UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K/A
(Amendment No. 1)
(Mark One)
[ X ] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 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
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act: None
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 _____
Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein, and will not be
contained, to the best of registrant's knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this
Form 10-K or any amendment to this Form 10-K. [ X ]
Aggregate market value of voting stock held by non-affiliates as of
February 28, 2002 was approximately $61.2 million. For purposes of this
calculation, it is assumed that directors, executive officers and
beneficial owners of more than 5% of the registrant's outstanding voting
stock are affiliates.
Number of shares of Common Stock outstanding as of February 28, 2002:
2,766,897.
PART I
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 Cynthiana (Harrison
County), Kentucky. The deposits of Kentucky Bank are insured up to
prescribed limits by the Bank Insurance Fund ("BIF") and the Savings
Association Insurance Fund ("SAIF"), both of the Federal Deposit
Insurance Corporation ("FDIC"). Kentucky Bank is engaged in general
full-service commercial and consumer banking. Kentucky Bank makes
commercial, agricultural and real estate loans to its commercial
customers, with emphasis on small-to-medium-sized industrial, service
and agricultural businesses. Kentucky Bank makes residential mortgage,
installment and other loans to its individual and other non-commercial
customers. Kentucky Bank also offers its customers the opportunity to
obtain a credit card. Kentucky Bank offers its customers a variety of
other services, including checking, savings, club and money market
accounts, certificates of deposits, safe deposit facilities and other
consumer-oriented financial services. 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, annuities, life and long term care insurance, 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, 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 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, 2001, the number of full time equivalent employees of
the Company was 180.
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 offer a full range
of banking services. Kentucky Bank owns all of the properties at which
it conducts its business, except the location in Scott County at Paris
Pike, which is leased. The Company owns approximately 66,000 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 2001.
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. 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. Submission of Matters to a Vote of Security Holders
Not Applicable.
PART II
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. 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
2001 Quarter 4 $26.00 $22.40 $.15
Quarter 3 25.50 23.50 .15
Quarter 2 26.00 23.00 .15
Quarter 1 24.50 21.25 .15
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
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, 2001 the Company had 2,766,917 shares of Common Stock
outstanding and approximately 450 holders of record of its Common Stock.
Item 6. Selected Financial Data
The following selected financial data should be read in conjunction with
the Company's Consolidated Financial Statements and the accompanying
notes presented elsewhere herein. On June 8, 1999, the stockholders
approved a two-for-one stock split effective July 15, 1999. All shares
and per share amounts have been retroactively restated to reflect the
split.
At or For the Year Ended December 31
(dollars and shares in thousands, except per share amounts)
2001 2000 1999 1998 1997
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CONDENSED STATEMENT OF INCOME:
Total Interest Income $28,046 $28,207 $23,453 $21,983 $20,962
Total Interest Expense 13,386 13,597 10,547 10,666 10,415
Net Interest Income 14,660 14,610 12,906 11,317 10,547
Provision for Losses 1,068 750 700 700 493
Net Interest Income After
Provision for Losses 13,592 13,860 12,206 10,617 10,054
Noninterest Income 5,672 3,798 3,386 3,073 2,390
Noninterest Expense 11,756 10,374 9,422 8,514 7,888
Income Before Income
Tax Expense 7,508 7,284 6,170 5,176 4,556
Income Tax Expense 1,984 2,031 1,720 1,372 1,148
Net Income 5,524 5,253 4,450 3,804 3,408
SHARE DATA:
Basic Earnings per Share (EPS) $1.98 $1.87 $1.59 $1.36 $1.22
Diluted EPS 1.95 1.83 1.55 1.33 1.20
Cash Dividends Declared 0.60 0.52 0.44 0.40 0.36
Book Value 14.13 12.77 11.32 10.46 9.58
Average Common Shares-Basic 2,790 2,812 2,803 2,801 2,792
Average Common Shares-Diluted 2,837 2,868 2,868 2,862 2,844
SELECTED BALANCE SHEET DATA:
Loans, net including held for sale $272,129 $269,757 $238,998 $210,108 $182,839
Investment Securities 75,608 68,054 70,623 72,353 81,703
Total Assets 397,257 371,847 347,479 308,705 290,655
Deposits 308,915 300,816 274,566 258,740 241,325
Securities sold under agreements to
repurchase and other borrowings 1,602 9,446 11,858 11,248 9,458
Federal Home Loan Bank advances 43,598 21,644 26,592 6,954 10,236
Stockholders' Equity 39,100 35,860 31,720 29,372 26,716
PERFORMANCE RATIOS:
(Average Balances)
Return on Assets 1.46% 1.49% 1.39% 1.31% 1.23%
Return on Stockholders' Equity 14.60% 15.63% 14.57% 13.57% 13.43%
Net Interest Margin (1) 4.22% 4.47% 4.46% 4.27% 4.18%
Equity to Assets (annual average) 9.99% 9.51% 9.54% 9.62% 9.17%
SELECTED STATISTICAL DATA:
Dividend Payout Ratio 30.28% 27.84% 27.73% 29.49% 29.49%
Number of Employees (at period end) 180 159 149 144 145
ALLOWANCE COVERAGE RATIOS:
Allowance to Total Loans 1.23% 1.24% 1.28% 1.28% 1.25%
Net Charge-offs as a Percentage of
Average Loans 0.39% 0.18% 0.15% 0.15% 0.16%
(1) Tax equivalent
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.
Critical Accounting Policies
The accounting and reporting policies of the Company and its
subsidiary are in accordance with accounting principles generally
accepted in the United States and conform to general practices within
the banking industry. The more critical accounting and reporting
policies include accounting for securities, loans and leases, the
allowance for loan and lease losses and income taxes. In particular,
the accounting policies relating to the allowance for loan and lease
losses and income taxes involve the use of estimates and require
significant judgments to be made by management. Different
assumptions in the application of these policies could result in
material changes in the consolidated financial position or
consolidated results of operations. See "Loan Losses" herein for a
complete discussion of the accounting methodologies related to the
allowance. Please also refer to Note 1 in the "Notes to Consolidated
Financial Statements" for details regarding all of the critical and
significant accounting policies.
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, 2001 was $5.5 million, or
$1.98 per common share compared to $5.3 million, or $1.87 for 2000 and
$4.5 million, or $1.59 for 1999. Earnings per share assuming dilution
were $1.95, $1.83 and $1.55 for 2001, 2000 and 1999, respectively.
During 2001, net income increased $272 thousand, up 5%. Net interest
income remained relatively constant, the loan loss provision increased
$318 thousand, while other income increased 49% and other expenses
increased 13%. 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%.
Return on average equity was 14.6% in 2001 compared to 15.6% in 2000 and
14.6% in 1999. Return on average assets was 1.46% in 2001 compared to
1.49% in 2000 and 1.39% in 1999.
Non-performing loans as of a percentage of loans (including held for
sale) were 0.80%, 0.66% and 0.31% as of December 31, 2001, 2000 and
1999, respectively. With the upward trend in non-performing loans,
management has placed more emphasis on loan quality and, with the
creation of a collection department, non-performing loan ratios are
expected to improve.
RESULTS OF OPERATIONS
Net Interest Income
Net interest income, the Company's largest source of revenue, on a tax
equivalent basis increased from $12.9 million in 1999 to $14.6 million
in 2000 to $14.7 million in 2001. 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 2001, average
earning assets and interest bearing liabilities continued to increase.
Generally, the increases in volume have been offset by the decline in
rates. The increase in earning assets of $23 million offset with a
decline of 56 basis points in the tax equivalent yield have resulted in
tax equivalent interest income decreasing $69 thousand. Average loans
increased $16 million along with a 54 basis point drop in the yield,
resulting in the loan income decreasing $22 thousand. These yield
declines are mainly attributable to the drop in interest rates. Bank
prime rates decreased 475 basis points during the year. Average
interest bearing liabilities increased $19 million, which coupled with a
39 basis point decline in the yield caused the interest on liabilities
to increase $2.8 million. The $501 thousand decline in deposit interest
is a result of average deposits increasing $10 million and the
corresponding yield dropping 40 basis points. In spite of the positive
impact on net interest income that may result from the potential
increasing rate environment in 2002, 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 1999 to 2000. 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.
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 2001 and 2000. Changes in interest income and
expenses due to both rate and volume are allocated on a pro rata basis.
