Table of Contents

 

 

 

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 September 30, 2015

 

or

 

o         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:  000-52598

 

KENTUCKY BANCSHARES, INC.

(Exact name of registrant as specified in its charter)

 

Kentucky

 

61-0993464

(State or other jurisdiction of

 

(I.R.S. Employer Identification No.)

incorporation or organization)

 

 

 

P.O. Box 157, Paris, Kentucky

 

40362-0157

(Address of principal executive offices)

 

(Zip Code)

 

Registrant’s telephone number, including area code:  (859) 987-1795

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.  Yes x  No o

 

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (Section 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).  Yes x  No o

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company.  See definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.  (Check one):

 

Large accelerated filer o

Accelerated filer o

Non-accelerated filer x  (Do not check if a smaller reporting company)

Smaller reporting company o

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).  Yes o  No x

 

Number of shares of Common Stock outstanding as of October 31, 2015:  2,989,205.

 

 

 


 


Table of Contents

 

KENTUCKY BANCSHARES, INC.

 

Table of Contents

 

Part I - Financial Information

 

 

 

Item 1. Financial Statements

 

 

 

 

Consolidated Balance Sheets

3

 

 

 

 

Consolidated Statements of Income and Comprehensive Income

4

 

 

 

 

Consolidated Statement of Changes in Stockholders’ Equity

6

 

 

 

 

Consolidated Statements of Cash Flows

7

 

 

 

 

Notes to Consolidated Financial Statements

8

 

 

 

Item 2.

Management’s Discussion and Analysis of Financial Condition and Results of Operations

38

 

 

 

Item 3.

Quantitative and Qualitative Disclosures About Market Risk

51

 

 

 

Item 4.

Controls and Procedures

52

 

 

 

Part II - Other Information

53

 

 

Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds

53

 

 

 

Item 6.

Exhibits

53

 

 

 

Signatures

55

 

2



Table of Contents

 

Item 1 - Financial Statements

 

KENTUCKY BANCSHARES, INC.

 

CONSOLIDATED BALANCE SHEETS (unaudited)

(in thousands, except per share data)

 

 

 

9/30/2015

 

12/31/2014

 

Assets

 

 

 

 

 

Cash and due from banks

 

$

19,752

 

$

16,771

 

Federal funds sold

 

3,129

 

398

 

Cash and cash equivalents

 

22,881

 

17,169

 

Interest bearing time deposits

 

4,874

 

1,280

 

Securities available for sale

 

238,600

 

246,861

 

Trading Assets

 

5,480

 

5,370

 

Mortgage loans held for sale

 

1,520

 

776

 

Loans

 

612,504

 

538,305

 

Allowance for loan losses

 

(6,142

)

(6,012

)

Net loans

 

606,362

 

532,293

 

Federal Home Loan Bank stock

 

7,034

 

5,981

 

Real estate owned, net

 

3,384

 

4,603

 

Bank premises and equipment, net

 

16,865

 

16,479

 

Interest receivable

 

3,888

 

3,299

 

Mortgage servicing rights

 

1,270

 

1,209

 

Goodwill

 

13,117

 

13,117

 

Other intangible assets

 

853

 

177

 

Other assets

 

7,414

 

6,595

 

Total assets

 

$

933,542

 

$

855,209

 

 

 

 

 

 

 

Liabilities and Stockholders’ Equity

 

 

 

 

 

Deposits

 

 

 

 

 

Non-interest bearing

 

$

201,644

 

$

176,743

 

Time deposits, $250,000 and over

 

58,710

 

52,913

 

Other interest bearing

 

450,651

 

425,213

 

Total deposits

 

711,005

 

654,869

 

Repurchase agreements

 

19,918

 

12,457

 

Federal funds purchased

 

4,300

 

 

Short-term Federal Home Loan Bank advances

 

 

10,000

 

Long-term Federal Home Loan Bank advances

 

90,991

 

83,785

 

Other borrowings

 

5,000

 

 

Subordinated debentures

 

7,217

 

7,217

 

Interest payable

 

783

 

642

 

Other liabilities

 

5,739

 

8,297

 

Total liabilities

 

844,953

 

777,267

 

 

 

 

 

 

 

Stockholders’ equity

 

 

 

 

 

Preferred stock, 300,000 shares authorized and unissued

 

 

 

Common stock, no par value; 10,000,000 shares authorized; 2,988,205 and 2,720,098 shares issued and outstanding on September 30, 2015 and December 31, 2014

 

19,584

 

12,662

 

Retained earnings

 

67,448

 

64,489

 

Accumulated other comprehensive income

 

1,557

 

791

 

Total stockholders’ equity

 

88,589

 

77,942

 

Total liabilities & stockholders’ equity

 

$

933,542

 

$

855,209

 

 

See Accompanying Notes

 

3



Table of Contents

 

KENTUCKY BANCSHARES, INC.

CONSOLIDATED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME (LOSS) (unaudited)

(in thousands, except per share amounts)

 

 

 

Nine Months Ending

 

 

 

9/30/2015

 

9/30/2014

 

INTEREST INCOME:

 

 

 

 

 

Loans, including fees

 

$

19,649

 

$

17,757

 

Securities

 

 

 

 

 

Taxable

 

2,180

 

1,941

 

Tax exempt

 

2,029

 

2,133

 

Trading assets

 

127

 

129

 

Other

 

222

 

210

 

Total interest income

 

24,207

 

22,170

 

INTEREST EXPENSE:

 

 

 

 

 

Deposits

 

1,499

 

1,557

 

Repurchase agreements and other borrowings

 

122

 

72

 

Federal Home Loan Bank advances

 

1,187

 

1,003

 

Subordinated debentures

 

175

 

172

 

Total interest expense

 

2,983

 

2,804

 

Net interest income

 

21,224

 

19,366

 

Provision for loan losses

 

1,025

 

500

 

Net interest income after provision

 

20,199

 

18,866

 

NON-INTEREST INCOME:

 

 

 

 

 

Service charges

 

3,210

 

3,223

 

Loan service fee income, net

 

153

 

63

 

Trust department income

 

788

 

717

 

Gain on sale of available for sale securities, net

 

410

 

514

 

Gain (loss) on trading assets

 

(16

)

196

 

Gain on sale of mortgage loans

 

1,172

 

715

 

Brokerage income

 

431

 

422

 

Debit card interchange income

 

1,813

 

1,543

 

Bargain purchase gain

 

141

 

 

Other

 

780

 

34

 

Total other income

 

8,882

 

7,427

 

NON-INTEREST EXPENSE:

 

 

 

 

 

Salaries and employee benefits

 

12,176

 

11,013

 

Occupancy expenses

 

2,887

 

2,526

 

Repossession expenses, net

 

343

 

163

 

FDIC Insurance

 

436

 

403

 

Legal and professional fees

 

790

 

765

 

Data processing

 

1,000

 

1,005

 

Debit card expenses

 

872

 

698

 

Amortization

 

146

 

104

 

Advertising and marketing

 

700

 

653

 

Taxes other than payroll, property and income

 

728

 

647

 

Telephone

 

230

 

256

 

Postage

 

266

 

236

 

Loan fees

 

264

 

273

 

Acquisition expenses

 

858

 

 

Other

 

1,798

 

1,452

 

Total other expenses

 

23,494

 

20,194

 

Income before taxes

 

5,587

 

6,099

 

Income taxes

 

409

 

704

 

Net income

 

$

5,178

 

$

5,395

 

Other Comprehensive Income, net of tax:

 

 

 

 

 

Change in Unrealized Gains on Securities

 

766

 

5,080

 

Comprehensive Income

 

$

5,944

 

$

10,475

 

Earnings per share

 

 

 

 

 

Basic

 

$

1.85

 

$

1.99

 

Diluted

 

1.85

 

1.99

 

Dividends per share

 

0.78

 

0.75

 

 

See Accompanying Notes

 

4



Table of Contents

 

KENTUCKY BANCSHARES, INC.

CONSOLIDATED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME (LOSS) (unaudited)

(in thousands, except per share amounts)

 

 

 

Three Months Ending

 

 

 

9/30/2015

 

9/30/2014

 

INTEREST INCOME:

 

 

 

 

 

Loans, including fees

 

$

7,094

 

$

6,100

 

Securities

 

 

 

 

 

Taxable

 

755

 

586

 

Tax exempt

 

663

 

682

 

Trading assets

 

44

 

49

 

Other

 

85

 

65

 

Total interest income

 

8,641

 

7,482

 

INTEREST EXPENSE:

 

 

 

 

 

Deposits

 

520

 

483

 

Repurchase agreements and other borrowings

 

75

 

24

 

Federal Home Loan Bank advances

 

388

 

380

 

Subordinated debentures

 

60

 

57

 

Total interest expense

 

1,043

 

944

 

Net interest income

 

7,598

 

6,538

 

Provision for loan losses

 

375

 

300

 

Net interest income after provision

 

7,223

 

6,238

 

NON-INTEREST INCOME:

 

 

 

 

 

Service charges

 

1,215

 

1,150

 

Loan service fee income, net

 

45

 

29

 

Trust department income

 

252

 

256

 

Gain on sale of available for sale securities, net

 

159

 

81

 

Gain (loss) on trading assets

 

37

 

34

 

Gain on sale of mortgage loans

 

404

 

317

 

Brokerage income

 

189

 

132

 

Debit card interchange income

 

649

 

534

 

Bargain purchase gain

 

141

 

 

Other

 

(101

)

(43

)

Total other income

 

2,990

 

2,490

 

NON-INTEREST EXPENSE:

 

 

 

 

 

Salaries and employee benefits

 

4,232

 

3,750

 

Occupancy expenses

 

1,101

 

848

 

Repossession expenses, net

 

61

 

140

 

FDIC Insurance

 

135

 

135

 

Legal and professional fees

 

267

 

307

 

Data processing

 

329

 

337

 

Debit card expenses

 

323

 

202

 

Amortization

 

85

 

30

 

Advertising and marketing

 

275

 

212

 

Taxes other than payroll, property and income

 

269

 

225

 

Telephone

 

85

 

80

 

Postage

 

95

 

79

 

Loan fees

 

67

 

113

 

Acquisition expense

 

721

 

 

Other

 

524

 

507

 

Total other expenses

 

8,569

 

6,965

 

Income before taxes

 

1,644

 

1,763

 

Income taxes

 

103

 

43

 

Net income

 

$

1,541

 

$

1,720

 

Other Comprehensive Income, net of tax:

 

 

 

 

 

Change in Unrealized Gains on Securities

 

1,989

 

99

 

Comprehensive Income

 

$

3,530

 

$

1,819

 

Earnings per share

 

 

 

 

 

Basic

 

$

0.52

 

$

0.63

 

Diluted

 

0.52

 

0.63

 

Dividends per share

 

0.26

 

0.25

 

 

See Accompanying Notes

 

5



Table of Contents

 

KENTUCKY BANCSHARES, INC.

 

CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS’ EQUITY (unaudited)

(in thousands, except share information)

 

 

 

 

 

 

 

 

 

 

 

 

 

Accumulated

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Other

 

Total

 

 

 

—Common Stock(1)—

 

— Preferred Stock—

 

Retained

 

Comprehensive

 

Stockholders’

 

 

 

Shares

 

Amount

 

Shares

 

Amount

 

Earnings

 

Income

 

Equity

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balances, January 1, 2015

 

2,720,098

 

$

12,662

 

 

$

 

$

64,489

 

$

791

 

$

77,942

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Assumption of Madison Financial Corporation preferred stock

 

 

 

12,047

 

4,390

 

 

 

4,390

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Redemption of Madison Financial Corporation preferred stock

 

 

 

(12,047

)

(4,390

)

 

 

(4,390

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Common stock issued, net of forfeitures Stock grants of 5,850 shares, stock gifts of 22 shares and stock forfeitures of 153 shares)

 

5,719

 

2

 

 

 

 

 

2

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Shares issued to acquire Madison Financial Corporation, net of issuance costs

 

263,361

 

6,827

 

 

 

 

 

6,827

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Stock based compensation expense

 

 

99

 

 

 

 

 

99

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Common stock purchased and retired

 

(973

)

(6

)

 

 

(25

)

 

(31

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net change in unrealized gain (loss) on securities available for sale, net of tax and reclassifications

 

 

 

 

 

 

766

 

766

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net income

 

 

 

 

 

5,178

 

 

5,178

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Dividends declared - $0.78 per share

 

 

 

 

 

(2,194

)

 

(2,194

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balances, September 30, 2015

 

2,988,205

 

$

19,584

 

 

$

 

$

67,448

 

$

1,557

 

$

88,589

 

 


(1) Common Stock has no par value; amount includes Additional Paid-in Capital

 

See Accompanying Notes

 

6



Table of Contents

 

KENTUCKY BANCSHARES, INC.

 

CONSOLIDATED STATEMENTS OF CASH FLOWS  (unaudited)

(in thousands)

 

 

 

Nine Months Ending

 

 

 

9/30/2015

 

9/30/2014

 

Cash Flows From Operating Activities

 

 

 

 

 

Net Income

 

$

5,178

 

$

5,395

 

Adjustments to reconcile net income to net cash provided by operating activities:

 

 

 

 

 

Depreciation and amortization

 

1,439

 

1,357

 

Securities amortization (accretion), net

 

741

 

476

 

Stock based compensation expense

 

99

 

83

 

Provision for loan losses

 

1,025

 

500

 

Securities available for sale gains, net

 

(410

)

(514

)

Net change in trading assets

 

(110

)

(5,325

)

Originations of loans held for sale

 

(38,991

)

(26,655

)

Proceeds from sale of loans

 

39,419

 

26,839

 

Losses (gains) on sale of fixed assets

 

(4

)

 

Losses (gains) on other real estate

 

(5

)

(134

)

Gain on sale of mortgage loans

 

(1,172

)

(715

)

Bargain purchase gain

 

(141

)

 

Write-downs of other real estate, net

 

252

 

64

 

Changes in:

 

 

 

 

 

Interest receivable

 

(280

)

99

 

Other assets

 

(1,379

)

872

 

Interest payable

 

82

 

(79

)

Other liabilities

 

(1,659

)

(2,125

)

Net cash from operating activities

 

4,084

 

138

 

Cash Flows From Investing Activities

 

 

 

 

 

Acquisition of Madison Financial Corporation, net

 

3,514

 

 

Net change in interest bearing time deposits

 

(615

)

 

Purchases of securities available for sale

 

(20,310

)

(41,495

)

Proceeds from sales of securities

 

21,579

 

53,555

 

Proceeds from principal payments, maturities and calls of securities

 

34,360

 

11,928

 

Net change in loans

 

(585

)

(44,225

)

Proceeds from redemption of Federal Home Loan Bank stock

 

 

750

 

Purchases of bank premises and equipment

 

(705

)

(895

)

Proceeds from sale of bank premises & equipment

 

7

 

 

Proceeds from the sale of other real estate

 

4,812

 

1,752

 

Net cash from investing activities

 

42,057

 

(18,630

)

Cash Flows From Financing Activities:

 

 

 

 

 

Net change in deposits

 

(39,687

)

(29,082

)

Net change in repurchase agreements and other borrowings

 

5,516

 

1,198

 

Short-term advances from Federal Home Loan Bank

 

130,000

 

175,000

 

Payment on short-term Federal Home Loan Bank advances

 

(140,000

)

(150,000

)

Long-term advances from Federal Home Loan Bank

 

14,709

 

27,277

 

Payments on long-term Federal Home Loan Bank advances

 

(7,503

)

(9,687

)

Proceeds from note payable

 

5,000

 

 

Redemption of acquired preferred shares and unpaid dividends and interest

 

(6,066

)

 

Issue costs paid for common shares issued

 

(176

)

 

Proceeds from issuance of common stock

 

2

 

 

Purchase of common stock

 

(30

)

(91

)

Dividends paid

 

(2,194

)

(2,041

)

Net cash from financing activities

 

(40,429

)

12,574

 

Net change in cash and cash equivalents

 

5,712

 

(5,918

)

Cash and cash equivalents at beginning of period

 

17,169

 

23,160

 

Cash and cash equivalents at end of period

 

$

22,881

 

$

17,242

 

Supplemental disclosures of cash flow information Cash paid during the year for:

 

 

 

 

 

Interest expense

 

$

2,842

 

$

2,883

 

Income taxes

 

 

1,000

 

 

 

 

 

 

 

Supplemental disclosures of non-cash investing activities

 

 

 

 

 

Real estate acquired through foreclosure

 

$

3,394

 

$

1,651

 

 

See Accompanying Notes

 

7



Table of Contents

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

1.              SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

 

The financial information presented as of any date other than December 31 has been prepared from the Company’s books and records without audit.  The accompanying consolidated financial statements have been prepared in accordance with the instructions to Form 10-Q and Rule 10-01 of Regulation S-X.  Certain financial information that is normally included in annual financial statements prepared in accordance with accounting principles generally accepted in the United States of America, but is not required for interim reporting purposes, has been condensed or omitted.  There have been no significant changes to the Company’s accounting and reporting policies as disclosed in the Company’s Annual Report on Form 10-K for the year ended December 31, 2014.  In the opinion of management, all adjustments, consisting of normal recurring adjustments, necessary for a fair presentation of such financial statements, have been included.  The results of operations for the interim periods are not necessarily indicative of the results to be expected for the full year.

 

For further information, refer to the consolidated financial statements and footnotes thereto included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2014.

