UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
[ X ] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 1999
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: (606)987-1795
Indicate by check mark whether the registrant (1) has filed
all reports required to be filed by Section 13 or 15(d) of
the Securities Exchange Act of 1934 during the preceding 12
months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days.
Yes X No _____
Number of shares of Common Stock outstanding as of November
12, 1999: 2,802,471.
BOURBON BANCSHARES, INC.
Table of Contents
Part I - Financial Information
Item 1. Financial Statements
Consolidated Balance Sheets 3
Consolidated Statement of Income and Comprehensive Income
Six Months Ending September 30, 1999 & 1998 4
Consolidated Statement of Income and Comprehensive Income
Three Months Ending September 30, 1999 & 1998 5
Consolidated Statements of Cash Flows
Six Months Ending September 30, 1999 & 1998 6
Consolidated Statements of Cash Flows
Three Months Ending September 30, 1999 & 1998 7
Notes to Consolidated Financial Statements 8
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 9
Item 3. Quantitative and Qualitative Disclosures About
Market Risk 17
Part II - Other Information 21
Signatures 22
Exhibits
27 Financial Data Schedule 23
Item 1 - Financial Statements
CONSOLIDATED BALANCE SHEET (unaudited)
(thousands)
9/30/99 12/31/98
Assets
Cash & Due From Banks $ 12,682 $ 10,756
Investment Securities:
Securities Held to Maturity 15,407 16,934
Securities Available for Sale 50,378 55,420
Federal Home Loan Bank Stock 3,288 3,119
Mortgage Loans Held for Sale 3,159 5,909
Loans $227,486 $206,934
Reserve for Loan Losses 3,053 2,735
Net Loans $224,433 $204,199
Premises and Equipment 7,195 6,794
Other Assets 6,599 5,574
Total Assets $323,141 $308,705
Liabilities & Stockholders' Equity
Deposits
Demand $ 40,490 $ 40,336
Savings & Interest Checking 88,694 96,579
Certificates of Deposit 134,912 121,825
Total Deposits $264,096 $258,740
Repurchase Agreements 6,070 6,713
Federal Home Loan Bank Advances 16,667 6,954
Other Borrowed Funds 2,327 4,535
Other Liabilities 2,789 2,391
Total Liabilities $291,949 $279,333
Stockholders' Equity
Common Stock $ 6,491 $ 6,474
Retained Earnings 25,007 22,832
Accumulated Other Comprehensive Income (306) 66
Total Stockholders' Equity $ 31,192 $ 29,372
Total Liabilities & Stockholders' Equity $323,141 $308,705
BOURBON BANCSHARES, INC.
CONSOLIDATED STATEMENT OF INCOME AND COMPREHENSIVE INCOME (unaudited)
(thousands, except per share amounts) Nine Months Ending
9/30/99 9/30/98
INTEREST INCOME:
Loans, including fees $ 14,002 $ 12,637
Investment Securities 2,945 3,290
Other 260 361
Total Interest Income $ 17,207 $ 16,288
INTEREST EXPENSE:
Deposits $ 6,806 $ 7,352
Other 866 677
Total Interest Expense $ 7,672 $ 8,029
Net Interest Income $ 9,535 $ 8,259
Loan Loss Provision 525 488
Net Interest Income After Provision $ 9,010 $ 7,771
OTHER INCOME:
Service Charges $ 1,772 $ 1,646
Securities Gains (Losses) 1 35
Other 772 560
Total Other Income $ 2,545 $ 2,241
OTHER EXPENSES:
Salaries and Benefits $ 3,658 $ 3,371
Occupancy Expenses 875 854
Other 2,347 2,070
Total Other Expenses $ 6,880 $ 6,295
Income Before Taxes $ 4,675 $ 3,717
Income Taxes 1,304 978
Net Income $ 3,371 $ 2,739
Other Comprehensive Income, net of tax:
Change in Unrealized Gains on Securities (372) (4)
Comprehensive Income $ 2,999 $ 2,735
Earnings per share $ 1.20 $ 0.98
Earnings per share - assuming dilution $ 1.18 $ 0.96
CONSOLIDATED STATEMENT OF INCOME AND COMPREHENSIVE INCOME (unaudited)
(thousands, except per share amounts) Three Months Ending
9/30/99 9/30/98
INTEREST INCOME:
Loans, including fees $ 4,891 $ 4,336
Investment Securities 960 1,070
Other 71 100
Total Interest Income $ 5,922 $ 5,506
INTEREST EXPENSE:
Deposits $ 2,283 $ 2,482
Other 339 218
Total Interest Expense $ 2,622 $ 2,700
Net Interest Income $ 3,300 $ 2,806
Loan Loss Provision 175 163
