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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 March 31, 2015

 

or

 

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

 

For the transition period from                                          to                                         

 

Commission File Number:  000-52598

 

KENTUCKY BANCSHARES, INC.

(Exact name of registrant as specified in its charter)

 

Kentucky

 

61-0993464

(State or other jurisdiction of

 

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

incorporation or organization)

 

 

 

P.O. Box 157, Paris, Kentucky

 

40362-0157

(Address of principal executive offices)

 

(Zip Code)

 

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

 

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

 

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

 

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

 

Large accelerated filer o

 

Accelerated filer o

 

 

 

Non-accelerated filer x

 

Smaller reporting company o

(Do not check if a smaller reporting company)

 

 

 

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 April 30, 2015:  2,725,648.

 

 

 



Table of Contents

 

KENTUCKY BANCSHARES, INC.

 

Table of Contents

 

Part I - Financial Information

 

 

 

Item 1. Financial Statements

 

 

 

 

 

Consolidated Balance Sheets

3

 

 

 

 

Consolidated Statements of Income and Comprehensive Income

4

 

 

 

 

Consolidated Statement of Changes in Stockholders’ Equity

5

 

 

 

 

Consolidated Statements of Cash Flows

6

 

 

 

 

Notes to Consolidated Financial Statements

7

 

 

 

Item 2.

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

33

 

 

 

Item 3.

Quantitative and Qualitative Disclosures About Market Risk

44

 

 

 

Item 4.

Controls and Procedures

45

 

 

 

Part II - Other Information

46

 

 

 

Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds

46

 

 

 

Item 6.

Exhibits

46

 

 

 

Signatures

 

47

 

2



Table of Contents

 

Item 1 - Financial Statements

 

KENTUCKY BANCSHARES, INC.

 

CONSOLIDATED BALANCE SHEETS  (unaudited)

(in thousands, except per share data)

 

 

 

3/31/2015

 

12/31/2014

 

Assets

 

 

 

 

 

Cash and due from banks

 

$

14,844

 

$

16,771

 

Federal funds sold

 

222

 

398

 

Cash and cash equivalents

 

15,066

 

17,169

 

Interest bearing time deposits

 

1,280

 

1,280

 

Securities available for sale

 

249,476

 

246,861

 

Trading Assets

 

5,409

 

5,370

 

Mortgage loans held for sale

 

940

 

776

 

Loans

 

538,644

 

538,305

 

Allowance for loan losses

 

(5,920

)

(6,012

)

Net loans

 

532,724

 

532,293

 

Federal Home Loan Bank stock

 

5,981

 

5,981

 

Real estate owned, net

 

4,219

 

4,603

 

Bank premises and equipment, net

 

16,343

 

16,479

 

Interest receivable

 

3,570

 

3,299

 

Mortgage servicing rights

 

1,227

 

1,209

 

Goodwill

 

13,117

 

13,117

 

Other intangible assets

 

146

 

177

 

Other assets

 

7,023

 

6,595

 

Total assets

 

$

856,521

 

$

855,209

 

 

 

 

 

 

 

Liabilities and Stockholders’ Equity

 

 

 

 

 

Deposits

 

 

 

 

 

Non-interest bearing

 

$

185,424

 

$

176,743

 

Time deposits, $250,000 and over

 

57,856

 

52,913

 

Other interest bearing

 

417,534

 

425,213

 

Total deposits

 

660,814

 

654,869

 

Repurchase agreements and other borrowings

 

12,121

 

12,457

 

Federal funds purchased

 

2,148

 

 

Short-term Federal Home Loan Bank advances

 

 

10,000

 

Long-term Federal Home Loan Bank advances

 

86,950

 

83,785

 

Subordinated debentures

 

7,217

 

7,217

 

Interest payable

 

602

 

642

 

Other liabilities

 

6,960

 

8,297

 

Total liabilities

 

776,812

 

777,267

 

 

 

 

 

 

 

Stockholders’ equity

 

 

 

 

 

Preferred stock, 300,000 shares authorized and unissued

 

 

 

Common stock, no par value; 10,000,000 shares authorized; 2,725,609 and 2,720,098 shares issued and outstanding on March 31, 2015 and December 31, 2014

 

12,693

 

12,662

 

Retained earnings

 

65,288

 

64,489

 

Accumulated other comprehensive income

 

1,728

 

791

 

Total stockholders’ equity

 

79,709

 

77,942

 

Total liabilities & stockholders’ equity

 

$

856,521

 

$

855,209

 

 

See Accompanying Notes

 

3



Table of Contents

 

KENTUCKY BANCSHARES, INC.

 

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

(in thousands, except per share amounts)

 

 

 

Three Months Ending

 

 

 

3/31/2015

 

3/31/2014

 

INTEREST INCOME:

 

 

 

 

 

Loans, including fees

 

$

6,209

 

$

5,761

 

Securities

 

 

 

 

 

Taxable

 

733

 

675

 

Tax exempt

 

676

 

733

 

Trading assets

 

44

 

37

 

Other

 

69

 

76

 

Total interest income

 

7,731

 

7,282

 

INTEREST EXPENSE:

 

 

 

 

 

Deposits

 

486

 

539

 

Repurchase agreements and other borrowings

 

23

 

23

 

Federal Home Loan Bank advances

 

402

 

314

 

Subordinated debentures

 

57

 

57

 

Total interest expense

 

968

 

933

 

Net interest income

 

6,763

 

6,349

 

Provision for loan losses

 

300

 

100

 

Net interest income after provision

 

6,463

 

6,249

 

NON-INTEREST INCOME:

 

 

 

 

 

Service charges

 

904

 

1,011

 

Loan service fee income, net

 

53

 

29

 

Trust department income

 

277

 

222

 

Gain on sale of available for sale securities, net

 

8

 

188

 

Gain (loss) on trading assets

 

(5

)

71

 

Gain on sale of mortgage loans

 

327

 

157

 

Brokerage income

 

106

 

80

 

Debit card interchange income

 

541

 

479

 

Other

 

59

 

32

 

Total other income

 

2,270

 

2,269

 

NON-INTEREST EXPENSE:

 

 

 

 

 

Salaries and employee benefits

 

3,794

 

3,602

 

Occupancy expenses

 

932

 

848

 

Repossession expenses, net

 

45

 

(2

)

FDIC Insurance

 

156

 

128

 

Legal and professional fees

 

285

 

136

 

Data processing

 

367

 

337

 

Debit card expenses

 

256

 

234

 

Amortization

 

31

 

37

 

Advertising and marketing

 

213

 

209

 

Taxes other than payroll, property and income

 

230

 

225

 

Telephone

 

68

 

89

 

Postage

 

81

 

72

 

Loan fees

 

93

 

77

 

Other

 

666

 

462

 

Total other expenses

 

7,217

 

6,454

 

Income before taxes

 

1,516

 

2,064

 

Income taxes

 

1

 

293

 

Net income

 

$

1,515

 

$

1,771

 

Other Comprehensive Income, net of tax:

 

 

 

 

 

Change in Unrealized Gains on Securities

 

937

 

3,251

 

Comprehensive Income

 

$

2,452

 

$

5,022

 

Earnings per share

 

 

 

 

 

Basic

 

$

0.56

 

$

0.66

 

Diluted

 

0.56

 

0.66

 

Dividends per share

 

0.26

 

0.25

 

 

See Accompanying Notes

 

4



Table of Contents

 

KENTUCKY BANCSHARES, INC.

 

CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS’ EQUITY  (unaudited)

(in thousands, except share information)

 

 

 

 

 

 

 

 

 

Accumulated

 

 

 

 

 

 

 

 

 

 

 

Other

 

Total

 

 

 

—Common Stock(1)—

 

Retained

 

Comprehensive

 

Stockholders’

 

 

 

Shares

 

Amount

 

Earnings

 

Income/(Loss)

 

Equity

 

 

 

 

 

 

 

 

 

 

 

 

 

Balances, January 1, 2015

 

2,720,098

 

$

12,662

 

$

64,489

 

$

791

 

$

77,942

 

 

 

 

 

 

 

 

 

 

 

 

 

Common stock issued, net of forfeitures

 

5,850

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Stock based compensation expense

 

 

33

 

 

 

33

 

 

 

 

 

 

 

 

 

 

 

 

 

Common stock purchased and retired

 

(339

)

(2

)

(7

)

 

(9

)

 

 

 

 

 

 

 

 

 

 

 

 

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

 

 

 

 

937

 

937

 

 

 

 

 

 

 

 

 

 

 

 

 

Net income

 

 

 

1,515

 

 

1,515

 

 

 

 

 

 

 

 

 

 

 

 

 

Dividends declared - $0.26 per share

 

 

 

(709

)

 

(709

)

 

 

 

 

 

 

 

 

 

 

 

 

Balances, March 31, 2015

 

2,725,609

 

$

12,693

 

$

65,288

 

$

1,728

 

$

79,709

 

 


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

 

See Accompanying Notes

 

5



Table of Contents

 

KENTUCKY BANCSHARES, INC.