 

Basis of Presentation:  The consolidated financial statements include the accounts of Kentucky Bancshares, Inc. (the “Company”, “we”, “our” or “us”), its wholly-owned subsidiaries, Kentucky Bank (the “Bank”) and KBI Insurance Company, Inc., and the Bank’s wholly-owned subsidiary, KB Special Assets Unit, LLC.  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, Elliott, Fayette, Harrison, Jessamine, Madison, Rowan, Scott, Woodford and adjoining counties in Kentucky.  Management continues to consider opportunities for branch expansion and will also consider acquisition opportunities that help advance its strategic objectives.  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.

 

On July 9, 2014, a new subsidiary of the Company was incorporated under the name KBI Insurance Company, Inc.  KBI Insurance Company, Inc. is a subsidiary of Kentucky Bancshares, Inc. and is located in Las Vegas, Nevada.  It is a captive insurance subsidiary which provides various liability and property damage insurance policies for Kentucky Bancshares, Inc. and its related subsidiaries.  KBI Insurance Company, Inc. is regulated by the State of Nevada Division of Insurance.

 

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 and such differences could be material to the financial statements.

 

8



Table of Contents

 

Trading Assets:  The Company engages in trading activities for its own account.  Securities that are held principally for resale in the near term are recorded at fair value with changes in fair value included in earnings. Interest and dividends are included in net interest income.

 

Loss Contingencies:  Loss contingencies, including claims and legal actions arising in the ordinary course of business, are recorded as liabilities when the likelihood of loss is probable and an amount or range of loss can be reasonably estimated.

 

Reclassifications:  Some items in the prior year financial statements were reclassified to conform to the current presentation.  Reclassifications had no effect on prior period net income or stockholders’ equity.

 

Acquisition:  On July 24, 2015, the Company acquired Madison Financial Corporation (“MFC”) and its wholly-owned subsidiary, Madison Bank (“MB”).  MFC was headquartered in Richmond, Kentucky with approximately $116.0 million in total assets and operated 3 financial centers. The acquisition expanded the Company’s presence into Madison County, Kentucky with minimal overlap of its existing market footprint. The total purchase price for MFC was $6.8 million net of capital stock issuance cost, consisting of the issuance of 263,361 shares of the Company’s common stock valued at $6.8 million net of capital stock issuance cost, and $3 thousand in cash for fractional shares.  The acquisition was accounted for under the acquisition method of acounting. Accordingly, the Company recognized amounts for identifiable assets acquired and liabilities assumed at their estimated acquisition date fair values, while approximately $900 thousand of transaction and integration costs associated with the acquisition were expensed as incurred. Of the total purchase price, $0 was allocated to goodwill and $141 thousand was recorded for a bargain purchase gain. 

 

Goodwill:  Goodwill resulting from business combinations prior to January 1, 2009 represents the excess of the purchase price over the fair value of the net assets of businesses acquired.  Goodwill resulting from business combinations after January 1, 2009, is generally determined as the excess of the fair value of the consideration transferred, plus the fair value of any noncontrolling interests in the acquiree, over the fair value of the net assets acquired and liabilities assumed as of the acquisition date.  Goodwill and intangible assets acquired in a purchase business combination and determined to have an indefinite useful life are not amortized, but tested for impairment at least annually.  The Company has selected December 31 as the date to perform the annual impairment test.  Intangible assets with definite useful lives are amortized over their estimated useful lives to their estimated residual values.  Goodwill is the only intangible asset with an indefinite life on our balance sheet.  At a minimum, management is required to assess goodwill and other intangible assets annually for impairment.  This assessment involves estimating cash flows for future periods, preparing analyses of market multiples for similar operations, and estimating the fair value of the reporting unit to which the goodwill is allocated.  If these variables change negatively, the Company would be required to take a charge against earnings to write down the asset to the lower fair value.

 

Purchased Credit Impaired Loans:  As part of the Madison Financial Corporation acquisition, the Company purchased loans, some of which have shown evidence of credit deterioration since origination. These purchased credit impaired loans are recorded at the amount paid, such that there is no carryover of the seller’s allowance for loan losses. After acquisition, losses are recognized by an increase in the allowance for loan losses. Such purchased credit impaired loans are accounted for individually or aggregated into pools of loans based on common risk characteristics such as, credit score, loan type, and date of origination. 

 

The Company estimates the amount and timing of expected cash flows for each loan or pool, and the expected cash flows in excess of amount paid is recorded as interest income over the remaining life of the loan or pool (accretable yield).

 

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The excess of the loan’s or pool’s contractual principal and interest over expected cash flows is not recorded (nonaccretable difference). Over the life of the loan or pool, expected cash flows continue to be estimated. If the present value of expected cash flows is less than the carrying amount, a loss is recorded. If the present value of expected cash flows is greater than the carrying amount, it is recognized as part of future interest income.

 

Adoption of New Accounting Standards

 

In January 2014, FASB issued Accounting Standards Update 2014-04, Receivables—Troubled Debt Restructurings by Creditors (Subtopic 310-40): Reclassification of Residential Real Estate Collateralized Consumer Mortgage Loans upon Foreclosure (a consensus of the FASB Emerging Issues Task Force). The ASU clarifies when an insubstance repossession or foreclosure occurs and a creditor is considered to have received physical possession of real estate property collateralizing a consumer mortgage loan. Specifically, the new ASU requires a creditor to reclassify a collateralized consumer mortgage loan to real estate property upon obtaining legal title to the real estate collateral, or the borrower voluntarily conveying all interest in the real estate property to the lender to satisfy the loan through a deed in lieu of foreclosure or similar legal agreement. Additional disclosures are required detailing the amount of foreclosed residential real estate property held by the creditor and the recorded investment in consumer mortgages collateralized by real estate property that are in the process of foreclosure. The new guidance is effective for annual periods, and interim reporting periods within those annual periods, beginning after December 15, 2014. The adoption of this guidance did not have a material impact on the Company’s consolidated financial statements, but will result in additional disclosures.

 

In May 2014, FASB issued Accounting Standards Update 2014-09, Revenue from Contracts with Customers (Topic 606). The ASU creates a new topic, Topic 606, to provide guidance on revenue recognition for entities that enter into contracts with customers to transfer goods or services or enter into contracts for the transfer of nonfinancial assets. The core principle of the guidance is that an entity should recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. Additional disclosures are required to provide quantitative and qualitative information regarding the nature, amount, timing, and uncertainty of revenue and cash flows arising from contracts with customers. The new guidance is effective for annual reporting periods, and interim reporting periods within those annual periods, beginning after December 15, 2016. Early adoption is not permitted. Management is currently evaluating the impact of the adoption of this guidance on the Company’s financial statements.  However, in April 2015, the FASB voted to defer the effective date of ASU 2014-09 by one year making the amendments effective for public entities for annual reporting periods beginning after December 15, 2017, including interim periods within those reporting periods.  Companies have the option to apply ASU 2014-09 as of the original effective date.

 

In June 2014, FASB issued Accounting Standards Update 2014-11, Transfers and Servicing (Topic 860): Repurchase-to-Maturity Transactions, Repurchase Financings, and Disclosures.  The amendments in this update require two accounting changes.  First, the amendments in this update change the accounting for repurchase-to-maturity transactions to secured borrowing accounting.

 

Second, for repurchase financing arrangements, the amendments require separate accounting for a transfer of a financial asset executed contemporaneously with a repurchase agreement with the same counter-party, which will result in secured borrowing accounting for the repurchase agreement.

 

This update also requires certain disclosures for these types of transactions.  This ASU became effective for the Company on January 1, 2015.  The adoption of ASU 2014-11 did not have a material impact on the Company’s financial statements.

 

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2.  ACQUISITION OF MADISON FINANCIAL CORPORATION

 

On July 24, 2015, the Company acquired Madison Financial Corporation and its wholly-owned subsidiary, Madison Bank, both of which were headquartered in Richmond, Kentucky.  As a result of the acquisition the Company expanded its presence into central Kentucky with minimal overlap of its existing market footprint and generate long-term value for the Company shareholders.  Madison Bank had $116.0 million in total assets and operated three financial centers.

 

The total purchase price for Madison Financial Corporation was $6.8 million net of capital stock issuance cost, consisting of $3 thousand cash for fractional shares and the issuance of 263,361 shares of the Company’s common stock valued at $6.8 million net of capital stock issuance cost.  The acquisition was accounted for under the acquisition method of accounting.  Accordingly, the Company recognized amounts for identifiable assets acquired and liabilities assumed at their estimated acquisition date fair values, while approximately $900 thousand of transaction and integration costs associated with the acquisition were expensed as incurred.  Of the total purchase price, $0 was allocated to goodwill.

 

Based on management’s preliminary valuation of the fair value of tangible and intangible assets acquired and liabilities assumed, which are based on assumptions that are subject to change, the purchase price for the Madison Financial Corporation acquisition is allocated as follows (in thousands):

 

Cash and cash equivalents

 

$

3,517

 

Interest-bearing deposits in other financial institutions

 

2,979

 

Securities available for sale

 

27,704

 

Loans

 

77,620

 

Federal Home Loan Bank Stock

 

1,053

 

Accrued interest receivable

 

309

 

Premises and equipment

 

789

 

Other real estate

 

445

 

Deferred tax assets

 

647

 

Core deposit intangible asset

 

800

 

Other assets

 

115

 

 

 

 

 

Total assets acquired

 

$

115,978 

 

 

 

 

 

Deposits

 

$

95,823

 

Other borrowings

 

6,245

 

Accrued interest payable

 

59

 

Other liabilities

 

817

 

Total liabilities assumed

 

$

102,944

 

 

 

 

 

Liquidation amount of preferred stock including unpaid dividends and interest

 

6,066

 

 

 

 

 

Total identifiable net assets

 

$

6,968

 

Bargain purchase gain

 

$

(141

)

 

 

$

6,827

 

 

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The fair value of net assets acquired includes fair value adjustments to certain loan receivables that were not considered impaired as of the acquisition date.  The fair value adjustments were determined using discounted contractual cash flows.  However, the Company believes that all contractual cash flows related to these loans will be collected.  As such, these loan receivables were not considered impaired at the acquisition date and were not subject to the guidance relating to purchase credit impaired loans, which have shown evidence of credit deterioration since origination.  Loan receivables acquired that were not subject to these requirements include non-impaired loans with a fair value and gross contractual amounts receivable of $73.6 million and $74.7 million as of the date of acquisition.  The company is still in process of gathering information about the day one fair value of assets acquired and liabilities assumed which are subject to change during the measurement period.

 

3.  SECURITIES

 

SECURITIES AVAILABLE FOR SALE

 

Period-end securities are as follows:

(in thousands)

 

 

 

 

 

Gross

 

Gross

 

 

 

 

 

Amortized 

 

Unrealized

 

Unrealized

 

Fair

 

 

 

Cost

 

Gains

 

Losses

 

Value

 

Available for Sale

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

September 30, 2015

 

 

 

 

 

 

 

 

 

U.S. government agencies

 

$

51,671

 

$

210

 

$

(185

)

$

51,696

 

States and political subdivisions

 

84,914

 

2,414

 

(287

)

87,041

 

Mortgage-backed - residential

 

99,625

 

559

 

(716

)

99,468

 

Equity securities

 

368

 

27

 

 

395

 

Total

 

$

236,578

 

$

3,210

 

$

(1,188

)

$

238,600

 

 

 

 

 

 

 

 

 

 

 

December 31, 2014

 

 

 

 

 

 

 

 

 

U.S. government agencies

 

$

61,721

 

$

1

 

$

(1,136

)

$

60,586

 

States and political subdivisions

 

86,322

 

3,234

 

(275

)

89,281

 

Mortgage-backed - residential

 

97,349

 

267

 

(918

)

96,698

 

Equity securities

 

270

 

26

 

 

296

 

Total

 

$

245,662

 

$

3,528

 

$

(2,329

)

$

246,861

 

 

The amortized cost and fair value of securities at September 30, 2015 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.  Further discussion concerning Fair Value Measurements can be found in Note 8.

 

 

 

Amortized

 

Fair

 

(in thousands)

 

Cost

 

Value

 

Due in one year or less

 

$

40

 

$

40

 

Due after one year through five years

 

22,352

 

22,468

 

Due after five years through ten years

 

64,933

 

65,724

 

Due after ten years

 

49,260

 

50,505

 

 

 

136,585

 

138,737

 

Mortgage-backed - residential

 

99,625

 

99,468

 

Equity

 

368

 

395

 

Total

 

$

236,578

 

$

238,600

 

 

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Table of Contents

 

Proceeds from sales of securities during the first nine months of 2015 and 2014 were $21.6 million and $53.6 million.  Gross gains of $413 thousand and $914 thousand and gross losses of $3 and $400 thousand were realized on those sales, respectively.  The tax provision related to these realized net gains was $139 and $175 thousand, respectively.  Proceeds from sales of securities during the three months ending September 30, 2015 and September 30, 2014 were $12.5 million and $13.5 million.  Gross gains of $162 thousand and $129 thousand and gross losses of $3 thousand and $48 thousand were realized on those sales, respectively.  The tax provision related to these realized gains and losses was $54 thousand and $28 thousand, respectively.

 

Securities with unrealized losses September 30, 2015 and at December 31, 2014 not recognized in income are as follows:

 

September 30, 2015

 

 

 

Less than 12 Months

 

12 Months or More

 

Total

 

 

 

Fair

 

Unrealized

 

Fair

 

Unrealized

 

Fair

 

Unrealized

 

Description of Securities

 

Value

 

Loss

 

Value

 

Loss

 

Value

 

Loss

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

U.S. Government agencies

 

$

8,815

 

$

(33

)

$

19,404

 

$

(152

)

$

28,219

 

$

(185

)

States and municipals

 

8,453

 

(118

)

7,166

 

(169

)

15,619

 

(287

)

Mortgage-backed - residential

 

38,558

 

(493

)

12,346

 

(223

)

50,904

 

(716

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total temporarily impaired

 

$

55,826

 

$

(644

)

$

38,916

 

$

(544

)

$

94,742

 

$

(1,188

)

 

December 31, 2014

 

 

 

Less than 12 Months

 

12 Months or More

 

Total

 

 

 

Fair

 

Unrealized

 

Fair

 

Unrealized

 

Fair

 

Unrealized

 

Description of Securities

 

Value

 

Loss

 

Value

 

Loss

 

Value

 

Loss

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

U.S. Government agencies

 

$

12,528

 

$

(176

)

$

45,066

 

$

(960

)

$

57,594

 

$

(1,136

)

States and municipals

 

5,011

 

(27

)

9,738

 

(248

)

14,749

 

(275

)

Mortgage-backed - residential

 

46,685

 

(572

)

18,747

 

(346

)

65,432

 

(918

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total temporarily impaired

 

$

64,224

 

$

(775

)

$

73,551

 

$

(1,554

)

$

137,775

 

$

(2,329

)

 

The Company evaluates securities for other than temporary impairment at least on a quarterly basis, and more frequently when economic or market concerns warrant such evaluation.  In analyzing an issuer’s financial condition, we may consider many factors including, (1) whether the securities are issued by the federal government or its agencies, (2) whether downgrades by bond rating agencies have occurred, (3) the results of reviews of the issuer’s financial condition and near-term prospects, (4) the length of time and the extent to which the fair value has been less than cost, and (5) whether we intend to sell the investment security or more likely than not will be required to sell the investment security before its anticipated recovery.

 

Unrealized losses on securities included in the tables above have not been recognized into income because (1) all rated securities are investment grade and are of high credit quality, (2) management does not intend to sell and it is more likely than not that management would not be required to sell the securities prior to their anticipated recovery, (3) management believes the decline in fair value is largely due to changes in interest rates and (4) management believes the declines in fair value are temporary.  The Company believes the fair value is expected to recover as the securities approach maturity.

 

TRADING ASSETS

 

The trading assets of $5.5 million are primarily comprised of municipal securities which are held for a minimal period of time.

