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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 March 31, 2019

 

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 ☒

 

Securities registered pursuant to Section 12(b) of the Act:

 

 

 

Title of each class

Trading Symbol(s)

Name of each exchange on which registered

Common Stock

KTYB

OTCQX

 

Number of shares of Common Stock outstanding as of April 30, 2019:  5,981,326.

 

 

 

 


 

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 

36

 

 

 

Item 3. Quantitative and Qualitative Disclosures About Market Risk 

44

 

 

 

Item 4. Controls and Procedures 

45

 

 

 

Part II - Other Information 

46

 

 

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

46

 

 

 

Item 6. Exhibits 

47

 

 

 

Signatures 

48

 

 

 

 

2


 

Table of Contents

Item 1 – Financial Statements

KENTUCKY BANCSHARES, INC.

CONSOLIDATED BALANCE SHEETS (unaudited)

(Dollar amounts in thousands except per share data)

 

 

 

 

 

 

 

 

 

    

3/31/2019

    

12/31/2018

 

ASSETS

 

 

 

 

 

 

 

Cash and due from banks

 

$

37,676

 

$

25,835

 

Federal funds sold

 

 

230

 

 

266

 

Cash and cash equivalents

 

 

37,906

 

 

26,101

 

Interest bearing time deposits

 

 

2,175

 

 

2,175

 

Securities available for sale

 

 

297,969

 

 

315,369

 

Loans held for sale

 

 

1,282

 

 

1,203

 

Loans

 

 

687,484

 

 

686,144

 

Allowance for loan losses

 

 

(7,882)

 

 

(8,127)

 

Net loans

 

 

679,602

 

 

678,017

 

Federal Home Loan Bank stock

 

 

7,034

 

 

7,034

 

Real estate owned, net

 

 

852

 

 

830

 

Bank premises and equipment, net

 

 

17,332

 

 

17,349

 

Interest receivable

 

 

4,177

 

 

4,150

 

Mortgage servicing rights

 

 

1,483

 

 

1,536

 

Goodwill

 

 

14,001

 

 

14,001

 

Other intangible assets

 

 

210

 

 

238

 

  Bank owned life insurance

 

 

10,282

 

 

10,198

 

  Operating lease right of use asset

 

 

6,262

 

 

 —

 

Other assets

 

 

6,406

 

 

7,811

 

Total assets

 

$

1,086,973

 

$

1,086,012

 

 

 

 

 

 

 

 

 

LIABILITIES AND STOCKHOLDERS’ EQUITY

 

 

 

 

 

 

 

Deposits

 

 

 

 

 

 

 

Non-interest bearing

 

$

241,400

 

$

231,429

 

Time deposits, $250,000 and over

 

 

44,631

 

 

59,736

 

Other interest bearing

 

 

558,107

 

 

559,277

 

Total deposits

 

 

844,138

 

 

850,442

 

Repurchase agreements

 

 

6,604

 

 

8,077

 

Short-term Federal Home Loan Bank advances

 

 

11,400

 

 

11,600

 

Long-term Federal Home Loan Bank advances

 

 

90,347

 

 

88,852

 

Note payable

 

 

2,592

 

 

2,718

 

Subordinated debentures

 

 

7,217

 

 

7,217

 

Interest payable

 

 

902

 

 

893

 

Operating lease liability

 

 

6,262

 

 

 —

 

Other liabilities

 

 

5,802

 

 

9,420

 

Total liabilities

 

 

975,264

 

 

979,219

 

 

 

 

 

 

 

 

 

Stockholders’ equity

 

 

 

 

 

 

 

Preferred stock, 300,000 shares authorized and unissued

 

 

 —

 

 

 —

 

Common stock, no par value; 10,000,000 shares authorized; 5,981,326 and 5,955,242 shares issued and outstanding at March 31, 2019 and December 31, 2018

 

 

21,521

 

 

21,170

 

Retained earnings

 

 

90,897

 

 

89,101

 

Accumulated other comprehensive loss

 

 

(709)

 

 

(3,478)

 

Total stockholders’ equity

 

 

111,709

 

 

106,793

 

Total liabilities and stockholders’ equity

 

$

1,086,973

 

$

1,086,012

 

 

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

 

 

    

3/31/2019

    

3/31/2018

 

INTEREST INCOME:

 

 

 

 

 

 

 

Loans, including fees

 

$

8,800

 

$

8,012

 

Securities

 

 

 

 

 

 

 

Taxable

 

 

1,829

 

 

1,502

 

Tax exempt

 

 

333

 

 

513

 

Other

 

 

217

 

 

193

 

Total interest income

 

 

11,179

 

 

10,220

 

INTEREST EXPENSE:

 

 

 

 

 

 

 

Deposits

 

 

1,537

 

 

847

 

Repurchase agreements and federal funds purchased

 

 

24

 

 

23

 

Federal Home Loan Bank advances

 

 

543

 

 

435

 

Note payable

 

 

34

 

 

36

 

Subordinated debentures

 

 

102

 

 

85

 

Total interest expense

 

 

2,240

 

 

1,426

 

Net interest income

 

 

8,939

 

 

8,794

 

Provision for loan losses

 

 

125

 

 

 —

 

Net interest income after provision

 

 

8,814

 

 

8,794

 

NON-INTEREST INCOME:

 

 

 

 

 

 

 

Service charges

 

 

1,194

 

 

1,288

 

Loan service fee income, net

 

 

73

 

 

52

 

Trust department income

 

 

328

 

 

315

 

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

 

 

94

 

 

(44)

 

Gain on sale of loans

 

 

207

 

 

374

 

Brokerage income

 

 

136

 

 

209

 

Debit card interchange income

 

 

790

 

 

763

 

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

 

 

86

 

 

 7

 

Other

 

 

92

 

 

87

 

Total other income

 

 

3,000

 

 

3,051

 

NON-INTEREST EXPENSE:

 

 

 

 

 

 

 

Salaries and employee benefits

 

 

4,690

 

 

4,493

 

Occupancy expenses

 

 

981

 

 

980

 

Repossession expenses, net

 

 

53

 

 

15

 

