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EX-32 - EX-32 - KENTUCKY BANCSHARES INC /KY/ktyb-20180331xex32.htm
EX-31.2 - EX-31.2 - KENTUCKY BANCSHARES INC /KY/ktyb-20180331ex312e98053.htm
EX-31.1 - EX-31.1 - KENTUCKY BANCSHARES INC /KY/ktyb-20180331ex311bf2923.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 March 31, 2018

 

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  April 30, 2018:  2,978,440.

 

 

 

 


 

KENTUCKY BANCSHARES, INC.

 

Table of Contents

 

Part I - Financial Information

 

 

 

Item 1. Financial Statements 

 

 

 

Consolidated Balance Sheets 

3

 

 

 

Consolidated Statements of Income  

4

 

 

 

Consolidated Statements of Comprehensive Income 

5

 

 

 

Consolidated Statement of Changes in Stockholders’ Equity 

6

 

 

 

Consolidated Statement of Cash Flows 

7

 

 

 

Notes to Consolidated Financial Statements 

8

 

 

 

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations 

30

 

 

 

Item 3. Quantitative and Qualitative Disclosures About Market Risk 

39

 

 

 

Item 4. Controls and Procedures 

40

 

 

 

Part II - Other Information 

40

 

 

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

40

 

 

 

Item 6. Exhibits 

41

 

 

 

Signatures 

42

 

 

 

 

2


 

Item 1 – Financial Statements

KENTUCKY BANCSHARES, INC.

CONSOLIDATED BALANCE SHEETS (unaudited)

(Dollar amounts in thousands except per share data)

 

 

 

 

 

 

 

 

 

    

3/31/2018

    

12/31/2017

 

ASSETS

 

 

 

 

 

 

 

Cash and due from banks

 

$

23,519

 

$

38,851

 

Federal funds sold

 

 

3,266

 

 

321

 

Cash and cash equivalents

 

 

26,785

 

 

39,172

 

Interest bearing time deposits

 

 

1,785

 

 

1,830

 

Securities available for sale

 

 

305,998

 

 

318,177

 

Loans held for sale

 

 

1,221

 

 

1,231

 

Loans

 

 

649,845

 

 

648,535

 

Allowance for loan losses

 

 

(7,905)

 

 

(7,720)

 

Net loans

 

 

641,940

 

 

640,815

 

Federal Home Loan Bank stock

 

 

7,034

 

 

7,034

 

Real estate owned, net

 

 

2,276

 

 

2,404

 

Bank premises and equipment, net

 

 

17,293

 

 

16,539

 

Interest receivable

 

 

3,809

 

 

3,951

 

Mortgage servicing rights

 

 

1,568

 

 

1,511

 

Goodwill

 

 

14,001

 

 

14,001

 

Other intangible assets

 

 

333

 

 

369

 

  Bank owned life insurance

 

 

10,007

 

 

 —

 

Other assets

 

 

7,086

 

 

6,159

 

Total assets

 

$

1,041,136

 

$

1,053,193

 

 

 

 

 

 

 

 

 

LIABILITIES AND STOCKHOLDERS’ EQUITY

 

 

 

 

 

 

 

Deposits

 

 

 

 

 

 

 

Non-interest bearing

 

$

230,692

 

$

230,241

 

Time deposits, $250,000 and over

 

 

62,674

 

 

79,578

 

Other interest bearing

 

 

523,376

 

 

505,454

 

Total deposits

 

 

816,742

 

 

815,273

 

Repurchase agreements

 

 

12,233

 

 

19,900

 

Short-term Federal Home Loan Bank advances

 

 

8,200

 

 

8,400

 

Long-term Federal Home Loan Bank advances

 

 

88,512

 

 

90,332

 

Note payable

 

 

3,084

 

 

3,321

 

Subordinated debentures

 

 

7,217

 

 

7,217

 

Interest payable

 

 

641

 

 

838

 

Other liabilities

 

 

5,241

 

 

7,583

 

Total liabilities

 

 

941,870

 

 

952,864

 

 

 

 

 

 

 

 

 

Stockholders’ equity

 

 

 

 

 

 

 

Preferred stock, 300,000 shares authorized and unissued

 

