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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
(MARK ONE)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 2002.
[ ] 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: 333-89952
KENSINGTON BANKSHARES, INC.
(Exact Name of Registrant as Specified in Its Charter)
FLORIDA 59-3709535
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(State of Incorporation) (IRS Employer Identification No.)
13246 NORTH DALE MABRY HWY., TAMPA, FL 33624
--------------------------------------------
(Address of Principal Executive Offices, Zip Code)
(813) 961-6200
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(Registrant's Telephone Number, Including Area Code)
Securities registered under Section 12(b) of the Exchange Act: None
Securities registered under Section 12(g) of the Exchange Act: None
Indicate by check mark whether the registrant: (1) has filed all
reports required to be filed by Section 13 or 15(d) of the Securities Exchange
Act of 1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes [X] No[ ]
Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein, and will not be contained,
to the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [X]
As of December 31, 2002, there were approximately 3,710,000 shares
outstanding of the registrant's Common Stock, par value $.01 per share, its only
class of common stock, and the aggregate market value of the Common Stock held
by non-affiliates of the registrant (approximately 923,841 shares) was
approximately $6,928,807 as computed by reference to the most recent trade price
of the Company's shares (March 17, 2003).
DOCUMENTS INCORPORATED BY REFERENCE
None.
PART I
ITEM 1. BUSINESS
KENSINGTON BANKSHARES, INC.
Kensington Bankshares, Inc. ("Bankshares"), is a one-bank holding
company registered under the Bank Holding Company Act of 1956, as amended.
Although organized under Florida law on January 26, 2001, Bankshares commenced
operations in January 2002. Bankshares' sole subsidiary and principal asset is
First Kensington Bank ("Kensington Bank"), organized on December 8, 1999, under
the laws of the State of Florida. Kensington Bank commenced operations on
February 28, 2000. In January 2002, Bankshares acquired all of the outstanding
shares of common stock of First Kensington Bank upon the effectiveness of an
exchange offer whereby each share of Kensington Bank's common stock was
automatically exchanged for four shares of common stock of Bankshares.
In September 2002, Bankshares consummated a public offering and sold
750,000 shares of its common stock to its shareholders and the general public at
a price of $7.50 per share. The net proceeds to Bankshares was approximately
$5,575,000. The net proceeds were used to pay indebtedness incurred to increase
the capital accounts of Kensington Bank ($4,000,000) and the balance was
contributed to the capital accounts of the bank. See "Supervision and
Regulation."
KENSINGTON BANK
Kensington Bank was incorporated as a State Bank on December 8, 1999,
under the laws of the State of Florida and commenced operations on February 28,
2000. Kensington Bank is subject to the rules, regulations and examinations
conducted by the Federal Deposit Insurance Corporation and the State of Florida
Division of Banking. See "Supervision and Regulation." Kensington Bank operates
under the day-to-day management of its officers and they have substantial
authority in making autonomous decisions regarding investments, loan policies,
interest rates and service charges.
BANKING SERVICES
Kensington Bank offers most of the usual banking services, including
checking accounts, savings accounts, certificates of deposit, money market
accounts, money orders, travelers' checks, safe deposit boxes, night depository,
installment loans, commercial loans, mortgage loans and mortgage collections.
Kensington Bank does not have trust powers.
Kensington Bank's commercial loan department serves a variety of
professionals and local businesses, including many small, family owned
enterprises. The department offers a full range of business credit services
including lines of credit, term loans, revolving loans, equipment financing and
mortgages. On occasion, a borrower's needs exceed the maximum regulatory lending
limit of Kensington Bank. In these instances, the department initiates a loan
participation with another bank to meet the customer's needs.
Kensington Bank's consumer loan services include consumer credit common
to most full-service commercial banks. These services include automobile loans,
home improvement loans, home equity lines of credit and other personal loans.
PRIMARY MARKET AREA
Kensington Bank conducts a commercial banking business from six office
locations, its main office and one branch office located in Hernando County,
Florida, two branch offices located in Pasco County, Florida and two branch
offices located in Hillsborough County, Florida. Hernando, Pasco and
Hillsborough Counties, located on the Gulf of Mexico about halfway down the west
coast, make up the bank's primary service area. According to the U. S. Census,
the primary service area experienced a population growth of approximately 21%
during the 1990's resulting in a total population of approximately 1,475,000 at
December 31, 2000; 999,000 in Hillsborough County, 345,000 in Pasco County and
131,000 in Hernando County. Hillsborough County experienced a population growth
of approximately 19.8% from 1990 to 2000, Pasco County 22.6% and Hernando County
29.4%. In addition, the number of household units increased during the same
periods as follows: Hillsborough County from 263,219 to 425,962, Pasco County
from 100,846 to 147,566 and Hernando County from 22,500 to 62,717. At December
31, 2000, the number of persons per household approximated 2.4 and as of July
2001, the unemployment rate was approximately 3.4%. During 2000, the number of
housing units covered by building permits was 11,657 (Hillsborough County),
3,486 (Pasco County) and 1,326 (Hernando County).
In spite of changing conditions involving the infrastructure
requirements which have limited economic expansion and population growth at
various geographic locations around the country, Kensington Bank's primary
market area has continued to grow because of its ability to attract new
residents to its favorable year round climate and relatively stable economic
environment. Furthermore, although the major economic base in Kensington Bank's
primary service area is tourism and construction, there has been a growth of
other diverse service businesses. Bankshares believes that it is situated to
take advantage of any economic and demographic growth in its primary service
area.
COMPETITION
Kensington Bank encounters strong competition both in making loans and
attracting deposits. The deregulation of the banking industry and the widespread
enactment of state laws which permit multi-bank holding companies as well as a
degree of interstate banking has created a highly competitive environment for
commercial banking in Kensington Bank's primary service area. In one or more
aspects of its business, Kensington Bank competes with other commercial banks,
savings and loan associations, credit unions, finance companies, mutual funds,
insurance companies, brokerage and investment banking companies, and other
financial intermediaries operating in and around the service area. Most of the
competitors, some of which are affiliated with large bank holding companies,
have substantially greater resources and lending limits, and may offer certain
services, such as trust services, that Kensington Bank does not currently
provide. In addition, many of the bank's non-bank competitors are not subject to
the same extensive federal regulations that govern bank holding companies and
state chartered and federally insured banks. Kensington Bank's primary service
area is currently being served by approximately 40 commercial banks with
approximately 343 offices. Kensington Bank's principal competitors are branches
of major regional holding company banks, which, for the most part, are
headquartered elsewhere in Florida, Alabama, Georgia and North Carolina.
Management believes that Kensington Bank is well positioned to compete
successfully in its primary service area, although no assurances can be given.
Competition among financial institutions is based upon interest rates offered on
deposit accounts, interest rates charged on loans and other credit and service
charges, the quality and scope of the services rendered, the convenience of
banking facilities, and, in the case of loans to commercial borrowers, relative
lending limits.
2
EMPLOYEES
As of December 31, 2002, Kensington Bank had 42 employees. Management
believes that its employee relations have been and continue to be good. No
employees are represented by any union or similar group and Kensington Bank has
never experienced any strike or labor dispute.
SUPERVISION AND REGULATIONS
GENERAL
As a bank holding Company, Bankshares is required to file with the
Board of Governors of the Federal Reserve System (the "Board") an annual report
and such additional information as the Board may require pursuant to the Bank
Holding Act of 1956, as amended. The Board also makes examinations of Bankshares
and its subsidiary.
The principal supervisory authorities of Kensington Bank are the State
of Florida Department of Banking and Finance and the FDIC, which regularly
examine such areas as reserves, loans, investments, management practices and
other aspects of Kensington Bank's operations. These examinations are designed
for the protection of Kensington Bank's depositors and not for its stockholders.
In addition to these regular examinations, Kensington Bank must furnish to these
agencies quarterly reports containing a full and accurate statement of its
affairs. Kensington Bank is a member of the FDIC, and its deposits are insured
as provided by law.
Federal and State banking laws and regulations govern, among other
things, the scope of a bank's business, the investments a bank may make, the
reserves against deposits a bank must maintain, loans a bank makes and
collateral it takes, the activities of a bank with respect to mergers and
consolidations, and the establishment of branches. The Florida Department and
the FDIC have the authority to issue cease-and-desist orders to prevent a bank
from engaging in an unsafe or an unsound practice or violating the law in
conducting its business. The payment of dividends, depending upon the financial
condition of a bank, could be deemed such a practice.
The earnings of Kensington Bank are affected to some extent by the
policies of regulatory authorities including the Federal Reserve System, which
regulate the national supply of bank credit in order to mitigate recessionary
and inflationary pressures. Among the instruments of monetary policy used to
implement these objectives are open market transactions in United States
Government securities, changes in the discount rate on member bank borrowing,
changes in reserve requirements against member bank deposits, and limitations on
interest rates which member banks may pay on time and savings deposits. The
effect, if any, of such policies on the future business and earnings of
Kensington Bank cannot be predicted.
COMPANY ACTIVITIES
Bankshares has elected not to become a financial holding company under
the Gramm-Leach-Bliley Act, and as a result, will generally be prohibited from
acquiring control of any company which is not a bank and from engaging in any
business other than the business of banking or managing and controlling banks.
However, Bankshares may still engage in certain activities which have been
identified by the Federal Reserve Board to be so closely related to banking as
to be a proper incident thereto and thus permissible for bank holding companies.
3
The list of permissible nonbanking activities includes the following
activities: extending credit and servicing loans; acting as investment or
financial advisor to any person, with certain limitations; leasing personal and
real property or acting as a broker with respect thereto; providing management
and employee benefits consulting advice and career counseling services to
nonaffiliated banks and nonbank depository institutions; operating certain
nonbank depository institutions; performing certain trust company functions;
providing certain agency transactional services, including securities brokerage
services, riskless principal transactions, provide placement services, and
acting as a futures commission merchant; providing data processing and data
transmission services; acting as an insurance agent or underwriter with respect
to limited types of insurance; performing real estate appraisals arranging
commercial real estate equity financing; providing check-guaranty; collection
agency and credit bureau services; engaging in asset management; servicing and
collection activities; providing real estate settlement services; acquiring
certain debt which is in default; underwriting and dealing in obligations of the
United States, the states and their political subdivisions; engaging as a
principal in foreign exchange trading and dealing in precious metals; providing
other support services such as courier services and the printing and selling of
checks; and investing in programs designed to promote community welfare.
The Act requires prior approval of the Board of Governors of the
Federal Reserve before a bank holding company can (1) acquire, directly or
indirectly, ownership or control of more than 5% of the voting stock of a bank;
(2) acquire substantially all of the assets of a bank; or (3) merge or
consolidate with another bank holding company. If the effect of a proposed
acquisition, merger or consolidation may be to substantially lessen competition
or tend to create a monopoly, the Board cannot approve the acquisition unless it
finds that the anti-competitive effects of the acquisition, merger or
consolidation are clearly outweighed by the convenience and needs of the
community to be served. Furthermore, any acquisition by a bank holding company
of more than 5% of the voting shares, or of all or substantially all of the
assets of a bank located in another State may not be approved by the Board
unless the laws of the second State specifically authorize such an acquisition.
A bank holding company is also prohibited, with limited exceptions,
from acquiring direct or indirect ownership or control of more than 5% of the
voting shares of any company which is not a bank and from engaging, directly or
indirectly, in activities unrelated to banking or managing or controlling banks.
An exception to this prohibition permits ownership of the shares of a company,
the activities of which the Board, after due notice and opportunity for hearing,
has determined to be so closely related to banking or managing or controlling
banks as to be a proper incident thereto.
Bankshares and its subsidiaries are prohibited from engaging in certain
tie-in arrangements in connection with any extension of credit, sale or lease of
property or furnishing of services. For example, with certain exceptions
Kensington Bank may not condition an extension of credit on a customer's
obtaining other services provided by it, Bankshares or any other subsidiary, or
on a promise by its customer not to obtain other services from a competitor.
REGULATION OF PAYMENT OF DIVIDEND
Bankshares is a legal entity separate and distinct from Kensington
Bank. The principal source of cash flow for Bankshares is dividends from
Kensington Bank. There are various statutory and regulatory limitations on the
payment of dividends by Kensington Bank, as well as dividends paid by Bankshares
to its shareholders.
The payment of dividends by Bankshares and Kensington Bank may be
affected or limited by regulatory requirements and policies, such as the
maintenance of adequate capital. If, in the opinion of the applicable regulatory
authority, a bank under its jurisdiction is engaged in or is about to engage in
an unsafe or
4
unsound practice (which could include the payment of dividends depending on the
institution's financial condition), such authority may require, after notice and
hearing, that the bank cease and desist from such practice. The FDIC and the
Federal Reserve Board have issued policy statements that provide, generally,
that insured banks and bank holding companies should only pay dividends out of
current operating earnings. The Federal Reserve has issued a policy statement to
the same effect for bank holding companies. In addition, all insured depository
institutions are subject to the capital-based limitations required by the
Federal Deposit Insurance Corporation Improvement Act of 1991.
Under Florida law, Kensington Bank may pay quarterly, semiannual or
annual dividends out of its net profits for such period and its retained net
profits so long as (1) it complies with certain Florida law restrictions with
respect to Kensington Bank's surplus fund, (2) the net income for the such
dividend period when combined with retained earnings for the preceding 2 years
is not a loss and (3) payment of the dividend will not result in the capital
accounts of Kensington Bank to fall below minimum amounts required under law,
regulation, order or any written agreement with the Florida Department or a
federal regulatory agency. At December 31, 2002, there was no money available
for the payment of dividends without prior regulatory approval.
CAPITAL ADEQUACY REQUIREMENTS
Both Bankshares and Kensington Bank are subject to regulatory capital
requirements imposed by the Federal Reserve Board and the FDIC. The Federal
Reserve Board and the FDIC have issued risk-based capital guidelines for bank
holding companies and banks, which make regulatory capital requirements more
sensitive to differences in risk profiles of various banking organizations. The
capital adequacy guidelines issued by the Federal Reserve Board are applied to
bank holding companies, on a consolidated basis with the banks owned by the
holding company, as well as the state member banks. Both agencies' requirements
(which are substantially similar) provide that banking organizations must have
capital equivalent to at least 8% of risk-weighted assets. The risk weights
assigned to assets are based primarily on credit risks. Depending upon the risk
level of a particular asset, it is assigned to a risk category. For example,
securities with an unconditional guarantee by the United States government are
assigned to the lowest risk category, while a risk weight of 50% is assigned to
loans secured by owner-occupied one to four family residential mortgages
provided that certain conditions are met. The aggregate amount of assets
assigned to each risk category is multiplied by the risk weight assigned to that
category to determine the weighted values, which are added together to determine
total risk-weighted assets.
RESTRICTIONS ON THE MAKING OF LOANS
Both the Federal Deposit Insurance Corporation and the Federal Reserve
Act limit banks with respect to the amount of loans or extensions of credit to,
and investments in an affiliate and the amount of advances to third parties
collateralized by the securities or obligations of an affiliate. There are also
additional restrictions on loans to executive officers and persons owning or
controlling more than 10% of the voting shares of a member bank's stock and to
officers, directors or controlling persons of a bank holding company controlling
such member bank.