FDIC Insurance

 

 

77

 

 

79

 

Legal and professional fees

 

 

216

 

 

229

 

Data processing

 

 

601

 

 

469

 

Debit card expenses

 

 

530

 

 

434

 

Amortization expense of intangible assets, excluding mortgage servicing right

 

 

29

 

 

36

 

Advertising and marketing

 

 

234

 

 

219

 

Taxes other than payroll, property and income

 

 

324

 

 

312

 

Telephone

 

 

127

 

 

79

 

Postage

 

 

31

 

 

85

 

Loan fees

 

 

25

 

 

40

 

Other

 

 

847

 

 

820

 

Total other expenses

 

 

8,765

 

 

8,290

 

Income before income taxes

 

 

3,049

 

 

3,555

 

Provision for income taxes

 

 

238

 

 

407

 

Net income

 

$

2,811

 

$

3,148

 

Earnings per share

 

 

 

 

 

 

 

Basic

 

$

0.47

 

$

0.53

 

Diluted

 

 

0.47

 

 

0.53

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

See Accompanying Notes

4


 

Table of Contents

KENTUCKY BANCSHARES, INC.

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (unaudited)

(Dollar amounts in thousands)

 

 

 

 

 

 

 

 

 

Three Months Ended

 

3/31/2019

    

3/31/2018

Net income

$

2,811

 

$

3,148

 

 

 

 

 

 

Other comprehensive income (loss)

 

 

 

 

 

Unrealized gains (losses) on securities arising during the period

 

3,599

 

 

(4,344)

Reclassification of realized amount

 

(94)

 

 

44

Net change in unrealized gain (loss) on securities

 

3,505

 

 

(4,300)

Less: Tax impact

 

(736)

 

 

903

Other comprehensive income (loss)

 

2,769

 

 

(3,397)

 

 

 

 

 

 

Comprehensive income (loss)

$

5,580

 

$

(249)

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

 

5,943,044

 

$

20,931

 

$

80,395

 

$

(997)

 

$

100,329

 

Common stock issued (employee stock grants of 10,674 shares, net of 766 shares forfeited, director stock awards of 1,962 shares and director stock options exercised of 1,200 shares)

 

13,836

 

 

64

 

 

 —

 

 

 —

 

 

64

 

Stock compensation expense

 

 —

 

 

45

 

 

 —

 

 

 —

 

 

45

 

Other comprehensive loss

 

 —

 

 

 —

 

 

 —

 

 

(3,397)

 

 

(3,397)

 

Net income

 

 —

 

 

 —

 

 

3,148

 

 

 —

 

 

3,148

 

Dividends declared - $0.155 per share

 

 —

 

 

 —

 

 

(923)

 

 

 —

 

 

(923)

 

Balances, March 31, 2018

 

5,956,880

 

$

21,040

 

$

82,620

 

$

(4,394)

 

$

99,266

 


(1)

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

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

    

    

    

 

 

 

    

Accumulated

    

 

 

 

 

 

 

 

 

 

 

 

 

Other

 

Total

 

 

 

Common Stock

 

Retained

 

Comprehensive

 

Stockholders’

 

 

 

Shares

 

Amount

 

Earnings

 

Loss

 

Equity

 

Balances, December 31, 2018

 

5,955,242

 

$

21,170

 

$

89,101

 

$

(3,478)

 

$

106,793

 

Common stock issued (employee stock grants of 23,260 shares, net of 120 shares forfeited, and director stock grants of 2,824 shares)

 

26,084

 

 

295

 

 

 —

 

 

 —

 

 

295

 

Stock compensation expense

 

 —

 

 

56

 

 

 —

 

 

 —

 

 

56

 

Other comprehensive loss

 

 —

 

 

 —

 

 

 —

 

 

2,769

 

 

2,769

 

Net income

 

 —

 

 

 —

 

 

2,811

 

 

 —

 

 

2,811

 

Dividends declared - $0.170 per share

 

 —

 

 

 —

 

 

(1,015)

 

 

 —

 

 

(1,015)

 

Balances, March 31, 2019

 

5,981,326

 

$

21,521

 

$

90,897

 

$

(709)

 

$

111,709

 


(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)

 

 

 

 

 

 

 

 

    

Three Months Ended

 

 

3/31/2019

    

3/31/2018

Cash Flows From Operating Activities

 

 

 

 

 

 

Net Income

 

$

2,811

 

$

3,148

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

 

 

 

 

 

 

Depreciation

 

 

300

 

 

299

Amortization (accretion), net

 

 

(31)

 

 

(133)

Securities amortization (accretion), net

 

 

174

 

 

232

Stock based compensation expense

 

 

56

 

 

45

Provision for loan losses

 

 

125

 

 

 —

Securities losses (gains) available for sale gains, net

 

 

(94)

 

 

44

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

 

 

(84)

 

 

(7)

Originations of loans held for sale

 

 

(8,435)

 

 

(11,343)

Proceeds from sale of loans

 

 

8,563

 

 

11,727

Gain on sale of loans

 

 

(207)

 

 

(374)

Losses (gains) on other real estate

 

 

 —

 

 

(1)

Write-downs of other real estate, net

 

 

38

 

 

 —

Changes in:

 

 

 

 

 

 

Interest receivable

 

 

(27)

 

 

142

Other assets

 

 

664

 

 

21

Interest payable

 

 

 9

 

 

(197)

Deferred taxes

 

 

 5

 

 

(45)

Other liabilities

 

 

      (3,618)

 

 

(2,342)

Net cash from operating activities

 

 

249

 

 

1,216

Cash Flows From Investing Activities

 

 

 

 

 

 

Net change in interest bearing time deposits

 

 

 —

 

 

45

Purchases of securities available for sale

 

 

(8,022)

 

 

(9,599)

Purchase of bank owned life insurance

 

 

 —

 

 

(10,000)

Proceeds from sales of securities available for sale

 

 

16,318

 

 

3,922

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

 

 

12,529

 

 

13,280

Net change in loans

 

 

(1,670)

 

 

(1,013)

Purchases of bank premises and equipment

 

 

(283)

 

 