 

 —

 

 

 —

 

Common stock, no par value; 10,000,000 shares authorized; 2,978,440 and 2,971,522 shares issued and outstanding at March 31, 2018 and December 31, 2017

 

 

21,040

 

 

20,931

 

Retained earnings

 

 

82,620

 

 

80,395

 

Accumulated other comprehensive (loss)

 

 

(4,394)

 

 

(997)

 

Total stockholders’ equity

 

 

99,266

 

 

100,329

 

Total liabilities and stockholders’ equity

 

$

1,041,136

 

$

1,053,193

 

 

See Accompanying Notes

 

 

3


 

KENTUCKY BANCSHARES, INC.

CONSOLIDATED STATEMENTS OF INCOME (unaudited)

(Dollar amounts in thousands except per share data)

 

 

 

 

 

 

 

 

 

Three Months Ended

 

    

3/31/2018

    

3/31/2017

INTEREST INCOME:

 

 

 

 

 

 

Loans, including fees

 

$

8,012

 

$

7,494

Securities

 

 

 

 

 

 

Taxable

 

 

1,502

 

 

1,062

Tax exempt

 

 

513

 

 

608

Trading assets

 

 

 —

 

 

34

Other

 

 

193

 

 

178

Total interest income

 

 

10,220

 

 

9,376

INTEREST EXPENSE:

 

 

 

 

 

 

Deposits

 

 

847

 

 

645

Repurchase agreements and federal funds purchased

 

 

23

 

 

26

Federal Home Loan Bank advances

 

 

435

 

 

397

Note payable

 

 

36

 

 

50

Subordinated debentures

 

 

85

 

 

80

Total interest expense

 

 

1,426

 

 

1,198

Net interest income

 

 

8,794

 

 

8,178

Provision for loan losses

 

 

 —

 

 

350

Net interest income after provision

 

 

8,794

 

 

7,828

NON-INTEREST INCOME:

 

 

 

 

 

 

Service charges

 

 

1,288

 

 

1,223

Loan service fee income, net

 

 

52

 

 

114

Trust department income

 

 

315

 

 

288

Gain on sale of available for sale securities, net

 

 

(44)

 

 

 —

Gain (loss) on trading assets

 

 

 —

 

 

17

Gain on sale of loans

 

 

374

 

 

550

Brokerage income

 

 

209

 

 

193

Debit card interchange income

 

 

763

 

 

731

Gain on bank premises

 

 

 —

 

 

1,194

Other

 

 

94

 

 

40

Total other income

 

 

3,051

 

 

4,350

NON-INTEREST EXPENSE:

 

 

 

 

 

 

Salaries and employee benefits

 

 

4,493

 

 

4,445

Occupancy expenses

 

 

980

 

 

965

Repossession expenses, net

 

 

15

 

 

79

FDIC Insurance

 

 

79

 

 

94

Legal and professional fees

 

 

229

 

 

283

Data processing

 

 

469

 

 

406

Debit card expenses

 

 

434

 

 

375

Amortization expense of intangible assets, excluding mortgage servicing right

 

 

36

 

 

43

Advertising and marketing

 

 

219

 

 

212

Taxes other than payroll, property and income

 

 

312

 

 

300

Telephone

 

 

79

 

 

122

Postage

 

 

85

 

 

93

Loan fees

 

 

40

 

 

63

Other

 

 

820

 

 

706

Total other expenses

 

 

8,290

 

 

8,186

Income before income taxes

 

 

3,555

 

 

3,992

Provision for income taxes

 

 

407

 

 

855

Net income

 

$

3,148

 

$

3,137

Earnings per share

 

 

 

 

 

 

Basic

 

$

1.06

 

$

1.06

Diluted

 

 

1.06

 

 

1.06

Dividends per share

 

 

0.31

 

 

0.29

See Accompanying Notes

4


 

KENTUCKY BANCSHARES, INC.

