Attached files

file filename
EX-31.2 - EX-31.2 - KENTUCKY BANCSHARES INC /KY/a15-17952_1ex31d2.htm
EX-31.1 - EX-31.1 - KENTUCKY BANCSHARES INC /KY/a15-17952_1ex31d1.htm
EX-32 - EX-32 - KENTUCKY BANCSHARES INC /KY/a15-17952_1ex32.htm

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 September 30, 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  (Do not check if a smaller reporting company)

Smaller reporting company o

 

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

 

Number of shares of Common Stock outstanding as of October 31, 2015:  2,989,205.

 

 

 


 


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

6

 

 

 

 

Consolidated Statements of Cash Flows

7

 

 

 

 

Notes to Consolidated Financial Statements

8

 

 

 

Item 2.

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

38

 

 

 

Item 3.

Quantitative and Qualitative Disclosures About Market Risk

51

 

 

 

Item 4.

Controls and Procedures

52

 

 

 

Part II - Other Information

53

 

 

Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds

53

 

 

 

Item 6.

Exhibits

53

 

 

 

Signatures

55

 

2



Table of Contents

 

Item 1 - Financial Statements

 

KENTUCKY BANCSHARES, INC.

 

CONSOLIDATED BALANCE SHEETS (unaudited)

(in thousands, except per share data)

 

 

 

9/30/2015

 

12/31/2014

 

Assets

 

 

 

 

 

Cash and due from banks

 

$

19,752

 

$

16,771

 

Federal funds sold

 

3,129

 

398

 

Cash and cash equivalents

 

22,881

 

17,169

 

Interest bearing time deposits

 

4,874

 

1,280

 

Securities available for sale

 

238,600

 

246,861

 

Trading Assets

 

5,480

 

5,370

 

Mortgage loans held for sale

 

1,520

 

776

 

Loans

 

612,504

 

538,305

 

Allowance for loan losses

 

(6,142

)

(6,012

)

Net loans

 

606,362

 

532,293

 

Federal Home Loan Bank stock

 

7,034

 

5,981

 

Real estate owned, net

 

3,384

 

4,603

 

Bank premises and equipment, net

 

16,865

 

16,479

 

Interest receivable

 

3,888

 

3,299

 

Mortgage servicing rights

 

1,270

 

1,209

 

Goodwill

 

13,117

 

13,117

 

Other intangible assets

 

853

 

177

 

Other assets

 

7,414

 

6,595

 

Total assets

 

$

933,542

 

$

855,209

 

 

 

 

 

 

 

Liabilities and Stockholders’ Equity

 

 

 

 

 

Deposits

 

 

 

 

 

Non-interest bearing

 

$

201,644

 

$

176,743

 

Time deposits, $250,000 and over

 

58,710

 

52,913

 

Other interest bearing

 

450,651

 

425,213

 

Total deposits

 

711,005

 

654,869

 

Repurchase agreements

 

19,918

 

12,457

 

Federal funds purchased

 

4,300

 

 

Short-term Federal Home Loan Bank advances

 

 

10,000

 

Long-term Federal Home Loan Bank advances

 

90,991

 

83,785

 

Other borrowings

 

5,000

 

 

Subordinated debentures

 

7,217

 

7,217

 

Interest payable

 

783

 

642

 

Other liabilities

 

5,739

 

8,297

 

Total liabilities

 

844,953

 

777,267

 

 

 

 

 

 

 

Stockholders’ equity

 

 

 

 

 

Preferred stock, 300,000 shares authorized and unissued

 

 

 

Common stock, no par value; 10,000,000 shares authorized; 2,988,205 and 2,720,098 shares issued and outstanding on September 30, 2015 and December 31, 2014

 

19,584

 

12,662

 

Retained earnings

 

67,448

 

64,489

 

Accumulated other comprehensive income

 

1,557

 

791

 

Total stockholders’ equity

 

88,589

 

77,942

 

Total liabilities & stockholders’ equity

 

$

933,542

 

$

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)

 

 

 

Nine Months Ending

 

 

 

9/30/2015

 

9/30/2014

 

INTEREST INCOME:

 

 

 

 

 

Loans, including fees

 

$

19,649

 

$

17,757

 

Securities

 

 

 

 

 

Taxable

 

2,180

 

1,941

 

Tax exempt

 

2,029

 

2,133

 

Trading assets

 

127

 

129

 

Other

 

222

 

210

 

Total interest income

 

24,207

 

22,170

 

