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, 2019.



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
"future", "expects," "believes," "anticipates," "intends," "estimates,"
"potential," "may," and similar expressions.



Forward looking statements are neither historical facts nor assurances of future
performance. Instead, they are based on only our current beliefs, expectations
and assumptions regarding the future of our business, future plans and
strategies, projections, anticipated events and trends, the economy and other
future conditions. 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 in
which we operate); negative impacts of current COVID-19 pandemic, current or
future volatility in market conditions; competition for our subsidiary's
customers from other providers of financial and mortgage services; government
legislation, regulation and monetary policy (which changes from time to time and
over which we have no control); changes in interest rates (both generally and
more specifically mortgage interest rates); ability to successfully gain
regulatory approval when required; material unforeseen changes in the liquidity,
results of operations, or financial condition of our subsidiary's customers;
adequacy of the allowance for losses on loans and the level of future provisions
for losses on loans; future acquisitions, changes in technology, information
security breaches or cyber security attacks involving the Company, its
subsidiaries, or third-party service providers; and other risks detailed in our
filings with the Securities and Exchange Commission, all of which are difficult
to predict and many of which are beyond our control.



As a result of the uncertainties and the assumptions on which this discussion
and the forward-looking statements are based, actual future operations and
results in the future may differ materially from those indicated herein. You
should not place undue reliance on any forward-looking statements made by us or
on our behalf. Our forward-looking statements are made as of the date of the
report, and we undertake no obligation to republish revised forward-looking
statements to reflect events or circumstances after the date hereof or to
reflect the occurrence of unanticipated events.



Summary



Policy and Regulatory Developments. Federal, state and local governments and
regulatory authorities have enacted and issued a range of policy responses to
the COVID-19 pandemic, including the following:

· The Federal Reserve decreased the range for the federal funds target rate by 50

basis points on March 3, 2020, and by another 100 basis points on March 16,

2020, reaching a current range of 0.0% - 0.25 %.






                                       35

  Table of Contents

· On March 27, 2020, President Trump signed the Coronavirus Aid, Relief and

Economic Security Act (CARES Act), which established a $2 trillion economic

stimulus package, including cash payments to individuals, supplemental

unemployment insurance benefits and a $349 billion loan program administered

through the U.S. Small Business Administration (SBA), referred to as the

paycheck protection program (PPP). Under the PPP, small businesses, sole

proprietorships, independent contractors and self-employed individuals may

apply for loans from existing SBA lenders and other approved regulated lenders

that enroll in the program, subject to numerous limitations and eligibility

criteria. The Bank is participating as a lender in the PPP. In addition, the

CARES Act provides financial institutions the option to temporarily suspend

certain requirements under GAAP related to TDRs for a limited period of time to


    account for the effects of COVID-19.

· On April 7, 2020, federal banking regulators issued a revised Interagency

Statement on Loan Modifications and Reporting for Financial Institutions,

which, among other things, encouraged financial institutions to work prudently

with borrowers who are or may be unable to meet their contractual payment

obligations because of the effects of COVID-19, and stated that institutions

generally do not need to categorize COVID-19-related modifications as TDRs and

that the agencies will not direct supervised institutions to automatically


    categorize all COVID-19 related loan modifications as TDRs.