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (unaudited)

(Dollar amounts in thousands)

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended

 

    

3/31/2018

    

3/31/2017

 

 

 

 

 

 

 

Net income

 

$

3,148

 

$

3,137

 

 

 

 

 

 

 

Other comprehensive income (loss)

 

 

 

 

 

 

Unrealized gains (losses) on securities arising during the period

 

 

(4,344)

 

 

1,115

Reclassification of realized amount

 

 

44

 

 

 —

Net change in unrealized gain (loss) on securities

 

 

(4,300)

 

 

1,115

Less: Tax impact

 

 

903

 

 

(379)

Other comprehensive income (loss)

 

 

(3,397)

 

 

736

 

 

 

 

 

 

 

Comprehensive income (loss)

 

$

(249)

 

$

3,873

See Accompanying Notes

 

 

 

5


 

KENTUCKY BANCSHARES, INC.

CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY (unaudited)

(Dollar amounts in thousands except per share data)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

    

    

    

 

 

 

    

Accumulated

    

 

 

 

 

 

 

 

 

 

 

 

 

Other

 

Total

 

 

 

Common Stock

 

Retained

 

Comprehensive

 

Stockholders’

 

(Dollars in thousands)

 

Shares

 

Amount

 

Earnings

 

Loss

 

Equity

 

Balances, December 31, 2017

 

2,971,522

 

$

20,931

 

$

80,395

 

$

(997)

 

$

100,329

 

Common stock issued (employee stock grants of  5,337 shares, net of 383 shares forfeited, director stock awards of 981 shares and director stock options exercised of 600 shares)

 

6,918

 

 

64

 

 

 —

 

 

 —

 

 

64

 

Stock compensation expense

 

 —

 

 

45

 

 

 —

 

 

 —

 

 

45

 

Other comprehensive loss

 

 —

 

 

 —

 

 

 —

 

 

(3,397)

 

 

(3,397)

 

Net income

 

 —

 

 

 —

 

 

3,148

 

 

 —

 

 

3,148

 

Dividends declared - $0.31 per share

 

 —

 

 

 —

 

 

(923)

 

 

 —

 

 

(923)

 

Balances, March 31, 2018

 

2,978,440

 

$

21,040

 

$

82,620

 

$

(4,394)

 

$

99,266

 


(1)

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

 

See Accompanying Notes

 

 

6


 

KENTUCKY BANCSHARES, INC.

CONSOLIDATED STATEMENT OF CASH FLOWS (unaudited)

(Dollar amounts in thousands)

 

 

 

 

 

 

 

 

    

Three Months Ended

 

 

3/31/2018

    

3/31/2017

Cash Flows From Operating Activities

 

 

 

 

 

 

Net Income

 

$

3,148

 

$

3,137

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

 

 

 

 

 

 

Depreciation

 

 

299

 

 

301

Amortization (accretion), net

 

 

(133)

 

 

(147)

Securities amortization (accretion), net

 

 

232

 

 

231

Stock based compensation expense

 

 

45

 

 

40

Provision for loan losses

 

 

 —

 

 

350

Securities losses (gains) available for sale gains, net

 

 

44

 

 

 —

Net change in trading assets

 

 

 —

 

 

(52)

Net change in cash surrender value of bank owned life insurance

 

 

(7)

 

 

 —

Originations of loans held for sale

 

 

(11,343)

 

 

(12,296)

Proceeds from sale of loans

 

 

11,727

 

 

12,381

Losses (gains) on sale of bank premises and equipment

 

 

 —

 

 

(1,194)

Losses (gains) on other real estate

 

 

1

 

 

(46)

Gain on sale of loans

 

 

(374)

 

 

(550)

Changes in:

 

 

 

 

 

 

Interest receivable

 

 

142

 

 

66

Other assets

 

 

21

 

 

312

Interest payable

 

 

(197)

 

 

(25)

Deferred taxes

 

 

(45)

 

 

320

Other liabilities

 

 

(2,342)

 

 

(1,813)

Net cash from operating activities

 

 

1,218

 

 

1,015

Cash Flows From Investing Activities

 

 

 

 

 

 

Net change in interest bearing time deposits

 

 

45

 

 

370

Purchases of securities available for sale

 

 

(9,599)

 

 

(37,701)

Purchase of bank owned life insurance

 

 

(10,000)

 

 

 —

Proceeds from sales of securities available for sale

 

 

3,922

 

 

 —

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

 

 

13,280

 

 

10,399

Net change in loans

 

