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").
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. During 2001, the Company plans to add a full service banking facility in Cynthiana. 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. In 2000, Kentucky Bank made Internet banking available to its customers at www.kybank.com. Through its Wealth Management Department, Kentucky Bank provides brokerage services, 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.
Beginning January 1, 2001, a new accounting standard requires 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. The Company periodically enters into non-exchange traded mandatory forward sales contracts in conjunction with its mortgage banking operation. These contracts, considered derivatives, typically last 90 days and are used to hedge the risk of interest rate changes between the time of the commitment to make a loan to a borrower at a stated rate and when the loan is sold. The Company did not have any mandatory forward sales contracts at December 31, 2000. As allowed in conjunction with the adoption of this standard, the Company transferred its entire securities held to maturity portfolio to available for sale. As a result of this transfer and the corresponding adjustment to fair value, on January 1, 2001 securities increased $407,000, other assets decreased $138,000, and accumulated other comprehensive income increased $269,000.
The 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, 2000, the number of full time equivalent employees of the Company was 159.
Item 2.
Item 2. Properties
The main banking office of Kentucky Bank, which also serves as the principal office of Bourbon Bancshares, Inc., 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. In Cynthiana, land has been purchased and plans have been made to construct a full service facility during the 2001 year. 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 $16 thousand in 2000.
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.OB". 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
2000 Quarter 4 $23.50 $21.00 $.13 Quarter 3 24.50 19.00 .13 Quarter 2 30.00 24.00 .13 Quarter 1 26.00 24.00 .13
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
Note 13 to the Company's consolidated financial statements included in this report contains additional information relating to amounts available to be paid as dividends.
As of December 31, 2000 the Company had 2,808,067 shares of Common Stock outstanding and approximately 442 holders of record of its Common Stock.
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.
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 2000 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.
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; 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.
Summary
Net income for the year ended December 31, 2000 was $5.3 million, or $1.87 per common share compared to $4.5 million, or $1.59 for 1999 and $3.8 million, or $1.36 for 1998. Earnings per share assuming dilution were $1.83, $1.55 and $1.33 for 2000, 1999 and 1998, respectively. For 2000, net income increased $803 thousand, or 18%. Net interest income increased 13%, loan loss provision increased 7%, other income increased 12% and other expenses increased 10%. During 1999, net income increased $647 thousand, up 17%. Net interest income increased 14% and the loan loss provision remained relatively constant, while other income increased 10% and other expenses increased 11%.
Return on average equity was 15.6% in 2000 compared to 14.6% in 1999 and 13.6% in 1998. Return on average assets was 1.49% in 2000 compared to 1.39% in 1999 and 1.31% in 1998.
Non-performing loans as of a percentage of loans (including held for sale) were 0.66%, 0.31% and 0.50% as of December 31, 2000, 1999 and 1998, 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.
RESULTS OF OPERATIONS
Net Interest Income
Net interest income, the Company's largest source of revenue, on a tax equivalent basis increased from $11.7 million in 1998 to $13.2 million in 1999 to $14.9 million in 2000. The taxable equivalent adjustment (nontaxable interest income on state and municipal securities net of the related non-deductible portion of interest expense) is based on our Federal income tax rate of 34%.
Based on the volume rate analysis that follows, during 2000, average earning assets and interest bearing liabilities continued to increase. Average earning assets increased $36 million, or 12%. This increase in volume accounted for 72% of the increase in net interest income. Bank-wide efforts to increase loan demand have also been successful. Loans were the largest contributor to the 2000 increase with real estate mortgages increasing $29 million from 1999 to 2000. Average interest liabilities increased $27 million, or 11% during this same period. The increase in volume accounted for 46% of the increase in interest expense. Certificates of deposit and other time deposits composed $19 million of this increase. Federal Home Loan Bank (FHLB) advances made up an additional $5 million. The Company continues to actively pursue quality loans and fund these primarily with deposits and FHLB advances. During 2000 rates were on the rise. Bank prime rates increased 100 basis points during the year. As a result of this, the tax equivalent yield on earning assets increased from 8.00% in 1999 to 8.54% in 2000. The volume rate analysis that follows indicates that 28% of the increase in interest income was attributable to the change in rates. The rate increase also caused an increase in the cost of interest bearing liabilities. The average rate of these liabilities increased from 4.29% in 1999 to 4.99% in 2000. Based on the volume rate analysis that follows, the change in rates was responsible for 54% of the change in interest expense. As a result, 2000 gross and net interest income and margin is attributed to increases in volume reduced slightly by the negative impact of increases in rates. In spite of the conversely positive impact on net interest income that may result from the declining rates environment in 2001, competitive pressures on interest rates will continue and are likely to result in tighter net interest margins.
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, which 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.
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 2000 and 1999. Changes in interest income and expenses due to both rate and volume are allocated on a pro rata basis.
2000 vs. 1999 1999 vs. 1998 Increase (Decrease) Due Increase (Decrease) Due to Change in to Change in Net Net Volume Rate Change Volume Rate Change
INTEREST INCOME Loans $3,293 $1,220 $4,513 $2,419 $ (462) $1,957 Investment Securities (35) 37 2 (135) (263) (398) Federal Funds Sold and Securities Purchased under Agreements to Resell 184 51 235 (69) (18) (87) Deposits with Banks 4 1 5 (1) (1) (2) Total Interest Income 3,446 1,309 4,755 2,214 (744) 1,470 INTEREST EXPENSE Deposits Demand 16 339 355 793 (833) (40) Savings 11 1 12 23 (69) (46) Negotiable Certificates of Deposit and Other Time Deposits 990 1,151 2,141 255 (657) (402) Securities sold under agreements to repurchase and other borrowings 120 33 153 176 32 208 Federal Home Loan Bank advances 285 105 390 223 (62) 161 Total Interest Expense 1,422 1,629 3,051 1,470 (1,589) (119) Net Interest Income $2,024 $ (320) $1,704 $ 744 $ 845 $1,589
Noninterest Income and Expenses
Noninterest income was $3.8 million in 2000 compared to $3.4 million in 1999 and $3.1 million in 1998. The $413 thousand increase in 2000 is mainly attributable to an increase in service charges, as a result of an increase in overdraft charges of $444 thousand. In 2000 securities losses were $88 thousand compared to $1 thousand gains in 1999 and $41 thousand gains in 1998. These resulted principally from U. S. Treasury securities sold before maturity to obtain interest yields. In addition, gains on loans sold were $133 thousand, $351 thousand and $440 thousand in 2000, 1999 and 1998, respectively. During 2000 and 1999, the volume of origination of mortgage loans held for sale declined. Loans held for sale are generally sold after closing to the Federal Home Loan Mortgage Corporation. During 2000, the Company sold some loans along with their servicing rights and therefore there was a slight decline in loan service fee income in 2000. The sales of loans were $15 million, $25 million and $35 million in 2000, 1999 and 1998, respectively. Volume of loan sales are inverse to rate changes. The rate environment in 2000 and 1999 was rising and therefore resulted in declining loan sales. Rates have fallen in the first quarter of 2001 and as a result, will favorably impact our loan sales in 2001 compared to 2000. Other noninterest income excluding security and loans net gains was $3.8 million in 2000, $3.0 million in 1999 and $2.6 million in 1998. Service charges and trust department income have both been big contributors to this increase in income over this three-year period. Overdraft income increased $444 thousand in 2000, principally the result of increases in deposits and implementation of a new "Kentucky Courtesy" overdraft in the last quarter of 2000.
Noninterest expense increased $952 thousand in 2000 to $10.4 million, $908 thousand in 1999 to $9.4 million from $8.5 million in 1998. The increases in salaries and benefits from $4.5 million in 1998 to $5.1 million in 1999 and to $5.5 million in 2000 are mainly attributable to normal salary and benefit increases and a change in bonus compensation in 1999, with an increased focus on incentive compensation. Due to this change, bonuses were $23 thousand higher in 2000 compared to 1999 and $234 thousand higher in 1999 compared to 1998. Occupancy expense increased $177 thousand, or 13% in 2000 to $1.5 million and increased $197 thousand, or 17% in 1999 to $1.4 million and 16% in 1998, to $1.2 million. The Company has purchased land and plans are under way to construct a new full service facility in Cynthiana. This project is expected to be complete toward the end of the third quarter of 2001. Other noninterest expense increased from $2.8 million in 1998 to $3.0 million in 1999 and in 2000 other noninterest expenses increased to $3.3 million.