 

CONSOLIDATED STATEMENTS OF CASH FLOWS  (unaudited)

(in thousands)

 

 

 

Three Months Ending

 

 

 

3/31/2015

 

3/31/2014

 

Cash Flows From Operating Activities

 

 

 

 

 

Net Income

 

$

1,515

 

$

1,771

 

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

 

 

 

 

 

Depreciation and amortization

 

423

 

441

 

Securities amortization (accretion), net

 

240

 

150

 

Stock based compensation expense

 

33

 

27

 

Provision for loan losses

 

300

 

100

 

Securities available for sale gains, net

 

(8

)

(188

)

Net change in trading assets

 

(39

)

(5,108

)

Originations of loans held for sale

 

(8,988

)

(5,715

)

Proceeds from sale of loans

 

9,151

 

5,946

 

Losses (gains) on other real estate

 

39

 

(46

)

Gain on sale of mortgage loans

 

(327

)

(157

)

Write-downs of other real estate, net

 

26

 

 

Changes in:

 

 

 

 

 

Interest receivable

 

(271

)

134

 

Other assets

 

(745

)

1,694

 

Interest payable

 

(40

)

(27

)

Other liabilities

 

(1,869

)

(2,522

)

Net cash from operating activities

 

(560

)

(3,500

)

Cash Flows From Investing Activities

 

 

 

 

 

Purchases of securities available for sale

 

(11,797

)

(20,089

)

Proceeds from sales of securities

 

 

16,525

 

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

 

10,368

 

2,561

 

Net change in loans

 

(3,477

)

(5,423

)

Proceeds from redemption of Federal Home Loan Bank stock

 

 

750

 

Purchases of bank premises and equipment

 

(190

)

(316

)

Proceeds from the sale of other real estate

 

3,349

 

309

 

Net cash from investing activities

 

(1,747

)

(5,683

)

Cash Flows From Financing Activities:

 

 

 

 

 

Net change in deposits

 

5,945

 

10,604

 

Net change in repurchase agreements and other borrowings

 

1,812

 

(1,465

)

Short-term advances from Federal Home Loan Bank

 

 

10,000

 

Payment on short-term Federal Home Loan Bank advances

 

(10,000

)

(10,000

)

Long-term advances from Federal Home Loan Bank

 

4,682

 

1,635

 

Payments on long-term Federal Home Loan Bank advances

 

(1,517

)

(2,102

)

Purchase of common stock

 

(9

)

(91

)

Dividends paid

 

(709

)

(681

)

Net cash from financing activities

 

204

 

7,900

 

Net change in cash and cash equivalents

 

(2,103

)

(1,283

)

Cash and cash equivalents at beginning of period

 

17,169

 

23,160

 

Cash and cash equivalents at end of period

 

$

15,066

 

$

21,877

 

 

 

 

 

 

 

 

 

Supplemental disclosures of cash flow information

 

 

 

 

 

Cash paid during the year for:

 

 

 

 

 

Interest expense

 

$

1,008

 

$

960

 

Income taxes

 

 

 

Supplemental disclosures of non-cash investing activities

 

 

 

 

 

Real estate acquired through foreclosure

 

$

3,029

 

$

141

 

 

See Accompanying Notes

 

6



Table of Contents

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

1.              SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

 

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

 

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

 

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

 

Nature of Operations:  The Bank operates under a state bank charter and provides full banking services, including trust services, to customers located in Bourbon, Clark, Elliott, Fayette, Harrison, Jessamine, Madison, Rowan, Scott, Woodford and adjoining counties in Kentucky.  Management continues to consider opportunities for branch expansion and will also consider acquisition opportunities that help advance its strategic objectives.  As a state bank, the Bank is subject to regulation by the Kentucky Department of Financial Institutions and the Federal Deposit Insurance Corporation (“FDIC”).  The Company, a bank holding company, is regulated by the Federal Reserve.  On July 9, 2014, a new subsidiary of the Company was incorporated under the name KBI Insurance Company, Inc.  KBI Insurance Company, Inc. is a subsidiary of Kentucky Bancshares, Inc. and is located in Las Vegas, Nevada.  It is a captive insurance subsidiary which provides various liability and property damage insurance policies for Kentucky Bancshares, Inc. and its related subsidiaries.  KBI Insurance Company, Inc. is regulated by the State of Nevada Division of Insurance.  Our transfer, registrar and dividend agent, Registrar and Transfer Company, was recently acquired by Computershare.  The migration to Computershare occurred October 31, 2014.

 

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.

 

7



Table of Contents

 

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

 

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

 

Pension Matter:  Kentucky Bancshares, Inc. (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 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 appealed, but the District Court’s ruling was affirmed by the United States Court of Appeals for the Sixth Circuit on January 15, 2015.  The Company accrued approximately $1.6 million as of December 31, 2013 for this matter and made the necessary payments to the eligible individuals in March 2015.  Thus, no liability related to the pension termination existed as of March 31, 2015.  Moreover, the Company believes it has claims for contribution towards payment of this liability from professionals who assisted the Company in the termination of the Plan and had a receivable at March 31, 2015 on the balance sheet tied to a letter of credit established for the Company’s benefit for these fees.

 

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.

 

8



Table of Contents

 

Adoption of New Accounting Standards

 

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

 

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

 

9



Table of Contents

 

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

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

March 31, 2015

 

 

 

 

 

 

 

 

 

U.S. government agencies

 

$

59,270

 

$

37

 

$

(479

)

$

58,828

 

States and political subdivisions

 

90,228

 

3,074

 

(333

)

92,969

 

Mortgage-backed - residential

 

97,090

 

697

 

(406

)

97,381

 

Equity securities

 

270

 

28

 

 

298

 

Total

 

$

246,858

 

$

3,836

 

$

(1,218

)

$

249,476

 

 

 

 

 

 

 

 

 

 

 

December 31, 2014

 

 

 

 

 

 

 

 

 

U.S. government agencies

 

$

61,721

 

$

1

 

$

(1,136

)

$

60,586

 

States and political subdivisions

 

86,322

 

3,234

 

(275

)

89,281

 

Mortgage-backed - residential

 

97,349

 

267

 

(918

)

96,698

 

Equity securities

 

270

 

26

 

 

296

 

Total

 

$

245,662

 

$

3,528

 

$

(2,329

)

$

246,861

 

 

The amortized cost and fair value of securities at March 31, 2015 by contractual maturity are shown below.  Expected maturities will differ from contractual maturities because borrowers may have the right to call or prepay obligations with or without call or prepayment penalties.  Securities not due at a single maturity are shown separately.  Further discussion concerning Fair Value Measurements can be found in Note 8.

 

 

 

Amortized

 

Fair

 

(in thousands)

 

Cost

 

Value

 

Due in one year or less

 

$

40

 

$

41

 

Due after one year through five years

 

10,463

 

10,471

 

Due after five years through ten years

 

84,999

 

85,505

 

Due after ten years

 

53,996

 

55,780

 

 

 

149,498

 

151,797

 

Mortgage-backed - residential

 

97,090

 

97,381

 

Equity

 

270

 

298

 

Total

 

$

246,858

 

$

249,476

 

 

Proceeds from sales of securities during the first three months of 2015 and 2014 were $0 and $16.5 million.  Gross gains of $0 and $309 thousand and gross losses of $0 and $121 thousand were realized on those sales, respectively.  The tax provision related to these realized net gains was $0 and $64 thousand, respectively.

 

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

 

March 31, 2015

 

 

 

Less than 12 Months

 

12 Months or More

 

Total

 

 

 

Fair

 

Unrealized

 

Fair

 

Unrealized

 

Fair

 

Unrealized

 

Description of Securities

 

Value

 

Loss

 

Value

 

Loss

 

Value

 

Loss

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

U.S. Government agencies

 

$

11,592

 

$

(164

)

$

35,114

 

$

(315

)

$

46,706

 

$

(479

)

States and municipals

 

5,954

 

(65

)

9,413

 

(268

)

15,367

 

(333

)

Mortgage-backed - residential

 

30,748

 

(202

)

15,666

 

(204

)

46,414

 

(406

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total temporarily impaired

 

$

48,294

 

$

(431

)

$

60,193

 

$

(787

)

$

108,487

 

$

(1,218

)

 

10



Table of Contents

 

December 31, 2014

 

 

 

Less than 12 Months

 

12 Months or More

 

Total

 

 

 

Fair

 

Unrealized

 

Fair

 

Unrealized

 

Fair

 

Unrealized

 

Description of Securities

 

Value

 

Loss

 

Value

 

Loss

 

Value

 

Loss

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

U.S. Government agencies

 

$

12,528

 

$

(176

)

$

45,066

 

$

(960

)

$

57,594

 

$

(1,136

)

States and municipals

 

5,011

 

(27

)

9,738

 

(248

)

14,749

 

(275

)

Mortgage-backed - residential

 

46,685

 

(572

)

18,747

 

(346

)

65,432

 

(918

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total temporarily impaired

 

$

64,224

 

$

(775

)

$

73,551

 

$

(1,554

)

$

137,775

 

$

(2,329

)

 

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

 

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

 

TRADING ASSETS

 

The trading assets of $5.4 million are primarily comprised of municipal securities which are held for a minimal period of time.

 

3. LOANS

 

Loans at period-end are as follows:

(in thousands)

 

 

 

3/31/15

 

12/31/14

 

 

 

 

 

 

 

Commercial

 

$

44,658

 

$

47,185

 

Real estate construction

 

17,208

 

16,938

 

Real estate mortgage:

 

 

 

 

 

1-4 family residential

 

193,309

 

189,458

 

Multi-family residential

 

33,981

 

34,415

 

Non-farm & non-residential

 

166,568

 

161,822

 

Agricultural

 

66,293

 

71,345

 

Consumer

 

16,508

 

16,863

 

Other

 

119

 

279

 

Total

 

$

538,644

 

$

538,305

 

 

11



Table of Contents

 

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

 

 

 

Three Months Ended March 31, 2015

 

 

 

(in thousands)

 

 

 

Beginning

 

 

 

 

 

 

 

Ending

 

 

 

Balance

 

Charge-offs

 

Recoveries 

 

Provision

 

Balance

 

 

 

 

 

 

 

 

 

 

 

 

 

Commercial

 

$

339

 

$

25

 

$

 

$

26

 

$

340

 

Real estate Construction

 

446

 

 

2

 

(10

)

438

 

Real estate mortgage:

 

 

 

 

 

 

 

 

 

 

 

1-4 family residential

 

1,829

 

32

 

3

 

25

 

1,825

 

Multi-family residential

 

495

 

 

 

4

 

499

 

Non-farm & non-residential

 

813

 

 

 

217

 

1,030

 

Agricultural

 

998

 

242

 

1

 

(34

)

723

 

Consumer

 

520

 

81

 

15

 

43

 

497

 

Other

 

32

 

242

 

209

 

35

 

34

 

Unallocated

 

540

 

 

 

(6

)

534

 

 

 

$

6,012

 

$

622

 

$

230

 

$

300

 

$

5,920

 

 

 

 

Three Months Ended March 31, 2014

 

 

 

(in thousands)

 

 

 

Beginning

 

 

 

 

 

 

 

Ending

 

 

 

Balance

 

Charge-offs

 

Recoveries

 

Provision

 

Balance

 

 

 

 

 

 

 

 

 

 

 

 

 

Commercial

 

$

230

 

$

200

 

$

 

$

178

 

$

208

 

Real estate Construction

 

358

 

 

4

 

(33

)

329

 

Real estate mortgage:

 

 

 

 

 

 

 

 

 

 

 

1-4 family residential

 

2,169

 

63

 

12

 

(7

)

2,111

 

Multi-family residential

 

