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EX-32 - EX-32 - KENTUCKY BANCSHARES INC /KY/ktyb_ex32.htm
EX-31.2 - EX-31.2 - KENTUCKY BANCSHARES INC /KY/ktyb_ex312.htm
EX-31.1 - EX-31.1 - KENTUCKY BANCSHARES INC /KY/ktyb_ex311.htm

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C.  20549

 

FORM 10-Q

(Mark One)

 

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

 

For the quarterly period September 30, 2016

 

or

 

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

 

For the transition period from                         to                         

 

Commission File Number:  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 ☒ No ☐

 

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 ☒ No ☐

 

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 ☐

Accelerated filer ☐

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

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 ☐ No ☒

 

Number of shares of Common Stock outstanding as of October 31, 2016:  2,982,952.

 

 

 

 


 

KENTUCKY BANCSHARES, INC.

 

Table of Contents

 

Part I - Financial Information

 

 

 

Item 1. Financial Statements 

 

 

 

 

Consolidated Balance Sheets

 

 

 

 

Consolidated Statements of Income and Comprehensive Income

 

 

 

 

Consolidated Statement of Changes in Stockholders’ Equity

 

 

 

 

Consolidated Statements of Cash Flows

 

 

 

 

Notes to Consolidated Financial Statements

 

 

 

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

47 

 

 

 

Signatures 

48 

 

 

2


 

Item 1 – Financial Statements

KENTUCKY BANCSHARES, INC.

CONSOLIDATED BALANCE SHEETS (unaudited)

(in thousands, except per share amounts)

 

 

 

 

 

 

 

 

 

    

9/30/2016

    

12/31/2015

 

ASSETS

 

 

 

 

 

 

 

Cash and due from banks

 

$

16,558

 

$

26,546

 

Federal funds sold

 

 

551

 

 

1,502

 

Cash and cash equivalents

 

 

17,109

 

 

28,048

 

Interest bearing time deposits

 

 

5,029

 

 

4,874

 

Securities available for sale

 

 

255,618

 

 

264,212

 

Trading Assets

 

 

5,696

 

 

5,531

 

Loans held for sale

 

 

2,899

 

 

624

 

Loans

 

 

659,970

 

 

624,121

 

Allowance for loan losses

 

 

(7,405)

 

 

(6,521)

 

Net loans

 

 

652,565

 

 

617,600

 

Federal Home Loan Bank stock

 

 

7,034

 

 

7,034

 

Real estate owned, net

 

 

1,838

 

 

2,347

 

Assets held for sale

 

 

969

 

 

 —

 

Bank premises and equipment, net

 

 

15,295

 

 

16,597

 

Interest receivable

 

 

3,687

 

 

3,681

 

Mortgage servicing rights

 

 

1,206

 

 

1,277

 

Goodwill

 

 

14,001

 

 

14,001

 

Other intangible assets

 

 

572

 

 

773

 

Other assets

 

 

7,624

 

 

8,085

 

Total assets

 

$

991,142

 

$

974,684

 

 

 

 

 

 

 

 

 

LIABILITIES AND STOCKHOLDERS’ EQUITY

 

 

 

 

 

 

 

Deposits

 

 

 

 

 

 

 

Non-interest bearing

 

$

217,869

 

$

209,289

 

Time deposits, $250,000 and over

 

 

67,576

 

 

61,199

 

Other interest bearing

 

 

448,753

 

 

488,493

 

Total deposits

 

 

734,198

 

 

758,981

 

Repurchase agreements

 

 

23,551

 

 

18,514

 

Federal funds purchased

 

 

10,517

 

 

 —

 

Short-term Federal Home Loan Bank advances

 

 

10,000

 

 

 —

 

Long-term Federal Home Loan Bank advances

 

 

96,173

 

 

87,833

 

Note payable

 

 

4,194

 

 

4,794

 

Subordinated debentures

 

 

7,217

 

 

7,217

 

Interest payable

 

 

740

 

 

659

 

Other liabilities

 

 

8,168

 

 

7,273

 

Total liabilities

 

 

894,758

 

 

885,271

 

 

 

 

 

 

 

 

 

Stockholders’ equity

 

 

 

 

 

 

 

Preferred stock, 300,000 shares authorized and unissued

 

 

 —

 

 

 —

 

Common stock, no par value; 10,000,000 shares authorized; 2,985,952 and 2,989,205 shares issued and outstanding at September 30, 2016 and December 31, 2015

 

 

20,657

 

 

20,730

 

Retained earnings

 

 

72,125

 

 

68,324

 

Accumulated other comprehensive income

 

 

3,602

 

 

359

 

Total stockholders’ equity

 

 

96,384

 

 

89,413

 

Total liabilities and stockholders’ equity

 

$

991,142

 

$

974,684

 

 

 

See Accompanying Notes

 

 

 

3


 

KENTUCKY BANCSHARES, INC.

