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Table of Contents

 

 

 

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

Washington, D.C.  20549

 

FORM 10-Q

 

(Mark One)

 

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

 

For the quarterly period ended June 30, 2014

 

or

 

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

 

For the transition period from                          to                         

 

Commission File Number:  000-52598

 

KENTUCKY BANCSHARES, INC.

(Exact name of registrant as specified in its charter)

 

Kentucky

 

61-0993464

(State or other jurisdiction of

 

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

incorporation or organization)

 

 

 

P.O. Box 157, Paris, Kentucky

 

40362-0157

(Address of principal executive offices)

 

(Zip Code)

 

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

 

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

 

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

 

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

 

Large accelerated filer o

 

Accelerated filer o

 

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

 

Smaller reporting company o

 

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

 

Number of shares of Common Stock outstanding as of July 31, 2014:  2,721,142.

 

 

 




Table of Contents

 

Item 1 - Financial Statements

 

KENTUCKY BANCSHARES, INC.

 

CONSOLIDATED BALANCE SHEETS (unaudited)

(in thousands, except per share data)

 

 

 

6/30/2014

 

12/31/2013

 

Assets

 

 

 

 

 

Cash and due from banks

 

$

14,951

 

$

22,650

 

Federal funds sold

 

88

 

510

 

Cash and cash equivalents

 

15,039

 

23,160

 

Securities available for sale

 

224,168

 

230,396

 

Trading Assets

 

5,242

 

 

Mortgage loans held for sale

 

495

 

223

 

Loans

 

496,134

 

468,655

 

Allowance for loan losses

 

(5,614

)

(5,441

)

Net loans

 

490,520

 

463,214

 

Federal Home Loan Bank stock

 

5,981

 

6,731

 

Real estate owned, net

 

2,306

 

3,379

 

Bank premises and equipment, net

 

16,780

 

16,709

 

Interest receivable

 

3,254

 

3,618

 

Mortgage servicing rights

 

1,245

 

1,344

 

Goodwill

 

13,117

 

13,117

 

Other intangible assets

 

243

 

317

 

Other assets

 

6,906

 

8,371

 

Total assets

 

$

785,296

 

$

770,579

 

 

 

 

 

 

 

Liabilities and Stockholders’ Equity

 

 

 

 

 

Deposits

 

 

 

 

 

Non-interest bearing

 

$

157,988

 

$

152,052

 

Time deposits, $100,000 and over

 

92,069

 

96,264

 

Other interest bearing

 

347,352

 

369,084

 

Total deposits

 

597,409

 

617,400

 

Repurchase agreements and other borrowings

 

11,297

 

12,867

 

Federal funds purchased

 

4,649

 

 

Short-term Federal Home Loan Bank advances

 

20,000

 

 

Long-term Federal Home Loan Bank advances

 

61,414

 

57,847

 

Subordinated debentures

 

7,217

 

7,217

 

Interest payable

 

679

 

736

 

Other liabilities

 

7,699

 

6,839

 

Total liabilities

 

710,364

 

702,906

 

 

 

 

 

 

 

Stockholders’ equity

 

 

 

 

 

Preferred stock, 300,000 shares authorized and unissued

 

 

 

Common stock, no par value; 10,000,000 shares authorized; 2,721,142 and 2,717,434 shares issued and outstanding on June 30, 2014 and December 31, 2013

 

12,608

 

12,570

 

Retained earnings

 

62,469

 

60,229

 

Accumulated other comprehensive loss

 

(145

)

(5,126

)

Total stockholders’ equity

 

74,932

 

67,673

 

Total liabilities & stockholders’ equity

 

$

785,296

 

$

770,579

 

 

See Accompanying Notes

 

3



Table of Contents

 

KENTUCKY BANCSHARES, INC.

 

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

(in thousands, except per share amounts)

 

 

 

Six Months Ending

 

 

 

6/30/2014

 

6/30/2013

 

INTEREST INCOME:

 

 

 

 

 

Loans, including fees

 

$

11,657

 

$

11,279

 

Securities

 

 

 

 

 

Taxable

 

1,355

 

1,006

 

Tax exempt

 

1,451

 

1,349

 

Trading assets

 

80

 

 

Other

 

145

 

159

 

Total interest income

 

14,688

 

13,793

 

INTEREST EXPENSE:

 

 

 

 

 

Deposits

 

1,074

 

1,162

 

Repurchase agreements and other borrowings

 

48

 

31

 

Federal Home Loan Bank advances

 

623

 

330

 

Subordinated debentures

 

115

 

115

 

Total interest expense

 

1,860

 

1,638

 

Net interest income

 

12,828

 

12,155

 

Provision for loan losses

 

200

 

600

 

Net interest income after provision

 

12,628

 

11,555

 

NON-INTEREST INCOME:

 

 

 

 

 

Service charges

 

2,073

 

2,108

 

Loan service fee income, net

 

34

 

(36

)

Trust department income

 

461

 

360

 

Gain on sale of available for sale securities, net

 

433

 

774

 

Gain on trading assets

 

162

 

 

Gain on sale of mortgage loans

 

398

 

1,140

 

Brokerage income

 

290

 

177

 

Debit card interchange income

 

1,009

 

953

 

Other

 

77

 

(46

)

Total other income

 

4,937

 

5,430

 

NON-INTEREST EXPENSE:

 

 

 

 

 

Salaries and employee benefits

 

7,263

 

6,778

 

Occupancy expenses

 

1,678

 

1,547

 

Repossession expenses, net

 

23

 

35

 

FDIC Insurance

 

268

 

262

 

Legal and professional fees

 

458

 

390

 

Data processing

 

668

 

688

 

Debit card expenses

 

496

 

468

 

Amortization

 

74

 

114

 

Advertising and marketing

 

441

 

376

 

Taxes other than payroll, property and income

 

422

 

447

 

Telephone

 

176

 

110

 

Postage

 

157

 

147

 

Loan fees

 

160

 

246

 

Other

 

945

 

1,013

 

Total other expenses

 

13,229

 

12,621

 

Income before taxes

 

4,336

 

4,364

 

Income taxes

 

661

 

870

 

Net income

 

$

3,675

 

$

3,494

 

Other Comprehensive Income (Loss), net of tax:

 

 

 

 

 

Change in Unrealized Gains (losses) on Securities

 

4,981

 

(5,976

)

Comprehensive Income (Loss)

 

$

8,656

 

$

(2,482

)

Earnings per share

 

 

 

 

 

Basic

 

$

1.36

 

$

1.29

 

Diluted

 

1.36

 

1.29

 

Dividends per share

 

0.50

 

0.48

 

 

See Accompanying Notes

 

4



Table of Contents

 

KENTUCKY BANCSHARES, INC.

 

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

(in thousands, except per share amounts)

 

 

 

Three Months Ending

 

 

 

6/30/2014

 

6/30/2013

 

INTEREST INCOME:

 

 

 

 

 

Loans, including fees

 

$

5,896

 

$

5,553

 

Securities

 

 

 

 

 

Taxable

 

680

 

527

 

Tax exempt

 

718

 

681

 

Trading assets

 

43

 

 

Other

 

69

 

76

 

Total interest income

 

7,406

 

6,837

 

INTEREST EXPENSE:

 

 

 

 

 

Deposits

 

535

 

572

 

Repurchase agreements and other borrowings

 

25

 

24

 

Federal Home Loan Bank advances

 

309

 

164

 

Subordinated debentures

 

58

 

56

 

Total interest expense

 

927

 

816

 

Net interest income

 

6,479

 

6,021

 

Provision for loan losses

 

100

 

150

 

Net interest income after provision

 

6,379

 

5,871

 

NON-INTEREST INCOME:

 

 

 

 

 

Service charges

 

1,062

 

1,088

 

Loan service fee income, net

 

5

 

16

 

Trust department income

 

239

 

183

 

Gain on sale of available for sale securities, net

 

245

 

485

 

Gain on trading assets

 

91

 

 

Gain on sale of mortgage loans

 

241

 

514

 

Brokerage income

 

210

 

109

 

Debit card interchange income

 

530

 

505

 

Other

 

45

 

(73

)

Total other income

 

2,668

 

2,827

 

NON-INTEREST EXPENSE:

 

 

 

 

 

Salaries and employee benefits

 

3,661

 

3,488

 

Occupancy expenses

 

830

 

829

 

Repossession expenses, net

 

25

 

(32

)

FDIC Insurance

 

140

 

130

 

Legal and professional fees

 

322

 

237

 

Data processing

 

331

 

340

 

Debit card expenses

 

262

 

245

 

Amortization

 

37

 

57

 

Advertising and marketing

 

232

 

192

 

Taxes other than payroll, property and income

 

197

 

222

 

Telephone

 

87

 

43

 

Postage

 

85

 

72

 

Loan fees

 

83

 

123

 

Other

 

483

 

499

 

Total other expenses

 

6,775

 

6,445

 

Income before taxes

 

2,272

 

2,253

 

Income taxes

 

368

 

468

 

Net income

 

$

1,904

 

$

1,785

 

Other Comprehensive Income (Loss), net of tax:

 

 

 

 

 

Change in Unrealized Gains (losses) on Securities

 

1,730

 

(4,724

)

Comprehensive Income (Loss)

 

$

3,634

 

$

(2,939

)

Earnings per share

 

 

 

 

 

Basic

 

$

0.70

 

$

0.66

 

Diluted

 

0.70

 

0.66

 

Dividends per share

 

0.25

 

0.24

 

 

See Accompanying Notes

 

5



Table of Contents

 

KENTUCKY BANCSHARES, INC.

 

CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS’ EQUITY (unaudited)

(in thousands, except share information)

 

 

 

 

 

 

 

 

 

Accumulated

 

 

 

 

 

 

 

 

 

 

 

Other

 

Total

 

 

 

—Common Stock(1) —

 

Retained

 

Comprehensive

 

Stockholders’

 

 

 

Shares

 

Amount

 

Earnings

 

Income/(Loss)

 

Equity

 

 

 

 

 

 

 

 

 

 

 

 

 

Balances, January 1, 2014

 

2,717,434

 

$

12,570

 

$

60,229

 

$

(5,126

)

$

67,673

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Common stock issued

 

7,503

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Stock based compensation expense

 

 

55

 

 

 

55

 

 

 

 

 

 

 

 

 

 

 

 

 

Common stock purchased and retired

 

(3,795

)

(17

)

(74

)

 

(91

)

 

 

 

 

 

 

 

 

 

 

 

 

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

 

 

 

 

4,981

 

4,981

 

 

 

 

 

 

 

 

 

 

 

 

 

Net income

 

 

 

3,675

 

 

3,675

 

 

 

 

 

 

 

 

 

 

 

 

 

Dividends declared - $0.50 per share

 

 

 

(1,361

)

 

(1,361

)

 

 

 

 

 

 

 

 

 

 

 

 

Balances, June 30, 2014

 

2,721,142

 

$

12,608

 

$

62,469

 

$

(145

)

$

74,932

 

 


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

 

See Accompanying Notes

 

6



Table of Contents

 

KENTUCKY BANCSHARES, INC.

 

CONSOLIDATED STATEMENTS OF CASH FLOWS (unaudited)

(in thousands)

 

 

 

Six Months Ending

 

 

 

6/30/2014

 

6/30/2013

 

Cash Flows From Operating Activities

 

 

 

 

 

Net Income

 

$

3,675

 

$

3,494

 

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

 

 

 

 

 

Depreciation and amortization

 

904

 

945

 

Securities amortization (accretion), net

 

303

 

565

 

Stock based compensation expense

 

55

 

48

 

Provision for loan losses

 

200

 

600

 

Securities available for sale gains, net

 

(433

)

(774

)

Net change in trading assets

 

(5,242

)

 

Originations of loans held for sale

 

(13,757

)

(34,329

)

Proceeds from sale of loans

 

13,883

 

35,536

 

Losses (gains) on sale of fixed assets

 

 

105

 

Losses (gains) on other real estate

 

(70

)

(30

)

Gain on sale of mortgage loans

 

(398

)

(1,140

)

Changes in:

 

 

 

 

 

Interest receivable

 

364

 

373

 

Write-downs of other real estate, net

 

10

 

(10

)

Other assets

 

1,369

 

(185

)

Interest payable

 

(57

)

78

 

Other liabilities

 

(1,707

)

708

 

Net cash from operating activities

 

(901

)

5,984

 

Cash Flows From Investing Activities

 

 

 

 

 

Purchases of securities available for sale

 

(34,977

)

(55,086

)

Proceeds from principal payments, sales, maturities and calls of securities

 

48,883

 

42,583

 

Net change in loans

 

(27,925

)

(23,668

)

Proceeds from sale of Federal Home Loan Bank stock

 

750

 

 

Purchases of bank premises and equipment

 

(705

)

(897

)

Proceeds from the sale of other real estate

 

1,551

 

754

 

Net cash from investing activities

 

(12,423

)

(36,314

)

Cash Flows From Financing Activities:

 

 

 

 

 

Net change in deposits

 

(19,991

)

(14,681

)

Net change in repurchase agreements and other borrowings

 

3,079

 

17,238

 

Short-term advances from Federal Home Loan Bank

 

105,000

 

41,000

 

Payment on short-term Federal Home Loan Bank advances

 

(85,000

)

(31,000

)

Long-term advances from Federal Home Loan Bank

 

6,538

 

8,200

 

Payments on long-term Federal Home Loan Bank advances

 

(2,971

)

(5,991

)

Payments on note payable

 

 

(500

)

Purchase of common stock

 

(91

)

(87

)

Dividends paid

 

(1,361

)

(1,307

)

Net cash from financing activities

 

5,203

 

12,872

 

Net change in cash and cash equivalents

 

(8,121

)

(17,458

)

Cash and cash equivalents at beginning of period

 

23,160

 

31,764

 

Cash and cash equivalents at end of period

 

$

15,039

 

$

14,306

 

 

 

 

 

 

 

Supplemental disclosures of cash flow information

 

 

 

 

 

Cash paid during the year for:

 

 

 

 

 

Interest expense

 

$

1,917

 

$

1,560

 

Income taxes

 

700

 

975

 

Supplemental disclosures of non-cash investing activities

 

 

 

 

 

Real estate acquired through foreclosure

 

$

419

 

$

248

 

 

See Accompanying Notes

 

7



Table of Contents

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

 

The financial information presented as of any date other than December 31 has been prepared from the Company’s books and records without audit.  The accompanying consolidated financial statements have been prepared in accordance with the instructions to Form 10-Q and Rule 10-01 of Regulation S-X.  Certain financial information that is normally included in annual financial statements prepared in accordance with accounting principles generally accepted in the United States of America, but is not required for interim reporting purposes, has been condensed or omitted.  There have been no significant changes to the Company’s accounting and reporting policies as disclosed in the Company’s Annual Report on Form 10-K for the year ended December 31, 2013.  In the opinion of management, all adjustments, consisting of normal recurring adjustments, necessary for a fair presentation of such financial statements, have been included.  The results of operations for the interim periods are not necessarily indicative of the results to be expected for the full year.

