Item 1. Business
General
Bourbon Bancshares, Inc. ("Company" or "Bourbon") is a Kentucky corporation organized in 1981 and a bank and savings and loan holding company registered under the Bank Holding Company Act of 1956, as amended ("BHCA") and the Home Owners Loan Act of 1933, as amended ("HOLA").
On August 13, 1999, Kentucky Bank acquired the Wilmore, Kentucky branch of National City Bank. Included in the purchase were $9.0 million in net deposits and $353 thousand in fixed assets. The net deposits assumed exceeded the cash received by $287 thousand.
The Company conducts business through one banking subsidiary, Kentucky Bank. Kentucky Bank is a commercial bank and trust company organized under the laws of Kentucky. Kentucky Bank has its main office in Paris (Bourbon County), Kentucky, additional offices in Paris, North Middletown (Bourbon County), Winchester (Clark County), Georgetown (Scott County), Versailles (Woodford County), Nicholasville (Jessamine County), Wilmore (Jessamine County), Kentucky and a loan production office in Cynthiana (Harrison County), Kentucky. The deposits of Kentucky Bank are insured up to prescribed limits by the Bank Insurance Fund ("BIF") and the Savings Association Insurance Fund ("SAIF"), both of the Federal Deposit Insurance Corporation ("FDIC"). Kentucky Bank is engaged in general full-service commercial and consumer banking. Kentucky Bank makes commercial, agricultural and real estate loans to its commercial customers, with emphasis on small-to-medium-sized industrial, service and agricultural businesses. Kentucky Bank makes residential mortgage, installment and other loans to its individual and other non-commercial customers. Kentucky Bank also offers its customers the opportunity to obtain a credit card. Kentucky Bank offers its customers a variety of other services, including checking, savings, club and money market accounts, certificates of deposits, safe deposit facilities and other consumer-oriented financial services. Recently, Kentucky Bank has made Internet banking available to its customers at www.kybank.com. Through its trust department, Kentucky Bank provides primarily personal trust and agency services (including management agency services) and, to a lesser extent, corporate trust services (including the management of corporate pension and profits sharing plans).
Competition
The Company and its subsidiary face vigorous competition from a number of sources, including other bank holding companies and commercial banks, consumer finance companies, thrift institutions, other financial institutions and financial intermediaries. In addition to commercial banks, savings and loan associations, savings banks and credit unions actively compete to provide a wide variety of banking services. Mortgage banking firms, finance companies, insurance companies, brokerage companies, financial affiliates of industrial companies and government agencies provide additional competition for loans and for many other financial services. The subsidiary also currently competes for interest-bearing funds with a number of other financial intermediaries, including brokerage firms and mutual funds, which offer a diverse range of investment alternatives.
Supervision and Regulation
As a bank holding company, the Company is subject to the regulation and supervision of the Federal Reserve Board. The Company's subsidiary is subject to supervision and regulation by applicable state and federal banking agencies, including the Federal Reserve Board, the Federal Deposit Insurance Corporation and the Kentucky Department of Financial Institutions. The subsidiary is also subject to various requirements and restrictions under federal and state law, including requirements to maintain reserves against deposits, restrictions on the types and amounts of loans that may be granted and the interest that may be charged thereon, and limitations on the types of investments that may be made and the types of services that may be offered. Various consumer laws and regulations also affect the operations of the subsidiary. In addition to the impact of regulation, the subsidiary is affected significantly by the actions of the Federal Reserve Board as it attempts to control the money supply and credit availability in order to influence the economy.
There are a number of obligations and restrictions imposed on bank holding companies and their depository institution subsidiaries by federal law and regulatory policy that are designed to reduce potential loss exposure to the depositors of such depository institutions and to the FDIC insurance funds in the event the depository institution becomes in danger of default or is in default. For example, under a policy of the Federal Reserve Board with respect to bank holding company operations, a bank holding company is required to serve as a source of financial strength to its subsidiary depository institutions and commit resources to support such institutions in circumstances where it might not do so absent such policy. In addition, the "cross- guarantee" provisions of federal law require insured depository institutions under common control to reimburse the FDIC for any loss suffered or reasonably anticipated as a result of the default of a commonly controlled insured depository institution or for any assistance provided by the FDIC to a commonly controlled insured depository institution in danger of default.
The federal banking agencies have broad powers under current federal law to take prompt corrective action to resolve problems of insured depository institutions. The extent of these powers depends upon whether the institutions in question are "well capitalized", "adequately capitalized", "undercapitalized", "significantly undercapitalized" or "critically undercapitalized", as such terms are defined under uniform regulation defining such capital levels issued by each of the federal banking agencies.
There are various legal and regulatory limits on the extent to which the Company's subsidiary bank may pay dividends or otherwise supply funds to the Company. In addition, federal and state regulatory agencies also have the authority to prevent a bank or bank holding company from paying a dividend or engaging in any other activity that, in the opinion of the agency, would constitute an unsafe or unsound practice.
There have been a number of legislative and regulatory proposals that would have an impact on the operation of bank holding companies and their banks. It is impossible to predict whether or in what form these proposals may be adopted in the future and, if adopted, what their effect will be on the Company.
Beginning January 1, 2001, a new accounting standard will require all derivatives to be recorded at fair value. Unless designated as hedges, changes in these fair values will be recorded in the income statement. Fair value changes involving hedges will generally be recorded by offsetting gains and losses on the hedge and on the hedged item, even if the fair value of the hedged item is not otherwise recorded. This is not expected to have a material effect, but the effect will depend on derivative holdings when this standard applies.
The recently adopted Gramm-Leach-Bliley Act of 1999 eliminates restrictions imposed by the Glass-Steagall Financial Services Law, adopted in the 1930s, which prevented banking, insurance and securities firms from fully entering each other's businesses. While it is still uncertain what the impact of this legislation will be, it is likely to result in further consolidation in the financial services industry. In addition, removal of these barriers will likely increase the number of entities providing banking services, thereby increasing competition.
Employees
At December 31, 1999, the number of full time equivalent employees of the Company was 149.
Item 2.
Item 2. Properties
The main banking office of Kentucky Bank, which also serves as the principal office of Kentucky Bank, is located at Fourth and Main Streets, Paris, Kentucky 40361. In addition, Kentucky Bank serves customer needs at 10 other locations. All locations, except for the Cynthiana office (which is a loan production office), offer a full range of banking services. Kentucky Bank owns all of the properties at which it conducts its business, except the location in Scott County at Paris Pike, which is leased. The Company owns approximately 63,000 square feet of office space and leases approximately 2,000 square feet of office space, with aggregate annual lease payments of approximately $15 thousand in 1999.
Note 5 to the Company's consolidated financial statements included in this report contains additional information relating to amounts invested in premises and equipment.
Item 3.
Item 3. Legal Proceedings
The Company and its subsidiary are from time to time involved in routine legal proceedings occurring in the ordinary course of business that, in the aggregate, management believes will not have a material impact on the Company's financial condition and results of operation.
Item 4.
Item 4. Submission of Matters to a Vote of Security Holders
Not Applicable.
PART II
Item 5.
Item 5. Market for Common Equity and Related Stockholder Matters
The Company's Common Stock is not listed on any national securities exchange nor is it quoted on the NASDAQ system. However, it is listed on the OTC Bulletin Board under the symbol "BBON". Trading in the Common Stock has been infrequent, with two regional retail brokerage firms making the market. On June 8, 1999, the stockholders approved a two-for-one stock split effective July 15, 1999. All shares and per share amounts have been retroactively restated to reflect the split. The following table sets forth the high and low sales prices of the Common Stock and the dividends declared thereon, for the periods indicated below:
High Low Dividend
1999 Quarter 4 $26.00 $24.00 $.11 Quarter 3 24.00 22.00 .11 Quarter 2 22.50 20.50 .11 Quarter 1 21.00 20.00 .11
1998 Quarter 4 20.12 20.50 .10 Quarter 3 21.00 20.00 .10 Quarter 2 20.00 18.25 .10 Quarter 1 18.25 15.50 .10
As of December 31, 1999 the Company had 2,802,471 shares of Common Stock outstanding and approximately 442 holders of record of its Common Stock.
During 1999, 7,695 shares of unregistered stock were issued to employees and directors. This stock was issued through the exercise of stock options or employee gifts. In accordance with Rule 701 promulgated under the Securities Act of 1933, all shares of Common Stock were issued upon the exercise of stock options issued prior to the Company becoming subject to the reporting requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934. The following shares were issued during 1999:
Aggregate Date Issued Shares Consideration
March 10, 1999 1,220 $ 9,460 March 18, 1999 200 1,725 May 12, 1999 580 4,600 June 8, 1999 5,200 34,350 July 31, 1999 400 4,050 October 31, 1999 95 gift
Total 7,695
Item 6.
Item 6. Selected Financial Data
The following selected financial data should be read in conjunction with the Company's Consolidated Financial Statements and the accompanying notes presented elsewhere herein. On June 8, 1999, the stockholders approved a two- for-one stock split effective July 15, 1999. All shares and per share amounts have been retroactively restated to reflect the split.
At or For the Year Ended December 31 (dollars in thousands, except per share amounts) 1999 1998 1997 1996 1995 CONDENSED STATEMENT OF INCOME: Total Interest Income $ 23,453 $ 21,983 $ 20,962 $ 19,425 $ 19,658 Total Interest Expense 10,547 10,666 10,415 9,839 10,426 Net Interest Income 12,906 11,317 10,547 9,586 9,232 Provision for Losses 700 700 493 402 396 Net Interest Income After Provision for Losses 12,206 10,617 10,054 9,184 8,836 Noninterest Income 3,386 3,073 2,390 2,284 2,053 Noninterest Expense 9,422 8,514 7,888 7,715 7,684 Income Before Income Tax Expense 6,170 5,176 4,556 3,753 3,205 Income Tax Expense 1,720 1,372 1,148 866 717 Net Income 4,450 3,804 3,408 2,887 2,488
SHARE DATA: Basic Earnings per Share (EPS) 1.59 1.36 1.22 1.02 0.87 Diluted EPS 1.55 1.33 1.20 1.00 0.86 Cash Dividends Declared 0.44 0.40 0.36 0.32 0.30 Book Value 11.32 10.46 9.58 8.72 8.08 Average Common Shares-Basic 2,803 2,801 2,792 2,849 2,860 Average Common Shares-Diluted 2,868 2,862 2,844 2,887 2,916
SELECTED BALANCE SHEET DATA: Loans, net including held for sale 238,998 210,108 182,839 157,564 153,201 Investment Securities 70,623 72,353 81,703 92,540 92,639 Total Assets 347,479 308,705 290,655 272,453 269,431 Deposits 274,566 258,740 241,325 231,071 213,348 Securities sold under agreements to repurchase and other borrowings 11,858 11,248 9,458 4,160 11,791 Federal Home Loan Bank advances 26,592 6,954 10,236 10,534 19,071 Stockholders' Equity 31,720 29,372 26,716 24,633 23,167
PERFORMANCE RATIOS: (Average Balances) Return on Assets 1.39% 1.31% 1.23% 1.10% 0.94% Return on Stockholders' Equity 14.57% 13.57% 13.43% 12.06% 11.36% Net Interest Margin (1) 4.46% 4.27% 4.18% 4.02% 3.80% Equity to Assets (at period end) 9.13% 9.51% 9.19% 9.04% 8.60%
SELECTED STATISTICAL DATA: Dividend Payout Ratio 27.73% 29.49% 29.49% 31.57% 32.93% Number of Employees (at period end) 149 144 145 137 125
ALLOWANCE COVERAGE RATIOS: Allowance to Total Loans 1.28% 1.28% 1.25% 1.32% 1.20% Net Charge-offs as a Percentage of Average Loans 0.15% 0.15% 0.16% 0.10% 0.12%
(1) Tax equivalent
Item 7.
Item 7. Management's Discussion and Analysis
The following discussion and analysis of financial condition and results of operations should be read in conjunction with the Consolidated Financial Statements and accompanying notes included as Exhibit 13. When necessary, reclassifications have been made to prior years' data throughout the following discussion and analysis for purposes of comparability with 1999 data. On June 8, 1999, the stockholders approved a two- for-one stock split effective July 15, 1999. All shares and per share amounts have been retroactively restated to reflect the split.
Summary
Net income for the year ended December 31, 1999 was $4.5 million, or $1.59 per common share compared to $3.8 million, or $1.36 for 1998 and $3.4 million, or $1.22 for 1997. Earnings per share assuming dilution were $1.55, $1.33 and $1.20 for 1999, 1998 and 1997, respectively. During 1999, net income increased $646 thousand, up 17%. Net interest income increased 14% and the loan loss provision remained relatively constant, while other income and other expenses increased 10%. For 1998, net income increased over $395 thousand, nearly 12%. Increases in net interest income of over 7% and other income of 28% were offset by increases in other expenses of over 7% and the provision for loan losses of 42%. The increase in the loan loss provision was mainly attributable to the 15% growth in loans.
Return on average equity was 14.6% in 1999 compared to 13.6% in 1998 and 13.4% in 1997. Return on average assets was 1.39% in 1999 compared to 1.31% in 1998 and 1.23% in 1997.
Non-performing loans as of a percentage of loans (including held for sale) were 0.31%, 0.50% and 0.26% as of December 31, 1999, 1998 and 1997, respectively. With emphasis on loan growth and through management's concerted effort on loan quality, these ratios have remained well below peer groups over the last three years.
During 1996, the federal thrift charters of Kentucky Savings Bank, FSB and Jessamine were terminated and both entities became branches of Kentucky Bank. Financial statements have been adjusted to reflect this change.
RESULTS OF OPERATIONS
Net Interest Income
Net interest income, the largest source of revenue, on a tax equivalent basis increased from $10.9 million in 1997 to $11.7 million in 1998 to $13.2 million in 1999. The taxable equivalent adjustment (which is net of the effect of the non- deductible portion of interest expense) is based on a Federal income tax rate of 34%.
Average earning assets and interest bearing liabilities both increased from 1998 to 1999. The increase in earning assets of $24 million offset with a decline of 18 basis points in the tax equivalent yield have resulted in tax equivalent interest income increasing $1.5 million. Average loans increased $28 million along with a 25 basis point drop in the yield, resulting in the loan income increasing $2 million. Average interest bearing liabilities increased $20 million coupled with a 42 basis point decline in the yield caused the interest on liabilities to decline $119 thousand. The $488 thousand decline in deposit interest is a result of average deposits increasing $12 million and the corresponding yield dropping 47 basis points.
