UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
[ X ] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 2002
or
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from ____________________ to ___________________
Commission File Number: 33-96358
BOURBON BANCSHARES, INC.
(Exact name of registrant as specified in its charter)
Kentucky 61-0993464
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
P.O. Box 157, Paris, Kentucky 40362-0157
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (859)987-1795
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days.
Yes X No _____
Number of shares of Common Stock outstanding as of July 31, 2002: 2,775,935.
BOURBON BANCSHARES, INC.
Table of Contents
Part I - Financial Information
Item 1. Financial Statements
Consolidated Balance Sheets 3
Consolidated Statements of Income and
Comprehensive Income 4
Consolidated Statements of Changes in
Stockholders' Equity 6
Consolidated Statements of Cash Flows 7
Notes to Consolidated Financial Statements 9
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 12
Item 3. Quantitative and Qualitative Disclosures About
Market Risk 19
Part II - Other Information 21
Signatures 22
Exhibits
11 Earnings Per Share Calculation 23
99.1 Certification of Chief Executive Officer pursuant
to 18 U.S.C. Section 1350, as adopted pursuant
to Section 906 of the Sarbanes-Oxley Act of 2002. 24
99.2 Certification of Chief Financial Officer pursuant
to 18 U.S.C. Section 1350, as adopted pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002. 25
Item 1 - Financial Statements
BOURBON BANCSHARES, INC.
CONSOLIDATED BALANCE SHEETS (unaudited)
(thousands) 6/30/2002 12/31/2001
Assets
Cash and due from banks $ 9,468 $ 15,229
Federal funds sold 212 14,409
Cash and cash equivalents 9,680 29,638
Investment securities:
Available for sale 86,265 75,608
Held to maturity -
Mortgage loans held for sale 531 2,343
Loans 282,731 273,173
Allowance for loan losses (3,840) (3,386)
Net loans 278,891 269,787
Federal Home Loan Bank stock 3,935 3,846
Bank premises and equipment, net 10,187 10,505
Interest receivable 3,312 3,507
Intangible assets 1,264 1,406
Other assets 800 617
Total assets $ 394,865 $ 397,257
Liabilities and Stockholders' Equity
Deposits
Non-interest bearing $ 50,527 $ 47,623
Time deposits, $100,000 and over 36,958 41,672
Other interest bearing 213,846 219,620
Total deposits 301,331 308,915
Securities sold under agreements to repurchase 2,067 683
Federal Funds Purchased - -
Other borrowed funds 4,322 919
Federal Home Loan Bank advances 42,452 43,598
Interest payable 1,894 2,815
Other liabilities 1,503 1,227
Total liabilities 353,569 358,157
Stockholders' equity
Common stock 6,775 6,649
Retained earnings 33,203 31,703
Accumulated other comprehensive income 1,318 748
Total stockholders' equity 41,296 39,100
Total liabilities & stockholders' equity $ 394,865 $ 397,257
BOURBON BANCSHARES, INC.
CONSOLIDATED STATEMENT OF INCOME AND COMPREHENSIVE INCOME (unaudited)
(thousands, except per share amounts) Six Months Ending
6/30/2002 6/30/2001
INTEREST INCOME:
Loans, including fees $ 10,369 $ 12,181
Investment securities 1,909 1,939
Other 102 220
Total interest income 12,380 14,340
INTEREST EXPENSE:
Deposits 3,825 6,137
Other 1,191 994
Total interest expense 5,016 7,131
Net interest income 7,364 7,209
Loan loss provision 702 384
Net interest income after provision 6,662 6,825
OTHER INCOME:
Service charges 1,913 1,852
Loan service fee income 112 134
Trust department income 177 182
Investment securities gains (losses), net 181 75
Gain on sale of mortgage loans 169 156
Other 474 352
Total other income 3,026 2,751
OTHER EXPENSES:
Salaries and employee benefits 3,323 2,973
Occupancy expenses 943 904
Amortization of intangibles 205 208
Advertising and marketing 150 215
Taxes other than payroll, property and income 200 175
Other 1,255 1,231
Total other expenses 6,076 5,706
Income before taxes 3,612 3,870
Income taxes 1,095 1,151
Net income $ 2,517 $ 2,719
Other Comprehensive Income, net of tax:
Change in Unrealized Gains on Securities 570 638
Comprehensive Income $ 3,087 $ 3,357
Earnings per share
Basic $ 0.91 $ 0.97
Diluted 0.90 0.95
BOURBON BANCSHARES, INC.