427

 

 

 

(26

)

401

 

Non-farm & non-residential

 

564

 

 

367

 

(1

)

930

 

Agricultural

 

578

 

 

24

 

(49

)

553

 

Consumer

 

548

 

77

 

18

 

61

 

550

 

Other

 

51

 

97

 

87

 

(30

)

11

 

Unallocated

 

516

 

 

 

7

 

523

 

 

 

$

5,441

 

$

437

 

$

512

 

$

100

 

$

5,616

 

 

12



Table of Contents

 

The following tables present the balance in the allowance for loan losses and the recorded investment (excluding accrued interest receivable amounting to $2.2 million as of March 31, 2015 and $2.0 million at December 31, 2014) in loans by portfolio segment and based on impairment method as of March 31, 2015 and December 31, 2014:

 

As of March 31, 2015

(in thousands)

 

 

 

Individually

 

Collectively

 

 

 

 

 

Evaluated for

 

Evaluated for

 

 

 

 

 

Impairment

 

Impairment

 

Total

 

Allowance for Loan Losses:

 

 

 

 

 

 

 

Commercial

 

$

 

$

340

 

$

340

 

Real estate construction

 

 

438

 

438

 

Real estate mortgage

 

 

 

 

 

 

 

1-4 family residential

 

52

 

1,773

 

1,825

 

Multi-family residential

 

95

 

404

 

499

 

Non-farm & non-residential

 

258

 

772

 

1,030

 

Agricultural

 

394

 

329

 

723

 

Consumer

 

 

497

 

497

 

Other

 

 

34

 

34

 

Unallocated

 

 

534

 

534

 

 

 

$

799

 

$

5,121

 

$

5,920

 

Loans:

 

 

 

 

 

 

 

Commercial

 

$

 

$

44,658

 

$

44,658

 

Real estate construction

 

 

17,208

 

17,208

 

Real estate mortgage:

 

 

 

 

 

 

 

1-4 family residential

 

2,085

 

191,224

 

193,309

 

Multi-family residential

 

95

 

33,886

 

33,981

 

Non-farm & non-residential

 

2,940

 

163,628

 

166,568

 

Agricultural

 

4,428

 

61,865

 

66,293

 

Consumer

 

 

16,508

 

16,508

 

Other

 

 

119

 

119

 

 

 

$

9,548

 

$

529,096

 

$

538,644

 

 

As of December 31, 2014

(in thousands)

 

 

 

Individually

 

Collectively

 

 

 

 

 

Evaluated for

 

Evaluated for

 

 

 

 

 

Impairment

 

Impairment

 

Total

 

Allowance for Loan Losses:

 

 

 

 

 

 

 

Commercial

 

$

 

$

339

 

$

339

 

Real estate construction

 

 

446

 

446

 

Real estate mortgage:

 

 

 

 

 

 

 

1-4 family residential

 

56

 

1,773

 

1,829

 

Multi-family residential

 

94

 

401

 

495

 

Non-farm & non-residential

 

136

 

677

 

813

 

Agricultural

 

712

 

286

 

998

 

Consumer

 

 

520

 

520

 

Other

 

 

32

 

32

 

Unallocated

 

 

540

 

540

 

 

 

$

998

 

$

5,014

 

$

6,012

 

Loans:

 

 

 

 

 

 

 

Commercial

 

$

 

$

47,185

 

$

47,185

 

Real estate construction

 

 

16,938

 

16,938

 

Real estate mortgage:

 

 

 

 

 

 

 

1-4 family residential

 

2,098

 

187,360

 

189,458

 

Multi-family residential

 

264

 

34,151

 

34,415

 

Non-farm & non-residential

 

2,958

 

158,864

 

161,822

 

Agricultural

 

8,479

 

62,866

 

71,345

 

Consumer

 

 

16,863

 

16,863

 

Other

 

 

279

 

279

 

 

 

$

13,799

 

$

524,506

 

$

538,305

 

 

13



Table of Contents

 

The following table presents loans individually evaluated for impairment by class of loans as of and for the three months ended March 31, 2015 (in thousands):

 

 

 

Unpaid

 

 

 

Allowance for

 

Average

 

Interest

 

Cash Basis

 

 

 

Principal

 

Recorded

 

Loan Losses

 

Recorded

 

Income

 

Interest

 

 

 

Balance

 

Investment

 

Allocated

 

Investment

 

Recognized

 

Recognized

 

With no related allowance recorded:

 

 

 

 

 

 

 

 

 

 

 

 

 

Commercial

 

$

 

$

 

$

 

$

 

$

 

$

 

Real estate construction

 

 

 

 

 

 

 

Real estate mortgage:

 

 

 

 

 

 

 

 

 

 

 

 

 

1-4 family residential

 

1,608

 

1,608

 

 

1,613

 

13

 

13

 

Multi-family residential

 

 

 

 

 

 

 

Non-farm & non-residential

 

 

 

 

 

 

 

Agricultural

 

438

 

438

 

 

440

 

10

 

10

 

Consumer

 

 

 

 

 

 

 

Other

 

 

 

 

 

 

 

With an allowance recorded:

 

 

 

 

 

 

 

 

 

 

 

 

 

Commercial

 

 

 

 

 

 

 

Real estate construction

 

 

 

 

 

 

 

Real estate mortgage:

 

 

 

 

 

 

 

 

 

 

 

 

 

1-4 family residential

 

477

 

477

 

52

 

420

 

5

 

5

 

Multi-family residential

 

95

 

95

 

95

 

179

 

 

 

Non-farm & non-residential

 

2,940

 

2,940

 

258

 

2,949

 

30

 

30

 

Agricultural

 

3,990

 

3,990

 

394

 

5,793

 

 

 

Consumer

 

 

 

 

 

 

 

Other

 

 

 

 

 

 

 

 

Total

 

$

9,548

 

$

9,548

 

$

799

 

$

11,394

 

$

58

 

$

58

 

 

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

 

14



Table of Contents

 

The following table presents loans individually evaluated for impairment by class of loans as of March 31, 2014 (in thousands):

 

 

 

 

 

Year to Date

 

Year to Date

 

 

 

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

 

396

 

 

 

Multi-family residential

 

 

 

 

Non-farm & non-residential

 

401

 

 

 

 

Agricultural

 

1,413

 

4

 

4

 

Consumer

 

 

 

 

Other

 

 

 

 

With an allowance recorded:

 

 

 

 

 

 

 

Commercial

 

 

 

 

Real estate construction

 

 

 

 

 

Real estate mortgage:

 

 

 

 

 

 

 

1-4 family residential

 

1,470

 

6

 

6

 

Multi-family residential

 

275

 

4

 

4

 

Non-farm & non-residential

 

2,541

 

25

 

25

 

Agricultural

 

4,801

 

 

 

Consumer

 

 

 

 

Other

 

 

 

 

 

Total

 

$

11,297

 

$

39

 

$

39

 

 

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

 

15



Table of Contents

 

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

 

 

 

Unpaid

 

 

 

Allowance for

 

Average

 

Interest

 

Cash Basis

 

 

 

Principal

 

Recorded

 

Loan Losses

 

Recorded

 

Income

 

Interest

 

 

 

Balance

 

Investment

 

Allocated

 

Investment

 

Recognized

 

Recognized

 

With no related allowance recorded:

 

 

 

 

 

 

 

 

 

 

 

 

 

Commercial

 

$

 

$

 

$

 

$

 

$

 

$

 

Real estate construction

 

 

 

 

 

 

 

Real estate mortgage:

 

 

 

 

 

 

 

 

 

 

 

 

 

1-4 family residential

 

1,618

 

1,618

 

 

1,147

 

25

 

25

 

Multi-family residential

 

 

 

 

 

 

 

Non-farm & non-residential

 

 

 

 

552

 

 

 

Agricultural

 

442

 

442

 

 

2,696

 

29

 

29

 

Consumer

 

 

 

 

 

 

 

Other

 

 

 

 

 

 

 

With an allowance recorded:

 

 

 

 

 

 

 

 

 

 

 

 

 

Commercial

 

 

 

 

 

 

 

Real estate construction

 

 

 

 

 

 

 

Real estate mortgage

 

 

 

 

 

 

 

 

 

 

 

 

 

1-4 family residential

 

480

 

480

 

56

 

990

 

18

 

18

 

Multi-family residential

 

264

 

264

 

94

 

284

 

5

 

5

 

Non-farm & non-residential

 

2,958

 

2,958

 

136

 

3,173

 

115

 

115

 

Agricultural

 

8,037

 

8,037

 

712

 

5,341

 

116

 

116

 

Consumer

 

 

 

 

 

 

 

Other

 

 

 

 

 

 

 

 

Total

 

$

13,799

 

$

13,799

 

$

998

 

$

14,183

 

$

308

 

$

308

 

 

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

 

16



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 March 31, 2015 and December 31, 2014:

 

As of March 31, 2015

(in thousands)

 

 

 

 

 

Loans Past Due

 

 

 

 

 

 

 

Over 90 Days

 

Accruing

 

 

 

 

 

Still

 

Troubled Debt

 

 

 

Nonaccrual

 

Accruing

 

Restructurings

 

Commercial

 

$

 

$

 

$

 

Real estate construction

 

140

 

 

 

Real estate mortgage:

 

 

 

 

 

 

 

1-4 family residential

 

1,301

 

158

 

477

 

Multi-family residential

 

225

 

 

 

Non-farm & non-residential

 

380

 

 

1,816

 

Agricultural

 

 

232

 

3,829

 

Consumer

 

4

 

46

 

 

Total

 

$

2,050

 

$

436

 

$

6,122

 

 

As of December 31, 2014

(in thousands)

 

 

 

 

 

Loans Past Due

 

 

 

 

 

 

 

Over 90 Days

 

Accruing

 

 

 

 

 

Still

 

Troubled Debt

 

 

 

Nonaccrual

 

Accruing

 

Restructurings

 

Commercial

 

$

25

 

$

 

$

 

Real estate construction

 

142

 

 

 

Real estate mortgage:

 

 

 

 

 

 

 

1-4 family residential

 

1,390

 

23

 

480

 

Multi-family residential

 

264

 

 

 

Non-farm & non-residential

 

380

 

 

1,829

 

Agricultural

 

4,371

 

 

3,829

 

Consumer

 

5

 

1

 

 

Total

 

$

6,577

 

$

24

 

$

6,138

 

 

Nonaccrual loans secured by real estate make up 99.8% of the total nonaccruals at March 31, 2015.