For 1998, average earning assets and interest bearing liabilities increased. The $12 million increase in average earning assets, and maintenance of the same tax equivalent yield resulted in tax equivalent interest income increasing over $1 million. Average loans increasing over $22 million with a 14 basis point decline in yield along with an over $10 million decline in investment securities and an 8 basis point decline caused the yield on earning assets to remain constant. The increase of $10 million in deposits along with an 8 basis point decline in yield accounted for the change in liabilities.
The accompanying analysis of changes in net interest income in the following table shows the relationships of the volume and rate portions of these increases in 1999 and 1998. Changes in interest income and expenses due to both rate and volume are allocated on a pro rata basis.
[FN] (1) Averages computed at amortized cost. (2) Includes loans on a nonaccrual status. (3) Tax equivalent difference represents the tax equivalent adjustment detailed above.
Noninterest Income and Expenses
Noninterest income was $3.4 million in 1999 compared to $3.1 million in 1998 and $2.4 million in 1997. In 1999 securities gains were $1 thousand compared to $41 thousand gains in 1998 and $14 thousand gains in 1997. Typically, U. S. Treasury securities are sold before maturity when additional interest yields can be realized. Other types of investment securities are generally not sold. In addition, gains on loans sold were $351 thousand, $440 thousand and $72 thousand in 1999, 1998 and 1997, respectively. During 1999, the volume of mortgage loans held for sale declined. This decline along with rising rates account for the drop in loan gains during the year. In 1998, management increased its focus on mortgage banking and this focus along with the increased volume of loans sold in a declining rate environment resulted in the increased gain on loans sold. Loans held for sale are generally sold after closing to Federal Home Loan Mortgage Corporation. The sales of loans were $25 million, $35 million and $18 million in 1999, 1998 and 1997, respectively. Other noninterest income excluding security and loans net gains was $3.0 million in 1999, $2.6 million in 1998 and $2.3 million in 1997. Service charges and trust department income have both been big contributors to this increase in income over this three-year period.
Noninterest expense increased $908 thousand in 1999 to $9.4 million and $626 thousand from $7.9 million in 1997 to $8.5 million in 1998. The increases in salaries and benefits from $4.3 million in 1997 to $4.5 million in 1998 and $5.1 million in 1999 are mainly attributable to normal salary and benefit increases and a change in bonus compensation, with an increased focus on incentive compensation. Due to this change, bonuses were $234 thousand higher in 1999 compared to 1998. Occupancy expense increased $197 thousand, or 17% in 1999 to $1.4 million and 16% in 1998, from $1.0 million in 1997 to $1.2 million in 1998. In August 1998 the Company added a new branch in Georgetown and in March 1997, the Company opened its new branch in Versailles resulting in higher operating cost attributable to these facilities. The Company has also placed more emphasis on maintaining its existing facilities since 1997, which are reflected in increases in occupancy expenses. Other noninterest expense increased from $2.6 million in 1997 to $2.8 million in 1998 and in 1999 other noninterest expenses increased to $3.0 million.
The following table is a summary of noninterest income and expense for the three-year period indicated.
Year Ended December 31 (in thousands) 1999 1998 1997 NON-INTEREST INCOME Service Charges $2,075 $1,811 $1,674 Loan Service Fee Income 291 283 258 Trust Department Income 398 300 237 Investment Securities Gains 1 41 14 (Losses),net Gains on Sale of Mortgage Loans 351 440 72 Other 270 198 135 Total Non-interest Income 3,386 3,073 2,390
NON-INTEREST EXPENSE Salaries and Employee Benefits 5,054 4,527 4,274 Occupancy Expenses 1,361 1,164 1,002 Other 3,007 2,823 2,612 Total Non-interest Expense 9,422 8,514 7,888
Net Non-interest Expense as a Percentage of Average Assets 1.88% 1.87% 1.99%
Income Taxes
The Company had income tax expense of $1.7 million in 1999 compared to $1.4 million in 1998 and $1.1 million in 1997. This represents an effective income tax rate of 27.9% in 1999, 26.5% in 1998 and 25.2% in 1997. The difference between the effective tax rate and the statutory federal rate of 34% is due to tax exempt income on certain loans and investment securities. The higher effective rate for 1999 and 1998 is a result of tax-free income remaining virtually unchanged for these two years while income before taxes increased $995 thousand in 1999 and $619 thousand in 1998.
Balance Sheet Review
Assets at year-end 1999 totaled $347 million compared to $309 million in 1998 and $291 million in 1997. Loan growth of $32 million in 1999 was funded by deposit growth of $16 million and an increase in borrowings of $20 million. At the end of 1999, Cash and Due From Banks were $9 million higher as a precaution to possible Y2K anxieties. Changes in 1998 are a result of loans increasing $27.7 million and investment securities decreasing $9.3 million. Assets were funded by an increase in deposits of $17.4 million. Federal Home Loan Bank Advances declined by $3.3 million.
Loans
Total loans (including loans held for sale) were $242 million at December 31, 1999 compared to $213 million at the end of 1998 and $185 million in 1997. As of the end of 1999 and compared to the prior year-end, commercial loans increased $2.5 million, real estate construction loans increased $5.9 million, real estate mortgage loans (including loans held for sale) increased $13.6 million, agricultural loans increased $2.2 million and installment loans increased $4.8 million. In 1998, commercial loans increased $4.5 million, real estate construction loans increased $3.4 million, real estate mortgages increased $11.2 million, agricultural loans increased $6.3 million and installment loans increased $2.4 million. Since 1998, management has utilized regional loan goals for each type of loan and this emphasis has resulted in improved sales efforts by the lending personnel. Management continues to place more emphasis on the growth without sacrificing the quality of the loan portfolio.
As of December 31, 1999, the real estate mortgage portfolio comprised 57% of total loans compared to 59% in 1998. Of this, 1-4 family residential property represented 76% in 1999 and 79% in 1998. Agricultural loans comprised 19% in 1999 and 21% in 1998 of the loan portfolio. Approximately 75% and 73% of the agricultural loans are secured by real estate for 1999 and 1998, respectively. The remainder of the agricultural portfolio is used to purchase livestock, equipment and other capital improvements and for general operation of the farm. Generally, a secured interest is obtained in the capital assets, equipment, livestock or crops. Automobile loans account for 52% in 1999 and 47% in 1998 of the installment loan portfolio, while the purpose of the remainder of this portfolio is used by customers for purchasing retail goods, home improvement or other personal reasons. Collateral is generally obtained on these loans after analyzing the repayment ability of borrower. Commercial loan's portfolio is mainly for capital outlays and business operation. Collateral is requested depending on the creditworthiness of the borrower. Unsecured loans are made to individuals or companies mainly based on the creditworthiness of the customer. Approximately 5% of the loan portfolio is unsecured. Management is not aware of any significant concentrations that may cause future material risks, which may result in significant problems with future income and capital requirements.
The following table represents a summary of the Company's loan portfolio by category for each of the last five years. There is no concentration of loans (greater than 5% of the loan portfolio) in any industry. Bourbon has no foreign loans or highly leveraged transactions in its loan portfolio.
Loans Outstanding December 31 (in thousands) 1999 1998 1997 1996 1995 Commercial $ 17,713 $ 15,177 $ 10,644 $ 10,216 $ 11,167 Real Estate Construction 17,003 11,055 7,657 4,200 3,497 Real Estate Mortgage 138,337 124,721 113,524 99,293 102,077 Agricultural 46,443 44,199 37,924 30,947 27,019 Installment 22,358 17,608 15,182 14,789 11,029 Other 280 159 287 374 397 Total Loans 242,134 212,919 185,218 159,819 155,186 Less Deferred Loan Fees 33 76 57 154 125 Total Loans Net of Deferred Loan Fees 242,101 212,843 185,161 159,665 155,061 Less loans held for sale 3,494 5,909 5,418 863 1,364 Less Allowance For Loan Losses 3,103 2,734 2,322 2,101 1,860 Net Loans 235,504 204,200 177,421 156,701 151,837
The following table sets forth the maturity distribution and interest sensitivity of selected loan categories at December 31, 1999. Maturities are based upon contractual term. The total loans in this report represents loans net of deferred loan fees, including loans held for sale but excluding the allowance for loan losses. In addition, deferred loan fees on the above schedule is netted with real estate mortgage loans on the following schedule.
Loan Maturities and Interest Sensitivity
December 31, 1999 (in thousands) One Year One Through Over Total or Less Five Years Five Years Loans Commercial $ 8,625 $ 6,595 $ 2,494 $ 17,714 Real Estate 14,321 2,525 162 17,008 Construction Real Estate Mortgage 9,029 77,389 51,875 138,293 Agricultural 14,256 29,794 2,398 46,448 Installment 5,481 16,660 217 22,358 Other 280 0 0 280 Total Loans 51,992 132,963 57,146 242,101 Fixed Rate Loans 25,206 125,656 17,893 168,755 Floating Rate Loans 26,786 7,307 39,253 73,346 Total 51,992 132,963 57,146 242,101
Deposits
Total deposits increased to $275 million in 1999, up $16 million from 1998. Noninterest bearing deposits increased $2 million, while time deposits of $100 thousand and over, and other interest bearing deposits both increased $7 million. Public funds totaled $34 million at the end of 1999 ($33 million was interest bearing). On August 13, 1999, Kentucky Bank acquired the Wilmore, Kentucky branch of National City Bank. Included in the purchase were $9.0 million in net deposits and $353 thousand in fixed assets. The net deposits assumed exceeded the cash received by $287 thousand.
Total deposits increased $17 million in 1998 to $259 million. Noninterest bearing deposits increased $7 million to $40 million, while $100,000 and over time deposits and other interest bearing deposits both increased $5 million. Public funds composed $35 million, with $34 million of this being interest bearing. In addition, management placed more emphasis on deposits and monitored deposits generated by type on a monthly basis.
The tables below provide information on the maturities of time deposits of $100,000 or more at December 31, 1999 and detail of short-term borrowing for the past three years.
Maturity of Time Deposits of $100,000 or More
December 31, 1999 (in thousands)
Maturing 3 Months or Less $ 7,904 Maturing over 3 Months through 6 Months 8,540 Maturing over 6 Months through 12 Months 13,858 Maturing over 12 Months 4,412
Total 34,714
Borrowing
The Company utilizes both long and short term borrowing. Long term borrowing is mainly from the Federal Home Loan Bank (FHLB). As of December 31, 1999, $26.6 million was borrowed from FHLB, an increase of $19.6 million from 1998. Advances are either paid monthly or at maturity. This borrowing is mainly used to fund long term, fixed rate mortgages and to assist in asset/liability management. Nearly $361 thousand of FHLB borrowing was paid in 1999, and advances were made for an additional $20 million. The following table depicts relevant information concerning our short term borrowings.
Short Term Borrowings December 31 (in thousands) 1999 1998 1997 Federal Funds Purchased: Balance at Year end $ 0 $3,750 $2,375 Average Balance During the Year 2,196 446 488 Maximum Month End Balance 11,925 4,550 2,375 Repurchase Agreements: Balance at Year end 10,330 6,713 4,615 Average Balance During the Year 5,683 4,329 4,103 Maximum Month End Balance 10,330 6,713 4,895 Other Borrowed Funds: Balance at Year end 1,528 785 2,468 Average Balance During the Year 1,203 1,198 1,259 Maximum Month End Balance 1,759 1,761 2,468
Asset Quality
With respect to asset quality, management considers three categories of assets to merit close scrutiny. These categories include: loans that are currently nonperforming, other real estate, and loans that are currently performing but which management believes require special attention.
The Company discontinues the accrual of interest on loans that become 90 days past due as to principal or interest unless extreme justifiable reasons are documented such as the loan being in the process of collection. Uncollected interest generally remains in earned income until collected and removed from earnings if the loan is charged-off. A loan remains in a non-accrual status until factors indicating doubtful collection no longer exist. A loan is classified as a restructured loan when the interest rate is materially reduced or the term is extended beyond the original maturity date because of the inability of the borrower to service the interest payments at market rates. Other real estate is recorded at the lower of cost or fair market value less estimated costs to sell. A summary of the components of nonperforming assets, including several rates using period-end data, is shown below.
Nonperforming Assets December 31 (dollars in thousands) 1999 1998 1997 1996 1995 Non-accrual Loans $ 63 $ 136 $ 173 $ 33 $ 44 Accruing Loans which are Contractually past due 90 days or more 565 790 154 562 438 Restructured Loans 131 147 160 180 201 Total Nonperforming Loans 759 1,073 487 775 683 Other Real Estate 371 70 0 79 57 Total Nonperforming Assets 1,130 1,143 487 854 740 Total Nonperforming Loans as a Percentage of Net Loans (including loans held for sale) (1) 0.31% 0.50% 0.26% 0.49% 0.44% Total Nonperforming Assets as a Percentage of Total Assets 0.33% 0.37% 0.17% 0.31% 0.27%
(1) Net of deferred loan fees
Total nonperforming assets loans at December 31, 1999 were $1.1 million compared to $1.1 million at December 31, 1998 and $487 thousand at December 31, 1997. Total nonperforming loans were $759 thousand, $1.1 million and $487 thousand at December 31, 1999, 1998 and 1997, respectively. The amount of lost interest on non-accrual loans is considered immaterial. At December 31, 1999, loans currently performing but which management believes require special attention were not significant. The Company continues to follow its long-standing policy of not engaging in international lending and not concentrating lending activity in any one industry.
Impaired loans as of December 31, 1999 were $201 thousand compared to $286 thousand in 1998 and $333 thousand in 1997. These amounts are included in the total nonperforming and restructured loans presented in the table above. See Note 4 in the notes to consolidated financial statements included as Exhibit 13.
A loan is considered impaired when it is probable that all principal and interest amounts will not be collected according to the loan contract. The allowance for loan losses on impaired loans is determined using the present value of estimated future cash flows of the loan, discounted at the loan's effective interest rate or the fair value of the underlying collateral. The entire change in present value of expected cash flows is reported as a provision for loan losses in the same manner in which impairment initially was recognized or as a reduction in the amount of provision for loan losses that otherwise would be reported. The total allowance for loan losses related to these loans was $10 thousand, $85 thousand and $57 thousand on December 31, 1999, 1998 and 1997, respectively.
Loan Losses
The following table is a summary of the Company's loan loss experience for each of the past five years.