(1,053)

Capitalized expenditures for other real estate

 

 

 —

 

 

(74)

Proceeds from the sale of other real estate

 

 

12

 

 

203

Net cash used in investing activities

 

 

18,884

 

 

(4,289)

Cash Flows From Financing Activities:

 

 

 

 

 

 

Net change in deposits

 

 

(6,304)

 

 

1,469

Net change in repurchase agreements

 

 

(1,473)

 

 

(7,667)

Net change in short-term Federal Home Loan Bank advances

 

 

(200)

 

 

(200)

Proceeds from long-term Federal Home Loan Bank advances

 

 

5,000

 

 

 —

Repayment of long-term Federal Home Loan Bank advances

 

 

(3,505)

 

 

(1,820)

Repayment of note payable

 

 

(126)

 

 

(237)

Proceeds from issuance of common stock

 

 

295

 

 

64

Dividends paid

 

 

(1,015)

 

 

(923)

Net cash (used in) from financing activities

 

 

(7,328)

 

 

(9,314)

Net change in cash and cash equivalents

 

 

11,805

 

 

(12,387)

Cash and cash equivalents at beginning of period

 

 

26,101

 

 

39,172

Cash and cash equivalents at end of period

 

$

37,906

 

$

26,785

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

 

 

 

 

 

 

Interest expense

 

$

2,231

 

$

1,623

Supplemental disclosures of non-cash investing activities

 

 

 

 

 

 

     Real estate acquired through foreclosure

    

 

72

 

 

 —

     In conjunction with the adoption of ASU 2016-02, as detailed in Note 10 of the unaudited consolidated

       financial statements, an operating lease asset and a related lease liability was recognized

 

 

6,262

 

 

 —

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, 2018. 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, 2018.

 

Basis of Presentation:  The consolidated financial statements include the accounts of Kentucky Bancshares, Inc. (the Company), its wholly-owned subsidiaries, Kentucky Bank (the Bank) and KBI Insurance Company, Inc., a captive insurance subsidiary, and the Bank’s wholly-owned subsidiary, KB Special Assets Unit, LLC.  Intercompany transactions and balances have been eliminated in consolidation.

 

Nature of Operations:  The Bank operates under a state bank charter and provides full banking services, including trust services, to customers located in Bourbon, Clark, Elliot, Fayette, Harrison, Jessamine, Madison, Rowan, Scott, Woodford and adjoining counties in Kentucky.  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., a captive insurance subsidiary, is regulated by the State of Nevada Division of Insurance.

 

Subsequent Events:  The Company has evaluated subsequent events for recognition and disclosure through May 10, 2019 which is the date the financial statements were available to be issued.

 

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. 

 

Cash Flows:  For purposes of reporting cash flows, cash and cash equivalents include cash on hand, amounts due from banks, federal funds sold, and certain short-term investments with maturities of less than three months.  Generally, federal funds are sold for one-day periods.  Net cash flows are reported for loan, deposit and short-term borrowing transactions.

 

Interest Bearing Time Deposits: Interest bearing time deposits in other financial institutions have original maturities between one and three years and are carried at cost.

 

Securities:  The Company is required to classify its securities portfolio into one of three categories:  trading securities, securities available for sale and securities held to maturity.  Fair value adjustments are made to the securities based on their classification with the exception of the held to maturity category.  The Company has no investments classified as trading securities or held to maturity.  Securities available for sale are carried at fair value. Unrealized holding gains and losses for securities which are classified as available for sale are reported in other comprehensive income, net of deferred tax. 

 

 

 

 

8


 

Table of Contents

Interest income includes amortization of purchase premium or discount.  Premiums and discounts on securities are amortized on the level-yield method without anticipating prepayments, except for mortgage backed securities where prepayments are anticipated.  Premiums on purchased callable debt securities are amortized to the earliest call date.  Gains and losses on sales are recorded on the settlement date and determined using the specific identification method.

 

On January 1st, 2018, the Company adopted the new accounting standard for Financial Instruments, which requires equity investments to be measured at fair value with changes in fair value recognized in net income.  Equity investments are included in other assets with changes in fair value recorded in other income. 

 

Management evaluates securities for other-than-temporary impairment (“OTTI”) at least on a quarterly basis, and more frequently when economic or market conditions warrant such an evaluation.  For securities in an unrealized loss position, management considers the extent and duration of the unrealized loss, and the financial condition and near-term prospects of the issuer.  Management also assesses whether it intends to sell, or it is more likely than not that it will be required to sell, a security in an unrealized loss position before recovery of its amortized cost basis.  If either of the criteria regarding intent or requirement to sell is met, the entire difference between amortized cost and fair value is recognized as impairment through earnings.

 

For debt securities that do not meet the aforementioned criteria, the amount of impairment is split into two components as follows: 1) OTTI related to credit loss, which must be recognized in the income statement and 2) OTTI related to other factors, which is recognized in other comprehensive income.  The credit loss is defined as the difference between the present value of the cash flows expected to be collected and the amortized cost basis. 

 

Loans Held for Sale:  Loans held for sale are carried at the lower of cost or fair value as determined by outstanding commitments from investors or current secondary market prices, calculated on the aggregate loan basis.  The Company also provides for any losses on uncovered commitments to lend or sell.  The Company sells loans with servicing rights retained and also with servicing rights released.

 

Loans:  Loans that management has the intent and ability to hold for the foreseeable future or until maturity are stated at the amount of unpaid principal, net of deferred loan origination fees and costs and acquired purchase premiums and discounts, reduced by an allowance for loan losses.  Interest income on loans is recognized  on the accrual basis except for those loans on a nonaccrual status.  Interest income on real estate mortgage (1-4 family residential and multi-family residential) and consumer loans is discontinued at the time the loan is 90 days delinquent, and interest income on real estate construction, non-farm and non-residential mortgage, agricultural and commercial loans is discontinued at the time the loan is 120 days delinquent, unless the loan is well-secured and in process of collection.  Past due status is based on the contractual terms of the loan.  In all cases, loans are placed on nonaccrual or charged-off at an earlier date if collection of principal or interest is considered doubtful.  Nonaccrual loans and loans past due 90 days still on accrual include both smaller balance homogeneous loans that are collectively evaluated for impairment and individually classified impaired loans.  Loan origination fees and certain direct origination costs are capitalized and recognized as an adjustment of the yield on the related loan.  Recorded investment is the outstanding loan balance, excluding accrued interest receivable.

