UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
[ X ] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 2002
or
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from ____________________ to ___________________
Commission File Number: 33-96358
BOURBON BANCSHARES, INC.
(Exact name of registrant as specified in its charter)
Kentucky 61-0993464
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
P.O. Box 157, Paris, Kentucky 40362-0157
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (859)987-1795
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days.
Yes X No _____
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act). Yes No X___
Number of shares of Common Stock outstanding as of October 31, 2002:
2,775,547.
BOURBON BANCSHARES, INC.
Table of Contents
Part I - Financial Information
Item 1. Financial Statements
Consolidated Balance Sheets 3
Consolidated Statements of Income and
Comprehensive Income 4
Consolidated Statements of Changes in
Stockholders' Equity 6
Consolidated Statements of Cash Flows 7
Notes to Consolidated Financial Statements 9
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 12
Item 3. Quantitative and Qualitative Disclosures About
Market Risk 19
Item 4. Control and Procedures 20
Part II - Other Information 21
Signatures 22
Certifications 23
Exhibits
11 Earnings Per Share Calculation 25
99.1 Certification of Chief Executive Officer pursuant
to 18 U.S.C. Section 1350, as adopted pursuant
to Section 906 of the Sarbanes-Oxley Act of 2002. 26
99.2 Certification of Chief Financial Officer pursuant
to 18 U.S.C. Section 1350, as adopted pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002. 27
Item 1 - Financial Statements
BOURBON BANCSHARES, INC.
CONSOLIDATED BALANCE SHEETS (unaudited)
(thousands) 9/30/2002 12/31/2001
Assets
Cash and due from banks $ 10,060 $ 15,229
Federal funds sold 381 14,409
Cash and cash equivalents 10,441 29,638
Investment securities:
Available for sale 84,749 75,608
Held to maturity -
Mortgage loans held for sale 2,104 2,343
Loans 283,162 273,173
Allowance for loan losses (3,348) (3,386)
Net loans 279,814 269,787
Federal Home Loan Bank stock 3,982 3,846
Bank premises and equipment, net 10,179 10,505
Interest receivable 3,629 3,507
Intangible assets 1,267 1,406
Other assets 668 617
Total assets $ 396,833 $ 397,257
Liabilities and Stockholders' Equity
Deposits
Non-interest bearing $ 51,858 $ 47,623
Time deposits, $100,000 and over 41,964 41,672
Other interest bearing 209,251 219,620
Total deposits 303,073 308,915
Securities sold under agreements to repurchase 2,177 683
Federal Funds Purchased 1,610 -
Other borrowed funds 1,336 919
Federal Home Loan Bank advances 41,991 43,598
Interest payable 1,551 2,815
Other liabilities 2,031 1,227
Total liabilities 353,769 358,157
Stockholders' equity
Common stock 6,775 6,649
Retained earnings 34,346 31,703
Accumulated other comprehensive income 1,943 748
Total stockholders' equity 43,064 39,100
Total liabilities & stockholders' equity $ 396,833 $ 397,257
BOURBON BANCSHARES, INC.
CONSOLIDATED STATEMENT OF INCOME AND COMPREHENSIVE INCOME (unaudited)
(thousands, except per share amounts) Nine Months Ending
9/30/2002 9/30/2001
INTEREST INCOME:
Loans, including fees $ 15,505 $ 18,091
Investment securities 2,887 2,835
Other 129 329
Total interest income 18,521 21,255
INTEREST EXPENSE:
Deposits 5,444 8,861
Other 1,781 1,545
Total interest expense 7,225 10,406
Net interest income 11,296 10,849
Loan loss provision 1,003 576
Net interest income after provision 10,293 10,273
OTHER INCOME:
Service charges 2,949 2,784
Loan service fee income 168 197
Trust department income 253 263
Investment securities gains (losses), net 243 78
Gain on sale of mortgage loans 428 224
Other 705 630
Total other income 4,746 4,176
OTHER EXPENSES:
Salaries and employee benefits 4,882 4,511
Occupancy expenses 1,426 1,366
Amortization of intangibles 312 313
Advertising and marketing 225 322
Taxes other than payroll, property and income 300 266
Other 1,980 1,838
Total other expenses 9,125 8,616
Income before taxes 5,914 5,833
Income taxes 1,772 1,754
Net income $ 4,142 $ 4,079
Other Comprehensive Income, net of tax:
Change in Unrealized Gains on Securities 1,195 1,190
Comprehensive Income $ 5,337 $ 5,269
Earnings per share
Basic $ 1.50 $ 1.46
Diluted 1.48 1.43
BOURBON BANCSHARES, INC.
CONSOLIDATED STATEMENT OF INCOME AND COMPREHENSIVE INCOME (unaudited)
(thousands, except per share amounts) Three Months Ending
9/30/2002 9/30/2001
INTEREST INCOME:
Loans, including fees $ 5,136 $ 5,910
Investment securities 978 896
Other 27 109
Total interest income 6,141 6,915
INTEREST EXPENSE:
Deposits 1,619 2,724
Other 590 551
Total interest expense 2,209 3,275
Net interest income 3,932 3,640
Loan loss provision 301 192
Net interest income after provision 3,631 3,448
OTHER INCOME:
Service charges 1,036 932
Loan service fee income 56 63
Trust department income 76 81
Investment securities gains (losses), net 62 3
Gain on sale of mortgage loans 259 68
Other 231 278
Total other income 1,720 1,425
OTHER EXPENSES:
Salaries and employee benefits 1,559 1,538
Occupancy expenses 483 462
Amortization of intangibles 107 105
Advertising and marketing 75 107
Taxes other than payroll, property and income 100 91
Other 725 607
Total other expenses 3,049 2,910
Income before taxes 2,302 1,963
Income taxes 677 603
Net income $ 1,625 $ 1,360
Other Comprehensive Income, net of tax:
Change in Unrealized Gains on Securities 625 552
Comprehensive Income $ 2,250 $ 1,912
Earnings per share
Basic $ 0.59 $ 0.49
Diluted 0.58 0.48
BOURBON BANCSHARES, INC.