The following table is a summary of noninterest income and expense for the three-year period indicated.
For the Year Ended December 31 (in thousands) 2000 1999 1998 NON-INTEREST INCOME Service Charges $ 2,650 $ 2,075 $ 1,811 Loan Service Fee Income 287 291 283 Trust Department Income 420 398 300 Investment Securities Gains (Losses), net (88) 1 41 Gains on Sale of Mortgage Loans 132 351 440 Other 397 270 198 Total Non-interest Income $ 3,798 $ 3,386 $ 3,073
NON-INTEREST EXPENSE Salaries and Employee Benefits $ 5,539 $ 5,054 $ 4,527 Occupancy Expenses 1,538 1,361 1,164 Other 3,297 3,007 2,823 Total Non-interest Expense $10,374 $ 9,422 $ 8,514
Net Non-interest Expense as a Percentage of Average Assets 1.86% 1.88% 1.87%
Income Taxes
The Company had income tax expense of $2.0 million in 2000 compared to $1.7 million in 1999 and $1.4 million in 1998. This represents an effective income tax rate of 27.9% in 2000 and in 1999, and 26.5% in 1998. The difference between the effective tax rate and the statutory federal rate of 34% is primarily due to tax exempt income on certain investment securities. The higher effective rate for 1999 compared to 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 2000 totaled $372 million compared to $347 million in 1999 and $309 million in 1998. In 2000, loan growth was $34 million and deposit growth was $26 million. FHLB advances declined $5 million. An additional $5 million FHLB advance was received in 2000 and the short term advance of $10 million discussed below was repaid. 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 and an additional short term FHLB advance was obtained for $10 million as a precaution for possible Y2K anxieties. The advance was repaid in the first quarter of 2000 and cash and due from banks returned to their normal levels in the first quarter of 2000 also.
Loans
Total loans (including loans held for sale) were $273 million at December 31, 2000 compared to $242 million at the end of 1999 and $213 million in 1998. As of the end of 2000 and compared to the prior year-end, real estate construction loans decreased $1.7 million, real estate mortgage loans (including loans held for sale) increased $24.9 million, agricultural loans increased $5.6 million and installment loans increased $2.4 million. 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. 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, 2000, the real estate mortgage portfolio comprised 60% of total loans compared to 57% in 1999. Of this, 1-4 family residential property represented 73% in 2000 and 76% in 1999. Agricultural loans comprised 19% in 2000 and in 1999 of the loan portfolio. Approximately 77% and 75% of the agricultural loans are secured by real estate for 2000 and 1999, 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 51% in 2000 and 52% in 1999 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 At December 31 (in thousands) 2000 1999 1998 1997 1996 Commercial $ 17,452 $ 17,713 $ 15,177 $ 10,644 $ 10,216 Real Estate Construction 15,270 17,003 11,055 7,657 4,200 Real Estate Mortgage 163,190 138,337 124,721 113,524 99,293 Agricultural 52,008 46,443 44,199 37,924 30,947 Installment 24,807 22,358 17,608 15,182 14,789 Other 434 280 159 287 374 Total Loans 273,161 242,134 212,919 185,218 159,819 Less Deferred Loan Fees 16 33 76 57 154 Total Loans Net of Deferred Loan Fees 273,145 242,101 212,843 185,161 159,665 Less loans held for sale 868 3,494 5,909 5,418 863 Less Allowance For Loan Loan Losses 3,388 3,103 2,734 2,322 2,101 Net Loans $268,889 $235,504 $204,200 $177,421 $156,701
The following table sets forth the maturity distribution and interest sensitivity of selected loan categories at December 31, 2000. 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
At December 31, 2000 (in thousands) One Through Over One Year Five Five Total or Less Years Years Loans Commercial $ 8,351 $ 6,550 $ 2,551 $ 17,452 Real Estate Construction 12,122 2,755 393 15,270 Real Estate Mortgage 14,391 102,543 46,240 163,174 Agricultural 14,258 35,913 1,837 52,008 Installment 5,973 18,698 136 24,807 Other 434 0 0 434 Total Loans 55,529 166,459 51,157 273,145 Fixed Rate Loans 27,695 157,162 14,132 198,989 Floating Rate Loans 27,834 9,297 37,025 74,156 Total $ 55,529 $166,459 $ 51,157 $273,145
Mortgage Banking
The Company has been in Mortgage Banking since the early 1980's. The activity in origination and sale of these loans fluctuates, mainly due to changes in interest rates. During 2000 interest rates were rising. As a result of this, mortgage loan originations decreased from $36 million in 1998 to $22 million in 1999 to $13 million in 2000. The sale of loans were $15 million, $25 million and $35 million for the year 2000, 1999 and 1998, respectively. Mortgage loans held for sale decreased from $3.5 million at December 31, 1999 to $868 thousand at December 31, 2000. Volume of loan sales are inverse to rate changes. The rate environment in 2000 and 1999 was rising and therefore resulted in declining loan sales. Rates have fallen in the first quarter of 2001 and as a result, will favorably impact our loan sales in 2001 compared to 2000. The effect of these changes was also reflected on the income statement. Loan service fee income was $287 thousand in 2000, $291 thousand in 1999 and $283 thousand in 1998. Fluctuations of larger degrees are reflected in the gain on sale of mortgage loans. For 2000, the gain was $133 thousand compared to $351 thousand in 1999 and $440 thousand in 1998.
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. Mortgage servicing rights were $521 thousand at December 31, 2000, $606 thousand at December 31, 1999 and $534 thousand at December 31, 1998. Amortization of mortgage servicing rights was $155 thousand, $155 thousand and $112 thousand for the years ended December 31, 2000, 1999 and 1998, respectively. See Note 4 in the notes to consolidated financial statements included as Exhibit 13 for additional information.
Deposits
For 2000, total deposits increased $26 million to $301 million. Noninterest bearing deposits increased $6 million, while time deposits of $100 thousand and over increased $6 million, and other interest bearing deposits increased $15 million. Public funds totaled $39 million at the end of 2000 ($38 million was interest bearing).
Total deposits increased to $275 million in 1999, up $16 million from 1998. Noninterest bearing deposits increased $3 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).
The tables below provide information on the maturities of time deposits of $100,000 or more at December 31, 2000 and detail of short-term borrowing for the past three years.
Maturity of Time Deposits of $100,000 or More
At December 31, 2000 (in thousands)
Maturing 3 Months or Less $14,383 Maturing over 3 Months through 6 Months 11,024 Maturing over 6 Months through 12 Months 9,992 Maturing over 12 Months 4,907
Total $40,306
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, 2000, $21.6 million was borrowed from FHLB, a decrease of $5 million from 1999. 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. In 2000, $11.3 million of FHLB advances were paid, and advances were made for an additional $6.3 million. Nearly $361 thousand of FHLB borrowing was paid in 1999, and advances were made for an additional $20 million. For potential Y2K problems, $10 million in advances were received in late 1999 and repaid in early 2000. The following table depicts relevant information concerning our short term borrowings.
Short Term Borrowings At of for the year ended December 31 (in thousands) 2000 1999 1998 Federal Funds Purchased: Balance at Year end $ 0 $ 0 $ 3,750 Average Balance During the Year 373 2,196 446 Maximum Month End Balance 2,300 11,925 4,550 Repurchase Agreements: Balance at Year end 8,189 10,330 6,713 Average Balance During the Year 8,726 5,683 4,329 Maximum Month End Balance 12,310 10,330 6,713 Other Borrowed Funds: Balance at Year end 1,257 1,528 785 Average Balance During the Year 1,216 1,203 1,198 Maximum Month End Balance $ 1,766 $ 1,759 $ 1,761
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.
During periods of economic slowdown, the Company may experience an increase in nonperforming loans.