INTEREST EXPENSE:

 

 

 

 

 

Deposits

 

1,499

 

1,557

 

Repurchase agreements and other borrowings

 

122

 

72

 

Federal Home Loan Bank advances

 

1,187

 

1,003

 

Subordinated debentures

 

175

 

172

 

Total interest expense

 

2,983

 

2,804

 

Net interest income

 

21,224

 

19,366

 

Provision for loan losses

 

1,025

 

500

 

Net interest income after provision

 

20,199

 

18,866

 

NON-INTEREST INCOME:

 

 

 

 

 

Service charges

 

3,210

 

3,223

 

Loan service fee income, net

 

153

 

63

 

Trust department income

 

788

 

717

 

Gain on sale of available for sale securities, net

 

410

 

514

 

Gain (loss) on trading assets

 

(16

)

196

 

Gain on sale of mortgage loans

 

1,172

 

715

 

Brokerage income

 

431

 

422

 

Debit card interchange income

 

1,813

 

1,543

 

Bargain purchase gain

 

141

 

 

Other

 

780

 

34

 

Total other income

 

8,882

 

7,427

 

NON-INTEREST EXPENSE:

 

 

 

 

 

Salaries and employee benefits

 

12,176

 

11,013

 

Occupancy expenses

 

2,887

 

2,526

 

Repossession expenses, net

 

343

 

163

 

FDIC Insurance

 

436

 

403

 

Legal and professional fees

 

790

 

765

 

Data processing

 

1,000

 

1,005

 

Debit card expenses

 

872

 

698

 

Amortization

 

146

 

104

 

Advertising and marketing

 

700

 

653

 

Taxes other than payroll, property and income

 

728

 

647

 

Telephone

 

230

 

256

 

Postage

 

266

 

236

 

Loan fees

 

264

 

273

 

Acquisition expenses

 

858

 

 

Other

 

1,798

 

1,452

 

Total other expenses

 

23,494

 

20,194

 

Income before taxes

 

5,587

 

6,099

 

Income taxes

 

409

 

704

 

Net income

 

$

5,178

 

$

5,395

 

Other Comprehensive Income, net of tax:

 

 

 

 

 

Change in Unrealized Gains on Securities

 

766

 

5,080

 

Comprehensive Income

 

$

5,944

 

$

10,475

 

Earnings per share

 

 

 

 

 

Basic

 

$

1.85

 

$

1.99

 

Diluted

 

1.85

 

1.99

 

Dividends per share

 

0.78

 

0.75

 

 

See Accompanying Notes

 

4



Table of Contents

 

KENTUCKY BANCSHARES, INC.

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

(in thousands, except per share amounts)

 

 

 

Three Months Ending

 

 

 

9/30/2015

 

9/30/2014

 

INTEREST INCOME:

 

 

 

 

 

Loans, including fees

 

$

7,094

 

$

6,100

 

Securities

 

 

 

 

 

Taxable

 

755

 

586

 

Tax exempt

 

663

 

682

 

Trading assets

 

44

 

49

 

Other

 

85

 

65

 

Total interest income

 

8,641

 

7,482

 

INTEREST EXPENSE:

 

 

 

 

 

Deposits

 

520

 

483

 

Repurchase agreements and other borrowings

 

75

 

24

 

Federal Home Loan Bank advances

 

388

 

380

 

Subordinated debentures

 

60

 

57

 

Total interest expense

 

1,043

 

944

 

Net interest income

 

7,598

 

6,538

 

Provision for loan losses

 

375

 

300

 

Net interest income after provision

 

7,223

 

6,238

 

NON-INTEREST INCOME:

 

 

 

 

 

Service charges

 

1,215

 

1,150

 

Loan service fee income, net

 

45

 

29

 

Trust department income

 

252

 

256

 

Gain on sale of available for sale securities, net

 

159

 

81

 

Gain (loss) on trading assets

 

37

 

34

 

Gain on sale of mortgage loans

 

404

 

317

 

Brokerage income

 

189

 

132

 

Debit card interchange income

 

649

 

534

 

Bargain purchase gain

 

141

 

 

Other

 

(101

)

(43

)

Total other income

 

2,990

 

2,490

 

NON-INTEREST EXPENSE:

 

 

 

 

 

Salaries and employee benefits

 

4,232

 

3,750

 

Occupancy expenses

 

1,101

 

848

 

Repossession expenses, net

 

61

 

140

 

FDIC Insurance

 

135

 

135

 