2001 vs. 2000 2000 vs. 1999
Increase (Decrease) Due to Change in Increase (Decrease) Due to Change in
Volume Rate Net Change Volume Rate Net Change
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INTEREST INCOME
Loans $ 1,408 $ (1,430) $ (22) $ 3,293 $ 1,220 $ 4,513
Investment Securities 89 (256) (167) (35) 37 2
Federal Funds Sold and
Securities Purchased under
Agreements to Resell 221 (214) 7 184 51 235
Deposits with Banks 25 (5) 20 4 1 5
Total Interest Income 1,743 (1,905) (162) 3,446 1,309 4,755
INTEREST EXPENSE
Deposits
Demand 247 (482) (235) 16 339 355
Savings 8 (37) (29) 11 1 12
Negotiable Certificates of
Deposit and Other
Time Deposits 149 (386) (237) 990 1,151 2,141
Securities sold under
agreements to
repurchase and
other borrowings (297) (113) (410) 120 33 153
Federal Home Loan
Bank advances 775 (76) 699 285 105 390
Total Interest Expense 882 (1,094) (212) 1,422 1,629 3,051
Net Interest Income $ 861 $ (811) $ 50 $ 2,024 $ (320) $ 1,704
Average Consolidated Balance Sheets and Net Interest Analysis (dollars in thousands)
2001 2000 1999
Average Average Average Average Average Average
Balance Interest Rate Balance Interest Rate Balance Interest Rate
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ASSETS
Interest-Earning Assets
Securities Held to Maturity
State and Municipal obligations $ - $ - 0.00% $15,837 $ 912 5.76% $16,360 $ 945 5.78%
Securities Available for Sale (1)
U.S. Treasury and Federal Agency Securities 41,654 2,421 5.81% 44,585 2,726 6.11% 47,887 2,725 5.69%
State and Municipal obligations 17,978 974 5.42% 2,947 148 5.02% 3,642 182 5.00%
Other Securities 11,365 570 5.02% 6,110 346 5.66% 4,943 278 5.62%
Total Securities Available for Sale 70,997 3,965 5.58% 53,642 3,220 6.00% 56,472 3,185 5.64%
Total Investment Securities 70,997 3,965 5.58% 69,479 4,132 5.95% 72,832 4,130 5.67%
Tax Equivalent Adjustment 371 0.52% 278 0.40% 340 0.47%
Tax Equivalent Total 4,336 6.11% 4,410 6.35% 4,470 6.14%
Federal Funds Sold and Agreements to Repurchase 10,893 391 3.59% 6,038 384 6.36% 2,999 149 4.97%
Interest-Bearing Deposits with Banks 870 31 3.56% 193 11 5.70% 124 6 4.84%
Loans, Net of Deferred Loan Fees (2)
Commercial 32,837 2,678 8.16% 29,497 2,822 9.57% 26,530 2,306 8.69%
Real Estate Mortgage 217,132 18,543 8.54% 204,197 18,371 9.00% 175,429 14,946 8.52%
Installment 23,535 2,438 10.36% 24,017 2,488 10.36% 19,350 1,916 9.90%
Total Loans 273,504 23,659 8.65% 257,711 23,681 9.19% 221,309 19,168 8.66%
Total Interest-Earning Assets 356,264 28,417 7.98% 333,421 28,486 8.54% 297,264 23,793 8.00%
Allowance for Loan Losses (3,386) (3,330) (2,969)
Cash and Due From Banks 9,281 10,063 12,899
Premises and Equipment 9,171 7,445 6,952
Other Assets 7,375 5,816 6,091
Total Assets 378,705 353,415 320,237
LIABILITIES
Interest-Bearing Deposits
Negotiable Order of Withdrawal ("NOW")
and Money Market Investment Accounts 78,220 2,279 2.91% 70,788 2,514 3.55% 70,263 2,159 3.07%
Savings 14,494 252 1.74% 14,089 281 1.99% 13,533 269 1.99%
Certificates of Deposit and Other Deposits 160,751 8,776 5.46% 158,106 9,013 5.70% 139,381 6,872 4.93%
Total Interest-Bearing Deposits 253,465 11,307 4.46% 242,983 11,808 4.86% 223,177 9,300 4.17%
Securities sold under agreements to
repurchase and other borrowings 4,590 222 4.84% 10,316 632 6.13% 9,082 479 5.27%
Federal Home Loan Bank advances 33,247 1,857 5.59% 19,442 1,158 5.96% 13,749 768 5.59%
Total Interest-Bearing Liabilities 291,302 13,386 4.60% 272,741 13,598 4.99% 246,008 10,547 4.29%
Noninterest-Bearing Earning Demand Deposits 45,469 43,813 40,715
Other Liabilities 4,092 3,254 2,963
Total Liabilities 340,863 319,808 289,686
STOCKHOLDERS' EQUITY 37,842 33,607 30,551
Total Liabilities and Shareholders' Equity 378,705 353,415 320,237
Average Equity to Average Total Assets 9.99% 9.51% 9.54%
Net Interest Income 14,660 14,610 12,906
Net Interest Income (tax equivalent) (3) 15,031 14,888 13,246
Net Interest Spread (tax equivalent) (3) 3.38% 3.55% 3.72%
Net Interest Margin (tax equivalent) (3) 4.22% 4.47% 4.46%
Noninterest Income and Expenses
Noninterest income was $5.7 million in 2001 compared to $3.8 million in
2000 and $3.4 million in 1999. The $1.9 million increase in 2001 and
the $413 thousand increase in 2000 is mainly attributable to an increase
in service charges. In 2001 securities gains were $287 thousand
compared to $88 thousand losses in 2000 and $1 thousand gains in 1999.
The increase in gains for 2001 is a result of the declining rate
environment and municipal securities being called at premiums before
their maturities. In addition, U. S. Treasury securities were sold
before maturity to recognize some gains and extend out the yield curve.
Gains on loans sold were $383 thousand, $133 thousand and $351 thousand
in 2001, 2000 and 1999, respectively. Loans held for sale are generally
sold after closing to the Federal Home Loan Mortgage Corporation.
During 2001 and 2000, the Company sold some loans along with their
servicing rights and therefore there was a slight decline in loan
service fee income in 2001 and 2000. The sales of loans were $28
million, $15 million and $25 million in 2001, 2000 and 1999,
respectively. Volume of loan originations are inverse to rate changes.
The rate environment in 2000 was rising and therefore resulted in
declining loan originations. Rates have fallen in 2001 and as a result,
have favorably impacted our loan originations in 2001 compared to 2000.
Other noninterest income excluding security net gains was $5.4 million
in 2001, $3.9 million in 2000 and $3.4 million in 1999. Service charge
income has been a big contributor to this increase in income over this
three-year period. Overdraft income increased $1.1 million in 2001 and
$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. Other income increased from $270 thousand in 1999 to
$397 thousand in 2000 to $734 thousand in 2001. The increase in 2001 is
mainly a result of title insurance sales of $122 thousand and an
increase in brokerage commissions of $124 thousand. The sale of title
insurance was started during 2001 and has been very successful. The
sale of brokerage services was an effective additional source of income
in 2001.
Noninterest expense increased $1.4 million in 2001 to $11.8 million,
$952 thousand in 2000 to $10.4 million from $9.4 million in 1999. The
increases in salaries and benefits from $5.1 million in 1999 to $5.5
million in 2000 and to $6.0 million in 2001 are attributable to
converting the Loan Production Office in Cynthiana to a full service
branch in October 2001, 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 $82 thousand lower in
2001 compared to 2000 and $23 thousand higher in 2000 compared to 1999.
Occupancy expense increased $353 thousand, or 23% in 2001 to $1.9
million and increased $177 thousand, or 13% in 2000 to $1.5 million and
17% in 1999, to $1.4 million. The Company completed its construction of
a new full service facility in Cynthiana in October 2001. Over the past
3 years, 3 new facilities have been constructed and 2 facilities have
been substantially renovated. In 2001, land was purchased in Georgetown
to construct a full service facility. A definite date for constructing
this facility has not been set at this time. This overall improvement
of our facilities has led to the increase in occupancy expenses. The
largest expense, Depreciation, increased from $766 thousand in 1999, to
$812 thousand in 2000 to $961 thousand in 2001. Other noninterest
expense increased from $3.0 million in 1999 to $3.3 million in 2000 and
in 2001 other noninterest expenses increased to $3.8 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)
2001 2000 1999
NON-INTEREST INCOME
Service Charges $ 3,664 $ 2,650 $ 2,075
Loan Service Fee Income 258 287 291
Trust Department Income 347 420 398
Investment Securities Gains (Losses),net 287 (88) 1
Gains on Sale of Mortgage Loans 382 132 351
Other 734 397 270
Total Non-interest Income 5,672 3,798 3,386
NON-INTEREST EXPENSE
Salaries and Employee Benefits 6,019 5,539 5,054
Occupancy Expenses 1,891 1,538 1,361
Other 3,846 3,297 3,007
Total Non-interest Expense 11,756 10,374 9,422
Net Non-interest Expense as a
Percentage of Average Assets 1.61% 1.86% 1.88%
Income Taxes
The Company had income tax expense of $2.0 million in 2001 and 2000 and
$1.7 million in 1999. This represents an effective income tax rate of
26.4% in 2001 and 27.9% in 2000 and in 1999. 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 lower
effective rate for 2001 compared to 2000 and 1999 is a result of an
historic tax credit taken of $240 thousand taken on the Main Office in
Paris.
Balance Sheet Review
Assets grew from $372 million at December 31, 2000 to $397 million at
December 31, 2001. Loan growth was $1 million in 2001. The lesser loan
growth compared to previous years is mainly attributable to the economic
downturn in 2001. Deposits grew $8 million and borrowings grew $14
million. FHLB advances increased $22 million, while repurchase
agreements declined $8 million. 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. 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 $276 million at
December 31, 2001 compared to $273 million at the end of 2000 and $242
million in 1999. The loan growth being less compared to previous years
is mainly attributable to the economic downturn in 2001. As of the end
of 2001 and compared to the prior year-end, commercial loans increased
$1.2 million, real estate construction loans decreased $3.0 million,
real estate mortgage loans (including loans held for sale) increased
$5.5 million, agricultural loans increased $1.6 million and installment
loans decreased $2.9 million. 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. 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.
As of December 31, 2001, the real estate mortgage portfolio comprised
61% of total loans compared to 60% in 2000. Of this, 1-4 family
residential property represented 70% in 2001 and 73% in 2000.
Agricultural loans comprised 19% in 2001 and in 2000 of the loan
portfolio. Approximately 77% of the agricultural loans are secured by
real estate for both 2001 and 2000. 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 49% in 2001 and 51% in 2000 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)
2001 2000 1999 1998 1997
Commercial $ 18,618 $ 17,452 $ 17,713 $ 15,177 $ 10,644
Real Estate Construction 12,302 15,270 17,003 11,055 7,657
Real Estate Mortgage 168,684 163,190 138,337 124,721 113,524
Agricultural 53,640 52,008 46,443 44,199 37,924
Installment 21,952 24,807 22,358 17,608 15,182
Other 338 434 280 159 287
Total Loans 275,534 273,161 242,134 212,919 185,218
Less Deferred Loan Fees 19 16 33 76 57
Total Loans Net of
Deferred Loan Fees 275,515 273,145 242,101 212,843 185,161
Less loans held for sale 2,343 868 3,494 5,909 5,418
Less Allowance For Loan Losses 3,386 3,388 3,103 2,734 2,322
Net Loans 269,786 268,889 235,504 204,200 177,421
The following table sets forth the maturity distribution and interest
sensitivity of selected loan categories at December 31, 2001.
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, 2001 (in thousands)
One Year One Through Over Total
or Less Five Years Five Years Loans
Commercial $ 9,382 $ 6,789 $ 2,447 $ 18,618
Real Estate Construction 9,571 2,526 205 12,302
Real Estate Mortgage 15,894 105,993 46,778 168,665
Agricultural 16,240 35,234 2,166 53,640
Installment 5,461 16,344 147 21,952
Other 338 0 0 338
Total Loans 56,886 166,886 51,743 275,515
Fixed Rate Loans 33,647 152,359 12,174 198,180
Floating Rate Loans 23,239 14,527 39,569 77,335
Total 56,886 166,886 51,743 275,515
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. Rates have fallen in 2001 and as a
result, have favorably impacted our loan originations in 2001 compared
to 2000. During 2000 interest rates were rising. As a result of this,
mortgage loan originations decreased from $22 million in 1999 to $13
million in 2000, and increased to $29 million in 2001. The sale of
loans were $28 million, $15 million and $25 million for the year 2001,
2000 and 1999, respectively. Mortgage loans held for sale increased
from $868 thousand at December 31, 2000 to $2.3 million at December 31,
2001. Volume of loan originations are inverse to rate changes. The
rate environment in 2001 was falling in contrast to 2000 and 1999 when
rates were rising and therefore resulted in increased loan originations
in 2001 compared to 2000 and 1999. The effect of these changes was also
reflected on the income statement. Loan service fee income was $258
thousand in 2001, $287 thousand in 2000 and $291 thousand in 1999. This
decline is attributable to selling selected loans servicing released.
