UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
(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, 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
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 ]
Indicate by check mark whether the registrant is an accelerated filer
(as defined in Exchange Act Rule 12b-2). Yes No _X_
Aggregate market value of voting stock held by non-affiliates as of
February 28, 2003 was approximately $64.3 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, 2003:
2,774,090.
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 in the state of Kentucky 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), with additional offices
in Paris, North Middletown (Bourbon County), Winchester (Clark County),
Cynthiana (Harrison County), Nicholasville (Jessamine County), Wilmore
(Jessamine County), Georgetown (Scott County), and Versailles (Woodford
County). 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, money market accounts,
certificates of deposits, safe deposit facilities and other consumer-
oriented financial services. Kentucky Bank has Internet banking,
including bill payment 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).
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.
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, 2002, the number of full time equivalent employees of
the Company was 173.
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. Kentucky Bank also leases premises in Scott
County in which it formerly operated a branch; Kentucky Bank is
currently exploring subleasing this building. This Scott County branch
was relocated from this leased office in March 2003. The Company owns
approximately 70,000 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 2002.
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
There is no established public trading market for the Company's Common
Stock. 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 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
2002 Quarter 4 $26.50 $24.00 $.17
Quarter 3 27.00 25.50 .17
Quarter 2 27.50 25.50 .17
Quarter 1 27.00 24.25 .17
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
Note 14 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, 2002 the Company had 2,772,754 shares of Common Stock
outstanding and approximately 470 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)
2002 2001 2000 1999 1998
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CONDENSED STATEMENT OF INCOME:
Total Interest Income $24,788 $28,046 $28,207 $23,453 $21,983
Total Interest Expense 9,367 13,386 13,597 10,547 10,666
Net Interest Income 15,421 14,660 14,610 12,906 11,317
Provision for Losses 1,204 1,068 750 700 700
Net Interest Income After
Provision for Losses 14,217 13,592 13,860 12,206 10,617
Noninterest Income 6,590 5,672 3,798 3,386 3,073
Noninterest Expense 12,433 11,756 10,374 9,422 8,514
Income Before Income
Tax Expense 8,374 7,508 7,284 6,170 5,176
Income Tax Expense 2,471 1,984 2,031 1,720 1,372
Net Income 5,903 5,524 5,253 4,450 3,804
SHARE DATA:
Basic Earnings per Share (EPS) $2.13 $1.98 $1.87 $1.59 $1.36
Diluted EPS 2.10 1.95 1.83 1.55 1.33
Cash Dividends Declared 0.68 0.60 0.52 0.44 0.40
Book Value 15.90 14.13 12.77 11.32 10.46
Average Common Shares-Basic 2,770 2,790 2,812 2,803 2,801
Average Common Shares-Diluted 2,806 2,837 2,868 2,868 2,862
SELECTED BALANCE SHEET DATA:
Loans $281,499 $272,129 $269,757 $238,998 $210,108
Investment Securities 89,509 75,608 68,054 70,623 72,353
Total Assets 419,771 397,257 371,847 347,479 308,705
Deposits 322,836 308,915 300,816 274,566 258,740
Securities sold under agreements to
repurchase and other borrowings 5,277 1,602 9,446 11,858 11,248
Federal Home Loan Bank advances 43,937 43,598 21,644 26,592 6,954
Stockholders' Equity 44,092 39,100 35,860 31,720 29,372
PERFORMANCE RATIOS:
(Average Balances)
Return on Assets 1.48% 1.46% 1.49% 1.39% 1.31%
Return on Stockholders' Equity 14.27% 14.60% 15.63% 14.57% 13.57%
Net Interest Margin (1) 4.23% 4.22% 4.47% 4.46% 4.27%
Equity to Assets (annual average) 10.36% 9.99% 9.51% 9.54% 9.62%
SELECTED STATISTICAL DATA:
Dividend Payout Ratio 31.94% 30.28% 27.84% 27.73% 29.49%
Number of Employees (at period end) 173 180 159 149 144
ALLOWANCE COVERAGE RATIOS:
Allowance to Total Loans 1.19% 1.24% 1.24% 1.28% 1.28%
Net Charge-offs as a Percentage of
Average Loans 0.43% 0.39% 0.18% 0.15% 0.15%
(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 2001 data.
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. Significant accounting policies are listed in
Note 1 in the "Notes to Consolidated Financial Statements". Critical
accounting and reporting policies include accounting for securities,
loans and leases, the allowance for loan and lease losses and income
taxes. 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.
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. Currently, the Company has classified all
securities in its securities portfolio as available for sale and
carries them at fair value. Unrealized gains and losses are recorded
in stockholders' equity, net of related income tax.
Loans are stated at the amount of unpaid principal, reduced by an
allowance for loan losses. Interest on loans is recognized on the
accrual basis, except for those loans on the nonaccrual status.
Interest income received on such loans is accounted for on the cash
basis or cost recovery method. The allowance for loan losses is a
valuation allowance for probable incurred credit losses. 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.
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.
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, 2002 was $5.9 million, or
$2.13 per common share compared to $5.5 million, or $1.98 for 2001 and
$5.3 million, or $1.87 for 2000. Earnings per share assuming dilution
were $2.10, $1.95 and $1.83 for 2002, 2001 and 2000, respectively. For
2002, net income increased $378 thousand, or 7%. Net interest income
increased 5%, loan loss provision increased 13%, other income increased
16% and other expenses increased 6%. 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%.
Return on average equity was 14.3% in 2002 compared to 14.6% in 2001 and
15.6% in 2000. Return on average assets was 1.48% in 2002 compared to
1.46% in 2001 and 1.49% in 2000.
Non-performing loans as of a percentage of loans (including held for
sale) were 0.83%, 0.79% and 0.66% as of December 31, 2002, 2001 and
2000, 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 $14.9 million in 2000 to $15.0 million
in 2001 to $15.9 million in 2002. 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%.
Average earning assets and interest bearing liabilities both increased
from 2001 to 2002. Average earning assets increased $20 million, or 6%.
Investment securities increased $16 million primarily due to the
softening loan demand. Average interest bearing liabilities increased
$12 million, or 4% during this same period. Federal Home Loan Bank
(FHLB) advances made up $10 million of the increase. The Company
continues to actively pursue quality loans and fund these primarily with
deposits and FHLB advances.
During 2002 rates were fairly flat. Bank prime rates decreased 50 basis
points in the last quarter. However, the declining rate environment in
2001 resulted in a decrease in yields on assets and liabilities in 2002
due to repricing opportunities of interest earning assets and interest
bearing liabilities. As a result of this, the tax equivalent yield on
earning assets decreased from 7.98% in 2001 to 6.72% in 2002.
The volume rate analysis that follows indicates that $1.4 million of the
increase in interest income is attributable to the change in volume,
while the decrease in rates contributed to a decrease of $4.6 million in
interest income. The rate decrease also caused a decrease in the cost
of interest bearing liabilities. The average rate of these liabilities
decreased from 4.60% in 2001 to 3.09% in 2002. Based on the volume rate
analysis that follows, the change in volume contributed to an increase
of $447 thousand to interest expense, while the decrease in rates was
responsible for $4.5 million decrease in interest expense. As a result,
the 2002 net interest income increase is attributed to increases in
volume reduced slightly by the negative impact of decreases in rates.
In spite of the positive impact on net interest income that may result
from the potential increasing rate environment in 2003, competitive
pressures on interest rates will continue and are likely to result in
tighter net interest margins.
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 were 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, 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 were 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.
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 2002 and 2001. Changes in interest income and
expenses due to both rate and volume are allocated on a pro rata basis.
2002 vs. 2001 2001 vs. 2000
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 $ 642 $ (3,669) $ (3,027) $ 1,408 $ (1,430) $ (22)
Investment Securities 802 (767) 35 89 (256) (167)
Federal Funds Sold and
Securities Purchased under
Agreements to Resell (111) (176) (287) 221 (214) 7
Deposits with Banks 24 (3) 21 25 (5) 20
Total Interest Income 1,357 (4,615) (3,258) 1,743 (1,905) (162)
INTEREST EXPENSE
Deposits
Demand 132 (1,209) (1,077) 247 (482) (235)
Savings 36 (130) (94) 8 (37) (29)
Negotiable Certificates of
Deposit and Other
Time Deposits (192) (2,966) (3,158) 149 (386) (237)
Securities sold under
agreements to
repurchase and
other borrowings (43) (47) (90) (297) (113) (410)
Federal Home Loan
Bank advances 514 (114) 400 775 (76) 699
Total Interest Expense 447 (4,466) (4,019) 882 (1,094) (212)
Net Interest Income $ 910 $ (149) $ 761 $ 861 $ (811) $ 50
Average Consolidated Balance Sheets and Net Interest Analysis (dollars in thousands)
2002 2001 2000
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% $ - $ - 0.00% $15,837 $ 912 5.76%
Securities Available for Sale (1)
U.S. Treasury and Federal Agency Securities 47,090 2,241 4.76% 41,654 2,421 5.81% 44,585 2,726 6.11%
State and Municipal obligations 26,476 1,254 4.74% 17,978 974 5.42% 2,947 148 5.02%
Other Securities 13,364 505 3.78% 11,365 570 5.02% 6,110 346 5.66%
Total Securities Available for Sale 86,930 4,000 4.60% 70,997 3,965 5.58% 53,642 3,220 6.00%
Total Investment Securities 86,930 4,000 4.60% 70,997 3,965 5.58% 69,479 4,132 5.95%
Tax Equivalent Adjustment 516 0.59% 371 0.52% 278 0.40%
Tax Equivalent Total 4,516 5.19% 4,336 6.11% 4,410 6.35%
Federal Funds Sold and Agreements to Repurchase 6,912 104 1.50% 10,893 391 3.59% 6,038 384 6.36%
Interest-Bearing Deposits with Banks 1,620 52 3.21% 870 31 3.56% 193 11 5.70%
Loans, Net of Deferred Loan Fees (2)
Commercial 31,952 2,016 6.31% 32,837 2,678 8.16% 29,497 2,822 9.57%
Real Estate Mortgage 230,455 16,788 7.28% 217,132 18,543 8.54% 204,197 18,371 9.00%
Installment 18,698 1,828 9.78% 23,535 2,438 10.36% 24,017 2,488 10.36%
Total Loans 281,105 20,632 7.34% 273,504 23,659 8.65% 257,711 23,681 9.19%
Total Interest-Earning Assets 376,567 25,304 6.72% 356,264 28,417 7.98% 333,421 28,486 8.54%
Allowance for Loan Losses (3,555) (3,386) (3,330)
Cash and Due From Banks 9,312 9,281 10,063
Premises and Equipment 10,270 9,171 7,445
Other Assets 6,654 7,375 5,816
Total Assets 399,248 378,705 353,415
LIABILITIES
Interest-Bearing Deposits
Negotiable Order of Withdrawal ("NOW")
and Money Market Investment Accounts 83,025 1,202 1.45% 78,220 2,279 2.91% 70,788 2,514 3.55%
Savings 16,853 158 0.94% 14,494 252 1.74% 14,089 281 1.99%
Certificates of Deposit and Other Deposits 157,167 5,618 3.57% 160,751 8,776 5.46% 158,106 9,013 5.70%
Total Interest-Bearing Deposits 257,045 6,978 2.71% 253,465 11,307 4.46% 242,983 11,808 4.86%
Securities sold under agreements to
repurchase and other borrowings 3,585 132 3.68% 4,590 222 4.84% 10,316 632 6.13%
Federal Home Loan Bank advances 42,923 2,257 5.26% 33,247 1,857 5.59% 19,442 1,158 5.96%
Total Interest-Bearing Liabilities 303,553 9,367 3.09% 291,302 13,386 4.60% 272,741 13,598 4.99%
Noninterest-Bearing Earning Demand Deposits 50,782 45,469 43,813
Other Liabilities 3,539 4,092 3,254
Total Liabilities 357,874 340,863 319,808
STOCKHOLDERS' EQUITY 41,374 37,842 33,607
Total Liabilities and Shareholders' Equity 399,248 378,705 353,415
Average Equity to Average Total Assets 10.36% 9.99% 9.51%
Net Interest Income 15,421 14,660 14,610
Net Interest Income (tax equivalent) (3) 15,937 15,031 14,888
Net Interest Spread (tax equivalent) (3) 3.63% 3.38% 3.55%
Net Interest Margin (tax equivalent) (3) 4.23% 4.22% 4.47%
(1) Averages computed at amortized cost.
