible for a $367 thousand increase in interest expense.  The net effect to interest expense was an increase of $80 thousand.  The average rate of the Company’s total outstanding deposits and borrowings slightly decreased from 0.53% in 2014 to 0.50% in 2015.

As a result, the increase in net interest income for the first six months in 2015 is mostly attributed to growth in the Company’s loan and security portfolios.

The volume rate analysis for the three months ending June 30, 2015 indicates that $1.0 million of the increase in interest income is attributable to an increase in loan volume and $106 thousand of the increase in interest income is attributable to an increase in the volume of our security portfolio.  Further, a decrease in loan rates caused a decrease of $569 thousand in interest income and a decrease in rates in our security portfolio contributed a decrease of $127 thousand in interest income.  The net effect to interest income was an increase of $429 thousand for the first three months of 2015 compared to the same time period in 2014.

Also based on the following volume rate analysis, the lower level of interest rates contributed to a decrease of $34 thousand in interest expense for the comparable three months, while the change in volume in deposits and borrowings, mostly Federal Home Loan Bank advances, was responsible for a $79 thousand increase in interest expense.  The net change in interest expense for the comparable three month period was an increase of $45 thousand.

The increase in net interest income for the three months ending June 30, 2015 compared to the same period in 2014 is attributed to growth in the Company’s loan and security portfolios.

The accompanying analyses of changes in net interest income in the following table shows the relationships of the volume and rate portions of these changes in 2015 for the comparable six months and three months.  Changes in interest income and expenses due to both rate and volume are allocated on a pro rata basis.

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Changes in Interest Income and Expense

	Six Months Ending
	2015 vs. 2014
	Increase (Decrease) Due to Change in
(in thousands)	Volume			Rate			Net Change
INTEREST INCOME
Loans	$	2,178		$	(1,280	)	$	898
Investment Securities	220			(233		)	(13		)
Other	(8		)	1			(7		)
Total Interest Income	2,390			(1,512		)	878
INTEREST EXPENSE
Deposits
Demand	24			(21		)	3
Savings	8			(20		)	(12		)
Negotiable Certificates of Deposit and Other Time Deposits	(9		)	(77		)	(86		)
Securities sold under agreements to repurchase and other borrowings	(1		)	—			(1		)
Federal Home Loan Bank advances	345			(169		)	176
Total Interest Expense	367			(287		)	80
Net Interest Income	$	2,023		$	(1,225	)	$	798

	Three Months Ending
	2015 vs. 2014
	Increase (Decrease) Due to Change in
	Volume			Rate			Net Change
INTEREST INCOME
Loans	$	1,019		$	(569	)	$	450
Investment Securities	106			(127		)	(21		)
Other	6			(6		)	—
Total Interest Income	1,131			(702		)	429
INTEREST EXPENSE
Deposits
Demand	13			(9		)	4
Savings	3			(9		)	(6		)
Negotiable Certificates of Deposit and Other Time Deposits	(63		)	23			(40		)
Securities sold under agreements to repurchase and other borrowings	(2		)	2			—
Federal Home Loan Bank advances	128			(41		)	87
Total Interest Expense	79			(34		)	45
Net Interest Income	$	1,052		$	(668	)	$	384

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Non-Interest Income

Non-interest income increased $955 thousand for the six months ending June 30, 2015, compared to the same period in 2014, to $5.9 million.  For the three month period ending June 30, 2015 compared to the three months ending June 30, 2014, total non-interest income increased $954 thousand.

Decreases to non-interest income for the six month period ending June 30, 2015 compared to the six months ending June 30, 2014 included a decrease of $215 thousand in gains on trading assets, a decrease $182 thousand in gains on the sale of securities and a decrease of $78 thousand in service charges.  Favorable variances to non-interest income for the first six months of 2015 included, an increase of $804 thousand in other income due to restitution received for a legal dispute, an increase of $370 thousand in gains on the sale of mortgage loans, an increase of $155 thousand in debit card interchange income, an increase of $75 thousand in trust fee income and an increase of $74 thousand in net loan servicing fee income.

For the three months ending June 30, 2015 compared to the same period in 2014, decreases to non-interest income included a decrease of $74 thousand in brokerage fee income.  Favorable variances for the three months ending June 30, 2015 compared to the same period in 2014 included an increase of $777 thousand in other income due to restitution received for a legal dispute, an increase of $200 thousand in gains on the sale of mortgage loans, an increase of $93 thousand in debit card interchange income and an increase of $50 thousand in loan service fee income.

The gain on the sale of mortgage loans increased from $398 thousand during the first six months of 2014 to $768 thousand during the first six months of 2015, an increase of $370 thousand.  For the three months ending June 30, 2015 compared to the same time period in 2014, the gain on the sale of mortgage loans increased $200 thousand.  The volume of loans originated to sell during the first six months of 2015 increased $10.8 million compared to the same time period in 2014.  For the three months ending June 30, 2015, the volume of loans originated for sale increased $8.0 million compared to the same three months in 2014.  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 $108 thousand for the six months ending June 30, 2015 compared to $34 thousand for the six months ending June 30, 2014, an increase of $74 thousand.  For the three month period ending June 30, 2015, loan service fee income, net of amortization and impairment expense, was $55 thousand compared to $5 thousand for the same time period one year ago.  During the first six months of 2015, the market value adjustment to the carrying value of the mortgage servicing right was a positive net amount of $34 thousand, as the fair value of this asset increased.  Of this, a positive valuation adjustment of $14 thousand was recorded in the first quarter of 2015 and a positive valuation adjustment of $20 thousand was recorded during the second quarter of 2015.  During the first six months of 2014, the carrying value of the mortgage servicing right was written down a net amount of $12 thousand, as the fair value of this asset decreased.  Of this, a positive valuation adjustment of $5 thousand was recorded in the first quarter of 2014 and a negative valuation adjustment of $17 thousand was recorded during the second quarter of 2014.

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Non-Interest Expense

Total non-interest expense increased $1.7 million for the six month period ending June 30, 2015 compared to the same period in 2014.  For the three month period ending June 30, 2015 compared to the three months ending June 30, 2014, total non-interest expense increased $933 thousand.

For the comparable six month periods, salaries and benefits increased $681 thousand, an increase of 9.4%.  The number of full time equivalent employees at June 30, 2015 was 228 compared to 219 one year ago. The increase in salaries and benefits was largely due to an increase in incentive compensation expense attributed to the Bank performing favorably in regards to benchmarks set forth in the incentive compensation plan.  Salaries and employee benefits increased $489 thousand, or 13.4%, for the three month period ending June 30, 2015 compared to the same time period in 2014.

Occupancy expenses increased $108 thousand to $1.8 million for the first six months of 2015 compared to the same time period in 2014.  Expenses associated with purchasing equipment with an initial cost of less than $1 thousand increased $47 thousand, computer maintenance expense increased $36 thousand and building maintenance expense increased $17 thousand.  Occupancy expenses increased $24 thousand for the three month period ending June 30, 2015 compared to the same time period in 2014.

Legal and professional fees increased $120 thousand for the first six months ending June 30, 2015 compared to the same time period in 2014 and decreased $29 thousand for the comparable three month period.  An increase of approximately $53 thousand for the first six months of 2015 in legal and professional fees was attributed to the acquisition of Madison Financial Corporation.  The acquisition was completed on July 24, 2015.  Repossession expenses increased $259 thousand for the first six months ending June 30, 2015 compared to the same time period in 2014 and increased $212 thousand for the comparable three month period.  Repossession expenses are reported net of rental income earned on repossessed properties.  Net repossession expenses were higher during the first six months of 2015 when compared to 2014 due to net write-downs totaling $227 thousand in 2015 compared to net write-downs of $10 thousand in 2014.  FDIC insurance expense increased $33 thousand for the six months ending June 30, 2015 compared to the same time period in 2014 and $5 thousand for the comparable three month period.

Income Taxes

The effective tax rate for the six months ending June 30, 2015 was 7.8% compared to 15.2% in 2014.  The effective tax rate for the three months ending June 30, 2015 was 12.6% compared to 16.2% for the three months ending June 30, 2014.  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.  Income tax expense decreased $355 thousand for the six months ending June 30, 2015 compared to the first six months in 2014.  Income tax expense decreased due to the implementation of the captive insurance subsidiary that generated $542 thousand of tax-exempt income during the six months of 2015.  The captive insurance subsidiary was established during the third quarter of 2014.  Income tax expense also decreased due to lower book earnings than in the same quarter in the previous year and the permanent book-tax differences remained the same except as otherwise noted.  Tax-exempt interest income increased $18 thousand for the first six months of 2015 compared to the first six months of 2014.  Further, for the first six months of 2015, the Company had tax credits totaling $306 thousand for investments made in low income housing projects which represented an increase of $29 thousand compared to similar tax credits for the first six months of 2014.

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,

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credit worthiness of the underlying issuer and the favorable impact on our tax position.  For the six months ending June 30, 2015, the Company averaged $90.0 million in tax free securities and $18.2 million in tax free loans.  As of June 30, 2015, the weighted average remaining maturity for the tax free securities is 123 months, while the weighted average remaining maturity for the tax free loans is 192 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 $16.3 million as of June 30, 2015 compared to $17.2 million at December 31, 2014.  The decrease in cash and cash equivalents is mostly attributed to a decrease of $628 thousand in cash and due from banks.  In addition to cash and cash equivalents, the securities portfolio provides an important source of liquidity.  Securities available for sale totaled $237.5 million at June 30, 2015 compared to $246.9 million at December 31, 2014.  Securities classified as trading assets totaled $5.4 million both at June 30, 2015 December 31, 2014.

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 six months of 2015, deposits decreased $10.9 million. The Company’s investment portfolio decreased $9.4 million and the Company’s loan portfolio increased $7.8 million.  The Company’s borrowed funds from the Federal Home Loan Bank increased $6.6 million from December 31, 2014 to June 30, 2015.  The Company had outstanding federal funds purchased totaling $2.5 million at June 30, 2015 and $0 at December 31, 2014.

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 June 30, 2015, we have sufficient collateral to borrow an additional $39 million from the Federal Home Loan Bank.  In addition, as of June 30, 2015, $29 million is available in overnight borrowing through various correspondent banks and the Company has access to $273 million in brokered deposits.

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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 June 30, 2015 and December 31, 2014, 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 will revise their leverage and risk-based capital requirements and the method of calculating risk-weighted assets to make them consistent with agreements that were reached by the Basel Committee on Banking Supervision and certain provisions of the Dodd-Frank Act.

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

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The rule limits a banking organization’s capital distributions and certain discretionary bonus payments if the banking organization does not hold a “capital conservation buffer” consisting of 2.5% of common equity Tier 1 capital to risk-weighted assets in addition to the amount necessary to meet its minimum risk-based capital requirements. The final rule became effective for the Bank on January 1, 2015.  In accordance with the final rule, the capital conservation buffer requirement will be phased in beginning January 1, 2016 and ending January 1, 2019, when the full capital conservation buffer requirement will be effective.

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

									To Be Well
									Capitalized
									Under Prompt
					For Capital				Corrective
	Actual				Adequacy Purposes				Action Provisions
	Amount		Ratio		Amount		Ratio		Amount		Ratio
	(Dollars in Thousands
June 30, 2015
Consolidated
Total Capital (to Risk-Weighted Assets)	$	79,318	13.1	%	$	48,325	8.0	%	$	N/A	N/A
Tier I Capital (to Risk-Weighted Assets)	73,281		12.1		36,244		6.0		N/A		N/A
Common Equity Tier 1 Capital (to Risk-Weighted Assets)	66,281		11.0		27,183		4.5		N/A		N/A
Tier I Capital (to Average Assets)	73,281		8.7		33,783		4.0		N/A		N/A
Bank Only
Total Capital (to Risk-Weighted Assets)	$	76,174	12.6	%	$	48,298	8.0	%	$	60,373	10.0	%
Tier I Capital (to Risk-Weighted Assets)	70,136		11.6		36,224		6.0		48,298		8.0
Common Equity Tier 1 Capital (to Risk-Weighted Assets)	70,136		11.6		27,168		4.5		39,242		6.5
Tier I Capital (to Average Assets)	70,136		8.3		33,717		4.0		42,146		5.0
December 31, 2014
Consolidated
Total Capital (to Risk-Weighted Assets)	$	77,016	13.1	%	$	47,208	8.0	%	N/A		N/A
Tier I Capital (to Risk-Weighted Assets)	70,917		12.0		23,604		4.0		N/A		N/A
Tier I Capital (to Average Assets)	70,917		8.7		32,497		4.0		N/A		N/A
Bank Only
Total Capital (to Risk-Weighted Assets)	$	74,575	12.6	%	$	47,184	8.0	%	$	58,980	10.0	%
Tier I Capital (to Risk-Weighted Assets)	68,476		11.6		23,592		4.0		35,388		6.0
Tier I Capital (to Average Assets)	68,476		8.4		32,442		4.0		40,553		5.0

Non-Performing Assets

As of June 30, 2015, our non-performing assets totaled $11.3 million or 1.33% of assets compared to $17.3 million or 2.03% of assets at December 31, 2014 (See table below.)  The Company experienced a decrease of $5.2 million in non-accrual loans from December 31, 2014 to June 30, 2015.  As of June 30, 2015, non-accrual loans include $834 thousand in loans secured by 1-4 family properties, $380 thousand in loans secured by non-farm and non-residential properties and $138 thousand in loans secured by real estate construction loans.  Real estate loans composed 98.9% of the non-performing loans as of June 30, 2015 and 99.6% as of December 31, 2014.  Forgone interest income on non-accrual loans totaled $18 thousand for the first six months of 2015 compared to forgone interest of $59 thousand for the same time period in 2014.  Accruing loans that are contractually 90 days or more past due as of June 30, 2105 totaled $267 thousand compared to $24 thousand at December 31, 2014, an increase of $243 thousand.

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Total nonperforming and restructured loans decreased $5.0 million from December 31, 2014 to June 30, 2015.  The decrease in total non-performing loan balances is mostly attributed to one loan customer who had three loans totaling $4.0 million on non-accrual at December 31, 2014.  These loan balances were moved to other real estate owned during the first three months of 2015 and subsequently sold.  The decrease in non-accrual loan balances contributed to the decrease in the ratio of nonperforming and restructured loans to loans which decreased 94 basis points to 1.42% from December 31, 2014 to June 30, 2015.

In addition, the amount the Company has recorded as other real estate owned decreased $1.0 million from December 31, 2014 to June 30, 2015.  As of June 30, 2015, the amount recorded as other real estate owned totaled $3.6 million compared to $4.6 million at December 31, 2014.  During the first six months of 2015, $3.3 million in loan balances were foreclosed upon and added to other real estate properties while $4.7 million in other real estate properties were sold.  The allowance as a percentage of non-performing and restructured loans and other real estate owned increased from 35% at December 31, 2014 to 52% at June 30, 2015.

Nonperforming and Restructured Assets

	6/30/15			12/31/14
	(in thousands)
Non-accrual Loans	$	1,367		$	6,577
Accruing Loans which are Contractually past due 90 days or more	267			24
Accruing Troubled Debt Restructurings	6,107			6,138
Total Nonperforming and Restructured Loans	7,741			12,739
Other Real Estate	3,595			4,604
Total Nonperforming and Restructured Loans and Other Real Estate	$	11,336		$	17,343
Nonperforming and Restructured Loans as a Percentage of Loans	1.42		%	2.36		%
Nonperforming and Restructured Loans and Other Real Estate as a Percentage of Total Assets	1.33		%	2.03		%
Allowance as a Percentage of Period-end Loans	1.09		%	1.12		%
Allowance as a Percentage of Non-performing and Restructured Loans and Other Real Estate	52		%	35		%

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.

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Provision for Loan Losses

The loan loss provision for the first six months of 2015 was $650 thousand compared to $200 thousand for the first six months of 2014.  The loan loss provision was $350 thousand for the three months ending June 30, 2015 compared to $100 thousand for the three months ending June 30, 2014.  The increase in the total loan loss provision during the first six months of 2015 compared to the same time period in 2014 is attributed to growth in the Bank’s loan portfolio and having a significant recovery of $367 thousand during the first quarter of 2014 for a loan that was charged off in a prior year.

Management evaluates the loan portfolio by reviewing the historical loss rate for each respective loan type and assigns risk multiples to certain categories to account for qualitative factors including current economic conditions.  The average loss rates are reviewed for trends in the analysis, as well as comparisons to peer group loss rates.  Management makes allocations within the allowance for loan losses for specifically classified loans regardless of loan amount, collateral or loan type.  Loan categories are evaluated utilizing subjective factors in addition to the historical loss calculations to determine a loss allocation for each of those types.

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

Nonperforming loans and restructured loans decreased $5.0 million since December 31, 2014 to $7.7 million as of June 30, 2015.  Other real estate properties owned decreased $1.0 million over this same time period.   Additions to Other real estate properties totaled $3.3 million, of which $283 thousand was included in other assets at December 31, 2014, while sales totaled $4.7 million and negative valuation adjustments totaled $227 thousand.

Net charge-offs were $712 thousand for the six months ending June 30, 2015 and $27 thousand for the six months ending June 30, 2014.  Net charge-offs were $320 thousand for the three months ending June 30, 2015 and $102 thousand for the three months ending June 30, 2014.  During the first quarter of 2014, the Company recorded a recovery of $367 for one loan which was previously charged-off.  Future levels of charge-offs will be determined by the particular facts and circumstances surrounding individual loans.  Based on the above information, management believes the current loan loss allowance is sufficient to meet probable incurred loan losses.

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Loan Losses

	Six Months Ended June 30
	(in thousands)
	2015			2014
Balance at Beginning of Period	$	6,012		$	5,441
Amounts Charged-off:
Commercial	25			200
1-4 family residential	152			88
Multi-family residential	94			—
Agricultural	242			—
Consumer and other	656			355
Total Charged-off Loans	1,169			643
Recoveries on Amounts
Previously Charged-off:
Real Estate Construction	2			8
1-4 family residential	5			16
Multi-family residential	2			—
Non-farm & non-residential	—			367
Agricultural	12			25
Consumer and other	436			200
Total Recoveries	457			616
Net Charge-offs	712			27
Provision for Loan Losses	650			200
Balance at End of Period	5,950			5,614
Loans
Average	540,316			480,557
At June 30	546,085			496,134
As a Percentage of Average Loans:
Net Charge-offs for the period	0.13		%	0.01		%
Provision for Loan Losses for the period	0.12		%	0.04		%
Allowance as a Multiple of
Net Charge-offs annualized	4.2			104.0

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Loan Losses

	Three Months Ended June 30
	(in thousands)
	2015			2014
Balance at Beginning of Period	$	5,920		$	5,616
Amounts Charged-off:
1-4 family residential	120			25
Multi-family residential	94			—
Consumer and other	333			181
Total Charged-off Loans	547			206
Recoveries on Amounts
Previously Charged-off:
Real Estate Construction	—			4
1-4 family residential	2			4
Multi-family residential	2			—
Agricultural	11			1
Consumer and other	212			95
Total Recoveries	227			104
Net Charge-offs	320			102
Provision for Loan Losses	350			100
Balance at End of Period	5,950			5,614
Loans
Average	543,634			486,609
At June 30	546,085			496,134
As a Percentage of Average Loans:
Net Charge-offs for the period	0.06		%	0.02		%
Provision for Loan Losses for the period	0.06		%	0.02		%
Allowance as a Multiple of
Net Charge-offs annualized	4.6			13.8

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 $5.4 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.

