ktyb_Current folio_10Q

Table of Contents

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C.  20549

 

FORM 10-Q

(Mark One)

 

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the quarterly period June 30, 2017

 

or

 

TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the transition period from                         to                         

 

Commission File Number:  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 ☒ No ☐

 

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 ☒ No ☐

 

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

 

Large accelerated filer ☐

Accelerated filer ☐

 

 

Non-accelerated filer   

Smaller reporting company ☐

(Do not check if a smaller reporting company)

 

 

Emerging growth company ☐

 

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐

 

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

 

Number of shares of Common Stock outstanding as of July 31, 2017:  2,972,163.

 

 

 

 


 

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

5

 

 

 

 

Consolidated Statement of Cash Flows

6

 

 

 

 

Notes to Consolidated Financial Statements

7

 

 

 

Item 2. 

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

32

 

 

 

Item 3. 

Quantitative and Qualitative Disclosures About Market Risk

44

 

 

 

Item 4. 

Controls and Procedures

45

 

 

 

Part II - Other Information 

45

 

 

Item 2. 

Unregistered Sales of Equity Securities and Use of Proceeds

45

 

 

 

Item 6. 

Exhibits

46

 

 

 

Signatures 

47

 

 

2


 

Table of Contents

Item 1 – Financial Statements

KENTUCKY BANCSHARES, INC.

CONSOLIDATED BALANCE SHEETS (unaudited)

(in thousands, except per share amounts)

 

 

 

 

 

 

 

 

 

    

6/30/2017

    

12/31/2016

 

ASSETS

 

 

 

 

 

 

 

Cash and due from banks

 

$

15,328

 

$

42,052

 

Federal funds sold

 

 

809

 

 

1,198

 

Cash and cash equivalents

 

 

16,137

 

 

43,250

 

Interest bearing time deposits

 

 

5,009

 

 

5,029

 

Securities available for sale

 

 

297,786

 

 

273,770

 

Trading Assets

 

 

5,702

 

 

5,592

 

Loans held for sale

 

 

1,917

 

 

724

 

Loans

 

 

650,657

 

 

656,007

 

Allowance for loan losses

 

 

(7,958)

 

 

(7,541)

 

Net loans

 

 

642,699

 

 

648,466

 

Federal Home Loan Bank stock

 

 

7,034

 

 

7,034

 

Real estate owned, net

 

 

2,782

 

 

1,824

 

Assets held for sale

 

 

 —

 

 

969

 

Bank premises and equipment, net

 

 

15,882

 

 

14,781

 

Interest receivable

 

 

3,614

 

 

3,715

 

Mortgage servicing rights

 

 

1,457

 

 

1,321

 

Goodwill

 

 

14,001

 

 

14,001

 

Other intangible assets

 

 

443

 

 

529

 

Other assets

 

 

6,429

 

 

7,442

 

Total assets

 

$

1,020,892

 

$

1,028,447

 

 

 

 

 

 

 

 

 

LIABILITIES AND STOCKHOLDERS’ EQUITY

 

 

 

 

 

 

 

Deposits

 

 

 

 

 

 

 

Non-interest bearing

 

$

216,833

 

$

219,556

 

Time deposits, $250,000 and over

 

 

69,046

 

 

74,302

 

Other interest bearing

 

 

498,093

 

 

509,123

 

Total deposits

 

 

783,972

 

 

802,981

 

Repurchase agreements

 

 

23,950

 

 

20,873

 

Short-term Federal Home Loan Bank advances

 

 

5,000

 

 

 —

 

Long-term Federal Home Loan Bank advances

 

 

83,809

 

 

92,500

 

Note payable

 

 

3,873

 

 

4,090

 

Subordinated debentures

 

 

7,217

 

 

7,217

 

Interest payable

 

 

662

 

 

692

 

Other liabilities

 

 

13,564

 

 

7,122

 

Total liabilities

 

 

922,047

 

 

935,475

 

 

 

 

 

 

 

 

 

Stockholders’ equity

 

 

 

 

 

 

 

Preferred stock, 300,000 shares authorized and unissued

 

 

 —

 

 

 —

 

Common stock, no par value; 10,000,000 shares authorized; 2,972,163 and 2,973,232 shares issued and outstanding at June 30, 2017 and December 31, 2016

 

 

20,848

 

 

20,767

 

Retained earnings

 

 

76,784

 

 

73,161

 

Accumulated other comprehensive income (loss)

 

 

1,213

 

 

(956)

 

Total stockholders’ equity

 

 

98,845

 

 

92,972

 

Total liabilities and stockholders’ equity

 

$

1,020,892

 

$

1,028,447

 

 

See Accompanying Notes

 

 

3


 

Table of Contents

KENTUCKY BANCSHARES, INC.

CONSOLIDATED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME (unaudited)

(in thousands, except per share amounts)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended

 

Six Months Ended

 

 

    

6/30/2017

    

6/30/2016

    

6/30/2017

    

6/30/2016

 

INTEREST INCOME:

 

 

 

 

 

 

 

 

 

 

 

 

 

Loans, including fees

 

$

7,712

 

$

7,423

 

$

15,206

 

$

14,802

 

Securities

 

 

 

 

 

 

 

 

 

 

 

 

 

Taxable

 

 

1,135

 

 

866

 

 

2,197

 

 

1,773

 

Tax exempt

 

 

568

 

 

661

 

 

1,176

 

 

1,318

 

Trading assets

 

 

25

 

 

31

 

 

59

 

 

73

 

Other

 

 

144

 

 

105

 

 

322

 

 

218

 

Total interest income

 

 

9,584

 

 

9,086

 

 

18,960

 

 

18,184

 

INTEREST EXPENSE:

 

 

 

 

 

 

 

 

 

 

 

 

 

Deposits

 

 

684

 

 

555

 

 

1,329

 

 

1,112

 

Repurchase agreements

 

 

25

 

 

27

 

 

51

 

 

53

 

Federal Home Loan Bank advances

 

 

388

 

 

393

 

 

785

 

 

777

 

Note payable

 

 

49

 

 

59

 

 

99

 

 

120

 

Subordinated debentures

 

 

77

 

 

67

 

 

157

 

 

128

 

Total interest expense

 

 

1,223

 

 

1,101

 

 

2,421

 

 

2,190

 

Net interest income

 

 

8,361

 

 

7,985

 

 

16,539

 

 

15,994

 

Provision for loan losses

 

 

200

 

 

225

 

 

550

 

 

600

 

Net interest income after provision

 

 

8,161

 

 

7,760

 

 

15,989

 

 

15,394

 

NON-INTEREST INCOME:

 

 

 

 

 

 

 

 

 

 

 

 

 

Service charges

 

 

1,302

 

 

1,264

 

 

2,525

 

 

2,381

 

Loan service fee income, net

 

 

60

 

 

(2)

 

 

174

 

 

49

 

Trust department income

 

 

287

 

 

261

 

 

575

 

 

524

 

Gain on sale of available for sale securities, net

 

 

43

 

 

151

 

 

43

 

 

277

 

Gain (loss) on trading assets

 

 

34

 

 

60

 

 

51

 

 

100

 

Gain on sale of loans

 

 

491

 

 

457

 

 

1,041

 

 

756

 

Brokerage income

 

 

181

 

 

250

 

 

374

 

 

434

 

Debit card interchange income

 

 

780

 

 

710

 

 

1,511

 

 

1,354

 

Gain on bank premises

 

 

 6

 

 

 0

 

 

1,200

 

 

 —

 

Other

 

 

111

 

 

135

 

 

151

 

 

158

 

Total other income

 

 

3,295

 

 

3,286

 

 

7,645

 

 

6,033

 

NON-INTEREST EXPENSE:

 

 

 

 

 

 

 

 

 

 

 

 

 

Salaries and employee benefits

 

 

4,508

 

 

4,562

 

 

8,953

 

 

8,932

 

Occupancy expenses

 

 

984

 

 

939

 

 

1,949

 

 

1,857

 

Repossession expenses, net

 

 

106

 

 

31

 

 

185

 

 

143

 

FDIC Insurance

 

 

94

 

 

164

 

 

188

 

 

338

 

Legal and professional fees

 

 

194

 

 

513

 

 

477

 

 

891

 

Data processing

 

 

494

 

 

427

 

 

900

 

 

853

 

Debit card expenses

 

 

443

 

 

368

 

 

818

 

 

687

 

Amortization expense of intangible assets, excluding mortgage servicing right

 

 

43

 

 

77

 

 

86

 

 

156

 

Advertising and marketing

 

 

212

 

 

225

 

 

424

 

 

450

 

Taxes other than payroll, property and income

 

 

300

 

 

279

 

 

600

 

 

554

 

Telephone

 

 

137

 

 

94

 

 

259

 

 

185

 

Postage

 

 

85

 

 

101

 

 

178

 

 

190

 

Loan fees

 

 

48

 

 

46

 

 

111

 

 

91

 

Other

 

 

901

 

 

782

 

 

1,607

 

 

1,609

 

Total other expenses

 

 

8,549

 

 

8,608

 

 

16,735

 

 

16,936

 

Income before taxes

 

 

2,907

 

 

2,438

 

 

6,899

 

 

4,491

 

Income taxes

 

 

497

 

 

356

 

 

1,352

 

 

572

 

Net income

 

$

2,410

 

$

2,082

 

$

5,547

 

$

3,919

 

Other Comprehensive Income, net of tax:

 

 

 

 

 

 

 

 

 

 

 

 

 

Change in Unrealized Gains on Securities

 

 

1,433

 

 

1,656

 

 

2,169

 

 

4,043

 

Comprehensive Income

 

$

3,843

 

$

3,738

 

$

7,716

 

$

7,962

 

Earnings per share

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic

 

$

0.81

 

$

0.70

 

$

1.87

 

$

1.31

 

Diluted

 

 

0.81

 

 

0.70

 

 

1.87

 

 

1.31

 

Dividends per share

 

 

0.29

 

 

0.27

 

 

0.58

 

 

0.54

 

See Accompanying Notes

 

 

4


 

Table of Contents

KENTUCKY BANCSHARES, INC.

CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY (unaudited)

(in thousands, except share information)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

    

    

    

 

 

 

 

 

 

 

    

 

    

Accumulated

    

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Other

 

Total

 

 

 

Common Stock

 

Preferred Stock

 

 

Retained

 

Comprehensive

 

Stockholders’

 

(Dollars in thousands)

 

Shares

 

Amount

 

Shares

 

 

Amount

 

 

Earnings

 

Income 

 

Equity

 

Balances, January 1, 2017

 

2,973,232

 

$

20,767

 

 —

 

$

 —

 

 

$

73,161

 

$

(956)

 

$

92,972

 

Common stock issued (employee stock grants of  5,975 shares, net of 600 shares forfeited, director stock awards of 1,386 shares and director stock options exercised of 600 shares)

 

7,961

 

 

64

 

 —

 

 

 —

 

 

 

 —

 

 

 —

 

 

64

 

Stock compensation expense

 

 —

 

 

80

 

 —

 

 

 —

 

 

 

 —

 

 

 —

 

 

80

 

Common stock purchased and retired

 

(9,030)

 

 

(63)

 

 —

 

 

 —

 

 

 

(200)

 

 

 —

 

 

(263)

 

Other comprehensive income

 

 —

 

 

 —

 

 —

 

 

 —

 

 

 

 —

 

 

2,169

 

 

2,169

 

Net income

 

 —

 

 

 —

 

 —

 

 

 —

 

 

 

5,547

 

 

 —

 

 

5,547

 

Dividends declared - $0.58 per share

 

 —

 

 

 —

 

 —

 

 

 —

 

 

 

(1,724)

 

 

 —

 

 

(1,724)

 

Balances, June 30, 2017

 

2,972,163

 

$

20,848

 

 —

 

$

 —

 

 

$

76,784

 

$

1,213

 

$

98,845

 


(1)

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

 

See Accompanying Notes

 

 

5


 

Table of Contents

KENTUCKY BANCSHARES, INC.

CONSOLIDATED STATEMENT OF CASH FLOWS (unaudited)

(in thousands, except share information)

 

 

 

 

 

 

 

 

 

    

Six Months Ended

 

 

 

6/30/2017

    

6/30/2016

 

Cash Flows From Operating Activities

 

 

 

 

 

 

 

Net Income

 

$

5,547

 

$

3,919

 

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

 

 

 

 

 

 

 

Depreciation and amortization

 

 

323

 

 

694

 

Securities amortization (accretion), net

 

 

500

 

 

527

 

Stock based compensation expense

 

 

80

 

 

80

 

Provision for loan losses

 

 

550

 

 

600

 

Securities available for sale gains, net

 

 

(43)

 

 

(277)

 

Net change in trading assets

 

 

(110)

 

 

(173)

 

Originations of loans held for sale

 

 

(32,957)

 

 

(23,913)

 

Proceeds from sale of loans

 

 

32,805

 

 

23,808

 

Losses (gains) on sale of bank premises and equipment

 

 

(1,200)

 

 

 —

 

Losses (gains) on other real estate

 

 

(17)

 

 

 —

 

Gain on sale of loans

 

 

(1,041)

 

 

(756)

 

Write-downs of other real estate, net

 

 

38

 

 

85

 

Changes in:

 

 

 

 

 

 

 

Interest receivable

 

 

101

 

 

40

 

Other assets

 

 

(181)

 

 

506

 

Interest payable

 

 

(30)

 

 

34

 

Deferred taxes

 

 

260

 

 

208

 

Other liabilities

 

 

(1,374)

 

 

(735)

 

Net cash from operating activities

 

 

3,251

 

 

4,647

 

Cash Flows From Investing Activities

 

 

 

 

 

 

 

Net change in interest bearing time deposits

 

 

20

 

 

45

 

Purchases of securities available for sale

 

 

(37,702)

 

 

(48,094)

 

Proceeds from sales of securities available for sale

 

 

4,017

 

 

21,388

 

Proceeds from principal payments, maturities and calls securities available for sale

 

 

20,131

 

 

30,087

 

Net change in loans

 

 

3,533

 

 

(29,073)

 

Purchases of bank premises and equipment

 

 

(1,692)

 

 

(422)

 

Proceeds from the sale of bank premises and equipment

 

 

2,174

 

 

 —

 

Proceeds from the sale of other real estate

 

 

918

 

 

15

 

Net cash used in investing activities

 

 

(8,601)

 

 

(26,054)

 

Cash Flows From Financing Activities:

 

 

 

 

 

 

 

Net change in deposits

 

 

(19,009)

 

 

(7,585)

 

Net change in repurchase agreements

 

 

3,077

 

 

7,543

 

Proceeds from short-term Federal Home Loan Bank advances        

 

 

5,000

 

 

 

Proceeds from long-term Federal Home Loan Bank advances

 

 

 —

 

 

15,000

 

Repayment of long-term Federal Home Loan Bank advances

 

 

(8,691)

 

 

(3,216)

 

Repayment of note payable

 

 

(217)

 

 

(99)

 

Proceeds from issuance of common stock

 

 

64

 

 

49

 

Purchase of common stock

 

 

(263)

 

 

(87)

 

Dividends paid

 

 

(1,724)

 

 

(1,618)

 

Net cash (used in) from financing activities

 

 

(21,763)

 

 

9,987

 

Net change in cash and cash equivalents

 

 

(27,113)

 

 

(11,420)

 

Cash and cash equivalents at beginning of period

 

 

43,250

 

 

28,048

 

Cash and cash equivalents at end of period

 

$

16,137

 

$

16,628

 

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

 

 

 

 

 

 

 

Interest expense

 

$

2,451

 

$

2,156

 

Supplemental disclosures of non-cash investing activities

 

 

 

 

 

 

 

Securities transactions in process, payable                                      

 

$            

7,642

 

$

 

Real estate acquired through foreclosure

 

 

       1,897

 

 

235

 

See Accompanying Notes

 

 

6


 

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, 2016. 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, 2016.

