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EX-32 - EX-32 - KENTUCKY BANCSHARES INC /KY/ktyb-20170930xex32.htm
EX-31.2 - EX-31.2 - KENTUCKY BANCSHARES INC /KY/ktyb-20170930ex3128e134f.htm
EX-31.1 - EX-31.1 - KENTUCKY BANCSHARES INC /KY/ktyb-20170930ex311ce09ac.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, 2017

 

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, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

 

Large accelerated filer ☐

Accelerated filer ☐

 

 

Non-accelerated filer   

Smaller reporting company ☐

(Do not check if a smaller reporting company)

 

 

Emerging growth company ☐

 

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐

 

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, 2017:  2,971,611.

 

 

 

 


 

KENTUCKY BANCSHARES, INC.

 

Table of Contents

 

 

 

2


 

Item 1 – Financial Statements

KENTUCKY BANCSHARES, INC.

CONSOLIDATED BALANCE SHEETS (unaudited)

(in thousands, except per share amounts)

 

 

 

 

 

 

 

 

 

    

9/30/2017

    

12/31/2016

 

ASSETS

 

 

 

 

 

 

 

Cash and due from banks

 

$

18,426

 

$

42,052

 

Federal funds sold

 

 

186

 

 

1,198

 

Cash and cash equivalents

 

 

18,612

 

 

43,250

 

Interest bearing time deposits

 

 

1,830

 

 

5,029

 

Securities available for sale

 

 

289,956

 

 

273,770

 

Trading Assets

 

 

5,714

 

 

5,592

 

Loans held for sale

 

 

1,316

 

 

724

 

Loans

 

 

648,965

 

 

656,007

 

Allowance for loan losses

 

 

(7,755)

 

 

(7,541)

 

Net loans

 

 

641,210

 

 

648,466

 

Federal Home Loan Bank stock

 

 

7,034

 

 

7,034

 

Real estate owned, net

 

 

2,669

 

 

1,824

 

Assets held for sale

 

 

 —

 

 

969

 

Bank premises and equipment, net

 

 

16,265

 

 

14,781

 

Interest receivable

 

 

3,785

 

 

3,715

 

Mortgage servicing rights

 

 

1,485

 

 

1,321

 

Goodwill

 

 

14,001

 

 

14,001

 

Other intangible assets

 

 

405

 

 

529

 

Other assets

 

 

6,476

 

 

7,442

 

Total assets

 

$

1,010,758

 

$

1,028,447

 

 

 

 

 

 

 

 

 

LIABILITIES AND STOCKHOLDERS’ EQUITY

 

 

 

 

 

 

 

Deposits

 

 

 

 

 

 

 

Non-interest bearing

 

$

220,518

 

$

219,556

 

Time deposits, $250,000 and over

 

 

68,528

 

 

74,302

 

Other interest bearing

 

 

459,333

 

 

509,123

 

Total deposits

 

 

748,379

 

 

802,981

 

Repurchase agreements

 

 

24,070

 

 

20,873

 

Federal funds purchased

 

 

17,302

 

 

 —

 

Short-term Federal Home Loan Bank advances

 

 

8,530

 

 

 —

 

Long-term Federal Home Loan Bank advances

 

 

93,665

 

 

92,500

 

Note payable

 

 

3,762

 

 

4,090

 

Subordinated debentures

 

 

7,217

 

 

7,217

 

Interest payable

 

 

796

 

 

692

 

Other liabilities

 

 

6,768

 

 

7,122

 

Total liabilities

 

 

910,489

 

 

935,475

 

 

 

 

 

 

 

 

 

Stockholders’ equity

 

 

 

 

 

 

 

Preferred stock, 300,000 shares authorized and unissued

 

 

 —

 

 

 —

 

Common stock, no par value; 10,000,000 shares authorized; 2,971,611 and 2,973,232 shares issued and outstanding at September 30, 2017 and December 31, 2016

 

 

20,889

 

 

20,767

 

Retained earnings

 

 

78,515

 

 

73,161

 

Accumulated other comprehensive income (loss)

 

 

865

 

 

(956)

 

Total stockholders’ equity

 

 

100,269

 

 

92,972

 

Total liabilities and stockholders’ equity

 

$

1,010,758

 

$

1,028,447

 

 

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

 

 

    

9/30/2017

    

9/30/2016

    

9/30/2017

    

9/30/2016

 

INTEREST INCOME:

 

 

 

 

 