 

(1,013)

 

 

(1,593)

Purchases of bank premises and equipment

 

 

(1,053)

 

 

(454)

Proceeds from the sale of bank premises and equipment

 

 

 —

 

 

2,093

Capitalized expenditures for other real estate

 

 

(74)

 

 

 —

Proceeds from the sale of other real estate

 

 

201

 

 

623

Net cash used in investing activities

 

 

(4,291)

 

 

(26,263)

Cash Flows From Financing Activities:

 

 

 

 

 

 

Net change in deposits

 

 

1,469

 

 

21,364

Net change in repurchase agreements

 

 

(7,667)

 

 

938

Net change in short-term Federal Home Loan Bank advances

 

 

(200)

 

 

 —

Repayment of long-term Federal Home Loan Bank advances

 

 

(1,820)

 

 

(1,888)

Repayment of note payable

 

 

(237)

 

 

(107)

Proceeds from issuance of common stock

 

 

64

 

 

64

Purchase of common stock

 

 

 —

 

 

(263)

Dividends paid

 

 

(923)

 

 

(862)

Net cash (used in) from financing activities

 

 

(9,314)

 

 

19,246

Net change in cash and cash equivalents

 

 

(12,387)

 

 

(6,002)

Cash and cash equivalents at beginning of period

 

 

39,172

 

 

43,250

Cash and cash equivalents at end of period

 

$

26,785

 

$

37,248

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

 

 

 

 

 

 

Interest expense

 

$

1,623

 

$

1,223

Supplemental disclosures of non-cash investing activities

 

 

 

 

 

 

     Real estate acquired through foreclosure

    

 

 —

 

 

126

See Accompanying Notes

 

 

7


 

Table of Contents

Notes to Consolidated Financial Statements

(Dollar amounts in thousands except per share data)

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, 2017. 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, 2017.

 

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.

 

Bank Owned Life Insurance:  The Company has purchased life insurance policies on certain key executives.  Bank owned life insurance is recorded at the amount that can be realized under the insurance contract at the balance sheet date, which is the cash surrender value adjusted for other charges or other amounts due that are probable at settlement.

 

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 2016-13, “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.

8


 

Table of Contents

Notes to Consolidated Financial Statements

(Dollar amounts in thousands except per share data)

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 2016-02, “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 March 31, 2018, all leases in which Kentucky Bancshares was the lessee were classified as operating leases. 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 adopted the amendments of ASU 2016-01 during the first quarter of 2018. The adoption of this amendment did not have a material impact on the Company’s consolidated financial statements.

 

ASU 2018-02, “Income Statement-Reporting Comprehensive Income (Topic 220) – Reclassification of Certain Tax Effects from Accumulated Other Comprehenisve Income.” On December 22, 2017, the U.S. federal government enacted a tax bill, H.R.1, An Act to Provide for Reconciliation Pursuant to Titles II and V of the Concurrent Resolution on the Budget for Fiscal Year 2018 (“Tax Cuts and Jobs Act”). Stakeholders in the banking and insurance industries submitted unsolicited comment letters to the FASB about a narrow-scope financial reporting issue that arose as a consequence of the Tax Cuts and Jobs Act.

9


 

Table of Contents

Notes to Consolidated Financial Statements

(Dollar amounts in thousands except per share data)

Specifically, stakeholders expressed concern about the guidance in current generally accepted accounting principles (GAAP) that requires deferred tax liabilities and assets to be adjusted for the effect of a change in tax laws or rates with the effect included in income from continuing operations in the reporting period that includes the enactment date. That guidance is applicable even in situations in which the related income tax effects of items in accumulated other comprehensive income were originally recognized in other comprehensive income (rather than in income from continuing operations).

 

Those stakeholders asserted that because the adjustment of deferred taxes due to the reduction of the historical corporate income tax rate to the newly enacted corporate income tax rate is required to be included in income from continuing operations, the tax effects of items within accumulated other comprehensive income (referred to as stranded tax effects for purposes of ASU 2018-02) do not reflect the appropriate tax rate.