 

For further information, refer to the consolidated financial statements and footnotes thereto included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2013.

 

Basis of Presentation:  The consolidated financial statements include the accounts of Kentucky Bancshares, Inc. (the “Company”, “we”, “our” or “us”), its wholly-owned subsidiary, Kentucky Bank (the “Bank”), and the Bank’s wholly-owned subsidiary, KB Special Assets Unit, LLC.  Intercompany transactions and balances have been eliminated in consolidation.

 

Nature of Operations:  The Bank operates under a state bank charter and provides full banking services, including trust services, to customers located in Bourbon, Clark, Elliott, Fayette, Harrison, Jessamine, Madison, Rowan, Scott, Woodford and adjoining counties in Kentucky.  Management continues to consider opportunities for branch expansion and will also consider acquisition opportunities that help advance its strategic objectives.  As a state bank, the Bank is subject to regulation by the Kentucky Department of Financial Institutions and the Federal Deposit Insurance Corporation (“FDIC”).  The Company, a bank holding company, is regulated by the Federal Reserve.  On July 9, 2014, a new subsidiary of the Company was incorporated under the name KBI Insurance Company, Inc.  KBI Insurance Company, Inc. is a subsidiary of Kentucky Bancshares, Inc. and is located in Las Vegas, Nevada.  It is a captive insurance subsidiary which insures various liability and property damage policies for Kentucky Bancshares, Inc. and its related subsidiaries.  KBI Insurance Company, Inc. is regulated by the State of Nevada Division of Insurance.

 

Estimates in the Financial Statements:  The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period.  Actual results could differ from those estimates and such differences could be material to the financial statements.  The allowance for loan losses, loss contingencies, mortgage servicing rights, real estate owned, goodwill and fair value of financial instruments are particularly subject to change.

 

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

 

8



Table of Contents

 

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

 

Pension Matter:  The Company terminated the Kentucky Bancshares, Inc. Retirement Plan and Trust (the “Plan”) in a standard termination, with a termination date of December 31, 2008.  Prior to such termination, the Pension Protection Act of 2006 (“PPA”) had amended Internal Revenue Code (“IRC”) Section 417(e)(3) in part by changing the definition of “applicable interest rate” in a manner that in most cases (when combined with other changes to IRC Section 417(e)(3)) would result in a decrease in the value of a participant’s or beneficiary’s plan benefits under pension plans such as the Company’s Plan with the new definition applicable (for most plans, including the Plan) to lump sums with annuity starting dates in or after the 2008 plan year.  The Plan had determined in mid-2008 to comply with IRC Section 417(e)(3), as amended by PPA, by using the assumptions governing minimum lump sums, rather than by using the pre-PPA minimum lump sum assumptions, and operated the Plan in compliance with that decision.  As permitted by the IRC, the Plan was amended on February 24, 2009 (after the termination of the Plan on December 31, 2008) to formalize that decision in accordance with Section 1107 of PPA.

 

The Internal Revenue Service issued a favorable determination as to the Plan termination in July 2010.  Subsequent to Plan termination and distributions to Plan participants, the Plan was selected for audit by the Pension Benefit Guaranty Corporation (“PBGC”).  The PBGC asserted that the February, 2009 amendment to the Plan violated PBGC Regulation Section 4041.8(a) because the amendment served to lower benefits to Plan beneficiaries.  The PBGC filed a Complaint in May 2013 in United States District Court (Eastern District of Kentucky) to require the Company to make additional distributions to Plan beneficiaries.  On March 17, 2014, the United States District Court (Eastern District of Kentucky) issued an Opinion and Order entering judgment in favor of the PBGC and ruling that the Company must comply with the PBGC’s determination respecting the Plan.  The Company is appraising its options with respect to this judgment, and has appealed the decision. The appeal is pending.  However, in light of the court’s opinion, the Company accrued approximately $1.6 million as of December 31, 2013 for this matter.  The accrued balance for this matter remains $1.6 million at June 30, 2014.  Moreover, in the event the subject court decision is not overturned, the Company believes it has claims for further contribution towards payment of this liability from professionals who assisted the Company in the termination of the Plan.

 

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

 

9



Table of Contents

 

Adoption of New Accounting Standards

 

In January 2014, the FASB issued Accounting Standards Update (“ASU”) 2014-04 - Receivables - Troubled Debt Restructurings by Creditors (Subtopic 310-40) - Reclassification of Residential Real Estate Collateralized Consumer Mortgage loans upon Foreclosure. This standard provides clarification when a creditor should be considered to have received physical possession of residential real estate property collateralizing a consumer mortgage loan such that the loan should be removed from the balance sheet and other real estate owned recognized. These amendments clarify that when an in-substance foreclosure occurs, and a creditor is considered to have received physical possession of residential real estate property collateralizing a consumer mortgage loan upon either: (1) the creditor obtaining legal title to the residential real estate property upon completion of a foreclosure, or (2) the borrower conveying all interest in the residential real estate property to the creditor to satisfy that loan through completion of a deed in lieu of foreclosure or through a similar legal agreement. For public business entities (PBEs) this ASU is effective for annual periods, and interim periods within those annual periods, beginning after Dec 15, 2014.  For entities that are not PBEs, this ASU is effective for annual periods beginning after Dec 15, 2014, and for interim periods within annual periods beginning after Dec 15, 2015.  Early adoption is permitted.  The effect of adopting this standard is not expected to have a material effect on the Company’s results of operations or financial condition.

 

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

 

2. SECURITIES

 

SECURITIES AVAILABLE FOR SALE

 

Period-end securities are as follows:

(in thousands)

 

 

 

 

 

Gross

 

Gross

 

 

 

 

 

Amortized

 

Unrealized

 

Unrealized

 

Fair

 

 

 

Cost

 

Gains

 

Losses

 

Value

 

Available for Sale

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

June 30, 2014

 

 

 

 

 

 

 

 

 

U.S. government agencies

 

$

69,062

 

$

19

 

$

(1,809

)

$

67,272

 

States and political subdivisions

 

85,375

 

2,894

 

(731

)

87,538

 

Mortgage-backed - residential

 

69,681

 

315

 

(932

)

69,064

 

Equity securities

 

270

 

24

 

 

294

 

Total

 

$

224,388

 

$

3,252

 

$

(3,472

)

$

224,168

 

 

 

 

 

 

 

 

 

 

 

December 31, 2013

 

 

 

 

 

 

 

 

 

U.S. government agencies

 

$

73,930

 

$

51

 

$

(4,695

)

$

69,286

 

States and political subdivisions

 

91,043

 

1,614

 

(2,474

)

90,183

 

Mortgage-backed - residential

 

72,920

 

44

 

(2,326

)

70,638

 

Equity securities

 

270

 

19

 

 

289

 

Total

 

$

238,163

 

$

1,728

 

$

(9,495

)

$

230,396

 

 

The amortized cost and fair value of securities at June 30, 2014 by contractual maturity are shown below.  Expected maturities will differ from contractual maturities because borrowers may have the right to call or prepay obligations with or without call or prepayment penalties.  Securities not due at a single maturity are shown separately.  Further discussion concerning Fair Value Measurements can be found in Note 8.

 

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(in thousands)

 

 

 

Amortized

 

Fair

 

 

 

Cost

 

Value

 

Due in one year or less

 

$

467

 

$

469

 

Due after one year through five years

 

8,888

 

8,897

 

Due after five years through ten years

 

80,302

 

79,607

 

Due after ten years

 

64,780

 

65,837

 

 

 

154,437

 

154,810

 

Mortgage-backed - residential

 

69,681

 

69,064

 

Equity

 

270

 

294

 

Total

 

$

224,388

 

$

224,168

 

 

Proceeds from sales of securities during the first six months of 2014 and 2013 were $40.0 million and $27.2 million.  Gross gains of $785 thousand and $774 thousand and gross losses of $352 thousand and $0 were realized on those sales, respectively.  The tax provision related to these realized net gains was $147 thousand and $263 thousand, respectively.

 

Proceeds from sales of securities during the three months ending June 30, 2014 and June 30, 2013 were $23.5 million and $16.7 million.  Gross gains of $477 thousand and $485 thousand and gross losses of $232 thousand and $0 were realized on those sales, respectively.  The tax provision related to these realized gains and losses was $83 thousand and $165 thousand, respectively.

 

Securities with unrealized losses June 30, 2014 and at December 31, 2013 not recognized in income are as follows:

 

June 30, 2014

 

 

 

Less than 12 Months

 

12 Months or More

 

Total

 

 

 

Fair

 

Unrealized

 

Fair

 

Unrealized

 

Fair

 

Unrealized

 

Description of Securities

 

Value

 

Loss

 

Value

 

Loss

 

Value

 

Loss

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

U.S. Government agencies

 

$

12,771

 

$

(142

)

$

53,774

 

$

(1,667

)

$

66,545

 

$

(1,809

)

States and municipals

 

4,426

 

(66

)

13,892

 

(665

)

18,318

 

(731

)

Mortgage-backed - residential

 

10,695

 

(167

)

25,753

 

(765

)

36,448

 

(932

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total temporarily impaired

 

$

27,892

 

$

(375

)

$

93,419

 

$

(3,097

)

$

121,311

 

$

(3,472

)

 

December 31, 2013

 

 

 

Less than 12 Months

 

12 Months or More

 

Total

 

 

 

Fair

 

Unrealized

 

Fair

 

Unrealized

 

Fair

 

Unrealized

 

Description of Securities

 

Value

 

Loss

 

Value

 

Loss

 

Value

 

Loss

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

U.S. Government agencies

 

$

57,203

 

$

(3,812

)

$

8,117

 

$

(883

)

$

65,320

 

$

(4,695

)

States and municipals

 

32,289

 

(2,106

)

2,879

 

(368

)

35,168

 

(2,474

)

Mortgage-backed - residential

 

62,126

 

(2,326

)

 

 

62,126

 

(2,326

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total temporarily impaired

 

$

151,618

 

$

(8,244

)

$

10,996

 

$

(1,251

)

$

162,614

 

$

(9,495

)

 

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

 

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

 

TRADING ASSETS

 

The trading assets of $5.2 million are primarily comprised of municipal securities which are held for a very short period of time.

 

3. LOANS

 

Loans at period-end are as follows:

(in thousands)

 

 

 

6/30/14

 

12/31/13

 

 

 

 

 

 

 

Commercial

 

$

33,727

 

$

34,654

 

Real estate construction

 

13,393

 

11,177

 

Real estate mortgage:

 

 

 

 

 

1-4 family residential

 

208,620

 

194,388

 

Multi-family residential

 

18,805

 

16,420

 

Non-farm & non-residential

 

131,795

 

126,791

 

Agricultural

 

72,605

 

68,002

 

Consumer

 

16,947

 

17,065

 

Other

 

242

 

158

 

Total

 

$

496,134

 

$

468,655

 

 

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

 

 

 

Six Months Ended June 30, 2014

 

 

 

(in thousands)

 

 

 

Beginning

 

 

 

 

 

 

 

Ending

 

 

 

Balance

 

Charge-offs

 

Recoveries

 

Provision

 

Balance

 

 

 

 

 

 

 

 

 

 

 

 

 

Commercial

 

$

230

 

$

200

 

$

 

$

201

 

$

231

 

Real estate Construction

 

358

 

 

8

 

(7

)

359

 

Real estate mortgage:

 

 

 

 

 

 

 

 

 

 

 

1-4 family residential

 

2,169

 

88

 

16

 

227

 

2,324

 

Multi-family residential

 

427

 

 

 

(100

)

327

 

Non-farm & non-residential

 

564

 

 

367

 

(197

)

734

 

Agricultural

 

578

 

 

25

 

(57

)

546

 

Consumer

 

548

 

153

 

41

 

107

 

543

 

Other

 

51

 

202

 

159

 

25

 

33

 

Unallocated

 

516

 

 

 

1

 

517

 

 

 

$

5,441

 

$

643

 

$

616

 

$

200

 

$

5,614

 

 

 

 

Three Months Ended June, 30 2014

 

 

 

(in thousands)

 

 

 

Beginning

 

 

 

 

 

 

 

Ending

 

 

 

Balance

 

Charge-offs

 

Recoveries

 

Provision

 

Balance

 

 

 

 

 

 

 

 

 

 

 

 

 

Commercial

 

$

208

 

$

 

$

 

$

23

 

$

231

 

Real estate Construction

 

329

 

 

4

 

26

 

359

 

Real estate mortgage:

 

 

 

 

 

 

 

 

 

 

 

1-4 family residential

 

2,111

 

25

 

4

 

234

 

2,324

 

Multi-family residential

 

401

 

 

 

(74

)

327

 

Non-farm & non-residential

 

930

 

 

 

(196

)

734

 

Agricultural

 

553

 

 

1

 

(8

)

546

 

Consumer

 

550

 

76

 

23

 

46

 

543

 

Other

 

11

 

105

 

72

 

55

 

33

 

Unallocated

 

523

 

 

 

(6

)

517

 

 

 

$

5,616

 

$

206

 

$

104

 

$

100

 

$

5,614

 

 

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Six Months Ended June 30, 2013

 

 

 

(in thousands)

 

 

 

Beginning

 

 

 

 

 

 

 

Ending

 

 

 

Balance

 

Charge-offs

 

Recoveries

 

Provision

 

Balance

 

 

 

 

 

 

 

 

 

 

 

 

 

Commercial

 

$

150

 

$

11

 

$

28

 

$

(16

)

$

151

 

Real estate Construction

 

918

 

578

 

21

 

12

 

373

 

Real estate mortgage:

 