 

When interest accrual is discontinued, interest income received on such loans is accounted for on the cash-basis or cost-recovery method, until qualifying for return to accrual.  Loans are returned to accrual status when all the principal and interest amounts contractually due are brought current and future payments are reasonably assured.  Typically, the Company seeks to establish a payment history of at least six consecutive payments made on a timely basis before returning a loan to accrual status.  Consumer and credit card loans are typically charged off no later than 120 days past due.  Loans are placed on nonaccrual or charged-off at an earlier date if collection of principal or interest is considered doubtful.

 

Concentration of Credit Risk:  Most of the Company’s business activity is with customers located within Bourbon, Clark, Elliott, Fayette, Harrison, Jessamine, Madison, Rowan, Scott, Woodford and surrounding counties located in Kentucky.  Therefore, the Company’s exposure to credit risk is significantly affected by changes in the economy in these counties.

 

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Allowance for Loan Losses:  The allowance for loan losses is a valuation allowance for probable incurred credit losses.  Loan losses are charged against the allowance when management believes the uncollectibility of a loan balance is confirmed.  Subsequent recoveries, if any, are credited to the allowance.

 

Adjustments are made to the historical loss experience ratios based on the qualitative factors as outlined in the regulatory Interagency Policy Statement on the Allowance for Loan and Lease Losses.  These qualitative factors include the nature and volume of portfolio, economic and business conditions, classification, past due and non-accrual trends.  Management estimates the allowance balance required using past loan loss experience, the nature and volume of the portfolio, information about specific borrower situations and estimated collateral values, economic conditions, and other factors.  Allocations of the allowance may be made for specific loans, but the entire allowance is available for any loan that, in management’s judgment, should be charged off.

 

The allowance for loan losses is evaluated at the portfolio segment level using the same methodology for each segment.  The recent historical actual net losses is the basis for the general reserve for each segment which is then adjusted for qualitative factors as outlined above (i.e., nature and volume of portfolio, economic and business conditions, classification, past due and non-accrual trends) specifically evaluated at individual segment levels.

 

The allowance consists of specific and general components.  The specific component relates to loans that are individually classified as impaired.  The general component covers non-classified loans and is based on historical loss experience adjusted for current factors for non-classified loans and a migration analysis for classified loans.

 

A loan is impaired when, based on current information and events, it is probable that the Company will be unable to collect all amounts due according to the contractual terms of the loan agreement.  Loans, for which the terms have been modified, and for which the borrower is experiencing financial difficulties and has been granted a concession, are considered troubled debt restructurings and classified as impaired.

 

Loans are charged off when available information confirms that loans, or portions thereof, are uncollectible.  While management considers the number of days a loan is past due in its evaluation process, we also consider a variety of other factors.

 

Factors considered by management in evaluating the charge-off decision include collateral value, availability of current financial information for both borrower and guarantor, and the probability of collecting contractual principal and interest payments.  These considerations may result in loans being charged off before they are 90 days or more past due.  This evaluation framework for determining charge-offs is consistently applied to each segment. 

 

From time to time, the Company will charge-off a portion of impaired and non-performing loans.  Loans that meet the criteria under ASC 310 are evaluated individually for impairment.  Management considers payment status, collateral value, availability of current financial information for the borrower and guarantor, actual and expected cash flows, and probability of collecting amounts due.  If a loan’s collection status is deemed to be collateral dependent or foreclosure is imminent, the loan is charged down to the fair value of the collateral, less selling costs.  In circumstances where the loan is not deemed to be collateral dependent, but we believe, after completing our evaluation process, that probable loss has been incurred, we will provide a specific allocation on that loan.

 

The impact of recording partial charge-offs is a reduction of gross loans and a reduction of the loan loss reserve.  The net loan balance is unchanged in instances where the loan had a specific allocation as a component of the allowance for loan losses.  The allowance as a percentage of total loans may be lower as the allowance no longer needs to include a component for the loss, which has now been recorded, and net charge-off amounts are increased as partial charge-offs are recorded.

 

 

 

 

 

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Factors considered by management in determining impairment include payment status, collateral value, and the probability of collecting scheduled principal and interest payments when due.  Loans that experience insignificant payment delays and payment shortfalls generally are not classified as impaired.  Management determines the significance of payment delays and payment shortfalls on case-by-case basis, taking into consideration all of the circumstances surrounding the loan and the borrower, including the length of the delay, the reasons for the delay, the borrower’s prior payment record, and the amount of the shortfall in relation to the principal and interest owed.

 

Commercial and real estate construction and real estate mortgage loans (multi-family residential, and non-farm and non-residential mortgage) over $200 thousand are individually evaluated for impairment.  If a loan is impaired, a portion of the allowance is allocated so that the loan is reported, net, at the present value of estimated future cash flows using the loan’s existing rate or at the fair value of collateral if repayment is expected solely from the collateral.  Large groups of smaller balance homogeneous loans, such as consumer and 1-4 family residential real estate loans, are collectively evaluated for impairment, and accordingly, they are not separately identified for impairment disclosures.  Troubled debt restructurings are separately identified for impairment disclosures and are measured at the present value of estimated future cash flows using the loan’s effective rate at inception.    If a troubled debt restructuring is considered to be a collateral dependent loan, the loan is reported, net, at the fair value of the collateral. For troubled debt restructurings that subsequently default, the Company determines the amount of reserve in accordance with the accounting policy for the allowance for loan losses.

 

The general component covers non-impaired loans and is based on historical loss experience adjusted for current factors.  The historical loss experience is determined by portfolio segment and is based on the actual loss history experienced by the Company over the most recent 5 years.  This actual loss experience is supplemented with other economic factors based on the risks present for each portfolio segment.  These economic factors include consideration of the following:  levels of and trends in delinquencies and impaired loans; levels of and trends in charge-offs and recoveries; trends in volume and terms of loans; effects of any changes in risk selection and underwriting standards; other changes in lending policies, procedures, and practices; experience, ability, and depth of lending management and other relevant staff; national and local economic trends and conditions; industry conditions; and effects of changes in credit concentrations.