Legal and professional fees

 

267

 

307

 

Data processing

 

329

 

337

 

Debit card expenses

 

323

 

202

 

Amortization

 

85

 

30

 

Advertising and marketing

 

275

 

212

 

Taxes other than payroll, property and income

 

269

 

225

 

Telephone

 

85

 

80

 

Postage

 

95

 

79

 

Loan fees

 

67

 

113

 

Acquisition expense

 

721

 

 

Other

 

524

 

507

 

Total other expenses

 

8,569

 

6,965

 

Income before taxes

 

1,644

 

1,763

 

Income taxes

 

103

 

43

 

Net income

 

$

1,541

 

$

1,720

 

Other Comprehensive Income, net of tax:

 

 

 

 

 

Change in Unrealized Gains on Securities

 

1,989

 

99

 

Comprehensive Income

 

$

3,530

 

$

1,819

 

Earnings per share

 

 

 

 

 

Basic

 

$

0.52

 

$

0.63

 

Diluted

 

0.52

 

0.63

 

Dividends per share

 

0.26

 

0.25

 

 

See Accompanying Notes

 

5



Table of Contents

 

KENTUCKY BANCSHARES, INC.

 

CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS’ EQUITY (unaudited)

(in thousands, except share information)

 

 

 

 

 

 

 

 

 

 

 

 

 

Accumulated

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Other

 

Total

 

 

 

—Common Stock(1)—

 

— Preferred Stock—

 

Retained

 

Comprehensive

 

Stockholders’

 

 

 

Shares

 

Amount

 

Shares

 

Amount

 

Earnings

 

Income

 

Equity

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balances, January 1, 2015

 

2,720,098

 

$

12,662

 

 

$

 

$

64,489

 

$

791

 

$

77,942

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Assumption of Madison Financial Corporation preferred stock

 

 

 

12,047

 

4,390

 

 

 

4,390

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Redemption of Madison Financial Corporation preferred stock

 

 

 

(12,047

)

(4,390

)

 

 

(4,390

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Common stock issued, net of forfeitures Stock grants of 5,850 shares, stock gifts of 22 shares and stock forfeitures of 153 shares)

 

5,719

 

2

 

 

 

 

 

2

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Shares issued to acquire Madison Financial Corporation, net of issuance costs

 

263,361

 

6,827

 

 

 

 

 

6,827

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Stock based compensation expense

 

 

99

 

 

 

 

 

99

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Common stock purchased and retired

 

(973

)

(6

)

 

 

(25

)

 

(31

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

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

 

 

 

 

 

 

766

 

766

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net income

 

 

 

 

 

5,178

 

 

5,178

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Dividends declared - $0.78 per share

 

 

 

 

 

(2,194

)

 

(2,194

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balances, September 30, 2015

 

2,988,205

 

$

19,584

 

 

$

 

$

67,448

 

$

1,557

 

$

88,589

 

 


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

 

See Accompanying Notes

 

6



Table of Contents

 

KENTUCKY BANCSHARES, INC.

 

CONSOLIDATED STATEMENTS OF CASH FLOWS  (unaudited)

(in thousands)

 

 

 

Nine Months Ending

 

 

 

9/30/2015

 

9/30/2014

 

Cash Flows From Operating Activities

 

 

 

 

 

Net Income

 

$

5,178

 

$

5,395

 

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

 

 

 

 

 

Depreciation and amortization

 

1,439

 

1,357

 

Securities amortization (accretion), net

 

741

 

476

 

Stock based compensation expense

 

99

 

83

 

Provision for loan losses

 

1,025

 

500

 

Securities available for sale gains, net

 

(410

)

(514

)

Net change in trading assets

 

(110

)

(5,325

)

Originations of loans held for sale

 

(38,991

)

(26,655

)

Proceeds from sale of loans

 

39,419

 

26,839

 

Losses (gains) on sale of fixed assets

 

(4

)

 

Losses (gains) on other real estate

 

(5

)

(134

)

Gain on sale of mortgage loans

 

(1,172

)

(715

)

Bargain purchase gain

 

(141

)

 

Write-downs of other real estate, net

 

252

 

64

 

Changes in:

 

 

 

 

 

Interest receivable

 

(280

)

99

 

Other assets

 

(1,379

)

872

 

Interest payable

 

82

 

(79

)

Other liabilities

 

(1,659

)

(2,125

)

Net cash from operating activities

 

4,084

 

138

 

Cash Flows From Investing Activities

 