Fluctuations of larger degrees are reflected in the gain on sale of
mortgage loans. For 2001, the gain was $383 thousand compared to $133
thousand in 2000 and $351 thousand in 1999.
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 $463 thousand at December 31,
2001, $521 thousand at December 31, 2000 and $606 thousand at December
31, 1999. Amortization of mortgage servicing rights was $140 thousand,
$155 thousand and $155 thousand for the years ended December 31, 2001,
2000 and 1999, respectively. See Note 4 in the notes to consolidated
financial statements included as Exhibit 13 for additional information.
Deposits
Total deposits increased to $309 million in 2001, up $8 million from
2000. Noninterest bearing deposits decreased $816 thousand, while time
deposits of $100 thousand and over increased $1.4 million, and other
interest bearing deposits increased $7.5 million. Public funds totaled
$34 million at the end of 1999 ($33 million was interest bearing). Due
to the downturn in the economy in 2001 and the softening loan demand,
deposits were not aggressively pursued.
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).
The tables below provide information on the maturities of time deposits
of $100,000 or more at December 31, 2001 and detail of short-term
borrowing for the past three years.
Maturity of Time Deposits of $100,000 or More
At December 31, 2001
(in thousands)
Maturing 3 Months or Less $18,746
Maturing over 3 Months through 6 Months 9,387
Maturing over 6 Months through 12 Months 11,224
Maturing over 12 Months 2,315
Total $41,672
Borrowing
The Company utilizes both long and short term borrowing. Long term
borrowing is mainly from the Federal Home Loan Bank (FHLB). This
borrowing is mainly used to fund long term, fixed rate mortgages and to
assist in asset/liability management. Advances are either paid monthly
or at maturity. FHLB advances were $43.6 million at December 31, 2001.
During 2001, $246 thousand of FHLB borrowing was paid, and advances were
made for an additional $22 million. The 2001 advances were obtained for
a $10 million arbitrage transaction and the remainder to fund fixed rate
mortgages, as detailed above. As of December 31, 2000, $21.6 million
was borrowed from FHLB, a decrease of $5 million from 1999. In 2000,
$11.3 million of FHLB advances were paid, and advances were made for an
additional $6.3 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
As of and for the year ended
December 31 (in thousands)
2001 2000 1999
Federal Funds Purchased:
Balance at Year end $ - $ - $ -
Average Balance During the Year 6 373 2,196
Maximum Month End Balance - 2,300 11,925
Year end rate 0.00% 0.00% 0.00%
Average annual rate 5.89% 6.95% 5.18%
Repurchase Agreements:
Balance at Year end $ 683 $ 8,189 $10,330
Average Balance During the Year 3,303 8,727 5,683
Maximum Month End Balance 5,164 12,310 10,330
Year end rate 1.59% 5.92% 4.87%
Average annual rate 3.35% 5.51% 4.37%
Other Borrowed Funds:
Balance at Year end $ 919 $ 1,257 $ 1,528
Average Balance During the Year 1,281 1,216 1,203
Maximum Month End Balance 1,768 1,766 1,759
Year end rate 7.24% 11.71% 7.90%
Average annual rate 8.67% 10.13% 9.49%
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)
2001 2000 1999 1998 1997
Non-accrual Loans $ 935 $ 307 $ 63 $ 136 $ 173
Accruing Loans which are
Contractually past due
90 days or more 1,228 1,365 549 790 154
Restructured Loans 0 130 131 147 160
Total Nonperforming Loans 2,163 1,802 743 1,073 487
Other Real Estate 212 165 371 70 0
Total Nonperforming Assets 2,375 1,967 1,114 1,143 487
Total Nonperforming Loans as a
Percentage of Net Loans (including
loans held for sale) (1) 0.79% 0.66% 0.31% 0.50% 0.26%
Total Nonperforming Assets
as a Percentage of Total Assets 0.60% 0.53% 0.32% 0.37% 0.17%
Allowance to nonperforming assets 1.43 1.72 2.79 2.39 4.77
(1) Net of deferred loan fees
Total nonperforming assets at December 31, 2001 were $2.4 million
compared to $2.0 million at December 31, 2000 and $1.1 million at
December 31, 1999. Total nonperforming loans were $2.2 million, $1.8
million and $743 thousand at December 31, 2001, 2000 and 1999,
respectively. Two mortgage loans totaling $453 thousand account for the
increase in 2001 on nonaccrual loans. A loss of $20 thousand is
expected on these loans. The economic downturn in 2001 was a
contributing factor to the increase in loans 90 days or more past due.
Two lines totaling $376 thousand account for most of the change
(considering the loan of $790 thousand in 2000 that follows was paid off
in 2001). Expected losses on these loans are not to exceed $30
thousand. For 2000, the increase in loans that are 90 days or more past
due 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, 2001, 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, 2001 were $964 thousand compared to
$395 thousand in 2000 and $201 thousand in 1999. 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 $249 thousand, $117
thousand and $10 thousand on December 31, 2001, 2000 and 1999,
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)
2001 2000 1999 1998 1997
Balance at Beginning of Year $ 3,388 $ 3,103 $ 2,735 $ 2,322 $ 2,101
Amounts Charged-off:
Commercial 178 14 0 13 5
Real Estate Construction 0 0 0 0 0
Real Estate Mortgage 171 115 50 36 25
Agricultural 46 30 72 19 52
Consumer 751 400 289 300 273
Total Charged-off Loans 1,146 559 411 368 355
Recoveries on Amounts
Previously Charged-off:
Commercial 4 14 5 4 3
Real Estate Construction 0 0 0 0 0
Real Estate Mortgage 2 7 1 9 1
Agricultural 1 8 32 2 25
Consumer 69 65 41 66 54
Total Recoveries 76 94 79 81 83
Net Charge-offs 1,070 465 332 287 272
Provision for Loan Losses 1,068 750 700 700 493
Balance at End of Year 3,386 3,388 3,103 2,735 2,322
Total Loans, Net of Deferred
Loan Fees
Average 273,504 257,711 221,309 193,182 171,128
At December 31 275,515 273,145 242,101 212,843 185,161
As a Percentage of Average Loans:
Net Charge-offs 0.39% 0.18% 0.15% 0.15% 0.16%
Provision for Loan Losses 0.39% 0.29% 0.32% 0.36% 0.29%
Allowance as a Percentage of
Year-end Net Loans (1) 1.23% 1.24% 1.28% 1.28% 1.25%
Beginning Allowance as a Multiple
of Net Charge-offs 3.2 6.7 8.2 8.1 7.7
Ending Allowance as a Multiple
of Nonperforming Assets 1.40 1.72 2.79 2.39 4.77
(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 2001 was $1.1 million compared to $750
thousand in 2000 and $700 thousand in 1999. Net charge-offs were $1.1
million in 2001, $465 thousand in 2000 and $332 thousand in 1999. Net
charge-offs to average loans were 0.39%, 0.18% and 0.15% in 2001, 2000
and 1999, respectively. With the current quality of the loan portfolio,
the loan loss provision increased $318 thousand from 2000 to 2001, and
increased $50 thousand in 2000. The trend in the loan loss provision
increasing for 2001 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. The economic downturn in
2001 resulted in higher loan losses than in previous years. In light of
this, management has increased its emphasis on the lending process in
order to improve loan quality. At December 31, 2001, the allowance for
loan losses was 1.23% of loans outstanding compared to 1.24% at year-end
2000 and 1.28% in 1999. Management believes the allowance for loan
losses at the end of 2001 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.
Allowance for Loan Losses
At December 31 (in thousands)
2001 2000 1999 1998 1997
Dollars Percentage Dollars Percentage Dollars Percentage Dollars Percentage Dollars Percentage
<s> <c> <c> <c> <c> <c> <c> <c> <c> <c> <c>
Commercial $ 291 8.59% $ 275 8.12% $ 275 8.86% $ 262 9.58% $ 191 8.23%
Real Estate Construction 194 5.73% 244 7.20% 294 9.47% 168 6.14% 118 5.08%
Real Estate Mortgage 1,602 47.31% 1,563 46.13% 1,471 47.41% 1,480 54.11% 1,327 57.15%
Agricultural 693 20.47% 668 19.72% 565 18.21% 473 17.29% 393 16.93%
Consumer 606 17.90% 638 18.83% 498 16.05% 352 12.87% 293 12.62%
Total 3,386 100.00% 3,388 100.00% 3,103 100.00% 2,735 100.00% 2,322 100.00%
Loans
At December 31 (in thousands)
2001 2000 1999 1998 1997
Dollars Percentage Dollars Percentage Dollars Percentage Dollars Percentage Dollars Percentage
<s> <c> <c> <c> <c> <c> <c> <c> <c> <c> <c>
Commercial $ 18,618 6.76% $ 17,452 6.39% $17,713 7.32% $ 15,177 7.13% $ 10,644 5.75%
Real Estate Construction 12,302 4.47% 15,270 5.59% 17,003 7.02% 11,055 5.19% 7,657 4.14%
Real Estate Mortgage 168,665 61.22% 163,174 59.74% 138,304 57.13% 124,645 58.56% 113,467 61.28%
Agricultural 53,640 19.47% 52,008 19.04% 46,443 19.18% 44,199 20.77% 37,924 20.48%
Consumer 21,952 7.97% 24,807 9.08% 22,358 9.23% 17,608 8.27% 15,182 8.20%
Other 338 0.12% 434 0.16% 280 0.12% 159 0.07% 287 0.16%
Total, Net (1) 275,515 100.00% 273,145 100.00% 242,101 100.00% 212,843 100.00% 185,161 100.00%
(1) Net of deferred loan fees
Capital
As displayed by the following table, the Company's Tier I capital (as
defined by the Federal Reserve Board under the Board's risk-based
guidelines) at December 31, 2001 increased $2.9 million to $37.4
million. Total stockholders' equity, excluding accumulated other
comprehensive income was $38.4 million at December 31, 2001. 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)
2001 2000 Change
Stockholders' Equity (1) $ 38,353 $ 35,868 2,485
Less Disallowed Amount 943 1,380 (437)
Tier I Capital 37,410 34,488 2,922
Allowance for Loan Losses 3,386 3,296 90
Other 104 0 104
Tier II Capital 3,490 3,296 194
Total Capital 40,900 37,784 3,116
Total Risk Weighted Assets 283,541 263,660 19,881
Ratios:
Tier I Capital to Risk-weighted Assets 13.19% 13.08% 0.11%
Total Capital to Risk-weighted Assets 14.42% 14.33% 0.09%
Leverage 9.63% 9.29% 0.34%
(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, 2001, the bank had ratios that exceeded the
minimum requirements established for the "well capitalized" category.
