UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
[ X ] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 2001
or
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from ____________________ to
___________________
Commission File Number: 33-96358
BOURBON BANCSHARES, INC.
(Exact name of registrant as specified in its charter)
Kentucky 61-0993464
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
P.O. Box 157, Paris, Kentucky 40362-0157
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (859)987-1795
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange
Act of 1934 during the preceding 12 months (or for such shorter period
that the registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days.
Yes X No _____
Number of shares of Common Stock outstanding as of October 31, 2001:
2,769,304.
BOURBON BANCSHARES, INC.
Table of Contents
Part I - Financial Information
Item 1. Financial Statements
Consolidated Balance Sheets 3
Consolidated Statements of Income and
Comprehensive Income 4
Consolidated Statements of Changes in
Stockholders' Equity 6
Consolidated Statements of Cash Flows 7
Notes to Consolidated Financial Statements 9
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 12
Item 3. Quantitative and Qualitative Disclosures About
Market Risk 19
Part II - Other Information 21
Signatures 22
Exhibits
11 Earnings Per Share Calculation 23
Item 1 - Financial Statements
BOURBON BANCSHARES, INC.
CONSOLIDATED BALANCE SHEETS (unaudited)
(thousands)
9/30/2001
12/31/2000
Assets
Cash and due from banks
$ 10,075
$ 11,596
Federal funds sold
6,266
3,749
Cash and cash equivalents
16,341
15,345
Investment securities:
Available for sale
68,491
52,823
Held to maturity
-
15,231
Mortgage loans held for sale
1,089
868
Loans
273,106
272,277
Allowance for loan losses
(3,325)
(3,388)
Net loans
269,781
268,889
Federal Home Loan Bank stock
3,794
3,598
Bank premises and equipment, net
9,398
8,299
Interest receivable
4,337
4,262
Intangible assets
1,477
1,744
Other assets
676
788
Total assets
$375,384
$371,847
Liabilities and Stockholders' Equity
Deposits
Non-interest bearing
$ 45,262
$ 48,439
Time deposits, $100,000 and over
40,486
40,306
Other interest bearing
207,014
212,071
Total deposits
292,762
300,816
Securities sold under agreements to repurchase
1,553
8,189
Other borrowed funds
1,763
1,257
Federal Home Loan Bank advances
36,458
21,644
Interest payable
2,601
3,427
Other liabilities
1,117
654
Total liabilities
336,254
335,987
Stockholders' equity
Common stock
6,609
6,627
Retained earnings
31,339
29,241
Accumulated other comprehensive income
1,182
(8)
Total stockholders' equity
39,130
35,860
Total liabilities & stockholders' equity
$375,384
$371,847
BOURBON BANCSHARES, INC.
CONSOLIDATED STATEMENT OF INCOME AND COMPREHENSIVE INCOME (unaudited)
(thousands, except per share amounts)
Nine Months Ending
9/30/2001
9/30/2000
INTEREST INCOME:
Loans, including fees
$ 18,091
$ 17,391
Investment securities
2,835
2,945
Other
526
360
Total interest income
21,452
20,696
INTEREST EXPENSE:
Deposits
8,861
8,520
Other
1,545
1,276
Total interest expense
10,406
9,796
Net interest income
11,046
10,900
Loan loss provision
576
563
Net interest income after provision
10,470
10,337
OTHER INCOME:
Service charges
2,784
1,897
Loan service fee income
197
217
Trust department income
263
326
Investment securities gains (losses), net
78
(85)
Gain on sale of mortgage loans
224
74
Other
433
293
Total other income
3,979
2,722
OTHER EXPENSES:
Salaries and employee benefits
4,511
4,017
Occupancy expenses
1,366
1,170
Amortization of intangibles
313
325
Advertising and marketing
322
272
Taxes other than payroll, property and income
266
252
Other
1,838
1,562
Total other expenses
8,616
7,598
Income before taxes
5,833
5,461
Income taxes
1,754
1,544
Net income
$ 4,079
$ 3,917
Other Comprehensive Income, net of tax:
Change in Unrealized Gains on Securities
1,190
296
Comprehensive Income
$ 5,269
$ 4,213
Earnings per share
Basic
$ 1.46
$ 1.39
Diluted
1.43
1.36
BOURBON BANCSHARES, INC.