CONSOLIDATED STATEMENT OF INCOME AND COMPREHENSIVE INCOME (unaudited)
(thousands, except per share amounts) Three Months Ending
6/30/2002 6/30/2001
INTEREST INCOME:
Loans, including fees $ 5,133 $ 6,054
Investment securities 985 952
Other (14) (23)
Total interest income 6,104 6,983
INTEREST EXPENSE:
Deposits 1,816 2,949
Other 593 520
Total interest expense 2,409 3,469
Net interest income 3,695 3,514
Loan loss provision 501 192
Net interest income after provision 3,194 3,322
OTHER INCOME:
Service charges 1,010 1,032
Loan service fee income 55 66
Trust department income 79 81
Investment securities gains (losses), net 142 57
Gain on sale of mortgage loans 87 81
Other 275 300
Total other income 1,648 1,617
OTHER EXPENSES:
Salaries and employee benefits 1,686 1,499
Occupancy expenses 462 451
Amortization of intangibles 104 104
Advertising and marketing 75 108
Taxes other than payroll, property and income 101 87
Other 660 631
Total other expenses 3,088 2,880
Income before taxes 1,754 2,059
Income taxes 533 621
Net income $ 1,221 $ 1,438
Other Comprehensive Income, net of tax:
Change in Unrealized Gains on Securities 558 (11)
Comprehensive Income $ 1,779 $ 1,427
Earnings per share
Basic $ 0.44 $ 0.51
Diluted 0.44 0.50
BOURBON BANCSHARES, INC.
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY (unaudited)
(thousands, except number of shares)
Accumulated
Other Total
----Common Stock---- Retained Comprehensive Stockholders'
Shares Amount Earnings Income Equity
Balances, December 31, 2001 2,766,917 $ 6,649 $ 31,703 $ 748 $ 39,100
Common stock issued 12,194 135 - - 135
Common stock purchased (5,016) (9) (75) - (84)
Net change in unrealized gain (loss)
on securities available for sale,
net of tax - - - 570 570
Net income - - 2,517 - 2,517
Dividends declared - $0.34 per share - - (942) - (942)
Balances, June 30, 2002 2,774,095 $ 6,775 $ 33,203 $ 1,318 $ 41,296
BOURBON BANCSHARES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS (unaudited)
(thousands) Six Months Ending
6/30/2002 6/30/2001
Cash Flows From Operating Activities
Net Income $ 2,517 $ 2,719
Adjustments to reconcile net income to
net cash provided by operating activities:
Depreciation 503 482
Amortization 205 208
Investment securities amortization (accretion), net 192 (14)
Provision for loan losses 702 384
Investment securities gains (losses), net (181) (76)
Originations of loans held for sale (9,898) (12,226)
Proceeds from sale of loans 11,879 11,178
Federal Home Loan Bank Stock Dividends (89) (130)
Gain on sale of mortgage loans (169) (156)
Losses (gains), including write-downs, on real
estate acquired through foreclosure, net (5) (10)
Changes in:
Interest receivable 195 389
Other assets (619) 98
Interest payable (921) (1,126)
Other liabilities 41 (335)
Net cash from operating activities 4,352 1,385
Cash Flows From Investing Activities
Purchases of securities available for sale (29,959) (28,513)
Proceeds from sales of securities available for sale 12,348 6,239
Proceeds from principal payments, maturities and
calls of securities available for sale 7,807 21,539
Net change in loans (9,806) (1,549)
Purchases of bank premises and equipment, net (185) (1,407)
Proceeds from the sale of bank premises and equipment
Proceeds from real estate acquired through foreclosure 319 -
Net cash from investing activities (19,476) (3,691)
Cash Flows From Financing Activities:
Net change in deposits (7,584) (8,193)
Net change in securities sold under agreements to
repurchase and other borrowings 4,787 (4,566)
Advances from Federal Home Loan Bank 4,250 15,000
Payments on Federal Home Loan Bank advances (5,396) (127)
Proceeds from issuance of common stock 135 39
Purchase of common stock (84) (555)
Dividends paid (942) (839)
Net cash from financing activities (4,834) 759
Net change in cash and cash equivalents (19,958) (1,547)
Cash and cash equivalents at beginning of period 29,638 15,345
Cash and cash equivalents at end of period $ 9,680 $ 13,798
BOURBON BANCSHARES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS (unaudited)
(thousands) Three Months Ending
6/30/2002 6/30/2001
Cash Flows From Operating Activities
Net Income $ 1,221 $ 1,438
Adjustments to reconcile net income to
net cash provided by operating activities:
Depreciation 247 240
Amortization 104 104
Investment securities amortization (accretion), net 89 4
Provision for loan losses 501 192
Investment securities gains (losses), net (142) (57)
Originations of loans held for sale (4,566) (7,191)
Proceeds from sale of loans 5,252 5,668
Federal Home Loan Bank Stock Dividends (46) (66)
Gain on sale of mortgage loans (87) (81)
Losses (gains), including write-downs, on real
estate acquired through foreclosure, net - (14)
Changes in:
Interest receivable (139) 69
Other assets (291) (113)
Interest payable (387) (874)
Other liabilities (257) (180)
Net cash from operating activities 1,499 (861)
Cash Flows From Investing Activities
Purchases of securities available for sale (9,718) (25,258)
Proceeds from sales of securities available for sale 10,297 6,131
Proceeds from principal payments, maturities and
calls of securities available for sale 2,010 13,201
Net change in loans (10,276) (3,141)
Purchases of bank premises and equipment, net (96) (706)
Proceeds from real estate acquired through foreclosure 247 -
Net cash from investing activities (7,536) (9,773)
Cash Flows From Financing Activities:
Net change in deposits (2,503) (4,958)
Net change in securities sold under agreements to
repurchase and other borrowings 3,231 1,092
Advances from Federal Home Loan Bank 4,250 10,000
Payments on Federal Home Loan Bank advances (4,811) (58)
Proceeds from issuance of common stock 106 9
Purchase of common stock - (271)
Dividends paid (472) (418)
Net cash from financing activities (199) 5,396
Net change in cash and cash equivalents (6,236) (5,238)
Cash and cash equivalents at beginning of period 15,916 19,036
Cash and cash equivalents at end of period $ 9,680 $ 13,798
BOURBON BANCSHARES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. In Management's opinion, the financial information, which is unaudited,
reflects all adjustments, (consisting solely of normal recurring
adjustments) necessary for a fair presentation of the financial information
as of June 30, 2002 and December 31, 2001, and for the six and three month
periods ended June 30, 2002 and June 30, 2001 in conformity with accounting
principles generally accepted in the United States of America. These
financial statements should be read in conjunction with Bourbon Bancshares,
Inc. (Company) Annual Report on Form 10-K.