 

Basis of Presentation: The consolidated financial statements include the accounts of Kentucky Bancshares, Inc. (“Kentucky Bancshares”, 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: 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.

 

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.

 

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.

 

Adoption of New Accounting Standards

 

ASU 2016-15, “Statement of Cash Flows (Topic 230): Classification of Certain Cash Receipts and Cash Payments.” Issued in August 2016, ASU 2016-15 provides guidance to reduce the diversity in practice of how certain cash receipts and cash payments are presented and classified in the statement of cash flows. The amendments of ASU 2016-15 provide guidance on eight specific cash flow: (i) debt prepayment or debt extinguishment costs; (ii) settlement of zero-coupon bonds; (iii) contingent consideration payments made after a business combination; (iv) proceeds from the settlement of insurance claims; (v) proceeds from the settlement of corporate-owned life insurance policies, including bank-owned life insurance policies; (vi) distributions received from equity method investees; (vii) beneficial interests in securitization

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transactions and (viii) separately identifiable cash flows and application of the predominance principle. The amendments of ASU 2016-15 are effective for interim and annual periods beginning after December 15, 2017. Management has evaluated the amendments of ASU 2016-15 and does not believe that adoption of this ASU will impact Kentucky Bancshares existing presentation of the applicable cash receipts and cash payments on its consolidated statement of cash flows.

 

ASU 2016-13, “Financial Instruments-Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments.” Issued in June 2016, ASU 2016-13 will add Financial Accounting Standards Board “FASB” ASC Topic 326, “Financial Instruments-Credit Losses” and finalizes amendments to FASB ASC Subtopic 825-15, “Financial Instruments-Credit Losses.” The amendments of ASU 2016-13 are intended to provide financial statement users with more decision-useful information related to expected credit losses on financial instruments and other commitments to extend credit by replacing the current incurred loss impairment methodology with a methodology that reflects expected credit losses and requires consideration of a broader range of reasonable and supportable information to determine credit loss estimates. The amendments of ASU 2016-13 eliminate the probable initial recognition threshold and, in turn, reflect an entity’s current estimate of all expected credit losses. ASU 2016-13 does not specify the method for measuring expected credit losses, and an entity is allowed to apply methods that reasonably reflect its expectations of the credit loss estimate. Additionally, the amendments of ASU 2016-13 require that credit losses on available for sale debt securities be presented as an allowance rather than as a writedown.  The amendments of ASU 2016-13 are effective for interim and annual periods beginning after December 15, 2019. Earlier application is permitted for interim and annual periods beginning after December 15, 2018. Kentucky Bancshares plans to adopt the amendments of ASU 2016-13 during the first quarter of 2020. Kentucky Bancshares has established a steering committee which includes the appropriate members of management to evaluate the impact this ASU will have on the Company’s financial position, results of operations and financial statement disclosures and determine the most appropriate method of implementing the amendments in this ASU as well as any resources needed to implement the amendments.

 

ASU 2016-09, “Compensation-Stock Compensation (Topic 718): Improvements to Employee Share-Based Payment Accounting.” Issued in March 2016, ASU 2016-09 seeks to reduce complexity in accounting standards by simplifying several aspects of the accounting for share-based payment transactions. The amendments of ASU 2016-09 include: (i) requiring all excess tax benefits and tax deficiencies to be recognized as income tax expense or benefit in the income statement; (ii) requiring excess tax benefits to be classified along with other income tax cash flows as an operating activity on the statement of cash flow; (iii) allowing an entity to make an entity-wide accounting policy election to either estimate the number of awards that expect to vest or account for forfeitures when they occur; (iv) change the threshold to qualify for equity classification to permit withholding up to the maximum statutory tax rates in the applicable jurisdictions; and (v) requiring that cash paid by an employer when directly withholding shares for tax-withholding purposes to be classified as a financing activity on the statement of cash flows. The amendments of ASU 2016-09 became effective for Kentucky Bancshares on January 1, 2017 and did not have a material impact on Kentucky Bancshares consolidated financial statements. The Company has made an entity-wide accounting policy election to account for forfeitures of stock awards as they occur. Changes to Kentucky Bancshares consolidated statement of cash flows required by the amendments of ASU 2016-09 are incorporated into the presentation in the Quarterly Report on Form 10-Q for the three month and six month periods ending June 30, 2017.

 

ASU 2016-02, “Leases (Topic 842).” Issued in February 2016, ASU 2016-02 was issued by the FASB to increase transparency and comparability among organizations by recognizing lease assets and lease liabilities on the balance sheet and by disclosing key information about leasing arrangements. ASU 2016-02 will, among other things, require lessees to recognize a lease liability, which is a lessee’s obligation to make lease payments arising from a lease, measured on a discounted basis; and a right-of-use asset, which is an asset that represents the lessee’s right to use, or control the use of, a specified asset for the lease term.  ASU 2016-02 does not significantly change lease accounting requirements applicable to lessors; however, the ASU contains some targeted improvements that are intended to align, where necessary, lessor accounting with the lessee accounting model and with the updated revenue recognition guidance issued in 2014. The amendments of ASU 2016-02 are effective for interim and annual periods beginning after December 15, 2018. Kentucky Bancshares plans to adopt the amendments of ASU 2016-02 beginning in the first quarter of 2019. At adoption, Kentucky Bancshares will recognize a lease asset and a corresponding lease liability on its consolidated balance sheet for its total lease obligation measured on a discounted basis. As of June 30, 2017, all leases in which Kentucky Bancshares was the lessee were classified as operating leases.

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Kentucky Bancshares does not anticipate any material impact to its consolidated statements of income, balance sheet or regulatory capital as a result of the adoption of this ASU as the Company has an immaterial amount of leases in which it is the lessor.

 

ASU 2016-01, “Financial Instruments-Overall (Subtopic 825-10): Recognition and Measurement of Financial Assets and Financial Liabilities (An Amendment of the FASB Accounting Standards Codification).” Issued in January 2016, ASU 2016-01 is intended to enhance the reporting model for financial instruments to provide users of financial statements with improved decision-making information. The amendments of ASU 2016-01 include: (i) requiring equity investments, except those accounted for under the equity method of accounting or those that result in the consolidation of an investee, to be measured at fair value with changes in fair value recognized in net income; (ii) requiring a qualitative assessment to identify impairment of equity investments without readily determinable fair values; (iii) eliminating the requirement to disclose the method and significant assumptions used to estimate the fair value for financial instruments measured at amortized cost on the balance sheet; (iv) requiring the use of the exit price notion when measuring the fair value of financial instruments for disclosure purposes; (v) requiring an entity that has elected the fair value option to measure the fair value of a liability to present separately in other comprehensive income the portion of the change in the fair value resulting from a change in the instrument-specific credit risk; (vi) requiring separate presentation of financial assets and financial liabilities by measurement category and form of financial asset on the balance sheet or the accompanying notes to the financial statements and (vii) clarifying that an entity should evaluate the need for a valuation allowance on a deferred tax asset related to available for sale securities in combination with the entity’s other deferred tax assets. The amendments of ASU 2016-01 are effective for interim and annual periods beginning after December 15, 2017. Kentucky Bancshares plans to adopt the amendments of ASU 2016-01 during the first quarter of 2018. Management has evaluated the impact this ASU will have on the Company’s consolidated financial statements and does not expect the adoption of this ASU to have a material impact on the Company’s consolidated financials statements..  

 

ASU 2014-09, “Revenue from Contracts with Customers (Topic 606).” Issued in May 2014, ASU 2014-09 will add FASB ASC Topic 606, “Revenue from Contracts with Customers,” and will supersede revenue recognition requirements in FASB ASC Topic 605, “Revenue Recognition,” as well as certain cost guidance in FASB ASC Topic 605-35, “Revenue Recognition – Construction-Type and Production-Type Contracts.” ASU 2014-09 provides a framework for revenue recognition that replaces the existing industry and transaction specific requirements under the existing standards. ASU 2014-09 requires an entity to apply a five-step model to determine when to recognize revenue and at what amount. The model specifies that revenue should be recognized when (or as) an entity transfers control of goods or services to a customer at the amount in which the entity expects to be entitled. Depending on whether certain criteria are met, revenue should be recognized either over time, in a manner that depicts the entity’s performance, or at a point in time, when control of the goods or services are transferred to the customer. ASU 2014-09 provides that an entity should apply the following steps: (1) identify the contract(s) with a customer; (2) identify the performance obligations in the contract; (3) determine the transaction price; (4) allocate the transaction price to the performance obligations in the contract; and (5) recognize revenue when (or as) the entity satisfies a performance obligation. In addition, the existing requirements for the recognition of a gain or loss on the transfer of non-financial assets that are not in a contract with a customer are amended to be consistent with the guidance on recognition and measurement in ASU 2014-09.

 

The amendments of ASU 2014-09 may be applied either retrospectively to each prior reporting period presented or retrospectively with the cumulative effect of initially applying ASU 2014-09 recognized at the date of initial application. If the transition method of application is elected, the entity should also provide the additional disclosures in reporting periods that include the date of initial application of (1) the amount by which each financial statement line item is affected in the current reporting period, as compared to the guidance that was in effect before the change, and (2) an explanation of the reasons for significant changes. ASU 2015-14, “Revenue from Contracts with Customers (Topic 606)-Deferral of the Effective Date,” issued in August 2015, defers the effective date of ASU 2014-09 by one year. ASU 2015-14 provides that the amendments of ASU 2014-09 become effective for interim and annual periods beginning after December 15, 2017. All subsequently issued ASUs which provide additional guidance and clarifications to various aspects of FASB ASC Topic 606 will become effective when the amendments of ASU 2014-09 become effective. Kentucky Bancshares plans to adopt these amendments during the first quarter of 2018. Management is continuing to evaluate the impact ASU 2014-09 will have on Kentucky Bancshares consolidated financial statements as well as the most appropriate transition method of application. Based on this evaluation to date, Management has determined that the majority of the revenues earned by Kentucky Bancshares are not within the scope of ASU 2014-09. Management also believes that for most revenue streams within the scope of ASU 2014-09, the amendments will not change the timing of when the revenue is recognized.

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Management will continue to evaluate the impact the adoption of ASU 2014-09 will have on Kentucky Bancshares consolidated financial statements, focusing on noninterest income sources within the scope of ASU 2014-09 as well as new disclosures required by these amendments; however, the adoption of ASU 2014‑09 is not expected to have a material impact on Kentucky Bancshares consolidated financial statements.

 

ASU 2017-04 - Intangibles - Goodwill and Other (Topic 350): Simplifying the Test for Goodwill Impairment:  In January 2017, the FASB issued ASU 2017-04, Intangibles - Goodwill and Other (Topic 350): Simplifying the Test for Goodwill Impairment. This ASU eliminates Step 2 from the goodwill impairment test. Instead, under the new guidance, an entity is to perform its annual goodwill impairment test by comparing the fair value of a reporting unit with its carrying amount. An impairment charge would be recognized for the amount by which the carrying amount exceeds the reporting unit's fair value. The new guidance is effective for annual reporting periods, and interim reporting periods within those annual periods, beginning after December 15, 2019. Early adoption is permitted for interim or annual goodwill impairment tests performed on testing dates after January 1, 2017. The adoption of this guidance is not expected to have an impact on the Company’s consolidated financial statements.

 

ASU 2017-08 - Receivables - Nonrefundable Fees and Other Costs (Subtopic 310-20): Premium Amortization on Purchased Callable Debt Securities: In March 2017, the FASB issued ASU 2017-08 - Receivables - Nonrefundable Fees and Other Costs (Subtopic 310-20): Premium Amortization on Purchased Callable Debt Securities. This ASU amends the amortization period for certain purchased callable debt securities held at a premium. It shortens the amortization period for the premium to the earliest call date. Under current U.S. GAAP, premiums on callable debt securities generally are amortized to the maturity date. The new guidance is effective for annual reporting periods, and interim reporting periods within those annual periods, beginning after December 15, 2018. Early adoption is permitted for interim or annual periods. The adoption of this guidance is not expected to have a material impact on the Company’s consolidated financial statements.

 

ASU 2016-18 - Statement of Cash Flows (Topic 230):  Restricted Cash (a consensus of the FASB Emerging Issues Task Force):  Effective for public business entities for fiscal years beginning after December 15, 2017, and interim periods within those fiscal years. For all other entities, the amendments are effective for fiscal years beginning after December 15, 2018, and interim periods within fiscal years beginning after December 15, 2019. Early adoption is permitted, including adoption in an interim period. If an entity early adopts the amendments in an interim period, any adjustments should be reflected as of the beginning of the fiscal year that includes that interim period.  The adoption of this guidance is not expected to have a material impact on the Company’s consolidated financial statements.