· On April 9, 2020, the Federal Reserve announced additional measures aimed at

supporting small and mid-sized businesses, as well as state and local

governments impacted by COVID-19. The Federal Reserve announced the Main Street

Business Lending Program, which establishes two new loan facilities intended to

facilitate lending to small and mid-sized businesses: (1) the Main Street New

Loan Facility, or MSNLF, and (2) the Main Street Expanded Loan Facility, or

MSELF. MSNLF loans are unsecured term loans originated on or after April 8,

2020, while MSELF loans are provided as upsized tranches of existing loans

originated before April 8, 2020. The combined size of the program will be up to

$600 billion. The program is designed for businesses with up to 10,000

employees or $2.5 billion in 2019 revenues. To obtain a loan, borrowers must

confirm that they are seeking financial support because of COVID-19 and that

they will not use proceeds from the loan to pay off debt. The Federal Reserve

also stated that it would provide additional funding to banks offering PPP

loans to struggling small businesses. Lenders participating in the PPP will be

able to exclude loans financed by the facility from their leverage ratio. In

addition, the Federal Reserve created a Municipal Liquidity Facility to support

state and local governments with up to $500 billion in lending, with the

Treasury Department backing $35 billion for the facility using funds

appropriated by the CARES Act. The facility will make short-term financing

available to cities with a population of more than one million or counties with

a population of greater than two million. The Federal Reserve expanded both the

size and scope its Primary and Secondary Market Corporate Credit Facilities to

support up to $750 billion in credit to corporate debt issuers. This will allow

companies that were investment grade before the onset of COVID-19 but then

subsequently downgraded after March 22, 2020 to gain access to the facility.

Finally, the Federal Reserve announced that its Term Asset-Backed Securities

Loan Facility will be scaled up in scope to include the triple A-rated tranche

of commercial mortgage-backed securities and newly issued collateralized loan


    obligations. The size of the facility is $100 billion.





Effects on Our Business. We currently expect that the COVID-19 pandemic and the
specific developments referred to above could have a significant impact on our
business. In particular, we anticipate that a significant portion of the Bank's
borrowers in various segments will continue to endure significant economic
distress, which has caused, and may continue to cause, them to draw on their
existing lines of credit and adversely affect their ability to repay existing
indebtedness, and is expected to adversely impact the value of collateral.

These developments, together with economic conditions generally, are also expected to impact our commercial real estate portfolio, particularly with respect to real estate with exposure to these industries, and the value of certain collateral securing our loans. As a result, we anticipate that our financial condition, capital levels and results of operations could be adversely affected, as described in further detail below.

Our Response. We have taken numerous steps in response to the COVID-19 pandemic, including the following:

· We are actively working with loan customers to evaluate prudent loan


    modification terms.




                                       36

  Table of Contents

· We continue to promote our digital banking options through our website.

Customers are encouraged to utilize online and mobile banking tools, and our

customer service and retail departments are fully staffed and available to

assist customers remotely.

· We are a participating lender in the PPP. We believe it is our responsibility

as a community bank to assist the SBA in the distribution of funds authorized

under the CARES Act to our customers and communities, which we are carrying out


    in a prudent and responsible manner.

· We have limited all branches to drive-up and appointment only services. We

continue to pay all employees according to their normal work schedule, even if

their work has been reduced. No employees have been furloughed. Employees whose

job responsibilities can be effectively carried out remotely are working from

home. Employees whose critical duties require their continued presence on-site


    are observing social distancing and cleaning protocols.




The Company recorded net income of $1.8 million, or $0.30 basic earnings and
diluted earnings per share for the first three months ended March 31, 2020
compared to $2.8 million or $0.47 basic earnings and diluted earnings per share
for the three month period ended March 31, 2019. The first three months net
earnings reflect a decrease when compared to the same time period in 2019
although net interest income increased. Net interest income increased $53
thousand, or 0.6%, and the provision for loan losses increased $1.5 million.
Non-interest income increased $562 thousand, or 18.7%, for the three months
ended March 31, 2020 compared to the same three month period in 2019. The
increase in non-interest income is mostly attributed to an increase in gain

on
sale of loans.




For the three months ended March 31, 2020 and compared to the three months ended
March 31, 2019, service charges increased $95 thousand, gain on the sale of
loans increased $476 thousand, gain on the sale of available for sale securities
increased $18 thousand and salaries and benefits expense increased $275
thousand. Data processing fees decreased $22 thousand and debit card expenses
decreased $23 thousand.



Return on average assets was 0.62% for the three months ended March 31, 2020 and
1.04% for the three months ended March 31, 2019. Return on average equity was
5.77% for the three month period ended March 31, 2020 and 10.39% for the three
month period ended March 31, 2019.