RECENT EVENTS
On June 3, 2002, Kensington Bank was advised by the Atlanta Regional
Office of the FDIC that the bank's leverage ratio (total capital divided by
average assets) of 6.78% at March 31, 2002 was below the 8.0% required
regulatory level for banks with less than three years of operations. The bank
was requested to increase its leverage ratio to at least 8.0% by June 30, 2002.
Management advised the FDIC that the company had on
5
file with the Securities and Exchange Commission a Registration Statement
covering a public offering of shares of common stock. The FDIC was further
advised that the proceeds of the offering were to be used to increase the
capital of the bank. On June 26, 2002, the bank was advised that in spite of the
proposed offering, the FDIC required that the bank meet its leverage ratio by
June 30, 2002. This necessitated an immediate investment of $4.0 million. To
accomplish this, the directors loaned the company $4.0 million and the company
invested $4.0 in the bank. This increased the bank's leverage ratio to 8.1%. At
February 28, 2003, the leverage ratio of the bank required by the FDIC was
reduced to 6%. See "Item 12 "Certain Relationships and Certain Transactions."
The Federal Reserve requires that within the first two years of the
commencement of operations, members are required to obtain prior approval to
borrow money. Because of the time involved, the holding company was unable to
comply with this requirement. The company notified the Federal Reserve of such
fact and subsequently received approval of the company's request for a waiver of
the notification requirement.
STATISTICAL INFORMATION ABOUT KENSINGTON BANK
The following tables and schedules contain statistical information
concerning the financial condition and operations of Kensington Bank for the
period or periods or as of the date or dates indicated in each table or
schedule.
AVERAGE DAILY BALANCE SHEETS
The following table shows Kensington Bank balances of assets,
liabilities and capital computed on an average daily basis.
AVERAGE DAILY BALANCE SHEET
(IN THOUSANDS)
YEAR ENDED
DECEMBER 31,
--------------------
2001 2002
---- ----
Assets:
Cash and due from banks $ 1,941 $ 2,037
Federal funds sold 4,406 5,291
Taxable securities 90,016 183,446
Loans (Net) 31,762 58,520
Premises and equipment (Net) 2,121 2,505
Other 1,680 4,020
----------- ---------
Total Assets $ 131,926 $ 255,819
Liabilities and equity:
Non-interest-bearing demand deposits $ 3,952 $ 6,278
Interest-bearing demand deposits 6,760 15,483
Savings deposits 2,684 6,177
Other time deposits 94,862 198,892
----------- ---------
Total deposits 108,258 226,830
Other borrowed funds 9,116 10,037
Other liabilities 273 578
Stockholders' equity 14,279 18,374
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Total Liabilities and Stockholders' Equity $ 131,926 $ 255,819
6
INCOME AND AVERAGE YIELD ON INTEREST EARNING ASSETS AND INTEREST
EXPENSE AND AVERAGE RATE ON INTEREST BEARING LIABILITIES
The following table shows the interest income and average yield on
interest earning assets and the interest expense and average rate on interest
bearing liabilities for the periods indicated. The calculations of average
yields or rates are based upon the average daily balances.
INTEREST INCOME AND EXPENSES
(DOLLARS IN THOUSANDS)
YEAR ENDED DECEMBER 31,
------------------------------------
2001 2002
---- ----
INTEREST AVG. RATE INTEREST AVG.RATE
-------- --------- -------- --------
Assets:
Taxable securities $ 6,057 6.73% $ 8,962 4.89%
Loans, net 2,864 9.02% 4,766 8.14%
Federal funds sold 168 3.81% 93 1.76%
-------- -------- --------- --------
Total interest - earning assets 9,089 7.20% 13,821 5.59%
Liabilities:
Interest-bearing demand deposits 159 2.35% 214 1.38%
Savings deposits 90 3.35% 132 2.14%
Time deposits 5,210 5.49% 7,302 3.67%
Other borrowed funds 315 3.46% 177 1.76%
-------- -------- --------- --------
Total interest - bearing liabilities $ 5,774 5.09% $ 7,825 3.39%
Interest income and expense are affected by changes in interest rates,
by changes in the volumes of earning assets and interest-bearing liabilities,
and by changes in the mix of these assets and liabilities. The following
analysis shows the year-to-year changes in the components of net interest
income:
RATE/VOLUME VARIANCE ANALYSIS
(DOLLARS IN THOUSANDS)
2002 COMPARED TO 2001
INCREASE (DECREASE) DUE TO
--------------------------
VOLUME (1) RATE CHANGE
-------- ---- ------
Interest earned on:
Taxable securities $ 3,947 $ (1,042) $ 2,905
Loans, net(1) 2,149 (247) 1,902
Federal funds sold 44 (119) (75)
-------- -------- -------
Total interest income $ 6,140 $ (1,408) $ 4,732
-------- -------- -------
Interest paid on:
Interest-bearing demand deposits $ 81 $ (26) $ 55
Savings deposits 58 (16) 42
Time deposits 2,998 (906) 2,092
Other borrowed funds 36 (174) (138)
-------- -------- -------
Total interest expense 3,173 (1,122) 2,051
-------- -------- -------
Change in net interest income $ 2,967 ($ 286) $ 2,681
-------- -------- -------
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(1) Non-accruing loans are excluded from the average volumes used in
calculating the table.
7
COMPOSITION OF INVESTMENT SECURITIES
The tables below set forth the investment securities at the dates
indicated (dollars in thousands):
BOOK VALUE OF INVESTMENT SECURITIES
DECEMBER 31,
------------
2001 2002
---- ----
U.S. government agencies $139,786 $184,370
The following table indicates the maturities, scheduled by the
weighted-average lives of the underlying collateral, of Kensington Bank's U. S.
government agency securities as of December 31, 2002, and the weighted average
yields of such securities.
MATURITY PAR BOOK MARKET WEIGHTED AVERAGE YIELD
-------- --- ---- ------ ----------------------
3 Months or less $ 77,284 $ 77,376 $ 77,459 2.47%
Over 3 through 12 months 39,405 39,801 40,147 3.60%
Over 1 year through 5 years 30,714 31,383 32,271 4.26%
Over 5 years through 10 years 17,795 17,761 18,072 5.00%
Over 10 years 18,105 18,049 18,165 6.55%
--------- -------- --------- ----
Total $ 183,303 $184,370 $186,114 3.66%
LENDING ACTIVITIES
Lending activities are conducted pursuant to a comprehensive written
loan policy that was approved by the bank's board of directors and is reviewed
and re-affirmed by that same body at least annually. Our loan approval process
provides for various levels of lending authority to loan officers, the Senior
Lender, the President and Chief Executive Officer, and the Executive Management
Loan Committee. In addition, loans in excess of $1,250,000 require the approval
of the board of directors prior to funding. Loan purchases, when applicable,
will be made subject to the same underwriting standards as loan originations.
Florida Banking Statutes limits the amount of credit to any one person to a
maximum amount of 25% of the bank's capital accounts, subject to certain
conditions (approximately $5.5 million as of December 31, 2002).
We manage our loan portfolio on an ongoing basis following written
policies and portfolio management strategies, guidelines for underwriting
standards and risk assessment, and procedures for ongoing identification and
management of credit deterioration. We undertake regular portfolio reviews to
estimate loss exposure and determine compliance with bank policies.
Kensington Bank is primarily in the real estate market and provides
construction and permanent financing and residential real estate loans to
qualified applicants without discrimination and under the guidelines set forth
in the bank's loan policy. Kensington Bank also provides commercial loans and
installment loans to small to medium-sized businesses and to individuals with
satisfactory cash flows.
Our real estate loan portfolio mostly consists of single-family
residential, construction and commercial loans. We concentrate on short-term
loans with one to five year maturities and loans with interest rate adjustment
periods within the same time frame. The relatively short maturities afford
Kensington Bank a degree of protection against interest rate fluctuations and
will give management the ability to review the quality of our loan portfolio
more frequently. These re-pricing opportunities allow for interest rate
adjustments that are commensurate with the quality of our loans. The ratio and
loan mix of our real estate portfolio will
8
vary from time-to-time based on the investment criteria determined by management
and the needs of the communities we serve.
Real estate and construction loans generally originate in amounts of no
more than 85% of appraised value and are secured by a mortgage on the real
estate. Construction loans are structured either to be converted to permanent
loans with the bank at the end of the construction phase or to be paid off upon
receiving financing from another financial institution. These type loans are
supported by the builders' financial capacity and their ability to sell their
finished product. Real estate risk is associated with the ability of borrowers
to service their monthly debt obligations and the value of the real estate being
held as collateral. Commercial real estate risk is associated with the financial
capacity of the borrowers to meet their monthly debts; the value of the real
estate held as collateral, the success of the borrowers business along with any
fluctuation in the value of business assets. Construction real estate risk is
centered on the ability of the borrowers to complete the project and service
their monthly payments.
The bank offers a variety of commercial loans including term loans,
both collateralized and un-collateralized, made to businesses for working
capital (including real estate acquisitions and improvements), and the purchase
of equipment and machinery. As a general practice, the bank takes a security
interest in any available real estate, equipment, or other chattel. Commercial
loans are primarily underwritten in the bank's service area on the basis of the
borrowers ability to service such debt from cash flows from their business. As a
result, the risk in this type of credit is in the availability of funds for
repayment and the success of the business be substantially dependent on the
success of the business itself. Further, the collateral underlying the loans may
depreciate over time, cannot be appraised with as much precision as real estate,
and may fluctuate in value based on the success of the business.
Installment loans, while not a significant part of the bank's loan
portfolio, are made to qualified borrowers for automobiles, recreation vehicles,
boats, second mortgages, home improvements, home equity lines of credit,
personal (collateralized and un-collateralized) and deposit account
collateralized loans. The terms on these types of credit typically range from 12
to 60 months and vary based on the kind of collateral and size of the loan.
These types of loans generally have a shorter term and carry a higher interest
rate than that charged on other types of loans. Installment loans, however, do
pose additional risks of collectability when compared to traditional types of
loans granted by commercial banks such as real estate loans. In many instances,
the bank is required to rely on the borrower's ability to repay since the
collateral may be of reduced value at the time of collection. Accordingly, the
determination of the borrower's ability to repay the debt is of primary
importance in the underwriting of consumer loans.
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The following table sets forth the gross amount and percent of loans
outstanding at the indicated dates according to the type of loan and total loans
netting deferred loan fees and allowance for loan loss (dollars in thousands):
DECEMBER 31,
-------------------------------------------------
2001 2002
--------------------------- ---------------------
AMOUNT PERCENT AMOUNT PERCENT
-------- ------- ------ -------
Real estate $ 35,083 72.76 $ 50,493 62.53
Construction 9,923 20.58 23,706 29.36
Commercial 2,142 4.44 5,077 6.28
Installment 1,053 2.18 1,438 1.78
Other 22 .04 37 0.05
--------- ------- --------- -------
Gross loans 48,223 100.00 80,751 100.00
Net deferred loan fees (89) (278)
Allowance for loan loss (410) (700)
--------- ---------
Net loans $ 47,724 $ 79,773
As of December 31, 2002, 36.3% of gross loans were fixed rate loans and
63.7% were variable rate loans. For the year ended December 31, 2002, the
average interest yield on the loan portfolio was 8.14%.
LOAN MATURITIES AND SENSITIVITY TO CHANGES IN INTEREST RATES
The amount of gross loans outstanding as of December 31, 2002, which,
based on remaining scheduled repayments of principal that are due in (1) one
year or less, (2) more than one year, but less than five years, and (3) more
than five years and the mix of fixed rate and variable rate loans, are shown in
the following table (in thousands):
AGGREGATE MATURITIES OF LOAN BALANCES WHICH ARE DUE
AS OF DECEMBER 31, 2002
IN ONE YEAR AFTER ONE YEAR BUT AFTER FIVE
OR LESS WITHIN FIVE YEARS YEARS
------- ----------------- -----
Real Estate:
Residential $ 2,936 $ 4,789 $ 999
Commercial 5,092 28,891 7,786
Construction 13,683 8,925 1,098
All Other Loans 3,230 3,297 25
-------- -------- -------
Total $ 24,941 $ 45,902 $ 9,908
Fixed Rate $ 6,168 $ 14,315 $ 8,772
Variable Rate (1) 18,773 31,587 1,136
-------- -------- -------
Total $ 24,941 $ 45,902 $ 9,908
- ----------
(1) These loans are generally tied to the prime rate or an index. The range of
interest rate charges is governed by State usury ceilings.
10
RISK ELEMENTS
There is a certain degree of risk inherent in any loan. To limit these
risks, Kensington Bank operates under a comprehensive loan policy that is
approved by its Board of Directors. Board members recognize that the loan
portfolio is one of Kensington Bank's greatest earning asset and that every
effort must be made to protect the depositors' money, earn adequate returns for
its shareholders and provide lending services on a broad and constructive basis
in the community.
The allowance for loan losses, established by Kensington Bank to absorb
unidentified loan losses in the loan portfolio, was 0.9% of total loans
outstanding at December 31, 2001 and 0.9% at December 31, 2002. It is
management's desire to maintain a level adequate to provide protection against
possible losses from problem loans, including Kensington Bank's own loan
portfolio review, review by regulatory authorities, the actual loan loss
experience of Kensington Bank, the extent of existing risks in the loan
portfolio and level of the loan loss allowance, and Kensington Bank's review of
prevailing economic conditions. Kensington Bank's allowance for loan loss is a
general loan loss reserve and does not presently allocate loan loss provisions
to the various types of loans.
Kensington Bank's Reserve for Loan Loss Committee meets on a monthly
basis to review the bank's loss reserve. The committee consists of the bank's
President and Chief Executive Officer, Executive Vice President/Chief Financial
Officer and Kensington Bank's Senior Loan Officer.
The committee reviews Kensington Bank's "watch list" of problem
credits, past due loans, non-accrual loans and evaluates the bank's reserve
position. Kensington Bank's methodology for this reserve is to allow 5% of a
loan's balance to the reserve for loans categorized as Other Loans Especially
Mentioned, 10% for secured loans classified Substandard, 15% for unsecured loans
classified Substandard, 50% for loans classified Doubtful, 100% for loans
classified Loss and 0.8% of the balance for the remaining portfolio. These
reserve percentages are determined and evaluated by management on a regular
basis based on regulatory guidance and upon management's periodic review of the
collectability of the loans in light of historical experience, the nature and
volume of the loan portfolio, adverse situations that may affect the borrower's
ability to repay, estimated value of any underlying collateral and prevailing
economic conditions. Recommendations are made to the Board of Directors for
loans that are deemed uncollectable and need to be charged-off.
As of December 31, 2001 and December 31, 2002, Kensington Bank had no
non-accrual loans and there were no loans, which had been renegotiated to
provide a reduction or deferral of interest or principal because of
deterioration in the financial position of the borrower. Generally, once loans
are placed on a non-accrual status, no interest income is recognized until all
of the principal has been liquidated unless there are extenuating circumstances,
such as adequate protection payments being made in a bankruptcy case. Accrual of
interest is discontinued on a loan when management believes, after considering
economic and business conditions and collection efforts that the borrower's
financial condition is such that collection of interest is doubtful.