CONSOLIDATED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME (unaudited)

(in thousands, except per share amounts)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended

 

Nine Months Ended

 

 

    

9/30/2016

    

9/30/2015

    

9/30/2016

    

9/30/2015

 

INTEREST INCOME:

 

 

 

 

 

 

 

 

 

 

 

 

 

Loans, including fees

 

$

7,630

 

$

7,094

 

$

22,432

 

$

19,649

 

Securities

 

 

 

 

 

 

 

 

 

 

 

 

 

Taxable

 

 

782

 

 

755

 

 

2,555

 

 

2,180

 

Tax exempt

 

 

649

 

 

663

 

 

1,967

 

 

2,029

 

Trading assets

 

 

44

 

 

44

 

 

117

 

 

127

 

Other

 

 

101

 

 

85

 

 

319

 

 

222

 

Total interest income

 

 

9,206

 

 

8,641

 

 

27,390

 

 

24,207

 

INTEREST EXPENSE:

 

 

 

 

 

 

 

 

 

 

 

 

 

Deposits

 

 

555

 

 

520

 

 

1,667

 

 

1,499

 

Repurchase agreements

 

 

30

 

 

36

 

 

83

 

 

83

 

Federal Home Loan Bank advances

 

 

428

 

 

388

 

 

1,205

 

 

1,187

 

Note payable

 

 

57

 

 

39

 

 

177

 

 

39

 

Subordinated debentures

 

 

70

 

 

60

 

 

198

 

 

175

 

Total interest expense

 

 

1,140

 

 

1,043

 

 

3,330

 

 

2,983

 

Net interest income

 

 

8,066

 

 

7,598

 

 

24,060

 

 

21,224

 

Provision for loan losses

 

 

175

 

 

375

 

 

775

 

 

1,025

 

Net interest income after provision

 

 

7,891

 

 

7,223

 

 

23,285

 

 

20,199

 

NON-INTEREST INCOME:

 

 

 

 

 

 

 

 

 

 

 

 

 

Service charges

 

 

1,401

 

 

1,215

 

 

3,782

 

 

3,210

 

Loan service fee income, net

 

 

(26)

 

 

45

 

 

23

 

 

153

 

Trust department income

 

 

272

 

 

252

 

 

796

 

 

788

 

Gain on sale of available for sale securities, net

 

 

40

 

 

159

 

 

317

 

 

410

 

Gain (loss) on trading assets

 

 

(52)

 

 

37

 

 

48

 

 

(16)

 

Gain on sale of loans

 

 

533

 

 

404

 

 

1,289

 

 

1,172

 

Brokerage income

 

 

168

 

 

189

 

 

602

 

 

431

 

Debit card interchange income

 

 

699

 

 

649

 

 

2,053

 

 

1,813

 

Bargain purchase gain

 

 

 —

 

 

141

 

 

 —

 

 

141

 

Other

 

 

201

 

 

(101)

 

 

222

 

 

780

 

Total other income

 

 

3,236

 

 

2,990

 

 

9,132

 

 

8,882

 

NON-INTEREST EXPENSE:

 

 

 

 

 

 

 

 

 

 

 

 

 

Salaries and employee benefits

 

 

4,540

 

 

4,232

 

 

13,472

 

 

12,176

 

Occupancy expenses

 

 

974

 

 

1,101

 

 

2,831

 

 

2,887

 

Repossession expenses, net

 

 

79

 

 

61

 

 

222

 

 

343

 

FDIC Insurance

 

 

106

 

 

135

 

 

444

 

 

436

 

Legal and professional fees

 

 

423

 

 

212

 

 

1,314

 

 

790

 

Data processing

 

 

396

 

 

247

 

 

1,249

 

 

1,000

 

Debit card expenses

 

 

391

 

 

323

 

 

1,078

 

 

872

 

Amortization expense of intangible assets, excluding mortgage servicing right

 

 

45

 

 

85

 

 

201

 

 

146

 

Advertising and marketing

 

 

225

 

 

275

 

 

675

 

 

700

 

Taxes other than payroll, property and income

 

 

282

 

 

269

 

 

836

 

 