 

Update 2017-01 - Business Combinations (Topic 805): Clarifying the Definition of a Business:  The amendments in this ASU are intended to help companies and other organizations evaluate whether transactions should be accounted for as acquisitions (or disposals) of assets or businesses.    Public business entities should apply the amendments in this Update to annual periods beginning after December 15, 2017, including interim periods within those periods. All other entities should apply the amendments to annual periods beginning after December 15, 2018, and interim periods within annual periods beginning after December 15, 2019.

 

ASU 2017-09 - Compensation - Stock Compensation (Topic 718): Scope of Modification Accounting: In May 2017, the FASB issued ASU 2017-09 - Compensation - Stock Compensation (Topic 718): Scope of Modification Accounting. This ASU amends the guidance about which changes to the terms or conditions of a share-based payment award require an entity to apply modification accounting in Topic 718. The new guidance is effective for annual reporting periods, and interim reporting periods within those annual periods, beginning after December 15, 2017. Early adoption is permitted for interim or annual periods. The adoption of this guidance is not expected to have a material impact on Kentucky Bancshares consolidated financial statements.

 

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2.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

 

 

 

 

 

 

 

 

 

 

 

 

 

June 30, 2017

 

 

 

 

 

 

 

 

 

 

 

 

 

U. S. government agencies

 

$

41,450

 

$

521

 

$

(164)

 

$

41,807

 

States and political subdivisions

 

 

87,395

 

 

2,538

 

 

(103)

 

 

89,830

 

Mortgage-backed - residential

 

 

166,783

 

 

363

 

 

(1,338)

 

 

165,808

 

Equity securities

 

 

320

 

 

21

 

 

 —

 

 

341

 

Total

 

$

295,948

 

$

3,443

 

$

(1,605)

 

$

297,786

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

December 31, 2016

 

 

 

 

 

 

 

 

 

 

 

 

 

U. S. government agencies

 

$

36,454

 

$

373

 

$

(299)

 

$

36,528

 

States and political subdivisions

 

 

90,117

 

 

1,731

 

 

(716)

 

 

91,132

 

Mortgage-backed - residential

 

 

148,327

 

 

120

 

 

(2,677)

 

 

145,770

 

Equity securities

 

 

320

 

 

20

 

 

 —

 

 

340

 

Total

 

$

275,218

 

$

2,244

 

$

(3,692)

 

$

273,770

 

 

The amortized cost and fair value of securities June 30, 2017 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 9.

 

 

 

 

 

 

 

 

 

 

    

Amortized

    

Fair

 

 

 

Cost

 

Value

 

Due in one year or less

 

$

3,384

 

$

3,381

 

Due after one year through five years

 

 

28,556

 

 

29,280

 

Due after five years through ten years

 

 

46,719

 

 

47,590

 

Due after ten years

 

 

50,186

 

 

51,386

 

 

 

 

128,845

 

 

131,637

 

Mortgage-backed - residential

 

 

166,783

 

 

165,808

 

Equity

 

 

320

 

 

341

 

Total

 

$

295,948

 

$

297,786

 

 

Proceeds from sales of securities during the first six months of 2017 and 2016 were $4.0 and $21.4 million.  Gross gains of $43  thousand and $277 thousand and gross losses of $0 were realized on those sales, respectively.  The tax provision related to these realized net gains was $15  thousand and $94 thousand, respectively. 

 

Proceeds from sales of securities during the three months ended June 30, 2017 and June 30, 2016 were were $4.0 and $12.1 million.  Gross gains of $43 thousand and $151 thousand and gross losses of $0 were realized on those sales, respectively.  The tax provision related to these realized net gains was $15 thousand and $51 thousand, respectively. 

 

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Securities with unrealized losses June 30, 2017 and at December 31, 2016 not recognized in income are as follows:

 

June 30, 2017

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

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

 

$

24,399

 

$

(164)

 

$

 —

 

$

 —

 

$

24,399

 

$

(164)

 

States and municipals

 

 

9,870

 

 

(103)

 

 

 —

 

 

 —

 

 

9,870

 

 

(103)

 

Mortgage-backed - residential

 

 

63,992

 

 

(673)

 

 

30,108

 

 

(665)

 

 

94,100

 

 

(1,338)

 

Total temporarily impaired

 

$

98,261

 

$

(940)

 

$

30,108

 

$

(665)

 

$

128,369

 

$

(1,605)

 

 

December 31, 2016

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

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

 

$

28,202

 

$

(299)

 

$

 —

 

$

 —

 

$

28,202

 

$

(299)

 

States and municipals

 

 

27,834

 

 

(716)

 

 

 —

 

 

 —

 

 

27,834

 

 

(716)

 

Mortgage-backed - residential

 

 

119,802

 

 

(1,938)

 

 

13,652

 

 

(739)

 

 

133,454

 

 

(2,677)

 

Total temporarily impaired

 

$

175,838

 

$

(2,953)

 

$

13,652

 

$

(739)

 

$

189,490

 

$

(3,692)

 

 

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 will recover as the securities approach maturity.

 

TRADING ASSETS

 

The trading assets, which totaled $5.7 million at June 30, 2017 and $5.6 million at December 31, 2016, are primarily comprised of cash and cash equivalents and municipal securities which are generally held for 60 days or less.

 

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3.LOANS

 

Loans at period-end are as follows:

(in thousands)

 

 

 

 

 

 

 

 

 

 

    

6/30/2017

    

12/31/2016

 

Commercial

 

$

79,468

 

$

77,436

 

Real estate construction

 

 

29,614

 

 

29,169

 

Real estate mortgage:

 

 

 

 

 

 

 

1-4 family residential

 

 

247,158

 

 

244,638

 

Multi-family residential

 

 

42,741

 

 

47,199

 

Non-farm & non-residential

 

 

173,410

 

 

176,024

 

Agricultural

 

 

60,060

 

 

62,491

 

Consumer

 

 

17,963

 

 

18,867

 

Other

 

 

243

 

 

183

 

Total

 

$

650,657

 

$

656,007

 

 

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

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Six Months Ended June 30, 2017

 

 

 

(in thousands)

 

 

 

Beginning

 

 

 

 

 

 

 

 

 

 

Ending

 

 

    

Balance

    

Charge-offs 

    

Recoveries 

    

Provision

    

Balance

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Commercial

 

$

789

 

$

(15)

 

$

15

 

$

217

 

$

1,006

 

Real estate Construction

 

 

564

 

 

 —

 

 

 1

 

 

19

 

 

584

 

Real estate mortgage:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

1-4 family residential

 

 

2,301

 

 

(33)

 

 

 5

 

 

302

 

 

2,575

 

Multi-family residential

 

 

581

 

 

 —

 

 

 7

 

 

57

 

 

645

 

Non-farm & non-residential

 

 

1,203

 

 

 —

 

 

 —

 

 

119

 

 

1,322

 

Agricultural

 

 

856

 

 

 —

 

 

28

 

 

(380)

 

 

504

 

Consumer

 

 

547

 

 

(102)

 

 

28

 

 

88

 

 

561

 

Other

 

 

60

 

 

(468)

 

 

401

 

 

83

 

 

76

 

Unallocated

 

 

640

 

 

 —

 

 

 —

 

 

45

 

 

685

 

 

 

$

7,541

 

$

(618)

 

$

485

 

$

550

 

$

7,958

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended June 30, 2017

 

 

 

(in thousands)

 

 

 

Beginning

 

 

 

 

 

 

 

 

 

 

Ending

 

 

    

Balance

    

Charge-offs 

    

Recoveries 

    

Provision

    

Balance

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Commercial

 

$

871

 

$

(13)

 

$

 7

 

$

141

 

$

1,006

 

Real estate construction

 

 

545

 

 

 —

 

 

 1

 

 

38

 

 

584

 

Real estate mortgage:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

1-4 family residential

 

 

2,375

 

 

(22)

 

 

 4

 

 

218

 

 

2,575

 

Multi-family residential

 

 

666

 

 

 —

 

 

 4

 

 

(25)

 

 

645

 

Non-farm & non-residential

 

 

1,311

 

 

 —

 

 

 —

 

 

11

 

 

1,322

 

Agricultural

 

 

862

 

 

 —

 

 

18

 

 

(376)

 

 

504

 

Consumer

 

 

534

 

 

(65)

 

 

24

 

 

68

 

 

561

 

Other

 

 

60

 

 

(243)

 

 

167

 

 

92

 

 

76

 

Unallocated

 

 

652

 

 

 —

 

 

 —

 

 

33

 

 

685

 

 

 

$

7,876

 

$

(343)

 

$

225

 

$

200

 

$

7,958

 

 

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Six Months Ended June 30, 2016

 

 

 

(in thousands)

 

 

 

Beginning

 

 

 

 

 

 

 

 

 

 

Ending

 

 

    

Balance

    

Charge-offs 

    

Recoveries 

    

Provision

    

Balance

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Commercial

 

$

486

 

$

 —

 

$

34

 

$

 146

 

$

666

 

Real estate Construction

 

 

411

 

 

 —

 

 

13

 

 

128

 

 

552

 

Real estate mortgage:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

1-4 family residential

 

 

2,081

 

 

(64)

 

 

 7

 

 

280

 

 

2,304

 

Multi-family residential

 

 

458

 

 

 —

 

 

 4

 

 

45

 

 

507

 

Non-farm & non-residential

 

 

1,213

 

 

 —

 

 

273

 

 

(328)

 

 

1,158

 

Agricultural

 

 

678

 

 

 —

 

 

23

 

 

100

 

 

801

 

Consumer

 

 

525

 

 

(163)

 

 

70

 

 

118

 

 

550

 

Other

 

 

60

 

 

(499)

 

 

440

 

 

49

 

 

50

 

Unallocated

 

 

609

 

 

 —

 

 

 —

 

 

62

 

 

671

 

 

 

$

6,521

 

$

(726)

 

$

864

 

$

600

 

$

7,259

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended June 30, 2016

 

 

 

(in thousands)

 

 

    

Beginning

    

 

 

    

 

 

    

 

 

    

Ending

 

 

 

Balance

 

Charge-offs 

 

Recoveries 

 

Provision

 

Balance

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Commercial

 

$

508

 

$

 —

 

$

 3

 

$

155

 

$

666

 

Real estate Construction

 

 

876

 

 

 —

 

 

 7

 

 

(331)

 

 

552

 

Real estate mortgage:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

1-4 family residential

 

 

2,176

 

 

(52)

 

 

 2

 

 

178

 

 

2,304

 

Multi-family residential

 

 

472

 

 

 —

 

 

 1

 

 

34

 

 

507

 

Non-farm & non-residential

 

 

1,181

 

 

 —

 

 

 7

 

 

(30)

 

 

1,158

 

Agricultural

 

 

727

 

 

 —

 

 

12

 

 

62

 

 

801

 

Consumer

 

 

531

 

 

(53)

 

 

13

 

 

59

 

 

550

 

Other

 

 

60

 

 

(196)

 

 

143

 

 

43

 

 

50

 

Unallocated

 

 

616

 

 

 —

 

 

 —

 

 

55

 

 

671

 

 

 

$

7,147

 

$

(301)

 

$

188

 

$

225

 

$

7,259

 

 

14


 

Table of Contents

The following tables present the balance in the allowance for loan losses and the recorded investment (excluding accrued interest receivable amounting to $2.3 million as of June 30, 2017 and $2.4 million at December 31, 2016) in loans by portfolio segment and based on impairment method as of June 30, 2017 and December 31, 2016:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

    

Individually

    

Collectively

    

Purchased

    

 

 

As of June 30, 2017

 

Evaluated for

 

Evaluated for

 

Credit

 

 

 

 

(in thousands)

 

Impairment

 

Impairment

 

Impaired

 

Total

 

Allowance for Loan Losses:

 

 

 

 

 

 

 

 

 

 

 

 

 

Commercial

 

$

 —

 

$

1,006

 

$

 —

 

$

1,006

 

Real estate construction

 

 

 —

 

 

584

 

 

 —

 

 

584

 

Real estate mortgage:

 

 

 

 

 

 —

 

 

 

 

 

 

 

1-4 family residential

 

 

205

 

 

2,370

 

 

 —

 

 

2,575

 

Multi-family residential

 

 

 —

 

 

645

 

 

 —

 

 

645

 

Non-farm & non-residential

 

 

 —

 

 

1,322

 

 

 —

 

 

1,322

 

Agricultural

 

 

 —

 

 

504

 

 

 —

 

 

504

 

Consumer

 

 

 —

 

 

561

 

 

 —

 

 

561

 

Other

 

 

 —

 

 

76

 

 

 —

 

 

76

 

Unallocated

 

 

 —

 

 

685

 

 

 —

 

 

685

 

 

 

$

205

 

$

7,753

 

$

 —

 

$

7,958

 

Loans:

 

 

 

 

 

 

 

 

 

 

 

 

 

Commercial

 

$

 —

 

$

79,468

 

$

 —

 

$

79,468

 

Real estate construction

 

 

 —

 

 

29,614

 

 

 —

 

 

29,614

 

Real estate mortgage:

 

 

 

 

 

 

 

 

 

 

 

 

 

1-4 family residential

 

 

631

 

 

245,634

 

 

893

 

 

247,158

 

Multi-family residential

 

 

 —

 

 

42,158

 

 

583

 

 

42,741

 

Non-farm & non-residential

 

 

2,596

 

 

170,664

 

 

150

 

 

173,410

 

Agricultural

 

 

289

 

 

59,585

 

 

186

 

 

60,060

 

Consumer

 

 

 —

 

 

17,963

 

 

 —

 

 

17,963

 

Other

 

 

 —

 

 

243

 

 

 —

 

 

243

 

 

 

$

3,516

 

$

645,329

 

$

1,812

 

$

650,657

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

    

Individually

    

Collectively

    

Purchased

    

 

 

As of December 31, 2016

 

Evaluated for

 

Evaluated for

 

Credit

 

 

 

(in thousands)

 

Impairment

 

Impairment

 

Impaired

 

Total

 

Allowance for Loan Losses:

 

 

 

 

 

 

 

 

 

 

 

 

 

Commercial

 

$

 —

 