(2) Includes loans on a nonaccrual status and loans held for sale.
(3) Tax equivalent difference represents the nontaxable interest income on state and municipal securities net of the
related non-deductible portion of interest expense.
Noninterest Income and Expenses
Noninterest income was $6.6 million in 2002 compared to $5.7 million in
2001 and $3.8 million in 2000. The $917 thousand increase in 2002 and
$1.9 million increase in 2001 is mainly attributable to an increase in
service charges and the increase from Gain on sale of mortgage loans.
Securities gains were $219 thousand in 2002, $287 thousand in 2001,
compared to $88 thousand of losses in 2000. The increase in gains for
2002 and 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 $948 thousand, $382 thousand and $133 thousand
in 2002, 2001 and 2000, respectively. Loans held for sale are generally
sold after closing to the Federal Home Loan Mortgage Corporation.
During 2002, 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 2002 and 2001. The sales of loans were $41
million, $28 million and $15 million in 2002, 2001 and 2000,
respectively. Volume of loan originations are inverse to rate changes.
The rate environment in 2002 and 2001 was falling and as a result, has
favorably impacted our mortgage loan originations in 2002 and 2001.
Other noninterest income excluding security net gains and gain on sale
of mortgage loans was $5.4 million in 2002, $5.0 million in 2001 and
$3.8 million in 2000. Service charge income has been a big contributor
to this increase in income over this three-year period. Overdraft
income increased $239 thousand in 2002 and $1.1 million in 2001,
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 $397 thousand in 2000 to $734 thousand in 2001 to
$1.0 million in 2002. The increase in 2002 is mainly a result of title
insurance sales of $89 thousand and an increase in brokerage commissions
of $98 thousand. 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 2002 and 2001.
Noninterest expense increased $677 thousand in 2002 to $12.4 million,
and increased $1.4 million in 2001 to $11.8 million from $10.4 million
in 2000. The increases in salaries and benefits from $5.5 million in
2000 to $6.0 million in 2001 and to $6.7 million in 2002 are
attributable to converting the Loan Production Office in Cynthiana to a
full service branch in October 2001, and normal salary and benefit
increases. Incentives were $179 thousand higher in 2002 compared to
2001 and $82 thousand lower in 2001 compared to 2000. Occupancy expense
increased $18 thousand, or 1% in 2002 to $1.9 million and increased $353
thousand, or 23% in 2001 to $1.9 million. The Company completed its
construction of a new full service facility in Cynthiana in October
2001. From 1999 to 2001, 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, and
relocate one of our branches in Georgetown, and this facility was opened
in March 2003. This overall improvement of our facilities has led to
the increase in occupancy expenses. The largest expense, depreciation,
increased from $812 thousand in 2000, to $961 thousand in 2001 to $990
thousand in 2002. Other noninterest expense increased from $3.3 million
in 2000 to $3.8 million in 2001 and 2002.
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)
2002 2001 2000
NON-INTEREST INCOME
Service Charges $ 3,848 $ 3,664 $ 2,650
Loan Service Fee Income 228 258 287
Trust Department Income 346 347 420
Investment Securities Gains (Losses),net 219 287 (88)
Gains on Sale of Mortgage Loans 948 382 132
Other 1,001 734 397
Total Non-interest Income 6,590 5,672 3,798
NON-INTEREST EXPENSE
Salaries and Employee Benefits 6,728 6,019 5,539
Occupancy Expenses 1,909 1,891 1,538
Other 3,796 3,846 3,297
Total Non-interest Expense 12,433 11,756 10,374
Net Non-interest Expense as a
Percentage of Average Assets 1.46% 1.61% 1.86%
Income Taxes
The Company had income tax expense of $2.5 million in 2002 and $2.0
million in 2001 and 2000. This represents an effective income tax rate
of 29.5% in 2002, 26.4% in 2001 and 27.9% in 2000. 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 is a result of an
historic tax credit of $240 thousand taken on the Main Office in Paris.
Balance Sheet Review
Assets grew from $397 million at December 31, 2001 to $420 million at
December 31, 2002. Loan growth was $11 million in 2002. Deposits grew
$14 million and borrowings grew $4 million. FHLB advances remained
level at $44 million. Assets at year-end 2001 totaled $397 million
compared to $372 million in 2000. In 2001, loan growth was $1 million
and deposit growth was $8 million. FHLB advances increased $22 million,
while repurchase agreements decline $8 million.
Loans
Total loans (including loans held for sale) were $285 million at
December 31, 2002 compared to $276 million at the end of 2001 and $273
million in 2000. Loan growth improved in 2002 compared to 2001. The
Company's rate of loan growth has decreased since 2000, and is mainly
attributable to the economic downturn starting in 2001. As of the end
of 2002 and compared to the prior year-end, real estate construction
loans increased $3.2 million, real estate mortgage loans (including
loans held for sale) increased $14.3 million, agricultural loans
decreased $1.5 million and installment loans decreased $4.8 million. 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. 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, 2002, the real estate mortgage portfolio comprised
64% of total loans compared to 61% in 2001. Of this, 1-4 family
residential property represented 69% in 2002 and 70% in 2001.
Agricultural loans comprised 18% in 2002 and 19% in 2001 of the loan
portfolio. Approximately 77% of the agricultural loans are secured by
real estate for both 2002 and 2001. 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 43% in 2002 and 49% in 2001 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 the borrower.
The commercial loan 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 4%
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)
2002 2001 2000 1999 1998
Commercial $ 16,803 $ 18,618 $ 17,452 $ 17,713 $ 15,177
Real Estate Construction 15,514 12,302 15,270 17,003 11,055
Real Estate Mortgage 182,958 168,684 163,190 138,337 124,721
Agricultural 52,188 53,640 52,008 46,443 44,199
Installment 17,134 21,952 24,807 22,358 17,608
Other 309 338 434 280 159
Total Loans 284,906 275,534 273,161 242,134 212,919
Less Deferred Loan Fees 12 19 16 33 76
Total Loans Net of
Deferred Loan Fees 284,894 275,515 273,145 242,101 212,843
Less loans held for sale 740 2,343 868 3,494 5,909
Less Allowance For Loan Losses 3,395 3,386 3,388 3,103 2,734
Net Loans 280,759 269,786 268,889 235,504 204,200
The following table sets forth the maturity distribution and interest
sensitivity of selected loan categories at December 31, 2002.
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, 2002 (in thousands)
One Year One Through Over Total
or Less Five Years Five Years Loans
Commercial $ 10,426 $ 4,899 $ 1,478 $ 16,803
Real Estate Construction 13,761 1,264 489 15,514
Real Estate Mortgage 20,718 109,243 52,985 182,946
Agricultural 15,624 34,321 2,243 52,188
Installment 5,335 11,686 113 17,134
Other 309 0 0 309
Total Loans 66,173 161,413 57,308 284,894
Fixed Rate Loans 29,728 136,534 12,350 178,612
Floating Rate Loans 36,445 24,879 44,958 106,282
Total 66,173 161,413 57,308 284,894
-
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 2002 and 2001 and as
a result, have favorably impacted our loan originations in 2002 compared
to 2001. During 2000 interest rates were rising. As a result of these
rate changes, mortgage loan originations increased from $13 million in
2000 to $29 million in 2001, and to $39 million in 2002. The sale of
loans were $41 million, $28 million and $15 million for the year 2002,
2001 and 2000, respectively. Mortgage loans held for sale decreased
from $2.3 million at December 31, 2001 to $740 thousand at December 31,
2002. Volume of loan originations are inverse to rate changes. The
rate environment in 2001 was falling in contrast to 2000 when rates were
rising and therefore resulted in increased loan originations in 2002 and
2001 compared to 2000. The effect of these changes was also reflected
on the income statement. As a result, the gain on sale of mortgage
loans was $948 thousand in 2002 compared to $383 thousand in 2001 and
$133 thousand in 2000.
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 life
of 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 $704 thousand at
December 31, 2002, $463 thousand at December 31, 2001 and $521 thousand
at December 31, 2000. Amortization of mortgage servicing rights was $150
thousand, $140 thousand and $155 thousand for the years ended December
31, 2002, 2001 and 2000, respectively. See Note 4 in the notes to
consolidated financial statements included as Exhibit 13 for additional
information.