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY (unaudited)
(thousands, except number of shares)
Accumulated
Other Total
----Common Stock---- Retained Comprehensive Stockholders'
Shares Amount Earnings Income Equity
<s> <c> <c> <c> <c> <c>
Balances, December 31, 2001 2,766,917 $ 6,649 $ 31,703 $ 748 $ 39,100
Common stock issued 14,886 135 - - 135
Common stock purchased (6,256) (9) (85) - (94)
Net change in unrealized gain (loss)
on securities available for sale,
net of tax - - - 1,195 1,195
Net income - - 4,142 - 4,142
Dividends declared - $0.34 per share - - (1,414) - (1,414)
Balances, September 30, 2002 2,775,547 $ 6,775 $ 34,346 $ 1,943 $ 43,064
BOURBON BANCSHARES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS (unaudited)
(thousands) Nine Months Ending
9/30/2002 9/30/2001
Cash Flows From Operating Activities
Net Income $ 4,142 $ 4,079
Adjustments to reconcile net income to
net cash provided by operating activities:
Depreciation 746 721
Amortization 312 313
Investment securities amortization (accretion), net 268 72
Provision for loan losses 1,003 576
Investment securities gains (losses), net (243) (79)
Originations of loans held for sale (21,683) (17,024)
Proceeds from sale of loans 22,350 17,027
Federal Home Loan Bank Stock Dividends (136) (196)
Gain on sale of mortgage loans (428) (224)
Losses (gains), including write-downs, on real
estate acquired through foreclosure, net (5) (21)
Changes in:
Interest receivable (122) (75)
Other assets (438) 165
Interest payable (1,264) (826)
Other liabilities 34 (229)
Net cash from operating activities 4,536 4,279
Cash Flows From Investing Activities
Purchases of securities available for sale (35,805) (35,340)
Proceeds from sales of securities available for sale 18,839 6,239
Proceeds from principal payments, maturities and
calls of securities available for sale 9,610 30,475
Net change in loans (11,030) (1,468)
Purchases of bank premises and equipment, net (420) (1,820)
Proceeds from real estate acquired through foreclosure 374 -
Net cash from investing activities (18,432) (1,914)
Cash Flows From Financing Activities:
Net change in deposits (5,842) (8,054)
Net change in securities sold under agreements to
repurchase and other borrowings 3,521 (6,130)
Advances from Federal Home Loan Bank 4,250 15,000
Payments on Federal Home Loan Bank advances (5,857) (186)
Proceeds from issuance of common stock 135 60
Purchase of common stock (94) (801)
Dividends paid (1,414) (1,258)
Net cash from financing activities (5,301) (1,369)
Net change in cash and cash equivalents (19,197) 996
Cash and cash equivalents at beginning of period 29,638 15,345
Cash and cash equivalents at end of period $ 10,441 $ 16,341
BOURBON BANCSHARES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS (unaudited)
(thousands) Three Months Ending
9/30/2002 9/30/2001
Cash Flows From Operating Activities
Net Income $ 1,625 $ 1,360
Adjustments to reconcile net income to
net cash provided by operating activities:
Depreciation 243 239
Amortization 107 105
Investment securities amortization (accretion), net 76 86
Provision for loan losses 301 192
Investment securities gains (losses), net (62) (3)
Originations of loans held for sale (11,785) (4,798)
Proceeds from sale of loans 10,471 5,849
Federal Home Loan Bank Stock Dividends (47) (66)
Gain on sale of mortgage loans (259) (68)
Losses (gains), including write-downs, on real
estate acquired through foreclosure, net - (11)
Changes in:
Interest receivable (317) (464)
Other assets 181 67
Interest payable (343) 300
Other liabilities (7) 106
Net cash from operating activities 184 2,894
Cash Flows From Investing Activities
Purchases of securities available for sale (5,846) (6,827)
Proceeds from sales of securities available for sale 6,491 -
Proceeds from principal payments, maturities and
calls of securities available for sale 1,803 8,936
Net change in loans (1,224) 81
Purchases of bank premises and equipment, net (235) (413)
Proceeds from real estate acquired through foreclosure 55 -
Net cash from investing activities 1,044 1,777
Cash Flows From Financing Activities:
Net change in deposits 1,742 139
Net change in securities sold under agreements to
repurchase and other borrowings (1,266) (1,564)
Payments on Federal Home Loan Bank advances (461) (59)
Proceeds from issuance of common stock - 21
Purchase of common stock (10) (246)
Dividends paid (472) (419)
Net cash from financing activities (467) (2,128)
Net change in cash and cash equivalents 761 2,543
Cash and cash equivalents at beginning of period 9,680 13,798
Cash and cash equivalents at end of period $ 10,441 $ 16,341
BOURBON BANCSHARES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. In Management's opinion, the financial information, which is unaudited,
reflects all adjustments, (consisting solely of normal recurring
adjustments) necessary for a fair presentation of the financial information
as of September 30, 2002 and December 31, 2001, and for the nine and three
month periods ended September 30, 2002 and September 30, 2001 in conformity
with accounting principles generally accepted in the United States of
America. These financial statements should be read in conjunction with
Bourbon Bancshares, Inc. (Company) Annual Report on Form 10-K.