2. GOODWILL AND OTHER INTANGIBLE ASSETS
Original Accumulated
Amount Amortization
Core deposit intangible $2,890,404 $2,087,287
Amortization expense for the first six months of 2002 was $139,734.
Estimated amortization expense for the next five years is: 2002 - $279,468;
2003 - $279,468; 2004 - $198,895; 2005 - $19,140; and 2006 - $19,140.
There are no Intangible assets not subject to amortization.
3. INVESTMENT SECURITIES
Period-end securities are as follows:
(in thousands)
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
Available for Sale
June 30, 2002
U.S. Treasury $ 5,035 $ 86 $ - $ 5,121
U.S. government agencies 6,983 100 - 7,083
States and political subdivisions 28,746 774 (125) 29,395
Mortgage-backed 33,854 681 (3) 34,532
Equity securities 6,607 385 (4) 6,988
Other 3,043 103 - 3,146
Total 84,268 2,129 (132) 86,265
December 31, 2001
U.S. Treasury $ 7,079 $ 139 $ (1) $ 7,217
U.S. government agencies 5,999 119 - 6,118
States and political subdivisions 19,067 574 (171) 19,470
Mortgage-backed 28,818 351 (112) 29,057
Equity securities 10,463 255 (25) 10,693
Other 3,048 33 (28) 3,053
Total 74,474 1,471 (337) 75,608
4. LOANS
Loans at period-end are as follows:
(in thousands)
6/30/2002 12/31/2001
Commercial $ 17,137 $ 18,618
Real estate construction 13,349 12,302
Real estate mortgage 176,955 166,323
Agricultural 56,260 53,640
Consumer 19,030 22,290
Total 282,731 273,173
5. Basic earnings per common share is net income divided by the weighted
average number of common shares outstanding during the period. Diluted
earnings per common share includes the dilutive effect of additional
potential common shares issuable under stock options.
The factors used in the earnings per share computation follow:
Six Months Ended
June 30
2002 2001
(in thousands)
Basic Earnings Per Share
Net Income $2,517 $2,719
Weighted average common shares outstanding 2,767 2,800
Basic earnings per share $ 0.91 $ 0.97
Diluted Earnings Per Share
Net Income $2,517 $2,719
Weighted average common shares outstanding 2,767 2,800
Add dilutive effects of assumed exercise
of stock options 39 49
Weighted average common and dilutive
Potential common shares outstanding 2,806 2,849
Diluted earnings per share $ 0.90 $ 0.95
Stock options for 4,720 shares (for the period ended June 30, 2002) and 600
shares (for the period ended June 30, 2001) of common stock were not
considered in computing earnings per share because they were antidilutive.
Three Months Ended
June 30
2002 2001
(in thousands)
Basic Earnings Per Share
Net Income $1,221 $1,438
Weighted average common shares outstanding 2,767 2,796
Basic earnings per share $ 0.44 $ 0.51
Diluted Earnings Per Share
Net Income $1,221 $1,438
Weighted average common shares outstanding 2,767 2,796
Add dilutive effects of assumed exercise
of stock options 40 49
Weighted average common and dilutive
Potential common shares outstanding 2,807 2,845
Diluted earnings per share $ 0.44 $ 0.50
Stock options for 600 shares (for the quarter ended June 30, 2001) of
common stock were not considered in computing earnings per share because
they were antidilutive.
6. Dividends per share paid for the quarter ended June 30, 2002 were $0.17
compared to $0.15 for June 30, 2001. This is the same rate of dividend
paid for the first quarters of the respective years.
7. Beginning January 1, 2001, a new accounting standard requires all
derivatives to be recorded at fair value. Unless designated as hedges,
changes in these fair values will be recorded in the income statement.
Fair value changes involving hedges will generally be recorded by
offsetting gains and losses on the hedge and on the hedged item, even if
the fair value of the hedged item is not otherwise recorded. The Company
periodically enters into non-exchange traded mandatory forward sales
contracts in conjunction with its mortgage banking operation. These
contracts, considered derivatives, typically last 90 days and are used to
hedge the risk of interest rate changes between the time of the commitment
to make a loan to a borrower at a stated rate and when the loan is sold.
The Company did not have any mandatory forward sales contracts at June 30,
2002.