Deposits
For 2002, total deposits increased $14 million to $323 million.
Noninterest bearing deposits increased $6 million, while time deposits
of $100 thousand and over increased $5 million, and other interest
bearing deposits increased $3 million. Public funds totaled $36 million
at the end of 2002 ($35 million was interest bearing).
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.
The table below provides information on the maturities of time deposits
of $100,000 or more at December 31, 2002:
Maturity of Time Deposits of $100,000 or More
At December 31, 2002
(in thousands)
Maturing 3 Months or Less $7,385
Maturing over 3 Months through 6 Months 8,352
Maturing over 6 Months through 12 Months 19,452
Maturing over 12 Months 11,715
Total $46,904
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. As of December 31, 2002, $43.9 million was borrowed
from FHLB, an increase of $339 thousand from 2001. In 2002, $6.6
million of FHLB advances were paid, and advances were made for an
additional $6.9 million. 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. 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)
2002 2001 2000
Federal Funds Purchased:
Balance at Year end $ - $ - $ -
Average Balance During the Year 240 6 373
Maximum Month End Balance 6,852 0 2,300
Year end rate 0.00% 0.00% 0.00%
Average annual rate 1.97% 5.89% 6.95%
Repurchase Agreements:
Balance at Year end $ 3,505 $ 683 $ 8,189
Average Balance During the Year 2,097 3,303 8,727
Maximum Month End Balance 3,505 5,164 12,310
Year end rate 0.84% 1.59% 5.92%
Average annual rate 1.22% 3.35% 5.51%
Other Borrowed Funds:
Balance at Year end $ 1,772 $ 919 $ 1,257
Average Balance During the Year 1,248 1,281 1,216
Maximum Month End Balance 1,883 1,768 1,766
Year end rate 6.56% 7.24% 11.71%
Average annual rate 8.16% 8.67% 10.13%
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 for delinquency
are documented such as the loan being in the process of collection. 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 ratios using period-end data, is shown below.
Nonperforming Assets
At December 31 (dollars in thousands)
2002 2001 2000 1999 1998
Non-accrual Loans $1,573 $ 935 $ 307 $ 63 $ 136
Accruing Loans which are
Contractually past due
90 days or more 789 1,278 1,365 549 790
Restructured Loans 0 0 130 131 147
Total Nonperforming Loans 2,362 2,213 1,802 743 1,073
Other Real Estate 172 212 165 371 70
Total Nonperforming Assets 2,534 2,425 1,967 1,114 1,143
Total Nonperforming Loans as a
Percentage of Net Loans (including
loans held for sale) (1) 0.83% 0.80% 0.66% 0.31% 0.50%
Total Nonperforming Assets
as a Percentage of Total Assets 0.60% 0.61% 0.53% 0.32% 0.37%
Allowance to nonperforming assets 1.34 1.40 1.72 2.79 2.39
(1) Net of deferred loan fees
Total nonperforming assets at December 31, 2002 were $2.5 million
compared to $2.4 million at December 31, 2001 and $2.0 million at
December 31, 2000. Total nonperforming loans were $2.4 million, $2.2
million and $1.8 million at December 31, 2002, 2001 and 2000,
respectively. The non-accrual loan increase from 2001 to 2002 is mainly
attributable to one credit line totaling $750 thousand. A loan loss
reserve of $500 thousand is set aside for this loan. Two mortgage loans
totaling $453 thousand account for the increase in 2001 on non-accrual
loans. The economic downturn in 2001 was a contributing factor to the
increase in nonaccrual loans. Two lines totaling $376 thousand account
for most of the change (considering the loan of $790 thousand in 2000
that follows was paid in full in 2001). 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 amount of lost
interest on our non-accrual loans is immaterial. At December 31, 2002,
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, 2002 were $1.6 million compared to
$964 thousand in 2001 and $395 thousand in 2000. 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 $675 thousand, $249
thousand and $117 thousand on December 31, 2002, 2001 and 2000,
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)
2002 2001 2000 1999 1998
Balance at Beginning of Year $ 3,386 $ 3,388 $ 3,103 $ 2,735 $ 2,322
Amounts Charged-off:
Commercial 536 178 14 0 13
Real Estate Construction 18 0 0 0 0
Real Estate Mortgage 69 171 115 50 36
Agricultural 5 46 30 72 19
Consumer 701 751 400 289 300
Total Charged-off Loans 1,329 1,146 559 411 368
Recoveries on Amounts
Previously Charged-off:
Commercial 15 4 14 5 4
Real Estate Construction 0 0 0 0 0
Real Estate Mortgage 19 2 7 1 9
Agricultural 10 1 8 32 2
Consumer 90 69 65 41 66
Total Recoveries 134 76 94 79 81
Net Charge-offs 1,195 1,070 465 332 287
Provision for Loan Losses 1,204 1,068 750 700 700
Balance at End of Year 3,395 3,386 3,388 3,103 2,735
Total Loans, Net of Deferred
Loan Fees
Average 281,105 273,504 257,711 221,309 193,182
At December 31 284,894 275,515 273,145 242,101 212,843
As a Percentage of Average Loans:
Net Charge-offs 0.43% 0.39% 0.18% 0.15% 0.15%
Provision for Loan Losses 0.43% 0.39% 0.29% 0.32% 0.36%
Allowance as a Percentage of
Year-end Net Loans (1) 1.19% 1.23% 1.24% 1.28% 1.28%
Beginning Allowance as a Multiple
of Net Charge-offs 2.8 3.2 6.7 8.2 8.1
Ending Allowance as a Multiple
of Nonperforming Assets 1.34 1.43 1.72 2.79 2.39
(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 2002 was $1.2 million compared to $1.1
million in 2001 and $750 thousand in 2000. Net charge-offs were $1.2
million in 2002, $1.1 million in 2001 and $465 thousand in 2000. Net
charge-offs to average loans were 0.43%, 0.39% and 0.18% in 2002, 2001
and 2000, respectively. With the current quality of the loan portfolio,
the loan loss provision increased $136 thousand from 2001 to 2002 and
$318 thousand from 2000 to 2001. The trend in the loan loss provision
increasing for 2002 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
2002 and 2001 resulted in higher loan losses and, as a result, higher
provisions 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, 2002, the allowance for loan losses was 1.19%
of loans outstanding compared to 1.23% at year-end 2001 and 1.24% in
2000. Management believes the allowance for loan losses at the end of
2002 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)
2002 2001 2000 1999 1998
Dollars Percentage Dollars Percentage Dollars Percentage Dollars Percentage Dollars Percentage
<s> <c> <c> <c> <c> <c> <c> <c> <c> <c> <c>
Commercial $ 820 24.15% $ 291 8.59% $ 275 8.12% $ 275 8.86% $ 262 9.58%
Real Estate Construction 216 6.36% 194 5.73% 244 7.20% 294 9.47% 168 6.14%
Real Estate Mortgage 1,166 34.34% 1,602 47.31% 1,563 46.13% 1,471 47.41% 1,480 54.11%
Agricultural 698 20.56% 693 20.47% 668 19.72% 565 18.21% 473 17.29%
Consumer 495 14.58% 606 17.90% 638 18.83% 498 16.05% 352 12.87%
Total 3,395 100.00% 3,386 100.00% 3,388 100.00% 3,103 100.00% 2,735 100.00%
Loans
At December 31 (in thousands)
2002 2001 2000 1999 1998
Dollars Percentage Dollars Percentage Dollars Percentage Dollars Percentage Dollars Percentage
<s> <c> <c> <c> <c> <c> <c> <c> <c> <c> <c>
Commercial $ 16,803 5.90% $ 18,618 6.76% $17,452 6.39% $ 17,713 7.32% $ 15,177 7.13%
Real Estate Construction 15,514 5.45% 12,302 4.47% 15,270 5.59% 17,003 7.02% 11,055 5.19%
Real Estate Mortgage 182,946 64.22% 168,665 61.22% 163,174 59.74% 138,304 57.13% 124,645 58.56%
Agricultural 52,188 18.32% 53,640 19.47% 52,008 19.04% 46,443 19.18% 44,199 20.77%
Consumer 17,134 6.01% 21,952 7.97% 24,807 9.08% 22,358 9.23% 17,608 8.27%
Other 309 0.11% 338 0.12% 434 0.16% 280 0.12% 159 0.07%
Total, Net (1) 284,894 100.00% 275,515 100.00% 273,145 100.00% 242,101 100.00% 212,843 100.00%
(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, 2002 increased $4.1 million to $41.5
million. Total stockholders' equity, excluding accumulated other
comprehensive income was $42.2 million at December 31, 2002. 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)
2002 2001 Change
Stockholders' Equity (1) $ 42,243 $ 38,353 3,890
Less Disallowed Amount 719 943 (224)
Tier I Capital 41,524 37,410 4,114
Allowance for Loan Losses 3,395 3,386 9
Other 122 104 18
Tier II Capital 3,517 3,490 27
Total Capital 45,041 40,900 4,141
Total Risk Weighted Assets 290,589 283,541 7,048
Ratios:
Tier I Capital to Risk-weighted Assets 14.29% 13.19% 1.10%
Total Capital to Risk-weighted Assets 15.50% 14.42% 1.08%
Leverage 10.21% 9.63% 0.58%
(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, 2002, 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 $75.6 million at December 31, 2001 to $89.5
million at December 31, 2002. The increase is mainly attributable to
the lower loan demand. Federal funds sold totaled $18.7 million at
December 31, 2002 and $14.4 million at December 31, 2001. 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 $11.2 million of adjustable asset backed securities held
on December 31, 2002, $5.2 million are repriceable monthly and the
remaining $6.0 million are repriceable annually. 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. Unrealized gains (losses) on investment
securities are temporary and change inversely with movements in interest
rates. In addition, some prepayment risk exists 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, 2002.