2. GOODWILL AND OTHER INTANGIBLE ASSETS
Information concerning the Company's core deposit intangible follows:
Original Accumulated
Amount Amortization
9/30/2002
Core deposit intangible $2,890,404 $2,157,154
Amortization expense for the first nine months of 2002 was $209,601.
Estimated amortization expense for the next five years is: 2002 - $279,468;
2003 - $279,468; 2004 - $198,895; 2005 - $19,140; and 2006 - $19,140.
There are no Intangible assets not subject to amortization.
3. INVESTMENT SECURITIES
Period-end securities are as follows:
(in thousands)
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
Available for Sale
September 30, 2002
U.S. Treasury $ 5,024 $ 74 $ - $ 5,098
U.S. government agencies 7,990 122 - 8,112
States and political subdivisions 29,026 1,642 - 30,668
Mortgage-backed 35,484 758 (6) 36,236
Equity securities 1,241 279 (16) 1,504
Other 3,040 127 (36) 3,131
Total 81,805 3,002 (58) 84,749
December 31, 2001
U.S. Treasury $ 7,079 $ 139 $ (1) $ 7,217
U.S. government agencies 5,999 119 - 6,118
States and political subdivisions 19,067 574 (171) 19,470
Mortgage-backed 28,818 351 (112) 29,057
Equity securities 10,463 255 (25) 10,693
Other 3,048 33 (28) 3,053
Total 74,474 1,471 (337) 75,608
4. LOANS
Loans at period-end are as follows:
(in thousands)
9/30/2002 12/31/2001
Commercial $ 16,495 $ 18,618
Real estate construction 13,597 12,302
Real estate mortgage 178,389 166,323
Agricultural 56,840 53,640
Consumer 17,841 22,290
Total 283,162 273,173
5. Basic earnings per common share is net income divided by the weighted
average number of common shares outstanding during the period. Diluted
earnings per common share includes the dilutive effect of additional
potential common shares issuable under stock options.
The factors used in the earnings per share computation follow:
Nine Months Ended
September 30
2002 2001
(in thousands)
Basic Earnings Per Share
Net Income $4,142 $4,079
Weighted average common shares outstanding 2,770 2,797
Basic earnings per share $ 1.50 $ 1.46
Diluted Earnings Per Share
Net Income $4,142 $4,079
Weighted average common shares outstanding 2,770 2,797
Add dilutive effects of assumed exercise
of stock options 38 48
Weighted average common and dilutive
Potential common shares outstanding 2,808 2,845
Diluted earnings per share $ 1.48 $ 1.43
Stock options for 550 shares (for the period ended September 30, 2001) of
common stock were not considered in computing earnings per share because
they were antidilutive.
Three Months Ended
September 30
2002 2001
(in thousands)
Basic Earnings Per Share
Net Income $1,625 $1,360
Weighted average common shares outstanding 2,776 2,791
Basic earnings per share $ 0.59 $ 0.49
Diluted Earnings Per Share
Net Income $1,625 $1,360
Weighted average common shares outstanding 2,776 2,791
Add dilutive effects of assumed exercise
of stock options 37 49
Weighted average common and dilutive
Potential common shares outstanding 2,813 2,840
Diluted earnings per share $ 0.58 $ 0.48
Stock options for 550 shares (for the quarter ended September 30, 2001) of
common stock were not considered in computing earnings per share because
they were antidilutive.
6. Dividends per share paid for the quarter ended September 30, 2002 were
$0.17 compared to $0.15 for September 30, 2001. This is the same rate of
dividend paid for the first two quarters of the respective years.
7. Beginning January 1, 2001, a new accounting standard requires all
derivatives to be recorded at fair value. Unless designated as hedges,
changes in these fair values will be recorded in the income statement.
Fair value changes involving hedges will generally be recorded by
offsetting gains and losses on the hedge and on the hedged item, even if
the fair value of the hedged item is not otherwise recorded. The Company
periodically enters into non-exchange traded mandatory forward sales
contracts in conjunction with its mortgage banking operation. These
contracts, considered derivatives, typically last 90 days and are used to
hedge the risk of interest rate changes between the time of the commitment
to make a loan to a borrower at a stated rate and when the loan is sold.
The Company did not have any mandatory forward sales contracts at September
30, 2002.
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 did not have a material effect on the Company's financial
statements.
On October 1, 2002, the Financial Accounting Standards Board ("FASB")
issued Statement of Financial Accounting Standards ("SFAS") No. 147,
"Acquisitions of Certain Financial Institutions." SFAS No. 147 is
effective October 1, 2002, and may be early applied. SFAS No. 147
supersedes SFAS No. 72, "Accounting for Certain Acquisitions of Banking or
Thrift Institutions." SFAS No. 147 provides guidance on the accounting for
the acquisition of a financial institution, and applies to all such
acquisitions except those between two or more mutual enterprises. Under
SFAS No. 147, the excess of the fair value of liabilities assumed over the
fair value of tangible and identifiable intangible assets acquired in a
financial institution business combination represents goodwill that should
be accounted for under SFAS No. 142, "Goodwill and Other Intangible
Assets." If certain criteria are met, the amount of the unidentifiable
intangible asset resulting from prior financial institutions acquisitions
is to be reclassified to goodwill upon adoption of this Statement.