It is Kensington Bank's policy to charge-off all installment and
consumer loans on which there has not been a scheduled interest payment within
the past 180 days and which are deemed uncollectable. A loan is charged-off as
the result of a determination made by Kensington Bank's senior management and
approved by the Board of Directors or is recommended for charge-off by bank
regulatory agencies who believe that the collection or liquidation of the
account is seriously impaired. All loans, regardless of whether they are real
estate, commercial, or installment, are placed on a non-accrual basis where
collection of the principal balances of such loans is in jeopardy. For the year
ended December 31, 2002, Kensington Bank charged-off $0 as compared with $2,000
for the year ended December 31, 2001.
11
LOAN LOSS EXPERIENCE AND PROVISION FOR LOAN LOSSES
(DOLLARS IN THOUSANDS)
YEAR ENDED
DECEMBER 31,
-----------------
2001 2002
---- ----
Daily average amount of net loans outstanding $ 31,762 $ 58,520
Balance of allowance for loan losses at beginning of period 140 410
Loans charged off:
Commercial, financial and agricultural 2 0
Real estate - construction 0 0
Real estate - mortgage 0 0
Installment loans to individuals 0 0
Recoveries of loans previously charged off 0 0
-------- --------
Net loans charged off 2 0
-------- --------
Additions to allowance charged to operations (1) 272 290
-------- --------
Balance at end of period 410 700
-------- --------
Ratio of net charge offs to the daily average of loans outstanding 0% 0%
- ------------
(1) Additions to the allowance were based primarily on current economic
conditions and the condition of the loan portfolio.
The following is a loan delinquency table as reported in Kensington
Bank's Call Report to the regulatory authorities as of December 31, 2001 and
December 31, 2002 of past due loans 30 to 89 days delinquent and still accruing
interest. There were no loans past due for 90 days or more that were still
accruing interest.
DECEMBER 31,
-----------
2001 2002
---- ----
Real estate loans $ 225,000 $ 23,000
Commercial loans 125,000 0
Past due real estate loans at December 31, 2002 consisted of two loans.
12
DEPOSITS
The following table presents the average daily amount of deposits
(dollars in thousands):
YEAR ENDED
DECEMBER 31,
------------------------------------
2001 2002
---- ----
AVERAGE AVERAGE AVERAGE AVERAGE
------- ------- ------- -------
BALANCE RATE BALANCE RATE
------- ---- ------- ----
Non interest-bearing demand deposits $ 3,952 0.00% $ 6,278 0.00%
Interest-bearing demand deposits 6,760 2.35% 15,483 1.38%
Savings deposits 2,684 3.35% 6,177 2.14%
Time deposits 94,862 5.49% 198,892 3.67%
---------- --------- ---------- -------
Total Deposits $ 108,258 5.04% $ 226,830 3.39%
Time Deposits and certificates of deposit of $100,000 or more
outstanding at December 31, 2002, will mature as follows (in thousands):
Under 3 Months $ 13,301
3 to 6 Months 8,117
6 to 12 Months 11,415
Over 12 Months 16,706
---------
Total $ 49,539
At December 31, 2002, certificates of deposit represented approximately
82.8% of total deposits. Time deposits over $100,000 represented 21.8% of
average total deposits at December 31, 2002. As a percentage, demand deposits
decreased from 3.7% of average total deposits at December 31, 2001 to 2.8% at
December 31, 2002. Interest-bearing demand deposits increased from 6.2% of
average total deposits at December 31, 2001 to 6.8% at December 31, 2002.
Savings deposits increased from 2.5% of average total deposits at December 31,
2001 to 2.7% at December 31, 2002, and Time Deposits (certificates of deposit)
increased from 87.6% of average total deposits at December 31, 2001 to 87.7% at
December 31, 2002. Kensington Bank does not knowingly accept brokered deposits
of any nature.
RETURN ON EQUITY
The ratio of net income to average stockholders' equity and daily
average total assets and certain other ratios are presented below for Kensington
Bank:
YEAR ENDED
DECEMBER 31,
-------------------
2001 2002
---- ----
Percentage of net income to:
Average total assets 0.29% 0.53%
Average stockholders' equity 2.58% 7.34%
Percentage of average shareholders' equity to daily
average total assets 10.82% 7.18%
13
ITEM 2. DESCRIPTION OF PROPERTY
Kensington Bank's main office is located 1300 Pinehurst Dr., Spring
Hill, Florida 34606. The bank also either owns or leases the following branch
facilities:
ADDRESS SIZE OWNED/LEASED EXPIRATION DATE
---- ------------ ----------------
1300 Pinehurst Dr.
Spring Hill, FL 34606 4,000 sq. ft. Owned
4842 State Road 674
Sun City Center, FL 33573 2,400 sq. ft. Leased September 30, 2005(a)
13246 N. Dale Mabry
Tampa, FL 33624 2,170 sq. ft. Leased May 2, 2005(a)
14363 Spring Hill Dr.
Spring Hill, FL 34609 1,050 sq. ft. Leased January 4, 2004(b)
8623 Regency Park Blvd.
Port Richey, FL 34668 4,875 sq. ft. Leased November 11, 2005(c)
8805 Mitchell Blvd.
New Port Richey, FL 34655 1,900 sq. ft. Leased October 15, 2004(d)
- -----------
(a) Option to renew for additional five years
(b) Option to renew for additional three years
(c) Option to renew for two additional five-year periods
(d) Optionto renew for two additional three-year periods
The annual rental on the above-leased facilities is $245,800.
ITEM 3. LEGAL PROCEEDINGS
There were no material legal proceedings as of December 31, 2002.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
There was no submission of matters to a vote of security holders during
the fourth quarter of 2002.
PART II
ITEM 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
There is no active market for the common stock of Bankshares, although
occasional trades have taken place. The last trade took place on March 17, 2003
at $7.50 per share. Bankshares acts as its own transfer agent. As of December
31, 2002, the approximate number of shareholders was 257.
Bankshares has not paid any dividends to date to its shareholders and
does not anticipate paying dividends in the foreseeable future. Future payment
of dividends by Bankshares is necessarily dependent upon adequate earnings of
Kensington Bank. The ability of Kensington Bank to pay dividends is, in turn,
regulated by Federal and State statutes and regulations and is also affected by
national and local economic conditions
14
and other pertinent conditions. At December 31, 2002, there was no money
available for the payment of dividends without prior regulatory approval.
ITEM 6. SELECTED FINANCIAL DATA
SELECTED FINANCIAL INFORMATION - (DOLLARS IN THOUSANDS EXCEPT
PER SHARE AMOUNTS)
CONSOLIDATED STATEMENTS OF OPERATIONS - SUMMARY(1)
FEB. 28, 2000 YEAR ENDED
TO DECEMBER 31,
DECEMBER 31, -----------------------------
2000 2001 2002
--------- -------- -----------
Interest income $ 2,875 $ 9,089 $ 13,821
Interest expense 1,531 5,773 7,825
--------- -------- ---------
Net interest income 1,344 3,316 5,996
Provision for loan losses 140 272 290
Non-interest income 21 95 188
Non-interest expense 2,010 2,768 3,707
Net income (loss) (624) 371 1,349
Income (loss) per share of common stock (0.24) 0.13 0.42
CONSOLIDATED STATEMENTS OF CONDITION - SUMMARY(1)
DECEMBER 31,
---------------------------------------------------
2000 2001 2002
------------- -------------- ------------
Total assets $ 65,647 $ 198,226 $ 272,774
Investment securities 39,561 139,762 184,466
Loans receivable, net 17,681 47,724 79,773
Deposits 52,929 176,989 238,247
Stockholders' equity 12,496 15,252 22,299
Common shares outstanding 2,560,000 2,960,000 3,710,000
SELECTED FINANCIAL RATIOS
Equity to asset ratio 19.03% 7.70% 8.10%
Return on average assets (1.67)% .29% .53%
Return on average equity (5.74)% 2.58% 7.34%
Allowens for loan losses to total loans .79% .85% .87%
Net interest margin 3.79% 2.63% 2.43%
Non-interest expense to interest income and
non-interest income 56.75% 30.13% 26.46%
Risk based capital ratios:
Tier I Capital 39.49% 19.25% 17.51%
Total Capital 39.93% 19.76% 18.07%
Leverage ratio 21.81% 8.04% 8.80%
- ---------------
(1) For more complete information see Consolidated Financial Statements and
related notes of Bankshares appearing elsewhere herein.
15
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
The following discussion and analysis is designed to provide a better
understanding of the significant factors related to Bankshares results of
operations, financial condition, liquidity, and capital resources.
GENERAL
Bankshares principal asset is its ownership of Kensington Bank.
Accordingly, results of operations are primarily dependent upon the results of
operations of Kensington Bank. Kensington Bank conducts a general commercial
banking business, which consists of attracting deposits from the general public
and applying those funds to the origination of loans for commercial, consumer
and residential purposes. Kensington Bank's profitability depends primarily on
net interest income, which is the difference between interest income generated
from interest-earning assets (i.e., loans and investments) less the interest
expense incurred on interest-bearing liabilities (i.e., customer deposits and
borrowed funds). Net interest income is affected by the relative amounts of
interest-earning assets and interest-bearing liabilities, and the interest rate
paid on these balances. Net interest income is dependent upon Kensington Bank's
interest rate spread, which is the difference between the average yield earned
on its interest-earnings assets and the average rate paid on its
interest-bearing liabilities. When interest-earning assets approximate or exceed
interest-bearing liabilities, any positive interest rate spread will generate
net interest income. The interest rate spread is impacted by interest rates,
deposit flows, and loan demands. Additionally, to a lesser extent, Kensington
Bank's profitability is affected by such factors as the level of non-interest
income and expenses, the provision for loan losses, and the effective tax rate.
Non-interest income consists of service charges and other income. Non-interest
expenses consist of compensation and benefits, occupancy related expense,
equipment and data processing expenses, professional fees and other operating
expenses.
RESULTS OF OPERATIONS AND FINANCIAL CONDITION
Comparison of year ended December 31, 2002 to the year ended December 31, 2001.
Bankshares experienced continued asset, investment, loan and deposit
growth during 2002. Total assets increased 37.6% to $272,774,400 at December 31,
2002 from $198,226,021 at December 31, 2001. This increase is primarily
attributable to an increase in securities of $44,703,856 and an increase in
loans of $32,049,148 during the year. Securities available for sale increased to
$32,025,356 at December 31, 2002 from $9,476,211 at December 31, 2001, while
securities held to maturity increased 17% or $22,154,711 to $152,440,397 at
December 31, 2002 from $130,285,686 at December 31, 2001. These increases are
attributable to the increase in deposit accounts during the year by 34.6%, or
$66,258,104, from $176,988,713 at December 31, 2001 to $238,246,817 at December
31, 2002.
Total interest income increased 52% to $13,821,118 for the year ended
December 31, 2002, from $9,089,340 at December 31, 2001. The increase was due
primarily to a rise in interest earning assets, loans and investments, resulting
from a $66,258,104 growth in deposits from 2001 to 2002. The 34.6% increase in
deposits from 2001 to 2002 is attributable to a general growth in Kensington
Bank's service area. In addition, the existing branches have become more
established in their market area. Loan interest income in 2002 increased 66.4%
to $4,766,063 from $2,864,394 in 2001. Interest income from investment
securities increased by 47.9% to $8,961,986 during 2002 from $6,057,058 in 2001.
Interest income from federal funds sold decreased by 44.6% to $93,069 during
2002 from $167,888 in 2001. Interest expense increased by 35.5% to $7,825,245
during 2002 from $5,773,648 in 2001. Non-interest income, which consists of
service charges and other income, increased by 98.3% to $188,181 during 2002
from $94,895 in 2001. Non-interest expense, which consists of salaries and
employee benefits, occupancy expense and other expense increased by 33.9% to
16
$3,706,839 during 2002 from $2,767,670 in 2001. Net earnings after income taxes
increased to $1,348,865 or $0.42 per share in 2002 from $370,501 or $0.13 per
share in 2001.
Comparison of year ended December 31, 2001 to the period from February 28, 2000
(date of inception) to December 31, 2000.
Bankshares experienced continued asset, investment, loan and deposit
growth during 2001. Total assets increased 202% to $198,226,021 at December 31,
2001 from $65,646,684 at December 31, 2000. This increase is primarily
attributable to an increase in securities of $100,200,328 and an increase in
loans of $30,042,951 during the year. Securities available for sale increased to
$9,476,211 at December 31, 2001 from $0 at December 31, 2000, while securities
held to maturity increased 229% or $90,724,112 to $130,285,681 at December 31,
2001 from $39,561,569 at December 31, 2000. These increases are attributable to
the increase in deposit accounts during the year by 234%, or $124,060,105, from
$52,928,608 at December 31, 2000 to $176,988,713 at December 31, 2001.
Total interest income increased 216% to $9,089,340 for the year ended
December 31, 2001, from $2,874,865 for the ten months ended December 31, 2000.
The increase was due primarily to a rise in interest earning assets, loans and
investments, resulting from a $124,060,105 growth in deposits from 2000 to 2001.
The 234% increase in deposits from 2000 to 2001 is attributable to a general
growth in Kensington Bank's service area and the opening of two additional
locations. In addition, the existing branches have become more established in
their market area. Loan interest income in 2001 increased 331% to $2,864,394
from $665,220 in 2000. Interest income from investment securities increased by
221% to $6,057,058 during 2001 from $1,884,808 in 2000. Interest income from
federal funds sold decreased by 50% to $167,888 during 2001 from $334,837 in
2000. Interest expense increased by 277% to $5,773,648 during 2001 from
$1,530,548 in 2000. Non-interest income, which consists of service charges and
other income, increased by 347% to $94,895 during 2001 from $21,234 in 2000.
Non-interest expense, which consists of salaries and employee benefits,
occupancy expense and other expense increased by 38% to $2,767,670 during 2001
from $2,010,238 in 2000. Net earnings after income taxes increased to $370,501
or $0.13 per share in 2001 from a loss of ($623,709) or ($0.24) per share in
2000.
NET INTEREST INCOME
Net interest income is the difference between interest and fees earned
on interest earning assets, primarily loans and investment securities, and
interest paid on deposits and borrowed funds. Accordingly, net interest income
depends upon the volume of average earning assets and average interest bearing
liabilities and the rates earned or paid on them. Presented on pages 17 and 18
is an analysis of interest earned on average earning assets and the interest
paid on average interest bearing liabilities and the related average rates
earned or paid on them.
Net yield on interest earning assets is net interest revenue, on a tax
equivalent basis, divided by total interest earning assets. This ratio is a
measure of the Bank's effectiveness in pricing interest earning assets and
funding them with both interest and non-interest bearing liabilities. The Bank's
net yield, on a tax equivalent basis, decreased to 2.43% for the year ending
December 31, 2002 compared to 2.63% for the year ending December 31, 2001. The
numerous and rapid interest rates reductions in 2002 caused rates earned on
loans and other interest-earning assets to decrease more rapidly than rates paid
on the liabilities, primarily deposits, used to support those assets.