 

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

 

17



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.

 

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

 

As of March 31, 2015

(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

 

$

43

 

$

 

$

 

$

––

 

$

43

 

$

44,615

 

Real estate construction

 

 

 

 

140

 

140

 

17,068

 

Real estate mortgage:

 

 

 

 

 

 

 

 

 

 

 

 

 

1-4 family residential

 

1,651

 

119

 

158

 

1,301

 

3,229

 

190,080

 

Multi-family residential

 

 

 

 

225

 

225

 

33,756

 

Non-farm & non-residential

 

163

 

50

 

 

380

 

593

 

165,975

 

Agricultural

 

29

 

 

232

 

 

261

 

66,032

 

Consumer

 

85

 

15

 

46

 

4

 

150

 

16,358

 

Other

 

 

 

 

 

 

119

 

Total

 

$

1,971

 

$

184

 

$

436

 

$

2,050

 

$

4,641

 

$

534,003

 

 

As of December 31, 2014

   (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

 

$

92

 

$

 

$

 

$

25

 

$

117

 

$

47,068

 

Real estate construction

 

 

 

 

142

 

142

 

16,796

 

Real estate mortgage:

 

 

 

 

 

 

 

 

 

 

 

 

 

1-4 family residential

 

1,531

 

232

 

23

 

1,390

 

3,176

 

186,282

 

Multi-family residential

 

 

131

 

 

264

 

395

 

34,020

 

Non-farm & non-residential

 

67

 

 

 

380

 

447

 

161,375

 

Agricultural

 

7

 

11

 

 

4,371

 

4,389

 

66,956

 

Consumer

 

130

 

25

 

1

 

5

 

161

 

16,702

 

Other

 

 

 

 

 

 

279

 

Total

 

$

1,827

 

$

399

 

$

24

 

$

6,577

 

$

8,827

 

$

529,478

 

 

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Troubled Debt Restructurings:

 

The Company has allocated $353 thousand in specific reserves to customers whose loan terms have been modified in troubled debt restructurings as of March 31, 2015.  The Company allocated $369 thousand for specific reserves to customers whose loan terms had been modified in troubled debt restructuring as of December 31, 2014.  The Company has not committed to lend additional amounts as of March 31, 2015 and December 31, 2014 to customers with outstanding loans that are classified as troubled debt restructurings.  All loans which have undergone a troubled debt restructuring modification are performing.  Further, there were no troubled debt restructurings for which there was a payment default within twelve months following the modification during the periods ending March 31, 2015 and 2014.

 

No loans were modified as troubled debt restructurings during the three months ending March 31, 2015 and 2014.

 

Credit Quality Indicators:

 

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

 

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

 

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

 

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

 

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

 

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

 

As of March 31, 2015

  (in thousands)

 

 

 

 

 

Special

 

 

 

 

 

 

 

Pass

 

Mention

 

Substandard

 

Doubtful

 

Commercial

 

$

42,927

 

$

1,484

 

$

247

 

$

 

Real estate construction

 

15,820

 

1,248

 

140

 

 

Real estate mortgage:

 

 

 

 

 

 

 

 

 

1-4 family residential

 

179,502

 

6,447

 

7,169

 

191

 

Multi-family residential

 

33,728

 

 

253

 

 

Non-farm & non-residential

 

159,623

 

6,154

 

791

 

 

Agricultural

 

57,097

 

7,783

 

1,413

 

 

Total

 

$

488,697

 

$

23,116

 

$

10,013

 

$

191

 

 

As of December 31, 2014

  (in thousands)

 

 

 

 

 

Special

 

 

 

 

 

 

 

Pass

 

Mention

 

Substandard

 

Doubtful

 

Commercial

 

$

45,602

 

$

1,307

 

$

275

 

$

 

Real estate construction

 

15,529

 

1,267

 

142

 

 

Real estate mortgage:

 

 

 

 

 

 

 

 

 

1-4 family residential

 

176,791

 

5,439

 

7,068

 

160

 

Multi-family residential

 

33,990

 

 

425

 

 

Non-farm & non-residential

 

154,857

 

5,178

 

1,787

 

 

Agricultural

 

58,110

 

7,653

 

5,581

 

 

Total

 

$

484,879

 

$

20,844

 

$

15,278

 

$

160

 

 

For consumer loans, the Company evaluates the credit quality based on the aging of the recorded investment in loans, which was previously presented.  Non-performing consumer loans are loans which are greater than 90 days past due or on non-accrual status, and total $50 thousand at March 31, 2015 and $6 thousand at December 31, 2014.

 

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4.  REAL ESTATE OWNED

 

Activity in real estate owned, net was as follows:

 

 

 

Three Months Ended

 

 

 

2015

 

2014

 

 

 

(in thousands)

 

Beginning of year

 

$

4,603

 

$

3,379

 

Additions

 

3,029

 

141

 

Sales

 

(3,413

)

(277

)

(Additions) subtractions to valuation allowance, net

 

(26

)

 

Recovery from sale in valuation allowance

 

26

 

13

 

End of period

 

$

4,219

 

 $3,256

 

 

Activity in the valuation allowance was as follows:

 

 

 

Three Months Ended

 

 

 

2015

 

2014

 

 

 

(in thousands)

 

Beginning of year

 

$

1,583

 

$

1,524

 

Additions (subtractions) to valuation allowance, net

 

26

 

 

Recovery from sale

 

(26

)

(13

)

End of period

 

$

1,583

 

$

1,511

 

 

Expenses related to foreclosed assets include:

 

 

 

Three Months Ended

 

 

 

2015

 

2014

 

 

 

(in thousands)

 

Net loss (gain) on sales

 

$

39

 

$

(46

)

Additions (subtractions) to valuation allowance, net

 

26

 

 

Operating expenses (receipts), net of rental income

 

19

 

(2

)

Repossession expenses, net

 

45

 

(2

)

For the period

 

$

84

 

$

(48

)

 

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5.  EARNINGS PER SHARE

 

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

 

The factors used in the earnings per share computation follow:

 

 

 

Three Months Ended

 

 

 

March 31

 

 

 

2015

 

2014

 

 

 

(in thousands)

 

Basic Earnings Per Share

 

 

 

 

 

Net Income

 

$

1,515

 

$

1,771

 

Weighted average common shares outstanding

 

2,708

 

2,702

 

Basic earnings per share

 

$

0.56

 

$

0.66

 

 

 

 

 

 

 

Diluted Earnings Per Share

 

 

 

 

 

Net Income

 

$

1,515

 

$

1,771

 

Weighted average common shares outstanding

 

2,708

 

2,702

 

Weighted average common and dilutive potential common shares outstanding

 

2,708

 

2,702

 

Diluted earnings per share

 

$

0.56

 

$

0.66

 

 

Stock options for 2,400 shares of common stock for the three months ended March 31, 2015 and 12,725 shares of common stock for the three months ended March 31, 2014 were excluded from diluted earnings per share because their impact was antidilutive.

 

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6.  STOCK COMPENSATION

 

We have four stock based compensation plans as described below.

 

Two Stock Option Plans

 

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

 

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

 

 

 

 

 

 

 

Weighted

 

 

 

 

 

 

 

Weighted

 

Average

 

 

 

 

 

 

 

Average

 

Remaining

 

Aggregate

 

 

 

 

 

Exercise

 

Contractual

 

Intrinsic

 

 

 

Shares

 

Price

 

Term

 

Value

 

Outstanding, beginning of year

 

12,625

 

$

30.46

 

 

 

 

 

Granted

 

 

 

 

 

 

 

Forfeited or expired

 

(10,225

)

30.48

 

 

 

 

 

Exercised

 

 

 

 

 

 

 

Outstanding, end of period

 

2,400

 

$

30.38

 

21.5 months

 

$

 

Vested and expected to vest

 

2,400

 

$

30.38

 

21.5 months

 

$

 

Exercisable, end of period

 

2,400

 

$

30.38

 

21.5 months

 

$

 

 

As of March 31, 2015, there was $0 of total unrecognized compensation cost related to nonvested stock options granted under the Plan.  Since both stock option plans have expired, neither plan allows for additional options to be issued.

 

2005 Restricted Stock Grant Plan

 

On May 10, 2005, the Company’s stockholders approved a restricted stock grant plan.  Total shares issuable under the plan are 50,000.  There were 5,385 shares issued during the first three months of 2015 and 7,475 shares issued during the first three months of 2014.  There were 0 shares forfeited during the first three months of 2015 and 2014.

 

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

 

 

 

 

 

Weighted-Average

 

Fair

 

 

 

 

 

Grant-Date

 

Value

 

Nonvested Shares

 

Shares

 

Fair Value

 

Per Share

 

Nonvested at January 1, 2015

 

17,694

 

$

365,586

 

$

20.66

 

Granted

 

5,385

 

147,280

 

27.35

 

Vested

 

(5,175

)

(101,767

)

19.67

 

Forfeited

 

 

 

 

Nonvested at March 31, 2015

 

17,904

 

$

411,099

 

$

22.96

 

 

As of March 31, 2015, there was $380,867 of total unrecognized compensation cost related to nonvested shares granted under the restricted stock grant plan.  The cost is expected to be recognized over a weighted-average period of 3.3 years.  As of March 31, 2015, no additional shares are available for issue under the restricted stock grant plan.

 

2009 Stock Award Plan

 

On May 13, 2009, the Company’s stockholders approved a stock award plan that provides for the granting of both incentive and nonqualified stock options and other share based awards.  Total shares issuable under the plan are 150,000.  There were 465 shares issued during the first three months of 2015 and none in 2014.  There were 0 shares forfeited during the first three months of 2014 and 2013.

 

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

 

 

 

 

 

Weighted-Average

 

Fair

 

 

 

 

 

Grant-Date

 

Value

 

Nonvested Shares

 

Shares

 

Fair Value

 

Per Share

 

Nonvested at January 1, 2015

 

720

 

$

16,704

 

$

23.20

 

Granted

 

465

 

12,718

 

27.35

 

Vested

 

(180

)

(4,176

)

23.20

 

Forfeited

 

 

 

 

Nonvested at March 31, 2015

 

1,005

 

$

25,246

 

$

25.12

 

 

As of March 31, 2015, there was $24,262 of total unrecognized compensation cost related to nonvested shares granted under the restricted stock grant plan.  The cost is expected to be recognized over a weighted-average period of 3.8 years.  As of March 31, 2015, 148,635 shares are still available for issuance.