 

 

 

 

Acquisition of Madison Financial Corporation, net

 

3,514

 

 

Net change in interest bearing time deposits

 

(615

)

 

Purchases of securities available for sale

 

(20,310

)

(41,495

)

Proceeds from sales of securities

 

21,579

 

53,555

 

Proceeds from principal payments, maturities and calls of securities

 

34,360

 

11,928

 

Net change in loans

 

(585

)

(44,225

)

Proceeds from redemption of Federal Home Loan Bank stock

 

 

750

 

Purchases of bank premises and equipment

 

(705

)

(895

)

Proceeds from sale of bank premises & equipment

 

7

 

 

Proceeds from the sale of other real estate

 

4,812

 

1,752

 

Net cash from investing activities

 

42,057

 

(18,630

)

Cash Flows From Financing Activities:

 

 

 

 

 

Net change in deposits

 

(39,687

)

(29,082

)

Net change in repurchase agreements and other borrowings

 

5,516

 

1,198

 

Short-term advances from Federal Home Loan Bank

 

130,000

 

175,000

 

Payment on short-term Federal Home Loan Bank advances

 

(140,000

)

(150,000

)

Long-term advances from Federal Home Loan Bank

 

14,709

 

27,277

 

Payments on long-term Federal Home Loan Bank advances

 

(7,503

)

(9,687

)

Proceeds from note payable

 

5,000

 

 

Redemption of acquired preferred shares and unpaid dividends and interest

 

(6,066

)

 

Issue costs paid for common shares issued

 

(176

)

 

Proceeds from issuance of common stock

 

2

 

 

Purchase of common stock

 

(30

)

(91

)

Dividends paid

 

(2,194

)

(2,041

)

Net cash from financing activities

 

(40,429

)

12,574

 

Net change in cash and cash equivalents

 

5,712

 

(5,918

)

Cash and cash equivalents at beginning of period

 

17,169

 

23,160

 

Cash and cash equivalents at end of period

 

$

22,881

 

$

17,242

 

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

 

 

 

 

 

Interest expense

 

$

2,842

 

$

2,883

 

Income taxes

 

 

1,000

 

 

 

 

 

 

 

Supplemental disclosures of non-cash investing activities

 

 

 

 

 

Real estate acquired through foreclosure

 

$

3,394

 

$

1,651

 

 

See Accompanying Notes

 

7



Table of Contents

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

1.              SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

 

The financial information presented as of any date other than December 31 has been prepared from the Company’s books and records without audit.  The accompanying consolidated financial statements have been prepared in accordance with the instructions to Form 10-Q and Rule 10-01 of Regulation S-X.  Certain financial information that is normally included in annual financial statements prepared in accordance with accounting principles generally accepted in the United States of America, but is not required for interim reporting purposes, has been condensed or omitted.  There have been no significant changes to the Company’s accounting and reporting policies as disclosed in the Company’s Annual Report on Form 10-K for the year ended December 31, 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.

 

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.

 

8



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.

 

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.

 

Acquisition:  On July 24, 2015, the Company acquired Madison Financial Corporation (“MFC”) and its wholly-owned subsidiary, Madison Bank (“MB”).  MFC was headquartered in Richmond, Kentucky with approximately $116.0 million in total assets and operated 3 financial centers. The acquisition expanded the Company’s presence into Madison County, Kentucky with minimal overlap of its existing market footprint. The total purchase price for MFC was $6.8 million net of capital stock issuance cost, consisting of the issuance of 263,361 shares of the Company’s common stock valued at $6.8 million net of capital stock issuance cost, and $3 thousand in cash for fractional shares.  The acquisition was accounted for under the acquisition method of acounting. Accordingly, the Company recognized amounts for identifiable assets acquired and liabilities assumed at their estimated acquisition date fair values, while approximately $900 thousand of transaction and integration costs associated with the acquisition were expensed as incurred. Of the total purchase price, $0 was allocated to goodwill and $141 thousand was recorded for a bargain purchase gain. 