Net Interest Income After Provision $ 3,125 $ 2,643
OTHER INCOME:
Service Charges $ 478 $ 460
Securities Gains (Losses) 15 7
Other 358 318
Total Other Income $ 851 $ 785
OTHER EXPENSES:
Salaries and Benefits $ 1,242 $ 1,124
Occupancy Expenses 291 304
Other 810 742
Total Other Expenses $ 2,343 $ 2,170
Income Before Taxes $ 1,633 $ 1,258
Income Taxes 457 328
Net Income $ 1,176 $ 930
Other Comprehensive Income, net of tax:
Change in Unrealized Gains on Securities (33) 93
Comprehensive Income $ 1,143 $ 1,023
Earnings per share $ 0.42 $ 0.33
Earnings per share - assuming dilution $ 0.42 $ 0.33
BOURBON BANCSHARES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS (unaudited)
(thousands) Nine Months Ending
9/30/99 9/30/98
Cash Flows From Operating Activities
Net Income $ 3,371 $ 2,739
Adjustments to reconcile net income to
net cash provided by operating activities:
Depreciation 450 428
Amortization 380 352
Investment securities (accretion) amortization, net 27 (22)
Provision for loan losses 525 488
Deferred Income Taxes (53) (50)
Investment securities losses (gains), net (1) (35)
Originations of loans held for sale (19,345) (24,272)
Proceeds from sale of loans 22,210 27,984
Capitalization of Mortgage Servicing Rights (203) (252)
Losses (gains) on sale of fixed assets - 25
Losses (gains) on sale of loans (115) (94)
Losses (gains), including write-downs, on real
estate acquired through foreclosure, net 25 -
Changes in:
Interest receivable (286) (417)
Income taxes refundable (47) -
Other assets (592) (34)
Interest payable 229 119
Income taxes payable 26 285
Other liabilities 143 (416)
Net cash provided by operating activities $ 6,744 $ 6,828
Cash Flows From Investing Activities
Purchases of securities available for sale $(32,653)$(19,266)
Proceeds from sales of securities available for sale 17,828 5,544
Proceeds from principal payments, maturities and
calls of securities available for sale 19,084 26,606
Purchase of securities held to maturity - (2,375)
Proceeds from sales, principal payments, maturities
and calls of securities held to maturity 1,551 833
Net change in loans (20,816) (18,217)
Purchases of bank premises and equipment, net (851) (1,031)
Net cash provided by investing activities (15,857) (7,906)
Cash Flows From Financing Activities:
Net change in deposits $ 5,356 $ 9,793
Net change in securities sold under agreements to
repurchase and other borrowings (2,851) (5,174)
Advances from Federal Home Loan Bank 10,000 4,000
Payments on Federal Home Loan Bank advances (287) (4,460)
Purchase of common stock (304) -
Proceeds from issuance of common stock 50 142
Dividends paid (925) (841)
Net cash provided by financing activities 11,039 3,460
Net increase (decrease) in cash and cash equivalents 1,926 2,382
Cash and cash equivalents at beginning of period 10,756 12,275
Cash and cash equivalents at end of period $ 12,682 $ 14,657
CONSOLIDATED STATEMENTS OF CASH FLOWS (unaudited)
(thousands) Three Months Ending
9/30/99 9/30/98
Cash Flows From Operating Activities
Net Income $ 1,176 $ 930
Adjustments to reconcile net income to
net cash provided by operating activities:
Depreciation 150 143
Amortization 125 121
Investment securities (accretion) amortization, net 7 (10)
Provision for loan losses 175 163
Deferred Income Taxes (21) (14)
Investment securities losses (gains), net (15) (7)
Originations of loans held for sale (4,090) (6,195)
Proceeds from sale of loans 4,418 6,023
Capitalization of Mortgage Servicing Rights (35) (64)
Losses (gains) on sale of loans (8) (54)
Changes in:
Interest receivable (349) (184)
Income taxes refundable 180 57
Other assets (382) (55)
Interest payable 239 (10)
Income taxes payable 26 285
Other liabilities 251 130
Net cash provided by operating activities $ 1,847 $ 1,259
Cash Flows From Investing Activities
Purchases of securities available for sale $(10,039)$ (8,088)
Proceeds from sales of securities available for sale 9,007 2,002
Proceeds from principal payments, maturities and