 

7.  OTHER BORROWINGS

 

At December 31, 2014 the Company had a $5 million revolving promissory note with a maturity date of July 26, 2015.  The Company has no outstanding balances related to this promissory note at March 31, 2015 or December 31, 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 for similar loans and collateral underlying such loans.  Such adjustments were $14 thousand for 2015 and $387 for 2014 and resulted in a Level 3 classification of the inputs for determining fair value.  Non-real estate collateral may be valued using an appraisal, net book value per the borrower’s financial statements, or aging reports, adjusted or discounted based on management’s historical knowledge, changes in market conditions from the time of the valuation, and management’s expertise and knowledge of the client and client’s business, resulting in a Level 3 fair value classification.  Impaired loans are evaluated on a quarterly basis for additional impairment and adjusted in accordance with the allowance policy.

 

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Table of Contents

 

Other Real Estate Owned:  Assets acquired through or instead of loan foreclosure and classified as other real estate owned (OREO) are initially recorded at fair value less costs to sell when acquired, establishing a new cost basis.  These assets are subsequently accounted for at lower of cost or fair value less estimated costs to sell.  Fair value is commonly based on recent real estate appraisals which are updated no less frequently than annually.  These appraisals may utilize a single valuation approach or a combination of approaches including comparable sales and the income approach with data from comparable properties.  Adjustments are routinely made in the appraisal process by the independent appraisers to adjust for differences between the comparable sales and income data available. Such adjustments were $98 thousand as of March 31, 2015 and $123 thousand as of March 31, 2014 and resulted in a Level 3 classification of the inputs for determining fair value.  Real estate owned properties are evaluated on a quarterly basis for additional impairment and adjusted accordingly.

 

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 March 31, 2015 Using (In thousands):

 

 

 

 

 

Quoted Prices

 

 

 

 

 

 

 

 

 

In Active

 

 

 

 

 

 

 

 

 

Markets for

 

Significant Other

 

Significant

 

 

 

 

 

Identical

 

Observable

 

Unobservable

 

 

 

Fair

 

Assets

 

Inputs

 

Inputs

 

Description

 

Value

 

(Level 1)

 

(Level 2)

 

(Level 3)

 

U. S. government agencies

 

$

58,828

 

$

 

$

58,828

 

$

 

States and municipals

 

92,969

 

 

92,969

 

 

Mortgage-backed - residential

 

97,381

 

 

97,381

 

 

Equity securities

 

298

 

298

 

 

 

Trading Assets

 

5,409

 

5,409

 

 

 

Total

 

$

254,885

 

$

5,707

 

$

249,178

 

$

 

 

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

 

 

 

 

 

Quoted Prices

 

 

 

 

 

 

 

 

 

In Active

 

 

 

 

 

 

 

 

 

Markets for

 

Significant Other

 

Significant

 

 

 

 

 

Identical

 

Observable

 

Unobservable

 

 

 

Fair

 

Assets

 

Inputs

 

Inputs

 

Description

 

Value

 

(Level 1)

 

(Level 2)

 

(Level 3)

 

U. S. government agencies

 

$

60,586

 

$

 

$

60,586

 

$

 

States and municipals

 

89,281

 

 

89,281

 

 

Mortgage-backed - residential

 

96,698

 

 

96,698

 

 

Equity securities

 

296

 

296

 

 

 

Trading Assets

 

5,370

 

5,370

 

 

 

Total

 

$

252,231

 

$

5,666

 

$

246,565

 

$

 

 

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

 

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Table of Contents

 

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

 

 

 

Fair Value Measurements at March 31, 2015 Using:

 

 

 

 

 

Quoted Prices

 

 

 

 

 

 

 

 

 

In Active

 

 

 

Other

 

 

 

 

 

Markets for

 

Significant

 

Significant

 

 

 

 

 

Identical

 

Observable

 

Unobservable

 

(In thousands)

 

Carrying

 

Assets

 

Inputs

 

Inputs

 

Description

 

Value

 

(Level 1)

 

(Level 2)

 

(Level 3)

 

Impaired loans:

 

 

 

 

 

 

 

 

 

Real Estate Mortgage:

 

 

 

 

 

 

 

 

 

1-4 family residential

 

$

 

 

 

$

 

Multi-family residential

 

 

 

 

 

Non-farm & non-residential

 

224

 

 

 

224

 

Agricultural

 

 

 

 

 

 

 

Other real estate owned:

 

 

 

 

 

 

 

 

 

Residential

 

1,670

 

 

 

1,670

 

Loan servicing rights

 

282

 

 

 

282

 

 

 

 

Fair Value Measurements at December 31, 2014 Using:

 

 

 

 

 

Quoted Prices

 

 

 

 

 

 

 

 

 

In Active

 

 

 

Other

 

 

 

 

 

Markets for

 

Significant

 

Significant

 

 

 

 

 

Identical

 

Observable

 

Unobservable

 

(In thousands)

 

Carrying

 

Assets

 

Inputs

 

Inputs

 

Description

 

Value

 

(Level 1)

 

(Level 2)

 

(Level 3)

 

Impaired loans:

 

 

 

 

 

 

 

 

 

Real Estate Mortgage:

 

 

 

 

 

 

 

 

 

Multi-family residential

 

169

 

 

 

169

 

Non-farm & non-residential

 

366

 

 

 

366

 

Agricultural

 

3,729

 

 

 

3,729

 

Other real estate owned:

 

 

 

 

 

 

 

 

 

Residential

 

1,670

 

 

 

1,670

 

Loan servicing rights

 

292

 

 

 

292

 

 

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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 $224 thousand, which includes a valuation allowance of $156 thousand at March 31, 2015.  During the first three months of 2015, no new loans became impaired.  The total allowance for specific impaired loans decreased $199 thousand for the three months ending March 31, 2015 and increased $134 thousand for the three months ending March 31, 2014.  During the first three months of 2014, one new loan became impaired resulting in an additional provision for loan losses of $282 thousand.

 

Other real estate owned, which is measured at fair value less costs to sell, had a net carrying amount of $1.7 million, which is made up of the outstanding balance of $3.3 million, net of a valuation allowance of $1.6 million at March 31, 2015.  The Company recorded $26 thousand in write-downs of other real estate owned properties for the three months ending March 31, 2015 and $0 for the three month period ending March 31, 2014.

 

Loan servicing rights, which are carried at the lower of cost or fair value, were carried at their fair value of $282 thousand, which is made up of the outstanding balance of $347 thousand, net of a valuation allowance of $65 thousand at March 31, 2015.  The Bank recorded a net recovery of prior write-downs of $14 thousand for the three months ending March 31, 2015 and a recovery of prior write-downs totaling $5 thousand for the three months ending March 31, 2014.  At December 31, 2014, loan servicing rights were carried at their fair value of $292 thousand, which is made up of the outstanding balance of $371 thousand, net of a valuation allowance of $79 thousand.

 

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

 

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Table of Contents

 

 

 

 

 

 

 

 

 

Range

March 31, 2015

 

Fair

 

Valuation

 

Unobservable

 

(Weighted

(In thousands)

 

Value

 

Technique(s)

 

Input(s)

 

Average)

Impaired loans

 

 

 

 

 

 

 

 

Non-farm & non-residential

 

224

 

income approach

 

capitalization rate

 

0%-0%

 

 

 

 

 

 

 

 

(0%)

Other real estate owned:

 

 

 

 

 

 

 

 

Residential

 

1,670

 

sales comparison

 

adjustment for differences between the comparable sales

 

0%-48%

(11%)

 

 

 

 

income approach

 

capitalization rate

 

8%-10%

 

 

 

 

 

 

 

 

(9%)

Loan Servicing Rights

 

282

 

discounted cash flow

 

constant prepayment rates

 

8%-21%

(12%)

 

 

 

 

 

 

 

 

 

Range

December 31, 2014

 

Fair

 

Valuation

 

Unobservable

 

(Weighted

(In thousands)

 

Value

 

Technique(s)

 

Input(s)

 

Average)

Impaired loans

 

 

 

 

 

 

 

 

Real estate mortgage:

 

 

 

 

 

 

 

 

Multi-family residential

 

169

 

sales comparison

 

adjustment for differences between the comparable sales

 

10%-10%

(10%)

Non-farm & non-residential

 

366

 

sales comparison

 

adjustment for differences between the comparable sales

 

0%-0%

(0%)

Agricultural

 

3,729

 

sales comparison

 

adjustment for differences between the comparable sales

 

5%-53%

(43%)

Other real estate owned:

 

 

 

 

 

 

 

 

Residential

 

1,670

 

sales comparison

 

adjustment for differences between the comparable sales

 

0%-48%

(11%)

 

 

 

 

income approach

 

capitalization rate

 

8%-10%

 

 

 

 

 

 

 

 

(9%)

Loan Servicing Rights

 

292

 

discounted cash flow

 

constant prepayment rates

 

8%-35%

(11%)

 

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Table of Contents

 

Fair Value of Financial Instruments

 

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

 

March 31, 2015:

 

 

 

Carrying

 

 

 

 

 

 

 

 

 

(in thousands)

 

Value

 

Level 1

 

Level 2

 

Level 3

 

Total

 

Financial assets

 

 

 

 

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

15,066

 

$

15,066

 

$

 

$

 

$

15,066

 

Interest bearing deposits

 

1,280

 

1,280

 

 

 

1,280

 

Securities

 

249,476

 

298

 

249,178

 

 

249,476

 

Trading Assets

 

5,409

 

5,409

 

 

 

 

5,409

 

Mortgage loans held for sale

 

940

 

 

940

 

 

940

 

Loans, net

 

532,724

 

 

 

531,547

 

531,547

 

FHLB Stock

 

5,981

 

 

 

 

N/A

 

Interest receivable

 

3,570

 

1

 

1,348

 

2,221

 

3,570

 

Financial liabilities

 

 

 

 

 

 

 

 

 

 

 

Deposits

 

$

660,814

 

$

472,790

 

$

188,732

 

$

 

$

661,522

 

Securities sold under agreements to repurchase and other borrowings

 

12,121

 

 

12,160

 

 

12,160

 

Federal Funds Purchased

 

2,148

 