CONSOLIDATED STATEMENT OF INCOME AND COMPREHENSIVE INCOME (unaudited)
(thousands, except per share amounts)
Three Months Ending
9/30/2001
9/30/2000
INTEREST INCOME:
Loans, including fees
$ 5,910
$ 6,194
Investment securities
896
900
Other
305
256
Total interest income
7,111
7,350
INTEREST EXPENSE:
Deposits
2,724
3,094
Other
551
488
Total interest expense
3,275
3,582
Net interest income
3,836
3,768
Loan loss provision
192
188
Net interest income after provision
3,644
3,580
OTHER INCOME:
Service charges
932
633
Loan service fee income
63
71
Trust department income
81
77
Investment securities gains (losses), net
3
(9)
Gain on sale of mortgage loans
68
30
Other
82
(5)
Total other income
1,229
797
OTHER EXPENSES:
Salaries and employee benefits
1,538
1,362
Occupancy expenses
462
394
Amortization of intangibles
105
109
Advertising and marketing
107
90
Taxes other than payroll, property and income
91
84
Other
607
505
Total other expenses
2,910
2,544
Income before taxes
1,963
1,833
Income taxes
603
536
Net income
1,360
1,297
Other Comprehensive Income, net of tax:
Change in Unrealized Gains on Securities
552
323
Comprehensive Income
$ 1,912
$ 1,620
Earnings per share
Basic
$ 0.49
$ 0.46
Diluted
0.48
0.45
BOURBON BANCSHARES, INC.
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY (unaudited)
(thousands, except number of shares)
Accumulated
Other
Total
- ----Common Stock----
Retained
Comprehensive
Stockholders'
Shares
Amount
Earnings
Income
Equity
<s>
<c>
<c>
<c>
<c>
<c>
Balances, December 31, 2000
2,808,067
$ 6,627
$ 29,241
$ (8)
$ 35,860
Common stock issued
19,910
60
-
-
60
Common stock purchased
(38,809)
(78)
(723)
-
(801)
Net change in unrealized gain (loss)
on securities available for sale,
net of tax
-
-
-
1,190
1,190
Net income
-
-
4,079
-
4,079
Dividends declared - $0.45 per share
-
-
(1,258)
-
(1,258)
Balances, September 30, 2001
2,789,168
$ 6,609
$ 31,339
$ 1,182
$ 39,130
BOURBON BANCSHARES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS (unaudited)
(thousands)
Nine Months Ending
9/30/2001
9/30/2000
Cash Flows From Operating Activities
Net Income
$ 4,079
$ 3,917
Adjustments to reconcile net income to
net cash provided by operating activities:
Depreciation
721
605
Amortization
313
325
Investment securities amortization (accretion), net
72
(47)
Provision for loan losses
576
563
Investment securities gains (losses), net
(78)
85
Originations of loans held for sale
(17,024)
(9,385)
Proceeds from sale of loans
17,027
11,441
Federal Home Loan Bank Stock Dividends
(196)
(58)
Gain on sale of mortgage loans
(224)
(74)
Losses (gains), including write-downs, on real
estate acquired through foreclosure, net
(21)
5
Changes in:
Interest receivable
(75)
(885)
Other assets
164
(170)
Interest payable
(826)
1,115
Other liabilities
(229)
(124)
Net cash from operating activities
4,279
7,313
Cash Flows From Investing Activities
Purchases of securities available for sale
(35,340)
(12,793)
Proceeds from sales of securities available for sale
6,239
14,759
Proceeds from principal payments, maturities and
calls of securities available for sale
30,475
10,031
Purchases of securities held to maturity
-
(632)
Proceeds from maturities and calls of securities
held to maturity
-
435
Net change in loans
(1,468)
(27,261)
Purchases of bank premises and equipment, net
(1,820)
(1,090)
Net cash from investing activities
(1,914)
(16,551)
Cash Flows From Financing Activities:
Net change in deposits
(8,054)
8,457
Net change in securities sold under agreements to
repurchase and other borrowings
(6,130)
(128)
Advances from Federal Home Loan Bank
15,000
6,317
Payments on Federal Home Loan Bank advances
(186)
(10,261)
Proceeds from issuance of common stock
60
141
Purchase of common stock
(801)
(195)
Dividends paid
(1,258)
(1,098)
Net cash from financing activities
(1,369)
3,233
Net change in cash and cash equivalents