 

 

 

 

 

 

 

 

 

 

1-4 family residential

 

1,989

 

141

 

56

 

80

 

1,984

 

Multi-family residential

 

414

 

161

 

39

 

189

 

481

 

Non-farm & non-residential

 

628

 

 

18

 

31

 

677

 

Agricultural

 

845

 

86

 

3

 

(101

)

661

 

Consumer

 

517

 

252

 

18

 

265

 

548

 

Other

 

54

 

309

 

206

 

141

 

92

 

Unallocated

 

532

 

 

 

(1

)

531

 

 

 

$

6,047

 

$

1,538

 

$

389

 

$

600

 

$

5,498

 

 

 

 

Three Months Ended June 30, 2013

 

 

 

(in thousands)

 

 

 

Beginning

 

 

 

 

 

 

 

Ending

 

 

 

Balance

 

Charge-offs

 

Recoveries

 

Provision

 

Balance

 

 

 

 

 

 

 

 

 

 

 

 

 

Commercial

 

$

135

 

$

5

 

$

 

$

21

 

$

151

 

Real estate Construction

 

497

 

 

16

 

(140

)

373

 

Real estate mortgage:

 

 

 

 

 

 

 

 

 

 

 

1-4 family residential

 

1,974

 

16

 

30

 

(4

)

1,984

 

Multi-family residential

 

493

 

161

 

39

 

110

 

481

 

Non-farm & non-residential

 

611

 

 

10

 

56

 

677

 

Agricultural

 

747

 

 

1

 

(87

)

661

 

Consumer

 

511

 

104

 

7

 

134

 

548

 

Other

 

99

 

172

 

80

 

85

 

92

 

Unallocated

 

556

 

 

 

(25

)

531

 

 

 

$

5,623

 

$

458

 

$

183

 

$

150

 

$

5,498

 

 

The following tables present the balance in the allowance for loan losses and the recorded investment (excluding accrued interest receivable amounting to $2.0 million as of June 30, 2014 and $2.3 million at December 31, 2013) in loans by portfolio segment and based on impairment method as of June 30, 2014 and December 31, 2013:

 

As of June 30, 2014

(in thousands)

 

 

 

Individually

 

Collectively

 

 

 

 

 

Evaluated for

 

Evaluated for

 

 

 

 

 

Impairment

 

Impairment

 

Total

 

Allowance for Loan Losses:

 

 

 

 

 

 

 

Commercial

 

$

 

$

231

 

$

231

 

Real estate construction

 

 

359

 

359

 

Real estate mortgage:

 

 

 

 

 

 

 

1-4 family residential

 

326

 

1,998

 

2,324

 

Multi-family residential

 

50

 

277

 

327

 

Non-farm & non-residential

 

182

 

552

 

734

 

Agricultural

 

260

 

286

 

546

 

Consumer

 

 

543

 

543

 

Other

 

 

33

 

33

 

Unallocated

 

 

517

 

517

 

 

 

$

818

 

$

4,796

 

$

5,614

 

Loans:

 

 

 

 

 

 

 

Commercial

 

$

 

$

33,727

 

$

33,727

 

Real estate construction

 

 

13,393

 

13,393

 

Real estate mortgage:

 

 

 

 

 

 

 

1-4 family residential

 

3,196

 

205,424

 

208,620

 

Multi-family residential

 

345

 

18,460

 

18,805

 

Non-farm & non-residential

 

3,937

 

127,858

 

131,795

 

Agricultural

 

9,534

 

63,071

 

72,605

 

Consumer

 

 

16,947

 

16,947

 

Other

 

 

242

 

242

 

 

 

$

 17,012

 

$

479,122

 

$

496,134

 

 

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As of December 31, 2013

(in thousands)

 

 

 

Individually

 

Collectively

 

 

 

 

 

Evaluated for

 

Evaluated for

 

 

 

 

 

Impairment

 

Impairment

 

Total

 

Allowance for Loan Losses:

 

 

 

 

 

 

 

Commercial

 

$

 

$

230

 

$

230

 

Real estate construction

 

 

358

 

358

 

Real estate mortgage:

 

 

 

 

 

 

 

1-4 family residential

 

228

 

1,941

 

2,169

 

Multi-family residential

 

76

 

351

 

427

 

Non-farm & non-residential

 

110

 

454

 

564

 

Agricultural

 

298

 

280

 

578

 

Consumer

 

 

548

 

548

 

Other

 

 

51

 

51

 

Unallocated

 

 

516

 

516

 

 

 

$

712

 

$

4,729

 

$

5,441

 

Loans:

 

 

 

 

 

 

 

Commercial

 

$

 

$

34,654

 

$

34,654

 

Real estate construction

 

 

11,177

 

11,177

 

Real estate mortgage:

 

 

 

 

 

 

 

1-4 family residential

 

2,873

 

191,515

 

194,388

 

Multi-family residential

 

274

 

16,146

 

16,420

 

Non-farm & non-residential

 

2,716

 

124,075

 

126,791

 

Agricultural

 

7,673

 

60,329

 

68,002

 

Consumer

 

 

17,065

 

17,065

 

Other

 

 

158

 

158

 

 

 

$

13,536

 

$

455,119

 

$

468,655

 

 

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The following table presents loans individually evaluated for impairment by class of loans as of and for the six months ended June 30, 2014 (in thousands):

 

 

 

Unpaid

 

 

 

Allowance for

 

Average

 

Interest

 

Cash Basis

 

 

 

Principal

 

Recorded

 

Loan Losses

 

Recorded

 

Income

 

Interest

 

 

 

Balance

 

Investment

 

Allocated

 

Investment

 

Recognized

 

Recognized

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

With no related allowance recorded:

 

 

 

 

 

 

 

 

 

 

 

 

 

Commercial

 

$

 

$

 

$

 

$

 

$

 

$

 

Real estate construction

 

 

 

 

 

 

 

Real estate mortgage:

 

 

 

 

 

 

 

 

 

 

 

 

 

1-4 family residential

 

1,302

 

1,302

 

 

1,002

 

 

 

Multi-family residential

 

 

 

 

 

 

 

Non-farm & non-residential

 

 

 

 

267

 

 

 

Agricultural

 

4,780

 

4,780

 

 

2,684

 

80

 

80

 

Consumer

 

 

 

 

 

 

 

Other

 

 

 

 

 

 

 

With an allowance recorded:

 

 

 

 

 

 

 

 

 

 

 

 

 

Commercial

 

 

 

 

 

 

 

Real estate construction

 

 

 

 

 

 

 

Real estate mortgage:

 

 

 

 

 

 

 

 

 

 

 

 

 

1-4 family residential

 

1,894

 

1,894

 

326

 

1,991

 

44

 

44

 

Multi-family residential

 

345

 

345

 

50

 

323

 

5

 

5

 

Non-farm & non-residential

 

3,937

 

3,937

 

182

 

3,043

 

73

 

73

 

Agricultural

 

4,754

 

4,754

 

260

 

5,034

 

19

 

19

 

Consumer

 

 

 

 

 

 

 

Other

 

 

 

 

 

 

 

 

Total

 

$

17,012

 

$

17,012

 

$

818

 

$

14,344

 

$

221

 

$

221

 

 

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

 

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The following table presents loans individually evaluated for impairment by class of loans as of and for the year ended December 31, 2013 (in thousands):

 

 

 

Unpaid

 

 

 

Allowance for

 

Average

 

Interest

 

Cash Basis

 

 

 

Principal

 

Recorded

 

Loan Losses

 

Recorded

 

Income

 

Interest

 

 

 

Balance

 

Investment

 

Allocated

 

Investment

 

Recognized

 

Recognized

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

With no related allowance recorded:

 

 

 

 

 

 

 

 

 

 

 

 

 

Commercial

 

$

 

$

 

$

 

$

 

$

 

$

 

Real estate construction

 

 

 

 

 

 

 

Real estate mortgage:

 

 

 

 

 

 

 

 

 

 

 

 

 

1-4 family residential

 

824

 

793

 

 

1,217

 

28

 

28

 

Multi-family residential

 

 

 

 

 

 

 

Non-farm & non-residential

 

1,650

 

803

 

 

1,471

 

81

 

81

 

Agricultural

 

2,912

 

2,826

 

 

2,802

 

123

 

123

 

Consumer

 

 

 

 

 

 

 

Other

 

 

 

 

 

 

 

With an allowance recorded:

 

 

 

 

 

 

 

 

 

 

 

 

 

Commercial

 

 

 

 

 

 

 

Real estate construction

 

 

 

 

607

 

 

 

Real estate mortgage

 

 

 

 

 

 

 

 

 

 

 

 

 

1-4 family residential

 

2,080

 

2,080

 

228

 

1,349

 

96

 

96

 

Multi-family residential

 

274

 

274

 

76

 

443

 

3

 

3

 

Non-farm & non-residential

 

1,913

 

1,913

 

110

 

1,938

 

79

 

79

 

Agricultural

 

4,847

 

4,847

 

298

 

4,864

 

287

 

287

 

Consumer

 

 

 

 

 

 

 

Other

 

 

 

 

 

 

 

 

Total

 

$

14,501

 

$

13,536

 

$

712

 

$

14,691

 

$

697

 

$

697

 

 

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

 

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Table of Contents

 

The following table presents loans individually evaluated for impairment by class of loans as of and for the six months ended June 30, 2013 (in thousands):

 

 

 

Average

 

Interest

 

Cash Basis

 

 

 

Recorded

 

Income

 

Interest

 

 

 

Investment

 

Recognized

 

Recognized

 

With no related allowance recorded:

 

 

 

 

 

 

 

Commercial

 

$

 

$

 

$

 

Real estate construction

 

 

 

 

Real estate mortgage:

 

 

 

 

 

 

 

1-4 family residential

 

1,253

 

21

 

21

 

Multi-family residential

 

 

 

 

Non-farm & non-residential

 

1,625

 

40

 

40

 

Agricultural

 

2,873

 

9

 

9

 

Consumer

 

 

 

 

Other

 

 

 

 

With an allowance recorded:

 

 

 

 

 

 

 

Commercial

 

 

 

 

Real estate construction

 

 

 

 

 

Real estate mortgage:

 

 

 

 

 

 

 

1-4 family residential

 

874

 

21

 

21

 

Multi-family residential

 

511

 

3

 

3

 

Non-farm & non-residential

 

2,641

 

40

 

40

 

Agricultural

 

4,711

 

57

 

57

 

Consumer

 

 

 

 

Other

 

 

 

 

 

Total

 

$

14,488

 

$

191

 

$

191

 

 

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

 

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Table of Contents

 

The following tables present loans individually evaluated for impairment by class of loans for the three months ending June 30, 2014 and June 30, 2013 (in thousands):

 

 

 

Three Months Ending June 30, 2014

 

 

 

Average

 

Interest

 

Cash Basis

 

 

 

Recorded

 

Income

 

Interest

 

 

 

Investment

 

Recognized

 

Recognized

 

 

 

 

 

 

 

 

 

With no related allowance recorded:

 

 

 

 

 

 

 

Commercial

 

$

 

$

 

$

 

Real estate construction

 

 

 

 

Real estate mortgage:

 

 

 

 

 

 

 

1-4 family residential

 

1,562

 

 

 

Multi-family residential

 

 

 

 

Non-farm & non-residential

 

 

 

 

Agricultural

 

2,836

 

77

 

77

 

Consumer

 

 

 

 

Other

 

 

 

 

With an allowance recorded:

 

 

 

 

 

 

 

Commercial

 

 

 

 

Real estate construction

 

 

 

 

Real estate mortgage:

 

 

 

 

 

 

 

1-4 family residential

 

1,377

 

38

 

38

 

Multi-family residential

 

310

 

1

 

1

 

Non-farm & non-residential

 

3,553

 

48

 

48

 

Agricultural

 

4,755

 

19

 

19

 

Consumer

 

 

 

 

Other

 

 

 

 

Total

 

$

14,393

 

$

183

 

$

183

 

 

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

 

 

 

Three Months Ending June 30, 2013

 

 

 

Average

 

Interest

 

Cash Basis

 

 

 

Recorded

 

Income

 

Interest

 

 

 

Investment

 

Recognized

 

Recognized

 

 

 

 

 

 

 

 

 

With no related allowance recorded:

 

 

 

 

 

 

 

Commercial

 

$

 

$

 

$

 

Real estate construction

 

 

 

 

Real estate mortgage:

 

 

 

 

 

 

 

1-4 family residential

 

1,035

 

2

 

2

 

Multi-family residential

 

 

 

 

Non-farm & non-residential

 

1,065

 

20

 

20

 

Agricultural

 

2,854

 

3

 

3

 

Consumer

 

 

 

 

Other

 

 

 

 

With an allowance recorded:

 

 

 

 

 

 

 

Commercial

 

 

 

 

Real estate construction

 

 

 

 

Real estate mortgage:

 

 

 

 

 

 

 

1-4 family residential

 

1,016

 

7

 

7

 

Multi-family residential

 

669

 

1

 

1

 

Non-farm & non-residential

 

2,421

 

20

 

20

 

Agricultural

 

4,744

 

7

 

7

 

Consumer

 

 

 

 

Other

 

 

 

 

Total

 

$

13,804

 

$

60

 

$

60

 

 

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

 

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Table of Contents

 

The following tables present the recorded investment in nonaccrual, loans past due over 90 days still on accrual and accruing troubled debt restructurings by class of loans as of June 30, 2014 and December 31, 2013:

 

As of June 30, 2014

(in thousands)

 

 

 

 

 

Loans Past Due

 

 

 

 

 

 

 

Over 90 Days

 

Accruing

 

 

 

 

 

Still

 

Troubled Debt

 

 

 

Nonaccrual

 

Accruing

 

Restructurings

 

 

 

 

 

 

 

 

 

Commercial

 

$

299

 

$

 

$

 

Real estate construction

 

 

 

 

Real estate mortgage:

 

 

 

 

 

 

 

1-4 family residential

 

2,350

 

266

 

487

 

Multi-family residential

 

85

 

 

 

Non-farm & non-residential

 

988

 

 

1,853

 

Agricultural

 

216

 

 

4,530

 

Consumer

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total

 

$

3,938

 

$

266

 

$

6,870

 

 

As of December 31, 2013

(in thousands)

 

 

 

 

 

Loans Past Due

 

 

 

 

 

 

 

Over 90 Days

 

Accruing

 

 

 

 

 

Still

 

Troubled Debt

 

 

 

Nonaccrual

 

Accruing

 

Restructurings

 

 

 

 

 

 

 

 

 

Commercial

 

$

 

$

 

$

 

Real estate construction

 

 

 

 

Real estate mortgage:

 

 

 

 

 

 

 

1-4 family residential

 

1,171

 

314

 

493

 

Multi-family residential

 

275

 

 

 

Non-farm & non-residential

 

803

 

 

1,878

 

Agricultural

 

717

 

232

 

4,530

 

Consumer

 

8

 

8

 

 

 

 

 

 

 

 

 

 

 

 

 

Total

 

$

2,974

 

$

554

 

$

6,901

 

 

Nonaccrual loans secured by real estate make up 92.4% of the total nonaccruals at June 30, 2014.