 

Goodwill:  Goodwill resulting from business combinations prior to January 1, 2009 represents the excess of the purchase price over the fair value of the net assets of businesses acquired.  Goodwill resulting from business combinations after January 1, 2009, is generally determined as the excess of the fair value of the consideration transferred, plus the fair value of any noncontrolling interests in the acquiree, over the fair value of the net assets acquired and liabilities assumed as of the acquisition date.  Goodwill and intangible assets acquired in a purchase business combination and determined to have an indefinite useful life are not amortized, but tested for impairment at least annually.  The Company has selected December 31 as the date to perform the annual impairment test.  Intangible assets with definite useful lives are amortized over their estimated useful lives to their estimated residual values.  Goodwill is the only intangible asset with an indefinite life on our balance sheet.  At a minimum, management is required to assess goodwill and other intangible assets annually for impairment.  This assessment involves estimating cash flows for future periods, preparing analyses of market multiples for similar operations, and estimating the fair value of the reporting unit to which the goodwill is allocated.  If these variables change negatively, the Company would be required to take a charge against earnings to write down the asset to the lower fair value.

 

Purchased Credit Impaired Loans:  As part of the Madison Financial Corporation acquisition, the Company purchased loans, some of which have shown evidence of credit deterioration since origination. These purchased credit impaired loans are recorded at the amount paid, such that there is no carryover of the seller’s allowance for loan losses. After acquisition, losses are recognized by an increase in the allowance for loan losses. Such purchased credit impaired loans are accounted for individually or aggregated into pools of loans based on common risk characteristics such as, credit score, loan type, and date of origination. 

 

The Company estimates the amount and timing of expected cash flows for each loan or pool, and the expected cash flows in excess of amount paid is recorded as interest income over the remaining life of the loan or pool (accretable yield).

 

9



Table of Contents

 

The excess of the loan’s or pool’s contractual principal and interest over expected cash flows is not recorded (nonaccretable difference). Over the life of the loan or pool, expected cash flows continue to be estimated. If the present value of expected cash flows is less than the carrying amount, a loss is recorded. If the present value of expected cash flows is greater than the carrying amount, it is recognized as part of future interest income.

 

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.  However, in April 2015, the FASB voted to defer the effective date of ASU 2014-09 by one year making the amendments effective for public entities for annual reporting periods beginning after December 15, 2017, including interim periods within those reporting periods.  Companies have the option to apply ASU 2014-09 as of the original effective date.

 

In June 2014, FASB issued Accounting Standards Update 2014-11, Transfers and Servicing (Topic 860): Repurchase-to-Maturity Transactions, Repurchase Financings, and Disclosures.  The amendments in this update require two accounting changes.  First, the amendments in this update change the accounting for repurchase-to-maturity transactions to secured borrowing accounting.

 

Second, for repurchase financing arrangements, the amendments require separate accounting for a transfer of a financial asset executed contemporaneously with a repurchase agreement with the same counter-party, which will result in secured borrowing accounting for the repurchase agreement.

 

This update also requires certain disclosures for these types of transactions.  This ASU became effective for the Company on January 1, 2015.  The adoption of ASU 2014-11 did not have a material impact on the Company’s financial statements.

 

10



Table of Contents

 

2.  ACQUISITION OF MADISON FINANCIAL CORPORATION

 

On July 24, 2015, the Company acquired Madison Financial Corporation and its wholly-owned subsidiary, Madison Bank, both of which were headquartered in Richmond, Kentucky.  As a result of the acquisition the Company expanded its presence into central Kentucky with minimal overlap of its existing market footprint and generate long-term value for the Company shareholders.  Madison Bank had $116.0 million in total assets and operated three financial centers.

 

The total purchase price for Madison Financial Corporation was $6.8 million net of capital stock issuance cost, consisting of $3 thousand cash for fractional shares and the issuance of 263,361 shares of the Company’s common stock valued at $6.8 million net of capital stock issuance cost.  The acquisition was accounted for under the acquisition method of accounting.  Accordingly, the Company recognized amounts for identifiable assets acquired and liabilities assumed at their estimated acquisition date fair values, while approximately $900 thousand of transaction and integration costs associated with the acquisition were expensed as incurred.  Of the total purchase price, $0 was allocated to goodwill.