 

 

 

 

 

 

 

 

Loans, including fees

 

$

7,779

 

$

7,630

 

$

22,985

 

$

22,432

 

Securities

 

 

 

 

 

 

 

 

 

 

 

 

 

Taxable

 

 

1,156

 

 

782

 

 

3,353

 

 

2,555

 

Tax exempt

 

 

625

 

 

649

 

 

1,801

 

 

1,967

 

Trading assets

 

 

27

 

 

44

 

 

86

 

 

117

 

Other

 

 

132

 

 

101

 

 

454

 

 

319

 

Total interest income

 

 

9,719

 

 

9,206

 

 

28,679

 

 

27,390

 

INTEREST EXPENSE:

 

 

 

 

 

 

 

 

 

 

 

 

 

Deposits

 

 

668

 

 

555

 

 

1,997

 

 

1,667

 

Repurchase agreements and federal funds purchased

 

 

38

 

 

30

 

 

89

 

 

83

 

Federal Home Loan Bank advances

 

 

466

 

 

428

 

 

1,251

 

 

1,205

 

Note payable

 

 

48

 

 

57

 

 

147

 

 

177

 

Subordinated debentures

 

 

75

 

 

70

 

 

232

 

 

198

 

Total interest expense

 

 

1,295

 

 

1,140

 

 

3,716

 

 

3,330

 

Net interest income

 

 

8,424

 

 

8,066

 

 

24,963

 

 

24,060

 

Provision for loan losses

 

 

100

 

 

175

 

 

650

 

 

775

 

Net interest income after provision

 

 

8,324

 

 

7,891

 

 

24,313

 

 

23,285

 

NON-INTEREST INCOME:

 

 

 

 

 

 

 

 

 

 

 

 

 

Service charges

 

 

1,281

 

 

1,401

 

 

3,806

 

 

3,782

 

Loan service fee income, net

 

 

60

 

 

(26)

 

 

234

 

 

23

 

Trust department income

 

 

304

 

 

272

 

 

879

 

 

796

 

Gain on sale of available for sale securities, net

 

 

60

 

 

40

 

 

103

 

 

317

 

Gain (loss) on trading assets

 

 

(15)

 

 

(52)

 

 

36

 

 

48

 

Gain on sale of loans

 

 

415

 

 

533

 

 

1,456

 

 

1,289

 

Brokerage income

 

 

215

 

 

168

 

 

589

 

 

602

 

Debit card interchange income

 

 

763

 

 

699

 

 

2,274

 

 

2,053

 

Gain on bank premises

 

 

 —

 

 

 —

 

 

1,200

 

 

 4

 

Other

 

 

88

 

 

201

 

 

239

 

 

218

 

Total other income

 

 

3,171

 

 

3,236

 

 

10,816

 

 

9,132

 

NON-INTEREST EXPENSE:

 

 

 

 

 

 

 

 

 

 

 

 

 

Salaries and employee benefits

 

 

4,592

 

 

4,540

 

 

13,545

 

 

13,472

 

Occupancy expenses

 

 

935

 

 

974

 

 

2,884

 

 

2,831

 

Repossession expenses, net

 

 

104

 

 

79

 

 

289

 

 

222

 

FDIC Insurance

 

 

86

 

 

106

 

 

274

 

 

444

 

Legal and professional fees

 

 

285

 

 

423

 

 

762

 

 

1,314

 

Data processing

 

 

409

 

 

396

 

 

1,309

 

 

1,249

 

Debit card expenses

 

 

486

 

 

391

 

 

1,304

 

 

1,078

 

Amortization expense of intangible assets, excluding mortgage servicing right

 

 

38

 

 

45

 

 

124

 

 

201

 

Advertising and marketing

 

 

212

 

 

225

 

 

636

 

 

675

 

Taxes other than payroll, property and income

 

 

304

 

 

282

 

 

904

 

 

836

 

Telephone

 

 

83

 

 

77

 

 

342

 

 

262

 

Postage

 

 

92

 

 

88

 

 

270

 

 

278

 

Loan fees

 

 

40

 

 

64

 

 

151

 

 

155

 

Other

 

 

669

 

 

1,064

 

 

2,276

 

 

2,536

 

Total other expenses

 

 

8,335

 

 

8,754

 

 

25,070

 

 

25,553

 

Income before taxes

 

 

3,160

 

 

2,373

 

 

10,059

 

 

6,864

 

Income taxes

 