48

The projections are based on balance sheet growth assumptions and repricing opportunities for new, maturing and adjustable rate amounts.  As of June 30, 2015, 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 June 30, 2015 is as follows:

PROJECTED NET INTEREST INCOME

(dollars in thousands)

	Level
Change in basis points:	- 100			Rates		+ 100			+ 300
Year One (7/15 – 6/16)
Net interest income	$	26,878		$	27,629	$	27,713		$	27,663
Net interest income dollar change	(750		)	N/A		84			35
Net interest income percentage change	-2.7		%	N/A		0.3		%	0.1		%
Board approved limit	>-4.0		%	N/A		>-4.0		%	>-10.0		%

The projected net interest income report summarizing the Company’s interest rate sensitivity as of June 30, 2014 is as follows:

PROJECTED NET INTEREST INCOME

(dollars in thousands)

	Level
Change in basis points:	- 100			Rates		+ 100			+ 300
Year One (7/14 – 6/15)
Net interest income	$	25,144		$	25,898	$	26,096		$	26,137
Net interest income dollar change	(754		)	N/A		198			239
Net interest income percentage change	-2.9		%	N/A		0.8		%	0.9		%
Board approved limit	>-4.0		%	N/A		>-4.0		%	>-10.0		%

Projections from June 30, 2015, year one reflected a decline in net interest income of 2.7% with a 100 basis point decline compared to the 2.9% decline in 2014.  The 100 basis point increase in rates reflected a 0.3% increase in net interest income in 2015 compared to an increase of 0.8% in 2014.

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 June 30, 2015 balance sheet, a 100 basis point increase in rates results in a 10.9% decrease in EVE.  A 100 basis point decrease in rates results in a 0.1% decrease in EVE.  These are within the Board approved limits.

49

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
4/1/15 – 4/30/15	—	$	—	—	82,890 shares
5/1/15 – 5/31/15	—	—		—	82,890 shares
6/1/15 – 6/30/15	—	—		—	82,890 shares
Total	—	$	—	—	82,890 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.  Shares will be purchased from time to time in the open market depending on market prices and other considerations.  Through June 30, 2015, 317,110 shares have been purchased.

50

Item 6.Exhibits

2.1Agreement 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.

2.2Agreement 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.

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

3.2Bylaws of the Registrant are incorporated by reference to Exhibit 3.1 of the Registrant’s Quarterly Report of Form 10-Q for the quarterly period ending June 30, 2000 and filed August 14, 2000.

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

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

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

32Certifications 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 June 30, 2015, filed with the SEC on August 13, 2015, formatted in Extensible Business Reporting Language (XBRL):  (i) Consolidated Balance Sheets at June 30, 2015 and December 31, 2014, (ii) Consolidated Statements of Income and Comprehensive Income (Loss) for the six and three months ended June 30, 2015 and June 30, 2014, (iii) Consolidated Statement of Stockholders’ Equity for the six months ended June 30, 2015, (iv) Consolidated Statements of Cash Flows for the six months ended June 30, 2015 and June 30, 2014 and (v) Notes to Consolidated Financial Statements.

51

*Pursuant to Rule 402 of Regulation S-T, the XBRL related information in Exhibit 101 to this Quarterly Report on Form 10-Q shall not be deemed to be “filed” for purposes of Section 11 of the Securities Act of 1933 and Section 12 of the Exchange Act of 1934, or otherwise subject to the liability of those sections, and shall not be deemed part of a registration statement, prospectus or other document filed under the Securities Act of 1933 or the Exchange Act of 1934, except as shall be expressly set forth by specific reference in such filings.

SIGNATURES

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

		KENTUCKY BANCSHARES, INC.
Date	8/13/15	/s/Louis Prichard
		Louis Prichard, President and C.E.O.
Date	8/13/15	/s/Gregory J. Dawson
		Gregory J. Dawson, Chief Financial Officer

52

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:   August 13, 2015

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:   August 13, 2015

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 June 30, 2015, 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:	August 13, 2015	By	/s/ Louis Prichard
		Louis Prichard
		President & Chief Executive Officer
Date:	August 13, 2015	By	/s/ Gregory J. Dawson
		Gregory J. Dawson
		Chief Financial Officer

XML

EARNINGS PER SHARE (Details) - USD ($) $ / shares in Units, shares in Thousands, $ in Thousands	3 Months Ended		6 Months Ended
	Jun. 30, 2015	Jun. 30, 2014	Jun. 30, 2015	Jun. 30, 2014
Basic Earnings Per Share
Net Income	$ 2,122	$ 1,904	$ 3,637	$ 3,675
Weighted average common shares outstanding	2,707	2,708	2,707	2,708
Basic earnings per share (in dollars per share)	$ 0.77	$ 0.70	$ 1.33	$ 1.36
Diluted Earnings Per Share
Net income	$ 2,122	$ 1,904	$ 3,637	$ 3,675
Weighted average common shares outstanding	2,707	2,708	2,707	2,708
Weighted average common and dilutive potential common shares outstanding	2,707	2,708	2,707	2,708
Diluted earnings per share (in dollars per share)	$ 0.77	$ 0.70	$ 1.33	$ 1.36

XML

FAIR VALUE MEASUREMENTS (Details 4) - USD ($) $ in Thousands	Jun. 30, 2015	Dec. 31, 2014
Financial Assets
Interest bearing deposits	$ 1,280	$ 1,280
Securities	237,476	246,861
Trading Assets	5,400	5,370
Mortgage loans held for sale	1,719	776
Interest receivable	3,661	3,299
Financial liabilities
Interest payable	658	642
Quoted Prices In Active Markets for Identical Assets (Level 1)
Financial Assets
Cash and cash equivalents	16,348	17,169
Interest bearing deposits	1,280	1,280
Securities	295	296
Trading Assets	5,400	5,370
Interest receivable	3
Financial liabilities
Deposits	461,492	470,912
Federal Funds Purchased	2,456
Significant Other Observable Inputs (Level 2)
Financial Assets
Securities	237,181	246,565
Mortgage loans held for sale	1,733	782
Interest receivable	1,296	1,274
Financial liabilities
Deposits	183,880	185,429
Securities sold under agreements to repurchase and other borrowings	13,697	12,620
FHLB advances	95,450	88,373
Interest payable	648	633
Significant Unobservable Inputs (Level 3)
Financial Assets
Loans, net	537,951	535,213
Interest receivable	2,362	2,025
Financial liabilities
Subordinated debentures	7,204	7,209
Interest payable	10	9
Carrying Value
Financial Assets
Cash and cash equivalents	16,348	17,169
Interest bearing deposits	1,280	1,280
Securities	237,476	246,861
Trading Assets	5,400	5,370
Mortgage loans held for sale	1,719	776
Loans, net	540,135	532,293
FHLB stock	5,981	5,981
Interest receivable	3,661	3,299
Financial liabilities
Deposits	644,016	654,869
Securities sold under agreements to repurchase and other borrowings	13,690	12,457
Federal Funds Purchased	2,456
FHLB advances	100,417	93,785
Subordinated debentures	7,217	7,217
Interest payable	658	642
Fair Value
Financial Assets
Cash and cash equivalents	16,348	17,169
Interest bearing deposits	1,280	1,280
Securities	237,476	246,861
Trading Assets	5,400	5,370
Mortgage loans held for sale	1,733	782
Loans, net	$ 537,951	535,213
FHLB stock
Interest receivable	$ 3,661	3,299
Financial liabilities
Deposits	645,372	656,341
Securities sold under agreements to repurchase and other borrowings	13,697	12,620
Federal Funds Purchased	2,456
FHLB advances	95,450	88,373
Subordinated debentures	7,204	7,209
Interest payable	$ 658	$ 642

XML

FAIR VALUE MEASUREMENTS (Details 2) $ in Thousands	3 Months Ended		6 Months Ended
	Jun. 30, 2015 USD ($)	Jun. 30, 2014 USD ($)	Jun. 30, 2015 USD ($) loan	Jun. 30, 2014 USD ($) loan	Dec. 31, 2014 USD ($)	Dec. 31, 2013 USD ($)
Impaired Loans
Valuation allowance of impaired loans	$ 698		$ 698		$ 998
Other real estate owned, net:
Outstanding balance of other real estate owned	3,595	$ 2,306	3,595	$ 2,306	4,603	$ 3,379
Valuation allowance of other real estate owned	1,198	1,476	1,198	$ 1,476	1,583	$ 1,524
Loan servicing rights
Mortgage servicing rights	1,261		1,261		1,209
Non-recurring
Impaired Loans
Impaired loans, at fair value	270		270
Valuation allowance of impaired loans	270		$ 270
Number of impaired loans | loan			0	5
Impaired loans, additional provision for loan losses				$ 536
Decrease in allowance for specific impaired loans	(101)	28	$ (301)	106
Other real estate owned, net:
Other real estate owned	2,000		2,000
Outstanding balance of other real estate owned	3,200		3,200
Valuation allowance of other real estate owned	1,200		1,200
Write downs of other real estate owned	201	10	227	10
Loan servicing rights
Mortgage servicing rights	277		277		292
Outstanding balance of loan servicing rights	322		322		371
Valuation allowance of loan servicing rights		45		45	79
Write-downs of loan servicing rights	20	$ 17	34	$ 12
Non-recurring | Carrying Value
Loan servicing rights
Mortgage servicing rights	277		277		292
Non-recurring | Significant Unobservable Inputs (Level 3)
Loan servicing rights
Mortgage servicing rights	277		277		292
Non-recurring | Multi-family residential | Carrying Value
Impaired Loans
Impaired loans, at fair value					169
Non-recurring | Multi-family residential | Significant Unobservable Inputs (Level 3)
Impaired Loans
Impaired loans, at fair value					169
Non-recurring | Non-farm & non-residential | Carrying Value
Impaired Loans
Impaired loans, at fair value	226		226		366
Non-recurring | Non-farm & non-residential | Significant Unobservable Inputs (Level 3)
Impaired Loans
Impaired loans, at fair value	226		226		366
Non-recurring | Agricultural | Carrying Value
Impaired Loans
Impaired loans, at fair value	44		44		3,729
Non-recurring | Agricultural | Significant Unobservable Inputs (Level 3)
Impaired Loans
Impaired loans, at fair value	44		44		3,729
Non-recurring | Residential | Carrying Value
Other real estate owned, net:
Other real estate owned	1,651		1,651		1,670
Non-recurring | Residential | Significant Unobservable Inputs (Level 3)
Other real estate owned, net:
Other real estate owned	1,651		1,651		$ 1,670
Non-recurring | Commercial | Carrying Value
Other real estate owned, net:
Other real estate owned	347		347
Non-recurring | Commercial | Significant Unobservable Inputs (Level 3)
Other real estate owned, net:
Other real estate owned	$ 347		$ 347

XML

LOANS (Details 4) - USD ($) $ in Thousands	3 Months Ended		6 Months Ended		12 Months Ended
	Jun. 30, 2015	Jun. 30, 2014	Jun. 30, 2015	Jun. 30, 2014	Dec. 31, 2014
Unpaid Principal Balance
Total	$ 9,166		$ 9,166		$ 13,799
Recorded Investment
Total	9,166		9,166		13,799
Allowance for Loan Losses Allocated	698		698		998
Average Recorded Investment
Total	9,357	$ 14,393	10,716	$ 14,344	14,183
Interest Income Recognized
Total	80	183	138	221	308
Cash Basis Interest Recognized
Total	80	183	138	221	308
1-4 family residential
Unpaid Principal Balance
With no related allowance recorded	1,345		1,345		1,618
With an allowance recorded	634		634		480
Recorded Investment
With no related allowance recorded	1,345		1,345		1,618
With an allowance recorded	634		634		480
Allowance for Loan Losses Allocated	170		170		56
Average Recorded Investment
With no related allowance recorded	1,476	1,562	1,524	1,002	1,147
With an allowance recorded	556	1,377	556	1,991	990
Interest Income Recognized
With no related allowance recorded	28		42		25
With an allowance recorded	5	38	10	44	18
Cash Basis Interest Recognized
With no related allowance recorded	28		42		25
With an allowance recorded	5	38	10	44	18
Multi-family residential
Unpaid Principal Balance
With an allowance recorded					264
Recorded Investment
With an allowance recorded					264
Allowance for Loan Losses Allocated					94
Average Recorded Investment
With an allowance recorded	47	310		323	284
Interest Income Recognized
With an allowance recorded		1		5	5
Cash Basis Interest Recognized
With an allowance recorded		1		5	5
Non-farm & non-residential
Unpaid Principal Balance
With an allowance recorded	2,922		2,922		2,958
Recorded Investment
With an allowance recorded	2,922		2,922		2,958
Allowance for Loan Losses Allocated	259		259		136
Average Recorded Investment
With no related allowance recorded				267	552
With an allowance recorded	2,931	3,553	2,940	3,043	3,173
Interest Income Recognized
With an allowance recorded	30	48	59	73	115
Cash Basis Interest Recognized
With an allowance recorded	30	48	59	73	115
Agricultural
Unpaid Principal Balance
With no related allowance recorded	205		205		442
With an allowance recorded	4,060		4,060		8,037
Recorded Investment
With no related allowance recorded	205		205		442
With an allowance recorded	4,060		4,060		8,037
Allowance for Loan Losses Allocated	269		269		712
Average Recorded Investment
With no related allowance recorded	322	2,836	362	2,684	2,696
With an allowance recorded	4,025	4,755	5,215	5,034	5,341
Interest Income Recognized
With no related allowance recorded	17	77	27	80	29
With an allowance recorded		19		19	116
Cash Basis Interest Recognized
With no related allowance recorded	$ 17	77	$ 27	80	29
With an allowance recorded		$ 19		$ 19	$ 116

XML

FAIR VALUE MEASUREMENTS (Tables)

6 Months Ended

Jun. 30, 2015

FAIR VALUE MEASUREMENTS

Schedule of assets measured at fair value on a recurring basis

Fair Value Measurements at June 30, 2015 Using (In thousands):

			Quoted Prices
			In Active
			Markets for		Significant Other		Significant
			Identical		Observable		Unobservable
	Fair		Assets		Inputs		Inputs
Description	Value		(Level 1)		(Level 2)		(Level 3)
U. S. government agencies	$	55,078	$	—	$	55,078	$	—
States and municipals	88,195		—		88,195		—
Mortgage-backed - residential	93,908		—		93,908		—
Equity securities	295		295		—		—
Trading Assets	5,400		5,400		—		—
Total	$	242,876	$	5,695	$	237,181	$	—

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

			Quoted Prices
			In Active
			Markets for		Significant Other		Significant
			Identical		Observable		Unobservable
	Fair		Assets		Inputs		Inputs
Description	Value		(Level 1)		(Level 2)		(Level 3)
U. S. government agencies	$	60,586	$	—	$	60,586	$	—
States and municipals	89,281		—		89,281		—
Mortgage-backed - residential	96,698		—		96,698		—
Equity securities	296		296		—		—
Trading Assets	5,370		5,370		—		—
Total	$	252,231	$	5,666	$	246,565	$	—

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

	Fair Value Measurements at June 30, 2015 Using:
		Quoted Prices
		In Active		Other
		Markets for	Significant	Significant
		Identical	Observable	Unobservable
(In thousands)	Carrying	Assets	Inputs	Inputs
Description	Value	(Level 1)	(Level 2)	(Level 3)
Impaired loans:
Real Estate Mortgage:
Non-farm & non-residential	226	—	—	226
Agricultural	44	—	—	44
Other real estate owned:
Residential	1,651	—	—	1,651
Commercial	347			347
Loan servicing rights	277	—	—	277

	Fair Value Measurements at December 31, 2014 Using:
		Quoted Prices
		In Active		Other
		Markets for	Significant	Significant
		Identical	Observable	Unobservable
(In thousands)	Carrying	Assets	Inputs	Inputs
Description	Value	(Level 1)	(Level 2)	(Level 3)
Impaired loans:
Real Estate Mortgage:
Multi-family residential	169	—	—	169
Non-farm & non-residential	366	—	—	366
Agricultural	3,729	—	—	3,729
Other real estate owned:
Residential	1,670	—	—	1,670
Loan servicing rights	292	—	—	292

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

				Range
June 30, 2015	Fair	Valuation	Unobservable	(Weighted
(In thousands)	Value	Technique(s)	Input(s)	Average)
Impaired loans
Non-farm & non-residential	226	sales approach	adjustment for differences between the comparable sales	0%-0% (0%)
Agricultural	44	sales approach	adjustment for differences between the comparable sales	5%-44% (24%)
Other real estate owned:
Residential	1,651	sales comparison	adjustment for differences between the comparable sales	0%-28% (16%)
		income approach	capitalization rate	8%-8%
				(8%)
Commercial	347	income approach	capitalization rate	10%-10%
				(10%)
Loan Servicing Rights	277	discounted cash flow	discount rates	(12%-12%) (12%)

				Range
December 31, 2014	Fair	Valuation	Unobservable	(Weighted
(In thousands)	Value	Technique(s)	Input(s)	Average)
Impaired loans
Real estate mortgage:
Multi-family residential	169	sales comparison	adjustment for differences between the comparable sales	10%-10% (10%)
Non-farm & non-residential	366	sales comparison	adjustment for differences between the comparable sales	0%-0% (0%)
Agricultural	3,729	sales comparison	adjustment for differences between the comparable sales	5%-53% (43%)
Other real estate owned:
Residential	1,670	sales comparison	adjustment for differences between the comparable sales	0%-48% (11%)
		income approach	capitalization rate	8%-10%
				(9%)
Loan Servicing Rights	292	discounted cash flow	discount rates	12%-12% (12%)

Schedule of carrying amounts and estimated fair values of financial instruments

June 30, 2015:

	Carrying
(in thousands)	Value		Level 1		Level 2		Level 3		Total
Financial assets
Cash and cash equivalents	$	16,348	$	16,348	$	—	$	—	$	16,348
Interest bearing deposits	1,280		1,280		—		—		1,280
Securities	237,476		295		237,181		—		237,476
Trading Assets	5,400		5,400		—				5,400
Mortgage loans held for sale	1,719		—		1,733		—		1,733
Loans, net	540,135		—		—		537,951		537,951
FHLB Stock	5,981		N/A		N/A		N/A		N/A
Interest receivable	3,661		3		1,296		2,362		3,661
Financial liabilities
Deposits	$	644,016	$	461,492	$	183,880	$	—	$	645,372
Securities sold under agreements to repurchase and other borrowings	13,690		—		13,697		—		13,697
Federal Funds Purchased	2,456		2,456		—		—		2,456
FHLB advances	100,417		—		95,450		—		95,450
Subordinated Debentures	7,217		—		—		7,204		7,204
Interest payable	658		—		648		10		658

December 31, 2014:

	Carrying
(in thousands)	Value		Level 1		Level 2		Level 3		Total
Financial assets
Cash and cash equivalents	$	17,169	$	17,169	$	—	$	—	$	17,169
Interest bearing deposits	1,280		1,280						1,280
Securities	246,861		296		246,565		—		246,861
Trading assets	5,370		5,370						5,370
Mortgage loans held for sale	776		—		782		—		782
Loans, net	532,293		—		—		535,213		535,213
FHLB Stock	5,981		N/A		N/A		N/A		N/A
Interest receivable	3,299		—		1,274		2,025		3,299
Financial liabilities
Deposits	$	654,869	$	470,912	$	185,429	$	—	$	656,341
Securities sold under agreements to repurchase and other borrowings	12,457		—		12,620		—		12,620
FHLB advances	93,785		—		88,373		—		88,373
Subordinated Debentures	7,217		—		—		7,209		7,209
Interest Payable	642				633		9		642

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CHANGES IN ACCUMULATED OTHER COMPREHENSIVE INCOME BY COMPONENT (Details 2) - USD ($) $ in Thousands	3 Months Ended		6 Months Ended
	Jun. 30, 2015	Jun. 30, 2014	Jun. 30, 2015	Jun. 30, 2014
Reclassifications out of AOCI by component
Securities gains realized in income, net	$ (243)	$ (245)	$ (251)	$ (433)
Provision for income taxes	305	368	306	661
Net of tax	(2,122)	(1,904)	(3,637)	(3,675)
Unrealized Gains and Losses on Available for Sale Securities | Amount Reclassified From Accumulated Other Comprehensive Income
Reclassifications out of AOCI by component
Securities gains realized in income, net	(243)	(245)	(251)	(433)
Provision for income taxes	83	83	85	147
Net of tax	$ (160)	$ (162)	$ (166)	$ (286)

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STOCK COMPENSATION (Details 2) - Jun. 30, 2015 - Stock Option Plans - USD ($) $ / shares in Units, $ in Thousands	Total
Shares
Outstanding, beginning of year (in shares)	12,625
Forfeited or expired (in shares)	(10,225)
Outstanding, end of period (in shares)	2,400
Vested and expected to vest (in shares)	2,400
Exercisable, end of period (in shares)	2,400
Weighted Average Exercise Price
Outstanding, beginning of year (in dollars per share)	$ 30.46
Forfeited or expired (in dollars per share)	30.48
Outstanding, end of period (in dollars per share)	30.38
Vested and expected to vest (in dollars per share)	$ 30.38
Weighted Average Remaining Contractual Term
Outstanding, end of period	18 months 15 days
Vested and expected to vest	18 months 15 days
Exercisable, end of period	18 months 15 days
Additional disclosures
Unrecognized compensation cost related to nonvested stock options granted	$ 0

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LOANS (Details 8) - USD ($) $ in Thousands	6 Months Ended
	Jun. 30, 2015	Dec. 31, 2014
Credit Quality Indicators
Loans	$ 546,085	$ 538,305
Pass
Credit Quality Indicators
Loans	498,045	484,879
Special Mention
Credit Quality Indicators
Loans	22,511	20,844
Substandard
Credit Quality Indicators
Loans	8,244	15,278
Doubtful
Credit Quality Indicators
Loans	56	160
Commercial
Credit Quality Indicators
Loans	50,236	47,185
Commercial | Pass
Credit Quality Indicators
Loans	48,623	45,602
Commercial | Special Mention
Credit Quality Indicators
Loans	1,396	1,307
Commercial | Substandard
Credit Quality Indicators
Loans	217	275
Real estate construction
Credit Quality Indicators
Loans	21,320	16,938
Real estate construction | Pass
Credit Quality Indicators
Loans	19,843	15,529
Real estate construction | Special Mention
Credit Quality Indicators
Loans	1,242	1,267
Real estate construction | Substandard
Credit Quality Indicators
Loans	235	142
1-4 family residential
Credit Quality Indicators
Loans	196,215	189,458
1-4 family residential | Pass
Credit Quality Indicators
Loans	183,844	176,791
1-4 family residential | Special Mention
Credit Quality Indicators
Loans	6,194	5,439
1-4 family residential | Substandard
Credit Quality Indicators
Loans	6,121	7,068
1-4 family residential | Doubtful
Credit Quality Indicators
Loans	56	160
Multi-family residential
Credit Quality Indicators
Loans	34,121	34,415
Multi-family residential | Pass
Credit Quality Indicators
Loans	33,966	33,990
Multi-family residential | Substandard
Credit Quality Indicators
Loans	155	425
Non-farm & non-residential
Credit Quality Indicators
Loans	158,041	161,822
Non-farm & non-residential | Pass
Credit Quality Indicators
Loans	151,237	154,857
Non-farm & non-residential | Special Mention
Credit Quality Indicators
Loans	6,074	5,178
Non-farm & non-residential | Substandard
Credit Quality Indicators
Loans	732	1,787
Agricultural
Credit Quality Indicators
Loans	68,921	71,345
Agricultural | Pass
Credit Quality Indicators
Loans	60,532	58,110
Agricultural | Special Mention
Credit Quality Indicators
Loans	7,605	7,653
Agricultural | Substandard
Credit Quality Indicators
Loans	784	5,581
Consumer
Credit Quality Indicators
Loans	17,031	16,863
Consumer | Non-performing
Credit Quality Indicators
Loans	$ 20	$ 6
Minimum period past due for loans to be considered as non-performing	90 days

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REPURCHASE AGREEMENTS (Details) - USD ($) $ in Thousands	6 Months Ended
	Jun. 30, 2015	Dec. 31, 2014
REPURCHASE AGREEMENTS
Repurchase agreements and other borrowings	$ 13,690	$ 12,457
Average weighted life	2 years 6 months
Carrying amount of agency-backed securities pledged to secure repurchase agreements	$ 16,600
Overnight obligations
REPURCHASE AGREEMENTS
Repurchase agreements and other borrowings	7,700
Terms extending through May 2019
REPURCHASE AGREEMENTS
Repurchase agreements and other borrowings	$ 6,000

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FAIR VALUE MEASUREMENTS (Details 3) - USD ($) $ in Thousands	6 Months Ended	12 Months Ended
	Jun. 30, 2015	Dec. 31, 2014
Fair Value Measurements
Loan servicing rights	$ 1,261	$ 1,209
Non-recurring
Fair Value Measurements
Impaired loans, at fair value	270
Other real estate owned	2,000
Loan servicing rights	277	292
Non-recurring | Significant Unobservable Inputs (Level 3)
Fair Value Measurements
Loan servicing rights	277	292
Non-recurring | Discounted cash flow | Significant Unobservable Inputs (Level 3)
Fair Value Measurements
Loan servicing rights	$ 277	$ 292
Non-recurring | Minimum | Discounted cash flow | Significant Unobservable Inputs (Level 3)
Fair Value Measurements
Discount rates	12.00%	12.00%
Non-recurring | Maximum | Discounted cash flow | Significant Unobservable Inputs (Level 3)
Fair Value Measurements
Discount rates	12.00%	12.00%
Non-recurring | Weighted average | Discounted cash flow | Significant Unobservable Inputs (Level 3)
Fair Value Measurements
Discount rates	12.00%	12.00%
Multi-family residential | Non-recurring | Significant Unobservable Inputs (Level 3)
Fair Value Measurements
Impaired loans, at fair value		$ 169
Multi-family residential | Non-recurring | Sales comparison | Significant Unobservable Inputs (Level 3)
Fair Value Measurements
Impaired loans, at fair value		$ 169
Multi-family residential | Non-recurring | Minimum | Sales comparison | Significant Unobservable Inputs (Level 3)
Fair Value Measurements
Adjustment for differences between the comparable sales and income data available (as a percent)		10.00%
Multi-family residential | Non-recurring | Maximum | Sales comparison | Significant Unobservable Inputs (Level 3)
Fair Value Measurements
Adjustment for differences between the comparable sales and income data available (as a percent)		10.00%
Multi-family residential | Non-recurring | Weighted average | Sales comparison | Significant Unobservable Inputs (Level 3)
Fair Value Measurements
Adjustment for differences between the comparable sales and income data available (as a percent)		10.00%
Non-farm & non-residential | Non-recurring | Significant Unobservable Inputs (Level 3)
Fair Value Measurements
Impaired loans, at fair value	$ 226	$ 366
Non-farm & non-residential | Non-recurring | Sales comparison | Significant Unobservable Inputs (Level 3)
Fair Value Measurements
Impaired loans, at fair value		$ 366
Non-farm & non-residential | Non-recurring | Sales approach | Significant Unobservable Inputs (Level 3)
Fair Value Measurements
Impaired loans, at fair value	$ 226
Non-farm & non-residential | Non-recurring | Minimum | Sales comparison | Significant Unobservable Inputs (Level 3)
Fair Value Measurements
Adjustment for differences between the comparable sales and income data available (as a percent)		0.00%
Non-farm & non-residential | Non-recurring | Minimum | Sales approach | Significant Unobservable Inputs (Level 3)
Fair Value Measurements
Adjustment for differences between the comparable sales and income data available (as a percent)	0.00%
Non-farm & non-residential | Non-recurring | Maximum | Sales comparison | Significant Unobservable Inputs (Level 3)
Fair Value Measurements
Adjustment for differences between the comparable sales and income data available (as a percent)		0.00%
Non-farm & non-residential | Non-recurring | Maximum | Sales approach | Significant Unobservable Inputs (Level 3)
Fair Value Measurements
Adjustment for differences between the comparable sales and income data available (as a percent)	0.00%
Non-farm & non-residential | Non-recurring | Weighted average | Sales comparison | Significant Unobservable Inputs (Level 3)
Fair Value Measurements
Adjustment for differences between the comparable sales and income data available (as a percent)		0.00%
Non-farm & non-residential | Non-recurring | Weighted average | Sales approach | Significant Unobservable Inputs (Level 3)
Fair Value Measurements
Adjustment for differences between the comparable sales and income data available (as a percent)	0.00%
Agricultural | Non-recurring | Significant Unobservable Inputs (Level 3)
Fair Value Measurements
Impaired loans, at fair value	$ 44	$ 3,729
Agricultural | Non-recurring | Sales comparison | Significant Unobservable Inputs (Level 3)
Fair Value Measurements
Impaired loans, at fair value		$ 3,729
Agricultural | Non-recurring | Sales approach | Significant Unobservable Inputs (Level 3)
Fair Value Measurements
Impaired loans, at fair value	$ 44
Agricultural | Non-recurring | Minimum | Sales comparison | Significant Unobservable Inputs (Level 3)
Fair Value Measurements
Adjustment for differences between the comparable sales and income data available (as a percent)		5.00%
Agricultural | Non-recurring | Minimum | Sales approach | Significant Unobservable Inputs (Level 3)
Fair Value Measurements
Adjustment for differences between the comparable sales and income data available (as a percent)	5.00%
Agricultural | Non-recurring | Maximum | Sales comparison | Significant Unobservable Inputs (Level 3)
Fair Value Measurements
Adjustment for differences between the comparable sales and income data available (as a percent)		53.00%
Agricultural | Non-recurring | Maximum | Sales approach | Significant Unobservable Inputs (Level 3)
Fair Value Measurements
Adjustment for differences between the comparable sales and income data available (as a percent)	44.00%
Agricultural | Non-recurring | Weighted average | Sales comparison | Significant Unobservable Inputs (Level 3)
Fair Value Measurements
Adjustment for differences between the comparable sales and income data available (as a percent)		43.00%
Agricultural | Non-recurring | Weighted average | Sales approach | Significant Unobservable Inputs (Level 3)
Fair Value Measurements
Adjustment for differences between the comparable sales and income data available (as a percent)	24.00%
Residential | Non-recurring | Significant Unobservable Inputs (Level 3)
Fair Value Measurements
Other real estate owned	$ 1,651	$ 1,670
Residential | Non-recurring | Sales comparison | Significant Unobservable Inputs (Level 3)
Fair Value Measurements
Other real estate owned	$ 1,651	$ 1,670
Residential | Non-recurring | Minimum | Sales comparison | Significant Unobservable Inputs (Level 3)
Fair Value Measurements
Adjustment for differences between the comparable sales and income data available (as a percent)	0.00%	0.00%
Residential | Non-recurring | Minimum | Income approach | Significant Unobservable Inputs (Level 3)
Fair Value Measurements
Capitalization rate (as a percent)	8.00%	8.00%
Residential | Non-recurring | Maximum | Sales comparison | Significant Unobservable Inputs (Level 3)
Fair Value Measurements
Adjustment for differences between the comparable sales and income data available (as a percent)	28.00%	48.00%
Residential | Non-recurring | Maximum | Income approach | Significant Unobservable Inputs (Level 3)
Fair Value Measurements
Capitalization rate (as a percent)	8.00%	10.00%
Residential | Non-recurring | Weighted average | Sales comparison | Significant Unobservable Inputs (Level 3)
Fair Value Measurements
Adjustment for differences between the comparable sales and income data available (as a percent)	16.00%	11.00%
Residential | Non-recurring | Weighted average | Income approach | Significant Unobservable Inputs (Level 3)
Fair Value Measurements
Capitalization rate (as a percent)	8.00%	9.00%
Commercial | Non-recurring | Significant Unobservable Inputs (Level 3)
Fair Value Measurements
Other real estate owned	$ 347
Commercial | Non-recurring | Income approach | Significant Unobservable Inputs (Level 3)
Fair Value Measurements
Other real estate owned	$ 347
Commercial | Non-recurring | Minimum | Income approach | Significant Unobservable Inputs (Level 3)
Fair Value Measurements
Capitalization rate (as a percent)	10.00%
Commercial | Non-recurring | Maximum | Income approach | Significant Unobservable Inputs (Level 3)
Fair Value Measurements
Capitalization rate (as a percent)	10.00%
Commercial | Non-recurring | Weighted average | Income approach | Significant Unobservable Inputs (Level 3)
Fair Value Measurements
Capitalization rate (as a percent)	10.00%

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SECURITIES

6 Months Ended

Jun. 30, 2015

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
June 30, 2015
U.S. government agencies	$	55,817	$	27	$	(766	)	$	55,078
States and political subdivisions	87,055		2,105		(965		)	88,195
Mortgage-backed - residential	94,988		176		(1,256		)	93,908
Equity securities	270		25		—			295
Total	$	238,130	$	2,333	$	(2,987	)	$	237,476
December 31, 2014
U.S. government agencies	$	61,721	$	1	$	(1,136	)	$	60,586
States and political subdivisions	86,322		3,234		(275		)	89,281
Mortgage-backed - residential	97,349		267		(918		)	96,698
Equity securities	270		26		—			296
Total	$	245,662	$	3,528	$	(2,329	)	$	246,861

The amortized cost and fair value of securities at June 30, 2015 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 8.

(in thousands)

	Amortized		Fair
	Cost		Value
Due in one year or less	$	40	$	40
Due after one year through five years	17,392		17,299
Due after five years through ten years	75,717		75,588
Due after ten years	49,723		50,346
	142,872		143,273
Mortgage-backed - residential	94,988		93,908
Equity	270		295
Total	$	238,130	$	237,476

Proceeds from sales of securities during the first six months of 2015 and 2014 were $9.1 million and $40.0 million.  Gross gains of $251 thousand and $785 thousand and gross losses of $0 and $352 thousand were realized on those sales, respectively.  The tax provision related to these realized net gains was $85 and $147 thousand, respectively.

Proceeds from sales of securities during the three months ending June 30, 2015 and June 30, 2014 were $9.1 million and $23.5 million.  Gross gains of $243 thousand and $477 thousand and gross losses of $0 and $232 were realized on those sales, respectively.  The tax provision related to these realized gains and losses was $83 thousand for both periods, respectively.

Securities with unrealized losses June 30, 2015 and at December 31, 2014 not recognized in income are as follows:

June 30, 2015

	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	$	8,873	$	(66	)	$	36,854	$	(700	)	$	45,727	$	(766	)
States and municipals	19,875		(414		)	9,126		(551		)	29,001		(965		)
Mortgage-backed - residential	59,964		(772		)	14,788		(484		)	74,752		(1,256		)
Total temporarily impaired	$	88,712	$	(1,252	)	$	60,768	$	(1,735	)	$	149,480	$	(2,987	)

December 31, 2014

	Less than 12 Months					12 Months or More					Total
	Fair		Unrealized			Fair		Unrealized			Fair		Unrealized
Description of Securities	Value		Loss			Value		Loss			Value		Loss
U.S. Government agencies	$	12,528	$	(176	)	$	45,066	$	(960	)	$	57,594	$	(1,136	)
States and municipals	5,011		(27		)	9,738		(248		)	14,749		(275		)
Mortgage-backed - residential	46,685		(572		)	18,747		(346		)	65,432		(918		)
Total temporarily impaired	$	64,224	$	(775	)	$	73,551	$	(1,554	)	$	137,775	$	(2,329	)

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

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

TRADING ASSETS

The trading assets of $5.4 million are primarily comprised of municipal securities which are held for a minimal period of time.