 

Based on management’s preliminary valuation of the fair value of tangible and intangible assets acquired and liabilities assumed, which are based on assumptions that are subject to change, the purchase price for the Madison Financial Corporation acquisition is allocated as follows (in thousands):

 

Cash and cash equivalents

 

$

3,517

 

Interest-bearing deposits in other financial institutions

 

2,979

 

Securities available for sale

 

27,704

 

Loans

 

77,620

 

Federal Home Loan Bank Stock

 

1,053

 

Accrued interest receivable

 

309

 

Premises and equipment

 

789

 

Other real estate

 

445

 

Deferred tax assets

 

647

 

Core deposit intangible asset

 

800

 

Other assets

 

115

 

 

 

 

 

Total assets acquired

 

$

115,978 

 

 

 

 

 

Deposits

 

$

95,823

 

Other borrowings

 

6,245

 

Accrued interest payable

 

59

 

Other liabilities

 

817

 

Total liabilities assumed

 

$

102,944

 

 

 

 

 

Liquidation amount of preferred stock including unpaid dividends and interest

 

6,066

 

 

 

 

 

Total identifiable net assets

 

$

6,968

 

Bargain purchase gain

 

$

(141

)

 

 

$

6,827

 

 

11



Table of Contents

 

The fair value of net assets acquired includes fair value adjustments to certain loan receivables that were not considered impaired as of the acquisition date.  The fair value adjustments were determined using discounted contractual cash flows.  However, the Company believes that all contractual cash flows related to these loans will be collected.  As such, these loan receivables were not considered impaired at the acquisition date and were not subject to the guidance relating to purchase credit impaired loans, which have shown evidence of credit deterioration since origination.  Loan receivables acquired that were not subject to these requirements include non-impaired loans with a fair value and gross contractual amounts receivable of $73.6 million and $74.7 million as of the date of acquisition.  The company is still in process of gathering information about the day one fair value of assets acquired and liabilities assumed which are subject to change during the measurement period.

 

3.  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

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

September 30, 2015

 

 

 

 

 

 

 

 

 

U.S. government agencies

 

$

51,671

 

$

210

 

$

(185

)

$

51,696

 

States and political subdivisions

 

84,914

 

2,414

 

(287

)

87,041

 

Mortgage-backed - residential

 

99,625

 

559

 

(716

)

99,468

 

Equity securities

 

368

 

27

 

 

395

 

Total

 

$

236,578

 

$

3,210

 

$

(1,188

)

$

238,600

 

 

 

 

 

 

 

 

 

 

 

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 September 30, 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

 

$

40

 

Due after one year through five years

 

22,352

 

22,468

 

Due after five years through ten years

 

64,933

 

65,724

 

Due after ten years

 

49,260

 

50,505

 

 

 

136,585

 

138,737

 

Mortgage-backed - residential

 

99,625

 

99,468

 

Equity

 

368

 

395

 

Total

 

$

236,578

 

$

238,600

 

 

12



Table of Contents

 

Proceeds from sales of securities during the first nine months of 2015 and 2014 were $21.6 million and $53.6 million.  Gross gains of $413 thousand and $914 thousand and gross losses of $3 and $400 thousand were realized on those sales, respectively.  The tax provision related to these realized net gains was $139 and $175 thousand, respectively.  Proceeds from sales of securities during the three months ending September 30, 2015 and September 30, 2014 were $12.5 million and $13.5 million.  Gross gains of $162 thousand and $129 thousand and gross losses of $3 thousand and $48 thousand were realized on those sales, respectively.  The tax provision related to these realized gains and losses was $54 thousand and $28 thousand, respectively.

 

Securities with unrealized losses September 30, 2015 and at December 31, 2014 not recognized in income are as follows:

 

September 30, 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

 

$

8,815

 

$

(33

)

$

19,404

 

$

(152

)

$

28,219

 

$

(185

)

States and municipals

 

8,453

 

(118

)

7,166

 

(169

)

15,619

 

(287

)

Mortgage-backed - residential

 

38,558

 

(493

)

12,346

 

(223

)

50,904

 

(716

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total temporarily impaired

 

$

55,826

 

$

(644

)

$

38,916

 

$

(544

)

$

94,742

 

$

(1,188

)

 

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 $5.5 million are primarily comprised of municipal securities which are held for a minimal period of time.

 

13



Table of Contents

 

4. LOANS

 

Loans at period-end are as follows:

 

(in thousands)

 

9/30/15

 

12/31/14

 

 

 

 

 

 

 

Commercial

 

$

51,905

 

$

47,185

 

Real estate construction

 

27,305

 

16,938

 

Real estate mortgage:

 

 

 

 

 

1-4 family residential

 

217,498

 

189,458

 

Multi-family residential

 

38,768

 

34,415

 

Non-farm & non-residential

 

187,033

 

161,822

 

Agricultural

 

70,754

 

71,345

 

Consumer

 

19,082

 

16,863

 

Other

 

159

 

279

 

Total

 

$

612,504

 

$

538,305

 

 