The Company discontinues the accrual of interest on loans that become 90 days past due as to principal or interest unless 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 At December 31 (dollars in thousands) 2000 1999 1998 1997 1996 Non-accrual Loans $ 307 $ 63 $ 136 $ 173 $ 33 Accruing Loans which are Contractually past due 90 days or more 1,365 549 790 154 562 Restructured Loans 130 131 147 160 180 Total Nonperforming Loans 1,802 743 1,073 487 775 Other Real Estate 165 371 70 0 79 Total Nonperforming Assets $1,967 $1,114 $1,143 $ 487 $ 854 Total Nonperforming Loans as a Percentage of Net Loans (including loans held for sale) (1) 0.66% 0.31% 0.50% 0.26% 0.49% Total Nonperforming Assets as a Percentage of Total Assets 0.53% 0.32% 0.37% 0.17% 0.31%
(1) Net of deferred loan fees
Total nonperforming assets at December 31, 2000 were $2.0 million compared to $1.1 million at December 31, 1999 and $1.1 million at December 31, 1998. Total nonperforming loans were $1.8 million, $743 thousand and $1.1 million at December 31, 2000, 1999 and 1998, respectively. The increase in loans that are 90 days or more is mainly attributable to one Small Business Administration loan of $790 thousand. The Company does not expect to incur a loss on this loan. The amount of lost interest on our non- accrual loans is immaterial. At December 31, 2000, 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, 2000 were $395 thousand compared to $201 thousand in 1999 and $286 thousand in 1998. 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 $117 thousand, $10 thousand and $85 thousand on December 31, 2000, 1999 and 1998, respectively.
Loan Losses
The following table is a summary of the Company's loan loss experience for each of the past five years.
For the Year Ended December 31 (in thousands) 2000 1999 1998 1997 1996 Balance at Beginning of Year $ 3,103 $ 2,735 $ 2,322 $ 2,101 $ 1,860 Amounts Charged-off: Commercial 14 0 13 5 55 Real Estate Construction 0 0 0 0 0 Real Estate Mortgage 115 50 36 25 4 Agricultural 30 72 19 52 12 Consumer 400 289 300 273 142 Total Charged-off Loans 559 411 368 355 213 Recoveries on Amounts Previously Charged-off: Commercial 14 5 4 3 12 Real Estate Construction 0 0 0 0 0 Real Estate Mortgage 7 1 9 1 8 Agricultural 8 32 2 25 1 Consumer 65 41 66 54 31 Total Recoveries 94 79 81 83 52 Net Charge-offs 465 332 287 272 161 Provision for Loan Losses 750 700 700 493 402 Balance at End of Year $ 3,388 $ 3,103 $ 2,735 $ 2,322 $ 2,101 Total Loans, Net of Deferred Loan Fees Average $257,711 $221,309 $193,182 $171,128 $155,735 At December 31 $273,145 $242,101 $212,843 $185,161 $159,665 As a Percentage of Average Loans: Net Charge-offs 0.18% 0.15% 0.15% 0.16% 0.10% Provision for Loan Losses 0.29% 0.32% 0.36% 0.29% 0.26% Allowance as a Percentage of Year-end Net Loans (1) 1.24% 1.28% 1.28% 1.25% 1.32% Beginning Allowance as a Multiple Of Net Charge-offs 6.7 8.2 8.1 7.7 11.6 Ending Allowance as a Multiple of Nonperforming Assets 1.72 2.79 2.39 4.77 2.46
(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 2000 was $750 thousand compared to $700 thousand in 1999 and $700 thousand in 1998. Net charge-offs were $465 thousand in 2000, $332 thousand in 1999 and $287 thousand in 1998. Net charge-offs to average loans were 0.18%, 0.15% and 0.15% in 2000, 1999 and 1998, respectively. With the current quality of the loan portfolio, the loan loss provision stayed constant from 1998 to 1999, and increased $50 thousand in 2000. The trend in the loan loss provision increasing for 2000 is a result of considering our probable losses and risk analysis of our loan portfolio. 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, 2000, the allowance for loan losses was 1.24% of loans outstanding compared to 1.28% at year-end 1999 and 1.28% in 1998. Management believes the allowance for loan losses at the end of 2000 is adequate to cover probable 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.
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, 2000 increased $3.9 million to $34.5 million. Total stockholders' equity, excluding accumulated other comprehensive income was $35.9 million at December 31, 2000. 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.
At December 31 (dollars in thousands) 2000 1999 Change Stockholders' Equity (1) $ 35,868 $ 32,269 $ 3,599 Less Disallowed Amount (1,380) (1,685) 305 Tier I Capital 34,488 30,584 3,904 Allowance for Loan Losses 3,296 2,926 370 Tier II Capital 3,296 2,926 370 Total Capital 37,784 33,510 4,274 Total Risk Weighted Assets $263,660 $233,929 $29,731 Ratios: Tier I Capital to Risk-weighted Assets 13.08% 13.07% 0.01% Total Capital to Risk-weighted Assets 14.33% 14.32% 0.01% Leverage 9.29% 9.59% -0.30%
(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, 2000, 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 $70.6 million at December 31, 1999 to $68.1 million at December 31, 2000. The decrease is mainly attributable to the increased loan demand. Federal funds sold totaled $3.7 million at December 31, 2000 and $675 thousand at December 31, 1999. As allowed in conjunction with the adoption of the new "derivative" standard, the Company transferred its entire securities held to maturity portfolio to available for sale on January 1, 2001.
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 $12.4 million of adjustable asset backed securities held on December 31, 2000, $3.3 million are repriceable monthly and the remaining $9.1 million are repriceable annually. 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 are repriceable annually. Unrealized gains (losses) on investment securities are temporary and change inversely with movements in interest rates. In addition, some prepayment risk exist on Mortgage- backed securities and prepayments are likely to increase with decreases in interest rates. 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, 2000.
Investment Securities (Held to maturity at amortized cost, available for sale at market value) At December 31 (in thousands) 2000 1999 1998 Available for Sale U.S. treasury $14,992 $17,954 $16,087 U.S. government agencies 5,028 5,902 5,979 States and political subdivisions 3,366 3,681 3,804 Mortgage-backed Fixed - GNMA, FNMA, FHLMC Passthroughs 5,580 5,998 2,352 GNMA, FNMA, FHLMC CMO's 4,941 5,191 7,570 Total 10,521 11,189 9,922 Variable - GNMA, FNMA, FHLMC Passthroughs 9,374 11,539 12,529 GNMA, FNMA, FHLMC CMO's 2,983 3,045 3,173 Total 12,357 14,584 15,702 Total mortgage-backed 22,878 25,773 25,624 Other 6,559 1,620 3,926 Total 52,823 54,930 55,420
Held to Maturity States and political subdivisions 15,231 15,693 16,933
Total $68,054 $70,623 $72,353
Maturity Distribution of Securities
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 requires 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. The Company periodically enters into non-exchange traded mandatory forward sales contracts in conjunction with its mortgage banking operation. These contracts, considered derivatives, typically last 90 days and are used to hedge the risk of interest rate changes between the time of the commitment to make a loan to a borrower at a stated rate and when the loan is sold. The Company did not have any mandatory forward sales contracts at December 31, 2000. As allowed in conjunction with the adoption of this standard, the Company transferred its entire securities held to maturity portfolio to available for sale. As a result of this transfer and the corresponding adjustment to fair value, on January 1, 2001 securities increased $407,000, other assets decreased $138,000, and accumulated other comprehensive income increased $269,000.
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. The primary tool used by management is an interest rate shock simulation model. Certain assumptions, such as prepayment risks, are included in the model. However, actual prepayments may differ from those assumptions. In addition, immediate withdrawal of interest checking and other savings accounts may have an effect on the results of the 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 approved limits. As of December 31, 2000 the projected percentage changes are within the Board of Directors limits and the Company's interest rate risk is also within Board of Directors limits. The projected net interest income report summarizing the Company's interest rate sensitivity as of December 31, 2000 and December 31, 1999 is as follows:
Projected Net Interest Income (December 31, 2000)
Level Rate Change: - 300 - 100 Rates + 100 + 300
Year One (1/1/01 - 12/31/01) Interest Income $26,736 $29,116 $30,306 $31,495 $33,875 Interest Expense 11,428 13,841 15,048 16,255 18,669
Net Interest Income 15,308 15,275 15,258 15,240 15,206
Net interest income dollar change $ 50 $ 17 N/A $ (18) $ (52)
Net interest income percentage change 0.3% 0.1% N/A -0.1% -0.3%
Board of Director Limitation on % Change >-10.0% >-4.0% N/A >-4.0% >-10.0%
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 $ (300) $ (104) N/A $ 105 $ 313
Net interest income percentage change -2.1% -0.7% N/A 0.7% 2.2%
Board of Director Limitation on % Change >-10.0% >-4.0% N/A >-4.0% >-10.0%
These numbers in 2000 show less fluctuation when compared to 1999. In 2000, year one reflected a slight increase in net interest income of 0.3% compared to 2.1% decrease with a 300 basis point decline. The 300 basis point increase in rates reflected a 0.3% decrease in net interest income in 2000 compared to a 2.2% increase in 1999. The risk is less in 2000 due to an improved "match" of rate sensitive assets and rate sensitive liabilities.