$

789

 

$

 —

 

$

789

 

Real estate construction

 

 

 —

 

 

564

 

 

 —

 

 

564

 

Real estate mortgage:

 

 

 

 

 

 

 

 

 

 

 

 

 

1-4 family residential

 

 

99

 

 

2,202

 

 

 —

 

 

2,301

 

Multi-family residential

 

 

 —

 

 

581

 

 

 —

 

 

581

 

Non-farm & non-residential

 

 

15

 

 

1,188

 

 

 —

 

 

1,203

 

Agricultural

 

 

427

 

 

429

 

 

 —

 

 

856

 

Consumer

 

 

 —

 

 

547

 

 

 —

 

 

547

 

Other

 

 

 —

 

 

60

 

 

 —

 

 

60

 

Unallocated

 

 

 —

 

 

640

 

 

 —

 

 

640

 

 

 

$

541

 

$

7,000

 

$

 —

 

$

7,541

 

Loans:

 

 

 

 

 

 

 

 

 

 

 

 

 

Commercial

 

$

97

 

$

77,339

 

$

 —

 

 

77,436

 

Real estate construction

 

 

153

 

 

29,016

 

 

 —

 

 

29,169

 

Real estate mortgage:

 

 

 

 

 

 

 

 

 

 

 

 

 

1-4 family residential

 

 

2,704

 

 

240,906

 

 

1,028

 

 

244,638

 

Multi-family residential

 

 

 —

 

 

46,637

 

 

562

 

 

47,199

 

Non-farm & non-residential

 

 

1,725

 

 

174,154

 

 

145

 

 

176,024

 

Agricultural

 

 

3,315

 

 

58,998

 

 

178

 

 

62,491

 

Consumer

 

 

 —

 

 

18,867

 

 

 —

 

 

18,867

 

Other

 

 

 —

 

 

183

 

 

 —

 

 

183

 

        Total

 

$

7,994

 

$

646,100

 

$

1,913

 

$

656,007

 

15


 

Table of Contents

The following table presents loans individually evaluated for impairment by class of loans as of and for the six months ended June 30, 2017 (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:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

1-4 family residential

 

$

15

 

 

15

 

$

 —

 

 

311

 

$

 —

 

$

 —

 

Non-farm & non-residential

 

 

2,596

 

 

2,596

 

 

 —

 

 

2,595

 

 

53

 

 

53

 

Agricultural

 

 

289

 

 

289

 

 

 —

 

 

472

 

 

 7

 

 

 7

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

With an allowance recorded:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Real estate mortgage:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

1-4 family residential

 

 

616

 

 

616

 

 

205

 

 

1,358

 

 

 —

 

 

 —

 

Total

 

$

3,516

 

$

3,516

 

$

205

 

$

4,737

 

$

60

 

$

60

 

 

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

 

The following table presents loans individually evaluated for impairment by class of loans for the six months ended June 30, 2016:

 

 

 

 

 

 

 

 

 

 

 

 

 

    

 

    

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

 

$

304

 

$

 4

 

$

 4

 

Agricultural

 

 

393

 

 

25

 

 

25

 

 

 

 

 

 

 

 

 

 

 

 

With an allowance recorded:

 

 

 

 

 

 

 

 

 

 

Real estate mortgage:

 

 

 

 

 

 

 

 

 

 

  Construction

 

 

689

 

 

20

 

 

20

 

1-4 family residential

 

 

1,067

 

 

27

 

 

27

 

Non-farm & non-residential

 

 

2,070

 

 

41

 

 

41

 

Agricultural

 

 

3,689

 

 

 —

 

 

 —

 

 

 

 

 

 

 

 

 

 

 

 

Total

 

$

8,212

 

$

117

 

$

117

 

 

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

 

16


 

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, 2016 (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:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Commercial

 

$

97

 

$

97

 

$

 —

 

$

48

 

$

30

 

$

30

 

Real-estate construction

 

 

153

 

 

153

 

 

 

 

 

494

 

 

9

 

 

9

 

Real-estate mortgage:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

1-4 family residential

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Non-farm & non-residential

 

 

606

 

 

606

 

 

 —

 

 

488

 

 

 —

 

 

 —

 

Agricultural

 

 

654

 

 

654

 

 

 —

 

 

561

 

 

 —

 

 

 —

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

With an allowance recorded:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Real estate mortgage

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

1-4 family residential

 

 

2,098

 

 

2,098

 

 

99

 

 

1,590

 

 

56

 

 

56

 

Non-farm & non-residential

 

 

1,725

 

 

1,725

 

 

15

 

 

2,303

 

 

71

 

 

71

 

Agricultural

 

 

2,661

 

 

2,661

 

 

427

 

 

3,309

 

 

25

 

 

25

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total

 

$

7,994

 

$

7,994

 

$

541

 

$

8,793

 

$

191

 

$

191

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

The recorded investment in loans excludes accrued interest receivable and loan origination fees, net due to immateriality.  The following tables present loans individually evaluated for impairment by class of loans for the three months ended June 30, 2017 and June 30, 2016:

 

 

 

 

 

 

 

 

 

 

 

   

 

Three Months Ending June 30, 2017

 

 

 

Average

 

Interest

 

Cash Basis

 

 

 

Recorded

 

Income

 

Interest

 

(in thousands):

    

Investment

    

Recognized

    

Recognized

 

With no related allowance recorded:

 

 

 

 

 

 

 

 

 

 

 Real estate mortgage:

 

 

 

 

 

 

 

 

 

 

1-4 family residential

 

$

 8

 

$

 —

 

$

 —

 

Non-farm & non-residential

 

 

1,298

 

 

25

 

 

25

 

Agricultural

 

 

594

 

 

4

 

 

 4

 

 

 

 

 

 

 

 

 

 

 

 

With an allowance recorded:

 

 

 

 

 

 

 

 

 

 

Real estate mortgage:

 

 

 

 

 

 

 

 

 

 

1-4 family residential

 

 

474

 

 

 —

 

 

 —

 

 

 

$

2,372

 

$

29

 

$

29

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ending June 30, 2016

 

 

 

Average

 

Interest

 

Cash Basis

 

 

 

Recorded

 

Income

 

Interest

 

 

    

Investment

    

Recognized

    

Recognized

 

With no related allowance recorded:

 

 

 

 

 

 

 

 

 

 

Real estate mortgage:

 

 

 

 

 

 

 

 

 

 

1-4 family residential

 

$

947

 

$

40

 

$

40

 

Agricultural

 

 

292

 

 

47

 

 

47

 

 

 

 

 

 

 

 

 

 

 

 

With an allowance recorded:

 

 

 

 

 

 

 

 

 

 

Real estate mortgage:

 

 

 

 

 

 

 

 

 

 

  Construction

 

 

2,394

 

 

 —

 

 

 —

 

1-4 family residential

 

 

720

 

 

 1

 

 

 1

 

Non-farm & non-residential

 

 

2,070

 

 

23

 

 

23

 

Agricultural

 

 

3,957

 

 

 —

 

 

 —

 

Total

 

$

10,380

 

$

111

 

$

111

 

17


 

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 June 30, 2017 and December 31, 2016:

 

 

 

 

 

 

 

 

 

 

 

 

 

    

 

    

Loans Past Due

    

 

 

 

 

 

 

 

Over 90 Days

 

 

 

 

As of June 30, 2017

 

 

 

 

Still

 

Troubled Debt

 

(in thousands)

 

Nonaccrual

 

Accruing

 

Restructurings

 

Commercial

 

$

 —

 

$

252

 

$

 —

 

Real estate construction

 

 

 —

 

 

67

 

 

 —

 

Real estate mortgage:

 

 

 

 

 

 

 

 

 

 

1-4 family residential

 

 

1,830

 

 

135

 

 

 —

 

Non-farm & non-residential

 

 

333

 

 

63

 

 

1,702

 

Agricultural

 

 

52

 

 

98

 

 

 —

 

Consumer

 

 

10

 

 

 9

 

 

 —

 

Total

 

$

2,225

 

$

624

 

$

1,702

 

 

 

 

 

 

 

 

 

 

 

 

 

 

    

 

    

Loans Past Due

    

 

 

 

 

 

 

 

Over 90 Days

 

 

 

 

As of December 31, 2016

 

 

 

 

Still

 

Troubled Debt

 

(in thousands)

 

Nonaccrual

 

Accruing

 

Restructurings

 

Commercial

 

$

 3

 

$

11

 

$

 —

 

Real estate construction

 

 

 —

 

 

153

 

 

 —

 

Real estate mortgage:

 

 

 

 

 

 

 

 

 

 

1-4 family residential

 

 

2,725

 

 

31

 

 

338

 

Multi-family residential

 

 

25

 

 

 —

 

 

 —

 

Non-farm & non-residential

 

 

272

 

 

 —

 

 

1,725

 

Agricultural

 

 

1,541

 

 

724

 

 

 —

 

Consumer

 

 

 —

 

 

 8

 

 

 —

 

Total

 

$

4,566

 

$

927

 

$

2,063

 

 

Nonaccrual loans secured by real estate make up 99.5% of the total nonaccrual loan balances at June 30, 2017.

 

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.

 

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.

18


 

Table of Contents

The following tables present the aging of the recorded investment in past due and non-accrual loans as of June 30, 2017 and December 31, 2016 by class of loans:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

    

30–59

    

60–89

    

Greater than

    

 

    

Total

    

 

 

As of June 30, 2017

 

Days

 

Days

 

90 Days

 

 

 

  Past Due &  

 

Loans Not

 

(in thousands)

 

Past Due

 

Past Due

 

Past Due

 

Non-accrual

 

Non-accrual

 

Past Due

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Commercial

 

$

417

 

$

 7

 

$

252

 

$

 —

 

$

676

 

$ 

78,792

 

Real estate construction

 

 

 —

 

 

 —

 

 

67

 

 

 —

 

 

67

 

 

29,547

 

Real estate mortgage:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

1-4 family residential

 

 

1,905

 

 

221

 

 

135

 

 

1,830

 

 

4,091

 

 

243,067

 

Multi-family residential

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

42,741

 

Non-farm & non-residential

 

 

538

 

 

 —

 

 

63

 

 

333

 

 

934

 

 

172,476

 

Agricultural

 

 

21

 

 

 —

 

 

98

 

 

52

 

 

171

 

 

59,889

 

Consumer

 

 

93

 

 

10

 

 

 9

 

 

10

 

 

122

 

 

17,841

 

Other

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

243

 

Total

 

$

2,974

 

$

238

 

$

624

 

$

2,225

 

$

6,061

 

$

644,596

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

    

30–59

    

60–89

    

Greater than

    

 

    

Total

    

    

 

 

As of December 31, 2016

 

Days

 

Days

 

90 Days

 

 

 

  Past Due &  

 

Loans Not

 

(in thousands)

 

Past Due

 

Past Due

 

Past Due

 

Non-accrual

 

Non-accrual

 

Past Due

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Commercial

 

$

54

 

$

45

 

$

11

 

$

 3

 

$

113

 

$

77,323

 

Real estate construction

 

 

 —

 

 

 —

 

 

153

 

 

 —

 

 

153

 

 

29,016

 

Real estate mortgage:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

1-4 family residential

 

 

2,310

 

 

228

 

 

31

 

 

2,725

 

 

5,294

 

 

239,344

 

Multi-family residential

 

 

391

 

 

 3

 

 

 —

 

 

25

 

 

419

 

 

46,780

 

Non-farm & non-residential

 

 

159

 

 

61

 

 

 —

 

 

272

 

 

492

 

 

175,532

 

Agricultural

 

 

647

 

 

61

 

 

724

 

 

1,541

 

 

2,973

 

 

59,518

 

Consumer

 

 

97

 

 

37

 

 

 8

 

 

 —

 

 

142

 

 

18,725

 

Other

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

183

 

Total

 

$

3,658

 

$

435

 

$

927

 

$

4,566

 

$

9,586

 

$

646,421

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Troubled Debt Restructurings:

 

The Company has allocated $0 in specific reserves to customers whose loan terms have been modified in troubled debt restructurings as of June 30, 2017.  The Company allocated $40 thousand for specific reserves to customers whose loan terms had been modified in troubled debt restructuring as of December 31, 2016. 

 

The Company has not committed to lend additional amounts as of June 30, 2017 and December 31, 2016 to customers with outstanding loans that are classified as troubled debt restructurings.

 

No loans were modified as troubled debt restructurings during the first six months ended of 2017 or 2016.

 

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.

 

 

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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.

 

As of June 30, 2017 and December 31, 2016, and based on the most recent analysis performed, the risk category of loans by class of loans is as follows:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

As of June 30, 2017

    

 

    

Special

    

 

    

 

 

(in thousands)

 

Pass

 

Mention

 

Substandard

 

Doubtful

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Commercial

 

$

77,822

 

$

1,580

 

$

46

 

$

20

 

Real estate construction

 

 

29,614

 

 

 —

 

 

 —

 

 

 —

 

Real estate mortgage:

 

 

 

 

 

 

 

 

 

 

 

 

 

1-4 family residential

 

 

238,288

 

 

3,843

 

 

5,027

 

 

 —

 

Multi-family residential

 

 

39,410

 

 

2,584

 

 

747

 

 

 —

 

Non-farm & non-residential

 

 

164,215

 

 

7,399

 

 

1,796

 

 

 —

 

Agricultural

 

 

57,056

 

 

2,188

 

 

816

 

 

 —

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total

 

$

606,405

 

$

17,594

 

$

8,432

 

$

20

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

As of December 31, 2016

    

 

    

Special

    

 

    

 

 

(in thousands)

 

Pass

 

Mention

 

Substandard

 

Doubtful

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Commercial

 

$

76,346

 

$

1,078

 

$

12

 

$

 —

 

Real estate construction

 

 

28,577

 

 

 —

 

 

592

 

 

 —

 

Real estate mortgage:

 

 

 

 

 

 

 

 

 

 

 

 

 

1-4 family residential

 

 

232,969

 

 

4,031

 

 

7,627

 

 

11

 

Multi-family residential

 

 

43,681

 

 

2,617

 

 

901

 

 

 —

 

Non-farm & non-residential

 

 

167,451

 

 

8,185

 

 

388

 

 

 —

 

Agricultural

 

 

58,155

 

 

1,367

 

 

2,969

 

 

 —

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total

 

$

607,179

 

$

17,278

 

$

12,489

 

$

11

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

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 $19 thousand at June 30, 2017 and $8 thousand at December 31, 2016.