17
Net interest income totaled $5,995,873 for the year ended December 31,
2002, an 80.8% increase from $3,315,692 at December 31, 2001. Average interest
earning assets and interest bearing liabilities increased from $126,184,000 and
$113,422,000, respectively, for the year ending December 31, 2001 to
$247,257,000 and $230,589,000, respectively, for the year ended December 31,
2002.
PROVISION FOR LOAN LOSSES
The provision for possible loan losses reflects management's current
assessment of risks inherent in the lending process, the level of past due loans
and problem assets. In management's opinion, the allowance for loan losses as of
December 31, 2002, is adequate to absorb potential losses in the loan portfolio.
However, since we have been experiencing rapid growth, many of our loans are too
new to exhibit any problems. The ratio of loan loss allowance to total loans was
0.9% as of December 31, 2001 and 0.9% as of December 31, 2002. Although
management uses the best information available to make determinations with
respect to the allowance for loan losses, future adjustments may be necessary if
economic conditions differ substantially from the assumptions used or adverse
developments arise with respect to Bankshares non-performing or performing
loans. Material additions to Bankshares allowance for loan losses would result
in a decrease in net income and capital.
NON-INTEREST INCOME AND EXPENSES
NON-INTEREST INCOME
YEAR ENDED
DECEMBER 31,
--------------------------
2001 2002
---- ----
Service charges on deposit accounts $ 79,851 $127,101
Gain on call of securities -0- 47,038
Other income 15,044 14,042
--------- --------
Total non-interest income $ 94,895 $188,181
Non-interest income increased $93,286 to $188,181 for the year ended
December 31, 2002 from $94,895 for the year ended December 31, 2001. The
increases in non-interest income are primarily attributable to increases in
service charges on deposit accounts as a result of the $61,258,104 or 35%
increase in deposits from December 31, 2001 to December 31, 2002 and gains
recognized on the call on securities of $47,308 for the year ended December 31,
2002.
NON-INTEREST EXPENSE
YEAR ENDED
DECEMBER 31,
--------------------------
2001 2002
---- ----
Salaries and employee benefits $ 1,533,330 $ 1,890,325
Occupancy expense 212,344 369,748
Equipment expense 232,531 323,978
Data processing 170,297 253,586
Professional fees 112,044 206,888
Other expense 507,124 662,314
------------ ------------
Total non-interest expense $ 2,767,670 $ 3,706,839
18
Non-interest expense increased $939,169 to $3,706,839 for the year
ended December 31, 2002 from $2,767,670 for the year ended December 31, 2001.
The increase in non-interest expenses is attributable to several factors
including the continual hiring of new employees during 2001 and 2002, resulting
in a total of 37 employees at the end of 2001 compared to 42 at the end of 2002,
and the overall growth in total assets to $272,774,400 at December 31, 2002 from
$198,226,021 at December 31, 2001.
Due to strong asset growth relative to fixed expenses during the above
periods, the Bank has been able to reduce the percent of non-interest expenses
as a percent of average assets from 2.1% in 2001 to 1.4% for year ended December
31, 2002. Management does not anticipate any further significant reductions in
non-interest expenses as a percent of average assets.
INCOME TAX EXPENSE (BENEFIT)
The income tax provision for the year ended December 31, 2002 was
$838,350, or 38.3% of earnings before income taxes, compared to $-0- for the
year ended December 31, 2001.
For the period from February 28, 2000 (date of inception) to December
31, 2000, the Company had deferred income tax benefits amounting to $302,104.
However, this benefit was reduced by a valuation allowance of $141,126 in 2000,
as it was more likely than not that all deferred tax benefits would not be
realized. For the year ended December 31, 2001, total current and deferred tax
expense amounted to $141,126, which was reduced by the reversal of the valuation
allowance recorded in 2000. The valuation allowance was reversed in 2001 as a
result of the profitability of the Company in 2001 and the Company's projection
of continued profitability.
The effective tax rates of the year ended December 31, 2001 reflected
above was significantly affected by the recording of and subsequent reversal of
the valuation allowance discussed above. Management believes that the Company's
effective tax rates going forward will approximate 38.5% of income before taxes.
ASSET/LIABILITY MANAGEMENT
Volatile interest rates have made managing interest rate sensitivity of
Kensington Bank's asset and liability portfolios increasingly important. The
principal objectives of asset/liability management are to achieve an optimum and
stable net interest margin, after tax return on assets and return on equity
capital, as well as to maintain adequate liquidity and capital. In order to
accomplish these goals, management attempts to structure Kensington Bank's
balance sheet by shortening maturities of loans and investment securities to
match the corresponding maturities of deposits that are being repriced at market
rates.
Kensington Bank has a comprehensive asset/liability management policy.
Its main objective is to maintain adequate margins of rate sensitivity and
protect capital through the maintenance of liquidity while achieving adequate
profitability. Kensington Bank's asset/liability management committee meets
quarterly and consists of the bank's President and Chief Executive Officer,
Executive Vice President/Chief Financial Officer and Senior Loan Officer.
Minutes are recorded at the meeting with a copy provided to each member of
Kensington Bank's board of directors.
Kensington Bank's asset/liability committee ("ALCO") report is produced
by an outside servicing agent on a quarterly basis. Management provides the
servicing agent with all of Kensington Bank's financial data in order for the
servicing agent to complete the report in a timely manner.
19
Management of the bank and the board of directors review all of the
information provided by the ALCO in assessing exposure of the bank to interest
rate risk. As a part of Kensington Bank's interest rate risk management policy,
the ALCO Committee examines the extent to which its assets and liabilities are
"interest rate-sensitive" and monitors Kensington Bank's interest
rate-sensitivity "gap." An asset or liability is considered to be interest
rate-sensitive if it will reprice or mature within the time period analyzed,
usually one year or less. The interest rate-sensitive gap is the difference
between interest-bearing assets and interest-bearing liabilities scheduled to
mature or reprice within such time period. A gap is considered positive when the
amount of interest rate-sensitive assets exceeds the amount of interest
rate-sensitive liabilities. A gap is considered negative when the amount of
interest rate-sensitive liabilities exceeds interest rate-sensitive assets.
During a period of rising interest rates, a negative gap would tend to adversely
affect net interest income, while a positive gap would tend to result in an
increase in net interest income. During a period of falling interest rates, a
negative gap would tend to result in an increase in net interest income, while a
positive gap would tend to adversely affect net interest income. If the
repricing of Kensington Bank's assets and liabilities were equally flexible and
moved concurrently, the impact of any increase or decrease in interest rates on
net interest income would be minimal.
The following table sets forth the interest rate-sensitive assets and
liabilities of Kensington Bank at December 31, 2002, which are expected to
mature or are subject to repricing in each of the time periods indicated. Dollar
amounts are presented in thousands.
INTEREST SENSITIVITY DUE TO MATURING OR REPRICING
---------------------------------------------------------------------------
MORE
90 DAYS 90-180 181 DAYS THAN 5
OR LESS DAYS TO 1 YEAR 1-3 YEARS 3-5 YEARS YEARS TOTAL
-------- -------- --------- --------- --------- ------ --------
Interest-earning assets:
Federal funds sold $ 417 -- -- -- -- -- $ 417
Investment securities 74,406 $ 33,109 $ 15,749 $ 31,007 $ 30,195 -- 184,466
Loans 52,653 1,578 3,156 6,692 7,626 8,068 79,773
-------- -------- --------- --------- --------- ------ --------
Total interest-earning assets $127,476 34,687 18,905 37,699 37,821 8,068 $264,656
Interest-bearing liabilities:
Interest-bearing demand deposits 21,784 -- -- -- -- -- 21,784
Savings deposits -- -- -- -- 7,738 -- 7,738
Time deposits 56,950 37,918 55,658 24,523 20,114 2,233 197,396
Customer repurchase agreements 863 -- -- -- -- -- 863
Securities sold under agreements
to repurchase 10,000 -- -- -- -- -- 10,000
-------- --------
Total interest-bearing liabilities 89,597 37,918 55,658 24,523 27,852 2,233 208,259
Interest-sensitivity gap per period 37,879 (3,231) (36,753) 13,176 9,969 5,835 26,875
Cumulative gap 37,879 34,648 (2,105) 11,071 21,040 26,875
Cumulative ratio of interest
Earning assets to interest-bearing
Liabilities 1.42 1.00 0.34 1.54 1.36 3.61
Cumulative gap to total assets 0.14 0.13 (0.01) 0.04 0.08 .10
RATE SENSITIVE ASSETS/RATE SENSITIVE LIABILITIES (RSA/RSL)
Kensington Bank is asset sensitive in each of the measured ranges
except the one-year area. Kensington Bank's 90-day and 180-day forward
cumulative RSA/RSL were 1.42% and 1.00% as of December 31, 2002. The balance
sheet becomes well matched at the one year area with a 0.34% RSA/RSL. Kensington
20
Bank's rate sensitivity remains positive overall, but this should not be a
significant concern because Kensington Bank's performance in the simulation
model of our asset/liability-servicing agent indicates that the risk is not
substantial.
LIQUIDITY AND CAPITAL RESOURCES
Kensington Bank continually monitors the maturity of its monetary
assets and liabilities (liquidity management) in an attempt to properly match
source and use availability of funds to provide the best overall yield
opportunities. The role of liquidity management is to ensure that Kensington
Bank has a ready access to sufficient liquid funds to meet normal transaction
requirements, to take advantage of market opportunities requiring flexibility
and speed and to provide a cushion against unforeseeable liquidity needs. The
need for a program of liquidity management has been heightened substantially by
economic development in recent years. Interest rates have become more volatile,
creating major new uncertainties and risks in the decision making process.
Kensington Bank's liquidity ratios, as calculated using the regulatory
formula (essentially liquid assets, except for loans, which can be converted to
cash within one year divided by liabilities due within one year) are set forth
below as of the dates indicated:
DECEMBER 31,
--------------------
2001 2002
---- ----
Liquidity ratio 81.9% 70.9%
Net loan to deposit ratio 27.0% 33.4%
Management believes that short-term and long-term liquidity needs can
be met by active monitoring of the bank's asset/liability position. For the year
ended December 31, 2002, the bank was able to meets its liquidity needs from the
following: Bankshares completed a public sale of 750,000 shares of common stock
realizing proceeds of approximately $5,625,000. $5,400,000 of such funds were
contributed to the capital of the Bank. In addition, the Bank received
$67,289,104 from deposit growth and short-term borrowed funds and $216,137,192
from maturities and calls of investment securities. These sources of funds were
used by the Bank to fund a net increase in loans of $32,339,148 and the purchase
of $262,707,048 in investment securities. Additionally, Kensington Bank has
available, if needed, $5,000,000 of federal funds lines of credits with
correspondent banks.
Since inception, in anticipation of a decline in interest rates, it has
been the policy of the bank to pursue the sale of short-term time deposits. As a
result, a significant portion of the bank's time deposits mature in 2003. The
banks asset/liability policy enables management to continuously evaluate its
interest rate exposure and use various strategies to manage interest rate risks.
With regard to time deposits, management can adjust interest rates paid on new
or renewing certificates of deposit, set withdrawal penalties at levels to
discourage early withdrawals and eliminate any dependency on public funds from
government agencies. Since time deposits are a competitive product among banks,
the most common method for managing interest rate exposure is to increase or
decrease interest rate pricing as the need for funds increases or decreases.
Therefore, we do not expect any adverse effect from early withdrawals or the
non-renewing of time deposits. If, for some reason, a significant portion of the
short-term time deposits were not renewed or covered by the sale of new time
deposits, the bank would be required to sell a portion of its investment
securities to meet the payment of such obligations.
21
In accordance with risk-based capital guidelines by the FDIC Rules and
Regulations, Kensington Bank is expected to meet a minimum ratio of qualifying
total capital to risk-weighted assets of 8%, of which at least four percentage
points should be in the form of core capital (Tier I).
A bank is considered well capitalized if it has a total risk-based
capital ratio of 10% or greater; and has a Tier I risk-based capital ratio of 6
% or greater; and has a leveraged ratio of 5% or greater (8% for banks in
operation for less than three years) and is not subject to any corrective
agreement or order.
The following table summarizes the risk-based and leverage ratios of
Kensington Bank as of December 31, 2002 (dollars in thousands):
Tier I Capital
Common Shareholders' equity less intangible assets $ 22,094
Tier II Capital
Allowance for Loan Loss 700
--------
Total Capital $ 22,794
Risk-adjusted assets $126,172
Risk-based capital ratios:
Tier I Capital 17.51%
Total Capital 18.07%
Leverage Ratio 8.80%
The various components of Kensington Bank's regulatory capital and
certain ratios are shown below on the dates indicated (dollars in thousands):
DECEMBER 31,
--------------------
2001 2002
---- ----
Equity capital $ 15,267 $22,094
Allowance for loan losses 410 700
Primary capital 15,677 $22,794
Primary capital to total assets 7.91% 8.36%
Equity capital to total assets 7.70% 8.10%
EFFECTS OF INFLATION
As is the case with most financial institutions, Kensington Bank's
monetary assets exceed monetary liabilities. Thus, a loss in purchasing power
occurs during periods of high inflation. Inflation impacts the interest rate
structure. The effect of inflation on Kensington Bank's non-monetary assets
(primarily premises and equipment) has not been material.
NET UNREALIZED DEPRECIATION ON AVAILABLE-FOR-SALE (AFS) SECURITIES
Investment securities that management has the ability and intent to
hold to maturity are classified as held-to-maturity and are reported at cost,
adjusted for amortization of premiums and accretion of discounts using methods
approximating the interest method. Other investment securities are classified as
available-for-sale and are reported at fair value. As of December 31, 2002,
Kensington Bank would have incurred a net gain after tax effect of $1,072,295 if
it had sold and liquidated its entire investment portfolio. Each month
Kensington Bank reprices its investment portfolio and by book entry makes the
current market price adjustment to net unrealized gains/losses for all
securities classified as available-for-sale.
22
ITEM 7(a). QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
Bankshare's profitability depends to a large extent on Kensington
Bank's net interest income, which is the difference between income on
interest-earning assets such as real estate and construction loans and
investment securities, and expense on interest-bearing liabilities such as
deposits and borrowings. Like most financial institutions, we are affected by
changes in general interest rate levels and by other economic factors beyond our
control. Net interest income may be reduced if (i) more interest-earning assets
than interest-bearing liabilities reprice or mature during a time when interest
rates are declining or (ii) more interest-bearing liabilities than
interest-earning assets reprice or mature during a time when interest rates are
rising. As of December 31, 2001, interest-bearing liabilities maturing or
repricing within one year exceeded interest-earning assets maturing or repricing
within one year by $67 million, or 34% of interest-earning assets.
Changes in the difference between short and long-term interest rates
may also harm business. For example, short-term deposits may be used to fund
longer-term loans. When differences between short-term and long-term interest
rates shrink or disappear, the spread between rates paid on deposits and
received on loans could narrow significantly, decreasing net interest income.
A substantial portion of loans are real estate related loans in the
Tampa Bay area. Adverse changes in the real estate market in this area could
lead to higher levels of problem loans and charge-offs, and adversely affect
earnings and financial condition.