Year Ended December 31 (in thousands) 1999 1998 1997 1996 1995 Balance at Beginning of Year $2,735 $2,322 $2,101 $1,860 $1,648 Amounts Charged-off: Commercial 0 13 5 55 14 Real Estate Construction 0 0 0 0 0 Real Estate Mortgage 50 36 25 4 41 Agricultural 72 19 52 12 36 Consumer 289 300 273 142 139 Total Charged-off Loans 411 368 355 213 230 Recoveries on Amounts Previously Charged-off: Commercial 5 4 3 12 15 Real Estate Construction 0 0 0 0 0 Real Estate Mortgage 1 9 1 8 21 Agricultural 32 2 25 1 0 Consumer 41 66 54 31 11 Total Recoveries 79 81 83 52 47 Net Charge-offs 332 287 272 161 183 Provision for Loan Losses 700 700 493 402 395 Balance at End of Year 3,103 2,735 2,322 2,101 1,860 Total Loans, Net of Deferred Loan Fees Average 221,309 193,182 171,128 155,735 153,109 At December 31 242,101 212,843 185,161 159,665 155,061 As a Percentage of Average Loans: Net Charge-offs 0.15% 0.15% 0.16% 0.10% 0.12% Provision for Loan Losses 0.32% 0.36% 0.29% 0.26% 0.26% Allowance as a Percentage of Year-end Net Loans (1) 1.28% 1.28% 1.25% 1.32% 1.20% Beginning Allowance as a Multiple Of Net Charge-offs 8.2 8.1 7.7 11.6 9.0
(1) Net of deferred loan fees
Loans are typically charged-off after being 120 days delinquent. Limited exceptions for not charging-off a loan would be well documented and approved by the appropriate responsible party or committee. The provision for loan losses for 1999 was $700 thousand compared to $700 thousand in 1998 and $493 thousand in 1997. Net charge-offs were $332 thousand in 1999, $287 thousand in 1998 and $272 thousand in 1997. Net chargeoffs to average loans were 0.15%, 0.15% and 0.16% in 1999, 1998 and 1997, respectively. With the current quality of the loan portfolio, the loan loss provision stayed constant from 1998 to 1999. The trend in the loan loss provision increasing for 1998 is a result of considering our historical loan loss trends, risk analysis of our loan portfolio and the increase in loan outstandings. In evaluating the allowance for loan losses, management considers the composition of the loan portfolio, historical loan loss experience, the overall quality of the loans and an assessment of current economic conditions. At December 31, 1999, the allowance for loan losses was 1.28% of loans outstanding compared to 1.28% at year-end 1998 and 1.25% in 1997. Management believes the allowance for loan losses at the end of 1999 is adequate to cover inherent credit losses within the portfolio.
The following tables set forth an allocation for the allowance for loan losses and loans by category and a percentage distribution of the allowance allocation. In making the allocation, management evaluates the risk in each category, current economic conditions and charge-off experience. An allocation for the allowance for loan losses is an estimate of the portion of the allowance that will be used to cover future charge-offs in each loan category, but it does not preclude any portion of the allowance allocated to one type of loan being used to absorb losses of another loan type.
[FN] (1) Net of deferred loan fees
Capital
As displayed by the following table, the Company's Tier I capital (as defined by the Federal Reserve Board under the Board's risk-based guidelines) at December 31, 1999 increased $2.9 million to $30.6 million. Total stockholders' equity, excluding accumulated other comprehensive income was $32.3 million at December 31, 1999. The Company's risk-based capital and leverage ratios, as shown in the following table, exceeded the levels required to be considered "well capitalized". The leverage ratio compares Tier I capital to total average assets less disallowed amounts of goodwill.
December 31 (dollars in thousands) 1999 1998 Change Stockholders' Equity (1) $ 32,269 $ 29,306 $ 2,963 Less Disallowed Amount 1,685 1,574 111 Tier I Capital 30,584 27,732 2,852 Allowance for Loan Losses 2,926 2,601 325 Tier II Capital 2,926 2,601 325 Total Capital 33,510 30,333 3,177 Total Risk Weighted Assets 233,929 207,970 25,959 Ratios: Tier I Capital to Risk-weighted Assets 13.07% 13.33% -0.26% Total Capital to Risk-weighted Assets 14.32% 14.59% -0.27% Leverage 9.59% 9.56% 0.03%
(1) Excluding accumulated other comprehensive income.
The Federal Deposit Insurance Corporation Improvement Act of 1991 ("FDICIA") established five capital categories for insured depository institutions under its Prompt Corrective Action Provisions. The bank regulatory agencies adopted regulations, which became effective in 1992, defining these five capital categories for banks they regulate. The categories vary from "well capitalized" to "critically undercapitalized". A "well capitalized" bank is defined as one with a total risk-based capital ratio of 10% or more, a Tier I risk-based capital ratio of 6% or more, a leverage ratio of 5% or more, and one not subject to any order, written agreement, capital directive, or prompt corrective action directive to meet or maintain a specific capital level. At December 31, 1999, the bank had ratios that exceeded the minimum requirements established for the "well capitalized" category.
In management's opinion, there are no known trends, events or uncertainties that will have or that are reasonably likely to have a material effect on the Company's liquidity, capital resources or operations. Securities and Federal Funds Sold
Securities, including those classified as held to maturity and available for sale, decreased from $72.4 million at December 31, 1998 to $70.6 million at December 31, 1999. The decrease is attributable to the increased loan demand. Federal funds sold totaled $675 thousand at December 31, 1999.
Per Company policy, fixed rate asset backed securities will not have an average life exceeding seven years, but final maturity may be longer. Adjustable rate securities shall adjust within three years per Company policy. Of the $14.6 million of adjustable asset backed securities held on December 31, 1999, $3.4 million are repriceable monthly and the remaining $11.2 million is repriceable annually. In addition, all applicable securities have passed the appropriate stress tests. The following tables present the investment securities for each of the past three years and the maturity and yield characteristics of securities as of December 31, 1999.
Investment Securities (Held to maturity at amortized cost, available for sale at market value) December 31 (in thousands) 1999 1998 1997
U.S. Treasury Securities Available for Sale $17,954 $16,087 $19,072 U.S. Federal Agency Securities Available for Sale 5,902 5,979 10,485 State and Municipal Obligations Available for Sale 3,681 3,804 4,077 Held to Maturity 15,693 16,933 15,603 Asset-Backed Securities Available for Sale 25,773 25,624 32,466 Fixed - GNMA, FNMA, FHLMC Passthroughs 5,998 2,352 4,924 GNMA, FNMA, FHLMC CMO's 5,191 7,570 9,970 Total 11,189 9,922 14,894 Variable - GNMA, FNMA, FHLMC Passthroughs 11,539 12,529 14,306 GNMA, FNMA, FHLMC CMO's 3,045 3,173 3,266 Total 14,584 15,702 17,572 Other Securities Available for Sale 1,620 3,926 0 Total Securities Available for Sale 54,930 55,420 66,100 Held to Maturity 15,693 16,933 15,603 Total 70,623 72,353 81,703
[FN] (1) Tax Equivalent Yield
Impact of Inflation and Changing Prices
The majority of Bourbon's assets and liabilities are monetary in nature. Therefore, Bourbon differs greatly from most commercial and industrial companies that have significant investments in nonmonetary assets and inventories. However, inflation does have an important impact on the growing of assets in the banking industry and the resulting need to increase equity capital at higher than normal rates in order to maintain an appropriate equity to assets ratio. Inflation also affects other expenses, which tend to rise during periods of inflation.
Other Accounting Issues
Beginning January 1, 2001, a new accounting standard will require all derivatives to be recorded at fair value. Unless designated as hedges, changes in these fair values will be recorded in the income statement. Fair value changes involving hedges will generally be recorded by offsetting gains and losses on the hedge and on the hedged item, even if the fair value of the hedged item is not otherwise recorded. This is not expected to have a material effect, but the effect will depend on derivative holdings when this standard applies.
Year 2000
The Company assessed the operational and financial implications of its Year 2000 needs and developed a plan to address its data processing systems and their ability to handle the change. The Company also assessed the Year 2000 readiness of other third party entities such as public utilities and governmental units. These and other like entities provide important ongoing services to the Company. Therefore, management also developed contingency plans for continued operations. The Company's credit customers were also subject to review for potential losses as a result of Year 2000 exposure in their own computer systems as well as the computer systems of their suppliers and customers.
Management believes its plan was successful as all operating systems performed will during the year change. While management does not expect future problems resulting from the Year 2000 issue, it is possible that other dates in the year 2000 may further affect computer software and systems, or cause a Year 2000 problem relating to the Company's own systems or to those of third parties with whom the Company conducts business that could adversely affect its financial condition.
Costs for this project were under $150 thousand, with the majority of this expenditure being for equipment and software to be capitalized over 3-5 years.
Monitoring of computer date sensitive issues will continue in 2000. Corrective action will be taken if such an event arises. Management has determined that if an unlikely business interruption as a result of computer date sensitive issues occurred, such an interruption could be material to the overall financial performance of the Company.
Forward-Looking Statements
This discussion contains forward-looking statements under the Private Securities Litigation Reform Act of 1995 that involve risks and uncertainties. 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: economic conditions (both generally and more specifically in the markets, including the tobacco market, in which the Company and its bank operate); competition for the Company's customers from other providers of financial and mortgage services; government legislation and regulation (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; material unforeseen complications related to addressing the Year 2000 problem experienced by the Company, its suppliers, customers and governmental agencies; 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. 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.
Item 7A.
Item 7A. Asset/Liability Management, Interest Rate Sensitivity, Market Risk and Liquidity
Asset/Liability management control is designed to ensure safety and soundness, maintain liquidity and regulatory capital standards, and achieve acceptable net interest income. Management considers interest rate risk to be the most significant market risk. The Company's exposure to market risk is reviewed on a regular basis by the Asset/Liability Committee. Interest rate risk is the potential of economic losses due to future interest rate changes. These economic losses can be reflected as a loss of future net interest income and/or a loss of current fair market values. The objective is to measure the effect on net interest income and to adjust the balance sheet to minimize the inherent risk while at the same time maximize income. Management realizes certain risks are inherent and that the goal is to identify and minimize the risks. Tools used by management include the standard GAP model and an interest rate shock simulation model. The Bank has no market risk sensitive instruments held for trading purposes. The following table depicts the change in net interest income resulting from 100 and 300 basis point changes in rates. The projections are based on balance sheet growth assumptions and repricing opportunities for new, maturing and adjustable rate amounts. In addition, the projected percentage changes from level rates are outlined below along with the Board of Directors specified limits. As of December 31, 1999 the projected percentage changes are within the Board limits and the Company's interest rate risk is also within Board limits. The projected net interest income report summarizing the Company's interest rate sensitivity as of December 31, 1999 and December 31, 1998 is as follows:
Projected Net Interest Income (December 31, 1999)
Level Rate Change: - 300 - 100 Rates + 100 + 300
Year One (1/1/00 - 12/31/2000) Interest Income $23,593 $25,822 $26,942 $28,063 $30,303 Interest Expense 9,785 11,818 12,834 13,850 15,882
Net Interest Income 13,808 14,004 14,108 14,213 14,421
Net interest income dollar change (300) (104) 105 313
Net interest income percentage change -2.1% -0.7% N/A 0.7% 2.2%
Limitation on % Change >-10.0% >-4.0% N/A >-4.0% >-10.0%
Projected Net Interest Income (December 31, 1998)
Level Rate Change: - 300 - 100 Rates + 100 + 300
Year One (1/1/99 - 12/31/99) Interest Income $19,989 $22,127 $23,210 $24,295 $26,463 Interest Expense 7,317 9,281 10,264 11,246 13,210
Net Interest Income 12,672 12,846 12,946 13,049 13,253
Net interest income dollar change (274) (100) 103 307
Net interest income percentage change -2.1% -0.8% N/A 0.8% 2.4%
Limitation on % Change >-10.0% >-4.0% N/A >-4.0% >-10.0%
These numbers are comparable to 1998. In 1998 and 1999, year one reflected a decline in net interest income of 2.1% with a 300 basis point decline. The 300 basis point increase in rates reflected a 2.4% increase in net interest income in 1998 compared to 2.2% in 1999.
Management measures the Company's interest rate risk by computing estimated changes in net interest income in the event of a range of assumed changes in market interest rates. The Company's exposure to interest rates is reviewed on a monthly basis by senior management and quarterly with the Board of Directors. Exposure to interest rate risk is measured with the use of interest rate sensitivity analysis to determine the change in net interest income in the event of hypothetical changes in interest rates, while interest rate sensitivity gap analysis is used to determine the repricing characteristics of the Company's assets and liabilities. If estimated changes to net interest income are not within the limits established by the Board, the Board may direct management to adjust the Company's asset and liability mix to bring interest rate risk within Board approved limits.
In addition, the Company uses interest rate sensitivity gap analysis to monitor the relationship between the maturity and repricing of its interest-earning assets and interest- bearing liabilities, while maintaining an acceptable interest rate spread. Interest rate sensitivity gap is defined as the difference between the amount of interest- earning assets maturing or repricing within a specific time period and the amount of interest-bearing liabilities maturing or repricing within that time period. A gap is considered positive when the amount of interest-rate- sensitive assets exceeds the amount of interest-sensitive- liabilities, and is considered negative when the amount of interest-rate-sensitive liabilities exceeds the amount of interest-rate-sensitive assets. Generally, during a period of rising interest rates, a negative gap would adversely affect net interest income, while a positive gap would result in an increase in net interest income. Conversely, during a period of falling interest rates, a negative gap would result in an increase in net interest income, while a positive gap would negatively affect net interest income. The Company's goal is to maintain a reasonable balance between exposure to interest rate fluctuations and earnings.
The interest rate sensitivity analysis as of December 31, 1999 shown below depicts amounts based on the earliest period in which they can normally be expected to reprice. The chart reveals that assets and liabilities are fairly well matched for the early periods specified below. The decay rates used for Demand deposits, NOW's, Savings and Money Market Savings are 5%, 30%, 20% and 30%, respectively.
Interest Rate Sensitivity Analysis
[FN] (1) Held to maturity at amortized cost, available for sale at market value
Little change in the above numbers has occurred since 1998. For the first three repricing years in 1998 and 1999, the cumulative gap percentage is less than 4%. There was a slight decrease in the cumulative gap for the three-year repricing period from 3.15% in 1998 to 1.00% in 1999. The cumulative gap at December 31, 1998 for the 5-year period was 14.7%. This decreased to 12.2% as of December 31, 1999. These percentages remain below the Board established guidelines.
Liquidity risk is the possibility that Bourbon may not be able to meet its cash requirements. Management of liquidity risk includes maintenance of adequate cash and sources of cash to fund operations and meeting the needs of borrowers, depositors and creditors. Excess liquidity has a negative impact on earnings resulting from the lower yields on short- term assets.