calls of securities available for sale 4,949 7,662
Purchase of securities held to maturity - (1,385)
Proceeds from sales, principal payments, maturities
and calls of securities held to maturity 1,286 50
Net change in loans (13,360) (7,556)
Purchases of bank premises and equipment, net (547) (345)
Net cash provided by investing activities (8,704) (7,660)
Cash Flows From Financing Activities:
Net change in deposits $ 11,287 $ 15,171
Net change in securities sold under agreements to
repurchase and other borrowings (8,016) (5,159)
Advances from Federal Home Loan Bank 5,000 -
Payments on Federal Home Loan Bank advances (73) 1,929
Purchase of common stock (68) -
Proceeds from issuance of common stock - 56
Dividends paid (308) (281)
Net cash provided by financing activities $ 7,822 $ 11,716
Net increase (decrease) in cash and cash equivalents $ 965 $ 5,315
Cash and cash equivalents at beginning of period 11,717 9,342
Cash and cash equivalents at end of period $ 12,682 $ 14,657
BOURBON BANCSHARES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. In Management's opinion, the financial information,
which is unaudited, reflects all adjustments, (consisting
solely of normal recurring adjustments) necessary for a fair
presentation of the financial information as of and for the
nine and three month periods ended September 30, 1999 and
September 30, 1998 in conformity with generally accepted
accounting principles. These financial statements should be
read in conjunction with Bourbon Bancshares, Inc. (Company)
Annual Report on Form 10-K.
2. The Financial Accounting Standards Board has issued
Statement of Financial Accounting Standards No. 130,
"Reporting Comprehensive Income". The requirements are
disclosure related and its implementation will have no
impact on the Company's financial condition or results of
operations. Prior period financial statements have been
restated to meet this reporting format.
3. Recently, the Financial Accounting Standards Board
issued Statement 128, "Earnings Per Share", under which
basic and diluted earnings per share are computed. Prior
amounts have been restated to be comparable. Basic earnings
per share is based on net income divided by the weighted
average number of shares outstanding during the period.
Diluted earnings per share shows the dilutive effect of
additional common shares issuable under stock options.
4. Dividends per share paid for the quarter ended
September 30, 1999 were $0.11 compared to $0.10 on september
30, 1998. This is the same rate of dividend paid in each of
the quarters of the respective years.
5. As of July 15, 1999, the Company issued a two for one
stock split. Each shareholder will receive one additional
share for each share they held. Relative numbers have been
adjusted to reflect this change.
6. On August 13, 1999, the Company acquired the Wilmore
office of National City and assumed certain deposits and
other branch related liabilities. Assets purchased consist
of land, bank premises and equipment, intangible assets and
other assets. Kentucky Bank was paid $8.2 million in cash
for the deposits and branch related liabilities assumed,
less assets purchased.
Item 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
Summary
Bourbon Bancshares, Inc. recorded net income of $3.4
million, or $1.20 per share and $1.18 per share assuming
dilution for the first nine months ended September 30, 1999
compared to $2.7 million, or $0.98 per share and $0.96 per
share assuming dilution for September. The first nine
months reflects an increase in earnings of 23%. The net
income for third quarter of 1999 was $1.2 million, or $0.42
per share and $0.42 per share assuming dilution compared to
$930 thousand, or $0.33 per share and $0.33 per share
assuming dilution for the same period in 1998. The third
quarter's net income resulted in a 26% increase from 1998 to
1999. The per share amounts above have been adjusted to
reflect the 2 for 1 stock split effective in July 1999.