A substantial amount of loans are secured by real estate as collateral.
At December 31, 2002, approximately 62.5% of loans were real estate loans and
29.4% were construction loans, which often have much more risk than many other
type of loans. This concentration exposes us to the risk that adverse
developments in the real estate market, or in the general economic conditions in
the Tampa Bay market, could increase the levels of nonperforming loans and
charge-offs, and reduce loan demand and deposit growth. In that event,
Bankshares would likely experience lower earnings or losses. It is anticipated
that for the foreseeable future, real estate and construction loans will
continue to represent approximately 90% of the loan portfolio.
In originating loans, there is a substantial likelihood that certain
losses will be experienced. The risk of loss will vary with, among other things,
general economic conditions, the type of loan being made, the creditworthiness
of the borrower over the term of the loan and, in the case of a collateralized
loan, the quality of the collateral for the loan. Management maintains an
allowance for loan losses based on, among other things, historical experience,
an evaluation of economic conditions, and regular reviews of delinquencies and
loan portfolio quality. Based upon such factors, management makes various
assumptions and judgments about the ultimate collectability of the loan
portfolio and provides an allowance for potential loan losses based upon a
percentage of the outstanding loan balances and for specific loans when their
ultimate collectability is considered questionable. Since certain lending
activities involve greater risks, the percentage applied to specific loan types
may vary. In addition, since Kensington Bank has been experiencing rapid growth,
many of the loans are too new to exhibit any problems. Material additions to the
allowance for loan losses would result in a decrease in net income and capital.
ITEM 8. FINANCIAL STATEMENTS
The information required by this Item is found immediately following
the signature page of this Report.
23
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
PART III
ITEM 10. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS;
COMPLIANCE WITH SECTION 16(a) OF THE EXCHANGE ACT
The following table sets forth the names and ages of the directors and
executive officers of Bankshares and Kensington Bank (Each, a "Director" and/or
"Officer"), the positions and offices that each Director and Officer, and the
period during which each served in such positions and offices.
POSITION
NAME AGE BANKSHARES BANK
- -------------------------------- --- -------------------------- -------------------------------
Gerald K. Archibald (1)(3)(4)(5) 62 President, Chief President, Chief Executive
Executive Officer and Officer and Chairman Executive
Chairman Vice President, Chief Financial
Officer, Secretary and Director
William R. Bender, Jr. (1)(2)(4) 55 Secretary/Treasurer Chief Financial Officer,
Secretary and Director
Frank T. Burke 58 Executive Vice President and
Senior Loan Officer
Gary L. Blackwell (1)(4) 58 Director Director
Bryan Gates(2)(5) 58 Director
Ronald S. Hockman 50 Director
D. Dewey Mitchell(2)(5) 45 Director Director
Dennis A. Taylor(2) 52 Director
- --------------------------
(1) Member of Executive Committee of Bank.
(2) Member of Audit Committee of Bank. The Audit Committee assists the Board in
such areas as accounting and financial reporting practices, internal
controls and compliance with financial policies of Kensington Bank.
(3) Kensington Bank has a loan committee, which consists of Chairman and any
three Directors.
(4) Member of Investment Committee of Bank.
(5) Member of Compensation Committee of Bank.
Directors of Bankshares are elected for one-year terms. Kensington Bank
has a staggered board and its directors are elected for three-year term.
Gerald K. Archibald. Mr. Archibald may be deemed the founder of
Bankshares and Kensington Bank and has been President, Chief Executive Officer
and Chairman of the Board of each since their inception. Mr. Archibald began his
career in banking in 1961 as a bank examiner with the State of Florida. In 1967,
he went to work for Peoples Bank, Tampa, Florida serving as Executive Vice
President/ Cashier. From 1985 to 1998, Mr. Archibald served as President, Chief
Executive Officer, and Chairman of Village Bank of Florida when it was sold to
Regions Bank. Mr. Archibald resides in Tampa, Florida.
24
William R. Bender, Jr. Mr. Bender has been the Secretary/Treasurer of
Bankshares since its inception and Executive Vice President, Chief Financial
Officer and director of Kensington Bank since its inception. Prior thereto, he
was Senior Executive Vice President and Chief Financial Officer of Village Bank
of Florida from 1985 to 1998 when it was sold to Regions Bank. He is a graduate
of the University of South Florida and prior to joining Village Bank worked as a
bank examiner with the State of Florida from 1974 to 1985. Mr. Bender resides in
Tampa, Florida.
Frank T. Burke. Mr. Burke joined First Kensington Bank in March 2001.
Prior thereto, he spent 17 years with Republic Bank, St. Petersburg, Florida
where he rose to Senior Vice President and Lending Officer. Before that, he
spent 13 years with Flagship Bank, Pinellas County, Florida where he rose to
Executive Vice President. He is a graduate of the University of Florida,
Gainesville, Florida and of the School of Banking of the South, Louisiana State
University, Baton Rouge, Louisiana. Mr. Burke resides in St. Petersburg,
Florida.
Gary L. Blackwell. Mr. Blackwell has been a real estate developer,
builder and investor for over 35 years in the Tampa Bay area. He holds a real
estate license, general contractor, electrical contractor and plumbing
contractor licenses. He has served as a director on the boards of Ellis First
National Bank, New Port Richey, Florida; Bank of Pasco County, New Port Richey,
Florida; First National Bank of the South, Wesley Chapel, Florida; and Village
Bank of Florida, Tampa, Florida. He has been a director of Bankshares and
Kensington Bank since each company's inception. Mr. Blackwell resides in New
Port Richey, Florida.
Bryan Gates. Mr. Gates is a federally authorized tax practitioner, tax
advisor and since 1973 chief executive officer and owner of Tax Analysis
Advisory Services, Inc. From 1963 to 1972, he served with the Internal Revenue
Service in a variety of positions. He has written and lectured extensively on
tax issues. In addition, Mr. Gates has both authored and edited several
authoritative tax guides. He is a graduate of Florida State University,
Tallahassee, Florida and also holds a real estate broker's license. He has been
a director of First Kensington Bank since its inception. Mr. Gates resides in
Clearwater, Florida.
Ronald S. Hockman. Mr. Hockman has been involved in the field of
insurance since completing his military career as a member of the U. S. Navy in
1972. In 1977, he joined the Harmon Insurance Agency, Inc. as an insurance agent
and in 1981 he purchased the company. The company is now known as Hockman Lackey
Insurance, Inc. and specializes in commercial and industrial insurance. He has
been a director of Bankshares since January 2002. Mr. Hockman resides in Tampa,
Florida.
D. Dewey Mitchell. Mr. Mitchell is a realtor and has been President of
Prudential Tropical Realty in New Port Richey, Florida since 1984. He is a
graduate of the University of Alabama in Tuscaloosa, Alabama and holds a
Certified Commercial Investment Member certification from the National
Association of Realtors. He served as a director of Village Bank of Florida from
1990 to 1992 and a director of Barnett Bank of Pasco from 1992 to 1998. He has
been a director of Bankshares and Kensington Bank since each company's
inception. Mr. Mitchell resides in New Port Richey, Florida.
Dennis A. Taylor. Mr. Taylor is currently the Chief Executive Officer
of Superior Residence, Inc., a developer and operator of assisted living
facilities. From 1995 to December 1998, he was Chief Executive Officer of North
Bay Hospital in New Port Richey, Florida and from 1986 to 1995 he was Chief
Executive Officer of HCA Oak Hill Hospital in Springhill, Florida. From 1987 to
1998, he was a director of Barnett Bank of the Suncoast, N.A., Brooksville,
Florida. He has been a director of Bankshares since its inception. Mr. Taylor
resides in Springhill, Florida.
25
INDEMNIFICATION
As permitted by the Florida Business Corporation Act, Bankshares
By-laws provide for the indemnification of its officers and directors to any
threatened, pending or completed action, suit or proceeding, whether civil,
criminal, administrative or investigative, by reason of the fact that such
person is or was an officer or director of Bankshares, against expenses
(including attorney's fees), judgments, fines and amounts paid in settlement
actually or reasonably incurred by such person or in connection with such
action, suit or proceeding if such person acted in good faith and in a manner
such person reasonably believed to be in, or not opposed to, the best interests
of Bankshares and, with respect to any criminal action or proceeding, had no
reasonable cause to believe such person's conduct was unlawful.
STOCK OPTION PLAN
We have adopted an Incentive and Non-Statutory Stock Option Plan, under
which 350,000 shares of common stock are reserved for issuance upon exercise of
stock options. The plan is designed as a means to retain and motivate key
employees. The Board of Directors administer and interpret the plan. Options may
be granted to all employees and directors of Bankshares and Kensington Bank, and
others who perform services for Bankshares and Kensington Bank.
The Plan provides for the granting of both incentive stock options (as
defined in Section 422 of the Internal Revenue Code) and non-statutory
(non-incentive) stock options. Options are granted under the Plan on such terms
and at such prices as determined by the Board of Directors, except that the per
share exercise price of incentive stock options cannot be less than the fair
market value of the common stock on the date of grant. Each option is
exercisable after the period or periods specified in the option agreement, but
no option may be exercisable after the expiration of ten years from the date of
grant. Options granted under the Plan are not transferable other than by will or
by the laws of descent and distribution.
In September 2002, options were granted to directors for the purchase
of 30,000 shares of common stock and to employees for the purchase of 75,000
shares of common stock. All options are exercisable at $7.50 per share, the fair
market value on the date of grant. In addition, all options expire ten years
from the date of grant and vest and become exercisable 10% in 2004, 2005, and
2006 and fully vested and exercisable in 2007. No options were granted as of
December 31, 2001.
ITEM 11. EXECUTIVE COMPENSATIONS
Bankshares pays no compensation to its executive officers. All
compensation is paid by Kensington Bank. The following table provides
information with respect to aggregate direct remuneration paid by Kensington
Bank to the officers listed below whose aggregate remuneration from Kensington
Bank exceeded $100,000 during 2002. Remuneration information is also provided
with respect to Kensington Bank's executive officers as a group.
ANNUAL COMPENSATION
NAME AND PRINCIPAL POSITION YEAR SALARY BONUS
---------- -------- ----------
Gerald K. Archibald, President (1) President and 2002 $163,000(2) $ 25,368
CEO of Bankshares and Kensington Bank
Francis T. Burke, II, Executive Vice President 2002 125,000 10,147
Kensington Bank
All Officers as a group, (3 Persons) 323,000(3) 36,598
26
(1) Kensington Bank has a $500,000 keyman life insurance policy on Mr.
Archibald, payable to Kensington Bank.
(2) Includes directors' fees of $13,000. Directors of Kensington Bank
receive a fee of $500 per board meeting and $100 per committee meeting
attended.
(3) Includes directors' fees aggregating $23,500.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND
RELATED STOCKHOLDER MATTERS
The following table sets forth as of December 31, 2002, information
with respect to the beneficial ownership of the common stock by (i) each person
who is known by Bankshares to be the beneficial owner of more than 5% of
Bankshares' outstanding shares of common stock, (ii) each director and executive
officer of Bankshares and (iii) all directors and executive officers of
Bankshares as a group. Unless otherwise indicated, each of the shareholders
listed below has sole voting and investment power with respect to the shares of
common stock beneficially owned.
NUMBER AND PERCENT OF SHARES
BENEFICIALLY OWNED
------------------
NAME AND ADDRESS NUMBER PERCENT
---------------- ------- -------
Gerald K. Archibald(a) 306,242 8.25
William R. Bender, Jr.(a) 19,466 0.53
Gary L. Blackwell 274,372 7.40
6915 SR 54
New Port Richey, Florida 34653
Ronald S. Hockman 164,867 4.44
5680 W. Cypress Street, Suite A
Tampa, Florida 33607
D. Dewey Mitchell 158,894 4.28
4532 US Highway 19, 2nd Floor
New Port Richey, Florida 34652
Carl Minieri 200,000 5.39
29656 US Highway 19 No.
Clearwater, Florida 33761
Joseph Idicula, M.D. 200,000 5.39
6015 Patricia Place
Springhill, Florida 34607
Director and executive officers as a group (5 persons) 923,841 24.90
(a) The address of Messrs. Archibald and Bender is the address of Bankshares
executive offices, 13246 N. Dale Mabry Highway, Tampa, Florida 33624.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Bankshares directors and their affiliates, including corporations and
firms of which they are officers or in which they and/or their families have an
ownership interest, are customers of Kensington Bank. These persons,
corporations and firms have had transactions in the ordinary course of business
with Kensington Bank, including borrowing of material amounts, all of which, in
the opinion of management, were on substantially the same terms, including
interest rates and collateral, as those prevailing at the time for comparable
transactions with unaffiliated persons and did not involve more than normal risk
of collectability
27
or present other unfavorable features. The aggregate amount of loans outstanding
by the subsidiary Bank to directors, officers and related parties of Bankshares
and Bank as of December 31, 2002, was $2,201,000.
All such transactions conform to the restrictions and limitations
imposed by the Financial Institutions Regulatory and Interest Rate Control Act
of 1978. For a discussion of the restrictions and limitations imposed by that
act, see "Description of Business - Supervision and Regulation."
In June 2002, Messrs. Archibald, Blackwell, Hockman and Mitchell loaned
an aggregate of $4,000,000 to Bankshares. Such loans are evidenced by three
notes, a note to Mr. Archibald for $1.5 million, a note to Mr. Blackwell for
$1.5 million and a note to the four directors for $1 million The notes, although
due and payable on December 31, 2003, were paid from the proceeds from the
company's initial public offering which was consummated in September 2002.
Interest was imputed at Bankshares' incremental borrowing rate of 6.5%.
ITEM 14. CONTROLS AND PROCEDURES
The company's principal executive officer and principal financial
officer evaluated the company's disclosure controls and procedures (as defined
in Rule 13a-14(c) and 15d-14(c) under the Securities Exchange Act of 1934, as
amended) as of a date within 90 days before the filing of this Annual Report
(the Evaluation Date). Based on that evaluation, the principal executive officer
and principal financial officer of the company concluded that, as of the
Evaluation Date, the disclosure controls and procedures in place at the company
were adequate to ensure that information required to be disclosed by the
company, including its consolidated subsidiary, in reports that the company
files under the Exchange Act, is recorded, processed, summarized and reported on
a timely basis in accordance with applicable rules and regulations. The company
has not made any significant changes to its internal controls subsequent to the
Evaluation Date. The company has not identified any significant deficiencies or
material weaknesses or other factors that could significantly affect these
controls, and therefore, no corrective action was taken.
PART IV
ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a) Index to Exhibits
3.1 Articles of Incorporation of Kensington Bankshares, Inc.*
3.2 By-Laws of Kensington Bankshares, Inc.*
10.1 Copy of Agreement for Stock Exchange between the Registrant
and First Kensington Bank*
10.2 Copy of Registrant's Incentive and Non-Statutory Stock Option
Plan*
23.1 Consent of Accountants
99.1 Certification of CEO Pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002.
99.2 Certification of CFO Pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002.
* Filed as Exhibits to the Company's Registration Statement on Form
SB-2 (File No. 333-89952) ordered effective August 7, 2002.