Financial institutions meeting conditions outlined in SFAS No. 147 are
required to restate previously issued financial statements. The objective
of the restatement is to present the balance sheet and income statement as
if the amount accounted for under SFAS No. 72 as an unidentifiable
intangible asset had been reclassified to goodwill as of the date the
Company adopted SFAS No. 142. Adoption of SFAS No. 147 on October 1, 2002
did not have a material effect on the Company's consolidated financial
position or results of operations.
Item 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
Forward-Looking Statements
This discussion contains forward-looking statements under the Private
Securities Litigation Reform Act of 1995 that involve risks and uncertainties.
Words such as "believes," "anticipates," "expects," "intends," "plans,"
"targeted," and similar expressions are intended to identify forward-looking
statements but are not the exclusive means of identifying such statements.
Although the Company believes that the assumptions underlying the
forward-looking statements contained herein are reasonable, any of the
assumptions could be inaccurate, and therefore, there can be no assurance that
the forward-looking statements included herein will prove to be accurate.
Factors that could cause actual results to differ from the results discussed
in the forward-looking statements include, but are not limited to: economic
conditions (both generally and more specifically in the markets, including the
tobacco market, in which the Company and its bank operate); competition for
the Company's customers from other providers of financial and mortgage
services; government legislation and regulation (which changes from time to
time and over which the Company has no control); changes in interest rates
(both generally and more specifically mortgage interest rates); material
unforeseen changes in the liquidity, results of operations, or financial
condition of the Company's customers; and other risks detailed in the
Company's filings with the Securities and Exchange Commission, all of which
are difficult to predict and many of which are beyond the control of the
Company. The Company undertakes no obligation to republish revised
forward-looking statements to reflect events or circumstances after the date
hereof or to reflect the occurrence of unanticipated events.
Summary
Bourbon Bancshares, Inc. recorded net income of $4.1 million, or $1.50 basic
earnings per share and $1.48 diluted earnings per share for the first nine
months ended September 30, 2002 compared to $4.1 million, or $1.46 basic
earnings per share and $1.43 diluted earnings per share for the nine month
period ending September 30, 2001. The first nine months reflects an increase
in net income of 1.5%. For the three month period ending September 30, 2002,
net income was $1.6 million ($0.59 basic earnings and $0.58 diluted earnings
per share) compared to $1.4 million ($0.49 basic earnings per share and $0.48
diluted earnings per share) for the same period in 2001. This was an increase
in net income of 19.4%.
Return on average assets was 1.39% for the nine months ending September 30,
2002 and 1.43% for the same time period in 2001, a decrease of 3%. Return on
average assets was 1.63% for the three months ended September 30, 2002
compared to 1.42% for the same time period in 2001, an increase of 15%.
Return on average equity was 13.6% for the nine month period ended September
30, 2002 and 14.5% for the same period in 2001 (a decrease of 6%). Return on
average equity was 15.6% and 14.2% for the three months ended September 30,
2002 and 2001, respectively, an increase of 10%.
Loans increased $10.0 million from $273.2 million on December 31, 2001 to
$283.2 million on September 30, 2002. An increase of $12.1 million in real
estate mortgage loans, and a smaller increase in real estate construction and
agricultural loans were offset by a decrease in commercial and consumer loans.
Management attributes the continued increase in loans primarily to low
interest rates. The increased loan demand and leveling of interest rates have
contributed to increases in net interest income.
Total deposits decreased from $308.9 million on December 31, 2001 to $303.1
million on September 30, 2002, a decrease of $5.8 million. The decrease is
mainly attributable to other interest bearing deposits decreasing $10.4
million. This was partially offset by an increase in non-interest bearing
deposits of $4.2 million. The decline in total deposits is primarily
attributable to our decision to be less aggressive in our deposit gathering
activities.
Net Interest Income
Net interest income was $11.3 million for the nine months ending September 30,
2002 and $10.8 million for the nine months ending September 30, 2001,
resulting in an increase of $447 thousand. Net interest income was $3.9
million for the three months ending September 30, 2002 and $3.6 million for
the three months ending September 30, 2001, resulting in an increase of $292
thousand or 8%. The interest spread was 3.95% for the first nine months of
2002 compared to 4.01% for the same period in 2001, a decrease of 6 basis
points. The Federal Reserve has dropped the discount rate from 6% at December
31, 2000 to 1.25% as of September 30, 2002. These decreases have had a short
term adverse effect on net interest income. We believe the decline in net
interest margin will be temporary.
For the first nine months, the yield on assets decreased from 8.15% in 2001 to
6.66% in 2002. The cost of liabilities decreased from 4.14% in 2001 to 2.71%
in 2002. Rates have remained stable during the first nine months of 2002 and
have resulted in an improvement in the spread between the yield on assets and
the cost of liabilities during 2002. Year to date average loans are up $5.8
million, or 2.1% from September 30, 2001 to September 30, 2002, while loan
interest income has decreased $2.6 million for the first nine months of 2002
compared to the first nine months of 2001. Year to date average deposits also
increased from September 30, 2001 to September 30, 2002, up $11.0 million, or
3.7%. Deposit interest expense has decreased $3.4 million for the first nine
months of 2002 compared to the same period in 2001.
For the three months ending September 30, the yield on assets decreased from
7.84% in 2001 to 6.58% in 2002. The cost of liabilities decreased from 3.83%
in 2001 to 2.45% in 2002, primarily due to the decrease in rates in 2001.
This has resulted in the spread improving to 4.13% for this period in 2002,
compared to 4.01% for the same period in 2001. Loan interest income has
decreased $774 thousand for the three months ending September 30, 2002
compared to the same period of 2001. Deposit interest expense has decreased
$1.1 million for the three months ending September 30, 2002 compared to the
same period in 2001.