As allowed in conjunction with the adoption of this standard, the Company
transferred its entire securities held to maturity portfolio to available
for sale. As a result of this transfer and the corresponding adjustment to
fair value, on January 1, 2001 securities increased $407,000, other assets
decreased $138,000, and accumulated other comprehensive income increased
$269,000.
A new accounting standard requires all business combinations to be recorded
using the purchase method of accounting for any transaction initiated after
June 30, 2001. Under the purchase method, all identifiable tangible and
intangible assets and liabilities of the acquired company must be recorded
at fair value at date of acquisition, and the excess of cost over fair
value of net assets acquired is recorded as goodwill. Identifiable
intangible assets must be separated from goodwill. Identifiable intangible
assets with finite useful lives will be amortized under the new standard,
whereas goodwill, both amounts previously recorded and future amounts
purchased, will cease being amortized starting in 2002. Annual impairment
testing will be required for goodwill with impairment being recorded if the
carrying amount of goodwill exceeds its implied fair value. All recorded
acquistion intangibles are identified with specific assets. There are no
intangible assets identified as goodwill. Adoption of this standard on
January 1, 2002 did not have a material effect on the Company's financial
statements.
Item 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
Forward-Looking Statements
This discussion contains forward-looking statements under the Private
Securities Litigation Reform Act of 1995 that involve risks and uncertainties.
Words such as "believes," "anticipates," "expects," "intends," "plans,"
"targeted," and similar expressions are intended to identify forward-looking
statements but are not the exclusive means of identifying such statements.
Although the Company believes that the assumptions underlying the
forward-looking statements contained herein are reasonable, any of the
assumptions could be inaccurate, and therefore, there can be no assurance that
the forward-looking statements included herein will prove to be accurate.
Factors that could cause actual results to differ from the results discussed
in the forward-looking statements include, but are not limited to: economic
conditions (both generally and more specifically in the markets, including the
tobacco market, in which the Company and its bank operate); competition for
the Company's customers from other providers of financial and mortgage
services; government legislation and regulation (which changes from time to
time and over which the Company has no control); changes in interest rates
(both generally and more specifically mortgage interest rates); material
unforeseen changes in the liquidity, results of operations, or financial
condition of the Company's customers; and other risks detailed in the
Company's filings with the Securities and Exchange Commission, all of which
are difficult to predict and many of which are beyond the control of the
Company. The Company undertakes no obligation to republish revised
forward-looking statements to reflect events or circumstances after the date
hereof or to reflect the occurrence of unanticipated events.
Summary
Bourbon Bancshares, Inc. recorded net income of $2.5 million, or $0.91 basic
earnings per share and $0.90 diluted earnings per share for the first six
months ended June 30, 2002 compared to $2.7 million, or $0.97 basic earnings
per share and $0.95 diluted earnings per share for the six month period ending
June 30, 2001. The first six months reflects a decrease in net income of
7.4%. For the three month period ending June 30, 2002, net income was $1.2
million ($0.44 basic earnings and diluted earnings per share) compared to $1.4
million ($0.51 basic earnings per share and $0.50 diluted earnings per share)
for the same period in 2001. This was a decrease in net income of 15.1%.
Return on average assets was 1.27% for the six months ending June 30, 2002 and
1.44% for the same time period in 2001, a decrease of 12%. Return on average
assets was 1.22% for the three months ended June 30, 2002 compared to 1.51%
for the same time period in 2001, a decrease of 19%. Return on average equity
was 12.6% for the six month period ended June 30, 2002 and 14.7% for the same
period in 2001 (a decrease of 14%). Return on average equity was 12.1% and
15.4% for the three months ended June 30, 2002 and 2001, respectively, a
decrease of 21%.
Loans increased $9.5 million from $273.2 million on December 31, 2001 to
$282.7 million on June 30, 2002. An increase of $10.6 million in real estate
mortgage loans, and a smaller increase in real estate construction and
agricultural loans were offset by a decrease in commercial and consumer loans.
Management attributes the continued increase in loans primarily to low
interest rates. The increased loan demand and leveling of interest rates have
contributed to increases in net interest income.
Total deposits decreased from $308.9 million on December 31, 2001 to $301.3
million on June 30, 2002, a decrease of $7.6 million. The decrease is mainly
attributable to time deposits of $100,000 and more decreasing $4.7 million and
other interest bearing deposits decreasing $5.8 million. This was partially
offset by an increase in non-interest bearing deposits of $2.9 million. The
decline in total deposits is primarily attributable to our decision to be less
aggressive in our deposit gathering activities.