 

The amendments in ASU 2018-02 allowed a reclassification from accumulated other comprehensive income to retained earnings for stranded tax effects resulting from the Tax Cuts and Jobs Act. Consequently, the amendments eliminate the stranded tax effects resulting from the Tax Cuts and Jobs Act and will improve the usefulness of information reported to financial statement users. However, because the amendments only relate to the reclassification of the income tax effects of the Tax Cuts and Jobs Act, the underlying guidance that requires that the effect of a change in tax laws or rates be included in income from continuing operations is not affected. The amendments in ASU 2018-02 also require certain disclosures about stranded tax effects.

 

The amendments in ASU 2018-02 are effective for all entities for fiscal years beginning after December 15, 2018, and interim periods within those fiscal years. Early adoption of the amendments in ASU 2018-02 is permitted, including adoption in any interim period, (1) for public business entities for reporting periods for which financial statements have not yet been issued and (2) for all other entities for reporting periods for which financial statements have not yet been made available for issuance. The Company chose to early adopt the amendments in ASU 2018-02 as of December 31, 2017.

 

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 adopted these amendments during the first quarter of 2018 and there was no material impact to the Company’s financial statements.

10


 

Table of Contents

Notes to Consolidated Financial Statements

(Dollar amounts in thousands except per share data)

 

In March 2016, the FASB issued ASU No. 2016-08, Revenue from Contracts with Customers (Topic 606): Principal versus Agent Considerations (Reporting Revenue Gross versus Net). The amendments relate to when another party, along with the entity, is involved in providing a good or service to a customer. Topic 606 requires an entity to determine whether the nature of its promise is to provide that good or service to the customer (that is, the entity is a principal) or to arrange for the good or service to be provided to the customer by the other party (that is, the entity is an agent). This determination is based upon whether the entity controls the good or the service before it is transferred to the customer. Topic 606 includes indicators to assist in this evaluation. The amendments in this update affect the guidance in ASU No. 2014-09 above. The effective date is the same as the effective date of ASU No. 2014-09.

 

In April 2016, the FASB issued ASU No. 2016-10, Revenue from Contracts with Customers (Topic 606): Identifying Performance Obligations and Licensing. The amendments clarify the following two aspects of Topic 606: identifying performance obligations, and the licensing implementation guidance. Before an entity can identify its performance obligations in a contract with a customer, the entity first identifies the promised goods or services in the contract. The amendments in this update are expected to reduce the cost and complexity of applying the guidance on identifying promised goods or services. To identify performance obligations in a contract, an entity evaluates whether promised goods and services are distinct. Topic 606 includes two criteria for assessing whether promises to transfer goods or services are distinct. One of those criteria is that the promises are separately identifiable. This update will improve the guidance on assessing that criterion. Topic 606 also includes implementation guidance on determining whether as entity’s promise to grant a license provides a customer with either a right to use the entity’s intellectual property, which is satisfied at a point in time, or a right to access the entity’s intellectual property, which is satisfied over time. The amendments in this update are intended to improve the operability and understandability of the licensing implementation guidance. The amendments in this update affect the guidance in ASU No. 2014-09 above. The effective date is the same as the effective date of ASU No. 2014-09.

 

In May 2016, the FASB issued ASU No. 2016-12, Revenue from Contracts with Customers (Topic 606): Narrow-Scope Improvements and Practical Expedients. The amendments do not change the core revenue recognition principle in Topic 606. The amendments provide clarifying guidance in certain narrow areas and add some practical expedients.

 

In December 2016, the FASB issued ASU No. 2016-20, Revenue from Contracts with Customers (Topic 606): Technical Corrections and Improvements. The FASB board decided to issue a separate update for technical corrections and improvements to Topic 606 and other Topics amended by ASU No. 2014-09 to increase awareness of the proposals and to expedite improvements to ASU No. 2014-09. The amendment affects narrow aspects of the guidance issued in ASU No. 2014-09.

 

On January 1, 2018, we adopted ASU 2014-09, Revenue from Contracts with Customers and all subsequent amendments to the ASU (collectively, “Topic 606”). We elected to implement using the modified retrospective application, with the cumulative effect recorded as an adjustment to opening retained earnings at January 1, 2018. Due to immateriality, we had no cumulative effect to record. Since interest income on loans and securities are both excluded from this topic, a significant majority of our revenues are not subject to the new guidance. Our services that fall within the scope of Topic 606 are presented within noninterest income and are recognized as revenue as we satisfy our obligation to the customer. Services within the scope of Topic 606 include trust department income, service charges, debit card interchange income, and brokerage income.

