-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, NvODHBDNM3MUbnrFFMkmM1ibjtop8HTxVb1CHN6BP6+u2dYY21UOqZ2rLOiyDef3 GsZMn5VKNeYBv7lI49kIcQ== 0001000232-02-000009.txt : 20020830 0001000232-02-000009.hdr.sgml : 20020830 20020830100034 ACCESSION NUMBER: 0001000232-02-000009 CONFORMED SUBMISSION TYPE: 10-K/A PUBLIC DOCUMENT COUNT: 1 CONFORMED PERIOD OF REPORT: 20011231 FILED AS OF DATE: 20020830 FILER: COMPANY DATA: COMPANY CONFORMED NAME: BOURBON BANCSHARES INC /KY/ CENTRAL INDEX KEY: 0001000232 STANDARD INDUSTRIAL CLASSIFICATION: SAVINGS INSTITUTION, FEDERALLY CHARTERED [6035] STATE OF INCORPORATION: KY FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K/A SEC ACT: 1934 Act SEC FILE NUMBER: 033-96358 FILM NUMBER: 02753504 BUSINESS ADDRESS: STREET 1: 4TH & MAIN ST STREET 2: P O BOX 157 CITY: PARIS STATE: KY ZIP: 40362-0157 MAIL ADDRESS: STREET 1: 4TH & MAIN ST STREET 2: PO BOX 157 CITY: PARIS STATE: KY ZIP: 40362-0157 10-K/A 1 k2001a.txt UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-K/A (Amendment No. 1) (Mark One) [ X ] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the fiscal year ended December 31, 2001 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: 33-96358 BOURBON 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 Securities registered pursuant to Section 12(b) of the Act: None Securities registered pursuant to Section 12(g) of the Act: None 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 X No _____ Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [ X ] Aggregate market value of voting stock held by non-affiliates as of February 28, 2002 was approximately $61.2 million. For purposes of this calculation, it is assumed that directors, executive officers and beneficial owners of more than 5% of the registrant's outstanding voting stock are affiliates. Number of shares of Common Stock outstanding as of February 28, 2002: 2,766,897. PART I Item 1. Business General Bourbon Bancshares, Inc. ("Company" or "Bourbon") is a Kentucky corporation organized in 1981 and a bank and savings and loan holding company registered under the Bank Holding Company Act of 1956, as amended ("BHCA") and the Home Owners Loan Act of 1933, as amended ("HOLA"). The Company conducts business through one banking subsidiary, Kentucky Bank. Kentucky Bank is a commercial bank and trust company organized under the laws of Kentucky. Kentucky Bank has its main office in Paris (Bourbon County), Kentucky, additional offices in Paris, North Middletown (Bourbon County), Winchester (Clark County), Georgetown (Scott County), Versailles (Woodford County), Nicholasville (Jessamine County), Wilmore (Jessamine County), Kentucky and Cynthiana (Harrison County), Kentucky. The deposits of Kentucky Bank are insured up to prescribed limits by the Bank Insurance Fund ("BIF") and the Savings Association Insurance Fund ("SAIF"), both of the Federal Deposit Insurance Corporation ("FDIC"). Kentucky Bank is engaged in general full-service commercial and consumer banking. Kentucky Bank makes commercial, agricultural and real estate loans to its commercial customers, with emphasis on small-to-medium-sized industrial, service and agricultural businesses. Kentucky Bank makes residential mortgage, installment and other loans to its individual and other non-commercial customers. Kentucky Bank also offers its customers the opportunity to obtain a credit card. Kentucky Bank offers its customers a variety of other services, including checking, savings, club and money market accounts, certificates of deposits, safe deposit facilities and other consumer-oriented financial services. In 2000, Kentucky Bank made Internet banking available to its customers at www.kybank.com. Through its Wealth Management Department, Kentucky Bank provides brokerage services, annuities, life and long term care insurance, personal trust and agency services (including management agency services) and, to a lesser extent, corporate trust services (including the management of corporate pension and profits sharing plans). Competition The Company and its subsidiary face vigorous competition from a number of sources, including other bank holding companies and commercial banks, consumer finance companies, thrift institutions, other financial institutions and financial intermediaries. In addition to commercial banks, savings and loan associations, savings banks and credit unions actively compete to provide a wide variety of banking services. Mortgage banking firms, finance companies, insurance companies, brokerage companies, financial affiliates of industrial companies and government agencies provide additional competition for loans and for many other financial services. The subsidiary also currently competes for interest-bearing funds with a number of other financial intermediaries, including brokerage firms and mutual funds, which offer a diverse range of investment alternatives. Supervision and Regulation As a bank holding company, the Company is subject to the regulation and supervision of the Federal Reserve Board. The Company's subsidiary is subject to supervision and regulation by applicable state and federal banking agencies, including the Federal Reserve Board, the Federal Deposit Insurance Corporation and the Kentucky Department of Financial Institutions. The subsidiary is also subject to various requirements and restrictions under federal and state law, including requirements to maintain reserves against deposits, restrictions on the types and amounts of loans that may be granted and the interest that may be charged thereon, and limitations on the types of investments that may be made and the types of services that may be offered. Various consumer laws and regulations also affect the operations of the subsidiary. In addition to the impact of regulation, the subsidiary is affected significantly by the actions of the Federal Reserve Board as it attempts to control the money supply and credit availability in order to influence the economy. There are a number of obligations and restrictions imposed on bank holding companies and their depository institution subsidiaries by federal law and regulatory policy that are designed to reduce potential loss exposure to the depositors of such depository institutions and to the FDIC insurance funds in the event the depository institution becomes in danger of default or is in default. For example, under a policy of the Federal Reserve Board with respect to bank holding company operations, a bank holding company is required to serve as a source of financial strength to its subsidiary depository institutions and commit resources to support such institutions in circumstances where it might not do so absent such policy. In addition, the "cross-guarantee" provisions of federal law require insured depository institutions under common control to reimburse the FDIC for any loss suffered or reasonably anticipated as a result of the default of a commonly controlled insured depository institution or for any assistance provided by the FDIC to a commonly controlled insured depository institution in danger of default. The federal banking agencies have broad powers under current federal law to take prompt corrective action to resolve problems of insured depository institutions. The extent of these powers depends upon whether the institutions in question are "well capitalized", "adequately capitalized", "undercapitalized", "significantly undercapitalized" or "critically undercapitalized", as such terms are defined under uniform regulation defining such capital levels issued by each of the federal banking agencies. There are various legal and regulatory limits on the extent to which the Company's subsidiary bank may pay dividends or otherwise supply funds to the Company. In addition, federal and state regulatory agencies also have the authority to prevent a bank or bank holding company from paying a dividend or engaging in any other activity that, in the opinion of the agency, would constitute an unsafe or unsound practice. Beginning January 1, 2001, a new accounting standard requires all derivatives to be recorded at fair value. Unless designated as hedges, changes in these fair values will be recorded in the income statement. Fair value changes involving hedges will generally be recorded by offsetting gains and losses on the hedge and on the hedged item, even if the fair value of the hedged item is not otherwise recorded. The Company periodically enters into non-exchange traded mandatory forward sales contracts in conjunction with its mortgage banking operation. These contracts, considered derivatives, typically last 90 days and are used to hedge the risk of interest rate changes between the time of the commitment to make a loan to a borrower at a stated rate and when the loan is sold. The Company did not have any mandatory forward sales contracts at December 31, 2001. As allowed in conjunction with the adoption of this standard, the Company transferred its entire securities held to maturity portfolio to available for sale. As a result of this transfer and the corresponding adjustment to fair value, on January 1, 2001 securities increased $407,000, other assets decreased $138,000, and accumulated other comprehensive income increased $269,000. The Gramm-Leach-Bliley Act of 1999 eliminates restrictions imposed by the Glass-Steagall Financial Services Law, adopted in the 1930s, which prevented banking, insurance and securities firms from fully entering each other's businesses. While it is still uncertain what the impact of this legislation will be, it is likely to result in further consolidation in the financial services industry. In addition, removal of these barriers will likely increase the number of entities providing banking services, thereby increasing competition. Employees At December 31, 2001, the number of full time equivalent employees of the Company was 180. Item 2. Properties The main banking office of Kentucky Bank, which also serves as the principal office of Bourbon Bancshares, Inc., is located at Fourth and Main Streets, Paris, Kentucky 40361. In addition, Kentucky Bank serves customer needs at 10 other locations. All locations offer a full range of banking services. Kentucky Bank owns all of the properties at which it conducts its business, except the location in Scott County at Paris Pike, which is leased. The Company owns approximately 66,000 square feet of office space and leases approximately 2,000 square feet of office space, with aggregate annual lease payments of approximately $16 thousand in 2001. Note 5 to the Company's consolidated financial statements included in this report contains additional information relating to amounts invested in premises and equipment. Item 3. Legal Proceedings The Company and its subsidiary are from time to time involved in routine legal proceedings occurring in the ordinary course of business that, in the aggregate, management believes will not have a material impact on the Company's financial condition and results of operation. Item 4. Submission of Matters to a Vote of Security Holders Not Applicable. PART II Item 5. Market for Common Equity and Related Stockholder Matters The Company's Common Stock is not listed on any national securities exchange nor is it quoted on the NASDAQ system. However, it is listed on the OTC Bulletin Board under the symbol "BBON.OB". Trading in the Common Stock has been infrequent, with two regional retail brokerage firms making the market. The following table sets forth the high and low sales prices of the Common Stock and the dividends declared thereon, for the periods indicated below: High Low Dividend 2001 Quarter 4 $26.00 $22.40 $.15 Quarter 3 25.50 23.50 .15 Quarter 2 26.00 23.00 .15 Quarter 1 24.50 21.25 .15 2000 Quarter 4 $23.50 $21.00 $.13 Quarter 3 24.50 19.00 .13 Quarter 2 30.00 24.00 .13 Quarter 1 26.00 24.00 .13 Note 13 to the Company's consolidated financial statements included in this report contains additional information relating to amounts available to be paid as dividends. As of December 31, 2001 the Company had 2,766,917 shares of Common Stock outstanding and approximately 450 holders of record of its Common Stock. Item 6. Selected Financial Data The following selected financial data should be read in conjunction with the Company's Consolidated Financial Statements and the accompanying notes presented elsewhere herein. On June 8, 1999, the stockholders approved a two-for-one stock split effective July 15, 1999. All shares and per share amounts have been retroactively restated to reflect the split.
At or For the Year Ended December 31 (dollars and shares in thousands, except per share amounts) 2001 2000 1999 1998 1997 CONDENSED STATEMENT OF INCOME: Total Interest Income $28,046 $28,207 $23,453 $21,983 $20,962 Total Interest Expense 13,386 13,597 10,547 10,666 10,415 Net Interest Income 14,660 14,610 12,906 11,317 10,547 Provision for Losses 1,068 750 700 700 493 Net Interest Income After Provision for Losses 13,592 13,860 12,206 10,617 10,054 Noninterest Income 5,672 3,798 3,386 3,073 2,390 Noninterest Expense 11,756 10,374 9,422 8,514 7,888 Income Before Income Tax Expense 7,508 7,284 6,170 5,176 4,556 Income Tax Expense 1,984 2,031 1,720 1,372 1,148 Net Income 5,524 5,253 4,450 3,804 3,408 SHARE DATA: Basic Earnings per Share (EPS) $1.98 $1.87 $1.59 $1.36 $1.22 Diluted EPS 1.95 1.83 1.55 1.33 1.20 Cash Dividends Declared 0.60 0.52 0.44 0.40 0.36 Book Value 14.13 12.77 11.32 10.46 9.58 Average Common Shares-Basic 2,790 2,812 2,803 2,801 2,792 Average Common Shares-Diluted 2,837 2,868 2,868 2,862 2,844 SELECTED BALANCE SHEET DATA: Loans, net including held for sale $272,129 $269,757 $238,998 $210,108 $182,839 Investment Securities 75,608 68,054 70,623 72,353 81,703 Total Assets 397,257 371,847 347,479 308,705 290,655 Deposits 308,915 300,816 274,566 258,740 241,325 Securities sold under agreements to repurchase and other borrowings 1,602 9,446 11,858 11,248 9,458 Federal Home Loan Bank advances 43,598 21,644 26,592 6,954 10,236 Stockholders' Equity 39,100 35,860 31,720 29,372 26,716 PERFORMANCE RATIOS: (Average Balances) Return on Assets 1.46% 1.49% 1.39% 1.31% 1.23% Return on Stockholders' Equity 14.60% 15.63% 14.57% 13.57% 13.43% Net Interest Margin (1) 4.22% 4.47% 4.46% 4.27% 4.18% Equity to Assets (annual average) 9.99% 9.51% 9.54% 9.62% 9.17% SELECTED STATISTICAL DATA: Dividend Payout Ratio 30.28% 27.84% 27.73% 29.49% 29.49% Number of Employees (at period end) 180 159 149 144 145 ALLOWANCE COVERAGE RATIOS: Allowance to Total Loans 1.23% 1.24% 1.28% 1.28% 1.25% Net Charge-offs as a Percentage of Average Loans 0.39% 0.18% 0.15% 0.15% 0.16% (1) Tax equivalent
Item 7. Management's Discussion and Analysis The following discussion and analysis of financial condition and results of operations should be read in conjunction with the Consolidated Financial Statements and accompanying notes included as Exhibit 13. When necessary, reclassifications have been made to prior years' data throughout the following discussion and analysis for purposes of comparability with 2000 data. On June 8, 1999, the stockholders approved a two-for-one stock split effective July 15, 1999. All shares and per share amounts have been retroactively restated to reflect the split. Critical Accounting Policies The accounting and reporting policies of the Company and its subsidiary are in accordance with accounting principles generally accepted in the United States and conform to general practices within the banking industry. The more critical accounting and reporting policies include accounting for securities, loans and leases, the allowance for loan and lease losses and income taxes. In particular, the accounting policies relating to the allowance for loan and lease losses and income taxes involve the use of estimates and require significant judgments to be made by management. Different assumptions in the application of these policies could result in material changes in the consolidated financial position or consolidated results of operations. See "Loan Losses" herein for a complete discussion of the accounting methodologies related to the allowance. Please also refer to Note 1 in the "Notes to Consolidated Financial Statements" for details regarding all of the critical and significant accounting policies. Forward-Looking Statements This discussion contains forward-looking statements under the Private Securities Litigation Reform Act of 1995 that involve risks and uncertainties. Although the Company believes that the assumptions underlying the forward-looking statements contained herein are reasonable, any of the assumptions could be inaccurate, and therefore, there can be no assurance that the forward-looking statements included herein will prove to be accurate. Factors that could cause actual results to differ from the results discussed in the forward-looking statements include, but are not limited to: economic conditions (both generally and more specifically in the markets, including the tobacco market, in which the Company and its bank operate); competition for the Company's customers from other providers of financial and mortgage services; government legislation and regulation (which changes from time to time and over which the Company has no control); changes in interest rates (both generally and more specifically mortgage interest rates); material unforeseen changes in the liquidity, results of operations, or financial condition of the Company's customers; and other risks detailed in the Company's filings with the Securities and Exchange Commission, all of which are difficult to predict and many of which are beyond the control of the Company. The Company undertakes no obligation to republish revised forward-looking statements to reflect events or circumstances after the date hereof or to reflect the occurrence of unanticipated events. Summary Net income for the year ended December 31, 2001 was $5.5 million, or $1.98 per common share compared to $5.3 million, or $1.87 for 2000 and $4.5 million, or $1.59 for 1999. Earnings per share assuming dilution were $1.95, $1.83 and $1.55 for 2001, 2000 and 1999, respectively. During 2001, net income increased $272 thousand, up 5%. Net interest income remained relatively constant, the loan loss provision increased $318 thousand, while other income increased 49% and other expenses increased 13%. For 2000, net income increased $803 thousand, or 18%. Net interest income increased 13%, loan loss provision increased 7%, other income increased 12% and other expenses increased 10%. Return on average equity was 14.6% in 2001 compared to 15.6% in 2000 and 14.6% in 1999. Return on average assets was 1.46% in 2001 compared to 1.49% in 2000 and 1.39% in 1999. Non-performing loans as of a percentage of loans (including held for sale) were 0.80%, 0.66% and 0.31% as of December 31, 2001, 2000 and 1999, respectively. With the upward trend in non-performing loans, management has placed more emphasis on loan quality and, with the creation of a collection department, non-performing loan ratios are expected to improve. RESULTS OF OPERATIONS Net Interest Income Net interest income, the Company's largest source of revenue, on a tax equivalent basis increased from $12.9 million in 1999 to $14.6 million in 2000 to $14.7 million in 2001. The taxable equivalent adjustment (nontaxable interest income on state and municipal securities net of the related non-deductible portion of interest expense) is based on our Federal income tax rate of 34%. Based on the volume rate analysis that follows, during 2001, average earning assets and interest bearing liabilities continued to increase. Generally, the increases in volume have been offset by the decline in rates. The increase in earning assets of $23 million offset with a decline of 56 basis points in the tax equivalent yield have resulted in tax equivalent interest income decreasing $69 thousand. Average loans increased $16 million along with a 54 basis point drop in the yield, resulting in the loan income decreasing $22 thousand. These yield declines are mainly attributable to the drop in interest rates. Bank prime rates decreased 475 basis points during the year. Average interest bearing liabilities increased $19 million, which coupled with a 39 basis point decline in the yield caused the interest on liabilities to increase $2.8 million. The $501 thousand decline in deposit interest is a result of average deposits increasing $10 million and the corresponding yield dropping 40 basis points. In spite of the positive impact on net interest income that may result from the potential increasing rate environment in 2002, competitive pressures on interest rates will continue and are likely to result in tighter net interest margins. Average earning assets and interest bearing liabilities both increased from 1999 to 2000. Average earning assets increased $36 million, or 12%. This increase in volume accounted for 72% of the increase in net interest income. Bank-wide efforts to increase loan demand have also been successful. Loans were the largest contributor to the 2000 increase with real estate mortgages increasing $29 million from 1999 to 2000. Average interest liabilities increased $27 million, or 11% during this same period. The increase in volume accounted for 46% of the increase in interest expense. Certificates of deposit and other time deposits composed $19 million of this increase. Federal Home Loan Bank (FHLB) advances made up an additional $5 million. The Company continues to actively pursue quality loans and fund these primarily with deposits and FHLB advances. During 2000 rates were on the rise. Bank prime rates increased 100 basis points during the year. As a result of this, the tax equivalent yield on earning assets increased from 8.00% in 1999 to 8.54% in 2000. The volume rate analysis that follows indicates that 28% of the increase in interest income was attributable to the change in rates. The rate increase also caused an increase in the cost of interest bearing liabilities. The average rate of these liabilities increased from 4.29% in 1999 to 4.99% in 2000. Based on the volume rate analysis that follows, the change in rates was responsible for 54% of the change in interest expense. As a result, 2000 gross and net interest income and margin is attributed to increases in volume reduced slightly by the negative impact of increases in rates. The accompanying analysis of changes in net interest income in the following table shows the relationships of the volume and rate portions of these increases in 2001 and 2000. Changes in interest income and expenses due to both rate and volume are allocated on a pro rata basis.