996
(6,005)
Cash and cash equivalents at beginning of period
15,345
20,717
Cash and cash equivalents at end of period
$ 16,341
$ 14,712
BOURBON BANCSHARES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS (unaudited)
(thousands)
Three Months Ending
9/30/2001
9/30/2000
Cash Flows From Operating Activities
Net Income
$ 1,360
$ 1,297
Adjustments to reconcile net income to
net cash provided by operating activities:
Depreciation
239
210
Amortization
105
109
Investment securities amortization (accretion), net
86
1
Provision for loan losses
192
188
Investment securities gains (losses), net
(3)
9
Originations of loans held for sale
(4,798)
(3,324)
Proceeds from sale of loans
5,849
3,547
Federal Home Loan Bank Stock Dividends
(66)
-
Gain on sale of mortgage loans
(68)
(30)
Losses (gains), including write-downs, on real
estate acquired through foreclosure, net
(11)
5
Changes in:
Interest receivable
(464)
(454)
Other assets
67
32
Interest payable
300
853
Other liabilities
106
245
Net cash from operating activities
2,894
2,688
Cash Flows From Investing Activities
Purchases of securities available for sale
(6,827)
(175)
Proceeds from principal payments, maturities and
calls of securities available for sale
8,936
3,886
Proceeds from maturities and calls of securities
held to maturity
-
320
Net change in loans
81
(4,817)
Purchases of bank premises and equipment, net
(413)
(505)
Net cash from investing activities
1,777
(1,291)
Cash Flows From Financing Activities:
Net change in deposits
139
3,872
Net change in securities sold under agreements to
repurchase and other borrowings
(1,564)
(1,286)
Advances from Federal Home Loan Bank
-
1,317
Payments on Federal Home Loan Bank advances
(59)
(77)
Proceeds from issuance of common stock
21
4
Purchase of common stock
(246)
(81)
Dividends paid
(419)
(365)
Net cash from financing activities
(2,128)
3,384
Net change in cash and cash equivalents
2,543
4,781
Cash and cash equivalents at beginning of period
13,798
9,931
Cash and cash equivalents at end of period
$ 16,341
$ 14,712
BOURBON BANCSHARES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. In Management's opinion, the financial information, which is
unaudited, reflects all adjustments, (consisting solely of normal
recurring adjustments) necessary for a fair presentation of the
financial information as of September 30, 2001 and December 31, 2000,
and for the nine and three month periods ended September 30, 2001 and
September 30, 2000 in conformity with accounting principles generally
accepted in the United States of America. These financial statements
should be read in conjunction with Bourbon Bancshares, Inc. (Company)
Annual Report on Form 10-K.
2. INVESTMENT SECURITIES
Period-end securities are as follows:
(in thousands)
Amortized
Unrealized
Unrealized
Fair
Cost
Gains
Losses
Value
Available for Sale
September 30, 2001
U.S. Treasury
$ 10,493
$ 247
$ -
$ 10,740
U.S. government agencies
9,506
170
(22)
9,654
States and political subdivisions
18,117
850
(13)
18,954
Mortgage-backed
23,093
560
(55)
23,598
Equity securities
2,441
202
(186)
2,457
Other
3,050
38
-
3,088
Total
66,700
2,067
(276)
68,491
December 31, 2000
U.S. Treasury
14,970
24
(2)
$ 14,992
U.S. government agencies
4,999
40
(11)
5,028
States and political subdivisions
3,272
94
-
3,366
Mortgage-backed
22,876
141
(139)
22,878
Equity securities
2,230
96
(256)
2,070
Other
4,489
-
-
4,489
Total
52,836
395
(408)
52,823
Held to Maturity
December 31, 2000
States and political subdivisions
15,231
417
(10)
15,638
3. LOANS
Loans at period-end are as follows:
(in thousands)
9/30/2001
12/31/2000
Commercial
$ 18,422
$ 17,452
Real estate construction
14,317
15,270
Real estate mortgage
163,569
162,306
Agricultural
53,753
52,008
Consumer
23,045
25,241
Total
273,106
272,277
4. 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.