Investment Securities (Held to maturity at amortized cost, available for
sale at market value)
At December 31 (in thousands)
2002 2001 2000
Available for Sale
U.S. treasury $ 5,059 $ 7,218 $ 14,992
U.S. government agencies 6,138 6,118 5,028
States and political subdivisions 31,024 19,470 3,366
Mortgage-backed
Fixed -
GNMA, FNMA, FHLMC Passthroughs 17,465 12,672 5,580
GNMA, FNMA, FHLMC CMO's 11,682 5,057 4,941
Total 29,147 17,729 10,521
Variable -
GNMA, FNMA, FHLMC Passthroughs 8,645 8,402 9,374
GNMA, FNMA, FHLMC CMO's 2,529 2,925 2,983
Total 11,174 11,327 12,357
Total mortgage-backed 40,321 29,056 22,878
Other 6,967 13,746 6,559
Total 89,509 75,608 52,823
Held to Maturity
States and political subdivisions $ - $ - $ 15,231
Total $ 89,509 $ 75,608 $ 68,054
Maturity Distribution of Securities
December 31, 2002 (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 $ 5,059 $ - $ - $ - $ - $ 5,059
U.S. government agencies 0 6,138 0 0 0 6,138
States and political subdivisions 1,599 6,437 7,597 15,391 0 31,024
Mortgage-backed 0 0 0 0 40,321 40,321
Equity Securities 0 0 0 0 3,748 3,748
Other 0 2,095 1,124 0 0 3,219
Total 6,658 14,670 8,721 15,391 44,069 89,509
Percent of Total 7.4% 16.4% 9.7% 17.2% 49.3% 100.0%
Weighted Average Yield (1) 5.28% 5.64% 7.02% 7.15% 4.82% 5.60%
(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
growth 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, 2002 and 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.
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
are amortized under the new standard, whereas goodwill, both amounts
previously recorded and future amounts purchased, ceased being amortized
in 2002. Annual impairment testing is required for goodwill with
impairment being recorded if the carrying amount of goodwill exceeds its
implied fair value. All recorded acquisition intangibles are identified
with specific assets. A subsequent accounting standard also required
goodwill on branch acquisitions to cease being amortized separate from
core deposit intangible assets which will continue to be amortized.
Adoption of this standard on January 1, 2002 did not have a material
effect on the Company's financial statements, as there are no intangible
assets identified as goodwill.
New accounting standards on asset retirement obligations, restructuring
activities and exit costs, operating leases, and early extinguishment of
debt were issued in 2002. Management determined that when the new
accounting standards are adopted in 2003 they will not have a material
impact on the Company's financial condition or results of operations.
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. The Company's exposure to
market risk is reviewed on a regular basis by the Asset/Liability
Committee. Management considers interest rate risk to be the most
significant market risk. 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, 2002
the projected net interest income percentage change of down 300 basis
points is outside the Board of Directors limits. Because of the low
level of rates, an across the board drop of 300 basis points is
impossible. This along with a higher likelihood of increasing rates in
the future have resulted in Management believing this risk is acceptable
under the current conditions. This limit variation has been reviewed
with the Asset/Liability Committee and the Board of Directors. The
projected net interest income report summarizing the Company's interest
rate sensitivity as of December 31, 2002 and December 31, 2001 is as
follows:
Projected Net Interest Income (December 31, 2002)
Level
-300 -100 Rates +100 +300
<s> <c> <c> <c> <c> <c>
Year One (1/03 - 12/03)
Interest Income $19,906 $22,469 $24,019 $25,576 $28,704
Interest Expense 6,528 7,382 8,317 9,243 11,107
Net Interest Income 13,378 15,087 15,702 16,333 17,597
Net interest income dollar change (2,324) (615) 631 1,895
Net interest income percentage change -14.8% -3.9% N/A 4.0% 12.1%
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 (1/1/02 - 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%
The numbers in 2002 show greater fluctuation when compared to 2001. In
2002, year one reflected a decrease in net interest income of 14.8%
compared to 6.0% projected decrease from 2001 with a 300 basis point
decline. The 300 basis point increase in rates reflected a 12.1%
increase in net interest income in 2002 compared to a 3.0% increase in
2001. The risk is greater in 2002 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 $35.8
million at December 31, 2002. Additionally, securities available-for-
sale with maturities greater than one year totaled $82.9 million at
December 31, 2002. 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, 2002 these balances totaled $46.9 million, approximately
14.5% 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 $31 million from the FHLB
at December 31, 2002.
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 flow 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
2002 2001 2000
Average Loans (including loans held
for sale)/Average Deposits 91.3% 91.5% 89.9%
Average Securities sold under
agreements to repurchase and other
borrowings/Average Assets 0.9% 1.2% 2.9%
This chart shows that the loan to deposit ratio decreased slightly in
2002 compared to an increase in 2001. Loan growth of 3% and deposit
growth of 3% in 2002, coupled with loan growth of 6% and deposit growth
of 5% in 2001 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 2002 Annual Report to Stockholders included as Exhibit 13, and
are incorporated herein by reference. No other portion of the 2002
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 2003:
William R. Stamler, age 68, is Chairman of Signal Investments, Inc. He
has been a director of Kentucky Bank since 1984 and the Company since
1988.
Buckner Woodford, age 58, is President and Chief Executive Officer of
Bourbon Bancshares, Inc. and Chief Executive Officer of Kentucky Bank.
He has been a director of Kentucky Bank since 1971 and the Company since
inception.
Terms expiring in 2004:
William Arvin, age 62, is an attorney. He has been a director of
Kentucky Bank and the Company since 1995.
James L. Ferrell, M.D., age 68, is a Physician. He has been a director
of Kentucky Bank since 1980 and the Company since inception.
Louis Prichard, age 49, is President and Chief Operating Officer of
Kentucky Bank. He has been a director of Kentucky Bank and the Company
since 2003.
Terms expiring in 2005:
Henry Hinkle, age 51, is President of Hinkle Construction Company. He
has been a director of Kentucky Bank and the Company since 1989.
Theodore Kuster, age 59, 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 53, is Executive Director of the Paris Bourbon
County YMCA, a farmer and thoroughbred horse breeder. He has been a
director of Kentucky Bank and the Company since 1991.
The Company's other executive officer is Gregory J. Dawson, age 42. 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 2002 $180,008 $ 39,825 (1) 500
Buckner Woodford 2001 $175,000 $ 19,250 (1) 500
Buckner Woodford 2000 168,500 49,630 (1) 500
(1) Less than the lesser of $50,000 or 10% of annual salary and bonuses
The following table contains information regarding the grant of stock
options under the Company's stock option plan to the Chief Executive
Officer during the year ended December 31, 2002. In addition, in
accordance with rules of the Securities and Exchange Commission, the
following table sets forth the hypothetical grant date present value
with respect to the referenced options, using the Black-Scholes Option
Pricing Model.
Option Grants in the Last Fiscal Year
% of Total
Options Grant
Shares Granted to Exercise Date
Granted Employees Price Expiration Present
Name (#) in 2002 ($/Sh) Date Value($)
Buckner Woodford 500 8.4% $26.00 1/2/12 $1,215
The following table sets forth certain information regarding options
exercised by the Chief Executive Officer during calendar year 2002 and
unexercised stock options held by him as of December 31, 2002.
Aggregated Option Exercises in Calendar 2001
and Year-end Stock Option Values
Shares Number of Securities Value of Unexercised
Acquired Value Underlying Unexercised In-the-Money
on Exercise Realized Options at 12/31/02 Options at 12/31/02
Name (#) ($) Exercisable/Unexercisable Exercisable/Unexercisable
<s> <c> <c> <c> <c>
Buckner Woodford 2,680 $50,585 18,700/3,400 $213,980/$15,620
No SAR's exist for the Company.
Compensation of Directors
Each director of the Company is a director of Kentucky Bank. Company
Directors are paid $400 for each Company and Kentucky Bank board meeting
attended and non-employee Company directors are paid $100 for each
Kentucky Bank committee meeting attended. Non-employee Directors of
Kentucky Bank 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 30 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,
2002.
Name Shares Beneficially Owned(1)
Number Percentage
William Arvin (2) 33,409 1.2%
Gregory J. Dawson (3) 9,175 *
James L. Ferrell, M.D. (4) 29,550 1.0%
Henry Hinkle (5) 27,955 *
Theodore Kuster (6) 18,120 *
Louis Prichard (7) 3,000 *
William R. Stamler (8) 31,370 1.1%
Robert G. Thompson (9) 7,650 *
Buckner Woodford (10) 254,478 9.0%
All directors and officers
(9 persons) as a group
(consisting of those
persons named above)(11) 411,707 14.5%
* 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 450 shares
that Mr. Arvin may acquire upon exercise of outstanding stock options.
3) Includes 4,270 shares that Mr. Dawson may acquire upon exercise of
outstanding stock options.
4) Includes 5,400 shares held in a retirement account and 850 shares
that Dr. 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 850
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 5,350 shares
held in a retirement account and 650 shares that Mr. Kuster may acquire
upon exercise of outstanding stock options.
7) Includes 3,000 shares that Mr. Prichard may acquire upon exercise of
outstanding stock options.
8) Includes 7,860 shares held by Signal Investments Corporation, as to
which Mr. Stamler, as the chief executive officer and majority
stockholder of such corporation, has sole voting and investment power.
Also includes 430 shares that Mr. Stamler may acquire upon exercise of
outstanding stock options.
9) Includes 650 shares that Mr. Thompson may acquire upon exercise of
outstanding stock options.
10) 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 18,700 shares that Mr. Woodford may acquire upon
exercise of outstanding stock options.
11) Includes 26,850 shares that may be acquired upon exercise of
outstanding stock options.
The following table sets forth as of December 31, 2002 the only person
known by the Company to own beneficially (as determined in accordance
with the rules and regulations of the Commission) more than 5% of the
outstanding common stock. See note 10 in the preceding table for
further information.
Name and Address Shares Beneficially
of Beneficial Owner Owned Percentage
Buckner Woodford 254,478 9.0%
340 Stoner Avenue
Paris, Kentucky 40361
The following table sets forth as of December 31, 2002 the Company's
common stock authorized for issuance under equity compensation plans.
The Company's shareholders have approved all of the Company's equity
compensation plans.
Number of Securities
Number of Securities remaining available for
To be issued Weighted average future issuance under
Upon exercise of exercise price of equity compensation plans
Outstanding options, outstanding options, (excluding securities
Plan category warrants and rights warrants and rights reflected in column (a)
Equity compensation plans
Approved by security holders:
<s> <c> <c> <c>
Employee Gift Program 0 $ n/a 790
1985 Incentive Stock
Option Plan 400 8.63 0
1993 Employee Stock Ownership
Incentive Plan 66,840 15.29 0
1993 Non-Employee Directors
Stock Ownership Plan 4,980 18.83 12,950
1999 Employee Stock Option Plan 10,894 24.79 88,950
Total 83,114 $16.72 102,690
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, 2002.