2001 vs. 2000 2000 vs. 1999 Increase (Decrease) Due to Change in Increase (Decrease) Due to Change in Volume Rate Net Change Volume Rate Net Change INTEREST INCOME Loans $ 1,408 $ (1,430) $ (22) $ 3,293 $ 1,220 $ 4,513 Investment Securities 89 (256) (167) (35) 37 2 Federal Funds Sold and Securities Purchased under Agreements to Resell 221 (214) 7 184 51 235 Deposits with Banks 25 (5) 20 4 1 5 Total Interest Income 1,743 (1,905) (162) 3,446 1,309 4,755 INTEREST EXPENSE Deposits Demand 247 (482) (235) 16 339 355 Savings 8 (37) (29) 11 1 12 Negotiable Certificates of Deposit and Other Time Deposits 149 (386) (237) 990 1,151 2,141 Securities sold under agreements to repurchase and other borrowings (297) (113) (410) 120 33 153 Federal Home Loan Bank advances 775 (76) 699 285 105 390 Total Interest Expense 882 (1,094) (212) 1,422 1,629 3,051 Net Interest Income $ 861 $ (811) $ 50 $ 2,024 $ (320) $ 1,704
Average Consolidated Balance Sheets and Net Interest Analysis (dollars in thousands) 2001 2000 1999 Average Average Average Average Average Average Balance Interest Rate Balance Interest Rate Balance Interest Rate ASSETS Interest-Earning Assets Securities Held to Maturity State and Municipal obligations $ - $ - 0.00% $15,837 $ 912 5.76% $16,360 $ 945 5.78% Securities Available for Sale (1) U.S. Treasury and Federal Agency Securities 41,654 2,421 5.81% 44,585 2,726 6.11% 47,887 2,725 5.69% State and Municipal obligations 17,978 974 5.42% 2,947 148 5.02% 3,642 182 5.00% Other Securities 11,365 570 5.02% 6,110 346 5.66% 4,943 278 5.62% Total Securities Available for Sale 70,997 3,965 5.58% 53,642 3,220 6.00% 56,472 3,185 5.64% Total Investment Securities 70,997 3,965 5.58% 69,479 4,132 5.95% 72,832 4,130 5.67% Tax Equivalent Adjustment 371 0.52% 278 0.40% 340 0.47% Tax Equivalent Total 4,336 6.11% 4,410 6.35% 4,470 6.14% Federal Funds Sold and Agreements to Repurchase 10,893 391 3.59% 6,038 384 6.36% 2,999 149 4.97% Interest-Bearing Deposits with Banks 870 31 3.56% 193 11 5.70% 124 6 4.84% Loans, Net of Deferred Loan Fees (2) Commercial 32,837 2,678 8.16% 29,497 2,822 9.57% 26,530 2,306 8.69% Real Estate Mortgage 217,132 18,543 8.54% 204,197 18,371 9.00% 175,429 14,946 8.52% Installment 23,535 2,438 10.36% 24,017 2,488 10.36% 19,350 1,916 9.90% Total Loans 273,504 23,659 8.65% 257,711 23,681 9.19% 221,309 19,168 8.66% Total Interest-Earning Assets 356,264 28,417 7.98% 333,421 28,486 8.54% 297,264 23,793 8.00% Allowance for Loan Losses (3,386) (3,330) (2,969) Cash and Due From Banks 9,281 10,063 12,899 Premises and Equipment 9,171 7,445 6,952 Other Assets 7,375 5,816 6,091 Total Assets 378,705 353,415 320,237 LIABILITIES Interest-Bearing Deposits Negotiable Order of Withdrawal ("NOW") and Money Market Investment Accounts 78,220 2,279 2.91% 70,788 2,514 3.55% 70,263 2,159 3.07% Savings 14,494 252 1.74% 14,089 281 1.99% 13,533 269 1.99% Certificates of Deposit and Other Deposits 160,751 8,776 5.46% 158,106 9,013 5.70% 139,381 6,872 4.93% Total Interest-Bearing Deposits 253,465 11,307 4.46% 242,983 11,808 4.86% 223,177 9,300 4.17% Securities sold under agreements to repurchase and other borrowings 4,590 222 4.84% 10,316 632 6.13% 9,082 479 5.27% Federal Home Loan Bank advances 33,247 1,857 5.59% 19,442 1,158 5.96% 13,749 768 5.59% Total Interest-Bearing Liabilities 291,302 13,386 4.60% 272,741 13,598 4.99% 246,008 10,547 4.29% Noninterest-Bearing Earning Demand Deposits 45,469 43,813 40,715 Other Liabilities 4,092 3,254 2,963 Total Liabilities 340,863 319,808 289,686 STOCKHOLDERS' EQUITY 37,842 33,607 30,551 Total Liabilities and Shareholders' Equity 378,705 353,415 320,237 Average Equity to Average Total Assets 9.99% 9.51% 9.54% Net Interest Income 14,660 14,610 12,906 Net Interest Income (tax equivalent) (3) 15,031 14,888 13,246 Net Interest Spread (tax equivalent) (3) 3.38% 3.55% 3.72% Net Interest Margin (tax equivalent) (3) 4.22% 4.47% 4.46%
Noninterest Income and Expenses Noninterest income was $5.7 million in 2001 compared to $3.8 million in 2000 and $3.4 million in 1999. The $1.9 million increase in 2001 and the $413 thousand increase in 2000 is mainly attributable to an increase in service charges. In 2001 securities gains were $287 thousand compared to $88 thousand losses in 2000 and $1 thousand gains in 1999. The increase in gains for 2001 is a result of the declining rate environment and municipal securities being called at premiums before their maturities. In addition, U. S. Treasury securities were sold before maturity to recognize some gains and extend out the yield curve. Gains on loans sold were $383 thousand, $133 thousand and $351 thousand in 2001, 2000 and 1999, respectively. Loans held for sale are generally sold after closing to the Federal Home Loan Mortgage Corporation. During 2001 and 2000, the Company sold some loans along with their servicing rights and therefore there was a slight decline in loan service fee income in 2001 and 2000. The sales of loans were $28 million, $15 million and $25 million in 2001, 2000 and 1999, respectively. Volume of loan originations are inverse to rate changes. The rate environment in 2000 was rising and therefore resulted in declining loan originations. Rates have fallen in 2001 and as a result, have favorably impacted our loan originations in 2001 compared to 2000. Other noninterest income excluding security net gains was $5.4 million in 2001, $3.9 million in 2000 and $3.4 million in 1999. Service charge income has been a big contributor to this increase in income over this three-year period. Overdraft income increased $1.1 million in 2001 and $444 thousand in 2000, principally the result of increases in deposits and implementation of a new "Kentucky Courtesy" overdraft in the last quarter of 2000. Other income increased from $270 thousand in 1999 to $397 thousand in 2000 to $734 thousand in 2001. The increase in 2001 is mainly a result of title insurance sales of $122 thousand and an increase in brokerage commissions of $124 thousand. The sale of title insurance was started during 2001 and has been very successful. The sale of brokerage services was an effective additional source of income in 2001. Noninterest expense increased $1.4 million in 2001 to $11.8 million, $952 thousand in 2000 to $10.4 million from $9.4 million in 1999. The increases in salaries and benefits from $5.1 million in 1999 to $5.5 million in 2000 and to $6.0 million in 2001 are attributable to converting the Loan Production Office in Cynthiana to a full service branch in October 2001, normal salary and benefit increases and a change in bonus compensation in 1999, with an increased focus on incentive compensation. Due to this change, bonuses were $82 thousand lower in 2001 compared to 2000 and $23 thousand higher in 2000 compared to 1999. Occupancy expense increased $353 thousand, or 23% in 2001 to $1.9 million and increased $177 thousand, or 13% in 2000 to $1.5 million and 17% in 1999, to $1.4 million. The Company completed its construction of a new full service facility in Cynthiana in October 2001. Over the past 3 years, 3 new facilities have been constructed and 2 facilities have been substantially renovated. In 2001, land was purchased in Georgetown to construct a full service facility. A definite date for constructing this facility has not been set at this time. This overall improvement of our facilities has led to the increase in occupancy expenses. The largest expense, Depreciation, increased from $766 thousand in 1999, to $812 thousand in 2000 to $961 thousand in 2001. Other noninterest expense increased from $3.0 million in 1999 to $3.3 million in 2000 and in 2001 other noninterest expenses increased to $3.8 million. The following table is a summary of noninterest income and expense for the three-year period indicated. For the Year Ended December 31 (in thousands) 2001 2000 1999 NON-INTEREST INCOME Service Charges $ 3,664 $ 2,650 $ 2,075 Loan Service Fee Income 258 287 291 Trust Department Income 347 420 398 Investment Securities Gains (Losses),net 287 (88) 1 Gains on Sale of Mortgage Loans 382 132 351 Other 734 397 270 Total Non-interest Income 5,672 3,798 3,386 NON-INTEREST EXPENSE Salaries and Employee Benefits 6,019 5,539 5,054 Occupancy Expenses 1,891 1,538 1,361 Other 3,846 3,297 3,007 Total Non-interest Expense 11,756 10,374 9,422 Net Non-interest Expense as a Percentage of Average Assets 1.61% 1.86% 1.88% Income Taxes The Company had income tax expense of $2.0 million in 2001 and 2000 and $1.7 million in 1999. This represents an effective income tax rate of 26.4% in 2001 and 27.9% in 2000 and in 1999. The difference between the effective tax rate and the statutory federal rate of 34% is primarily due to tax exempt income on certain investment securities. The lower effective rate for 2001 compared to 2000 and 1999 is a result of an historic tax credit taken of $240 thousand taken on the Main Office in Paris. Balance Sheet Review Assets grew from $372 million at December 31, 2000 to $397 million at December 31, 2001. Loan growth was $1 million in 2001. The lesser loan growth compared to previous years is mainly attributable to the economic downturn in 2001. Deposits grew $8 million and borrowings grew $14 million. FHLB advances increased $22 million, while repurchase agreements declined $8 million. Assets at year-end 2000 totaled $372 million compared to $347 million in 1999 and $309 million in 1998. In 2000, loan growth was $34 million and deposit growth was $26 million. FHLB advances declined $5 million. An additional $5 million FHLB advance was received in 2000 and the short term advance of $10 million discussed below was repaid. At the end of 1999, Cash and Due From Banks were $9 million higher and an additional short term FHLB advance was obtained for $10 million as a precaution for possible Y2K anxieties. The advance was repaid in the first quarter of 2000 and cash and due from banks returned to their normal levels in the first quarter of 2000 also. Loans Total loans (including loans held for sale) were $276 million at December 31, 2001 compared to $273 million at the end of 2000 and $242 million in 1999. The loan growth being less compared to previous years is mainly attributable to the economic downturn in 2001. As of the end of 2001 and compared to the prior year-end, commercial loans increased $1.2 million, real estate construction loans decreased $3.0 million, real estate mortgage loans (including loans held for sale) increased $5.5 million, agricultural loans increased $1.6 million and installment loans decreased $2.9 million. As of the end of 2000 and compared to the prior year-end, real estate construction loans decreased $1.7 million, real estate mortgage loans (including loans held for sale) increased $24.9 million, agricultural loans increased $5.6 million and installment loans increased $2.4 million. Since 1998, management has utilized regional loan goals for each type of loan and this emphasis has resulted in improved sales efforts by the lending personnel. As of December 31, 2001, the real estate mortgage portfolio comprised 61% of total loans compared to 60% in 2000. Of this, 1-4 family residential property represented 70% in 2001 and 73% in 2000. Agricultural loans comprised 19% in 2001 and in 2000 of the loan portfolio. Approximately 77% of the agricultural loans are secured by real estate for both 2001 and 2000. The remainder of the agricultural portfolio is used to purchase livestock, equipment and other capital improvements and for general operation of the farm. Generally, a secured interest is obtained in the capital assets, equipment, livestock or crops. Automobile loans account for 49% in 2001 and 51% in 2000 of the installment loan portfolio, while the purpose of the remainder of this portfolio is used by customers for purchasing retail goods, home improvement or other personal reasons. Collateral is generally obtained on these loans after analyzing the repayment ability of borrower. Commercial loan's portfolio is mainly for capital outlays and business operation. Collateral is requested depending on the creditworthiness of the borrower. Unsecured loans are made to individuals or companies mainly based on the creditworthiness of the customer. Approximately 5% of the loan portfolio is unsecured. Management is not aware of any significant concentrations that may cause future material risks, which may result in significant problems with future income and capital requirements. The following table represents a summary of the Company's loan portfolio by category for each of the last five years. There is no concentration of loans (greater than 5% of the loan portfolio) in any industry. Bourbon has no foreign loans or highly leveraged transactions in its loan portfolio. Loans Outstanding At December 31 (in thousands) 2001 2000 1999 1998 1997 Commercial $ 18,618 $ 17,452 $ 17,713 $ 15,177 $ 10,644 Real Estate Construction 12,302 15,270 17,003 11,055 7,657 Real Estate Mortgage 168,684 163,190 138,337 124,721 113,524 Agricultural 53,640 52,008 46,443 44,199 37,924 Installment 21,952 24,807 22,358 17,608 15,182 Other 338 434 280 159 287 Total Loans 275,534 273,161 242,134 212,919 185,218 Less Deferred Loan Fees 19 16 33 76 57 Total Loans Net of Deferred Loan Fees 275,515 273,145 242,101 212,843 185,161 Less loans held for sale 2,343 868 3,494 5,909 5,418 Less Allowance For Loan Losses 3,386 3,388 3,103 2,734 2,322 Net Loans 269,786 268,889 235,504 204,200 177,421 The following table sets forth the maturity distribution and interest sensitivity of selected loan categories at December 31, 2001. Maturities are based upon contractual term. The total loans in this report represents loans net of deferred loan fees, including loans held for sale but excluding the allowance for loan losses. In addition, deferred loan fees on the above schedule is netted with real estate mortgage loans on the following schedule. Loan Maturities and Interest Sensitivity At December 31, 2001 (in thousands) One Year One Through Over Total or Less Five Years Five Years Loans Commercial $ 9,382 $ 6,789 $ 2,447 $ 18,618 Real Estate Construction 9,571 2,526 205 12,302 Real Estate Mortgage 15,894 105,993 46,778 168,665 Agricultural 16,240 35,234 2,166 53,640 Installment 5,461 16,344 147 21,952 Other 338 0 0 338 Total Loans 56,886 166,886 51,743 275,515 Fixed Rate Loans 33,647 152,359 12,174 198,180 Floating Rate Loans 23,239 14,527 39,569 77,335 Total 56,886 166,886 51,743 275,515 Mortgage Banking The Company has been in Mortgage Banking since the early 1980's. The activity in origination and sale of these loans fluctuates, mainly due to changes in interest rates. Rates have fallen in 2001 and as a result, have favorably impacted our loan originations in 2001 compared to 2000. During 2000 interest rates were rising. As a result of this, mortgage loan originations decreased from $22 million in 1999 to $13 million in 2000, and increased to $29 million in 2001. The sale of loans were $28 million, $15 million and $25 million for the year 2001, 2000 and 1999, respectively. Mortgage loans held for sale increased from $868 thousand at December 31, 2000 to $2.3 million at December 31, 2001. Volume of loan originations are inverse to rate changes. The rate environment in 2001 was falling in contrast to 2000 and 1999 when rates were rising and therefore resulted in increased loan originations in 2001 compared to 2000 and 1999. The effect of these changes was also reflected on the income statement. Loan service fee income was $258 thousand in 2001, $287 thousand in 2000 and $291 thousand in 1999. This decline is attributable to selling selected loans servicing released. Fluctuations of larger degrees are reflected in the gain on sale of mortgage loans. For 2001, the gain was $383 thousand compared to $133 thousand in 2000 and $351 thousand in 1999. The Bank has sold various loans to the Federal Home Loan Mortgage Corporation (FHLMC) while retaining the servicing rights. Gains and losses on loan sales are recorded at the time of the cash sale, which represents the premium or discount paid by the FHLMC. The Bank receives a servicing fee from the FHLMC on each loan sold. Servicing rights are capitalized based on the relative fair value of the rights and the loan and are included in intangible assets on the balance sheet and expensed in proportion to, and over the period of, estimated net servicing