KENTUCKY BANCSHARES : KY/ MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (form 10-Q)

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, 2020.
Results for the prior periods indicated in this report are not necessarily
indicative of the results for the year ending December 31, 2021 or any future
period.



Although the Company believes 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:

the magnitude and duration of the COVID-19 pandemic and its impact on the

• global economy and financial market conditions and the business, results of

operations and financial condition of the Company

economic conditions (both generally and more specifically in the markets,

• including the cattle market, the thoroughbred horse industry and the automobile

industry relating to Toyota vehicles, in which the Company and its bank

operate);

• competition for the Company'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 the Company has 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 the Company's customers; and

other risks detailed in Part 1, Item 1A "Risk Factors" in this report and other

• risks detailed in the Company's filings with the Securities and Exchange

Commission, all of which are difficult to predict and many of which are beyond

   the control of the Company.




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The Company undertakes 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. There is no assurance that any list of risks and uncertainties or risk factors is complete.

Forward-looking statements involve known and unknown risks, uncertainties, and
other factors that may cause actual results, performance, or achievements to be
materially different from future results, performance, or achievements expressed
or implied by the statement. These statements are often, but not always, made
through the use of words or phrases such as "anticipate," "believe," "aim,"
"can," "conclude," "continue," "could," "estimate," "expect," "foresee," "goal,"
"intend," "may," "might," "outlook," "possible," "plan," "predict," "project,"
"potential," "seek," "should,"

"target," "will," "will likely," "would," or other similar expressions.

These forward-looking statements are not historical facts and are based on
current expectations, estimates and projections about our industry, management's
beliefs and certain assumptions made by management, many of which, by their
nature, are inherently uncertain and beyond our control, particularly with
regard to developments related to the COVID-19 pandemic. Forward-looking
statements detail management's expectations regarding the future and are based
on information known to management only as of the date the statements are made
and management undertakes no obligation to update forward-looking statements to
reflect events or circumstances that occur after the date forward-looking
statements are made, except as required by applicable law.



The Company executed a definitive Agreement and Plan of Merger ("agreement")
dated as of January 27, 2021, with Stock Yards Bancorp. This document also
contains statements regarding the proposed acquisition transaction that are not
statements of historical fact and are considered forward-looking statements
within the criteria described above. These statements are likewise subject to
various risks and uncertainties that may cause actual results and outcomes of
the proposed transaction to differ, possibly materially, from the anticipated
results or outcomes expressed or implied in these forward-looking statements. In
addition to factors disclosed in reports filed by Stock Yards and Kentucky
Bancshares with the SEC, risks and uncertainties for Stock Yards, Kentucky
Bancshares and the combined company include, but are not limited to: the
possibility that any of the anticipated benefits of the proposed merger will not
be realized or will not be realized within the expected time period; the risk
that integration of Kentucky Bancshares' operations with those of Stock Yards
will be materially delayed or will be more costly or difficult than expected;
the parties' inability to meet expectations regarding the timing, completion and
accounting and tax treatments of the merger; the inability to complete the
merger due to the failure of Kentucky Bancshares' shareholders to adopt the
merger agreement; the failure to satisfy other conditions to completion of the
merger, including receipt of required regulatory and other approvals; the
failure of the proposed transaction to close for any other reason; diversion of
management's attention from ongoing business operations and opportunities due to
the merger; the challenges of integrating and retaining key employees; the
effect of the announcement of the merger on Stock Yards', Kentucky Bancshares'
or the combined company's respective customer and employee relationships and
operating results; the possibility that the merger may be more expensive to
complete than anticipated, including as a result of unexpected factors or
events; dilution caused by Stock Yards' issuance of additional shares of Stock
Yards common stock in connection with the merger; the magnitude and duration of
the COVID-19 pandemic and its impact on the global economy and financial market
conditions and the business, results of operations and financial condition of
Stock Yards, Kentucky Bancshares and the combined company; and general
competitive, economic, political and market conditions and fluctuations.