In management's opinion, there are no other 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, increased from $68.1 million at December 31, 2000 to $75.6
million at December 31, 2001. The increase is mainly attributable to
the lower loan demand. Federal funds sold totaled $14.4 million at
December 31, 2001 and $3.7 million at December 31, 2000. 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 $11.3 million of adjustable asset backed securities held
on December 31, 2001, $6.3 million are repriceable monthly and the
remaining $5.0 million are repriceable annually. 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. 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, 2001.
Investment Securities (Held to maturity at amortized cost, available for
sale at market value)
At December 31 (in thousands)
2001 2000 1999
Available for Sale
U.S. treasury $ 7,218 $ 14,992 $ 17,954
U.S. government agencies 6,118 5,028 5,902
States and political subdivisions 19,470 3,366 3,681
Mortgage-backed
Fixed -
GNMA, FNMA, FHLMC Passthroughs 12,672 5,580 5,998
GNMA, FNMA, FHLMC CMO's 5,057 4,941 5,191
Total 17,729 10,521 11,189
Variable -
GNMA, FNMA, FHLMC Passthroughs 8,402 9,374 11,539
GNMA, FNMA, FHLMC CMO's 2,925 2,983 3,045
Total 11,327 12,357 14,584
Total mortgage-backed 29,056 22,878 25,773
Other 13,746 6,559 1,620
Total 75,608 52,823 54,930
Held to Maturity
States and political subdivisions $ - $ 15,231 $ 15,693
Total $ 75,608 $ 68,054 $ 70,623
Maturity Distribution of Securities
At December 31, 2001 (in thousands)
Over One Over Five Asset
Year Years Backed
One Year Through Through Over Ten & Equity
or Less Five Years Ten Years Years Securities Total
<s> <c> <c> <c> <c> <c> <c>
Available for Sale
U.S. treasury $ 2,061 $ 5,157 $ - $ - $ - $ 7,218
U.S. government agencies 3,103 3,015 0 0 0 6,118
States and political subdivisions 816 5,534 5,650 7,470 0 19,470
Mortgage-backed 0 0 0 0 29,056 29,056
Equity Securities 0 0 0 0 10,693 10,693
Other 0 2,015 1,038 0 0 3,053
Total 5,980 15,721 6,688 7,470 39,749 75,608
Percent of Total 7.9% 20.8% 8.8% 9.9% 52.6% 100.0%
Weighted Average Yield (1) 6.03% 6.16% 7.92% 7.48% 4.74% 5.69%
(1) Tax Equivalent Yield
Impact of Inflation and Changing Prices
The majority of Bourbon's assets and liabilities are monetary in nature.
Therefore, Bourbon differs greatly from most commercial and industrial
companies that have significant investments in nonmonetary assets and
inventories. However, inflation does have an important impact on the
growing of assets in the banking industry and the resulting need to
increase equity capital at higher than normal rates in order to maintain
an appropriate equity to assets ratio. Inflation also affects other
expenses, which tend to rise during periods of inflation.
Other Accounting Issues
Beginning January 1, 2001, a new accounting standard 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, 2001 and 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.
A new accounting standard requires all business combinations to be
recorded using the purchase method of accounting for any transaction
initiated after June 30, 2001. Under the purchase method, all
identifiable tangible and intangible assets and liabilities of the
acquired company must be recorded at fair value at date of acquisition,
and the excess of cost over fair value of net assets acquired is
recorded as goodwill. Identifiable intangible assets must be separated
from goodwill. Identifiable intangible assets with finite useful lives
will be amortized under the new standard, whereas goodwill, both amounts
previously recorded and future amounts purchased, will cease being
amortized starting in 2002. Annual impairment testing will be required
for goodwill with impairment being recorded if the carrying amount of
goodwill exceeds its implied fair value. All recorded acquistion
intangibles are identified with specific assets. There are no
intangible assets identified as goodwill. Adoption of this standard on
January 1, 2002 will not have a material effect on the Company's
financial statements.
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, 2001 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, 2001 and December 31, 2000
is as follows:
Projected Net Interest Income (December 31, 2001)
Level
-300 -100 Rates +100 +300
<s> <c> <c> <c> <c> <c>
Year One (1/1/02 - 12/31/02)
Interest Income $21,449 $23,849 $25,210 $26,577 $29,316
Interest Expense 7,076 8,704 9,917 11,130 13,557
Net Interest Income 14,373 15,145 15,293 15,447 15,759
Net interest income dollar change (920) (148) 154 466
Net interest income percentage change -6.0% -1.0% N/A 1.0% 3.0%
Limitation on % Change >-10.0% >-4.0% N/A >-4.0% >-10.0%
Level
-300 -100 Rates +100 +300
<s> <c> <c> <c> <c> <c>
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 (18) (52)
Net interest income percentage change 0.3% 0.1% N/A -0.1% -0.3%
Limitation on % Change >-10.0% >-4.0% N/A >-4.0% >-10.0%
These numbers in 2001 show greater fluctuation when compared to 2000.
In 2001, year one reflected a decrease in net interest income of 6.0%
compared to 0.3% projected increase from 2000 with a 300 basis point
decline. The 300 basis point increase in rates reflected a 3.0%
decrease in net interest income in 2001 compared to a 0.3% decrease in
2000. The risk is greater in 2001 due to the current status of existing
interest rates (being low) and their effect on rate sensitive assets and
rate sensitive liabilities. An increase in rates would improve net
interest income.
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 maturing
within one year along with cash and cash equivalents totaled $46.3
million at December 31, 2001. Additionally, securities available-for-
sale with maturities greater than one year totaled $58.9 million at
December 31, 2001. 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, 2001 these balances totaled $41.7 million, approximately
13.5% 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 $13 million from the FHLB
at December 31, 2001.
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
2001 2000 1999
Average Loans (including loans held
for sale)/Average Deposits 91.5% 89.9% 83.9%
Average Securities sold under
agreements to repurchase and other
borrowings/Average Assets 1.2% 2.9% 2.8%
This chart shows that the loan to deposit ratio increased in 2001 and
2000. Loan growth of 6% and deposit growth of 5% in 2001, coupled with
loan growth of 15% and deposit growth of 7% in 2000 have been
contributing factors to the change in this ratio over the past two
years.
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 2001 Annual Report to Stockholders included as Exhibit 13, and
are incorporated herein by reference. No other portion of the 2001
Annual Report to Stockholders is to be deemed "filed" as part of this
filing.
Item 9. Changes In and Disagreements with Accountants on Accounting and
Financial Disclosure
Not Applicable
PART III
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 2002:
Henry Hinkle, age 50, is President of Hinkle Construction Company. He
has been a director of Kentucky Bank and the Company since 1989.
Theodore Kuster, age 58, 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 52, 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 67, is Chairman of Signal Investments, Inc. He
has been a director of Kentucky Bank since 1984 and the Company since
1988.
Buckner Woodford, age 57, is President and Chief Executive Officer of
Bourbon Bancshares, Inc. and Kentucky Bank. He has been a director of
Kentucky Bank since 1971 and the Company since inception.
Terms expiring in 2004:
William Arvin, age 61, is an attorney. He has been a director of
Kentucky Bank and the Company since 1995.
James L. Ferrell, M.D., age 67, is a Physician. He has been a director
of Kentucky Bank since 1980 and the Company since inception.
The Company's other executive officer is Gregory J. Dawson, age 41. 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. Executive Compensation
The following table sets forth information with respect to the
compensation of the President and Chief Executive Officer of the
Company, Buckner Woodford. 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 2001 $175,000 $ 19,250 (1) 500
Buckner Woodford 2000 168,500 49,630 (1) 500
Buckner Woodford 1999 162,000 47,952 (1) 3,600
(1) Less than the lesser of $50,000 or 10% of annual salary and bonuses
The following table contains information regarding the grant of stock
options under the Company's stock option plan to the Chief Executive
Officer during the year ended December 31, 2001. In addition, in
accordance with rules of the Securities and Exchange Commission, the
following table sets forth the hypothetical grant date present value
with respect to the referenced options, using the Black-Scholes Option
Pricing Model.
Option Grants in the Last Fiscal Year
% of Total
Options Grant
Shares Granted to Exercise Date
Granted Employees Price Expiration Present
Name (#) in 2001 ($/Sh) Date Value($)
Buckner Woodford 500 12.0% $23.50 1/2/11 $2,290
The following table sets forth certain information regarding options
exercised by the Chief Executive Officer during calendar year 2001 and
unexercised stock options held by him as of December 31, 2001.
Aggregated Option Exercises in Calendar 2001
and Year-end Stock Option Values
Shares Number of Securities Value of Unexercised
Acquired Value Underlying Unexercised In-the-Money
on Exercise Realized Options at 12/31/01 Options at 12/31/01
Name (#) ($) Exercisable/Unexercisable Exercisable/Unexercisable
<s> <c> <c> <c> <c>
Buckner Woodford None N/A 19,060/5,220 $248,955/$38,260
No SAR's exist for the Company.
Compensation of Directors
Directors are paid $400 for each board meeting attended and $100 for
each committee meeting attended. Directors are also granted a 10-year
option to purchase 50 shares of the Company's common stock following
each year in which Kentucky Bank has a return on assets of 1 percent or
greater. The option's exercise price is the fair market value per share
on the date of grant.
Pension Plan
The following table sets forth the annual benefits which an eligible
employee would receive under the Company's qualified defined benefit
pension plan based on remuneration that is covered under the plan and
years of service with the Company and its subsidiaries.
Years of Service
Remuneration 15 20 25 30 35
$ 25,000 $ 3,750 $ 5,000 $ 6,250 $ 7,500 $ 8,750
50,000 7,500 10,000 12,500 15,000 17,500
75,000 11,250 15,000 18,750 22,500 26,250
100,000 15,000 20,000 25,000 30,000 35,000
125,000 18,750 25,000 31,250 37,500 43,750
150,000 22,500 30,000 37,500 45,000 52,500
175,000 26,250 35,000 43,750 52,500 61,250
200,000 30,000 40,000 50,000 60,000 70,000
225,000 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. 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,
2001.
Name Shares Beneficially Owned(1)
Number Percentage
William Arvin (2) 33,359 1.2%
Gregory J. Dawson (3) 8,695 *
James L. Ferrell, M.D. (4) 29,900 1.1%
Henry Hinkle (5) 27,905 *
Theodore Kuster (6) 17,410 *
William R. Stamler (7) 31,320 1.1%
Robert G. Thompson (8) 7,600 *
Buckner Woodford (9) 253,498 8.9%
All directors and officers
(8 persons) as a group
(consisting of those
persons named above)(10) 409,687 14.4%
* 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 400 shares
that Mr. Arvin may acquire upon exercise of outstanding stock options.
3) Includes 4,990 shares that Mr. Dawson may acquire upon exercise of
outstanding stock options.
4) Includes 5,400 shares held in a retirement account and 800 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 800
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 600 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 380 shares that Mr. Stamler may acquire upon exercise of
outstanding stock options.