Securities available for sale decreased $18.1 million from $265.3 million at December 31, 2019 to $247.2 million at March 31, 2020.

Gross Loans increased $34.0 million from $744.3 million on December 31, 2019 to $778.3 million at March 31, 2020.





The overall increase in loan balances from December 31, 2019 to March 31, 2020
is comprised of the following: an increase of $8.5 million in 1-4 family
residential loans, a decrease of $3.8 million in commercial loans, an increase
of $6.9 million in multi-family residential loans, an increase of $2.8 million
in agricultural loans, an increase of $18.3 million in non-farm and
non-residential loans, a decrease of $524 thousand in consumer loans, and an
increase of $2.0 million in real-estate construction loans. Other loan balances
decreased $154 thousand from December 31, 2019 to March 31, 2020.



Total deposits increased from $842.7 million on December 31, 2019 to $853.2
million on March 31, 2020, an increase of $10.6 million. Time deposits $250
thousand and over increased $2.4 million from December 31, 2019 to March 31,
2020 while non-interest bearing demand deposit accounts increased $7.8 million
and other interest bearing deposit accounts increased $363 thousand from
December 31, 2019 to March 31, 2020.



Public fund account balances decreased $3.6 million from December 31, 2019 to
March 31, 2020. 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 subsequent months.

Borrowings from the Federal Home Loan Bank increased $22.5 million from December 31, 2019 to March 31, 2020 and repurchase agreements decreased $584 thousand.





                                       37

  Table of Contents

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 $9.0 million for the three months ended
March 31, 2020 compared to $8.9 million for the three months ended March 31,
2019, an increase of 0.6%.



The interest spread, excluding tax equivalent adjustments, was 3.10% for the
first three months of 2020 compared to 3.27% for the first three months of 2019.
For the first three months in 2020, the yield on interest earning assets
decreased from 4.49% in 2019 to 4.24% in 2020, excluding tax equivalent
adjustments.



The yield on loans, excluding tax equivalent adjustments, decreased twenty basis
points for the three months ended March 31, 2020 compared to the three months
ended March 31, 2019 from 5.15% to 4.95%. The yield on securities, excluding tax
equivalent adjustments, decreased thirty-seven basis points during the first
three months of 2020 compared to 2019 from 2.91% in 2019 to 2.54% in 2020. The
cost of liabilities was 1.14% for the first three months in 2020 compared to
1.22% in 2019.




Year to date average loans, excluding overdrafts, increased $76.5 million, or
11.2% for the three months ended March 31, 2020 compared to the three months
ended March 31, 2019. Loan interest income increased $580 thousand during the
first three months of 2020 compared to the first three months of 2019.



Year to date average total deposits increased from March 31, 2019 to March 31,
2020 by $17.2 million or 2.0%. Year to date average interest bearing deposits
increased $11.8 million, or 1.9%, from March 31, 2019 to March 31, 2020. Deposit
interest expense decreased $69 thousand for the first three months of 2020
compared to the same period in 2019. Year to date average borrowings, including
repurchase agreements, increased $11.3 million, or 10.1%, from March 31, 2019 to
March 31, 2020. Interest expense on borrowed funds, including repurchase
agreements, decreased $28 thousand for the first three months of 2020 compared
to the same period in 2019. This decrease is mostly attributed to the Bank
paying the note payable in full in 2019.



The volume rate analysis for the three months ended March 31, 2020 indicates
loan interest income increased $580 thousand when compared to the same time
period in 2019. An increase of $2.4 million attributed to increased loan volume
was offset by a decrease of $1.8 million in loan interest income attributed to a
decrease in loan rates. Much of the decrease in loan income is attributed to
variable rate loans repricing at lower rates. The decrease of $515 thousand in
securities interest income is attributable to both decreases in rates and volume
of our security portfolio.



Also based on the following volume rate analysis for the three months ended
March 31, 2020, a decrease in demand deposit interest rates resulted in a $243
thousand reduction to interest expense, interest paid for savings deposits
remained fairly flat, and increases in interest rates paid for time deposits
resulted in additional interest expense of $82 thousand.