As discussed under Footnote 2 “Acquisition”, the above loan balances include loans purchased in the Madison Financial Corporation acquisition.  All loan balances acquired in the Madison Financial Corporation acquisition have no allocated allowance for loan losses. The composition of loans acquired as of September 30, 2015 is as follows:

 

 

 

9/30/15

 

 

 

 

 

Commercial

 

$

2,073

 

Real estate construction

 

5,822

 

Real estate mortgage:

 

 

 

1-4 family mortgage

 

20,837

 

Multi-family residential

 

5,729

 

Non-farm & non-residential

 

29,668

 

Agricultural

 

2,793

 

Consumer

 

1,283

 

Total

 

$

68,205

 

 

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

 

 

 

Nine Months Ended September 30, 2015

 

 

 

(in thousands)

 

 

 

Beginning

 

 

 

 

 

 

 

Ending

 

 

 

Balance

 

Charge-offs 

 

Recoveries 

 

Provision

 

Balance

 

 

 

 

 

 

 

 

 

 

 

 

 

Commercial

 

$

339

 

$

30

 

$

 

$

116

 

$

425

 

Real estate Construction

 

446

 

 

6

 

46

 

498

 

Real estate mortgage:

 

 

 

 

 

 

 

 

 

 

 

1-4 family residential

 

1,829

 

241

 

8

 

260

 

1,856

 

Multi-family residential

 

495

 

94

 

27

 

12

 

440

 

Non-farm & non-residential

 

813

 

 

8

 

221

 

1,042

 

Agricultural

 

998

 

242

 

20

 

(92

)

684

 

Consumer

 

520

 

195

 

35

 

196

 

556

 

Other

 

32

 

768

 

571

 

231

 

66

 

Unallocated

 

540

 

 

 

35

 

575

 

 

 

$

6,012

 

$

1,570

 

$

675

 

$

1,025

 

$

6,142

 

 

 

 

Three Months Ended September 30, 2015

 

 

 

(in thousands)

 

 

 

Beginning

 

 

 

 

 

 

 

Ending

 

 

 

Balance

 

Charge-offs 

 

Recoveries 

 

Provision

 

Balance

 

 

 

 

 

 

 

 

 

 

 

 

 

Commercial

 

$

399

 

$

5

 

$

 

$

31

 

$

425

 

Real estate construction

 

476

 

 

4

 

18

 

498

 

Real estate mortgage:

 

 

 

 

 

 

 

 

 

 

 

1-4 family residential

 

1,807

 

89

 

3

 

135

 

1,856

 

Multi-family residential

 

442

 

 

25

 

(27

)

440

 

Non-farm & non-residential

 

1,074

 

 

8

 

(40

)

1,042

 

Agricultural

 

578

 

 

8

 

98

 

684

 

Consumer

 

534

 

32

 

8

 

46

 

556

 

Other

 

55

 

275

 

162

 

124

 

66

 

Unallocated

 

585

 

 

 

(10

)

575

 

 

 

$

5,950

 

$

401

 

$

218

 

$

375

 

$

6,142

 

 

14



Table of Contents

 

Purchased Credit Impaired Loans:

 

The Company has purchased loans, for which there was, at acquisition, evidence of deterioration of credit quality since origination and it was probable, at acquisition, that all contractually required payments would not be collected.  The carrying amount of those loans is as follows:

 

 

 

9/30/15

 

12/31/14

 

 

 

 

 

 

 

Commercial

 

$

2

 

$

 

Real estate mortgage:

 

 

 

 

 

1-4 family residential

 

2,584

 

 

Non-farm & non-residential

 

1,034

 

 

Agricultural

 

4

 

 

 

 

$

3,624

 

$

 

 

There was no associated allowance for loan losses as of September 30, 2015 or December 31, 2014 for purchased credit impaired loans. The contractual value of these loans was $4.6 million at September 30, 2015.