The merger agreement should not be read alone, but should instead be read in
conjunction with the other information regarding Stock Yards Bancorp, Kentucky
Bancshares, their respective affiliates or their respective businesses, the
merger agreement and the mergers is contained in, or incorporated by reference
into, the registration statement on Form S-4 that includes a proxy statement of
Kentucky Bancshares and a prospectus of Stock Yards Bancorp, as well as in the
Forms 10-K, Forms 10-Q, Forms 8-K and other filings that each of Stock Yards
Bancorp and Kentucky Bancshares make with the Securities and Exchange Commission
("SEC").



This quarterly report is not a substitute for the proxy statement/prospectus or
registration statement or any other document that Stock Yards Bancorp or
Kentucky Bancshares may file with the SEC. KENTUCKY BANCSHARES' SHAREHOLDERS ARE
ADVISED TO READ THE REGISTRATION STATEMENT ON FORM S-4 AND THE RELATED PROXY
STATEMENT/PROSPECTUS, AS WELL AS ANY AMENDMENTS OR SUPPLEMENTS TO THOSE
DOCUMENTS AND ANY OTHER RELEVANT DOCUMENTS FILED OR TO BE FILED WITH THE SEC IN
CONNECTION WITH THE PROPOSED MERGER TRANSACTION.

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The definitive proxy statement/prospectus and other documents relating to the
merger transaction filed by Stock Yards Bancorp and Kentucky Bancshares can be
obtained free of charge from the SEC's website at www.sec.gov. These documents
also can be obtained free of charge by accessing Stock Yard Bancorp's website at
www.syb.com under the tab "Investor Relations" and then under "SEC Filings."
Alternative, these documents, when available, can be obtained free of charge
from Stock Yards Bancorp upon written request to Stock Yards Bancorp, Attention:
Chief Financial Officer, 1040 East Main Street, Louisville, Kentucky 40206 or by
calling [phone], or to Kentucky Bancshares, Attention: Chief Financial
Officer, 339 Main Street, Paris, Kentucky 40361 or by calling [phone].



This quarterly report is not intended to and shall not constitute an offer to
sell or the solicitation of an offer to buy securities nor shall there be any
sale of securities in any jurisdiction in which such offer, solicitation or sale
would be unlawful prior to registration or qualification under the securities
laws of such jurisdiction. This quarterly report is also not a solicitation of
any vote in any jurisdiction pursuant to the proposed transactions or otherwise.
No offer of securities or solicitation will be made except by means of a
prospectus meeting the requirements of Section 10 of the Securities Act of

1933,
as amended.



Recent Events

Pending Merger with Stock Yards Bancorp, Inc.

Effective January 27, 2021, Kentucky Bancshares, Stock Yards Bancorp, Inc., a
Kentucky corporation ("Stock Yards Bancorp"), and H. Meyer Merger Subsidiary,
Inc., a Kentucky corporation and a direct, wholly owned subsidiary of Stock
Yards Bancorp ("Merger Sub"), entered into an Agreement and Plan of Merger (the
"merger agreement"), pursuant to which, on the terms and subject to the
conditions set forth therein, Merger Sub will merge with and into Kentucky
Bancshares (the "merger"), with Kentucky Bancshares as the surviving entity and
a wholly owned subsidiary of Stock Yards Bancorp. Following the merger, the
surviving company will merge with and into Stock Yards Bancorp (the "combined
company"), and thereafter Kentucky Bank will merge with and into Stock Yards
Bancorp's bank subsidiary, Stock Yards Bank & Trust Company, a Kentucky banking
corporation ("Stock Yards Bank"), with Stock Yards Bank as the surviving banking
corporation. The acquisition is expected to close during the second quarter of
2021, subject to customary regulatory approval, approval by Kentucky Bancshares'
shareholders and completion of other customary closing conditions.



Impact of COVID-19



On January 30, 2020, the World Health Organization ("WHO") announced that the
outbreak of the novel coronavirus disease 2019 (COVID-19) constituted a public
health emergency of international concern. On March 11, 2020, WHO declared
COVID-19 to be a global pandemic. On March 13, 2020, the President of the United
States declared the COVID-19 outbreak a national emergency. The health concerns
relating to the COVID-19 outbreak and related governmental actions taken to
reduce the spread of the virus have had a significant adverse impact on the
economy, the banking industry and the Company. While quarantine and lock-down
orders have been lifted and vaccination efforts are underway, COVID-19 has not
yet been fully contained and commercial activity has not yet returned to the
levels existing prior to the pandemic outbreak. As a result, the demand for the
Company's products and services has been, and will continue to be, significantly
impacted.