 

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4.REAL ESTATE OWNED

 

Activity in real estate owned, net was as follows:

 

 

 

 

 

 

 

 

 

 

 

Six Months Ended

 

 

 

June 30,

 

 

    

2017

    

2016

 

Beginning of year

 

$

1,824

 

$

2,347

 

Additions

 

 

1,897

 

 

193

 

Sales

 

 

(901)

 

 

(15)

 

(Additions) subtractions to valuation allowance, net

 

 

(38)

 

 

(85)

 

 

 

 

 

 

 

 

 

End of period

 

$

2,782

 

$

2,440

 

 

Activity in the valuation allowance was as follows:

 

 

 

 

 

 

 

 

 

 

2017

    

2016

Beginning of year

 

$

803

 

$

616

Write-downs of other real estate, net

 

 

38

 

 

85

Reductions from sale

 

 

(46)

 

 

 —

 

 

 

 

 

 

 

End of Period

 

$

795

 

$

701

 

Expenses related to foreclosed assets include:

 

 

 

 

 

 

 

 

 

    

Six Months Ended

 

 

 

June 30,

 

 

 

2017

    

2016

 

 

 

 

(in thousands)

 

Net (gain) loss on sales, included in other income on income statement

 

$

(17)

 

$

 —

 

 

 

 

 

 

 

 

 

Additions to valuation allowance, net

 

 

38

 

 

85

 

Operating expenses, net of rental income

 

 

147

 

 

58

 

Repossession expense, net

 

 

185

 

 

143

 

 

 

 

 

 

 

 

 

Net expense, net of gain or loss on sales, for the period

 

$

168

 

$

143

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended

 

 

 

June 30,

 

 

    

2017

    

2016

 

 

 

 

(in thousands)

 

Net (gain) loss on sales, included in other income on income statement

 

$

28

 

$

 —

 

 

 

 

 

 

 

 

 

Additions to valuation allowance, net

 

 

38

 

 

 —

 

Operating expenses, net of rental income

 

 

68

 

 

31

 

Repossession expense, net

 

 

106

 

 

31

 

 

 

 

 

 

 

 

 

Net expense, net of gain or loss on sales, for the period

 

$

134

 

$

31

 

 

 

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5.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:

 

 

 

 

 

 

 

 

 

 

Six Months Ended

 

 

June 30,

 

    

2017

    

2016

 

 

(in thousands)

Basic Earnings Per Share

 

 

 

 

 

 

Net Income

 

$

5,547

 

$

3,919

Weighted average common shares outstanding

 

 

2,954

 

 

2,977

Basic earnings per share

 

$

1.87

 

$

1.31

 

 

 

 

 

 

 

Diluted Earnings Per Share

 

 

 

 

 

 

Net Income

 

$

5,547

 

$

3,919

Weighted average common shares outstanding

 

 

2,954

 

 

2,977

Weighted average common and dilutive potential common shares outstanding

 

 

2,954

 

 

2,977

Diluted earnings per share

 

$

1.87

 

$

1.31

 

 

 

 

 

 

 

 

 

 

Three Months Ended

 

 

June 30,

 

    

2017

    

2016

 

 

(in thousands)

Basic Earnings Per Share

 

 

 

 

 

 

Net Income

 

$

2,410

 

$

2,082

Weighted average common shares outstanding

 

 

2,954

 

 

2,977

Basic earnings per share

 

$

0.81

 

$

0.70

 

 

 

 

 

 

 

Diluted Earnings Per Share

 

 

 

 

 

 

Net Income

 

$

2,410

 

$

2,082

Weighted average common shares outstanding

 

 

2,954

 

 

2,977

Weighted average common and dilutive potential common shares outstanding

 

 

2,954

 

 

2,977

Diluted earnings per share

 

$

0.81

 

$

0.70

 

Stock options for 0 shares of common stock for the six and three months ended June 30, 2017 and 1,200 shares of common stock for the six and three months ended June 30, 2016 were excluded from diluted earnings per share because their impact was antidilutive.

 

6.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.   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 stock on the date of grant.

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Summary of activity in the stock option plan for the first six months of 2017 follows:

 

 

 

 

 

 

 

 

 

 

 

 

 

    

    

    

 

    

Weighted

    

 

 

 

 

 

Weighted

 

Average

 

Aggregate

 

 

 

 

Average

 

Remaining

 

Intrinsic

 

 

 

 

Exercise

 

Contractual 

 

Value

 

 

Shares

 

Price

 

Term

 

(in thousands)

Outstanding, beginning of year

 

1,200

 

$

31.00

 

 

 

 

 

Granted

 

 —

 

 

 —

 

 

 

 

 —

Forfeited or expired

 

 —

 

 

 —

 

 

 

 

 —

Exercised

 

(600)

 

 

31.00

 

 

 

 

 

Outstanding, end of year

 

600

 

$

31.00

 

8 months

 

$

 5

Vested and expected to vest

 

600

 

$

31.00

 

8 months

 

$

 5

Exercisable, end of period

 

600

 

$

31.00

 

8 months

 

$

 5

(1)

Aggregate intrinsic value in thousands

 

As of June 30, 2017, 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 were 50,000. There were no shares issued during the first six months of 2017 or 2016.  The plan is now expired and no additional shares will be issued from the 2005 plan.  There were no shares forfeited during the first six months of 2017 or 2016.

 

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, 2017

 

10,636

 

$

254

 

$

23.84

 

Granted

 

 —

 

 

 —

 

 

 —

 

Vested

 

(4,192)

 

 

(94)

 

 

22.39

 

Forfeited

 

 —

 

 

 —

 

 

 —

 

Nonvested at June 30, 2017

 

6,444

 

$

160

 

$

24.77

 

(1) Grant date fair value in thousands

 

As of June 30, 2017, there was $122 thousand 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 2.0 years. As of June 30, 2017, no additional shares are available for issuance under the restricted stock grant plan.

 

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 6,575 shares issued during the first six months of 2017 and 6,170 shares were issued during the first six months of 2016. There were 600 shares forfeited during the first six months of 2017 and no shares were forfeited during the first six months of 2016.

 

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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, 2017

 

7,297

 

$

214

 

$

29.31

 

Granted

 

6,575

 

 

214

 

 

32.50

 

Vested

 

(1,414)

 

 

(41)

 

 

28.77

 

Forfeited

 

(600)

 

 

(20)

 

 

32.50

 

Nonvested at June 30, 2017

 

11,858

 

$

367

 

$

30.98

 

(1)

Grant date fair value in thousands

 

As of June 30, 2017, there was $343 thousand 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  4.0 years. As of June 30, 2017, 133,017, shares are still available for issuance.

 

 

 

7.REPURCHASE AGREEMENTS

 

Repurchase agreements totaled $24.0 million at June 30, 2017. Of this, $18.0 million were overnight obligations and $6.0 million had terms extending through May 2021 and a weighted remaining average life of 1.8 years. The Company pledged agencies and mortgage-backed securities with a carrying amount of $29.5 million to secure repurchase agreements as of June 30, 2017.

 

8.OTHER BORROWINGS

 

On July 20, 2015, the Company borrowed $5 million which had an outstanding balance of $3.9 million at June 30, 2017. 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 Kentucky Bank stock.  The maturity schedule for the term loan as of June 30, 2017 is as follows (in thousands):

 

 

 

 

 

 

2017

    

$

192

 

2018

 

 

399

 

2019

 

 

419

 

2020

 

 

441

 

2021

 

 

463

 

Thereafter

 

 

1,959

 

 

 

$

3,873

 

 

 

9.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:

 

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.

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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.

 

No adjustments were made for the first six months of 2017 or 2016 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 $38 for the six months ended June 30, 2017 and $85 thousand for the six months ended June 30, 2016, and $38 thousand for the three months ended June 30, 2017 and $0 for the three months ended June 30, 2016, 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.

 

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. 

 

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Table of Contents

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 June 30, 2017 (in thousands):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

    

    

    

Quoted Prices

    

 

    

 

 

 

 

 

 

 

In Active

 

 

 

 

 

 

 

 

 

 

 

 

Markets for

 

Significant Other

 

Significant

 

 

 

 

 

 

Identical

 

Observable

 

Unobservable

 

 

 

Carrying

 

Assets

 

Inputs

 

Inputs

 

Description

 

Value

 

(Level 1)

 

(Level 2)

 

(Level 3)

 

U. S. government agencies

 

$

41,807

 

$

 —

 

$

41,807

 

$

 —

 

States and municipals

 

 

89,830

 

 

 —

 

 

89,830

 

 

 —

 

Mortgage-backed - residential

 

 

165,808

 

 

 —

 

 

165,808

 

 

 —

 

Equity securities

 

 

341

 

 

341

 

 

 —

 

 

 —

 

Trading Assets

 

 

5,702

 

 

2,395

 

 

3,307

 

 

 —

 

Total

 

$

303,488

 

$

2,736

 

$

300,752

 

$

 —

 

 

Fair Value Measurements at December 31, 2016 (in thousands):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

    

    

    

Quoted Prices

    

    

    

    

 

 

 

 

 

 

In Active

 

 

 

 

 

 

 

 

 

 

 

 

Markets for

 

Significant Other

 

Significant

 

 

 

 

 

 

Identical

 

Observable

 

Unobservable

 

 

 

Carrying

 

Assets

 

Inputs

 

Inputs

 

Description

 

Value

 

(Level 1)

 

(Level 2)

 

(Level 3)

 

U. S. government agencies

 

$

36,528

 

$

 —

 

$

36,528

 

$

 —

 

States and municipals

 

 

91,132

 

 

 —

 

 

91,132

 

 

 —

 

Mortgage-backed - residential

 

 

145,770

 

 

 —

 

 

145,770

 

 

 —

 

Equity securities

 

 

340

 

 

340

 

 

 —

 

 

 —

 

Trading Assets

 

 

5,592

 

 

1,608

 

 

3,984

 

 

 —

 

Total

 

$

279,362

 

$

1,948

 

$

277,414

 

$

 —

 

 

There were no transfers between level 1 and level 2 during 2017 or 2016.

 

Assets measured at fair value on a non-recurring basis are summarized below (in thousands):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Fair Value Measurements at June 30, 2017 Using :

 

 

    

    

    

Quoted Prices

    

    

    

    

 

 

 

 

 

 

In Active

 

 

 

 

 

 

 

 

 

 

 

Markets for

 

Significant Other

 

Significant

 

 

 

 

 

 

Identical

 

Observable

 

Unobservable

 

 

 

Carrying

 

Assets

 

Inputs

 

Inputs

 

(In thousands)

 

Value

 

(Level 1)

 

(Level 2)

 

(Level 3)

 

Description

 

 

 

 

 

 

 

 

 

 

 

Impaired loans:

 

 

 

 

 

 

 

 

 

 

 

Real Estate Mortgage:

 

 

 

 

 

 

 

 

 

 

 

1-4 family Residential

 

$

412

$

 —

$

 —

 

$

412

 

       Other real estate owned, net:

 

 

 

 

 

 

 

 

 

 

 

             Residential

 

 

752

 

 —

 

 —

 

 

752

 

    Commercial

 

 

57

 

 —

 

 —

 

 

57

 

      Mortgage servicing rights

 

 

1,352

 

 —

 

 —

 

 

1,352

 

 

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Table of Contents

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Fair Value Measurements at December 31, 2016 Using :

 

 

    

    

    

Quoted Prices

    

    

    

    

 

 

 

 

 

 

In Active

 

 

 

 

 

 

 

 

 

 

 

Markets for

 

Significant Other

 

Significant

 

 

 

 

 

 

Identical

 

Observable

 

Unobservable

 

 

 

Carrying

 

Assets

 

Inputs

 

Inputs

 

(In thousands)

 

Value

 

(Level 1)

 

(Level 2)

 

(Level 3)

 

Description

 

 

 

 

 

 

 

 

 

 

 

Impaired loans:

 

 

 

 

 

 

 

 

 

 

 

Real Estate Mortgage:

 

 

 

 

 

 

 

 

 

 

 

1-4 family residential

 

$

1,685

$

 —

$

 —

 

$

1,685

 

Agricultural

 

 

2,234

 

 —

 

 —

 

 

2,234

 

Other real estate owned, net:

 

 

 

 

 

 

 

 

 

 

 

Residential

 

 

956

 

 —

 

 —

 

 

956

 

Commercial

 

 

272

 

 —

 

 

 

 

272

 

Mortgage servicing rights

 

 

1,083

 

 —

 

 —

 

 

1,083

 

 

Impaired loans measured for impairment using the fair value of the collateral for collateral dependent loans had a carrying amount of $412 thousand, which includes a valuation allowance of $205 thousand at June 30, 2017.  Impaired loans measured for impairment using the fair value of the collateral for collateral dependent loans had a net carrying amount of $3.9 million, with a valuation allowance of $502 thousand at December 31, 2016.  No new loans became impaired during the six month period ended June 30, 2017 which resulted in no additional provision for loan losses for impaired loans.  For the six months ended June 30, 2016, two new loans became impaired resulting in additional loan loss provision expense of $34 thousand.  For the three months ended June 30, 2016, one new loan became impaired resulting in additional loan loss provision expense of $19 thousand.

 

Other real estate owned measured at fair value less costs to sell had a net carrying amount of $809 thousand, which is made up of the outstanding balance of $1.6 million, net of a valuation allowance of $757 thousand at June 30, 2017. Other real estate owned which was measured at fair value less costs to sell, had a net carrying amount of $1.6 million, which was made up of the outstanding balance of $2.4 million, net of a valuation allowance of $803 thousand at December 31, 2016.   The Company recorded $38 thousand in write-downs of other real estate owned properties for both the six months and the three months ended June 30, 2017. The Company recorded $85 thousand and $0 in net write-downs of other real estate owned properties during the six months and the three months ended June 30, 2016. 

 

Impaired mortgage servicing rights, which are carried at the lower of cost or fair value, were carried at their fair value of $1.35 million, which is made up of the outstanding balance of $1.44 million, net of a valuation allowance of $91 thousand at June 30, 2017.