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 $1.6 million as of December
31, 2002 and $1.5 million as of December 31, 2001. See Note 4 in the
notes to consolidated financial statements included as Exhibit 13.
Item 14 - 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.
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 in all material respects. 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, and is accumulated
and communicated to management, including the Chief Executive Officer
and the Chief Financial Officer, as appropriate to allow for timely
disclosure.
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 IV
Item 15. 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 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.
* 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, 2002
None
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be
signed on its behalf by the undersigned, thereunto duly authorized.
Bourbon Bancshares, Inc.
By: __/s/Buckner Woodford__
Buckner Woodford, President and Chief Executive Officer, Director
March 28, 2003
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed below by the following persons on behalf of
the registrant and in the capacities and on the dates indicated.
__/s/Buckner Woodford _______ March 31, 2003
Buckner Woodford, President and Chief Executive Officer, Director
__/s/Gregory J. Dawson_______ March 31, 2003
Gregory J. Dawson, Chief Financial and Accounting Officer
__/s/James L. Ferrell________ March 31, 2003
James L. Ferrell, M.D., Chairman of the Board, Director
_____________________________ March 31, 2003
William Arvin, Director
__/s/Henry Hinkle __ ____ March 31, 2003
Henry Hinkle, Director
_____________________________ March 31, 2003
Theodore Kuster, Director
__/s/Louis Prichard__________ March 31, 2003
Louis Prichard, Director
_____________________________ March 31, 2003
William R. Stamler, Director
__/s/Robert G. Thompson______ March 31, 2003
Robert G. Thompson, Director
SUPPLEMENTAL INFORMATION TO BE FURNISHED WITH REPORTS FILED PURSUANT TO
SECTION 15(d) OF THE ACT BY REGISTRANTS WHICH HAVE NOT REGISTERED
SECURITIES PURSUANT TO SECTION 12 OF THE ACT.
The Registrant refers to Exhibit 13 to the Form 10-K.
Certifications
I, Buckner Woodford, certify that:
1. I have reviewed this annual report on Form 10-K of Bourbon
Bancshares, Inc.;
2. Based on my knowledge, this annual 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 annual report;
3. Based on my knowledge, the financial statements, and other financial
information included in this annual 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 annual 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
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 annual 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 annual report (the "Evaluation Date"); and
c) presented in this annual 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 functions):
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 annual 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: March 31, 2003
___/s/ Buckner Woodford_____
Buckner Woodford
President & Chief Executive Officer
I, Gregory J. Dawson, certify that:
1. I have reviewed this annual report on Form 10-K of Bourbon
Bancshares, Inc.;
2. Based on my knowledge, this annual 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 annual report;
3. Based on my knowledge, the financial statements, and other financial
information included in this annual 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 annual 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
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 annual 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 annual report (the "Evaluation Date"); and
c) presented in this annual 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 functions):
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 annual 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: March 31, 2003
___/s/ Gregory J. Dawson____
Gregory J. Dawson
Chief Financial Officer
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. 2002 Annual Report
21 Subsidiaries of Registrant
23 Consent of Crowe, Chizek and Company LLP
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.
* 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.
Dear Shareholders,
As we begin a new year in 2003, we welcome a strong addition to our management
team. Louis Prichard joins us as President and Chief Operating Officer of our
subsidiary, Kentucky Bank. I will move up to the title of Chairman of the
bank. My role as CEO of the bank, and President and CEO of Bourbon Bancshares
remains unchanged.
Louis comes to us from Danville, where he was President and CEO of a very
successful community bank serving three counties. His presence makes an
already strong management team even stronger and deeper. This should position
us very well to meet the challenges of building shareholder value, and the
competitive challenges found in the thriving communities we serve.
My role in the organization will now be to focus on identifying new business
opportunities for us. I will turn over to Louis much of the responsibility
for managing our existing business.
We are especially proud of our year end results given the weakness in our
economy. That weakness has led to some decline in credit quality for most
banks, including us. It has also given us the challenge of managing the rapid
drop to record low interest rates. In spite of these two obstacles, we still
improved earnings in 2002.
The strong second half of the year boosted our financial performance. For the
full year we earned $5.9 million, up about 7% from the prior year. Earnings
per share assuming dilution were $2.10, a nice increase from $1.95 a year ago.
We also increased our dividend to shareholders for the twentieth consecutive
year.
We are nearing completion of our new branch office in Georgetown, and expect
it to open in the first quarter of this year. It is located on Blossom Park
Drive, which is a very rapidly growing part of that community.
Involvement in the Bluegrass communities we call home is a vital part of our
future growth. We continue our commitment to build our earnings and increase
the value of your franchise.
Buckner Woodford
President
FINANCIAL HIGHLIGHTS...
BOURBON BANCSHARES, INC. 2002 2001 2000
Assets ($ thousands) $419,771 $397,257 $371,847
Net Income ($ thousands) $ 5,903 $ 5,524 $ 5,253
Per Share Results
Earnings(assuming dilution) $ 2.10 $ 1.95 $ 1.83
Dividends $ .68 $ .60 $ .52
Shareholder Information
CORPORATE HEADQUARTERS
Bourbon Bancshares, Inc.
4th and Main Street
Paris, Kentucky 40361
859-987-1795
MARKET MAKERS
Morgan Keegan & Co.
489 East Main Street
Lexington, Kentucky 40507
800-937-0161
Hilliard Lyons
West Vine Street, Suite 400
Lexington, Kentucky 40507
800-944-2663
Howe Barnes Investments, Inc.
135 South LaSalle Street, Suite 150
Chicago, Illinois 60603-4398
800-800-4693
TRANSFER, REGISTRAR AND DIVIDEND AGENT
Registrar and Transfer Company
10 Commerce Drive
Cranford, NJ 07016-3572
800-368-5948
rtco.com
INVESTOR INFORMATION
Any individual requesting general information or a copy of the
Corporation's 2002 Form 10-K Report may obtain these by writing Investor
Relations at the Corporate Headquarters.
CONSOLIDATED BALANCE SHEETS
December 31 2002 2001
ASSETS
Cash and due from banks $ 10,493,495 $ 15,229,462
Federal funds sold 18,683,000 14,409,000
Cash and cash equivalents 29,176,495 29,638,462
Securities available for sale 89,509,140 75,607,874
Mortgage loans held for sale 740,023 2,343,095
Loans 284,153,605 273,172,802
Allowance for loan losses (3,395,075) (3,386,425)
Net loans 280,758,530 269,786,377
Federal Home Loan Bank stock 4,027,300 3,846,500
Bank premises and equipment, net 10,331,618 10,504,904
Interest receivable 3,276,432 3,507,473
Intangible assets 1,367,417 1,405,918
Other assets 584,441 616,556
Total assets $ 419,771,396 $ 397,257,159
LIABILITIES AND STOCKHOLDERS' EQUITY
Deposits
Non-interest bearing $ 53,366,283 $ 47,622,621
Time deposits, $100,000 and over 46,903,641 41,671,945
Other interest bearing 222,566,031 219,620,618
Total deposits 322,835,955 308,915,184
Repurchase agreements and other borrowings 5,276,695 1,601,982
Federal Home Loan Bank advances 43,937,306 43,597,929
Interest payable 1,844,705 2,814,581
Other liabilities 1,784,893 1,227,102
Total liabilities 375,679,554 358,156,778
Stockholders' equity
Preferred stock, 300,000 shares
authorized and unissued - -
Common stock, no par value; 10,000,000
shares authorized; 2,772,754 and
2,766,917 shares issued and
outstanding in 2002 and 2001 6,806,887 6,649,018
Retained earnings 35,435,996 31,703,573
Accumulated other comprehensive
income (loss) 1,848,959 747,790
Total stockholders' equity 44,091,842 39,100,381
Total liabilities and
stockholders' equity $ 419,771,396 $ 397,257,159
CONSOLIDATED STATEMENTS OF INCOME
Years Ended December 31 2002 2001 2000
Interest income
Loans, including fees $ 20,632,003 $ 23,658,873 $ 23,681,081
Securities
Taxable 2,564,539 2,591,330 2,818,906
Tax exempt 1,254,065 1,124,620 1,059,658
Other 337,397 671,231 647,597
24,788,004 28,046,054 28,207,242
Interest expense
Deposits 6,977,969 11,306,963 11,807,823
Repurchase agreements and
other borrowings 42,148 131,913 541,550
Federal Home Loan Bank advances 2,257,413 1,857,061 1,158,250
Other 90,000 90,000 90,000
9,367,530 13,385,937 13,597,623
Net interest income 15,420,474 14,660,117 14,609,619
Provision for loan losses 1,204,000 1,068,000 750,000
Net interest income after provision
for loan losses 14,216,474 13,592,117 13,859,619
Other income
Service charges 3,848,055 3,663,990 2,650,310
Loan service fee income 228,121 257,823 286,704
Trust department income 345,730 346,554 419,728
Securities gains (losses), net 218,604 287,262 (88,169)
Gain on sale of mortgage loans 948,369 382,532 132,559
Other 1,000,716 734,043 397,131
6,589,595 5,672,204 3,798,263
Other expenses
Salaries and employee benefits 6,728,443 6,019,279 5,538,589
Occupancy expenses 1,908,479 1,890,878 1,538,037
Amortization 429,366 419,486 434,373
Advertising and marketing 330,069 428,229 362,958
Taxes other than payroll,
property and income 406,077 370,537 363,957
Other 2,630,321 2,627,444 2,135,581
12,432,755 11,755,853 10,373,495
Income before income taxes 8,373,314 7,508,468 7,284,387
Provision for income taxes 2,470,789 1,983,978 2,031,445
Net income $ 5,902,525 $ 5,524,490 $ 5,252,942
Earnings per share:
Basic $ 2.13 $ 1.98 $ 1.87
Diluted 2.10 1.95 1.83
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
Years Ended December 31 2002 2001 2000
Net income $ 5,902,525 $ 5,524,490 $ 5,252,942
Other comprehensive income (loss),