 

568

 

 

 8

 

 

1,920

 

 

580

 

Net income

 

$

2,592

 

$

2,365

 

$

8,139

 

$

6,284

 

Other comprehensive income, net of tax:

 

 

 

 

 

 

 

 

 

 

 

 

 

Change in unrealized gains on securities, net of tax

 

 

(348)

 

 

(800)

 

 

1,821

 

 

3,243

 

Comprehensive Income

 

$

2,244

 

$

1,565

 

$

9,960

 

$

9,527

 

Earnings per share

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic

 

$

0.87

 

$

0.79

 

$

2.74

 

$

2.10

 

Diluted

 

 

0.87

 

 

0.79

 

 

2.74

 

 

2.10

 

Dividends per share

 

 

0.29

 

 

0.27

 

 

0.87

 

 

0.81

 

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, 2017

 

2,973,232

 

$

20,767

 

$

73,161

 

$

(956)

 

$

92,972

 

Common stock issued (employee stock grants of  5,423 shares, net of 1,152 shares forfeited, director stock awards of 1,386 shares and director stock options exercised of 600 shares)

 

7,409

 

 

64

 

 

 —

 

 

 —

 

 

64

 

Stock compensation expense

 

 —

 

 

121

 

 

 —

 

 

 —

 

 

121

 

Common stock purchased and retired

 

(9,030)

 

 

(63)

 

 

(200)

 

 

 —

 

 

(263)

 

Other comprehensive income

 

 —

 

 

 —

 

 

 —

 

 

1,821

 

 

1,821

 

Net income

 

 —

 

 

 —

 

 

8,139

 

 

 —

 

 

8,139

 

Dividends declared - $0.87 per share

 

 —

 

 

 —

 

 

(2,585)

 

 

 —

 

 

(2,585)

 

Balances, September 30, 2017

 

2,971,611

 

$

20,889

 

$

78,515

 

$

865

 

$

100,269

 


(1)

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

 

See Accompanying Notes

 

 

5


 

KENTUCKY BANCSHARES, INC.

CONSOLIDATED STATEMENT OF CASH FLOWS (unaudited)

(in thousands, except share information)

 

 

 

 

 

 

 

 

 

    

Nine Months Ended

 

 

 

9/30/2017

    

9/30/2016

 

Cash Flows From Operating Activities

 

 

 

 

 

 

 

Net Income

 

$

8,139

 

$

6,284

 

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

 

 

 

 

 

 

 

Depreciation and amortization

 

 

514

 

 

985

 

Securities amortization (accretion), net

 

 

794

 

 

854

 

Stock based compensation expense

 

 

121

 

 

117

 

Provision for loan losses

 

 

650

 

 

775

 

Securities available for sale gains, net

 

 

(103)

 

 

(317)

 

Net change in trading assets

 

 

(122)

 

 

(165)

 

Originations of loans held for sale

 

 

(46,559)

 

 

(43,331)

 

Proceeds from sale of loans

 

 

47,423

 

 

42,345

 

Losses (gains) on sale of bank premises and equipment

 

 

(1,200)

 

 

(4)

 

Losses (gains) on other real estate

 

 

(11)

 

 

(163)

 

Gain on sale of loans

 

 

(1,456)

 

 

(1,289)

 

Write-downs of other real estate, net

 

 

141

 

 

131

 

Changes in:

 

 

 

 

 

 

 

Interest receivable

 

 

(70)

 

 

(6)

 

Other assets

 

 

 4

 

 

461

 

Interest payable

 

 

104

 

 

81

 

Deferred taxes

 

 

12

 

 

1,663

 

Other liabilities

 

 

(354)

 

 

(2,425)

 

Net cash from operating activities

 

 

8,027

 

 

5,996

 

Cash Flows From Investing Activities

 

 

 

 

 

 

 

Net change in interest bearing time deposits

 

 

3,199

 

 

(155)

 

Purchases of securities available for sale

 

 

(59,235)

 

 

(61,876)

 

Proceeds from sales of securities available for sale

 

 

14,559

 

 

23,888

 

Proceeds from principal payments, maturities and calls securities available for sale

 

 

30,570

 

 

50,987

 

Net change in loans

 

 

5,048

 

 

(35,688)

 

Purchases of bank premises and equipment

 

 

(2,270)

 

 

(667)

 

Proceeds from the sale of bank premises and equipment

 

 

2,062

 

 

 4

 