 

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4. LOANS

 

Loans at period-end are as follows:

 

(in thousands)

 

9/30/15

 

12/31/14

 

 

 

 

 

 

 

Commercial

 

$

51,905

 

$

47,185

 

Real estate construction

 

27,305

 

16,938

 

Real estate mortgage:

 

 

 

 

 

1-4 family residential

 

217,498

 

189,458

 

Multi-family residential

 

38,768

 

34,415

 

Non-farm & non-residential

 

187,033

 

161,822

 

Agricultural

 

70,754

 

71,345

 

Consumer

 

19,082

 

16,863

 

Other

 

159

 

279

 

Total

 

$

612,504

 

$

538,305

 

 

As discussed under Footnote 2 “Acquisition”, the above loan balances include loans purchased in the Madison Financial Corporation acquisition.  All loan balances acquired in the Madison Financial Corporation acquisition have no allocated allowance for loan losses. The composition of loans acquired as of September 30, 2015 is as follows:

 

 

 

9/30/15

 

 

 

 

 

Commercial

 

$

2,073

 

Real estate construction

 

5,822

 

Real estate mortgage:

 

 

 

1-4 family mortgage

 

20,837

 

Multi-family residential

 

5,729

 

Non-farm & non-residential

 

29,668

 

Agricultural

 

2,793

 

Consumer

 

1,283

 

Total

 

$

68,205

 

 

Activity in the allowance for loan losses for the nine month and three month periods indicated was as follows:

 

 

 

Nine Months Ended September 30, 2015

 

 

 

(in thousands)

 

 

 

Beginning

 

 

 

 

 

 

 

Ending

 

 

 

Balance

 

Charge-offs 

 

Recoveries 

 

Provision

 

Balance

 

 

 

 

 

 

 

 

 

 

 

 

 

Commercial

 

$

339

 

$

30

 

$

 

$

116

 

$

425

 

Real estate Construction

 

446

 

 

6

 

46

 

498

 

Real estate mortgage:

 

 

 

 

 

 

 

 

 

 

 

1-4 family residential

 

1,829

 

241

 

8

 

260

 

1,856

 

Multi-family residential

 

495

 

94

 

27

 

12

 

440

 

Non-farm & non-residential

 

813

 

 

8

 

221

 

1,042

 

Agricultural

 

998

 

242

 

20

 

(92

)

684

 

Consumer

 

520

 

195

 

35

 

196

 

556

 

Other

 

32

 

768

 

571

 

231

 

66

 

Unallocated

 

540

 

 

 

35

 

575

 

 

 

$

6,012

 

$

1,570

 

$

675

 

$

1,025

 

$

6,142

 

 

 

 

Three Months Ended September 30, 2015

 

 

 

(in thousands)

 

 

 

Beginning

 

 

 

 

 

 

 

Ending

 

 

 

Balance

 

Charge-offs 

 

Recoveries 

 

Provision

 

Balance

 

 

 

 

 

 

 

 

 

 

 

 

 

Commercial

 

$

399

 

$

5

 

$

 

$

31

 

$

425

 

Real estate construction

 

476

 

 

4

 

18

 

498

 

Real estate mortgage:

 

 

 

 

 

 

 

 

 

 

 

1-4 family residential

 

1,807

 

89

 

3

 

135

 

1,856

 

Multi-family residential

 

442

 

 

25

 

(27

)

440

 

Non-farm & non-residential

 

1,074

 

 

8

 

(40

)

1,042

 

Agricultural

 

578

 

 

8

 

98

 

684

 

Consumer

 

534

 

32

 

8

 

46

 

556

 

Other

 

55

 

275

 

162

 

124

 

66

 

Unallocated

 

585

 

 

 

(10

)

575

 

 

 

$

5,950

 

$

401

 

$

218

 

$

375

 

$

6,142

 

 

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Table of Contents

 

Purchased Credit Impaired Loans:

 

The Company has purchased loans, for which there was, at acquisition, evidence of deterioration of credit quality since origination and it was probable, at acquisition, that all contractually required payments would not be collected.  The carrying amount of those loans is as follows:

 

 

 

9/30/15

 

12/31/14

 

 

 

 

 

 

 

Commercial

 

$

2

 

$

 

Real estate mortgage:

 

 

 

 

 

1-4 family residential

 

2,584

 

 

Non-farm & non-residential

 

1,034

 

 

Agricultural

 

4

 

 

 

 

$

3,624

 

$

 

 

There was no associated allowance for loan losses as of September 30, 2015 or December 31, 2014 for purchased credit impaired loans. The contractual value of these loans was $4.6 million at September 30, 2015.

 

Accretable yield, or income expected to be collected, is as follows:

 

 

 

Three months ended

 

Nine Months Ended

 

 

 

9/30/15

 

9/30/14

 

9/30/15

 

9/30/14

 

 

 

 

 

 

 

 

 

 

 

Balance, beginning of period

 

$

 

$

 

$

 

$

 

New loans purchased

 

514

 

 

514

 

 

Accretion of income

 

 

 

 

 

Balance, end of period

 

$

514

 

$

 

$

514

 

$

 

 

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Table of Contents

 

 

 

Nine Months Ended September 30, 2014

 

 

 

(in thousands)

 

 

 

Beginning

 

 

 

 

 

 

 

Ending

 

 

 

Balance

 

Charge-offs 

 

Recoveries 

 

Provision

 

Balance

 

 

 

 

 

 

 

 

 

 

 

 

 

Commercial

 

$

230

 

$

200

 

$

 

$

213

 

$

243

 

Real estate Construction

 

358

 

 

11

 

18

 

387

 

Real estate mortgage:

 

 

 

 

 

 

 

 

 

 

 

1-4 family residential

 

2,169

 

179

 

55

 

(27

)

2,018

 

Multi-family residential

 

427

 

42

 

 

86

 

471

 

Non-farm & non-residential

 

564

 

 

367

 

(167

)

764

 

Agricultural

 

578

 

18

 

27

 

103

 

690

 

Consumer

 

548

 

201

 

58

 

139

 

544

 

Other

 

51

 

398

 

285

 

139

 

77

 

Unallocated

 

516

 

 

 

(4

)

512

 

 

 

$

5,441

 

$

1,038

 

$

803

 

$

500

 

$

5,706

 

 

 

 

Three Months Ended September 30, 2014

 

 

 

(in thousands)

 

 

 

Beginning

 

 

 

 

 

 

 

Ending

 

 

 

Balance

 

Charge-offs 

 

Recoveries 

 

Provision

 

Balance

 

 

 

 

 

 

 

 

 

 

 

 

 

Commercial

 

$

231

 

$

 

$

 

$

12

 

$

243

 

Real estate Construction

 

359

 

 

3

 

25

 

387

 

Real estate mortgage:

 

 

 

 

 

 

 

 

 

 

 

1-4 family residential

 

2,324

 

91

 

39

 

(254

)

2,018

 

Multi-family residential

 

327

 

42

 

 

186

 

471

 

Non-farm & non-residential

 

734

 

 

 

30

 

764

 

Agricultural

 

546

 

18

 

2

 

160

 

690

 

Consumer

 

543

 

48

 

17

 

32

 

544

 

Other

 

33

 

196

 

126

 

114

 

77

 

Unallocated

 

517

 

 

 

(5

)

512

 

 

 

$

5,614

 

$

395

 

$

187

 

$

300

 

$

5,706

 

 

The following tables present the balance in the allowance for loan losses and the recorded investment (excluding accrued interest receivable amounting to $2.6 million as of September 30, 2015 and $2.0 million at December 31, 2014) in loans by portfolio segment and based on impairment method as of September 30, 2015 and December 31, 2014:

 

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Table of Contents

 

 

 

Individually

 

Collectively

 

Purchased

 

 

 

As of September 30, 2015

 

Evaluated for

 

Evaluated for

 

Credit

 

 

 

(in thousands)

 

Impairment

 

Impairment

 

Impaired

 

Total

 

Allowance for Loan Losses:

 

 

 

 

 

 

 

 

 

Commercial

 

$

 

$

425

 

$

 

$

425

 

Real estate construction

 

 

498

 

 

498

 

Real estate mortgage

 

 

 

 

 

 

 

 

 

1-4 family residential

 

51

 

1,805

 

 

1,856

 

Multi-family residential

 

 

440

 

 

440

 

Non-farm & non-residential

 

86

 

956

 

 

1,042

 

Agricultural

 

335

 

349

 

 

684

 

Consumer

 

 

556

 

 

556

 

Other

 

 

66

 

 

66

 

Unallocated

 

 

575

 

 

575

 

 

 

$

472

 

$

5,670

 

 

$

6,142

 

Loans:

 

 

 

 

 

 

 

 

 

Commercial

 

$

 

$

51,903

 

$

2

 

$

51,905

 

Real estate construction

 

 

27,305

 

 

27,305

 

Real estate mortgage:

 

 

 

 

 

 

 

 

 

1-4 family residential

 

3,120

 

211,794

 

2,584

 

217,498

 

Multi-family residential

 

 

38,768

 

 

38,768

 

Non-farm & non-residential

 

2,796

 

183,203

 

1,034

 

187,033

 

Agricultural

 

4,262

 

66,488

 

4

 

70,754

 

Consumer

 

 

19,082

 

 

19,082

 

Other

 

 

159

 

 

159

 

 

 

$

10,178

 

$

598,702

 

$

3,624

 

$

612,504

 

 

 

 

Individually

 

Collectively

 

 

 

As of December 31, 2014

 

Evaluated for

 

Evaluated for

 

 

 

(in thousands)

 

Impairment

 

Impairment

 

Total

 

Allowance for Loan Losses:

 

 

 

 

 

 

 

Commercial

 

$

 

$

339

 

$

339

 

Real estate construction

 

 

446

 

446

 

Real estate mortgage:

 

 

 

 

 

 

 

1-4 family residential

 

56

 

1,773

 

1,829

 

Multi-family residential

 

94

 

401

 

495

 

Non-farm & non-residential

 

136

 

677

 

813

 

Agricultural

 

712

 

286

 

998

 

Consumer

 

 

520

 

520

 

Other

 

 

32

 

32

 

Unallocated

 

 

540

 

540

 

 

 

$

998

 

$

5,014

 

$

6,012

 

Loans:

 

 

 

 

 

 

 

Commercial

 

$

 

$

47,185

 

$

47,185

 

Real estate construction

 

 

16,938

 

16,938

 

Real estate mortgage:

 

 

 

 

 

 

 

1-4 family residential

 

2,098

 

187,360

 

189,458

 

Multi-family residential

 

264

 

34,151

 

34,415

 

Non-farm & non-residential

 

2,958

 

158,864

 

161,822

 

Agricultural

 

8,479

 

62,866

 

71,345

 

Consumer

 

 

16,863

 

16,863

 

Other

 

 

279

 

279

 

 

 

$

 13,799

 

$

524,506

 

$

538,305

 

 

17



Table of Contents

 

The following table presents loans individually evaluated for impairment by class of loans as of and for the nine months ended September 30, 2015 (in thousands):

 

 

 

Unpaid

 

 

 

Allowance for

 

Average

 

Interest

 

Cash Basis

 

 

 

Principal

 

Recorded

 

Loan Losses

 

Recorded

 

Income

 

Interest

 

 

 

Balance

 

Investment

 

Allocated

 

Investment

 

Recognized

 

Recognized

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

With no related allowance recorded:

 

 

 

 

 

 

 

 

 

 

 

 

 

Real estate mortgage:

 

 

 

 

 

 

 

 

 

 

 

 

 

1-4 family residential

 

2,649

 

2,649

 

 

1,867

 

90

 

90

 

Non-farm & non-residential

 

273

 

273

 

 

 

91

 

 

 

 

 

Agricultural

 

230

 

230

 

 

291

 

25

 

25

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

With an allowance recorded:

 

 

 

 

 

 

 

 

 

 

 

 

 

Real estate mortgage:

 

 

 

 

 

 

 

 

 

 

 

 

 

1-4 family residential

 

471

 

471

 

51

 

1,512

 

15

 

15

 

Non-farm & non-residential

 

2,523

 

2,523

 

86

 

2,795

 

89

 

89

 

Multi-family residential

 

 

 

 

31

 

 

 

Agricultural

 

4,032

 

4,032

 

335

 

4,242

 

7

 

7

 

Consumer

 

 

 

 

 

 

 

Other

 

 

 

 

 

 

 

Total

 

$

10,178

 

$

10,178

 

$

472

 

$

10,829

 

$

226

 

$

226

 

 

The recorded investment in loans excludes accrued interest receivable and loan origination fees, net due to immateriality.

 

18



Table of Contents

 

The following table presents loans individually evaluated for impairment by class of loans for the nine months ended September 30, 2014:

 

 

 

 

 

Year to Date

 

Year to Date

 

 

 

Average

 

Interest

 

Cash Basis

 

 

 

Recorded

 

Income

 

Interest

 

(in thousands):

 

Investment

 

Recognized

 

Recognized

 

 

 

 

 

 

 

 

 

With no related allowance recorded:

 

 

 

 

 

 

 

Real estate mortgage:

 

 

 

 

 

 

 

1-4 family residential

 

1,109

 

43

 

43

 

Non-farm & non-residential

 

653

 

68

 

68

 

Agricultural

 

3,404

 

96

 

96

 

 

 

 

 

 

 

 

 

With an allowance recorded:

 

 

 

 

 

 

 

Real estate mortgage:

 

 

 

 

 

 

 

1-4 family residential

 

1,442

 

26

 

26

 

Multi-family residential

 

289

 

5

 

5

 

Non-farm & non-residential

 

3,263

 

100

 

100

 

Agricultural

 

4,633

 

 

 

 

 

 

 

 

 

 

 

Total

 

$

14,793

 

$

338

 

$

338

 

 

The recorded investment in loans excludes accrued interest receivable and loan origination fees, net due to immateriality.

 

19



Table of Contents

 

The following table presents loans individually evaluated for impairment by class of loans as of and for the year ended December 31, 2014 (in thousands):

 

 

 

Unpaid

 

 

 

Allowance for

 

Average

 

Interest

 

Cash Basis

 

 

 

Principal

 

Recorded

 

Loan Losses

 

Recorded

 

Income

 

Interest

 

 

 

Balance

 

Investment

 

Allocated

 

Investment

 

Recognized

 

Recognized

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

With no related allowance recorded:

 

 

 

 

 

 

 

 

 

 

 

 

 

Real estate mortgage:

 

 

 

 

 

 

 

 

 

 

 

 

 

1-4 family residential

 

$

1,618

 

$

1,618

 

$

 

$

1,147

 

$

25

 

$

25

 

Non-farm & non-residential

 

 

 

 

552

 

 

 

Agricultural

 

442

 

442

 

 

2,696

 

29

 

29

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

With an allowance recorded:

 

 

 

 

 

 

 

 

 

 

 

 

 

Real estate mortgage

 

 

 

 

 

 

 

 

 

 

 

 

 

1-4 family residential

 

480

 

480

 

56

 

990

 

18

 

18

 

Multi-family residential

 

264

 

264

 

94

 

284

 

5

 

5

 

Non-farm & non-residential

 

2,958

 

2,958

 

136

 

3,173

 

115

 

115

 

Agricultural

 

8,037

 

8,037

 

712

 

5,341

 

116

 

116

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total

 

$

13,799

 

$

13,799

 

$

998

 

$

14,183

 

$

308

 

$

308

 

 

The recorded investment in loans excludes accrued interest receivable and loan origination fees, net due to immateriality.

 

20



Table of Contents

 

The following tables present loans individually evaluated for impairment by class of loans for the three months ending September 30, 2015 and September 30, 2014

 

 

 

Three Months Ending September 30, 2015

 

 

 

Average

 

Interest

 

Cash Basis

 

 

 

Recorded

 

Income

 

Interest

 

(in thousands):

 

Investment

 

Recognized

 

Recognized

 

 

 

 

 

 

 

 

 

With no related allowance recorded:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Real estate mortgage:

 

 

 

 

 

 

 

1-4 family residential

 

$

1,997

 

$

28

 

$

28

 

Agricultural

 

217

 

3

 

3

 

Non-farm & non-residential

 

137

 

 

 

 

 

 

 

 

 

 

 

With an allowance recorded:

 

 

 

 

 

 

 

Real estate mortgage:

 

 

 

 

 

 

 

1-4 family residential

 

1,225

 

5

 

5

 

Multi-family residential

 

 

 

 

Non-farm & non-residential

 

2,722

 

30

 

30

 

Agricultural

 

4,149

 

2

 

2

 

Total

 

$

10,447

 

$

68

 

$

68

 

 

The recorded investment in loans excludes accrued interest receivable and loan origination fees, net due to immateriality.

 

 

 

Three Months Ending September 30, 2014

 

 

 

Average

 

Interest

 

Cash Basis

 

 

 

Recorded

 

Income

 

Interest

 

 

 

Investment

 

Recognized

 

Recognized

 

 

 

 

 

 

 

 

 

With no related allowance recorded:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Real estate mortgage:

 

 

 

 

 

 

 

1-4 family residential

 

$

1,208

 

$

13

 

$

13

 

Non-farm & non-residential

 

980

 

19

 

19

 

Agricultural

 

4,883

 

37

 

37

 

 

 

 

 

 

 

 

 

With an allowance recorded:

 

 

 

 

 

 

 

Real estate mortgage:

 

 

 

 

 

 

 

1-4 family residential

 

1,572

 

5

 

5

 

Multi-family residential

 

303

 

 

 

Non-farm & non-residential

 

3,910

 

34

 

34

 

Agricultural

 

4,755

 

 

 

 

 

 

 

 

 

 

 

Total

 

$

17,611

 

$

108

 

$

108

 

 

The recorded investment in loans excludes accrued interest receivable and loan origination fees, net due to immateriality.

 

21



Table of Contents

 

The following tables present the recorded investment in nonaccrual, loans past due over 90 days still on accrual and accruing troubled debt restructurings by class of loans as of September 30, 2015 and December 31, 2014:

 

 

 

 

 

Loans Past Due

 

 

 

 

 

 

 

Over 90 Days

 

Accruing

 

As of September 30, 2015

 

 

 

Still

 

Troubled Debt

 

(in thousands)

 

Nonaccrual

 

Accruing

 

Restructurings

 

 

 

 

 

 

 

 

 

Commerical

 

$

9

 

$

 

 

$

 

 

Real estate construction

 

136

 

 

 

Real estate mortgage:

 

 

 

 

 

 

 

1-4 family residential

 

1,569

 

60

 

471

 

Multi-family residential

 

 

 

 

Non-farm & non-residential

 

477

 

 

1,791

 

Agricultural

 

155

 

32

 

3,829

 

Consumer

 

7

 

4

 

 

 

 

 

 

 

 

 

 

Total

 

$

2,353

 

$

96

 

$

6,091

 

 

 

 

 

 

 

 

 

Loans included in totals above acquired from Madison Financial Corporation

 

$

929

 

$

34

 

$

 

 

 

 

 

 

Loans Past Due

 

 

 

 

 

 

 

Over 90 Days

 

Accruing

 

As of December 31, 2014

 

 

 

Still

 

Troubled Debt

 

(in thousands)

 

Nonaccrual

 

Accruing

 

Restructurings

 

 

 

 

 

 

 

 

 

Commercial

 

$

25

 

$

 

$

 

Real estate construction

 

142

 

 

 

Real estate mortgage:

 

 

 

 

 

 

 

1-4 family residential

 

1,390

 

23

 

480

 

Multi-family residential

 

264

 

 

 

Non-farm & non-residential

 

380

 

 

1,829

 

Agricultural

 

4,371

 

 

3,829

 

Consumer

 

5

 

1

 

 

 

 

 

 

 

 

 

 

Total

 

$

6,577

 

$

24

 

$

6,138

 

 

Nonaccrual loans secured by real estate make up 99.3% of the total nonaccruals at September 30, 2015.