Return on average assets was 1.42% for the first nine months
ended September compared to 1.27% for the same time period
in 1998, an increase of 12%. For the third quarter of 1999,
the return on average assets was 1.47% compared to 1.28% in
1998, an increase of 15%. Return on average equity was
14.9% and 13.2% for the nine months ended September 30, 1999
and 1998, respectively, an increase of 13%. The third
quarter of 1999 resulted in an increase in return on equity
of 16% from 13.2% to 15.3% in 1999.
Net Interest Income
Net interest income was $9.5 million for the nine months
ended September 30, 1999 compared to $8.2 million in 1998,
resulting in an increase of $1.3 million or 15.4%. Net
interest income for the three months ended September 30,
1999 was $3.3 million compared to $2.8 million for the same
period in 1998. Loan volume continues to improve. Year to
date average loans are up $24 million, or nearly 12% from
1998 to 1999 resulting in an increase in loan interest
income of $1.4 million for the first nine months and $555
thousand for the third quarter. Average deposits also
increased from 1998 to 1999, up $14 million, or 6%. This
increased volume within the declining rate environment
resulted in lower interest expense of $546 thousand for the
first nine months and $199 thousand for the third quarter.
Non-Interest Income
Non-interest income increased for the nine-month period
ended September 30 from $2.2 million in 1998 to $2.5 million
in 1999. Third quarter's non-interest income increased from
$785 thousand in 1998 to $851 thousand in 1999. For the
year, an increase of $126 thousand in service charges from
1998 to 1999 is mainly attributable to an improvement in
overdraft charges of $104 thousand ($60 thousand for the
third quarter). The third quarter of 1999 reflects an
increase in service charges of $18 thousand when compared to
1998. Trust income accounts for $77 thousand, debit card
interchange income accounts for $46 thousand, and gains on
loans sold accounts for $21 thousand of the $212 thousand
increase in other income for the first nine months. Other
income increased $40 thousand for the three months ending
September 30, 1999 compared to 1998. Trust commissions
increased $9 thousand during the third quarter of 1999
compared to 1998. The increase in trust fees is mainly due
to non-recurring estate fees and trust termination fees.
Non-Interest Expense
The explanations for the increase of $585 thousand in non-
interest expenses from $6.3 million for the nine months
ended September 30, 1998 to $6.9 million for the same period
in 1999 follows. The third quarter increase was $173
thousand from $2.2 million in 1998 to $2.3 million in 1999.
Salaries and benefits increased $287 thousand for the first
nine months of 1999 compared to 1998, an increase of 8.5%,
and increased $118 thousand during the third quarter of 1999
compared to 1998. In 1999, the Company implemented a
compensation plan with additional incentive compensation.
Incentives for the first nine months were $115 thousand
greater in 1999 compared to 1998 due to this change. Other
compensation and benefits increased 5%.
Occupancy expense increased $21 thousand to $875 thousand
for the first nine months of 1999 compared to 1998. The
decrease for the third quarter was $13 thousand.
Depreciation is up $22 thousand for the year. Equipment
maintenance was $10 thousand higher for the first nine
months of 1999.
Other expenses for the first nine months of 1999 compared to
1998 increased $277 thousand, from $2.1 million to $2.3
million. The third quarter increase compared to 1998 was
$68 thousand. During the third quarter of 1999, the
processing of electronic products was changed. Costs of
these products and their increased usage, and the related
conversion have resulted in an increase in expenses of $100
thousand for 1999 compared to 1998. Other taxes are $25
thousand greater in 1999 compared to 1998. The overall
growth of the Company has caused this item to increase.
With the selling of mortgage loans, the amortization of
mortgage servicing rights increased $29 thousand from 1998
to 1999.