Proceeds from the sale of other real estate

 

 

922

 

 

734

 

Net cash used in investing activities

 

 

(5,145)

 

 

(22,773)

 

Cash Flows From Financing Activities:

 

 

 

 

 

 

 

Net change in deposits

 

 

(54,602)

 

 

(24,783)

 

Net change in repurchase agreements

 

 

3,197

 

 

5,037

 

Net change in federal funds purchased

 

 

17,302

 

 

10,517

 

Net change in short-term Federal Home Loan Bank advances

 

 

8,530

 

 

10,000

 

Proceeds from long-term Federal Home Loan Bank advances

 

 

13,000

 

 

15,000

 

Repayment of long-term Federal Home Loan Bank advances

 

 

(11,835)

 

 

(6,660)

 

Repayment of note payable

 

 

(328)

 

 

(600)

 

Proceeds from issuance of common stock

 

 

64

 

 

49

 

Purchase of common stock

 

 

(263)

 

 

(296)

 

Dividends paid

 

 

(2,585)

 

 

(2,426)

 

Net cash (used in) from financing activities

 

 

(27,520)

 

 

5,838

 

Net change in cash and cash equivalents

 

 

(24,638)

 

 

(10,939)

 

Cash and cash equivalents at beginning of period

 

 

43,250

 

 

28,048

 

Cash and cash equivalents at end of period

 

$

18,612

 

$

17,109

 

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

 

 

 

 

 

 

 

Interest expense

 

$

3,612

 

$

3,249

 

Income taxes

 

 

1,600

 

 

800

 

Supplemental disclosures of non-cash investing activities

 

 

 

 

 

 

 

Real estate acquired through foreclosure

 

$

1,897

 

$

235

 

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, 2016. 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, 2016.

 

Basis of Presentation: The consolidated financial statements include the accounts of Kentucky Bancshares, Inc. (“Kentucky Bancshares”, 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.

 

Adoption of New Accounting Standards

 

ASU 2016-15, “Statement of Cash Flows (Topic 230): Classification of Certain Cash Receipts and Cash Payments.” Issued in August 2016, ASU 2016-15 provides guidance to reduce the diversity in practice of how certain cash receipts and cash payments are presented and classified in the statement of cash flows. The amendments of ASU 2016-15 provide guidance on eight specific cash flow: (i) debt prepayment or debt extinguishment costs; (ii) settlement of zero-coupon bonds; (iii) contingent consideration payments made after a business combination; (iv) proceeds from the settlement of insurance claims; (v) proceeds from the settlement of corporate-owned life insurance policies, including bank-owned life insurance policies; (vi) distributions received from equity method investees; (vii) beneficial interests in securitization

7


 

transactions and (viii) separately identifiable cash flows and application of the predominance principle. The amendments of ASU 2016-15 are effective for interim and annual periods beginning after December 15, 2017. Management has evaluated the amendments of ASU 2016-15 and does not believe that adoption of this ASU will impact Kentucky Bancshares existing presentation of the applicable cash receipts and cash payments on its consolidated statement of cash flows.

 

ASU 2016-13, “Financial Instruments-Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments.” Issued in June 2016, ASU 2016-13 will add Financial Accounting Standards Board “FASB” ASC Topic 326, “Financial Instruments-Credit Losses” and finalizes amendments to FASB ASC Subtopic 825-15, “Financial Instruments-Credit Losses.” The amendments of ASU 2016-13 are intended to provide financial statement users with more decision-useful information related to expected credit losses on financial instruments and other commitments to extend credit by replacing the current incurred loss impairment methodology with a methodology that reflects expected credit losses and requires consideration of a broader range of reasonable and supportable information to determine credit loss estimates. The amendments of ASU 2016-13 eliminate the probable initial recognition threshold and, in turn, reflect an entity’s current estimate of all expected credit losses. ASU 2016-13 does not specify the method for measuring expected credit losses, and an entity is allowed to apply methods that reasonably reflect its expectations of the credit loss estimate. Additionally, the amendments of ASU 2016-13 require that credit losses on available for sale debt securities be presented as an allowance rather than as a writedown.  The amendments of ASU 2016-13 are effective for interim and annual periods beginning after December 15, 2019. Earlier application is permitted for interim and annual periods beginning after December 15, 2018. Kentucky Bancshares plans to adopt the amendments of ASU 2016-13 during the first quarter of 2020. Kentucky Bancshares has established a steering committee which includes the appropriate members of management to evaluate the impact this ASU will have on the Company’s financial position, results of operations and financial statement disclosures and determine the most appropriate method of implementing the amendments in this ASU as well as any resources needed to implement the amendments.