 

Nonaccrual loans and loans past due 90 days still on accrual include both smaller balance homogeneous loans that are collectively evaluated for impairment and individually classified impaired loans.

 

A loan is considered impaired when, based on current information and events, it is probable that a creditor will be unable to collect all amounts due according to the contractual terms of the loan agreement.  All amounts due according to the contractual terms means that both the contractual interest payments and the contractual principal payments of a loan will be collected as scheduled in the loan agreement.

 

22



Table of Contents

 

Nonaccrual loans are loans for which payments in full of principal or interest is not expected or which principal or interest has been in default for a period of 90 days or more unless the asset is both well secured and in the process of collection.  Other impaired loans may be loans showing signs of weakness or interruptions in cash flow, but ultimately are current or less than 90 days past due with respect to principal and interest and for which we anticipate full payment of principal and interest but not in accordance with contractual terms.

 

Additional factors considered by management in determining impairment and non-accrual status include payment status, collateral value, availability of current financial information, and the probability of collecting all contractual principal and interest payments.

 

The following tables present the aging of the recorded investment in past due and non-accrual loans as of September 30, 2015 and December 31, 2014 by class of loans:

 

 

 

30-59

 

60-89

 

Loans Past Due

 

 

 

Total

 

 

 

As of September 30, 2015

 

Days

 

Days

 

Over 90 Days

 

 

 

Past Due &

 

Loans Not

 

(in thousands)

 

Past Due 

 

Past Due

 

Still Accruing

 

Non-accrual

 

Non-accrual

 

Past Due

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Commercial

 

$

106

 

$

113

 

$

 

$

9

 

$

228

 

$

51,677

 

Real estate construction

 

1,211

 

 

 

136

 

1,347

 

25,958

 

Real estate mortgage:

 

 

 

 

 

 

 

 

 

 

 

 

 

1-4 family residential

 

1,248

 

705

 

60

 

1,569

 

3,582

 

213,916

 

Multi-family residential

 

 

 

 

 

 

38,768

 

Non-farm & non-residential

 

110

 

 

 

477

 

587

 

186,446

 

Agricultural

 

127

 

118

 

32

 

155

 

432

 

70,322

 

Consumer

 

93

 

10

 

4

 

7

 

114

 

18,968

 

Other

 

 

 

 

 

 

159

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total

 

$

2,895

 

$

946

 

$

96

 

$

2,353

 

$

6,290

 

$

606,214

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Loans included in totals above acquired from Madison Financial Corporation

 

$

585

 

$

100

 

$

34

 

$

929

 

$

1,648

 

$

66,557

 

 

 

 

30-59

 

60-89

 

Greater than

 

 

 

Total

 

 

 

As of December 31, 2014

 

Days

 

Days

 

90 Days

 

 

 

Past Due &

 

Loans Not

 

(in thousands)

 

Past Due 

 

Past Due

 

Past Due

 

Non-accrual

 

Non-accrual

 

Past Due

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Commercial

 

$

92

 

$

 

$

 

$

25

 

$

117

 

$

47,068

 

Real estate construction

 

 

 

 

142

 

142

 

16,796

 

Real estate mortgage:

 

 

 

 

 

 

 

 

 

 

 

 

 

1-4 family residential

 

1,531

 

232

 

23

 

1,390

 

3,176

 

186,282

 

Multi-family residential

 

 

131

 

 

264

 

395

 

34,020

 

Non-farm & non-residential

 

67

 

 

 

380

 

447

 

161,375

 

Agricultural

 

7

 

11

 

 

4,371

 

4,389

 

66,956

 

Consumer

 

130

 

25

 

1

 

5

 

161

 

16,702

 

Other

 

 

 

 

 

 

279

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total

 

$

1,827

 

$

399

 

$

24

 

$

6,577

 

$

8,827

 

$

529,478

 

 

23



Table of Contents

 

Troubled Debt Restructurings:

 

The Company has allocated $403 thousand in specific reserves to customers whose loan terms have been modified in troubled debt restructurings as of September 30, 2015.  The Company allocated $369 thousand for specific reserves to customers whose loan terms had been modified in troubled debt restructuring as of December 31, 2014.

 

The Company has not committed to lend additional amounts as of September 30, 2015 and December 31, 2014 to customers with outstanding loans that are classified as troubled debt restructurings.  All loans which have undergone a troubled debt restructuring modification are performing.

 

Further, there were no troubled debt restructurings for which there was a payment default within twelve months following the modification during the periods ending September 30, 2015 and 2014.

 

No loans were modified as troubled debt restructurings during the nine or three months ending September 30, 2015 and 2014.

 

Credit Quality Indicators:

 

The Company categorizes loans into risk categories based on relevant information about the ability of borrowers to service their debt such as: current financial information, historical payment experience, credit documentation, public information, and current economic trends, among other factors.  The Company analyzes loans individually by classifying the loans as to credit risk.  This analysis is performed on a quarterly basis.  The Company uses the following definitions for risk ratings:

 

Special Mention.  Loans classified as special mention have one or more potential weaknesses that deserve management’s close attention.  If left uncorrected, these potential weaknesses may result in deterioration of the repayment prospects for the loan or of the institution’s credit position at some future date.

 

Substandard.  Loans classified as substandard are inadequately protected by the current net worth and paying capacity of the obligor or of the collateral pledged, if any.  Loans so classified have a well-defined and documented weakness or weaknesses that jeopardize the liquidation of the debt.  They are characterized by the distinct possibility that the institution will sustain some loss if the deficiencies are not corrected.

 

Doubtful.  Loans classified as doubtful have all the weaknesses inherent in those classified as substandard, with the added characteristic that the weaknesses make collection or liquidation in full, on the basis of currently existing facts, conditions, and values, highly questionable and improbable.

 

Loans not meeting the criteria above that are analyzed individually as part of the above described process are considered to be pass rated loans.

 

24



Table of Contents

 

As of September 30, 2015 and December 31, 2014, and based on the most recent analysis performed, the risk category of loans by class of loans is as follows:

 

As of September 30, 2015

 

 

 

Special

 

 

 

 

 

(in thousands)

 

Pass

 

Mention

 

Substandard

 

Doubtful

 

 

 

 

 

 

 

 

 

 

 

Commercial

 

$

50,335

 

$

1,345

 

$

216

 

$

9

 

Real estate construction

 

25,514

 

1,644

 

147

 

 

Real estate mortgage:

 

 

 

 

 

 

 

 

 

1-4 family residential

 

202,240

 

6,905

 

8,311

 

42

 

Multi-family residential

 

38,364

 

257

 

148

 

 

Non-farm & non-residential

 

178,617

 

7,175

 

1,240

 

 

Agricultural

 

62,321

 

6,933

 

1,499

 

 

 

 

 

 

 

 

 

 

 

 

Total

 

$

557,391

 

$

24,259

 

$

11,561

 

$

51

 

 

 

 

 

 

 

 

 

 

 

Loans included in totals above acquired from Madison Financial Corporation

 

$

62,256

 

$

2,738

 

$

3,184

 

$

27

 

 

As of December 31, 2014

 

 

 

Special

 

 

 

 

 

(in thousands)

 

Pass

 

Mention

 

Substandard

 

Doubtful

 

 

 

 

 

 

 

 

 

 

 

Commercial

 

$

45,602

 

$

1,307

 

$

275

 

$

 

Real estate construction

 

15,529

 

1,267

 

142

 

 

Real estate mortgage:

 

 

 

 

 

 

 

 

 

1-4 family residential

 

176,791

 

5,439

 

7,068

 

160

 

Multi-family residential

 

33,990

 

 

425

 

 

Non-farm & non-residential

 

154,857

 

5,178

 

1,787

 

 

Agricultural

 

58,110

 

7,653

 

5,581

 

 

 

 

 

 

 

 

 

 

 

 

Total

 

$

484,879

 

$

20,844

 

$

15,278

 

$

160

 

 

For consumer loans, the Company evaluates the credit quality based on the aging of the recorded investment in loans, which was previously presented.  Non-performing consumer loans are loans which are greater than 90 days past due or on non-accrual status, and total $11 thousand at September 30, 2015 and $6 thousand at December 31, 2014.

 

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5.  REAL ESTATE OWNED

 

Activity in real estate owned, net was as follows:

 

 

 

Nine Months Ended

 

 

 

September 30

 

 

 

2015

 

2014

 

 

 

(in thousands)

 

 

 

 

 

 

 

Beginning of year

 

$

4,603

 

$

3,379

 

Additions

 

3,394

 

1,651

 

Acquired with Madison Financial Corporation

 

445

 

 

Sales

 

(6,000

)

(1,676

)

(Additions) subtractions to valuation allowance, net

 

942

 

(6

)

 

 

 

 

 

 

End of period

 

$

3,384

 

$

3,348

 

 

Activity in the valuation allowance was as follows:

 

 

 

Nine Months Ended

 

 

 

September 30

 

 

 

2015

 

2014

 

 

 

(in thousands)

 

 

 

 

 

 

 

Beginning of year

 

$

1,583

 

$

1,524

 

Write-downs of other real estate, net

 

252

 

64

 

Reduction from sale

 

(1,194

)

(58

)

 

 

 

 

 

 

End of period

 

$

641

 

$

1,530

 

 

Expenses related to foreclosed assets include:

 

 

 

Nine Months Ended

 

 

 

September 30

 

 

 

2015

 

2014

 

 

 

(in thousands)

 

 

 

 

 

 

 

Net loss (gain) on sales

 

$

(5

)

$

(134

)

 

 

 

 

 

 

Write-downs of other real estate, net

 

252

 

64

 

Operating expenses (receipts), net of rental income

 

91

 

99

 

 

 

 

 

 

 

Repossession expenses, net

 

343

 

163

 

 

 

 

 

 

 

For the period

 

$

338

 

$

29

 

 

 

 

Three Months Ended

 

 

 

September 30

 

 

 

2015

 

2014

 

 

 

(in thousands)

 

 

 

 

 

 

 

Net loss (gain) on sales

 

$

(64

)

$

(64

)

 

 

 

 

 

 

Additions (subtractions) to valuation allowance, net

 

25

 

54

 

Operating expenses (receipts), net of rental income

 

36

 

86

 

 

 

 

 

 

 

Repossession expenses, net

 

61

 

140

 

For the period

 

$

(3

)

$

76

 

 

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Table of Contents

 

6.  EARNINGS PER SHARE

 

Basic earnings per common share is net income divided by the weighted average number of common shares outstanding during the period.  Diluted earnings per common share includes the dilutive effect of additional potential common shares issuable under stock based compensation agreements.

 

The factors used in the earnings per share computation follow:

 

 

 

Nine Months Ended

 

 

 

September 30

 

 

 

2015

 

2014

 

 

 

(in thousands)

 

 

 

 

 

 

 

Basic Earnings Per Share

 

 

 

 

 

Net Income

 

$

5,178

 

$

5,395

 

Weighted average common shares outstanding

 

2,774

 

2,708

 

Basic earnings per share

 

$

1.85

 

$

1.99

 

 

 

 

 

 

 

Diluted Earnings Per Share

 

 

 

 

 

Net Income

 

$

5,178

 

$

5,395

 

Weighted average common shares outstanding

 

2,774

 

2,708

 

Weighted average common and dilutive potential common shares outstanding

 

2,774

 

2,708

 

Diluted earnings per share

 

$

1.85

 

$

1.99

 

 

 

 

Three Months Ended

 

 

 

September 30

 

 

 

2015

 

2014

 

 

 

(in thousands)

 

 

 

 

 

 

 

Basic Earnings Per Share

 

 

 

 

 

Net Income

 

$

1,541

 

$

1,720

 

Weighted average common shares outstanding

 

2,941

 

2,708

 

Basic earnings per share

 

$

0.52

 

$

0.63

 

 

 

 

 

 

 

Diluted Earnings Per Share

 

 

 

 

 

Net Income

 

$

1,541

 

$

1,720

 

Weighted average common shares outstanding

 

2,941

 

2,708

 

Weighted average common and dilutive potential common shares outstanding

 

2,941

 

2,708

 

Diluted earnings per share

 

$

0.52

 

$

0.63

 

 

Stock options for 2,400 shares of common stock for the nine and three months ended September 30, 2015 and 12,725 shares of common stock for the nine and three months ended September 30, 2014 were excluded from diluted earnings per share because their impact was antidilutive.

 

7.  STOCK COMPENSATION

 

We have four stock based compensation plans as described below.

 

Two Stock Option Plans

 

Under its expired 1999 Employee Stock Option Plan, the Company has granted certain officers and key employees stock option awards which vest and become fully exercisable at the end of five years and provided for issuance of up to 100,000 options.

 

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Under the expired 1993 Non-Employee Directors Stock Ownership Incentive Plan, the Company also granted certain directors stock option awards which vest and become fully exercisable immediately and provided for issuance of up to 20,000 options.  For each Stock Option Plan, the exercise price of each option which has a ten year life, was equal to the market price of the Company’s our stock on the date of grant.

 

Summary of activity in the stock option plan for the first nine months of 2015 follows:

 

 

 

 

 

 

 

Weighted

 

 

 

 

 

 

 

Weighted

 

Average

 

 

 

 

 

 

 

Average

 

Remaining

 

Aggregate

 

 

 

 

 

Exercise

 

Contractual

 

Intrinsic

 

 

 

Shares

 

Price

 

Term

 

Value

 

 

 

 

 

 

 

 

 

 

 

Outstanding, beginning of year

 

12,625

 

$

30.46

 

 

 

 

 

Granted

 

 

 

 

 

 

 

Forfeited or expired

 

(10,225

)

30.48

 

 

 

 

 

Exercised

 

 

 

 

 

 

 

Outstanding, end of period

 

2,400

 

$

30.38

 

15.5 months

 

$

 

Vested and expected to vest

 

2,400

 

$

30.38

 

15.5 months

 

$

 

Exercisable, end of period

 

2,400

 

$

30.38

 

15.5 months

 

$

 

 

As of September 30, 2015, there was $0 of total unrecognized compensation cost related to nonvested stock options granted under the Plan.  Since both stock option plans have expired, neither plan allows for additional options to be issued.

 

2005 Restricted Stock Grant Plan

 

On May 10, 2005, the Company’s stockholders approved a restricted stock grant plan.  Total shares issuable under the plan are 50,000.  There were 5,385 shares issued during the first nine months of 2015 and 7,475 shares issued during the first nine months of 2014.  There were 153 shares forfeited during the first nine months of 2015 and 300 shares were forfeited during the first nine months of 2014.

 

A summary of changes in the Company’s nonvested shares for the year follows:

 

 

 

 

 

Weighted-Average

 

Fair

 

 

 

 

 

Grant-Date

 

Value

 

Nonvested Shares

 

Shares

 

Fair Value

 

Per Share

 

 

 

 

 

 

 

 

 

Nonvested at January 1, 2015

 

17,694

 

$

365,586

 

$

20.66

 

Granted

 

5,385

 

147,280

 

27.35

 

Vested

 

(5,175

)

(101,767

)

19.67

 

Forfeited

 

(153

)

(3,700

)

24.18

 

 

 

 

 

 

 

 

 

Nonvested at September 30, 2015

 

17,751

 

$

407,399

 

$

22.95

 

 

As of September 30, 2015, there was $316,239 of total unrecognized compensation cost related to nonvested shares granted under the restricted stock grant plan.  The cost is expected to be recognized over a weighted-average period of 2.9 years.  As of September 30, 2015, no additional shares are available for issue under the restricted stock grant plan.

 

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2009 Stock Award Plan

 

On May 13, 2009, the Company’s stockholders approved a stock award plan that provides for the granting of both incentive and nonqualified stock options and other share based awards.  Total shares issuable under the plan are 150,000.  There were 465 shares issued during the first nine months of 2015 and none in 2014.  There were no shares forfeited during the first nine months of 2015 or 2014.

 

A summary of changes in the Company’s nonvested shares for the year follows:

 

 

 

 

 

Weighted-Average

 

Fair

 

 

 

 

 

Grant-Date

 

Value

 

Nonvested Shares

 

Shares

 

Fair Value

 

Per Share

 

 

 

 

 

 

 

 

 

Nonvested at January 1, 2015

 

720

 

$

16,704

 

$

23.20

 

Granted

 

465

 

12,718

 

27.35

 

Vested

 

(180

)

(4,176

)

23.20

 

Forfeited

 

 

 

 

 

 

 

 

 

 

 

 

Nonvested at September 30, 2015

 

1,005

 

$

25,246

 

$

25.12

 

 

As of September 30, 2015, there was $22,582 of total unrecognized compensation cost related to nonvested shares granted under the restricted stock grant plan.  The cost is expected to be recognized over a weighted-average period of 3.3 years.  As of September 30, 2015, 148,635 shares are still available for issuance.

 

8. REPURCHASE AGREEMENTS

 

Repurchase agreements totaled $19.9 million as of September 30, 2015. Of this, $13.9 million were overnight obligations and $6.0 million had terms extending through May 2019 and a weighted average life of 2.3 years. The Company pledged agency-backed securities with a carrying amount of $20.2 million to secure repurchase agreements as of September 30, 2015.