On March 27, 2020, the Coronavirus Aid, Relief and Economic Security Act (the
"CARES Act") was signed into law, providing an approximately $2 trillion
stimulus package that includes direct payments to individual taxpayers, economic
stimulus to significantly impacted industry sectors, emergency funding for
hospitals and providers, small business loans, increased unemployment benefits,
and a variety of tax incentives.

For small businesses, eligible nonprofits and certain others, the CARES Act
established a Paycheck Protection Program ("PPP"), which is administered by the
Small Business Administration ("SBA"). On April 24, 2020, the Paycheck
Protection Program and Health Care Enhancement Act was enacted. Among other
things, this legislation amended the initial CARES Act program by raising the
appropriation level for PPP loans from $349 billion to $670 billion.









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The PPP was further modified on June 5, 2020 with the adoption of the Paycheck
Protection Program Flexibility Act (the "Flexibility Act"), which extended the
maturity date for PPP loans from two years to five years for loans disbursed on
or after the date of enactment of the Flexibility Act. For PPP loans disbursed
prior to such enactment, the Flexibility Act permits the borrower and lender to
mutually agree to extend the term of the loan to five years. The vast majority
of the Company's PPP loans have two-year maturities. PPP loans earn interest at
a fixed rate of 1% and are fully guaranteed by the U.S. government.



On December 27, 2020, a $900 billion COVID-19 relief package, as passed by the
U.S. Congress, was signed into law as part of the 2021 Consolidated
Appropriations Act ("CAA"). In addition to providing direct stimulus payments to
certain individuals, an increase in unemployment insurance benefits, an
extension of the eviction moratorium, relief to the healthcare industry, and
additional aid to various other businesses, the COVID-19-related provisions of
the CAA also established an additional $284 billion in funding for the PPP
through May 31, 2021. The Company is also participating in this phase of the
PPP.



As the health and safety of our employees and customers is of primary
importance, throughout the COVID-19 pandemic, the Company has enforced mask
policies and maintained social distancing precautions for all employees in the
office and customer conducting business in our branches, to the fullest extent
possible and pursuant to guidance issued by the Centers for Disease Control and
state and local authorities. While COVID-19 cases have begun to ease during the
first quarter of 2021 and progress has been made related to vaccination efforts,
our management team continues to monitor the ongoing situation related to the
COVID-19 pandemic in order to anticipate and respond to ongoing COVID-19 related
developments.



Summary



The Company recorded net income of $2.5 million, or $0.41 basic earnings and
diluted earnings per share for the first three months ended March 31, 2021
compared to $1.8 million or $0.30 basic earnings and diluted earnings per share
for the three month period ended March 31, 2020. Net interest income decreased
$293 thousand, or 3.3%, and the provision for loan losses decreased $1.5
million. Non-interest income increased $606 thousand, or 17.0%, for the three
months ended March 31, 2021 compared to the same three month period in 2020. 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, 2021 and compared to the three months ended
March 31, 2020, service charges decreased $208 thousand, gain on the sale of
loans increased $464 thousand, gain on the sale of available for sale securities
decreased $112 thousand and salaries and benefits expense increased $146
thousand. Data processing fees increased $86 thousand and debit card expenses
decreased $7 thousand.



Return on average assets was 0.78% for the three months ended March 31, 2021 and
0.62% for the three months ended March 31, 2020. Return on average equity was
7.66% for the three month period ended March 31, 2021 and 5.77% for the three
month period ended March 31, 2020.

Securities available for sale decreased $3.9 million from $353.5 million at December 31, 2020 to $349.6 million at March 31, 2021.

Gross Loans decreased $1.8 million from $766.9 million on December 31, 2020 to $765.1 million at March 31, 2021.

The overall decrease in loan balances from December 31, 2020 to March 31, 2021
is comprised of the following: a decrease of $5.5 million in 1-4 family
residential loans, a decrease of $4.9 million in commercial loans, a decrease of
$2.1 million in multi-family residential loans, a decrease of $2.1 million in
agricultural loans, an increase of $12.8 million in non-farm and non-residential
loans, a decrease of $612 thousand in consumer loans, and an increase of $565
thousand in real-estate construction loans. Other loan balances decreased $20
thousand from December 31, 2020 to March 31, 2021.