728

 

Telephone

 

 

77

 

 

85

 

 

262

 

 

230

 

Postage

 

 

88

 

 

95

 

 

278

 

 

266

 

Loan fees

 

 

64

 

 

67

 

 

155

 

 

264

 

Acquisition expense

 

 

 —

 

 

858

 

 

 —

 

 

858

 

Other

 

 

1,064

 

 

524

 

 

2,536

 

 

1,798

 

Total other expenses

 

 

8,754

 

 

8,569

 

 

25,553

 

 

23,494

 

Income before taxes

 

 

2,373

 

 

1,644

 

 

6,864

 

 

5,587

 

Income taxes

 

 

8

 

 

103

 

 

580

 

 

409

 

Net income

 

$

2,365

 

$

1,541

 

$

6,284

 

$

5,178

 

Other Comprehensive Income, net of tax:

 

 

 

 

 

 

 

 

 

 

 

 

 

Change in Unrealized Gains on Securities

 

 

(800)

 

 

1,989

 

 

3,243

 

 

766

 

Comprehensive Income

 

$

1,565

 

$

3,530

 

$

9,527

 

$

5,944

 

Earnings per share

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic

 

$

0.79

 

$

0.52

 

$

2.10

 

$

1.85

 

Diluted

 

 

0.79

 

 

0.52

 

 

2.10

 

 

1.85

 

Dividends per share

 

 

0.27

 

 

0.26

 

 

0.81

 

 

0.78

 

See Accompanying Notes

 

 

4


 

KENTUCKY BANCSHARES, INC.

CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY (unaudited)

(in thousands, except share information)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

    

    

    

 

    

 

    

Accumulated

    

 

 

 

 

 

 

 

 

 

 

 

 

Other

 

Total

 

 

 

Common Stock

 

Retained

 

Comprehensive

 

Stockholders’

 

(Dollars in thousands)

 

Shares

 

Amount

 

Earnings

 

Income 

 

Equity

 

Balances, January 1, 2016

 

2,989,205

 

$

20,730

 

$

68,324

 

$

359

 

$

89,413

 

Common stock issued (including employee stock grants of  6,170 shares and director stock awards of 1,352 shares), net of 999 shares forfeited

 

6,523

 

 

49

 

 

 —

 

 

 —

 

 

49

 

Stock compensation expense

 

 —

 

 

117

 

 

 —

 

 

 —

 

 

117

 

Common stock purchased and retired

 

(9,776)

 

 

(239)

 

 

(57)

 

 

 —

 

 

(296)

 

Other comprehensive income

 

 

 

 

 

 

 

 

 

 

3,243

 

 

3,243

 

Net income

 

 —

 

 

 —

 

 

6,284

 

 

 —

 

 

6,284

 

Dividends declared - $0.81 per share

 

 —

 

 

 —

 

 

(2,426)

 

 

 —

 

 

(2,426)

 

Balances, September 30, 2016

 

2,985,952

 

$

20,657

 

$

72,125

 

$

3,602

 

$

96,384

 


(1)

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

 

See Accompanying Notes

 

 

5


 

KENTUCKY BANCSHARES, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS (unaudited)

(in thousands)

 

 

 

 

 

 

 

 

    

Nine Months Ended

 

 

 

9/30/2016

    

9/30/2015

 

Cash Flows From Operating Activities

 

 

 

 

 

 

 

Net Income

 

$

6,284

 

$

5,178

 

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

 

 

 

 

 

 

 

Depreciation and amortization

 

 

985

 

 

1,439

 

Securities amortization (accretion), net

 

 

854

 

 

741

 

Stock based compensation expense

 

 

117

 

 

99

 

Provision for loan losses

 

 

775

 

 

1,025

 

Securities available for sale gains, net

 

 

(317)

 

 

(410)

 

Net change in trading assets

 

 

(165)

 

 

(110)

 

Originations of loans held for sale

 

 

(43,331)

 

 

(38,991)

 

Proceeds from sale of loans

 

 

42,345

 

 

39,419

 

Losses (gains) on sale of bank premises and equipment

 

 

(4)

 

 

(4)

 

Losses (gains) on other real estate

 

 

(163)

 

 

(5)

 

Gain on sale of mortgage loans

 

 

(1,289)

 

 

(1,172)

 

Bargain purchase gain

 

 

 —

 

 

(141)

 

Write-downs of other real estate, net

 

 

131

 

 

252

 

Changes in:

 

 

 

 

 

 

 

Interest receivable

 

 

(6)