 

A “portfolio segment” is defined as the level at which an entity develops and documents a systematic methodology to determine its allowance for loan losses.  The Company has identified the following portfolio segments:  commercial, real estate construction, real estate mortgage, agricultural, consumer (credit cards and other consumer) and other (overdrafts).

 

Commercial:  These loans to businesses do not have real estate as the underlying collateral.  Instead of real estate, collateral could be business assets such as equipment or accounts receivable or the personal guarantee of one or more guarantors.  These loans generally present a higher level of risk than loans secured by commercial real estate because in the event of default by the borrower, the business assets must be liquidated and/or guarantors pursued for deficit funds.  Business assets are worth more while they are in use to produce income for the business and worth significantly less if the business is no longer in operation.  Within the commercial portfolio, risk analysis is performed primarily based on the individual loan type.

 

Real estate construction:  Real estate construction consists of loans secured by real estate for additions or alterations to existing structures, as well as constructing new structures.  They include fixed and floating rate loans.  Real estate construction loans generally present a higher level of risk than loans secured by 1-4 family residential real estate primarily because of the length of the construction period, potential change in prices of construction, the incomplete status of the collateral and economic cycles.  Because of these factors, real estate construction loans generally have higher qualitative adjustments.

 

 

 

 

 

 

 

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Real Estate Mortgage:

 

1-4 family residential:  Loans secured by 1-4 family residential real estate represent the lowest risk of loans for the Company.  They include fixed and floating rate loans as well as loans for commercial purposes or consumer purposes.  The Company generally does not hold subprime residential mortgages. Borrowers with loans in this category, whether for commercial or consumer purposes, tend to make their payments timely as they do not want to risk foreclosure and loss of property.

 

Multifamily residential:  Loans secured by multifamily residential real estate consist primarily of loans secured by apartment buildings and can be either fixed or floating rate loans.  Multi-family residential real estate loans generally present a higher level of risk than loans secured by 1-4 family residential real estate because the borrower’s repayment ability typically comes from rents from tenants.  Local economic and employment fluctuations impact rent rolls and potentially the borrower’s repayment ability.

Non-farm & non-residential:  Loans secured by non-farm non-residential real estate consist of loans secured by commercial real estate that is not owner occupied.  These loans generally consist of loans collateralized by property whereby rents received from commercial tenants of the borrower are the source of repayment.   These loans generally present a higher level of risk than loans secured by owner occupied commercial real estate because repayment risk is expanded to be dependent on the success of multiple businesses which are paying rent to the borrower.  If multiple businesses fail due to deteriorating economic conditions or poor business management skills, the borrower may not have enough rents to cover their monthly payment.  Repayment risk is also increased depending on the level of surplus available commercial lease space in the local market area.

 

Agricultural:  These loans to agricultural businesses do not have real estate as the underlying collateral.  Instead of real estate, collateral could be assets such as equipment or accounts receivable or the personal guarantee of one or more guarantors.  These loans generally present a higher level of risk than loans secured by real estate because in the event of default by the borrower, the assets must be liquidated and/or guarantors pursued for deficit funds.  Farm assets are worth more while they are in use to produce income and worth significantly less if the farm is no longer in operation.

 

Consumer:  Consumer loans are generally loans to borrowers for non-business purposes.  They can be either secured or unsecured.  Consumer loans are generally small in the individual amount of principal outstanding and are repaid from the borrower’s private funds earned from employment.  Consumer lending risk is very susceptible to local economic trends.

 

If there is a consumer loan default, any collateral that may be repossessed is generally not well maintained and has a diminished value.  For this reason, consumer loans tend to have higher overall interest rates to cover the higher cost of repossession and charge-offs.  However, due to their smaller average balance per borrower, consumer loans are collectively evaluated for impairment in determining the appropriate allowance for loan losses.

 

Other:  All other loan types are aggregated together for credit risk evaluation due to the varying nature but small number of the remaining types of loans in the Company’s loan portfolio.  Loans in this segment include but are not limited to overdrafts.  Due to their smaller balance, other loans are collectively evaluated for impairment in determining the appropriate allowance for loan losses.

 

Due to the overall high level of real estate mortgage loans within the loan portfolio as a whole, as compared to other portfolio segments, for risk assessment and allowance purposes this segment was segregated into more granular pools by collateral property type. 

 

The non-farm non-residential and the multi-family real estate mortgage loan portfolio segments had the next highest level of qualitative adjustments due to the effects of local markets and economies on the underlying collateral property values, as well as for industry concentrations and risks related to the this type of property. 

 

Mortgage Servicing Rights:  The Bank has sold certain residential mortgage loans to the Federal Home Loan Mortgage Corporation (FHLMC) while retaining the servicing rights.

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Servicing rights are recognized separately when they are acquired through sales of loans.  When mortgage loans are sold, servicing rights are initially recorded at fair value with the income statement effect recorded in gain on sale of mortgage loans.  Fair value is based on market prices for comparable mortgage servicing contracts, when available, or alternatively, is based on a valuation model that calculates the present value of estimated future net servicing income.  The valuation model incorporates assumptions that market participants would use in estimating future net servicing income, such as the cost to service, the discount rate, the custodial earnings rate, an inflation rate, ancillary income, prepayment speeds and default rates and losses.  All classes of servicing assets are subsequently measured using the amortization method which requires servicing rights to be amortized into loan service fee income, net, included in non-interest income in proportion to, and over the period of, the estimated future net servicing income of the underlying loans.

 

Servicing assets are evaluated for impairment based upon the fair value of the rights as compared to carrying amount.  Impairment is determined by stratifying rights into groupings based on predominant risk characteristics, such as interest rate, loan type and investor type.  Impairment is recognized through a valuation allowance for an individual grouping, to the extent that fair value is less than the carrying amount.  If the Company later determines that all or a portion of the impairment no longer exists for a particular grouping, a reduction of the allowance may be recorded as an increase to income.  The fair values of servicing rights are subject to significant fluctuations as a result of changes in estimated and actual prepayment speeds and default rates and losses.