The change in volume in deposits and borrowings was responsible for a $265
thousand increase in interest expense, of which a decrease in demand deposits
resulted in a decrease of $55 thousand in interest expense, an increase in time
deposits resulted in an increase of $149 thousand in interest expense, a
decrease in repurchase agreements resulted in a decrease of $43 thousand in
interest expense, and an increase in other borrowings resulted in an increase of
$214 thousand in interest expense. The net effect to interest expense was a
decrease of $97 thousand. As a result, the increase in net interest income for
the first three months in 2020 is mostly attributed to decreasing rates paid on
deposits.



                                       38

  Table of Contents

Changes in Interest Income and Expense






                                                                                      Three Months Ended
                                                                                        2020 vs. 2019
                                                                             Increase (Decrease) Due to Change in
(in thousands)                                                           Volume                           Rate            Net Change
INTEREST INCOME
Loans                                                    $                                2,427     $         (1,847)    $        580
Investment Securities                                                                     (257)                 (258)           (515)
Other                                                                                       146                 (255)           (109)
Total Interest Income                                                                     2,316               (2,360)            (44)
INTEREST EXPENSE
Deposits
Demand                                                                                     (55)                 (243)           (298)
Savings                                                                                       -                   (2)             (2)
Negotiable Certificates of Deposit and Other Time
Deposits                                                                                    149                    82             231
Securities sold under agreements to repurchase and
other borrowings                                                                           (43)                  (24)            (67)
Federal Home Loan Bank advances                                            

                214                 (175)              39
Total Interest Expense                                                                      265                 (362)            (97)
Net Interest Income                                      $                                2,051     $         (1,998)    $         53



Non-Interest Income

Non-interest income increased $562 thousand for the three months ended March 31, 2020, compared to the same period in 2019, to $3.6 million.





Favorable variances to non-interest income for the first three months of 2020
include an increase of $18 thousand in gain on sale of available for sale
securities, an increase of $42 thousand in trust department income, an increase
of $95 thousand in service charges, an increase of $476 thousand in gains on the
sale of loans, an increase of $22 thousand in debit card interchange income and
an increase of $74 thousand in other income. Decreases to non-interest income
for the three months ended March 31, 2020 compared to the three months ended
March 31, 2019 include a decrease of $156 thousand in net loan service fee
income and a decrease of $9 thousand in brokerage income.

The gain on the sale of loans increased from $207 thousand during the first three months of 2019 to $683 thousand during the first three months of 2020, an increase of $476 thousand.





The volume of loans originated to sell during the first three months of 2020
increased $15.1 million compared to the same time period in 2019. The increase
in the volume of loans originated to sell during 2019 is largely attributed to
an increase in customers choosing to refinance existing mortgages due to the
decrease in mortgage rates. 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 $(83) thousand for the three months ended March 31, 2020 compared
to $73 thousand for the three months ended March 31, 2019, a decrease of $156
thousand. During the first three months of 2020, the market value adjustment to
the carrying value of the mortgage servicing right was a net writedown of $142
thousand, as the fair value of this asset decreased. During the first three
months of 2019, the market
value adjustment to the carrying value of the mortgage servicing right asset was a net
writedown of $6 thousand, as the fair value of the asset decreased.



Non-Interest Expense




Total non-interest expense increased $465 thousand, or 5.3%, for the three month
period ended March 31, 2020 compared to the same period in 2019. Management
continues to consider opportunities for branch expansion and will also consider
acquisition opportunities that help advance its strategic objectives, which
would result in additional future non-interest expense. Our most recent
expansion involves constructing a new branch in Lexington, KY in Tates Creek
Centre. We anticipate the new branch to be open by the end of the second quarter
or early third quarter of 2020.

                                       39

Table of Contents



For the comparable three month periods, salaries and employees benefits expense
increased $275 thousand, an increase of 5.9%. The number of full-time employee
equivalent employees increased from 230 at March 31, 2019 to 235 at March 31,
2020, an increase of five full-time equivalent employees.