8) Includes 800 shares that Mr. Thompson may acquire upon exercise of
outstanding stock options.
9) Includes 8,000 shares held by his wife, as to which Mr. Woodford
disclaims beneficial ownership. Also includes 208 shares held in a
retirement account and 19,060 shares that Mr. Woodford may acquire upon
exercise of outstanding stock options.
10) Includes 27,830 shares that may be acquired upon exercise of
outstanding stock options.
The following table sets forth as of December 31, 2001 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 253,498 8.9%
340 Stoner Avenue
Paris, Kentucky 40361
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, 2001.
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 as of December
31, 2001 and 2000. See Note 4 in the notes to consolidated financial
statements included as Exhibit 13.
Part IV
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 26, 2002, sent to the Registrant's
security holders in connection with the 2002 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, 2001
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 Amendment No.
1 to the Form 10-K to be signed on its behalf by the undersigned,
thereunto duly authorized.
Bourbon Bancshares, Inc.
By: _/s/Buckner Woodford____
Buckner Woodford, President and Chief Executive Officer, Director
August 30, 2002
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).*
10.2 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 Bourbon Bancshares, Inc. 2001 Annual Report
21 Subsidiaries of Registrant
23 Consent of Crowe, Chizek and Company LLP
99.1 Proxy statement dated March 26, 2002, sent to the
Registrant's security holders in connection with the 2002
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 2002
Letter to the Shareholders.
Our country was drastically changed in 2001 by the
terrorist attack on September 11. Many and varied
emotions were felt by our citizens --shock, anger, fear,
patriotism, and more. Peaceful enjoyment was replaced
with deep concern for our future.
Our prosperity was also a victim of the attack. Consumers
cut back first on travel plans, then on other spending.
Large employers cut back and announced layoffs. After
many years of growth, our economy slipped into recession.
This is not a favorable environment for business. In spite
of that our company performed fairly well. Growth
slowed. After several years of double-digit loan growth,
our portfolio showed little increase this past year. Because
of the lessened loan demand we were more conservative in
our efforts to build deposits. We did add about $8 million
to our deposit base. Bank assets overall grew by 7% to
$397 million.
Earnings for the year increased from $5.2 million to $5.5
million. The lower growth in our loan portfolio and
slimmer margins combined to limit earnings growth. The
brightest part of our financial performance in 2001 was a
very healthy 47%increase in non-interest income.
Stockholder equity rose from $36 million to $39 million by
year-end.
Two directors of Kentucky Bank retired in December. Joe
Allen and Joe McClain provided valuable advice to us for
many years. They were good friends as well. We will miss
their presence when we meet to guide company affairs.
We completed two important construction projects this
year. Our new branch in Cynthiana opened in October. It
has gotten off to a promising start. At our headquarters in
downtown Paris, we completed an historic restoration. We
moved back into the lobby in December 2001. The
building is now more impressive both outside and inside.
We hope you share our pride in this important community
project.
The positive long economic trend in our markets
has been interrupted, but we hope not for long. We
believe we are well positioned to benefit over the long
term.
Buckner Woodford
President
FINANCIAL HIGHLIGHTS...
BOURBON BANCSHARES, INC. 2001 2000 1999
Assets ($ millions) $ 397 $ 372 $ 347
Net Income ($ thousands) $ 5,524 $ 5,253 $ 4,450
Per Share Results
Diluted Earnings $ 1.95 $ 1.83 $ 1.55
Dividends $ .60 $ .52 $ .44
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 1, 2002 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. 3016
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 2001 Form 10-K Report may obtain these by writing Investor
Relations at the Corporate Headquarters.
CONSOLIDATED BALANCE SHEETS
December 31
2001 2000
ASSETS
Cash and due from banks $ 15,229,462 $ 11,595,878
Federal funds sold 14,409,000 3,749,000
Cash and cash equivalents 29,638,462 15,344,878
Available for sale 75,607,874 52,822,939
Held to maturity (fair value
2000 - $15,638,185) - 15,231,406
Mortgage loans held for sale 2,343,095 867,804
Loans 273,172,802 272,277,776
Allowance for loan losses (3,386,425) (3,388,380)
Net loans 269,786,377 268,889,396
Federal Home Loan Bank stock 3,846,500 3,597,900
Bank premises and equipment, net 10,504,904 8,298,504
Interest receivable 3,507,473 4,262,243
Intangible assets 1,405,918 1,743,786
Other assets 616,556 788,407
Total assets $ 397,257,159 $ 371,847,263
LIABILITIES AND STOCKHOLDERS' EQUITY
Deposits
Non-interest bearing $ 47,622,621 $ 48,438,750
Time deposits, $100,000 and over 41,671,945 40,305,827
Other interest bearing 219,620,618 212,071,008
Total deposits 308,915,184 300,815,585
Securities sold under agreements to repurchase
and other borrowings 1,601,982 9,446,393
Federal Home Loan Bank advances 43,597,929 21,644,278
Interest payable 2,814,581 3,427,489
Total liabilities 358,156,778 335,987,282
Stockholders' equity
Preferred stock, 300,000 shares
authorized and unissued - -
Common stock, no par value; 10,000,000
shares authorized; 2,766,917 and
2,808,067 shares issued and
outstanding in 2001 and 2000 6,649,018 6,627,255
Retained earnings 31,703,573 29,241,091
Accumulated other comprehensive
income (loss) 747,790 (8,365)
Total stockholders' equity 39,100,381 35,859,981
Total liabilities and stockholders' equity $ 397,257,159 $ 371,847,263
CONSOLIDATED STATEMENTS OF INCOME
Years Ended December 31
2001 2000 1999
Interest income
Loans, including fees $ 23,658,873 $ 23,681,081 $ 19,167,985
Securities
Taxable 2,591,330 2,818,906 2,761,337
Tax exempt 1,124,620 1,059,658 1,115,480
Other 671,231 647,597 408,077
28,046,054 28,207,242 23,452,879
Interest expense
Deposits 11,306,963 11,807,823 9,300,244
Securities sold under agreements
to repurchase and
other borrowings 131,913 541,550 386,607
Federal Home Loan Bank advances 1,857,061 1,158,250 767,779
Other 90,000 90,000 92,440
13,385,937 13,597,623 10,547,070
Net interest income 14,660,117 14,609,619 12,905,809
Provision for loan losses 1,068,000 750,000 699,600
Net interest income after
provision for loan losses 13,592,117 13,859,619 12,206,209
Other income
Service charges 3,663,990 2,650,310 2,074,999
Loan service fee income 257,823 286,704 290,622
Trust department income 346,554 419,728 397,416
Securities gains (losses), net 287,262 (88,169) 906
Gain on sale of mortgage loans 382,532 132,559 351,192
Other 734,043 397,131 270,416
5,672,204 3,798,263 3,385,551
Other expenses
Salaries and employee benefits 6,019,279 5,538,589 5,054,249
Occupancy expenses 1,890,878 1,538,037 1,361,025
Amortization 419,486 434,373 441,286
Advertising and marketing 428,229 362,958 323,726
Taxes other than payroll,
Property and income 370,537 363,957 234,818
Other 2,627,444 2,135,581 2,006,858
11,755,853 10,373,495 9,421,962
Income before income taxes 7,508,468 7,284,387 6,169,798
Provision for income taxes 1,983,978 2,031,445 1,719,685
Net income $ 5,524,490 $ 5,252,942 $ 4,450,113
Earnings per share:
Basic $ 1.98 $ 1.87 $ 1.59
Diluted 1.95 1.83 1.55
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
Years Ended December 31
2001 2000 1999
Net income $ 5,524,490 $ 5,252,942 $ 4,450,113
Other comprehensive income (loss),
net of tax:
Unrealized gains (losses) on
securities arising
during the period 945,748 483,032 (615,012)
Reclassification of realized
amount (189,593) 58,192 (598)
Net change in unrealized gain
(loss) on securities 756,155 541,224 (615,610)
Comprehensive income $ 6,280,645 $ 5,794,166 $ 3,834,503
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
Years Ended December 31, 2001, 2000 and 1999
Accumulated
Other Total
Common Stock Retained Comprehensive Stockholders'
Shares Amount Earnings Income Equity
<s> <c> <c> <c> <c> <c>
Balances, January 1, 1999 2,809,256 $ 6,474,241 $ 22,832,043 $ 66,021 $ 29,372,305
Common stock issued (including
employee gifts of 95 shares) 7,695 54,187 - - 54,187
Common stock purchased (14,480) (37,055) (271,071) - (308,126)
Net change in unrealized gain (loss)
on securities available for sale, net
of tax - - - (615,610) (615,610)
Net income - - 4,450,113 - 4,450,113
Dividends declared - $.44 per share - - (1,233,296) - (1,233,296)
Balances, December 31, 1999 2,802,471 6,491,373 25,777,789 (549,589) 31,719,573
Common stock issued (including
employee gifts of 48 shares) 21,208 172,580 - - 172,580
Common stock purchased (15,612) (36,698) (327,012) - (363,710)
Net change in unrealized gain (loss)
on securities available for sale, net
of tax - - - 541,224 541,224
Net income - - 5,252,942 - 5,252,942
Dividends declared - $.52 per share - - (1,462,628) - 1,462,628)
Balances, December 31, 2000 2,808,067 6,627,255 29,241,091 (8,365) 35,859,981
Common stock issued (including
employee gifts of 77 shares) 30,553 344,280 - - 344,280
Common stock purchased (71,703) (322,517) (1,388,960) - (1,711,477)
Net change in unrealized gain (loss)
on securities available for sale, net
of tax - - - 756,155 756,155
Net income - - 5,524,490 - 5,524,490
Dividends declared - $.60 per share - - (1,673,048) - (1,673,048)
Balances, December 31, 2001 2,766,917 $ 6,649,018 $ 31,703,573 $ 747,790 $ 39,100,381
CONSOLIDATED STATEMENTS OF CASH FLOWS
Years Ended December 31
2001 2000 1999
<s> <c> <c> <c>
Cash flows from operating activities
Net income $ 5,524,490 $ 5,252,942 $ 4,450,113
Adjustments to reconcile net
income to net cash from
operating activities
Depreciation and amortization 1,380,148 1,246,826 1,207,402
Provision for loan losses 1,068,000 750,000 699,600
Securities amortization (accretion), net 155,678 (52,915) 5,293
Securities (gains) losses, net (287,262) 88,169 (906)
Originations of loans held for sale (29,054,241) (12,588,461) (22,264,141)
Proceeds from sale of loans 27,879,863 15,292,943 24,802,228
Gain on sale of mortgage loans (382,532) (132,559) (351,192)
Federal Home Loan Bank stock dividends (248,600) (252,400) (226,000)
Changes in:
Interest receivable 754,770 (808,025) (289,108)
Other assets (99,188) 289,452 (33,731)
Interest payable (612,908) 1,285,735 332,017
Other liabilities 573,565 52,791 (50,333)
Net cash from operating activities 6,651,783 10,424,498 8,281,242
Cash flows from investing activities
Purchases of securities available for sale (52,945,350) (24,858,046) (38,694,863)
Proceeds from sales of securities available
for sale 12,344,139 17,045,613 17,828,018
Proceeds from principal payments and \
maturities of securities available for sale 34,325,320 10,685,161 20,393,126
Purchases of securities held to maturity - (632,490) (349,522)
Proceeds from maturities of securities held
to maturity - 1,113,500 1,616,300
Net change in loans (2,083,841) (34,356,698) (32,401,646)
Purchases of bank premises and equipment, net (3,167,061) (2,029,097) (701,261)
Net cash acquired in branch acquisition - - 8,387,089
Net cash from investing activities (11,526,793) (33,032,057) (23,922,759)
Cash flows from financing activities
Net change in deposits 8,099,599 26,249,645 6,840,197
Net change in securities sold under agreements
to repurchase and other borrowings (7,844,411) (2,412,071) 610,187
Advances from Federal Home Loan Bank 22,200,000 6,317,000 20,000,000
Payments on Federal Home Loan Bank advances (246,349) (11,265,027) (361,197)
Proceeds from issuance of common stock 344,280 172,580 50,135
Purchase of common stock (1,711,477) (363,710) (304,074)
Dividends paid (1,673,048) (1,462,628) (1,233,296)
Net cash from financing activities 19,168,594 17,235,789 25,601,952
CONSOLIDATED STATEMENTS OF CASH FLOWS
Years Ended December 31
2001 2000 1999
Net change in cash and cash equivalents $ 14,293,584 $ (5,371,770) $ 9,960,435
Cash and cash equivalents at beginning of year 15,344,878 20,716,648 10,756,213
Cash and cash equivalents at end of year $ 29,638,462 $ 15,344,878 $ 20,716,648
Supplemental disclosures of cash flow
Information cash paid during the year for:
Interest expense $ 13,998,845 $ 12,311,888 $ 10,184,300
Income taxes 1,930,000 2,060,803 1,849,988
Supplemental schedules of non-cash investing
activities
Real estate acquired through foreclosure $ 118,860 $ 205,200 $ 426,205
Transfer of held to maturity portfolio to
available for sale 15,231,406 - -
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.
