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Section 1: 10-Q (10-Q)

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Table of Contents

 

 

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, 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 every interactive Data File required to be submitted 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 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 ☐

 

 

 

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, 2018:  2,977,686.

 

 

 

 


 

Table of Contents

KENTUCKY BANCSHARES, INC.

 

Table of Contents

 

Part I - Financial Information

 

 

 

Item 1. Financial Statements 

 

 

 

Consolidated Balance Sheets 

3

 

 

 

Consolidated Statements of Income  

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 

32

 

 

 

Item 3. Quantitative and Qualitative Disclosures About Market Risk 

42

 

 

 

Item 4. Controls and Procedures 

43

 

 

 

Part II - Other Information 

44

 

 

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

44

 

 

 

Item 6. Exhibits 

45

 

 

 

Signatures 

46

 

 

 

 

2


 

Table of Contents

Item 1 – Financial Statements

KENTUCKY BANCSHARES, INC.

CONSOLIDATED BALANCE SHEETS (unaudited)

(Dollar amounts in thousands except per share data)

 

 

 

 

 

 

 

 

 

    

9/30/2018

    

12/31/2017

 

ASSETS

 

 

 

 

 

 

 

Cash and due from banks

 

$

25,911

 

$

38,851

 

Federal funds sold

 

 

186

 

 

321

 

Cash and cash equivalents

 

 

26,097

 

 

39,172

 

Interest bearing time deposits

 

 

2,275

 

 

1,830

 

Securities available for sale

 

 

278,575

 

 

318,177

 

Loans held for sale

 

 

3,699

 

 

1,231

 

Loans

 

 

685,738

 

 

648,535

 

Allowance for loan losses

 

 

(8,199)

 

 

(7,720)

 

Net loans

 

 

677,539

 

 

640,815

 

Federal Home Loan Bank stock

 

 

7,034

 

 

7,034

 

Real estate owned, net

 

 

1,004

 

 

2,404

 

Bank premises and equipment, net

 

 

17,525

 

 

16,539

 

Interest receivable

 

 

4,138

 

 

3,951

 

Mortgage servicing rights

 

 

1,614

 

 

1,511

 

Goodwill

 

 

14,001

 

 

14,001

 

Other intangible assets

 

 

267

 

 

369

 

  Bank owned life insurance

 

 

10,136

 

 

 —

 

Other assets

 

 

8,973

 

 

6,159

 

Total assets

 

$

1,052,877

 

$

1,053,193

 

 

 

 

 

 

 

 

 

LIABILITIES AND STOCKHOLDERS’ EQUITY

 

 

 

 

 

 

 

Deposits

 

 

 

 

 

 

 

Non-interest bearing

 

$

244,155

 

$

230,241

 

Time deposits, $250,000 and over

 

 

48,374

 

 

79,578

 

Other interest bearing

 

 

528,211

 

 

505,454

 

Total deposits

 

 

820,740

 

 

815,273

 

Repurchase agreements

 

 

8,248

 

 

19,900

 

Short-term Federal Home Loan Bank advances

 

 

11,900

 

 

8,400

 

Long-term Federal Home Loan Bank advances

 

 

91,824

 

 

90,332

 

Note payable

 

 

2,841

 

 

3,321

 

Subordinated debentures

 

 

7,217

 

 

7,217

 

Interest payable

 

 

818

 

 

838

 

Other liabilities

 

 

7,924

 

 

7,583

 

Total liabilities

 

 

951,512

 

 

952,864

 

 

 

 

 

 

 

 

 

Stockholders’ equity

 

 

 

 

 

 

 

Preferred stock, 300,000 shares authorized and unissued

 

 

 —

 

 

 —

 

Common stock, no par value; 10,000,000 shares authorized; 2,978,326 and 2,971,522 shares issued and outstanding at September 30, 2018 and December 31, 2017

 

 

21,130

 

 

20,931

 

Retained earnings

 

 

87,118

 

 

80,395

 

Accumulated other comprehensive loss

 

 

(6,883)

 

 

(997)

 

Total stockholders’ equity

 

 

101,365

 

 

100,329

 

Total liabilities and stockholders’ equity

 

$

1,052,877

 

$

1,053,193

 

 

See Accompanying Notes

 

 

3


 

Table of Contents

KENTUCKY BANCSHARES, INC.