Income Taxes
The tax equivalent rate for the nine months ended September
30 was 28% for 1999 and 26% for 1998. The rate for the
third quarter of 1999 was 28% and for 1998 was 26%. These
rates being less than the statutory rate is a result of the
tax-free securities and loans held by the Company.
Liquidity and Funding
The cash flow statements provide a useful analysis of
liquidity. This report reveals an increase of cash and cash
equivalents for the first nine months of 1999 of $1.9
million and of $2.4 million for the same period in 1998.
The three months ending September 30, 1999 shows an increase
in cash and cash equivalents of $965 thousand and of $5.3
million for the same period in 1998. In 1999, proceeds from
the sale of loans were nearly $22 million compared to $28
million in 1998. Four million dollars of 1998 sales and
five million dollars of 1999 loan securitizations were of a
nonrecurring nature. The decline in rates allowed the
Company to sell some lower coupon loans. Originations of
loans held for sale were $19 million and $24 million for the
nine months ending September 30, 1999 and 1998,
respectively. Third quarter originations were $4 million in
1999 and 6 million in 1998. The loans sold during the third
quarter were $4 million in 1999 and $6 million in 1998.
For the first nine-months, proceeds from security
transactions have exceeded purchases by $6 million in 1999
and $11 million in 1998. For the third quarter, proceeds
from security transactions have exceeded purchases by $5
million in 1999 and $241 thousand in 1998. Of these
changes, principal payments on securities have amounted to
over $6 million in 1999 and over $10 million for the same
period in 1998.
During 1999, $10 million has been borrowed from the Federal
Home Loan Bank (FHLB), $5 million in the third quarter. In
1998, $4 million in advances were received from the FHLB and
$4 million repaid on FHLB advances. Short-term borrowings
decreased $3 million in 1999 and $5 million in 1998.
Deposits increased $5 million in 1999 compared to $10
million in 1998.
Management believes there is sufficient liquidity to meet
all reasonable borrower, depositor and creditor needs in the
present economic environment.
Non-Performing Assets
As of September 30, 1999, the Company's non-performing
assets totaled $1.1 million or 0.4 of loans compared to $931
thousand or 0.5% of loans in 1998. (See table below) Real
estate loans composed 69% and 65% of the non-performing
loans as of September 30, 1999 and 1998, respectively. Lost
interest income on the non-accrual loans for both 1999 and
1998 is immaterial.
September 30
(in thousands)
1999 1998
Non-accrual Loans $ 155 $ 227
Accruing Loans which are
Contractually past due
90 days or more 505 555
Restructured Loans 135 149
Total Nonperforming and Restructured $ 795 $ 931
Other Real Estate 312 -
Total Nonperforming and Restructured
Loans and Other Real Estate $ 1,107 $ 931
Nonperforming and Restructured Loans
as a Percentage of Net Loans 0.35% 0.47%
Nonperforming and Restructured Loans
and Other Real Estate as a Percentage
of Total Assets 0.34% 0.31%
Provision and Reserve for Possible Loan Losses
The 1999 nine-month provision for loan losses of $525
thousand is higher than the 1998 number of $488 thousand.
Loan growth has required management to increase the
provision in order to maintain a reserve ratio that is
adequate and indicative of the quality of loans currently in
the portfolio. As depicted in the table below, the loan
loss reserve to total loans was 1.34% on September 30, 1999
and 1.32% on September 30, 1998. Net charge-offs for the
periods mentioned above have been relatively insignificant.
Management feels the current loan loss reserve is sufficient
to meet future loan problems.