Estimates in the Financial Statements: The preparation of financial statements
in conformity with accounting principles generally accepted in the United
States of America 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.
Securities: The Company is required to classify its 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.
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.
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.
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
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. The Company
also provides for any losses on uncovered commitments to lend or sell.
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.
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.
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Federal Home Loan Bank Stock: Amount is carried at cost.
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.
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.
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Derivatives: 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 60 to 90 days and are used
to offset 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,
2001 and 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.
New Accounting Pronouncements: A new accounting standard requires all business
combinations to be recorded using the purchase method of accounting for any
transaction initiated after June 30, 2001. Under the purchase method, all
identifiable tangible and intangible assets and liabilities of the acquired
company must be recorded at fair value at date of acquisition, and the excess
of cost over fair value of net assets acquired is recorded as goodwill.
Identifiable intangible assets must be separated from goodwill. Identifiable
intangible assets with finite useful lives will be amortized under the new
standard, whereas goodwill, both amounts previously recorded and future
amounts purchased, will cease being amortized starting in 2002. Annual
impairment testing will be required for goodwill with impairment being
recorded if the carrying amount of goodwill exceeds its implied fair value.
All recorded acquistion intangibles are identified with specific assets.
There are no intangible assets identified as goodwill. Adoption of this
standard on January 1, 2002 will not have a material effect on the Company's
financial statements.
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 reclassifications have been made in the 1999 and
2000 consolidated financial statements to conform to the 2001 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, 2001 and 2000 was $123,000
and $191,000.
NOTE 3 - SECURITIES
Year-end securities are as follows:
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
Available for Sale
<s> <c> <c> <c> <c>
2001
U. S. Treasury $ 7,079,500 $ 139,106 $ (1,106) $ 7,217,500
U. S. government agencies 5,999,478 118,507 - 6,117,985
States and political subdivisions 19,066,704 574,253 (170,855) 19,470,102
Mortgage-backed 28,817,956 350,629 (112,170) 29,056,415
Equity securities 10,463,121 255,528 (25,319) 10,693,330
Other 3,047,738 32,753 (27,949) 3,052,542
Total $ 74,474,497 $ 1,470,776 $ (337,399) $ 75,607,874
2000
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
Held to Maturity
2000
State and political subdivisions $ 15,231,406 $ 416,441 $ (9,662) $ 15,638,185
NOTE 3 - SECURITIES (Continued)
The amortized cost and fair value of securities at December 31, 2001, 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 $ 5,821,150 $ 5,979,485
Due after one year through five years 15,353,469 15,721,369
Due after five years through ten years 6,467,443 6,687,877
Due after ten years 7,551,358 7,469,398
35,193,420 35,858,129
Mortgage-backed 28,817,956 29,056,415
Equity 10,463,121 10,693,330
Total $ 74,474,497 $ 75,607,874
Proceeds from sales of securities during 2001, 2000 and 1999 were $12,344,139,
$17,045,613 and $17,828,018. Gross gains of $288,105, $42,704 and $29,674 and
gross losses of $843, $130,873 and $28,768, were realized on those sales.
Securities with an approximate carrying value of $52,707,000 and $54,829,000 at
December 31, 2001 and 2000, 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:
2001 2000
Commercial $ 18,617,714 $ 17,452,151
Real estate construction 12,301,704 15,269,683
Real estate mortgage 166,322,768 162,305,751
Agricultural 53,640,436 52,008,373
Consumer 21,951,943 24,807,486
Other 338,237 434,332
$ 273,172,802 $ 272,277,776
Activity in the allowance for loan losses was as follows:
2001 2000 1999
Beginning balance $ 3,388,380 $ 3,102,800 $ 2,734,589
Charge-offs (1,145,942) (558,552) (410,245)
Recoveries 75,987 94,132 78,856
Provision for loan losses 1,068,000 750,000 699,600
Ending balance $ 3,386,425 $ 3,388,380 $ 3,102,800
Impaired loans totaled $964,000 and $395,000 at December 31, 2001 and 2000.
The average recorded investment in impaired loans during 2001, 2000 and 1999
was $457,000, $224,000 and $244,000. The total allowance for loan losses
related to these loans was $249,000 and $117,000 at December 31, 2001 and
2000. Interest income on impaired loans of $31,000, $11,000 and $18,000 was
recognized for cash payments received in 2001, 2000 and 1999.
Nonperforming loans were as follows:
2001 2000 1999
Loans past due over 90 days
still on accrual $ 1,278,000 $ 1,365,000 $ 549,000
Nonaccrual loans 935,000 307,000 63,000
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 $86,527,000 and $101,893,000 at December
31, 2001 and 2000. Custodial escrow balances maintained in connection with the
foregoing loan servicing, and included in demand deposits, were approximately
$683,000 and $682,000 at December 31, 2001 and 2000.
Changes in mortgage servicing rights were as follows:
2001 2000 1999
Beginning balance $ 521,467 $ 606,487 $ 533,822
Additions 81,619 69,885 228,016
Amortization (140,019) (154,905) (155,351)
Ending balance $ 463,067 $ 521,467 $ 606,487
Certain directors and executive officers of the Company and companies in which
they have beneficiary ownership were loan customers of the Bank during 2001 and
2000. 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:
2001 2000
Balance, beginning of year $ 1,478,000 $ 1,174,000
Additions, including loans now meeting
disclosure requirements 1,514,000 893,000
Amounts collected, including loans no
longer meeting disclosure requirements (1,463,000) (589,000)
Balance, end of year $ 1,529,000 $ 1,478,000
NOTE 5 - PREMISES AND EQUIPMENT
Year-end premises and equipment were as follows:
2001 2000
Land and buildings $ 10,773,183 $ 8,588,831
Furniture and equipment 7,941,210 6,958,501
18,714,393 15,547,332
Less accumulated depreciation (8,209,489) (7,248,828)
$ 10,504,904 $ 8,298,504
Depreciation expense was $960,661, $812,453 and $766,117 in 2001, 2000, and
1999.
NOTE 6 - DEPOSITS
At December 31, 2001, the scheduled maturities of time deposits are as follows:
2002 $ 146,536,700
2003 9,620,845
2004 4,627,077
2005 822,602
2006 536,980
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 $861,000 and $812,000 at December 31, 2001
and 2000.
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 2001 and 2000 is summarized as follows:
2001 2000
Average daily balance during the year $ 3,303,000 $ 8,726,000
Average interest rate during the year 3.35% 5.53%
Maximum month-end balance during the year $ 5,164,000 $ 12,310,000
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,
2001 and 2000, $43,597,929 and $21,644,278 represented the balance due on
advances from the FHLB. All advances are paid either on a monthly basis or at
maturity, over remaining terms of one month to fourteen years, with fixed
interest rates ranging from 2.32% to 7.23%. The Bank also has letters of
credit from the FHLB totaling $16,200,000 at December 31, 2001 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, 2001 are as follows:
2002 $ 11,947,651
2003 4,826,198
2004 15,531,519
2005 5,033,804
2006 5,036,256
Thereafter 1,222,501
$ 43,597,929
NOTE 9 - INCOME TAXES
Income tax expense was as follows:
2001 2000 1999
Current $ 1,878,784 $ 1,782,641 $ 1,697,291
Deferred 105,194 248,804 22,394
$ 1,983,978 $ 2,031,445 $ 1,719,685
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.