 

 

(280)

 

Other assets

 

 

461

 

 

(1,379)

 

Interest payable

 

 

81

 

 

82

 

Other liabilities

 

 

(762)

 

 

(1,659)

 

Net cash from operating activities

 

 

5,996

 

 

4,084

 

Cash Flows From Investing Activities

 

 

 

 

 

 

 

     Acquisition of Madison Financial Corporation, net

 

 

 —

 

 

3,514

 

Net change in interest bearing time deposits

 

 

(155)

 

 

(615)

 

Purchases of securities available for sale

 

 

(61,876)

 

 

(20,310)

 

Proceeds from sales of securities

 

 

23,888

 

 

21,579

 

Proceeds from principal payments, maturities and calls of securities

 

 

50,987

 

 

34,360

 

Net change in loans

 

 

(35,688)

 

 

(585)

 

Purchases of bank premises and equipment

 

 

(667)

 

 

(705)

 

Proceeds from the sale of bank premises and equipment

 

 

4

 

 

7

 

Proceeds from the sale of other real estate

 

 

734

 

 

4,812

 

Net cash from investing activities

 

 

(22,773)

 

 

42,057

 

Cash Flows From Financing Activities:

 

 

 

 

 

 

 

Net change in deposits

 

 

(24,783)

 

 

(39,687)

 

Net change in repurchase agreements

 

 

5,037

 

 

5,516

 

Net change in federal funds purchased

 

 

10,517

 

 

 —

 

Proceeds from short-term Federal Home Loan Bank advances

 

 

50,000

 

 

130,000

 

Repayment of short-term Federal Home Loan Bank advances

 

 

(40,000)

 

 

(140,000)

 

Proceeds from long-term Federal Home Loan Bank advances

 

 

15,000

 

 

14,709

 

Repayment of long-term Federal Home Loan Bank advances

 

 

(6,660)

 

 

(7,503)

 

Proceeds from note payable

 

 

 —

 

 

5,000

 

Repayment of note payable

 

 

(600)

 

 

 —

 

Redemption of acquired preferred shares and unpaid  dividends and interest

 

 

 —

 

 

(6,066)

 

Issuance costs paid for common shares issued

 

 

 —

 

 

(176)

 

Proceeds from issuance of common stock

 

 

49

 

 

2

 

Purchase of common stock

 

 

(296)

 

 

(30)

 

Dividends paid

 

 

(2,426)

 

 

(2,194)

 

Net cash from financing activities

 

 

5,838

 

 

(40,429)

 

Net change in cash and cash equivalents

 

 

(10,939)

 

 

5,712

 

Cash and cash equivalents at beginning of period

 

 

28,048

 

 

17,169

 

Cash and cash equivalents at end of period

 

$

17,109

 

$

22,881

 

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

 

 

 

 

 

 

 

Interest expense

 

$

3,249

 

$

2,842

 

Supplemental disclosures of non-cash investing activities

 

 

 

 

 

 

 

Real estate acquired through foreclosure

 

$

235

 

$

3,394

 

 

See Accompanying Notes

6


 

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, 2015.  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, 2015.

 

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:  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. 

 

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.

 

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.

 

 

 

 

 

 

 

 

7


 

Adoption of New Accounting Standards

 

Accounting Standards Update (“ASU”) ASU No. 2014-09, Revenue from Contracts with Customers (Topic 606)

 

In May 2014, FASB issued ASU 2014-09, Revenue from Contracts with Customers (Topic 606). This 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 encourages an entity to 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.  The Company does not anticipate this update will have a material impact on its Consolidated Financial Statements because almost all revenue sources are outside the scope of ASU 2014-09.

 

Accounting Standards Update (“ASU”) ASU No. 2016-1, Financial Instruments-Overall:  Recognition and Measurement of Financial Assets and Financial Liabilities

 

In January 2016, the FASB issued an update (ASU 2016-1, Financial Instruments-Overall: Recognition and Measurement of Financial Assets and Financial Liabilities) which will require entities to measure many equity investments at fair value and recognize changes in fair value in net income.  This update does not apply to equity investments that result in consolidation, those accounted for under the equity method and certain others, and will eliminate use of the available for sale classification for equity securities while providing a new measurement alternative for equity investments that do not have readily determinable fair values and do not qualify for the net asset value practical expedient.  The guidance in this ASU will become effective for interim and annual reporting periods beginning after December 15, 2017, with early adoption permitted.  The Company does not anticipate this update will have a material impact on its Consolidated Financial Statements.