CONSOLIDATED STATEMENTS OF INCOME (unaudited)

(Dollar amounts in thousands except per share data)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended

 

Nine Months Ended

 

 

    

9/30/2018

    

9/30/2017

    

9/30/2018

    

9/30/2017

 

INTEREST INCOME:

 

 

 

 

 

 

 

 

 

 

 

 

 

Loans, including fees

 

$

8,718

 

$

7,779

 

$

25,151

 

$

22,985

 

Securities

 

 

 

 

 

 

 

 

 

 

 

 

 

Taxable

 

 

1,435

 

 

1,156

 

 

4,486

 

 

3,353

 

Tax exempt

 

 

429

 

 

625

 

 

1,378

 

 

1,801

 

Trading assets

 

 

 —

 

 

27

 

 

 —

 

 

86

 

Other

 

 

159

 

 

132

 

 

496

 

 

454

 

Total interest income

 

 

10,741

 

 

9,719

 

 

31,511

 

 

28,679

 

INTEREST EXPENSE:

 

 

 

 

 

 

 

 

 

 

 

 

 

Deposits

 

 

1,112

 

 

668

 

 

2,863

 

 

1,997

 

Repurchase agreements and federal funds purchased

 

 

53

 

 

38

 

 

117

 

 

89

 

Federal Home Loan Bank advances

 

 

500

 

 

466

 

 

1,376

 

 

1,251

 

Note payable

 

 

39

 

 

48

 

 

101

 

 

147

 

Subordinated debentures

 

 

95

 

 

75

 

 

285

 

 

232

 

Total interest expense

 

 

1,799

 

 

1,295

 

 

4,742

 

 

3,716

 

Net interest income

 

 

8,942

 

 

8,424

 

 

26,769

 

 

24,963

 

Provision for loan losses

 

 

150

 

 

100

 

 

400

 

 

650

 

Net interest income after provision

 

 

8,792

 

 

8,324

 

 

26,369

 

 

24,313

 

NON-INTEREST INCOME:

 

 

 

 

 

 

 

 

 

 

 

 

 

Service charges

 

 

1,375

 

 

1,281

 

 

3,989

 

 

3,806

 

Loan service fee income, net

 

 

64

 

 

60

 

 

212

 

 

234

 

Trust department income

 

 

332

 

 

304

 

 

967

 

 

879

 

Gain (loss) on sale of available for sale securities, net

 

 

66

 

 

60

 

 

(8)

 

 

103

 

Gain (loss) on trading assets

 

 

 —

 

 

(15)

 

 

 —

 

 

36

 

Gain on sale of loans

 

 

472

 

 

415

 

 

1,291

 

 

1,456

 

Brokerage income

 

 

192

 

 

215

 

 

542

 

 

589

 

Debit card interchange income

 

 

815

 

 

763

 

 

2,415

 

 

2,274

 

Gain on bank premises

 

 

(9)

 

 

 —

 

 

(9)

 

 

1,200

 

     Income from bank-owned life insurance

 

 

85

 

 

 —

 

 

176

 

 

 —

 

Other

 

 

91

 

 

88

 

 

267

 

 

239

 

Total other income

 

 

3,483

 

 

3,171

 

 

9,842

 

 

10,816

 

NON-INTEREST EXPENSE:

 

 

 

 

 

 

 

 

 

 

 

 

 

Salaries and employee benefits

 

 

4,776

 

 

4,592

 

 

13,986

 

 

13,545

 

Occupancy expenses

 

 

955

 

 

935

 

 

3,019

 

 

2,884

 

Repossession expenses, net

 

 

19

 

 

104

 

 

76

 

 

289

 

FDIC Insurance

 

 

80

 

 

86

 

 

236

 

 

274

 

Legal and professional fees

 

 

223

 

 

285

 

 

648

 

 

762

 

Data processing

 

 

456

 

 

409

 

 

1,388

 

 

1,309

 

Debit card expenses

 