 

Servicing fee income, which is reported on the income statement as loan service income, net, is recorded for fees earned for servicing loans.  The fees are based on a contractual percentage of the outstanding principal or a fixed amount per loan and are recorded as income when earned.  The amortization of mortgage servicing rights and valuation allowance are netted against loan servicing fee income.  Servicing fees totaled $134 thousand for the three months ended March 31, 2019 compared to $125 thousand for the first three months of 2018. Servicing fees are included in loan service fee income in the income statement.  Late fees and ancillary fees related to loan servicing are not material.

 

Federal Home Loan Bank (FHLB) Stock:  The Bank is a member of the FHLB system. Members are required to own a certain amount of stock based on the level of borrowings and other factors, and may invest in additional amounts.  FHLB stock is carried at cost, classified as a restricted security, and periodically evaluated for impairment based on ultimate recovery of par value.  Both cash and stock dividends are reported as income.

 

Bank-Owned Life Insurance:  The Company has purchased life insurance policies on certain key employees.  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.

 

Bank Premises and Equipment:  Land is carried at cost.  Bank premises and equipment are stated at cost less accumulated depreciation.  Buildings and related components are depreciated using the straight-line method with useful lives ranging from 5 to 40 years.  Furniture, fixtures and equipment are depreciated using the straight-line (or accelerated) method with useful lives ranging from 3 to 10 years.

 

Real Estate Owned:  Real estate acquired through foreclosure is initially recorded at fair value less costs to sell when acquired, establishing a new cost basis.  These assets are subsequently accounted for at the lower of cost or fair value less estimated costs to sell.  The value of the underlying loan is written down to the fair value of the real estate to be acquired by a charge to the allowance for loan losses, if necessary.  Any subsequent write-downs are charged to operating expenses.  Operating expenses of such properties, net of related income, and gains and losses on their disposition are included in other expenses.

 

Investments in Limited Partnerships:  Investments in limited partnerships represent the Company’s investments in affordable housing projects for the primary purpose of available tax benefits.  The Company is a limited partner in these investments and as such, the Company is not involved in the management or operation of such investments.  These investments are amortized over the period that the Company expects to receive the tax benefits.  These investments are evaluated for impairment when events indicate the carrying amount may not be recoverable. 

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The investment recorded at March 31, 2019 was $4.0 million and $3.6 million at March 31, 2018, respectively, and is included with other assets in the balance sheet.  During the quarters ended March 31, 2019 and 2018, the Company recognized amortization expense of $159 thousand and $156 thousand, respectively, which was included within other noninterest expense on the consolidated statements of income.

 

Leases:  The Company adopted FASB issued ASU No. 2016-02, “Leases (Topic 842)” (“ASU 2016-

02”), including the adoption of the practical expedients, on January 1, 2019. Lessees are required to recognize

assets and liabilities on the balance sheet for leases with lease terms greater than 12 months. The Company

recorded assets and liabilities of $6.3 million, as of March 31, 2019, as a result of recording operating lease contracts where the Company is lessee.  The Company did not restate comparative periods. The right of use asset and the lease obligations are included reported on the Company’s balance sheet in the accompanying consolidated statements of financial condition

Repurchase Agreements:  Substantially all repurchase agreement liabilities represent amounts advanced by various customers.  Securities are pledged to cover these liabilities, which are not covered by federal deposit insurance.

 

Stock-Based Compensation:  Compensation cost is recognized for stock options and restricted stock awards issued to employees, based on the fair value of these awards at the date of grant.  A Black-Scholes model is utilized to estimate the fair value of stock options, while the market price of the Company’s common stock at the date of grant is used for restricted stock awards.  Compensation cost is recognized over the required service period, generally defined as the vesting period.  For awards with graded vesting, compensation cost is recognized on a straight-line basis over the requisite service period for the entire award.

 

Revenue Recognition:  The Company’s services that fall within the scope of ASC 606 are presented within Non-Interest Income and are recognized as revenue as the Company satisifies its obligation to the customer.  Services within the scope of ASC 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.  These fees totaled $328 thousand for the three months ended March 31, 2019 and $315 thousand for the three months ended March 31, 2018.

 

·

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 montrepresenting the period over which we satisfy our performance obligation.  These fees totaled $1.2 million for the three months ended March 31, 2019 and $1.3 million for the three months ended March 31, 2018.

 

·

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.  These fees totaled $790 thousand for the three months ended March 31, 2019 and $763 thousand for the three months ended March 31, 2018.

 

 

 

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·

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.  These fees totaled $136 thousand for the three months ended March 31, 2019 and $209 thousand for the three months ended March 31, 2018. 

 

Income Taxes:  Income tax expense is the total of the current year income tax due or refundable and the change in deferred tax assets and liabilities.  Deferred tax assets and liabilities are the expected future tax amounts for the temporary differences between carrying amounts and tax bases of assets and liabilities, computed using enacted tax rates.  A valuation allowance, if needed, reduces deferred tax assets to the amount expected to be realized.

 

A tax position is recognized as a benefit only if it is “more likely than not” that the tax position would be sustained in a tax examination, with a tax examination being presumed to occur.  The amount recognized is the largest amount of tax benefit that is greater than 50% likely of being realized on examination.  For tax positions not meeting the “more likely than not” test, no tax benefit is recorded.

 

The Company recognizes interest related to income tax matters as interest expense and penalties related to income tax matters as other expense.

 

Retirement Plans:  Employee 401(k) and profit sharing plan expense is the amount of matching contributions.

 

Goodwill and Intangible Assets:  Goodwill and intangible assets acquired in a purchase business combination and determined to have an indefinite useful life are not amortized, but tested for impairment at least annually.  The Company has selected December 31 as the date to perform the annual impairment test.  Intangible assets with definite useful lives are amortized over their estimated useful lives to their estimated residual values.  Goodwill is the only intangible asset with an indefinite life on our balance sheet.