 

Accounting Standards Update (“ASU”) ASU No. 2016-2, Leases (Topic 842)

 

This ASU is a standard that applies to all lease contracts. A lease contract is defined as a contract, or part of a contract, that conveys the right to control the use of an asset for a period in exchange for consideration. Most leases are considered operating leases, which are not accounted for on the lessees’ balance sheets. The significant change under this ASU is that those operating leases will be recorded on the balance sheet. 

 

Under this ASU, after determining that a contract contains a lease, a lessee will need to evaluate whether the lease is a finance or an operating lease at the commencement of a new lease and upon change in the lease term or change in the lessee’s option to purchase the asset. The classification criteria for distinguishing between finance leases and operating leases under this ASU are substantially similar to the classification criteria for distinguishing between capital leases and operating leases under previous GAAP. All leases, whether finance or operating, will be on balance sheet unless they are subject to a short-term (12 months or less) lease accounting policy election. The lease term includes periods subject to an option to extend the lease if the lessee is reasonably certain to exercise that option. This means leases of 12 months or less with extension options that meet that criteria will be recorded on the balance sheet.

 

Finance leases under this ASU will recognize amortization expense on the asset separately from interest expense on the liability, similar to capital lease guidance under existing GAAP. Operating leases under this ASU will recognize lease expense that includes amortization expense on the leased asset and interest on the liability.

 

The amendments in this ASU are effective for fiscal years beginning after December 15, 2018, and interim periods within those fiscal years. The Company is a lessee for a material level of operating leases and is analyzing the impact of this ASU on its consolidated financial statements.

 

 

 

Accounting Standards Update (“ASU”) ASU No. 2016-09, Compensation-Stock Compensation (Topic 718)

8


 

 

In March 2016, the FASB issued ASU No. 2016-09, Compensation – Stock Compensation (Topic 718): Improvements to Employee Shared-Based Payment Accounting. The amendments are intended to improve the accounting for employee shared-based payments and affects all organizations that issue share-based payment awards to their employees. Several aspects of the accounting for share-based payment award transactions are simplified, including the income tax consequences, the classification of awards as either equity or liabilities, and the classification on the statement of cash flows. The amendments in this update become effective for annual periods and interim periods within those annual periods beginning after December 15, 2016. We are currently evaluating the impact of adopting the new guidance on the consolidated financial statements, but the Company does not expect these amendments to have a material impact.

 

Accounting Standards Update (“ASU”) ASU No. 2016-13, Financial Instruments (Topic 326)

 

In June 2016, the FASB issued ASU No. 2016-13, .  The final standard will change estimates for credit losses related to financial assets measured at amortized cost such as loans, held-to-maturity debt securities, and certain other contracts.  For estimating credit losses, the FASB is replacing the incurred loss model with an expected loss model, which is referred to as the current expected credit loss (CECL) model. The largest impact will be on the allowance for loan and lease losses.  The standard will become effective for fiscal years beginning after December 15, 2019 for public companies.  We are currently evaluating the impact of adopting the new guidance on the consolidated financial statements.

 

Accounting Standards Update (“ASU”) ASU No. 2016-15, Statement of Cash Flows (Topic 230)

 

In August 2016, the FASB issued ASU No. 2016-15, Statement of Cash Flows (Topic 230): Classification of Certain Cash Receipts and Cash Payments.  The primary purpose of the ASU is to reduce the diversity in practice that has resulted from the lack of consistent principles on this topic. The ASU’s amendments add or clarify guidance on eight cash flow issues. The guidance in the ASU is effective for fiscal years beginning after December 15, 2017, including interim periods within those fiscal years. Early adoption is permitted. Entities must apply the guidance retrospectively to all periods presented but may apply it prospectively from the earliest date practicable if retrospective application would be impracticable.  The Company does not anticipate this update will have a material impact on its Consolidated Financial Statements.