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STOCK COMPENSATION (Details 3) - USD ($)	6 Months Ended
	Jun. 30, 2015	Jun. 30, 2014
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)	17,694
Granted (in shares)	5,385	7,475
Vested (in shares)	(5,175)
Forfeited (in shares)	0	0
Nonvested at the end of the period (in shares)	17,904
Weighted-Average Grant-Date Fair Value
Nonvested shares, balance at the beginning of the period (in dollars)	$ 365,586
Granted (in dollars)	147,280
Vested (in dollars)	(101,767)
Nonvested shares, balance at the end of the period (in dollars)	$ 411,099
Fair Value Per Share
Nonvested shares, balance at the beginning of the period (in dollars per share)	$ 20.66
Granted (in dollars per share)	27.35
Vested (in dollars per share)	19.67
Nonvested shares, balance at the end of the period (in dollars per share)	$ 22.96
Additional disclosures
Total unrecognized compensation cost related to nonvested shares granted	$ 349,393
Period over which cost is expected to be recognized	3 years 1 month 6 days
2009 Stock Award Plan
Stock Based Compensation
Number of shares authorized for issuance	150,000
Shares available for issuance	148,635
Shares
Nonvested at the beginning of the period (in shares)	720
Granted (in shares)	465
Vested (in shares)	(180)
Nonvested at the end of the period (in shares)	1,005
Weighted-Average Grant-Date Fair Value
Nonvested shares, balance at the beginning of the period (in dollars)	$ 16,704
Granted (in dollars)	12,718
Vested (in dollars)	(4,176)
Nonvested shares, balance at the end of the period (in dollars)	$ 25,246
Fair Value Per Share
Nonvested shares, balance at the beginning of the period (in dollars per share)	$ 23.20
Granted (in dollars per share)	27.35
Vested (in dollars per share)	23.20
Nonvested shares, balance at the end of the period (in dollars per share)	$ 25.12
Additional disclosures
Total unrecognized compensation cost related to nonvested shares granted	$ 22,582
2009 Stock Award Plan | Restricted stock
Additional disclosures
Period over which cost is expected to be recognized	2 years 10 months 24 days

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SECURITIES (Details 3) - USD ($) $ in Thousands	Jun. 30, 2015	Dec. 31, 2014
Securities with unrealized losses
Less than 12 Months, Fair Value	$ 88,712	$ 64,224
Less than 12 Months, Unrealized Loss	(1,252)	(775)
12 Months or More, Fair Value	60,768	73,551
12 Months or More, Unrealized Loss	(1,735)	(1,554)
Total, Fair Value	149,480	137,775
Total, Unrealized Loss	(2,987)	(2,329)
Trading Assets
Trading Assets	5,400	5,370
U.S. government agencies
Securities with unrealized losses
Less than 12 Months, Fair Value	8,873	12,528
Less than 12 Months, Unrealized Loss	(66)	(176)
12 Months or More, Fair Value	36,854	45,066
12 Months or More, Unrealized Loss	(700)	(960)
Total, Fair Value	45,727	57,594
Total, Unrealized Loss	(766)	(1,136)
States and political subdivisions
Securities with unrealized losses
Less than 12 Months, Fair Value	19,875	5,011
Less than 12 Months, Unrealized Loss	(414)	(27)
12 Months or More, Fair Value	9,126	9,738
12 Months or More, Unrealized Loss	(551)	(248)
Total, Fair Value	29,001	14,749
Total, Unrealized Loss	(965)	(275)
Trading Assets
Trading Assets	5,400
Mortgage-backed - residential
Securities with unrealized losses
Less than 12 Months, Fair Value	59,964	46,685
Less than 12 Months, Unrealized Loss	(772)	(572)
12 Months or More, Fair Value	14,788	18,747
12 Months or More, Unrealized Loss	(484)	(346)
Total, Fair Value	74,752	65,432
Total, Unrealized Loss	$ (1,256)	$ (918)

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SECURITIES (Details 2) - USD ($) $ in Thousands	3 Months Ended		6 Months Ended
	Jun. 30, 2015	Jun. 30, 2014	Jun. 30, 2015	Jun. 30, 2014	Dec. 31, 2014
Amortized Cost
Due in one year or less	$ 40		$ 40
Due after one year through five years	17,392		17,392
Due after five years through ten years	75,717		75,717
Due after ten years	49,723		49,723
Securities due at a single maturity date	142,872		142,872
Total	238,130		238,130		$ 245,662
Fair Value
Due in one year or less	40		40
Due after one year through five years	17,299		17,299
Due after five years through ten years	75,588		75,588
Due after ten years	50,346		50,346
Securities due at a single maturity date	143,273		143,273
Fair Value	237,476		237,476		246,861
Proceeds from sales of securities	9,100	$ 23,500	9,100	$ 40,000
Gross gains realized on sales of securities	243	477	251	785
Gross losses realized on sales of securities	0	232	0	352
Tax provision related to realized gains	83	$ 83	85	$ 147
Mortgage-backed - residential
Amortized Cost
Mortgage-backed - residential	94,988		94,988
Total	94,988		94,988		97,349
Fair Value
Mortgage-backed - residential	93,908		93,908
Fair Value	93,908		93,908		96,698
Equity
Amortized Cost
Amortized cost of equity securities	270		270
Total	270		270		270
Fair Value
Fair Value Equity Securities	295		295
Fair Value	$ 295		$ 295		$ 296

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OTHER BORROWINGS (Details) - USD ($) $ in Millions	Jul. 20, 2015	Jun. 30, 2015	Dec. 31, 2014
OTHER BORROWINGS
Borrowings	$ 5
Fixed interest rate	5.02%
Revolving promissory note
OTHER BORROWINGS
Maximum borrowing capacity			$ 5
Outstanding balance		$ 0	$ 0

XML

LOANS (Details) - USD ($) $ in Thousands	Jun. 30, 2015	Dec. 31, 2014
Loans
Loans	$ 546,085	$ 538,305
Commercial
Loans
Loans	50,236	47,185
Real estate construction
Loans
Loans	21,320	16,938
1-4 family residential
Loans
Loans	196,215	189,458
Multi-family residential
Loans
Loans	34,121	34,415
Non-farm & non-residential
Loans
Loans	158,041	161,822
Agricultural
Loans
Loans	68,921	71,345
Consumer
Loans
Loans	17,031	16,863
Other
Loans
Loans	$ 200	$ 279

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LOANS (Details 2) - USD ($) $ in Thousands	3 Months Ended		6 Months Ended
	Jun. 30, 2015	Jun. 30, 2014	Jun. 30, 2015	Jun. 30, 2014
Activity in allowance for loan losses
Beginning Balance	$ 5,920	$ 5,616	$ 6,012	$ 5,441
Charge-offs	547	206	1,169	643
Recoveries	227	104	457	616
Provision	350	100	650	200
Ending Balance	5,950	5,614	5,950	5,614
Commercial
Activity in allowance for loan losses
Beginning Balance	340	208	339	230
Charge-offs			25	200
Provision	59	23	85	201
Ending Balance	399	231	399	231
Real estate construction
Activity in allowance for loan losses
Beginning Balance	438	329	446	358
Recoveries		4	2	8
Provision	38	26	28	(7)
Ending Balance	476	359	476	359
1-4 family residential
Activity in allowance for loan losses
Beginning Balance	1,825	2,111	1,829	2,169
Charge-offs	120	25	152	88
Recoveries	2	4	5	16
Provision	100	234	125	227
Ending Balance	1,807	2,324	1,807	2,324
Multi-family residential
Activity in allowance for loan losses
Beginning Balance	499	401	495	427
Charge-offs	94		94
Recoveries	2		2
Provision	35	(74)	39	(100)
Ending Balance	442	327	442	327
Non-farm & non-residential
Activity in allowance for loan losses
Beginning Balance	1,030	930	813	564
Recoveries				367
Provision	44	(196)	261	(197)
Ending Balance	1,074	734	1,074	734
Agricultural
Activity in allowance for loan losses
Beginning Balance	723	553	998	578
Charge-offs			242
Recoveries	11	1	12	25
Provision	(156)	(8)	(190)	(57)
Ending Balance	578	546	578	546
Consumer
Activity in allowance for loan losses
Beginning Balance	497	550	520	548
Charge-offs	82	76	163	153
Recoveries	12	23	27	41
Provision	107	46	150	107
Ending Balance	534	543	534	543
Other
Activity in allowance for loan losses
Beginning Balance	34	11	32	51
Charge-offs	251	105	493	202
Recoveries	200	72	409	159
Provision	72	55	107	25
Ending Balance	55	33	55	33
Unallocated
Activity in allowance for loan losses
Beginning Balance	534	523	540	516
Provision	51	(6)	45	1
Ending Balance	$ 585	$ 517	$ 585	$ 517

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SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

6 Months Ended

Jun. 30, 2015

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, 2014.  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, 2014.

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:  The Bank operates under a state bank charter and provides full banking services, including trust services, to customers located in Bourbon, Clark, Elliott, Fayette, Harrison, Jessamine, Madison, Rowan, Scott, Woodford and adjoining counties in Kentucky.  Management continues to consider opportunities for branch expansion and will also consider acquisition opportunities that help advance its strategic objectives.  As a state bank, the Bank is subject to regulation by the Kentucky Department of Financial Institutions and the Federal Deposit Insurance Corporation (“FDIC”).  The Company, a bank holding company, is regulated by the Federal Reserve. 

On July 9, 2014, a new subsidiary of the Company was incorporated under the name KBI Insurance Company, Inc.  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. 

Our transfer, registrar and dividend agent, Registrar and Transfer Company, was recently acquired by Computershare.  The migration to Computershare occurred October 31, 2014.

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

In January 2014, FASB issued Accounting Standards Update 2014-04, Receivables—Troubled Debt Restructurings by Creditors (Subtopic 310-40): Reclassification of Residential Real Estate Collateralized Consumer Mortgage Loans upon Foreclosure (a consensus of the FASB Emerging Issues Task Force). The ASU clarifies when an insubstance repossession or foreclosure occurs and a creditor is considered to have received physical possession of real estate property collateralizing a consumer mortgage loan. Specifically, the new ASU requires a creditor to reclassify a collateralized consumer mortgage loan to real estate property upon obtaining legal title to the real estate collateral, or the borrower voluntarily conveying all interest in the real estate property to the lender to satisfy the loan through a deed in lieu of foreclosure or similar legal agreement. Additional disclosures are required detailing the amount of foreclosed residential real estate property held by the creditor and the recorded investment in consumer mortgages collateralized by real estate property that are in the process of foreclosure. The new guidance is effective for annual periods, and interim reporting periods within those annual periods, beginning after December 15, 2014. The adoption of this guidance did not have a material impact on the Company’s consolidated financial statements, but will result in additional disclosures.

In May 2014, FASB issued Accounting Standards Update 2014-09, Revenue from Contracts with Customers (Topic 606). The ASU creates a new topic, Topic 606, to provide guidance on revenue recognition for entities that enter into contracts with customers to transfer goods or services or enter into contracts for the transfer of nonfinancial assets. The core principle of the guidance is that an entity should recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. Additional disclosures are required to provide quantitative and qualitative information regarding the nature, amount, timing, and uncertainty of revenue and cash flows arising from contracts with customers. The new guidance is effective for annual reporting periods, and interim reporting periods within those annual periods, beginning after December 15, 2016. Early adoption is not permitted. Management is currently evaluating the impact of the adoption of this guidance on the Company’s financial statements.  However, in April 2015, the FASB voted to defer the effective date of ASU 2014-09 by one year making the amendments effective for public entities for annual reporting periods beginning after December 15, 2017, including interim periods within those reporting periods.  Companies have the option to apply ASU 2014-09 as of the original effective date.

In June 2014, FASB issued Accounting Standards Update 2014-11, Transfers and Servicing (Topic 860): Repurchase-to-Maturity Transactions, Repurchase Financings, and Disclosures.  The amendments in this update require two accounting changes.  First, the amendments in this update change the accounting for repurchase-to-maturity transactions to secured borrowing accounting.

Second, for repurchase financing arrangements, the amendments require separate accounting for a transfer of a financial asset executed contemporaneously with a repurchase agreement with the same counter-party, which will result in secured borrowing accounting for the repurchase agreement.  This update also requires certain disclosures for these types of transactions.  This ASU became effective for the Company on January 1, 2015.  The adoption of ASU 2014-11 did not have a material impact on the Company’s financial statements.

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LOANS (Details 3) - USD ($) $ in Thousands	Jun. 30, 2015	Mar. 31, 2015	Dec. 31, 2014	Jun. 30, 2014	Mar. 31, 2014	Dec. 31, 2013
Loans
Accrued interest receivable	$ 2,400		$ 2,000
Allowance for Loan Losses:
Individually Evaluated for Impairment	698		998
Collectively Evaluated for Impairment	5,252		5,014
Total	5,950	$ 5,920	6,012	$ 5,614	$ 5,616	$ 5,441
Loans:
Individually Evaluated for Impairment	9,166		13,799
Collectively Evaluated for Impairment	536,919		524,506
Total	546,085		538,305
Commercial
Allowance for Loan Losses:
Collectively Evaluated for Impairment	399		339
Total	399	340	339	231	208	230
Loans:
Collectively Evaluated for Impairment	50,236		47,185
Total	50,236		47,185
Real estate construction
Allowance for Loan Losses:
Collectively Evaluated for Impairment	476		446
Total	476	438	446	359	329	358
Loans:
Collectively Evaluated for Impairment	21,320		16,938
Total	21,320		16,938
1-4 family residential
Allowance for Loan Losses:
Individually Evaluated for Impairment	170		56
Collectively Evaluated for Impairment	1,637		1,773
Total	1,807	1,825	1,829	2,324	2,111	2,169
Loans:
Individually Evaluated for Impairment	1,979		2,098
Collectively Evaluated for Impairment	194,236		187,360
Total	196,215		189,458
Multi-family residential
Allowance for Loan Losses:
Individually Evaluated for Impairment			94
Collectively Evaluated for Impairment	442		401
Total	442	499	495	327	401	427
Loans:
Individually Evaluated for Impairment			264
Collectively Evaluated for Impairment	34,121		34,151
Total	34,121		34,415
Non-farm & non-residential
Allowance for Loan Losses:
Individually Evaluated for Impairment	259		136
Collectively Evaluated for Impairment	815		677
Total	1,074	1,030	813	734	930	564
Loans:
Individually Evaluated for Impairment	2,922		2,958
Collectively Evaluated for Impairment	155,119		158,864
Total	158,041		161,822
Agricultural
Allowance for Loan Losses:
Individually Evaluated for Impairment	269		712
Collectively Evaluated for Impairment	309		286
Total	578	723	998	546	553	578
Loans:
Individually Evaluated for Impairment	4,265		8,479
Collectively Evaluated for Impairment	64,656		62,866
Total	68,921		71,345
Consumer
Allowance for Loan Losses:
Collectively Evaluated for Impairment	534		520
Total	534	497	520	543	550	548
Loans:
Collectively Evaluated for Impairment	17,031		16,863
Total	17,031		16,863
Other
Allowance for Loan Losses:
Collectively Evaluated for Impairment	55		32
Total	55	34	32	33	11	51
Loans:
Collectively Evaluated for Impairment	200		279
Total	200		279
Unallocated
Allowance for Loan Losses:
Collectively Evaluated for Impairment	585		540
Total	$ 585	$ 534	$ 540	$ 517	$ 523	$ 516

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EARNINGS PER SHARE (Details 2) - shares	6 Months Ended
	Jun. 30, 2015	Jun. 30, 2014
Stock options
Antidilutive securities
Antidilutive shares excluded from computation of diluted earnings per share	2,400	12,725

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CONSOLIDATED BALANCE SHEETS(unaudited) - USD ($) $ in Thousands	Jun. 30, 2015	Dec. 31, 2014
Assets
Cash and due from banks	$ 16,143	$ 16,771
Federal funds sold	205	398
Cash and cash equivalents	16,348	17,169
Interest bearing time deposits	1,280	1,280
Securities available for sale	237,476	246,861
Trading Assets	5,400	5,370
Mortgage loans held for sale	1,719	776
Loans	546,085	538,305
Allowance for loan losses	(5,950)	(6,012)
Net loans	540,135	532,293
Federal Home Loan Bank stock	5,981	5,981
Real estate owned, net	3,595	4,603
Bank premises and equipment, net	16,270	16,479
Interest receivable	3,661	3,299
Mortgage servicing rights	1,261	1,209
Goodwill	13,117	13,117
Other intangible assets	116	177
Other assets	6,595	6,595
Total assets	852,954	855,209
Deposits
Non-interest bearing	179,909	176,743
Time deposits, $250,000 and over	55,229	52,913
Other interest bearing	408,878	425,213
Total deposits	644,016	654,869
Repurchase agreements and other borrowings	13,690	12,457
Federal funds purchased	2,456
Short-term Federal Home Loan Bank advances	15,000	10,000
Long-term Federal Home Loan Bank advances	85,417	83,785
Subordinated debentures	7,217	7,217
Interest payable	658	642
Other liabilities	5,503	8,297
Total liabilities	$ 773,957	$ 777,267
Stockholders' equity
Preferred stock, 300,000 shares authorized and unissued
Common stock, no par value; 10,000,000 shares authorized; 2,725,631 and 2,720,098 shares issued and outstanding on June 30, 2015 and December 31, 2014	$ 12,728	$ 12,662
Retained earnings	66,701	64,489
Accumulated other comprehensive income (loss)	(432)	791
Total stockholders' equity	78,997	77,942
Total liabilities and stockholders' equity	$ 852,954	$ 855,209

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FAIR VALUE MEASUREMENTS (Details) - USD ($) $ in Thousands	6 Months Ended
	Jun. 30, 2015	Jun. 30, 2014	Dec. 31, 2014
Fair value on instruments on recurring basis
Securities available for sale	$ 237,476		$ 246,861
Transfers from Level 1 to Level 2	0		0
Transfers from Level 2 to Level 1	0		0
Impaired Loans
Fair value on instruments on recurring basis
Adjustments for differences between the comparable sales and income data available	14	$ 387
Other Real Estate Owned
Fair value on instruments on recurring basis
Adjustments for differences between the comparable sales and income data available	372	$ 25
Carrying Value
Fair value on instruments on recurring basis
Securities available for sale	237,476		246,861
Quoted Prices In Active Markets for Identical Assets (Level 1)
Fair value on instruments on recurring basis
Securities available for sale	295		296
Significant Other Observable Inputs (Level 2)
Fair value on instruments on recurring basis
Securities available for sale	237,181		246,565
Recurring | Fair Value
Fair value on instruments on recurring basis
Securities available for sale	242,876		252,231
Recurring | Quoted Prices In Active Markets for Identical Assets (Level 1)
Fair value on instruments on recurring basis
Securities available for sale	5,695		5,666
Recurring | Significant Other Observable Inputs (Level 2)
Fair value on instruments on recurring basis
Securities available for sale	237,181		246,565
U.S. government agencies
Fair value on instruments on recurring basis
Securities available for sale	55,078		60,586
U.S. government agencies | Recurring | Fair Value
Fair value on instruments on recurring basis
Securities available for sale	55,078		60,586
U.S. government agencies | Recurring | Significant Other Observable Inputs (Level 2)
Fair value on instruments on recurring basis
Securities available for sale	55,078		60,586
States and political subdivisions
Fair value on instruments on recurring basis
Securities available for sale	88,195		89,281
States and political subdivisions | Recurring | Fair Value
Fair value on instruments on recurring basis
Securities available for sale	88,195		89,281
States and political subdivisions | Recurring | Significant Other Observable Inputs (Level 2)
Fair value on instruments on recurring basis
Securities available for sale	88,195		89,281
Mortgage-backed - residential
Fair value on instruments on recurring basis
Securities available for sale	93,908		96,698
Mortgage-backed - residential | Recurring | Fair Value
Fair value on instruments on recurring basis
Securities available for sale	93,908		96,698
Mortgage-backed - residential | Recurring | Significant Other Observable Inputs (Level 2)
Fair value on instruments on recurring basis
Securities available for sale	93,908		96,698
Equity
Fair value on instruments on recurring basis
Securities available for sale	295		296
Equity | Recurring | Fair Value
Fair value on instruments on recurring basis
Securities available for sale	295		296
Equity | Recurring | Quoted Prices In Active Markets for Identical Assets (Level 1)
Fair value on instruments on recurring basis
Securities available for sale	295		296
Trading Assets | Recurring | Fair Value
Fair value on instruments on recurring basis
Securities available for sale	5,400		5,370
Trading Assets | Recurring | Quoted Prices In Active Markets for Identical Assets (Level 1)
Fair value on instruments on recurring basis
Securities available for sale	$ 5,400		$ 5,370