 

Intangible assets consist of core deposit intangible assets arising from whole bank and branch acquisitions.  They are initially measured at fair value and then are amortized on either an accelerated or straight-line basis, over ten or fifteen years.

 

Loan Commitments and Related Financial Instruments:  Financial instruments include off-balance sheet credit instruments, such as commitments to make loans and commercial letters of credit, issued to meet customer financing needs.  The face amount for these items represents the exposure to loss, before considering customer collateral or ability to repay.  Such financial instruments are recorded when they are funded.

 

Earnings Per Common Share:  Basic earnings per common share is net income divided by the weighted average number of common shares outstanding during the period.  Diluted earnings per common share include the dilutive effect of additional potential common shares issuable under stock options.  Earnings and dividends per share have been adjusted in all periods presented to give effect to all stock splits and dividends through the date of issuance of the financial statements.

 

Stock Split:  On November 21, 2018, the Company announced that its Board of Directors declared a two-for-one stock split (the “Stock Split”) of the Company’s issued and outstanding common stock (“Common Stock”), no par value per share, pursuant to which one (1) additional share of the Common Stock was issued for each share of Common Stock held by shareholders of record as of the close of business on December 3, 2018.  The additional shares were issued on December 10, 2018.  Earnings and dividends per share, and the number of shares are restated for the Stock Split through the date of issuance of the financial statements.

 

Comprehensive Income (Loss):  Comprehensive income consists of net income and other comprehensive income.  Other comprehensive income (loss) includes unrealized gains and losses on securities available for sale, which are also recognized as a separate component of equity.

 

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Fair Value of Financial Instruments:  Fair values of financial instruments are estimated using relevant market information and other assumptions, as more fully disclosed in a separate note.  Fair value estimates involve uncertainties and matters of significant judgment regarding interest rates, credit risk, prepayments, and other factors, especially in the absence of broad markets for particular items.  Changes in assumptions or in market conditions could significantly affect the estimates.

 

Operating Segments:  While the Company’s chief decision makers monitor the revenue streams of the various Company products and services, operations are managed and financial performance is evaluated on a Company-wide basis.  Accordingly, all of the Company’s operations are considered by management to be aggregated into one reportable operating segment: banking.

 

Reclassifications:  Some items in the prior year financial statements were reclassified to conform to the current presentation. Reclassifications had no effect on prior year net income or stockholders’ equity. 

 

Adoption of New Accounting Standards

 

We adopted ASU 2016-02, “Leases (Topic 842),” on January 1, 2019, the effective date of the guidance, using the

practical expedient transition method whereby we did not revise comparative period information or disclosure. The new standard requires lessees to record assets and liabilities on the balance sheet for all leases with terms longer than 12 months. We elected the package of practical expedients permitted under the transition guidance within the new standard, which among other things, allows us to carryforward the historical lease classification. We also elected certain optional practical expedients including the hindsight practical expedient under which we considered the actual outcomes of lease renewals and terminations when measuring the lease term at adoption, and we made an accounting policy election to keep leases with an initial term of 12 months or less off of the balance sheet. We recognize these lease payments in the consolidated statements of income on a straight-line basis over the lease term. We have lease agreements with lease and non-lease components, and we have elected the practical expedient to account for these as a single lease component.

 

We evaluate our contracts at inception to determine if an arrangement is, or contains, a lease. Operating leases are included in operating lease right of use (ROU) assets and operating lease liabilities on our consolidated balance sheet. The Company has no finance leases.

 

ROU assets represent our right to use an underlying asset for the lease term, and lease liabilities represent our obligation to make lease payments arising from the lease. Operating lease ROU assets and liabilities are recognized at commencement date based on the present value of lease payments over the lease term. The operating lease ROU asset also includes any initial direct costs and prepaid lease payments made less any lease incentives. Our lease terms may include options to extend or terminate the lease when it is reasonably certain that we will exercise that option.

 

Our operating leases relate primarily to land and building leases for bank branches and office space. In conjunction with the adoption on January 1, 2019, we recognized operating lease liabilities of $6.4 million and related lease assets of $6.4 million on our balance sheet.  The adoption of ASU 2016-02  had no material impact on our consolidated income statement or cash flow statement.

 

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 amendment requires the measurement of all expected credit losses for financial assets held at the reporting date based on historical experience, current conditions, and reasonable and supportable forecasts.  Financial institutions and other organizations will now use forward-looking information to enhance their credit loss estimates.  The amendment requires enhanced disclosures to help investors and other financial statement users better understand significant estimates and judgments used in estimating credit losses, as well as the credit quality and underwriting standards of an organization’s portfolio.  In addition, the ASU amends the accounting for credit losses on available-for-sale debt securities and purchased financial assets with credit deterioration.  The amendments in this update become effective for annual periods and interim periods within those annual periods beginning after December 15, 2019.  Early adoption was permitted after December 15, 2018.

 

As previously disclosed, the Company formed a steering committee to oversee the adoption of the ASU at the effective date.  Appropriate members of Senior Management  have developed a plan focused on understanding the ASU, researching issues, identifying data needs for modeling inputs, technology requirements, and modeling considerations.  During 2019, the Company is focused on the completion of its model, refining assumptions, and continued review of the model.  Concurrent with this, the Company is also focused on researching and resolving interpretive accounting issues in the ASU, contemplating various related accounting policies, developing processes and related controls, and considering various reporting disclosures.

As of the beginning of the first reporting period in which the new standard is effective, the Company expects to recognize a one-time cumulative effect adjustment increasing the allowance for loan losses, if any, since the ASU covers credit losses over the expected life of a loan as well as considering future changes in macroeconomic conditions. The magnitude of any such one-time adjustment or the overall impact of the new guidance on the consolidated financial statements cannot yet be reasonably estimated, however, we expect to run multiple parallel models during 2019 before finalizing the adjustment amount by December 31, 2019.

 

In December 2018, the OCC, the Board of Governors of the Federal Reserve System, and the FDIC approved a final rule to address changes to credit loss accounting under GAAP, including banking organizations’ implementation of CECL.  The final rule provides banking organizations the option to phase in over a three-year period the day-one adverse effects on regulatory capital that may result from the adoption of the new accounting standard.