The factors used in the earnings per share computation follow:
Nine Months Ended
September 30,
2001 2000
(in thousands)
Basic Earnings Per Share
Net Income $4,079 $3,917
Weighted average common shares outstanding 2,797 2,812
Basic earnings per share $ 1.46 $ 1.39
Diluted Earnings Per Share
Net Income $4,079 $3,917
Weighted average common shares outstanding 2,797 2,812
Add dilutive effects of assumed exercise
of stock options 48 58
Weighted average common and dilutive
Potential common shares outstanding 2,845 2,870
Diluted earnings per share $ 1.43 $ 1.36
Three Months Ended
September 30,
2001 2000
(in thousands)
Basic Earnings Per Share
Net Income $1,360 $1,297
Weighted average common shares outstanding 2,791 2,812
Basic earnings per share $ 0.49 $ 0.46
Diluted Earnings Per Share
Net Income $1,360 $1,297
Weighted average common shares outstanding 2,791 2,812
Add dilutive effects of assumed exercise
of stock options 49 49
Weighted average common and dilutive
Potential common shares outstanding 2,840 2,861
Diluted earnings per share $ 0.48 $ 0.45
Stock options for 550 shares (for the period and quarter ended
September 30, 2001) and 600 shares (for the period and quarter ended
September 30, 2000) of common stock were not considered in computing
earnings per share because they were antidilutive.
5. Dividends per share paid for the quarter ended September 30, 2001
were $0.15 compared to $0.13 for September 30, 2000. This is the
same rate of dividend paid for the first and second quarters of the
respective years.
6. 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
September 30, 2001.
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 Financial Accounting Standards Board issued SFAS No. 141
"Business Combinations" and SFAS No. 142 "Goodwill and Other
Intangibles" in June 2001. As a result and effective immediately,
the purchase method is the only allowable method for accounting for
prospective business combinations. Effective January 1, 2002 for the
Company, acquisition intangibles must be separated into goodwill and
identifiable intangibles. Identifiable intangibles will continue to
be amortized while amortization of goodwill will cease. Annual
impairment testing will be required for goodwill with impairment
charges to be recorded if the carrying amount is in excess of its
fair value. The Company's acquisition intangibles as currently
reported include both core deposit and goodwill, the amounts of which
and therefore the financial statement impact, have not yet been
determined.
Item 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
Forward-Looking Statements
This discussion contains forward-looking statements under the Private
Securities Litigation Reform Act of 1995 that involve risks and
uncertainties. Words such as "believes," "anticipates," "expects,"
"intends," "plans," "targeted," and similar expressions are intended to
identify forward-looking statements but are not the exclusive means of
identifying such statements. 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
Bourbon Bancshares, Inc. recorded net income of $4.1 million, or $1.46
basic earnings per share and $1.43 diluted earnings per share for the
first nine months ended September 30, 2001 compared to $3.9 million, or
$1.39 basic earnings per share and $1.36 diluted earnings per share for
the nine month period ending September 30, 2000. The first nine months
reflects an increase in net income of 4.1%. For the three month period
ending September 30, 2001, net income was $1.4 million ($0.49 basic
earnings per share and $0.48 diluted earnings per share) compared to
$1.3 million ($0.46 basic earnings per share and $0.45 diluted earnings
per share) for the same period in 2000. This was an increase in net
income of 4.8%.
Return on average assets was 1.43% for the first nine months ended
September 30, 2001 compared to 1.49% for the same time period in 2000, a
decrease of 4%. For the three month period ended September 30, 2001,
the return on average assets was 1.42% compared to 1.45% for the same
period in 2000. Return on average equity was 14.5% and 15.8% for the
nine months ended September 30, 2001 and 2000, respectively, a decrease
of 8%. The return on equity was 14.2% and 15.2% for the three month
period ended September 30, 2001 and September 30, 2000, respectively.
Loans increased $829 thousand from $272.3 million on December 31, 2000
to $273.1 million on September 30, 2001. This small increase was mainly
attributable to an increase in commercial, real estate mortgage and
agricultural loans, while being offset by a reduction in real estate
construction and consumer loans. The softening loan demand and slight
temporary tightening of our net interest margin due to the rapidly
falling loan rates have contributed to smaller increases in net income.