 

ASU 2016-09, “Compensation-Stock Compensation (Topic 718): Improvements to Employee Share-Based Payment Accounting.” Issued in March 2016, ASU 2016-09 seeks to reduce complexity in accounting standards by simplifying several aspects of the accounting for share-based payment transactions. The amendments of ASU 2016-09 include: (i) requiring all excess tax benefits and tax deficiencies to be recognized as income tax expense or benefit in the income statement; (ii) requiring excess tax benefits to be classified along with other income tax cash flows as an operating activity on the statement of cash flow; (iii) allowing an entity to make an entity-wide accounting policy election to either estimate the number of awards that expect to vest or account for forfeitures when they occur; (iv) change the threshold to qualify for equity classification to permit withholding up to the maximum statutory tax rates in the applicable jurisdictions; and (v) requiring that cash paid by an employer when directly withholding shares for tax-withholding purposes to be classified as a financing activity on the statement of cash flows. The amendments of ASU 2016-09 became effective for Kentucky Bancshares on January 1, 2017 and did not have a material impact on Kentucky Bancshares consolidated financial statements. The Company has made an entity-wide accounting policy election to account for forfeitures of stock awards as they occur. Changes to Kentucky Bancshares consolidated statement of cash flows required by the amendments of ASU 2016-09 are incorporated into the presentation in the Quarterly Report on Form 10-Q for the three month and nine month periods ending September 30, 2017.

 

ASU 2016-02, “Leases (Topic 842).” Issued in February 2016, ASU 2016-02 was issued by the FASB to increase transparency and comparability among organizations by recognizing lease assets and lease liabilities on the balance sheet and by disclosing key information about leasing arrangements. ASU 2016-02 will, among other things, require lessees to recognize a lease liability, which is a lessee’s obligation to make lease payments arising from a lease, measured on a discounted basis; and a right-of-use asset, which is an asset that represents the lessee’s right to use, or control the use of, a specified asset for the lease term.  ASU 2016-02 does not significantly change lease accounting requirements applicable to lessors; however, the ASU contains some targeted improvements that are intended to align, where necessary, lessor accounting with the lessee accounting model and with the updated revenue recognition guidance issued in 2014. The amendments of ASU 2016-02 are effective for interim and annual periods beginning after December 15, 2018. Kentucky Bancshares plans to adopt the amendments of ASU 2016-02 beginning in the first quarter of 2019. At adoption, Kentucky Bancshares will recognize a lease asset and a corresponding lease liability on its consolidated balance sheet for its total lease obligation measured on a discounted basis. As of September 30, 2017, all leases in which Kentucky Bancshares was the lessee were classified as operating leases.

8


 

Kentucky Bancshares does not anticipate any material impact to its consolidated statements of income, balance sheet or regulatory capital as a result of the adoption of this ASU as the Company has an immaterial amount of leases in which it is the lessee.

 

ASU 2016-01, “Financial Instruments-Overall (Subtopic 825-10): Recognition and Measurement of Financial Assets and Financial Liabilities (An Amendment of the FASB Accounting Standards Codification).” Issued in January 2016, ASU 2016-01 is intended to enhance the reporting model for financial instruments to provide users of financial statements with improved decision-making information. The amendments of ASU 2016-01 include: (i) requiring equity investments, except those accounted for under the equity method of accounting or those that result in the consolidation of an investee, to be measured at fair value with changes in fair value recognized in net income; (ii) requiring a qualitative assessment to identify impairment of equity investments without readily determinable fair values; (iii) eliminating the requirement to disclose the method and significant assumptions used to estimate the fair value for financial instruments measured at amortized cost on the balance sheet; (iv) requiring the use of the exit price notion when measuring the fair value of financial instruments for disclosure purposes; (v) requiring an entity that has elected the fair value option to measure the fair value of a liability to present separately in other comprehensive income the portion of the change in the fair value resulting from a change in the instrument-specific credit risk; (vi) requiring separate presentation of financial assets and financial liabilities by measurement category and form of financial asset on the balance sheet or the accompanying notes to the financial statements and (vii) clarifying that an entity should evaluate the need for a valuation allowance on a deferred tax asset related to available for sale securities in combination with the entity’s other deferred tax assets. The amendments of ASU 2016-01 are effective for interim and annual periods beginning after December 15, 2017. Kentucky Bancshares plans to adopt the amendments of ASU 2016-01 during the first quarter of 2018. Management has evaluated the impact this ASU will have on the Company’s consolidated financial statements and does not expect the adoption of this ASU to have a material impact on the Company’s consolidated financials statements.