(b) Financial Statement Schedule
None
(c) Reports on Form 8-K
None
28
SIGNATURES
In accordance with the Section 13 or 15(d) of the Exchange Act, the
registrant has caused this report to be signed on behalf by the undersigned,
thereunto duly authorized.
Date: March 26, 2003
KENSINGTON BANKSHARES, INC.
By: /s/ Gerald K. Archibald
---------------------------
Gerald K. Archibald
President
By: /s/ William R. Bender, Jr.
---------------------------
William R. Bender, Jr.
Chief Financial Officer
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed below by the following persons on behalf of the
registrant and in the capacities on March 26, 2003:
Signatures Title
/s/ Gerald K. Archibald Chief Executive
- -------------------------------
Gerald K. Archibald Officer and Director
/s/ William R. Bender, Jr. Chief Financial and
- -------------------------------
William R. Bender, Jr. Accounting Officer
/s/ Gary L. Blackwell Director
- -------------------------------
Gary L. Blackwell
/s/ D. Dewey Mitchell Director
- -------------------------------
D. Dewey Mitchell
/s/ Ronald S. Hockman Director
- -------------------------------
Ronald S. Hockman
29
CERTIFICATION
I Certify that:
1. I have reviewed this Annual Report on Form 10-KSB of Kensington
Bankshares, Inc.
2. Based on my knowledge, this Annual Report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statement made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this Annual
Report;
3. Based on my knowledge, the Financial Statements, and other financial
information included in the Annual Report fairly present in all material
respects, the financial condition, results of operations and cash flows of the
registrant as of and for the periods presented in this Annual Report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13A-14 and 15D-14 for the registrant and we have:
a) Designed such disclosure controls and procedures to ensure
that material information relating to the registrant, including its consolidates
subsidiaries, is made known to us by others within those entities, particularly
during the period in which this Annual Report is being prepared;
b) Evaluated the effectiveness of the registrant's disclosure
controls and procedures as of a date within 90 days prior to the filing date of
this Annual Report (the "Evaluation Date") and;
c) Presented in this Annual Report our conclusions about the
effectiveness of the disclosure controls and procedures based on our evaluation
as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based
on our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors (or persons performing the
equivalent function):
a) All significant deficiencies in the design or operation of
internal controls, which could adversely affect the registrant's ability to
record, process, summarize and report financial data and have identified for the
registrant's auditors any material weaknesses in internal controls; and
b) Any fraud, whether or not material, that involves management
or other employees who have a significant role in the registrant's internal
controls; and
6. The registrant's other certifying officers and I have indicated in this
Annual Report whether or not there were significant changes in internal controls
or in other factors that could significantly affect internal controls subsequent
to the date of our most recent evaluation, including any corrective actions with
regard to significant deficiencies and material weaknesses.
Date: March 26, 2003
KENSINGTON BANKSHARES, INC.
By: /s/ Gerald K. Archibald
---------------------------
Gerald K. Archibald
President
30
CERTIFICATION
I Certify that:
1. I have reviewed this Annual Report on Form 10-KSB of Kensington
Bankshares, Inc.
2. Based on my knowledge, this Annual Report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statement made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this Annual
Report;
3. Based on my knowledge, the Financial Statements, and other financial
information included in the Annual Report fairly present in all material
respects, the financial condition, results of operations and cash flows of the
registrant as of and for the periods presented in this Annual Report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13A-14 and 15D-14 for the registrant and we have:
a) Designed such disclosure controls and procedures to ensure
that material information relating to the registrant, including its consolidates
subsidiaries, is made known to us by others within those entities, particularly
during the period in which this Annual Report is being prepared;
b) Evaluated the effectiveness of the registrant's disclosure
controls and procedures as of a date within 90 days prior to the filing date of
this Annual Report (the "Evaluation Date") and;
c) Presented in this Annual Report our conclusions about the
effectiveness of the disclosure controls and procedures based on our evaluation
as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based
on our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors (or persons performing the
equivalent function):
a) All significant deficiencies in the design or operation of
internal controls, which could adversely affect the registrant's ability to
record, process, summarize and report financial data and have identified for the
registrant's auditors any material weaknesses in internal controls; and
b) Any fraud, whether or not material, that involves management
or other employees who have a significant role in the registrant's internal
controls; and
6. The registrant's other certifying officers and I have indicated in this
Annual Report whether or not there were significant changes in internal controls
or in other factors that could significantly affect internal controls subsequent
to the date of our most recent evaluation, including any corrective actions with
regard to significant deficiencies and material weaknesses.
Date: March 26, 2003
KENSINGTON BANKSHARES, INC.
By: /s/ William R. Bender, Jr.
---------------------------
William R. Bender, Jr.
Chief Financial Officer
31
KENSINGTON BANKSHARES, INC. AND SUBSIDIARY
SPRING HILL, FLORIDA
CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2002 AND 2001
CONTENTS
Page
Independent Auditor's Report F-2
Consolidated Statements of Financial Condition F-3
Consolidated Statements of Income F-4
Consolidated Statements of Changes in Stockholders' Equity F-5
Consolidated Statements of Cash Flows F-6
Notes to Consolidated Financial Statements F-7
INDEPENDENT AUDITOR'S REPORT
To the Board of Directors
Kensington Bankshares, Inc.
and Subsidiary
Spring Hill, Florida
We have audited the accompanying consolidated statements of financial condition
of Kensington Bankshares, Inc. and Subsidiary as of December 31, 2002 and 2001,
and the related consolidated statements of income, changes in stockholders'
equity, and cash flows for the years then ended. These financial statements are
the responsibility of the Company's management. Our responsibility is to express
an opinion on these financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States of America. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the consolidated financial position of Kensington
Bankshares, Inc. and Subsidiary as of December 31, 2002 and 2001, and the
consolidated results of their operations and their cash flows for the years then
ended in conformity with accounting principles generally accepted in the United
States of America.
/s/ Saltmarsh, Cleaveland, & Gund
January 10, 2003
Pensacola, Florida
F-2
KENSINGTON BANKSHARES, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
DECEMBER 31, 2002 AND 2001
ASSETS
2002 2001
----------------- ---------------
Cash and due from banks $ 1,896,344 $ 2,419,010
Interest-bearing deposits in bank 50,562 -0-
Federal funds sold 417,495 3,416,451
----------------- ---------------
Cash and cash equivalents 2,364,401 5,835,461
Securities held to maturity 152,440,397 130,285,686
Securities available for sale 32,025,356 9,476,211
Loans receivable, net of allowance for loan losses
of $700,000 in 2002 and $410,000 in 2001 79,772,812 47,723,664
Accrued interest receivable 3,163,855 2,166,929
Premises and equipment 2,629,612 2,515,147
Deferred income taxes 155,333 170,178
Other assets 222,634 52,745
----------------- ---------------
TOTAL ASSETS $ 272,774,400 $ 198,226,021
================= ===============
LIABILITIES AND STOCKHOLDERS' EQUITY
LIABILITIES:
Noninterest-bearing demand deposits $ 9,513,959 $ 7,421,218
Interest-bearing demand deposits 23,598,849 11,526,600
Savings deposits 7,737,984 4,732,189
Other time deposits 197,396,025 153,308,706
----------------- ---------------
Total deposits 238,246,817 176,988,713
Securities sold under agreements to repurchase 10,000,000 4,969,000
Federal funds purchased 1,000,000 -0-
Customer repurchase agreements 863,057 748,323
Accrued interest payable 290,052 249,388
Accrued expenses and other liabilities 74,991 18,500
----------------- ---------------
Total liabilities 250,474,917 182,973,924
----------------- ---------------
COMMITMENTS AND CONTINGENCIES - -
STOCKHOLDERS' EQUITY:
Common stock, $.01 par value; 10,000,000 shares
authorized, 3,710,000 shares in 2002 and 2,960,000
shares in 2001 issued and outstanding 37,100 29,600
Additional paid-in-capital 21,107,902 15,490,402
Retained earnings (deficit) 1,095,657 (253,208)
Accumulated other comprehensive income (loss) 58,824 (14,697)
----------------- -----------------
Total stockholders' equity 22,299,483 15,252,097
----------------- -----------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 272,774,400 $ 198,226,021
================= =================
The accompanying notes are an integral
part of these consolidated financial statements.
F-3
KENSINGTON BANKSHARES, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF INCOME
YEARS ENDED DECEMBER 31, 2002 AND 2001
2002 2001
----------------- -----------------
INTEREST INCOME:
Loans receivable and fees on loans $ 4,766,063 $ 2,864,394
Investment securities 8,961,986 6,057,058
Federal funds sold 93,069 167,888
----------------- -----------------
Total interest income 13,821,118 9,089,340
----------------- -----------------
INTEREST EXPENSE:
Deposits 7,648,636 5,458,689
Other 176,609 314,959
----------------- -----------------
Total interest expense 7,825,245 5,773,648
----------------- -----------------
Net interest income 5,995,873 3,315,692
PROVISION FOR LOAN LOSSES 290,000 272,416
----------------- -----------------
Net interest income after provision for loan losses 5,705,873 3,043,276
----------------- -----------------
NONINTEREST INCOME:
Service charges on deposit accounts 127,101 79,851
Gain on call of securities 47,038 -0-
Other income 14,042 15,044
----------------- -----------------
Total noninterest income 188,181 94,895
----------------- -----------------
NONINTEREST EXPENSES:
Salaries and employee benefits 1,890,325 1,533,330
Occupancy expense 369,748 212,344
Equipment expense 323,978 232,531
Data Processing 253,586 170,297
Professional fees 206,888 112,044
Other expense 662,314 507,124
----------------- -----------------
Total noninterest expenses 3,706,839 2,767,670
----------------- -----------------
INCOME BEFORE INCOME TAX EXPENSE 2,187,215 370,501
INCOME TAX EXPENSE 838,350 -0-
----------------- -----------------
NET INCOME $ 1,348,865 $ 370,501
================= =================
EARNINGS PER SHARE OF COMMON STOCK $ .42 .13
================= =================
The accompanying notes are an integral
part of these consolidated financial statements.
F-4
KENSINGTON BANKSHARES, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
YEARS ENDED DECEMBER 31, 2002 AND 2001
Accumulated
Other
Number Additional Retained Comprehensive
of Common Paid-In Earnings Income
Shares Stock Capital (Deficit) (Loss) Total
------------- ----------- ------------- ------------- --------------- ------------
JANUARY 1, 2001 2,560,000 $ 25,600 $ 13,094,400 $ (623,709) $ -0- $ 12,496,291
----------
Net income 370,501 370,501
Other comprehensive income
(loss), net of tax:
Change in unrealized gain (loss)
on securities available for
sale, net of tax of $9,200 (14,697) (14,697)
------------
TOTAL COMPREHENSIVE INCOME 355,804
Issuance of common stock 400,000 4,000 2,396,002 2,400,002
------------- ----------- ------------- ------------- --------------- ------------
BALANCE, DECEMBER 31, 2001 2,960,000 29,600 15,490,402 (253,208) $ (14,697) 15,252,097
------------
Net income 1,348,865 1,348,865
Other comprehensive income
(loss), net of tax:
Change in unrealized gain (loss)
on securities available for
sale, net of tax of $46,025 73,521 73,521
------------
TOTAL COMPREHENSIVE INCOME 1,422,386
Issuance of common stock 750,000 7,500 5,617,500 5,625,000
------------- ----------- ------------- ------------- --------------- ------------
BALANCE, DECEMBER 31, 2002 3,710,000 $ 37,100 $ 21,107,902 $ 1,095,657 $ 58,824 $ 22,299,483
============= =========== ============= ============= =============== ============
The accompanying notes are an integral
part of these consolidated financial statements.
F-5
KENSINGTON BANKSHARES, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, 2002 AND 2001
2002 2001
------------------ -----------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 1,348,865 $ 370,501
Adjustments to reconcile net income to net cash
provided by (used) in operating activities -
Depreciation and amortization 243,639 176,457
Provision for loan losses 290,000 272,416
Net amortization on securities 1,985,546 8,261
Deferred tax benefit (31,180) -0-
Net change in -
Accrued interest receivable (996,926) (1,353,983)
Other assets (169,889) 3,592
Accrued interest payable and other liabilities 97,155 96,432
----------------- -----------------
Net cash provided by (used in) operating activities 2,767,210 (426,324)
----------------- -----------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of available-for-sale securities (82,149,996) -0-
Purchases of held-to-maturity securities (180,557,052) (201,313,150)
Proceeds from maturities and calls of available-for-sale securities 58,610,349 3,450,000
Proceeds from maturities and calls of held-to-maturity securities 157,526,843 97,630,664
Net increase in loans (32,339,148) (30,315,367)
Purchases of premises and equipment (358,104) (850,676)
----------------- -----------------
Net cash used in investing activities (79,267,108) (131,398,529)
----------------- -----------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net increase in demand and savings deposits 17,170,785 14,377,853
Net increase in time deposits 44,087,319 109,682,252
Net increase in securities sold under agreements to repurchase 5,031,000 4,969,000
Net increase in federal funds purchased 1,000,000 -0-
Net increase in customer repurchase agreements 114,734 697,994
Proceeds from issuance of additional common stock 5,625,000 2,400,002
----------------- -----------------
Net cash provided by financing activities 73,028,838 132,127,101
----------------- -----------------
NET CHANGE IN CASH AND CASH EQUIVALENTS (3,471,060) 302,248
CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR 5,835,461 5,533,213
----------------- -----------------
CASH AND CASH EQUIVALENTS AT END OF YEAR $ 2,364,401 $ 5,835,461
================= =================
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Interest paid on deposits $ 7,606,767 $ 5,320,136
================= =================
Other interest paid $ 177,814 $ 313,744
================= =================
Income taxes paid $ 1,010,350 $ -0-
================= =================
The accompanying notes are an integral
part of these consolidated financial statements.
F-6
KENSINGTON BANKSHARES, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2002 AND 2001
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Principles of Consolidation:
The consolidated financial statements include the accounts of Kensington
Bankshares, Inc. (the "Company") and its wholly-owned subsidiary, First
Kensington Bank (the "Bank"). All material intercompany balances and
transactions have been eliminated during consolidation.
Organization:
The Company was incorporated on January 26, 2001, as a bank holding
company. In January 2002, the Company commenced operations and the
stockholders of the Bank received four shares of common stock of the
Company for each share of common stock of the Bank. The transaction
represented an exchange of shares between enterprises under common control.
The financial statements reflect the consolidated results of operations as
if the combination had occurred at the date of Bank inception.
On February 28, 2000, (date of inception), the organizers of First
Kensington Bank (the "Bank") received final approval from the Federal
Deposit Insurance Corporation and the State of Florida Department of
Banking and Finance to conduct banking transactions. These consolidated
financial statements reflect the operations of the Company for the years
ended December 31, 2002 and 2001.
Nature of Business:
The Company is a one-bank holding company which provides a full range of
banking services to individuals and businesses in the Tampa Bay area
through its wholly-owned subsidiary, First Kensington Bank. The Bank is
regulated by various Federal and State agencies and is subject to periodic
examinations by those regulatory authorities.