Total deposits decreased from $300.8 million on December 31, 2000 to
$292.8 million on September 30, 2001, a decrease of $8.0 million. The
decrease is mainly attributable to non-interest bearing deposits
decreasing $3.2 million and other interest bearing deposits decreasing
$5.1 million. The decline in total deposits is primarily attributable
to our decision to be less aggressive in our deposit gathering
activities in light of a softening loan demand.
Net Interest Income
Net interest income was $11.0 million for the nine months ending
September 30, 2001 compared to $10.9 million for the nine months ending
September 30, 2000, resulting in an increase of $146 thousand or 1%.
The interest spread was 3.92% for the first nine months of 2001 compared
to 4.24% for the same period in 2000, a decrease of 32 basis points.
Typically, banks have experienced declining margins over the past three
quarters as a result of the general decline in interest rates. The
Federal Reserve has dropped the discount rate from 6% at December 31,
2000 to 2.50% at September 30, 2001. These decreases have had a short
term effect on net interest income, particularly a decrease in loan
interest income. However, as our interest rate shock simulation model
that follows shows, changes in interest rates are expected to have a
minor effect on net interest income, and therefore the decline in net
interest margin is felt to be temporary.
For the first nine months, the yield on assets decreased from 8.43% in
2000 to 8.07% in 2001. The cost of liabilities decreased from 4.19% in
2000 to 4.16% in 2001. Decreasing rates during the first nine months of
2001 have caused the yield on assets and the cost of liabilities to
decline during 2001. Year to date average loans are up $21.4 million,
or 8.5% from September 30, 2000 to September 30, 2001, resulting in an
increase in loan interest income of $700 thousand for the first nine
months of 2001 compared to the first nine months of 2000. Year to date
average deposits also increased from September 30, 2000 to September 30,
2001, up $14.8 million, or 5.2%. This increased volume has resulted in
an increase in deposit interest expense of $341 thousand for the first
nine months of 2001 compared to the same period in 2000. The banking
industry continues to battle competition for deposit dollars, and this
trend is expected to continue.
Non-Interest Income
Non-interest income increased $1.3 million for the nine month period
ended September 30 from $2.7 million in 2000 to $4.0 million in 2001.
An increase of $887 thousand in service charges from the first nine
months of 2000 to the comparable 2001 period is mainly attributable to
an increase in checking service charges and overdraft charges of $842
thousand. Overdraft income increased principally due to the
implementation of a new "Kentucky Courtesy" overdraft program and an
increase in overdraft fees in the last quarter of 2000. "Kentucky
Courtesy" is available to qualified customers, and is an overdraft
protection service that pays checks up to the "Kentucky Courtesy" limit.
Trust deparment income decreased in the first nine months of 2001
compared to the same period in 2000, primarily due to the drop in market
prices of assets held and higher than normal estate fees collected in
2000. Investment securities net gains were $163 thousand greater for
the first nine months of 2001 compared to the same period in 2000. Net
gains from sale of securities were mainly attributable to municipal
securities being called at premiums before their maturity, and the sale
of U.S. Treasury Notes. U.S. Treasury Notes are sold before maturity
when the total return (gain and net interest) can be improved.
The increase in gain on sale of mortgage loans of $150 thousand during
the first nine months of 2001 compared to the same 2000 period is
attributable to a decrease in rates in 2001 as compared to 2000. The
decrease in rates resulted in an increase in loan originations and
refinances. Volume of loan sales are inverse to rate changes. Rates
have fallen in the first nine months of 2001 and as a result, we expect
a favorable impact on our loan sales in 2001 compared to 2000. The
increase in other income of $140 thousand in the first nine months of
2001 as compared to the same time period in 2000 is primarily a result
of an increase in debit card income of $57 thousand and an increase in
brokerage fee income of $60 thousand. We continue to promote the use of
electronic products and the use of our brokerage services to better
serve our customers financial needs.
For the three month period ending September 30, 2001, total other income
increased $432 thousand from the same period in 2000. This is
principally due to the increase in service charges of $299 thousand,
mainly due to the overdraft fees mentioned earlier.