Occupancy expense increased $113 thousand to $1.1 million for the first three months of 2020 compared to the same time period in 2019.





Loss on limited partnership expense increased $134 thousand for the first three
months ended March 31, 2020 compared to the same time period in 2019. The
increase is attributed to accelerating the amortization of one our tax credit
investments. However, this was offset through reduced income tax expense.



Income Taxes




The effective tax rate for the three months ended March 31, 2020 was (3.1)%
compared to 7.8% in 2019. These effective tax rates are less than the statutory
rate of 21% as a result of the Company investing in tax-free securities, loans
and other investments which generate tax credits for the Company. The Company
also has a captive insurance subsidiary which contributes to reducing taxable
income. The effective tax rate was lower for the three months ended March 31,
2020 when compared to the three months ended March 31, 2019 due to tax credits
associated with low income housing investments increasing from $138 thousand for
the three months ended March 31, 2019 to $304 thousand for the three months
ended March 31, 2020; an increase of $165 thousand. Tax- exempt interest income
increased $127 thousand for the first three months of 2020 compared to the first
three months of 2019. Further, income before income taxes for the three months
ended March 31, 2020 decreased $1.4 million when compared to the three months
ended March 31, 2019.



As part of normal business, the Bank typically makes tax free loans to select
municipalities in our market and invests in selected tax free securities,
primarily in the Commonwealth of Kentucky. In making these investments, the
Company considers the overall impact to managing our net interest margin, credit
worthiness of the underlying issuer and the favorable impact on our tax
position. For the three months ended March 31, 2020, the Company averaged $24.8
million in tax free securities and $56.1 million in tax free loans. As of March
31, 2020, the weighted average remaining maturity for the tax free securities is
41 months, while the weighted average remaining maturity for the tax free loans
is 170 months.




For the year ended December 31, 2019, the Company averaged $36.3 million in tax
free securities, and $42.8 million in tax free loans. As of December 31, 2019,
the weighted average remaining maturity for the tax free securities
was 103 months, while the weighted average remaining maturity for the tax free loans was 131 months.



On March 26, 2019, Governor Bevin signed House Bill 354 into law which, among
other things, repealed the bank franchise tax structure in Kentucky. The capital
based franchise tax structure will be replaced with the state-wide corporate
income tax structure starting in 2021. Kentucky Bancshares, Inc. has
historically filed a separate return in Kentucky, and has generated a Kentucky
net operating loss ("NOL") carryforward, given the nature of its operations.
Given House Bill 354, Kentucky Bancshares, Inc. will file a combined return in
2021, unless the Company decides to timely elect to file on a consolidated
basis.



On April 9, 2019, Governor Bevin signed House Bill 458 into law which, among
other things, allows a taxpayer to utilize certain net operating loss ("NOL")
carryforwards to offset other members in the combined filing group starting

in
2021.

As a result of these tax law changes, the Company had a deferred tax asset of $563 thousand as of March 31, 2020 and $606 thousand as of December 31, 2019.





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.



                                       40

  Table of Contents

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


Cash and cash equivalents were $37.8 million as of March 31, 2020 compared to
$22.2 million at December 31, 2019. The increase in cash and cash equivalents is
attributed to an increase of $15.6 million in cash and due from banks.



In addition to cash and cash equivalents, the securities portfolio provides an
important source of liquidity. Securities available for sale totaled $247.2
million at March 31, 2020 compared to $265.3 million at December 31, 2019. The
securities available for sale are available to meet liquidity needs on a
continuing basis. However, we expect our customers' deposits to be adequate to
meet our funding demands.



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



For the first three months of 2020, deposits increased $10.6 million compared to
December 31, 2019. The Company's borrowed funds from the Federal Home Loan Bank
increased $22.5 million from December 31, 2019 to March 31, 2020, federal funds
purchased remained at zero, and total repurchase agreements decreased $584
thousand from December 31, 2019 to March 31, 2020.