Net Interest Income
Net interest income was $7.4 million for the six months ending June 30, 2002
and $7.2 million for the six months ending June 30, 2001, resulting in an
increase of $155 thousand. Net interest income was $3.7 million for the three
months ending June 30, 2002 and $3.5 million for the three months ending June
30, 2001, resulting in an increase of $181 thousand or 5%. The interest
spread was 3.89% for the first six months of 2002 compared to 4.01% for the
same period in 2001, a decrease of 13 basis points. The Federal Reserve has
dropped the discount rate from 6% at December 31, 2000 to the current rate of
1.25% (last changed December, 2001). These decreases have had a short term
effect on net interest income. However, as our interest rate shock simulation
model that follows shows, changes in interest rates are expected to have a
minor effect on net interest income. Therefore the decline in net interest
margin is believed to be temporary. In the short-term, increases in rates
should have a positive effect on net interest income
For the first six months, the yield on assets decreased from 8.30% in 2001 to
6.72% in 2002. The cost of liabilities decreased from 4.29% in 2001 to 2.84%
in 2002. Rates have leveled during the first six months of 2002 and have
caused the yield on assets and the cost of liabilities to also level during
2002. Year to date average loans are up $3.4 million, or 1.3% from June 30,
2001 to June 30, 2002, and loan interest income has decreased $1.8 million for
the first six months of 2002 compared to the first six months of 2001. Year
to date average deposits also increased from June 30, 2001 to June 30, 2002,
up $10.1 million, or 3.4%. Deposit interest expense has decreased $2.3
million for the first six months of 2002 compared to the same period in 2001.
For the three months ending June 30, the yield on assets decreased from 8.16%
in 2001 to 6.65% in 2002. The cost of liabilities decreased from 4.12% in
2001 to 2.71% in 2002, primarily due to the decrease in rates in 2001. Loan
interest income has decreased $921 thousand for the first six months of 2002
compared to the first six months of 2001. Deposit interest expense has
decreased $1.1 million for the first six months of 2002 compared to the same
period in 2001.
Declining rates in 2001 have resulted in tighter margins in 2002. However,
the balance sheet growth has resulted in net interest income increasing $155
thousand for the first six months of 2002 compared to the same period in 2001,
and increasing $181 thousand for the three months ending June 30, 2002
compared to June 30, 2001. Increasing loan demand and the widening on net
interest margins are both factors contributing to an increase in net interest
income during the second quarter. The banking industry continues to battle
competition for loan and deposit dollars, and this trend is expected to
continue.
Non-Interest Income
Non-interest income increased $275 thousand for the six month period ended
June 30, 2002 from $2.7 million to $3.0 million. An increase of $61 thousand
in service charges from the first six months of 2001 to the comparable 2002
period is mainly attributable to an increase in checking overdraft charges of
$72 thousand and net proceeds from title insurance of $55 thousand. Title
insurance sales began in April 2001. Checking account service charges
decreased $50 thousand, mainly a result of the "free" checking product.
Overdraft income increased principally due to the implementation of a new
"Kentucky Courtesy" overdraft program. "Kentucky Courtesy" is available to
qualified customers, and is an overdraft protection service that pays checks
up to the "Kentucky Courtesy" limit. Investment securities net gains were
$106 thousand greater for the first six months of 2002 compared to the same
period in 2001. Net gains from sale of securities were mainly attributable to
municipal securities being called at premiums before their maturity, the sale
of U.S. Treasury Notes, and the sale of various stocks. U.S. Treasury Notes
are sold before maturity when the total return (gain and net interest) can be
improved.
Non-interest income increased $31 thousand for the three month period ended
June 30 to $1.6 million in 2002. This was mainly attributable to an increase
in net security gains of $85 thousand.
The gain on sale of mortgage loans increased $13 thousand during the first six
months of 2002 compared to the same 2001 period. The increase for the three
months ending June 30, 2002 compared to 2001 was $6 thousand. Decreasing
rates result in an increase in loan originations and refinances. Volume of
loan originations and sales are inverse to rate changes. Rates fell during
2001 and as a result, had a favorable impact on our loan sales in 2001. Due
to the stabilizing of interest rates, income from the sale of loans may be
lower in 2002 compared to 2001.
The increase in other income of $122 thousand in the first six months of 2002
as compared to the same time period in 2001 is primarily a result of an
increase in brokerage fee income of $110 thousand. The increase in other
income for the three month period ended June 30, 2002 was $31 thousand. We
continue to promote the use of our brokerage services to better serve our
customers' financial needs.
Non-Interest Expense
The increase of $370 thousand in non-interest expenses from $5.7 million for
the six months ended June 30, 2001 to $6.1 million for the same period in 2002
was a result of several factors. Salaries and benefits increased $350
thousand for the first six months of 2002 compared to 2001, an increase of
12%. For the three months ended June 30, 2002, salaries and benefits
increased $187 thousand. The increase is due to annual salary increases and
increased staffing. Staffing has mainly been increased in branches to better
serve our customers, and more specifically the opening of a full service
branch in Cynthiana, Kentucky in October 2001. Salaries, excluding bonuses
and incentives, increased 9% from the first six months of 2001 to the first
six months of 2002. Employee benefits increased $88 thousand and incentives
increased $63 thousand during these comparable periods.
Occupancy expense increased $39 thousand to $943 thousand for the first six
months of 2002 compared to first six months of 2001. The increase for the
three months ended June 30, 2002 over the same period in 2001 was $11
thousand. Depreciation increased $21 thousand during for the first six months
ending June 30, 2002 compared to same period in 2001. Renovation of existing
facilities and the purchase of hardware and software for recent technological
advances have added to the depreciation expense. The construction of a new
full service facility in Cynthiana was completed and opened for business on
October 1, 2001. Construction is planned on a new full service branch in
Georgetown, and is expected to begin in the third quarter of 2002. This
facility will replace the Paris Pike Branch, and is expected to be complete in
the first half of 2003. These increases are a result of the Company's
continued emphasis on improving and maintaining its facilities, and to stay
current with our technology.