 

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

 

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Table of Contents

 

A loan is considered impaired when, based on current information and events, it is probable that a creditor will be unable to collect all amounts due according to the contractual terms of the loan agreement.  All amounts due according to the contractual terms means that both the contractual interest payments and the contractual principal payments of a loan will be collected as scheduled in the loan agreement.  Nonaccrual loans are loans for which payments in full of principal or interest is not expected or which principal or interest has been in default for a period of 90 days or more unless the asset is both well secured and in the process of collection.  Other impaired loans may be loans showing signs of weakness or interruptions in cash flow, but ultimately are current or less than 90 days past due with respect to principal and interest and for which we anticipate full payment of principal and interest but not in accordance with contractual terms.

 

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

 

During the first six months of 2014, $419 thousand in impaired loans were transferred to other real estate owned.  Additionally, $643 thousand in loan balances were charged off during the first six months of 2014 and $616 thousand in prior loan charge offs were recovered.

 

The following tables present the aging of the recorded investment in past due and non-accrual loans as of June 30, 2014 and December 31, 2013 by class of loans:

 

As of June 30, 2014

(in thousands)

 

 

 

30–59

 

60–89

 

Loans Past Due

 

 

 

Total

 

 

 

 

 

Days

 

Days

 

Over 90 Days

 

 

 

Past Due &

 

Loans Not

 

 

 

Past Due

 

Past Due

 

Still Accruing

 

Non-accrual

 

Non-accrual

 

Past Due

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Commercial

 

$

79

 

$

 

$

 

$

299

 

$

378

 

$

33,349

 

Real estate construction

 

 

 

 

 

 

13,393

 

Real estate mortgage:

 

 

 

 

 

 

 

 

 

 

 

 

 

1-4 family residential

 

1,788

 

433

 

266

 

2,350

 

4,837

 

203,783

 

Multi-family residential

 

 

260

 

 

85

 

345

 

18,460

 

Non-farm & non-residential

 

777

 

 

 

988

 

1,765

 

130,030

 

Agricultural

 

312

 

 

 

216

 

528

 

72,077

 

Consumer

 

151

 

44

 

 

 

195

 

16,752

 

Other

 

 

 

 

 

 

242

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total

 

$

3,107

 

$

737

 

$

266

 

$

3,938

 

$

8,048

 

$

488,086

 

 

As of December 31, 2013

(in thousands)

 

 

 

30–59

 

60–89

 

Greater than

 

 

 

Total

 

 

 

 

 

Days

 

Days

 

90 Days

 

 

 

Past Due &

 

Loans Not

 

 

 

Past Due

 

Past Due

 

Past Due

 

Non-accrual

 

Non-accrual

 

Past Due

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Commercial

 

$

49

 

$

 

$

 

$

 

$

49

 

$

34,605

 

Real estate construction

 

175

 

 

 

 

175

 

11,002

 

Real estate mortgage:

 

 

 

 

 

 

 

 

 

 

 

 

 

1-4 family residential

 

1,981

 

1,285

 

314

 

1,171

 

4,751

 

189,637

 

Multi-family residential

 

 

 

 

275

 

275

 

16,145

 

Non-farm & non-residential

 

503

 

 

 

803

 

1,306

 

125,485

 

Agricultural

 

155

 

 

232

 

717

 

1,104

 

66,898

 

Consumer

 

102

 

27

 

8

 

8

 

145

 

16,920

 

Other

 

 

 

 

 

 

158

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total

 

$

2,965

 

$

1,312

 

$

554

 

$

2,974

 

$

7,805

 

$

460,850

 

 

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Troubled Debt Restructurings:

 

The Company has allocated $398 thousand in specific reserves to customers whose loan terms have been modified in troubled debt restructurings as of June 30, 2014.  The Company allocated $428 thousand for specific reserves to customers whose loan terms had been modified in troubled debt restructuring as of December 31, 2013.  The Company has not committed to lend additional amounts as of June 30, 2014 and December 31, 2013 to customers with outstanding loans that are classified as troubled debt restructurings.  There were no troubled debt restructurings for which there was a payment default within twelve months following the modification during the periods ending June 30, 2014 and 2013.

 

No loans were modified as troubled debt restructurings during the six months ending June 30, 2014 and 2013.

 

Credit Quality Indicators:

 

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

 

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

 

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

 

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

 

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

 

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Table of Contents

 

As of June 30, 2014 and December 31, 2013, and based on the most recent analysis performed, the risk category of loans by class of loans is as follows:

 

As of June 30, 2014

(in thousands)

 

 

 

 

 

Special

 

 

 

 

 

 

 

Pass

 

Mention

 

Substandard

 

Doubtful

 

 

 

 

 

 

 

 

 

 

 

Commercial

 

$

31,932

 

$

1,241

 

$

554

 

$

 

Real estate construction

 

11,934

 

1,459

 

 

 

Real estate mortgage:

 

 

 

 

 

 

 

 

 

1-4 family residential

 

190,893

 

10,040

 

7,666

 

21

 

Multi-family residential

 

16,738

 

1,555

 

512

 

 

Non-farm & non-residential

 

125,306

 

5,050

 

1,439

 

 

Agricultural

 

58,709

 

12,353

 

1,543

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total

 

$

435,512

 

$

31,698

 

$

11,714

 

$

21

 

 

As of December 31, 2013

(in thousands)

 

 

 

 

 

Special

 

 

 

 

 

 

 

Pass

 

Mention

 

Substandard

 

Doubtful

 

 

 

 

 

 

 

 

 

 

 

Commercial

 

$

32,771

 

$

1,587

 

$

296

 

$

 

Real estate construction

 

9,660

 

1,517

 

 

 

Real estate mortgage:

 

 

 

 

 

 

 

 

 

1-4 family residential

 

176,553

 

10,346

 

7,489

 

 

Multi-family residential

 

14,392

 

1,579

 

449

 

 

Non-farm & non-residential

 

120,195

 

5,327

 

1,269

 

 

Agricultural

 

56,713

 

7,297

 

3,992

 

 

 

 

 

 

 

 

 

 

 

 

Total

 

$

410,284

 

$

27,653

 

$

13,495

 

$

 

 

For consumer loans, the Company evaluates the credit quality based on the aging of the recorded investment in loans, which was previously presented.  Non-performing consumer loans are loans which are greater than 90 days past due or on non-accrual status, and total $0 at June 30, 2014 and $16 thousand at December 31, 2013.

 

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Table of Contents

 

4.  REAL ESTATE OWNED

 

Activity in real estate owned, net was as follows:

 

 

 

Six Months Ended

 

 

 

2014

 

2013

 

 

 

(in thousands)

 

 

 

 

 

Beginning of year

 

$

3,379

 

$

4,168

 

Additions

 

419

 

335

 

Sales

 

(1,540

)

(924

)

(Additions) subtractions to valuation allowance, net

 

(10

)

10

 

Recovery from sale in valuation allowance

 

58

 

199

 

 

 

 

 

 

 

End of period

 

$

2,306

 

$

3,788

 

 

Activity in the valuation allowance was as follows:

 

 

 

Six Months Ended

 

 

 

2014

 

2013

 

 

 

(in thousands)

 

 

 

 

 

Beginning of year

 

$

1,524

 

$

1,668

 

Additions (subtractions) to valuation allowance, net

 

10

 

(10

)

Recovery from sale

 

(58

)

(199

)

 

 

 

 

 

 

End of period

 

$

1,476

 

$

1,459

 

 

Expenses related to foreclosed assets include:

 

 

 

Six Months Ended

 

 

 

2014

 

2013

 

 

 

(in thousands)

 

 

 

 

 

Net loss (gain) on sales

 

$

(70

)

$

(30

)

Additions (subtractions) to valuation allowance, net

 

10

 

(10

)

Operating expenses (receipts), net of rental income

 

13

 

45

 

Repossession expenses, net

 

23

 

35

 

 

 

 

 

 

 

End of period

 

$

(47

)

$

5

 

 

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Table of Contents

 

5.  EARNINGS PER SHARE

 

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

 

The factors used in the earnings per share computation follow:

 

 

 

Six Months Ended

 

 

 

June 30

 

 

 

2014

 

2013

 

 

 

(in thousands)

 

 

 

 

 

Basic Earnings Per Share

 

 

 

 

 

Net Income

 

$

3,675

 

$

3,494

 

Weighted average common shares outstanding

 

2,708

 

2,705

 

Basic earnings per share

 

$

1.36

 

$

1.29

 

Diluted Earnings Per Share

 

 

 

 

 

Net Income

 

$

3,675

 

$

3,494

 

Weighted average common shares outstanding

 

2,708

 

2,705

 

Add dilutive effects of assumed vesting of stock grants

 

 

4

 

Weighted average common and dilutive potential common shares outstanding

 

2,708

 

2,709

 

Diluted earnings per share

 

$

1.36

 

$

1.29

 

 

 

 

Three Months Ended

 

 

 

June 30

 

 

 

2014

 

2013

 

 

 

(in thousands)

 

 

 

 

 

Basic Earnings Per Share

 

 

 

 

 

Net Income

 

$

1,904

 

$

1,785

 

Weighted average common shares outstanding

 

2,708

 

2,704

 

Basic earnings per share

 

$

0.70

 

$

0.66

 

Diluted Earnings Per Share

 

 

 

 

 

Net Income

 

$

1,904

 

$

1,785

 

Weighted average common shares outstanding

 

2,708

 

2,704

 

Add dilutive effects of assumed vesting of stock grants

 

 

4

 

Weighted average common and dilutive potential common shares outstanding

 

2,708

 

2,708

 

Diluted earnings per share

 

$

0.70

 

$

0.66

 

 

Stock options for 12,725 shares of common stock for the six and three months ended June 30, 2014 and 19,500 shares of common stock for the six and three months ended June 30, 2013 were excluded from diluted earnings per share because their impact was antidilutive.

 

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Table of Contents

 

6.  STOCK COMPENSATION

 

We have four stock based compensation plans as described below.

 

Two Stock Option Plans

 

Under our now expired 1999 Employee Stock Option Plan (the “1999 Plan”), we granted certain officers and key employees stock option awards which vest and become fully exercisable at the end of five years and provide for issuance of up to 100,000 options.  Under the now expired 1993 Non-Employee Directors Stock Ownership Incentive Plan (together with the 1999 Plan, the “Stock Option Plans”), we also granted certain directors stock option awards which vest and become fully exercisable immediately and provide for issuance of up to 20,000 options.  For each Stock Option Plan, the exercise price of each option, which has a ten year life, was equal to the market price of our stock on the date of grant.

 

The combined summary of activity for 2014 in the expired Stock Option Plans follows:

 

 

 

 

 

 

 

Weighted

 

 

 

 

 

 

 

Weighted

 

Average

 

 

 

 

 

 

 

Average

 

Remaining

 

Aggregate

 

 

 

 

 

Exercise

 

Contractual

 

Intrinsic

 

 

 

Shares

 

Price

 

Term

 

Value

 

 

 

 

 

 

 

 

 

 

 

 

Outstanding, beginning of year

 

19,100

 

$

31.50

 

 

 

 

 

Granted

 

 

 

 

 

 

 

Forfeited or expired

 

(6,375

)

33.56

 

 

 

 

 

Exercised

 

 

 

 

 

 

 

Outstanding, end of period

 

12,725

 

$

30.46

 

10.9 months

 

$

 

 

 

 

 

 

 

 

 

 

 

 

 

Vested and expected to vest

 

12,725

 

$

30.46

 

10.9 months

 

$

 

 

 

 

 

 

 

 

 

 

 

 

 

Exercisable, end of period

 

12,725

 

$

30.46

 

10.9 months

 

$

 

 

As of June 30, 2014, there was no unrecognized compensation cost related to nonvested stock options granted under either Stock Option Plan.  Since both Stock Option Plans have expired, no additional options can be granted under either of these plans.

 

2005 Restricted Stock Grant Plan

 

On May 10, 2005, our stockholders approved a restricted stock grant plan.  Total shares issuable under the plan are 50,000.  We issued 7,475 shares during 2014 and 6,065 shares during 2013.  There were no shares forfeited during the first six months of 2014 or 2013.  As of June 30, 2014, the restricted stock grant plan allows for additional restricted stock share awards of up to 4,995 shares.

 

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Table of Contents

 

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

 

 

 

 

 

Weighted-Average

 

Fair

 

 

 

 

 

Grant-Date

 

Value

 

Nonvested Shares

 

Shares

 

Fair Value

 

Per Share

 

 

 

 

 

 

 

 

 

 

 

Nonvested at January 1, 2014

 

15,565

 

$

280,016

 

$

17.99

 

Granted

 

7,475

 

181,194

 

24.24

 

Vested

 

(4,756

)

(84,518

)

17.77

 

Forfeited

 

 

 

 

 

 

 

 

 

 

 

 

Nonvested at June 30, 2014

 

18,284

 

$

376,692

 

$

20.60

 

 

As of June 30, 2014, there was $327,197 of total unrecognized compensation cost related to nonvested shares granted under the restricted stock grant plan.  The cost is expected to be recognized over a weighted-average period of 5 years.

 

2009 Stock Award Plan

 

On May 13, 2009, our stockholders approved a stock award plan that provides for the granting of both incentive and nonqualified stock options and other share based awards.  Total shares issuable under the plan are 150,000.  We issued no stock grants during the first six months of 2014 and 900 shares during the first six months of 2013.  As of June 30, 2014, 149,100 shares are still available for issuance.