Loan Losses
Nine Months Ended
September 30
(in thousands)
1999 1998
Balance at Beginning of Period $ 2,735 $ 2,322
Amounts Charged-off:
Commercial $ - $ 3
Real Estate Mortgage 38 11
Agricultural 54 15
Consumer 152 205
Total Charged-off Loans $ 244 $ 234
Recoveries on Amounts
Previously Charged-off:
Commercial $ 3 $ 3
Real Estate Mortgage 1 8
Agricultural 2 1
Consumer 31 48
Total Recoveries $ 37 $ 60
Net Charge-offs $ 207 174
Provision for Loan Losses 525 488
Balance at End of Period $ 3,053 $ 2,636
Total Loans, Net of Unearned Income
Average $211,801 $188,707
At September 30 227,486 199,529
As a Percentage of Average Loans:
Net Charge-offs 0.10% 0.09%
Provision for Loan Losses 0.25% 0.26%
Allowance as a Percentage of
Period-end Net Loans 1.34% 1.32%
Allowance as a Multiple of
Net Charge-offs 14.7 15.1
Loan Losses
Quarter
Ended
September 30
(in
thousands)
1999 1998
Balance at Beginning of Period $ 2,935 $ 2,542
Amounts Charged-off:
Commercial $ - $ -
Real Estate Mortgage 10 -
Agricultural 11 15
Consumer 44 83
Total Charged-off Loans $ 65 $ 98
Recoveries on Amounts
Previously Charged-off:
Commercial $ - $ 1
Real Estate Mortgage - 7
Agricultural 1 -
Consumer 7 21
Total Recoveries $ 8 $ 29
Net Charge-offs $ 57 $ 69
Provision for Loan Losses 175 163
Balance at End of Period $ 3,053 $ 2,636
Total Loans, Net of Unearned Income
Average $212,579 $187,368
At September 30 227,486 199,529
As a Percentage of Average Loans:
Net Charge-offs 0.03% 0.04%
Provision for Loan Losses 0.08% 0.09%
Allowance as a Percentage of
Period-end Net Loans 1.34% 1.32%
Allowance as a Multiple of
Net Charge-offs 53.6 38.2
Year 2000
Management has assessed the operational and financial
implications of its Year 2000 needs and developed a plan to
address its data processing systems and their ability to
handle the change. Management has determined that if a
business interruption as a result of the Year 2000 issue
occurred, such an interruption could be material. The
primary effort required to prevent a potential business
interruption is the installation of the most current
software release from the Company's third party provider and
replacement of certain system hardware. The third party
software provider has warranted that Year 2000 remediation
and testing efforts to become compliant have been
successfully completed. Testing of mission critical systems
was completed at the end of the first quarter. Non-mission
critical systems have been evaluated and the final follow-up
was completed during the third quarter. Current cost
estimates for this project are under $150 thousand, with the
majority of this expenditure being for equipment and
software to be capitalized over 3-5 years. In addition,
over $400 thousand was spent on a new mainframe computer
system to enhance our overall computer technology. Year
2000 expenses are subject to change and could vary from
current estimates if the final requirements for Year 2000
readiness exceed management's expectations.
The Company must also rely to some extent on the Year 2000
readiness of other third party entities such as public
utilities and governmental units. These and other like
entities provide important ongoing services to the Company.
Management has therefore developed and implemented
contingency plans that were put in place in the second
quarter, 1999.
The Company's credit customers are also subject to potential
losses as a result of Year 2000 exposure in their own
computer systems as well as the computer systems of their
suppliers and customers. The Company is working with those
customers that the Company believes may be significantly
affected to assess each customer's Year 2000 exposure and
the extent to which the customer has addressed the problem.
Any exposure which, in the opinion of management, is not
adequately addressed will be taken into account in assessing
the loss potential, if any, associated with that credit
relationship.
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 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; material unforeseen complications
related to addressing the Year 2000 problem experienced by
the Company, its suppliers, customers and governmental
agencies; 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.
Item 3 - QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT
MARKET RISK
Asset/Liability management control is designed to ensure
safety and soundness, maintain liquidity and regulatory
capital standards, and achieve acceptable net interest
income. Management considers interest rate risk to be the
most significant market risk. The Company's exposure to
market risk is reviewed on a regular basis by the
Asset/Liability Committee. Interest rate risk is the
potential of economic losses due to future interest rate
changes. These economic losses can be reflected as a loss
of future net interest income and/or a loss of current fair
market values. The objective is to measure the effect on
net interest income and to adjust the balance sheet to
minimize the inherent risk while at the same time maximize
income. Management realizes certain risks are inherent and
that the goal is to identify and minimize the risks. Tools
used by management include the standard GAP model and an
interest rate shock simulation model. The Bank has no
market risk sensitive instruments held for trading purposes.