revenues. Mortgage servicing rights were $463 thousand at December 31, 2001, $521 thousand at December 31, 2000 and $606 thousand at December 31, 1999. Amortization of mortgage servicing rights was $140 thousand, $155 thousand and $155 thousand for the years ended December 31, 2001, 2000 and 1999, respectively. See Note 4 in the notes to consolidated financial statements included as Exhibit 13 for additional information. Deposits Total deposits increased to $309 million in 2001, up $8 million from 2000. Noninterest bearing deposits decreased $816 thousand, while time deposits of $100 thousand and over increased $1.4 million, and other interest bearing deposits increased $7.5 million. Public funds totaled $34 million at the end of 1999 ($33 million was interest bearing). Due to the downturn in the economy in 2001 and the softening loan demand, deposits were not aggressively pursued. For 2000, total deposits increased $26 million to $301 million. Noninterest bearing deposits increased $6 million, while time deposits of $100 thousand and over increased $6 million, and other interest bearing deposits increased $15 million. Public funds totaled $39 million at the end of 2000 ($38 million was interest bearing). The tables below provide information on the maturities of time deposits of $100,000 or more at December 31, 2001 and detail of short-term borrowing for the past three years. Maturity of Time Deposits of $100,000 or More At December 31, 2001 (in thousands) Maturing 3 Months or Less $18,746 Maturing over 3 Months through 6 Months 9,387 Maturing over 6 Months through 12 Months 11,224 Maturing over 12 Months 2,315 Total $41,672 Borrowing The Company utilizes both long and short term borrowing. Long term borrowing is mainly from the Federal Home Loan Bank (FHLB). This borrowing is mainly used to fund long term, fixed rate mortgages and to assist in asset/liability management. Advances are either paid monthly or at maturity. FHLB advances were $43.6 million at December 31, 2001. During 2001, $246 thousand of FHLB borrowing was paid, and advances were made for an additional $22 million. The 2001 advances were obtained for a $10 million arbitrage transaction and the remainder to fund fixed rate mortgages, as detailed above. As of December 31, 2000, $21.6 million was borrowed from FHLB, a decrease of $5 million from 1999. In 2000, $11.3 million of FHLB advances were paid, and advances were made for an additional $6.3 million. For potential Y2K problems, $10 million in advances were received in late 1999 and repaid in early 2000. The following table depicts relevant information concerning our short term borrowings. Short Term Borrowings As of and for the year ended December 31 (in thousands) 2001 2000 1999 Federal Funds Purchased: Balance at Year end $ - $ - $ - Average Balance During the Year 6 373 2,196 Maximum Month End Balance - 2,300 11,925 Year end rate 0.00% 0.00% 0.00% Average annual rate 5.89% 6.95% 5.18% Repurchase Agreements: Balance at Year end $ 683 $ 8,189 $10,330 Average Balance During the Year 3,303 8,727 5,683 Maximum Month End Balance 5,164 12,310 10,330 Year end rate 1.59% 5.92% 4.87% Average annual rate 3.35% 5.51% 4.37% Other Borrowed Funds: Balance at Year end $ 919 $ 1,257 $ 1,528 Average Balance During the Year 1,281 1,216 1,203 Maximum Month End Balance 1,768 1,766 1,759 Year end rate 7.24% 11.71% 7.90% Average annual rate 8.67% 10.13% 9.49% Asset Quality With respect to asset quality, management considers three categories of assets to merit close scrutiny. These categories include: loans that are currently nonperforming, other real estate, and loans that are currently performing but which management believes require special attention. During periods of economic slowdown, the Company may experience an increase in nonperforming loans. The Company discontinues the accrual of interest on loans that become 90 days past due as to principal or interest unless reasons are documented such as the loan being in the process of collection. Uncollected interest generally remains in earned income until collected and removed from earnings if the loan is charged-off. A loan remains in a non- accrual status until factors indicating doubtful collection no longer exist. A loan is classified as a restructured loan when the interest rate is materially reduced or the term is extended beyond the original maturity date because of the inability of the borrower to service the interest payments at market rates. Other real estate is recorded at the lower of cost or fair market value less estimated costs to sell. A summary of the components of nonperforming assets, including several rates using period-end data, is shown below. Nonperforming Assets At December 31 (dollars in thousands) 2001 2000 1999 1998 1997 Non-accrual Loans $ 935 $ 307 $ 63 $ 136 $ 173 Accruing Loans which are Contractually past due 90 days or more 1,228 1,365 549 790 154 Restructured Loans 0 130 131 147 160 Total Nonperforming Loans 2,163 1,802 743 1,073 487 Other Real Estate 212 165 371 70 0 Total Nonperforming Assets 2,375 1,967 1,114 1,143 487 Total Nonperforming Loans as a Percentage of Net Loans (including loans held for sale) (1) 0.79% 0.66% 0.31% 0.50% 0.26% Total Nonperforming Assets as a Percentage of Total Assets 0.60% 0.53% 0.32% 0.37% 0.17% Allowance to nonperforming assets 1.43 1.72 2.79 2.39 4.77 (1) Net of deferred loan fees Total nonperforming assets at December 31, 2001 were $2.4 million compared to $2.0 million at December 31, 2000 and $1.1 million at December 31, 1999. Total nonperforming loans were $2.2 million, $1.8 million and $743 thousand at December 31, 2001, 2000 and 1999, respectively. Two mortgage loans totaling $453 thousand account for the increase in 2001 on nonaccrual loans. A loss of $20 thousand is expected on these loans. The economic downturn in 2001 was a contributing factor to the increase in loans 90 days or more past due. Two lines totaling $376 thousand account for most of the change (considering the loan of $790 thousand in 2000 that follows was paid off in 2001). Expected losses on these loans are not to exceed $30 thousand. For 2000, the increase in loans that are 90 days or more past due is mainly attributable to one Small Business Administration loan of $790 thousand. The Company does not expect to incur a loss on this loan. The amount of lost interest on our non-accrual loans is immaterial. At December 31, 2001, loans currently performing but which management believes require special attention were not significant. The Company continues to follow its long-standing policy of not engaging in international lending and not concentrating lending activity in any one industry. Impaired loans as of December 31, 2001 were $964 thousand compared to $395 thousand in 2000 and $201 thousand in 1999. These amounts are included in the total nonperforming and restructured loans presented in the table above. See Note 4 in the notes to consolidated financial statements included as Exhibit 13. A loan is considered impaired when it is probable that all principal and interest amounts will not be collected according to the loan contract. The allowance for loan losses on impaired loans is determined using the present value of estimated future cash flows of the loan, discounted at the loan's effective interest rate or the fair value of the underlying collateral. The entire change in present value of expected cash flows is reported as a provision for loan losses in the same manner in which impairment initially was recognized or as a reduction in the amount of provision for loan losses that otherwise would be reported. The total allowance for loan losses related to these loans was $249 thousand, $117 thousand and $10 thousand on December 31, 2001, 2000 and 1999, respectively. Loan Losses The following table is a summary of the Company's loan loss experience for each of the past five years. For the Year Ended December 31 (in thousands) 2001 2000 1999 1998 1997 Balance at Beginning of Year $ 3,388 $ 3,103 $ 2,735 $ 2,322 $ 2,101 Amounts Charged-off: Commercial 178 14 0 13 5 Real Estate Construction 0 0 0 0 0 Real Estate Mortgage 171 115 50 36 25 Agricultural 46 30 72 19 52 Consumer 751 400 289 300 273 Total Charged-off Loans 1,146 559 411 368 355 Recoveries on Amounts Previously Charged-off: Commercial 4 14 5 4 3 Real Estate Construction 0 0 0 0 0 Real Estate Mortgage 2 7 1 9 1 Agricultural 1 8 32 2 25 Consumer 69 65 41 66 54 Total Recoveries 76 94 79 81 83 Net Charge-offs 1,070 465 332 287 272 Provision for Loan Losses 1,068 750 700 700 493 Balance at End of Year 3,386 3,388 3,103 2,735 2,322 Total Loans, Net of Deferred Loan Fees Average 273,504 257,711 221,309 193,182 171,128 At December 31 275,515 273,145 242,101 212,843 185,161 As a Percentage of Average Loans: Net Charge-offs 0.39% 0.18% 0.15% 0.15% 0.16% Provision for Loan Losses 0.39% 0.29% 0.32% 0.36% 0.29% Allowance as a Percentage of Year-end Net Loans (1) 1.23% 1.24% 1.28% 1.28% 1.25% Beginning Allowance as a Multiple of Net Charge-offs 3.2 6.7 8.2 8.1 7.7 Ending Allowance as a Multiple of Nonperforming Assets 1.40 1.72 2.79 2.39 4.77 (1) Net of deferred loan fees Loans are typically charged-off after being 120 days delinquent. Limited exceptions for not charging-off a loan would be well documented and approved by the appropriate responsible party or committee. The provision for loan losses for 2001 was $1.1 million compared to $750 thousand in 2000 and $700 thousand in 1999. Net charge-offs were $1.1 million in 2001, $465 thousand in 2000 and $332 thousand in 1999. Net charge-offs to average loans were 0.39%, 0.18% and 0.15% in 2001, 2000 and 1999, respectively. With the current quality of the loan portfolio, the loan loss provision increased $318 thousand from 2000 to 2001, and increased $50 thousand in 2000. The trend in the loan loss provision increasing for 2001 is a result of considering our probable losses and risk analysis of our loan portfolio. In evaluating the allowance for loan losses, management considers the composition of the loan portfolio, historical loan loss experience, the overall quality of the loans and an assessment of current economic conditions. The economic downturn in 2001 resulted in higher loan losses than in previous years. In light of this, management has increased its emphasis on the lending process in order to improve loan quality. At December 31, 2001, the allowance for loan losses was 1.23% of loans outstanding compared to 1.24% at year-end 2000 and 1.28% in 1999. Management believes the allowance for loan losses at the end of 2001 is adequate to cover probable credit losses within the portfolio. The following tables set forth an allocation for the allowance for loan losses and loans by category and a percentage distribution of the allowance allocation. In making the allocation, management evaluates the risk in each category, current economic conditions and charge-off experience. An allocation for the allowance for loan losses is an estimate of the portion of the allowance that will be used to cover future charge-offs in each loan category, but it does not preclude any portion of the allowance allocated to one type of loan being used to absorb losses of another loan type. Allowance for Loan Losses
At December 31 (in thousands) 2001 2000 1999 1998 1997 Dollars Percentage Dollars Percentage Dollars Percentage Dollars Percentage Dollars Percentage Commercial $ 291 8.59% $ 275 8.12% $ 275 8.86% $ 262 9.58% $ 191 8.23% Real Estate Construction 194 5.73% 244 7.20% 294 9.47% 168 6.14% 118 5.08% Real Estate Mortgage 1,602 47.31% 1,563 46.13% 1,471 47.41% 1,480 54.11% 1,327 57.15% Agricultural 693 20.47% 668 19.72% 565 18.21% 473 17.29% 393 16.93% Consumer 606 17.90% 638 18.83% 498 16.05% 352 12.87% 293 12.62% Total 3,386 100.00% 3,388 100.00% 3,103 100.00% 2,735 100.00% 2,322 100.00%
Loans
At December 31 (in thousands) 2001 2000 1999 1998 1997 Dollars Percentage Dollars Percentage Dollars Percentage Dollars Percentage Dollars Percentage Commercial $ 18,618 6.76% $ 17,452 6.39% $17,713 7.32% $ 15,177 7.13% $ 10,644 5.75% Real Estate Construction 12,302 4.47% 15,270 5.59% 17,003 7.02% 11,055 5.19% 7,657 4.14% Real Estate Mortgage 168,665 61.22% 163,174 59.74% 138,304 57.13% 124,645 58.56% 113,467 61.28% Agricultural 53,640 19.47% 52,008 19.04% 46,443 19.18% 44,199 20.77% 37,924 20.48% Consumer 21,952 7.97% 24,807 9.08% 22,358 9.23% 17,608 8.27% 15,182 8.20% Other 338 0.12% 434 0.16% 280 0.12% 159 0.07% 287 0.16% Total, Net (1) 275,515 100.00% 273,145 100.00% 242,101 100.00% 212,843 100.00% 185,161 100.00% (1) Net of deferred loan fees
Capital As displayed by the following table, the Company's Tier I capital (as defined by the Federal Reserve Board under the Board's risk-based guidelines) at December 31, 2001 increased $2.9 million to $37.4 million. Total stockholders' equity, excluding accumulated other comprehensive income was $38.4 million at December 31, 2001. The Company's risk-based capital and leverage ratios, as shown in the following table, exceeded the levels required to be considered "well capitalized". The leverage ratio compares Tier I capital to total average assets less disallowed amounts of goodwill. At December 31 (dollars in thousands) 2001 2000 Change Stockholders' Equity (1) $ 38,353 $ 35,868 2,485 Less Disallowed Amount 943 1,380 (437) Tier I Capital 37,410 34,488 2,922 Allowance for Loan Losses 3,386 3,296 90 Other 104 0 104 Tier II Capital 3,490 3,296 194 Total Capital 40,900 37,784 3,116 Total Risk Weighted Assets 283,541 263,660 19,881 Ratios: Tier I Capital to Risk-weighted Assets 13.19% 13.08% 0.11% Total Capital to Risk-weighted Assets 14.42% 14.33% 0.09% Leverage 9.63% 9.29% 0.34% (1) Excluding accumulated other comprehensive income. The Federal Deposit Insurance Corporation Improvement Act of 1991 ("FDICIA") established five capital categories for insured depository institutions under its Prompt Corrective Action Provisions. The bank regulatory agencies adopted regulations, which became effective in 1992, defining these five capital categories for banks they regulate. The categories vary from "well capitalized" to "critically undercapitalized". A "well capitalized" bank is defined as one with a total risk-based capital ratio of 10% or more, a Tier I risk-based capital ratio of 6% or more, a leverage ratio of 5% or more, and one not subject to any order, written agreement, capital directive, or prompt corrective action directive to meet or maintain a specific capital level. At December 31, 2001, the bank had ratios that exceeded the minimum requirements established for the "well capitalized" category. In management's opinion, there are no other known trends, events or uncertainties that will have or that are reasonably likely to have a material effect on the Company's liquidity, capital resources or operations. Securities and Federal Funds Sold Securities, including those classified as held to maturity and available for sale, increased from $68.1 million at December 31, 2000 to $75.6 million at December 31, 2001. The increase is mainly attributable to the lower loan demand. Federal funds sold totaled $14.4 million at December 31, 2001 and $3.7 million at December 31, 2000. As allowed in conjunction with the adoption of the new "derivative" standard, the Company transferred its entire securities held to maturity portfolio to available for sale on January 1, 2001. Per Company policy, fixed rate asset backed securities will not have an average life exceeding seven years, but final maturity may be longer. Adjustable rate securities shall adjust within three years per Company policy. Of the $11.3 million of adjustable asset backed securities held on December 31, 2001, $6.3 million are repriceable monthly and the remaining $5.0 million are repriceable annually. Of the $12.4 million of adjustable asset backed securities held on December 31, 2000, $3.3 million are repriceable monthly and the remaining $9.1 million are repriceable annually. Unrealized gains (losses) on investment securities are temporary and change inversely with movements in interest rates. In addition, some prepayment risk exist on mortgage-backed securities and prepayments are likely to increase with decreases in interest rates. The following tables present the investment securities for each of the past three years and the maturity and yield characteristics of securities as of December 31, 2001. Investment Securities (Held to maturity at amortized cost, available for sale at market value) At December 31 (in thousands) 2001 2000 1999 Available for Sale U.S. treasury $ 7,218 $ 14,992 $ 17,954 U.S. government agencies 6,118 5,028 5,902 States and political subdivisions 19,470 3,366 3,681 Mortgage-backed Fixed - GNMA, FNMA, FHLMC Passthroughs 12,672 5,580 5,998 GNMA, FNMA, FHLMC CMO's 5,057 4,941 5,191 Total 17,729 10,521 11,189 Variable - GNMA, FNMA, FHLMC Passthroughs 8,402 9,374 11,539 GNMA, FNMA, FHLMC CMO's 2,925 2,983 3,045 Total 11,327 12,357 14,584 Total mortgage-backed 29,056 22,878 25,773 Other 13,746 6,559 1,620 Total 75,608 52,823 54,930 Held to Maturity States and political subdivisions $ - $ 15,231 $ 15,693 Total $ 75,608 $ 68,054 $ 70,623 Maturity Distribution of Securities