 

453

 

 

486

 

 

1,319

 

 

1,304

 

Amortization expense of intangible assets, excluding mortgage servicing right

 

 

31

 

 

38

 

 

102

 

 

124

 

Advertising and marketing

 

 

218

 

 

212

 

 

658

 

 

636

 

Taxes other than payroll, property and income

 

 

312

 

 

304

 

 

937

 

 

904

 

Telephone

 

 

69

 

 

83

 

 

267

 

 

342

 

Postage

 

 

69

 

 

92

 

 

241

 

 

270

 

Loan fees

 

 

55

 

 

40

 

 

112

 

 

151

 

Other

 

 

801

 

 

669

 

 

2,402

 

 

2,276

 

Total other expenses

 

 

8,517

 

 

8,335

 

 

25,391

 

 

25,070

 

Income before income taxes

 

 

3,758

 

 

3,160

 

 

10,820

 

 

10,059

 

Provision for income taxes

 

 

480

 

 

568

 

 

1,326

 

 

1,920

 

Net income

 

$

3,278

 

$

2,592

 

$

9,494

 

$

8,139

 

Earnings per share

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic

 

$

1.10

 

$

0.87

 

$

3.19

 

$

2.74

 

Diluted

 

 

1.10

 

 

0.87

 

 

3.19

 

 

2.74

 

Dividends per share

 

 

0.31

 

 

0.29

 

 

0.93

 

 

0.87

 

See Accompanying Notes

4


 

Table of Contents

KENTUCKY BANCSHARES, INC.

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (unaudited)

(Dollar amounts in thousands)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended

 

 

Nine Months Ended

 

    

9/30/2018

    

9/30/2017

    

9/30/2018

    

9/30/2017

 

 

 

 

 

 

 

 

 

 

 

 

 

Net income

 

$

3,278

 

$

2,592

 

$

9,494

 

$

8,139

 

 

 

 

 

 

 

 

 

 

 

 

 

Other comprehensive income (loss)

 

 

 

 

 

 

 

 

 

 

 

 

Unrealized gains (losses) on securities arising during the period

 

 

(1,862)

 

 

(468)

 

 

(7,459)

 

 

2,862

Reclassification of realized amount

 

 

(66)

 

 

(60)

 

 

 8

 

 

(103)

Net change in unrealized gain (loss) on securities

 

 

(1,928)

 

 

(528)

 

 

(7,451)

 

 

2,759

Less: Tax impact

 

 

405

 

 

180

 

 

1,565

 

 

(938)

Other comprehensive income (loss)

 

 

(1,523)

 

 

(348)

 

 

(5,886)

 

 

1,821

 

 

 

 

 

 

 

 

 

 

 

 

 

Comprehensive income

 

$

1,755

 

$

2,244

 

$

3,608

 

$

9,960

See Accompanying Notes

 

 

 

5


 

Table of Contents

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’

 

 

 

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  5,223 shares, net of 497 shares forfeited, director stock grants of 981 shares and director stock options exercised of 600 shares)

 

6,804

 

 

64

 

 

 —

 

 

 —

 

 

64

 

Stock compensation expense

 

 —

 

 

135

 

 

 —

 

 

 —

 

 

135

 

Other comprehensive loss

 

 —

 

 

 —

 

 

 —

 

 

(5,886)

 

 

(5,886)

 

Net income

 

 —

 

 

 —

 

 

9,494

 

 

 —

 

 

9,494

 

Dividends declared - $0.93 per share

 

 —

 

 

 —

 

 

(2,771)

 

 

 —

 

 

(2,771)

 

Balances, September 30, 2018

 

2,978,326

 

$

21,130

 

$

87,118

 

$

(6,883)

 

$

101,365

 


(1)

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

 

See Accompanying Notes

 

 

6


 

Table of Contents

KENTUCKY BANCSHARES, INC.