Advertising and marketing costs decreased $65 thousand to $150 thousand for
the first six months of 2002 as compared to the same period in 2001. Although
the costs are lower this year, continued efforts have been made by the Company
to promote the name and the products of Kentucky Bank using various forms of
promotional materials and selected types of media, including television.
Income Taxes
The tax equivalent rate for the six months ended June 30 was 30% for 2002 and
for 2001. The tax equivalent rate for the three months ended June 30 was 30%
for 2002 and for 2001. These rates are less than the statutory rate as a
result of the tax-free securities and loans held by the Company.
Stock Repurchase Program
On October 25, 2000, the Company announced that its Board of Directors
approved a stock repurchase program. The Company is authorized to purchase up
to 100,000 shares of its outstanding common stock. Shares will be purchased
from time to time in the open market depending on market prices and other
considerations. Through June 30, 2002, 75,023 shares have been purchased.
The repurchase program has had a positive effect on earnings per share
calculations.
Liquidity and Funding
Liquidity risk is the possibility that the Company may not be able to meet its
cash requirements. Management of liquidity risk includes maintenance of
adequate cash and sources of cash to fund operations and meeting the needs of
borrowers, depositors and creditors. Excess liquidity has a negative impact
on earnings as a result of the lower yields on short-term assets.
Cash and cash equivalents were $9.7 million as of June 30, 2002 compared to
$29.6 million at December 31, 2001. The decrease in cash and cash equivalents
is mainly attributable to a decrease in federal funds sold. The balance
decreased $20 million since the end of the year, mainly attributable to this
money being used to purchase investment securities. In addition to cash and
cash equivalents, the securities portfolio provides an important source of
liquidity. Total investment securities available for sale totaled $86.3
million at June 30, 2002. The available for sale securities are available to
meet liquidity needs on a continuing basis.
The Company maintains a relatively stable base of customer deposits, which is
expected to be adequate to meet its funding demands. In addition, management
believes the majority of its $100,000 or more certificates of deposit are no
more volatile than its core deposits.
Generally, the Company relies upon net cash inflows from financing activities,
supplemented by net cash inflows from operating activities, to provide cash
used in its investing activities. As is typical of many financial
institutions, significant financing activities include deposit gathering, and
the use of short-term borrowings, such as federal funds purchased and
securities sold under repurchase agreements along with long-term debt. The
Company's primary investing activities include purchasing investment
securities and loan originations. Management believes there is sufficient
cash flow from operations to meet investing and liquidity needs related to
reasonable borrower, depositor and creditor needs in the present economic
environment.
Management is aware of the potential problem of funding sustained loan growth.
Therefore, in addition to deposits, other sources of funds, such as Federal
Home Loan Bank (FHLB) advances may be used. The Company relies on FHLB
advances for both liquidity and asset/liability management purposes. These
advances are used primarily to fund long-term fixed rate residential mortgage
loans. As of June 30, 2002, we have sufficient collateral to borrow an
additional $32 million from the FHLB. In addition, as of June 30, 2002 over
$57 million is available in overnight borrowing through various correspondent
banks. In light of this, management believes there is sufficient liquidity to
meet all reasonable borrower, depositor and creditor needs in the present
economic environment.
Non-Performing Assets
As of June 30, 2002, the Company's non-performing assets totaled $2.8 million
or 1.0% of loans compared to $2.2 million or 0.8% of loans at December 31,
2001. (See table below) The increase in non-accrual loans is mainly
attributable to a large commercial loan customer with indebtedness of $1.2
million. Additional loan loss provisions were made to include the potential
loss on this loan. Real estate loans composed 43% and 75% of the non-
performing loans as of June 30, 2002 and December 31, 2001, respectively.
Forgone interest income on the non-accrual loans for both 2002 and 2001 is
immaterial.
Nonperforming Assets
6/30/02 12/31/01
(in thousands)
Non-accrual Loans $ 1,958 $ 935
Accruing Loans which are
Contractually past due
90 days or more 830 1,228
Restructured Loans - -
Total Nonperforming and Restructured 2,788 2,163
Other Real Estate 227 212
Total Nonperforming and Restructured
Loans and Other Real Estate $ 3,015 $ 2,375
Nonperforming and Restructured Loans
as a Percentage of Loans 0.99% 0.79%
Nonperforming and Restructured Loans
and Other Real Estate as a Percentage
of Total Assets 0.76% 0.60%
Provision for Loan Losses
The first six months 2002 provision for loan losses of $702 thousand is higher
than the comparable 2001 period by $318 thousand. The June 30, 2002 three
month provision for loan losses of $501 thousand is higher than the comparable
2001 period by $309 thousand. An increase in nonperforming loans has required
management to increase the provision in order to maintain a reserve for loan
losses that is representative of the risk of loss based on the quality of
loans currently in the portfolio. Net charge-offs for the six month period
ending June 30, 2002 were $248 thousand compared to $406 thousand for the same
period in 2001. Net charge-offs for the three month period ending June 30,
2002 were $129 thousand compared to $250 thousand for the same period in 2001.