At December 31, 2001 (in thousands) Over One Over Five Asset Year Years Backed One Year Through Through Over Ten & Equity or Less Five Years Ten Years Years Securities Total Available for Sale U.S. treasury $ 2,061 $ 5,157 $ - $ - $ - $ 7,218 U.S. government agencies 3,103 3,015 0 0 0 6,118 States and political subdivisions 816 5,534 5,650 7,470 0 19,470 Mortgage-backed 0 0 0 0 29,056 29,056 Equity Securities 0 0 0 0 10,693 10,693 Other 0 2,015 1,038 0 0 3,053 Total 5,980 15,721 6,688 7,470 39,749 75,608 Percent of Total 7.9% 20.8% 8.8% 9.9% 52.6% 100.0% Weighted Average Yield (1) 6.03% 6.16% 7.92% 7.48% 4.74% 5.69% (1) Tax Equivalent Yield
Impact of Inflation and Changing Prices The majority of Bourbon's assets and liabilities are monetary in nature. Therefore, Bourbon differs greatly from most commercial and industrial companies that have significant investments in nonmonetary assets and inventories. However, inflation does have an important impact on the growing of assets in the banking industry and the resulting need to increase equity capital at higher than normal rates in order to maintain an appropriate equity to assets ratio. Inflation also affects other expenses, which tend to rise during periods of inflation. Other Accounting Issues Beginning January 1, 2001, a new accounting standard requires all derivatives to be recorded at fair value. Unless designated as hedges, changes in these fair values will be recorded in the income statement. Fair value changes involving hedges will generally be recorded by offsetting gains and losses on the hedge and on the hedged item, even if the fair value of the hedged item is not otherwise recorded. The Company periodically enters into non-exchange traded mandatory forward sales contracts in conjunction with its mortgage banking operation. These contracts, considered derivatives, typically last 90 days and are used to hedge the risk of interest rate changes between the time of the commitment to make a loan to a borrower at a stated rate and when the loan is sold. The Company did not have any mandatory forward sales contracts at December 31, 2001 and 2000. As allowed in conjunction with the adoption of this standard, the Company transferred its entire securities held to maturity portfolio to available for sale. As a result of this transfer and the corresponding adjustment to fair value, on January 1, 2001 securities increased $407,000, other assets decreased $138,000, and accumulated other comprehensive income increased $269,000. A new accounting standard requires all business combinations to be recorded using the purchase method of accounting for any transaction initiated after June 30, 2001. Under the purchase method, all identifiable tangible and intangible assets and liabilities of the acquired company must be recorded at fair value at date of acquisition, and the excess of cost over fair value of net assets acquired is recorded as goodwill. Identifiable intangible assets must be separated from goodwill. Identifiable intangible assets with finite useful lives will be amortized under the new standard, whereas goodwill, both amounts previously recorded and future amounts purchased, will cease being amortized starting in 2002. Annual impairment testing will be required for goodwill with impairment being recorded if the carrying amount of goodwill exceeds its implied fair value. All recorded acquistion intangibles are identified with specific assets. There are no intangible assets identified as goodwill. Adoption of this standard on January 1, 2002 will not have a material effect on the Company's financial statements. Item 7A. Asset/Liability Management, Interest Rate Sensitivity, Market Risk and Liquidity Asset/Liability management control is designed to ensure safety and soundness, maintain liquidity and regulatory capital standards, and achieve acceptable net interest income. Management considers interest rate risk to be the most significant market risk. The Company's exposure to market risk is reviewed on a regular basis by the Asset/Liability Committee. Interest rate risk is the potential of economic losses due to future interest rate changes. These economic losses can be reflected as a loss of future net interest income and/or a loss of current fair market values. The objective is to measure the effect on net interest income and to adjust the balance sheet to minimize the inherent risk while at the same time maximize income. Management realizes certain risks are inherent and that the goal is to identify and minimize the risks. The primary tool used by management is an interest rate shock simulation model. Certain assumptions, such as prepayment risks, are included in the model. However, actual prepayments may differ from those assumptions. In addition, immediate withdrawal of interest checking and other savings accounts may have an effect on the results of the model. The Bank has no market risk sensitive instruments held for trading purposes. The following table depicts the change in net interest income resulting from 100 and 300 basis point changes in rates. The projections are based on balance sheet growth assumptions and repricing opportunities for new, maturing and adjustable rate amounts. In addition, the projected percentage changes from level rates are outlined below along with the Board of Directors approved limits. As of December 31, 2001 the projected percentage changes are within the Board of Directors limits and the Company's interest rate risk is also within Board of Directors limits. The projected net interest income report summarizing the Company's interest rate sensitivity as of December 31, 2001 and December 31, 2000 is as follows: Projected Net Interest Income (December 31, 2001)
Level -300 -100 Rates +100 +300 Year One (1/1/02 - 12/31/02) Interest Income $21,449 $23,849 $25,210 $26,577 $29,316 Interest Expense 7,076 8,704 9,917 11,130 13,557 Net Interest Income 14,373 15,145 15,293 15,447 15,759 Net interest income dollar change (920) (148) 154 466 Net interest income percentage change -6.0% -1.0% N/A 1.0% 3.0% Limitation on % Change >-10.0% >-4.0% N/A >-4.0% >-10.0%
Level -300 -100 Rates +100 +300 Year One (1/1/01 - 12/31/01) Interest Income $ 26,736 $ 29,116 $ 30,306 $ 31,495 $ 33,875 Interest Expense 11,428 13,841 15,048 16,255 18,669 Net Interest Income 15,308 15,275 15,258 15,240 15,206 Net interest income dollar change 50 17 (18) (52) Net interest income percentage change 0.3% 0.1% N/A -0.1% -0.3% Limitation on % Change >-10.0% >-4.0% N/A >-4.0% >-10.0%
These numbers in 2001 show greater fluctuation when compared to 2000. In 2001, year one reflected a decrease in net interest income of 6.0% compared to 0.3% projected increase from 2000 with a 300 basis point decline. The 300 basis point increase in rates reflected a 3.0% decrease in net interest income in 2001 compared to a 0.3% decrease in 2000. The risk is greater in 2001 due to the current status of existing interest rates (being low) and their effect on rate sensitive assets and rate sensitive liabilities. An increase in rates would improve net interest income. Management measures the Company's interest rate risk by computing estimated changes in net interest income in the event of a range of assumed changes in market interest rates. The Company's exposure to interest rates is reviewed on a monthly basis by senior management and quarterly with the Board of Directors. Exposure to interest rate risk is measured with the use of interest rate sensitivity analysis to determine the change in net interest income in the event of hypothetical changes in interest rates, while interest rate sensitivity gap analysis is used to determine the repricing characteristics of the Company's assets and liabilities. If estimated changes to net interest income are not within the limits established by the Board, the Board may direct management to adjust the Company's asset and liability mix to bring interest rate risk within Board approved limits. Liquidity risk is the possibility that the Company may not be able to meet its cash requirements. Management of liquidity risk includes maintenance of adequate cash and sources of cash to fund operations and meeting the needs of borrowers, depositors and creditors. Excess liquidity has a negative impact on earnings resulting from the lower yields on short-term assets. In addition to cash and cash equivalents, the securities portfolio provides an important source of liquidity. Total securities maturing within one year along with cash and cash equivalents totaled $46.3 million at December 31, 2001. Additionally, securities available-for- sale with maturities greater than one year totaled $58.9 million at December 31, 2001. As part of the new accounting pronouncement mentioned in Note 1 of the Notes to Consolidated Financial Statements included in Exhibit 13 the Company transferred its entire securities held to maturity portfolio to available for sale on January 1, 2001. This added an additional $15.6 million in securities to the available for sale portfolio. The available for sale securities are available to meet liquidity needs on a continuing basis. Bourbon maintains a relatively stable base of customer deposits and its steady growth is expected to be adequate to meet its funding demands. In addition, management believes the majority of its $100,000 or more certificates of deposit are no more volatile than its core deposits. At December 31, 2001 these balances totaled $41.7 million, approximately 13.5% of total deposits. The Company also relies on FHLB advances for both liquidity and asset/liability management purposes. These advances are used primarily to fund long-term fixed rate residential mortgage loans. We have sufficient collateral to borrow an additional $13 million from the FHLB at December 31, 2001. Generally, Bourbon relies upon net cash inflows from financing activities, supplemented by net cash inflows from operating activities, to provide cash used in its investing activities. As is typical of many financial institutions, significant financing activities include deposit gathering, and the use of short-term borrowings, such as federal funds purchased and securities sold under repurchase agreements along with long-term debt. The Company's primary investing activities include purchasing investment securities and loan originations. Management believes there is sufficient cash flows from operations to meet investing and liquidity needs related to reasonable borrower, depositor and creditor needs in the present economic environment. The cash flow statements for the periods presented provide an indication of the Company's sources and uses of cash as well as an indication of the ability of the Company to maintain an adequate level of liquidity. A number of other techniques are used to measure the liquidity position, including the ratios presented below. These ratios are calculated based on annual averages for each year. Liquidity Ratios December 31 2001 2000 1999 Average Loans (including loans held for sale)/Average Deposits 91.5% 89.9% 83.9% Average Securities sold under agreements to repurchase and other borrowings/Average Assets 1.2% 2.9% 2.8% This chart shows that the loan to deposit ratio increased in 2001 and 2000. Loan growth of 6% and deposit growth of 5% in 2001, coupled with loan growth of 15% and deposit growth of 7% in 2000 have been contributing factors to the change in this ratio over the past two years. Item 8. Financial Statements The consolidated financial statements of the Company together with the notes thereto and report of independent auditors are contained in the Company's 2001 Annual Report to Stockholders included as Exhibit 13, and are incorporated herein by reference. No other portion of the 2001 Annual Report to Stockholders is to be deemed "filed" as part of this filing. Item 9. Changes In and Disagreements with Accountants on Accounting and Financial Disclosure Not Applicable PART III Item 10. Directors and Executive Officers of the Registrant Under the Company's Articles of Incorporation, the Board of Directors consists of three different classes, each to serve, subject to the provisions of the Articles of Incorporation and Bylaws for a three year term and until his successor is duly elected and qualified. The names of the directors and their terms are set forth below. Terms expiring in 2002: Henry Hinkle, age 50, is President of Hinkle Construction Company. He has been a director of Kentucky Bank and the Company since 1989. Theodore Kuster, age 58, is a farmer and thoroughbred horse breeder. He has been a director of Kentucky Bank since 1979 and the Company since 1985. Robert G. Thompson, age 52, is Executive Director of the Paris Bourbon County YMCA, a farmer and thoroughbred horse breeder. He has been a director of Kentucky Bank and the Company since 1991. Terms expiring in 2003: William R. Stamler, age 67, is Chairman of Signal Investments, Inc. He has been a director of Kentucky Bank since 1984 and the Company since 1988. Buckner Woodford, age 57, is President and Chief Executive Officer of Bourbon Bancshares, Inc. and Kentucky Bank. He has been a director of Kentucky Bank since 1971 and the Company since inception. Terms expiring in 2004: William Arvin, age 61, is an attorney. He has been a director of Kentucky Bank and the Company since 1995. James L. Ferrell, M.D., age 67, is a Physician. He has been a director of Kentucky Bank since 1980 and the Company since inception. The Company's other executive officer is Gregory J. Dawson, age 41. He is the Chief Financial Officer and has been with the Company since 1985 and serves at the pleasure of the Board of Directors. Item 11. Executive Compensation The following table sets forth information with respect to the compensation of the President and Chief Executive Officer of the Company, Buckner Woodford. No other executive officer earned total salary and bonus in excess of $100,000. Summary Compensation Table Annual Compensation Other Annual Options Name Year Salary Bonus Compensation Granted Buckner Woodford 2001 $175,000 $ 19,250 (1) 500 Buckner Woodford 2000 168,500 49,630 (1) 500 Buckner Woodford 1999 162,000 47,952 (1) 3,600 (1) Less than the lesser of $50,000 or 10% of annual salary and bonuses The following table contains information regarding the grant of stock options under the Company's stock option plan to the Chief Executive Officer during the year ended December 31, 2001. In addition, in accordance with rules of the Securities and Exchange Commission, the following table sets forth the hypothetical grant date present value with respect to the referenced options, using the Black-Scholes Option Pricing Model. Option Grants in the Last Fiscal Year % of Total Options Grant Shares Granted to Exercise Date Granted Employees Price Expiration Present Name (#) in 2001 ($/Sh) Date Value($) Buckner Woodford 500 12.0% $23.50 1/2/11 $2,290 The following table sets forth certain information regarding options exercised by the Chief Executive Officer during calendar year 2001 and unexercised stock options held by him as of December 31, 2001.
Aggregated Option Exercises in Calendar 2001 and Year-end Stock Option Values Shares Number of Securities Value of Unexercised Acquired Value Underlying Unexercised In-the-Money on Exercise Realized Options at 12/31/01 Options at 12/31/01 Name (#) ($) Exercisable/Unexercisable Exercisable/Unexercisable Buckner Woodford None N/A 19,060/5,220 $248,955/$38,260 No SAR's exist for the Company.