 

Trust department income: We earn wealth management fees based upon asset custody, investment management, trust, and estate services provided to customers. Most of these customers receive monthly billings for services rendered based upon the market value of assets and/or income generated. Fees that are transaction based are recognized at the point in time that the transaction is executed.

 

Service charges: We earn fees from our deposit customers for transaction-based, account maintenance, and overdraft services. Transaction-based fees and overdraft fees are recognized at a point in time, since the customer generally has a right to cancel the depository arrangement at any time. The arrangement is considered a day-to-day contract with ongoing renewals and optional purchases, so the duration of the contract does not extend beyond the services already performed. Account maintenance fees, which relate primarily to monthly maintenance, are earned over the course of a month, representing the period over which we satisfy our performance obligation.

11


 

Table of Contents

Notes to Consolidated Financial Statements

(Dollar amounts in thousands except per share data)

 

Debit card interchange income: As with the transaction-based fees on deposit accounts, debit card interchange income is recognized at the point in time that we fulfill the customer’s request. We earn interchange fees from cardholder transactions processed through card association networks. Interchange rates are generally set by the card associations based upon purchase volumes and other factors. Interchange fees represent a percentage of the underlying transaction value and are recognized daily, concurrently with the transaction processing services provided to the cardholder.

 

Brokerage income: Brokerage income fees are the commissions and fees received from a registered broker/dealer and investment adviser that provide those services to our customers. We act as an agent in arranging the relationship between the customer and the third-party service provider. These fees are recognized monthly from the third-party broker based upon services already performed.

 

2.SECURITIES

 

SECURITIES AVAILABLE FOR SALE

 

Period-end securities are as follows:

(in thousands)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

    

 

    

Gross

    

Gross

    

 

 

 

 

Amortized

 

Unrealized

 

Unrealized

 

Fair

 

 

 

Cost

 

Gains

 

Losses

 

Value

 

Available for Sale

 

 

 

 

 

 

 

 

 

 

 

 

 

March 31, 2018

 

 

 

 

 

 

 

 

 

 

 

 

 

     U.S. treasury notes

 

$

4,043

 

$

 —

 

$

(60)

 

$

3,983

 

U. S. government agencies

 

 

40,155

 

 

373

 

 

(763)

 

 

39,765

 

States and political subdivisions

 

 

81,270

 

 

779

 

 

(613)

 

 

81,436

 

Mortgage-backed - residential

 

 

135,603

 

 

20

 

 

(4,004)

 

 

131,619

 

Mortgage-backed - commercial

 

 

50,170

 

 

 5

 

 

(1,315)

 

 

48,860

 

Equity securities

 

 

320

 

 

15

 

 

 —

 

 

335

 

Total

 

$

311,561

 

$

1,192

 

$

(6,755)

 

$

305,998

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

December 31, 2017

 

 

 

 

 

 

 

 

 

 

 

 

 

     U.S. treasury notes

 

$

4,046

 

$

 —

 

$

(22)

 

$

4,024

 

U. S. government agencies

 

 

41,658

 

 

405

 

 

(358)

 

 

41,705

 

States and political subdivisions

 

 

88,485

 

 

1,783

 

 

(133)

 

 

90,135

 

Mortgage-backed - residential

 

 

132,664

 

 

43

 

 

(2,330)

 

 

130,377

 

Mortgage-backed - commercial

 

 

52,267

 

 

18

 

 

(689)

 

 

51,596

 

Equity securities

 

 

320

 

 

20

 

 

 —

 

 

340

 

Total

 

$

319,440

 

$

2,269

 

$

(3,532)

 

$

318,177

 

 

12


 

Table of Contents

Notes to Consolidated Financial Statements

(Dollar amounts in thousands except per share data)

The amortized cost and fair value of securities as of March 31, 2018 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

 

$

6,096

 

$

6,062

 

Due after one year through five years

 

 

31,976

 

 

31,959

 