These losses are mainly attributable to several small consumer loans. Future
levels of charge-offs will be determined by the economic environment
surrounding individual loans. Management feels the current loan loss reserve
is sufficient to meet expected loan losses.
Loan Losses
Six Months Ended June 30
(in thousands)
2002 2001
Balance at Beginning of Period $ 3,386 $ 3,388
Amounts Charged-off:
Commercial 48 63
Real Estate Construction 18 -
Real Estate Mortgage 8 30
Agricultural - 8
Consumer 262 349
Total Charged-off Loans 336 450
Recoveries on Amounts
Previously Charged-off:
Commercial 15 2
Real Estate Construction - -
Real Estate Mortgage 20 2
Agricultural 8 1
Consumer 45 39
Total Recoveries 88 44
Net Charge-offs 248 406
Provision for Loan Losses 702 384
Balance at End of Period 3,840 3,366
Loans
Average 275,226 271,836
At June 30 282,731 273,420
As a Percentage of Average Loans:
Net Charge-offs 0.09% 0.15%
Provision for Loan Losses 0.26% 0.14%
Allowance as a Percentage of
Period-end Loans 1.36% 1.23%
Allowance as a Multiple of
Net Charge-offs 15.5 8.3
Allowance as a Percentage of
Non-performing and Restructured Loans 138% 319%
Loan Losses
Quarter Ended June 30
(in thousands)
2002 2001
Balance at Beginning of Period $ 3,468 $ 3,424
Amounts Charged-off:
Commercial 25 60
Real Estate Construction 18 -
Real Estate Mortgage - 27
Agricultural - 8
Consumer 132 181
Total Charged-off Loans 175 276
Recoveries on Amounts
Previously Charged-off:
Commercial 1 1
Real Estate Construction - -
Real Estate Mortgage 20 1
Agricultural 1 1
Consumer 24 23
Total Recoveries 46 26
Net Charge-offs 129 250
Provision for Loan Losses 501 192
Balance at End of Period 3,840 3,366
Loans
Average 278,096 272,007
At June 30 282,731 273,420
As a Percentage of Average Loans:
Net Charge-offs 0.05% 0.09%
Provision for Loan Losses 0.18% 0.07%
Allowance as a Multiple of
Net Charge-offs 29.8 13.5
Item 3 - QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Asset/Liability management control is designed to ensure safety and soundness,
maintain liquidity and regulatory capital standards, and achieve acceptable
net interest income. Management considers interest rate risk to be the most
significant market risk. The Company's exposure to market risk is reviewed on
a regular basis by the Asset/Liability Committee. Interest rate risk is the
potential of economic losses due to future interest rate changes. These
economic losses can be reflected as a loss of future net interest income
and/or a loss of current fair market values. The objective is to measure the
effect on net interest income and to adjust the balance sheet to minimize the
inherent risk while at the same time maximize income.
Management realizes certain risks are inherent and that the goal is to
identify and minimize the risks. The primary tool used by management is an
interest rate shock simulation model. The Bank has no market risk sensitive
instruments held for trading purposes.
The following table depicts the change in net interest income resulting from
100 and 300 basis point changes in rates. The projections are based on
balance sheet growth assumptions and repricing opportunities for new, maturing
and adjustable rate amounts. As of June 30, 2002 the projected percentage
changes are within the Board approved limits and the Company's interest rate
risk is also within Board approved limits. The projected net interest income
report summarizing the Company's interest rate sensitivity as of June 30, 2002
is as follows:
(dollars in thousands)
PROJECTED NET INTEREST INCOME
Level
Change in basis points: - 300 - 100 Rates + 100 + 300
Year One (7/1/02 - 6/30/03)
Interest Income $21,518 $23,957 $25,251 $26,552 $29,157
Interest Expense 6,350 8,099 9,209 10,317 12,536
Net Interest Income 15,168 15,858 16,042 16,235 16,621
PROJECTED DOLLAR INCREASE (DECREASE) FROM "LEVEL RATES"
Year One (7/1/02 - 6/30/03)
Interest Income $(3,733) $(1,294) N/A $ 1,301 $ 3,906
Interest Expense (2,859) (1,110) N/A 1,108 3,327
Net Interest Income (874) (184) N/A 193 579
PROJECTED PERCENTAGE INCREASE (DECREASE) FROM "LEVEL RATES"
Year One (7/1/02 - 6/30/03)
Interest Income -14.8% -5.1% N/A 5.2% 15.5%
Interest Expense -31.0% -12.1% N/A 12.0% 36.1%
Net Interest Income -5.4% -1.1% N/A 1.2% 3.6%
Board approved limit >-10.0% >-4.0% N/A >-4.0% >-10.0%
The projected net interest income report summarizing the Company's interest
rate sensitivity as of June 30, 2001 is as follows:
(dollars in thousands)
PROJECTED NET INTEREST INCOME
Level
Change in basis points: - 300 - 100 Rates + 100 + 300
Year One (7/1/01 - 6/30/02)
Interest Income $ 24,491 $ 26,698 $ 27,804 $ 28,917 $ 31,142
Interest Expense 9,691 11,473 12,525 13,508 15,464
Net Interest Income 14,800 15,225 15,279 15,409 15,678
PROJECTED DOLLAR INCREASE (DECREASE) FROM "LEVEL RATES"
Year One (7/1/01 - 6/30/02)
Interest Income $ (3,313) $ (1,106) N/A $ 1,113 $ 3,338
Interest Expense (2,834) (1,052) N/A 984 2,940
Net Interest Income (479) (54) N/A 129 398
PROJECTED PERCENTAGE INCREASE (DECREASE) FROM "LEVEL RATES"
Year One (7/1/01 - 6/30/02)
Interest Income -11.9% -4.0% N/A 4.0% 12.0%
Interest Expense -22.6% -8.4% N/A 7.9% 23.5%
Net Interest Income -3.1% -0.4% N/A 0.8% 2.6%
Board approved limit >-10.0% >-4.0% N/A >-4.0% >-10.0%
These projected changes in net interest income as of June 30, 2002 are
slightly greater when compared to the projected changes in net interest income
as of June 30, 2001. Projections from June 30, 2002, year one reflected a
decline in net interest income of 5.4% with a 300 basis point decline compared
to the 3.1% decline in 2001. The 300 basis point increase in rates reflected
a 3.6% increase in net interest income in 2002 compared to 2.6% in 2001.