2001 2000
Deferred tax assets
Allowance for loan losses $ 952,005 $ 958,814
Unrealized loss on investment securities - 4,310
Core deposit intangibles 215,651 186,149
Other 62,610 11,704
Deferred tax liabilities
Unrealized gain on securities (385,587) -
Bank premises and equipment (234,934) (146,734)
FHLB stock (626,331) (541,807)
Mortgage servicing rights (157,443) (177,299)
Other (80,389) (54,464)
Net deferred tax asset (liability) $ (254,418) $ 240,673
Effective tax rates differ from federal statutory rates applied to financial
statement income due to the following:
2001 2000 1999
U. S. federal income tax rate 34.0% 34.0% 34.0%
Changes from the statutory rate
Tax-exempt investment income (5.2) (5.9) (7.2)
Non-deductible interest expense related to
carrying tax-exempt investments .6 .8 .8
Rehabilitation tax credit (2.1) - -
Other (.9) (1.0) .3
26.4% 27.9% 27.9%
NOTE 10 - EARNINGS PER SHARE
The factors used in the earnings per share computation follow:
2001 2000 1999
Basic Earnings Per Share
Net income $ 5,524,490 $ 5,252,942 $ 4,450,113
Weighted average common shares
Outstanding 2,790,238 2,811,565 2,803,276
Basic earnings per share $ 1.98 $ 1.87 $ 1.59
Diluted Earnings Per Share
Net income $ 5,524,490 $ 5,252,942 $ 4,450,113
Weighted average common shares
Outstanding 2,790,238 2,811,565 2,803,276
Add dilutive effects of assumed
exercise of stock options 47,080 56,600 64,667
Weighted average common and dilutive
potential common shares outstanding 2,837,318 2,868,165 2,867,943
Diluted earnings per share $ 1.95 $ 1.83 $ 1.55
Stock options for 14,300 and 96,000 shares common stock were excluded from 2001
and 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:
2001 2000
Change in benefit obligation:
Beginning benefit obligation $ 3,130,826 $ 2,732,093
Service cost 240,644 221,305
Interest cost 219,979 191,676
Actuarial adjustment 51,306 42,126
Benefits paid (59,498) (56,374)
Ending benefit obligation 3,583,257 3,130,826
Change in plan assets, at fair value:
Beginning plan assets 3,118,137 2,953,831
Actual return (68,643) (40,539)
Employer contribution 289,475 261,219
Benefits paid (59,498) (56,374)
Ending plan assets 3,279,471 3,118,137
Funded status (303,786) (12,689)
Unrecognized net actuarial (gain) loss 126,254 120,465
Unrecognized prior transition asset (2,601) (2,973)
Net pension (liability) prepaid benefit $ (180,133) $ 104,803
Net periodic pension cost include the following components:
2001 2000 1999
Service cost $ 240,644 $ 221,305 $ 188,925
Interest cost 219,979 191,676 169,649
Expected return on plan assets (246,285) (233,428) (198,239)
Amortization of transition asset (372) (372) (372)
Net periodic cost $ 213,966 $ 179,181 $ 159,963
Discount rate on benefit obligation 7% 7% 7%
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 $237,661,
$224,106 and $165,087 in 2001, 2000 and 1999.
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:
2001 2000 1999
Weighted Weighted Weighted
Option Option Option
Options Price Options Price Options Price
<s> <c> <c> <c> <c> <c> <c>
Outstanding, beginning of year 131,730 $14.32 148,940 $13.17 130,760 $11.36
Granted 4,160 23.58 3,950 24.30 25,780 20.62
Expired (3,334) 18.34 - - - -
Exercised (29,072) 10.92 (21,160) 8.11 (7,600) 7.13
Outstanding, end of year 103,484 $15.52 131,730 $14.32 148,940 $13.17
Weighted remaining contractual
Life 62.3 months 66.4 months 70.6 months
NOTE 12 - STOCK OPTION PLAN (Continued)
2001 2000 1999
Options outstanding
From $4.25 to $6.38 per share - 5,800 19,600
From $8.63 to $11.14 per 16,880 26,980 30,480
From $12.00 to $15.50 per share 53,420 66,540 69,900
From $18.00 to $26.00 per share 33,184 32,410 28,960
103,484 131,730 148,940
Eligible for exercise
From $4.25 to $6.38 per share - 5,800 19,600
From $8.63 to $11.14 per share 16,880 26,980 30,480
From $12.00 to $15.50 per share 41,780 41,140 31,740
From $18.00 to $26.00 per share 13,240 8,116 2,680
71,900 82,036 84,500
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:
2001 2000 1999
Net income
As reported $ 5,524,490 $ 5,252,942 $ 4,450,113
Pro forma 5,447,742 5,162,251 4,368,134
Basic earnings per share
As reported $ 1.98 $ 1.87 $ 1.59
Pro forma 1.94 1.84 1.56
Diluted earnings per share
As reported $ 1.95 $ 1.83 $ 1.55
Pro forma 1.91 1.80 1.53
Weighted averages
Fair value of options granted $ 4.58 $ 6.56 $ 5.14
Risk free interest rate 4.93% 6.62% 4.82%
Expected life 8 years 8 years 8 years
Expected volatility 13.10% 11.61% 18.17%
Expected dividend yield 2.54% 2.14% 2.13%
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 2002 the Bank could, without prior approval,
declare dividends of approximately $4,235,000 plus any 2002 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, 2001 and
2000 are as follows:
2001 2000
Carrying Carrying
Amount Fair Value Amount Fair Value
(In Thousands)
Financial assets
Cash and cash equivalents $ 29,638 $ 29,638 $ 15,345 $ 15,345
Securities 75,608 75,608 68,054 68,461
Mortgage loans held for sale 2,343 2,392 868 890
Loans, net 269,786 274,929 268,889 267,801
FHLB stock 3,847 3,847 3,598 3,598
Interest receivable 3,507 3,507 4,262 4,262
Financial liabilities
Deposits $ 308,915 $ 311,191 $ 300,816 $ 302,423
Securities sold under
agreements to repurchase
and other borrowings 1,602 1,602 9,446 9,446
FHLB advances 43,598 44,752 21,644 21,847
Interest payable 2,815 2,815 3,427 3,427
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 AND COMMITMENTS
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:
2001 2000
Unused lines of credit $ 42,252,000 $ 33,901,000
Commitments to make loans 2,049,000 1,137,000
Letters of credit 495,000 856,000
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 5.75% to 7.00% with maturities
ranging from 15 to 30 years and are intended to be sold.
NOTE 15 - OFF-BALANCE SHEET ACTIVITIES AND COMMITMENTS (Continued)
At December 31, 2001, the Company's mortgage banking activities included
commitments to extend credit, primarily representing fixed rate mortgage loans,
totaling $6,870,000. The commitments are generally for a period of 60 to 90
days and are at market rates. Commitments to extend credit of $2,647,000 and
loans held for sale of $599,000 were not covered by sales contracts and are
therefore exposed to changes in underlying interest rates until sales contracts
are entered into, the customer withdraws from the commitment or the loan is
sold. The Company provides for any losses on uncovered loans and commitments
to lend or sell. At December 31, 2001, no such provisions were required.
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
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, 2001 and
2000, 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:
To Be Well
Capitalized
Under Prompt
For Capital Corrective
Actual Adequacy Purposes Action Provisions
Amount Ratio Amount Ratio Amount Ratio
2001 (Dollars in Thousands)
<s> <c> <c> <c> <c> <c> <c>
Consolidated
Total Capital (to Risk-Weighted Assets) $40,900 14.4% $22,683 8% $28,354 10%
Tier I Capital (to Risk-Weighted Assets) 37,410 13.2 11,342 4 17,012 6
Tier I Capital (to Average Assets) 37,410 9.6 15,540 4 19,426 5
Bank Only
Total Capital (to Risk-Weighted Assets) $35,775 12.7% $22,545 8% $28,182 10%
Tier I Capital (to Risk-Weighted Assets) 32,383 11.5 11,273 4 16,909 6
Tier I Capital (to Average Assets) 32,383 8.4 15,423 4 19,279 5
2000
Consolidated
Total Capital (to Risk-Weighted Assets) $37,784 14.3% $21,093 8% $26,366 10%
Tier I Capital (to Risk-Weighted Assets) 34,488 13.1 10,546 4 15,820 6
Tier I Capital (to Average Assets) 34,488 9.3 14,848 4 18,560 5
Bank Only
Total Capital (to Risk-Weighted Assets) $33,125 12.7% $20,908 8% $26,135 10%
Tier I Capital (to Risk-Weighted Assets) 29,858 11.4 10,454 4 15,681 6
Tier I Capital (to Average Assets) 29,858 8.1 14,752 4 18,441 5
NOTE 18 - PARENT COMPANY FINANCIAL STATEMENTS
Condensed Balance Sheets
December 31
2001 2000
(In Thousands)
ASSETS
Cash on deposit with subsidiary $ 3,510 $ 2,710
Investment in subsidiary 33,931 31,230
Securities available for sale 1,759 1,820
Other assets (100) 100
Total assets $ 39,100 $ 35,860
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities $ - $ -
Stockholders' equity
Preferred stock - -
Common stock 6,649 6,627
Retained earnings 31,703 29,241
Accumulated other comprehensive income 748 (8)
Total liabilities and stockholders' equity $ 39,100 $ 35,860
NOTE 18 - PARENT COMPANY FINANCIAL STATEMENTS (Continued)
Condensed Statements of Income and Comprehensive Income
Years Ended December 31
2001 2000 1999
(In Thousands)
Income
Dividends from subsidiary $ 3,280 $ 3,160 $ 2,700
Securities gains (losses), net 72 (17) -
Interest income 44 61 28
Total income 3,396 3,204 2,728
Expenses
Other expenses 39 39 53
Income before income taxes and equity in
undistributed income of subsidiary 3,357 3,165 2,675
Applicable income tax (expense) benefits (26) 46 9
Income before equity in undistributed
income of subsidiary 3,331 3,211 2,684
Equity in undistributed income of subsidiary 2,193 2,042 1,766
Net income 5,524 5,253 4,450
Other comprehensive income (loss), net of tax:
Unrealized gains (losses) on securities
Arising during the period 946 483 (615)
Reclassification of realized amount (189) 58 -
Net change in unrealized gain (loss)
on securities 757 541 (615)
Comprehensive income $ 6,281 $ 5,794 $ 3,835
NOTE 18 - PARENT COMPANY FINANCIAL STATEMENTS (Continued)
Condensed Statements of Cash Flows
Years Ended December 31
2001 2000 1999
(In Thousands)
Cash flows from operating activities
Net income $ 5,524 $ 5,253 $ 4,450
Adjustments to reconcile net income to net
cash from operating activities
Equity in undistributed earnings of
Subsidiary (2,193) (2,042) (1,766)
Securities (gains) losses, net (72) 17 -
Change in other assets 72 (37) (3)
Net cash from operating activities 3,331 3,191 2,681
Cash flows from investing activities
Purchase of securities available for sale (311) (1,071) (555)
Proceeds from sales of securities
available for sale 820 638 -
Net cash from investing activities 509 (433) (555)
Cash flows from financing activities
Dividends paid (1,673) (1,463) (1,233)
Proceeds from issuance of common stock 344 173 50
Purchase of common stock (1,711) (364) (304)
Net cash from financing activities (3,040) (1,654) (1,487)
Net change in cash 800 1,104 639
Cash at beginning of year 2,710 1,606 967
Cash at end of year $ 3,510 $ 2,710 $ 1,606
NOTE 19 - QUARTERLY FINANCIAL DATA (UNAUDITED)
Interest Net Interest Net Earnings Per Share
Income Income Income Basic Fully Diluted
2001
First quarter $ 7,289 $ 3,627 $ 1,281 $ .46 $ .45
Second quarter 7,181 3,713 1,438 .51 .50
Third quarter 6,982 3,706 1,360 .49 .48
Fourth quarter 6,594 3,614 1,445 .52 .52
2000
First quarter $ 6,534 $ 3,510 $ 1,308 $ .47 $ .46
Second quarter 6,933 3,743 1,312 .46 .45
Third quarter 7,350 3,768 1,297 .46 .45
Fourth quarter 7,390 3,589 1,336 .48 .47
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, 2001 and 2000, 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, 2001. 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 auditing standards generally
accepted in the United States of America. 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, 2001 and 2000, and the
results of its operations and its cash flows for each of the three years
in the period ended December 31, 2001, in conformity with accounting
principles generally accepted in the United States of America.