Total deposits increased from $978.6 million on December 31, 2020 to $1.0
billion on March 31, 2021, an increase of $47.1 million. Time deposits $250
thousand and over decreased $10.5 million from December 31, 2020 to March 31,
2021 while non-interest bearing demand deposit accounts increased $50.3 million
and other interest bearing deposit accounts increased $7.3 million from December
31, 2020 to March 31, 2021.



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Public fund account balances decreased $16.7 million from December 31, 2020 to
March 31, 2021. 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 decreased $6.8 million from December 31, 2020 to March 31, 2021 and repurchase agreements decreased $692 thousand.

Net Interest Income



Net interest income is the difference between interest income earned on
interest-earning assets and the interest expense paid on interest-bearing
liabilities. Net interest income was $8.7 million for the three months ended
March 31, 2021 compared to $9.0 million for the three months ended March 31,
2020, a decrease of 3.3%.



The interest spread, excluding tax equivalent adjustments, was 2.83% for the
first three months of 2021 compared to 3.10% for the first three months of 2020.
For the first three months in 2021, the yield on interest earning assets
decreased from 4.30% in 2020 to 3.41% in 2021, excluding tax equivalent
adjustments.



The yield on loans, excluding tax equivalent adjustments, decreased sixty-one
basis points for the three months ended March 31, 2021 compared to the three
months ended March 31, 2020 from 4.95% to 4.34%. The yield on securities,
excluding tax equivalent adjustments, decreased ninety basis points during the
first three months of 2021 compared to 2020 from 2.54% in 2020 to 1.64% in 2021.
The cost of liabilities was 0.59% for the first three months in 2021 compared to
1.14% in 2020.

Year to date average loans, excluding overdrafts, increased $10.1 million, or
1.3% for the three months ended March 31, 2021 compared to the three months
ended March 31, 2020. Loan interest income decreased $1.0 million during the
first three months of 2021 compared to the first three months of 2020.



Year to date average total deposits increased from March 31, 2020 to March 31,
2021 by $142.2 million or 16.4%. Year to date average interest bearing deposits
increased $49.9 million, or 8.0%, from March 31, 2020 to March 31, 2021. Deposit
interest expense decreased $807 thousand for the first three months of 2021
compared to the same period in 2020. Year to date average borrowings, including
repurchase agreements, decreased $21.4 million, or 16.4%, from March 31, 2020 to
March 31, 2021. Interest expense on borrowed funds, including repurchase
agreements, decreased $186 thousand for the first three months of 2021 compared
to the same period in 2020.



The volume rate analysis for the three months ended March 31, 2021 indicates
loan interest income decreased $1.0 million when compared to the same time
period in 2020. An increase of $800 thousand 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 $195 thousand in
securities interest income is attributable to decreases in rates of our security
portfolio.

Also based on the following volume rate analysis for the three months ended
March 31, 2021, a decrease in demand deposit interest rates resulted in a $773
thousand reduction to interest expense, interest paid for savings deposits
remained fairly flat, and decreases in interest rates paid for time deposits
resulted in a reduction of interest expense of $438 thousand. The change in
volume in deposits and borrowings was responsible for a $427 thousand increase
in interest expense, of which an increase in demand deposits resulted in an
increase of $577 thousand in interest expense, a decrease in time deposits
resulted in a decrease of $176 thousand in interest expense, an increase in
repurchase agreements resulted in an increase of $82 thousand in interest
expense, and a decrease in other borrowings resulted in a decrease of $112
thousand in interest expense. The net effect to interest expense was a decrease
of $993 thousand. As a result, the decrease in net interest income for the first
three months in 2021 is mostly attributed to decreasing rates paid on deposits.