Percentage changes in 2002 are greater when compared to 2001. Therefore,
changes in interest rates should have a larger effect on net interest income.
With the current lower level of interest rates, management has positioned the
Company to be slightly more sensitive to rising rates, and net interest income
should increase with these rising rates.
Part II - Other Information
Item 1. Legal Proceedings
The Company is not a party to any material legal proceedings.
Item 2. Changes in Securities
None
Item 3. Defaults upon Senior Securities
None
Item 4. Submission of Matters to a Vote of Security Holders
The registrant's 2002 Annual Meeting of Shareholders was held May 1, 2002.
Proxies were solicited by the registrant's Board of Directors. There was no
solicitation in opposition to the board's nominees as listed in the proxy
statement, and all of the nominees were elected by vote of the shareholders.
Voting results for each nominee were as follows:
Votes For Votes Withheld
Henry Hinkle 2,236,891 12,720
Theodore Kuster 2,236,891 12,720
Robert G. Thompson 2,236,891 12,720
The following directors have a term of office that will continue following the
Annual Meeting: William M. Arvin, James L. Ferrell, William R. Stamler and
Buckner Woodford.
The total number of Common Shares outstanding as of March 25, 2002, the record
date for the Annual Meeting of Shareholders was 2,767,141.
Item 5. Other Information
None
Item 6. Exhibits and Reports on Form 8-K
1. Exhibits as required by Item 601 of Regulation S-K.
11 Earnings Per Share Calculation
99.1 Certification of Chief Executive Officer pursuant to
18 U.S.C. Section 1350, as adopted pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002.
99.2 Certification of Chief Financial Officer pursuant to
18 U.S.C. Section 1350, as adopted pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002.
2. No reports on Form 8-K have been filed during the quarter for which
this report is filed.
SIGNATURES
In accordance with the requirements of the Exchange Act, the registrant caused
the report to be signed on its behalf by the undersigned, thereunto duly
authorized.
Bourbon Bancshares, Inc.
Date ___8/12/02_________ __/s/Buckner Woodford____________
Buckner Woodford, President and C.E.O.
Date ___8/12/02_________ __/s/Gregory J. Dawson___________
Gregory J. Dawson, Chief Financial Officer
Exhibit 11
Earnings Per Share
See Note 4 in Notes to Consolidated Financial Statements for computation of
per share earnings.
Exhibit 99.1
CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
In connection with the Quarterly Report of Bourbon Bancshares, Inc. (the
"Company") on Form 10-Q for the period ended June 30, 2002 as filed with the
Securities and Exchange Commission on the date hereof (the "Report"), I,
Buckner Woodford, Chief Executive Officer of the Company, certify, pursuant to
18 U.S.C. Section 1350, as adopted pursuant to section 906 of the Sarbanes-
Oxley Act of 2002, that to the best of my knowledge:
(1) The Report fully complies with the requirements of section 13(a) or
15(d) of the Securities Exchange Act of 1934; and
(2) The information contained in the Report fairly presents, in all
material respects, the financial condition and result of operations of the
Company.
___/s/ Buckner Woodford_____
Chief Executive Officer
August 12, 2002
Exhibit 99.2
CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
In connection with the Quarterly Report of Bourbon Bancshares, Inc. (the
"Company") on Form 10-Q for the period ended June 30, 2002 as filed with the
Securities and Exchange Commission on the date hereof (the "Report"), I,
Gregory J. Dawson, Chief Financial Officer of the Company, certify, pursuant
to 18 U.S.C. Section 1350, as adopted pursuant to section 906 of the Sarbanes-
Oxley Act of 2002, that to the best of my knowledge:
(1) The Report fully complies with the requirements of section 13(a) or
15(d) of the Securities Exchange Act of 1934; and
(2) The information contained in the Report fairly presents, in all
material respects, the financial condition and result of operations of the
Company.
___/s/ Gregory J. Dawson____
Chief Financial Officer
August 12, 2002
2