Non-Interest Expense
The increase of $1.0 million in non-interest expenses from $7.6 million
for the nine months ended September 30, 2000 to $8.6 million for the
same period in 2001 was a result of several factors. Salaries and
benefits increased $494 thousand for the first nine months of 2001
compared to 2000, an increase of 12%. The increase is due to annual
salary increases and increased staffing. Staffing has mainly been
increased in branches to better serve our customers. Salaries,
excluding bonuses and incentives, increased 10% from the first nine
months of 2000 to the first nine months of 2001. Employee benefits
increased $86 thousand and incentives increased $101 thousand during
these comparable periods. For the three month period ending September
30, 2001 compared to the same period in 2000, salaries and benefits
increased $176 thousand, or 13%. The explanations for these changes are
consistent with the nine months changes mentioned earlier.
Occupancy expense increased $196 thousand to $1.4 million for the first
nine months of 2001 compared to first nine months of 2000. Depreciation
increased $116 thousand during these comparable periods. The three
month increase from 2000 to 2001 in occupany expenses was $68 thousand.
Renovation of existing facilities and the purchase of hardware and
software for recent technological advances have added to the
depreciation expense. The construction of a new full service facility
in Cynthiana was completed and opened for business on October 1, 2001.
These increases are a result of the Company's continued emphasis on
improving and maintaining its facilities, and to stay current with our
technology.
Advertising and marketing costs increased $50 thousand to $322 thousand
for the first nine months of 2001 as compared to the same period in
2000. The three month increase from 2000 to 2001 was similar to the
first and second quarters' increase. Continued efforts have been made
by the Company to promote the name and the products of Kentucky Bank
using various forms of promotional materials and selected types of
media, including television.
Other expenses for the first nine months of 2001 compared to 2000
increased $276 thousand to $1.8 million. Internet banking and debit
card expenses increased $112 thousand and losses on checking account
overdrafts increased $92 thousand from 2000 to 2001. Other expenses
increased $102 thousand for the three month period ended September 30,
2001 compared to the same period ended September 30, 2000. Internet
banking and debit card expenses mentioned earlier increased $36 thousand
for the three month period ended September 30, 2001 from the same period
ended September 30, 2000. Losses on checking account overdrafts
increased $26 thousand for the three month period ended September 30,
2001 compared to the same period ended September 30, 2000, primarily
attributable to the implementation of the new "Kentucky Courtesy"
overdraft program. Outside of these changes, the other changes are
primarily the result of the growth of the Bank and the general increase
in the cost of doing business.
Income Taxes
The tax equivalent rate for the nine months ended September 30 was 30%
for 2001 and 28% for 2000. The tax equivalent rate for the three months
ended September 30 was 31% for 2001 and 29% for 2000. The increase in
the tax equivalent rate is mainly attributable to a tax benefit in 2000.
These rates are less than the statutory rate as a result of the tax-free
securities and loans held by the Company.
Stock Repurchase Program
On October 25, 2000, the Company announced that its Board of Directors
approved a stock repurchase program. The Company is authorized to
purchase up to 100,000 shares of its outstanding common stock. Shares
will be purchased from time to time in the open market depending on
market prices and other considerations. Through September 30, 2001,
40,123 shares have been purchased.
Liquidity and Funding
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 as a result of the lower
yields on short-term assets.
Cash and cash equivalents were $16.3 million as of September 30, 2001
compared to $15.3 million at December 31, 2000. In addition to cash and
cash equivalents, the securities portfolio provides an important source
of liquidity. Total investment securities available for sale totaled
$68.5 million at September 30, 2001. The available for sale securities
are available to meet liquidity needs on a continuing basis.
The Company maintains a relatively stable base of customer deposits
which 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.
Generally, the Company 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 flow from operations to meet investing
and liquidity needs related to reasonable borrower, depositor and
creditor needs in the present economic environment.
Management is aware of the potential problem of funding sustained loan
growth. Therefore, in addition to deposits, other sources of funds,
such as FHLB advances may be used. The Company 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. As of September 30, 2001, we have sufficient collateral
to borrow an additional $23 million from the FHLB. In addition, as of
September 30, 2001 over $54 million is available in overnight borrowing
through various correspondent banks. In light of this, management
believes there is sufficient liquidity to meet all reasonable borrower,
depositor and creditor needs in the present economic environment.