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CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY (unaudited) (Parenthetical) - $ / shares	3 Months Ended		6 Months Ended
	Jun. 30, 2015	Jun. 30, 2014	Jun. 30, 2015	Jun. 30, 2014
CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY (unaudited)
Dividends per share (in dollars per share)	$ 0.26	$ 0.25	$ 0.52	$ 0.50

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LOANS (Details 6) - USD ($) $ in Thousands	Jun. 30, 2015	Dec. 31, 2014
Aging of recorded investment in past due and non-accrual loans
30-59 Days Past Due	$ 2,021	$ 1,827
60-89 Days Past Due	406	399
Greater than 90 Days Past Due	267	24
Non-accrual	1,367	6,577
Total Past Due and Non-accrual	4,061	8,827
Loans Not Past Due	542,024	529,478
Commercial
Aging of recorded investment in past due and non-accrual loans
30-59 Days Past Due	365	92
Non-accrual		25
Total Past Due and Non-accrual	365	117
Loans Not Past Due	49,871	47,068
Real estate construction
Aging of recorded investment in past due and non-accrual loans
Non-accrual	138	142
Total Past Due and Non-accrual	138	142
Loans Not Past Due	21,182	16,796
1-4 family residential
Aging of recorded investment in past due and non-accrual loans
30-59 Days Past Due	1,570	1,531
60-89 Days Past Due	381	232
Greater than 90 Days Past Due	99	23
Non-accrual	834	1,390
Total Past Due and Non-accrual	2,884	3,176
Loans Not Past Due	193,331	186,282
Multi-family residential
Aging of recorded investment in past due and non-accrual loans
60-89 Days Past Due		131
Greater than 90 Days Past Due	131
Non-accrual		264
Total Past Due and Non-accrual	131	395
Loans Not Past Due	33,990	34,020
Non-farm & non-residential
Aging of recorded investment in past due and non-accrual loans
30-59 Days Past Due		67
Non-accrual	380	380
Total Past Due and Non-accrual	380	447
Loans Not Past Due	157,661	161,375
Agricultural
Aging of recorded investment in past due and non-accrual loans
30-59 Days Past Due	17	7
60-89 Days Past Due	6	11
Greater than 90 Days Past Due	32
Non-accrual		4,371
Total Past Due and Non-accrual	55	4,389
Loans Not Past Due	68,866	66,956
Consumer
Aging of recorded investment in past due and non-accrual loans
30-59 Days Past Due	69	130
60-89 Days Past Due	19	25
Greater than 90 Days Past Due	5	1
Non-accrual	15	5
Total Past Due and Non-accrual	108	161
Loans Not Past Due	16,923	16,702
Other
Aging of recorded investment in past due and non-accrual loans
Loans Not Past Due	$ 200	$ 279

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REAL ESTATE OWNED (Tables)

6 Months Ended

Jun. 30, 2015

REAL ESTATE OWNED

Schedule of activity in real estate owned

	Six Months Ended
	June 30
	2015			2014
	(in thousands)
Beginning of year	$	4,603		$	3,379
Additions	3,334			419
Sales	(4,727		)	(1,540		)
(Additions) subtractions to valuation allowance, net	385			48
End of period	$	3,595		$	2,306

Schedule of activity in the valuation allowance

	Six Months Ended
	June 30
	2015			2014
	(in thousands)
Beginning of year	$	1,583		$	1,524
Write-downs of other real estate, net	227			10
Reduction from sale	(612		)	(58		)
End of period	$	1,198		$	1,476

Schedule of expenses related to foreclosed assets

	Six Months Ended
	June 30
	2015		2014
	(in thousands)
Net loss (gain) on sales reported in other income	$	59	$	(70	)
Write-downs of other real estate, net	227		10
Operating expenses (receipts), net of rental income	55		13
Repossession expenses, net	282		23
For the period	$	341	$	(47	)

	Three Months Ended
	June 30
	2015		2014
	(in thousands)
Net loss (gain) on sales reported in other income	$	20	$	(24	)
Write-downs of other real estate, net	201		10
Operating expenses (receipts), net of rental income	36		15
Repossession expenses, net	237		25
For the period	$	257	$	1

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LOANS (Details 7) $ in Thousands	3 Months Ended		6 Months Ended
	Jun. 30, 2015 USD ($) loan	Jun. 30, 2014 loan	Jun. 30, 2015 USD ($) loan	Jun. 30, 2014 USD ($) loan	Dec. 31, 2014 USD ($)
LOANS
Reserves to customers whose loan terms have been modified in troubled debt restructurings	$ 387		$ 387		$ 369
Trouble debt restructuring defaulted on payment			$ 0	$ 0
Number of loans modified | loan	0	0	0	0

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STOCK COMPENSATION (Tables)

6 Months Ended

Jun. 30, 2015

Stock Based Compensation

Summary of activity for the Stock Option Plans

					Weighted
			Weighted		Average
			Average		Remaining	Aggregate
			Exercise		Contractual	Intrinsic
	Shares		Price		Term	Value
Outstanding, beginning of year	12,625		$	30.46
Granted	—		—
Forfeited or expired	(10,225	)	30.48
Exercised	—		—
Outstanding, end of period	2,400		$	30.38	18.5 months	$	—
Vested and expected to vest	2,400		$	30.38	18.5 months	$	—
Exercisable, end of period	2,400		$	30.38	18.5 months	$	—

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, 2015	17,694		$	365,586		$	20.66
Granted	5,385		147,280			27.35
Vested	(5,175	)	(101,767		)	19.67
Forfeited	—		—			—
Nonvested at June 30, 2015	17,904		$	411,099		$	22.96

2009 Stock Award Plan

Stock Based Compensation

Summary of changes in nonvested shares of stock award plan

			Weighted-Average			Fair
			Grant-Date			Value
Nonvested Shares	Shares		Fair Value			Per Share
Nonvested at January 1, 2015	720		$	16,704		$	23.20
Granted	465		12,718			27.35
Vested	(180	)	(4,176		)	23.20
Forfeited	—		—			—
Nonvested at June 30, 2015	1,005		$	25,246		$	25.12

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CONSOLIDATED STATEMENTS OF CASH FLOWS (unaudited) - USD ($) $ in Thousands	6 Months Ended
	Jun. 30, 2015	Jun. 30, 2014
Cash Flows From Operating Activities
Net Income	$ 3,637	$ 3,675
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization	843	904
Securities amortization (accretion), net	494	303
Stock based compensation expense	66	55
Provision for loan losses	650	200
Securities available for sale gains, net	(251)	(433)
Net change in trading assets	(30)	(5,242)
Originations of loans held for sale	(24,562)	(13,757)
Proceeds from sale of loans	24,387	13,883
Losses (gain) on other real estate	59	(70)
Gain on sale of mortgage loans	(768)	(398)
Write-downs of other real estate, net	227	10
Changes in:
Interest receivable	(362)	364
Other assets	(469)	1,369
Interest payable	16	(57)
Other liabilities	(2,165)	(1,707)
Net cash from operating activities	1,772	(901)
Cash Flows From Investing Activities
Purchases of securities available for sale	(20,074)	(34,977)
Proceeds from sales of securities	9,051	40,030
Proceeds from principal payments, sales, maturities and calls of securities	18,313	8,853
Net change in loans	(11,543)	(27,925)
Proceeds from redemption of Federal Home Loan Bank stock		750
Purchases of bank premises and equipment	(440)	(705)
Proceeds from the sale of other real estate	4,057	1,551
Net cash from investing activities	(636)	(12,423)
Cash Flows From Financing Activities:
Net change in deposits	(10,853)	(19,991)
Net change in repurchase agreements and other borrowings	3,689	3,079
short-term advances from Federal Home Loan Bank	15,000	105,000
payment on short-term Federal Home Loan Bank advances	(10,000)	(85,000)
Long-term advances from Federal Home Loan Bank	4,682	6,538
Payments on long-term Federal Home Loan Bank advances	(3,050)	(2,971)
Proceeds from issuance of common stock	2
Purchase of common stock	(10)	(91)
Dividends paid	(1,417)	(1,361)
Net cash from financing activities	(1,957)	5,203
Net change in cash and cash equivalents	(821)	(8,121)
Cash and cash equivalents at beginning of period	17,169	23,160
Cash and cash equivalents at end of period	16,348	15,039
Cash paid during the year for:
Interest expense	1,924	1,917
Income taxes		700
Supplemental disclosures of non-cash investing activities
Real estate acquired through foreclosure	$ 3,334	$ 419

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CONSOLIDATED BALANCE SHEETS(unaudited) (Parenthetical) - $ / shares	Jun. 30, 2015	Dec. 31, 2014
CONSOLIDATED BALANCE SHEETS(unaudited)
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	2,725,631	2,720,098
Common stock, shares outstanding	2,725,631	2,720,098

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SUBSEQUENT EVENT

6 Months Ended

Jun. 30, 2015

Subsequent Events [Abstract]

SUBSEQUENT EVENT

10.  SUBSEQUENT EVENT

Effective with the close of business on July 24, 2015, Kentucky Bancshares completed its purchase of Madison Financial Corporation and its wholly-owned subsidiary Madison Bank, both of which were headquartered in Richmond, Kentucky.  Under terms of an agreement and plan of share exchange dated January 21, 2015, the Company paid 1.1927 shares of Kentucky Bancshares common stock for each issued and outstanding share of Madison Financial Corporation stock.  The transaction was valued at approximately $7.2 million.  Following the acquisition, Madison Bank and its three branch locations, were merged into Kentucky Bank.  At June 30, 2015, Madison Bank had total assets of $119 million, total loans of $81 million and total deposits of $95 million.  Management has not yet completed all of the analyses needed to estimate the fair value of the assets and liabilities acquired, both tangible and intangible.

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Document and Entity Information - shares	6 Months Ended
	Jun. 30, 2015	Jul. 31, 2015
Document and Entity Information
Entity Registrant Name	KENTUCKY BANCSHARES INC /KY/
Entity Central Index Key	0001000232
Document Type	10-Q
Document Period End Date	Jun. 30, 2015
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		2,988,205
Document Fiscal Year Focus	2015
Document Fiscal Period Focus	Q2

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REPURCHASE AGREEMENTS

6 Months Ended

Jun. 30, 2015

REPURCHASE AGREEMENTS AND OTHER BORROWINGS

REPURCHASE AGREEMENTS

11.  REPURCHASE AGREEMENTS

Repurchase agreements totaled $13.7 million as of June 30, 2015. Of this, $7.7 million were overnight obligations and $6.0 million had terms extending through May 2019 and an average weighted life of 2.5 years. The Company pledged agency-backed securities with a carrying amount of $16.6 million to secure repurchase agreements as of June 30, 2015.

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CONSOLIDATED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME (LOSS) (unaudited) - USD ($) $ in Thousands	3 Months Ended		6 Months Ended
	Jun. 30, 2015	Jun. 30, 2014	Jun. 30, 2015	Jun. 30, 2014
INTEREST INCOME:
Loans, including fees	$ 6,346	$ 5,896	$ 12,555	$ 11,657
Securities
Taxable	692	680	1,425	1,355
Tax exempt	690	718	1,366	1,451
Trading Assets	39	43	83	80
Other	68	69	137	145
Total interest income	7,835	7,406	15,566	14,688
INTEREST EXPENSE:
Deposits	493	535	979	1,074
Repurchase agreements and other borrowings	24	25	47	48
Federal Home Loan Bank advances	397	309	799	623
Subordinated debentures	58	58	115	115
Total interest expense	972	927	1,940	1,860
Net interest income	6,863	6,479	13,626	12,828
Provision for loan losses	350	100	650	200
Net interest income after provision	6,513	6,379	12,976	12,628
NON-INTEREST INCOME:
Service charges	1,091	1,062	1,995	2,073
Loan service fee income, net	55	5	108	34
Trust department income	259	239	536	461
Gain on sale of available for sale securities, net	243	245	251	433
Gain (loss) on trading assets	(48)	91	(53)	162
Gain on sale of mortgage loans	441	241	768	398
Brokerage income	136	210	242	290
Debit card interchange income	623	530	1,164	1,009
Other	822	45	881	77
Total other income	3,622	2,668	5,892	4,937
NON-INTEREST EXPENSE:
Salaries and employee benefits	4,150	3,661	7,944	7,263
Occupancy expenses	854	830	1,786	1,678
Repossession expenses, net	237	25	282	23
FDIC Insurance	145	140	301	268
Legal and professional fees	293	322	578	458
Data processing	386	331	753	668
Debit card expenses	293	262	549	496
Amortization	30	37	61	74
Advertising and marketing	212	232	425	441
Taxes other than payroll, property and income	229	197	459	422
Telephone	77	87	145	176
Postage	90	85	171	157
Loan fees	104	83	197	160
Other	608	483	1,274	945
Total other expenses	7,708	6,775	14,925	13,229
Income before taxes	2,427	2,272	3,943	4,336
Income taxes	305	368	306	661
Net income	2,122	1,904	3,637	3,675
Other Comprehensive Income (Loss), net of tax:
Change in Unrealized Gains on Securities	(2,160)	1,730	(1,223)	4,981
Comprehensive Income (Loss)	$ (38)	$ 3,634	$ 2,414	$ 8,656
Earnings per share
Basic (in dollars per share)	$ 0.77	$ 0.70	$ 1.33	$ 1.36
Diluted (in dollars per share)	0.77	0.70	1.33	1.36
Dividends per share (in dollars per share)	$ 0.26	$ 0.25	$ 0.52	$ 0.50

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EARNINGS PER SHARE

6 Months Ended

Jun. 30, 2015

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:

	Six Months Ended
	June 30
	2015		2014
	(in thousands)
Basic Earnings Per Share
Net Income	$	3,637	$	3,675
Weighted average common shares outstanding	2,707		2,708
Basic earnings per share	$	1.33	$	1.36
Diluted Earnings Per Share
Net Income	$	3,637	$	3,675
Weighted average common shares outstanding	2,707		2,708
Weighted average common and dilutive potential common shares outstanding	2,707		2,708
Diluted earnings per share	$	1.33	$	1.36

	Three Months Ended
	June 30
	2015		2014
	(in thousands)
Basic Earnings Per Share
Net Income	$	2,122	$	1,904
Weighted average common shares outstanding	2,707		2,708
Basic earnings per share	$	0.77	$	0.70
Diluted Earnings Per Share
Net Income	$	2,122	$	1,904
Weighted average common shares outstanding	2,707		2,708
Weighted average common and dilutive potential common shares outstanding	2,707		2,708
Diluted earnings per share	$	0.77	$	0.70

Stock options for 2,400 shares of common stock for the six and three months ended June 30, 2015 and 12,725 shares of common stock for the six and three months ended June 30, 2014 were excluded from diluted earnings per share because their impact was antidilutive.

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REAL ESTATE OWNED

6 Months Ended

Jun. 30, 2015

REAL ESTATE OWNED

REAL ESTATE OWNED

4.  REAL ESTATE OWNED

Activity in real estate owned, net was as follows:

	Six Months Ended
	June 30
	2015			2014
	(in thousands)
Beginning of year	$	4,603		$	3,379
Additions	3,334			419
Sales	(4,727		)	(1,540		)
(Additions) subtractions to valuation allowance, net	385			48
End of period	$	3,595		$	2,306

Activity in the valuation allowance was as follows:

	Six Months Ended
	June 30
	2015			2014
	(in thousands)
Beginning of year	$	1,583		$	1,524
Write-downs of other real estate, net	227			10
Reduction from sale	(612		)	(58		)
End of period	$	1,198		$	1,476

Expenses related to foreclosed assets include:

	Six Months Ended
	June 30
	2015		2014
	(in thousands)
Net loss (gain) on sales reported in other income	$	59	$	(70	)
Write-downs of other real estate, net	227		10
Operating expenses (receipts), net of rental income	55		13
Repossession expenses, net	282		23
For the period	$	341	$	(47	)

	Three Months Ended
	June 30
	2015		2014
	(in thousands)
Net loss (gain) on sales reported in other income	$	20	$	(24	)
Write-downs of other real estate, net	201		10
Operating expenses (receipts), net of rental income	36		15
Repossession expenses, net	237		25
For the period	$	257	$	1

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EARNINGS PER SHARE (Tables)

6 Months Ended

Jun. 30, 2015

EARNINGS PER SHARE

Schedule of factors used in the earnings per share computation

	Six Months Ended
	June 30
	2015		2014
	(in thousands)
Basic Earnings Per Share
Net Income	$	3,637	$	3,675
Weighted average common shares outstanding	2,707		2,708
Basic earnings per share	$	1.33	$	1.36
Diluted Earnings Per Share
Net Income	$	3,637	$	3,675
Weighted average common shares outstanding	2,707		2,708
Weighted average common and dilutive potential common shares outstanding	2,707		2,708
Diluted earnings per share	$	1.33	$	1.36

	Three Months Ended
	June 30
	2015		2014
	(in thousands)
Basic Earnings Per Share
Net Income	$	2,122	$	1,904
Weighted average common shares outstanding	2,707		2,708
Basic earnings per share	$	0.77	$	0.70
Diluted Earnings Per Share
Net Income	$	2,122	$	1,904
Weighted average common shares outstanding	2,707		2,708
Weighted average common and dilutive potential common shares outstanding	2,707		2,708
Diluted earnings per share	$	0.77	$	0.70

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SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Policies)

6 Months Ended

Jun. 30, 2015

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:  The Bank operates under a state bank charter and provides full banking services, including trust services, to customers located in Bourbon, Clark, Elliott, Fayette, Harrison, Jessamine, Madison, Rowan, Scott, Woodford and adjoining counties in Kentucky.  Management continues to consider opportunities for branch expansion and will also consider acquisition opportunities that help advance its strategic objectives.  As a state bank, the Bank is subject to regulation by the Kentucky Department of Financial Institutions and the Federal Deposit Insurance Corporation (“FDIC”).  The Company, a bank holding company, is regulated by the Federal Reserve. 