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.
Liquidity risk is the possibility that the Company 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 (including held to maturity) maturing within one year along with cash and cash equivalents totaled $38.4 million at December 31, 2000. Additionally, securities available-for-sale with maturities greater than one year totaled $33.0 million at December 31, 2000. As part of the new accounting pronouncement mentioned in Note 1 of the Notes to Consolidated Financial Statements included in Exhibit 13 the Company transferred its entire securities held to maturity portfolio to available for sale on January 1, 2001. This added an additional $15.6 million in securities to the available for sale portfolio. The available for sale 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, 2000 these balances totaled $40 million, approximately 13.4% 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. We have sufficient collateral to borrow an additional $22 million from the FHLB at December 31, 2000.
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 cash flows from operations to meet investing and liquidity needs related to reasonable borrower, depositor and creditor needs in the present economic environment.
The cash flow statements for the periods presented provide an indication of the Company's sources and uses of cash as well as an indication of the ability of the Company to maintain an adequate level of liquidity.
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 2000 1999 1998 Average Loans (including loans held for sale)/Average Deposits 89.9% 83.9% 78.7% Average Securities sold under Agreements to repurchase and other Borrowings/Average Assets 2.9% 2.6% 1.8%
This chart shows that the loan to deposit ratio increased in 2000 and 1999. Loan growth of 15% and deposit growth of 7% in 2000, coupled with loan growth of 15% and deposit growth of 6% in 1999 have been contributing factors to the change in this ratio over the past two years.
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 2000 Annual Report to Stockholders included as Exhibit 13, and are incorporated herein by reference. No other portion of the 2000 Annual Report to Stockholders is to be deemed "filed" as part of this filing.
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 2001:
William Arvin, age 60, is an attorney. He has been a director of Kentucky Bank and the Company since December 19, 1995.
James L. Ferrell, M.D., age 66, is a Physician. He has been a director of Kentucky Bank since 1980 and the Company since inception.
Terms expiring in 2002:
Henry Hinkle, age 49, is President of Hinkle Construction Company. He has been a director of Kentucky Bank and the Company since 1989.
Theodore Kuster, age 57, 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 51, 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.
Terms expiring in 2003:
William R. Stamler, age 66, is Chairman of Signal Investments, Inc. He has been a director of Kentucky Bank since 1984 and the Company since 1988.
Buckner Woodford, age 56, 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.
The Company's other executive officer is Gregory J. Dawson, age 40. 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 2000 $168,500 $ 47,952 (1) 500 Buckner Woodford 1999 162,000 1,467 (1) 3,600 Buckner Woodford 1998 156,000 3,161 (1) 3,800
(1) Less than the lesser of $50,000 or 10% of annual salary and bonuses
The following table contains information regarding the grant of stock options under the Company's stock option plan to the Chief Executive Officer during the year ended December 31, 2000. In addition, in accordance with rules of the Securities and Exchange Commission, the following table sets forth the hypothetical grant date present value with respect to the referenced options, using the Black-Scholes Option Pricing Model.
Option Grants in the Last Fiscal Year
% of Total Options Grant Shares Granted to Exercise Date Granted Employees Price Expiration Present Name (#) in 2000 ($/Sh) Date Value($)
Buckner Woodford 500 14.9% $24.00 1/3/10 $3,280
The following table sets forth certain information regarding options exercised by the Chief Executive Officer during calendar year 2000 and unexercised stock options held by him as of December 31, 2000.
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 70,000 200,000 33,750 45,000 56,250 67,500 78,750
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 29 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, 2000.
Name Shares Beneficially Owned(1) Number Percentage
William Arvin (2) 33,309 1.2%
Gregory J. Dawson (3) 8,845 *
James L. Ferrell, M.D. (4) 30,250 1.1%
Henry Hinkle (5) 27,855 1.0%
Theodore Kuster (6) 17,360 *
William R. Stamler (7) 31,270 1.1%
Robert G. Thompson (8) 7,750 *
Buckner Woodford (9) 262,348 8.8%
All directors and officers (8 persons) as a group (consisting of those persons named above)(10) 418,987 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, 13,695 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 350 shares that Mr. Arvin may acquire upon exercise of outstanding stock options. 3) Includes 8,140 shares that Mr. Dawson may acquire upon exercise of outstanding stock options. 4) Includes 5,400 shares held in a retirement account and 750 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 750 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 5,180 shares held in a retirement account and 550 shares that Mr. Kuster may acquire upon exercise of outstanding stock options. 7) Includes 4,000 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 330 shares that Mr. Stamler may acquire upon exercise of outstanding stock options. 8) Includes 1,550 shares that Mr. Thompson may acquire upon exercise of outstanding stock options. 9) 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 15,640 shares that Mr. Woodford may acquire upon exercise of outstanding stock options. 10) Includes 28,060 shares that may be acquired upon exercise of outstanding stock options.
The following table sets forth as of December 31, 2000 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 9 in the preceding table for further information.
Name and Address Shares Beneficially of Beneficial Owner Owned Percentage
Buckner Woodford 262,348 8.8% 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, 2000. 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 $1.5 million and $1.2 million as of December 31, 2000 and 1999, 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 Quarterly Report on Form 10-Q for the quarterly period ending March 31, 2000 (File No. 33-96358).
3.2 Bylaws of the Registrant are incorporated by reference to Exhibit 3.1 of the Registrant's Quarterly Report on Form 10-Q for the quarterly period ending June 30, 2000 (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
99.1 Proxy statement dated March 15, 2001, sent to the Registrant's security holders in connection with the 2001 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, 2000 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: ________________________ Buckner Woodford, President and Chief Executive Officer, Director March 29, 2001
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.
_____________________________ March 29, 2001 Buckner Woodford, President and Chief Executive Officer, Director
_____________________________ March 29, 2001 Gregory J. Dawson, Chief Financial and Accounting Officer
_____________________________ March 29, 2001 James L. Ferrell, M.D., Chairman of the Board, Director
_____________________________ March 29, 2001 William Arvin, Director
_____________________________ March 29, 2001 Henry Hinkle, Director
_____________________________ March 29, 2001 Theodore Kuster, Director
_____________________________ March 29, 2001 William R. Stamler, Director
_____________________________ March 29, 2001 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 Quarterly Report on Form 10-Q for the quarterly period ending March 31, 2000 (File No. 33-96358).
3.2 Bylaws of the Registrant are incorporated by reference to Exhibit 3.1 of the Registrant's Quarterly Report on Form 10-Q for the quarterly period ending June 30, 2000 (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
99.1 Proxy statement dated March 15, 2001, sent to the Registrant's security holders in connection with the 2001 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 2000
Letter to the Shareholders.
Dear Shareholders,
It gives me great pleasure to present the information contained in this year's annual report. We have just enjoyed our best year ever. The economy in central Kentucky has been healthy for several years. This has helped our management and employees achieve very good results.
Earnings continue to grow strongly. Earnings per share (assuming dilution) were $1.83 in 2000. This compares with $1.55 in 1999 and $1.33 in 1998. Several years ago some investments were made to expand our franchise. We are now achieving returns on those investments.
Our business continued to grow last year. We ended the year with $372 million in assets, up from $347 million a year ago. During the year we attracted new customers at a steady pace.
We are using a portion of our earnings to further improve facilities and strengthen our business. In Winchester we have made major improvements to our Colby Road office. At this strategically located branch we have expanded our drive in facility from three lanes to six. In addition, we have enlarged the building and updated its appearance. At our downtown Paris headquarters we are currently in the midst of an historic renovation of our headquarters building. We have also completed our plans and awarded a contract to build a new full service branch office in Cynthiana. That office should be opened during the second half of this year.
One concern heading into this year is the apparent softening of the national economy. This has potential to cause problems with loan quality. In this environment we feel it is prudent to tighten up on our collection procedures and use extra caution when looking at new loans. A few other banks have made announcements that their numbers of loan problems are growing. We think it's only good judgement at this time to give extra focus to our loan quality.
During 2001 Kentucky Bank will celebrate its 150th anniversary. There are a number of bank charters that have been merged into what is now Kentucky Bank. The oldest of those charters, Deposit Bank, dates back to 1851. This summer we hope to complete the historic renovation of our headquarters building in downtown Paris. At that time we will celebrate our 150th anniversary. I hope you can join us.
/s/Buckner Woodford Buckner Woodford
FINANCIAL HIGHLIGHTS...