Non-Performing Assets
As of September 30, 2001, the Company's non-performing assets totaled
$2.0 million or 0.7% of loans compared to $1.8 million or 0.7% of loans
at December 31, 2000. (See table below) Real estate loans composed 73%
and 96% of the non-performing loans as of September 30, 2001 and
December 31, 2000, respectively. Forgone interest income on the non-
accrual loans for both 2001 and 2000 is immaterial.
Nonperforming Assets
9/30/01
12/31/00
(in thousands)
Non-accrual Loans
$ 392
$ 307
Accruing Loans which are
Contractually past due
90 days or more
1,641
1,365
Restructured Loans
-
130
Total Nonperforming and Restructured
2,033
1,802
Other Real Estate
137
165
Total Nonperforming and Restructured
Loans and Other Real Estate
$ 2,170
$ 1,967
Nonperforming and Restructured Loans
as a Percentage of Loans
0.74%
0.66%
Nonperforming and Restructured Loans
and Other Real Estate as a Percentage
of Total Assets
0.58%
0.53%
Provision and Reserve for Possible Loan Losses
The first nine months 2001 provision for loan losses of $576 thousand is
higher than the comparable 2000 period by $13 thousand. Loan growth and
an increase in charge-offs have required management to increase the
provision in order to maintain a reserve for loan losses that is
representative of the risk of loss based on the quality of loans
currently in the portfolio. Net charge-offs for the nine month period
ending September 30, 2001 were $639 thousand compared to $246 thousand
for the same period in 2000. Net charge-offs for the three month period
ending September 30, 2001 were $233 thousand compared to $100 thousand
for the same period ending September 30, 2000. The increase is mainly
attributable to several small consumer loans. Future levels of charge-
offs will be determined by the economic environment surrounding
individual loans. Management feels the current loan loss reserve is
sufficient to meet expected loan losses.
Loan Losses
Nine Months Ended September 30
(in thousands)
2001
2000
Balance at Beginning of Period
$ 3,388
$ 3,103
Amounts Charged-off:
Commercial
108
10
Real Estate Mortgage
58
45
Agricultural
8
29
Consumer
530
246
Total Charged-off Loans
704
330
Recoveries on Amounts
Previously Charged-off:
Commercial
3
12
Real Estate Mortgage
2
7
Agricultural
1
6
Consumer
59
59
Total Recoveries
65
84
Net Charge-offs
639
246
Provision for Loan Losses
576
563
Balance at End of Period
3,325
3,420
Loans
Average
273,273
250,949
At September 30
273,106
265,623
As a Percentage of Average Loans:
Net Charge-offs
0.23%
0.10%
Provision for Loan Losses
0.21%
0.22%
Allowance as a Percentage of
Period-end Loans
1.22%
1.29%
Allowance as a Multiple of
Net Charge-offs
5.2
13.8
Allowance as a Percentage of
Non-performing and Restructured Loans
164%
146%
Loan Losses
Quarter Ended September 30
(in thousands)
2001
2000
Balance at Beginning of Period
$ 3,366
$ 3,333
Amounts Charged-off:
Commercial
45
10
Real Estate Mortgage
28
21
Agricultural
-
23
Consumer
181
86
Total Charged-off Loans
254
140
Recoveries on Amounts
Previously Charged-off:
Commercial
1
9
Real Estate Mortgage
-
6
Agricultural
-
5
Consumer
20
19
Total Recoveries
21
39
Net Charge-offs
233
101
Provision for Loan Losses
192
188
Balance at End of Period
3,325
3,420
Loans
Average
276,147
265,155
At September 30
273,106
265,623
As a Percentage of Average Loans:
Net Charge-offs
0.08%
0.04%
Provision for Loan Losses
0.07%
0.07%
Allowance as a Multiple of
Net Charge-offs
14.3
34.2
Item 3 - QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Asset/Liability management control is designed to ensure safety and
soundness, maintain liquidity and regulatory capital standards, and
achieve acceptable net interest income. Management considers interest
rate risk to be the most significant market risk. 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. 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 outlined below are within the Board of