 

9.  OTHER BORROWINGS

 

On July 20, 2015, the Company borrowed $5 million which was outstanding at September 30, 2015.  The term loan has a fixed interest rate of 5.02%, requires quarterly principal and interest payments, matures July 20, 2025 and is collateralized by the Company’s stock.  The maturity schedule for the term loan as of September 30, 2015 is as follows:

 

Due in one year or less

 

$

407

 

Due in one through three years

 

850

 

Due in three through five years

 

940

 

Due after five years

 

2,803

 

 

 

$

 5,000

 

 

At December 31, 2014 the Company had a $5 million revolving promissory note with a maturity date of July 26, 2015.  The Company had no outstanding balances related to this promissory note at September 30, 2015 or December 31, 2014.  Upon maturity, the Company renewed the revolving promissory note.  The new note has similar terms as the original note and matures July 19, 2016.

 

10.  FAIR VALUE MEASUREMENTS

 

ASC Topic 820, “Fair Value Measurements and Disclosures”, defines fair value, establishes a framework for measuring fair value, and sets forth disclosures about fair value measurements.  ASC Topic 825, “Financial Instruments”, allows entities to choose to measure certain financial assets and liabilities at fair value.  The Company has not elected the fair value option for any financial assets or liabilities.

 

ASC Topic 820 defines fair value as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date.  It also establishes a fair value hierarchy which requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value.  This Topic describes three levels of inputs that may be used to measure fair value:

 

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Table of Contents

 

Level 1 — Quoted prices (unadjusted) for identical assets or liabilities in active markets that the entity has the ability to access as of the measurement date.

 

Level 2 — Significant other observable inputs other than Level 1 prices such as quoted prices for similar assets or liabilities; quoted prices in markets that are not active; or other inputs that are observable or can be corroborated by observable market data.

 

Level 3 — Significant unobservable inputs that reflect a company’s own assumptions about the assumptions that market participants would use in pricing an asset or liability.

 

The Company used the following methods and significant assumptions to estimate the fair value:

 

Investment Securities and Trading Assets:  The fair values for available for sale investment securities and trading assets are determined by quoted market prices, if available (Level 1).  For securities where quoted prices are not available, fair values are calculated based on market prices of similar securities (Level 2).  For securities where quoted prices or market prices of similar securities are not available, fair values are calculated using discounted cash flows or other market indicators (Level 3).

 

Impaired Loans:  The fair value of impaired loans with specific allocations of the allowance for loan losses is generally based on recent third party real estate appraisals.  These appraisals may utilize a single valuation approach or a combination of approaches including comparable sales and the income approach.

 

Adjustments are routinely made in the appraisal process by the appraisers to adjust for differences between the comparable sales and income data available for similar loans and collateral underlying such loans.  Such adjustments were $14 thousand for 2015 and $387 for 2014 and resulted in a Level 3 classification of the inputs for determining fair value.

 

Non-real estate collateral may be valued using an appraisal, net book value per the borrower’s financial statements, or aging reports, adjusted or discounted based on management’s historical knowledge, changes in market conditions from the time of the valuation, and management’s expertise and knowledge of the client and client’s business, resulting in a Level 3 fair value classification.  Impaired loans are evaluated on a quarterly basis for additional impairment and adjusted in accordance with the allowance policy.

 

Other Real Estate Owned:  Assets acquired through or instead of loan foreclosure and classified as other real estate owned (OREO) are initially recorded at fair value less costs to sell when acquired, establishing a new cost basis.  These assets are subsequently accounted for at lower of cost or fair value less estimated costs to sell.  Fair value is commonly based on recent real estate appraisals which are updated no less frequently than annually.  These appraisals may utilize a single valuation approach or a combination of approaches including comparable sales and the income approach with data from comparable properties.  Adjustments are routinely made in the appraisal process by the independent appraisers to adjust for differences between the comparable sales and income data available.

 

Such adjustments were $372 thousand as of September 30, 2015 and $25 thousand as of September 30, 2014 and resulted in a Level 3 classification of the inputs for determining fair value.  Real estate owned properties are evaluated on a quarterly basis for additional impairment and adjusted accordingly.

 

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Table of Contents

 

Mortgage Servicing Rights:  Fair value is based on market prices for comparable mortgage servicing contracts, when available, or alternatively based on a valuation model that calculates the present value of estimated future net servicing income, resulting in a Level 3 classification.

 

Assets and Liabilities Measured on a Recurring Basis

 

Available for sale investment securities and trading assets are the Company’s only balance sheet items that meet the disclosure requirements for instruments measured at fair value on a recurring basis.  Disclosures are as follows in the tables below.

 

Fair Value Measurements at September 30, 2015 Using (In thousands):

 

 

 

 

 

Quoted Prices

 

 

 

 

 

 

 

 

 

In Active

 

 

 

 

 

 

 

 

 

Markets for

 

Significant Other

 

Significant

 

 

 

 

 

Identical

 

Observable

 

Unobservable

 

 

 

Fair

 

Assets

 

Inputs

 

Inputs

 

Description

 

Value

 

(Level 1)

 

(Level 2)

 

(Level 3)

 

 

 

 

 

 

 

 

 

 

 

U. S. government agencies

 

$

51,696

 

$

 

$

51,696

 

$

 

States and municipals

 

87,041

 

 

87,041

 

 

Mortgage-backed - residential

 

99,468

 

 

99,468

 

 

Equity securities

 

395

 

395

 

 

 

Trading Assets

 

5,480

 

5,480

 

 

 

Total

 

$

244,080

 

$

5,875

 

$

238,205

 

$

 

 

Fair Value Measurements at December 31, 2014 Using (In thousands):

 

 

 

 

 

Quoted Prices

 

 

 

 

 

 

 

 

 

In Active

 

 

 

 

 

 

 

 

 

Markets for

 

Significant Other

 

Significant

 

 

 

 

 

Identical

 

Observable

 

Unobservable

 

 

 

Fair

 

Assets

 

Inputs

 

Inputs

 

Description

 

Value

 

(Level 1)

 

(Level 2)

 

(Level 3)

 

 

 

 

 

 

 

 

 

 

 

U. S. government agencies

 

$

60,586

 

$

 

$

60,586

 

$

 

States and municipals

 

89,281

 

 

89,281

 

 

Mortgage-backed - residential

 

96,698

 

 

96,698

 

 

Equity securities

 

296

 

296

 

 

 

Trading Assets

 

5,370

 

5,370

 

 

 

Total

 

$

252,231

 

$

5,666

 

$

246,565

 

$

 

 

There were no transfers between level 1 and level 2 during 2015 or 2014.

 

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Table of Contents

 

Assets measured at fair value on a non-recurring basis are summarized below:

 

 

 

Fair Value Measurements at September 30, 2015 Using:

 

 

 

 

 

Quoted Prices

 

 

 

 

 

 

 

 

 

In Active

 

 

 

Other

 

 

 

 

 

Markets for

 

Significant

 

Significant

 

 

 

 

 

Identical

 

Observable

 

Unobservable

 

(In thousands)

 

Carrying

 

Assets

 

Inputs

 

Inputs

 

Description

 

Value

 

(Level 1)

 

(Level 2)

 

(Level 3)

 

 

 

 

 

 

 

 

 

 

 

Impaired loans:

 

 

 

 

 

 

 

 

 

Agricultural

 

169

 

 

 

169

 

Other real estate owned:

 

 

 

 

 

 

 

 

 

Residential

 

1,504

 

 

 

1,504

 

Commercial

 

964

 

 

 

 

 

964

 

 

 

 

 

 

 

 

 

 

 

Loan servicing rights

 

261

 

 

 

261

 

 

 

 

Fair Value Measurements at December 31, 2014 Using:

 

 

 

 

 

Quoted Prices

 

 

 

 

 

 

 

 

 

In Active

 

 

 

Other

 

 

 

 

 

Markets for

 

Significant

 

Significant

 

 

 

 

 

Identical

 

Observable

 

Unobservable

 

(In thousands)

 

Carrying

 

Assets

 

Inputs

 

Inputs

 

Description

 

Value

 

(Level 1)

 

(Level 2)

 

(Level 3)

 

 

 

 

 

 

 

 

 

 

 

Impaired loans:

 

 

 

 

 

 

 

 

 

Real Estate Mortgage:

 

 

 

 

 

 

 

 

 

Multi-family residential

 

169

 

 

 

169

 

Non-farm & non-residential

 

366

 

 

 

366

 

Agricultural

 

3,729

 

 

 

3,729

 

 

 

 

 

 

 

 

 

 

 

Other real estate owned:

 

 

 

 

 

 

 

 

 

Residential

 

1,670

 

 

 

1,670

 

Loan servicing rights

 

292

 

 

 

292

 

 

Impaired loans, which are measured for impairment using the fair value of the collateral for collateral dependent loans, had a carrying amount of $169 thousand, which includes a valuation allowance of $34 thousand at September 30, 2015.  During the first three months and nine months of 2015, one new loan became impaired resulting in additional loan loss provision expense of $34 thousand.  The total allowance for specific impaired loans decreased $526 thousand for the nine months ending September 30, 2015 and decreased $226 thousand for the three months ending September 30, 2015.  During the first nine months of 2014, six new loans became impaired resulting in an additional provision for loan losses of $265 thousand.  The total allowance for specific impaired loans increased $71 thousand for the nine months ending September 30, 2014 and decreased $35 thousand for the three months ending September 30, 2014.

 

Other real estate owned, which is measured at fair value less costs to sell, had a net carrying amount of $2.5 million, which is made up of the outstanding balance of $3.1 million, net of a valuation allowance of $641 thousand at September 30, 2015.  The Company recorded $252 thousand in write-downs of other real estate owned properties for the nine months ending September 30, 2015 and $25 thousand for the three months ending September 30, 2015.  The Company recorded $64 thousand in net write-downs of other real estate owned properties for the nine months and $54 thousand for the three months ending September 30, 2014.

 

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Table of Contents

 

Loan servicing rights, which are carried at the lower of cost or fair value, were carried at their fair value of $261 thousand, which is made up of the outstanding balance of $297 thousand, net of a valuation allowance of $36 thousand at September 30, 2015.  The Company recorded a net recovery of prior write-downs of $43 thousand for the nine months ending September 30, 2015 and a recovery of prior write-downs totaling $9 thousand for the three months ending September 30, 2015.  For the first nine months of 2014, the Company recorded net write-downs of $3 thousand and a net recovery of prior write-downs totaling $9 thousand for the three months ending September 30, 2014.  At December 31, 2014, loan servicing rights were carried at their fair value of $292 thousand, which is made up of the outstanding balance of $371 thousand, net of a valuation allowance of $79 thousand.

 

The following table presents quantitative information about level 3 fair value measurements for financial instruments measured at fair value on a non-recurring basis at September 30, 2015 and December 31, 2014:

 

 

 

 

 

 

 

 

 

Range

September 30, 2015

 

Fair

 

Valuation

 

Unobservable

 

(Weighted

(In thousands)

 

Value

 

Technique(s)

 

Input(s)

 

Average)

Impaired loans

 

 

 

 

 

 

 

 

Agricultural

 

169

 

sales comparison

 

adjustment for

 

3%-38%

 

 

 

 

 

 

differences

 

(36%)

 

 

 

 

 

 

between the

 

 

 

 

 

 

 

 

comparable sales

 

 

Other real estate owned:

 

 

 

 

 

 

 

 

Residential

 

893

 

sales comparison

 

adjustment for

 

10%-28%

 

 

 

 

 

 

differences

 

(19%)

 

 

 

 

 

 

between the

 

 

 

 

 

 

 

 

comparable sales

 

 

 

 

611

 

income approach

 

capitalization rate

 

8%-8%

 

 

 

 

 

 

 

 

(8%)

Commercial

 

964

 

sales comparison

 

adjustment for

 

8%-37%

 

 

 

 

 

 

differences

 

(22%)

 

 

 

 

 

 

between the

 

 

 

 

 

 

 

 

comparable sales

 

 

Loan Servicing Rights

 

261

 

discounted cash

 

discount rate

 

12%-12%

 

 

 

 

flow

 

 

 

(12%)

 

 

 

 

 

 

 

 

 

Range

December 31, 2014

 

Fair

 

Valuation

 

Unobservable

 

(Weighted

(In thousands)

 

Value

 

Technique(s)

 

Input(s)

 

Average)

Impaired loans

 

 

 

 

 

 

 

 

Real estate mortgage:

 

 

 

 

 

 

 

 

Multi-family residential

 

169

 

sales comparison

 

adjustment for

 

10%-10%

 

 

 

 

 

 

differences

 

(10%)

 

 

 

 

 

 

between the

 

 

 

 

 

 

 

 

comparable sales

 

 

Non-farm & non-residential

 

366

 

sales comparison

 

adjustment for

 

0%-0%

 

 

 

 

 

 

differences

 

(0%)

 

 

 

 

 

 

between the

 

 

 

 

 

 

 

 

comparable sales

 

 

Agricultural

 

3,729

 

sales comparison

 

adjustment for

 

5%-53%

 

 

 

 

 

 

differences

 

(43%)

 

 

 

 

 

 

between the

 

 

 

 

 

 

 

 

comparable sales

 

 

Other real estate owned:

 

 

 

 

 

 

 

 

Residential

 

1,670

 

sales comparison

 

adjustment for

 

0%-48%

 

 

 

 

 

 

differences

 

(11%)

 

 

 

 

 

 

between the

 

 

 

 

 

 

 

 

comparable sales

 

 

 

 

 

 

income approach

 

capitalization rate

 

8%-10%

 

 

 

 

 

 

 

 

(9%)

Loan Servicing Rights

 

292

 

discounted cash

 

discount rate 

 

12%-12%

 

 

 

 

flow

 

 

 

(12%)

 

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Table of Contents

 

Fair Value of Financial Instruments

 

The carrying amounts and estimated fair values of financial instruments, at September 30, 2015 and December 31, 2014 are as follows:

 

September 30, 2015:

 

 

 

Carrying

 

 

 

 

 

 

 

 

 

(in thousands)

 

Value

 

Level 1

 

Level 2

 

Level 3

 

Total

 

 

 

 

 

 

 

 

 

 

 

 

 

Financial assets

 

 

 

 

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

22,881

 

$

22,881

 

$

 

$

 

$

22,881

 

Interest bearing deposits

 

4,874

 

4,874

 

 

 

4,874

 

Securities

 

238,600

 

395

 

238,205

 

 

238,600

 

Trading Assets

 

5,480

 

5,480

 

 

 

 

5,480

 

Mortgage loans held for sale

 

1,520

 

 

1,535

 

 

1,535

 

Loans, net

 

606,362

 

 

 

603,428

 

603,428

 

FHLB Stock

 

7,034

 

N/A

 

N/A

 

N/A

 

N/A

 

Interest receivable

 

3,888

 

 

1,266

 

2,622

 

3,888

 

 

 

 

 

 

 

 

 

 

 

 

 

Financial liabilities

 

 

 

 

 

 

 

 

 

 

 

Deposits

 

$

711,005

 

$

506,917

 

$

205,533

 

$

 

$

712,450

 

Securities sold under agreements to repurchase and other borrowings

 

24,918

 

 

24,960

 

 

24,960

 

Federal Funds Purchased

 

4,300

 

4,300

 

 

 

4,300

 

FHLB advances

 

90,991

 

 

86,266

 

 

86,266

 

Subordinated Debentures

 

7,217

 

 

 

7,205

 

7,205

 

Interest payable

 

783

 

 

774

 

9

 

783

 

 

December 31, 2014:

 

 

 

Carrying

 

 

 

 

 

 

 

 

 

(in thousands)

 

Value

 

Level 1

 

Level 2

 

Level 3

 

Total

 

 

 

 

 

 

 

 

 

 

 

 

 

Financial assets

 

 

 

 

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

17,169

 

$

17,169

 

$

 

$

 

$

17,169

 

Interest bearing deposits

 

1,280

 

1,280

 

 

 

 

 

1,280

 

Securities

 

246,861

 

296

 

246,565

 

 

246,861

 

Trading assets

 

5,370

 

5,370

 

 

 

 

 

5,370

 

Mortgage loans held for sale

 

776

 

 

782

 

 

782

 

Loans, net

 

532,293

 

 

 

535,213

 

535,213

 

FHLB Stock

 

5,981

 

N/A

 

N/A

 

N/A

 

N/A

 

Interest receivable

 

3,299

 

 

1,274

 

2,025

 

3,299

 

 

 

 

 

 

 

 

 

 

 

 

 

Financial liabilities

 

 

 

 

 

 

 

 

 

 

 

Deposits

 

$

654,869

 

$

470,912

 

$

185,429

 

$

 

$

656,341

 

Securities sold under agreements to repurchase and other borrowings

 

12,457

 

 

12,620

 

 

12,620

 

FHLB advances

 

93,785

 

 

88,373

 

 

88,373

 

Subordinated Debentures

 

7,217

 

 

 

7,209

 

7,209

 

Interest Payable

 

642

 

 

 

633

 

9

 

642

 

 

The methods and assumptions, not previously presented, used to estimate fair values are described as follows:

 

Cash and Cash Equivalents - The carrying amounts of cash and cash equivalents approximate fair values and are classified as Level 1.

 

Interest Bearing Deposits – The carrying amounts of interest bearing deposits approximate fair values and are classified as Level 1.

 

FHLB Stock - It is not practical to determine the fair value of FHLB stock due to restrictions placed on its transferability.