Management is aware of the challenge of funding sustained loan growth.
Therefore, in addition to deposits, other sources of funds, such as Federal Home
Loan Bank advances, may be used. We rely on Federal Home Loan Bank advances for
both liquidity and asset/liability management purposes. These advances are used
primarily to fund long- term fixed rate residential mortgage loans. As of March
31, 2020, we have sufficient collateral to borrow an additional $75.6 million
from the Federal Home Loan Bank. In addition, as of March 31, 2020, $33 million
is available in overnight borrowing through various correspondent banks and $273
million is available in brokered deposits. In light of this, management believes
there is sufficient liquidity to meet all reasonable borrower, depositor and
creditor needs in the present economic environment.  In addition, the Federal
Reserve has implemented a liquidity facility available to financial institutions
participating in the PPP.  As such, the Bank believes it has sufficient
liquidity sources to fund all pending PPP loans and to continue to provide this
important service to local businesses.



Capital Requirements



In August 2018, the Federal Reserve Board issued an interim final ruling that
holding companies with assets less than $3 billion are not subject to minimum
capital requirements. As a result, only Bank capital data and capital ratios are
presented as of March 31, 2020 and December 31, 2019.



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



The final rules implementing the Basel Committee on Banking Supervision's
capital guidelines for US banks (Basel III rules) became effective for the
Company on January 1, 2015 with full compliance with all of the requirements
being phased in over a multi-year schedule, and was fully phased in on January
1, 2019. The net unrealized gain or loss on available for sale securities and
holding gains or losses on cash flow hedges are not included in computing
regulatory capital.



                                       41

  Table of Contents


The federal banking agencies jointly issued a final rule that provides for an
optional, simplified measure of capital adequacy, the community bank leverage
ratio framework, for qualifying community banking organizations, consistent with
Section 201 of the Economic Growth, Regulatory Relief, and Consumer Protection
Act. The final rule became effective on January 1, 2020. This final rule is
applicable to all non-advanced approaches FDIC-supervised institutions with less
than $10 billion in total consolidated assets. Highlights of the Community Bank
Leverage Ratio Framework follow:

· The community bank leverage ratio (CBLR) final rule will be effective on

January 1, 2020, and will allow qualifying community banking organizations to

calculate a leverage ratio to measure capital adequacy. Banks opting into the

CBLR framework (CBLR banks) will not be required to calculate or report

risk-based capital.

· A qualifying community banking organization is defined as having less than $10

billion in total consolidated assets, a leverage ratio greater than 9%,

off-balance sheet exposures of 25% or less of total consolidated assets, and

trading assets and liabilities of 5% or less of total consolidated assets. It

also cannot be an advanced approaches institution.

· The final rule adopts tier 1 capital and the existing leverage ratio into the

community bank leverage ratio framework. The tier 1 numerator takes into

account the modifications made in relation to the capital simplifications and

current expected credit losses methodology (CECL) transitions rules as of the

compliance dates of those rules.

· A CBLR bank will not be subject to other capital and leverage requirements. It

will be deemed to have met the "well capitalized" ratio requirements and be in

compliance with the generally applicable capital rule.

· A CBLR bank that ceases to meet any qualifying criteria in a future period and

that has a leverage ratio greater than 8% will be allowed a grace period of two

reporting periods to satisfy the CBLR qualifying criteria or comply with the

generally applicable capital requirements.

· A CBLR may opt out of the framework at any time, without restriction, by


    reverting to the generally applicable risk-based capital rule.




Management believes as of March 31, 2020, the Bank meets all capital adequacy
requirements to which it is subject. Quantitative measures established by
regulation to ensure capital adequacy require the Bank to maintain minimum
amounts and ratios (set forth in the following table) and Tier I capital (as
defined in the regulations) to average assets (as defined).