 

At December 31, 2016, impaired loan servicing rights were carried at their fair value of $1.1 million, which is made up of the outstanding balance of $1.2 million, net of a valuation allowance of $125 thousand. For the first six months of 2017, the Company recorded a net recovery of prior write-downs of $34 thousand and net write-downs of $42 thousand for the six months ended June 30, 2016.  For the three months ended June 30, 2017, the Company recorded write-downs of $5 thousand compared to net write-downs of $45 thousand for the three months ended June 30, 2016. 

 

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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 June 30, 2017 and December 31, 2016:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Range

 

June 30, 2017

    

Fair

    

Valuation

    

Unobservable

    

(Weighted

 

(In thousands)

 

Value

 

Technique(s)

 

Input(s)

 

Average)

 

Impaired loans

 

 

 

 

 

 

 

 

 

 

Real estate mortgage:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 1-4 family residential

 

412

 

sales comparison

 

adjustment for differences between the comparable sales

 

6%-6%

(6)%

 

 

 

 

 

 

 

 

 

 

 

 

Other real estate owned:

 

 

 

 

 

 

 

 

 

 

Residential

 

752

 

sales comparison

 

adjustment for differences between the comparable sales

 

1%-10%

(5)%

 

 Commercial

 

57

 

income approach

 

capitalization rate

 

10%- 10%

(10)%

 

 

 

 

 

 

 

 

 

 

 

 

Mortgage servicing rights

 

1,352

 

discounted cash flow

 

constant prepayment rates

 

8%-35%

(11)%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

    

    

    

    

Range

 

December 31, 2016

 

Fair

 

Valuation

 

Unobservable

 

(Weighted

 

(In thousands)

    

Value

    

Technique(s)

 

Input(s)

 

Average)

 

Impaired loans

 

 

 

 

 

 

 

 

 

 

Real estate mortgage:

 

 

 

 

 

 

 

 

 

 

1-4 family residential

 

1,685

 

sales comparison

 

adjustment for differences between the comparable sales

 

0%-21%

(10)%

 

Agricultural

 

2,234

 

sales comparison

 

adjustment for differences between the comparable sales

 

2%-75%

(9)%

 

Other real estate owned:

 

 

 

 

 

 

 

 

 

 

Residential

 

956

 

sales comparison

 

adjustment for differences between the comparable sales

 

1%-16%

(9)%

 

  Commercial

 

272

 

income approach

 

capitalization rate

 

10%-10%

(10)%

 

Mortgage Servicing Rights

 

1083

 

discounted cash flow

 

constant prepayment rates

 

8%-45%

(13)%

 

 

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Fair Value of Financial Instruments

 

The carrying amounts and estimated fair values of financial instruments, at June 30, 2017 and December 31, 2016 are as follows:

 

June 30, 2017:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

    

Carrying

    

 

 

    

 

 

    

 

 

    

 

 

 

(in thousands)

 

Value

 

Level 1

 

Level 2

 

Level 3

 

Total

 

Financial assets

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

16,137

 

$

16,137

 

$

 —

 

$

 —

 

$

16,137

 

Interest bearing deposits

 

 

5,009

 

 

5,009

 

 

 —

 

 

 —

 

 

5,009

 

Securities

 

 

297,786

 

 

340

 

 

297,446

 

 

 —

 

 

297,786

 

Trading assets

 

 

5,702

 

 

2,384

 

 

3,318

 

 

 —

 

 

5,702

 

Loans held for sale

 

 

1,917

 

 

 —

 

 

1,954

 

 

 —

 

 

1,954

 

Loans, net

 

 

642,699

 

 

 —

 

 

 —

 

 

639,026

 

 

639,026

 

FHLB Stock

 

 

7,034

 

 

 —

 

 

 —

 

 

 —

 

 

N/A

 

Interest receivable

 

 

3,614

 

 

 —

 

 

1,355

 

 

2,259

 

 

3,614

 

Financial liabilities

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Deposits

 

$

783,972

 

$

592,641

 

$

192,357

 

$

 —

 

$

784,998

 

Securities sold under agreements to repurchase

 

 

23,950

 

 

 —

 

 

24,014

 

 

 —

 

 

24,014

 

Short-term Federal Home Loan Bank advances

 

 

5,000

 

 

 —

 

 

5,001

 

 

 —

 

 

5,001

 

Long-term Federal Home Loan Bank advances

 

 

83,809

 

 

 —

 

 

79,334

 

 

 —

 

 

79,334

 

Note payable

 

 

3,873

 

 

 

 

 

4,328

 

 

 

 

 

4,328

 

Subordinated debentures

 

 

7,217

 

 

 —

 

 

 —

 

 

7,211

 

 

7,213

 

Interest payable

 

 

662

 

 

 —

 

 

600

 

 

62

 

 

662

 

 

December 31, 2016:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

    

Carrying

    

 

 

    

 

 

    

 

 

    

 

 

 

(in thousands)

 

Value

 

Level 1

 

Level 2

 

Level 3

 

Total

 

Financial assets

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

43,250

 

$

43,250

 

$

 —

 

$

 —

 

$

43,250

 

Interest bearing deposits

 

 

5,029

 

 

5,029

 

 

 —

 

 

 —

 

 

5,029

 

Securities

 

 

273,770

 

 

340

 

 

273,430

 

 

 —

 

 

273,770

 

Trading assets

 

 

5,592

 

 

1,608

 

 

3,984

 

 

 —

 

 

5,592

 

Mortgage loans held for sale

 

 

724

 

 

 —

 

 

750

 

 

 —

 

 

750

 

Loans, net

 

 

648,466

 

 

 —

 

 

 —

 

 

648,234

 

 

648,234

 

FHLB Stock

 

 

7,034

 

 

 —

 

 

 —

 

 

 —

 

 

N/A

 

Interest receivable

 

 

3,715

 

 

 —

 

 

1,334

 

 

2,381

 

 

3,715

 

Financial liabilities

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Deposits

 

$

802,981

 

$

607,617

 

$

195,528

 

$

 —

 

$

803,145

 

Securities sold under agreements to repurchase

 

 

20,873

 

 

 —

 

 

21,006

 

 

 —

 

 

21,006

 

FHLB advances

 

 

92,500

 

 

 —

 

 

91,015

 

 

 —

 

 

91,015

 

Note payable

 

 

4,090

 

 

 —

 

 

4,564

 

 

 —

 

 

4,564

 

Subordinated debentures

 

 

7,217

 

 

 —

 

 

 —

 

 

7,210

 

 

7,210

 

Interest payable

 

 

692

 

 

 —

 

 

639

 

 

53

 

 

692

 

 

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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.

 

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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10.CHANGES IN ACCUMULATED OTHER COMPREHENSIVE INCOME BY COMPONENT

 

Changes in Accumulated Other Comprehensive Income by Component (unaudited)

(in thousands)

 

 

 

 

 

 

 

 

 

 

 

Unrealized

 

 

 

Gains and Losses on

 

 

 

Available for Sale

 

 

 

Securities

 

 

 

For the Six Months Ended June 30,

 

 

    

2017

    

2016

 

Beginning Balance

 

$

(956)

 

$

359

 

 

 

 

 

 

 

 

 

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

 

 

2,197

 

 

4,226

 

 

 

 

 

 

 

 

 

Reclassification adjustment for:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Securities gains realized in income

 

 

43

 

 

277

 

Income taxes

 

 

(15)

 

 

(94)

 

 

 

 

28

 

 

183

 

 

 

 

 

 

 

 

 

Net current period other comprehensive income

 

 

2,169

 

 

4,043

 

 

 

 

 

 

 

 

 

Ending balance

 

$

1,213

 

$

4,402

 

 

 

 

 

 

 

 

 

 

 

 

Unrealized

 

 

 

Gains and Losses on

 

 

 

Available for Sale

 

 

 

Securities

 

 

 

For the Three Months Ended June 30,

 

 

    

2017

    

2016

 

Beginning Balance

 

$

(220)

 

$

2,746

 

 

 

 

 

 

 

 

 

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

 

 

1,461

 

 

1,756

 

 

 

 

 

 

 

 

 

Reclassification adjustment for:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Securities gains realized in income, net

 

 

43

 

 

151

 

Income taxes

 

 

(15)

 

 

(51)

 

 

 

 

28

 

 

100

 

 

 

 

 

 

 

 

 

Net current period other comprehensive income

 

 

1,433

 

 

1,656

 

 

 

 

 

 

 

 

 

Ending balance

 

$

1,213

 

$

4,402

 

 

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The following is significant amounts reclassified out of each component of accumulated other comprehensive income (loss) for the six months ended June 30, 2017 and June 30, 2016:

 

June 30, 2017

 

 

 

 

 

 

 

 

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

 

$

43

 

Gain on sale of available for sale securities, net

 

 

 

 

15

 

Income taxes

 

 

 

 

28

 

Net income

 

 

June 30, 2016

 

 

 

 

 

 

 

 

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

 

$

277

 

Gain on sale of available for sale securities, net

 

 

 

 

94

 

Income taxes

 

 

 

 

183

 

Net income

 

 

 

 

 

 

 

 

 

 

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, 2016.

 

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); ability to successfully gain regulatory approval when required; 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

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for losses on loans; future acquisitions, changes in technology, information security breaches or cyber security attacks involving the Company, it subsidiaries, or third-party service providers; 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.

 

Summary

 

The Company recorded net income of $5.5 million, or $1.87 basic earnings and diluted earnings per share for the first six months ended June 30, 2017 compared to $3.9 million or $1.31 basic earnings and diluted earnings per share for the six month period ended June 30, 2016.  The first six months net earnings reflect an increase of $1.6 million, or 41.5%, compared to the same time period in 2016.  The increase in net earnings is mostly attributed to an increase of $545 thousand, or 3.4%, in net interest income, an increase of $1.6 million, or 26.7%, in non-interest income, a decrease of $201 thousand, or 1.2%, in non-interest expense, and a decrease of $50 thousand, or 8.3%, for the provision for loan losses.  The increase in non-interest income is mostly attributed to the sale of a branch building located in Winchester, Kentucky, to a non-banking real estate investor.  The sale was solely for the building and not for the loans or deposits associated with the branch. The sale of the building resulted in a pre-tax gain of approximately $1.2 million.  Absent the sale of the building, net income would have been up approximately $839 thousand or 21.4%, net of tax, compared to the same period last year.  The earnings for the three months ended June 30, 2017 were $3.8 million or $0.81 basic and diluted earnings per share compared to $3.7 million or $0.70 basic and diluted earnings per share for the three month period ended June 30, 2016. The earnings for the three month period in 2017 reflect an increase of 15.8% compared to the same time period in 2016.

 

For the six months ended June 30, 2017 and compared to the six months ended June 30, 2016, service charges increased $144 thousand, gain on the sale of loans increased $285 thousand, and debit card interchange income increased $157 thousand. Salaries and benefits expense increased $21 thousand, legal and professional fees decreased $414 thousand and debit card expenses increased $131 thousand.  For the three months ended June 30, 2017 and compared to the three months ended June 30, 2016, service charges increased $38 thousand, debit card interchange income increased $70 thousand, and gains on the sale of loans increased $34 thousand.  For the three months ended June 30, 2017 and compared to the the three months ended June 30, 2016, salaries and benefits expense decreased $54 thousand, legal and professional fees decreased $319 thousand, data processing expense increased $67 thousand, debit card expense increased $75 thousand and other expenses increased $119 thousand.  For the same three month comparision, repossession expense increased $75 thousand.

 

Return on average assets was 1.06% for the six months ended June 30, 2017 and 0.79% for the six months ended June 30, 2016. Return on average assets was 0.93% for the three months ended June 30, 2017 and 0.83% for the three months ended June 30, 2016.  Return on average equity was 11.57% for the six month period ended June 30, 2017 and 8.49% for the six month period ended June 30, 2016. Return on average equity was 9.81% for the three month period ended June 30, 2017 and 8.91% for the three month period ended June 30, 2016. 

 

Securities available for sale increased $24.0 million from $273.8 million at December 31, 2016 to $297.8 million at June 30, 2017.  Trading assets increased by $110 thousand, or 1.97%, totaled $5.7 million at June 30, 2017 compared to $5.6 million at December 31, 2016, and includes income on the investment totaling $110 thousand during the first six months of 2017 compared to $173 thousand for the six months ended June 30, 2016. Income (loss) on the trading account totaled $34 thousand for the three months ended June 30, 2017 compared to $60 thousand for the three months ended June 30, 2016.

 

 

 

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Gross Loans decreased $5.3 million from $656.0 million on December 31, 2016 to $650.7  million at June 30, 2017.  The overall decrease in loan balances from December 31, 2016 to June 30, 2017 is comprised of the following: an increase of $2.5 million in 1-4 family residential loans, an increase of $2.0 million in commercial loans, a decrease of $4.5 million in multi-family residential loans, a decrease of $2.4 million in agricultural loans, a decrease of $2.6 million in non-farm and non-residential loans, a decrease of $904 thousand in consumer loans, and an increase of $445 thousand in real-estate construction loans.  Other loan balances increased $60 thousand from December 31, 2016 to June 30, 2017.

 

Total deposits decreased from $803.0 million on December 31, 2016 to $784.0 million on June 30, 2017, a decrease of $19.0 million.  Non-interest bearing demand deposit accounts decreased $2.7 million from December 31, 2016 to June 30, 2017 while time deposits $250 thousand and over decreased $5.3 million and other interest bearing deposit accounts decreased $11.0 million from December 31, 2016 to June 30, 2017.

 

Public fund account balances decreased $20.4 million from December 31, 2016 to June 30, 2017.  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.

 

Borrowings from the Federal Home Loan Bank decreased $3.7 million from December 31, 2016 to June 30, 2017, repurchase agreements increased $3.1 million, and the note payable decreased $217 thousand.

 

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 $16.5 million for the six months ended June 30, 2017 compared to $16.0 million for the six months ended June 30, 2016, an increase of 3.4%. Net interest income was $8.4 million for the three months ended June 30, 2017 compared to $8.0 million for the three months ended June 30, 2016, an increase of 4.7%.