Declining rates in 2001 have resulted in tighter margins in 2002. However,
recent months have shown improvement in interest margins. This improvement,
along with the balance sheet growth, have resulted in net interest income
increasing $447 thousand for the first nine months of 2002 compared to the
same period in 2001, and increasing $292 thousand for the three months ending
September 30, 2002 compared to September 30, 2001. Increasing loan demand and
the widening of net interest margins are both factors contributing to an
increase in net interest income during the second and third quarters. The
banking industry continues to battle competition for loan and deposit dollars,
and this trend is expected to continue.
Non-Interest Income
Non-interest income increased $570 thousand for the nine month period ended
September 30, 2002 from $4.2 million to $4.7 million. An increase of $165
thousand in service charges from the first nine months of 2001 to the
comparable 2002 period is mainly attributable to an increase in checking
overdraft charges of $135 thousand and net proceeds from title insurance of
$68 thousand. Title insurance sales began in April 2001. Checking account
service charges decreased $64 thousand, mainly a result of the "free" checking
product. Overdraft income increased principally due to the implementation of
a new "Kentucky Courtesy" overdraft program. "Kentucky Courtesy" is available
to qualified customers, and is an overdraft protection service that pays
checks up to the "Kentucky Courtesy" limit. Investment securities net gains
were $165 thousand greater for the first nine months of 2002 compared to the
same period in 2001. Net gains from sale of securities were mainly
attributable to municipal securities being called at premiums before their
maturity, the sale of U.S. Treasury Notes, and the sale of various stocks.
U.S. Treasury Notes are sold before maturity when the total return (gain and
net interest) can be improved.
Non-interest income increased $295 thousand for the three month period ended
September 30 to $1.7 million in 2002. This increase was mainly attributable
to an increase in service charges of $104 thousand, and the gain on sale of
mortgage loans increased $204 thousand during the first nine months of 2002
compared to the same 2001 period. The increase for the three months ending
September 30, 2002 compared to 2001 was $191 thousand. Decreasing rates
result in an increase in loan originations and refinances. Volume of loan
originations and sales are inverse to rate changes. Rates fell during 2001
and as a result, had a favorable impact on our loan sales in 2001. Recently,
loan rates experienced another decline. As a result, gain from the sale of
mortgage loans increased during the three month period ending September 30,
2002 compared to the same period in 2001. The stabilizing or increasing of
interest rates may cause the income from the sale of loans to be lower in
future periods than in the first nine months of 2002.
The increase in other income of $75 thousand in the first nine months of 2002
as compared to the same time period in 2001 is primarily a result of an
increase in brokerage fee income of $86 thousand. We continue to promote the
use of our brokerage services to better serve our customers' financial needs.
The decrease in other income for the three month period ended September 30,
2002 was $47 thousand. This decrease was mainly attributable to a decrease in
Federal Home Loan Bank dividends of $19 thousand and a decrease in brokerage
fee income of $24 thousand.
Non-Interest Expense
The increase of $509 thousand in non-interest expenses from $8.6 million for
the nine months ended September 30, 2001 to $9.1 million for the same period
in 2002 was a result of several factors. Salaries and benefits increased $371
thousand for the first nine months of 2002 compared to 2001, an increase of
8%. For the three months ended September 30, 2002, salaries and benefits
increased $21 thousand. The increase is due to annual salary increases and
increased staffing. Staffing has mainly been increased in branches to better
serve our customers, and more specifically the opening of a full service
branch in Cynthiana, Kentucky in October 2001. Salaries, excluding bonuses
and incentives, increased 8% from the first nine months of 2001 to the first
nine months of 2002. Employee benefits increased $134 thousand and incentives
decreased $38 thousand during these comparable periods.
Occupancy expense increased $60 thousand to $1.4 million for the first nine
months of 2002 compared to first nine months of 2001. The increase for the
three months ended September 30, 2002 over the same period in 2001 was $21
thousand. Depreciation increased $25 thousand during for the first nine
months ending September 30, 2002 compared to same period in 2001. Renovation
of existing facilities and the purchase of hardware and software for recent
technological advances have added to the depreciation expense. The
construction of a new full service facility in Cynthiana was completed and
opened for business on October 1, 2001. Construction is planned on a new full
service branch in Georgetown, and is expected to begin in the third quarter of
2002. This facility will replace the Paris Pike Branch, and is expected to be
open for business in the first quarter of 2003. These increases are a result
of the Company's continued emphasis on improving and maintaining its
facilities, and to stay current with our technology.
Advertising and marketing costs decreased $97 thousand to $225 thousand for
the first nine months of 2002 as compared to the same period in 2001.
Although the costs are lower this year, continued efforts have been made by
the Company to promote the name and the products of Kentucky Bank using
various forms of promotional materials and selected types of media, including
television.
Income Taxes
The tax equivalent rate for the nine months ended September 30 was 30% for
2002 and for 2001. The tax equivalent rate for the three months ended
September 30, 2002 was 29% and 31% for 2001. These rates are less than the
statutory rate as a result of the tax-free securities and loans held by the
Company.
Stock Repurchase Program
On October 25, 2000, the Company announced that its Board of Directors
approved a stock repurchase program. The Company is authorized to purchase up
to 100,000 shares of its outstanding common stock. Shares will be purchased
from time to time in the open market depending on market prices and other
considerations. Through September 30, 2002, 75,423 shares have been
purchased. The repurchase program has had a positive effect on earnings per
share calculations.