2,148

 

 

 

2,148

 

FHLB advances

 

86,950

 

 

83,841

 

 

83,841

 

Subordinated Debentures

 

7,217

 

 

 

7,204

 

7,204

 

Interest payable

 

602

 

 

593

 

9

 

602

 

 

December 31, 2014:

 

 

 

Carrying

 

 

 

 

 

 

 

 

 

(in thousands)

 

Value

 

Level 1

 

Level 2

 

Level 3

 

Total

 

Financial assets

 

 

 

 

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

17,169

 

$

17,169

 

$

 

$

 

$

17,169

 

Interest bearing deposits

 

1,280

 

1,280

 

 

 

 

 

1,280

 

Securities

 

246,861

 

296

 

246,565

 

 

246,861

 

Trading assets

 

5,370

 

5,370

 

 

 

 

 

5,370

 

Mortgage loans held for sale

 

776

 

 

782

 

 

782

 

Loans, net

 

532,293

 

 

 

535,213

 

535,213

 

FHLB Stock

 

5,981

 

 

 

 

N/A

 

Interest receivable

 

3,299

 

 

1,274

 

2,025

 

3,299

 

Financial liabilities

 

 

 

 

 

 

 

 

 

 

 

Deposits

 

$

654,869

 

$

470,912

 

$

185,429

 

$

 

$

656,341

 

Securities sold under agreements to repurchase and other borrowings

 

12,457

 

 

12,620

 

 

12,620

 

FHLB advances

 

93,785

 

 

88,373

 

 

88,373

 

Subordinated Debentures

 

7,217

 

 

 

7,209

 

7,209

 

Interest Payable

 

642

 

 

 

633

 

9

 

642

 

 

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

 

Cash and Cash Equivalents - The carrying amounts of cash and 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.

 

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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.

 

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.

 

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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 Three Months Ending March 31

 

 

 

2015

 

2014

 

Beginning Balance

 

$

791

 

$

(5,126

)

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

 

942

 

3,375

 

Reclassification adjustment for:

 

 

 

 

 

Securities gains realized in income

 

(8

)

(188

)

Income taxes

 

(3

)

(64

)

Securities gains realized in income, net

 

(5

)

(124

)

Net current period other comprehensive income

 

937

 

3,251

 

Ending balance

 

$

1,728

 

$

(1,875

)

 

The following is significant amounts reclassified out of each component of accumulated other comprehensive Income (Loss) for the three months ending March 31, 2015 and 2014:

 

March 31, 2015

 

Details about

 

Amount

 

Affected Line Item

 

Accumulated Other

 

Reclassified From

 

in the Statement

 

Comprehensive

 

Accumulated Other

 

Where Net

 

Income Components

 

Comprehensive Income

 

Income is Presented

 

 

 

 

 

 

 

Unrealized gains and losses on available-for-sale securities

 

$

(8

)

Securities gains, net

 

 

 

3

 

Provision for income taxes

 

 

 

 

 

 

 

 

 

(5

)

Net of tax

 

 

March 31, 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

 

$

(188

)

Securities gains, net

 

 

 

64

 

Provision for income taxes

 

 

 

 

 

 

 

 

 

(124

)

Net of tax

 

 

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10.  PENDING ACQUISITION

 

On January 21, 2015, Kentucky Bancshares, Inc., the parent company of Kentucky Bank, and Madison Financial Corporation, the parent company of Madison Bank, jointly announced that they entered into an agreement and plan of share exchange in which Kentucky Bancshares will acquire Madison in a common-for-common share exchange transaction.  Under the terms of the Agreement, Kentucky Bancshares will exchange for each issued and outstanding share of Madison common stock 1.1927 shares of Kentucky Bancshares common stock, subject to potential adjustments at closing. Based on Kentucky Bancshares’ 20 trading day average common stock price of $27.25 per share, as of January 16, 2015, assuming no exchange ratio adjustments, the transaction is valued at approximately $7.2 million with a per share value of $32.50 for each share of Madison common stock. The transaction is subject to Madison shareholder approval and customary regulatory approvals and is expected to close in the third quarter of 2015.

 

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

 

Forward-Looking Statements

 

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

 

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

 

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

 

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

 

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

 

Summary

 

The Company recorded net income of $1.5 million, or $0.56 basic earnings and diluted earnings per share for the first three months ending March 31, 2015 compared to $1.8 million or $0.66 basic earnings and diluted earnings per share for the three month period ended March 31, 2014.  The first three months earnings reflect a decrease of 14.4% compared to the same time period in 2014.  The decrease in earnings is mostly attributed to an increase of $200 thousand in the provision for loan losses, an increase of $192 thousand in salaries and benefits, an increase of $149 thousand in legal and professional fees, and an increase of $204 thousand in various other expenses.  The increase in non-interest expense in 2015 compared to 2014 was partially due to the pending acquisition the Company has with Madison Bank which is expected to close during the third quarter of 2015.  Also contributing to the decrease in income was a decrease of $180 thousand in gains on securities, a decrease of $76 thousand in gains on trading assets and a decrease of $107 thousand in service charges which was primarily overdraft fees. These negative changes to net income during 2015 were partially offset by an increase of $414 thousand in net interest income, an increase of $170 thousand in gains on the sale of mortgage loans and a decrease of $292 thousand in income tax expense.

 

Return on average assets was 0.70% for the three months ending March 31, 2015 and 0.91% for the three months ending March 31, 2014.  Return on average equity was 7.64% for the three month period ending March 31, 2015 and 10.04% for the three month period ending March 31, 2014.

 

Securities available for sale increased $2.6 million from $246.9 million at December 31, 2014 to $249.5 million at March 31, 2015.  Trading assets totaled $5.4 million both at March 31, 2015 and December 31, 2014 and includes income on the investment totaling $39 thousand during the first three months of 2015 compared to $108 thousand for the three months ending March 31, 2014.

 

Gross Loans increased $339 thousand from $538.3 million on December 31, 2014 to $538.6 million on March 31, 2015.  The overall increase in loans is attributed to an increase of $4.7 million in non-farm and non-residential properties and an increase of $3.9 million in 1-4 family residential loans.  Agricultural loan balances decreased $5.1 million and commercial loan balances decreased $2.5 million.

 

Total deposits increased from $654.9 million on December 31, 2014 to $660.8 million on March 31, 2015, an increase of $5.9 million.  Non-interest bearing demand deposit accounts increased $8.7 million from December 31, 2014 to March 31, 2015.  Time deposits $250 thousand and over increased $4.9 million and other interest bearing deposit accounts decreased $7.7 million from December 31, 2014 to March 31, 2015.

 

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Public fund accounts decreased $15.1 million from December 31, 2014 to March 31, 2015.  Public fund accounts typically decrease during the first three quarters of the year and increase during the last quarter of the year due to tax payments collected during the fourth quarter and then withdrawn from the Bank in the following months.

 

Borrowings from the Federal Home Loan Bank decreased $6.8 million from December 31, 2014 to March 31, 2015.

 

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 $6.8 million for the three months ending March 31, 2015 compared to $6.3 million for the three months ending March 31, 2014, an increase of 6.5%.  The interest spread, excluding tax equivalent adjustments was 3.34% for the first three months of 2015 and down from 3.41% reported for the same period in 2014, a decrease of 7 basis points.  Rates have remained low during the past year.  For the first three months ending March 31, 2015, the cost of total deposits was 0.29% compared to 0.35% for the same time period in 2014.  Increasing non-interest bearing deposit accounts and lowering rates on certificates of deposit accounts have helped to lower the cost of deposits.

 

For the first three months, the yield on assets decreased from 3.94% in 2014 to 3.84% in 2015, excluding tax equivalent adjustments.  The yield on loans decreased 24 basis points in the first three months of 2015 compared to 2014 from 4.92% to 4.68%.  The yield on securities decreased 9 basis points in the first three months of 2015 compared to 2014 from 2.40% in 2014 to 2.31% in 2015.  The cost of liabilities was 0.51% for the first three months in 2015 compared to 0.53% in 2014.  Year to date average loans, excluding overdrafts, increased $63.2 million, or 13.4% from March 31, 2014 to March 31, 2015.  Loan interest income increased $448 thousand for the first three months of 2015 compared to the first three months of 2014.  Year to date average total deposits increased from March 31, 2014 to March 31, 2015, up $37.0 million or 5.9%.  Year to date average interest bearing deposits increased $33.8 million, or 7.2%, from March 31, 2014 to March 31, 2015.  Deposit interest expense decreased $53 thousand for the first three months of 2015 compared to the same period in 2014.  Year to date average borrowings increased $30.0 million, or 38.3% from March 31, 2014 to March 31, 2015.  Interest expense on borrowed funds increased $88 thousand for the first three months of 2015 compared to the same period in 2014.

 

The volume rate analysis for the three months ending March 31, 2015 indicates that $2.0 million of the increase in interest income is attributable to an increase in loan volume and $222 thousand of the increase in interest income is attributable to an increase in the volume of our security portfolio.  Further, a decrease in loan rates caused a decrease of $1.5 million in interest income and a decrease in rates in our security portfolio contributed a decrease of $214 thousand in interest income.  The net effect to interest income was an increase of $449 thousand for the first three months of 2015 compared to the same time period in 2014.  The average rate of the Company’s total outstanding deposits and borrowings slightly decreased from 0.53% in 2014 to 0.51% in 2015.

 

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Based on the following volume rate analysis, the lower level of interest rates contributed to a decrease of $544 thousand in interest expense, while the change in volume in deposits and borrowings was responsible for a $579 thousand increase in interest expense.  As a result, the increase in net interest income for the first three months in 2015 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 2015.  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

 

 

 

Three Months Ending

 

 

 

2015 vs. 2014

 

 

 

Increase (Decrease) Due to Change in

 

(in thousands)

 

Volume

 

Rate

 

Net Change

 

INTEREST INCOME

 

 

 

 

 

 

 

Loans

 

$

1,988

 

$

(1,540

)

$

448

 

Investment Securities

 

222

 

(214

)

8

 

Trading Assets

 

 

 

 

 

 

 

Other

 

(19

)

12

 

(7

)

Total Interest Income

 

2,191

 

(1,742

)

449

 

INTEREST EXPENSE

 

 

 

 

 

 

 

Deposits

 

 

 

 

 

 

 

Demand

 

21

 

(22

)

(1

)

Savings

 

10

 

(16

)

(6

)

Negotiable Certificates of Deposit and Other Time Deposits

 

186

 

(232

)

(46

)

Securities sold under agreements to repurchase and other borrowings

 

 

 

 

Federal Home Loan Bank advances

 

362

 

(274

)

88

 

Total Interest Expense

 

579

 

(544

)

35

 

Net Interest Income

 

$

1,612

 

$

(1,198

)

$

414

 

 

Non-Interest Income

 

Non-interest income was flat and increased $1 thousand for the three months ending March 31, 2015, compared to the same period in 2014, to $2.2 million.