Compensation of Directors Directors are paid $400 for each board meeting attended and $100 for each committee meeting attended. Directors are also granted a 10-year option to purchase 50 shares of the Company's common stock following each year in which Kentucky Bank has a return on assets of 1 percent or greater. The option's exercise price is the fair market value per share on the date of grant. Pension Plan The following table sets forth the annual benefits which an eligible employee would receive under the Company's qualified defined benefit pension plan based on remuneration that is covered under the plan and years of service with the Company and its subsidiaries. Years of Service Remuneration 15 20 25 30 35 $ 25,000 $ 3,750 $ 5,000 $ 6,250 $ 7,500 $ 8,750 50,000 7,500 10,000 12,500 15,000 17,500 75,000 11,250 15,000 18,750 22,500 26,250 100,000 15,000 20,000 25,000 30,000 35,000 125,000 18,750 25,000 31,250 37,500 43,750 150,000 22,500 30,000 37,500 45,000 52,500 175,000 26,250 35,000 43,750 52,500 61,250 200,000 30,000 40,000 50,000 60,000 70,000 225,000 33,750 45,000 56,250 67,500 78,750 In general, a participant's remuneration covered by the Company's pension plan is his or her average annual cash compensation (W-2 earnings) for the last 5 years. The years of service for Mr. Woodford are 29 years. Item 12. Security Ownership of Certain Beneficial Owners and Management Set forth below are the number of shares of the Company's common stock beneficially owned by each director and executive officer, and all current directors and executive officers as a group as of December 31, 2001. Name Shares Beneficially Owned(1) Number Percentage William Arvin (2) 33,359 1.2% Gregory J. Dawson (3) 8,695 * James L. Ferrell, M.D. (4) 29,900 1.1% Henry Hinkle (5) 27,905 * Theodore Kuster (6) 17,410 * William R. Stamler (7) 31,320 1.1% Robert G. Thompson (8) 7,600 * Buckner Woodford (9) 253,498 8.9% All directors and officers (8 persons) as a group (consisting of those persons named above)(10) 409,687 14.4% * Less than 1% 1) Beneficial ownership as reported in the above table has been determined in accordance with Rule 13d-3 under the Exchange Act. Unless otherwise indicated, beneficial ownership includes both sole or shared voting and sole or shared investment power. 2) Includes 11,858 shares held in a retirement account, 13,695 shares held of record by Mr. Arvin's wife, as to which Mr. Arvin disclaims beneficial ownership, 7,276 held jointly with his wife and 400 shares that Mr. Arvin may acquire upon exercise of outstanding stock options. 3) Includes 4,990 shares that Mr. Dawson may acquire upon exercise of outstanding stock options. 4) Includes 5,400 shares held in a retirement account and 800 shares that Mr. Ferrell may acquire upon exercise of outstanding stock options. Also, includes 3,000 shares held by Dr. Ferrell's wife, as to which Dr. Ferrell disclaims beneficial ownership. 5) Includes 1,000 shares held by his wife and 640 shares held by three sons, as to which Mr. Hinkle disclaims beneficial ownership. Includes 24,000 shares held of record by Hinkle Contracting Company, as to which Mr. Hinkle, as president, has shared voting power. Also includes 800 shares that Mr. Hinkle may acquire upon exercise of outstanding stock options. 6) Includes 6,270 share held of record by Mr. Kuster's wife, as to which Mr. Kuster disclaims beneficial ownership. Also includes 5,180 shares held in a retirement account and 600 shares that Mr. Kuster may acquire upon exercise of outstanding stock options. 7) Includes 4,000 shares held by Signal Investments Corporation, as to which Mr. Stamler, as the chief executive officer and majority Stockholder of such corporation, has sole voting and investment power. Also includes 380 shares that Mr. Stamler may acquire upon exercise of outstanding stock options. 8) Includes 800 shares that Mr. Thompson may acquire upon exercise of outstanding stock options. 9) Includes 8,000 shares held by his wife, as to which Mr. Woodford disclaims beneficial ownership. Also includes 208 shares held in a retirement account and 19,060 shares that Mr. Woodford may acquire upon exercise of outstanding stock options. 10) Includes 27,830 shares that may be acquired upon exercise of outstanding stock options. The following table sets forth as of December 31, 2001 the persons known by the Company to own beneficially (as determined in accordance with the rules and regulations of the Commission) more than 5% of the outstanding common stock. See note 9 in the preceding table for further information. Name and Address Shares Beneficially of Beneficial Owner Owned Percentage Buckner Woodford 253,498 8.9% 340 Stoner Avenue Paris, Kentucky 40361 Item 13. Certain Relationships and Related Transactions Directors and officers of the Company and their associates were customers of and had transactions with the Company's subsidiary bank in the ordinary course of business during the year ended December 31, 2001. Similar transactions may be expected to take place with the Company's subsidiary bank in the future. Outstanding loans and commitments made by such subsidiary bank in transactions with the Company's directors and officers and their associates were made on substantially the same terms, including interest rates and collateral, as those prevailing at the time for comparable transactions with other persons and did not involve more than a normal risk of collectibility or present other unfavorable features. Certain directors and executive officers were loan customers of Kentucky Bank and outstanding loans were $1.5 million as of December 31, 2001 and 2000. See Note 4 in the notes to consolidated financial statements included as Exhibit 13. Part IV Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K (a) The following exhibits are incorporated by reference herein or made a part of this Form 10-K: 3.1 Articles of Incorporation of the Registrant are incorporated by reference to Exhibit 3.1 of the Registrant's Quarterly Report on Form 10-Q for the quarterly period ending March 31, 2000 (File No. 33-96358). 3.2 Bylaws of the Registrant are incorporated by reference to Exhibit 3.1 of the Registrant's Quarterly Report on Form 10-Q for the quarterly period ending June 30, 2000 (File No. 33-96358). 10.1 Bourbon's 1993 Employee Stock Ownership Incentive Plan is incorporated by reference to Exhibit 10.2 of the Registrant's Registration Statement on Form S-4 (File No. 33-96358).* 10.2 Bourbon's 1993 Non-Employee Directors Stock Ownership Incentive Plan is incorporated by reference to Exhibit 10.3 of the Registrant's Registration Statement on Form S-4 (File No. 33-96358).* 10.3 Bourbon Bancshares, Inc. 1999 Employee Stock Option Plan is incorporated by reference to Exhibit 99.1 of the Registrant's Form 10-K for the fiscal year ended December 31, 1998.* 11 Computation of earnings per share - See Note 10 in the notes to consolidated financial statements included as Exhibit 13. 13 Financial Statements: Consolidated Balance Sheets Consolidated Statements of Income Consolidated Statements of Comprehensive Income Consolidated Statements of Changes in Stockholders' Equity Consolidated Statements of Cash Flows Notes to Consolidated Financial Statements Report of Independent Auditors 21 Subsidiaries of Registrant 23 Consent of Crowe, Chizek and Company LLP 99.1 Proxy statement dated March 26, 2002, sent to the Registrant's security holders in connection with the 2002 Annual Meeting of Shareholders and supplementally furnished to the Commission for its information as required by Form 10-K for registrants which have not registered securities pursuant to Section 12 of the Securities Exchange Act of 1934. This material is not otherwise to be deemed filed with the Commission. * Denotes a management contract or compensatory plan or arrangement of the Registrant required to be filed as an exhibit pursuant to Item 601(10) (iii) of Regulation S-K. (b) Current Reports on Form 8-K during the quarter ended December 31, 2001 None SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this Amendment No. 1 to the Form 10-K to be signed on its behalf by the undersigned, thereunto duly authorized. Bourbon Bancshares, Inc. By: _/s/Buckner Woodford____ Buckner Woodford, President and Chief Executive Officer, Director August 30, 2002 SUPPLEMENTAL INFORMATION TO BE FURNISHED WITH REPORTS FILED PURSUANT TO SECTION 15(d) OF THE ACT BY REGISTRANTS WHICH HAVE NOT REGISTERED SECURITIES PURSUANT TO SECTION 12 OF THE ACT. The Registrant refers to Exhibits 13 and 99.1 to the Form 10-K. INDEX TO EXHIBITS Exhibit Number Description of Document 3.1 Articles of Incorporation of the Registrant are incorporated by reference to Exhibit 3.1 of the Registrant's Quarterly Report on Form 10-Q for the quarterly period ending March 31, 2000 (File No. 33-96358). 3.2 Bylaws of the Registrant are incorporated by reference to Exhibit 3.1 of the Registrant's Quarterly Report on Form 10- Q for the quarterly period ending June 30, 2000 (File No. 33-96358). 10.1 Bourbon's 1993 Employee Stock Ownership Incentive Plan is incorporated by reference to Exhibit 10.2 of the Registrant's Registration Statement on Form S-4 (File No. 33-96358).* 10.2 Bourbon's 1993 Non-Employee Directors Stock Ownership Incentive Plan is incorporated by reference to Exhibit 10.3 of the Registrant's Registration Statement on Form S-4 (File No. 33-96358).* 10.3 Bourbon Bancshares, Inc. 1999 Employee Stock Option Plan is incorporated by reference to Exhibit 99.1 of the Registrant's Form 10-K for the fiscal year ended December 31, 1998.* 11 Computation of earnings per share - See Note 10 in the notes to consolidated financial statements included as Exhibit 13. 13 Bourbon Bancshares, Inc. 2001 Annual Report 21 Subsidiaries of Registrant 23 Consent of Crowe, Chizek and Company LLP 99.1 Proxy statement dated March 26, 2002, sent to the Registrant's security holders in connection with the 2002 Annual Meeting of Shareholders and supplementally furnished to the Commission for its information as required by Form 10-K for registrants which have not registered securities pursuant to Section 12 of the Securities Exchange Act of 1934. This material is not otherwise to be deemed filed with the Commission. * Denotes a management contract or compensatory plan or arrangement of the Registrant required to be filed as an exhibit pursuant to Item 601(10) (iii) of Regulation S-K. Exhibit 13 BOURBON BANCSHARES, INC. ANNUAL REPORT 2002 Letter to the Shareholders. Our country was drastically changed in 2001 by the terrorist attack on September 11. Many and varied emotions were felt by our citizens --shock, anger, fear, patriotism, and more. Peaceful enjoyment was replaced with deep concern for our future. Our prosperity was also a victim of the attack. Consumers cut back first on travel plans, then on other spending. Large employers cut back and announced layoffs. After many years of growth, our economy slipped into recession. This is not a favorable environment for business. In spite of that our company performed fairly well. Growth slowed. After several years of double-digit loan growth, our portfolio showed little increase this past year. Because of the lessened loan demand we were more conservative in our efforts to build deposits. We did add about $8 million to our deposit base. Bank assets overall grew by 7% to $397 million. Earnings for the year increased from $5.2 million to $5.5 million. The lower growth in our loan portfolio and slimmer margins combined to limit earnings growth. The brightest part of our financial performance in 2001 was a very healthy 47%increase in non-interest income. Stockholder equity rose from $36 million to $39 million by year-end. Two directors of Kentucky Bank retired in December. Joe Allen and Joe McClain provided valuable advice to us for many years. They were good friends as well. We will miss their presence when we meet to guide company affairs. We completed two important construction projects this year. Our new branch in Cynthiana opened in October. It has gotten off to a promising start. At our headquarters in downtown Paris, we completed an historic restoration. We moved back into the lobby in December 2001. The building is now more impressive both outside and inside. We hope you share our pride in this important community project. The positive long economic trend in our markets has been interrupted, but we hope not for long. We believe we are well positioned to benefit over the long term. Buckner Woodford President FINANCIAL HIGHLIGHTS... BOURBON BANCSHARES, INC. 2001 2000 1999 Assets ($ millions) $ 397 $ 372 $ 347 Net Income ($ thousands) $ 5,524 $ 5,253 $ 4,450 Per Share Results Diluted Earnings $ 1.95 $ 1.83 $ 1.55 Dividends $ .60 $ .52 $ .44 Shareholder Information CORPORATE HEADQUARTERS Bourbon Bancshares, Inc. 4th and Main Street Paris, Kentucky 40361 859-987-1795 ANNUAL MEETING The annual meeting of Shareholders of Bourbon Bancshares, Inc. will be held Wednesday, May 1, 2002 at 11:00 a.m. in the corporate headquarters. TRANSFER AGENT, REGISTRAR AND DIVIDEND DISBURSING AGENT Kentucky Bank Wealth Management Department 859-987-1795, ext. 3016 MARKET MAKERS Morgan Keegan & Co. 489 East Main Street Lexington, Kentucky 40507 1-800-937-0161 Hilliard Lyons West Vine Street, Suite 400 Lexington, Kentucky 40507 1-800-944-2663 OTC Bulletin Board Symbol: BBON.OB INVESTOR INFORMATION Any individual requesting general information or a copy of the Corporation's 2001 Form 10-K Report may obtain these by writing Investor Relations at the Corporate Headquarters. CONSOLIDATED BALANCE SHEETS December 31 2001 2000 ASSETS Cash and due from banks $ 15,229,462 $ 11,595,878 Federal funds sold 14,409,000 3,749,000 Cash and cash equivalents 29,638,462 15,344,878 Available for sale 75,607,874 52,822,939 Held to maturity (fair value 2000 - $15,638,185) - 15,231,406 Mortgage loans held for sale 2,343,095 867,804 Loans 273,172,802 272,277,776 Allowance for loan losses (3,386,425) (3,388,380) Net loans 269,786,377 268,889,396 Federal Home Loan Bank stock 3,846,500 3,597,900 Bank premises and equipment, net 10,504,904 8,298,504 Interest receivable 3,507,473 4,262,243 Intangible assets 1,405,918 1,743,786 Other assets 616,556 788,407 Total assets $ 397,257,159 $ 371,847,263 LIABILITIES AND STOCKHOLDERS' EQUITY Deposits Non-interest bearing $ 47,622,621 $ 48,438,750 Time deposits, $100,000 and over 41,671,945 40,305,827 Other interest bearing 219,620,618 212,071,008 Total deposits 308,915,184 300,815,585 Securities sold under agreements to repurchase and other borrowings 1,601,982 9,446,393 Federal Home Loan Bank advances 43,597,929 21,644,278 Interest payable 2,814,581 3,427,489 Total liabilities 358,156,778 335,987,282 Stockholders' equity Preferred stock, 300,000 shares authorized and unissued - - Common stock, no par value; 10,000,000 shares authorized; 2,766,917 and 2,808,067 shares issued and outstanding in 2001 and 2000 6,649,018 6,627,255 Retained earnings 31,703,573 29,241,091 Accumulated other comprehensive income (loss) 747,790 (8,365) Total stockholders' equity 39,100,381 35,859,981 Total liabilities and stockholders' equity $ 397,257,159 $ 371,847,263 CONSOLIDATED STATEMENTS OF INCOME Years Ended December 31 2001 2000 1999 Interest income Loans, including fees $ 23,658,873 $ 23,681,081 $ 19,167,985 Securities Taxable 2,591,330 2,818,906 2,761,337 Tax exempt 1,124,620 1,059,658 1,115,480 Other 671,231 647,597 408,077 28,046,054 28,207,242 23,452,879 Interest expense Deposits 11,306,963 11,807,823 9,300,244 Securities sold under agreements to repurchase and other borrowings 131,913 541,550 386,607 Federal Home Loan Bank advances 1,857,061 1,158,250 767,779 Other 90,000 90,000 92,440 13,385,937 13,597,623 10,547,070 Net interest income 14,660,117 14,609,619 12,905,809 Provision for loan losses 1,068,000 750,000 699,600 Net interest income after provision for loan losses 13,592,117 13,859,619 12,206,209 Other income Service charges 3,663,990 2,650,310 2,074,999 Loan service fee income 257,823 286,704 290,622 Trust department income 346,554 419,728 397,416 Securities gains (losses), net 287,262 (88,169) 906 Gain on sale of mortgage loans 382,532 132,559 351,192 Other 734,043 397,131 270,416 5,672,204 3,798,263 3,385,551 Other expenses Salaries and employee benefits 6,019,279 5,538,589 5,054,249 Occupancy expenses 1,890,878 1,538,037 1,361,025 Amortization 419,486 434,373 441,286 Advertising and marketing 428,229 362,958 323,726 Taxes other than payroll, Property and income 370,537 363,957 234,818 Other 2,627,444 2,135,581 2,006,858 11,755,853 10,373,495 9,421,962 Income before income taxes 7,508,468 7,284,387 6,169,798 Provision for income taxes 1,983,978 2,031,445 1,719,685 Net income $ 5,524,490 $ 5,252,942 $ 4,450,113 Earnings per share: Basic $ 1.98 $ 1.87 $ 1.59 Diluted 1.95 1.83 1.55 CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME Years Ended December 31 2001 2000 1999 Net income $ 5,524,490 $ 5,252,942 $ 4,450,113 Other comprehensive income (loss), net of tax: Unrealized gains (losses) on securities arising during the period 945,748 483,032 (615,012) Reclassification of realized amount (189,593) 58,192 (598) Net change in unrealized gain (loss) on securities 756,155 541,224 (615,610) Comprehensive income $ 6,280,645 $ 5,794,166 $ 3,834,503 CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY Years Ended December 31, 2001, 2000 and 1999