In addition to cash and cash equivalents, the securities portfolio provides an important source of liquidity. Total securities maturing within one year along with cash and cash equivalents totaled $35.3 million at December 31, 1999. Additionally, securities available-for-sale with maturities greater than one year totaled $41.0 million at December 31, 1999. These securities are available to meet liquidity needs on a continuing basis.
Bourbon maintains a relatively stable base of customer deposits and its steady growth is expected to be adequate to meet its funding demands. In addition, management believes the majority of its $100,000 or more certificates of deposit are no more volatile than its core deposits. At December 31, 1999 these balances totaled $35 million, approximately 12.6% of total deposits.
The Company also relies on FHLB advances for both liquidity and asset/liability management purposes. These advances are used primarily to fund long-term fixed rate residential mortgage loans. FHLB advances increased $19.6 million in 1999 to $26.6 million.
Generally, Bourbon relies upon net cash inflows from financing activities, supplemented by net cash inflows from operating activities, to provide cash used in its 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. The Company's primary investing activities include purchasing investment securities and loan originations. Management believes there is sufficient liquidity to meet all reasonable borrower, depositor and creditor needs in the present economic environment.
The cash flow statements for the periods presented provide an indication of Bourbon's sources and uses of cash as well as an indication of the ability of Bourbon to maintain an adequate level of liquidity. A discussion of cash flow statements for 1999, 1998 and 1997 follows.
Net cash provided by operating activities was $8.3 million, $3.5 million and $5.2 million for the years ended December 31, 1999, 1998 and 1997, respectively. The changes in 1999 and 1998 were mainly a result of the increase in net income from $3.4 million to $3.8 million to $3.5 million in 1997, 1998 and 1999, respectively. In addition for 1999, $2.6 million more was received from the sale of loans versus the origination of loans held for sale.
Net cash flow used in investing activities was $23.9 million, $20.0 million, and $15.8 million and for the years ended December 31, 1999, 1998 and 1997, respectively. The changes in net cash from investing activities included the result of normal maturities and reinvestment of investment securities as well as funding related to increases in loans. In 1999, funding for loan growth was $32 million. This was partially offset by the $8 million acquired in the Wilmore Branch acquisition. During 1998, funds used for loan growth were $28 million, partly offset by a decline in investments of $9 million. In 1997 and 1998, over $1.1 million was invested in the new Georgetown branch that opened in August 1998. In addition, over $400 thousand investment was made to upgrade the existing hardware and software.
Net cash flow from financing activities was $25.6 million, $14.9 million and $13.7 million for the years ended December 31, 1999, 1998 and 1997, respectively. The net cash increases and decreases were primarily attributable to changes in total deposits, securities sold under agreements to repurchase and federal funds purchased, and net changes in advances from the Federal Home Loan Bank and other borrowings. The chance in deposits was $6.8 million, $17.4 million and $10.3 million in 1999, 1998 and 1997, respectively. Federal Home Loan Bank advances were $20 million in 1999 and $4 million in 1998.
A number of other techniques are used to measure the liquidity position, including the ratios presented below. These ratios are calculated based on annual averages for each year.
Liquidity Ratios December 31 1999 1998 1997 Average Loans (including loans held for sale)/Average Deposits 83.9% 78.7% 73.6% Average Securities sold under agreements to repurchase and other borrowings/Average Assets 2.6% 1.8% 1.8%
This chart shows that the loan to deposit ratio increased in 1999 and 1998. Loan growth of 15% and deposit growth of 6% have both been contributing factors to the greater change in this ratio from 1997 to 1998 compared to the previous year.
Item 8.
Item 8. Financial Statements
The consolidated financial statements of the Company together with the notes thereto and report of independent auditors are contained in the Company's 1999 Annual Report to Stockholders included as Exhibit 13, and are incorporated herein by reference.
Item 9.
Item 9. Changes In and Disagreements with Accountants on Accounting and Financial Disclosure
Not Applicable
PART III
Item 10.
Item 10. Directors and Executive Officers of the Registrant
Under the Company's Articles of Incorporation, the Board of Directors consists of three different classes, each to serve, subject to the provisions of the Articles of Incorporation and Bylaws for a three year term and until his successor is duly elected and qualified. The names of the directors and their terms are set forth below.
Terms expiring in 2000:
William R. Stamler, age 65, is Chairman of Signal Investments, Inc. He has been a director of Kentucky Bank since 1984 and the Company since 1988.
Buckner Woodford, age 55, is President and Chief Executive Officer of Bourbon Bancshares, Inc. and Kentucky Bank. He has been a director of the Kentucky Bank since 1971 and the Company since inception.
Terms expiring in 2001:
William Arvin, age 59, is an attorney. He has been a director of Kentucky Bank and the Company since December 19, 1995.
James L. Ferrell, M.D., age 65, is a Physician. He has been a director of Kentucky Bank since 1980 and the Company since inception.
Joseph B. McClain, age 71, is President of Hopewell Co. (insurance agency). He has been a director of Kentucky Bank since 1971 and the Company since 1984.
Terms expiring in 2002:
Henry Hinkle, age 48, is President of Hinkle Construction Company. He has been a director of Kentucky Bank and the Company since 1989.
Theodore Kuster, age 56, is a farmer and thoroughbred horse breeder. He has been a director of Kentucky Bank since 1979 and the Company since 1985.
Robert G. Thompson, age 50, is Executive Director of the Paris Bourbon County YMCA, a farmer and thoroughbred horse breeder. He has been a director of Kentucky Bank and the Company since 1991.
The Company's other executive officer is Gregory J. Dawson, age 39. He is the Chief Financial Officer and has been with the Company since 1985 and serves at the pleasure of the Board of Directors.
Item 11.
Item 11. Executive Compensation
The following table sets forth information with respect to the compensation of the President and Chief Executive Officer of the Company. No other executive officer earned total salary and bonus in excess of $100,000. Summary Compensation Table Annual Compensation Other Annual Options Name Year Salary Bonus Compensation Granted Buckner Woodford 1999 $162,000 $ 1,467 (1) 3,600 Buckner Woodford 1998 $156,000 $ 3,161 (1) 3,800 Buckner Woodford 1997 $150,000 $ 4,879 (1) 3,200 Buckner Woodford 1996 $136,500 $ 1,505 (1) 6,000
(1) Less than the lesser of $50,000 or 10% of annual salary and bonuses
The following table contains information regarding the grant of stock options under the Company's stock option plan to the Chief Executive Officer during the year ended December 31, 1999. In addition, in accordance with rules of the Securities and Exchange Commission, the following table sets forth the hypothetical grant date present value with respect to the referenced options, using the Black-Scholes Option Pricing Model.
Option Grants in the Last Fiscal Year
% of Total Options Grant Shares Granted to Exercise Date Granted Employees Price Expiration Present Name (#) in 1999 ($/Sh) Date Value($)
Buckner Woodford 3,600 14.6% $20.63 1/12/09 $18,504
The following table sets forth certain information regarding options exercised by the Chief Executive Officer during calendar year 1999 and unexercised stock options held by him as of December 31, 1999.
No SAR's exist for the company.
Compensation of Directors
Directors are paid $400 for each board meeting attended and $100 for each committee meeting attended. Directors are also granted a 10-year option to purchase 50 shares of the Company's common stock following each year in which Kentucky Bank has a return on assets of 1 percent or greater. The option's exercise price is the fair market value per share on the date of grant.
Pension Plan
The following table sets forth the annual benefits which an eligible employee would receive under the Company's qualified defined benefit pension plan based on remuneration that is covered under the plan and years of service with the Company and its subsidiaries.
Years of Service
Remuneration 15 20 25 30 35
$ 25,000 $ 3,750 $ 5,000 $ 6,250 $ 7,500 $ 8,750 50,000 7,500 10,000 12,500 15,000 17,500 75,000 11,250 15,000 18,750 22,500 26,250 100,000 15,000 20,000 25,000 30,000 35,000 125,000 18,750 25,000 31,250 37,500 43,750 150,000 22,500 30,000 37,500 45,000 52,500 175,000 26,250 35,000 43,750 52,500 61,250 200,000 30,000 40,000 50,000 60,000 70,000
In general, a participant's remuneration covered by the Company's pension plan is his or her average annual cash compensation (W-2 earnings) for the last 5 years. The years of service for Mr. Woodford are 28 years.
Item 12.
Item 12. Security Ownership of Certain Beneficial Owners and Management
Set forth below are the number of shares of the Company's common stock beneficially owned by each director and executive officer, and all current directors and executive officers as a group as of December 31, 1999.
Name Shares Beneficially Owned(1) Number Percentage
William Arvin (2) 31,532 1.1%
Gregory J. Dawson (3) 11,220 *
James L. Ferrell, M.D. (4) 30,200 1.1%
Henry Hinkle (5) 27,805 *
Theodore Kuster (6) 18,210 *
Joseph B. McClain (7) 43,596 1.5%
William R. Stamler (8) 31,220 1.1%
Robert G. Thompson (9) 6,900 *
Buckner Woodford (10) 259,278 9.2%
All directors and officers (9 persons) as a group (consisting of those persons named above)(11) 459,961 16.4%
* Less than 1%
1) Beneficial ownership as reported in the above table has been determined in accordance with Rule 13d-3 under the Exchange Act. Unless otherwise indicated, beneficial ownership includes both sole or shared voting and sole or shared investment power. 2) Includes 11,858 shares held in a retirement account, 11,968 shares held of record by Mr. Arvin's wife, as to which Mr. Arvin disclaims beneficial ownership, 7,276 held jointly with his wife and 300 shares that Mr. Arvin may acquire upon exercise of outstanding stock options. 3) Includes 10,520 shares that Mr. Dawson may acquire upon exercise of outstanding stock options. 4) Includes 5,000 shares held in a retirement account and 1,500 shares that Mr. Ferrell may acquire upon exercise of outstanding stock options. Also, includes 3,000 shares held by Dr. Ferrell's wife, as to which Dr. Ferrell disclaims beneficial ownership.
5) Includes 1,000 shares held by his wife and 640 shares held by three sons, as to which Mr. Hinkle disclaims beneficial ownership. Includes 24,000 shares held of record by Hinkle Contracting Company, as to which Mr. Hinkle, as president, has shared voting power. Also includes 700 shares that Mr. Hinkle may acquire upon exercise of outstanding stock options. 6) Includes 6,270 share held of record by Mr. Kuster's wife, as to which Mr. Kuster disclaims beneficial ownership. Also includes 5,080 shares held in a retirement account and 1,500 shares that Mr. Kuster may acquire upon exercise of outstanding stock options. 7) Includes 1,500 shares that Mr. McClain may acquire upon exercise of outstanding stock options. Also includes 18,800 shares held of record by Mr. McClain's wife, as to which Mr. McClain disclaims beneficial ownership. 8) Includes 7,860 shares held by Signal Investments Corporation, as to which Mr. Stamler, as the chief executive officer and majority Stockholder of such corporation, has sole voting and investment power. Also includes 280 shares that Mr. Stamler may acquire upon exercise of outstanding stock options. 9) Includes 1,500 shares that Mr. Thompson may acquire upon exercise of outstanding stock options. 10) Includes 8,000 shares held by his wife and 11,332 shares held by two sons, as to which Mr. Woodford disclaims beneficial ownership. Also includes 208 shares held in a retirement account and 12,320 shares that Mr. Woodford may acquire upon exercise of outstanding stock options. 11) Includes 30,120 shares that may be acquired upon exercise of outstanding stock options.
The following table sets forth as of December 31, 1999 the persons known by the Company to own beneficially (as determined in accordance with the rules and regulations of the Commission) more than 5% of the outstanding common stock. See note 10 in the preceding table for further information.
Name and Address Shares Beneficially of Beneficial Owner Owned Percentage
Buckner Woodford 259,278 9.2% 340 Stoner Avenue Paris, Kentucky 40361
Item 13.
Item 13. Certain Relationships and Related Transactions
Directors and officers of the Company and their associates were customers of and had transactions with the Company's subsidiary bank in the ordinary course of business during the year ended December 31, 1999. Similar transactions may be expected to take place with the Company's subsidiary bank in the future. Outstanding loans and commitments made by such subsidiary bank in transactions with the Company's directors and officers and their associates were made on substantially the same terms, including interest rates and collateral, as those prevailing at the time for comparable transactions with other persons and did not involve more than a normal risk of collectibility or present other unfavorable features. Certain directors and executive officers were loan customers of Kentucky Bank and outstanding loans were $1.2 million and $1.2 million as of December 31, 1999 and 1998, respectively. See Note 4 in the notes to consolidated financial statements included as Exhibit 13.
Part IV
Item 14.
Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K
(a) The following exhibits are incorporated by reference herein or made a part of this Form 10-K:
3.1 Articles of Incorporation of the Registrant are incorporated by reference to Exhibit 3.1 of the Registrant's Registration Statement on Form S-4 (File No. 33-96358).
3.2 Bylaws of the Registrant are incorporated by reference to Exhibit 3.2 of the Registrant's Registration Statement on Form S-4 (File No. 33-96358).
10.1 Bourbon's 1993 Employee Stock Ownership Incentive Plan is incorporated by reference to Exhibit 10.2 of the Registrant's Registration Statement on Form S-4 (File No. 33-96358).*
10.2 Bourbon's 1993 Non-Employee Directors Stock Ownership Incentive Plan is incorporated by reference to Exhibit 10.3 of the Registrant's Registration Statement on Form S-4 (File No. 33-96358).*
10.3 Bourbon Bancshares, Inc. 1999 Employee Stock Option Plan is incorporated by reference to Exhibit 99.1 of the Registrant's Form 10-K for the fiscal year ended December 31, 1998.*
11 Computation of earnings per share - See Note 10 in the notes to consolidated financial statements included as Exhibit 13.
13 Financial Statements: Consolidated Balance Sheets Consolidated Statements of Income Consolidated Statements of Comprehensive Income Consolidated Statements of Changes in Stockholders' Equity Consolidated Statements of Cash Flows Notes to Consolidated Financial Statements Report of Independent Auditors
21 Subsidiaries of Registrant
23 Consent of Crowe, Chizek and Company LLP
27 Financial Data Schedule (for SEC use only)
99.1 Proxy statement dated March 17, 2000, sent to the Registrant's security holders in connection with the 2000 Annual Meeting of Shareholders and supplementally furnished to the Commission for its information as required by Form 10-K for registrants which have not registered securities pursuant to Section 12 of the Securities Exchange Act of 1934. This material is not otherwise to be deemed filed with the Commission.
* Denotes a management contract or compensatory plan or arrangement of the Registrant required to be filed as an exhibit pursuant to Item 601(10) (iii) of Regulation S-K.