net of tax:
Unrealized gains (losses) on
securities arising
during the period 1,245,448 945,748 483,032
Reclassification of
realized amount (144,279) (189,593) 58,192
Net change in unrealized gain
(loss) on securities 1,101,169 756,155 541,224
Comprehensive income $ 7,003,694 $ 6,280,645 $ 5,794,166
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
Years Ended December 31, 2002, 2001 and 2000
Accumulated
Other Total
Common Stock Retained Comprehensive Stockholders'
Shares Amount Earnings Income Equity
<s> <c> <c> <c> <c> <c>
Balances, January 1, 2000 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
Common stock issued (including
employee gifts of 85 shares) 20,879 187,889 - - 187,889
Common stock purchased (15,042) (30,020) (285,051) - (315,071)
Net change in unrealized gain (loss)
on securities available for sale, net
of tax - - - 1,101,169 1,101,169
Net income - - 5,902,525 - 5,902,525
Dividends declared - $.68 per share - - (1,885,051) - (1,885,051)
Balances, December 31, 2002 2,772,754 $ 6,806,887 $ 35,435,996 $ 1,848,959 $ 44,091,842
CONSOLIDATED STATEMENTS OF CASH FLOWS
Years Ended December 31
2002 2001 2000
<s> <c> <c> <c>
Cash flows from operating activities
Net income $ 5,902,525 $ 5,524,490 $ 5,252,942
Adjustments to reconcile net
income to net cash from
operating activities
Depreciation and amortization 1,419,205 1,380,148 1,246,826
Provision for loan losses 1,204,000 1,068,000 750,000
Securities amortization
(accretion), net 385,050 155,678 (52,915)
Securities (gains) losses, net (218,604) (287,262) 88,169
Originations of loans held
for sale (38,541,844) (29,054,241) (12,588,461)
Proceeds from sale of loans 40,702,420 27,879,863 15,292,943
Gain on sale of mortgage loans (948,369) (382,532) (132,559)
Federal Home Loan Bank stock
dividends (180,800) (248,600) (252,400)
Changes in:
Interest receivable 231,041 754,770 (808,025)
Other assets 32,115 (99,188) 289,452
Interest payable (969,876) (612,908) 1,285,735
Other liabilities (9,331) 573,565 52,791
Net cash from operating
Activities 9,007,532 6,651,783 10,424,498
Cash flows from investing activities
Purchases of securities available
for sale (49,204,809) (52,945,350) (24,858,046)
Proceeds from sales of securities
available for sale 18,838,747 12,344,139 17,045,613
Proceeds from principal payments
and maturities of securities
available for sale 17,966,641 34,325,320 10,685,161
Purchases of securities held
to maturity - - (632,490)
Proceeds from maturities of
securities held to maturity - - 1,113,500
Net change in loans (12,176,153) (2,083,841) (34,356,698)
Purchases of bank premises and
equipment, net (816,553) (3,167,061) (2,029,097)
Net cash from investing activities (25,392,127) (11,526,793) (33,032,057)
Cash flows from financing activities
Net change in deposits 13,920,771 8,099,599 26,249,645
Net change in repurchase
agreements and other borrowings 3,674,713 (7,844,411) (2,412,071)
Advances from Federal Home
Loan Bank 6,980,000 22,200,000 6,317,000
Payments on Federal Home Loan
Bank advances (6,640,623) (246,349) (11,265,027)
Proceeds from issuance of
common stock 187,889 344,280 172,580
Purchase of common stock (315,071) (1,711,477) (363,710)
Dividends paid (1,885,051) (1,673,048) (1,462,628)
Net cash from financing activities 15,922,628 19,168,594 17,235,789
CONSOLIDATED STATEMENTS OF CASH FLOWS
Years Ended December 31
2002 2001 2000
Net change in cash and cash equivalents $ (461,967) $ 14,293,584 $ (5,371,770)
Cash and cash equivalents at
beginning of year 29,638,462 15,344,878 20,716,648
Cash and cash equivalents at
end of year $29,176,495 $ 29,638,462 $ 15,344,878
Supplemental disclosures of cash flow information
Cash paid during the year for:
Interest expense $10,337,406 $ 13,998,845 $ 12,311,888
Income taxes 2,150,000 1,930,000 2,060,803
Supplemental schedules of non-cash investing
activities
Real estate acquired through
foreclosure $ - $ 118,860 $ 205,200
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, deposit and short-term borrowing 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.
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 received on
such loans is accounted for on the cash-basis or cost-recovery method, until
qualifying for return to accrual. Loans are returned to accrual status when
all the principal and interest amounts contractually due are brought current
and future payments are reasonably assured.
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.
Large groups of smaller balance homogenous loans, such as consumer and
residential real estate loans are collectively evaluated for impairment, and
accordingly, they are not separately identified for impairment disclosures.
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 loans'
estimated lives and are included in intangible assets on the balance sheet and
expensed in proportion to, and over the period of, estimated net servicing
revenues.
Federal Home Loan Bank Stock: Amount is carried at cost.
Bank Premises and Equipment: Land is carried at cost. 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 with useful lives ranging from 3 to
50 years.
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.
Stock Compensation: Employee compensation expense under stock options is
reported using the intrinsic value method. No stock-based compensation cost
is reflected in net income, as all options granted had an exercise price equal
to or greater than the market price of the underlying common stock at date of
grant. The following table illustrates the effect on net income and earnings
per share if expense was measured using the fair value recognition provisions
of FASB Statement No. 123, Accounting for Stock-Based Compensation.
2002 2001 2000
Net income
As reported $ 5,902,525 $ 5,524,490 $ 5,252,942
Deduct: Stock-based compensation
expense determined under fair
value based method (129,172) (76,748) (90,691)
Pro forma 5,773,353 5,447,742 5,162,251
Basic earnings per share
As reported $ 2.13 $ 1.98 $ 1.87
Pro forma 2.08 1.94 1.84
Diluted earnings per share
As reported $ 2.10 $ 1.95 $ 1.83
Pro forma 2.06 1.91 1.80
Weighted averages
Fair value of options granted $ 2.43 $ 4.58 $ 6.56
Risk free interest rate 4.30% 4.93% 6.62%
Expected life 8 years 8 years 8 years
Expected volatility 13.10% 13.10% 11.61%
Expected dividend yield 2.72% 2.54% 2.14%
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 include 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.
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,
2002 and 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.
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 are amortized under the new
standard, whereas goodwill, both amounts previously recorded and future
amounts purchased, ceased being amortized in 2002. Annual impairment testing
is required for goodwill with impairment being recorded if the carrying amount
of goodwill exceeds its implied fair value. All recorded acquisition
intangibles are identified with specific assets. A subsequent accounting
standard also required goodwill on branch acquisitions to cease being
amortized separate from core deposit intangible assets which will continue to
be amortized. Adoption of this standard on January 1, 2002 did not have a
material effect on the Company's financial statements, as there are no
intangible assets identified as goodwill.
Newly Issued But Not Yet Effective Accounting Standards: New accounting
standards on asset retirement obligations, restructuring activities and exit
costs, operating leases, and early extinguishment of debt were issued in 2002.
Management determined that when the new accounting standards are adopted in
2003 they will not have a material impact on the Company's financial condition
or results of operations.
Industry Segments: While the Company's chief decision makers monitor the
revenue streams of the various Company products and services, operations are
managed and financial performance is evaluated on a Company-wide basis.
Accordingly, all of the Company's operations are considered by management to
be aggregated into one reportable operating segment.
NOTE 2 - RESTRICTIONS ON CASH AND DUE FROM BANKS
Included in cash and due from banks are certain non-interest bearing deposits
that are held at the Federal Reserve or maintained in vault cash in accordance
with average balance requirements specified by the Federal Reserve Board of
Governors. The reserve requirement at December 31, 2002 and 2001 was $0 and
$123,000.
NOTE 3 - SECURITIES
Year-end securities available for sale are as follows:
Fair Unrealized Unrealized
Value Gains Losses
2002
U. S. Treasury $ 5,059,063 $ 47,096 $ -
U. S. government agencies 6,138,499 147,012 -
States and political subdivisions 31,024,014 1,299,516 (6,143)
Mortgage-backed 40,321,450 919,850 (57,387)
Equity securities 3,747,550 285,695 (15,355)
Other 3,218,564 197,169 (15,786)
Total $ 89,509,140 $ 2,896,338 $ (94,671)
Fair Unrealized Unrealized
Value Gains Losses
2001
U. S. Treasury $ 7,217,500 $ 139,106 $ (1,106)
U. S. government agencies 6,117,985 118,507 -
States and political subdivisions 19,470,102 574,253 (170,855)
Mortgage-backed 9,056,415 350,629 (112,170)
Equity securities 10,693,330 255,528 (25,319)
Other 3,052,542 32,753 (27,949)
Total $ 75,607,874 $ 1,470,776 $(337,399)
The fair value of securities available for sale at December 31, 2002, by
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.
Fair
Value
Due in one year or less $ 6,658,310
Due after one year through five years 14,670,456
Due after five years through ten years 8,720,647
Due after ten years 15,390,727
45,440,140
Mortgage-backed 40,321,450
Equity 3,747,550
Total $ 89,509,140
Proceeds from sales of securities during 2002, 2001 and 2000 were $18,838,747,
$12,344,139 and $17,045,613. Gross gains of $260,096, $288,105 and $42,704
and gross losses of $41,492, $843 and $103,873, were realized on those sales.
Securities with an approximate carrying value of $70,076,000 and $52,707,000
at December 31, 2002 and 2001, 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:
2002 2001
Commercial $ 16,802,888 $ 18,617,714
Real estate construction 15,513,702 12,301,704
Real estate mortgage 182,206,697 166,322,768
Agricultural 52,187,812 53,640,436
Consumer 17,133,717 21,951,943
Other 308,789 338,237
$ 284,153,605 $ 273,172,802
Activity in the allowance for loan losses was as follows:
2002 2001 2000
Beginning balance $ 3,386,425 $ 3,388,380 $ 3,102,800
Charge-offs (1,329,218) (1,145,942) (558,552)
Recoveries 133,868 75,987 94,132
Provision for loan losses 1,204,000 1,068,000 750,000
Ending balance $ 3,395,075 $ 3,386,425 $ 3,388,380
Impaired loans totaled $1,573,000 and $964,000 at December 31, 2002 and 2001.