 

Decreases to non-interest income for the three month period ending March 31, 2015 included a decrease of $180 thousand in gains on the sale of securities, a decrease of $107 thousand in service charges and a decrease of $76 thousand in gains on trading assets.  Favorable variances to non-interest income included an increase of $170 thousand in gains on the sale of mortgage loans, an increase of $62 thousand in debit card interchange income and an increase of $55 thousand in trust fees.

 

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The gain on the sale of mortgage loans increased from $157 thousand during the first three months of 2014 to $327 thousand during the first three months of 2015, an increase of $170 thousand.  The volume of loans originated to sell during the first three months of 2015 increased $3.3 million compared to the same time period in 2014.  The volume of mortgage loan originations and sales is generally inverse to rate changes.  A change in the mortgage loan rate environment can have a significant impact on the related gain on sale of mortgage loans.  Loan service fee income, net of amortization expense, was $53 thousand for the three months ending March 31, 2015 compared to $29 thousand for the three months ending March 31, 2014, an increase of $24 thousand.  During the first three months of 2015, the market value adjustment to the carrying value of the mortgage servicing right was a positive net amount of $14 thousand, as the fair value of this asset increased.  During the first three months of 2014, the adjustment to the carrying value of the mortgage servicing right was a positive net amount of $5 thousand, as the fair value of this asset increased.

 

Non-Interest Expense

 

Total non-interest expenses increased $763 thousand for the three month period ending March 31, 2015 compared to the same period in 2014.

 

For the comparable three month periods, salaries and benefits increased $192 thousand, an increase of 5.3%.  The increase is attributed to hiring additional personnel during 2014 and 2015 and normal pay increases at the beginning of 2015.  The number of full time equivalent employees at March 31, 2015 was 229 compared to 207 one year ago.

 

Occupancy expenses increased $84 thousand to $932 thousand for the first three months of 2015 compared to the same time period in 2014.  Expenses associated with purchasing equipment with an initial cost of less than $1 thousand increased $49 thousand and computer maintenance expenses increased $21 thousand.

 

Legal and professional fees increased $149 thousand for the first three months ending March 31, 2015 compared to the same time period in 2014.  Repossession expenses increased $47 thousand for the first three months ending March 31, 2015 compared to the same time period in 2014.  Repossession expenses are reported net of rental income earned on repossessed properties.  Net repossession expenses were higher in the first three months of 2015 when compared to the same time period in 2014 due to the Company selling many of the properties which earned income in the form of building rents.  Further, the Company added additional properties to other real estate owned properties during the year resulting in increased expenses.  FDIC insurance expense increased $28 thousand for the three months ending March 31, 2015 compared to the same time period in 2014.

 

Income Taxes

 

The effective tax rate for the three months ending March 31, 2015 was 0.1% compared to 14.2% in 2014.  These effective tax rates are less than the statutory rate as a result of the Company investing in tax-free securities, loans and other investments which generate tax credits for the Company.  Income tax expense decreased $292 thousand for the three months ending March 31, 2015 compared to the first three months in 2014.  Income tax expense decreased due to the implementation of the captive insurance subsidiary that generated $256 thousand of tax-exempt income during the three months of 2015.  The captive insurance subsidiary was established during the third quarter of 2014.

 

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Income tax expense also decreased due to lower book earnings than in the same quarter in the previous year and the permanent book-tax differences remained the same except as otherwise noted.  Tax-exempt interest income was essentially unchanged with a decrease of $6 thousand for the first three months of 2015 compared to the first three months of 2014.  Further, for the first three months of 2015, the Company had tax credits totaling $153 thousand for investments made in low income housing projects which represented an increase of $14 thousand compared to similar tax credits for the first three months of 2014.

 

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 three months ending March 31, 2015, the Company averaged $84.1 million in tax free securities and $18.0 million in tax free loans.  As of March 31, 2015, the weighted average remaining maturity for the tax free securities is 126 months, while the weighted average remaining maturity for the tax free loans is 165 months.

 

Liquidity and Funding

 

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

 

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

 

Cash and cash equivalents were $15.1 million as of March 31, 2015 compared to $17.2 million at December 31, 2014.  The decrease in cash and cash equivalents is attributed to a decrease of $ 1.9 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 $249.5 million at March 31, 2015 compared to $246.9 million at December 31, 2014.  Securities classified as trading assets totaled $5.4 million both at March 31, 2015 December 31, 2014.

 

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

 

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

 

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For the first three months of 2015, deposits increased $5.9 million. The Company’s investment portfolio increased $2.6 million and the Company’s loan portfolio increased $339 thousand.  The Company’s borrowed funds from the Federal Home Loan Bank decreased $6.8 million from December 31, 2014 to March 31, 2015.  The Company had outstanding federal funds purchased totaling $2.2 million at March 31, 2015 and $0 at December 31, 2014.

 

Management is aware of the challenge of funding sustained loan growth.  Therefore, in addition to deposits, other sources of funds, such as Federal Home Loan Bank advances, may be used.  We rely on Federal Home Loan Bank advances for both liquidity and asset/liability management purposes.  These advances are used primarily to fund long-term fixed rate residential mortgage loans.  As of March 31, 2015, we have sufficient collateral to borrow an additional $50 million from the Federal Home Loan Bank.  In addition, as March 31, 2015, $29 million is available in overnight borrowing through various correspondent banks and the Company has access to $280 million in brokered deposits.  In light of this, management believes there is sufficient liquidity to meet all reasonable borrower, depositor and creditor needs in the present economic environment.

 

Capital Requirements

 

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

 

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

 

Quantitative measures established by regulation to ensure capital adequacy require the Company and the Bank to maintain minimum amounts and ratios (set forth in the following table) of Total and Tier I capital, including Common Equity Tier 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 March 31, 2015 and December 31, 2014, that the Company and the Bank meet all capital adequacy requirements to which they are subject.

 

The most recent notification from the FDIC categorized the Bank as well capitalized under the regulatory framework for prompt corrective action.  To be categorized as well capitalized, the Bank must maintain minimum Total risk-based, Tier I risk-based, Common Equity Tier 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.

 

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

 

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

 

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

 

 

 

 

 

 

 

 

 

 

 

To Be Well

 

 

 

 

 

 

 

 

 

 

 

Capitalized

 

 

 

 

 

 

 

 

 

 

 

Under Prompt

 

 

 

 

 

 

 

For Capital

 

Corrective

 

 

 

Actual

 

Adequacy Purposes

 

Action Provisions

 

 

 

Amount

 

Ratio

 

Amount

 

Ratio

 

Amount

 

Ratio

 

 

 

(Dollars in Thousands)

 

March 31, 2015

 

 

 

 

 

 

 

 

 

 

 

 

 

Consolidated

 

 

 

 

 

 

 

 

 

 

 

 

 

Total Capital (to Risk-Weighted Assets)

 

$

77,834

 

12.9

%

$

48,107

 

8.0

%

$

N/A

 

N/A

 

Tier I Capital (to Risk-Weighted Assets)

 

71,826

 

 11.9

 

36,080

 

6.0

 

N/A

 

N/A

 

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

 

64,826

 

 10.8

 

27,060

 

4.5

 

N/A

 

N/A

 

Tier I Capital (to Average Assets)

 

71,826

 

8.5

 

33,984

 

4.0

 

N/A

 

N/A

 

Bank Only

 

 

 

 

 

 

 

 

 

 

 

 

 

Total Capital (to Risk-Weighted Assets)

 

$

75,146

 

12.5

%

$

48,172

 

8.0

%

$

60,215

 

10.0

%

Tier I Capital (to Risk-Weighted Assets)

 

69,137

 

 11.5

 

36,129

 

6.0

 

48,172

 

8.0

 

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

 

 69,137

 

 11.5

 

27,097

 

4.5

 

39,140

 

6.5

 

Tier I Capital (to Average Assets)

 

69,137

 

8.2

 

33,818

 

4.0

 

42,273

 

5.0

 

December 31, 2014

 

 

 

 

 

 

 

 

 

 

 

 

 

Consolidated

 

 

 

 

 

 

 

 

 

 

 

 

 

Total Capital (to Risk-Weighted Assets)

 

$

77,016

 

13.1

%

$

47,208

 

8.0

%

N/A

 

N/A

 

Tier I Capital (to Risk-Weighted Assets)

 

70,917

 

 12.0

 

23,604

 

4.0

 

N/A

 

N/A

 

Tier I Capital (to Average Assets)

 

70,917

 

8.7

 

32,497

 

4.0

 

N/A

 

N/A

 

Bank Only

 

 

 

 

 

 

 

 

 

 

 

 

 

Total Capital (to Risk-Weighted Assets)

 

$

74,575

 

12.6

%

$

47,184

 

8.0

%

$

58,980

 

10.0

%

Tier I Capital (to Risk-Weighted Assets)

 

68,476

 

 11.6

 

23,592

 

4.0

 

35,388

 

6.0

 

Tier I Capital (to Average Assets)

 

68,476

 

8.4

 

32,442

 

4.0

 

40,553

 

5.0

 

 

Non-Performing Assets

 

As of March 31, 2015, our non-performing assets totaled $12.8 million or 1.50% of assets compared to $17.3 million or 2.03% of assets at December 31, 2014 (See table below.)  The Company experienced a decrease of $4.5 million in non-accrual loans from December 31, 2014 to March 31, 2015.  As of March 31, 2015, non-accrual loans include $1.3 million in loans secured by 1-4 family properties, $380 thousand in loans secured by non-farm and non-residential properties, $225 thousand in loans secured by multi-family residential properties and $140 thousand in loans secured by real estate

 

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construction loans.  Real estate loans composed 99.8% of the non-performing loans as of March 31, 2015 and 99.6% as of December 31, 2014.  Forgone interest income on non-accrual loans totaled $15 thousand for the first three months of 2015 compared to forgone interest of $59 thousand for the same time period in 2014.  Accruing loans that are contractually 90 days or more past due as of March 31, 2105 totaled $436 thousand compared to $24 thousand at December 31, 2014, an increase of $412 thousand.  The total nonperforming and restructured loans decreased $4.1 million from December 31, 2014 to March 31, 2015.  The decrease in total non-performing loan balances is mostly attributed to one loan customer who had three loans totaling $4.0 million on non-accrual at December 31, 2014.  These loan balances were moved to other real estate owned during the first three months of 2015 and subsequently sold.  The decrease in non-accrual loan balances contributed to the decrease in the ratio of nonperforming and restructured loans to loans which decreased 76 basis points to 1.60% from December 31, 2014 to March 31, 2015. In addition, the amount the Company has recorded as other real estate owned decreased $385 thousand from December 31, 2014 to March 31, 2015. As of March 31, 2015, the amount recorded as other real estate owned totaled $4.2 million compared to $4.6 million at December 31, 2014. During the first three months of 2015, $2.7 million in loan balances were foreclosed upon and added to other real estate properties while $3.4 million in other real estate properties were sold.  The allowance as a percentage of non-performing and restructured loans and other real estate owned increased from 35% at December 31, 2014 to 46% at March 31, 2015.