Liquidity and Funding
Liquidity risk is the possibility that the Company may not be able to meet its
cash requirements. Management of liquidity risk includes maintenance of
adequate cash and sources of cash to fund operations and meeting the needs of
borrowers, depositors and creditors. Excess liquidity has a negative impact
on earnings as a result of the lower yields on short-term assets.
Cash and cash equivalents were $10.4 million as of September 30, 2002 compared
to $29.6 million at December 31, 2001. The decrease in cash and cash
equivalents is mainly attributable to a decrease in federal funds sold. Total
cash and cash equivalents decreased $19 million since the end of the year,
mainly attributable to this money being used to purchase investment
securities. In addition to cash and cash equivalents, the securities
portfolio provides an important source of liquidity. Total investment
securities available for sale totaled $84.7 million at September 30, 2002.
The available for sale securities are available to meet liquidity needs on a
continuing basis.
The Company maintains a relatively stable base of customer deposits, which is
expected to be adequate to meet its funding demands. In addition, management
believes the majority of its $100,000 or more certificates of deposit are no
more volatile than its core deposits.
Generally, the Company relies upon net cash inflows from financing activities,
supplemented by net cash inflows from operating activities, to provide cash
used in its investing activities. As is typical of many financial
institutions, significant financing activities include deposit gathering, and
the use of short-term borrowings, such as federal funds purchased and
securities sold under repurchase agreements along with long-term debt. The
Company's primary investing activities include purchasing investment
securities and loan originations. Management believes there is sufficient
cash flow from operations to meet investing and liquidity needs related to
reasonable borrower, depositor and creditor needs in the present economic
environment.
Management is aware of the potential problem of funding sustained loan growth.
Therefore, in addition to deposits, other sources of funds, such as Federal
Home Loan Bank (FHLB) advances may be used. The Company relies on FHLB
advances for both liquidity and asset/liability management purposes. These
advances are used primarily to fund long-term fixed rate residential mortgage
loans. As of September 30, 2002, we have sufficient collateral to borrow an
additional $22 million from the FHLB. In addition, as of September 30, 2002
over $58 million is available in overnight borrowing through various
correspondent banks. In light of this, management believes there is
sufficient liquidity to meet all reasonable borrower, depositor and creditor
needs in the present economic environment.
Non-Performing Assets
As of September 30, 2002, the Company's non-performing assets totaled $2.6
million or 0.9% of loans compared to $2.2 million or 0.8% of loans at December
31, 2001. (See table below) The increase in non-accrual loans is mainly
attributable to a large commercial loan customer with indebtedness of $1.2
million. Over $400 thousand of chargeoffs have been recorded on this loan.
Real estate loans composed 53% and 75% of the non-performing loans as of
September 30, 2002 and December 31, 2001, respectively. Forgone interest
income on the non-accrual loans for both 2002 and 2001 is immaterial.
Nonperforming Assets
9/30/02 12/31/01
(in thousands)
Non-accrual Loans $ 1,514 $ 935
Accruing Loans which are
Contractually past due
90 days or more 1,088 1,228
Restructured Loans - -
Total Nonperforming and Restructured 2,602 2,163
Other Real Estate 172 212
Total Nonperforming and Restructured
Loans and Other Real Estate $ 2,774 $ 2,375
Nonperforming and Restructured Loans
as a Percentage of Loans 0.92% 0.79%
Nonperforming and Restructured Loans
and Other Real Estate as a Percentage
of Total Assets 0.70% 0.60%
Provision for Loan Losses
The first nine months 2002 provision for loan losses of $1.0 million is higher
than the comparable 2001 period by $427 thousand. The September 30, 2002
three month provision for loan losses of $301 thousand is higher than the
comparable 2001 period by $109 thousand. An increase in nonperforming loans
has required management to increase the provision in order to maintain an
allowance for loan losses that is representative of the risk of loss based on
the quality of loans currently in the portfolio. Net charge-offs for the nine
month period ending September 30, 2002 were $1.1 million compared to $704
thousand for the same period in 2001. Net charge-offs for the three month
period ending September 30, 2002 were $813 thousand compared to $254 thousand
for the same period in 2001. These losses are mainly attributable to several
small consumer loans, and the one larger credit mentioned above. Future
levels of charge-offs will be determined by the economic environment
surrounding individual loans. Management feels the current loan loss reserve
is sufficient to meet expected loan losses.
Loan Losses
Nine Months Ended September 30
(in thousands)
2002 2001
Balance at Beginning of Period $ 3,386 $ 3,388
Amounts Charged-off:
Commercial 532 108
Real Estate Construction 18 -
Real Estate Mortgage 18 58
Agricultural - 8
Consumer 581 530
Total Charged-off Loans 1,149 704
Recoveries on Amounts
Previously Charged-off:
Commercial 15 3
Real Estate Construction - -
Real Estate Mortgage 20 2
Agricultural 9 1
Consumer 64 59
Total Recoveries 108 65
Net Charge-offs 1,041 639
Provision for Loan Losses 1,003 576
Balance at End of Period 3,348 3,325
Loans
Average 278,113 273,273
At September 30 283,162 273,106
As a Percentage of Average Loans:
Net Charge-offs 0.37% 0.23%
Provision for Loan Losses 0.36% 0.21%
Allowance as a Percentage of
Period-end Loans 1.18% 1.22%
Allowance as a Multiple of
Net Charge-offs 3.2 5.2
Allowance as a Percentage of
Non-performing and Restructured Loans 129% 164%
Loan Losses
Quarter Ended September 30
(in thousands)
2002 2001
Balance at Beginning of Period $ 3,840 $ 3,366
Amounts Charged-off:
Commercial 484 45
Real Estate Construction - -
Real Estate Mortgage 10 28
Agricultural - -
Consumer 319 181
Total Charged-off Loans 813 254
Recoveries on Amounts
Previously Charged-off:
Commercial - 1
Real Estate Construction - -
Real Estate Mortgage - -
Agricultural 1 -
Consumer 19 20
Total Recoveries 20 21
Net Charge-offs 793 233
Provision for Loan Losses 301 192
Balance at End of Period 3,348 3,325
Loans
Average 283,887 276,147
At September 30 283,162 273,106
As a Percentage of Average Loans:
Net Charge-offs 0.28% 0.08%
Provision for Loan Losses 0.11% 0.07%
Allowance as a Multiple of
Net Charge-offs 4.2 14.3
Item 3 - QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Asset/Liability management control is designed to ensure safety and soundness,
maintain liquidity and regulatory capital standards, and achieve acceptable
net interest income. Management considers interest rate risk to be the most
significant market risk. The Company's exposure to market risk is reviewed on
a regular basis by the Asset/Liability Committee. Interest rate risk is the
potential of economic losses due to future interest rate changes. These
economic losses can be reflected as a loss of future net interest income
and/or a loss of current fair market values. The objective is to measure the
effect on net interest income and to adjust the balance sheet to minimize the
inherent risk while at the same time maximize income.