Directors specified limits. As of September 30, 2001 the projected
percentage changes are within the Board approved limits and the
Company's interest rate risk is also within Board approved limits. The
projected net interest income report summarizing the Company's interest
rate sensitivity as of September 30, 2001 is as follows:
(in thousands)
PROJECTED NET INTEREST INCOME
Level
Rate Change:
- - 300
- - 100
Rates
+ 100
+ 300
<s>
<c>
<c>
<c>
<c>
<c>
Year One (10/1/01 - 9/30/02)
Interest Income
$23,389
$25,536
$26,674
$27,816
$30,099
Interest Expense
8,410
10,474
11,521
12,569
14,663
Net Interest Income
14,979
15,062
15,153
15,247
15,436
PROJECTED DOLLAR INCREASE (DECREASE) FROM "LEVEL RATES"
Year One (10/1/01 - 9/30/02)
Interest Income
$(3,285)
$(1,138)
N/A
$ 1,142
$ 3,425
Interest Expense
(3,111)
(1,047)
N/A
1,048
3,142
Net Interest Income
(174)
(91)
N/A
94
283
PROJECTED PERCENTAGE INCREASE (DECREASE) FROM "LEVEL RATES"
Year One (10/1/01 - 9/30/02)
Interest Income
- -12.3%
- -4.3%
N/A
4.3%
12.8%
Interest Expense
- -27.0%
- -9.1%
N/A
9.1%
27.3%
Net Interest Income
- -1.2%
- -0.6%
N/A
0.6%
1.9%
Board approved limit
>-10.0%
>-4.0%
N/A
>-4.0%
>-10.0%
The projected net interest income report summarizing the Company's
interest rate sensitivity as of September 30, 2000 is as follows:
(in thousands)
PROJECTED NET INTEREST INCOME
Level
Rate Change:
- - 300
- - 100
Rates
+ 100
+ 300
<s>
<c>
<c>
<c>
<c>
<c>
Year One (10/1/00 - 9/30/01)
Interest Income
$26,333
$28,603
$29,737
$30,872
$33,142
Interest Expense
11,571
13,786
14,893
16,000
18,214
Net Interest Income
14,762
14,817
14,844
14,872
14,928
PROJECTED DOLLAR INCREASE (DECREASE) FROM "LEVEL RATES"
Year One (10/1/00 - 9/30/01)
Interest Income
$(3,404)
$(1,135)
N/A
$ 1,135
$ 3,404
Interest Expense
(3,321)
(1,107)
N/A
1,107
3,321
Net Interest Income
(83)
(28)
N/A
28
83
PROJECTED PERCENTAGE INCREASE (DECREASE) FROM "LEVEL RATES"
Year One (10/1/00 - 9/30/01)
Interest Income
- -11.4%
- -3.8%
N/A
3.8%
11.4%
Interest Expense
- -22.3%
- -7.4%
N/A
7.4%
22.3%
Net Interest Income
- -0.6%
- -0.2%
N/A
0.2%
0.6%
Board approved limit
>-10.0%
>-4.0%
N/A
>-4.0%
>-10.0%
These projected changes in net interest income as of September 30, 2001
are comparable to the projected changes in net interest income as of
September 30, 2000. In 2001, year one reflected a decline in net
interest income of 1.2% with a 300 basis point decline compared to the
0.6% decline in 2000. The 300 basis point increase in rates reflected a
1.9% increase in net interest income in 2001 compared to 0.6% in 2000.
Percentage changes in 2001 are greater when compared to 2000.
Therefore, changes in interest rates should have a larger effect on net
interest income.
Part II - Other Information
Item 1. Legal Proceedings
The Company is not a party to any material legal proceedings.
Item 2. Changes in Securities
None
Item 3. Defaults upon Senior Securities
None
Item 4. Submission of Matters to a Vote of Security Holders
None
Item 5. Other Information
None
Item 6. Exhibits and Reports on Form 8-K
1. Exhibits as required by Item 601 of Regulation S-K.
11 Earnings Per Share Calculation
2. No reports on Form 8-K have been filed during the quarter
for which this report is filed.
SIGNATURES
In accordance with the requirements of the Exchange Act, the registrant
caused the report to be signed on its behalf by the undersigned,
thereunto duly authorized.
Bourbon Bancshares, Inc.
Date __11/13/01_________ __/s/Buckner Woodford____________
Buckner Woodford, President and C.E.O.
Date __11/13/01_________ __/s/Gregory J. Dawson___________
Gregory J. Dawson, Chief Financial Officer
Exhibit 11
Earnings Per Share
See Note 4 in Notes to Consolidated Financial Statements for computation
of per share earnings.
20