 

ASU 2014-09, “Revenue from Contracts with Customers (Topic 606).” Issued in May 2014, ASU 2014-09 will add FASB ASC Topic 606, “Revenue from Contracts with Customers,” and will supersede revenue recognition requirements in FASB ASC Topic 605, “Revenue Recognition,” as well as certain cost guidance in FASB ASC Topic 605-35, “Revenue Recognition – Construction-Type and Production-Type Contracts.” ASU 2014-09 provides a framework for revenue recognition that replaces the existing industry and transaction specific requirements under the existing standards. ASU 2014-09 requires an entity to apply a five-step model to determine when to recognize revenue and at what amount. The model specifies that revenue should be recognized when (or as) an entity transfers control of goods or services to a customer at the amount in which the entity expects to be entitled. Depending on whether certain criteria are met, revenue should be recognized either over time, in a manner that depicts the entity’s performance, or at a point in time, when control of the goods or services are transferred to the customer. ASU 2014-09 provides that an entity should apply the following steps: (1) identify the contract(s) with a customer; (2) identify the performance obligations in the contract; (3) determine the transaction price; (4) allocate the transaction price to the performance obligations in the contract; and (5) recognize revenue when (or as) the entity satisfies a performance obligation. In addition, the existing requirements for the recognition of a gain or loss on the transfer of non-financial assets that are not in a contract with a customer are amended to be consistent with the guidance on recognition and measurement in ASU 2014-09.

 

The amendments of ASU 2014-09 may be applied either retrospectively to each prior reporting period presented or retrospectively with the cumulative effect of initially applying ASU 2014-09 recognized at the date of initial application. If the transition method of application is elected, the entity should also provide the additional disclosures in reporting periods that include the date of initial application of (1) the amount by which each financial statement line item is affected in the current reporting period, as compared to the guidance that was in effect before the change, and (2) an explanation of the reasons for significant changes. ASU 2015-14, “Revenue from Contracts with Customers (Topic 606)-Deferral of the Effective Date,” issued in August 2015, defers the effective date of ASU 2014-09 by one year. ASU 2015-14 provides that the amendments of ASU 2014-09 become effective for interim and annual periods beginning after December 15, 2017. All subsequently issued ASUs which provide additional guidance and clarifications to various aspects of FASB ASC Topic 606 will become effective when the amendments of ASU 2014-09 become effective. Kentucky Bancshares plans to adopt these amendments during the first quarter of 2018. Management is continuing to evaluate the impact ASU 2014-09 will have on Kentucky Bancshares consolidated financial statements as well as the most appropriate transition method of application. Based on this evaluation to date, Management has determined that the majority of the revenues earned by Kentucky Bancshares are not within the scope of ASU 2014-09. Management also believes that for most revenue streams within the scope of ASU 2014-09, the amendments will not change the timing of when the revenue is recognized.

9


 

Management will continue to evaluate the impact the adoption of ASU 2014-09 will have on Kentucky Bancshares consolidated financial statements, focusing on noninterest income sources within the scope of ASU 2014-09 as well as new disclosures required by these amendments; however, the adoption of ASU 2014‑09 is not expected to have a material impact on Kentucky Bancshares consolidated financial statements.

 

ASU 2017-04 - Intangibles - Goodwill and Other (Topic 350): Simplifying the Test for Goodwill Impairment:  In January 2017, the FASB issued ASU 2017-04, Intangibles - Goodwill and Other (Topic 350): Simplifying the Test for Goodwill Impairment. This ASU eliminates Step 2 from the goodwill impairment test. Instead, under the new guidance, an entity is to perform its annual goodwill impairment test by comparing the fair value of a reporting unit with its carrying amount. An impairment charge would be recognized for the amount by which the carrying amount exceeds the reporting unit's fair value. The new guidance is effective for annual reporting periods, and interim reporting periods within those annual periods, beginning after December 15, 2019, which for Kentucky Bancshares will be effective for the fiscal year beginning January 1, 2020.  Early adoption is permitted for interim or annual goodwill impairment tests performed on testing dates after January 1, 2017. The adoption of this guidance is not expected to have an impact on the Company’s consolidated financial statements.