 

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Table of Contents

 

Loans - Fair values of loans, excluding loans held for sale, are estimated as follows:  For variable rate loans that reprice frequently and with no significant change in credit risk, fair values are based on carrying values resulting in a Level 3 classification.  Fair values for other loans are estimated using discounted cash flow analyses, using interest rates currently being offered for loans with similar terms to borrowers of similar credit quality resulting in a Level 3 classification.  Impaired loans are valued at the lower of cost or fair value as described previously.  The methods used to estimate the fair value of loans do not necessarily represent an exit price.

 

The fair value of mortgage loans held for sale is estimated based upon binding contracts and quotes from third party investors resulting in a Level 2 classification.

 

Deposits - The fair values disclosed for demand deposits (e.g., interest and non-interest checking, passbook savings, and certain types of money market accounts) are, by definition, equal to the amount payable on demand at the reporting date (i.e., their carrying amount) resulting in a Level 1 classification.  The carrying amounts of variable rate, fixed-term money market accounts and certificates of deposit approximate their fair values at the reporting date resulting in a Level 1 classification.  Fair values for fixed rate certificates of deposit are estimated using a discounted cash flows calculation that applies interest rates currently being offered on certificates to a schedule of aggregated expected monthly maturities on time deposits resulting in a Level 2 classification.

 

Securities Sold Under Agreements to Repurchase and Other Borrowings - The carrying amounts of borrowings under repurchase agreements approximate their fair values resulting in a Level 2 classification.

 

The carrying amount of the Company’s variable rate borrowings approximate their fair values resulting in a Level 2 classification.

 

Federal Funds Purchased - The carrying amounts of federal funds purchased approximate fair values and are classified as Level 1.

 

FHLB Advances, Borrowings and Subordinated Debentures - The fair values of the Company’s FHLB advances and other borrowings are estimated using discounted cash flow analyses based on the current borrowing rates for similar types of borrowing arrangements resulting in a Level 2 classification.

 

The fair values of the Company’s Subordinated Debentures are estimated using discounted cash flow analyses based on the current borrowing rates for similar types of borrowing arrangements resulting in a Level 3 classification.

 

Accrued Interest Receivable/Payable - The carrying amounts of accrued interest approximate fair value resulting in a Level 2 or Level 3 classification based on the level of the related asset/liability.

 

Off-balance Sheet Instruments - Fair values for off-balance sheet, credit-related financial instruments are based on fees currently charged to enter into similar agreements, taking into account the remaining terms of the agreements and the counterparties’ credit standing.  The fair value of off-balance sheet instruments is not material.

 

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Table of Contents

 

11.  CHANGES IN ACCUMULATED OTHER COMPREHENSIVE INCOME BY COMPONENT

 

Changes in Accumulated Other Comprehensive Income by Component (1)  (unaudited)

(in thousands)

 

 

 

Unrealized

 

 

 

Gains and Losses on

 

 

 

Available for Sale

 

 

 

Securities

 

 

 

For the Nine Months Ending September 30

 

 

 

2015

 

2014

 

 

 

 

 

 

 

Beginning Balance

 

$

791

 

$

(5,126

)

 

 

 

 

 

 

Unrealized holding gains (losses) for the period, net of tax

 

1,037

 

5,419

 

 

 

 

 

 

 

Reclassification adjustment for:

 

 

 

 

 

 

 

 

 

 

 

Securities gains realized in income

 

(410

)

(514

)

Income taxes

 

(139

)

(175

)

Securities gains realized in income, net

 

(271

)

(339

)

 

 

 

 

 

 

Net current period other comprehensive income

 

766

 

5,080

 

 

 

 

 

 

 

Ending balance

 

$

1,557

 

$

(46

)

 


(1)         All amounts are net of tax.

 

 

 

Unrealized

 

 

 

Gains and Losses on

 

 

 

Available for Sale

 

 

 

Securities

 

 

 

For the Three Months Ending September 30

 

 

 

2015

 

2014

 

 

 

 

 

 

 

Beginning Balance

 

$

(432

)

$

(145

)

 

 

 

 

 

 

Unrealized holding gains (losses) for the period, net of tax

 

2,094

 

152

 

 

 

 

 

 

 

Reclassification adjustment for:

 

 

 

 

 

 

 

 

 

 

 

Securities gains realized in income, net

 

(159

)

(81

)

Income taxes

 

(54

)

(28

)

 

 

(105

)

(53

)

 

 

 

 

 

 

Net current period other comprehensive income

 

1,989

 

99

 

 

 

 

 

 

 

Ending balance

 

$

1,557

 

$

(46

)

 


(1)         All amounts are net of tax.

 

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Table of Contents

 

The following is significant amounts reclassified out of each component of accumulated other comprehensive Income (Loss) for the nine months ending September 30, 2015 and 2014:

 

September 30, 2015

 

Details about

 

Amount

 

Affected Line Item

Accumulated Other

 

Reclassified From

 

in the Statement

Comprehensive

 

Accumulated Other

 

Where Net

Income Components

 

Comprehensive Income

 

Income is Presented

 

 

 

 

 

Unrealized gains and losses on available-for-sale securities

 

$

(410

)

Securities gains, net

 

 

139

 

Provision for income taxes

 

 

 

 

 

 

 

(271

)

Net of tax

 

September 30, 2014

 

Details about

 

Amount

 

Affected Line Item

Accumulated Other

 

Reclassified From

 

in the Statement

Comprehensive

 

Accumulated Other

 

Where Net

Income Components

 

Comprehensive Income

 

Income is Presented

 

 

 

 

 

Unrealized gains and losses on available-for-sale securities

 

$

(514

)

Securities gains, net

 

 

175

 

Provision for income taxes

 

 

 

 

 

 

 

(339

)

Net of tax

 

The following is significant amounts reclassified out of each component of accumulated other comprehensive Income (Loss) for the three months ending September 30, 2015 and 2014:

 

September 30, 2015

 

Details about

 

Amount

 

Affected Line Item

Accumulated Other

 

Reclassified From

 

in the Statement

Comprehensive

 

Accumulated Other

 

Where Net

Income Components

 

Comprehensive Income

 

Income is Presented

 

 

 

 

 

Unrealized gains and losses on available-for-sale securities

 

$

(159

)

Securities gains, net

 

 

54

 

Provision for income taxes

 

 

 

 

 

 

 

(105

)

Net of tax

 

September 30, 2014

 

Details about

 

Amount

 

Affected Line Item

Accumulated Other

 

Reclassified From

 

in the Statement

Comprehensive

 

Accumulated Other

 

Where Net

Income Components

 

Comprehensive Income

 

Income is Presented

 

 

 

 

 

Unrealized gains and losses on available-for-sale securities

 

$

(81

)

Securities gains, net

 

 

28

 

Provision for income taxes

 

 

 

 

 

 

 

(53

)

Net of tax

 

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Table of Contents

 

Item 2 - MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

 

Forward-Looking Statements

 

The following discussion provides information about the financial condition and results of operations of the Company and its subsidiaries as of the dates and periods indicated.  This discussion and analysis should be read in conjunction with the unaudited consolidated financial statements and Notes thereto appearing elsewhere in this report and the Management’s Discussion and Analysis in the Company’s Annual Report on Form 10-K for the year ended December 31, 2014.

 

This discussion contains forward-looking statements under the Private Securities Litigation Reform Act of 1995 that involve risks and uncertainties.  We intend such forward-looking statements to be covered by the safe harbor provisions for forward-looking statements contained in the federal securities laws. These statements are not historical facts, but rather statements based on our current expectations regarding our business strategies and their intended results and our future performance.  Forward-looking statements are preceded by terms such as “expects,” “believes,” “anticipates,” “intends,” “estimates,” “potential,” “may,” and similar expressions.

 

Although we believe 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 and the thoroughbred horse industry, in which we and our Bank operate); competition for our subsidiary’s customers from other providers of financial and mortgage services; government legislation, regulation and monetary policy (which changes from time to time and over which we have 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 our subsidiary’s customers; adequacy of the allowance for losses on loans and the level of future provisions for losses on loans; and other risks detailed in our filings with the Securities and Exchange Commission, all of which are difficult to predict and many of which are beyond our control.

 

As a result of the uncertainties and the assumptions on which this discussion and the forward-looking statements are based, actual future operations and results in the future may differ materially from those indicated herein.

 

You should not place undue reliance on any forward-looking statements made by us or on our behalf.  Our forward-looking statements are made as of the date of the report, and we undertake 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.

 

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Table of Contents

 

Summary

 

The Company recorded net income of $5.2 million, or $1.85 basic earnings and diluted earnings per share for the first nine months ending September 30, 2015 compared to $5.4 million or $1.99 basic earnings and diluted earnings per share for the nine month period ended September 30, 2014.  The first nine months earnings reflect a decrease of 4.0% compared to the same time period in 2014.  The decrease in net earnings is largely attributed to one-time expenditures related to the acquisition of Madison Financial Corporation which was completed on July 24, 2015.  The Company recorded nearly $900 thousand in expenses during the first nine months of 2015 related to the transaction.  However, management believes the acquisition of Madison Financial Corporation will have a positive impact on long-term earnings and shareholder value although short-term earnings were impacted during 2015.  Further contributing to the decrease in earnings is an increase of $525 thousand in the provision for loan losses, an increase of $1.2 million in salaries & benefits expense, an increase of $361 thousand in occupancy expense largely related to the acquisition of Madison Financial Corporation, an increase of $180 thousand in repossession expense due to write-downs of other real estate owned properties secured by real estate totaling $252 thousand and an increase of $346 thousand in various other expenses.  Increases in other expenses were primarily attributed to an increase of $130 thousand in losses on other real estate properties and an increase of $97 thousand in credit card interchange expense.  Also contributing to the decrease in income was a decrease of $104 thousand in gains on securities and a decrease of $212 thousand in gains on trading assets. These negative impacts to net income during 2015 were partially offset by an increase of $1.9 million in net interest income, an increase of $457 thousand in gains on the sale of mortgage loans, an increase of $270 thousand in debit card interchange income, an increase of $746 thousand in other income and a decrease of $295 thousand in income tax expense.  The increase in other income for the first nine months of 2015 was attributed to the Company receiving $747 thousand in June 2015 for restitution related to the settlement of the pension dispute disclosed in prior filings.  The earnings for the three months ending September 30, 2015 were $1.5 million or $0.52 basic and diluted earnings per share compared to $1.7 million or $0.63 basic and diluted earnings per share for the three month period ending September 30, 2014.  The earnings for the three month period in 2015 reflect a decrease of 10.4% compared to the same time period in 2014.

 

Return on average assets was 0.78% for the nine months ending September 30, 2015 and 0.91% for the nine months ending September 30, 2014.  Return on average assets was 0.52% for the three months ending September 30, 2015 and 0.63% for the three months ending September 30, 2014.  Return on average equity was 8.47% for the nine month period ending September 30, 2015 and 9.81% for the nine month period ending September 30, 2014.  Return on average equity was 7.14% for the three months ending September 30, 2015 and 9.06% for the same time period in 2014.

 

Securities available for sale decreased $8.3 million from $246.9 million at December 31, 2014 to $238.6 million at September 30, 2015.  Trading assets totaled $5.5 million at September 30, 2015 compared to $5.4 million at December 31, 2014 and includes income on the investment totaling $111 thousand during the first nine months of 2015 compared to $325 thousand for the nine months ending September 30, 2014.  Income on trading assets totaled $81 thousand for the three months ending September 30, 2015 compared to $83 thousand for the three months ending September 30, 2014.

 

Gross Loans increased $74.2 million from $538.3 million on December 31, 2014 to $612.5 million at September 30, 2015.  The increase in the loan portfolio is mostly attributed to acquiring Madison Financial Corporation.  Loans acquired with Madison Financial Corporation had outstanding loan balances of $68.2 million at September 30, 2015.

 

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Table of Contents

 

The overall increase in loans is attributed to an increase of $28.0 million in 1-4 family residential loans, an increase of $25.2 million in non-farm and non-residential loans, an increase of $10.4 million in real estate construction loans, an increase of $4.7 million in commercial loans, an increase of 4.4 million in multi-family residential loans and an increase of $2.2 million in consumer loans.  Loans secured by farmland and also loans used for agricultural production decreased $591 thousand and outstanding overdrafts decreased by $120 thousand.

 

Total deposits increased from $654.9 million on December 31, 2014 to $711.0 million on September 30, 2015, an increase of $56.1 million.  The increase in deposits is attributed to the Madison Financial Corporation acquisition.  On July 24, 2015, total deposit balances acquired totaled $95.8 million.  The increase in deposits related to the acquisition was partially offset by a decrease in public fund balances.  Non-interest bearing demand deposit accounts increased $24.9 million from December 31, 2014 to September 30, 2015.  Time deposits $250 thousand and over increased $5.8 million and other interest bearing deposit accounts increased $25.4 million from December 31, 2014 to September 30, 2015.

 

Public fund account balances decreased $42.5 million from December 31, 2014 to September 30, 2015.  The decrease of $42.5 million includes the $13.5 million addition to public fund balances from the acquisition of Madison Financial Corporation.  Public fund accounts typically decrease during the first three quarters of the year and increase during the last quarter of the year due to tax payments collected during the fourth quarter and then withdrawn from the Bank during the following months.  Further, during the third quarter of 2015, the Company lost a school board account which had total balances with the Company of $23.2 million at June 30, 2015 and balances totaling $7.7 million at September 30, 2015.  The remaining balance of $7.7 million for this one account will likely be lost during the fourth quarter.

 

Borrowings from the Federal Home Loan Bank decreased $2.8 million from December 31, 2014 to September 30, 2015.  Repurchase agreements and other borrowings increased $12.5 million from December 31, 2014 to September 30, 2015.  The increase in repurchase agreements is mostly attributed to repurchase agreement accounts acquired with the Madison Financial Corporation acquisition.  These repurchase agreement accounts had balances totaling $5.3 million at September 30, 2015.  Further, the Company borrowed $5 million in the form of a note during the third quarter of 2015 to aid in funding the Madison Financial Corporation acquisition.  The details of the $5 million note are disclosed in Note 8.

 

Net Interest Income

 

Net interest income is the difference between interest income earned on interest-earning assets and the interest expense paid on interest-bearing liabilities.

 

Net interest income was $21.2 million for the nine months ending September 30, 2015 compared to $19.4 million for the nine months ending September 30, 2014, an increase of 9.6%.  The interest spread, excluding tax equivalent adjustments was 3.38% for the first nine months of 2015 and down from 3.44% reported for the same period in 2014, a decrease of 6 basis points.

 

Rates have remained low during the past year.  For the first nine months ending September 30, 2015, the cost of total deposits was 0.29% compared to 0.34% for the same time period in 2014.  Increasing non-interest bearing deposit accounts and lowering rates on certificates of deposit accounts have helped to lower the cost of deposits.  Net interest income was $7.6 million for the three months ending September 30, 2015 compared to $6.5 million for the three months ending September 30, 2014, an increase of 16.2%.

 

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Table of Contents

 

The interest spread, excluding tax equivalent adjustments, was 3.38% for the three month period ending September 30, 2015 compared to 3.48% for the three month period in 2014, a decrease of 10 basis points.

 

For the first nine months, the yield on assets decreased from 3.98% in 2014 to 3.85% in 2015, excluding tax equivalent adjustments.  The yield on loans decreased 15 basis points in the first nine months of 2015 compared to 2014 from 4.87% to 4.72%.  The yield on securities decreased 8 basis points in the first nine months of 2015 compared to 2014 from 2.39% in 2014 to 2.31% in 2015.  The cost of liabilities was 0.50% for the first nine months in 2015 compared to 0.53% in 2014.  Year to date average loans, excluding overdrafts, increased $73.2 million, or 15.0% from September 30, 2014 to September 30, 2015.  Loan interest income increased $1.9 million for the first nine months of 2015 compared to the first nine months of 2014.  Year to date average total deposits increased from September 30, 2014 to September 30, 2015, up $61.7 million or 10.0%.  Year to date average interest bearing deposits increased $34.8 million, or 7.6%, from September 30, 2014 to September 30, 2015.  Deposit interest expense decreased $58 thousand for the first nine months of 2015 compared to the same period in 2014.  Year to date average borrowings increased $25.3 million, or 28.3% from September 30, 2014 to September 30, 2015.  Interest expense on borrowed funds increased $237 thousand for the first nine months of 2015 compared to the same period in 2014.

 

The volume rate analysis for the nine months ending September 30, 2015 indicates that $2.9 million of the increase in interest income is attributable to an increase in loan volume and $346 thousand of the increase in interest income is attributable to an increase in the volume of our security portfolio.  Further, a decrease in loan rates caused a decrease of $1.1 million in interest income and a decrease in rates in our security portfolio contributed a decrease of $213 thousand in interest income.  The net effect to interest income was an increase of $2.0 million for the first nine months of 2015 compared to the same time period in 2014.

 

Also based on the following volume rate analysis, the lower level of interest rates contributed to a decrease of $307 thousand in interest expense for the comparable nine months, while the change in volume in deposits and borrowings, mostly Federal Home Loan Bank advances, was responsible for a $486 thousand increase in interest expense.  The net effect to interest expense was an increase of $179 thousand.  As a result, the increase in net interest income for the first nine months in 2015 is mostly attributed to growth in the Company’s loan and security portfolios.

 

The volume rate analysis for the three months ending September 30, 2015 indicates that $1.3 million of the increase in interest income is attributable to an increase in loan volume and $191 thousand of the increase in interest income is attributable to an increase in the volume of our security portfolio.  Further, a decrease in loan rates caused a decrease of $279 thousand in interest income and a decrease in rates in our security portfolio contributed a decrease of $45 thousand in interest income.  The net effect to interest income was an increase of $1.2 million for the first three months of 2015 compared to the same time period in 2014.