(b) Current Reports on Form 8-K during the quarter ended December 31, 1999 None
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
Bourbon Bancshares, Inc. By: __/S/Buckner Woodford__ Buckner Woodford, President and Chief Executive Officer, Director March 29, 2000
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.
__/s/Buckner Woodford________ March 29, 2000 Buckner Woodford, President and Chief Executive Officer, Director
__/s/Gregory J. Dawson_______ March 29, 2000 Gregory J. Dawson, Chief Financial and Accounting Officer
__/s/James L. Ferrell________ March 29, 2000 James L. Ferrell, M.D., Chairman of the Board, Director
_____________________________ March 29, 2000 William Arvin, Director
__/s/Henry Hinkle____________ March 29, 2000 Henry Hinkle, Director
__/s/Theodore Kuster_________ March 29, 2000 Theodore Kuster, Director
__/s/Joseph B. McClain_______ March 29, 2000 Joseph B. McClain, Director
_____________________________ March 29, 2000 William R. Stamler, Director
__/s/Robert G. Thompson______ March 29, 2000 Robert G. Thompson, Director
SUPPLEMENTAL INFORMATION TO BE FURNISHED WITH REPORTS FILED PURSUANT TO SECTION 15(d) OF THE ACT BY REGISTRANTS WHICH HAVE NOT REGISTERED SECURITIES PURSUANT TO SECTION 12 OF THE ACT.
The Registrant refers to Exhibits 13 and 99.1 to the Form 10-K.
INDEX TO EXHIBITS
Exhibit Number Description of Document
3.1 Articles of Incorporation of the Registrant are incorporated by reference to Exhibit 3.1 of the Registrant's Registration Statement on Form S-4 (File No. 33-96358).
3.2 Bylaws of the Registrant are incorporated by reference to Exhibit 3.2 of the Registrant's Registration Statement on Form S-4 (File No. 33-96358).
10.1 Bourbon's 1993 Employee Stock Ownership Incentive Plan is incorporated by reference to Exhibit 10.2 of the Registrant's Registration Statement on Form S-4 (File No. 33-96358).*
10.3 Bourbon's 1993 Non-Employee Directors Stock Ownership Incentive Plan is incorporated by reference to Exhibit 10.3 of the Registrant's Registration Statement on Form S-4 (File No. 33-96358).*
10.3 Bourbon Bancshares, Inc. 1999 Employee Stock Option Plan is incorporated by reference to Exhibit 99.1 of the Registrant's Form 10-K for the fiscal year ended December 31, 1998.*
11 Computation of earnings per share - See Note 10 in the notes to consolidated financial statements included as Exhibit 13.
13 Bourbon Bancshares, Inc. 1999 Annual Report
21 Subsidiaries of Registrant
23 Consent of Crowe, Chizek and Company LLP
27 Financial Data Schedule (for SEC use only)
99.1 Proxy statement dated March 17, 2000, sent to the Registrant's security holders in connection with the 2000 Annual Meeting of Shareholders and supplementally furnished to the Commission for its information as required by Form 10-K for registrants which have not registered securities pursuant to Section 12 of the Securities Exchange Act of 1934. This material is not otherwise to be deemed filed with the Commission.
* Denotes a management contract or compensatory plan or arrangement of the Registrant required to be filed as an exhibit pursuant to Item 601(10) (iii) of Regulation S-K.
Exhibit 13
BOURBON BANCSHARES, INC.
ANNUAL REPORT 1999
Dear Shareholders,
Agriculture has long been important to central Kentucky. It has provided a livelihood for many and indirect benefits to many more. Much of the cash flow from these farms are from raising tobacco. Therefore it is a blow to our entire region that tobacco production will be cut so drastically. This has many of our customers taking a hard look at their operations and trying to adjust to the inevitable changes.
We are fortunate that the overall economy in central Kentucky remains strong. Population is growing and unemployment is low. This environment should make it easier for both the bank and our customers to adapt.
Bourbon Bancshares, Inc. had an outstanding year in 1999. Earnings rose by 17%. The loan portfolio grew more than 15% for the third consecutive year. Total assets reached an all time high of $347 million.
We were able to expand our franchise during 1999. In August we acquired a branch in Wilmore. This fit in perfectly with our geographic pattern in the smaller communities around Lexington. We now have eleven offices in eight different communities, all around the perimeter of Lexington.
As we start the new year the Internet continues to grow in commercial importance. Kentucky Bank has been preparing to offer Internet service to all its customers at www.kybank.com. We expect this to be started during the first quarter of 2000.
Plans are also underway to continue improving our facilities. There will be an historic renovation project of the headquarters building in downtown Paris that will include exterior renovation. There will also be expansion of one of our most valuable sites, the branch in Winchester at Colby Road. This will include expanding from three drive- in lanes to six.
At year-end our Executive Vice President Joe Allen retired as an employee of Kentucky Bank. His total banking career spanned fifty-two years. His many friends at the bank wish him a very happy and well-deserved retirement.
/s/Buckner Woodford
Buckner Woodford
FINANCIAL HIGHLIGHTS
BOURBON BANCSHARES, INC. 1999 1998 1997
Assets ($ millions) $ 347 $ 309 $ 291
Net Income ($ thousands) $ 4,450 $ 3,804 $ 3,408
Per Share Results
Primary Earnings $ 1.55 $ 1.33 $ 1.20
Dividends $ .44 $ .40 $ .36
Stockholder Information
CORPORATE HEADQUARTERS Bourbon Bancshares, Inc. 4th and Main Street Paris, Kentucky 40361 606-987-1795
ANNUAL MEETING The annual meeting of Stockholders of Bourbon Bancshares, Inc. will be held Tuesday, May 2, 2000 at 11:00 a.m. in the corporate headquarters.
TRANSFER AGENT, REGISTRAR AND DIVIDEND DISBURSING AGENT Kentucky Bank Trust Department 606-987-1795, ext. 316
MARKET MAKERS
Morgan Keegan & Co. 489 East Main Street Lexington, Kentucky 40507 1-800-937-0161
Hilliard Lyons West Vine Street, Suite 400 Lexington, Kentucky 40507 1-800-944-2663
OTC Bulletin Board Symbol: BBON
INVESTOR INFORMATION Any individual requesting general information or a copy of the Corporation's 1999 Form 10-K Report may obtain these by writing Investor Relations at the Corporate Headquarters.
BOURBON BANCSHARES, INC. Paris, Kentucky
CONSOLIDATED FINANCIAL STATEMENTS December 31, 1999, 1998 and 1997
CONSOLIDATED BALANCE SHEETS December 31
1999 1998 ASSETS Cash and due from banks $ 20,041,648 $ 10,756,213 Federal funds sold 675,000 - Cash and cash equivalents 20,716,648 10,756,213 Investment securities: Available for sale 54,930,326 55,419,734 Held to maturity (fair value 1999 - $15,916,799 and 1998 - $17,854,550) 15,692,975 16,933,755 Mortgage loans held for sale 3,493,765 5,908,676
Loans 238,606,545 206,934,127 Allowance for loan losses (3,102,800) (2,734,589) Net loans 235,503,745 204,199,538
Federal Home Loan Bank stock 3,345,500 3,119,500 Bank premises and equipment, net 7,081,860 6,793,998 Interest receivable 3,454,218 3,165,110 Intangible assets 2,108,274 2,034,441 Other assets 1,151,471 374,272
Total assets $347,478,782 $308,705,237
LIABILITIES AND STOCKHOLDERS' EQUITY Deposits Non-interest bearing $ 42,931,235 $ 40,336,201 Time deposits, $100,000 and over 34,714,390 28,168,022 Other interest bearing 196,920,315 190,235,493 Total deposits 274,565,940 258,739,716 Securities sold under agreements to repurchase and other borrowings 11,858,464 11,248,277 Federal Home Loan Bank advances 26,592,305 6,953,502 Interest payable 2,141,754 1,778,984 Other liabilities 600,746 612,453 Total liabilities 315,759,209 279,332,932
Stockholders' equity Preferred stock, 300,000 shares authorized and unissued - - Common stock, no par value; 10,000,000 shares authorized; 2,802,471 and 2,809,256 shares issued and outstanding in 1999 and 1998 6,491,373 6,474,241 Retained earnings 25,777,789 22,832,043 Accumulated other comprehensive income (549,589) 66,021 Total stockholders' equity 31,719,573 29,372,305
Total liabilities and stockholders' equity $347,478,782 $308,705,237
CONSOLIDATED STATEMENTS OF INCOME Years Ended December 31
1999 1998 1997 Interest income Loans, including fees $19,167,985 $17,211,687 $15,483,271 Investment securities Taxable 2,761,337 3,141,285 3,918,974 Tax exempt 1,115,480 1,168,049 1,174,113 Other 408,077 462,117 385,106 23,452,879 21,983,138 20,961,464 Interest expense Deposits 9,300,244 9,787,511 9,480,440 Securities sold under agreements to repurchase and other short-term borrowings 386,607 269,135 234,521 Federal Home Loan Bank advances 767,779 517,105 569,927 Other 92,440 92,717 129,827 10,547,070 10,666,468 10,414,715
Net interest income 12,905,809 11,316,670 10,546,749 Provision for loan losses 699,600 700,400 492,800 Net interest income after provision for loan losses 12,206,209 10,616,270 10,053,949
Other income Service charges 2,074,999 1,810,756 1,674,348 Loan service fee income 290,622 282,879 257,953 Trust department income 397,416 300,342 237,254 Investment securities gains, net 906 40,955 13,686 Gain on sale of mortgage loans 351,192 439,927 72,236 Other 270,416 198,116 134,510 3,385,551 3,072,975 2,389,987 Other expenses Salaries and employee benefits 5,054,249 4,526,735 4,274,022 Occupancy expenses 1,361,025 1,163,872 1,002,137 Amortization 441,286 400,147 346,891 Advertising and marketing 323,726 340,664 276,430 Taxes other than payroll, property and income 234,818 307,146 287,718 Other 2,006,858 1,775,563 1,700,780 9,421,962 8,514,127 7,887,978
Income before income taxes 6,169,798 5,175,118 4,555,958 Provision for income taxes 1,719,685 1,371,602 1,147,924
Net income $ 4,450,113 $ 3,803,516 $ 3,408,034
Earnings per share: Basic $ 1.59 $ 1.36 $1.22 Diluted 1.55 1.33 1.20
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME Years Ended December 31
1999 1998 1997
Net income $4,450,113 $3,803,516 $3,408,034
Other comprehensive income (loss), net of tax: Unrealized gains (losses) on securities arising during the period (615,012) (139,837) 240,455 Reclassification of realized amount (598) (27,030) (9,033) Net change in unrealized gain (loss) on securities (615,610) (166,867) 231,422
Comprehensive income $3,834,503 $3,636,649 $3,639,456
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation: The consolidated financial statements include the accounts of Bourbon Bancshares, Inc. (the Company) and its wholly-owned subsidiary, Kentucky Bank (the Bank). Intercompany transactions and balances have been eliminated in consolidation.
Nature of Operations: The Bank operates under a state bank charter and provides full banking services, including trust services, to customers located in Bourbon, Clark, Scott, Harrison, Woodford, Jessamine, and adjoining counties in Kentucky. As a state bank, the Bank is subject to regulation by the Kentucky Department of Financial Institutions and the Federal Deposit Insurance Corporation (FDIC). The Company, a bank holding company, is regulated by the Federal Reserve.
Branch Acquisition: On August 13, 1999, the Bank acquired the Wilmore, Kentucky branch of National City Bank. Included in the purchase were $9.0 million in net deposits and $353,000 in fixed assets. The net deposits assumed exceeded the cash received by $287,000.
Estimates in the Financial Statements: The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. The allowance for loan losses and fair value of financial instruments are particularly subject to change.
Cash Flows: For purposes of reporting cash flows, cash and cash equivalents include cash on hand, amounts due from banks, federal funds sold, and certain short-term investments with maturities of less than three months. Generally, federal funds are sold for one- day periods. Net cash flows are reported for loan and deposit transactions.
Investment Securities: The Company is required to classify its investment securities portfolio into three categories: trading securities, securities available for sale and securities held to maturity. Fair value adjustments are made to the securities based on their classification with the exception of the held to maturity category. The Company has no investments classified as trading.
Investment securities available for sale are carried at fair value. The difference between amortized cost and fair value is recorded in stockholders' equity, net of related income tax, under accumulated other comprehensive income. Changes in this difference are recorded as a component of comprehensive income. Amortization of premiums and accretion of discounts are recorded as adjustments to interest income using the constant yield method.
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Investment securities for which the Company has the positive intent and ability to hold to maturity are stated at cost, adjusted for amortization of premiums and accretion of discounts which are recorded as adjustments to interest income using the constant yield method.
Gains or losses on dispositions are based on the net proceeds and the adjusted carrying amount of the securities sold, using the specific identification method.
Loans Held for Sale: Loans held for sale are valued at the lower of cost or market as determined by outstanding commitments from investors or current investor yield requirements, calculated on the aggregate loan basis.
Loans: Loans are stated at the amount of unpaid principal, reduced by an allowance for loan losses. Interest income on loans is recognized on the accrual basis except for those loans on a nonaccrual status. The accrual of interest on impaired loans is discontinued when management believes, after consideration of economic and business conditions and collection efforts, that the borrowers' financial condition is such that collection of interest is doubtful. When interest accrual is discontinued, interest income is subsequently recognized only to the extent cash payments are received.
Loan origination fees and certain direct origination costs are capitalized and recognized as an adjustment of the yield on the related loan.
Allowance for Loan Losses: The allowance for loan losses is established through a provision for loan losses charged to expense. The allowance is an amount that management believes will be adequate to absorb losses on existing loans that may become uncollectible, based on evaluations of the collectibility of loans and prior loan loss experience. The evaluations take into consideration such factors as changes in the nature and volume of the loan portfolio, overall portfolio quality, review of specific problem loans, and current economic conditions that may affect the borrowers' ability to pay. Loans are charged against the allowance for loan losses when management believes that the collectibility of the principal is unlikely.
The allowance for loan losses on impaired loans is determined using the present value of estimated future cash flows of the loan, discounted at the loan's effective interest rate or the fair value of the underlying collateral. A loan is considered to be impaired when it is probable that all principal and interest amounts will not be collected according to the loan contract. The entire change in present value of expected cash flows is reported as provision for loan losses in the same manner in which impairment initially was recognized or as a reduction in the amount of provision for loan losses that otherwise would be reported.