As disclosed in Note 1 to the consolidated financial statements, on
January 1, 2001 the Company changed its method of accounting for
derivative instruments and hedging activities to comply with new
accounting guidance.
Crowe, Chizek and Company LLP
Lexington, Kentucky
January 17, 2002
MEET OUR OFFICERS.
BOURBON COUNTY.
PARIS
SENIOR MANAGEMENT
Buckner Woodford - President and CEO
Norman J. Fryman - Sr. Vice President, Director of Lending
James P. Shipp, Jr. - Sr. Vice President, Branch Administration
Greg Dawson - Vice President, Chief Financial Officer
Brenda Bragonier - Vice President, Director of Marketing and Human Resources
OFFICERS
Brenda Berry - Accountant
Rita Bugg - Vice President, Loan Officer
Wallis Brooks - Branch Manager
Patty Carpenter - Assistant Vice President, Loan Operations Officer
R.W. Collins, Jr. - Vice President, Loan Officer
Cynthian Criswell - Data Processing
Hugh Crombie - Vice President, Operations
Nancye Fightmaster - Assistant Vice President, Loan Officer
David Foster - Vice President, Loan Officer
Janice Hash - Accountant and Purchasing Agent
Cathy Hill - Assistant Vice President, Loan Officer
Perry Ingram - Network Administrator
Bill Leaver - Network Administrator
Jane Mogge - Head Bookkeeper
Jean Patton - Compliance,CRA,Quality Control
Bill Reynolds - Vice President, Trust Officer
Donald Roe - Data Processing
Rowena Ruff - Investment Advisor
Lydia Sosby - Corporate and Automated Products Officer
Judy Taylor - Human Resource Manager
Diana Thornell - Assistant Trust Officer
Rick Wagner - Maintenance Supervisor
George Wilder - Vice President, Loan Officer
Buck Woodford, V. - Management Trainee, Investment Officer
Martha Woodford - Assistant Vice President, Corporate and
Automated Products Officer
Jan Worth - Trust Officer
Lexington Road Branch
Susan A. Lemons - Branch Manager, Loan Officer
Pleasant Street Branch
Philip Hurst - Assistant Branch Manager
CLARK COUNTY.
WINCHESTER
Darryl Terry - Vice President, Regional Manager
Ron Burden, Vice President, Loan Officer
Teresa Shimfessel - Assistant Vice President, Loan Officer
Becky Taulbee - Assistant Vice President, Loan Officer
Carolyn Wilkins - Overdraft Management Officer
WOODFORD COUNTY.
VERSAILLES
Duncan Gardner - Vice President, Regional Manager
A.J. Gullett - Assistant Vice President, Loan Officer
SCOTT COUNTY.
SHOWALTER DRIVE BRANCH
J. Mark Walls - Vice President, Regional Manager
Ben Sargent - Assistant Vice President, Loan Officer
PARIS PIKE BRANCH
Jennifer Roberts - Assistant Vice President, Branch Manager, Loan Officer
JESSAMINE COUNTY.
NICHOLASVILLE
Michael Lovell - Vice President, Regional Manager
Jeanie Thompson - Office Manager & CSR
Rick Walling - Assistant Vice President, Loan Officer
WILMORE
Freida Lear, Branch Manager, Loan Officer
HARRISON COUNTY.
CYNTHIANA
Ken DeVasher - Vice President, Regional Manager
Paul Clift - Assistant Vice President, Loan Officer
Kentucky Bank - Board of Directors.
Buckner Woodford
President and Chief Executive Officer,
Joe Allen
Retired - Executive Vice President, Kentucky Bank
William M. Arvin
Attorney
James L. Ferrell, M.D.
Physician
Henry Hinkle
President, Hinkle Contracting Company
Tricia Kittinger
Woodford Circuit Clerk
Theodore Kuster
Farmer and Thoroughbred Breeder
Joseph B. McClain
President; Hopewell Insurance Company, Inc.
Eva McDaniel
Jessamine County Clerk
William R. Stamler
Chairman, Signal Investments, Inc.
James Taulbee
Farmer
Robert G. Thompson
Executive Director, Paris-Bourbon County YMCA, Snow Hill Farm
Everett Varney
Mayor, Georgetown
Gerald M. Whalen
President, Whalen and Company
REGIONAL BOARD OF DIRECTORS
CLARK COUNTY
Mary Beth Hendricks
Director of Clark County Child Support Services
Donald Pace
Consultant to Clark County Schools
John G. Roche
Optician
Ed Saunier
President, Saunier North American, Inc.
James Taulbee
Farmer
REGIONAL BOARD OF DIRECTORS
HARRISON COUNTY
Bruce Florence
Director, Licking Valley College
Brad Marshall
Farmer
Joel Techau
CEO-Techau Inc.
Gerald M. Whalen
President, Whalen and Company
REGIONAL BOARD OF DIRECTORS
JESSAMINE COUNTY
William M. Arvin
Attorney
Dan Brewer
Bluegrass RECC
Tom Buford
Kentucky Senator
Eva McDaniel
Jessamine County Clerk
Jonah Mitchell
President, Jonah Mitchell Real Estate and Auction Company
REGIONAL BOARD OF DIRECTORS
SCOTT COUNTY
Dr. Gus Bynum
Physician
Mike Hockensmith
Owner and President, The Hockensmith Agency, Inc.
R.C. Johnson, Jr.
Owner and President; Johnson's Funeral Home
George Lusby
County Judge Executive
Everette Varney
Mayor, Georgetown
REGIONAL BOARD OF DIRECTORS
WOODFORD COUNTY
Loren Carl
Director, Kentucky Attorney General's Office
Dr. William Graul
Physician
James Kay
Businessman, Farmer
Tricia Kittinger
Woodford Circuit Clerk
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
Executive 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 2004
William M. Arvin
Attorney, William M. Arvin Associates
Class of 2004
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 17, 2002 on the consolidated financial statements of
Bourbon Bancshares, Inc. as of December 31, 2001 and 2000 and for each of the
three years in the period ended December 31, 2001 as included in the
registrant's annual report on Form 10-K.
/s/Crowe, Chizek and Company LLP
Crowe, Chizek and Company LLP
Lexington, Kentucky
March 28, 2002
Exhibit 99.1 Proxy Statement
BOURBON BANCSHARES, INC
400 Main Street
Paris, Kentucky 40361
NOTICE OF ANNUAL MEETING OF SHAREHOLDERS
TO BE HELD MAY 1, 2002
March 26, 2002
To our Shareholders:
The annual meeting of the shareholders of Bourbon Bancshares, Inc (the
"Company") will be held on Wednesday, May 1, 2002 at 11:00 a.m. local time, at
the Main Office of Kentucky Bank at Main and Fourth Streets, Paris, Kentucky,
for the purposes of:
1. Election of directors: To elect three Class III directors
2. 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
25, 2002, are entitled to notice of and to vote at the Annual Meeting and any
adjournment thereof.
All Shareholders are cordially invited to attend the Annual Meeting, but
whether or not you expect to attend the Annual Meeting in person, please sign
and date the enclosed Proxy and return it promptly so your stock may be voted.
Thank you for your time and consideration. Please feel free to contact my
office should you have any questions.
BY ORDER OF THE BOARD OF DIRECTORS
/s/Buckner Woodford
Buckner Woodford
President, Bourbon Bancshares, Inc.
YOUR VOTE IS IMPORTANT
PLEASE MARK, SIGN, DATE AND RETURN THE ACCOMPANYING PROXY IMMEDIATELY
EVEN IF YOU PLAN TO ATTEND THE ANNUAL MEETING.
BOURBON BANCSHARES, INC.
PROXY STATEMENT
INTRODUCTION
This Proxy Statement is being furnished to shareholders of Bourbon
Bancshares, Inc., a Kentucky Corporation (the "Company"), in connection with
the solicitation of proxies by the Board of Directors of the Company (the
"Board") from holders of record of the Company's outstanding Common Shares
(the "Common Shares") as of the close of business on March 25, 2002 (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 1, 2002, 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 26, 2002. 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 three Class III directors:
(2) 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 III directors. 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, 2001, there were 2,766,917 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 three highest number of votes in the election
of directors (net of any votes against their election) will be elected to the
Board.
All Common Shares that are represented at the Annual Meeting by properly
executed proxies received prior to or at the Annual Meeting and not revoked
will be voted at the Annual Meeting in accordance with the instructions
indicated in such proxies. If no instructions are indicated, such proxies
will be voted "FOR" (I) the election of the Board's three nominees as Class
III 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).
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 III directorship has held the
specified position for the last five years. The names of the nominees
proposed for election as Class III 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.
Henry Hinkle is president of Hinkle Contracting Corporation. He became a
director in 1989.
Theodore Kuster owns West View Farm and is a thoroughbred breeder. He became
a director in 1979.
Robert G. Thompson serves as director of the Paris/Bourbon County YMCA. He
became a director in 1991.
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 III directors of the Company.
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 26, 2002
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 25, 2002, at the 2002 Annual Meeting of
Shareholders to be held on May 1, 2002 and at any adjournments thereof, with
all powers the undersigned would possess if personally present, as follows:
I ELECTION OF DIRECTORS
__ FOR all nominees listed below (except as otherwise indicated below)
__ AGAINST all nominees listed below
Henry Hinkle, Theodore Kuster, Robert Thompson
(INSTRUCTION: To withhold authority to vote for any individual nominee,
write the nominee's name on the line)
II OTHER BUSINESS. In their discretion, the Proxies are authorized to act
upon such other matters as may properly be brought before the Annual Meeting
or any adjournment thereof.
THE BOARD OF DIRECTORS RECOMMENDS A VOTE "FOR" ALL OF THE NOMINEES
LISTED IN ITEM I.
(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.
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___________, 2002 ________________________________
Signature
________________________________
Signature if held jointly
6
5
BOURBON BANCSHARES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2000, 1999 and 1998
69
37
BOURBON BANCSHARES, INC.
See accompanying notes.
41.
See accompanying notes.
42.
See accompanying notes.
44.
(Continued)
45.
See accompanying notes.
46.
BOURBON BANCSHARES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2001, 2000 and 1999
(Continued)
68.
83.