CONSOLIDATED STATEMENT OF CASH FLOWS (unaudited)

(Dollar amounts in thousands)

 

 

 

 

 

 

 

 

    

Nine Months Ended

 

 

9/30/2018

    

9/30/2017

Cash Flows From Operating Activities

 

 

 

 

 

 

Net Income

 

$

9,494

 

$

8,139

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

 

 

 

 

 

 

Depreciation

 

 

939

 

 

893

Amortization (accretion), net

 

 

(338)

 

 

(379)

Securities amortization (accretion), net

 

 

669

 

 

794

Stock based compensation expense

 

 

135

 

 

121

Provision for loan losses

 

 

400

 

 

650

Securities losses (gains) available for sale gains, net

 

 

 8

 

 

(103)

Net change in trading assets

 

 

 —

 

 

(122)

Net increase in cash surrender value of bank-owned life insurance

 

 

(136)

 

 

 —

Originations of loans held for sale

 

 

(47,422)

 

 

(46,559)

Proceeds from sale of loans

 

 

46,245

 

 

47,423

Losses (gains) on sale of bank premises and equipment

 

 

 9

 

 

(1,200)

Losses (gains) on other real estate

 

 

(149)

 

 

(11)

Gain on sale of loans

 

 

(1,291)

 

 

(1,456)

Write-downs of other real estate, net

 

 

 —

 

 

141

Changes in:

 

 

 

 

 

 

Interest receivable

 

 

(187)

 

 

(70)

Other assets

 

 

(1,247)

 

 

 4

Interest payable

 

 

(20)

 

 

104

Deferred taxes

 

 

(2)

 

 

12

Other liabilities

 

 

341

 

 

(354)

Net cash from operating activities

 

 

7,448

 

 

8,027

Cash Flows From Investing Activities

 

 

 

 

 

 

Net change in interest bearing time deposits

 

 

(445)

 

 

3,199

Purchases of securities available for sale

 

 

(21,691)

 

 

(59,235)

Purchase of bank owned life insurance

 

 

(10,000)

 

 

 —

Proceeds from sales of securities available for sale

 

 

16,707

 

 

14,559

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

 

 

36,458

 

 

30,570

Net change in loans

 

 

(36,988)

 

 

5,048

Purchases of bank premises and equipment

 

 

(1,934)

 

 

(2,270)

Proceeds from the sale of bank premises and equipment

 

 

 —

 

 

2,062

Capitalized expenditures for other real estate

 

 

(74)

 

 

 —

Proceeds from the sale of other real estate

 

 

1,824

 

 

922

Net cash used in investing activities

 

 

(16,143)

 

 

(5,145)

Cash Flows From Financing Activities:

 

 

 

 

 

 

Net change in deposits

 

 

5,467

 

 

(54,602)

Net change in federal funds purchased

 

 

 —

 

 

17,302

Net change in repurchase agreements

 

 

(11,652)

 

 

3,197

Net change in short-term Federal Home Loan Bank advances

 

 

3,500

 

 

8,530

Proceeds from long-term Federal Home Loan Bank advances

 

 

16,394

 

 

13,000

Repayment of long-term Federal Home Loan Bank advances

 

 

(14,902)

 

 

(11,835)

Repayment of note payable

 

 

(480)

 

 

(328)

Proceeds from issuance of common stock

 

 

64

 

 

64

Purchase of common stock

 

 

 —

 

 

(263)

Dividends paid

 

 

(2,771)

 

 

(2,585)

Net cash (used in) from financing activities

 

 

(4,380)

 

 

(27,520)

Net change in cash and cash equivalents

 

 

(13,075)

 

 

(24,638)

Cash and cash equivalents at beginning of period

 

 

39,172

 

 

43,250

Cash and cash equivalents at end of period

 

$

26,097

 

$

18,612

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

 

 

 

 

 

 

Interest expense

 

$

4,762

 

$

3,612

        Income taxes

 

 

1,585

 

 

1,600

Supplemental disclosures of non-cash investing activities

 

 

 

 

 

 

     Securities transactions in process, payable

    

 

 —

 

 

7,642

     Real estate acquired through foreclosure

    

 

201

 

 

1,897

See Accompanying Notes

 

 

7


 

Table of Contents

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.