Accumulated Other Total Common Stock Retained Comprehensive Stockholders' Shares Amount Earnings Income Equity Balances, January 1, 1999 2,809,256 $ 6,474,241 $ 22,832,043 $ 66,021 $ 29,372,305 Common stock issued (including employee gifts of 95 shares) 7,695 54,187 - - 54,187 Common stock purchased (14,480) (37,055) (271,071) - (308,126) Net change in unrealized gain (loss) on securities available for sale, net of tax - - - (615,610) (615,610) Net income - - 4,450,113 - 4,450,113 Dividends declared - $.44 per share - - (1,233,296) - (1,233,296) Balances, December 31, 1999 2,802,471 6,491,373 25,777,789 (549,589) 31,719,573 Common stock issued (including employee gifts of 48 shares) 21,208 172,580 - - 172,580 Common stock purchased (15,612) (36,698) (327,012) - (363,710) Net change in unrealized gain (loss) on securities available for sale, net of tax - - - 541,224 541,224 Net income - - 5,252,942 - 5,252,942 Dividends declared - $.52 per share - - (1,462,628) - 1,462,628) Balances, December 31, 2000 2,808,067 6,627,255 29,241,091 (8,365) 35,859,981 Common stock issued (including employee gifts of 77 shares) 30,553 344,280 - - 344,280 Common stock purchased (71,703) (322,517) (1,388,960) - (1,711,477) Net change in unrealized gain (loss) on securities available for sale, net of tax - - - 756,155 756,155 Net income - - 5,524,490 - 5,524,490 Dividends declared - $.60 per share - - (1,673,048) - (1,673,048) Balances, December 31, 2001 2,766,917 $ 6,649,018 $ 31,703,573 $ 747,790 $ 39,100,381
CONSOLIDATED STATEMENTS OF CASH FLOWS Years Ended December 31
2001 2000 1999 Cash flows from operating activities Net income $ 5,524,490 $ 5,252,942 $ 4,450,113 Adjustments to reconcile net income to net cash from operating activities Depreciation and amortization 1,380,148 1,246,826 1,207,402 Provision for loan losses 1,068,000 750,000 699,600 Securities amortization (accretion), net 155,678 (52,915) 5,293 Securities (gains) losses, net (287,262) 88,169 (906) Originations of loans held for sale (29,054,241) (12,588,461) (22,264,141) Proceeds from sale of loans 27,879,863 15,292,943 24,802,228 Gain on sale of mortgage loans (382,532) (132,559) (351,192) Federal Home Loan Bank stock dividends (248,600) (252,400) (226,000) Changes in: Interest receivable 754,770 (808,025) (289,108) Other assets (99,188) 289,452 (33,731) Interest payable (612,908) 1,285,735 332,017 Other liabilities 573,565 52,791 (50,333) Net cash from operating activities 6,651,783 10,424,498 8,281,242 Cash flows from investing activities Purchases of securities available for sale (52,945,350) (24,858,046) (38,694,863) Proceeds from sales of securities available for sale 12,344,139 17,045,613 17,828,018 Proceeds from principal payments and \ maturities of securities available for sale 34,325,320 10,685,161 20,393,126 Purchases of securities held to maturity - (632,490) (349,522) Proceeds from maturities of securities held to maturity - 1,113,500 1,616,300 Net change in loans (2,083,841) (34,356,698) (32,401,646) Purchases of bank premises and equipment, net (3,167,061) (2,029,097) (701,261) Net cash acquired in branch acquisition - - 8,387,089 Net cash from investing activities (11,526,793) (33,032,057) (23,922,759) Cash flows from financing activities Net change in deposits 8,099,599 26,249,645 6,840,197 Net change in securities sold under agreements to repurchase and other borrowings (7,844,411) (2,412,071) 610,187 Advances from Federal Home Loan Bank 22,200,000 6,317,000 20,000,000 Payments on Federal Home Loan Bank advances (246,349) (11,265,027) (361,197) Proceeds from issuance of common stock 344,280 172,580 50,135 Purchase of common stock (1,711,477) (363,710) (304,074) Dividends paid (1,673,048) (1,462,628) (1,233,296) Net cash from financing activities 19,168,594 17,235,789 25,601,952 CONSOLIDATED STATEMENTS OF CASH FLOWS Years Ended December 31 2001 2000 1999 Net change in cash and cash equivalents $ 14,293,584 $ (5,371,770) $ 9,960,435 Cash and cash equivalents at beginning of year 15,344,878 20,716,648 10,756,213 Cash and cash equivalents at end of year $ 29,638,462 $ 15,344,878 $ 20,716,648 Supplemental disclosures of cash flow Information cash paid during the year for: Interest expense $ 13,998,845 $ 12,311,888 $ 10,184,300 Income taxes 1,930,000 2,060,803 1,849,988 Supplemental schedules of non-cash investing activities Real estate acquired through foreclosure $ 118,860 $ 205,200 $ 426,205 Transfer of held to maturity portfolio to available for sale 15,231,406 - -
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Basis of Presentation: The consolidated financial statements include the accounts of Bourbon Bancshares, Inc. (the Company) and its wholly-owned subsidiary, Kentucky Bank (the Bank). 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, Harrison, Jessamine, 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. 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. The allowance for loan losses and fair value of financial instruments are particularly subject to change. 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 and deposit transactions. Securities: The Company is required to classify its securities portfolio into 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 available for sale are carried at fair value. The difference between amortized cost and fair value is recorded in stockholders' equity, net of related income tax, under accumulated other comprehensive income. Changes in this difference are recorded as a component of comprehensive income. Amortization of premiums and accretion of discounts are recorded as adjustments to interest income using the constant yield method. Securities for which the Company has the positive intent and ability to hold to maturity are stated at cost, adjusted for amortization of premiums and accretion of discounts which are recorded as adjustments to interest income using the constant yield method. Gains or losses on dispositions are based on the net proceeds and the adjusted carrying amount of the securities sold, using the specific identification method. NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued) Loans Held for Sale: Loans held for sale are valued at the lower of cost or market 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. Loans: Loans are stated at the amount of unpaid principal, 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. The accrual of interest on impaired loans is discontinued when management believes, after consideration of economic and business conditions and collection efforts, that the borrowers' financial condition is such that collection of interest is doubtful. When interest accrual is discontinued, interest income is subsequently recognized only to the extent cash payments are received. Loan origination fees and certain direct origination costs are capitalized and recognized as an adjustment of the yield on the related loan. Allowance for Loan Losses: The allowance for loan losses is a valuation allowance for probable incurred credit losses, increased by the provision for loan losses and decreased by charge-offs less recoveries. 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. Loan losses are charged against the allowance when management believes the uncollectibility of a loan balance is confirmed. A loan is impaired when full payment under the loan terms is not expected. Impairment is evaluated in total for smaller-balance loans of similar nature such as residential mortgage, consumer, and credit card loans, and on an individual loan basis for other loans. 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. Mortgage Servicing Rights: The Bank has sold various loans to the Federal Home Loan Mortgage Corporation (FHLMC) while retaining the servicing rights. Gains and losses on loan sales are recorded at the time of the cash sale, which represents the premium or discount paid by the FHLMC. The Bank receives a servicing fee from the FHLMC on each loan sold. Servicing rights are capitalized based on the relative fair value of the rights and the loan and are included in intangible assets on the balance sheet and expensed in proportion to, and over the period of, estimated net servicing revenues. NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued) Federal Home Loan Bank Stock: Amount is carried at cost. Bank Premises and Equipment: Bank premises and equipment are stated at cost less accumulated depreciation. Depreciation is recorded principally by the straight-line method over the estimated useful lives of the bank premises and equipment. Real Estate Acquired Through Foreclosure: Real estate acquired through foreclosure is carried at the lower of the recorded investment in the property or its fair value. 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. 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. 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. The Company uses the liability method for computing deferred income taxes. Under the liability method, deferred income taxes are based on the change during the year in the deferred tax liability or asset established for the expected future tax consequences of differences in the financial reporting and tax bases of assets and liabilities. Intangible Assets: Intangible assets include a premium on deposits paid in connection with the acquisition of branches which is being amortized on a straight-line basis over ten or fifteen years and capitalized mortgage servicing rights which are being amortized over the life of the related loans. 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 includes the dilutive effect of additional potential common shares issuable under stock options. Earnings and dividends per share are restated for all stock splits and dividends through the date of issuance of the financial statements. Comprehensive Income: Comprehensive income consists of net income and other comprehensive income. Other comprehensive income includes unrealized gains and losses on securities available for sale which are also recognized as a separate component of equity. NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued) Derivatives: Beginning January 1, 2001, a new accounting standard requires all derivatives to be recorded at fair value. Unless designated as hedges, changes in these fair values will be recorded in the income statement. Fair value changes involving hedges will generally be recorded by offsetting gains and losses on the hedge and on the hedged item, even if the fair value of the hedged item is not otherwise recorded. The Company periodically enters into non-exchange traded mandatory forward sales contracts in conjunction with its mortgage banking operation. These contracts, considered derivatives, typically last 60 to 90 days and are used to offset the risk of interest rate changes between the time of the commitment to make a loan to a borrower at a stated rate and when the loan is sold. The Company did not have any mandatory forward sales contracts at December 31, 2001 and 2000. As allowed in conjunction with the adoption of this standard, the Company transferred its entire securities held to maturity portfolio to available for sale. As a result of this transfer and the corresponding adjustment to fair value, on January 1, 2001 securities increased $407,000, other assets decreased $138,000, and accumulated other comprehensive income increased $269,000. New Accounting Pronouncements: A new accounting standard requires all business combinations to be recorded using the purchase method of accounting for any transaction initiated after June 30, 2001. Under the purchase method, all identifiable tangible and intangible assets and liabilities of the acquired company must be recorded at fair value at date of acquisition, and the excess of cost over fair value of net assets acquired is recorded as goodwill. Identifiable intangible assets must be separated from goodwill. Identifiable intangible assets with finite useful lives will be amortized under the new standard, whereas goodwill, both amounts previously recorded and future amounts purchased, will cease being amortized starting in 2002. Annual impairment testing will be required for goodwill with impairment being recorded if the carrying amount of goodwill exceeds its implied fair value. All recorded acquistion intangibles are identified with specific assets. There are no intangible assets identified as goodwill. Adoption of this standard on January 1, 2002 will not have a material effect on the Company's financial statements. Industry 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. Reclassifications: Certain reclassifications have been made in the 1999 and 2000 consolidated financial statements to conform to the 2001 presentation. NOTE 2 - RESTRICTIONS ON CASH AND DUE FROM BANKS Included in cash and due from banks are certain non-interest bearing deposits that are held at the Federal Reserve or maintained in vault cash in accordance with average balance requirements specified by the Federal Reserve Board of Governors. The reserve requirement at December 31, 2001 and 2000 was $123,000 and $191,000. NOTE 3 - SECURITIES Year-end securities are as follows:
Amortized Unrealized Unrealized Fair Cost Gains Losses Value Available for Sale 2001 U. S. Treasury $ 7,079,500 $ 139,106 $ (1,106) $ 7,217,500 U. S. government agencies 5,999,478 118,507 - 6,117,985 States and political subdivisions 19,066,704 574,253 (170,855) 19,470,102 Mortgage-backed 28,817,956 350,629 (112,170) 29,056,415 Equity securities 10,463,121 255,528 (25,319) 10,693,330 Other 3,047,738 32,753 (27,949) 3,052,542 Total $ 74,474,497 $ 1,470,776 $ (337,399) $ 75,607,874 2000 U. S. Treasury $ 14,969,462 $ 24,045 $ (1,632) $ 14,991,875 U. S. government agencies 4,999,043 40,332 (10,835) 5,028,540 States and political subdivisions 3,271,701 94,396 - 3,366,097 Mortgage-backed 22,876,407 140,385 (139,105) 22,877,687 Equity securities 2,230,037 96,117 (256,038) 2,070,116 Other 4,488,966 - (342) 4,488,624 Total $ 52,835,616 $ 395,275 $ (407,952) $ 52,822,939 Held to Maturity 2000 State and political subdivisions $ 15,231,406 $ 416,441 $ (9,662) $ 15,638,185
NOTE 3 - SECURITIES (Continued) The amortized cost and fair value of securities at December 31, 2001, by category and 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. Amortized Fair Cost Value Available for Sale Due in one year or less $ 5,821,150 $ 5,979,485 Due after one year through five years 15,353,469 15,721,369 Due after five years through ten years 6,467,443 6,687,877 Due after ten years 7,551,358 7,469,398 35,193,420 35,858,129 Mortgage-backed 28,817,956 29,056,415 Equity 10,463,121 10,693,330 Total $ 74,474,497 $ 75,607,874 Proceeds from sales of securities during 2001, 2000 and 1999 were $12,344,139, $17,045,613 and $17,828,018. Gross gains of $288,105, $42,704 and $29,674 and gross losses of $843, $130,873 and $28,768, were realized on those sales. Securities with an approximate carrying value of $52,707,000 and $54,829,000 at December 31, 2001 and 2000, were pledged to secure public deposits, trust funds, securities sold under agreements to repurchase and for other purposes as required or permitted by law. NOTE 4 - LOANS Loans at year-end were as follows: 2001 2000 Commercial $ 18,617,714 $ 17,452,151 Real estate construction 12,301,704 15,269,683 Real estate mortgage 166,322,768 162,305,751 Agricultural 53,640,436 52,008,373 Consumer 21,951,943 24,807,486 Other 338,237 434,332 $ 273,172,802 $ 272,277,776 Activity in the allowance for loan losses was as follows: 2001 2000 1999 Beginning balance $ 3,388,380 $ 3,102,800 $ 2,734,589 Charge-offs (1,145,942) (558,552) (410,245) Recoveries 75,987 94,132 78,856 Provision for loan losses 1,068,000 750,000 699,600 Ending balance $ 3,386,425 $ 3,388,380 $ 3,102,800 Impaired loans totaled $964,000 and $395,000 at December 31, 2001 and 2000. The average recorded investment in impaired loans during 2001, 2000 and 1999 was $457,000, $224,000 and $244,000. The total allowance for loan losses related to these loans was $249,000 and $117,000 at December 31, 2001 and 2000. Interest income on impaired loans of $31,000, $11,000 and $18,000 was recognized for cash payments received in 2001, 2000 and 1999. Nonperforming loans were as follows: 2001 2000 1999 Loans past due over 90 days still on accrual $ 1,278,000 $ 1,365,000 $ 549,000 Nonaccrual loans 935,000 307,000 63,000 Nonperforming loans include impaired loans and smaller balance homogeneous loans, such as residential mortgage and consumer loans, that are collectively evaluated for impairment. NOTE 4 - LOANS (Continued) Mortgage loans serviced for others are not included in the accompanying consolidated balance sheets. The unpaid principal balances of mortgage loans serviced for others was approximately $86,527,000 and $101,893,000 at December 31, 2001 and 2000. Custodial escrow balances maintained in connection with the foregoing loan servicing, and included in demand deposits, were approximately $683,000 and $682,000 at December 31, 2001 and 2000. Changes in mortgage servicing rights were as follows: 2001 2000 1999 Beginning balance $ 521,467 $ 606,487 $ 533,822 Additions 81,619 69,885 228,016 Amortization (140,019) (154,905) (155,351) Ending balance $ 463,067 $ 521,467 $ 606,487 Certain directors and executive officers of the Company and companies in which they have beneficiary ownership were loan customers of the Bank during 2001 and 2000. Such loans were made in the ordinary course of business at the Bank's normal