Accounting Estimates:
The preparation of financial statements in conformity with generally
accepted accounting principles 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. Material estimates that are particularly susceptible to
significant change in the near term relate primarily to the determination
of the allowance for loan losses and the valuation of deferred tax assets.
Cash Equivalents:
For purposes of the consolidated statements of cash flows, cash and cash
equivalents include cash and balances due from banks, interest-bearing
deposits in banks, and federal funds sold, all of which mature within
ninety days.
F-7
KENSINGTON BANKSHARES, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2002 AND 2001
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Securities:
Debt securities that management has the positive intent and ability to hold
to maturity are classified as "held to maturity" and recorded at amortized
cost. Securities not classified as held to maturity are classified as
"available for sale" and recorded at fair value, with unrealized gains and
losses excluded from earnings and reported in other comprehensive income.
Purchase premiums and discounts are recognized in interest income using the
interest method over the terms of the securities. Gains and losses on the
sale of securities are recorded on the trade date and are determined using
the specific identification method.
Loans Receivable:
The Bank grants real estate, commercial and consumer loans to customers. A
substantial portion of the loan portfolio is represented by commercial real
estate loans throughout the Tampa Bay area. The ability of the Bank's
debtors to honor their contracts is dependent upon the real estate and
general economic conditions in this area.
Loans that management has the intent and ability to hold for the
foreseeable future or until maturity or pay-off generally are reported at
their outstanding unpaid principal balances adjusted for charge-offs, the
allowance for loan losses, and any deferred fees or costs on originated
loans. Interest income is accrued on the unpaid principal balance. Loan
origination fees, net of certain direct origination costs, are deferred and
recognized as an adjustment of the related loan yield using the interest
method.
The accrual of interest on real estate and commercial loans is discontinued
at the time the loan is 90 days delinquent unless the credit is
well-secured and in process of collection. Other personal loans are
typically charged-off no later than 180 days past due. In all cases, loans
are placed on nonaccrual or charged-off at an earlier date if collection of
principal or interest is considered doubtful.
All interest accrued but not collected for loans that are placed on
nonaccrual or charged-off is reversed against interest income. The interest
on these loans is accounted for on the cash-basis or cost-recovery method,
until qualifying for return to accrual. Loans are returned to accrual
status when all the principal and interest amounts contractually due are
brought current and future payments are reasonably assured.
Allowance for Loan Losses:
The allowance for loan losses is established as losses are estimated to
have occurred through a provision for loan losses charged to earnings. Loan
losses are charged against the allowance when management believes the
uncollectibility of a loan balance is confirmed. Subsequent recoveries, if
any, are credited to the allowance.
F-8
KENSINGTON BANKSHARES, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2002 AND 2001
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Allowance for Loan Losses (Continued):
The allowance for loan losses is evaluated on a regular basis by management
and is based upon management's periodic review of the collectibility of the
loans in light of historical experience, the nature and volume of the loan
portfolio, adverse situations that may affect the borrower's ability to
repay, estimated value of any underlying collateral and prevailing economic
conditions. This evaluation is inherently subjective as it requires
estimates that are susceptible to significant revisions as more information
becomes available.
A loan is considered impaired when, based on current information and
events, it is probable that the Bank will be unable to collect the
scheduled payments of principal or interest when due according to the
contractual terms of the loan agreement. Factors considered by management
in determining impairment include payment status, collateral value, and the
probability of collecting scheduled principal and interest payments when
due. Loans that experience insignificant payment delays and payment
shortfalls generally are not classified as impaired. Management determines
the significance of payment delays and payment shortfalls on a case-by-case
basis, taking into consideration all of the circumstances surrounding the
loan and the borrower, including the length of the delay, the reasons for
the delay, the borrower's prior payment record, and the amount of the
shortfall in relation to the principal and interest owed. Impairment is
measured on a loan-by-loan basis for real estate and commercial loans by
either the present value of expected future cash flows discounted at the
loan's effective interest rate, the loan's obtainable market price, or the
fair value of the collateral if the loan is collateral dependent.
Large groups of smaller balance homogeneous loans are collectively
evaluated for impairment. Accordingly, the Bank does not separately
identify individual consumer loans for impairment disclosures.
Premises and Equipment:
Land is carried at cost. Buildings, furniture and equipment and leasehold
improvements are carried at cost, less accumulated depreciation and
amortization computed on the straight-line method over the estimated useful
lives of the assets.
Income Taxes:
Deferred income tax assets and liabilities are determined using the
liability (or balance sheet) method. Under this method, the net deferred
tax asset or liability is determined based on the tax effects of the
temporary differences between the book and tax bases of the various assets
and liabilities in the consolidated statements of financial condition and
gives current recognition to changes in tax rates and laws. Deferred tax
assets are reduced by a valuation allowance if it is more likely than not
that the tax benefits will not be realized.
The Bank and the Company file consolidated income tax returns, with the
amount of income tax expense or benefit computed and allocated on a
separate return basis.
Credit Related Financial Instruments:
In the ordinary course of business, the Bank has entered into commitments
to extend credit, including letters-of-credit. Such financial instruments
are recorded when they are funded.
F-9
KENSINGTON BANKSHARES, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2002 AND 2001
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Earnings Per Share of Common Stock:
Earnings per share of common stock are computed on the basis of the
weighted average number of shares outstanding. At December 31, 2002 and
2001, the Company did not have any dilutive securities outstanding and,
therefore, basic and diluted earnings per share are the same.
Reclassifications:
Certain prior year amounts have been reclassified to conform to the current
period presentation.
NOTE 2 - INVESTMENT SECURITIES
Investment securities have been classified in the consolidated statements
of financial condition according to management's intent. The carrying
amount of securities and their approximate fair values were as follows:
Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
------------------ ------------------ ----------------- -----------------
HELD TO MATURITY:
December 31, 2002 -
U.S. government agency securities $ 152,440,397 $ 1,668,642 $ (20,741) $ 154,088,298
================== ================== ================= =================
December 31, 2001 -
U.S. government agency securities $ 130,285,686 $ 610,727 $ (1,060,913) $ 129,835,500
================== ================== ================= =================
AVAILABLE FOR SALE:
December 31, 2002 -
U.S. government agency securities $ 31,929,707 $ 95,649 $ -0- $ 32,025,356
================== ================== ================= =================
December 31, 2001 -
U.S. government agency securities $ 9,500,108 $ 27,961 $ (51,858) $ 9,476,211
================== ================== ================= =================
There were no realized gains or losses from sales of available-for-sale
securities in 2002 or 2001.
F-10
KENSINGTON BANKSHARES, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2002 AND 2001
NOTE 2 - INVESTMENT SECURITIES (CONTINUED)
The scheduled maturities of securities held to maturity and securities
available for sale based on the estimated weighted-average lives of the
underlying collateral at December 31, 2002, were as follows:
Held To Maturity Available For Sale
-------------------------------------- -------------------------------------
Amortized Fair Amortized Fair
Cost Value Cost Value
------------------ ------------------ ----------------- -----------------
Due in one year or less $ 109,806,824 $ 110,433,382 $ 31,929,707 $ 32,025,356
Due from one to five years 40,640,033 41,654,916 -0- -0-
Due from five to ten years 1,993,540 2,000,000 -0- -0-
------------------ ------------------ ----------------- -----------------
$ 152,440,397 $ 154,088,298 $ 31,929,707 $ 32,025,356
================== ================== ================= =================
Investment securities with a carrying value and fair value of approximately
$1,008,500 and $1,025,900 at December 31, 2002, respectively, and
$2,070,800 and $2,187,600 at December 31, 2001, respectively, were pledged
to secure public deposits and for other purposes required or permitted by
law.
NOTE 3 - LOANS RECEIVABLE
The components of loans in the consolidated statements of financial
condition were as follows:
2002 2001
----------------- -----------------
Real estate -
Commercial $ 58,379,968 $ 37,480,141
Residential 12,284,427 5,648,426
Commercial 8,064,649 4,014,250
Consumer 2,021,631 1,080,105
----------------- -----------------
80,750,675 48,222,922
Deferred loan fees (277,863) (89,258)
Allowance for loan losses (700,000) (410,000)
----------------- -----------------
$ 79,772,812 $ 47,723,664
================= =================
The Bank primarily grants real estate, commercial and consumer loans in the
State of Florida with primary concentration being in the Tampa Bay area.
Although the Bank's loan portfolio is diversified, a significant portion of
its loans are secured by real estate.
F-11
KENSINGTON BANKSHARES, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2002 AND 2001
NOTE 3 - LOANS RECEIVABLE (CONTINUED)
An analysis of the change in the allowance for loan losses follows:
2002 2001
-------------- ---------------
Balance at January 1 $ 410,000 $ 140,000
-------------- ---------------
Loans charged-off -0- (2,416)
Recoveries -0- -0-
-------------- ---------------
Net loans charged-off -0- (2,416)
-------------- ---------------
Provision for loan losses 290,000 272,416
-------------- ---------------
Balance at December 31 $ 700,000 $ 410,000
============== ===============
At December 31, 2002 and 2001, there were no loans on which the accrual of
interest had been discontinued or reduced or for which impairment had been
recognized.
NOTE 4 - PREMISES AND EQUIPMENT
Components of premises and equipment included in the consolidated
statements of financial condition were as follows:
2002 2001
----------------- ---------------
Land $ 350,000 $ 350,000
Building and improvements 467,785 465,785
Leasehold improvements 783,861 777,837
Furniture, fixtures & equipment 1,296,434 1,138,770
Construction-in-process 173,818 -0-
----------------- ---------------
3,071,898 2,732,392
Less: accumulated depreciation and amortization (442,286) (217,245)
----------------- ---------------
$ 2,629,612 $ 2,515,147
================= ===============
Depreciation and amortization expense charged to operations amounted to
$243,639 in 2002 and $176,457 in 2001.
F-12
KENSINGTON BANKSHARES, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2002 AND 2001
NOTE 4 - PREMISES AND EQUIPMENT (CONTINUED)
Leases:
The Bank is obligated under certain non-cancelable operating leases for
Bank premises. The operating leases relating to Bank premises expire during
various years from 2003 to 2008 with the leases having various renewal
options. The leases require the payment of taxes, insurance, and
maintenance cost in addition to rental payments.
Future minimum lease payments under these operating leases are summarized
as follows:
2003 $ 339,242
2004 329,117
2005 281,874
2006 138,202
2007 91,055
Thereafter 7,606
-------------
Total future minimum lease payments $ 1,187,096
=============
Rental expense relating to the operating leases amounted to approximately
$276,800 in 2002 and $144,800 in 2001.
NOTE 5 - TIME DEPOSITS
The aggregate amount of time deposits at December 31, each with a minimum
denomination of $100,000 were approximately $49,539,300 in 2002 and
$37,626,100 in 2001.
At December 31, 2002, the scheduled maturities of time deposits were as
follows:
2003 $ 150,529,511
2004 19,967,912
2005 4,554,897
2006 11,290,861
2007 8,824,884
Thereafter 2,227,960
-----------------
$ 197,396,025
================
F-13
KENSINGTON BANKSHARES, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2002 AND 2001
NOTE 6 - SECURITIES SOLD UNDER AGREEMENTS TO REPURCHASE
Securities sold under agreements to repurchase were as follows:
2002 2001
--------------- --------------
FHLB note at 1.5% in 2002 and 5.565% in 2001 with total carrying value
and fair value including accrued interest of $10,279,042 and
$10,305,999 in 2002 and $5,071,881 and $5,047,134 in 2001, respectively $ 10,000,000 $ 4,969,000
=============== ==============
Weighted average interest rate of the agreement 1.50% 5.565%
=============== ==============
The agreements mature within one month. The securities underlying the
agreements were delivered to the dealer who arranged the transactions. The
dealer may have sold, loaned, or otherwise disposed of such securities to
other parties in the normal course of operations and has agreed to resell
to the Bank substantially identical securities at the maturity of the
agreement. The Bank is required under a master agreement with the dealer to
maintain a minimum margin of 100% for the value of all collateral
securities backing the agreements. If the market value of securities
underlying such agreements falls below the minimum margin requirement, the
Bank is required to deposit additional securities or cash with the dealer.
NOTE 7 - CUSTOMER REPURCHASE AGREEMENTS
At December 31, 2002 and 2001, the Bank had entered into repurchase
agreements with Bank customers. The repurchase agreements generally mature
within one business day from the transaction date. The average balance and
interest rate under the repurchase agreements amounted to approximately
$2,914,600 and 1.57% in 2002 and $936,200 and 4.66% in 2001.
NOTE 8 - STOCKHOLDERS' EQUITY
The Company and the Bank are subject to certain restrictions on the amount
of dividends that they may declare without regulatory approval. At December
31, 2002 and 2001 there were no funds available for payment of dividends
without prior regulatory approval.
F-14
KENSINGTON BANKSHARES, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2002 AND 2001
NOTE 8 - STOCKHOLDERS' EQUITY (CONTINUED)
Earnings per share is computed by dividing net income available to common
shareholders by the weighted average number of common shares issued and
outstanding. At December 31, 2002 and 2001, the Company did not have any
dilutive securities outstanding and, therefore, basic and diluted earnings
per share are the same. The calculation of earnings per common share is
presented below:
2002 2001
-------------- ---------------
Net Income (loss) $ 1,348,865 $ 370,501
============== ===============
Weighted average common shares outstanding 3,210,000 2,860,000
============== ===============
Earnings (loss) per common share $ .42 $ 0.13
============== ===============
NOTE 9 - STOCK OPTIONS
The Company has adopted SFAS No. 123, "Accounting for Stock-Based
Compensation," and accounts for these options under APB Opinion No. 25,
"Accounting for Stock Issued to Employees", for which no compensation cost
has been recognized. There were no compensation costs attributable to the
options during 2002 and 2001.
The Company has established an Incentive and Non-Statutory Stock Option
Plan, under which 350,000 shares of the Company's common stock is reserved
for issuance. Options are granted under the Plan on such terms and at such
prices as determined by the Board of Directors, except that the per share
exercise price of incentive stock options cannot be less that the fair
market value of the common stock at the date of the grant. In September
2002 options were granted to directors for the purchase of 30,000 shares of
common stock and to employees for the purchase of 75,000 shares of common
stock. All options expire ten years from the date of grant and vest and
become exercisable 10% in 2004, 2005, and 2006 and fully vested and
exercisable in 2007. No options were granted as of December 31, 2001.
F-15
KENSINGTON BANKSHARES, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2002 AND 2001
NOTE 9 - STOCK OPTIONS (CONTINUED)
A summary of the status of the Company's outstanding stock options is
presented below:
2002
-------------------------------
Weighted
Average
Exercise
Number Price
------------- --------------
Outstanding at beginning of year -0- $ -0-
Granted 104,700 7.50
Forfeited (300) 7.50
Exercised -0-
----------
Outstanding at end of year 104,400 $ 7.50
========== ==============
Weighted average fair value per option
of options granted during the year $ 1.01
==============
The fair value of each option granted is estimated on the grant date using
the minimum value method. In using the minimum value method, the Company
assumed (a) no dividend yield; (b) an expected life of five years; and (c)
a risk-free interest rate of 2.94% at date of grant in September 2002.