 

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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. ASU 2016-02 initially required a restatement of comparative financial statements from the earliest historical period presented to reflect consistent application of the rule in comparative historical periods but in July 2018 the FASB issued accounting standards update 2018-11, which provided an alternative transition method. Under the alternative transition method, provided in ASU 2018-11, the impact of applying the new lease accounting rules to comparative periods may be captured by a cumulative-effect adjustment to retained earnings in the initial period of adoption.  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, 2018, all leases in which Kentucky Bancshares was the lessee were classified as operating leases. The adoption of this standard will not have a material impact on the Company’s consolidated statements of income, balance sheet or regulatory capital 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.

 

 

 

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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.

 

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.

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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. There was no material impact to the Company’s financial statements related to thesce changes.

 

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.

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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.

 

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.

 

ASU 2018-07, Compensation – Stock Compensation (Topic 718):  Improvements to Nonemployee Share-Based Payment Accounting.  Issued in June 2018, the amendments in ASU 2018-07 to Topic 718, Compensation-Stock Compensation, are intended to align the accounting for share-based payment awards issued to employees and nonemployees.  Changes to the accounting for nonemployee awards include: 1) equity classified share-based payment awards issued to nonemployees will now be measured on the grant date, instead of the previous requirement to remeasure the awards through the performance completion date; 2) for performance conditions, compensation cost associated with the award will be recognized when achievement of the performance condition is probable, rather than upon achievement of the performance condition; and 3) the current requirement to reassess the classification (equity or liability) for nonemployee awards upon vesting will be eliminated, except for awards in the form of convertible instruments.  The new guidance also clarifies that any share-based payment awards issued to customers should be evaluated under ASC 606, Revenue from Contracts with Customers. The amendments in this ASU are effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2018.  

 

The Company's share-based payment awards to nonemployees consist only of grants made to the Company's Board of Directors as compensation solely related to the individual's role as a Director.  As such, in accordance with ASC 718, the Company accounts for these share-based payment awards to its Directors in the same manner as share-based payment awards for its employees.  Accordingly, the amendments in this guidance will not have an effect on the accounting for the Company's share-based payment awards to its Directors.

 

ASU 2018-09, Codification Improvements.  Issued in July 2018, the amendments in ASU 2018-09 are intended to clarify or correct unintended guidance in the FASB Codification and affect a wide variety of Topics in the Codification.  The topics that are applicable to the Company include: 1) debt modifications and extinguishments and 2) stock compensation.  For debt modifications and extinguishments, the amendment clarifies that, in an early extinguishment of debt for which the fair value option has been elected, the net carrying amount of the extinguished debt is equal to its fair value at the reacquisition date, and upon extinguishment, the cumulative amount of the gain or loss on the extinguished debt that resulted from changes in instrument-specific credit risk should be presented in net income.  The Company has subordinated debentures.  Accordingly, if in the future, the Company chooses to repay this debt prior to its contractual maturity, this amendment would be applicable.  For stock compensation, the amendment clarifies that excess tax benefits or tax deficiencies should be recognized in the period in which the amount of the tax deduction is determined, which is typically when an award is exercised (in the case of stock options) or vests (in the case of non-vested stock grants or awards).  The Company already records excess tax benefits or tax deficiencies in the periods in which the tax deduction is determined.  Therefore, this amendment will not have an effect on the Company's accounting for excess tax benefits or tax deficiencies.

 

 

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ASU 2018-13, Fair Value Measurement (Topic 820): Disclosure Framework – Changes to the Disclosure Requirements for Fair Value Measurement.  The updated guidance improves the disclosure requirements on fair value measurements.  The ASU removes certain disclosures required by Topic 820 related to transfers between Level 1 and Level 2 of the fair value hierarchy; the policy for timing of transfers between levels; the valuation processes for Level 3 fair value measurements; and for nonpublic entities, the changes in unrealized gains and losses for the period included in earnings for recurring Level 3 fair value measurements held at the end of the reporting period. 