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Changes in Interest Income and Expense

                                                                     Three Months Ended
                                                                       2021 vs. 2020
                                                            Increase (Decrease) Due to Change in
(in thousands)                                            Volume           Rate          Net Change
INTEREST INCOME
Loans                                                   $      800     $     (1,842)     $   (1,042)
Investment Securities                                        2,253           (2,448)           (195)
Other                                                          164             (213)            (49)
Total Interest Income                                        3,217           (4,503)         (1,286)
INTEREST EXPENSE
Deposits
Demand                                                         577             (773)           (196)
Savings                                                         56              (53)               3
Negotiable Certificates of Deposit and Other Time
Deposits                                                     (176)             (438)           (614)
Securities sold under agreements to repurchase and
other borrowings                                                82             (112)            (30)
Federal Home Loan Bank advances                              (112)         

    (44)           (156)
Total Interest Expense                                         427           (1,420)           (993)
Net Interest Income                                     $    2,790     $     (3,083)     $     (293)


Non-Interest Income

Non-interest income increased $606 thousand for the three months ended March 31, 2021, compared to the same period in 2020, to $4.2 million.

Favorable variances to non-interest income for the first three months of 2021
include an increase of $90 thousand in loan service fee income (net), an
increase of $92 thousand in trust department income, an increase of $68 thousand
in brokerage income, an increase of $464 thousand in gains on the sale of loans,
an increase of $198 thousand in debit card interchange income and an increase of
$14 thousand in other income. Decreases to non-interest income for the three
months ended March 31, 2021 compared to the three months ended March 31, 2020
include a decrease of $208 thousand in service charges and a decrease of $112
thousand in gain on sale of available for sale securities.

The gain on the sale of loans increased from $683 thousand during the first three months of 2020 to $1.1 million during the first three months of 2021, an increase of $464 thousand.

The volume of loans originated to sell during the first three months of 2021
increased $5.7 million compared to the same time period in 2020. 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 $7 thousand for the three months ended
March 31, 2021 compared to $(83) thousand for the three months ended March 31,
2020, an increase of $90 thousand. During the first three months of 2021, the
market value adjustment to the carrying value of the mortgage servicing right
was a net writedown of $2 thousand. During the first three months of 2020, the
market value adjustment to the carrying value of the mortgage servicing right
asset was a net writedown of $142 thousand, as the fair value of the asset

decreased.



Non-Interest Expense

Total non-interest expense increased $587 thousand, or 6.4%, for the three month period ended March 31, 2021 compared to the same period in 2020.

For the comparable three month periods, salaries and employees benefits expense
increased $146 thousand, an increase of 2.9%. The number of full-time employee
equivalent employees decreased from 235 at March 31, 2020 to 222 at March 31,
2021, a decrease of thirteen full-time equivalent employees. Much of the
decrease in full-time equivalent employees occurred near the end of the quarter.
Therefore, salaries and benefits were recorded for these employees for much

of
the quarter.

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Occupancy expense decreased $101 thousand to $993 thousand for the first three months of 2021 compared to the same time period in 2020.

Legal and professional fees increased $750 thousand for the three months ended
March 31, 2021 compared to the three months ended March 31, 2020 due to fees
incurred during the first quarter of 2021 related to the merger with Stock

Yards
Bank and Trust.



Taxes other than payroll, property and income decreased $254 thousand during the
three months ended March 31, 2021 compared to the three months ended March 31,
2020. The decrease was due to the elimination of the bank franchise tax in 2021.
However, this was partially offset by an increase in the provision for income
taxes as a newly implemented Kentucky state income tax replaced the bank
franchise tax.



Loss on limited partnership expense decreased $174 thousand for the three months
ended March 31, 2021 compared to the three months ended March 31, 2020. The
decrease in loss on limited partnership expense during 2021 is attributed to
increased amortization expense for one of our tax credit investments during

2020.



Income Taxes

The effective tax rate for the three months ended March 31, 2021 was 16.7%
compared to (3.1)% in 2020. 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 higher for the three
months ended March 31, 2021 when compared to the three months ended March 31,
2020 largely due to tax credits associated with low income housing investments
decreasing from $304 thousand for the three months ended March 31, 2020 to $119
thousand for the three months ended March 31, 2021; a decrease of $185 thousand.
Also, the Company is now subject to a state income tax. This replaces the
franchise tax the Bank was subject to in prior years. This change resulted in an
increase of $52 thousand in recorded income tax expense for the three months
ended March 31, 2021 compared to the three months ended March 31, 2020. Further,
income before income taxes for the three months ended March 31, 2021 increased
$1.3 million when compared to the three months ended March 31, 2020 which also
contributed to the increase in recorded income tax expense. Tax- exempt interest
income increased $111 thousand for the first three months of 2021 compared to
the first three months of 2020.