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Mortgage Servicing Rights: The Bank has sold various loans to the Federal Home Loan Mortgage Corporation (FHLMC) while retaining the servicing rights. Gains and losses on loan sales are recorded at the time of the cash sale, which represents the premium or discount paid by the FHLMC. The Bank receives a servicing fee from the FHLMC on each loan sold. Servicing rights are capitalized based on the relative fair value of the rights and the loan and are included in intangible assets on the balance sheet and expensed in proportion to, and over the period of, estimated net servicing revenues.
Bank Premises and Equipment: Bank premises and equipment are stated at cost less accumulated depreciation. Depreciation is recorded principally by the straight-line method over the estimated useful lives of the bank premises and equipment.
Real Estate Acquired Through Foreclosure: Real estate acquired through foreclosure is carried at the lower of the recorded investment in the property or its fair value. The value of the underlying loan is written down to the fair value of the real estate to be acquired by a charge to the allowance for loan losses, if necessary. Any subsequent write-downs are charged to operating expenses. Certain parcels of real estate are being leased to third parties to offset holding period costs. Operating expenses of such properties, net of related income, and gains and losses on their disposition are included in other expenses.
Repurchase Agreements: Substantially all repurchase agreement liabilities represent amounts advanced by various customers. Securities are pledged to cover these liabilities, which are not covered by federal deposit insurance.
Income Taxes: Income tax expense is the total of the current year income tax due or refundable and the change in deferred tax assets and liabilities. The Company uses the liability method for computing deferred income taxes. Under the liability method, deferred income taxes are based on the change during the year in the deferred tax liability or asset established for the expected future tax consequences of differences in the financial reporting and tax bases of assets and liabilities. The differences relate principally to premises and equipment, accrued pension, premium on loans and deposits purchased, unrealized gains (losses) on investment securities available for sale, mortgage servicing rights, FHLB stock, and the allowance for loan losses.
Intangible Assets: Intangible assets include a premium on deposits paid in connection with the acquisition of branches which is being amortized on a straight-line basis over ten or fifteen years and capitalized mortgage servicing rights which are being amortized over the life of the related loans.
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Earnings Per Common Share: Basic earnings per common share is net income divided by the weighted average number of common shares outstanding during the period. Diluted earnings per common share includes the dilutive effect of additional potential common shares issuable under stock options. Earnings and dividends per share are restated for all stock splits and dividends through the date of issuance of the financial statements.
Comprehensive Income: Comprehensive income consists of net income and other comprehensive income. Other comprehensive income includes unrealized gains and losses on securities available for sale which are also recognized as a separate component of equity.
New Accounting Pronouncements: Beginning January 1, 2001, a new accounting standard will require all derivatives to be recorded at fair value. Unless designated as hedges, changes in these fair values will be recorded in the income statement. Fair value changes involving hedges will generally be recorded by offsetting gains and losses on the hedge and on the hedged item, even if the fair value of the hedged item is not otherwise recorded. This is not expected to have a material effect, but the effect will depend on derivative holdings when this standard applies.
Industry Segments: While the Company's chief decision makers monitor the revenue streams of the various Company products and services, operations are managed and financial performance is evaluated on a Company-wide basis. Accordingly, all of the Company's operations are considered by management to be aggregated into one reportable operating segment.
NOTE 2 - RESTRICTIONS ON CASH AND DUE FROM BANKS
Included in cash and due from banks are certain non-interest bearing deposits that are held at the Federal Reserve or maintained in vault cash in accordance with average balance requirements specified by the Federal Reserve Board of Governors. The reserve requirement at December 31, 1999 and 1998 was $7,544,000 and $5,988,000.
NOTE 3 - INVESTMENT SECURITIES
Year-end securities are as follows:
Amortized Unrealized Unrealized Fair Cost Gains Losses Value Available for Sale
U. S. Treasury $18,012,932 $ - $ (58,683) $17,954,249 U. S. government agencies 5,983,561 - (81,261) 5,902,300 States and political subdivisions 3,642,574 44,699 (6,121) 3,681,152 Mortgage-backed 26,317,036 5,812 (550,487) 25,772,361 Other 1,806,933 14,730 (201,399) 1,620,264
Total $55,763,036 $65,241 $(897,951) $54,930,326
U. S. Treasury $16,013,161 $74,300 $ - $16,087,461 U. S. government agencies 5,979,883 406 (1,210) 5,979,079 States and political subdivisions 3,641,873 161,498 - 3,803,371 Mortgage-backed 25,725,143 71,089 (172,037) 25,624,195 Other 3,959,643 9,161 (43,176) 3,925,628
Total $55,319,703 $316,454 $(216,423) $55,419,734
Held to Maturity
States and political subdivisions $15,692,975 $361,580 $(137,756) $15,916,799
States and political subdivisions $16,933,755 $923,038 $ (2,243) $17,854,550
NOTE 3 - INVESTMENT SECURITIES (Continued)
The amortized cost and fair value of investment securities at December 31, 1999, by category and contractual maturity, are shown below. Expected maturities will differ from contractual maturities because borrowers may have the right to call or prepay obligations with or without call or prepayment penalties. Securities not due at a single maturity are shown separately.
Amortized Fair Cost Value Available for Sale Due in one year or less $13,992,453 $13,946,162 Due after one year through five years 13,013,406 12,959,679 Due after five years through ten years 876,226 873,024 27,882,085 27,778,865
Mortgage-backed 26,317,036 25,772,361 Equity 1,563,909 1,379,100
Total $55,763,036 $54,930,326
Held to Maturity Due in one year or less $ 650,790 $ 655,643 Due after one year through five years 7,758,325 8,034,867 Due after five years through ten years 4,406,937 4,480,209 Due after ten years 2,876,923 2,746,080
Total $15,692,975 $15,916,799
Proceeds from sales of investment securities during 1999, 1998 and 1997 were $17,828,018, $6,548,219 and $17,343,034. Gross gains of $29,674, $40,955 and $31,347 and gross losses of $28,768, $0 and $17,661, were realized on those sales.
Investment securities with an approximate carrying value of $61,321,000 and $55,657,000 at December 31, 1999 and 1998, were pledged to secure public deposits, trust funds, securities sold under agreements to repurchase and for other purposes as required or permitted by law.
NOTE 4 - LOANS
Loans at year-end were as follows:
1999 1998
Commercial $ 17,713,094 $ 15,177,364 Real estate construction 17,003,060 11,055,329 Real estate mortgage 134,809,876 118,735,789 Agricultural 46,442,610 44,198,784 Consumer 22,357,830 17,607,474 Other 280,075 159,387
$238,606,545 $206,934,127
Activity in the allowance for loan losses was as follows:
1999 1998 1997
Beginning balance $2,734,589 $2,321,536 $2,101,081 Charge-offs (410,245) (368,017) (355,123) Recoveries 78,856 80,670 82,778 Provision for loan losses 699,600 700,400 492,800
Ending balance $3,102,800 $2,734,589 $2,321,536
Impaired loans totaled $201,085 and $286,000 at December 31, 1999 and 1998. The average recorded investment in impaired loans during 1999, 1998 and 1997 was $244,000, $310,000 and $192,000. The total allowance for loan losses related to these loans was $10,000 and $85,000 at December 31, 1999 and 1998. Interest income on impaired loans of $18,000, $22,000 and $23,000 was recognized for cash payments received in 1999, 1998 and 1997.
Nonperforming loans were as follows: 1999 1998 1997
Loans past due over 90 days still on accrual $549,000 $790,000 $154,000 Nonaccrual loans 63,000 136,000 173,000
Nonperforming loans include impaired loans and smaller balance homogeneous loans, such as residential mortgage and consumer loans, that are collectively evaluated for impairment.
NOTE 4 - LOANS (Continued)
Mortgage loans serviced for others are not included in the accompanying consolidated balance sheets. The unpaid principal balances of mortgage loans serviced for others was approximately $108,480,000 and $103,122,000 at December 31, 1999 and 1998. Custodial escrow balances maintained in connection with the foregoing loan servicing, and included in demand deposits, were approximately $646,000 and $593,000 at December 31, 1999 and 1998.
Changes in mortgage servicing rights were as follows:
1999 1998 1997
Beginning balance $ 533,822 $ 314,877 $ 189,451 Additions 228,016 330,902 184,125 Amortization (155,351) (111,957) (58,699)
Ending balance $ 606,487 $ 533,822 $ 314,877
Certain directors and executive officers of the Company and companies in which they have beneficiary ownership were loan customers of the Bank during 1999 and 1998. Such loans were made in the ordinary course of business at the Bank's normal credit terms and interest rates. An analysis of the activity with respect to all director and executive officer loans is as follows:
1999 1998 Balance, beginning of year $1,216,000 $1,824,000 Additions, including loans now meeting disclosure requirements 615,000 704,000 Amounts collected, including loans no longer meeting disclosure requirements (657,000) (1,312,000)
Balance, end of year $1,174,000 $1,216,000
NOTE 5 - PREMISES AND EQUIPMENT
Year-end premises and equipment were as follows:
1999 1998
Land and buildings $ 7,717,995 $ 7,040,895 Furniture and equipment 5,800,240 5,423,361 13,518,235 12,464,256 Less accumulated depreciation (6,436,375) (5,670,258)
$ 7,081,860 $ 6,793,998
Depreciation expense was $766,117, $667,799, and $523,892 in 1999, 1998, and 1997.
NOTE 6 - DEPOSITS
At December 31, 1999, the scheduled maturities of time deposits are as follows:
2000 $108,940,738 2001 24,824,192 2002 1,266,304 2003 911,140 2004 and thereafter 792,094
$136,734,468
Certain directors and executive officers of the Company and companies in which they have beneficiary ownership, are deposit customers of the Bank. The amount of these deposits was approximately $2,522,000 and $3,173,000 at December 31, 1999 and 1998.
NOTE 7 - SECURITIES SOLD UNDER AGREEMENTS TO REPURCHASE
Securities sold under agreements to repurchase generally mature within one to four days from the transaction date. The securities underlying the agreements are maintained in a third-party custodian's account under a written custodial agreement. Information concerning securities sold under agreements to repurchase for 1999 and 1998 is summarized as follows:
1999 1998
Average daily balance during the year $ 5,683,000 $4,329,000 Average interest rate during the year 4.37% 4.76% Maximum month-end balance during the year $10,333,000 $6,713,000
NOTE 8 - FEDERAL HOME LOAN BANK ADVANCES
The Bank owns stock of the Federal Home Loan Bank (FHLB) of Cincinnati, Ohio. This stock allows the Bank to borrow advances from the FHLB. At December 31, 1999 and 1998, $26,592,305 and $6,953,502 represented the balance due on advances from the FHLB. All advances are paid either on a monthly basis or at maturity, over remaining terms of one to eight years, with either a variable interest rate which was 4.75% on December 31, 1999 or fixed interest rates ranging from 5.05% to 6.80%. Advances subject to the variable rate were $10,000,000 on December 31, 1999. Advances are secured by the FHLB stock and substantially all first mortgage loans. Scheduled principal payments due on advances during the years subsequent to December 31, 1999 are as follows: 2000 - $11,230,522; 2001 - $226,717; 2002 - $239,613; 2003 - $4,817,531; 2004 - $10,022,174; and for years thereafter - $55,748.
NOTE 9 - INCOME TAXES
Income tax expense (benefit) was as follows:
1999 1998 1997
Current payable $1,697,291 $1,306,758 $1,158,777 Deferred 22,394 64,844 (10,853)
$1,719,685 $1,371,602 $1,147,924
NOTE 9 - INCOME TAXES (Continued)
Year-end deferred tax assets and liabilities were due to the following. No valuation allowance for the realization of deferred tax assets is considered necessary.
1999 1998 Deferred tax assets Allowance for loan losses $ 861,717 $ 736,526 Unrealized loss on investment securities 283,121 - Premium on deposits purchased 156,646 127,144 Deferred loan fees 1,279 22,547 Other 29,763 46,597
Deferred tax liabilities Bank premises and equipment (142,812) (131,872) Unrealized gain on investment securities - (55,802) FHLB stock (455,991) (379,151) Mortgage servicing rights (206,206) (181,499) Other (54,278) (27,780)
Net deferred tax asset $ 473,239 $ 156,710
Effective tax rates differ from federal statutory rates applied to financial statement income due to the following:
1999 1998 1997
U. S. federal income tax rate 34.0% 34.0% 34.0% Changes from the statutory rate Tax-exempt investment income (7.2) (8.7) (10.0) Non-deductible interest expense related to carrying tax-exempt investments .8 1.1 1.3 Other .3 .1 (0.1)
27.9% 26.5% 25.2%
NOTE 10 - EARNINGS PER SHARE
The factors used in the earnings per share computation follow:
1999 1998 1997 Basic Earnings Per Share Net income $ 4,450,113 $ 3,803,516 $ 3,408,034 Weighted average common shares outstanding 2,803,276 2,801,320 2,792,402 Basic earnings per share $ 1.59 $ 1.36 $ 1.22
Diluted Earnings Per Share Net income $ 4,450,113 $ 3,803,516 $ 3,408,034 Weighted average common shares outstanding 2,803,276 2,801,320 2,792,402 Add dilutive effects of assumed exercise of stock options 64,667 59,974 51,192 Weighted average common and dilutive potential common shares outstanding 2,867,943 2,861,294 2,843,594 Diluted earnings per share $ 1.55 $ 1.33 $ 1.20
Stock options for 600 shares of common stock were not considered in computing earnings per share for 1997 because they were antidilutive.
NOTE 11 - RETIREMENT PLANS
The Company has a defined benefit pension plan covering substantially all of its employees. The Company's funding policy is to contribute annually the maximum amount that can be deducted for federal income tax purposes. Benefits are based on one percent of employee average earnings for the previous five years times years of credited service.
NOTE 11 - RETIREMENT PLANS (Continued)
Information about the pension plan was as follows: 1999 1998 Change in benefit obligation: Beginning benefit obligation $2,032,917 $1,813,183 Service cost 188,925 143,717 Interest cost 169,649 143,564 Actuarial adjustment 420,482 - Benefits paid (79,880) (67,547) Ending benefit obligation 2,732,093 2,032,917
Change in plan assets, at fair value: Beginning plan assets 2,500,009 1,995,586 Actual return 272,728 348,607 Employer contribution 234,801 223,363 Benefits paid (53,707) (67,547) Ending plan assets 2,953,831 2,500,009
Funded status 221,738 467,092 Unrecognized net actuarial gain (195,185) (515,005) Unrecognized prior transition asset (3,345) (3,717)
Prepaid (accrued) benefit cost $ 23,208 $ (51,630)
Net periodic pension cost include the following components:
1999 1998 1997
Service cost $ 188,925 $ 143,717 $ 137,229 Interest cost 169,649 143,564 126,623 Expected return on plan assets (198,239) (179,940) (136,298) Amortization of transition asset (372) (372) (372)
Net periodic cost $ 159,963 $ 106,969 $ 127,182
Discount rate on benefit obligation 7% 8% 8% Long-term expected rate of return on plan assets 8% 8% 8% Rate of compensation increase 5% 5% 5%
NOTE 11 - RETIREMENT PLANS (Continued)
The Company also has a qualified profit sharing plan which covers substantially all employees and includes a 401(k) provision. Profit sharing contributions, excluding the 401(k) provision, are at the discretion of the Company's Board of Directors. Expense recognized in connection with the plan was $165,087, $181,743 and $166,647 in 1999, 1998 and 1997.