On July 9, 2014, a new subsidiary of the Company was incorporated under the name KBI Insurance Company, Inc.  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. 

Our transfer, registrar and dividend agent, Registrar and Transfer Company, was recently acquired by Computershare.  The migration to Computershare occurred October 31, 2014.

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

In January 2014, FASB issued Accounting Standards Update 2014-04, Receivables—Troubled Debt Restructurings by Creditors (Subtopic 310-40): Reclassification of Residential Real Estate Collateralized Consumer Mortgage Loans upon Foreclosure (a consensus of the FASB Emerging Issues Task Force). The ASU clarifies when an insubstance repossession or foreclosure occurs and a creditor is considered to have received physical possession of real estate property collateralizing a consumer mortgage loan. Specifically, the new ASU requires a creditor to reclassify a collateralized consumer mortgage loan to real estate property upon obtaining legal title to the real estate collateral, or the borrower voluntarily conveying all interest in the real estate property to the lender to satisfy the loan through a deed in lieu of foreclosure or similar legal agreement. Additional disclosures are required detailing the amount of foreclosed residential real estate property held by the creditor and the recorded investment in consumer mortgages collateralized by real estate property that are in the process of foreclosure. The new guidance is effective for annual periods, and interim reporting periods within those annual periods, beginning after December 15, 2014. The adoption of this guidance did not have a material impact on the Company’s consolidated financial statements, but will result in additional disclosures.

In May 2014, FASB issued Accounting Standards Update 2014-09, Revenue from Contracts with Customers (Topic 606). The ASU creates a new topic, Topic 606, to provide guidance on revenue recognition for entities that enter into contracts with customers to transfer goods or services or enter into contracts for the transfer of nonfinancial assets. The core principle of the guidance is that an entity should recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. Additional disclosures are required to provide quantitative and qualitative information regarding the nature, amount, timing, and uncertainty of revenue and cash flows arising from contracts with customers. The new guidance is effective for annual reporting periods, and interim reporting periods within those annual periods, beginning after December 15, 2016. Early adoption is not permitted. Management is currently evaluating the impact of the adoption of this guidance on the Company’s financial statements.  However, in April 2015, the FASB voted to defer the effective date of ASU 2014-09 by one year making the amendments effective for public entities for annual reporting periods beginning after December 15, 2017, including interim periods within those reporting periods.  Companies have the option to apply ASU 2014-09 as of the original effective date.

In June 2014, FASB issued Accounting Standards Update 2014-11, Transfers and Servicing (Topic 860): Repurchase-to-Maturity Transactions, Repurchase Financings, and Disclosures.  The amendments in this update require two accounting changes.  First, the amendments in this update change the accounting for repurchase-to-maturity transactions to secured borrowing accounting.

Second, for repurchase financing arrangements, the amendments require separate accounting for a transfer of a financial asset executed contemporaneously with a repurchase agreement with the same counter-party, which will result in secured borrowing accounting for the repurchase agreement.  This update also requires certain disclosures for these types of transactions.  This ASU became effective for the Company on January 1, 2015.  The adoption of ASU 2014-11 did not have a material impact on the Company’s financial statements.

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FAIR VALUE MEASUREMENTS

6 Months Ended

Jun. 30, 2015

FAIR VALUE MEASUREMENTS

FAIR VALUE MEASUREMENTS

8.  FAIR VALUE MEASUREMENTS

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

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

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

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

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

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

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

Impaired Loans:  The fair value of impaired loans with specific allocations of the allowance for loan losses is generally based on recent third party real estate appraisals.  These appraisals may utilize a single valuation approach or a combination of approaches including comparable sales and the income approach. Adjustments are routinely made in the appraisal process by the appraisers to adjust for differences between the comparable sales and income data available for similar loans and collateral underlying such loans.  Such adjustments were $14 thousand for 2015 and $387 for 2014 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 $372 thousand as of June 30, 2015 and $25 thousand as of June 30, 2014 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 June 30, 2015 Using (In thousands):

			Quoted Prices
			In Active
			Markets for		Significant Other		Significant
			Identical		Observable		Unobservable
	Fair		Assets		Inputs		Inputs
Description	Value		(Level 1)		(Level 2)		(Level 3)
U. S. government agencies	$	55,078	$	—	$	55,078	$	—
States and municipals	88,195		—		88,195		—
Mortgage-backed - residential	93,908		—		93,908		—
Equity securities	295		295		—		—
Trading Assets	5,400		5,400		—		—
Total	$	242,876	$	5,695	$	237,181	$	—

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

			Quoted Prices
			In Active
			Markets for		Significant Other		Significant
			Identical		Observable		Unobservable
	Fair		Assets		Inputs		Inputs
Description	Value		(Level 1)		(Level 2)		(Level 3)
U. S. government agencies	$	60,586	$	—	$	60,586	$	—
States and municipals	89,281		—		89,281		—
Mortgage-backed - residential	96,698		—		96,698		—
Equity securities	296		296		—		—
Trading Assets	5,370		5,370		—		—
Total	$	252,231	$	5,666	$	246,565	$	—

There were no transfers between level 1 and level 2 during 2015 or 2014.

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

	Fair Value Measurements at June 30, 2015 Using:
		Quoted Prices
		In Active		Other
		Markets for	Significant	Significant
		Identical	Observable	Unobservable
(In thousands)	Carrying	Assets	Inputs	Inputs
Description	Value	(Level 1)	(Level 2)	(Level 3)
Impaired loans:
Real Estate Mortgage:
Non-farm & non-residential	226	—	—	226
Agricultural	44	—	—	44
Other real estate owned:
Residential	1,651	—	—	1,651
Commercial	347			347
Loan servicing rights	277	—	—	277

	Fair Value Measurements at December 31, 2014 Using:
		Quoted Prices
		In Active		Other
		Markets for	Significant	Significant
		Identical	Observable	Unobservable
(In thousands)	Carrying	Assets	Inputs	Inputs
Description	Value	(Level 1)	(Level 2)	(Level 3)
Impaired loans:
Real Estate Mortgage:
Multi-family residential	169	—	—	169
Non-farm & non-residential	366	—	—	366
Agricultural	3,729	—	—	3,729
Other real estate owned:
Residential	1,670	—	—	1,670
Loan servicing rights	292	—	—	292

Impaired loans, which are measured for impairment using the fair value of the collateral for collateral dependent loans, had a carrying amount of $270 thousand, which includes a valuation allowance of $270 thousand at June 30, 2015.  During the first six months of 2015, no new loans became impaired.  The total allowance for specific impaired loans decreased $301 thousand for the six months ending June 30, 2015 and decreased $101 thousand for the three months ending June 30, 2015.  During the first six months of 2014, five new loans became impaired resulting in an additional provision for loan losses of $536 thousand.  The total allowance for specific impaired loans increased $106 thousand for the six months ending June 30, 2014 and decreased $28 thousand for the three months ending June 30, 2014.

Other real estate owned, which is measured at fair value less costs to sell, had a net carrying amount of $2.0 million, which is made up of the outstanding balance of $3.2 million, net of a valuation allowance of $1.2 million at June 30, 2015.  The Company recorded $227 thousand in write-downs of other real estate owned properties for the six months ending June 30, 2015 and $201 thousand for the three months ending June 30, 2015.  The Company recorded $10 thousand in write-downs of other real estate owned properties for the six months and three months ending June 30, 2014.

Loan servicing rights, which are carried at the lower of cost or fair value, were carried at their fair value of $277 thousand, which is made up of the outstanding balance of $322 thousand, net of a valuation allowance of $45 thousand at June 30, 2015.  The Company recorded a net recovery of prior write-downs of $34 thousand for the six months ending June 30, 2015 and a recovery of prior write-downs totaling $20 thousand for the three months ending June 30, 2015.  For the first six months of 2014, the Company recorded net write-downs of $12 thousand and write-downs totaling $17 thousand for the three months ending June 30, 2014.  At December 31, 2014, loan servicing rights were carried at their fair value of $292 thousand, which is made up of the outstanding balance of $371 thousand, net of a valuation allowance of $79 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 June 30, 2015 and December 31, 2014:

				Range
June 30, 2015	Fair	Valuation	Unobservable	(Weighted
(In thousands)	Value	Technique(s)	Input(s)	Average)
Impaired loans
Non-farm & non-residential	226	sales approach	adjustment for differences between the comparable sales	0%-0% (0%)
Agricultural	44	sales approach	adjustment for differences between the comparable sales	5%-44% (24%)
Other real estate owned:
Residential	1,651	sales comparison	adjustment for differences between the comparable sales	0%-28% (16%)
		income approach	capitalization rate	8%-8%
				(8%)
Commercial	347	income approach	capitalization rate	10%-10%
				(10%)
Loan Servicing Rights	277	discounted cash flow	discount rates	(12%-12%) (12%)

				Range
December 31, 2014	Fair	Valuation	Unobservable	(Weighted
(In thousands)	Value	Technique(s)	Input(s)	Average)
Impaired loans
Real estate mortgage:
Multi-family residential	169	sales comparison	adjustment for differences between the comparable sales	10%-10% (10%)
Non-farm & non-residential	366	sales comparison	adjustment for differences between the comparable sales	0%-0% (0%)
Agricultural	3,729	sales comparison	adjustment for differences between the comparable sales	5%-53% (43%)
Other real estate owned:
Residential	1,670	sales comparison	adjustment for differences between the comparable sales	0%-48% (11%)
		income approach	capitalization rate	8%-10%
				(9%)
Loan Servicing Rights	292	discounted cash flow	discount rates	12%-12% (12%)

Fair Value of Financial Instruments

The carrying amounts and estimated fair values of financial instruments, at June 30, 2015 and December 31, 2014 are as follows:

June 30, 2015:

	Carrying
(in thousands)	Value		Level 1		Level 2		Level 3		Total
Financial assets
Cash and cash equivalents	$	16,348	$	16,348	$	—	$	—	$	16,348
Interest bearing deposits	1,280		1,280		—		—		1,280
Securities	237,476		295		237,181		—		237,476
Trading Assets	5,400		5,400		—				5,400
Mortgage loans held for sale	1,719		—		1,733		—		1,733
Loans, net	540,135		—		—		537,951		537,951
FHLB Stock	5,981		N/A		N/A		N/A		N/A
Interest receivable	3,661		3		1,296		2,362		3,661
Financial liabilities
Deposits	$	644,016	$	461,492	$	183,880	$	—	$	645,372
Securities sold under agreements to repurchase and other borrowings	13,690		—		13,697		—		13,697
Federal Funds Purchased	2,456		2,456		—		—		2,456
FHLB advances	100,417		—		95,450		—		95,450
Subordinated Debentures	7,217		—		—		7,204		7,204
Interest payable	658		—		648		10		658

December 31, 2014:

	Carrying
(in thousands)	Value		Level 1		Level 2		Level 3		Total
Financial assets
Cash and cash equivalents	$	17,169	$	17,169	$	—	$	—	$	17,169
Interest bearing deposits	1,280		1,280						1,280
Securities	246,861		296		246,565		—		246,861
Trading assets	5,370		5,370						5,370
Mortgage loans held for sale	776		—		782		—		782
Loans, net	532,293		—		—		535,213		535,213
FHLB Stock	5,981		N/A		N/A		N/A		N/A
Interest receivable	3,299		—		1,274		2,025		3,299
Financial liabilities
Deposits	$	654,869	$	470,912	$	185,429	$	—	$	656,341
Securities sold under agreements to repurchase and other borrowings	12,457		—		12,620		—		12,620
FHLB advances	93,785		—		88,373		—		88,373
Subordinated Debentures	7,217		—		—		7,209		7,209
Interest Payable	642				633		9		642

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

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

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

Loans - Fair values of loans, excluding loans held for sale, are estimated as follows:  For variable rate loans that reprice frequently and with no significant change in credit risk, fair values are based on carrying values resulting in a Level 3 classification.  Fair values for other loans are estimated using discounted cash flow analyses, using interest rates currently being offered for loans with similar terms to borrowers of similar credit quality resulting in a Level 3 classification.  Impaired loans are valued at the lower of cost or fair value as described previously.  The methods used to estimate the fair value of loans do not necessarily represent an exit price.

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

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

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

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

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

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

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

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

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

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STOCK COMPENSATION

6 Months Ended

Jun. 30, 2015

STOCK COMPENSATION

STOCK 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 six months of 2015 follows:

					Weighted
			Weighted		Average
			Average		Remaining	Aggregate
			Exercise		Contractual	Intrinsic
	Shares		Price		Term	Value
Outstanding, beginning of year	12,625		$	30.46
Granted	—		—
Forfeited or expired	(10,225	)	30.48
Exercised	—		—
Outstanding, end of period	2,400		$	30.38	18.5 months	$	—
Vested and expected to vest	2,400		$	30.38	18.5 months	$	—
Exercisable, end of period	2,400		$	30.38	18.5 months	$	—

As of June 30, 2015, 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 are 50,000.  There were 5,385 shares issued during the first six months of 2015 and 7,475 shares issued during the first six months of 2014.  There were no shares forfeited during the first six months of 2015 or 2014.

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, 2015	17,694		$	365,586		$	20.66
Granted	5,385		147,280			27.35
Vested	(5,175	)	(101,767		)	19.67
Forfeited	—		—			—
Nonvested at June 30, 2015	17,904		$	411,099		$	22.96

As of June 30, 2015, there was $349,393 of total unrecognized compensation cost related to nonvested shares granted under the restricted stock grant plan.  The cost is expected to be recognized over a weighted-average period of 3.1 years.  As of June 30, 2015, no additional shares are available for issue 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 465 shares issued during the first six months of 2015 and none in 2014.  There were no shares forfeited during the first six months of 2015 or 2014.

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, 2015	720		$	16,704		$	23.20
Granted	465		12,718			27.35
Vested	(180	)	(4,176		)	23.20
Forfeited	—		—			—
Nonvested at June 30, 2015	1,005		$	25,246		$	25.12

As of June 30, 2015, there was $22,582 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 2.9 years.  As of June 30, 2015, 148,635 shares are still available for issuance.

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OTHER BORROWINGS

6 Months Ended

Jun. 30, 2015

OTHER BORROWINGS

OTHER BORROWINGS

7.  OTHER BORROWINGS

At December 31, 2014 the Company had a $5 million revolving promissory note with a maturity date of July 26, 2015.  The Company has no outstanding balances related to this promissory note at June 30, 2015 or December 31, 2014. Upon maturity, the Company renewed the revolving promissory note. The new note has similar terms as the original note and matures July 19, 2016.

On July 20, 2015, the Company borrowed $5 million. The term loan has a fixed interest rate of 5.02%, requires quarterly principal and interest payments and matures July 20, 2025.

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CHANGES IN ACCUMULATED OTHER COMPREHENSIVE INCOME BY COMPONENT

6 Months Ended

Jun. 30, 2015

CHANGES IN ACCUMULATED OTHER COMPREHENSIVE INCOME BY COMPONENT

CHANGES IN ACCUMULATED OTHER COMPREHENSIVE INCOME BY COMPONENT

9.  CHANGES IN ACCUMULATED OTHER COMPREHENSIVE INCOME BY COMPONENT

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

	Unrealized
	Gains and Losses on
	Available for Sale
	Securities
	For the Six Months Ending June 30
	2015			2014
Beginning Balance	$	791		$	(5,126	)
Unrealized holding gains (losses) for the period, net of tax	(1,057		)	5,267
Reclassification adjustment for:
Securities gains realized in income	(251		)	(433		)
Income taxes	(85		)	(147		)
Securities gains realized in income, net	(166		)	(286		)
Net current period other comprehensive income	(1,223		)	4,981
Ending balance	$	(432	)	$	(145	)

(1) All amounts are net of tax.

	Unrealized
	Gains and Losses on
	Available for Sale
	Securities
	For the Three Months Ending June 30
	2015			2014
Beginning Balance	$	1,728		$	(1,875	)
Unrealized holding gains (losses) for the period, net of tax	(2,000		)	1,892
Reclassification adjustment for:
Securities gains realized in income, net	(243		)	(245		)
Income taxes	(83		)	(83		)
	(160		)	(162		)
Net current period other comprehensive income	(2,160		)	1,730
Ending balance	$	(432	)	$	(145	)

(2) All amounts are net of tax.