credit terms and interest rates. An analysis of the activity with respect to all director and executive officer loans is as follows: 2001 2000 Balance, beginning of year $ 1,478,000 $ 1,174,000 Additions, including loans now meeting disclosure requirements 1,514,000 893,000 Amounts collected, including loans no longer meeting disclosure requirements (1,463,000) (589,000) Balance, end of year $ 1,529,000 $ 1,478,000 NOTE 5 - PREMISES AND EQUIPMENT Year-end premises and equipment were as follows: 2001 2000 Land and buildings $ 10,773,183 $ 8,588,831 Furniture and equipment 7,941,210 6,958,501 18,714,393 15,547,332 Less accumulated depreciation (8,209,489) (7,248,828) $ 10,504,904 $ 8,298,504 Depreciation expense was $960,661, $812,453 and $766,117 in 2001, 2000, and 1999. NOTE 6 - DEPOSITS At December 31, 2001, the scheduled maturities of time deposits are as follows: 2002 $ 146,536,700 2003 9,620,845 2004 4,627,077 2005 822,602 2006 536,980 Certain directors and executive officers of the Company and companies in which they have beneficiary ownership, are deposit customers of the Bank. The amount of these deposits was approximately $861,000 and $812,000 at December 31, 2001 and 2000. NOTE 7 - SECURITIES SOLD UNDER AGREEMENTS TO REPURCHASE Securities sold under agreements to repurchase generally mature within one to 35 days from the transaction date. The securities underlying the agreements are maintained in a third-party custodian's account under a written custodial agreement. Information concerning securities sold under agreements to repurchase for 2001 and 2000 is summarized as follows: 2001 2000 Average daily balance during the year $ 3,303,000 $ 8,726,000 Average interest rate during the year 3.35% 5.53% Maximum month-end balance during the year $ 5,164,000 $ 12,310,000 NOTE 8 - FEDERAL HOME LOAN BANK ADVANCES The Bank owns stock of the Federal Home Loan Bank (FHLB) of Cincinnati, Ohio. This stock allows the Bank to borrow advances from the FHLB. At December 31, 2001 and 2000, $43,597,929 and $21,644,278 represented the balance due on advances from the FHLB. All advances are paid either on a monthly basis or at maturity, over remaining terms of one month to fourteen years, with fixed interest rates ranging from 2.32% to 7.23%. The Bank also has letters of credit from the FHLB totaling $16,200,000 at December 31, 2001 for the purpose of securing public deposits. Advances and letters of credit are secured by the FHLB stock and substantially all first mortgage loans. Scheduled principal payments due on advances during the years subsequent to December 31, 2001 are as follows: 2002 $ 11,947,651 2003 4,826,198 2004 15,531,519 2005 5,033,804 2006 5,036,256 Thereafter 1,222,501 $ 43,597,929 NOTE 9 - INCOME TAXES Income tax expense was as follows: 2001 2000 1999 Current $ 1,878,784 $ 1,782,641 $ 1,697,291 Deferred 105,194 248,804 22,394 $ 1,983,978 $ 2,031,445 $ 1,719,685 Year-end deferred tax assets and liabilities were due to the following. No valuation allowance for the realization of deferred tax assets is considered necessary. 2001 2000 Deferred tax assets Allowance for loan losses $ 952,005 $ 958,814 Unrealized loss on investment securities - 4,310 Core deposit intangibles 215,651 186,149 Other 62,610 11,704 Deferred tax liabilities Unrealized gain on securities (385,587) - Bank premises and equipment (234,934) (146,734) FHLB stock (626,331) (541,807) Mortgage servicing rights (157,443) (177,299) Other (80,389) (54,464) Net deferred tax asset (liability) $ (254,418) $ 240,673 Effective tax rates differ from federal statutory rates applied to financial statement income due to the following: 2001 2000 1999 U. S. federal income tax rate 34.0% 34.0% 34.0% Changes from the statutory rate Tax-exempt investment income (5.2) (5.9) (7.2) Non-deductible interest expense related to carrying tax-exempt investments .6 .8 .8 Rehabilitation tax credit (2.1) - - Other (.9) (1.0) .3 26.4% 27.9% 27.9% NOTE 10 - EARNINGS PER SHARE The factors used in the earnings per share computation follow: 2001 2000 1999 Basic Earnings Per Share Net income $ 5,524,490 $ 5,252,942 $ 4,450,113 Weighted average common shares Outstanding 2,790,238 2,811,565 2,803,276 Basic earnings per share $ 1.98 $ 1.87 $ 1.59 Diluted Earnings Per Share Net income $ 5,524,490 $ 5,252,942 $ 4,450,113 Weighted average common shares Outstanding 2,790,238 2,811,565 2,803,276 Add dilutive effects of assumed exercise of stock options 47,080 56,600 64,667 Weighted average common and dilutive potential common shares outstanding 2,837,318 2,868,165 2,867,943 Diluted earnings per share $ 1.95 $ 1.83 $ 1.55 Stock options for 14,300 and 96,000 shares common stock were excluded from 2001 and 2000 diluted earnings per share because their impact was antidilutive. NOTE 11 - RETIREMENT PLANS The Company has a defined benefit pension plan covering substantially all of its employees. The Company's funding policy is to contribute annually the maximum amount that can be deducted for federal income tax purposes. Benefits are based on one percent of employee average earnings for the previous five years times years of credited service. NOTE 11 - RETIREMENT PLANS (Continued) Information about the pension plan was as follows: 2001 2000 Change in benefit obligation: Beginning benefit obligation $ 3,130,826 $ 2,732,093 Service cost 240,644 221,305 Interest cost 219,979 191,676 Actuarial adjustment 51,306 42,126 Benefits paid (59,498) (56,374) Ending benefit obligation 3,583,257 3,130,826 Change in plan assets, at fair value: Beginning plan assets 3,118,137 2,953,831 Actual return (68,643) (40,539) Employer contribution 289,475 261,219 Benefits paid (59,498) (56,374) Ending plan assets 3,279,471 3,118,137 Funded status (303,786) (12,689) Unrecognized net actuarial (gain) loss 126,254 120,465 Unrecognized prior transition asset (2,601) (2,973) Net pension (liability) prepaid benefit $ (180,133) $ 104,803 Net periodic pension cost include the following components: 2001 2000 1999 Service cost $ 240,644 $ 221,305 $ 188,925 Interest cost 219,979 191,676 169,649 Expected return on plan assets (246,285) (233,428) (198,239) Amortization of transition asset (372) (372) (372) Net periodic cost $ 213,966 $ 179,181 $ 159,963 Discount rate on benefit obligation 7% 7% 7% Long-term expected rate of return on plan assets 8% 8% 8% Rate of compensation increase 5% 5% 5% NOTE 11 - RETIREMENT PLANS (Continued) The Company also has a qualified profit sharing plan which covers substantially all employees and includes a 401(k) provision. Profit sharing contributions, excluding the 401(k) provision, are at the discretion of the Company's Board of Directors. Expense recognized in connection with the plan was $237,661, $224,106 and $165,087 in 2001, 2000 and 1999. NOTE 12 - STOCK OPTION PLAN The Company has stock option plans, which are accounted for in accordance with Accounting Principles Board Opinion (APB) No. 25, "Accounting for Stock Issued to Employees", and related interpretations. Under the plans, the Company grants certain officers and key employees stock option awards which vest and become fully exercisable at the end of five years. The Company also grants certain directors stock option awards which vest and become fully exercisable immediately. The exercise price of each option, which has a ten year life, was equal to the market price of the Company's stock on the date of grant; therefore, no compensation expense was recognized. Although the Company has elected to follow APB No. 25, Statement of Financial Accounting Standards (SFAS) No. 123, "Accounting for Stock-Based Compensation", requires pro forma disclosures of net income and earnings per share as if the Company had accounted for its employee stock options under that Statement. The fair value of each option grant was estimated on the grant date using an option-pricing model. Summary of stock option transactions are as follows:
2001 2000 1999 Weighted Weighted Weighted Option Option Option Options Price Options Price Options Price Outstanding, beginning of year 131,730 $14.32 148,940 $13.17 130,760 $11.36 Granted 4,160 23.58 3,950 24.30 25,780 20.62 Expired (3,334) 18.34 - - - - Exercised (29,072) 10.92 (21,160) 8.11 (7,600) 7.13 Outstanding, end of year 103,484 $15.52 131,730 $14.32 148,940 $13.17 Weighted remaining contractual Life 62.3 months 66.4 months 70.6 months
NOTE 12 - STOCK OPTION PLAN (Continued) 2001 2000 1999 Options outstanding From $4.25 to $6.38 per share - 5,800 19,600 From $8.63 to $11.14 per 16,880 26,980 30,480 From $12.00 to $15.50 per share 53,420 66,540 69,900 From $18.00 to $26.00 per share 33,184 32,410 28,960 103,484 131,730 148,940 Eligible for exercise From $4.25 to $6.38 per share - 5,800 19,600 From $8.63 to $11.14 per share 16,880 26,980 30,480 From $12.00 to $15.50 per share 41,780 41,140 31,740 From $18.00 to $26.00 per share 13,240 8,116 2,680 71,900 82,036 84,500 Under SFAS No. 123, compensation cost is recognized in the amount of the estimated fair value of the options and amortized to expense over the options' vesting periods. The pro forma effect on net income and earnings per share of this statement are as follows: 2001 2000 1999 Net income As reported $ 5,524,490 $ 5,252,942 $ 4,450,113 Pro forma 5,447,742 5,162,251 4,368,134 Basic earnings per share As reported $ 1.98 $ 1.87 $ 1.59 Pro forma 1.94 1.84 1.56 Diluted earnings per share As reported $ 1.95 $ 1.83 $ 1.55 Pro forma 1.91 1.80 1.53 Weighted averages Fair value of options granted $ 4.58 $ 6.56 $ 5.14 Risk free interest rate 4.93% 6.62% 4.82% Expected life 8 years 8 years 8 years Expected volatility 13.10% 11.61% 18.17% Expected dividend yield 2.54% 2.14% 2.13% NOTE 13 - LIMITATION ON BANK DIVIDENDS The Company's principal source of funds is dividends received from the Bank. Banking regulations limit the amount of dividends that may be paid by the Bank without prior approval of regulatory agencies. Under these regulations, the amount of dividends that may be paid in any calendar year is limited to the current year's net profits, as defined, combined with the retained net profits of the preceding two years. During 2002 the Bank could, without prior approval, declare dividends of approximately $4,235,000 plus any 2002 net profits retained to the date of the dividend declaration. NOTE 14 - DISCLOSURES ABOUT FAIR VALUE OF FINANCIAL INSTRUMENTS The fair values of the Company's financial instruments at December 31, 2001 and 2000 are as follows: 2001 2000 Carrying Carrying Amount Fair Value Amount Fair Value (In Thousands) Financial assets Cash and cash equivalents $ 29,638 $ 29,638 $ 15,345 $ 15,345 Securities 75,608 75,608 68,054 68,461 Mortgage loans held for sale 2,343 2,392 868 890 Loans, net 269,786 274,929 268,889 267,801 FHLB stock 3,847 3,847 3,598 3,598 Interest receivable 3,507 3,507 4,262 4,262 Financial liabilities Deposits $ 308,915 $ 311,191 $ 300,816 $ 302,423 Securities sold under agreements to repurchase and other borrowings 1,602 1,602 9,446 9,446 FHLB advances 43,598 44,752 21,644 21,847 Interest payable 2,815 2,815 3,427 3,427 NOTE 14 - DISCLOSURES ABOUT FAIR VALUE OF FINANCIAL INSTRUMENTS (Continued) Carrying amount is the estimated fair value for cash and cash equivalents, short-term borrowings, Federal Home Loan Bank stock, accrued interest receivable and payable, demand deposits, short-term debt, and variable rate loans or deposits that reprice frequently and fully. Security fair values are based on market prices or dealer quotes, and if no such information is available, on the rate and term of the security and information about the issuer. For fixed rate loans or deposits and for variable rate loans or deposits with infrequent repricing or repricing limits, fair value is based on discounted cash flows using current market rates applied to the estimated life and credit risk. Fair values for impaired loans are estimated using discounted cash flow analysis or underlying collateral values. Fair value of debt is based on current rates for similar financing. The fair value of commitments to extend credit and standby letters of credit is not considered material. NOTE 15 - OFF-BALANCE SHEET ACTIVITIES AND COMMITMENTS Some financial instruments, such as loan commitments, credit lines, letters of credit, and overdraft protection, are issued to meet customer financing needs. These are agreements to provide credit or to support the credit of others, as long as conditions established in the contract are met, and usually have expiration dates. Commitments may expire without being used. Off-balance sheet risk to credit loss exists up to the face amount of these instruments, although material losses are not anticipated. The same credit policies are used to make such commitments as are used for loans, including obtaining collateral at exercise of the commitment. Financial instruments with off-balance sheet risk were as follows at year-end: 2001 2000 Unused lines of credit $ 42,252,000 $ 33,901,000 Commitments to make loans 2,049,000 1,137,000 Letters of credit 495,000 856,000 Unused lines of credit are substantially all at variable rates. Commitments to make loans are generally made for a period of 60 days or less and are primarily fixed at current market rates ranging from 5.75% to 7.00% with maturities ranging from 15 to 30 years and are intended to be sold. NOTE 15 - OFF-BALANCE SHEET ACTIVITIES AND COMMITMENTS (Continued) At December 31, 2001, the Company's mortgage banking activities included commitments to extend credit, primarily representing fixed rate mortgage loans, totaling $6,870,000. The commitments are generally for a period of 60 to 90 days and are at market rates. Commitments to extend credit of $2,647,000 and loans held for sale of $599,000 were not covered by sales contracts and are therefore exposed to changes in underlying interest rates until sales contracts are entered into, the customer withdraws from the commitment or the loan is sold. The Company provides for any losses on uncovered loans and commitments to lend or sell. At December 31, 2001, no such provisions were required. NOTE 16 - CONTINGENT LIABILITIES The Bank is a defendant in legal actions arising from normal business activities. Management believes these actions are without merit or that the ultimate liability, if any, resulting from them will not materially affect the Company's consolidated financial position or results of operations. NOTE 17 - STOCKHOLDER'S EQUITY Regulatory Matters: The Company and the Bank are subject to various regulatory capital requirements administered by the federal banking agencies. Failure to meet minimum capital requirements can initiate certain mandatory and possible additional discretionary actions by regulators that, if undertaken, could have a direct material effect on the Company's financial statements. Under capital adequacy guidelines and the regulatory framework for prompt corrective action, the Company and the Bank must meet specific capital guidelines that involve quantitative measures of the Company's and the Bank's assets, liabilities, and certain off-balance sheet items as calculated under regulatory accounting practices. The Company and Bank capital amounts and classifications are also subject to qualitative judgments by regulators about components, risk weightings, and other factors. Quantitative measures established by regulation to ensure capital adequacy require the Company and the Bank to maintain minimum amounts and ratios (set forth in the table below) of Total and Tier I capital (as defined in the regulations) to risk-weighted assets (as defined), and of Tier I capital to average assets (as defined). Management believes, as of December 31, 2001 and 2000, that the Company and the Bank meet all capital adequacy requirements to which they are subject. NOTE 17 - STOCKHOLDER'S EQUITY (Continued) The most recent notification from the Federal Deposit Insurance Corporation categorized the Bank as well capitalized under the regulatory framework for prompt corrective action. To be categorized as well capitalized, the Bank must maintain minimum Total risk-based, Tier I risk-based and Tier I leverage ratios as set forth in the following table. There are no conditions or events since that notification that management believes have changed the institution's category. The Company's and the Bank's actual amounts and ratios are presented in the table below:
To Be Well Capitalized Under Prompt For Capital Corrective Actual Adequacy Purposes Action Provisions Amount Ratio Amount Ratio Amount Ratio 2001 (Dollars in Thousands) Consolidated Total Capital (to Risk-Weighted Assets) $40,900 14.4% $22,683 8% $28,354 10% Tier I Capital (to Risk-Weighted Assets) 37,410 13.2 11,342 4 17,012 6 Tier I Capital (to Average Assets) 37,410 9.6 15,540 4 19,426 5 Bank Only Total Capital (to Risk-Weighted Assets) $35,775 12.7% $22,545 8% $28,182 10% Tier I Capital (to Risk-Weighted Assets) 32,383 11.5 11,273 4 16,909 6 Tier I Capital (to Average Assets) 32,383 8.4 15,423 4 19,279 5 2000 Consolidated Total Capital (to Risk-Weighted Assets) $37,784 14.3% $21,093 8% $26,366 10% Tier I Capital (to Risk-Weighted Assets) 34,488 13.1 10,546 4 15,820 6 Tier I Capital (to Average Assets) 34,488 9.3 14,848 4 18,560 5 Bank Only Total Capital (to Risk-Weighted Assets) $33,125 12.7% $20,908 8% $26,135 10% Tier I Capital (to Risk-Weighted Assets) 29,858 11.4 10,454 4 15,681 6 Tier I Capital (to Average Assets) 29,858 8.1 14,752 4 18,441 5