NOTE 12 - STOCK OPTION PLAN
The Company has stock option plans, which are accounted for in accordance with Accounting Principles Board Opinion (APB) No. 25, "Accounting for Stock Issued to Employees", and related interpretations. Under the plans, the Company grants certain directors, officers and key employees stock option awards which vest and become fully exercisable at the end of five years. The exercise price of each option, which has a ten year life, was equal to the market price of the Company's stock on the date of grant; therefore, no compensation expense was recognized.
Although the Company has elected to follow APB No. 25, Statement of Financial Accounting Standards (SFAS) No. 123, "Accounting for Stock-Based Compensation", requires pro forma disclosures of net income and earnings per share as if the Company had accounted for its employee stock options under that Statement. The fair value of each option grant was estimated on the grant date using an option-pricing model.
Summary of stock option transactions are as follows:
1999 1998 1997 Weighted Weighted Weighted Option Option Option Options Price Options Price Options Price
Outstanding, beginning of year 130,760 $11.36 125,640 $ 9.74 117,100 $ 8.60 Granted 25,780 20.62 27,200 15.88 22,000 12.62 Canceled - - (2,000) 14.55 (1,300) 8.00 Exercised (7,600) 7.13 (20,080) 7.04 (12,160) 4.19 Outstanding, end of year 148,940 $13.17 130,760 $11.36 125,640 $ 9.74
Weighted remaining contractual life 90.4 months 81.6 months 69.3 months
NOTE 12 - STOCK OPTION PLAN (Continued)
1999 1998 1997 Options Options Options Options outstanding From $3.92 to $6.38 per share 19,600 24,720 35,800 From $8.63 to $11.14 per share 30,480 32,640 40,640 From $12.00 to $15.50 per share 69,900 70,200 49,200 From $18.00 to $20.63 per share 28,960 3,200 - 148,940 130,760 125,640 Eligible for exercise From $3.92 to $6.38 per share 19,600 24,720 35,800 From $8.63 to $11.14 per share 30,480 29,360 36,480 From $12.00 to $15.50 per share 31,740 16,920 15,240 From $18.00 to $20.50 per share 2,680 - - 84,500 71,000 87,520
Under SFAS No. 123, compensation cost is recognized in the amount of the estimated fair value of the options and amortized to expense over the options' vesting periods. The pro forma effect on net income and earnings per share of this statement are as follows:
1999 1998 1997 Net income As reported $4,450,113 $3,803,516 $3,408,034 Pro forma 4,368,134 3,747,871 3,375,248
Basic earnings per share As reported $ 1.59 $ 1.36 $ 1.22 Pro forma 1.56 1.34 1.21
Diluted earnings per share As reported $ 1.55 $ 1.33 $ 1.20 Pro forma 1.53 1.32 1.19
Weighted averages Fair value of options granted $ 5.14 $ 4.52 $ 3.62 Risk free interest rate 4.82% 5.20% 6.50% Expected life 8 years 8 years 8 years Expected volatility 18.17% 23.40% 21.79% Expected dividend yield 2.13% 2.53% 2.86%
NOTE 13 - LIMITATION ON BANK DIVIDENDS
The Company's principal source of funds is dividends received from the Bank. Banking regulations limit the amount of dividends that may be paid by the Bank without prior approval of regulatory agencies. Under these regulations, the amount of dividends that may be paid in any calendar year is limited to the current year's net profits, as defined, combined with the retained net profits of the preceding two years. During 2000 the Bank could, without prior approval, declare dividends of approximately $3,254,000 plus any 2000 net profits retained to the date of the dividend declaration.
NOTE 14 - DISCLOSURES ABOUT FAIR VALUE OF FINANCIAL INSTRUMENTS
The fair values of the Company's financial instruments at December 31, 1999 and 1998 are as follows: 1999 1998 Carrying Fair Carrying Fair Amount Value Amount Value (In Thousands) Financial assets Cash and cash equivalents $ 20,717 $ 20,717 $ 10,756 $10,756 Investment securities 70,623 70,847 72,353 73,274 Mortgage loans held for sale 3,494 3,494 5,909 5,978 Loans, net 235,504 234,778 204,200 204,716 FHLB stock 3,346 3,346 3,120 3,120 Interest receivable 2,108 2,108 2,034 2,034
Financial liabilities Deposits $274,566 $275,192 $258,740 $259,532 Securities sold under agreements to repurchase and other borrowed funds 11,858 11,858 11,248 11,248 FHLB advances 26,592 25,892 6,954 7,033 Interest payable 2,142 2,142 1,789 1,789
Carrying amount is the estimated fair value for cash and cash equivalents, short-term borrowings, Federal Home Loan Bank stock, accrued interest receivable and payable, demand deposits, short- term debt, and variable rate loans or deposits that reprice frequently and fully. Security fair values are based on market prices or dealer quotes, and if no such information is available, on the rate and term of the security and information about the issuer. For fixed rate loans or deposits and for variable rate loans or deposits with infrequent repricing or repricing limits, fair value is based on discounted cash flows using current market rates applied to the estimated life and credit risk. Fair values for impaired loans are estimated using discounted cash flow analysis or underlying collateral values. Fair value of debt is based on current rates for similar financing. The fair value of commitments to extend credit and standby letters of credit is not considered material.
NOTE 15 - OFF BALANCE SHEET ACTIVITIES
Some financial instruments, such as loan commitments, credit lines, letters of credit, and overdraft protection, are issued to meet customer financing needs. These are agreements to provide credit or to support the credit of others, as long as conditions established in the contract are met, and usually have expiration dates. Commitments may expire without being used. Off-balance- sheet risk to credit loss exists up to the face amount of these instruments, although material losses are not anticipated. The same credit policies are used to make such commitments as are used for loans, including obtaining collateral at exercise of the commitment.
Financial instruments with off balance sheet risk were as follows at year-end:
1999 1998
Unused lines of credit $37,976,000 $34,728,000 Commitments to make loans 3,800,000 3,892,000 Letters of credit 453,000 586,000 Commitments to sell loans - 4,000,000
Unused lines of credit are substantially all at variable rates. Commitments to make loans are generally made for a period of 60 days or less and are primarily fixed at current market rates ranging from 7.63% to 8.25% with maturities ranging from 15 to 30 years.
Commitments to sell loans are to the Federal Home Loan Mortgage Corporation and have an underlying interest rate designed to transfer risk associated with loans held for sale and commitments to make loans that are intended to be sold. The notional amount of commitments to sell loans represent amounts of loans that have been committed for delivery on a specified date and within certain interest rate ranges, not credit exposure.
NOTE 16 - CONTINGENT LIABILITIES
The Bank is a defendant in legal actions arising from normal business activities. Management believes these actions are without merit or that the ultimate liability, if any, resulting from them will not materially affect the Company's consolidated financial position or results of operations.
NOTE 17 - STOCKHOLDER'S EQUITY
Stock Split: On March 9, 1999, the stockholders approved an amendment to Bourbon Bancshares, Inc.'s Articles of Incorporation to increase the authorized common stock to 10,000,000 shares. On June 8, 1999, the stockholders approved a two-for-one common stock split. All shares and per share amounts have been retroactively restated to reflect the split.
NOTE 17 - STOCKHOLDER'S EQUITY (Continued)
Regulatory Matters: The Company and the Bank are subject to various regulatory capital requirements administered by the federal banking agencies. Failure to meet minimum capital requirements can initiate certain mandatory and possible additional discretionary actions by regulators that, if undertaken, could have a direct material effect on the Company's financial statements. Under capital adequacy guidelines and the regulatory framework for prompt corrective action, the Company and the Bank must meet specific capital guidelines that involve quantitative measures of the Company's and the Bank's assets, liabilities, and certain off-balance sheet items as calculated under regulatory accounting practices. The Company and Bank capital amounts and classifications are also subject to qualitative judgments by regulators about components, risk weightings, and other factors.
Quantitative measures established by regulation to ensure capital adequacy require the Company and the Bank to maintain minimum amounts and ratios (set forth in the table below) of Total and Tier I capital (as defined in the regulations) to risk-weighted assets (as defined), and of Tier I capital to average assets (as defined). Management believes, as of December 31, 1999 and 1998, that the Company and the Bank meet all capital adequacy requirements to which they are subject.
The most recent notification from the Federal Deposit Insurance Corporation categorized the Bank as well capitalized under the regulatory framework for prompt corrective action. To be categorized as well capitalized, the Bank must maintain minimum Total risk-based, Tier I risk-based and Tier I leverage ratios as set forth in the following table. There are no conditions or events since that notification that management believes have changed the institution's category.
The Company's and the Bank's actual amounts and ratios are presented in the table below:
NOTE 18 - PARENT COMPANY FINANCIAL STATEMENTS
Condensed Balance Sheets December 31
1999 1998 (In Thousands) ASSETS Cash on deposit with subsidiary $ 1,606 $ 967 Investment in subsidiary 28,663 27,411 Investment securities available for sale 1,379 977 Other assets 71 17
Total assets $31,719 $29,372
LIABILITIES AND STOCKHOLDERS' EQUITY Liabilities $ - $ -
Stockholders' equity Preferred stock - - Common stock 6,491 6,474 Retained earnings 25,778 22,832 Accumulated other comprehensive income (550) 66
Total liabilities and stockholders' equity $31,719 $29,372
NOTE 18 - PARENT COMPANY FINANCIAL STATEMENTS (Continued)
Condensed Statements of Income and Comprehensive Income Years Ended December 31
1999 1998 1997 (In Thousands) Income Dividends from subsidiary $2,700 $2,330 $2,100 Interest income 28 5 - Total income 2,728 2,335 2,100
Expenses Interest expense - - 10 Other expenses 53 25 21 Total expenses 53 25 31
Income before income taxes and equity in undistributed income of subsidiary 2,675 2,310 2,069
Applicable income tax benefits 9 7 11
Income before equity in undistributed income of subsidiary 2,684 2,317 2,080
Equity in undistributed income of subsidiary 1,766 1,487 1,328
Net income 4,450 3,804 3,408
Other comprehensive income (loss), net of tax: Unrealized gains (losses) on securities arising during the period (615) (140) 240 Reclassification of realized amount - (27) (9)
Net change in unrealized gain (loss) on securities (615) (167) 231
Comprehensive income $3,835 $3,637 $3,639
NOTE 18 - PARENT COMPANY FINANCIAL STATEMENTS (Continued)
Condensed Statements of Cash Flows Years Ended December 31
1999 1998 1997 (In Thousands) Cash flows from operating activities Net income $ 4,450 $ 3,804 $ 3,408 Adjustments to reconcile net income to net cash from operating activities Equity in undistributed earnings of subsidiary (1,766) (1,487) (1,328) Change in other assets (3) (8) 8 Change in other liabilities - - (11) Net cash from operating activities 2,681 2,309 2,077
Cash flows from investing activities Purchase of investment securities available for sale (555) (977) -
Cash flows from financing activities Dividends paid (1,233) (1,122) (1,005) Proceeds from issuance of common stock 50 141 51 Purchase of common stock (304) - (603) Net cash from financing activities (1,487) (981) (1,557)
Net change in cash 639 351 520
Cash at beginning of year 967 616 96
Cash at end of year $ 1,606 $ 967 $ 616
REPORT OF INDEPENDENT AUDITORS
Board of Directors Bourbon Bancshares, Inc. Paris, Kentucky
We have audited the accompanying consolidated balance sheets of Bourbon Bancshares, Inc. as of December 31, 1999 and 1998, and the related consolidated statements of income, comprehensive income, changes in stockholders' equity and cash flows for each of the three years in the period ended December 31, 1999. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Bourbon Bancshares, Inc. as of December 31, 1999 and 1998, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 1999, in conformity with generally accepted accounting principles.
/s/Crowe, Chizek and Company LLP
Crowe, Chizek and Company LLP
Lexington, Kentucky January 21, 2000
Bourbon Bancshares, Inc. Board of Directors
Buckner Woodford President and Chief Executive Officer; Kentucky Bank and Bourbon Bancshares, Inc. Class of 2000
William R. Stamler Chairman, Signal Investments, Inc. Class of 2000
Henry Hinkle President; Hinkle Contracting Company Class of 2002
Robert G. Thompson Director, Paris/Bourbon County YMCA; Snow Hill Farm Class of 2002
Theodore Kuster Farmer and Thoroughbred Breeder; West View Farm Class of 2002
James L. Ferrell, M.D. Physician; Chairman, Bourbon Bancshares, Inc. Class of 2001
William M. Arvin Attorney Class of 2001
Kentucky Bank - Board of Directors
Buckner Woodford President and Chief Executive Officer; Bourbon Bancshares, Inc. and Kentucky Bank
Joe Allen Executive Vice President, Kentucky Bank
William M. Arvin Attorney, William M. Arvin and Associates
Dr. Gus A. Bynum Physician
Bonnie Dean Retired - Nicholasville City Clerk, Treasurer
James L. Ferrell, M.D. Physician
Dr. William J. Graul Physician
Mary Beth Hendricks Director of Clark County Child Support Services
Henry Hinkle President; Hinkle Contracting Company
Theodore Kuster Farmer and Thoroughbred Breeder; West View Farm
Joseph B. McClain President; Hopewell Insurance Company, Inc.
William R. Stamler Chairman, Signal Investments, Inc.
Robert G. Thompson Director, Paris/Bourbon County YMCA
Gerald M. Whalen President, Whalen and Co. Insurance and Real Estate
REGIONAL BOARD OF DIRECTORS CLARK
C. Richard Gamble Investor
Donald Pace Consultant, Clark Co. Schools
Ed Saunier President, Saunier North American Van Lines
Mary Beth Hendricks Director of Clark County Child Support Services
John G. Roche Optician
WOODFORD
Dr. William J. Graul Physician
James Kay Businessman, Farmer
Loren Carl Director, KY Attorney General's Office
Tricia N. Kittinger Woodford Circuit Clerk
SCOTT
R.C. Johnson, Jr. Owner and President; Johnson's Funeral Home
Dr. Gus A. Bynum Physician
Mike Hockensmith Owner and President, The Hockensmith Agency, Inc.