BOURBON BANCSHARES, INC. 2000 1999 1998
Assets ($ millions) $ 372 $ 347 $ 309
Net Income ($ thousands) $ 5,253 $ 4,450 $ 3,804
Per Share Results
Diluted Earnings $ 1.83 $ 1.55 $ 1.33
Dividends $ .52 $ .44 $ .40
Shareholder Information
CORPORATE HEADQUARTERS Bourbon Bancshares, Inc. 4th and Main Street Paris, Kentucky 40361 859-987-1795
ANNUAL MEETING The annual meeting of Shareholders of Bourbon Bancshares, Inc. will be held Wednesday, May 2, 2001 at 11:00 a.m. in the corporate headquarters.
TRANSFER AGENT, REGISTRAR AND DIVIDEND DISBURSING AGENT Kentucky Bank Wealth Management Department 859-987-1795, 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.OB
INVESTOR INFORMATION Any individual requesting general information or a copy of the Corporation's 2000 Form 10-K Report may obtain these by writing Investor Relations at the Corporate Headquarters.
CONSOLIDATED BALANCE SHEETS December 31
2000 1999 ASSETS Cash and due from banks $ 11,595,878 $ 20,041,648 Federal funds sold 3,749,000 675,000 Cash and cash equivalents 15,344,878 20,716,648 Investment securities: Available for sale 52,822,939 54,930,326 Held to maturity (fair value 2000 - $15,638,185 and 1999 - $15,916,799) 15,231,406 15,692,975 Mortgage loans held for sale 867,804 3,493,765
Loan 272,277,776 238,606,545 Allowance for loan losses (3,388,380) (3,102,800) Net loans 268,889,396 235,503,745
Federal Home Loan Bank stock 3,597,900 3,345,500 Bank premises and equipment, net 8,298,504 7,081,860 Interest receivable 4,262,243 3,454,218 Intangible assets 1,743,786 2,108,274 Other assets 788,407 1,151,471
Total assets $371,847,263 $347,478,782
LIABILITIES AND STOCKHOLDERS' EQUITY Deposits Non-interest bearing $ 48,438,750 $ 42,931,235 Time deposits, $100,000 and over 40,305,827 34,714,390 Other interest bearing 212,071,008 196,920,315 Total deposits 300,815,585 274,565,940 Securities sold under agreements to repurchase and other borrowings 9,446,393 11,858,464 Federal Home Loan Bank advances 21,644,278 26,592,305 Interest payable 3,427,489 2,141,754 Other liabilities 653,537 600,746 Total liabilities 335,987,282 315,759,209
Stockholders' equity Preferred stock, 300,000 shares authorized and unissued - - Common stock, no par value; 10,000,000 shares authorized; 2,808,067 and 2,802,471 shares issued and outstanding in 2000 and 1999 6,627,255 6,491,373 Retained earnings 29,241,091 25,777,789 Accumulated other comprehensive income (8,365) (549,589) Total stockholders' equity 35,859,981 31,719,573
Total liabilities and stockholders' equity $371,847,263 $347,478,782
See accompanying notes.
CONSOLIDATED STATEMENTS OF INCOME Years Ended December 31
2000 1999 1998 Interest income Loans, including fees $23,681,081 $19,167,985 $17,211,687 Investment securities Taxable 2,818,906 2,761,337 3,141,285 Tax exempt 1,059,658 1,115,480 1,168,049 Other 647,597 408,077 462,117 28,207,242 23,452,879 21,983,138 Interest expense Deposits 11,807,823 9,300,244 9,787,511 Securities sold under agreements to repurchase and other short-term borrowings 541,550 386,607 269,135 Federal Home Loan Bank advances 1,158,250 767,779 517,105 Other 90,000 92,440 92,717 13,597,623 10,547,070 10,666,468
Net interest income 14,609,619 12,905,809 11,316,670 Provision for loan losses 750,000 699,600 700,400 Net interest income after provision for loan losses 13,859,619 12,206,209 10,616,270
Other income Service charges 2,650,310 2,074,999 1,810,756 Loan service fee income 286,704 290,622 282,879 Trust department income 419,728 397,416 300,342 Investment securities gains (losses), net (88,169) 906 40,955 Gain on sale of mortgage loans 132,559 351,192 439,927 Other 397,131 270,416 198,116 3,798,263 3,385,551 3,072,975 Other expenses Salaries and employee benefits 5,538,589 5,054,249 4,526,735 Occupancy expenses 1,538,037 1,361,025 1,163,872 Amortization 434,373 441,286 400,147 Advertising and marketing 362,958 323,726 340,664 Taxes other than payroll, property and income 363,957 234,818 307,146 Other 2,135,581 2,006,858 1,775,563 10,373,495 9,421,962 8,514,127
Income before income taxes 7,284,387 6,169,798 5,175,118 Provision for income taxes 2,031,445 1,719,685 1,371,602
Net income $ 5,252,942 $ 4,450,113 $ 3,803,516
Earnings per share: Basic $ 1.87 $ 1.59 $ 1.36 Diluted 1.83 1.55 1.33
See accompanying notes.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME Years Ended December 31
2000 1999 1998
Net income $ 5,252,942 $ 4,450,113 $ 3,803,516
Other comprehensive income (loss), net of tax: Unrealized gains (losses) on securities arising during the period 483,032 (615,012) (139,837) Reclassification of realized amount 58,192 (598) (27,030) Net change in unrealized gain (loss) on securities 541,224 (615,610) (166,867)
Comprehensive income $ 5,794,166 $ 3,834,503 $ 3,636,649
See accompanying notes.
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY Years Ended December 31, 2000, 1999 and 1998
CONSOLIDATED STATEMENTS OF CASH FLOWS Years Ended December 31
2000 1999 1998 Cash flows from operating activities Net income $ 5,252,942 $ 4,450,113 $ 3,803,516 Adjustments to reconcile net income to net cash from operating activities Depreciation and amortization 1,246,826 1,207,402 1,007,948 Provision for loan losses 750,000 699,600 700,400 Investment securities amortization (accretion), net (52,915) 5,293 (42,854) Investment securities gains (losses), net 88,169 (906) (40,955) Originations of loans held for sale (12,588,461) (22,264,141) (35,798,502) Proceeds from sale of loans 15,292,943 24,802,228 35,417,148 Gain on sale of mortgage loans (132,559) (351,192) (439,927) Federal Home Loan Bank stock dividends (252,400) (226,000) (214,300) Changes in: Interest receivable (808,025) (289,108) (309,545) Other assets 289,452 (33,731) (10,827) Interest payable 1,285,735 332,017 (121,840) Other liabilities 52,791 (50,333) (406,176) Net cash from operating activities 10,424,498 8,281,242 3,544,086
Cash flows from investing activities Purchases of securities available for sale (24,858,046) (38,694,863) (29,252,389) Proceeds from sales of securities available for sale 17,045,613 17,828,018 6,548,219 Proceeds from principal payments and maturities of securities available for sale 10,685,161 20,393,126 33,189,842 Purchases of investment securities held to maturity (632,490) (349,522) (2,374,891) Proceeds from maturities of investment securities held to maturity 1,113,500 1,616,300 1,070,150 Net change in loans (34,356,698) (32,401,646) (27,549,007) Purchases of bank premises and equipment, net (2,029,097) (701,261) (1,636,487) Net cash acquired in branch acquisition - 8,387,089 - Net cash from investing activities (33,032,057) (23,922,759) (20,004,563)
Cash flows from financing activities Net change in deposits 26,249,645 6,840,197 17,414,395 Net change in securities sold under agreements to repurchase and other borrowings (2,412,071) 610,187 1,790,671 Advances from Federal Home Loan Bank 6,317,000 20,000,000 4,000,000 Payments on Federal Home Loan Bank advances (11,265,027) (361,197) (7,282,789) Proceeds from issuance of common stock 172,580 50,135 141,380 Purchase of common stock (363,710) (304,074) - Dividends paid (1,462,628) (1,233,296) (1,121,842) Net cash from financing activities 17,235,789 25,601,952 14,941,815
Continued
CONSOLIDATED STATEMENTS OF CASH FLOWS Years Ended December 31
2000 1999 1998
Net change in cash and cash equivalents $ (5,371,770) $ 9,960,435 $ (1,518,662)
Cash and cash equivalents at beginning of year 20,716,648 10,756,213 12,274,875
Cash and cash equivalents at end of year $ 15,344,878 $ 20,716,648 $ 10,756,213
Supplemental disclosures of cash flow information Cash paid during the year for: Interest expense $ 12,311,888 $ 10,184,300 $ 10,788,308 Income taxes 2,060,803 1,849,988 1,370,000
Supplemental schedules of non-cash investing activities: Real estate acquired through foreclosure $ 205,200 $ 426,205 $ 69,676
See accompanying notes.