Prompt corrective action regulations provide five classifications: well capitalized, adequately capitalized, undercapitalized, significantly undercapitalized, and critically undercapitalized, although these terms are not used to represent overall financial condition. If adequately capitalized, regulatory approval is required to accept brokered deposits. If undercapitalized, capital distributions are limited, as is asset growth and expansion, and capital restoration plans are required.





At March 31, 2020 and at December 31, 2019, the most recent regulatory
notifications 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 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.



                                       42

  Table of Contents

The Bank's actual amounts and ratios are presented in the following table:




                                                                                           To Be Well
                                                                                          Capitalized
                                                                                          Under Prompt
                                                                  For Capital              Corrective
                                              Actual           Adequacy Purposes       Action Provisions
                                         Amount      Ratio      Amount       Ratio      Amount       Ratio
                                                              (Dollars in Thousands)
March 31, 2020
Bank Only
Tier I Capital (to Average Assets)        103,101      9.3        100,111

9.0 100,111 9.0

December 31, 2019
Bank Only
Tier I Capital (to Average Assets)        102,759      9.3         44,164  

   4.0         55,206      5.0




Non-Performing Assets



As of March 31, 2020, our non-performing assets, including other real estate,
totaled $6.8 million or 0.60% of assets compared to $6.7 million or 0.61% of
assets at December 31, 2019 (see the following table). The Company experienced
an increase of $1.2 million in non-accrual loans from December 31, 2019 to March
31, 2020. As of March 31, 2020, non-accrual loans include $374 thousand in loans
secured by construction real estate, $1.3 million in loans secured by
multi-family residential property, $1.8 million in loans secured by non-farm
non-residential property, $744 thousand in loans secured by 1-4 family
properties and $27 thousand in consumer loans.



Loans secured by real estate composed 92.0% of the non-performing loans as of
March 31, 2020 and 97.8% as of December 31, 2019. Forgone interest income on
non-accrual loans totaled $101 thousand for the first three months of 2020
compared to forgone interest of $31 thousand for the same time period in 2019.
Accruing loans that are contractually 90 days or more past due as of March 31,
2019 totaled $474 thousand compared to $1.5 million at December 31, 2019, a
decrease of $1.0 million. Total nonperforming and restructured loans increased
$130 thousand from December 31, 2019 to March 31, 2020. The ratio of
nonperforming and restructured loans to loans remained the same at 0.61% from
December 31, 2019 to March 31, 2020.



In addition, the amount the Company has recorded as other real estate owned
decreased $38 thousand from December 31, 2019 to March 31, 2020. As of March 31,
2020 and December 31, 2019, the amount recorded as other real estate owned
totaled $2.1 million. During the first three months of 2020, no new additions
were added to other real estate properties and no sales occurred. The allowance
as a percentage of non-performing and restructured loans and other real estate
owned increased from 126% at December 31, 2019 to 145% at March 31, 2020.



The economic downturn experienced as a result of the COVID-19 pandemic is
expected to result in increased non-performing assets.  Loan modifications are
likely to be executed in the second quarter of 2020.  The majority of these
modifications will involve three to six month forbearance payments which will be
added to the end of the note. These modification and econcomic stimulus packages
offered by the government will help loan customers meet debt obligations but it
is unknown to what extent at this time.

                                       43

Table of Contents

Nonperforming and Restructured Assets






                                                                3/31/2020      12/31/2019
                                                                     (in thousands)
Non-accrual Loans                                              $     4,236    $      3,081
Accruing Loans which are Contractually past due over 89
days                                                                   474

1,499


Accruing Troubled Debt Restructurings                                    -               -
Total Nonperforming and Restructured Loans                           4,710

4,580


Other Real Estate                                                    2,110

2,148


Total Nonperforming and Restructured Loans and Other Real
Estate                                                         $     6,820

$ 6,728 Nonperforming and Restructured Loans as a Percentage of Loans

                                                                 0.61

% 0.61 % Nonperforming and Restructured Loans and Other Real Estate as a Percentage of Total Assets

                                       0.60 %          0.61 %
Allowance as a Percentage of Period-end Loans                         1.27 %          1.14 %
Allowance as a Percentage of Non-performing and
Restructured Loans and Other Real Estate                               145

%           126 %




We maintain a "watch list" of agricultural, commercial, real estate mortgage,
and real estate construction loans and review those loans at least quarterly but
more often if needed. Generally, assets are designated as "watch list" loans to
ensure more frequent monitoring. If we determine that there is serious doubt as
to performance in accordance with original terms of the contract, then the loan
is generally downgraded and often placed on non-accrual status.