The following is significant amounts reclassified out of each component of accumulated other comprehensive Income (Loss) for the six months ending June 30, 2015 and 2014:

June 30, 2015

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	$	(251	)	Securities gains realized in income, net
	85			Provision for income taxes
	(166		)	Net of tax

June 30, 2014

Details about	Amount			Affected Line Item
Accumulated Other	Reclassified From			in the Statement
Comprehensive	Accumulated Other			Where Net
Income Components	Comprehensive Income			Income is Presented
Unrealized gains and losses on available-for-sale securities	$	(433	)	Securities gains realized in income, net
	147			Provision for income taxes
	(286		)	Net of tax

The following is significant amounts reclassified out of each component of accumulated other comprehensive Income (Loss) for the three months ending June 30, 2015 and 2014:

June 30, 2015

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	$	(243	)	Securities gains realized in income, net
	83			Provision for income taxes
	(160		)	Net of tax

June 30, 2014

Details about	Amount			Affected Line Item
Accumulated Other	Reclassified From			in the Statement
Comprehensive	Accumulated Other			Where Net
Income Components	Comprehensive Income			Income is Presented
Unrealized gains and losses on available-for-sale securities	$	(245	)	Securities gains realized in income, net
	83			Provision for income taxes
	(162		)	Net of tax

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LOANS (Details 5) - USD ($) $ in Thousands	6 Months Ended
	Jun. 30, 2015	Dec. 31, 2014
Loans
Nonaccrual	$ 1,367	$ 6,577
Loans Past Due Over 90 Days Still Accruing	267	24
Accruing Troubled Debt Restructurings	$ 6,106	6,138
Percentage of nonaccrual loans secured by real estate	98.90%
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
Commercial
Loans
Nonaccrual		25
Real estate construction
Loans
Nonaccrual	$ 138	142
1-4 family residential
Loans
Nonaccrual	834	1,390
Loans Past Due Over 90 Days Still Accruing	99	23
Accruing Troubled Debt Restructurings	474	480
Multi-family residential
Loans
Nonaccrual		264
Loans Past Due Over 90 Days Still Accruing	131
Non-farm & non-residential
Loans
Nonaccrual	380	380
Accruing Troubled Debt Restructurings	1,803	1,829
Agricultural
Loans
Nonaccrual		4,371
Loans Past Due Over 90 Days Still Accruing	32
Accruing Troubled Debt Restructurings	3,829	3,829
Consumer
Loans
Nonaccrual	15	5
Loans Past Due Over 90 Days Still Accruing	$ 5	$ 1

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SUBSEQUENT EVENT (Details) - Madison Financial Corporation And Wholly Owned Subsidiary $ in Millions	Jul. 24, 2015 USD ($) item shares	Jun. 30, 2015 USD ($)
Total assets		$ 119.0
Total loans		81.0
Total deposits		$ 95.0
Subsequent Event
Exchange for each issued and outstanding share of Madison common stock by Kentucky Bancshares | shares	1.1927
Transaction value	$ 7.2
Number of branch locations merged | item	3

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LOANS (Tables)

6 Months Ended

Jun. 30, 2015

LOANS

Schedule of loans

(in thousands)

	6/30/15		12/31/14
Commercial	$	50,236	$	47,185
Real estate construction	21,320		16,938
Real estate mortgage:
1-4 family residential	196,215		189,458
Multi-family residential	34,121		34,415
Non-farm & non-residential	158,041		161,822
Agricultural	68,921		71,345
Consumer	17,031		16,863
Other	200		279
Total	$	546,085	$	538,305

Schedule of activity in the allowance for loan losses

	Six Months Ended June 30, 2015
	(in thousands)
	Beginning									Ending
	Balance		Charge-offs		Recoveries		Provision			Balance
Commercial	$	339	$	25	$	—	$	85		$	399
Real estate Construction	446		—		2		28			476
Real estate mortgage:
1-4 family residential	1,829		152		5		125			1,807
Multi-family residential	495		94		2		39			442
Non-farm & non-residential	813		—		—		261			1,074
Agricultural	998		242		12		(190		)	578
Consumer	520		163		27		150			534
Other	32		493		409		107			55
Unallocated	540		—		—		45			585
	$	6,012	$	1,169	$	457	$	650		$	5,950

	Three Months Ended June 30, 2015
	(in thousands)
	Beginning									Ending
	Balance		Charge-offs		Recoveries		Provision			Balance
Commercial	$	340	$	—	$	—	$	59		$	399
Real estate Construction	438		—		—		38			476
Real estate mortgage:
1-4 family residential	1,825		120		2		100			1,807
Multi-family residential	499		94		2		35			442
Non-farm & non-residential	1,030		—		—		44			1,074
Agricultural	723		—		11		(156		)	578
Consumer	497		82		12		107			534
Other	34		251		200		72			55
Unallocated	534		—		—		51			585
	$	5,920	$	547	$	227	$	350		$	5,950

	Six Months Ended June 30, 2014
	(in thousands)
	Beginning									Ending
	Balance		Charge-offs		Recoveries		Provision			Balance
Commercial	$	230	$	200	$	—	$	201		$	231
Real estate Construction	358		—		8		(7		)	359
Real estate mortgage:
1-4 family residential	2,169		88		16		227			2,324
Multi-family residential	427		—		—		(100		)	327
Non-farm & non-residential	564		—		367		(197		)	734
Agricultural	578		—		25		(57		)	546
Consumer	548		153		41		107			543
Other	51		202		159		25			33
Unallocated	516		—		—		1			517
	$	5,441	$	643	$	616	$	200		$	5,614

	Three Months Ended June 30, 2014
	(in thousands)
	Beginning									Ending
	Balance		Charge-offs		Recoveries		Provision			Balance
Commercial	$	208	$	—	$	—	$	23		$	231
Real estate Construction	329		—		4		26			359
Real estate mortgage:
1-4 family residential	2,111		25		4		234			2,324
Multi-family residential	401		—		—		(74		)	327
Non-farm & non-residential	930		—		—		(196		)	734
Agricultural	553		—		1		(8		)	546
Consumer	550		76		23		46			543
Other	11		105		72		55			33
Unallocated	523		—		—		(6		)	517
	$	5,616	$	206	$	104	$	100		$	5,614

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

As of June 30, 2015

(in thousands)

	Individually		Collectively
	Evaluated for		Evaluated for
	Impairment		Impairment		Total
Allowance for Loan Losses:
Commercial	$	—	$	399	$	399
Real estate construction	—		476		476
Real estate mortgage
1-4 family residential	170		1,637		1,807
Multi-family residential	—		442		442
Non-farm & non-residential	259		815		1,074
Agricultural	269		309		578
Consumer	—		534		534
Other	—		55		55
Unallocated	—		585		585
	$	698	$	5,252	$	5,950
Loans:
Commercial	$	—	$	50,236	$	50,236
Real estate construction	—		21,320		21,320
Real estate mortgage:
1-4 family residential	1,979		194,236		196,215
Multi-family residential	—		34,121		34,121
Non-farm & non-residential	2,922		155,119		158,041
Agricultural	4,265		64,656		68,921
Consumer	—		17,031		17,031
Other	—		200		200
	$	9,166	$	536,919	$	546,085

As of December 31, 2014

(in thousands)

	Individually		Collectively
	Evaluated for		Evaluated for
	Impairment		Impairment		Total
Allowance for Loan Losses:
Commercial	$	—	$	339	$	339
Real estate construction	—		446		446
Real estate mortgage:
1-4 family residential	56		1,773		1,829
Multi-family residential	94		401		495
Non-farm & non-residential	136		677		813
Agricultural	712		286		998
Consumer	—		520		520
Other	—		32		32
Unallocated	—		540		540
	$	998	$	5,014	$	6,012
Loans:
Commercial	$	—	$	47,185	$	47,185
Real estate construction	—		16,938		16,938
Real estate mortgage:
1-4 family residential	2,098		187,360		189,458
Multi-family residential	264		34,151		34,415
Non-farm & non-residential	2,958		158,864		161,822
Agricultural	8,479		62,866		71,345
Consumer	—		16,863		16,863
Other	—		279		279
	$	13,799	$	524,506	$	538,305

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 six months ended June 30, 2015 (in thousands):

	Unpaid				Allowance for		Average		Interest		Cash Basis
	Principal		Recorded		Loan Losses		Recorded		Income		Interest
	Balance		Investment		Allocated		Investment		Recognized		Recognized
With no related allowance recorded:
Real estate mortgage:
1-4 family residential	1,345		1,345		—		1,524		42		42
Agricultural	205		205		—		362		27		27
With an allowance recorded:
Real estate mortgage:
1-4 family residential	634		634		170		556		10		10
Non-farm & non-residential	2,922		2,922		259		2,940		59		59
Multi-family residential	—		—		—		119		—		—
Agricultural	4,060		4,060		269		5,215		—		—
Consumer	—		—		—		—		—		—
Other	—		—		—		—				—
Total	$	9,166	$	9,166	$	698	$	10,716	$	138	$	138

The following table presents loans individually evaluated for impairment by class of loans for the six months endedJune 30, 2014(in thousands):

			Year to Date		Year to Date
	Average		Interest		Cash Basis
	Recorded		Income		Interest
	Investment		Recognized		Recognized
With no related allowance recorded:
Real estate mortgage:
1-4 family residential	1,002		—		—
Non-farm & non-residential	267				—
Agricultural	2,684		80		80
With an allowance recorded:
Real estate mortgage:
1-4 family residential	1,991		44		44
Multi-family residential	323		5		5
Non-farm & non-residential	3,043		73		73
Agricultural	5,034		19		19
Total	$	14,344	$	221	$	221

The following table presents loans individually evaluated for impairment by class of loans as of and for the year ended December 31, 2014 (in thousands):

	Unpaid				Allowance for		Average		Interest		Cash Basis
	Principal		Recorded		Loan Losses		Recorded		Income		Interest
	Balance		Investment		Allocated		Investment		Recognized		Recognized
With no related allowance recorded:
Real estate mortgage:
1-4 family residential	$	1,618	$	1,618	$	—	$	1,147	$	25	$	25
Non-farm & non-residential	—		—		—		552		—		—
Agricultural	442		442		—		2,696		29		29
With an allowance recorded:
Real estate mortgage
1-4 family residential	480		480		56		990		18		18
Multi-family residential	264		264		94		284		5		5
Non-farm & non-residential	2,958		2,958		136		3,173		115		115
Agricultural	8,037		8,037		712		5,341		116		116
Total	$	13,799	$	13,799	$	998	$	14,183	$	308	$	308

The following tables present loans individually evaluated for impairment by class of loans for the three months ending June 30, 2015 and June 30, 2014(in thousands):

	Three Months Ending June 30, 2015
	Average		Interest		Cash Basis
	Recorded		Income		Interest
	Investment		Recognized		Recognized
With no related allowance recorded:
Real estate mortgage:
1-4 family residential	$	1,476	$	28	$	28
Agricultural	322		17		17
With an allowance recorded:
Real estate mortgage:
1-4 family residential	556		5		5
Multi-family residential	47		—		—
Non-farm & non-residential	2,931		30		30
Agricultural	4,025		—		—
Consumer	—		—		—
Other	—		—		—
Total	$	9,357	$	80	$	80

	Three Months Ending June 30, 2014
	Average		Interest		Cash Basis
	Recorded		Income		Interest
	Investment		Recognized		Recognized
With no related allowance recorded:
Real estate mortgage:
1-4 family residential	$	1,562	$	—	$	—
Agricultural	2,836		77		77
With an allowance recorded:
Real estate mortgage:
1-4 family residential	1,377		38		38
Multi-family residential	310		1		1
Non-farm & non-residential	3,553		48		48
Agricultural	4,755		19		19
Total	$	14,393	$	183	$	183

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

As of June 30, 2015

(in thousands)

			Loans Past Due
			Over 90 Days		Accruing
			Still		Troubled Debt
	Nonaccrual		Accruing		Restructurings
Real estate construction	$	138	$	—	$	—
Real estate mortgage:
1-4 family residential	834		99		474
Multi-family residential	—		131		—
Non-farm & non-residential	380		—		1,803
Agricultural	—		32		3,829
Consumer	15		5		—
Total	$	1,367	$	267	$	6,106

As of December 31, 2014

(in thousands)

			Loans Past Due
			Over 90 Days		Accruing
			Still		Troubled Debt
	Nonaccrual		Accruing		Restructurings
Commercial	$	25	$	—	$	—
Real estate construction	142		—		—
Real estate mortgage:
1-4 family residential	1,390		23		480
Multi-family residential	264		—		—
Non-farm & non-residential	380		—		1,829
Agricultural	4,371		—		3,829
Consumer	5		1		—
Total	$	6,577	$	24	$	6,138

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

As of June 30, 2015

(in thousands)

	30—59		60—89		Loans Past Due				Total
	Days		Days		Over 90 Days				Past Due &		Loans Not
	Past Due		Past Due		Still Accruing		Non-accrual		Non-accrual		Past Due
Commercial	$	365	$	—	$	—	$	—	$	365	$	49,871
Real estate construction	—		—		—		138		138		21,182
Real estate mortgage:
1-4 family residential	1,570		381		99		834		2,884		193,331
Multi-family residential	—		—		131		—		131		33,990
Non-farm & non-residential	—		—		—		380		380		157,661
Agricultural	17		6		32		—		55		68,866
Consumer	69		19		5		15		108		16,923
Other	—		—		—		—		—		200
Total	$	2,021	$	406	$	267	$	1,367	$	4,061	$	542,024

As of December 31, 2014

(in thousands)

	30—59		60—89		Greater than				Total
	Days		Days		90 Days				Past Due &		Loans Not
	Past Due		Past Due		Past Due		Non-accrual		Non-accrual		Past Due
Commercial	$	92	$	—	$	—	$	25	$	117	$	47,068
Real estate construction	—		—		—		142		142		16,796
Real estate mortgage:
1-4 family residential	1,531		232		23		1,390		3,176		186,282
Multi-family residential	—		131		—		264		395		34,020
Non-farm & non-residential	67		—		—		380		447		161,375
Agricultural	7		11		—		4,371		4,389		66,956
Consumer	130		25		1		5		161		16,702
Other	—		—		—		—		—		279
Total	$	1,827	$	399	$	24	$	6,577	$	8,827	$	529,478

Schedule of risk category of loans by class of loans

As of June 30, 2015

(in thousands)

			Special
	Pass		Mention		Substandard		Doubtful
Commercial	$	48,623	$	1,396	$	217	$	—
Real estate construction	19,843		1,242		235		—
Real estate mortgage:
1-4 family residential	183,844		6,194		6,121		56
Multi-family residential	33,966		—		155		—
Non-farm & non-residential	151,237		6,074		732		—
Agricultural	60,532		7,605		784		—
Total	$	498,045	$	22,511	$	8,244	$	56

As of December 31, 2014

(in thousands)

			Special
	Pass		Mention		Substandard		Doubtful
Commercial	$	45,602	$	1,307	$	275	$	—
Real estate construction	15,529		1,267		142		—
Real estate mortgage:
1-4 family residential	176,791		5,439		7,068		160
Multi-family residential	33,990		—		425		—
Non-farm & non-residential	154,857		5,178		1,787		—
Agricultural	58,110		7,653		5,581		—
Total	$	484,879	$	20,844	$	15,278	$	160

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CHANGES IN ACCUMULATED OTHER COMPREHENSIVE INCOME BY COMPONENT (Tables)

6 Months Ended

Jun. 30, 2015

CHANGES IN ACCUMULATED OTHER COMPREHENSIVE INCOME BY COMPONENT

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

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

	Unrealized
	Gains and Losses on
	Available for Sale
	Securities
	For the Six Months Ending June 30
	2015			2014
Beginning Balance	$	791		$	(5,126	)
Unrealized holding gains (losses) for the period, net of tax	(1,057		)	5,267
Reclassification adjustment for:
Securities gains realized in income	(251		)	(433		)
Income taxes	(85		)	(147		)
Securities gains realized in income, net	(166		)	(286		)
Net current period other comprehensive income	(1,223		)	4,981
Ending balance	$	(432	)	$	(145	)

(1) All amounts are net of tax.

	Unrealized
	Gains and Losses on
	Available for Sale
	Securities
	For the Three Months Ending June 30
	2015			2014
Beginning Balance	$	1,728		$	(1,875	)
Unrealized holding gains (losses) for the period, net of tax	(2,000		)	1,892
Reclassification adjustment for:
Securities gains realized in income, net	(243		)	(245		)
Income taxes	(83		)	(83		)
	(160		)	(162		)
Net current period other comprehensive income	(2,160		)	1,730
Ending balance	$	(432	)	$	(145	)

(2) All amounts are net of tax.

Significant amounts reclassified out of each component of AOCI

The following is significant amounts reclassified out of each component of accumulated other comprehensive Income (Loss) for the six months ending June 30, 2015 and 2014:

June 30, 2015

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	$	(251	)	Securities gains realized in income, net
	85			Provision for income taxes
	(166		)	Net of tax

June 30, 2014

Details about	Amount			Affected Line Item
Accumulated Other	Reclassified From			in the Statement
Comprehensive	Accumulated Other			Where Net
Income Components	Comprehensive Income			Income is Presented
Unrealized gains and losses on available-for-sale securities	$	(433	)	Securities gains realized in income, net
	147			Provision for income taxes
	(286		)	Net of tax

The following is significant amounts reclassified out of each component of accumulated other comprehensive Income (Loss) for the three months ending June 30, 2015 and 2014:

June 30, 2015

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	$	(243	)	Securities gains realized in income, net
	83			Provision for income taxes
	(160		)	Net of tax

June 30, 2014

Details about	Amount			Affected Line Item
Accumulated Other	Reclassified From			in the Statement
Comprehensive	Accumulated Other			Where Net
Income Components	Comprehensive Income			Income is Presented
Unrealized gains and losses on available-for-sale securities	$	(245	)	Securities gains realized in income, net
	83			Provision for income taxes
	(162		)	Net of tax

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CHANGES IN ACCUMULATED OTHER COMPREHENSIVE INCOME BY COMPONENT (Details) - USD ($) $ in Thousands	3 Months Ended		6 Months Ended
	Jun. 30, 2015	Jun. 30, 2014	Jun. 30, 2015	Jun. 30, 2014
Changes in accumulated other comprehensive income (loss) by component
Beginning Balance	$ 1,728	$ (1,875)	$ 791	$ (5,126)
Unrealized holding gains (losses) for the period, net of tax	(2,000)	1,892	(1,057)	5,267
Reclassification adjustment for:
Reclassification of realized amount	(243)	(245)	(251)	(433)
Income taxes	(83)	(83)	(85)	(147)
Securities gains realized in income, net	(160)	(162)	(166)	(286)
Net current period other comprehensive income	(2,160)	1,730	(1,223)	4,981
Ending Balance	$ (432)	$ (145)	$ (432)	$ (145)

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STOCK COMPENSATION (Details) - Jun. 30, 2015 - Stock options - shares	Total
Stock Option Plans
Stock Based Compensation
Life of awards	10 years
1999 Plan
Stock Based Compensation
Vesting period	5 years
Number of shares authorized for issuance	100,000
1993 Non-Employee Directors Stock Ownership Incentive Plan
Stock Based Compensation
Number of shares authorized for issuance	20,000

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CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY (unaudited) - 6 months ended Jun. 30, 2015 - USD ($) $ in Thousands	Common Stock Including Additional Paid in Capital	Retained Earnings	Accumulated Other Comprehensive Income/(Loss)	Total
Balances at Dec. 31, 2014	$ 12,662	$ 64,489	$ 791	$ 77,942
Balances (in shares) at Dec. 31, 2014	2,720,098
Increase (Decrease) in Stockholders' Equity
Common stock issued, net of forfeitures	$ 2			2
Common stock issued, net of forfeitures (in shares)	5,872
Stock based compensation expense	$ 66			66
Common stock purchased and retired	$ (2)	(8)		(10)
Common stock purchased and retired (in shares)	(339)
Net change in unrealized gain (loss) on securities available for sale, net of tax and reclassifications			(1,223)	(1,223)
Net income		3,637		3,637
Dividends declared - $0.52 per share		(1,417)		(1,417)
Balances at Jun. 30, 2015	$ 12,728	$ 66,701	$ (432)	$ 78,997
Balances (in shares) at Jun. 30, 2015	2,725,631