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, Harrison, Jessamine, Scott, Woodford and adjoining counties in Kentucky. As a state bank, the Bank is subject to regulation by the Kentucky Department of Financial Institutions and the Federal Deposit Insurance Corporation (FDIC). The Company, a bank holding company, is regulated by the Federal Reserve.
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 secondary market prices, 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 a valuation allowance for probable incurred credit losses, increased by the provision for loan losses and decreased by charge-offs less recoveries. Management estimates the allowance balance required using past loan loss experience, the nature and volume of the portfolio, information about specific borrower situations and estimated collateral values, economic conditions, and other factors. Allocations of the allowance may be made for specific loans, but the entire allowance is available for any loan that, in management's judgment, should be charged-off. Loan losses are charged against the allowance when management believes the uncollectibility of a loan balance is confirmed.
A loan is impaired when full payment under the loan terms is not expected. Impairment is evaluated in total for smaller-balance loans of similar nature such as residential mortgage, consumer, and credit card loans, and on an individual loan basis for other loans. If a loan is impaired, a portion of the allowance is allocated so that the loan is reported, net, at the present value of estimated future cash flows using the loan's existing rate or at the fair value of collateral if repayment is expected solely from the collateral.
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. 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.
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.
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.
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
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 requires 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. The Company periodically enters into non-exchange traded mandatory forward sales contracts in conjunction with its mortgage banking operation. These contracts, considered derivatives, typically last 90 days and are used to hedge the risk of interest rate changes between the time of the commitment to make a loan to a borrower at a stated rate and when the loan is sold. The Company did not have any mandatory forward sales contracts at December 31, 2000. As allowed in conjunction with the adoption of this standard, the Company transferred its entire securities held to maturity portfolio to available for sale. As a result of this transfer and the corresponding adjustment to fair value, on January 1, 2001 securities increased $407,000, other assets decreased $138,000, and accumulated other comprehensive income increased $269,000.
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.
Reclassifications: Certain reclassification have been made in the 1998 and 1999 consolidated financial statements to conform to the 2000 presentation.
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, 2000 and 1999 was $191,000 and $7,544,000.
NOTE 3 - INVESTMENT SECURITIES
Year-end securities are as follows:
Amortized Unrealized Unrealized Fair Cost Gains Losses Value Available for Sale
U. S. Treasury $14,969,462 $ 24,045 $ (1,632) $14,991,875 U. S. government agencies 4,999,043 40,332 (10,835) 5,028,540 States and political subdivisions 3,271,701 94,396 - 3,366,097 Mortgage-backed 22,876,407 140,385 (139,105) 22,877,687 Equity securities 2,230,037 96,117 (256,038) 2,070,116 Other 4,488,966 - (342) 4,488,624
Total $52,835,616 $395,275 $(407,952) $52,822,939
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 Equity securities 1,563,910 13,113 (197,923) 1,379,100 Other 243,023 1,617 (3,476) 241,164
Total $55,763,036 $ 65,241 $(897,951) $54,930,326
Held to Maturity
States and political subdivisions $15,231,406 $416,441 $ (9,662) $15,638,185
States and political subdivisions $15,692,975 $361,580 $(137,756) $15,916,799
NOTE 3 - INVESTMENT SECURITIES (Continued)
The amortized cost and fair value of investment securities at December 31, 2000, 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 $19,757,892 $19,792,273 Due after one year through five years 5,808,961 5,860,798 Due after five years through ten years 877,587 904,682 Due after ten years 1,284,732 1,317,383 27,729,172 27,875,136
Mortgage-backed 22,876,407 22,877,687 Equity 2,230,037 2,070,116
Total $52,835,616 $52,822,939
Held to Maturity Due in one year or less $ 3,287,329 $ 3,386,485 Due after one year through five years 4,024,819 4,128,886 Due after five years through ten years 4,408,178 4,551,688 Due after ten years 3,511,080 3,571,126
Total $15,231,406 $15,638,185
Proceeds from sales of investment securities during 2000, 1999 and 1998 were $17,045,613, $17,828,018 and $6,548,219. Gross gains of $42,704, $29,674 and $40,955 and gross losses of $130,873, $28,768 and $0, were realized on those sales.
Investment securities with an approximate carrying value of $54,829,000 and $61,321,000 at December 31, 2000 and 1999, 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:
2000 1999
Commercial $ 17,452,151 $ 17,713,094 Real estate construction 15,269,683 17,003,060 Real estate mortgage 162,305,751 134,809,876 Agricultural 52,008,373 46,442,610 Consumer 24,807,486 22,357,830 Other 434,332 280,075
$272,277,776 $238,606,545
Activity in the allowance for loan losses was as follows:
2000 1999 1998
Beginning balance $3,102,800 $2,734,589 $2,321,536 Charge-offs (558,552) (410,245) (368,017) Recoveries 94,132 78,856 80,670 Provision for loan losses 750,000 699,600 700,400
Ending balance $3,388,380 $3,102,800 $2,734,589
Impaired loans totaled $395,469 and $201,085 at December 31, 2000 and 1999. The average recorded investment in impaired loans during 2000, 1999 and 1998 was $224,000, $244,000 and $310,000. The total allowance for loan losses related to these loans was $117,000 and $10,000 at December 31, 2000 and 1999. Interest income on impaired loans of $11,000, $18,000 and $22,000 was recognized for cash payments received in 2000, 1999 and 1998.
Nonperforming loans were as follows: 2000 1999 1998
Loans past due over 90 days still on accrual $1,364,741 $ 549,000 $ 790,000 Nonaccrual loans 307,221 63,000 136,000
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 $101,893,000 and $108,480,000 at December 31, 2000 and 1999. Custodial escrow balances maintained in connection with the foregoing loan servicing, and included in demand deposits, were approximately $682,000 and $646,000 at December 31, 2000 and 1999.
Changes in mortgage servicing rights were as follows:
2000 1999 1998
Beginning balance $ 606,487 $ 533,822 $ 314,877 Additions 69,885 228,016 330,902 Amortization (154,905) (155,351) (111,957)
Ending balance $ 521,467 $ 606,487 $ 533,822
Certain directors and executive officers of the Company and companies in which they have beneficiary ownership were loan customers of the Bank during 2000 and 1999. 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:
2000 1999
Balance, beginning of year $1,174,000 $1,216,000 Additions, including loans now meeting disclosure requirements 893,000 615,000 Amounts collected, including loans no longer meeting disclosure requirements (589,000) (657,000)
Balance, end of year $1,478,000 $1,174,000
NOTE 5 - PREMISES AND EQUIPMENT
Year-end premises and equipment were as follows:
2000 1999
Land and buildings $ 8,588,831 $ 7,717,995 Furniture and equipment 6,958,501 5,800,240 15,547,332 13,518,235 Less accumulated depreciation (7,248,828) (6,436,375)
$ 8,298,504 $ 7,081,860
Depreciation expense was $812,453, $766,117 and $667,799 in 2000, 1999, and 1998.
NOTE 6 - DEPOSITS
At December 31, 2000, the scheduled maturities of time deposits are as follows:
2001 $136,165,679 2002 21,221,775 2003 2,075,811 2004 606,986 2005 and thereafter 816,565 $160,886,816
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 $812,000 and $838,000 at December 31, 2000 and 1999.
NOTE 7 - SECURITIES SOLD UNDER AGREEMENTS TO REPURCHASE
Securities sold under agreements to repurchase generally mature within one to 35 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 2000 and 1999 is summarized as follows:
2000 1999
Average daily balance during the year $ 8,726,000 $ 5,683,000 Average interest rate during the year 5.53% 4.37% Maximum month-end balance during the year $12,310,000 $10,333,000
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, 2000 and 1999, $21,644,278 and $26,592,305 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 two to fifteen years, with fixed interest rates ranging from 5.25% to 7.23%. The Bank also has letters of credit from the FHLB totaling $22,050,000 at December 31, 2000 for the purpose of securing public deposits. Advances and letters of credit 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, 2000 are as follows:
2001 $ 235,791 2002 249,383 2003 4,828,052 2004 10,033,503 2005 5,035,928 Thereafter 1,261,621
$21,644,278
NOTE 9 - INCOME TAXES
Income tax expense was as follows: 2000 1999 1998
Current payable $ 1,782,641 $ 1,697,291 $ 1,306,758 Deferred 248,804 22,394 64,844
$ 2,031,445 $ 1,719,685 $ 1,371,602
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.