We review and evaluate nonaccrual loans, past due loans, and loans graded substandard or worse on a regular basis to determine if the loan should be evaluated for impairment and whether specific allocations are needed.





Provision for Loan Losses




The loan loss provision for the first three months of 2020 was $1.6 million
compared to $125 thousand for the first three months of 2019. The increase in
the total loan loss provision during the first three months of 2020 compared to
the same time period in 2019 was attributed mostly to uncertainties surrounding
the COVID-19 pandemic. It is possible the Company will have additional provision
for loan losses expense in future quarters as a result of the economic downturn
associated with the COVID-19 pandemic. Strong loan growth during the first
quarter of 2020 also contributed to the increase in loan loss provision
expense. The allowance for loan losses as a percentage of loans was 1.27% at
March 31, 2020 compared to 1.15% at March 31, 2019.



Management evaluates the loan portfolio by reviewing the historical loss rate
for each respective loan type and assigns risk multiples to certain categories
to account for qualitative factors including current economic conditions. The
average loss rates are reviewed for trends in the analysis, as well as
comparisons to peer group loss rates.



Management makes allocations within the allowance for loan losses for
specifically classified loans regardless of loan amount, collateral or loan
type. Loan categories are evaluated utilizing subjective factors in addition to
the historical loss calculations to determine a loss allocation for each of
those types. As this analysis, or any similar analysis, is an imprecise measure
of loss, the allowance is subject to ongoing adjustments. Therefore, management
will often take into account other significant factors that may be necessary or
prudent in order to reflect probable incurred losses in the total
loan portfolio.



Nonperforming loans and restructured loans increased $130 thousand from December
31, 2019 to $4.7 million at March 31, 2020. The Company recorded net charge-offs
of $169 thousand for the three months ended March 31, 2020 compared to net
charge-offs of $370 thousand for the three months ended March 31, 2019.



Net charge-offs of $370 thousand recorded during the first three months of 2019
were mostly attributed to one loan which had a charged-off balance of $191
thousand during the first quarter of 2019. This loan had a specific reserve of
$191 thousand at December 31, 2018; thus, this charged-off balance did not
result in additional loan loss provision expense for the three months ended
March 31, 2019. Future levels of charge-offs will be determined by the
particular facts and circumstances surrounding individual loans.



                                       44

  Table of Contents

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




                                                                 Three Months Ended March 31,
                                                                        (in thousands)
                                                                    2020                2019
Balance at Beginning of Period                                $        8,460      $        8,127
Amounts Charged-Off:
Commercial                                                                25                 191
1-4 family residential                                                    35                  99
Non-farm & non-residential                                                 -                  17
Consumer and other                                                       347                 302
Total Charged-off Loans                                                  407                 609

Recoveries on Amounts Previously Charged-off:


  Commercial                                                               6                   7
1-4 family residential                                                    15                   8
Agricultural                                                               2                   1
Consumer and other                                                       215                 223
Total Recoveries                                                         238                 239
Net Charge-offs (Recoveries)                                             169                 370
Provision for Loan Losses                                              1,625                 125
Balance at End of Period                                               9,916               7,882
Loans
Average                                                              762,389             685,928
At March 31,                                                         778,327             687,484
As a Percentage of Average Loans:
Net Charge-offs for the period                                          0.02 %              0.05 %
Provision for Loan Losses for the period                                0.21 %              0.02 %
Allowance as a Multiple of Net Charge-offs annualized                   14.7                 5.3

© Edgar Online, source Glimpses