 

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

 

 

 

 

 

Weighted-Average

 

Fair

 

 

 

 

 

Grant-Date

 

Value

 

Nonvested Shares

 

Shares

 

Fair Value

 

Per Share

 

 

 

 

 

 

 

 

 

 

 

Nonvested at January 1, 2014

 

900

 

$

20,880

 

$

23.20

 

Granted

 

 

 

 

Vested

 

(180

)

(4,176

)

23.20

 

Forfeited

 

 

 

 

 

 

 

 

 

 

 

 

Nonvested at June 30, 2014

 

720

 

$

16,704

 

$

23.20

 

 

As of June 30, 2014, there was $15,312 of total unrecognized compensation cost related to nonvested shares granted under the restricted stock grant plan.  The cost is expected to be recognized over a weighted-average period of 5 years.

 

7.  OTHER BORROWINGS

 

The Company had a $5 million revolving promissory note which was scheduled to mature July 27, 2014.  The Company renewed this note with similar terms as the original note, with the maturity date of July 26, 2015.  The Company has no outstanding balances related to this promissory note at June 30, 2014.

 

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Table of Contents

 

8.  FAIR VALUE MEASUREMENTS

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

Impaired Loans:  The fair value of impaired loans with specific allocations of the allowance for loan losses is generally based on recent third party real estate appraisals.  These appraisals may utilize a single valuation approach or a combination of approaches including comparable sales and the income approach. Adjustments are routinely made in the appraisal process by the appraisers to adjust for differences between the comparable sales and income data available.  Such adjustments are usually significant and typically result in a Level 3 classification of the inputs for determining fair value.

 

Other Real Estate Owned:  The fair value of certain commercial and residential real estate properties classified as other real estate owned (OREO) are generally based on third party appraisals of the property, resulting in a Level 3 classification.   In cases where the carrying amount exceeds the fair value, less costs to sell, an impairment loss is recognized.

 

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Table of Contents

 

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

 

Assets and Liabilities Measured on a Recurring Basis

 

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

 

Fair Value Measurements at June 30, 2014 Using (In thousands):

 

 

 

 

 

Quoted Prices

 

 

 

 

 

 

 

 

 

In Active

 

 

 

 

 

 

 

 

 

Markets for 

 

Significant Other

 

Significant

 

 

 

 

 

Identical

 

Observable

 

Unobservable

 

 

 

Fair

 

Assets

 

Inputs

 

Inputs

 

Description

 

Value

 

(Level 1)

 

(Level 2)

 

(Level 3)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

U. S. government agencies

 

$

67,272

 

$

 

$

67,272

 

$

 

States and municipals

 

87,538

 

 

87,538

 

 

Mortgage-backed - residential

 

69,064

 

 

69,064

 

 

Equity securities

 

294

 

294

 

 

 

Trading Assets

 

5,242

 

5,242

 

 

 

Total

 

$

229,410

 

$

5,536

 

$

223,874

 

$

 

 

Available for Sale Investment Securities Fair Value Measurements at December 31, 2013 Using (In thousands):

 

 

 

 

 

Quoted Prices

 

 

 

 

 

 

 

 

 

In Active

 

 

 

 

 

 

 

 

 

Markets for

 

Significant Other

 

Significant

 

 

 

 

 

Identical

 

Observable

 

Unobservable

 

 

 

Fair

 

Assets

 

Inputs

 

Inputs

 

Description

 

Value

 

(Level 1)

 

(Level 2)

 

(Level 3)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

U. S. government agencies

 

$

69,286

 

$

 

$

69,286

 

$

 

States and municipals

 

90,183

 

 

90,183

 

 

Mortgage-backed - residential

 

70,638

 

 

70,638

 

 

Equity securities

 

289

 

289

 

 

 

Total

 

$

230,396

 

$

289

 

$

230,107

 

$

 

 

The Company held no trading assets at December 31, 2013.  Also, there were no transfers between level 1 and level 2 during 2014 or 2013.

 

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Table of Contents

 

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

 

(In thousands)

 

 

 

Fair Value Measurements at June 30, 2014 Using:

 

 

 

 

 

Quoted Prices

 

 

 

 

 

 

 

 

 

In Active

 

 

 

Other

 

 

 

 

 

Markets for

 

Significant

 

Significant

 

 

 

 

 

Identical

 

Observable

 

Unobservable

 

 

 

Carrying

 

Assets

 

Inputs

 

Inputs

 

Description

 

Value

 

(Level 1)

 

(Level 2)

 

(Level 3)

 

 

 

 

 

 

 

 

 

 

 

Impaired loans:

 

 

 

 

 

 

 

 

 

Real Estate Mortgage:

 

 

 

 

 

 

 

 

 

1-4 family residential

 

$

1,137

 

 

 

$

1,137

 

Multi-family residential

 

295

 

 

 

295

 

Non-farm & non-residential

 

1,276

 

 

 

1,276

 

Agricultural

 

220

 

 

 

 

 

220

 

Other real estate owned:

 

 

 

 

 

 

 

 

 

Residential

 

1,180

 

 

 

1,180

 

Loan servicing rights

 

344

 

 

 

344

 

 

(In thousands)

 

 

 

Fair Value Measurements at December 31, 2013 Using:

 

 

 

 

 

Quoted Prices

 

 

 

 

 

 

 

 

 

In Active

 

 

 

Other

 

 

 

 

 

Markets for

 

Significant

 

Significant

 

 

 

 

 

Identical

 

Observable

 

Unobservable

 

 

 

Carrying

 

Assets

 

Inputs

 

Inputs

 

Description

 

Value

 

(Level 1)

 

(Level 2)

 

(Level 3)

 

 

 

 

 

 

 

 

 

 

 

Impaired loans:

 

 

 

 

 

 

 

 

 

Real Estate Mortgage:

 

 

 

 

 

 

 

 

 

1-4 family residential

 

$

1,420

 

 

 

$

1,420

 

Multi-family residential

 

199

 

 

 

199

 

Non-farm & non-residential

 

36

 

 

 

36

 

Agricultural

 

275

 

 

 

275

 

Other real estate owned:

 

 

 

 

 

 

 

 

 

Residential

 

1,361

 

 

 

1,361

 

Loan servicing rights

 

201

 

 

 

201

 

 

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Table of Contents

 

Impaired loans, which are measured for impairment using the fair value of the collateral for collateral dependent loans, had a carrying amount of $2.9 million, which includes a valuation allowance of $370 thousand at June 30, 2014.  During the first six months of 2014, five new loans became impaired resulting in an additional provision for loan losses of $536 thousand.  The total allowance for specific impaired loans increased $106 thousand for the six months ending June 30, 2014 and decreased $28 thousand for the three months ending June 30, 2014. Other real estate owned, which is measured at fair value less costs to sell, had a net carrying amount of $1.2 million, which is made up of the outstanding balance of $2.7 million, net of a valuation allowance of $1.5 million at June 30, 2014.  The Company recorded $10 thousand in write-downs of other real estate owned properties for the six months and three months ending June 30, 2014 and none for the same time periods in 2013

 

Loan servicing rights, which are carried at the lower of cost or fair value, were carried at their fair value of $344 thousand, which is made up of the outstanding balance of $414 thousand, net of a valuation allowance of $70 thousand at June 30, 2014.  The Bank recorded net write-downs of $12 thousand for the six months ending June 30, 2014 and write-downs of $17 thousand for the three months ending June 30, 2014.  At December 31, 2013, loan servicing rights were carried at their fair value of $201 thousand, which is made up of the outstanding balance of $260 thousand, net of a valuation allowance of $59 thousand.

 

The following table presents quantitative information about level 3 fair value measurements for financial instruments measured at fair value on a non-recurring basis at June 30, 2014 and December 31, 2013:

 

June 30, 2014

 

(In thousands)

 

 

 

 

 

 

 

 

 

Range

 

 

Fair

 

Valuation

 

Unobservable

 

(Weighted

 

 

Value

 

Technique(s)

 

Input(s)

 

Average)

Impaired loans

 

 

 

 

 

 

 

 

Real estate mortgage:

 

 

 

 

 

 

 

 

1-4 family residential

 

1,137

 

sales comparison

 

adjustment for

 

0%-99%

 

 

 

 

 

 

differences

 

(6%)

 

 

 

 

 

 

between the

 

 

 

 

 

 

 

 

comparable sales

 

 

Multi-family residential

 

295

 

sales comparison

 

adjustment for

 

0%-32%

 

 

 

 

 

 

differences

 

(3%)

 

 

 

 

 

 

between the

 

 

 

 

 

 

 

 

comparable sales

 

 

Non-farm & non-residential

 

1,276

 

sales comparison

 

adjustment for

 

0%-61%

 

 

 

 

 

 

differences

 

(20%)

 

 

 

 

 

 

between the

 

 

 

 

 

 

 

 

comparable sales

 

 

Agricultural:

 

220

 

sales comparison

 

adjustment for

 

5%-44%

 

 

 

 

 

 

differences

 

(24%)

 

 

 

 

 

 

between the

 

 

 

 

 

 

 

 

comparable sales

 

 

Other real estate owned:

 

 

 

 

 

 

 

 

Residential

 

1,180

 

sales comparison

 

adjustment for

 

0%-32%

 

 

 

 

 

 

differences

 

(6%)

 

 

 

 

 

 

between the

 

 

 

 

 

 

 

 

comparable sales

 

 

 

 

 

 

income approach

 

capitalization rate

 

8%-8%

 

 

 

 

 

 

 

 

(8%)

Loan Servicing Rights

 

344

 

discounted cash flow

 

constant prepayment

 

7%-22%

 

 

 

 

 

 

rates

 

(11%)

 

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Table of Contents

 

December 31, 2013

 

(In thousands)

 

 

 

 

 

 

 

 

 

Range

 

 

Fair

 

Valuation

 

Unobservable

 

(Weighted

 

 

Value

 

Technique(s)

 

Input(s)

 

Average)

Impaired loans

 

 

 

 

 

 

 

 

Real estate mortgage:

 

 

 

 

 

 

 

 

1-4 family residential

 

1,420

 

sales comparison

 

adjustment for

 

0%-99%

 

 

 

 

 

 

differences

 

(14%)

 

 

 

 

 

 

between the

 

 

 

 

 

 

 

 

comparable sales

 

 

Multi-family residential

 

199

 

sales comparison

 

adjustment for

 

12%-32%

 

 

 

 

 

 

differences

 

(22%)

 

 

 

 

 

 

between the

 

 

 

 

 

 

 

 

comparable sales

 

 

Non-farm & non-residential

 

36

 

sales comparison

 

adjustment for

 

0%-61%

 

 

 

 

 

 

differences

 

(31%)

 

 

 

 

 

 

between the

 

 

 

 

 

 

 

 

comparable sales

 

 

Agricultural

 

275

 

sales comparison

 

adjustment for

 

5%-44%

 

 

 

 

 

 

differences

 

(20%)

 

 

 

 

 

 

between the

 

 

 

 

 

 

 

 

comparable sales

 

 

Other real estate owned:

 

 

 

 

 

 

 

 

Residential

 

1,361

 

sales comparison

 

adjustment for

 

0%-33%

 

 

 

 

 

 

differences

 

(4%)

 

 

 

 

 

 

between the

 

 

 

 

 

 

 

 

comparable sales

 

 

 

 

 

 

income approach

 

capitalization rate

 

8%-8%

 

 

 

 

 

 

 

 

(8%)

Loan Servicing Rights

 

201

 

discounted cash flow

 

constant prepayment

 

7%-23%

 

 

 

 

 

 

rates

 

(10%)

 

Fair Value of Financial Instruments

 

The carrying amounts and estimated fair values of financial instruments, at June 30, 2014 and December 31, 2013 are as follows:

 

June 30, 2014:

 

(in thousands)

 

 

 

Carrying

 

 

 

 

 

 

 

 

 

 

 

Value

 

Level 1

 

Level 2

 

Level 3

 

Total

 

Financial assets

 

 

 

 

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

15,039

 

$

15,039

 

$

 

$

 

$

15,039

 

Securities

 

224,168

 

294

 

223,874

 

 

224,168

 

Trading Assets

 

5,242

 

5,242

 

 

 

 

5,242

 

Mortgage loans held for sale

 

495

 

 

500

 

 

500

 

Loans, net

 

490,520

 

 

 

490,183

 

490,183

 

FHLB Stock

 

5,981

 

 

 

 

N/A

 

Interest receivable

 

3,254

 

 

1,216

 

2,038

 

3,254

 

Financial liabilities

 

 

 

 

 

 

 

 

 

 

 

Deposits

 

$

597,409

 

$

415,247

 

$

184,104

 

$

 

$

599,351

 

Securities sold under agreements to repurchase and other borrowings

 

11,297

 

 

11,459

 

 

11,459

 

Federal Funds Purchased

 

4,649

 

4,649

 

 

 

4,649

 

FHLB advances

 

81,414

 

 

77,953

 

 

77,953

 

Subordinated Debentures

 

7,217

 

 

 

7,210

 

7,210

 

Interest payable

 

679

 

 

670

 

9

 

679

 

 

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Table of Contents

 

December 31, 2013:

 

(in thousands)

 

 

 

Carrying

 

 

 

 

 

 

 

 

 

 

 

Value

 

Level 1

 

Level 2

 

Level 3

 

Total

 

Financial assets

 

 

 

 

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

23,160

 

$

23,160

 

$

 

$

 

$

23,160

 

Securities

 

230,396

 

289

 

230,107

 

 

230,396

 

Mortgage loans held for sale

 

223

 

 

229

 

 

229

 

Loans, net

 

463,214

 

 

 

459,796

 

459,796

 

FHLB Stock

 

6,731

 

 

 

 

N/A

 

Interest receivable

 

3,618

 

 

1,315

 

2,303

 

3,618

 

Financial liabilities

 

 

 

 

 

 

 

 

 

 

 

Deposits

 

$

617,400

 

$

428,239

 

$

191,523

 

$

 

$

619,762

 

Securities sold under agreements to repurchase and other borrowings

 

12,867

 

 

13,013

 

 

13,013

 

FHLB advances

 

57,847

 

 

52,220

 

 

52,220

 

Subordinated Debentures

 

7,217

 

 

 

7,217

 

7,217

 

Interest Payable

 

736

 

 

 

727

 

9

 

736

 

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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Table of Contents

 

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

 

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

 

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

 

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

 

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

 

9.              CHANGES IN ACCUMULATED OTHER COMPREHENSIVE INCOME BY COMPONENT

 

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

(in thousands)

 

 

 

Unrealized

 

 

 

Gains and Losses on

 

 

 

Available for Sale

 

 

 

Securities

 

 

 

For the Six Months Ending June 30

 

 

 

2014

 

2013

 

Beginning Balance

 

$

(5,126

)

$

4,283

 

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

 

5,267

 

(5,465

)

Reclassification adjustment for:

 

 

 

 

 

Securities gains realized in income, net

 

(433

)

(774

)

Income taxes

 

(147

)

(263

)

 

 

(286

)

(511

)

Net current period other comprehensive income

 

4,981

 

(5,976

)

Ending balance

 

$

(145

)

$

(1,693

)

 


(1)         All amounts are net of tax.