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, 2021, the Company averaged $53.9
million in tax free securities and $46.5 million in tax free loans. As of March
31, 2021, the weighted average remaining maturity for the tax free securities is
65 months, while the weighted average remaining maturity for the tax free loans
was 158 months.

For the year ended December 31, 2020, the Company averaged $36.9 million in tax
free securities, and $69.2 million in tax free loans. As of December 31, 2020,
the weighted average remaining maturity for the tax free securities was 62
months, while the weighted average remaining maturity for the tax free loans was
158 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 may have a
negative impact on earnings as a result of the lower yields on short-term
assets.



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Cash and cash equivalents were $81.9 million as of March 31, 2021 compared to
$39.0 million at December 31, 2020. The increase in cash and cash equivalents is
attributed to an increase of $43.0 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 $349.6
million at March 31, 2021 compared to $353.5 million at December 31, 2020. 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 2021, deposits increased $47.1 million compared to
December 31, 2020. The Company's borrowed funds from the Federal Home Loan Bank
decreased $6.8 million from December 31, 2020 to March 31, 2021, federal funds
purchased remained at zero, and total repurchase agreements decreased $692
thousand from December 31, 2020 to March 31, 2021.



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, 2021, we have sufficient collateral to borrow an additional $118.4 million
from the Federal Home Loan Bank. In addition, as of March 31, 2021, $45 million
is available in overnight borrowing through various correspondent banks and $315
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, 2021 and December 31, 2020.



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 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.











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The Bank has elected to use the CBLR framework. The community bank leverage
ratio removes the requirement for qualifying banking organizations to calculate
and report risk-based capital but rather only requires a Tier 1 to average
assets (leverage) ratio. Qualifying banking organizations that elect to use the
community bank leverage ratio framework and that maintain a leverage ratio of
greater than required minimums will be considered to have satisfied the
generally applicable risk based and leverage capital requirements in the
agencies' capital rules (generally applicable rule) and, if applicable, will be
considered to have met the well capitalized ratio requirements for purposes of
section 38 of the Federal Deposit Insurance Act. Under the interim final rules
the community bank leverage ratio minimum requirement was 8% as of December 31,
2020, 8.5% for calendar year 2021, and 9% for calendar year 2022 and beyond. The
interim rules allows for a two-quarter grace period to correct a ratio that
falls below the required amount, provided that the bank maintained a leverage
ratio of 7% as of December 31, 2020, and maintains a leverage ratio of 7.5% for
calendar year 2021, and 8% for calendar year 2022 and beyond.



At March 31, 2021, the Bank's CBLR was 8.8%. Management believes as of March 31,
2021, 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, 2021 and at December 31, 2020, 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.



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, 2021
Bank Only
Tier I Capital (to Average Assets)      $ 109,439      8.8    $    98,999

8.5 $ 98,999 8.5

December 31, 2020
Bank Only
Tier I Capital (to Average Assets)        107,805      9.0         96,258  

   8.0         96,258      8.0




Non-Performing Assets



As of March 31, 2021, our non-performing assets, including other real estate,
totaled $4.8 million or 0.38% of assets compared to $6.1 million or 0.50% of
assets at December 31, 2020 (see the following table). The Company experienced a
decrease of $80 thousand in non-accrual loans from December 31, 2020 to March
31, 2021. As of March 31, 2021, non-accrual loans include $124 thousand in loans
secured by construction real estate, $800 thousand in loans secured by
multi-family residential property, $1.8 million in loans secured by non-farm
non-residential property, $1.2 million in loans secured by 1-4 family properties
and $49 thousand in consumer loans.



Loans secured by real estate composed 96.7% of the non-performing loans as of
March 31, 2021 and 96.4% as of December 31, 2020. Forgone interest income on
non-accrual loans totaled $236 thousand for the first three months of 2021
compared to forgone interest of $101 thousand for the same time period in 2020.