There were no stock options outstanding as of December 31, 2001.
F-16
KENSINGTON BANKSHARES, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2002 AND 2001
NOTE 10 - INCOME TAXES
The provision for income taxes charged to earnings are summarized as
follows:
2002 2001
-------------- --------------
Current tax expense:
Federal $ 740,145 $ 24,779
State 129,385 4,245
-------------- --------------
869,530 29,024
-------------- --------------
Deferred tax (benefit) expense:
Federal (26,622) 95,716
State (4,558) 16,386
-------------- --------------
(31,180) 112,102
-------------- --------------
Change in valuation allowance -0- (141,126)
-------------- --------------
$ 838,350 $ -0-
============== ==============
The difference between the actual income tax expense and the amount
computed by applying the statutory federal income tax rate to income before
income taxes are as follows:
Tax based on statutory rate $ 743,653 $ 125,970
State tax, net of federal benefit 82,386 13,616
Change in valuation allowance -0- (141,126)
Other, net 12,311 1,540
-------------- --------------
$ 838,350 $ -0-
============== ==============
In management's opinion, based on expectations of future taxable income and
other relevant considerations, it is more likely than not that future
taxable income will be sufficient to utilize the deferred tax assets which
existed at December 31, 2002 and 2001.
The components of deferred taxes are summarized as follows:
2002 2001
-------------- --------------
Deferred tax assets:
Allowance for loan losses 253,170 133,738
Pre-opening expenses 59,538 73,906
Net unrealized loss on securities available for sale -0- 9,200
-------------- --------------
312,708 216,844
-------------- --------------
Deferred tax liabilities:
Net unrealized gain on securities available for sale (36,825) -0-
Depreciation (120,550) (46,666)
-------------- --------------
(157,375) (46,666)
-------------- --------------
Net deferred tax asset $ 155,333 $ 170,178
============== ==============
F-17
KENSINGTON BANKSHARES, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2002 AND 2001
NOTE 11 - COMMITMENTS AND CONTINGENCIES
Unused Lines of Credit:
The Bank has unsecured federal funds lines of credit with financial
institutions enabling the Bank to borrow up to $5,000,000 with interest
determined at the time of any advance. The arrangements are reviewed
annually for renewal of the credit line.
Credit Related Financial Instruments:
The Bank is a party to credit related financial instruments with
off-balance-sheet risk in the normal course of business to meet the
financing needs of its customers. These financial instruments include
commitments to extend credit, standby letters-of-credit and financial
guarantees. Such commitments involve, to varying degrees, elements of
credit and interest-rate risk in excess of the amount recognized in the
consolidated statements of financial condition.
The Bank's exposure to credit loss is represented by the contractual amount
of these commitments. The Bank follows the same credit policies in making
commitments and conditional obligations as it does for on-balance-sheet
instruments.
At December 31, the following financial instruments were outstanding whose
contract amounts represent credit risk:
2002 2001
-------------- --------------
Commitments to extend credit $ 18,959,874 $ 9,076,297
============== ==============
Standby letters-of-credit $ 1,841,283 $ 382,095
============== ==============
Commitments to extend credit are agreements to lend to customers as long as
there is no violation of any condition established in the contract.
Commitments generally have fixed expiration dates or other termination
clauses and may require payment of a fee. The commitments to extend credit
may expire without being drawn upon. Therefore, the total commitment
amounts do not necessarily represent future cash requirements. The amount
of collateral obtained, if it is deemed necessary by the Bank, is based on
management's credit evaluation of the customer.
Letters of credit are conditional commitments issued by the Bank to
guarantee the performance of a customer to a third party. Those letters of
credit are primarily issued to support private borrowing arrangements. The
credit risk involved in issuing letters of credit is essentially the same
as that involved in extending loan facilities to customers. The Bank
generally holds collateral for those commitments for which collateral is
deemed necessary.
The Bank has not incurred any losses on its commitments in 2002.
Other:
Various legal claims arise from time to time in the normal course of
business, which, in the opinion of management, will have no material effect
on the Company's consolidated financial statements.
F-18
KENSINGTON BANKSHARES, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2002 AND 2001
NOTE 12 - CONCENTRATIONS
At various times throughout the year the Bank may maintain cash balances
with financial institutions that exceed federally insured limits of
$100,000. The Bank monitors the capital adequacy of these financial
institutions on a quarterly basis.
NOTE 13 - RELATED PARTY TRANSACTIONS
The Bank has entered into transactions with its directors, stockholders,
and their affiliates (related parties). The aggregate amount of loans to
such related parties at December 31, 2002 and 2001, was approximately
$2,201,000 and $1,880,100, respectively. Also, certain related parties
maintain deposit balances with the Bank in the aggregate amount of
approximately $1,503,500 and $2,417,600 at December 31, 2002 and 2001,
respectively.
NOTE 14 - REGULATORY MATTERS
The Company and the Bank are subject to various regulatory capital
requirements administered by the federal banking agencies. Failure to meet
minimum capital requirements can initiate certain mandatory and possibly
additional discretionary actions by regulators that, if undertaken, could
have a direct material effect on the Company's and the Bank's financial
statements. Under capital adequacy guidelines and the regulatory framework
for prompt corrective action, the Company and the Bank must meet specific
capital guidelines that involve quantitative measures of the Company's and
the Bank's assets, liabilities, and certain off-balance-sheet items as
calculated under regulatory accounting practices. The capital amounts and
classification are also subject to qualitative judgments by the regulators
about components, risk weightings, and other factors. Prompt corrective
action provisions are not applicable to bank holding companies.
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 table below) of total and Tier I capital (as defined in
the regulations) to risk-weighted assets (as defined), and of Tier I
capital (as defined) to average assets (as defined). Management believes,
as of December 31, 2002, that the Company and the Bank meet all capital
adequacy requirements to which they are subject.
As of December 31, 2002, the Bank was considered well capitalized under the
regulatory framework for prompt corrective action. To be categorized as
well capitalized the Bank must maintain minimum total risk-based, Tier I
risk-based, and Tier I leverage ratios as set forth in the table. There are
no conditions or events that management believes have changed the Bank's
category. The Company's and the Bank's actual capital amounts and ratios as
of December 31, 2002 and 2001 are presented in the table below:
F-19
KENSINGTON BANKSHARES, INC. AND SUBSIDIARY
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 2002 AND 2001
NOTE 14 - REGULATORY MATTERS (CONTINUED)
Minimum
Capital
Actual Requirement:
--------------------- -----------------------------------------
Amount Ratio Amount Ratio
------------- ------ ----------------------- ----------------
As of December 31, 2002:
Total Capital
(to Risk Weighted Assets)
Consolidated $ 22,940,659 18.18% > than = to $10,093,799 > than = to 8.0%
Bank $ 22,793,886 18.07% > than = to $10,093,799 > than = to 8.0%
Tier I Capital
(to Risk Weighted Assets)
Consolidated $ 22,240,659 17.63% > than = to $ 5,046,900 > than = to 4.0%
Bank $ 22,093,886 17.51% > than = to $ 5,046,900 > than = to 4.0%
Tier I Capital
(to Average Assets)
Consolidated $ 22,240,659 8.86% > than = to $10,041,360 > than = to 4.0%
Bank $ 22,093,886 8.80% > than = to $10,041,360 > than = to 4.0%
As of December 31, 2001:
Total Capital
(to Risk Weighted Assets)
Consolidated $ 15,676,794 19.17% > than = to $ 6,543,141 > than = to 8.0%
Bank $ 15,676,794 19.17% > than = to $ 6,543,141 > than = to 8.0%
Tier I Capital
(to Risk Weighted Assets)
Consolidated $ 15,266,794 18.67% > than = to $ 3,271,571 > than = to 4.0%
Bank $ 15,266,794 18.67% > than = to $ 3,271,571 > than = to 4.0%
Tier I Capital
(to Average Assets)
Consolidated $ 15,266,794 12.31% > than = to $ 4,962,180 > than = to 4.0%
Bank $ 15,266,794 12.31% > than = to $ 4,962,180 > than = to 4.0%
Minimum
To Be Well
Capitalized Under
Prompt Corrective
Action Provisions:
-----------------------------------------
Amount Ratio
----------------------- -----------------
As of December 31, 2002:
Total Capital
(to Risk Weighted Assets)
Consolidated > than = to $ N/A > than = to N/A%
Bank > than = to $12,617,249 > than = to 10.0%
Tier I Capital
(to Risk Weighted Assets)
Consolidated > than = to $ N/A > than = to N/A%
Bank > than = to $ 7,570,350 > than = to 6.0%
Tier I Capital
(to Average Assets)
Consolidated > than = to $ N/A > than = to N/A%
Bank > than = to $12,551,700 > than = to 5.0%
As of December 31, 2001:
Total Capital
(to Risk Weighted Assets)
Consolidated > than = to $ N/A > than = to N/A%
Bank > than = to $ 8,178,926 > than = to 10.0%
Tier I Capital
(to Risk Weighted Assets)
Consolidated > than = to $ N/A > than = to N/A%
Bank > than = to $ 4,907,356 > than = to 6.0%
Tier I Capital
(to Average Assets)
Consolidated > than = to $ N/A > than = to N/A%
Bank > than = to $ 6,202,725 > than = to 5.0%
NOTE 15 - FAIR VALUES OF FINANCIAL INSTRUMENTS
The fair value of a financial instrument is the current amount that would
be exchanged between willing parties, other than in a forced liquidation.
Fair value is best determined based upon quoted market prices. However, in
many instances, there is no quoted market prices for the Company's various
financial instruments. In cases where quoted market prices are not
available, fair values are based on estimates using present value or other
valuation techniques. Those techniques are significantly affected by the
assumptions used, including the discount rate used and estimates of future
cash flows. Accordingly, the fair value estimates may not be realized in an
immediate settlement of the instrument. Statement of Financial Accounting
Standards No. 107, Disclosure about Fair Value of Financial Instruments,
excludes certain financial instruments and all nonfinancial instruments
from its disclosure requirements. Accordingly, the aggregate fair value
amounts presented may not necessarily represent the underlying fair value
of the Company.
F-20
KENSINGTON BANKSHARES, INC. AND SUBSIDIARY
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 2002 AND 2001
NOTE 15 - FAIR VALUES OF FINANCIAL INSTRUMENTS (CONTINUED)
The following methods and assumptions were used by the Company in
estimating fair values of financial instruments as disclosed herein:
Cash and cash equivalents. The carrying amounts of cash and cash
equivalents approximate their fair value.
Securities. Fair values for securities are based on quoted market prices.
Loans receivable. For variable-rate loans that reprice frequently and have
no significant change in credit risk, fair values are based on carrying
values. 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.
Deposit liabilities. The fair values disclosed for demand deposits are, by
definition, equal to the amount payable on demand at the reporting date
(that is, their carrying amounts). The carrying amounts of savings accounts
approximate their fair values at the reporting date. Fair values for
fixed-rate certificates of deposit are estimated using a discounted cash
flow calculation that applies interest rates currently being offered to a
schedule of aggregated expected maturities of time deposits.
Securities sold under agreements to repurchase. The carrying amounts of
securities sold under agreements to repurchase approximate their fair
values.
Customer repurchase agreements. The carrying amounts of customer repurchase
agreements approximate their fair values.
Federal funds purchased. The carrying amounts of federal funds purchased
approximate their fair values.
Accrued interest. The carrying amounts of accrued interest approximate
their fair values.
Off balance-sheet instruments. Fair values for off-balance-sheet lending
commitments are based on fees currently charged to enter into similar
agreements, taking into account the remaining terms of the agreements and
the counterparties' credit standings. The estimated fair value for these
instruments was insignificant at December 31, 2002 and 2001.
F-21
KENSINGTON BANKSHARES, INC. AND SUBSIDIARY
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 2002 AND 2001
NOTE 15 - FAIR VALUES OF FINANCIAL INSTRUMENTS (CONTINUED)
The estimated fair values of the Company's financial instruments were as
follows:
2002 2001
------------------------------------ -----------------------------------
Carrying Fair Carrying Fair
Amount Value Amount Value
---------------- ---------------- --------------- ---------------
Financial assets:
Cash and cash equivalents $ 2,364,401 $ 2,364,401 $ 5,835,461 $ 5,835,461
Securities held to maturity 152,440,397 154,088,298 130,285,686 129,835,500
Securities available for sale 32,025,356 32,025,356 9,476,211 9,476,211
Loans receivable 79,772,812 80,563,248 47,723,664 48,912,941
Accrued interest receivable 3,163,855 3,163,855 2,166,929 2,166,929
Financial liabilities:
Deposits 238,246,817 239,281,223 176,988,713 176,984,620
Securities sold under agreements
to repurchase 10,000,000 10,000,000 4,969,000 4,969,000
Federal funds purchased 1,000,000 1,000,000 -0- -0-
Customer repurchase agreements 863,057 863,057 748,323 748,323
Accrued interest payable 290,052 290,052 249,388 249,388
F-22
KENSINGTON BANKSHARES, INC. AND SUBSIDIARY
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 2002 AND 2001
NOTE 16 - CONDENSED PARENT COMPANY INFORMATION
The following presents the condensed statements of condition as of December
31, 2002 and 2001 and statements of income and cash flows for the years
ended December 31, 2002 and 2001.
2002 2001
-------------- ---------------
STATEMENTS OF CONDITION
Assets:
Cash $ 124,913 $ -0-
Other assets 21,860 -0-
Investment in Bank subsidiary 22,152,710 15,252,097
-------------- ---------------
Total Assets $ 22,299,483 $ 15,252,097
============== ===============
Liabilities & Stockholders' Equity:
Stockholders' equity $ 22,299,483 $ 15,252,097
============== ===============
STATEMENTS OF INCOME
Noninterest Income:
Equity in undistributed earnings
of Bank subsidiary $ 1,427,092 $ 370,501
Noninterest Expense:
Other expense 100,087 -0-
-------------- ---------------
Income before income tax expense (benefit) 1,327,005 370,501
Income tax benefit (21,860) -0-
-------------- ---------------
Net income $ 1,348,865 $ -0-
============== ===============
F-23
\
KENSINGTON BANKSHARES, INC. AND SUBSIDIARY
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 2002 AND 2001
NOTE 16 - CONDENSED PARENT COMPANY INFORMATION (CONTINUED)
2002 2001
-------------- ---------------
STATEMENTS OF CASH FLOWS
Cash Flows From Operating Activities:
Net income $ 1,348,865 $ 370,501
Adjustments to reconcile net income
to net cash used in operating activities:
Net change in other assets (21,860) -0-
Equity in undistributed earnings
of Bank subsidiary (1,427,092) (370,501)
-------------- ---------------
Net cash used in operating activities (100,087) -0-
-------------- ---------------
Net Cash Flows From Investing Activities:
Capital contribution to Bank subsidiary (5,400,000) -0-
-------------- ---------------
Net Cash Flows From Financing Activities:
Proceeds from issuance of common stock 5,625,000 -0-
-------------- ---------------
Net change in cash 124,913 -0-
Cash at beginning of year -0- -0-
-------------- ---------------
Cash at end of year $ 124,913 $ -0-
============== ===============
F-24