 

The ASU modifies certain disclosures required by Topic 820 related to disclosure of transfers into and out of Level 3 of the fair value hierarchy and purchases and issues of Level 3 assets and liabilities for nonpublic entities; the requirement to disclose the timing of liquidation of an investee’s assets and the date when restrictions from redemption might lapse only if the investee has communicated the timing to the entity or announced the timing publicly for investments in certain entities that calculate net asset value; and clarification that the measurement uncertainty disclosure is to communicate information about the uncertainty in measurement as of the reporting date.  The ASU adds certain disclosure requirements related to changes in unrealized gains and losses for the period included in other comprehensive income for recurring Level 3 fair value measurements held at the end of the reporting period and the range and weighted average of significant unobservable inputs used to develop Level 3 fair value measurements.  For certain unobservable inputs, an entity may disclose other quantitative information in lieu of the weighted average if the entity determines that other quantitative information would be a more reasonable and rational method to reflect the distribution of unobservable inputs used to develop Level 3 fair value measurements.  The amendments in this update become effective for fiscal years, and interim periods within those fiscal years beginning after December 15, 2019.  Early adoption is permitted.  The Company is currently evaluating the impact of adopting the new guidance on the consolidated financial statements, but it is not expected to have a material impact.

 

 

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, 2018

 

 

 

 

 

 

 

 

 

 

 

 

 

     U.S. treasury notes

 

$

4,036

 

$

 —

 

$

(96)

 

$

3,940

 

U. S. government agencies

 

 

32,443

 

 

369

 

 

(891)

 

 

31,921

 

States and political subdivisions

 

 

71,790

 

 

416

 

 

(1,251)

 

 

70,955

 

Mortgage-backed - residential

 

 

132,966

 

 

 8

 

 

(6,268)

 

 

126,706

 

Mortgage-backed - commercial

 

 

45,784

 

 

 —

 

 

(1,012)

 

 

44,772

 

Equity securities

 

 

270

 

 

11

 

 

 —

 

 

281

 

Total

 

$

287,289

 

$

804

 

$

(9,518)

 

$

278,575

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

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

 

 

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

 

$

 —

 

$

 —

 

Due after one year through five years

 

 

32,945

 

 

32,734

 

Due after five years through ten years

 

 

23,297

 

 

22,868

 

Due after ten years

 

 

52,027

 

 

51,214

 

 

 

 

108,269

 

 

106,816

 

Mortgage-backed - residential

 

 

132,966

 

 

126,706

 

Mortgage-backed - commercial

 

 

45,784

 

 

44,772

 

Equity

 

 

270

 

 

281

 

Total

 

$

287,289

 

$

278,575

 

 

Proceeds from sales of securities during the first nine months of 2018 and 2017 were $16.7 million and $14.6 million.  Gross gains of $138 thousand and $105 thousand and gross losses of $146 thousand and $2 thousand were realized on those sales, respectively.  The tax provision related to these realized net gains or losses was $(2) thousand and $35 thousand, respectively. 

 

Proceeds from sales of securities during the three months ended September 30, 2018 and September 30, 2017 were $2.0 million and $10.5 million.  Gross gains of $72 thousand and $60 thousand and gross losses of $6 thousand and $0 were realized on those sales, respectively.  The tax provision related to these realized net gains or losses was $(1) thousand and $20 thousand, respectively. 

 

Securities with unrealized losses at September 30, 2018 and at December 31, 2017 not recognized in income are as follows:

 

September 30, 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

 

$

3,940

 

$

(96)

 

$

 —

 

$

 —

 

$

3,940

 

$

(96)

 

U.S. government agencies

 

 

17,730

 

 

(362)

 

 

14,191

 

 

(529)

 

 

31,921

 

 

(891)

 

States and municipals

 

 

62,866

 

 

(924)

 

 

8,089

 

 

(327)

 

 

70,955

 

 

(1,251)

 

Mortgage-backed - residential

 

 

52,283

 

 

(2,342)

 

 

74,423

 

 

(3,926)

 

 

126,706

 

 

(6,268)

 

Mortgage-backed - commercial

 

 

21,483

 

 

(72)

 

 

23,289

 

 

(940)

 

 

44,772

 

 

(1,012)

 

Total temporarily impaired

 

$

158,302

 

$

(3,796)

 

$

119,992

 

$

(5,722)

 

$

278,294

 

$

(9,518)

 

 

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

 

$