 

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 were adopted on January 1, 2019 and did not have an effect on the accounting for the Company's share-based payment awards to its Directors.

 

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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, 2019

 

 

 

 

 

 

 

 

 

 

 

 

 

    U.S. treasury notes

 

$

4,029

 

$

 —

 

$

(28)

 

$

4,001

 

U. S. government agencies

 

 

30,902

 

 

568

 

 

(243)

 

 

31,227

 

States and political subdivisions

 

 

53,128

 

 

985

 

 

(68)

 

 

54,045

 

Mortgage-backed - residential

 

 

115,344

 

 

254

 

 

(1,465)

 

 

114,133

 

Mortgage-backed - commercial

 

 

79,896

 

 

130

 

 

(924)

 

 

79,102

 

Asset-backed

 

 

15,568

 

 

65

 

 

(172)

 

 

15,461

 

Total

 

$

298,867

 

$

2,002

 

$

(2,900)

 

$

297,969

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

December 31, 2018

 

 

 

 

 

 

 

 

 

 

 

 

 

    U.S. treasury notes

 

$

4,032

 

$

 —

 

$

(57)

 

$

3,975

 

U. S. government agencies

 

 

41,122

 

 

515

 

 

(459)

 

 

41,178

 

States and political subdivisions

 

 

64,196

 

 

503

 

 

(495)

 

 

64,204

 

Mortgage-backed - residential

 

 

150,704

 

 

159

 

 

(3,614)

 

 

147,249

 

Mortgage-backed - commercial

 

 

49,484

 

 

 —

 

 

(921)

 

 

48,563

 

Asset-backed

 

 

10,234

 

 

56

 

 

(90)

 

 

10,200

 

Total

 

$

319,772

 

$

1,233

 

$

(5,636)

 

$

315,369

 

 

The amortized cost and fair value of securities as of March 31, 2019 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

 

 

39,534

 

 

39,990

 

Due after five years through ten years

 

 

20,598

 

 

20,790

 

Due after ten years

 

 

27,927

 

 

28,493

 

 

 

 

88,059

 

 

89,273

 

Mortgage-backed - residential

 

 

115,344

 

 

114,133

 

Mortgage-backed - commercial

 

 

79,896

 

 

79,102

 

Asset-backed

 

 

15,568

 

 

15,461

 

Total

 

$

298,867

 

$

297,969

 

 

Proceeds from sales of securities during the first three months of 2019 and 2018 were $16.3 million and $3.9 million.  Gross gains of $109 thousand and $34 thousand and gross losses of $15 thousand and $78 thousand were realized on those sales, respectively.  The tax provision related to these realized net gains or losses was $20 thousand and $(9) thousand, respectively. 

 

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Securities with unrealized losses at March 31, 2019 and at December 31, 2018 not recognized in income are as follows:

 

March 31, 2019

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

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

 

$

 —

 

$

 —

 

$

4,001

 

$

(28)

 

$

4,001

 

$

(28)

 

U.S. government agencies

 

 

 —

 

 

 —

 

 

18,695

 

 

(243)

 

 

18,695

 

 

(243)

 

States and political subdivisions

 

 

283

 

 

(1)

 

 

8,399

 

 

(67)

 

 

8,682

 

 

(68)

 

Mortgage-backed - residential

 

 

3,725

 

 

(6)

 

 

84,952

 

 

(1,459)

 

 

88,677

 

 

(1,465)

 

Mortgage-backed - commercial

 

 

1,992

 

 

(1)

 

 

61,250

 

 

(923)

 

 

63,242

 

 

(924)

 

Asset-backed

 

 

8,353

 

 

(172)

 

 

 —

 

 

 —

 

 

8,353

 

 

(172)

 

Total temporarily impaired

 

$

14,353

 

$

(180)

 

$

177,297

 

$

(2,720)

 

$

191,650

 

$

(2,900)

 

 

December 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

 

$

 —

 

$

 —

 

$

3,975

 

$

(57)

 

$

3,975

 

$

(57)

 

U.S. government agencies

 

 

 —

 

 

 —

 

 

21,102

 

 

(459)

 

 

21,102

 

 

(459)

 

States and political subdivisions

 

 

8,007

 

 

(125)

 

 

25,540

 

 

(370)

 

 

33,547

 

 

(495)

 

Mortgage-backed - residential

 

 

19,250

 

 

(144)

 

 

112,369

 

 

(3,470)

 

 

131,619

 

 

(3,614)

 

Mortgage-backed - commercial

 

 

 —

 

 

 —

 

 

45,949

 

 

(921)

 

 

45,949

 

 

(921)

 

Asset-backed

 

 

1,920

 

 

(90)

 

 

 —

 

 

 —

 

 

1,920

 

 

(90)

 

Total temporarily impaired

 

$

29,177

 

$

(359)

 

$

208,935

 

$

(5,277)

 

$

238,112

 

$

(5,636)

 

 

The Company evaluates securities for other-than-temporary impairment at least on a quarterly basis, and more frequently when economic or market concerns warrant such evaluation.  In analyzing an issuer’s financial condition, we may consider many factors including, (1) whether the securities are issued by the federal government or its agencies, (2) whether downgrades by bond rating agencies have occurred, (3) the results of reviews of the issuer’s financial condition and near-term prospects, (4) the length of time and the extent to which the fair value has been less than cost, and (5) whether we intend to sell the investment security or more likely than not will be required to sell the investment security before its anticipated recovery.

 

Unrealized losses on securities included in the tables above have not been recognized into income because (1) all rated securities are investment grade and are of high credit quality, (2) management does not intend to sell and it is more likely than not that management would not be required to sell the securities prior to their anticipated recovery, (3) management believes the decline in fair value is largely due to changes in interest rates and (4) management believes the declines in fair value are temporary.  The Company believes the fair value will recover as the securities approach maturity.

 

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Table of Contents

3.LOANS

 

Loans at period-end are as follows:

(in thousands)

 

 

 

 

 

 

 

 

 

 

&n