The following table depicts the change in net interest
income resulting from 100 and 300 basis point changes in
rates. The projections are based on balance sheet growth
assumptions and repricing opportunities for new, maturing
and adjustable rate amounts. In addition, the projected
percentage changes from level rates are outlined below
within the Board of Directors specified limits. As of
September 30, 1999 the projected percentage changes are
within the Board limits and the Company's interest rate risk
is also with Board limits. The projected net interest
income report summarizing the Company's interest rate
sensitivity as of September 30, 1999 is as follows:
(in thousands)
PROJECTED NET INTEREST INCOME
Level
Rate Change: - 300 - 100 Rates + 100 + 300
Year One (10/1/99 - 9/30/2000)
Interest Income $22,017 $24,077 $25,143 $26,149 $28,222
Interest Expense 8,078 10,120 11,141 12,162 14,204
Net Interest Income $13,939 $13,957 $14,002 $13,987 $14,018
PROJECTED DOLLAR INCREASE (DECREASE) FROM "LEVEL RATES"
Year One (10/1/99 - 9/30/2000)
Interest Income (3,126) (1,066) N/A 1,006 3,078
Interest Expense (3,063) (1,021) N/A 1,021 3,063
Net Interest Income (63) (45) N/A (15) 15
PROJECTED PERCENTAGE INCREASE (DECREASE) FROM "LEVEL RATES"
Year One (10/1/99 - 9/30/2000)
Interest Income -12.4% -4.2% N/A 4.0% 12.2%
Interest Expense -27.5% -9.2% N/A 9.2% 27.5%
Net Interest Income -0.4% -0.3% N/A -0.1% 0.1%
Limitation on % Change >-10.0% >-4.0% N/A >-4.0% >-10.0%
These numbers are comparable to 1998. In 1999, year one
reflected a decline in net interest income of 0.4% with a
300 basis point decline compared to the 1.8% decline in
1998. The 300 basis point increase in rates reflected a
0.1% increase in net interest income in 1999 compared to
1.9% in 1998. Percentage changes in 1999 are less than 1998
reflecting less vulnerability to drastic shifts in interest
rates.
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.
In addition, the Company uses interest rate sensitivity gap
analysis to monitor the relationship between the maturity
and repricing of its interest-earning assets and interest-
bearing liabilities, while maintaining an acceptable
interest rate spread. Interest rate sensitivity gap is
defined as the difference between the amount of interest-
earning assets maturing or repricing within a specific time
period and the amount of interest-bearing liabilities
maturing or repricing within that time period. A gap is
considered positive when the amount of interest-rate-
sensitive assets exceeds the amount of interest-sensitive-
liabilities, and is considered negative when the amount of
interest-rate-sensitive liabilities exceeds the amount of
interest-rate-sensitive assets. Generally, during a period
of rising interest rates, a negative gap would adversely
affect net interest income, while a positive gap would
result in an increase in net interest income. Conversely,
during a period of falling interest rates, a negative gap
would result in an increase in net interest income, while a
positive gap would negatively affect net interest income.
The Company's goal is to maintain a reasonable balance
between exposure to interest rate fluctuations and earnings.
The interest rate sensitivity analysis as of September 30
shown below depicts amounts based on the earliest period in
which they can normally be expected to reprice. The chart
reveals that assets and liabilities are fairly well matched
for the early periods specified below. The 1999's numbers
reflect a more negative position due to the amount of 5 year
loans originated and deposits being generated, mainly with
repricing opportunities of less than 2 years. The decay
rates used for Demand deposits, NOW's, Savings and Money
Market Savings are 5%, 30%, 20% and 30%, respectively.