Management realizes certain risks are inherent and that the goal is to
identify and minimize the risks. The primary tool used by management is an
interest rate shock simulation model. The Bank has no market risk sensitive
instruments held for trading purposes.
The following table depicts the change in net interest income resulting from
100 and 300 basis point changes in rates on the Company's interest earning
assets and interest bearing liabilities. The projections are based on balance
sheet growth assumptions and repricing opportunities for new, maturing and
adjustable rate amounts. As of September 30, 2002 the projected percentage
changes are within the Board approved limits, except for the "- 300". In the
"- 300" scenario, most of the rates used in the model cannot decline 300 basis
points because of the current low level of rates. This has an effect on
causing the net interest income changes falling outside the Board approve
limit. In addition, management has made some asset/liability decisions that
would take advantage of rising interest rates. Therefore, the Company
currently has more volatility to changing rates than existing a year ago. The
projected net interest income report summarizing the Company's interest rate
sensitivity as of September 30, 2002 is as follows:
(dollars in thousands)
PROJECTED NET INTEREST INCOME
Level
Change in basis points: - 300 - 100 Rates + 100 + 300
Year One (10/02 - 9/03)
Interest Income $21,107 $23,530 $24,863 $26,201 $28,879
Interest Expense 6,854 7,894 8,698 9,503 11,113
Net Interest Income 14,253 15,636 16,165 16,698 17,766
PROJECTED DOLLAR INCREASE (DECREASE) FROM "LEVEL RATES"
Year One (10/02 - 9/03)
Interest Income $(3,756) $(1,333) N/A $ 1,338 $ 4,016
Interest Expense (1,844) (804) N/A 805 2,415
Net Interest Income (1,912) (529) N/A 533 1,601
PROJECTED PERCENTAGE INCREASE (DECREASE) FROM "LEVEL RATES"
Year One (10/02 - 9/03)
Interest Income -15.1% -5.4% N/A 5.4% 16.2%
Interest Expense -21.2% -9.2% N/A 9.3% 27.8%
Net Interest Income -11.8% -3.3% N/A 3.3% 9.9%
Board approved limit >-10.0% >-4.0% N/A >-4.0% >-10.0%
The projected net interest income report summarizing the Company's interest
rate sensitivity as of September 30, 2001 is as follows:
(dollars in thousands)
PROJECTED NET INTEREST INCOME
Level
Change in basis points: - 300 - 100 Rates + 100 + 300
Year One (10/01 - 9/02)
Interest Income $ 23,389 $ 25,536 $ 26,674 $ 27,816 $ 30,099
Interest Expense 8,410 10,474 11,521 12,569 14,663
Net Interest Income 14,979 15,062 15,153 15,247 15,436
PROJECTED DOLLAR INCREASE (DECREASE) FROM "LEVEL RATES"
Year One (10/01 - 9/02)
Interest Income $ (3,285) $ (1,138) N/A $ 1,142 $ 3,425
Interest Expense (3,111) (1,047) N/A 1,048 3,142
Net Interest Income (174) (91) N/A 94 283
PROJECTED PERCENTAGE INCREASE (DECREASE) FROM "LEVEL RATES"
Year One (10/01 - 9/02)
Interest Income -12.3% -4.3% N/A 4.3% 12.8%
Interest Expense -27.0% -9.1% N/A 9.1% 27.3%
Net Interest Income -1.2% -0.6% N/A 0.6% 1.9%
Board approved limit >-10.0% >-4.0% N/A >-4.0% >-10.0%
These projected changes in net interest income as of September 30, 2002 are
greater when compared to the projected changes in net interest income as of
September 30, 2001. Projections from September 30, 2002, year one reflected a
decline in net interest income of 11.8% with a 300 basis point decline
compared to the 1.2% decline in 2001. The 300 basis point increase in rates
reflected a 9.9% increase in net interest income in 2002 compared to 1.9% in
2001. Percentage changes in 2002 are greater when compared to 2001.
Therefore, changes in interest rates should have a larger effect on net
interest income. With the current lower level of interest rates, management
has positioned the Company to be slightly more sensitive to rising rates, and
net interest income should increase with these rising rates.