 

Accretable yield, or income expected to be collected, is as follows:

 

 

 

Three months ended

 

Nine Months Ended

 

 

 

9/30/15

 

9/30/14

 

9/30/15

 

9/30/14

 

 

 

 

 

 

 

 

 

 

 

Balance, beginning of period

 

$

 

$

 

$

 

$

 

New loans purchased

 

514

 

 

514

 

 

Accretion of income

 

 

 

 

 

Balance, end of period

 

$

514

 

$

 

$

514

 

$

 

 

15



Table of Contents

 

 

 

Nine Months Ended September 30, 2014

 

 

 

(in thousands)

 

 

 

Beginning

 

 

 

 

 

 

 

Ending

 

 

 

Balance

 

Charge-offs 

 

Recoveries 

 

Provision

 

Balance

 

 

 

 

 

 

 

 

 

 

 

 

 

Commercial

 

$

230

 

$

200

 

$

 

$

213

 

$

243

 

Real estate Construction

 

358

 

 

11

 

18

 

387

 

Real estate mortgage:

 

 

 

 

 

 

 

 

 

 

 

1-4 family residential

 

2,169

 

179

 

55

 

(27

)

2,018

 

Multi-family residential

 

427

 

42

 

 

86

 

471

 

Non-farm & non-residential

 

564

 

 

367

 

(167

)

764

 

Agricultural

 

578

 

18

 

27

 

103

 

690

 

Consumer

 

548

 

201

 

58

 

139

 

544

 

Other

 

51

 

398

 

285

 

139

 

77

 

Unallocated

 

516

 

 

 

(4

)

512

 

 

 

$

5,441

 

$

1,038

 

$

803

 

$

500

 

$

5,706

 

 

 

 

Three Months Ended September 30, 2014

 

 

 

(in thousands)

 

 

 

Beginning

 

 

 

 

 

 

 

Ending

 

 

 

Balance

 

Charge-offs 

 

Recoveries 

 

Provision

 

Balance

 

 

 

 

 

 

 

 

 

 

 

 

 

Commercial

 

$

231

 

$

 

$

 

$

12

 

$

243

 

Real estate Construction

 

359

 

 

3

 

25

 

387

 

Real estate mortgage:

 

 

 

 

 

 

 

 

 

 

 

1-4 family residential

 

2,324

 

91

 

39

 

(254

)

2,018

 

Multi-family residential

 

327

 

42

 

 

186

 

471

 

Non-farm & non-residential

 

734

 

 

 

30

 

764

 

Agricultural

 

546

 

18

 

2

 

160

 

690

 

Consumer

 

543

 

48

 

17

 

32

 

544

 

Other

 

33

 

196

 

126

 

114

 

77

 

Unallocated

 

517

 

 

 

(5

)

512

 

 

 

$

5,614

 

$

395

 

$

187

 

$

300

 

$

5,706

 

 

The following tables present the balance in the allowance for loan losses and the recorded investment (excluding accrued interest receivable amounting to $2.6 million as of September 30, 2015 and $2.0 million at December 31, 2014) in loans by portfolio segment and based on impairment method as of September 30, 2015 and December 31, 2014:

 

16



Table of Contents

 

 

 

Individually

 

Collectively

 

Purchased

 

 

 

As of September 30, 2015

 

Evaluated for

 

Evaluated for

 

Credit

 

 

 

(in thousands)

 

Impairment

 

Impairment

 

Impaired

 

Total

 

Allowance for Loan Losses:

 

 

 

 

 

 

 

 

 

Commercial

 

$

 

$

425

 

$

 

$

425

 

Real estate construction

 

 

498

 

 

498

 

Real estate mortgage

 

 

 

 

 

 

 

 

 

1-4 family residential

 

51

 

1,805

 

 

1,856

 

Multi-family residential

 

 

440

 

 

440

 

Non-farm & non-residential

 

86

 

956

 

 

1,042

 

Agricultural

 

335

 

349

 

 

684

 

Consumer

 

 

556

 

 

556

 

Other

 

 

66

 

 

66

 

Unallocated

 

 

575

 

 

575

 

 

 

$

472

 

$

5,670

 

 

$

6,142

 

Loans:

 

 

 

 

 

 

 

 

 

Commercial

 

$

 

$

51,903

 

$

2

 

$

51,905

 

Real estate construction

 

 

27,305

 

 

27,305

 

Real estate mortgage:

 

 

 

 

 

 

 

 

 

1-4 family residential

 

3,120

 

211,794

 

2,584

 

217,498

 

Multi-family residential

 

 

38,768

 

 

38,768

 

Non-farm & non-residential

 

2,796

 

183,203

 

1,034

 

187,033

 

Agricultural

 

4,262

 

66,488

 

4

 

70,754

 

Consumer

 

 

19,082

 

 

19,082

 

Other

 

 

159

 

 

159

 

 

 

$

10,178

 

$

598,702

 

$

3,624

 

$

612,504

 

 

 

 

Individually

 

Collectively

 

 

 

As of December 31, 2014

 

Evaluated for

 

Evaluated for

 

 

 

(in thousands)

 

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