 

ASU 2017-08 - Receivables - Nonrefundable Fees and Other Costs (Subtopic 310-20): Premium Amortization on Purchased Callable Debt Securities: In March 2017, the FASB issued ASU 2017-08 - Receivables - Nonrefundable Fees and Other Costs (Subtopic 310-20): Premium Amortization on Purchased Callable Debt Securities. This ASU amends the amortization period for certain purchased callable debt securities held at a premium. It shortens the amortization period for the premium to the earliest call date. Under current U.S. GAAP, premiums on callable debt securities generally are amortized to the maturity date. The new guidance is effective for annual reporting periods, and interim reporting periods within those annual periods, beginning after December 15, 2018, which for Kentucky Bancshares will be the fiscal year beginning January 1, 2019.   Early adoption is permitted for interim or annual periods. The adoption of this guidance is not expected to have a material impact on the Company’s consolidated financial statements.

 

ASU 2016-18 - Statement of Cash Flows (Topic 230):  Restricted Cash (a consensus of the FASB Emerging Issues Task Force):  Effective for public business entities for fiscal years beginning after December 15, 2017, and interim periods within those fiscal years. For all other entities, the amendments are effective for fiscal years beginning after December 15, 2018, and interim periods within fiscal years beginning after December 15, 2019. Early adoption is permitted, including adoption in an interim period. If an entity early adopts the amendments in an interim period, any adjustments should be reflected as of the beginning of the fiscal year that includes that interim period.  The adoption of this guidance is not expected to have a material impact on the Company’s consolidated financial statements.

 

Update 2017-01 - Business Combinations (Topic 805): Clarifying the Definition of a Business:  The amendments in this ASU are intended to help companies and other organizations evaluate whether transactions should be accounted for as acquisitions (or disposals) of assets or businesses.    Public business entities should apply the amendments in this Update to annual periods beginning after December 15, 2017, which for Kentucky Bancshares will be the fiscal year beginning January 1, 2018, including interim periods within those periods. All other entities should apply the amendments to annual periods beginning after December 15, 2018, and interim periods within annual periods beginning after December 15, 2019.

 

ASU 2017-09 - Compensation - Stock Compensation (Topic 718): Scope of Modification Accounting: In May 2017, the FASB issued ASU 2017-09 - Compensation - Stock Compensation (Topic 718): Scope of Modification Accounting. This ASU amends the guidance about which changes to the terms or conditions of a share-based payment award require an entity to apply modification accounting in Topic 718. The new guidance is effective for annual reporting periods, and interim reporting periods within those annual periods, beginning after December 15, 2017. Early adoption is permitted for interim or annual periods. The adoption of this guidance is not expected to have a material impact on Kentucky Bancshares consolidated financial statements.

 

ASU 2017-12, "Derivatives and Hedging (Topic 815): Targeted Improvements to Accounting for Hedging Activities."  Issued in August 2017, ASU 2017-12 aims to improve the financial reporting of hedging relationships to better portray the economic results of an entity's risk management activities in its financial statements.  The amendments in ASU 2017-12 aim to better align an entity's risk management activities and financial reporting for hedging relationships by expanding and refining hedge accounting for both non-financial and financial risk components and aligning the recognition and presentation of the effects of the hedging instrument and the hedged item in the financial statements. 

10


 

The amendments in ASU 2017-12 (i) permit hedge accounting for risk components in hedging relationships involving nonfinancial risk and interest rate risk; (ii) change the guidance for designating fair value hedges of interest rate risk and for measuring the change in fair value of the hedged item in fair value hedges of interest rate risk; (iii) continue to allow an entity to exclude option premiums and forward points from the assessment of hedge effectiveness; and (iv) permit an entity to exclude the portion of the change in fair value of a currency swap that is attributable to a cross-country basis spread from the assessment of hedge effectiveness.  The amendments of ASU 2017-12 also include targeted improvements intended to simplify the application of hedge accounting.  The amendments of ASU 2017-12 are effective for fiscal years, and interim periods within those years, beginning after December 15, 2018, which for Kentucky Bancshares is January 1, 2019.  All transition requirements and elections must be applied to all hedging relationships existing at the date of adoption.  Kentucky Bancshares plans to adopt ASU 2017-12 during the first quarter of 2019 using the required modified retrospective transition method.  Kentucky Bancshares is currently not impacted by ASU 2017-12.  However, if the Company does become involved with derivatives or hedge accounting, the Company will recognize the cumulative effect of the change, if any, in the beginning balance of each affected component of equity as of January 1, 2019.  The adoption of ASU 2017-12 is not expected to have a material impact on the Company’s consolidated financial statements.