Due after five years through ten years

 

 

29,550

 

 

29,425

 

Due after ten years

 

 

57,846

 

 

57,738

 

 

 

 

125,468

 

 

125,184

 

Mortgage-backed - residential

 

 

135,603

 

 

131,619

 

Mortgage-backed - commercial

 

 

50,170

 

 

48,860

 

Equity

 

 

320

 

 

335

 

Total

 

$

311,561

 

$

305,998

 

 

Proceeds from sales of securities during the first three months of 2018 and 2017 were $3.9 million and $0.  Gross gains of $34 thousand and $0 and gross losses of $78 thousand and $0 were realized on those sales, respectively.  The tax provision related to these realized net losses was $(9) thousand and $0, respectively. 

 

Securities with unrealized losses at March 31, 2018 and at December 31, 2017 not recognized in income are as follows:

 

March 31, 2018

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

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. treasury notes

 

$

3,983

 

$

(60)

 

$

 —

 

$

 —

 

$

3,983

 

$

(60)

 

U.S. government agencies

 

 

20,751

 

 

(440)

 

 

14,202

 

 

(323)

 

 

34,953

 

 

(763)

 

States and municipals

 

 

40,003

 

 

(500)

 

 

2,688

 

 

(113)

 

 

42,691

 

 

(613)

 

Mortgage-backed - residential

 

 

82,172

 

 

(1,868)

 

 

51,443

 

 

(2,136)

 

 

133,615

 

 

(4,004)

 

Mortgage-backed - commercial

 

 

39,033

 

 

(942)

 

 

6,837

 

 

(373)

 

 

45,870

 

 

(1,315)

 

Total temporarily impaired

 

$

185,942

 

$

(3,810)

 

$

75,170

 

$

(2,945)

 

$

261,112

 

$

(6,755)

 

 

December 31, 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. treasury notes

 

$

4,024

 

$

(22)

 

$

 —

 

$

 —

 

$

4,024

 

$

(22)

 

U.S. government agencies

 

 

18,405

 

 

(130)

 

 

12,692

 

 

(228)

 

 

31,097

 

 

(358)

 

States and municipals

 

 

15,442

 

 

(97)

 

 

2,769

 

 

(36)

 

 

18,211

 

 

(133)

 

Mortgage-backed - residential

 

 

70,646

 

 

(817)

 

 

54,760

 

 

(1,513)

 

 

125,406

 

 

(2,330)

 

Mortgage-backed - commercial

 

 

39,394

 

 

(409)

 

 

7,371

 

 

(280)

 

 

46,765

 

 

(689)

 

Total temporarily impaired

 

$

147,911

 

$

(1,475)

 

$

77,592

 

$

(2,057)

 

$

225,503

 

$

(3,532)

 

 

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.

 

13


 

Table of Contents

Notes to Consolidated Financial Statements

(Dollar amounts in thousands except per share data)

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.

 

3.LOANS

 

Loans at period-end are as follows:

(in thousands)

 

 

 

 

 

 

 

 

 

 

    

3/31/2018

    

12/31/2017

 

Commercial

 

$

80,016

 

$

80,070

 

Real estate construction

 

 

22,724

 

 

20,816

 

Real estate mortgage:

 

 

 

 

 

 

 

1-4 family residential

 

 

239,945

 

 

238,121

 

Multi-family residential

 

 

45,965

 

 

39,926

 

Non-farm & non-residential

 

 

183,252

 

 

192,074

 

Agricultural

 

 

59,720

 

 

59,176

 

Consumer

 

 

17,991

 

 

18,182

 

Other

 

 

232

 

 

170

 

Total

 

$

649,845

 

$

648,535

 

 

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

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended March 31, 2018

 

 

 

(in thousands)

 

 

 

Beginning

 

 

 

 

 

 

 

 

 

 

Ending

 

 

    

Balance

    

Charge-offs 

    

Recoveries 

    

Provision

    

Balance

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Commercial

 

$

975

 

$

 —

 

$

 —

 

$

(16)

 

$

959

 

Real estate Construction

 

 

462

 

 

 —

 

 

 —

 

 

(70)

 

 

392

 

Real estate mortgage:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

1-4 family residential