Item 4 - CONTROLS AND PROCEDURES
Within the 90 days prior to the filing date of this report, the Company
carried out an evaluation, under the supervision and with the participation of
the Company's management, including the Company's Chief Executive Officer and
Chief Financial Officer, of the effectiveness of the design and operation of
our disclosure controls and procedures pursuant to Exchange Act Rule 12a-15.
Based upon that evaluation, the Company's Chief Executive Officer and Chief
Financial Officer concluded that the Company's disclosure controls and
procedures are effective. Disclosure controls and procedures are controls and
procedures that are designed to ensure that information required to be
disclosed in Company reports filed or submitted under the Exchange Act is
recorded, processed, summarized and reported within the time periods specified
in the Securities and Exchange Commission's rules and forms.
There have been no significant changes in our internal controls or in other
factors that could significantly affect internal controls subsequent to the
date we carried out this evaluation.
Part II - Other Information
Item 1. Legal Proceedings
The Company is not a party to any material legal proceedings.
Item 2. Changes in Securities
None
Item 3. Defaults upon Senior Securities
None
Item 4. Submission of Matters to a Vote of Security Holders
None
Item 5. Other Information
None
Item 6. Exhibits and Reports on Form 8-K
1. Exhibits as required by Item 601 of Regulation S-K.
11 Earnings Per Share Calculation
99.1 Certification of Chief Executive Officer pursuant to
18 U.S.C. Section 1350, as adopted pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002.
99.2 Certification of Chief Financial Officer pursuant to
18 U.S.C. Section 1350, as adopted pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002.
2. No reports on Form 8-K have been filed during the quarter for which
this report is filed.
SIGNATURES
In accordance with the requirements of the Exchange Act, the registrant caused
the report to be signed on its behalf by the undersigned, thereunto duly
authorized.
Bourbon Bancshares, Inc.
Date ___11/8/02_________ __/s/Buckner Woodford____________
Buckner Woodford, President and C.E.O.
Date ___11/8/02_________ __/s/Gregory J. Dawson___________
Gregory J. Dawson, Chief Financial Officer
CERTIFICATIONS
I, Buckner Woodford, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Bourbon Bancshares,
Inc.;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to
make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by
this quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
a) designed such disclosure controls and procedures to ensure that material
information relating to the registrant, including its consolidated
subsidiaries, is made known to us by others within those entities,
particularly during the period in which this quarterly report is being
prepared;
b) evaluated the effectiveness of the registrant's disclosure controls and
procedures as of a date within 90 days prior to the filing date of this
quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about the effectiveness
of the disclosure controls and procedures based on our evaluation as of the
Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based on
our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors (or persons performing the
equivalent function):
a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to record,
process, summarize and report financial data and have identified for the
registrant's auditors any material weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal controls;
and
6. The registrant's other certifying officers and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal controls
subsequent to the date of our most recent evaluation, including any corrective
actions with regard to significant deficiencies and material weaknesses.
Date: November 8, 2002
___/s/ Buckner Woodford_____
Buckner Woodford
President & Chief Executive Officer
I, Gregory J. Dawson, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Bourbon Bancshares,
Inc.;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to
make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by
this quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
a) designed such disclosure controls and procedures to ensure that material
information relating to the registrant, including its consolidated
subsidiaries, is made known to us by others within those entities,
particularly during the period in which this quarterly report is being
prepared;
b) evaluated the effectiveness of the registrant's disclosure controls and
procedures as of a date within 90 days prior to the filing date of this
quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about the effectiveness
of the disclosure controls and procedures based on our evaluation as of the
Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based on
our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors (or persons performing the
equivalent function):
a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to record,
process, summarize and report financial data and have identified for the
registrant's auditors any material weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal controls;
and
6. The registrant's other certifying officers and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal controls
subsequent to the date of our most recent evaluation, including any corrective
actions with regard to significant deficiencies and material weaknesses.
Date: November 8, 2002
___/s/ Gregory J. Dawson____
Gregory J. Dawson
Chief Financial Officer
Exhibit 11
Earnings Per Share
See Note 5 in Notes to Consolidated Financial Statements for computation of
per share earnings.
Exhibit 99.1
CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
In connection with the Quarterly Report of Bourbon Bancshares, Inc. (the
"Company") on Form 10-Q for the period ended September 30, 2002 as filed with
the Securities and Exchange Commission on the date hereof (the "Report"), I,
Buckner Woodford, Chief Executive Officer of the Company, certify, pursuant to
18 U.S.C. Section 1350, as adopted pursuant to section 906 of the Sarbanes-
Oxley Act of 2002, that to the best of my knowledge:
(1) The Report fully complies with the requirements of section 13(a) or
15(d) of the Securities Exchange Act of 1934; and
(2) The information contained in the Report fairly presents, in all
material respects, the financial condition and result of operations of the
Company.
___/s/ Buckner Woodford_____
Chief Executive Officer
November 8, 2002
Exhibit 99.2
CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
In connection with the Quarterly Report of Bourbon Bancshares, Inc. (the
"Company") on Form 10-Q for the period ended September 30, 2002 as filed with
the Securities and Exchange Commission on the date hereof (the "Report"), I,
Gregory J. Dawson, Chief Financial Officer of the Company, certify, pursuant
to 18 U.S.C. Section 1350, as adopted pursuant to section 906 of the Sarbanes-
Oxley Act of 2002, that to the best of my knowledge:
(1) The Report fully complies with the requirements of section 13(a) or
15(d) of the Securities Exchange Act of 1934; and
(2) The information contained in the Report fairly presents, in all
material respects, the financial condition and result of operations of the
Company.
___/s/ Gregory J. Dawson____
Chief Financial Officer
November 8, 2002
17