 

Also based on the following volume rate analysis, the lower level of interest rates contributed to a decrease of $101 thousand in interest expense for the comparable three months, while the change in volume in deposits and borrowings, mostly Federal Home Loan Bank advances, was responsible for a $200 thousand increase in interest expense.  The net change in interest expense for the comparable three month period was an increase of $99 thousand.

 

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Table of Contents

 

The increase in net interest income for the three months ending September 30, 2015 compared to the same period in 2014 is attributed to growth in the Company’s loan and security portfolios.

 

The accompanying analyses of changes in net interest income in the following table shows the relationships of the volume and rate portions of these changes in 2015 for the comparable nine months and three months.  Changes in interest income and expenses due to both rate and volume are allocated on a pro rata basis.

 

Changes in Interest Income and Expense

 

 

 

Nine Months Ending

 

 

 

2015 vs. 2014

 

 

 

Increase (Decrease) Due to Change in

 

(in thousands)

 

Volume

 

Rate

 

Net Change

 

 

 

 

 

 

 

 

 

INTEREST INCOME

 

 

 

 

 

 

 

Loans

 

$

2,950

 

$

(1,058

)

$

1,892

 

Investment Securities

 

346

 

(213

)

133

 

Other

 

23

 

(11

)

12

 

Total Interest Income

 

3,319

 

(1,282

)

2,037

 

INTEREST EXPENSE

 

 

 

 

 

 

 

Deposits

 

 

 

 

 

 

 

Demand

 

43

 

(183

)

(140

)

Savings

 

19

 

(28

)

(9

)

Negotiable Certificates of Deposit and Other Time Deposits

 

38

 

52

 

90

 

Securities sold under agreements to repurchase and other borrowings

 

43

 

11

 

54

 

Federal Home Loan

 

 

 

 

 

 

 

Bank advances

 

343

 

(159

)

184

 

Total Interest Expense

 

486

 

(307

)

179

 

Net Interest Income

 

$

2,833

 

$

(975

)

$

1,858

 

 

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Table of Contents

 

 

 

Three Months Ending

 

 

 

2015 vs. 2014

 

 

 

Increase (Decrease) Due to Change in

 

 

 

Volume

 

Rate

 

Net Change

 

INTEREST INCOME

 

 

 

 

 

 

 

Loans

 

$

1,273

 

$

(279

)

$

994

 

Investment Securities

 

191

 

(45

)

146

 

Other

 

26

 

(7

)

19

 

Total Interest Income

 

1,490

 

(331

)

1,159

 

INTEREST EXPENSE

 

 

 

 

 

 

 

Deposits

 

 

 

 

 

 

 

Demand

 

22

 

(165

)

(143

)

Savings

 

8

 

(5

)

3

 

Negotiable Certificates of Deposit and Other Time Deposits

 

50

 

126

 

176

 

Securities sold under agreements to repurchase and other borrowings

 

47

 

8

 

55

 

Federal Home Loan

 

 

 

 

 

 

 

Bank advances

 

73

 

(65

)

8

 

Total Interest Expense

 

200

 

(101

)

99

 

Net Interest Income

 

$

1,290

 

$

(230

)

$

1,060

 

 

Non-Interest Income

 

Non-interest income increased $1.5 million for the nine months ending September 30, 2015, compared to the same period in 2014, to $8.9 million.  For the three month period ending September 30, 2015 compared to the three months ending September 30, 2014, total non-interest income increased $500 thousand.

 

Decreases to non-interest income for the nine month period ending September 30, 2015 compared to the nine months ending September 30, 2014 include a decrease of $212 thousand in gains on trading assets and a decrease $104 thousand in gains on the sale of securities.  Favorable variances to non-interest income for the first nine months of 2015 include, an increase of $746 thousand in other income due to restitution received for a legal dispute, an increase of $141 thousand in bargain purchase gains related to the acquisition of Madison Financial Corporation, an increase of $457 thousand in gains on the sale of mortgage loans, an increase of $270 thousand in debit card interchange income, an increase of $71 thousand in trust fee income and an increase of $90 thousand in net loan servicing fee income.

 

For the three months ending September 30, 2015 compared to the same period in 2014, favorable variances to non-interest income included an increase of $141 thousand in bargain purchase gains related to the acquisition of Madison Financial Corporation, an increase of $87 thousand in gains on the sale of mortgage loans, an increase of $115 thousand in debit card interchange income, an increase of $78 thousand in gains on securities and an increase of $65 thousand in service charges.

 

The gain on the sale of mortgage loans increased from $715 thousand during the first nine months of 2014 to $1.2 million during the first nine months of 2015, an increase of $457 thousand.  For the three months ending September 30, 2015 compared to the same time period in 2014, the gain on the sale of mortgage loans increased $87 thousand.  The volume of loans originated to sell during the first nine months of 2015 increased $12.3 million compared to the same time period in 2014.

 

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For the three months ending September 30, 2015, the volume of loans originated for sale increased $1.5 million compared to the same three months in 2014.  The volume of mortgage loan originations and sales is generally inverse to rate changes.  A change in the mortgage loan rate environment can have a significant impact on the related gain on sale of mortgage loans.  Loan service fee income, net of amortization and impairment expense, was $153 thousand for the nine months ending September 30, 2015 compared to $63 thousand for the nine months ending September 30, 2014, an increase of $90 thousand.  For the three month period ending September 30, 2015, loan service fee income, net of amortization and impairment expense, was $45 thousand compared to $29 thousand for the same time period one year ago.  During the first nine months of 2015, the market value adjustment to the carrying value of the mortgage servicing right was a positive net amount of $43 thousand, as the fair value of this asset increased.  Of this, a positive valuation adjustment of $14 thousand was recorded in the first quarter of 2015, a positive valuation adjustment of $20 thousand was recorded during the second quarter of 2015 and a positive valuation adjustment of $9 thousand was recorded during the third quarter of 2015.  During the first nine months of 2014, the carrying value of the mortgage servicing right was written down a net amount of $3 thousand, as the fair value of this asset decreased.  Of this, a positive valuation adjustment of $5 thousand was recorded in the first quarter of 2014, a negative valuation adjustment of $17 thousand was recorded during the second quarter of 2014 and a positive valuation adjustment of $9 thousand was recorded during the third quarter of 2014.

 

Non-Interest Expense

 

Total non-interest expense increased $3.3 million for the nine month period ending September 30, 2015 compared to the same period in 2014.  For the three month period ending September 30, 2015 compared to the three months ending September 30, 2014, total non-interest expense increased $1.6 million.

 

For the comparable nine month periods, salaries and benefits increased $1.2 million, an increase of 10.6%.  The number of full time equivalent employees at September 30, 2015 was 242 compared to 215 one year ago.  The increase in salaries and benefits was largely due to an increase in incentive compensation expense attributed to the Bank performing favorably in regards to benchmarks set forth in the incentive compensation plan.  The increase in the number of full time equivalents is largely attributed to acquiring Madison Financial Corporation during the third quarter of 2015.  Salaries and employee benefits increased $482 thousand, or 12.9%, for the three month period ending September 30, 2015 compared to the same time period in 2014.

 

Occupancy expenses increased $361 thousand to $2.9 million for the first nine months of 2015 compared to the same time period in 2014.  Depreciation expense increased $144 thousand of which $132 thousand was related to the acquisition of Madison Financial Corporation.  Lease expense increased $62 thousand due to acquiring Madison Financial Corporation which added three new facilities the Company is leasing.  The Company also expensed $37 thousand for early termination of an existing lease contract.  Expenses associated with purchasing equipment with an initial cost of less than $1 thousand increased $58 thousand, computer maintenance expense increased $59 thousand and building maintenance expense increased $37 thousand.  Occupancy expenses increased $253 thousand for the three month period ending September 30, 2015 compared to the same time period in 2014.  Most of the increase in occupancy expense for the three month period ending September 30, 2015 compared to the same period one year ago is attributed to the acquisition of Madison Financial Corporation.

 

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Legal and professional fees increased $25 thousand for the first nine months ending September 30, 2015 compared to the same time period in 2014 and decreased $40 thousand for the comparable three month period.  Repossession expenses increased $180 thousand for the first nine months ending September 30, 2015 compared to the same time period in 2014 and decreased $79 thousand for the comparable three month period.  Repossession expenses are reported net of rental income earned on repossessed properties.  Net repossession expenses were higher during the first nine months of 2015 when compared to 2014 due to net write-downs totaling $252 thousand in 2015 compared to net write-downs of $64 thousand in 2014.  FDIC insurance expense increased $33 thousand for the nine months ending September 30, 2015 compared to the same time period in 2014 and $0 for the comparable three month period.

 

Income Taxes

 

The effective tax rate for the nine months ending September 30, 2015 was 7.3% compared to 11.5% in 2014.  The effective tax rate for the three months ending September 30, 2015 was 6.3% compared to 2.4% for the three months ending September 30, 2014.  These effective tax rates are less than the statutory rate as a result of the Company investing in tax-free securities, loans and other investments which generate tax credits for the Company.  Income tax expense decreased $295 thousand for the nine months ending September 30, 2015 compared to the first nine months in 2014.  Income tax expense decreased largely due to the implementation of the captive insurance subsidiary which generated $813 thousand of tax-exempt income during the nine months of 2015.  The captive insurance subsidiary was established during the third quarter of 2014.  Tax-exempt interest income increased $22 thousand for the first nine months of 2015 compared to the first nine months of 2014.  Further, for the first nine months of 2015, the Company had tax credits totaling $458 thousand for investments made in low income housing projects which represented an increase of $42 thousand compared to similar tax credits for the first nine months of 2014. Further, the Company recorded $141 thousand in tax-exempt income during the third quarter of 2015 for the bargain purchase gain of Madison Financial Corporation.  The effective income tax rate increased for the three months ending September 30, 2015 when compared to the same period one year ago due to an adjustment to income tax expense during the third quarter of the prior year.

 

As part of normal business, the Bank typically makes tax free loans to select municipalities in our market and invests in selected tax free securities, primarily in the Commonwealth of Kentucky.  In making these investments, the Company considers the overall impact to managing our net interest margin, credit worthiness of the underlying issuer and the favorable impact on our tax position.  For the nine months ending September 30, 2015, the Company averaged $89.2 million in tax free securities and $29.9 million in tax free loans.  As of September 30, 2015, the weighted average remaining maturity for the tax free securities is 122 months, while the weighted average remaining maturity for the tax free loans is 155 months.

 

Liquidity and Funding

 

Liquidity is the ability to meet current and future financial obligations.  The Company’s primary sources of funds consist of deposit inflows, loan repayments, maturities and sales of investment securities and Federal Home Loan Bank borrowings.

 

Liquidity risk is the possibility that we may not be able to meet our cash requirements in an orderly manner.  Management of liquidity risk includes maintenance of adequate cash and sources of cash to fund operations and to meet the needs of borrowers, depositors and creditors.  Excess liquidity has a negative impact on earnings as a result of the lower yields on short-term assets.

 

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Cash and cash equivalents were $22.9 million as of September 30, 2015 compared to $17.2 million at December 31, 2014.  The increase in cash and cash equivalents is attributed to an increase of $3.0 million in cash and due from banks and an increase of $2.7 million in federal funds sold.  In addition to cash and cash equivalents, the securities portfolio provides an important source of liquidity.  Securities available for sale totaled $238.6 million at September 30, 2015 compared to $246.9 million at December 31, 2014.  Securities classified as trading assets totaled $5.5 million at September 30, 2015 compared to $5.4 million at December 31, 2014.

 

The securities available for sale and trading assets are available to meet liquidity needs on a continuing basis.  However, we expect our customers’ deposits to be adequate to meet our funding demands.

 

Generally, we rely upon net cash inflows from financing activities, supplemented by net cash inflows from operating activities, to provide cash used in our 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.  Our primary investing activities include purchasing investment securities and loan originations.

 

For the first nine months of 2015, deposits increased $56.1 million. The Company’s investment portfolio decreased $8.3 million and the Company’s loan portfolio increased $74.2 million.  The Company’s borrowed funds from the Federal Home Loan Bank decreased $2.8 million from December 31, 2014 to September 30, 2015.  The Company had outstanding federal funds purchased totaling $4.3 million at September 30, 2015 and $0 at December 31, 2014.

 

Management is aware of the challenge of funding sustained loan growth.  Therefore, in addition to deposits, other sources of funds, such as Federal Home Loan Bank advances, may be used.  We rely on Federal Home Loan Bank advances for both liquidity and asset/liability management purposes.  These advances are used primarily to fund long-term fixed rate residential mortgage loans.  As of September 30, 2015, we have sufficient collateral to borrow an additional $54 million from the Federal Home Loan Bank.  In addition, as of September 30, 2015, $27 million is available in overnight borrowing through various correspondent banks and the Company has access to $305 million in brokered deposits.  In light of this, management believes there is sufficient liquidity to meet all reasonable borrower, depositor and creditor needs in the present economic environment.

 

Capital Requirements

 

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.

 

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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, including Common Equity Tier 1 Capital, (as defined in the applicable banking regulations) to risk-weighted assets (as defined), and of Tier I capital to average assets (as defined).  Management believes, as of September 30, 2015 and December 31, 2014, that the Company and the Bank meet all capital adequacy requirements to which they are subject.

 

The most recent notification from the FDIC 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, Common Equity Tier 1 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.

 

In July 2013, the FDIC and the other federal bank regulatory agencies issued a final rule that will revise their leverage and risk-based capital requirements and the method of calculating risk-weighted assets to make them consistent with agreements that were reached by the Basel Committee on Banking Supervision and certain provisions of the Dodd-Frank Act.

 

Among other things, the rule establishes a new common equity Tier 1 minimum capital requirement (4.5% of risk-weighted assets), increases the minimum Tier 1 capital to risk-based assets requirement (from 4% to 6% of risk-weighted assets) and assigns a higher risk weight (150%) to exposures that are more than 90 days past due or are on nonaccrual status and to certain commercial real estate facilities that finance the acquisition, development or construction of real property.  The final rule also requires unrealized gains and losses on certain “available-for-sale” securities holdings to be included for purposes of calculating regulatory capital requirement unless a one-time opt-in or opt-out is exercised, which the Company did opt-out of.

 

The rule limits a banking organization’s capital distributions and certain discretionary bonus payments if the banking organization does not hold a “capital conservation buffer” consisting of 2.5% of common equity Tier 1 capital to risk-weighted assets in addition to the amount necessary to meet its minimum risk-based capital requirements. The final rule became effective for the Bank on January 1, 2015.  In accordance with the final rule, the capital conservation buffer requirement will be phased in beginning January 1, 2016 and ending January 1, 2019, when the full capital conservation buffer requirement will be effective.

 

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

 

 

 

(Dollars in Thousands

 

September 30, 2015

 

 

 

 

 

 

 

 

 

 

 

 

 

Consolidated

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total Capital (to Risk-Weighted Assets)

 

$

86,919

 

13.2

%

$

52,646

 

8.0

%

$

N/A

 

N/A

 

Tier I Capital (to Risk-Weighted Assets)

 

80,690

 

12.3

 

39,484

 

6.0

 

N/A

 

N/A

 

Common Equity Tier 1 Capital (to Risk-Weighted Assets)

 

73,690

 

11.2

 

29,613

 

4.5

 

N/A

 

N/A

 

Tier I Capital (to Average Assets)

 

80,690

 

8.9

 

36,399

 

4.0

 

N/A

 

N/A

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Bank Only

 

 

 

 

 

 

 

 

 

 

 

 

 

Total Capital (to Risk-Weighted Assets)

 

$

89,843

 

13.7

%

$

52,605

 

8.0

%

$

65,756

 

10.0

%

Tier I Capital (to Risk-Weighted Assets)

 

83,614

 

12.7

 

39,454

 

6.0

 

52,605

 

8.0

 

Common Equity Tier 1 Capital (to Risk-Weighted Assets)

 

83,614

 

12.7

 

29,590

 

4.5

 

42,741

 

6.5

 

Tier I Capital (to Average Assets)

 

83,614

 

9.2

 

36,265

 

4.0

 

45,332

 

5.0

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

December 31, 2014

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Consolidated

 

 

 

 

 

 

 

 

 

 

 

 

 

Total Capital (to Risk-Weighted Assets)

 

$

77,016

 

13.1

%

$

47,208

 

8.0

%

N/A

 

N/A

 

Tier I Capital (to Risk-Weighted Assets)

 

70,917

 

12.0

 

23,604

 

4.0

 

N/A

 

N/A

 

Tier I Capital (to Average Assets)

 

70,917

 

8.7

 

32,497

 

4.0

 

N/A

 

N/A

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Bank Only

 

 

 

 

 

 

 

 

 

 

 

 

 

Total Capital (to Risk-Weighted Assets)

 

$

74,575

 

12.6

%

$

47,184

 

8.0

%

$

58,980

 

10.0

%

Tier I Capital (to Risk-Weighted Assets)

 

68,476

 

11.6

 

23,592

 

4.0

 

35,388

 

6.0

 

Tier I Capital (to Average Assets)

 

68,476

 

8.4

 

32,442

 

4.0

 

40,553

 

5.0

 

 

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Table of Contents

 

Non-Performing Assets

 

As of September 30, 2015, our non-performing assets totaled $11.9 million or 1.28% of assets compared to $17.3 million or 2.03% of assets at December 31, 2014 (See table below.)  The Company experienced a decrease of $4.2 million in non-accrual loans from December 31, 2014 to September 30, 2015.  As of September 30, 2015, non-accrual loans include $1.6 million in loans secured by 1-4 family properties, $477 thousand in loans secured by non-farm and non-residential properties, $155 thousand in loans secured by farmland and $136 thousand in loans secured by real estate construction loans.  Real estate loans composed 99.3% of the non-performing loans as of September 30, 2015 and 99.6% as of December 31, 2014.  Forgone interest income on non-accrual loans totaled $47 thousand for the first nine months of 2015 compared to forgone interest of $108 thousand for the same time period in 2014.  Accruing loans that are contractually 90 days or more past due as of September 30, 2015 totaled $96 thousand compared to $24 thousand at December 31, 2014, an increase of $72 thousand.