 

The interest spread, excluding tax equivalent adjustments, was 3.30% for the first six months of 2017 compared to 3.37% for the first six months of 2016.  For the first six months in 2017, the yield on assets decreased from 3.86% in 2016 to 3.82% in 2017, excluding tax equivalent adjustments. The yield on loans increased two basis points compared to the six months ended June 30, 2016 from 4.65% to 4.67% for the six months ended June 30, 2017.  The yield on securities, excluding tax equivalent adjustments, was unchanged from 2.33% during the first six months of 2017 compared to 2016.  The cost of liabilities was 0.52% for the first six months in 2017 compared to 0.49% in 2016. 

 

Year to date average loans, excluding overdrafts, increased $15.6 million, or 2.4% for the six months ended June 30, 2017 compared to the six months ended June 30, 2016.  Loan interest income increased $404 thousand during the first six months of 2017 compared to the first six months of 2016.  Year to date average total deposits increased from June 30, 2016 to June 30, 2017 by $47.0 million or 6.1%.  Year to date average interest bearing deposits increased $49.0 million, or 8.7%, from June 30, 2016 to June 30, 2017.  Deposit interest expense increased $217 thousand for the first six months of 2017 compared to the same period in 2016.  Year to date average borrowings, including repurchase agreements, decreased $2.1 million, or 1.6%, from June 30, 2016 to June 30, 2017.  Interest expense on borrowed funds, including repurchase agreements, increased $15 thousand for the first six months of 2017 compared to the same period in 2016. 

 

The volume rate analysis for the six months ended June 30, 2017 indicates that $363 thousand of the increase in loan interest income is attributable to an increase in loan volume and $321 thousand of the increase in securities interest income is attributable to an increase in the volume of our security portfolio.  Further, an increase in loan rates caused an increase of $41 thousand in interest income and a decrease in rates in our security portfolio contributed to a decrease of $53 thousand in securities interest income.  The net effect to interest income was an increase of $776 thousand for the first six months of 2017 compared to the same time period in 2016.

 

Also based on the following volume rate analysis for the six months ended June 30, 2017, an increase in demand deposit interest rates resulted in $116 thousand additional interest expense, a decrease in interest rates paid for savings deposits resulted in a reduction of $3 thousand in interest expense, and increases in interest rates paid for time deposits resulted in an addition of $61 thousand in interest expense.

 

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The change in volume in deposits and borrowings was responsible for a $3 thousand decrease in interest expense, of which an increase in demand deposits resulted in an increase of $57 thousand in interest expense, an increase in time deposits resulted in a decrease of $14 thousand in interest expense, a decrease in repurchase agreements resulted in a decrease of $63 thousand in interest expense, and an increase in other borrowings resulted in an increase of $17 thousand in interest expense.  The net effect to interest expense was an increase of $231 thousand.  As a result, the increase in net interest income for the first six months in 2017 is mostly attributed to growth in the Company’s loan and security portfolios.

 

The volume rate analysis for the three months ended June 30, 2017 indicates that the $376 thousand increase in net interest income is attributable to a decrease of $402 thousand due to change in growth in the Company’s balance sheet and an increase of $778 thousand is a result of changes in rates.

 

Changes in Interest Income and Expense

 

 

 

 

 

 

 

 

 

 

 

 

 

    

Six Months Ended

 

 

 

2017 vs. 2016

 

 

 

Increase (Decrease) Due to Change in

 

(in thousands)

 

Volume

    

Rate

    

Net Change

 

INTEREST INCOME

 

 

 

 

 

 

 

 

 

 

Loans

 

$

363

 

$

41

 

$

404

 

Investment Securities

 

 

321

 

 

(53)

 

 

268

 

Other

 

 

33

 

 

71

 

 

104

 

Total Interest Income

 

 

717

 

 

59

 

 

776

 

INTEREST EXPENSE

 

 

 

 

 

 

 

 

 

 

Deposits

 

 

 

 

 

 

 

 

 

 

Demand

 

 

57

 

 

116

 

 

173

 

Savings

 

 

 —

 

 

(3)

 

 

(3)

 

Negotiable Certificates of Deposit and Other Time Deposits

 

 

(14)

 

 

61

 

 

47

 

Securities sold under agreements to repurchase and other borrowings

 

 

(63)

 

 

69

 

 

 6

 

Federal Home Loan

 

 

 

 

 

 

 

 

 

 

Bank advances

 

 

17

 

 

(9)

 

 

 8

 

Total Interest Expense

 

 

(3)

 

 

234

 

 

231

 

Net Interest Income

 

$

720

 

$

(175)

 

$

545

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended

 

 

 

2017 vs. 2016

 

 

 

Increase (Decrease) Due to Change in

 

 

    

Volume

    

Rate

    

Net Change

 

INTEREST INCOME

 

 

 

 

 

 

 

 

 

 

Loans

 

$

(497)

 

$

786

 

$

289

 

Investment Securities

 

 

(5)

 

 

178

 

 

173

 

Other

 

 

22

 

 

14

 

 

36

 

Total Interest Income

 

 

(480)

 

 

978

 

 

498

 

INTEREST EXPENSE

 

 

 

 

 

 

 

 

 

 

Deposits

 

 

 

 

 

 

 

 

 

 

Demand

 

 

18

 

 

87

 

 

105

 

Savings

 

 

 —

 

 

(1)

 

 

(1)

 

Negotiable Certificates of Deposit and Other Time Deposits

 

 

(16)

 

 

41

 

 

25

 

Securities sold under agreements to repurchase and other borrowings

 

 

(48)

 

 

46

 

 

(2)

 

Federal Home Loan

 

 

 

 

 

 

 

 

 

 

Bank advances

 

 

(32)

 

 

27

 

 

(5)

 

Total Interest Expense

 

 

(78)

 

 

200

 

 

122

 

Net Interest Income

 

$

(402)

 

$

778

 

$

376

 

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Table of Contents

Non-Interest Income

 

Non-interest income increased $1.6 million for the six months ended June 30, 2017, compared to the same period in 2016, to $7.6 million. Non-interest income increased $9 thousand for the three months ended June 30, 2017, compared to the thee months ended June 30 2016, to remain at $3.3 million.

 

As previously noted, non-interest income increased $1.6 million for the six months ended June 30, 2017 in comparison to the six months ended June 30, 2016.  Favorable variances to non-interest income for the first six months of 2017 include an increase of $144 thousand in service charges, an increase of $125 thousand in loan net service fee income, an increase of $51 thousand in trust department income, an increase of $157 thousand in debit card interchange income, and an increase of $285 thousand in gains on the sale of loans.

 

The largest favorable variance to non-interest income for the first six months of 2017 is an increase of $1.2 million in gains on bank premises due to the sale of a bank building located in Winchester, Kentucky.  The sale was solely for the building and not for the loans or deposits associated with the branch.

 

Decreases to non-interest income for the six months ended June 30, 2017 compared to the six months ended June 30, 2016 include a decrease of $234 thousand in gains on the sale of securities and a decrease of $49 thousand in gains on trading assets.    

 

The gain on the sale of loans increased from $756 thousand during the first six months of 2016 to $1.0 million during the first six months of 2017, an increase of $285 thousand. For the three months ended June 30, the gain on the sale of loans increased from $457 thousand in 2016 to $491 thousand in 2017.

 

The volume of loans originated to sell during the first six months of 2017 increased $9.0 million compared to the same time period in 2016.  The volume of loans originated to sell the during the three months ended June 30, 2017 compared to the six months ended June 30, 2016 increased $4.1 million. 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 $174 thousand for the six months ended June 30, 2017 compared to $49 thousand for the six months ended June 30, 2016, an increase of $125 thousand.  During the first six months of 2017, the market value adjustment to the carrying value of the mortgage servicing right was a net recovery of prior-writedowns of $34 thousand, as the fair value of this asset increased.  During the first six months of 2016, the market value adjustment to the carrying value of the mortgage servicing right asset was a net write-down of $42 thousand as the fair value of the mortgage servicing asset decreased.  For the three months ended June 30, 2017, the market value adjustment to the carrying value of the mortgage serving right asset was a net write-down of $5 thousand compared to a net write-down of $45 thousand during the second quarter of 2016.

 

Non-Interest Expense

 

Total non-interest expense decreased $201 thousand for the six month period ended June 30, 2017 compared to the same period in 2016.  Total non-interest expense decreased $59 thousand for the three month period ended June 30, 2017 compared to the three months ended June 30, 2016. Management continues to consider opportunities for branch expansion, and will also consider acquisition opportunities that help advance its strategic objectives, which would result in additional future non-interest expense.

 

For the comparable six month periods, salaries and employees benefits expense increased $21 thousand, an increase of 0.2%.  The number of full-time employee equivalent employees decreased from 246 at June 30, 2016 to 243 at June 30, 2017, a decrease of three full-time employee equivalent employees.  For the three months ended June 30, 2017 compared to the three months ended June 30, 2016, salaries and employee benefits expense decreased $54 thousand, or 1.2%. 

 

Occupancy expense increased $92 thousand to $1.9 million for the first six months of 2017 compared to the same time period in 2016.  Building rent expense increased $58 thousand  mostly due to rent expense being lower in 2016 due to the Company recovering $20 thousand in accrued expense for a former branch leased in Richmond, KY.

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In addition, the Company incurred an additional $24 thousand in building rents during the first six month of 2017 compared to the same time period in 2016 due to rent expense associated with leasing back the branch building that was sold in Winchester, KY during the first quarter of 2017.

 

Depreciation expense decreased $88 thousand for the six months ended June 30, 2017 compared to June 30, 2016.  Expenses incurred for assets not depreciated increased $116 thousand during the first six months of 2017 compared to the first six months of 2016.  This increase is attributed to purchasing additional equipment during the first quarter of 2017 and increasing the threshold for which we depreciate assets.  The capitalization policy, during the first six months of 2016, stated assets purchased with a cost of $1,000 or greater would be capitalized and depreciated.  This policy was changed during the last half of 2016 and now states the minimum threshold for an asset to be capitalized is $2,500.

 

Occupancy expense was $984 thousand  for the three months ended June 30, 2017 compared to $939 thousand for the three months ended June 30, 2016, an increase of $45 thousand.

 

Legal and professional fees decreased $414 thousand for the six months ended June 30, 2017 compared to the first six months in 2016 and decreased $319 thousand for the three months ended June 30, 2017 compared to the three months ended June 30, 2016.  The reduction in legal and professional fees is attributed to expenses being higher for the six months ended June 30, 2016 due to the Company incurring $390 thousand in additional expense related to acquiring the services of an outside firm to help the Company identify ways to become more efficient and profitable.

 

Debit card expenses increased $131 thousand for the six months ended June 30, 2017 compared to the first six months of 2016 and increased $56 thousand for the three months ended June 30, 2016 compared to the three months ended June 30, 2015.  The increase in debit card expense is attributed to an increase in debit card interchange activity which also resulted in increases in debit card interchange income as shown on the income statement.

 

Repossession expense increased $42 thousand for the first six months ended June 30, 2017 compared to the same time period in 2016 and increased $75 thousand for the three month period ended June 30, 2017 compared to the three months ended June 30, 2016.  Repossession expenses are reported net of rental income earned on repossessed properties.  Net repossession expenses were lower during the first six months of 2017 when compared to 2016 due to net write-downs totaling $38 in 2017 compared to net write-downs of $85 thousand in 2016. 

 

Income Taxes

 

The effective tax rate for the six months ended June 30, 2017 was 19.6% compared to 12.7% in 2016.  The effective tax rate for the three months ended June 30, 2017 was 17.1% compared to 14.6% in 2016. The effective tax rate is higher in 2017 due to taxable income increasing, largely due to the $1.2 million gain on the sale of the branch building.  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. 

 

The Company also has a captive insurance subsidiary which contributes to reducing taxable income.  Income tax expense increased $780 thousand for the six months ended June 30, 2017 compared to the first six months in 2016.  Tax-exempt interest income decreased $98 thousand for the first six months of 2017 compared to the first six months of 2016.  Further, for the first six months of 2017, the Company had tax credits totaling $277 thousand for investments made in low income housing projects compared to similar tax credits of $204 for the first six months of 2016.

 

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 six months ended June 30, 2017, the Company averaged $76.0 million in tax free securities and $39.9 million in tax free loans.  As of June 30, 2017, the weighted average remaining maturity for the tax free securities is 99 months, while the weighted average remaining maturity for the tax free loans is 141 months.

 

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Table of Contents

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.

 

Cash and cash equivalents were $16.1 million as of June 30, 2017 compared to $43.2 million at December 31, 2016.  The decrease in cash and cash equivalents is attributed to a decrease of $26.7 million in cash and due from banks and a decrease of $389 thousand in federal funds sold. The decrease in cash and cash equivalents is mostly attributed to deposits balances being greater at December 31 for our public entity depositors due to the recent collection of tax revenues.  As the tax dollars are dispursed throughout the year, the balances for these depsotors will decrease resulting in a decrease in the Company’s cash and cash equivalents.

 

In addition to cash and cash equivalents, the securities portfolio provides an important source of liquidity.  Securities available for sale totaled $297.8 million at June 30, 2017 compared to $273.8 million at December 31, 2016.  Securities classified as trading assets totaled $5.7 million at June 30, 2017 compared to $5.6 million at December 31, 2016. 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 six months of 2017, deposits decreased $19.0 million compared to December 31, 2016.  The Company’s borrowed funds from the Federal Home Loan Bank decreased $3.7 million from December 31, 2016 to June 30, 2017, federal funds purchased remained at zero, and total repurchase agreements increased $3.1 million from December 31, 2016 to June 30, 2017.

 

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 June 30, 2017, we have sufficient collateral to borrow an additional $87 million from the Federal Home Loan Bank. 

 

In addition, as of June 30, 2017, $49 million is available in overnight borrowing through various correspondent banks and the Company has access to an additional $299 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. 

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Table of Contents

The Company and Bank capital amounts and classifications are also subject to qualitative judgments by regulators about components, risk weightings, and other factors.

 

Quantitative measures established by regulation to ensure capital adequacy require the Company and the Bank to maintain minimum amounts and ratios (set forth in the following table) of Total and Tier I capital, 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 June 30, 2017 and December 31, 2016, 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 revised 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. 