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Accruing loans that are contractually 90 days or more past due as of March 31,
2021 totaled $101 thousand compared to $75 thousand at December 31, 2020, a
decrease of $26 thousand. Total nonperforming and restructured loans decreased
$1.2 million from December 31, 2020 to March 31, 2021. The decrease was mostly
attributed to one loan paying off during the first quarter of 2021 which had an
outstanding balance of $1.1 million and was classified as an accruing troubled
debt restructuring as of December 31, 2020. The ratio of nonperforming and
restructured loans to loans decreased from 0.69% at December 31, 2020 to 0.53%
at March 31, 2021.

In addition, the amount the Company has recorded as other real estate owned
decreased $141 thousand from December 31, 2020 to March 31, 2021. As of March
31, 2021 and December 31, 2020, the amount recorded as other real estate owned
totaled $735 thousand and $876 thousand, respectively. During the first three
months of 2021, one addition was made to other real estate properties and one
sale occurred. The allowance as a percentage of non-performing and restructured
loans and other real estate owned increased from 161% at December 31, 2020

to
197% at March 31, 2021.

Nonperforming and Restructured Assets

                                                                3/31/2021      12/31/2020

                                                                     (in thousands)
Non-accrual Loans                                              $     3,971    $      4,051
Accruing Loans which are Contractually past due over 89
days                                                                   101              75
Accruing Troubled Debt Restructurings                                    - 

1,145

Total Nonperforming and Restructured Loans                           4,072 

5,271

Other Real Estate                                                      735             876
Total Nonperforming and Restructured Loans and Other Real
Estate                                                         $     4,807

$ 6,147 Nonperforming and Restructured Loans as a Percentage of Loans

                                                                 0.53 

% 0.69 % Nonperforming and Restructured Loans and Other Real Estate as a Percentage of Total Assets

                                       0.38 %          0.50 %
Allowance as a Percentage of Period-end Loans                         1.24 %          1.29 %
Allowance as a Percentage of Non-performing and
Restructured Loans and Other Real Estate                               197

%           161 %




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 2021 was $100 thousand
compared to $1.6 million for the first three months of 2020. The decrease in the
total loan loss provision during the first three months of 2021 compared to the
same time period in 2020 was attributed mostly to uncertainties surrounding the
COVID-19 pandemic in 2020. For the three months ended March 31,2020, the Company
recorded additional provision for loan losses as a result of these
uncertainties. For the three months ended March 31, 2021, the Company reversed a
portion of the additional provision for loan losses recorded during 2020 due to
recording few charge offs thus far as a result of the pandemic. However, these
reductions were partially offset by one loan which had a partial charge off
totaling $500 thousand during the three months ended March 31, 2021. 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. The allowance for loan losses as a percentage of loans was
1.24% at March 31, 2021 compared to 1.29% at December 31, 2020.



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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 $1.2 million from December
31, 2020 to $4.1 million at March 31, 2021. The Company recorded net charge-offs
of $537 thousand for the three months ended March 31, 2021 compared to net
charge-offs of $169 thousand for the three months ended March 31, 2020. 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.

                                                              Three Months Ended March 31,
                                                                     (in thousands)
                                                                2021                2020

Balance at Beginning of Period:                            $        9,897

   $        8,460
Amounts Charged-Off:
Commercial                                                              3                  25
Real estate mortgage:
1-4 family residential                                                  -                  35
Multi-family residential                                              500                   -
Non-farm & non-residential                                             19                   -
Consumer and other                                                    289                 347
Total Charged-off Loans                                               811                 407
Recoveries on Amounts Previously Charged-off:
Commercial                                                              1                   6
Real Estate Construction                                                4                   -
Real estate mortgage:
1-4 family residential                                                  3                  15
Agricultural                                                            6                   2
Consumer and other                                                    260                 215
Total Recoveries                                                      274                 238
Net Charge-offs                                                       537                 169
Provision for Loan Losses                                             100               1,625
Balance at End of Period                                            9,460               9,916
Loans
Average                                                           768,491             762,389
At March 31,                                                      765,095             778,327
As a Percentage of Average Loans:
Net Charge-offs (Recoveries) for the period                          0.07 %              0.02 %
Provision for Loan Losses for the period                             0.01 %              0.21 %
Allowance as a Multiple of Net Charge-offs annualized                 4.4  

             14.7










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