 

Total nonperforming and restructured loans decreased $4.2 million from December 31, 2014 to September 30, 2015.  The decrease in total non-performing loan balances is mostly attributed to one loan customer who had three loans totaling $4.0 million on non-accrual at December 31, 2014.  These loan balances were moved to other real estate owned during the first three months of 2015 and subsequently sold.  The decrease in non-accrual loan balances contributed to the decrease in the ratio of nonperforming and restructured loans to loans which decreased 97 basis points to 1.39% from December 31, 2014 to September 30, 2015.

 

In addition, the amount the Company has recorded as other real estate owned decreased $1.2 million from December 31, 2014 to September 30, 2015.  As of September 30, 2015, the amount recorded as other real estate owned totaled $3.4 million compared to $4.6 million at December 31, 2014.  During the first nine months of 2015, $3.4 million in loan balances were foreclosed upon and added to other real estate properties while $4.8 million in other real estate properties were sold.  The allowance as a percentage of non-performing and restructured loans and other real estate owned increased from 35% at December 31, 2014 to 52% at September 30, 2015.

 

Nonperforming and Restructured Assets

 

 

 

9/30/15

 

12/31/14

 

 

 

(in thousands)

 

 

 

 

 

 

 

Non-accrual Loans

 

$

2,353

 

$

6,577

 

Accruing Loans which are Contractually past due 90 days or more

 

96

 

24

 

Accruing Troubled Debt Restructurings

 

6,091

 

6,138

 

Total Nonperforming and Restructured Loans

 

8,540

 

12,739

 

Other Real Estate

 

3,384

 

4,604

 

Total Nonperforming and Restructured Loans and Other Real Estate

 

$

11,924

 

$

17,343

 

Nonperforming and Restructured Loans as a Percentage of Loans

 

1.39

%

2.36

%

Nonperforming and Restructured Loans and Other Real Estate as a Percentage of Total Assets

 

1.28

%

2.03

%

Allowance as a Percentage of Period-end Loans

 

1.00

%

1.12

%

Allowance as a Percentage of Non-performing and Restructured Loans and Other Real Estate

 

52

%

35

%

 

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Table of Contents

 

We maintain a “watch list” of agricultural, commercial, real estate mortgage, and real estate construction loans and review those loans on a regular basis.  Generally, assets are designated as “watch list” loans to ensure more frequent monitoring.  If we determine that there is serious doubt as to performance in accordance with original terms of the contract, then the loan is generally downgraded and often placed on non-accrual status.

 

We review and evaluate nonaccrual loans, past due loans, and loans graded substandard or worse on a regular basis to determine if the loan should be evaluated for impairment and whether specific allocations are needed.

 

Provision for Loan Losses

 

The loan loss provision for the first nine months of 2015 was $1.025 million compared to $500 thousand for the first nine months of 2014.  The loan loss provision was $375 thousand for the three months ending September 30, 2015 compared to $300 thousand for the three months ending September 30, 2014.  The increase in the total loan loss provision during the first nine months of 2015 compared to the same time period in 2014 is attributed to growth in the Bank’s loan portfolio and having a significant recovery of $367 thousand during the first quarter of 2014 for a loan that was charged off in a prior year.

 

Management evaluates the loan portfolio by reviewing the historical loss rate for each respective loan type and assigns risk multiples to certain categories to account for qualitative factors including current economic conditions.  The average loss rates are reviewed for trends in the analysis, as well as comparisons to peer group loss rates.  Management makes allocations within the allowance for loan losses for specifically classified loans regardless of loan amount, collateral or loan type.  Loan categories are evaluated utilizing subjective factors in addition to the historical loss calculations to determine a loss allocation for each of those types.

 

As this analysis, or any similar analysis, is an imprecise measure of loss, the allowance is subject to ongoing adjustments.  Therefore, management will often take into account other significant factors that may be necessary or prudent in order to reflect probable incurred losses in the total loan portfolio.

 

Nonperforming loans and restructured loans decreased $4.2 million from December 31, 2014 to $8.5 million as of September 30, 2015.  Other real estate owned properties owned decreased $1.2 million over this same time period.  Additions to Other real estate properties totaled $3.6 million, of which $283 thousand was included in other assets at December 31, 2014 and $445 thousand was acquired with the acquisition of Madison Financial Corporation. Sales of other real estate owned properties totaled $4.8 million and valuation adjustments were a net write-down of $252 thousand.

 

Net charge-offs were $895 thousand for the nine months ending September 30, 2015 and $235 thousand for the nine months ending September 30, 2014.  Net charge-offs were $183 thousand for the three months ending September 30, 2015 and $208 thousand for the three months ending September 30, 2014.  During the first quarter of 2014, the Company recorded a recovery of $367 for one loan which was previously charged-off.  Future levels of charge-offs will be determined by the particular facts and circumstances surrounding individual loans.

 

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Based on the above information, management believes the current loan loss allowance is sufficient to meet probable incurred loan losses.

 

Loan Losses

 

 

 

Nine Months Ended September 30

 

 

 

(in thousands)

 

 

 

2015

 

2014

 

 

 

 

 

 

 

Balance at Beginning of Period Amounts Charged-off:

 

$

6,012

 

$

5,441

 

Commercial

 

30

 

200

 

1-4 family residential

 

241

 

179

 

Multi-family residential

 

94

 

42

 

Agricultural

 

242

 

18

 

Consumer and other

 

963

 

599

 

Total Charged-off Loans

 

1,570

 

1,038

 

Recoveries on Amounts Previously Charged-off:

 

 

 

 

 

Real Estate Construction

 

6

 

11

 

1-4 family residential

 

8

 

55

 

Multi-family residential

 

27

 

 

Non-farm & non-residential

 

8

 

367

 

Agricultural

 

20

 

27

 

Consumer and other

 

606

 

343

 

Total Recoveries

 

675

 

803

 

Net Charge-offs

 

895

 

235

 

Provision for Loan Losses

 

1,025

 

500

 

Balance at End of Period

 

6,142

 

5,706

 

Loans

 

 

 

 

 

Average

 

560,394

 

487,991

 

At September 30

 

612,504

 

510,994

 

As a Percentage of Average Loans:

 

 

 

 

 

Net Charge-offs for the period

 

0.16

%

0.05

%

Provision for Loan Losses for the period

 

0.18

%

0.10

%

Allowance as a Multiple of Net Charge-offs annualized

 

5.1

 

18.2

 

 

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Table of Contents

 

Loan Losses

 

 

 

Three Months Ended September 30

 

 

 

(in thousands)

 

 

 

2015

 

2014

 

 

 

 

 

 

 

Balance at Beginning of Period Amounts Charged-off:

 

$

5,950

 

$

5,614

 

Commercial

 

5

 

 

1-4 family residential

 

89

 

91

 

Multi-family residential

 

 

42

 

Agricultural

 

 

18

 

Consumer and other

 

307

 

244

 

Total Charged-off Loans

 

401

 

395

 

Recoveries on Amounts Previously Charged-off:

 

 

 

 

 

Real Estate Construction

 

4

 

3

 

1-4 family residential

 

3

 

39

 

Multi-family residential

 

25

 

 

Non-farm & non-residential

 

8

 

 

Agricultural

 

8

 

2

 

Consumer and other

 

170

 

143

 

Total Recoveries

 

218

 

187

 

Net Charge-offs

 

183

 

208

 

Provision for Loan Losses

 

375

 

300

 

Balance at End of Period

 

6,142

 

5,706

 

Loans

 

 

 

 

 

Average

 

600,550

 

502,859

 

At September 30

 

612,504

 

510,994

 

As a Percentage of Average Loans:

 

 

 

 

 

Net Charge-offs for the period

 

0.03

%

0.04

%

Provision for Loan Losses for the period

 

0.06

%

0.06

%

Allowance as a Multiple of Net Charge-offs annualized

 

8.4

 

6.9

 

 

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 since a bank’s net income is largely dependent on net interest income.  Our exposure to market risk is reviewed on a regular basis by the Asset/Liability Committee.  Interest rate risk is the potential of economic losses due to future interest rate changes.  These economic losses can be reflected as a loss of future net interest income and/or a loss of current fair market values.  The objective is to measure the effect on net interest income and to adjust the balance sheet to minimize the inherent risk, while at the same time, maximize income.

 

Management realizes certain risks are inherent and that the goal is to identify and minimize the risks.  The primary tools used by management are interest rate shock and economic value of equity (EVE) simulations.  The Company has $5.5 million in market risk sensitive instruments which are held for trading purposes.  These assets are held for a minimal period of time and are used to generate profits on short-term differences in price while earning interest for the time they are held.

 

Using interest rate shock simulations, the following table depicts the change in net interest income resulting from 100 and 300 basis point changes in rates on the Company’s interest earning assets and interest bearing liabilities.

 

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The projections are based on balance sheet growth assumptions and repricing opportunities for new, maturing and adjustable rate amounts.  As of September 30, 2015, the projected percentage changes are within limits approved by our Board of Directors (“Board”).  Although management does analyze and monitor the projected percentage change in a declining interest rate environment, due to the current rate environment many of the current deposit rates cannot decline an additional 100 basis points.  Therefore, management places more emphasis in the rising rate environment scenarios.  Similar to prior periods, this period’s volatility is slightly lower in each rate shock simulation when compared to the same period a year ago.  The projected net interest income report summarizing our interest rate sensitivity as of September 30, 2015 is as follows:

 

PROJECTED NET INTEREST INCOME

(dollars in thousands)

 

 

 

Level

 

Change in basis points:

 

- 100

 

Rates

 

+ 100

 

+ 300

 

 

 

 

 

 

 

 

 

 

 

Year One (10/15 - 9/16)

 

 

 

 

 

 

 

 

 

Net interest income

 

$

29,903

 

$

30,751

 

$

30,754

 

$

30,646

 

Net interest income dollar change

 

(848

)

N/A

 

3

 

(106

)

Net interest income percentage change

 

-2.8

%

N/A

 

0.0

%

-0.3

%

Board approved limit

 

>-4.0%

 

N/A

 

>-4.0%

 

>-10.0%

 

 

The projected net interest income report summarizing the Company’s interest rate sensitivity as of September 30, 2014 is as follows:

 

PROJECTED NET INTEREST INCOME

(dollars in thousands)

 

 

 

Level

 

Change in basis points:

 

- 100

 

Rates

 

+ 100

 

+ 300

 

 

 

 

 

 

 

 

 

 

 

Year One (10/14 - 9/15)

 

 

 

 

 

 

 

 

 

Net interest income

 

$

25,010

 

$

25,724

 

$

26,036

 

$

26,060

 

Net interest income dollar change

 

(715

)

N/A

 

311

 

336

 

Net interest income percentage change

 

-2.8

%

N/A

 

1.2

%

1.3

%

Board approved limit

 

>-4.0%

 

N/A

 

>-4.0%

 

>-10.0%

 

 

Projections from September 30, 2015, year one reflected a decline in net interest income of 2.8% with a 100 basis point decline compared to the 2.8% decline in 2014.  The 100 basis point increase in rates reflected a 0.3% decrease in net interest income in 2015 compared to an increase of 1.3% in 2014.

 

EVE applies discounting techniques to future cash flows to determine the present value of assets, liabilities, and therefore equity.  Based upon applying these techniques to the September 30, 2015 balance sheet, a 100 basis point increase in rates results in a 9.5% decrease in EVE.  A 100 basis point decrease in rates results in a 0.7% decrease in EVE.  These are within the Board approved limits.

 

Item 4 - CONTROLS AND PROCEDURES

 

As of the end of the period covered by this report, and pursuant to Rule 13a-15(b) of the Securities Exchange Act of 1934 (“Exchange Act”), our management, including the Chief Executive Officer and the Chief Financial Officer, carried out an evaluation of the effectiveness of the design and operation of our disclosure controls and procedures (as that term is defined in Rule 13a-15(e) of the Exchange Act.  Based on the foregoing, our Chief Executive Officer and Chief Financial Officer concluded that the Company’s disclosure controls and procedures were effective, in all material respects, to ensure that information required to be disclosed in the reports the Company files and submits under the Exchange Act is recorded, processed, summarized and reported as and when required.

 

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We also conducted an evaluation of internal control over financial reporting to determine whether any changes occurred during the quarter covered by this report that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting. Based on this evaluation, there has been no such change during the quarter covered by this report.

 

Our management recognizes that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives.

 

Part II - Other Information

 

Item 2.     Unregistered Sales of Equity Securities and Use of Proceeds

 

ISSUER PURCHASES OF EQUITY SECURITIES

 

 

 

(a)

 

(b)

 

(c) Total Number

 

(d) Maximum Number

 

 

 

Total

 

 

 

of Shares (or Units)

 

(or Approximate Dollar

 

 

 

Number of

 

Average

 

Purchased as Part

 

Value) of Shares (or

 

 

 

Shares (or

 

Price Paid

 

of Publicly

 

Units) that May Yet Be

 

 

 

Units)

 

Per Share

 

Announced Plans

 

Purchased Under the

 

Period

 

Purchased

 

(or Unit)

 

Or Programs

 

Plans or Programs

 

 

 

 

 

 

 

 

 

 

 

7/1/15 — 7/31/15

 

634

 

$

31.45

 

634

 

82,256 shares

 

 

 

 

 

 

 

 

 

 

 

8/1/15 — 8/31/15

 

 

 

 

82,256 shares

 

 

 

 

 

 

 

 

 

 

 

9/1/15 — 9/30/15

 

 

 

 

82,256 shares

 

 

 

 

 

 

 

 

 

 

 

Total

 

634

 

$

31.45

 

634

 

82,256 shares

 

 

On October 25, 2000, we announced that our Board approved a stock repurchase program and authorized the Company to purchase up to 100,000 shares of its outstanding common stock.  On November 11, 2002, the Board approved and authorized the Company’s repurchase of an additional 100,000 shares.  On May 20, 2008, the Board of Directors approved and authorized the Company to purchase an additional 100,000 shares.  On May 17, 2011, the Board approved and authorized the Company’s repurchase of an additional 100,000 shares.  Shares will be purchased from time to time in the open market depending on market prices and other considerations.  Through September 30, 2015, 317,744 shares have been purchased.

 

Item 6.     Exhibits

 

2.1

 

Agreement and Plan of Merger with Peoples Bancorp of Sandy Hook is incorporated by reference to Exhibit 2.1 of the Registrant’s Current Report on Form 8-K dated and filed February 24, 2006.

 

 

 

2.2

 

Agreement and Plan of Share Exchange with Madison Financial Corporation is incorporated by reference to Exhibit 2.1 of the Registrant’s Current Report on Form 8-K dated and filed January 21, 2015.

 

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3.1

 

Amended and Restated 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 and filed May 15, 2000.

 

 

 

3.2

 

Bylaws of the Registrant are incorporated by reference to Exhibit 3.1 of the Registrant’s Quarterly Report of Form 10-Q for the quarterly period ending June 30, 2000 and filed August 14, 2000.

 

 

 

3.3

 

Articles of Amendment to Amended and Restated Articles of Incorporation of the Registrant are incorporated by reference to Exhibit 3.3 of the Registrant’s Annual Report of Form 10-K for the period ending December 31, 2005 and filed March 29, 2006.

 

 

 

31.1

 

Certifications of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

 

 

 

31.2

 

Certifications of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

 

 

 

32

 

Certifications of Chief Executive Officer and Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

 

 

 

101*

 

The following financial information from Kentucky Bancshares, Inc. Quarterly Report on Form 10-Q for the period ended September 30, 2015, filed with the SEC on November 16, 2015, formatted in Extensible Business Reporting Language (XBRL): (i) Consolidated Balance Sheets at September 30, 2015 and December 31, 2014, (ii) Consolidated Statements of Income and Comprehensive Income (Loss) for the nine and three months ended September 30, 2015 and September 30, 2014, (iii) Consolidated Statement of Stockholders’ Equity for the nine months ended September 30, 2015, (iv) Consolidated Statements of Cash Flows for the nine months ended September 30, 2015 and September 30, 2014 and (v) Notes to Consolidated Financial Statements.

 


*Pursuant to Rule 402 of Regulation S-T, the XBRL related information in Exhibit 101 to this Quarterly Report on Form 10-Q shall not be deemed to be “filed” for purposes of Section 11 of the Securities Act of 1933 and Section 12 of the Exchange Act of 1934, or otherwise subject to the liability of those sections, and shall not be deemed part of a registration statement, prospectus or other document filed under the Securities Act of 1933 or the Exchange Act of 1934, except as shall be expressly set forth by specific reference in such filings.

 

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SIGNATURES

 

Pursuant to the requirements 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.

 

 

 

KENTUCKY BANCSHARES, INC.

 

 

 

 

Date

11/16/15

 

 /s/Louis Prichard

 

 

 

 Louis Prichard, President and C.E.O.

 

 

 

 

Date

11/16/15

 

 /s/Gregory J. Dawson

 

 

 Gregory J. Dawson, Chief Financial Officer

 

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