The average recorded investment in impaired loans during 2002, 2001 and 2000
was $1,441,000, $457,000 and $224,000. The total allowance for loan losses
related to these loans was $675,000 and $249,000 at December 31, 2002 and
2001. Interest income on impaired loans of $8,000, $31,000 and $11,000 was
recognized for cash payments received in 2002, 2001 and 2000.
Nonperforming loans were as follows:
2002 2001 2000
Loans past due over 90 days
still on accrual $ 789,000 $ 1,278,000 $ 1,365,000
Nonaccrual loans 1,573,000 935,000 307,000
Nonperforming loans include impaired loans and smaller balance homogeneous
loans, such as residential mortgage and consumer loans, that are collectively
evaluated for impairment.
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 $93,530,000 and $86,527,000 at December
31, 2002 and 2001. Custodial escrow balances maintained in connection with the
foregoing loan servicing, and included in demand deposits, were approximately
$714,000 and $683,000 at December 31, 2002 and 2001.
Changes in mortgage servicing rights were as follows:
2002 2001 2000
Beginning balance $ 463,067 $ 521,467 $ 606,487
Additions 390,865 81,619 69,885
Amortization (149,898) (140,019) (154,905)
Ending balance $ 704,034 $ 463,067 $ 521,467
Certain directors and executive officers of the Company and companies in which
they have beneficiary ownership were loan customers of the Bank during 2002
and 2001. 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:
2002 2001
Balance, beginning of year $ 1,529,000 $ 1,478,000
Additions, including loans now meeting
disclosure requirements 1,346,000 1,514,000
Amounts collected, including loans no
longer meeting disclosure requirements (1,249,000) (1,463,000)
Balance, end of year $ 1,626,000 $ 1,529,000
NOTE 5 - PREMISES AND EQUIPMENT
Year-end premises and equipment were as follows:
2002 2001
Land and buildings $ 10,790,642 $ 10,773,183
Furniture and equipment 8,001,811 7,941,210
Construction in process 534,659 -
19,327,112 18,714,393
Less accumulated depreciation (8,995,494) (8,209,489)
$ 10,331,618 $ 10,504,904
Depreciation expense was $989,839, $960,661 and $812,453 in 2002, 2001, and
2000.
NOTE 6 - INTANGIBLE ASSETS
Acquired intangible assets were as follows at year-end:
2002
Gross
Carrying Accumulated
Amount Amortization
Amortized intangible assets:
Core deposit intangibles $ 2,890,382 $ 2,226,999
Aggregate amortization expense was $279,468, $279,468 and $279,468 for 2002,
2001 and 2000.
Estimated amortization expense for each of the next five years:
2003 $ 279,468
2004 198,895
2005 19,140
2006 19,140
2007 19,140
NOTE 7 - DEPOSITS
At December 31, 2002, the scheduled maturities of time deposits are as
follows:
2003 $ 111,613,815
2004 20,857,153
2005 2,460,136
2006 21,315,832
2007 6,462,416
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 $1,178,000 and $861,000 at December 31,
2002 and 2001.
NOTE 8 - REPURCHASE AGREEMENTS
Repurchase agreements 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 repurchase agreements for 2002 and 2001 is summarized
as follows:
2002 2001
Average daily balance during the year $ 2,097,456 $ 3,303,000
Average interest rate during the year 1.22% 3.35%
Maximum month-end balance during the year $ 3,504,562 $ 5,164,000
NOTE 9 - 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,
2002 and 2001, $43,937,306 and $43,597,929 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 1.83% to 7.23%. The Bank also has letters of
credit from the FHLB totaling $2,000,000 at December 31, 2002 for the purpose
of securing trust 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, 2002 are as follows:
2003 $ 14,519,457
2004 15,645,814
2005 5,153,194
2006 5,160,971
2007 159,546
Thereafter 3,298,324
$ 43,937,306
NOTE 10 - INCOME TAXES
Income tax expense was as follows:
2002 2001 2000
Current $ 2,189,931 $ 1,878,784 $ 1,782,641
Deferred 280,858 105,194 248,804
$ 2,470,789 $ 1,983,978 $ 2,031,445
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.
2002 2001
Deferred tax assets
Allowance for loan losses $ 889,158 $ 952,005
Core deposit intangibles 245,154 215,651
Other 181 62,610
Deferred tax liabilities
Unrealized gain on securities (952,708) (385,587)
Bank premises and equipment (251,461) (234,934)
FHLB stock (687,803) (626,331)
Mortgage servicing rights (239,372) (157,443)
Other (105,546) (80,389)
Net deferred tax asset (liability) $ (1,102,397) $ (254,418)
Effective tax rates differ from federal statutory rates applied to financial
statement income due to the following:
2002 2001 2000
U. S. federal income tax rate 34.0% 34.0% 34.0%
Changes from the statutory rate
Tax-exempt investment income (5.7) (5.2) (5.9)
Non-deductible interest expense related to
carrying tax-exempt investments .6 .6 .8
Rehabilitation tax credit - (2.1) -
Other .6 (.9) (1.0)
29.5% 26.4% 27.9%
NOTE 11 - EARNINGS PER SHARE
The factors used in the earnings per share computation follow:
2002 2001 2000
Basic Earnings Per Share
Net income $ 5,902,525 $ 5,524,490 $ 5,252,942
Weighted average common
shares outstanding 2,770,282 2,790,238 2,811,565
Basic earnings per share $ 2.13 $ 1.98 $ 1.87
Diluted Earnings Per Share
Net income $ 5,902,525 $ 5,524,490 $ 5,252,942
Weighted average common
shares outstanding 2,770,282 2,790,238 2,811,565
Add dilutive effects of assumed
exercise of stock options 35,836 47,080 56,600
Weighted average common and
dilutive potential common
shares outstanding 2,806,118 2,837,318 2,868,165
Diluted earnings per share $ 2.10 $ 1.95 $ 1.83
Stock options for 3,050 and 14,300 shares common stock were excluded from 2002
and 2001 diluted earnings per share because their impact was antidilutive.
NOTE 12 - 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.
Information about the pension plan was as follows:
2002 2001
Change in benefit obligation:
Beginning benefit obligation $ 3,583,257 $ 3,130,826
Service cost 299,744 240,644
Interest cost 245,253 219,979
Actuarial adjustment 323,543 51,306
Benefits paid (66,230) (59,498)
Ending benefit obligation 4,385,567 3,583,257
Change in plan assets, at fair value:
Beginning plan assets 3,279,471 3,118,137
Actual return (176,162) (68,643)
Employer contribution 360,139 289,475
Benefits paid (66,230) (59,498)
Ending plan assets 3,397,218 3,279,471
Funded status (988,349) (303,786)
Unrecognized net actuarial
(gain) loss 1,236,596 486,520
Unrecognized prior transition asset (2,229) (2,601)
Net pension prepaid benefit $ 246,018 $ 180,133
Net periodic pension cost include the following components:
2002 2001 2000
Service cost $ 299,744 $ 240,644 $ 221,305
Interest cost 245,253 219,979 191,676
Expected return on plan assets (255,964) (246,285) (233,428)
Amortization 5,221 (372) (372)
Net periodic cost $ 294,254 $ 213,966 $ 179,181
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%
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 $270,348, $237,661 and $224,106 in 2002, 2001 and 2000.
NOTE 13 - STOCK OPTION PLAN
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.
Summary of stock option transactions are as follows:
2002 2001 2000
Weighted Weighted Weighted
Option Option Option
Options Price Options Price Options Price
<s> <c> <c> <c> <c> <c> <c>
Outstanding, beginning of year 103,484 $15.52 131,730 $14.32 148,940 $13.17
Granted 6,520 25.85 4,160 23.58 3,950 24.30
Expired (6,096) 20.84 (3,334) 18.34 - -
Exercised (20,794) 12.41 (29,072) 10.92 (21,160) 8.11
Outstanding, end of year 83,114 $16.72 103,484 $15.52 131,730 $14.32
Weighted remaining contractual
Life 64.7 months 62.3 months 66.4 months
Options outstanding at year-end 2002 were as follows:
Outstanding Exercisable
Weighted
Average Weighted Weighted
Remaining Average Average
Contractual Exercise Exercise
Range of Exercise Prices Options Life Price Options Price
<s> <c> <c> <c> <c> <c>
From $8.63 to $11.14 per share 8,800 30.0 $10.52 8,800 $10.52
From $12.00 to $15.50 per share 42,120 54.0 13.83 38,600 13.67
From $18.00 to $26.00 per share 32,194 88.1 22.19 15,424 20.91
83,114 62,824
NOTE 14 - 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 2003 the Bank could, without prior
approval, declare dividends of approximately $4,605,000 plus any 2003 net
profits retained to the date of the dividend declaration.
NOTE 15 - DISCLOSURES ABOUT FAIR VALUE OF FINANCIAL INSTRUMENTS
The fair values of the Company's financial instruments at December 31, 2002
and 2001 are as follows:
2002 2001
Carrying Carrying
Amount Fair Value Amount Fair Value
(In Thousands)
Financial assets
Cash and cash equivalents $ 29,176 $ 29,176 $ 29,638 $ 29,638
Securities 89,509 89,509 75,608 75,608
Mortgage loans held for sale 740 740 2,343 2,392
Loans, net 280,759 287,447 269,786 274,929
FHLB stock 4,027 4,027 3,847 3,847
Interest receivable 3,276 3,276 3,507 3,507
Financial liabilities
Deposits $322,836 $325,454 $308,915 $311,191
Securities sold under
agreements to repurchase
and other borrowings 5,277 5,277 1,602 1,602
FHLB advances 43,937 45,343 43,598 44,752
Interest payable 1,845 1,845 2,815 2,815
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 16 - 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:
2002 2001
Unused lines of credit $ 44,943,000 $ 42,252,000
Commitments to make loans - 2,049,000
Letters of credit 345,000 495,000
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 17 - 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 18 - CAPITAL REQUIREMENTS
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 following table) 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, 2002 and
2001, that the Company and the Bank meet all capital adequacy requirements to
which they are subject.
The most recent notification from the Federal Deposit Insurance Corporation
categorized the Bank as well capitalized under the regulatory framework for
prompt corrective action. To be categorized as well capitalized, the Bank
must maintain minimum Total risk-based, Tier I risk-based and Tier I leverage
ratios as set forth in the following table. There are no conditions or events
since that notification that management believes have changed the
institution's category.