 

Nonperforming and Restructured Assets

 

 

 

3/31/15

 

12/31/14

 

 

 

(in thousands)

 

 

 

 

 

 

 

Non-accrual Loans

 

$

2,050

 

$

6,577

 

Accruing Loans which are Contractually past due 90 days or more

 

436

 

24

 

Accruing Troubled Debt Restructurings

 

6,122

 

6,138

 

Total Nonperforming and Restructured Loans

 

8,608

 

12,739

 

Other Real Estate

 

4,219

 

4,604

 

Total Nonperforming and Restructured Loans and Other Real Estate

 

$

12,827

 

$

17,343

 

Nonperforming and Restructured Loans as a Percentage of Loans

 

1.60

%

2.36

%

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

 

1.50

%

2.03

%

Allowance as a Percentage of Period-end Loans

 

1.10

%

1.12

%

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

 

46

%

35

%

 

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.

 

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Table of Contents

 

Provision for Loan Losses

 

The loan loss provision for the first three months of 2015 was $300 thousand compared to $100 thousand for the first three months of 2014.    The increase in the total loan loss provision during the first three months of 2015 compared to the same time period in 2014 is attributed to growth in the Bank’s loan portfolio and having a significant recovery of $367 thousand during the first quarter of 2014 for a loan that was charged off in a prior year.

 

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

 

Nonperforming loans and restructured loans decreased $4.1 million since December 31, 2014 to $8.6 million as of March 31, 2015.  Other real estate properties owned decreased $385 thousand over this same time period.   Additions to Other real estate properties totaled $3.0 million, of which $283 thousand was included in other assets at December 31, 2014, while sales totaled $3.4 million and negative valuation adjustments totaled $26 thousand.

 

The March 31, 2015 unallocated allowance of $534 thousand was comparable to the December 31, 2014 balance of $516 thousand. Net charge-offs were $392 thousand for the three months ending March 31, 2015 and a net recovery of $75 thousand for the three months ending March 31, 2014.  During the first quarter of 2014, the Company recorded a recovery of $367 for one loan which was previously charged-off.  Future levels of charge-offs will be determined by the particular facts and circumstances surrounding individual loans.  Further, the growth the Company has experienced in our loan portfolio is attributed to passing grade loans which require fewer reserves as of March 31, 2015.  Based on the above information, management believes the current loan loss allowance is sufficient to meet probable incurred loan losses.

 

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Table of Contents

 

Loan Losses

 

 

 

Three Months Ended March 31

 

 

 

(in thousands)

 

 

 

2015

 

2014

 

Balance at Beginning of Period

 

$

6,012

 

$

5,441

 

Amounts Charged-off:

 

 

 

 

 

Commercial

 

25

 

200

 

Real Estate Construction

 

 

 

1-4 family residential

 

32

 

63

 

Multi-family residential

 

 

 

Non-farm & non-residential

 

 

 

Agricultural

 

242

 

 

Consumer and other

 

323

 

174

 

Total Charged-off Loans

 

622

 

437

 

Recoveries on Amounts

 

 

 

 

 

Previously Charged-off:

 

 

 

 

 

Commercial

 

 

 

Real Estate Construction

 

2

 

4

 

1-4 family residential

 

3

 

12

 

Multi-family residential

 

 

 

Non-farm & non-residential

 

 

367

 

Agricultural

 

1

 

24

 

Consumer and other

 

224

 

105

 

Total Recoveries

 

230

 

512

 

Net Charge-offs

 

392

 

(75

)

Provision for Loan Losses

 

300

 

100

 

Balance at End of Period

 

5,920

 

5,616

 

Loans

 

 

 

 

 

Average

 

536,998

 

474,505

 

At March 31

 

538,644

 

474,012

 

As a Percentage of Average Loans:

 

 

 

 

 

Net Charge-offs for the period

 

0.07

%

(0.02

)%

Provision for Loan Losses for the period

 

0.06

%

0.02

%

Allowance as a Multiple of Net Charge-offs annualized

 

3.8

 

(18.7

)

 

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Table of Contents

 

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 $5.4 million in market risk sensitive instruments which are held for trading purposes.  These assets are held for a minimal period of time and are used to generate profits on short-term differences in price while earning interest for the time they are held.

 

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

 

The projections are based on balance sheet growth assumptions and repricing opportunities for new, maturing and adjustable rate amounts.  As of March 31, 2015, the projected percentage changes are within limits approved by our Board of Directors (“Board”).  Although management does analyze and monitor the projected percentage change in a declining interest rate environment, due to the current rate environment many of the current deposit rates cannot decline an additional 100 basis points.  Therefore, management places more emphasis in the rising rate environment scenarios.  Similar to prior periods, this period’s volatility is slightly lower in each rate shock simulation when compared to the same period a year ago.  The projected net interest income report summarizing our interest rate sensitivity as of March 31, 2015 is as follows:

 

PROJECTED NET INTEREST INCOME

(dollars in thousands)

 

 

 

Level

 

Change in basis points:

 

- 100

 

Rates

 

+ 100

 

+ 300

 

 

 

 

 

 

 

 

 

 

 

Year One (4/15 - 3/16)

 

 

 

 

 

 

 

 

 

Net interest income

 

$

27,403

 

$

28,266

 

$

28,478

 

$

28,417

 

Net interest income dollar change

 

(864

)

N/A

 

212

 

151

 

Net interest income percentage change

 

-3.1

%

N/A

 

0.8

%

0.5

%

Board approved limit

 

>-4.0

%

N/A

 

>-4.0

%

>-10.0

%

 

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Table of Contents

 

The projected net interest income report summarizing the Company’s interest rate sensitivity as of March 31, 2014 is as follows:

 

PROJECTED NET INTEREST INCOME

(dollars in thousands)

 

 

 

Level

 

Change in basis points:

 

- 100

 

Rates

 

+ 100

 

+ 300

 

 

 

 

 

 

 

 

 

 

 

Year One (4/14 - 3/15)

 

 

 

 

 

 

 

 

 

Net interest income

 

$

24,497

 

$

25,298

 

$

25,517

 

$

25,483

 

Net interest income dollar change

 

(801

)

N/A

 

219

 

186

 

Net interest income percentage change

 

-3.2

%

N/A

 

0.9

%

0.7

%

Board approved limit

 

>-4.0

%

N/A

 

>-4.0

%

>-10.0

%

 

Projections from March 31, 2015, year one reflected a decline in net interest income of 3.1% with a 100 basis point decline compared to the 3.2% decline in 2014.  The 100 basis point increase in rates reflected a 0.8% increase in net interest income in 2015 compared to an increase of 0.9% in 2014.

 

EVE applies discounting techniques to future cash flows to determine the present value of assets, liabilities, and therefore equity.  Based upon applying these techniques to the March 31, 2015 balance sheet, a 100 basis point increase in rates results in a 10.7% decrease in EVE.  A 100 basis point decrease in rates results in a 1.8% decrease in EVE.  These are within the Board approved limits.

 

Item 4 - CONTROLS AND PROCEDURES

 

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

 

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

 

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

 

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Table of Contents

 

Part II - Other Information

 

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

 

 

 

ISSUER PURCHASES OF EQUITY SECURITIES

 

 

 

(a)

 

 

 

(c) Total Number

 

(d) Maximum Number

 

 

 

Total

 

(b)

 

of Shares (or Units)

 

(or Approximate Dollar

 

 

 

Number of

 

Average

 

Purchased as Part

 

Value) of Shares (or

 

 

 

Shares (or

 

Price Paid

 

of Publicly

 

Units) that May Yet Be

 

 

 

Units)

 

Per Share

 

Announced Plans

 

Purchased Under the

 

Period

 

Purchased

 

(or Unit)

 

Or Programs

 

Plans or Programs

 

1/1/15 — 1/31/15

 

300

 

$

27.75

 

300

 

82,929 shares

 

2/1/15 — 2/28/15

 

 

 

 

82,929 shares

 

3/1/15 — 3/31/15

 

39

 

27.25

 

39

 

82,890 shares

 

Total

 

339

 

$

27.69

 

339

 

82,890 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 March 31, 2015, 317,110 shares have been purchased.

 

Item 6.        Exhibits

 

2.1

 

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

 

 

 

2.2

 

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

 

 

 

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.

 

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Table of Contents

 

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 March 31, 2015, filed with the SEC on May 13, 2015, formatted in Extensible Business Reporting Language (XBRL): (i) Consolidated Balance Sheets at March 31, 2015 and December 31, 2014, (ii) Consolidated Statements of Income and Comprehensive Income (Loss) for the three months ended March 31, 2015 and March 31, 2014, (iii) Consolidated Statement of Stockholders’ Equity for the three months ended March 31, 2015, (iv) Consolidated Statements of Cash Flows for the three months ended March 31, 2015 and March 31, 2014 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.

 

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

5/13/15

 

/s/Louis Prichard

 

 

 

Louis Prichard, President and C.E.O.

 

 

 

 

Date

5/13/15

 

/s/Gregory J. Dawson

 

 

 

Gregory J. Dawson, Chief Financial Officer

 

47