2000 1999 Deferred tax assets Allowance for loan losses $958,814 $861,717 Unrealized loss on investment securities 4,310 283,121 Core deposit intangibles 186,149 156,646 Other 11,704 31,042
Deferred tax liabilities Bank premises and equipment (146,734) (142,812) FHLB stock (541,807) (455,991) Mortgage servicing rights (177,299) (206,206) Other (54,464) (54,278)
Net deferred tax asset $ 240,673 $ 473,239
Effective tax rates differ from federal statutory rates applied to financial statement income due to the following:
2000 1999 1998
U. S. federal income tax rate 34.0% 34.0% 34.0% Changes from the statutory rate Tax-exempt investment income (5.9) (7.2) (8.7) Non-deductible interest expense related to carrying tax-exempt investments .8 .8 1.1 Other (1.0) .3 .1
27.9% 27.9% 26.5%
NOTE 10 - EARNINGS PER SHARE
The factors used in the earnings per share computation follow:
2000 1999 1998 Basic Earnings Per Share Net income $ 5,252,942 $ 4,450,113 $ 3,803,516 Weighted average common shares outstanding 2,811,565 2,803,276 2,801,320 Basic earnings per share $ 1.87 $ 1.59 $ 1.36
Diluted Earnings Per Share Net income $ 5,252,942 $ 4,450,113 $ 3,803,516 Weighted average common shares outstanding 2,811,565 2,803,276 2,801,320 Add dilutive effects of assumed exercise of stock options 56,600 64,667 59,974 Weighted average common and dilutive potential common shares outstanding 2,868,165 2,867,943 2,861,294 Diluted earnings per share $ 1.83 $ 1.55 $ 1.33
Stock options for 96,000 shares common stock were excluded from 2000 diluted earnings per share because their impact was 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: 2000 1999 Change in benefit obligation: Beginning benefit obligation $2,732,093 $2,032,917 Service cost 221,305 188,925 Interest cost 191,676 169,649 Actuarial adjustment 42,126 420,482 Benefits paid (56,374) (79,880) Ending benefit obligation 3,130,826 2,732,093
Change in plan assets, at fair value: Beginning plan assets 2,953,831 2,500,009 Actual return (40,539) 272,728 Employer contribution 261,219 234,801 Benefits paid (56,374) (53,707) Ending plan assets 3,118,137 2,953,831
Funded status (12,689) 221,738 Unrecognized net actuarial (gain) loss 120,465 (195,185) Unrecognized prior transition asset (2,973) (3,345)
Prepaid benefit cost $ 104,803 $ 23,208
Net periodic pension cost includes the following components:
2000 1999 1998
Service cost $ 221,305 $ 188,925 $ 143,717 Interest cost 191,676 169,649 143,564 Expected return on plan assets (233,428) (198,239) (179,940) Amortization of transition asset (372) (372) (372)
Net periodic cost $ 179,181 $ 159,963 $ 106,969
Discount rate on benefit obligation 7% 7% 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 $224,106, $165,087 and $181,743 in 2000, 1999 and 1998.
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 officers and key employees stock option awards which vest and become fully exercisable at the end of five years. The Company also grants certain directors stock option awards which vest and become fully exercisable immediately. 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:
NOTE 12 - STOCK OPTION PLAN (Continued)
2000 1999 1998 Options outstanding From $4.25 to $6.38 per share 5,800 19,600 24,720 From $8.63 to $11.14 per share 26,980 30,480 32,640 From $12.00 to $15.50 per share 66,540 69,900 70,200 From $18.00 to $26.00 per share 32,410 28,960 3,200 131,730 148,940 130,760 Eligible for exercise From $4.25 to $6.38 per share 5,800 19,600 24,720 From $8.63 to $11.14 per share 26,980 30,480 29,360 From $12.00 to $15.50 per share 41,140 31,740 18,600 From $18.00 to $26.00 per share 8,116 2,680 1,200 82,036 84,500 73,880
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:
2000 1999 1998 Net income As reported $ 5,252,942 $ 4,450,113 $ 3,803,516 Pro forma 5,162,251 4,368,134 3,747,871
Basic earnings per share As reported $ 1.87 $ 1.59 $ 1.36 Pro forma 1.84 1.56 1.34
Diluted earnings per share As reported $ 1.83 $ 1.55 $ 1.33 Pro forma 1.80 1.53 1.32
Weighted averages Fair value of options granted $ 6.56 $ 5.14 $ 4.52 Risk free interest rate 6.62% 4.82% 5.20% Expected life 8 years 8 years 8 years Expected volatility 11.61% 18.17% 23.40% Expected dividend yield 2.14% 2.13% 2.53%
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 2001 the Bank could, without prior approval, declare dividends of approximately $3,809,000 plus any 2001 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, 2000 and 1999 are as follows:
2000 1999 Carrying Fair Carrying Fair Amount Value Amount Value (In Thousands) Financial assets Cash and cash equivalents $ 15,345 $ 15,345 $ 20,717 $ 20,717 Investment securities 68,054 68,461 70,623 70,847 Mortgage loans held for sale 868 890 3,494 3,494 Loans, net 268,889 267,801 235,504 234,778 FHLB stock 3,598 3,598 3,346 3,346 Interest receivable 4,262 4,262 3,454 3,454
Financial liabilities Deposits $ 300,816 $ 302,423 $ 274,566 $ 275,192 Securities sold under agreements to repurchase and other borrowed funds 9,446 9,446 11,858 11,858 FHLB advances 21,644 21,847 26,592 25,892 Interest payable 3,427 3,427 2,142 2,142
NOTE 14 - DISCLOSURES ABOUT FAIR VALUE OF FINANCIAL INSTRUMENTS (Continued)
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:
2000 1999
Unused lines of credit $ 33,901,000 $ 37,976,000 Commitments to make loans 1,137,000 3,800,000 Letters of credit 856,000 453,000
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 6.75% to 7.375% with maturities ranging from 15 to 30 years and are intended to be sold.
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.
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, 2000 and 1999, that the Company and the Bank meet all capital adequacy requirements to which they are subject.
NOTE 17 - STOCKHOLDER'S EQUITY (Continued)
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
2000 1999 (In Thousands) ASSETS Cash on deposit with subsidiary $ 2,710 $ 1,606 Investment in subsidiary 31,230 28,663 Investment securities available for sale 1,820 1,379 Other assets 100 71
Total assets $35,860 $31,719
LIABILITIES AND STOCKHOLDERS' EQUITY Liabilities $ - $ -
Stockholders' equity Preferred stock - - Common stock 6,627 6,491 Retained earnings 29,241 25,778 Accumulated other comprehensive income (8) (550)
Total liabilities and stockholders' equity $35,860 $31,719
NOTE 18 - PARENT COMPANY FINANCIAL STATEMENTS (Continued)
Condensed Statements of Income and Comprehensive Income Years Ended December 31
2000 1999 1998 (In Thousands) Income Dividends from subsidiary $3,160 $2,700 $2,330 Investment securities losses, net (17) - - Interest income 61 28 5 Total income 3,204 2,728 2,335
Expenses Other expenses 39 53 25
Income before income taxes and equity in undistributed income of subsidiary 3,165 2,675 2,310
Applicable income tax benefits 46 9 7
Income before equity in undistributed income of subsidiary 3,211 2,684 2,317
Equity in undistributed income of subsidiary 2,042 1,766 1,487
Net income 5,253 4,450 3,804
Other comprehensive income (loss), net of tax: Unrealized gains (losses) on securities arising during the period 483 (615) (140) Reclassification of realized amount 58 - (27)
Net change in unrealized gain (loss) on securities 541 (615) (167)
Comprehensive income $5,794 $3,835 $3,637
NOTE 18 - PARENT COMPANY FINANCIAL STATEMENTS (Continued)
Condensed Statements of Cash Flows Years Ended December 31
2000 1999 1998 (In Thousands) Cash flows from operating activities Net income $ 5,253 $ 4,450 $ 3,804 Adjustments to reconcile net income to net cash from operating activities Equity in undistributed earnings of subsidiary (2,042) (1,766) (1,487) Investment securities losses, net 17 - - Change in other assets (37) (3) (8) Net cash from operating activities 3,191 2,681 2,309
Cash flows from investing activities Purchase of investment securities available for sale (1,071) (555) (977) Proceeds from sales of securities available for sale 638 - - Net cash from investing activities (433) (555) (977)
Cash flows from financing activities Dividends paid (1,463) (1,233) (1,122) Proceeds from issuance of common stock 173 50 141 Purchase of common stock (364) (304) - Net cash from financing activities (1,654) (1,487) (981)
Net change in cash 1,104 639 351
Cash at beginning of year 1,606 967 616
Cash at end of year $ 2,710 $ 1,606 $ 967
NOTE 19 - QUARTERLY FINANCIAL DATA (UNAUDITED)
Interest Net Interest Net Earnings Per Share Income Income Income Basic Fully Diluted First quarter $6,592 $3,568 $1,308 $ .47 $ .46 Second quarter 6,875 3,685 1,312 .46 .45 Third quarter 7,229 3,647 1,297 .46 .45 Fourth quarter 7,511 3,710 1,336 .48 .47
First quarter $5,572 $3,051 $1,119 $ .40 $ .39 Second quarter 5,713 3,184 1,076 .39 .37 Third quarter 5,922 3,300 1,176 .42 .42 Fourth quarter 6,246 3,371 1,079 .38 .37
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, 2000 and 1999, 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, 2000. 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, 2000 and 1999, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 2000, in conformity with generally accepted accounting principles.