 

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Table of Contents

 

 

 

Unrealized

 

 

 

Gains and Losses on

 

 

 

Available for Sale

 

 

 

Securities

 

 

 

For the Three Months Ending June 30

 

 

 

2014

 

2013

 

Beginning Balance

 

$

(1,875

)

$

3,031

 

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

 

1,892

 

(4,404

)

Reclassification adjustment for:

 

 

 

 

 

Securities gains realized in income, net

 

(245

)

(485

)

Income taxes

 

(83

)

(165

)

 

 

(162

)

(320

)

Net current period other comprehensive income

 

1,730

 

(4,724

)

Ending balance

 

$

(145

)

$

(1,693

)

 


(2)         All amounts are net of tax.

 

The following is significant amounts reclassified out of each component of accumulated other comprehensive Income (Loss) for the six months ending June 30, 2014 and 2013:

 

June 30, 2014

 

Details about

 

Amount

 

Affected Line Item

 

Accumulated Other

 

Reclassified From

 

in the Statement

 

Comprehensive

 

Accumulated Other

 

Where Net

 

Income Components

 

Comprehensive Income

 

Income is Presented

 

Unrealized gains and losses on available-for-sale securities

 

$

(433

)

Securities gains, net

 

 

 

147

 

Provision for income taxes

 

 

 

(286

)

Net of tax

 

 

June 30, 2013

 

Details about

 

Amount

 

Affected Line Item

 

Accumulated Other

 

Reclassified From

 

in the Statement

 

Comprehensive

 

Accumulated Other

 

Where Net

 

Income Components

 

Comprehensive Income

 

Income is Presented

 

Unrealized gains and losses on available-for-sale securities

 

$

(774

)

Securities gains, net

 

 

 

263

 

Provision for income taxes

 

 

 

(511

)

Net of tax

 

 

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Table of Contents

 

The following is significant amounts reclassified out of each component of accumulated other comprehensive Income (Loss) for the three months ending June 30, 2014 and 2013:

 

June 30, 2014

 

Details about

 

Amount

 

Affected Line Item

 

Accumulated Other

 

Reclassified From

 

in the Statement

 

Comprehensive

 

Accumulated Other

 

Where Net

 

Income Components

 

Comprehensive Income

 

Income is Presented

 

Unrealized gains and losses on available-for-sale securities

 

$

(245

)

Securities gains, net

 

 

 

83

 

Provision for income taxes

 

 

 

(162

)

Net of tax

 

 

June 30, 2013

 

Details about

 

Amount

 

Affected Line Item

 

Accumulated Other

 

Reclassified From

 

in the Statement

 

Comprehensive

 

Accumulated Other

 

Where Net

 

Income Components

 

Comprehensive Income

 

Income is Presented

 

Unrealized gains and losses on available-for-sale securities

 

$

(485

)

Securities gains, net

 

 

 

165

 

Provision for income taxes

 

 

 

(320

)

Net of tax

 

 

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Table of Contents

 

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

 

Forward-Looking Statements

 

The following discussion provides information about the financial condition and results of operations of the Company and its subsidiaries as of the dates and periods indicated.  This discussion and analysis should be read in conjunction with the unaudited consolidated financial statements and Notes thereto appearing elsewhere in this report and the Management’s Discussion and Analysis in the Company’s Annual Report on Form 10-K for the year ended December 31, 2013.

 

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

 

Although we believe that the assumptions underlying the forward-looking statements contained herein are reasonable, any of the assumptions could be inaccurate, and therefore, there can be no assurance that the forward-looking statements included herein will prove to be accurate.  Factors that could cause actual results to differ from the results discussed in the forward-looking statements include, but are not limited to:  economic conditions (both generally and more specifically in the markets, including the tobacco market and the thoroughbred horse industry, in which we and our Bank operate); competition for our subsidiary’s customers from other providers of financial and mortgage services; government legislation, regulation and monetary policy (which changes from time to time and over which we have no control); changes in interest rates (both generally and more specifically mortgage interest rates); material unforeseen changes in the liquidity, results of operations, or financial condition of our subsidiary’s customers; adequacy of the allowance for losses on loans and the level of future provisions for losses on loans; and other risks detailed in our filings with the Securities and Exchange Commission, all of which are difficult to predict and many of which are beyond our control.

 

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

 

You should not place undue reliance on any forward-looking statements made by us or on our behalf.  Our forward-looking statements are made as of the date of the report, and we undertake no obligation to republish revised forward-looking statements to reflect events or circumstances after the date hereof or to reflect the occurrence of unanticipated events.

 

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Table of Contents

 

Summary

 

The Company recorded net income of $3.7 million, or $1.36 basic earnings and diluted earnings per share for the first six months ending June 30, 2014 compared to $3.5 million or $1.29 basic earnings and diluted earnings per share for the six month period ended June 30, 2013.  The first six months earnings reflect an increase of 5.2% compared to the same time period in 2013.  The increase in earnings is mostly attributed to an increase of $673 thousand in net interest income, a decrease of $400 thousand in the provision for loan losses, a decrease of $209 thousand in income tax expense, an increase of $162 thousand in gains on trading assets, an increase of $113 thousand in brokerage fee income and an increase of $101 thousand in trust department income. These positive changes to net income during 2014 were partially offset by a decrease of $742 thousand in the gains on the sale of mortgage loans, a decrease of $341 thousand in the gains on the sale of securities, an increase of $485 thousand in salaries & benefits expense and an increase of $131 thousand in occupancy expense.  The earnings for the three months ending June 30, 2014 were $1.9 million or $0.70 basic and diluted earnings per share compared to $1.8 million or $0.66 basic and diluted earnings per share for the three month period ending June 30, 2013.  The earnings for the three month period in 2014 reflect a 6.7% increase compared to the same time period in 2013.  During the second quarter of 2013, the Bank opened a new branch in Lexington, KY and during the first quarter of 2014, the Bank opened a new branch in Richmond, KY.  As expected, additional expenses were incurred with the opening of the two new locations which did affect short-term earnings.  However, management believes this expansion will increase long-term earnings and shareholder equity.

 

Return on average assets was 0.94% for the six months ending June 30, 2014 and 0.98% for the six months ending June 30, 2013.  Return on average assets was 0.97% for the three months ending June 30, 2014 and 1.00% for the three months ending June 30, 2013.  Return on average equity was 10.18% for the six month period ending June 30, 2014 and 9.43% for the three month period ending June 30, 2013.  Return on average equity was 10.33% for the three months ending June 30, 2014 and 9.63% for the same time period in 2013.

 

In January 2014, the Bank invested $5.0 million in trading securities which are shown as trading assets on the balance sheet. Management made the decision to invest in these assets after much due diligence because it believed the Company could earn a higher return on this investment, compared to other investments, with minimized additional risk due to the short-term attributes of the assets.  The assets are primarily comprised of municipal securities which are held for a very short period of time and generate additional profits primarily by taking gains on short-term differences in price.  At June 30, 2014, trading assets totaled $5.2 million, which represents income on the investment totaling $242 thousand during the first six months of 2014 and $134 thousand for the three months ending June 30, 2014.

 

Gross Loans increased $27.4 million from $468.7 million on December 31, 2013 to $496.1 million on June 30, 2014.  The overall increase in loans is attributed to an increase of $14.2 million in 1-4 family residential properties, an increase of $5.0 million in non-farm and non-residential properties, an increase of $4.6 million in agricultural loans, an increase of $2.4 million in multi-family residential properties and an increase of $2.2 million in real estate construction loans.  Commercial loan balances decreased $927 thousand and consumer loan balances decreased $118 thousand.

 

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Table of Contents

 

Total deposits decreased from $617.4 million on December 31, 2013 to $597.4 million on June 30, 2014, a decrease of $20.0 million.  Non-interest bearing demand deposit accounts increased $5.9 million from December 31, 2013 to June 30, 2014.  Time deposits $100 thousand and over decreased $4.2 million and other interest bearing deposit accounts decreased $21.7 million from December 31, 2013 to June 30, 2014.  Public fund accounts decreased $29.0 million from December 31, 2013 to June 30, 2014.  Public fund accounts typically decrease during the first three quarters of the year and increase during the last quarter of the year due to tax monies collected during the fourth quarter and then withdrawn from the Bank in the following months.

 

Borrowings from the Federal Home Loan Bank increased $23.6 million from December 31, 2013 to June 30, 2014.

 

Net Interest Income

 

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

 

Net interest income was $12.8 million for the six months ending June 30, 2014 compared to $12.2 million for the six months ending June 30, 2013, an increase of 5.5%.  The interest spread, excluding tax equivalent adjustments was 3.44% for the first six months of 2014 and down from 3.67% reported for the same period in 2013, a decrease of 23 basis points.  Rates have remained fairly low in the past year.  For the first six months ending June 30, 2014, the cost of total deposits was 0.35% compared to 0.39% for the same time period in 2013.  Increasing non-interest bearing deposit accounts and lower rates on certificates of deposit accounts have helped to lower the cost of deposits.  Net interest income was $6.5 million for the three months ending June 30, 2014 compared to $6.0 million for the three months ending June 30, 2013, an increase of 7.6%.  The interest spread, excluding tax equivalent adjustments, was 3.47% for the three month period ending June 30, 2014 compared to 3.67% for the three month period in 2013, a decrease of 20 basis points.

 

For the first six months, the yield on assets decreased from 4.19% in 2013 to 3.97% in 2014, excluding tax equivalent adjustments.  The yield on loans decreased 42 basis points in the first three months of 2014 compared to 2013 from 5.31% to 4.89%.  The yield on securities increased 10 basis points in the first six months of 2014 compared to 2013 from 2.31% in 2013 to 2.41% in 2014.  The cost of liabilities was 0.53% for the first six months in 2014 compared to 0.52% in 2013.  Year to date average loans, excluding overdrafts, increased $51.9 million, or 12.2% from June 30, 2013 to June 30, 2014.  Loan interest income increased $378 thousand for the first six months of 2014 compared to the first six months of 2013.  Year to date average total deposits increased from June 30, 2013 to June 30, 2014, up $28.5 million or 4.8%.  Year to date average interest bearing deposits increased $16.9 million, or 3.8%, from June 30, 2013 to June 30, 2014.  Deposit interest expense decreased $88 thousand for the first six months of 2014 compared to the same period in 2013.  Year to date average borrowings increased $46.5 million, or 31.8% from June 30, 2013 to June 30, 2014.  Interest expense on borrowed funds increased $310 thousand for the first six months of 2014 compared to the same period in 2013.

 

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Table of Contents

 

The volume rate analysis for the six months ending June 30, 2014 indicates that $2.4 million of the increase in interest income is attributable to an increase in loan volume and $356 thousand of the increase in interest income is attributable to an increase in the volume of our security portfolio.  Further, a decrease in loan rates caused a decrease of $2.0 million to interest income while an increase in rates in our security portfolio contributed an increase of $177 thousand to interest income.  The net effect to interest income was an increase of $895 thousand for the first six months of 2014 compared to the same time period in 2013.  The average rate of the Company’s total outstanding deposits and borrowings decreased from 0.68% in 2013 to 0.53% in 2014.  Based on the following volume rate analysis, the lower level of interest rates contributed to a decrease of $596 thousand in interest expense, while the change in volume was responsible for a $818 thousand increase in interest expense.  As a result, the increase in net interest income for the first six months in 2014 is mostly attributed to growth in the Company’s loan and security portfolios.

 

The accompanying analysis of changes in net interest income in the following table shows the relationships of the volume and rate portions of these changes in 2014.  Changes in interest income and expenses due to both rate and volume are allocated on a pro rata basis.

 

Changes in Interest Income and Expense

 

(in thousands)

 

 

 

Six Months Ending

 

 

 

2014 vs. 2013

 

 

 

Increase (Decrease) Due to Change in

 

 

 

Volume

 

Rate

 

Net Change

 

INTEREST INCOME

 

 

 

 

 

 

 

Loans

 

$

2,382

 

$

(2,004

)

$

378

 

Investment Securities

 

356

 

177

 

533

 

Other

 

(14

)

(2

)

(16

)

Total Interest Income

 

2,724

 

(1,829

)

895

 

INTEREST EXPENSE

 

 

 

 

 

 

 

Deposits

 

 

 

 

 

 

 

Demand

 

26

 

(57

)

(31

)

Savings

 

29

 

(23

)

6

 

Negotiable Certificates of

 

 

 

 

 

 

 

Deposit and Other

 

 

 

 

 

 

 

Time Deposits

 

(13

)

(50

)

(63

)

Securities sold under agreements to repurchase and other borrowings

 

48

 

(31

)

17

 

Federal Home Loan

 

 

 

 

 

 

 

Bank advances

 

728

 

(435

)

293

 

Total Interest Expense

 

818

 

(596

)

222

 

Net Interest Income

 

$

1,906

 

$

(1,233

)

$

673

 

 

39



Table of Contents

 

Non-Interest Income

 

Non-interest income decreased $493 thousand for the six months ending June 30, 2014, compared to the same period in 2013, to $4.9 million.  .  For the three month period ending June 30, 2014 compared to the three months ending June 30, 2013, total non-interest income decreased $159 thousand.

 

The decrease for the six month period ending June 30, 2014 was primarily due to a decrease of $742 thousand in gains on the sale of mortgage loans and a decrease of $341 thousand in gains on the sale of securities.  Favorable variances to non-interest income included an increase of $162 thousand in gains on trading assets, an increase of $113 thousand in brokerage fee income and an increase of $101 thousand in fee income generated by the trust department.