(in thousands)
Total 1 2 3 4 5 >5
Year Years Years Years Years Years
ASSETS
Cash & Due From Banks $ 12,500 $ - $ - $ - $ - $ - $ 12,500
Fed Funds & Int-Earning Due from Banks 182 182 - - - - -
Variable Rate Investment 16,593 16,593 - - - - -
Fixed Rate Investment 49,192 13,979 10,589 4,691 4,721 3,207 12,005
Variable Rate Loans 68,935 62,164 1,732 1,693 1,156 2,128 62
Fixed Rate Loans 158,551 40,932 21,755 33,648 35,425 24,650 2,141
Others Assets 17,188 - - - - - 17,188
Total Assets / Repricing Assets $323,141 $133,850 $ 34,076 $ 40,032 $ 41,302 $ 29,985 $ 43,896
Repricing Assets - Accumulated 133,850 167,926 207,958 249,260 279,245 323,141
% of Current Balance 41.4% 10.5% 12.4% 12.8% 9.3% 13.6%
% of Current Balance - Accumulated 41.4% 52.0% 64.4% 77.1% 86.4% 100.0%
Accumulated
LIABILITIES
Demand Deposit Accounts $ 40,490 $ 2,025 $ 1,923 $ 1,827 $ 1,736 $ 1,649 $ 31,330
NOW Accounts 53,060 15,918 11,143 7,800 5,460 3,822 8,917
Savings Accounts 14,375 2,873 2,301 1,840 1,472 1,178 4,711
Money Market Savings 9,263 2,779 1,945 1,362 953 667 1,557
Subtotal Deposit Accounts 117,188 23,595 17,312 12,829 9,621 7,316 46,515
Other Variable Deposits 7,133 7,133 - - - - -
Fixed Rate Deposits 139,775 116,756 20,117 1,234 998 531 139
Variable Rate Other Liabilities 7,648 7,073 - - - - 575
Fixed Rate Other Liabilities 17,416 304 1,170 236 4,229 11,416 61
Other Liabilities 2,789 - - - - - 2,789
Total Captial 31,192 - - - - - 31,192
Total Liabilities / Repricing Liab $323,141 $154,861 $ 38,599 $ 14,299 $ 14,848 $ 19,263 $ 81,271
Repricing Liabilities - Accumulated 154,861 193,460 207,759 222,607 241,870 323,141
% of Current Balance 47.9% 11.9% 4.4% 4.6% 6.0% 25.2%
% of Current Balance - Accum 47.9% 59.9% 64.3% 68.9% 74.8% 100.0%
SUMMARY
Total Repricing Assets $133,850 $ 34,076 $ 40,032 $ 41,302 $ 29,985 $ 43,896
Total Repricing Liabilities 154,861 38,599 14,299 14,848 19,263 81,271
Total Repricing Gap (By Bucket) (21,011) (4,523) 25,733 26,454 10,722 (37,375)
Total Repricing Assets - Cumulat 298,356 133,850 167,926 207,958 249,260 279,245 323,141
Total Repricing Liabilities - Cum 290,058 154,861 193,460 207,759 222,607 241,870 323,141
Repricing Gap - Cumulative 8,298 (21,011) (25,534) 199 26,653 37,375 -
Gap/Total Assets (by Bucket) -6.50% -1.40% 7.96% 8.19% 3.32% -11.57%
Cumulative Gap/Total Assets -6.50% -7.90% 0.06% 8.25% 11.57% 0.00%
Part II - Other Information
Item 1. Legal Proceedings
The Company is not a party to any material legal
proceedings.
Item 2. Changes in Securities
None
Item 3. Defaults upon Senior Securities
None
Item 4. Submission of Matters to a Vote of Security Holders
None
Item 5. Other Information
None
Item 6. Exhibits and Reports on Form 8-K
1. Exhibits as required by Item 601 of Regulation S-B.
27 Financial Data Schedule
2. No reports on Form 8-K have been filed during the
quarter for which this report is filed.
SIGNATURES
In accordance with the requirements of the Exchange Act, the
registrant caused the report to be signed on its behalf by
the undersigned, thereunto duly authorized.
Bourbon Bancshares, Inc.
Date ___11/12/99_______ __/s/Buckner Woodford____________
Buckner Woodford, President and C.E.O.
Date ___11/12/99 ______ __/s/Gregory J. Dawson___________
Gregory J. Dawson, Chief Financial Officer