Crowe, Chizek and Company LLP
Lexington, Kentucky January 19, 2001
Bourbon Bancshares, Inc. Board of Directors
Buckner Woodford President and Chief Executive Officer; Kentucky Bank and Bourbon Bancshares, Inc. Class of 2003
William R. Stamler Chairman, Signal Investments, Inc. Class of 2003
Henry Hinkle President; Hinkle Contracting Corporation 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 Retired - Executive Vice President, Kentucky Bank
William M. Arvin Attorney, William M. Arvin and Associates
Dan Brewer Bluegrass RECC
Loren Carl Director, KY Attorney General's Office
James L. Ferrell, M.D. Physician
Henry Hinkle President; Hinkle Contracting Company
Theodore Kuster Farmer and Thoroughbred Breeder; West View Farm
George Lusby County Judge Executive
Joseph B. McClain President; Hopewell Insurance Company, Inc.
John Roche Optician
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 COUNTY
Mary Beth Hendricks Director of Clark County Child Support Services
Donald Pace Consultant to Clark Co. Schools
Ed Saunier President, Saunier North American, Inc.
John G. Roche Optician
James Taulbee Farmer
REGIONAL BOARD OF DIRECTORS WOODFORD COUNTY
Loren Carl Director, KY Attorney General's Office
Dr. William J. Graul Physician
James Kay Businessman, Farmer
Tricia N. Kittinger Woodford Circuit Clerk
REGIONAL BOARD OF DIRECTORS SCOTT COUNTY
Dr. Gus A. Bynum Physician
R.C. Johnson, Jr. Owner and President; Johnson's Funeral Home
Mike Hockensmith Owner and President, The Hockensmith Agency, Inc.
George Lusby County Judge Executive
Everette Varney Mayor - Georgetown
REGIONAL BOARD OF DIRECTORS JESSAMINE COUNTY
Eva McDaniel Jessamine County Clerk
Bonnie Dean Retired - Nicholasville City Clerk, Treasurer
William M. Arvin Attorney, William M. Arvin and Associates
Dan Brewer Bluegrass RECC
Jonah Mitchell President, Jonah Mitchell Real Estate & Auction Co.
OFFICERS. BOURBON COUNTY. PARIS Buckner Woodford - President and CEO 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 Brenda Bragonier - Vice President, Director of Marketing and Human Resources Hugh Crombie - Vice President, Operations Bill Reynolds - Vice President, Trust Officer Brenda Berry - Accountant Mary Lou Boyle - Personnel Director Wallis Brooks - Branch Manager Patty Carpenter - Loan Operations Officer Nicholas Carter - Assistant Vice President, Loan Officer R.W. Collins, Jr. - Vice President, Loan Officer Nancye Fightmaster - Loan Officer Janice Hash - Accountant and Purchasing Agent Cathy Hill - Assistant Vice President, Loan Officer Bill Leaver - Network Administrator Michael Lovell - Vice President, Loan Officer Jean Patton - Compliance/CRA/Quality Control Donald Roe - Data Processing Lydia Sosby - Corporate and Automated Products Officer Judy Taylor - Human Resource Manager Rick Wagner - Maintenance Supervisor George Wilder - Vice President, Loan Officer Martha Woodford - AVP Corporate and Automated Products Officer Jan Worth - Trust Officer
Lexington Road Branch Rita Bugg - Vice President, Branch Manager, Loan Officer Paul Clift - 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 - Overdraft Management 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
SHOWALTER DRIVE BRANCH J. Mark Walls - Regional Vice President Ben Sargent - Assistant Vice President, Loan Officer
JESSAMINE COUNTY. NICHOLASVILLE Tom Buford - Regional Vice President Jeanie Thompson - Office Manager & CSR Rick Walling - Assistant Vice President, Loan Officer
WILMORE Freida Lear, Branch Manager, Loan Officer
HARRISON COUNTY. CYNTHIANA LOAN PRODUCTION OFFICE Ken DeVasher - Regional Vice President
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 19, 2001 on the consolidated financial statements of Bourbon Bancshares, Inc. as of December 31, 2000 and 1999 and for each of the three years in the period ended December 31, 2000 as included in the registrant's annual report on Form 10-K.
Crowe, Chizek and Company LLP
Lexington, Kentucky March 29, 2001
Exhibit 99.1 Proxy Statement
BOURBON BANCSHARES, INC. 400 Main Street Paris, Kentucky 40361
NOTICE OF ANNUAL MEETING OF SHAREHOLDERS TO BE HELD MAY 2, 2001
March 15, 2001 To our Shareholders:
The annual meeting of the shareholders of Bourbon Bancshares (the "Company") will be held on Wednesday, May 2, 2001 at 11:00 a.m. local time, at the Main Office Board Room of Kentucky Bank, Paris, Kentucky, for the purposes of:
1. Election of directors. To elect two Class II 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, 2001.
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 15, 2001, 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
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 15, 2001 (the "Annual Meeting Record Date"), for use at the Annual Meeting of Shareholders of the Company (the "Annual Meeting") to be held on Wednesday, May 2, 2001, at 11:00 a.m. (Eastern Daylight Time) at the Company's Main Office Board Room 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 15, 2001. The principal executive offices of the Company are located at Fourth and Main Streets, Paris, Kentucky 40361. Its telephone number is (859) 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 II directors: (2) To ratify the appointment of Crowe, Chizek and Company LLP as the Company's independent auditors for the 2001 fiscal year and (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 II directors and the ratification of the Board's appointment of Crowe, Chizek and Company LLP as the Company's independent auditors for the 2001 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, 2000, there were 2,808,067 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 will be elected to the Board. The appointment of Crowe, Chizek and Company LLP as the company's independent auditors for the 2001 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" (1) the election of the Board's two nominees as Class II 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 (2) the ratification of Crowe, Chizek and Company LLP as the Company's independent auditors for the 2001 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 II 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 M. Arvin is an attorney. He became a director in 1996.
James L. Ferrell, M.D. is a physician and Chairman of Bourbon Bancshares, Inc. He has been a director since 1980.
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 II 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, 2001. Crowe, Chizek and Company LLP has served as the Company's independent auditors since 1982. Services provided to the Company and its subsidiaries by Crowe, Chizek and Company LLP with respect to the fiscal year ended December 31, 2000 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 2001 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 2001 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 15, 2001
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 15, 2001, at the 2001 Annual Meeting of Shareholders to be held on May 2, 2001 and at any adjournments thereof, with all powers the undersigned would possess if personally present, as follows:
1. ELECTION OF DIRECTORS
__ FOR all nominees listed below (except as otherwise indicated below)
__ AGAINST all nominees listed below
William M. Arvin, James L. Ferrell, M.D.
(INSTRUCTION: To withhold authority to vote for any individual nominee, write the nominee's name on the line)
2. RATIFICATION OF CROWE, CHIZEK AND CO. LLP AS INDEPENDENT AUDITORS
______FOR ______AGAINST _____ABSTAIN
3. 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 1 AND "FOR" ITEM 2.
(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" Item 2.
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___________, 2001 ______________________________________ Signature
_______________________________________ Signature if held jointly