 

The gain on the sale of mortgage loans decreased from $1.1 million in the first six months of 2013 to $400 thousand during the first six months of 2014, a decrease of $742 thousand.  For the three months ending June 30, 2014 compared to the same time period in 2013, the gain on the sale of mortgage loans decreased $273 thousand.  The volume of loans originated to sell during the first six months of 2014 decreased $20.6 million compared to the same time period in 2013.  For the three months ending June 30, 2014, the volume of loans originated for sale decreased $10.2 million compared to the same three months in 2013.  The volume of mortgage loan originations and sales is generally inverse to rate changes.  A change in the mortgage loan rate environment can have a significant impact on the related gain on sale of mortgage loans.  Loan service fee income, net of amortization expense, was $34 thousand for the six months ending June 30, 2014 compared to $(36) thousand for the six months ending June 30, 2013, an increase of $70 thousand.  For the three month period ending June 30, 2014, loan service fee income, net of amortization and impairment expense, was $5 thousand compared to $16 thousand for the same time period one year ago.  During the first six months of 2014, the adjustment to the carrying value of the mortgage servicing right was a negative net amount of $12 thousand, as the fair value of this asset decreased.  Of this, a positive valuation adjustment of $5 thousand was recorded in the first quarter of 2014 and a negative valuation adjustment of $17 thousand was recorded during the second quarter of 2014.  During the first six months of 2013, the carrying value of the mortgage servicing right was written down a net amount of $65 thousand, as the fair value of this asset decreased.  Of this, a negative valuation adjustment of $73 thousand was recorded in the first quarter of 2013 and a positive valuation adjustment of $8 thousand was recorded during the second quarter of 2013.

 

Non-Interest Expense

 

Total non-interest expenses increased $608 thousand for the six month period ending June 30, 2014 compared to the same period in 2013.  For the three month period ending June 30, 2014 compared to the three months ending June 30, 2013, total non-interest expense increased $330 thousand

 

For the comparable six month periods, salaries and benefits increased $485 thousand, an increase of 7.2%.  The increase is attributed to additional personnel hired during 2013 for expanding into two new markets and normal pay increases at the beginning of 2014.  The number of full time equivalent employees at June 30, 2014 was 219 compared to 215 one year ago.  Salaries and employee benefits increased $173 thousand, or 5.0%, for the three month period ending June 30, 2014 compared to the same time period in 2013.

 

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Table of Contents

 

Occupancy expenses increased $131 thousand to $1.7 million for the first six months of 2014 compared to the same time period in 2013.  Rent expense increased $58 thousand due to entering two new markets within the past year and leasing branch facilities in both markets.  Depreciation expense increased $60 thousand during the first six months ending June 30, 2014 compared to the same time period one year ago.  In addition, computer maintenance expense increased $72 thousand.  Occupancy expenses increased $1 thousand for the three month period ending June 30, 2014 compared to the same time period in 2013.

 

Legal and professional fees increased $68 thousand for the first six months ending June 30, 2014 compared to the same time period in 2013.  Legal and professional fees increased $85 thousand for the three month period ending June 30, 2014 compared to the same time period in 2013.  Repossession expenses decreased $12 thousand for the first six months ending June 30, 2014 compared to the same time period in 2013 and increased $57 thousand for the three months ending June 30, 2014 compared to the same three months one year ago.  Repossession expenses are reported net of rental income earned on repossessed properties.  Repossession expenses were lower in the first six months of 2014 when compared to the same time period in 2013 due to the Company selling many of the properties included in other real estate owned.  FDIC insurance expense increased $7 thousand for the six months ending June 30, 2014 compared to the same time period in 2013 and $10 thousand for the three months ending June 30, 2014 compared to the three months ending June 30, 2013.

 

Income Taxes

 

The effective tax rate for the six months ending June 30, 2014 was 15.2% compared to 19.9% in 2013.  The effective tax rate for the three months ending June 30, 2014 was 16.2% compared to 20.8% for the three months ending June 30, 2013.  These effective tax rates are less than the statutory rate as a result of the Company investing in tax-free securities, loans and other investments which generate tax credits for the Company.  Tax-exempt interest income increased $40 thousand for the first six months of 2014 compared to the first six months of 2013.  Also, for the first six months of 2014, the Company had tax credits totaling $488 thousand for investments made in low income housing projects which represented an increase of $67 thousand compared to similar tax credits for the first six months of 2013.

 

As part of normal business, the Bank typically makes tax free loans to select municipalities in our market and invests in selected tax free securities, primarily in the Commonwealth of Kentucky.  In making these investments, the Company considers the overall impact to managing our net interest margin, credit worthiness of the underlying issuer and the favorable impact on our tax position.  For the six months ending June 30, 2014, the Company averaged $87.5 million in tax free securities and $17.0 million in tax free loans.  As of June 30, 2014, the weighted average remaining maturity for the tax free securities is 132 months, while the weighted average remaining maturity for the tax free loans is 169 months.

 

Liquidity and Funding

 

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

 

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Table of Contents

 

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

 

Cash and cash equivalents were $15.0 million as of June 30, 2014 compared to $23.2 million at December 31, 2013.  The decrease in cash and cash equivalents is attributed to a decrease of $7.7 million in cash and due from banks.  In addition to cash and cash equivalents, the securities portfolio provides an important source of liquidity.  Securities available for sale totaled $224.2 million at June 30, 2014 compared to $230.4 million at December 31, 2013.  Securities classified as trading assets totaled $5.2 million at June 30, 2014 and $0 at December 31, 2013.

 

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

 

Generally, we rely upon net cash inflows from financing activities, supplemented by net cash inflows from operating activities, to provide cash used in our investing activities.  As is typical of many financial institutions, significant financing activities include deposit gathering and the use of short-term borrowings, such as federal funds purchased and securities sold under repurchase agreements along with long-term debt.  Our primary investing activities include purchasing investment securities and loan originations.

 

For the first six months of 2014, deposits decreased $20.0 million. The Company’s investment portfolio decreased $1.0 million and the Company’s loan portfolio increased $27.4 million.  The borrowed funds the Company have with the Federal Home Loan Bank increased $23.6 million from December 31, 2013 to June 30, 2014.  The Company had outstanding federal funds purchased totaling $4.6 million at June 30, 2014 and $0 at December 31, 2013.

 

Management is aware of the challenge of funding sustained loan growth.  Therefore, in addition to deposits, other sources of funds, such as Federal Home Loan Bank advances, may be used.  We rely on Federal Home Loan Bank advances for both liquidity and asset/liability management purposes.  These advances are used primarily to fund long-term fixed rate residential mortgage loans.  As of June 30, 2014, we have sufficient collateral to borrow an additional $66 million from the Federal Home Loan Bank.  In addition, as of June 30, 2014, $26 million is available in overnight borrowing through various correspondent banks and the Company has access to $258 million in brokered deposits.  In light of this, management believes there is sufficient liquidity to meet all reasonable borrower, depositor and creditor needs in the present economic environment.

 

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Table of Contents

 

Capital Requirements

 

The Company and the Bank are subject to various regulatory capital requirements administered by the federal banking agencies.  Failure to meet minimum capital requirements can initiate certain mandatory and possible additional discretionary actions by regulators that, if undertaken, could have a direct material effect on the Company’s financial statements.

 

Under capital adequacy guidelines and the regulatory framework for prompt corrective action, the Company and the Bank must meet specific capital guidelines that involve quantitative measures of the Company’s and the Bank’s assets, liabilities, and certain off-balance sheet items as calculated under regulatory accounting practices.  The Company and Bank capital amounts and classifications are also subject to qualitative judgments by regulators about components, risk weightings, and other factors.

 

Quantitative measures established by regulation to ensure capital adequacy require the Company and the Bank to maintain minimum amounts and ratios (set forth in the following table) of Total and Tier I capital (as defined in the applicable banking regulations) to risk-weighted assets (as defined), and of Tier I capital to average assets (as defined).  Management believes, as of June 30, 2014 and December 31, 2013, that the Company and the Bank meet all capital adequacy requirements to which they are subject.

 

The most recent notification from the FDIC categorized the Bank as well capitalized under the regulatory framework for prompt corrective action.  To be categorized as well capitalized, the Bank must maintain minimum Total risk-based, Tier I risk-based and Tier I leverage ratios as set forth in the following table.  There are no conditions or events since that notification that management believes have changed the institution’s category. In July 2013, the FDIC and the other federal bank regulatory agencies issued a final rule that will revise their leverage and risk-based capital requirements and the method of calculating risk-weighted assets to make them consistent with agreements that were reached by the Basel Committee on Banking Supervision and certain provisions of the Dodd-Frank Act. Among other things, the rule establishes a new common equity Tier 1 minimum capital requirement (4.5% of risk-weighted assets), increases the minimum Tier 1 capital to risk-based assets requirement (from 4% to 6% of risk-weighted assets) and assigns a higher risk weight (150%) to exposures that are more than 90 days past due or are on nonaccrual status and to certain commercial real estate facilities that finance the acquisition, development or construction of real property. The final rule also requires unrealized gains and losses on certain “available-for-sale” securities holdings to be included for purposes of calculating regulatory capital requirement unless a one-time opt-in or opt-out is exercised. The rule limits a banking organization’s capital distributions and certain discretionary bonus payments if the banking organization does not hold a “capital conservation buffer” consisting of 2.5% of common equity Tier 1 capital to risk-weighted assets in addition to the amount necessary to meet its minimum risk-based capital requirements. The final rule becomes effective for the Bank on January 1, 2015.  In accordance with the final rule, the capital conservation buffer requirement will be phased in beginning January 1, 2016 and ending January 1, 2019, when the full capital conservation buffer requirement will be effective.

 

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Table of Contents

 

The Company’s and the Bank’s actual amounts and ratios are presented in the table below:

 

 

 

 

 

 

 

 

 

 

 

To Be Well

 

 

 

 

 

 

 

 

 

 

 

Capitalized

 

 

 

 

 

 

 

 

 

 

 

Under Prompt

 

 

 

 

 

 

 

For Capital

 

Corrective

 

 

 

Actual

 

Adequacy Purposes

 

Action Provisions

 

 

 

Amount

 

Ratio

 

Amount

 

Ratio

 

Amount

 

Ratio

 

 

 

(Dollars in Thousands)

 

June 30, 2014

 

 

 

 

 

 

 

 

 

 

 

 

 

Consolidated

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total Capital (to Risk-Weighted Assets)

 

$

74,499

 

14.1

%

$

42,323

 

8

%

$

N/A

 

N/A

 

Tier I Capital (to Risk-Weighted Assets)

 

68,799

 

13.0

 

21,162

 

4

 

N/A

 

N/A

 

Tier I Capital (to Average Assets)

 

68,799

 

8.9

 

31,018

 

4

 

N/A

 

N/A

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Bank Only

 

 

 

 

 

 

 

 

 

 

 

 

 

Total Capital (to Risk-Weighted Assets)

 

$

72,978

 

13.8

%

$

42,314

 

8

%

$

52,892

 

10

%

Tier I Capital (to Risk-Weighted Assets)

 

67,278

 

12.7

 

21,157

 

4

 

31,735

 

6

 

Tier I Capital (to Average Assets)

 

67,278

 

8.7

 

31,008

 

4

 

38,760

 

5

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

December 31, 2013

 

 

 

 

 

 

 

 

 

 

 

 

 

Consolidated

 

 

 

 

 

 

 

 

 

 

 

 

 

Total Capital (to Risk-Weighted Assets)

 

$

71,993

 

14.1

%

$

40,872

 

8

%

N/A

 

N/A

 

Tier I Capital (to Risk-Weighted Assets)

 

66,468

 

13.0

 

20,436

 

4

 

N/A

 

N/A

 

Tier I Capital (to Average Assets)

 

66,468

 

8.8

 

30,079

 

4

 

N/A

 

N/A

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Bank Only

 

 

 

 

 

 

 

 

 

 

 

 

 

Total Capital (to Risk-Weighted Assets)

 

$

70,827

 

13.9

%

$

40,859

 

8

%

$

51,073

 

10

%

Tier I Capital (to Risk-Weighted Assets)

 

65,302

 

12.8

 

20,429

 

4

 

30,644

 

6

 

Tier I Capital (to Average Assets)

 

65,302

 

8.7

 

30,070

 

4

 

37,588

 

5

 

 

Non-Performing Assets

 

As of June 30, 2014, our non-performing assets totaled $13.4 million or 1.71% of assets compared to $13.8 million or 1.79% of assets at December 31, 2013 (See table below.)  The Company experienced an increase of $964 thousand in non-accrual loans from December 31, 2013 to June 30, 2014.  As of June 30, 2014, non-accrual loans include $2.4 million in loans secured by 1-4 family properties, $988 thousand in loans secured by non-farm and non-residential properties, $299 thousand in commercial loans, $85 thousand in loans secured by multi-family residential properties and $216 thousand in loans secured by agricultural properties.  Real estate loans composed 92.4% of the non-performing loans as of June 30, 2014 and 99.8% as of December 31, 2013.  Forgone interest income on non-accrual loans totaled $116 thousand for the first six months of 2014 compared to forgone interest of $214 thousand for the same time period in 2013.  Accruing loans that are contractually 90 days or more past due as of June 30, 2014 totaled $266 thousand compared to $554 thousand at December 31, 2013, a decrease of $288 thousand.  The total nonperforming and restructured loans increased $645 thousand from December 31, 2013 to June 30, 2014, resulting in an increase in the ratio of nonperforming and restructured loans to loans of 1 basis point to 2.23%.  In addition, the amount the Company has recorded as other real estate owned decreased $1.1 million from December 31, 2013 to June 30, 2014.  As of June 30, 2014, the amount recorded as other real estate owned totaled $2.3 million compared to $3.4 million at December 31, 2013.  During the first six months of 2014, $419 thousand was added to other real estate properties while $1.5 million in other real estate properties were sold.  The allowance as a percentage of non-performing and restructured loans and other real estate owned increased from 39% at December 31, 2013 to 42% at June 30, 2014.