 

 

2.SECURITIES

 

SECURITIES AVAILABLE FOR SALE

 

Period-end securities are as follows:

(in thousands)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

    

 

    

Gross

    

Gross

    

 

 

 

 

Amortized

 

Unrealized

 

Unrealized

 

Fair

 

 

 

Cost

 

Gains

 

Losses

 

Value

 

Available for Sale

 

 

 

 

 

 

 

 

 

 

 

 

 

September 30, 2016

 

 

 

 

 

 

 

 

 

 

 

 

 

U. S. government agencies

 

$

29,801

 

$

503

 

$

(2)

 

$

30,302

 

States and political subdivisions

 

 

90,144

 

 

3,853

 

 

(8)

 

 

93,989

 

Mortgage-backed - residential

 

 

129,896

 

 

1,476

 

 

(393)

 

 

130,979

 

Equity securities

 

 

320

 

 

28

 

 

 —

 

 

348

 

Total

 

$

250,161

 

$

5,860

 

$

(403)

 

$

255,618

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

December 31, 2015

 

 

 

 

 

 

 

 

 

 

 

 

 

U. S. government agencies

 

$

49,012

 

$

51

 

$

(200)

 

$

48,863

 

States and political subdivisions

 

 

89,501

 

 

2,644

 

 

(183)

 

 

91,962

 

Mortgage-backed - residential

 

 

124,834

 

 

210

 

 

(2,001)

 

 

123,043

 

Equity securities

 

 

320

 

 

24

 

 

 —

 

 

344

 

Total

 

$

263,667

 

$

2,929

 

$

(2,384)

 

$

264,212

 

 

9


 

The amortized cost and fair value of securities at September 30, 2016 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 9.

 

 

 

 

 

 

 

 

 

 

    

Amortized

    

Fair

 

 

 

Cost

 

Value

 

 

 

 

 

 

 

 

 

Due in one year or less

 

$

 —

 

$

 —

 

Due after one year through five years

 

 

21,462

 

 

22,150

 

Due after five years through ten years

 

 

54,326

 

 

55,834

 

Due after ten years

 

 

44,157

 

 

46,307

 

 

 

 

119,945

 

 

124,291

 

Mortgage-backed - residential

 

 

129,896

 

 

130,979

 

Equity

 

 

320

 

 

348

 

Total

 

$

250,161

 

$

255,618

 

 

Proceeds from sales of securities during the first nine months of 2016 and 2015 were $23.9 million and $21.6 million.  Gross gains of $317 thousand and $413 thousand and gross losses of $0 and $3 thousand were realized on those sales, respectively.  The tax provision related to these realized net gains was $108 thousand and $139 thousand, respectively. 

 

Proceeds from sales of securities during the three months ended September 30, 2016 and September 30, 2015 were $2.5 million and $12.5 million.  Gross gains of $40 thousand and $162 thousand and gross losses of $0 thousand and $3 thousand were realized on those sales, respectively.  The tax provision related to these realized net gains was $14 thousand and $54 thousand, respectively.

 

Securities with unrealized losses  at September 30, 2016 and at December 31, 2015 not recognized in income are as follows:

 

September 30, 2016

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

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

 

$

4,018

 

$

(2)

 

$

 —

 

$

 —

 

$

4,018

 

$

(2)

 

States and municipals

 

 

1,685

 

 

(8)

 

 

 —

 

 

 —

 

 

1,685

 

 

(8)

 

Mortgage-backed - residential

 

 

30,099

 

 

(131)

 

 

14,586

 

 

(262)

 

 

44,685

 

 

(393)

 

Total temporarily impaired

 

$

35,802

 

$

(141)

 

$

14,586

 

$

(262)

 

$

50,388

 

$

(403)

 

 

December 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

 

$

15,243

 

$

(56)

 

$

30,293

 

$

(144)

 

$

45,536

 

$

(200)

 

States and municipals

 

 

10,938

 

 

(102)

 

 

4,065

 

 

(81)

 

 

15,003

 

 

(183)

 

Mortgage-backed - residential

 

 

77,898

 

 

(1,231)

 

 

23,488

 

 

(770)

 

 

101,386

 

 

(2,001)

 

Total temporarily impaired

 

$

104,079

 

$

(1,389)

 

$

57,846

 

$

(995)

 

$

161,925

 

$

(2,384)

 

 

10


 

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, which totaled $5.7 million at September 30, 2016 and $5.5 million at December 31, 2015, are primarily comprised of cash and cash equivalents and municipal securities which are generally held for 60 days or less.

 

 

3.LOANS

 

Loans at period-end are as follows:

(in thousands)

 

 

 

 

 

 

 

 

 

 

    

9/30/2016

    

12/31/2015

 

 

 

 

 

 

 

 

 

Commercial

 

$

71,388

 

$

55,929

 

Real estate construction

 

 

29,536

 

 

29,320

 

Real estate mortgage:

 

 

 

 

 

 

 

1-4 family residential

 

 

246,365

 

 

230,721

 

Multi-family residential

 

 

40,671

 

 

38,281

 

Non-farm & non-residential

 

 

184,490

 

 

183,692

 

Agricultural