 

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Table of Contents

The capital conservation buffer was 1.25% at June 30, 2017 and the Company is in compliance with the capital conservation buffer.  The final rule became effective for the Bank on January 1, 2016.  In accordance with the final rule, the capital conservation buffer requirement began being phased in beginning January 1, 2016 and will continue through January 1, 2019, when the full capital conservation buffer requirement will be effective. The Company’s and the Bank’s actual amounts and ratios, exclusive of the capital conservation buffer, 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)

 

June 30, 2017

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Consolidated

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total Capital (to Risk-Weighted Assets)

 

$

98,439

 

14.5

%  

$

54,364

 

8.0

%  

 

N/A

 

N/A

 

Tier I Capital (to Risk-Weighted Assets)

 

 

90,397

 

13.3

 

 

40,773

 

6.0

 

 

N/A

 

N/A

 

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

 

 

83,397

 

12.3

 

 

30,580

 

4.5

 

 

N/A

 

N/A

 

Tier I Capital (to Average Assets)

 

 

90,397

 

8.9

 

 

40,839

 

4.0

 

 

N/A

 

N/A

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Bank Only

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total Capital (to Risk-Weighted Assets)

 

$

97,796

 

14.4

%  

$

54,327

 

8.0

%  

$

67,909

 

10.0

%

Tier I Capital (to Risk-Weighted Assets)

 

 

89,754

 

13.2

 

 

40,746

 

6.0

 

 

54,327

 

8.0

 

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

 

 

89,754

 

13.2

 

 

30,559

 

4.5

 

 

44,141

 

6.5

 

Tier I Capital (to Average Assets)

 

 

89,754

 

8.8

 

 

40,804

 

4.0

 

 

51,005

 

5.0

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

December 31, 2016

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Consolidated

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total Capital (to Risk-Weighted Assets)

 

$

94,343

 

13.9

%  

$

54,280

 

8.0

%  

 

N/A

 

N/A

 

Tier I Capital (to Risk-Weighted Assets)

 

 

86,718

 

12.8

 

 

40,710

 

6.0

 

 

N/A

 

N/A

 

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

 

 

79,718

 

11.8

 

 

30,533

 

4.5

 

 

N/A

 

N/A

 

Tier I Capital (to Average Assets)

 

 

86,718

 

8.7

 

 

39,795

 

4.0

 

 

N/A

 

N/A

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Bank Only

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total Capital (to Risk-Weighted Assets)

 

$

95,118

 

14.0

%  

$

54,246

 

8.0

%  

$

67,808

 

10.0

%

Tier I Capital (to Risk-Weighted Assets)

 

 

87,493

 

12.9

 

 

40,685

 

6.0

 

 

54,246

 

8.0

 

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

 

 

87,493

 

12.9

 

 

30,513

 

4.5

 

 

44,075

 

6.5

 

Tier I Capital (to Average Assets)

 

 

87,493

 

8.8

 

 

39,671

 

4.0

 

 

49,588

 

5.0

 

 

Non-Performing Assets

 

As of June 30, 2017, our non-performing assets totaled $7.3 million or 0.72% of assets compared to $9.4 million or 0.91% of assets at December 31, 2016 (See table below.)  The Company experienced a decrease of $2.34 million in non-accrual loans from December 31, 2016 to June 30, 2017.  As of June 30, 2017, non-accrual loans include $52 thousand in loans secured by farmland, $1.8 million in loans secured by 1-4 family properties, $333 thousand in loans secured by non-farm and non-residential properties and $11 thousand in consumer loans. 

 

Loans secured by real estate composed 99.5% of the non-performing loans as of June 30, 2017 and 96.9% as of December 31, 2016.  Forgone interest income on non-accrual loans totaled $102 thousand for the first six months of 2017 compared to forgone interest of $108 thousand for the same time period in 2016.  Accruing loans that are contractually 90 days or more past due as of June 30, 2017 totaled $624 thousand compared to $927 thousand at December 31, 2016, a decrease of $303 thousand.

 

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Total nonperforming and restructured loans decreased $3.0 million from December 31, 2016 to June 30, 2017.  The decrease in non-performing loan balances contributed to the decrease in the ratio of nonperforming and restructured loans to loans which decreased 45 basis points to 0.70% from December 31, 2016 to June 30, 2017.

 

In addition, the amount the Company has recorded as other real estate owned increased $958 thousand from December 31, 2016 to June 30, 2017.  As of June 30, 2017, the amount recorded as other real estate owned totaled $2.8 million compared to $1.8 million at December 31, 2016.  During the first six months of 2017, $1.9 million in loan balances were foreclosed upon and added to other real estate properties while $901 thousand 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 80% at December 31, 2016 to 109% at June 30, 2017.

 

Nonperforming and Restructured Assets

 

 

 

 

 

 

 

 

 

 

    

6/30/2017

    

12/31/2016

 

 

 

(in thousands)

 

Non-accrual Loans

 

$

2,225

 

$

4,566

 

Accruing Loans which are Contractually past due 90 days or more

 

 

624

 

 

927

 

Accruing Troubled Debt Restructurings

 

 

1,702

 

 

2,063

 

Total Nonperforming and Restructured Loans

 

 

4,551

 

 

7,556

 

Other Real Estate

 

 

2,782

 

 

1,824

 

Total Nonperforming and Restructured Loans and Other Real Estate

 

$

7,333

 

$

9,380

 

Nonperforming and Restructured Loans as a Percentage of Loans

 

 

0.70

%  

 

1.15

%

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

 

 

0.72

%  

 

0.91

%

Allowance as a Percentage of Period-end Loans

 

 

1.22

%  

 

1.15

%

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

 

 

109

%  

 

80

%

 

We maintain a “watch list” of agricultural, commercial, real estate mortgage, and real estate construction loans and review those loans at least quarterly but more often if needed.  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 six months of 2017 was $550 thousand compared to $600 thousand for the first six months of 2016.  The loan loss provision for the three months ended June 30, 2017 was $200 thousand compared to $225 thousand for the three months ended June 30, 2016.  The decrease in the total loan loss provision during the first six months of 2017 compared to the same time period in 2016 is mostly attributed to improved loan quality.  The allowace for loan losses as a percentage of loans was 1.22%  at June 30, 2017 compared to 1.11% at June 30, 2016. 

 

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.

 

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Nonperforming loans and restructured loans decreased $3.0 million from December 31, 2016 to $4.6 million at June 30, 2017.  The Company recorded net charge-offs of $133 thousand for the six months ended June 30, 2017 compared to net recoveries of $138 thousand for the six months ended June 30, 2016.  During the first quarter of 2016, the Company recorded a recovery of $259 for one loan which was charged-off in a prior year.  Future levels of charge-offs will be determined by the particular facts and circumstances surrounding individual loans.

 

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

Loan Losses

 

 

 

 

 

 

 

 

 

 

 

Six Months Ended June 30,

 

 

 

(in thousands)

 

 

    

 

2017

    

 

2016

 

Balance at Beginning of Period

 

$

7,541

 

$

6,521

 

Amounts Charged-Off:

 

 

 

 

 

 

 

Commercial

 

 

15

 

 

 —

 

1-4 family residential

 

 

33

 

 

64

 

Multi-family residential

 

 

 —

 

 

 —

 

Agricultural

 

 

 —

 

 

 —

 

Consumer and other

 

 

570

 

 

662

 

Total Charged-off Loans

 

 

618

 

 

726

 

Recoveries on Amounts Previously Charged-off:

 

 

 

 

 

 

 

    Commercial

 

 

15

 

 

34

 

Real Estate Construction

 

 

 1

 

 

13

 

1-4 family residential

 

 

 5

 

 

 7

 

Multi-family residential

 

 

 7

 

 

 4

 

Non-farm & non-residential

 

 

 —

 

 

273

 

Agricultural

 

 

28

 

 

23

 

Consumer and other

 

 

429

 

 

510

 

Total Recoveries

 

 

485

 

 

864

 

Net Charge-offs (Recoveries)

 

 

133

 

 

(138)

 

Provision for Loan Losses

 

 

550

 

 

600

 

Balance at End of Period

 

 

7,958

 

 

7,259

 

Loans

 

 

 

 

 

 

 

Average

 

 

655,491

 

 

636,852

 

At June 30,

 

 

650,657

 

 

653,277

 

As a Percentage of Average Loans:

 

 

 

 

 

 

 

Net Charge-offs for the period

 

 

0.02

%

 

(0.02)

%

Provision for Loan Losses for the period

 

 

0.08

%

 

0.09

%

Allowance as a Multiple of Net Charge-offs annualized

 

 

29.9

 

 

(26.3)

 

 

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Table of Contents

 

 

 

 

 

 

 

 

 

 

Three Months Ended June 30,

 

 

 

(in thousands)

 

 

    

2017

    

2016

 

Balance at Beginning of Period:

 

$

7,876

 

$

7,147

 

Amounts Charged-Off:

 

 

 

 

 

 

 

Commercial

 

 

13

 

 

 —

 

1-4 family residential

 

 

22

 

 

52

 

Multi-family residential

 

 

 —

 

 

 

 

Agricultural

 

 

 —

 

 

 —

 

Consumer and other

 

 

308

 

 

249

 

Total Charged-off Loans

 

 

343

 

 

301

 

Recoveries on Amounts Previously Charged-off:

 

 

 

 

 

 

 

    Commercial

 

 

7

 

 

 3

 

Real Estate Construction

 

 

1

 

 

 7

 

1-4 family residential

 

 

4

 

 

 2

 

Multi-family residential

 

 

4

 

 

 1

 

Non-farm & non-residential

 

 

0

 

 

 7

 

Agricultural

 

 

18

 

 

12

 

Consumer and other

 

 

191

 

 

156

 

Total Recoveries

 

 

225

 

 

188

 

Net Charge-offs

 

 

118

 

 

113

 

Provision for Loan Losses

 

 

200

 

 

225

 

Balance at End of Period

 

 

7,958

 

 

7,259

 

Loans

 

 

 

 

 

 

 

Average

 

 

655,665

 

 

646,788

 

At June 30,

 

 

650,657

 

 

653,277

 

As a Percentage of Average Loans:

 

 

 

 

 

 

 

Net Charge-offs (Recoveries) for the period

 

 

0.02

%

 

0.02

%

Provision for Loan Losses for the period

 

 

0.03

%

 

0.03

%

Allowance as a Multiple of Net Charge-offs annualized

 

 

16.9

 

 

16.1

 

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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 $5.7 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.

 

The projections are based on balance sheet growth assumptions and repricing opportunities for new, maturing and adjustable rate amounts.  As of June 30, 2017, 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 comparable 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 June 30, 2017 is as follows:

 

PROJECTED NET INTEREST INCOME

(dollars in thousands)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Level

 

Change in basis points:

    

- 100

    

Rates

    

+ 100

    

+ 300

 

Year One (7/17 - 6/18)

 

 

 

 

 

 

 

 

 

 

 

 

 

Net interest income

 

$

33,474

 

$

34,376

 

$

34,277

 

$

34,114

 

Net interest income dollar change

 

 

(901)

 

 

N/A

 

 

(98)

 

 

(262)

 

Net interest income percentage change

 

 

(2.6)

%  

 

N/A

 

 

(0.3)

%  

 

(0.8)

%

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 June 30, 2016 is as follows:

 

PROJECTED NET INTEREST INCOME

(dollars in thousands)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Level

 

Change in basis points:

    

- 100

    

Rates

    

+ 100

    

+ 300

 

Year One (7/16-6/17)

 

 

 

 

 

 

 

 

 

 

 

 

 

Net interest income

 

$

31,429

 

$

32,294

 

$

32,412

 

$

32,314

 

Net interest income dollar change

 

 

(865)

 

 

N/A

 

 

118

 

 

20

 

Net interest income percentage change

 

 

(2.7)

%  

 

N/A

 

 

0.4

%  

 

0.1

%

Board approved limit

 

 

>(4.0)

%

 

N/A

 

 

>(4.0)

%

 

>(10.0)

%

 

Projections from June 30, 2017 and June 30, 2016, year one reflected declines of 2.6% and 2.7% in net interest income assuming rates were to decline 100 basis points.  Assuming an increase in rates of 100 basis points, projections  reflected a 0.3% decrease in net interest income in 2017 compared to an increase of 0.4% in 2016.

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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 June 30, 2017, balance sheet, a 100 basis point decrease in rates results in a 10.7% decrease in EVE.  A 100 basis point increase in rates results in a 1.3% 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.

 

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)

 

 

 

 

(c) Total Number

 

(d) Maximum Number

 

 

 

Total

 

(b)

 

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

 

4/1/17-4/30/17

 

 —

 

$

 —

 

 —

 

100,912

shares

 

 

 

 

 

 

 

 

 

 

 

5/1/17-5/31/17

 

 —

 

 

 —

 

 —

 

100,912

shares

 

 

 

 

 

 

 

 

 

 

 

6/1/17-6/30/17

 

 —

 

 

 —

 

 —

 

100,912

shares

 

 

 

 

 

 

 

 

 

 

 

Total

 

 —

 

$

 —

 

 —

 

100,912

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.  On November 18, 2016, the Board of Directors approved and authorized the Company’s repurchase of an additional 50,000 shares.  Shares will be purchased from time to time in the open market depending on market prices and other considerations.  Through June 30, 2017, 349,088 shares have been purchased.

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Table of Contents

Item 6.     Exhibits

 

Ay

 

 

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.

 

 

 

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 ended 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 Current Report on Form 8-K dated and filed November 21, 2007.

 

 

 

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 ended 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 June 30, 2017, filed with the SEC August 11, 2017, formatted in Extensible Business Reporting Language (XBRL): (i) Consolidated Balance Sheets at June 30, 2017,and December 31, 2016, (ii) Consolidated Statements of Income and Comprehensive Income (Loss) for the six months and three months ended June 30, 2017 and June 30, 2016, (iii) Consolidated Statement of Stockholders’ Equity for the six months ended June 30, 2017, (iv) Consolidated Statements of Cash Flows for the six months ended June 30, 2017 and June 30, 2016 and (v) Notes to Consolidated Financial Statements.

 

 

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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

8/11/17

 

 /s/Louis Prichard

 

 

 

 Louis Prichard, President and C.E.O.

 

 

 

 

Date

8/11/17

 

 /s/Gregory J. Dawson

 

 

 Gregory J. Dawson, Chief Financial Officer

 

 

47