 

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Table of Contents

 

Nonperforming and Restructured Assets

 

 

 

6/30/14

 

12/31/13

 

 

 

(in thousands)

 

 

 

 

 

 

 

Non-accrual Loans

 

$

3,938

 

$

2,974

 

Accruing Loans which are Contractually past due 90 days or more

 

266

 

554

 

Accruing Troubled Debt Restructurings

 

6,870

 

6,901

 

Total Nonperforming and Restructured Loans

 

11,074

 

10,429

 

Other Real Estate

 

2,306

 

3,379

 

Total Nonperforming and Restructured Loans and Other Real Estate

 

$

13,380

 

$

13,808

 

Nonperforming and Restructured Loans as a Percentage of Loans

 

2. 23

%

2.22

%

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

 

1.71

%

1.79

%

Allowance as a Percentage of Period-end Loans

 

1.13

%

1.16

%

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

 

42

%

39

%

 

We maintain a “watch list” of agricultural, commercial, real estate mortgage, and real estate construction loans and review those loans on a regular basis.  Generally, assets are designated as “watch list” loans to ensure more frequent monitoring.  If we determine that there is serious doubt as to performance in accordance with original terms of the contract, then the loan is generally downgraded and often placed on non-accrual status.  We review and evaluate nonaccrual loans, past due loans, and loans graded substandard or worse on a regular basis to determine if the loan should be evaluated for impairment and whether specific allocations are needed.

 

Provision for Loan Losses

 

The loan loss provision for the first six months of 2014 was $200 thousand compared to $600 thousand for the first six months of 2013.  The loan loss provision was $100 thousand for the three months ending June 30, 2014 compared to $150 thousand for the three months ending June 30, 2013.  The decrease in the total loan loss provision during the first six months of 2014 compared to the same time period in 2013 is attributed to improved quality of the Bank’s loan portfolio and having a significant recovery of $367 thousand during the first quarter of 2014 for a loan that was charged off in a prior year.

 

Management evaluates the loan portfolio by reviewing the historical loss rate for each respective loan type and assigns risk multiples to certain categories to account for qualitative factors including current economic conditions.  The average loss rates are reviewed for trends in the analysis, as well as comparisons to peer group loss rates.  Management makes allocations within the allowance for loan losses for specifically classified loans regardless of loan amount, collateral or loan type.  Loan categories are evaluated utilizing subjective factors in addition to the historical loss calculations to determine a loss allocation for each of those types.  As this analysis, or any similar analysis, is an imprecise measure of loss, the allowance is subject to ongoing adjustments.  Therefore, management will often take into account other significant factors that may be necessary or prudent in order to reflect probable incurred losses in the total loan portfolio.

 

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Nonperforming loans and restructured loans increased $645 thousand since December 31, 2013 to $11.1 million as of June 30, 2014.  Other real estate properties owned decreased $1.1 million over this same time period.  Additions to Other real estate properties totaled $419 thousand while sales totaled $1.5 million.

 

The June 30, 2014 unallocated allowance of $517 was comparable to the December 31, 2013 balance of $516 thousand.

 

Net charge-offs were $27 thousand for the six months ending June 30, 2014 and $1.1 million for the six months ending June 30, 2013.  Net charge-offs were $102 thousand for the three months ending June 30, 2014 and $275 thousand for the three months ending June 30, 2013.  During the first quarter of 2014, the Company recorded a recovery of $367 for one loan which was previously charged-off.  Future levels of charge-offs will be determined by the particular facts and circumstances surrounding individual loans.  Further, the growth the Company has experienced in our loan portfolio, particularly in 1-4 family residential loans, is attributed to passing grade loans which do not require additional reserves as of June 30, 2014.  Based on the above information, management believes the current loan loss allowance is sufficient to meet probable incurred loan losses.

 

 

 

Six Months Ended June 30

 

 

 

(in thousands)

 

Loan Losses

 

2014

 

2013

 

Balance at Beginning of Period

 

$

5,441

 

$

6,047

 

Amounts Charged-off:

 

 

 

 

 

Commercial

 

200

 

11

 

Real Estate Construction

 

 

578

 

1-4 family residential

 

88

 

141

 

Multi-family residential

 

 

161

 

Non-farm & non-residential

 

 

 

Agricultural

 

 

86

 

Consumer and other

 

355

 

561

 

Total Charged-off Loans

 

643

 

1,538

 

Recoveries on Amounts Previously Charged-off:

 

 

 

 

 

Commercial

 

 

28

 

Real Estate Construction

 

8

 

21

 

1-4 family residential

 

16

 

56

 

Multi-family residential

 

 

39

 

Non-farm & non-residential

 

367

 

18

 

Agricultural

 

25

 

3

 

Consumer and other

 

200

 

224

 

Total Recoveries

 

616

 

389

 

Net Charge-offs

 

27

 

1,149

 

Provision for Loan Losses

 

200

 

600

 

Balance at End of Period

 

5,614

 

5,498

 

Loans

 

 

 

 

 

Average

 

480,557

 

429,164

 

At June 30

 

496,134

 

452,245

 

As a Percentage of Average Loans:

 

 

 

 

 

Net Charge-offs for the period

 

0.01

%

0.27

%

Provision for Loan Losses for the period

 

0.04

%

0.14

%

Allowance as a Multiple of Net Charge-offs annualized

 

104.0

 

2.4

 

 

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Table of Contents

 

 

 

Three Months Ended June 30

 

 

 

(in thousands)

 

Loan Losses

 

2014

 

2013

 

Balance at Beginning of Period

 

$

5,616

 

$

5,623

 

Amounts Charged-off:

 

 

 

 

 

Commercial

 

 

5

 

Real Estate Construction

 

 

 

1-4 family residential

 

25

 

16

 

Multi-family residential

 

 

161

 

Non-farm & non-residential

 

 

 

Agricultural

 

 

 

Consumer and other

 

181

 

276

 

Total Charged-off Loans

 

206

 

458

 

Recoveries on Amounts Previously Charged-off:

 

 

 

 

 

Commercial

 

 

 

Real Estate Construction

 

4

 

16

 

1-4 family residential

 

4

 

30

 

Multi-family residential

 

 

39

 

Non-farm & non-residential

 

 

10

 

Agricultural

 

1

 

1

 

Consumer and other

 

95

 

87

 

Total Recoveries

 

104

 

183

 

Net Charge-offs

 

102

 

275

 

Provision for Loan Losses

 

100

 

150

 

Balance at End of Period

 

5,614

 

5,498

 

Loans

 

 

 

 

 

Average

 

486,609

 

431,995

 

At June 30

 

496,134

 

452,245

 

As a Percentage of Average Loans:

 

 

 

 

 

Net Charge-offs for the period

 

0.02

%

0.06

%

Provision for Loan Losses for the period

 

0.02

%

0.03

%

Allowance as a Multiple of Net Charge-offs annualized

 

13.8

 

5.0

 

 

Item 3 — QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

 

Asset/Liability management control is designed to ensure safety and  soundness, maintain liquidity and regulatory capital standards, and achieve acceptable net interest income.  Management considers interest rate risk to be the most significant market risk since a bank’s net income is largely dependent on net interest income.  Our exposure to market risk is reviewed on a regular basis by the Asset/Liability Committee.  Interest rate risk is the potential of economic losses due to future interest rate changes.  These economic losses can be reflected as a loss of future net interest income and/or a loss of current fair market values.  The objective is to measure the effect on net interest income and to adjust the balance sheet to minimize the inherent risk, while at the same time, maximize income.

 

Management realizes certain risks are inherent and that the goal is to identify and minimize the risks.  The primary tools used by management are interest rate shock and economic value of equity (EVE) simulations.  The Company has $5.1 million in market risk sensitive instruments which are held for trading purposes.  These assets are held for a very short period of time and are used to generate profits on short-term differences in price.  Using interest rate shock simulations, the following table depicts the change in net interest income resulting from 100 and 300 basis point changes in rates on the Company’s interest earning assets and interest bearing liabilities.

 

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The projections are based on balance sheet growth assumptions and repricing opportunities for new, maturing and adjustable rate amounts.  As of June 30, 2014, the projected percentage changes are within limits approved by our Board of Directors (“Board”).  Although management does analyze and monitor the projected percentage change in a declining interest rate environment, due to the current rate environment many of the current deposit rates cannot decline an additional 100 basis points.  Therefore, management places more emphasis in the rising rate environment scenarios.  Similar to prior periods, this period’s volatility is slightly lower in each rate shock simulation when compared to the same period a year ago.  The projected net interest income report summarizing our interest rate sensitivity as of June 30, 2014 is as follows:

 

PROJECTED NET INTEREST INCOME

(dollars in thousands)

 

 

 

Level

 

Change in basis points:

 

- 100

 

Rates

 

+ 100

 

+ 300

 

Year One (7/14 - 6/15)

 

 

 

 

 

 

 

 

 

Net interest income

 

$

25,144

 

$

25,898

 

$

26,096

 

$

26,137

 

Net interest income dollar change

 

(754

)

N/A

 

198

 

239

 

Net interest income percentage change

 

-2.9

%

N/A

 

0.8

%

0.9

%

Board approved limit

 

>-4.0

%

N/A

 

>-4.0

%

>-10.0

%

 

The projected net interest income report summarizing the Company’s interest rate sensitivity as of June 30, 2013 is as follows:

 

PROJECTED NET INTEREST INCOME

(dollars in thousands)

 

 

 

Level

 

Change in basis points:

 

- 100

 

Rates

 

+ 100

 

+ 300

 

Year One (7/13 - 6/14)

 

 

 

 

 

 

 

 

 

Net interest income

 

$

23,528

 

$

24,507

 

$

24,899

 

$

24,989

 

Net interest income dollar change

 

(979

)

N/A

 

392

 

483

 

Net interest income percentage change

 

-3.9

%

N/A

 

1.6

%

2.0

%

Board approved limit

 

>-4.0

%

N/A

 

>-4.0

%

>-10.0

%

 

Projections from June 30, 2014, year one reflected a decline in net interest income of 2.9% with a 100 basis point decline compared to the 3.9% decline in 2013.  The 100 basis point increase in rates reflected a 0.8% increase in net interest income in 2014 compared to an increase of 1.6% in 2013.

 

EVE applies discounting techniques to future cash flows to determine the present value of assets, liabilities, and therefore equity.  Based upon applying these techniques to the June 30, 2014 balance sheet, a 100 basis point increase in rates results in a 11.9% decrease in EVE.  A 100 basis point decrease in rates results in a 0.3% decrease in EVE.  These are within the Board approved limits.

 

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Table of Contents

 

Item 4 — CONTROLS AND PROCEDURES

 

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

 

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

 

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

 

Part II - Other Information

 

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

 

ISSUER PURCHASES OF EQUITY SECURITIES

 

Period

 

(a) 
Total 
Number of 
Shares (or 
Units) 
Purchased

 

(b) 
Average

Price Paid 
Per Share 
(or Unit)

 

(c) Total Number 
of Shares (or Units)
Purchased as Part 
of Publicly 
Announced Plans
Or Programs

 

(d) Maximum Number

(or Approximate Dollar 
Value) of Shares (or 
Units) that May Yet Be 
Purchased Under the
 Plans or Programs

 

 

 

 

 

 

 

 

 

 

 

4/1/14 – 4/30/14

 

 

$

 

 

83,929 shares

 

 

 

 

 

 

 

 

 

 

 

5/1/14 – 5/31/14

 

 

 

 

83,929 shares

 

 

 

 

 

 

 

 

 

 

 

6/1/14 – 6/30/14

 

 

 

 

83,929 shares

 

 

 

 

 

 

 

 

 

 

 

Total

 

 

$

 

 

83,929 shares

 

 

On October 25, 2000, we announced that our Board approved a stock repurchase program and authorized the Company to purchase up to 100,000 shares of its outstanding common stock.  On November 11, 2002, the Board approved and authorized the Company’s repurchase of an additional 100,000 shares.  On May 20, 2008, the Board of Directors approved and authorized the Company to purchase an additional 100,000 shares.  On May 17, 2011, the Board approved and authorized the Company’s repurchase of an additional 100,000 shares.  Shares will be purchased from time to time in the open market depending on market prices and other considerations.  Through June 30, 2014, 316,071 shares have been purchased.

 

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Table of Contents

 

Item 6.

Exhibits

 

 

 

 

 

2.1

 

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

 

 

 

 

 

3.1

 

Amended and Restated Articles of Incorporation of the Registrant are incorporated by reference to Exhibit 3.1 of the Registrant’s Quarterly Report on Form 10-Q for the quarterly period ending March 31, 2000 and filed May 15, 2000.

 

 

 

 

 

3.2

 

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

 

 

 

 

 

3.3

 

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

 

 

 

 

 

31.1

 

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

 

 

 

 

 

31.2

 

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

 

 

 

 

 

32

 

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

 

 

 

 

 

101*

 

The following financial information from Kentucky Bancshares, Inc. Quarterly Report on Form 10-Q for the period ended June 30, 2014, filed with the SEC on August 13, 2014, formatted in Extensible Business Reporting Language (XBRL): (i) Consolidated Balance Sheets at June 30, 2014 and December 31, 2013, (ii) Consolidated Statements of Income and Comprehensive Income (Loss) for the six and three months ended June 30, 2014 and June 30, 2013, (iii) Consolidated Statement of Stockholders’ Equity for the six months ended June 30, 2014, (iv) Consolidated Statements of Cash Flows for the six months ended June 30, 2014 and June 30, 2013 and (v) Notes to Consolidated Financial Statements.

 


*Pursuant to Rule 406T of Regulation S-T, the XBRL related information in Exhibit 101 to this Quarterly Report on Form 10-Q shall not be deemed to be “filed” for purposes of Sections 11 and 12 of the Securities Act of 1933 and Section 18 of the Exchange Act of 1934, or otherwise subject to the liability of those sections, and shall not be deemed part of a registration statement, prospectus or other document filed under the Securities Act of 1933 or the Exchange Act of 1934, except as shall be expressly set forth by specific reference in such filings.

 

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Table of Contents

 

SIGNATURES

 

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

 

 

 

 

KENTUCKY BANCSHARES, INC.

 

 

 

 

Date

  8/13/14

 

/s/Louis Prichard

 

 

 

Louis Prichard, President and C.E.O.

 

 

 

 

Date

  8/13/14

 

/s/Gregory J. Dawson

 

 

 

Gregory J. Dawson, Chief Financial Officer

 

51