The Company's and the Bank's actual amounts and ratios are presented in the
table below:
To Be Well
Capitalized
Under Prompt
For Capital Corrective
Actual Adequacy Purposes Action Provisions
Amount Ratio Amount Ratio Amount Ratio
2002 (Dollars in Thousands)
<s> <c> <c> <c> <c> <c> <c>
Consolidated
Total Capital (to Risk-Weighted Assets) $ 45,041 15.5% $ 23,247 8% $ 29,059 10%
Tier I Capital (to Risk-Weighted Assets) 41,524 14.3 11,624 4 17,435 6
Tier I Capital (to Average Assets) 41,524 10.2 16,264 4 20,331 5
Bank Only
Total Capital (to Risk-Weighted Assets) $ 38,481 13.3% $ 23,164 8% $ 28,955 10%
Tier I Capital (to Risk-Weighted Assets) 35,073 12.1 11,582 4 17,373 6
Tier I Capital (to Average Assets) 35,073 8.6 16,292 4 20,306 5
2001
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
NOTE 19 - PARENT COMPANY FINANCIAL STATEMENTS
Condensed Balance Sheets
December 31
2002 2001
(In Thousands)
ASSETS
Cash on deposit with subsidiary $ 5,609 $ 3,510
Investment in subsidiary 37,425 33,931
Securities available for sale 1,169 1,759
Total assets $ 44,203 $ 39,200
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities $ 111 $ 100
Stockholders' equity
Preferred stock - -
Common stock 6,807 6,649
Retained earnings 35,436 31,703
Accumulated other comprehensive income 1,849 748
Total liabilities and stockholders' equity $ 44,203 $ 39,200
Condensed Statements of Income and Comprehensive Income
Years Ended December 31
2002 2001 2000
(In Thousands)
Income
Dividends from subsidiary $ 3,400 $ 3,280 $ 3,160
Securities gains (losses), net 145 72 (17)
Interest income 32 44 61
Total income 3,577 3,396 3,204
Expenses
Other expenses 55 39 39
Income before income taxes and equity in
undistributed income of subsidiary 3,522 3,357 3,165
Applicable income tax (expense) benefits (29) (26) 46
Income before equity in undistributed
income of subsidiary 3,493 3,331 3,211
Equity in undistributed income of subsidiary 2,410 2,193 2,042
Net income 5,903 5,524 5,253
Other comprehensive income (loss), net of tax:
Unrealized gains (losses) on securities
Arising during the period 1,245 946 483
Reclassification of realized amount (144) (189) 58
Net change in unrealized gain (loss)
on securities 1,101 757 541
Comprehensive income $ 7,004 $ 6,281 $ 5,794
Condensed Statements of Cash Flows
Years Ended December 31
2002 2001 2000
(In Thousands)
Cash flows from operating activities
Net income $ 5,903 $ 5,524 $ 5,253
Adjustments to reconcile net income to net
cash from operating activities
Equity in undistributed earnings of
Subsidiary (2,410) (2,193) (2,042)
Securities (gains) losses, net (145) (72) 17
Change in other assets (100) 72 (37)
Change in other liabilities 103 - -
Net cash from operating activities 3,351 3,331 3,191
Cash flows from investing activities
Purchase of securities available for sale (109) (311) (1,071)
Proceeds from sales of securities
available for sale 869 820 638
Net cash from investing activities 760 509 (433)
Cash flows from financing activities
Dividends paid (1,885) (1,673) (1,463)
Proceeds from issuance of common stock 188 344 173
Purchase of common stock (315) (1,711) (364)
Net cash from financing activities (2,012) (3,040) (1,654)
Net change in cash 2,099 800 1,104
Cash at beginning of year 3,510 2,710 1,606
Cash at end of year $ 5,609 $ 3,510 $ 2,710
NOTE 20 - QUARTERLY FINANCIAL DATA (UNAUDITED)
Interest Net Interest Net Earnings Per Share
Income Income Income Basic Fully Diluted
2002
First quarter $ 6,233 $ 3,626 $ 1,296 $ .47 $ .46
Second quarter 6,104 3,695 1,221 .44 .44
Third quarter 6,141 3,932 1,625 .59 .58
Fourth quarter 6,310 4,167 1,761 .63 .62
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
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, 2002 and 2001, 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, 2002.
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, 2002 and 2001, and the results of its operations and
its cash flows for each of the three years in the period ended December 31,
2002, 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, 2003
MEET OUR OFFICERS.
BOURBON COUNTY.
PARIS
SENIOR MANAGEMENT
Buckner Woodford - Chairman and CEO
Louis Prichard - President and COO
Norman J. Fryman - Sr. Vice President, Director of Lending
James P. Shipp, Jr. - Sr. Vice President, Director of Branch Administration
Brenda Bragonier - Vice President, Director of Marketing and Human Resources
Hugh Crombie - Vice President, Director of Operations
Greg Dawson - Vice President, Chief Financial Officer
OFFICERS
Heather Barger - Auditor
Brenda Berry - Accountant
Wallis Brooks - Branch Manager
Patty Carpenter - Assistant Vice President, Loan Operations Officer
R.W. Collins, Jr. - Vice President, Agricultural Lender
Cynthia Criswell - Data Processing Officer
Nancye Fightmaster - Vice President, Loan Officer
Shane Foley - Mortgage Operations Manager
David Foster - Vice President, Agricultural Lender
Janice Hash - Accountant and Purchasing Agent
Lisa Highley - Personal Trust Officer
Cathy Hill - Vice President, Director of Collections
Perry Ingram - Assistant Vice President, Network Manager
Gary Linville - Assistant Vice President, Collections Negotiator
Jane Mogge - Head Deposit Operations
Mary Moreland - Assistant Vice President, Loan Officer
Donald Roe - Assistant Vice President, Sr. Data Processing Officer
Rowena Ruff - Investment Advisor
Lydia Sosby - Corporate and Automated Products Officer
Judy Taylor - Assistant Vice President, Human Resource Manager
Rick Wagner - Maintenance Supervisor
Lisa Watkins - Compliance Officer
George Wilder - Vice President, Loan Officer
Buck Woodford, V. - Management Intern
Martha Woodford - Assistant Vice President, Corporate and
Automated Products Manager
Jan Worth - Assistant Vice President, Sr. Personal Trust Officer
Lexington Road Branch
Susan A. Lemons - Assistant Vice President, Branch Manager/Loan Officer
Pleasant Street Branch
Philip Hurst - Assistant Branch Manager
CLARK COUNTY.
WINCHESTER
Rita Bugg - Vice President, Regional Manager
Darren Henry, Vice President, Loan Officer
Kathy Newkirk - Branch Manager, Loan Officer
Teresa Shimfessel - Assistant Vice President, Loan Officer
Rebecca Taulbee - Vice President, Loan Officer
Carolyn Wilkins - Overdraft Management Officer
HARRISON COUNTY.
CYNTHIANA
Ken DeVasher - Vice President, Regional Manager
Paul Clift - Assistant Vice President, Loan Officer
JESSAMINE COUNTY.
NICHOLASVILLE
Michael Lovell - Vice President, Regional Manager
Rick Walling - Assistant Vice President, Loan Officer
SCOTT COUNTY.
Georgetown
Ben Sargent - Vice President, Branch Manager
WOODFORD COUNTY.
VERSAILLES
Duncan Gardner - Vice President, Regional Manager
A.J. Gullett - Assistant Vice President, Loan Officer
Board of Directors
Kentucky Bank
Buckner Woodford
Chairman, Chief Executive Officer
William M. Arvin
Attorney
James L. Ferrell
Physician
K. Bruce Florence
Director, Licking Valley College
Henry Hinkle
President, Hinkle Contracting Company
Mike Hockensmith
Owner and President, The Hockensmith Agency, Inc.
James Kay
Businessman, Farmer
Theodore Kuster
Farmer and Thoroughbred Breeder, West View Equine
Ted McClain
Agent, Hopewell Insurance Company, Inc.
Jonah Mitchell
President, Johan Mitchell Real Estate and Auction Company
Donald Pace
Executive Director of Central Kentucky Educational Co-op with UK
Louis Prichard
President, COO
William R. Stamler
Chairman, Signal Investments, Inc.
Robert G. Thompson
Executive Director, Paris-Bourbon County YMCA
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
Executive Director of Central Kentucky Educational Co-op with UK
John G. Roche
Optician
Ed Saunier
President, Saunier North American, Inc.
James Taulbee
Farmer
REGIONAL BOARD OF DIRECTORS
HARRISON COUNTY
K. 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 J. Graul
Physician
James Kay
Businessman, Farmer
Tricia Kittinger
Woodford Circuit Clerk
Bourbon Bancshares, Inc.
Board of Directors
Buckner Woodford
President and Chief Executive Officer, Bourbon Bancshares, Inc.
Class of 2003
William R. Stamler
Chairman, Signal Investments, Inc.
Class of 2003
Henry Hinkle
President, Hinkle Contracting Corporation
Class of 2005
Robert G. Thompson
Executive Director, Paris/Bourbon County YMCA; Snow Hill Farm
Class of 2005
Theodore Kuster
Farmer and Thoroughbred Breeder, West View Farm
Class of 2005
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, 2003 on the consolidated financial statements of
Bourbon Bancshares, Inc. as of December 31, 2002 and 2001 and for each of the
three years in the period ended December 31, 2002 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, 2003
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 Annual Report of Bourbon Bancshares, Inc. (the
"Company") on Form 10-K for the period ended December 31, 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 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
March 31, 2003
A signed original of this written statement required by Section 906 has been
provided to Bourbon Bancshares, Inc. and will be retained by Bourbon
Bancshares, Inc. and furnished to the Securities and Exchange Commission or
its staff upon request.
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 Annual Report of Bourbon Bancshares, Inc. (the
"Company") on Form 10-K for the period ended December 31, 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 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
March 31, 2003
A signed original of this written statement required by Section 906 has been
provided to Bourbon Bancshares, Inc. and will be retained by Bourbon
Bancshares, Inc. and furnished to the Securities and Exchange Commission or
its staff upon request.
6
6
BOURBON BANCSHARES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2000, 1999 and 1998
43
36
42.
74.
BOURBON BANCSHARES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2002, 2001 and 2000