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LOANS

6 Months Ended

Jun. 30, 2015

LOANS

LOANS

3. LOANS

Loans at period-end are as follows:

(in thousands)

	6/30/15		12/31/14
Commercial	$	50,236	$	47,185
Real estate construction	21,320		16,938
Real estate mortgage:
1-4 family residential	196,215		189,458
Multi-family residential	34,121		34,415
Non-farm & non-residential	158,041		161,822
Agricultural	68,921		71,345
Consumer	17,031		16,863
Other	200		279
Total	$	546,085	$	538,305

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

	Six Months Ended June 30, 2015
	(in thousands)
	Beginning									Ending
	Balance		Charge-offs		Recoveries		Provision			Balance
Commercial	$	339	$	25	$	—	$	85		$	399
Real estate Construction	446		—		2		28			476
Real estate mortgage:
1-4 family residential	1,829		152		5		125			1,807
Multi-family residential	495		94		2		39			442
Non-farm & non-residential	813		—		—		261			1,074
Agricultural	998		242		12		(190		)	578
Consumer	520		163		27		150			534
Other	32		493		409		107			55
Unallocated	540		—		—		45			585
	$	6,012	$	1,169	$	457	$	650		$	5,950

	Three Months Ended June 30, 2015
	(in thousands)
	Beginning									Ending
	Balance		Charge-offs		Recoveries		Provision			Balance
Commercial	$	340	$	—	$	—	$	59		$	399
Real estate Construction	438		—		—		38			476
Real estate mortgage:
1-4 family residential	1,825		120		2		100			1,807
Multi-family residential	499		94		2		35			442
Non-farm & non-residential	1,030		—		—		44			1,074
Agricultural	723		—		11		(156		)	578
Consumer	497		82		12		107			534
Other	34		251		200		72			55
Unallocated	534		—		—		51			585
	$	5,920	$	547	$	227	$	350		$	5,950

	Six Months Ended June 30, 2014
	(in thousands)
	Beginning									Ending
	Balance		Charge-offs		Recoveries		Provision			Balance
Commercial	$	230	$	200	$	—	$	201		$	231
Real estate Construction	358		—		8		(7		)	359
Real estate mortgage:
1-4 family residential	2,169		88		16		227			2,324
Multi-family residential	427		—		—		(100		)	327
Non-farm & non-residential	564		—		367		(197		)	734
Agricultural	578		—		25		(57		)	546
Consumer	548		153		41		107			543
Other	51		202		159		25			33
Unallocated	516		—		—		1			517
	$	5,441	$	643	$	616	$	200		$	5,614

	Three Months Ended June 30, 2014
	(in thousands)
	Beginning									Ending
	Balance		Charge-offs		Recoveries		Provision			Balance
Commercial	$	208	$	—	$	—	$	23		$	231
Real estate Construction	329		—		4		26			359
Real estate mortgage:
1-4 family residential	2,111		25		4		234			2,324
Multi-family residential	401		—		—		(74		)	327
Non-farm & non-residential	930		—		—		(196		)	734
Agricultural	553		—		1		(8		)	546
Consumer	550		76		23		46			543
Other	11		105		72		55			33
Unallocated	523		—		—		(6		)	517
	$	5,616	$	206	$	104	$	100		$	5,614

The following tables present the balance in the allowance for loan losses and the recorded investment (excluding accrued interest receivable amounting to $2.4 million as of June 30, 2015 and $2.0 million at December 31, 2014) in loans by portfolio segment and based on impairment method as of June 30, 2015 and December 31, 2014:

As of June 30, 2015

(in thousands)

	Individually		Collectively
	Evaluated for		Evaluated for
	Impairment		Impairment		Total
Allowance for Loan Losses:
Commercial	$	—	$	399	$	399
Real estate construction	—		476		476
Real estate mortgage
1-4 family residential	170		1,637		1,807
Multi-family residential	—		442		442
Non-farm & non-residential	259		815		1,074
Agricultural	269		309		578
Consumer	—		534		534
Other	—		55		55
Unallocated	—		585		585
	$	698	$	5,252	$	5,950
Loans:
Commercial	$	—	$	50,236	$	50,236
Real estate construction	—		21,320		21,320
Real estate mortgage:
1-4 family residential	1,979		194,236		196,215
Multi-family residential	—		34,121		34,121
Non-farm & non-residential	2,922		155,119		158,041
Agricultural	4,265		64,656		68,921
Consumer	—		17,031		17,031
Other	—		200		200
	$	9,166	$	536,919	$	546,085

As of December 31, 2014

(in thousands)

	Individually		Collectively
	Evaluated for		Evaluated for
	Impairment		Impairment		Total
Allowance for Loan Losses:
Commercial	$	—	$	339	$	339
Real estate construction	—		446		446
Real estate mortgage:
1-4 family residential	56		1,773		1,829
Multi-family residential	94		401		495
Non-farm & non-residential	136		677		813
Agricultural	712		286		998
Consumer	—		520		520
Other	—		32		32
Unallocated	—		540		540
	$	998	$	5,014	$	6,012
Loans:
Commercial	$	—	$	47,185	$	47,185
Real estate construction	—		16,938		16,938
Real estate mortgage:
1-4 family residential	2,098		187,360		189,458
Multi-family residential	264		34,151		34,415
Non-farm & non-residential	2,958		158,864		161,822
Agricultural	8,479		62,866		71,345
Consumer	—		16,863		16,863
Other	—		279		279
	$	13,799	$	524,506	$	538,305

The following table presents loans individually evaluated for impairment by class of loans as of and for the six months ended June 30, 2015 (in thousands):

	Unpaid				Allowance for		Average		Interest		Cash Basis
	Principal		Recorded		Loan Losses		Recorded		Income		Interest
	Balance		Investment		Allocated		Investment		Recognized		Recognized
With no related allowance recorded:
Real estate mortgage:
1-4 family residential	1,345		1,345		—		1,524		42		42
Agricultural	205		205		—		362		27		27
With an allowance recorded:
Real estate mortgage:
1-4 family residential	634		634		170		556		10		10
Non-farm & non-residential	2,922		2,922		259		2,940		59		59
Multi-family residential	—		—		—		119		—		—
Agricultural	4,060		4,060		269		5,215		—		—
Consumer	—		—		—		—		—		—
Other	—		—		—		—				—
Total	$	9,166	$	9,166	$	698	$	10,716	$	138	$	138

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 six months endedJune 30, 2014(in thousands):

			Year to Date		Year to Date
	Average		Interest		Cash Basis
	Recorded		Income		Interest
	Investment		Recognized		Recognized
With no related allowance recorded:
Real estate mortgage:
1-4 family residential	1,002		—		—
Non-farm & non-residential	267				—
Agricultural	2,684		80		80
With an allowance recorded:
Real estate mortgage:
1-4 family residential	1,991		44		44
Multi-family residential	323		5		5
Non-farm & non-residential	3,043		73		73
Agricultural	5,034		19		19
Total	$	14,344	$	221	$	221

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, 2014 (in thousands):

	Unpaid				Allowance for		Average		Interest		Cash Basis
	Principal		Recorded		Loan Losses		Recorded		Income		Interest
	Balance		Investment		Allocated		Investment		Recognized		Recognized
With no related allowance recorded:
Real estate mortgage:
1-4 family residential	$	1,618	$	1,618	$	—	$	1,147	$	25	$	25
Non-farm & non-residential	—		—		—		552		—		—
Agricultural	442		442		—		2,696		29		29
With an allowance recorded:
Real estate mortgage
1-4 family residential	480		480		56		990		18		18
Multi-family residential	264		264		94		284		5		5
Non-farm & non-residential	2,958		2,958		136		3,173		115		115
Agricultural	8,037		8,037		712		5,341		116		116
Total	$	13,799	$	13,799	$	998	$	14,183	$	308	$	308

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

The following tables present loans individually evaluated for impairment by class of loans for the three months ending June 30, 2015 and June 30, 2014(in thousands):

	Three Months Ending June 30, 2015
	Average		Interest		Cash Basis
	Recorded		Income		Interest
	Investment		Recognized		Recognized
With no related allowance recorded:
Real estate mortgage:
1-4 family residential	$	1,476	$	28	$	28
Agricultural	322		17		17
With an allowance recorded:
Real estate mortgage:
1-4 family residential	556		5		5
Multi-family residential	47		—		—
Non-farm & non-residential	2,931		30		30
Agricultural	4,025		—		—
Consumer	—		—		—
Other	—		—		—
Total	$	9,357	$	80	$	80

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

	Three Months Ending June 30, 2014
	Average		Interest		Cash Basis
	Recorded		Income		Interest
	Investment		Recognized		Recognized
With no related allowance recorded:
Real estate mortgage:
1-4 family residential	$	1,562	$	—	$	—
Agricultural	2,836		77		77
With an allowance recorded:
Real estate mortgage:
1-4 family residential	1,377		38		38
Multi-family residential	310		1		1
Non-farm & non-residential	3,553		48		48
Agricultural	4,755		19		19
Total	$	14,393	$	183	$	183

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 June 30, 2015 and December 31, 2014:

As of June 30, 2015

(in thousands)

			Loans Past Due
			Over 90 Days		Accruing
			Still		Troubled Debt
	Nonaccrual		Accruing		Restructurings
Real estate construction	$	138	$	—	$	—
Real estate mortgage:
1-4 family residential	834		99		474
Multi-family residential	—		131		—
Non-farm & non-residential	380		—		1,803
Agricultural	—		32		3,829
Consumer	15		5		—
Total	$	1,367	$	267	$	6,106

As of December 31, 2014

(in thousands)

			Loans Past Due
			Over 90 Days		Accruing
			Still		Troubled Debt
	Nonaccrual		Accruing		Restructurings
Commercial	$	25	$	—	$	—
Real estate construction	142		—		—
Real estate mortgage:
1-4 family residential	1,390		23		480
Multi-family residential	264		—		—
Non-farm & non-residential	380		—		1,829
Agricultural	4,371		—		3,829
Consumer	5		1		—
Total	$	6,577	$	24	$	6,138

Nonaccrual loans secured by real estate make up 98.9% of the total nonaccruals at June 30, 2015.

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 June 30, 2015 and December 31, 2014 by class of loans:

As of June 30, 2015

(in thousands)

	30—59		60—89		Loans Past Due				Total
	Days		Days		Over 90 Days				Past Due &		Loans Not
	Past Due		Past Due		Still Accruing		Non-accrual		Non-accrual		Past Due
Commercial	$	365	$	—	$	—	$	—	$	365	$	49,871
Real estate construction	—		—		—		138		138		21,182
Real estate mortgage:
1-4 family residential	1,570		381		99		834		2,884		193,331
Multi-family residential	—		—		131		—		131		33,990
Non-farm & non-residential	—		—		—		380		380		157,661
Agricultural	17		6		32		—		55		68,866
Consumer	69		19		5		15		108		16,923
Other	—		—		—		—		—		200
Total	$	2,021	$	406	$	267	$	1,367	$	4,061	$	542,024

As of December 31, 2014

(in thousands)

	30—59		60—89		Greater than				Total
	Days		Days		90 Days				Past Due &		Loans Not
	Past Due		Past Due		Past Due		Non-accrual		Non-accrual		Past Due
Commercial	$	92	$	—	$	—	$	25	$	117	$	47,068
Real estate construction	—		—		—		142		142		16,796
Real estate mortgage:
1-4 family residential	1,531		232		23		1,390		3,176		186,282
Multi-family residential	—		131		—		264		395		34,020
Non-farm & non-residential	67		—		—		380		447		161,375
Agricultural	7		11		—		4,371		4,389		66,956
Consumer	130		25		1		5		161		16,702
Other	—		—		—		—		—		279
Total	$	1,827	$	399	$	24	$	6,577	$	8,827	$	529,478

Troubled Debt Restructurings:

The Company has allocated $387 thousand in specific reserves to customers whose loan terms have been modified in troubled debt restructurings as of June 30, 2015.  The Company allocated $369 thousand for specific reserves to customers whose loan terms had been modified in troubled debt restructuring as of December 31, 2014.  The Company has not committed to lend additional amounts as of June 30, 2015 and December 31, 2014 to customers with outstanding loans that are classified as troubled debt restructurings.  All loans which have undergone a troubled debt restructuring modification are performing.  Further, there were no troubled debt restructurings for which there was a payment default within twelve months following the modification during the periods ending June 30, 2015 and 2014.

No loans were modified as troubled debt restructurings during the six or three months ending June 30, 2015 and 2014.

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 June 30, 2015 and December 31, 2014, and based on the most recent analysis performed, the risk category of loans by class of loans is as follows:

As of June 30, 2015

(in thousands)

			Special
	Pass		Mention		Substandard		Doubtful
Commercial	$	48,623	$	1,396	$	217	$	—
Real estate construction	19,843		1,242		235		—
Real estate mortgage:
1-4 family residential	183,844		6,194		6,121		56
Multi-family residential	33,966		—		155		—
Non-farm & non-residential	151,237		6,074		732		—
Agricultural	60,532		7,605		784		—
Total	$	498,045	$	22,511	$	8,244	$	56

As of December 31, 2014

(in thousands)

			Special
	Pass		Mention		Substandard		Doubtful
Commercial	$	45,602	$	1,307	$	275	$	—
Real estate construction	15,529		1,267		142		—
Real estate mortgage:
1-4 family residential	176,791		5,439		7,068		160
Multi-family residential	33,990		—		425		—
Non-farm & non-residential	154,857		5,178		1,787		—
Agricultural	58,110		7,653		5,581		—
Total	$	484,879	$	20,844	$	15,278	$	160

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 $20 thousand at June 30, 2015 and $6 thousand at December 31, 2014.

XML

SECURITIES (Details) - USD ($) $ in Thousands	Jun. 30, 2015	Dec. 31, 2014
Securities Available for Sale
Amortized Cost	$ 238,130	$ 245,662
Gross Unrealized Gains	2,333	3,528
Gross Unrealized Losses	(2,987)	(2,329)
Fair Value	237,476	246,861
U.S. government agencies
Securities Available for Sale
Amortized Cost	55,817	61,721
Gross Unrealized Gains	27	1
Gross Unrealized Losses	(766)	(1,136)
Fair Value	55,078	60,586
States and political subdivisions
Securities Available for Sale
Amortized Cost	87,055	86,322
Gross Unrealized Gains	2,105	3,234
Gross Unrealized Losses	(965)	(275)
Fair Value	88,195	89,281
Mortgage-backed - residential
Securities Available for Sale
Amortized Cost	94,988	97,349
Gross Unrealized Gains	176	267
Gross Unrealized Losses	(1,256)	(918)
Fair Value	93,908	96,698
Equity
Securities Available for Sale
Amortized Cost	270	270
Gross Unrealized Gains	25	26
Fair Value	$ 295	$ 296

XML

Label	Element	Value
Gain (Loss) on Sale of Mortgage Loans	us-gaap_GainLossOnSaleOfMortgageLoans	$ 241
Gain (Loss) on Sale of Mortgage Loans	us-gaap_GainLossOnSaleOfMortgageLoans	$ 441

XML

REAL ESTATE OWNED (Details) - USD ($) $ in Thousands	3 Months Ended		6 Months Ended
	Jun. 30, 2015	Jun. 30, 2014	Jun. 30, 2015	Jun. 30, 2014
Activity in real estate owned
Beginning of year			$ 4,603	$ 3,379
Additions			3,334	419
Sales			(4,727)	(1,540)
(Additions) subtractions to valuation allowance, net			(385)	(48)
End of period	$ 3,595	$ 2,306	3,595	2,306
Activity in the valuation allowance
Beginning of year			1,583	1,524
Write-downs of other real estate, net	201	10	227	10
Reduction from sale			(612)	(58)
End of period	1,198	1,476	1,198	1,476
Expenses related to foreclosed assets
Net loss (gain) on sales reported in other income	20	(24)	59	(70)
Write-downs of other real estate, net	201	10	227	10
Operating expenses (receipts), net of rental income	36	15	55	13
Repossession expenses, net	237	25	282	23
End of year	$ 257	$ 1	$ 341	$ (47)

XML

SECURITIES (Tables)

6 Months Ended

Jun. 30, 2015

SECURITIES

Schedule of securities available for sale

(in thousands)

			Gross		Gross
	Amortized		Unrealized		Unrealized			Fair
	Cost		Gains		Losses			Value
Available for Sale
June 30, 2015
U.S. government agencies	$	55,817	$	27	$	(766	)	$	55,078
States and political subdivisions	87,055		2,105		(965		)	88,195
Mortgage-backed - residential	94,988		176		(1,256		)	93,908
Equity securities	270		25		—			295
Total	$	238,130	$	2,333	$	(2,987	)	$	237,476
December 31, 2014
U.S. government agencies	$	61,721	$	1	$	(1,136	)	$	60,586
States and political subdivisions	86,322		3,234		(275		)	89,281
Mortgage-backed - residential	97,349		267		(918		)	96,698
Equity securities	270		26		—			296
Total	$	245,662	$	3,528	$	(2,329	)	$	246,861

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

(in thousands)

	Amortized		Fair
	Cost		Value
Due in one year or less	$	40	$	40
Due after one year through five years	17,392		17,299
Due after five years through ten years	75,717		75,588
Due after ten years	49,723		50,346
	142,872		143,273
Mortgage-backed - residential	94,988		93,908
Equity	270		295
Total	$	238,130	$	237,476

Schedule of securities with unrealized losses not recognized in income

June 30, 2015

	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	$	8,873	$	(66	)	$	36,854	$	(700	)	$	45,727	$	(766	)
States and municipals	19,875		(414		)	9,126		(551		)	29,001		(965		)
Mortgage-backed - residential	59,964		(772		)	14,788		(484		)	74,752		(1,256		)
Total temporarily impaired	$	88,712	$	(1,252	)	$	60,768	$	(1,735	)	$	149,480	$	(2,987	)

December 31, 2014

	Less than 12 Months					12 Months or More					Total
	Fair		Unrealized			Fair		Unrealized			Fair		Unrealized
Description of Securities	Value		Loss			Value		Loss			Value		Loss
U.S. Government agencies	$	12,528	$	(176	)	$	45,066	$	(960	)	$	57,594	$	(1,136	)
States and municipals	5,011		(27		)	9,738		(248		)	14,749		(275		)
Mortgage-backed - residential	46,685		(572		)	18,747		(346		)	65,432		(918		)
Total temporarily impaired	$	64,224	$	(775	)	$	73,551	$	(1,554	)	$	137,775	$	(2,329	)