George Lusby County Judge Executive
JESSAMINE
William M. Arvin Attorney, William M. Arvin and Associates
Dan Brewer Bluegrass RECC
Bonnie Dean Retired - Nicholasville City Clerk, Treasurer
Eva McDaniel Jessamine County Clerk
OFFICERS BOURBON COUNTY PARIS Buckner Woodford - President and CEO Joe Allen - Executive Vice President James P. Shipp, Jr. - Sr. Vice President, Branch Administration Norman J. Fryman - Sr. Vice President, Director of Lending Greg Dawson - Vice President, Chief Financial Officer Hugh Crombie - Vice President, Operations Bill Reynolds - Vice President, Trust Officer Brenda Bragonier - Vice President, Director of Marketing and Human Resources R.W. Collins, Jr. - Vice President, Loan Officer Michael Lovell - Vice President, Loan Officer George Wilder - Vice President, Loan Officer Nicholas L. Carter - Assistant Vice President, Loan Officer Cathy Hill - Assistant Vice President, Loan Officer Brenda Berry - Accountant Mary Lou Boyle - Human Resources Wallis Brooks - Branch Manager Patty Carpenter - Loan Operations Officer Paul Clift - Systems Support Janice Hash - Accountant and Purchasing Agent Jean Patton - Compliance/CRA/Quality Control Donald Roe - Data Processing Lydia Sosby - Corporate and Automated Products Officer Rick Wagner - Maintenance Supervisor Martha Woodford - Corporate and Automated Products Officer Jan Worth - Trust Officer
Lexington Road Branch Rita Bugg - Vice President, Branch Manager, Loan Officer
Pleasant Street Branch Philip Hurst - Assistant Branch Manager
CLARK COUNTY WINCHESTER Tim Duncan - Regional Vice President Becky Taulbee - Assistant Vice President, Loan Officer Darryl Terry - Vice President, Loan Officer Carolyn Wilkins - Calling Officer Ron Burden, Vice President, Loan Officer
Colby Road Branch Teresa Shimfessel - Assistant Vice President, Branch Manager, Loan Officer
WOODFORD COUNTY VERSAILLES Duncan Gardner - Regional Vice President A.J. Gullett - Assistant Vice President, Loan Officer
SCOTT COUNTY PARIS PIKE BRANCH Jennifer Roberts - Assistant Vice President, Branch Manager, Loan Officer
GEORGETOWN Mark Walls - Regional Vice President Ben Sargent - Assistant Vice President, Loan Officer
JESSAMINE COUNTY NICHOLASVILLE Tom Buford - Regional Vice President Jeanie Thompson - Assistant Cashier & CSR Rick Walling - Assistant Vice President, Loan Officer
WILMORE Freida Lear, Assistant Vice President, Branch Manager, Loan Officer
HARRISON COUNTY CYNTHIANA LOAN PRODUCTION OFFICE Ken DeVasher - Regional Manager, Loan Officer
Exhibit 21 Subsidiaries of Registrant
Bourbon Bancshares, Inc.'s Subsidiary
Kentucky Bank
EXHIBIT 23
CONSENT OF INDEPENDENT AUDITORS
We hereby consent to the incorporation by reference in the Form S-8 Registration Statement No. 333-92725 of Bourbon Bancshares, Inc., of our report dated January 21, 2000 on the consolidated financial statements of Bourbon Bancshares, Inc. as of December 31, 1999 and 1998 and for each of the three years in the period ended December 31, 1999 as included in the registrant's annual report on Form 10-K.
/s/Crowe, Chizek and Company LLP
Crowe, Chizek and Company LLP
Lexington, KY March 29, 2000
Exhibit 99.1 Proxy Statement
BOURBON BANCSHARES 400 Main Street Paris, Kentucky 40361
NOTICE OF ANNUAL MEETING OF SHAREHOLDERS TO BE HELD MAY 2, 2000
March 17, 2000 To our Shareholders:
The annual meeting of the shareholders of Bourbon Bancshares (the "Company") will be held on Tuesday, May 2, 2000 at 11:00 a.m. local time, at the Lexington Road Branch of Kentucky Bank, Paris, Kentucky, for the purposes of:
1. Election of directors; to elect two Class I directors
2. Ratification of Independent Auditors. To act upon a proposal to ratify the appointment of Crowe, Chizek and Company LLP as the Corporation's independent auditors for the fiscal year ending December 31, 2000.
3. Other Business. To act upon such other matters as may properly be brought before the Annual Meeting or any adjournment thereof. The Board of Directors does not know of any other matter to come before the Annual Meeting.
Information regarding the matters to be acted upon at the Annual Meeting is contained in the Proxy statement accompanying this Notice. Only those holders of record of the corporation's common stock at the close of business on March 17, 2000, are entitled to notice of and to vote at the Annual Meeting and any adjournment thereof.
All Shareholders are cordially invited to attend the Annual Meeting, but whether or not you expect to attend the Annual Meeting in person, please sign and date the enclosed Proxy and return it promptly so your stock may be voted.
Thank you for your time and consideration. Please feel free to contact my office should you have any questions.
BY ORDER OF THE BOARD OF DIRECTORS
/s/Buckner Woodford Buckner Woodford President Bourbon Bancshares, Inc.
YOUR VOTE IS IMPORTANT
PLEASE MARK, SIGN, DATE AND RETURN THE ACCOMPANYING PROXY IMMEDIATELY EVEN IF YOU PLAN TO ATTEND THE ANNUAL MEETING.
BOURBON BANCSHARES, INC.
PROXY STATEMENT
INTRODUCTION
This Proxy Statement is being furnished to shareholders of Bourbon Bancshares, Inc., a Kentucky Corporation (the "Company"), in connection with the solicitation of proxies by the Board of Directors of the Company (the "Board") from holders of record of the Company's outstanding Common Shares (the "Common Shares") as of the close of business on March 17, 2000 (the "Annual Meeting Record Date"), for use at the Annual Meeting of Shareholders of the Company (the "Annual Meeting") to be held on Tuesday, May 2, 2000, at 11:00 a.m. (Eastern Daylight Time) at the Company's Lexington Road Branch office of Kentucky Bank, Fourth and Main Streets, Paris, Kentucky, and at any adjournment or postponement thereof. This Proxy Statement is first being mailed to the Company's shareholders on or about March 17, 2000. The principal executive offices of the Company are located at Fourth and Main Streets, Paris, Kentucky 40361. Its telephone number is (606) 987-1795.
Purposes of the Annual Meeting
At the Annual Meeting, holders of Common Shares will be asked to consider and to vote upon the following matters:
(1) To elect two Class I directors: (2) To ratify the appointment of Crowe, Chizek and Company LLP as the Company's independent auditors for the 2000 fiscal year end (3) To transact such other business as may properly come before the meeting.
The Board recommends that shareholders vote FOR the election of the Board's nominees for Class I directors and the ratification of the Board's appointment of Crowe, Chizek and Company LLP as the Company's independent auditors for the 2000 fiscal year. As of the date of this Proxy Statement, the Board knows of no other business to come before the Annual Meeting.
Voting Rights and Proxy Information
Only holders of record of Common Shares as of the close of business on the Annual Meeting Record Date will be entitled to notice of and to vote at the Annual Meeting or any adjournment or postponement thereof. As of December 31, 1999, there were 2,802,471 Common Shares outstanding and entitled to vote at the Annual Meeting. The presence either in person or by properly executed proxy, of the holders of a majority of the outstanding Common Shares as of the Annual Meeting Record Date is necessary to constitute a quorum at the Annual Meeting. Holders of Common Shares are entitled to one vote per share on any matter, other than the election of directors, that may properly come before the Annual Meeting. In the election of directors, holders of Common Shares have cumulative voting rights whereby each holder is entitled to vote the number of Common Shares owned multiplied by two (the number of directors to be elected at the Annual Meeting), and each holder may cast the whole number of votes for one candidate or distribute such votes among two or more candidates. The Board of Directors is soliciting discretionary authority for the individuals appointed in the proxies to cumulate votes represented by properly executed proxies and to vote for less than all the Company's nominees to the Board if deemed appropriate to ensure the election of as many of the Company's nominees to the Board as possible.
Those persons receiving the two highest number of votes in the election of directors (net of any votes against their election) will be elected to the Board. The appointment of Crowe, Chizek and Company LLP as the company's independent auditors for the 2000 year will be ratified, if the votes cast in favor of ratification exceed the votes cast against that matter.
All Common Shares that are represented at the Annual Meeting by properly executed proxies received prior to or at the Annual Meeting and not revoked will be voted at the Annual Meeting in accordance with the instructions indicated in such proxies. If no instructions are indicated, such proxies will be voted "FOR" (I) the election of the Board's two nominees as Class I directors of the Company (or, if deemed appropriate by the individuals appointed in the proxies, cumulatively voted for less than all of the Board's nominees) and (II) the ratification of Crowe, Chizek and Company LLP as the Company's independent auditors for the 2000 year.
Any proxy given pursuant to this solicitation may be revoked by the person giving it at any time before it is voted. Proxies may be revoked by (i) filing with the Company, to the attention of William C. Reynolds, Secretary, at or before the Annual Meeting, a written notice of revocation bearing a later date than the proxy, (ii) duly executing a subsequent proxy relating to the same Common Shares and delivering it to the Company at or before the Annual Meeting or (iii) attending the Annual Meeting and voting in person (although attendance at the Annual Meeting will not in and of itself constitute a revocation of a proxy). Any written notice revoking a proxy should be sent to Bourbon Bancshares, Inc., P. O. Box 157, Paris, Kentucky 40362-0157, Attention: William C. Reynolds, Secretary.
The Company will bear the cost of the solicitation of proxies by the Board in connection with the Annual Meeting. In addition to solicitation by mail, the Company will request banks, brokers and other custodian nominees and fiduciaries to supply proxy material to the beneficial owners of Common Shares, and will reimburse them for their expenses in so doing. Certain directors, officers and other employees of the Company, not specially employed for this purpose, may solicit proxies without additional remuneration therefore, by personal interview, mail, telephone, facsimile or other electronic means.
ITEM 1 -- ELECTION OF DIRECTORS
Under the Company's Articles of Incorporation, the Board of Directors consists of three different classes (Class I, Class II and Class III), each to serve, subject to the provisions of the Articles of Incorporation and Bylaws for a three year term and until his successor is duly elected and qualified. Except as listed below, each nominee for a Class II directorship has held the specified position for the last five years. The names of the nominees proposed for election as Class I directors, all of whom are presently directors of the Company, are set forth below. The Company is not aware of any other individual who may be nominated for election to the Board of Directors at the Annual Meeting.
William R. Stamler, Retired, is a consultant of Stamler Corp, Oldenburg Group. He has been a director since 1988.
Buckner Woodford, President of the bank and holding company. Became a director in 1981.
The Board of Directors does not contemplate that any of the nominees will be unable to accept election as a director for any reason. However, in the event that one or more of such nominees is unable or unwilling to accept or is unavailable to serve, the persons named in the proxies or their substitutes shall have authority, according to their judgment, to vote or to refrain from voting for other individuals as directors.
The Board recommends that shareholders vote "FOR" each of the above nominees for election as Class I directors of the Company.
ITEM 2 -- RATIFICATION OF APPOINTMENT OF INDEPENDENT AUDITORS
The Company has appointed Crowe, Chizek and Company LLP, Louisville and Lexington, Kentucky as the Company's independent auditors for the fiscal year ending December 31, 2000. Eskew & Gresham, P.S.C. has served as the Company's independent auditors since 1982. In January 1998 Eskew & Gresham was merged into Crowe, Chizek and Company LLP. Services provided to the Company and its subsidiaries by Crowe, Chizek and Company LLP with respect to the fiscal year ended December 31, 1999 included the examination of the Company's consolidated financial statements and consultations on various tax matters.
In the event shareholders do not ratify the appointment of Crowe, Chizek and Company LLP as the Company's independent auditors for the 2000 year such appointment will be reconsidered by the Board.
The Board recommends that shareholders vote "FOR" ratification of the appointment of Crowe, Chizek and Company LLP as the Company's independent auditors for the 2000 year.
OTHER MATTERS
As of the date of this Proxy Statement, the Company knows of no business that will be presented for consideration at the Annual Meeting other than that referred to above. Proxies in the enclosed form will be voted in respect of any other business that is properly brought before the Annual Meeting in accordance with the judgment of the person or persons voting the proxies.
By Order of the Board of Directors
/s/William C. Reynolds
William C. Reynolds, Secretary
March 17, 2000
This Proxy Form is Solicited by the Board of Directors
Bourbon Bancshares, Inc. Paris, Kentucky
The undersigned hereby appoints Buckner Woodford and William Reynolds, or either one of them (with full power to act alone), my proxy, each with the power to appoint his substitute, to represent me to vote all of the Corporation's Common Stock which I held of record or am otherwise entitled to vote at the close of business on March 17, 2000, at the 2000 Annual Meeting of Shareholders to be held on May 2, 2000 and at any adjournments thereof, with all powers the undersigned would possess if personally present, as follows:
I ELECTION OF DIRECTORS
__ FOR all nominees listed below (except as otherwise indicated below)
__ AGAINST all nominees listed below
William Stamler, Buckner Woodford
(INSTRUCTION: To withhold authority to vote for any individual nominee, write the nominee's name on the line)
II RATIFICATION OF CROWE, CHIZEK AND CO. LLP AS INDEPENDENT AUDITORS
______FOR ______AGAINST _____ABSTAIN
III OTHER BUSINESS. In their discretion, the Proxies are authorized to act upon such other matters As may properly be brought before the Annual Meeting or any adjournment thereof.
THE BOARD OF DIRECTORS RECOMMENDS A VOTE "FOR" ALL OF THE NOMINEES LISTED IN ITEM I AND "FOR" ITEMS 2 AND 3.
(PLEASE DATE, MARK, SIGN AND RETURN IMMEDIATELY)
This proxy form relates to ALL shares owned by the undersigned.
This proxy form is solicited by the Board of Directors and will be voted as specified and in accordance with the accompanying proxy statement. If no instruction is indicated, this proxy form will be voted "FOR" all of the nominees listed in Item 1 and "FOR" Items 2 and 3.
Please sign exactly as name appears. When shares are held by joint tenants, both should sign. When signing as attorney, as executor, administrator, trustee or guardian, please give full title as such. If a corporation, please sign full corporate name by President or other authorized officer. If a partnership, please sign partnership name by authorized person.
DATE___________, 2000 ______________________________________ Signature
_______________________________________ Signature if held jointly