 

11


 

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, 2017

 

 

 

 

 

 

 

 

 

 

 

 

 

U. S. government agencies

 

$

30,391

 

$

448

 

$

(179)

 

$

30,660

 

States and political subdivisions

 

 

100,195

 

 

2,254

 

 

(158)

 

 

102,291

 

Mortgage-backed - residential

 

 

157,739

 

 

330

 

 

(1,406)

 

 

156,663

 

Equity securities

 

 

320

 

 

22

 

 

 —

 

 

342

 

Total

 

$

288,645

 

$

3,054

 

$

(1,743)

 

$

289,956

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

December 31, 2016

 

 

 

 

 

 

 

 

 

 

 

 

 

U. S. government agencies

 

$

36,454

 

$

373

 

$

(299)

 

$

36,528

 

States and political subdivisions

 

 

90,117

 

 

1,731

 

 

(716)

 

 

91,132

 

Mortgage-backed - residential

 

 

148,327

 

 

120

 

 

(2,677)

 

 

145,770

 

Equity securities

 

 

320

 

 

20

 

 

 —

 

 

340

 

Total

 

$

275,218

 

$

2,244

 

$

(3,692)

 

$

273,770

 

 

The amortized cost and fair value of securities September 30, 2017 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

 

$

384

 

$

384

 

Due after one year through five years

 

 

25,963

 

 

26,669

 

Due after five years through ten years

 

 

40,893

 

 

41,554

 

Due after ten years

 

 

63,346

 

 

64,344

 

 

 

 

130,586

 

 

132,951

 

Mortgage-backed - residential

 

 

157,739

 

 

156,663

 

Equity

 

 

320

 

 

342

 

Total

 

$

288,645

 

$

289,956

 

 

Proceeds from sales of securities during the first nine months of 2017 and 2016 were $14.6 and $23.9 million.  Gross gains of $105 thousand and $317 thousand and gross losses of $2 thousand and $0 were realized on those sales, respectively.  The tax provision related to these realized net gains was $35 thousand and $108 thousand, respectively. 

 

Proceeds from sales of securities during the three months ended September 30, 2017 and September 30, 2016 were $10.5 million and $2.5 million.  Gross gains of $60 thousand and $40 thousand and gross losses of $2 thousand and $0 were realized on those sales, respectively.  The tax provision related to these realized net gains was $20 thousand and $14 thousand, respectively. 

 

12


 

Securities with unrealized losses at September 30, 2017 and at December 31, 2016 not recognized in income are as follows:

 

September 30, 2017

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

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

 

$

15,617

 

$

(79)

 

$

6,056

 

$

(100)

 

$

21,673

 

$

(179)

 

States and municipals

 

 

16,449

 

 

(110)

 

 

2,271

 

 

(48)

 

 

18,720

 

 

(158)

 

Mortgage-backed - residential

 

 

54,303

 

 

(385)

 

 

44,469

 

 

(1,021)

 

 

98,772

 

 

(1,406)

 

Total temporarily impaired

 

$

86,369

 

$

(574)

 

$

52,796

 

$

(1,169)

 

$

139,165

 

$

(1,743)

 

 

December 31, 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

 

$

28,202

 

$

(299)

 

$

 —

 

$

 —

 

$

28,202

 

$

(299)

 

States and municipals

 

 

27,834

 

 

(716)

 

 

 —

 

 

 —

 

 

27,834

 

 

(716)

 

Mortgage-backed - residential

 

 

119,802

 

 

(1,938)

 

 

13,652

 

 

(739)

 

 

133,454

 

 

(2,677)

 

Total temporarily impaired

 

$

175,838

 

$

(2,953)

 

$

13,652

 

$

(739)

 

$

189,490

 

$

(3,692)

 

 

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 will recover as the securities approach maturity.

 

TRADING ASSETS

 

The trading assets, which totaled $5.7 million at September 30, 2017 and $5.6 million at December 31, 2016, are primarily comprised of cash and cash equivalents and municipal securities which are generally held for 60 days or less.

 

13


 

3.LOANS

 

Loans at period-end are as follows:

(in thousands)