NOTE 18 - PARENT COMPANY FINANCIAL STATEMENTS Condensed Balance Sheets December 31 2001 2000 (In Thousands) ASSETS Cash on deposit with subsidiary $ 3,510 $ 2,710 Investment in subsidiary 33,931 31,230 Securities available for sale 1,759 1,820 Other assets (100) 100 Total assets $ 39,100 $ 35,860 LIABILITIES AND STOCKHOLDERS' EQUITY Liabilities $ - $ - Stockholders' equity Preferred stock - - Common stock 6,649 6,627 Retained earnings 31,703 29,241 Accumulated other comprehensive income 748 (8) Total liabilities and stockholders' equity $ 39,100 $ 35,860 NOTE 18 - PARENT COMPANY FINANCIAL STATEMENTS (Continued) Condensed Statements of Income and Comprehensive Income Years Ended December 31 2001 2000 1999 (In Thousands) Income Dividends from subsidiary $ 3,280 $ 3,160 $ 2,700 Securities gains (losses), net 72 (17) - Interest income 44 61 28 Total income 3,396 3,204 2,728 Expenses Other expenses 39 39 53 Income before income taxes and equity in undistributed income of subsidiary 3,357 3,165 2,675 Applicable income tax (expense) benefits (26) 46 9 Income before equity in undistributed income of subsidiary 3,331 3,211 2,684 Equity in undistributed income of subsidiary 2,193 2,042 1,766 Net income 5,524 5,253 4,450 Other comprehensive income (loss), net of tax: Unrealized gains (losses) on securities Arising during the period 946 483 (615) Reclassification of realized amount (189) 58 - Net change in unrealized gain (loss) on securities 757 541 (615) Comprehensive income $ 6,281 $ 5,794 $ 3,835 NOTE 18 - PARENT COMPANY FINANCIAL STATEMENTS (Continued) Condensed Statements of Cash Flows Years Ended December 31 2001 2000 1999 (In Thousands) Cash flows from operating activities Net income $ 5,524 $ 5,253 $ 4,450 Adjustments to reconcile net income to net cash from operating activities Equity in undistributed earnings of Subsidiary (2,193) (2,042) (1,766) Securities (gains) losses, net (72) 17 - Change in other assets 72 (37) (3) Net cash from operating activities 3,331 3,191 2,681 Cash flows from investing activities Purchase of securities available for sale (311) (1,071) (555) Proceeds from sales of securities available for sale 820 638 - Net cash from investing activities 509 (433) (555) Cash flows from financing activities Dividends paid (1,673) (1,463) (1,233) Proceeds from issuance of common stock 344 173 50 Purchase of common stock (1,711) (364) (304) Net cash from financing activities (3,040) (1,654) (1,487) Net change in cash 800 1,104 639 Cash at beginning of year 2,710 1,606 967 Cash at end of year $ 3,510 $ 2,710 $ 1,606 NOTE 19 - QUARTERLY FINANCIAL DATA (UNAUDITED) Interest Net Interest Net Earnings Per Share Income Income Income Basic Fully Diluted 2001 First quarter $ 7,289 $ 3,627 $ 1,281 $ .46 $ .45 Second quarter 7,181 3,713 1,438 .51 .50 Third quarter 6,982 3,706 1,360 .49 .48 Fourth quarter 6,594 3,614 1,445 .52 .52 2000 First quarter $ 6,534 $ 3,510 $ 1,308 $ .47 $ .46 Second quarter 6,933 3,743 1,312 .46 .45 Third quarter 7,350 3,768 1,297 .46 .45 Fourth quarter 7,390 3,589 1,336 .48 .47 REPORT OF INDEPENDENT AUDITORS Board of Directors Bourbon Bancshares, Inc. Paris, Kentucky We have audited the accompanying consolidated balance sheets of Bourbon Bancshares, Inc. as of December 31, 2001 and 2000, and the related consolidated statements of income, comprehensive income, changes in stockholders' equity and cash flows for each of the three years in the period ended December 31, 2001. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Bourbon Bancshares, Inc. as of December 31, 2001 and 2000, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 2001, in conformity with accounting principles generally accepted in the United States of America. As disclosed in Note 1 to the consolidated financial statements, on January 1, 2001 the Company changed its method of accounting for derivative instruments and hedging activities to comply with new accounting guidance. Crowe, Chizek and Company LLP Lexington, Kentucky January 17, 2002 MEET OUR OFFICERS. BOURBON COUNTY. PARIS SENIOR MANAGEMENT Buckner Woodford - President and CEO Norman J. Fryman - Sr. Vice President, Director of Lending James P. Shipp, Jr. - Sr. Vice President, Branch Administration Greg Dawson - Vice President, Chief Financial Officer Brenda Bragonier - Vice President, Director of Marketing and Human Resources OFFICERS Brenda Berry - Accountant Rita Bugg - Vice President, Loan Officer Wallis Brooks - Branch Manager Patty Carpenter - Assistant Vice President, Loan Operations Officer R.W. Collins, Jr. - Vice President, Loan Officer Cynthian Criswell - Data Processing Hugh Crombie - Vice President, Operations Nancye Fightmaster - Assistant Vice President, Loan Officer David Foster - Vice President, Loan Officer Janice Hash - Accountant and Purchasing Agent Cathy Hill - Assistant Vice President, Loan Officer Perry Ingram - Network Administrator Bill Leaver - Network Administrator Jane Mogge - Head Bookkeeper Jean Patton - Compliance,CRA,Quality Control Bill Reynolds - Vice President, Trust Officer Donald Roe - Data Processing Rowena Ruff - Investment Advisor Lydia Sosby - Corporate and Automated Products Officer Judy Taylor - Human Resource Manager Diana Thornell - Assistant Trust Officer Rick Wagner - Maintenance Supervisor George Wilder - Vice President, Loan Officer Buck Woodford, V. - Management Trainee, Investment Officer Martha Woodford - Assistant Vice President, Corporate and Automated Products Officer Jan Worth - Trust Officer Lexington Road Branch Susan A. Lemons - Branch Manager, Loan Officer Pleasant Street Branch Philip Hurst - Assistant Branch Manager CLARK COUNTY. WINCHESTER Darryl Terry - Vice President, Regional Manager Ron Burden, Vice President, Loan Officer Teresa Shimfessel - Assistant Vice President, Loan Officer Becky Taulbee - Assistant Vice President, Loan Officer Carolyn Wilkins - Overdraft Management Officer WOODFORD COUNTY. VERSAILLES Duncan Gardner - Vice President, Regional Manager A.J. Gullett - Assistant Vice President, Loan Officer SCOTT COUNTY. SHOWALTER DRIVE BRANCH J. Mark Walls - Vice President, Regional Manager Ben Sargent - Assistant Vice President, Loan Officer PARIS PIKE BRANCH Jennifer Roberts - Assistant Vice President, Branch Manager, Loan Officer JESSAMINE COUNTY. NICHOLASVILLE Michael Lovell - Vice President, Regional Manager Jeanie Thompson - Office Manager & CSR Rick Walling - Assistant Vice President, Loan Officer WILMORE Freida Lear, Branch Manager, Loan Officer HARRISON COUNTY. CYNTHIANA Ken DeVasher - Vice President, Regional Manager Paul Clift - Assistant Vice President, Loan Officer Kentucky Bank - Board of Directors. Buckner Woodford President and Chief Executive Officer, Joe Allen Retired - Executive Vice President, Kentucky Bank William M. Arvin Attorney James L. Ferrell, M.D. Physician Henry Hinkle President, Hinkle Contracting Company Tricia Kittinger Woodford Circuit Clerk Theodore Kuster Farmer and Thoroughbred Breeder Joseph B. McClain President; Hopewell Insurance Company, Inc. Eva McDaniel Jessamine County Clerk William R. Stamler Chairman, Signal Investments, Inc. James Taulbee Farmer Robert G. Thompson Executive Director, Paris-Bourbon County YMCA, Snow Hill Farm Everett Varney Mayor, Georgetown Gerald M. Whalen President, Whalen and Company REGIONAL BOARD OF DIRECTORS CLARK COUNTY Mary Beth Hendricks Director of Clark County Child Support Services Donald Pace Consultant to Clark County Schools John G. Roche Optician Ed Saunier President, Saunier North American, Inc. James Taulbee Farmer REGIONAL BOARD OF DIRECTORS HARRISON COUNTY Bruce Florence Director, Licking Valley College Brad Marshall Farmer Joel Techau CEO-Techau Inc. Gerald M. Whalen President, Whalen and Company REGIONAL BOARD OF DIRECTORS JESSAMINE COUNTY William M. Arvin Attorney Dan Brewer Bluegrass RECC Tom Buford Kentucky Senator Eva McDaniel Jessamine County Clerk Jonah Mitchell President, Jonah Mitchell Real Estate and Auction Company REGIONAL BOARD OF DIRECTORS SCOTT COUNTY Dr. Gus Bynum Physician Mike Hockensmith Owner and President, The Hockensmith Agency, Inc. R.C. Johnson, Jr. Owner and President; Johnson's Funeral Home George Lusby County Judge Executive Everette Varney Mayor, Georgetown REGIONAL BOARD OF DIRECTORS WOODFORD COUNTY Loren Carl Director, Kentucky Attorney General's Office Dr. William Graul Physician James Kay Businessman, Farmer Tricia Kittinger Woodford Circuit Clerk Bourbon Bancshares, Inc. Board of Directors Buckner Woodford President and Chief Executive Officer, Kentucky Bank and Bourbon Bancshares, Inc. Class of 2003 William R. Stamler Chairman, Signal Investments, Inc. Class of 2003 Henry Hinkle President, Hinkle Contracting Corporation Class of 2002 Robert G. Thompson Executive Director, Paris/Bourbon County YMCA; Snow Hill Farm Class of 2002 Theodore Kuster Farmer and Thoroughbred Breeder, West View Farm Class of 2002 James L. Ferrell, M.D. Physician; Chairman, Bourbon Bancshares, Inc. Class of 2004 William M. Arvin Attorney, William M. Arvin Associates Class of 2004 Exhibit 21 Subsidiaries of Registrant Bourbon Bancshares, Inc.'s Subsidiary Kentucky Bank EXHIBIT 23 CONSENT OF INDEPENDENT AUDITORS We hereby consent to the incorporation by reference in the Form S-8 Registration Statement No. 333-92725 of Bourbon Bancshares, Inc., of our report dated January 17, 2002 on the consolidated financial statements of Bourbon Bancshares, Inc. as of December 31, 2001 and 2000 and for each of the three years in the period ended December 31, 2001 as included in the registrant's annual report on Form 10-K. /s/Crowe, Chizek and Company LLP Crowe, Chizek and Company LLP Lexington, Kentucky March 28, 2002 Exhibit 99.1 Proxy Statement BOURBON BANCSHARES, INC 400 Main Street Paris, Kentucky 40361 NOTICE OF ANNUAL MEETING OF SHAREHOLDERS TO BE HELD MAY 1, 2002 March 26, 2002 To our Shareholders: The annual meeting of the shareholders of Bourbon Bancshares, Inc (the "Company") will be held on Wednesday, May 1, 2002 at 11:00 a.m. local time, at the Main Office of Kentucky Bank at Main and Fourth Streets, Paris, Kentucky, for the purposes of: 1. Election of directors: To elect three Class III directors 2. Other Business: To act upon such other matters as may properly be brought before the Annual Meeting or any adjournment thereof. The Board of Directors does not know of any other matter to come before the Annual Meeting. Information regarding the matters to be acted upon at the Annual Meeting is contained in the Proxy statement accompanying this Notice. Only those holders of record of the corporation's common stock at the close of business on March 25, 2002, are entitled to notice of and to vote at the Annual Meeting and any adjournment thereof. All Shareholders are cordially invited to attend the Annual Meeting, but whether or not you expect to attend the Annual Meeting in person, please sign and date the enclosed Proxy and return it promptly so your stock may be voted. Thank you for your time and consideration. Please feel free to contact my office should you have any questions. BY ORDER OF THE BOARD OF DIRECTORS /s/Buckner Woodford Buckner Woodford President, Bourbon Bancshares, Inc. YOUR VOTE IS IMPORTANT PLEASE MARK, SIGN, DATE AND RETURN THE ACCOMPANYING PROXY IMMEDIATELY EVEN IF YOU PLAN TO ATTEND THE ANNUAL MEETING. BOURBON BANCSHARES, INC. PROXY STATEMENT INTRODUCTION This Proxy Statement is being furnished to shareholders of Bourbon Bancshares, Inc., a Kentucky Corporation (the "Company"), in connection with the solicitation of proxies by the Board of Directors of the Company (the "Board") from holders of record of the Company's outstanding Common Shares (the "Common Shares") as of the close of business on March 25, 2002 (the "Annual Meeting Record Date"), for use at the Annual Meeting of Shareholders of the Company (the "Annual Meeting") to be held on Wednesday, May 1, 2002, at 11:00 a.m. (Eastern Daylight Time) at the Company's Main Office Board Room of Kentucky Bank, Fourth and Main Streets, Paris, Kentucky, and at any adjournment or postponement thereof. This Proxy Statement is first being mailed to the Company's shareholders on or about March 26, 2002. The principal executive offices of the Company are located at Fourth and Main Streets, Paris, Kentucky 40361. Its telephone number is (859) 987-1795. Purposes of the Annual Meeting At the Annual Meeting, holders of Common Shares will be asked to consider and to vote upon the following matters: (1) To elect three Class III directors: (2) To transact such other business as may properly come before the meeting. The Board recommends that shareholders vote FOR the election of the Board's nominees for Class III directors. As of the date of this Proxy Statement, the Board knows of no other business to come before the Annual Meeting. Voting Rights and Proxy Information Only holders of record of Common Shares as of the close of business on the Annual Meeting Record Date will be entitled to notice of and to vote at the Annual Meeting or any adjournment or postponement thereof. As of December 31, 2001, there were 2,766,917 Common Shares outstanding and entitled to vote at the Annual Meeting. The presence either in person or by properly executed proxy, of the holders of a majority of the outstanding Common Shares as of the Annual Meeting Record Date is necessary to constitute a quorum at the Annual Meeting. Holders of Common Shares are entitled to one vote per share on any matter, other than the election of directors, that may properly come before the Annual Meeting. In the election of directors, holders of Common Shares have cumulative voting rights whereby each holder is entitled to vote the number of Common Shares owned multiplied by two (the number of directors to be elected at the Annual Meeting), and each holder may cast the whole number of votes for one candidate or distribute such votes among two or more candidates. The Board of Directors is soliciting discretionary authority for the individuals appointed in the proxies to cumulate votes represented by properly executed proxies and to vote for less than all the Company's nominees to the Board if deemed appropriate to ensure the election of as many of the Company's nominees to the Board as possible. Those persons receiving the three highest number of votes in the election of directors (net of any votes against their election) will be elected to the Board. All Common Shares that are represented at the Annual Meeting by properly executed proxies received prior to or at the Annual Meeting and not revoked will be voted at the Annual Meeting in accordance with the instructions indicated in such proxies. If no instructions are indicated, such proxies will be voted "FOR" (I) the election of the Board's three nominees as Class III directors of the Company (or, if deemed appropriate by the individuals appointed in the proxies, cumulatively voted for less than all of the Board's nominees). Any proxy given pursuant to this solicitation may be revoked by the person giving it at any time before it is voted. Proxies may be revoked by (i) filing with the Company, to the attention of William C. Reynolds, Secretary, at or before the Annual Meeting, a written notice of revocation bearing a later date than the proxy, (ii) duly executing a subsequent proxy relating to the same Common Shares and delivering it to the Company at or before the Annual Meeting or (iii) attending the Annual Meeting and voting in person (although attendance at the Annual Meeting will not in and of itself constitute a revocation of a proxy). Any written notice revoking a proxy should be sent to Bourbon Bancshares, Inc., P. O. Box 157, Paris, Kentucky 40362-0157, Attention: William C. Reynolds, Secretary. The Company will bear the cost of the solicitation of proxies by the Board in connection with the Annual Meeting. In addition to solicitation by mail, the Company will request banks, brokers and other custodian nominees and fiduciaries to supply proxy material to the beneficial owners of Common Shares, and will reimburse them for their expenses in so doing. Certain directors, officers and other employees of the Company, not specially employed for this purpose, may solicit proxies without additional remuneration therefore, by personal interview, mail, telephone, facsimile or other electronic means. ITEM 1 -- ELECTION OF DIRECTORS Under the Company's Articles of Incorporation, the Board of Directors consists of three different classes (Class I, Class II and Class III), each to serve, subject to the provisions of the Articles of Incorporation and Bylaws for a three year term and until his successor is duly elected and qualified. Except as listed below, each nominee for a Class III directorship has held the specified position for the last five years. The names of the nominees proposed for election as Class III directors, all of whom are presently directors of the Company, are set forth below. The Company is not aware of any other individual who may be nominated for election to the Board of Directors at the Annual Meeting. Henry Hinkle is president of Hinkle Contracting Corporation. He became a director in 1989. Theodore Kuster owns West View Farm and is a thoroughbred breeder. He became a director in 1979. Robert G. Thompson serves as director of the Paris/Bourbon County YMCA. He became a director in 1991. The Board of Directors does not contemplate that any of the nominees will be unable to accept election as a director for any reason. However, in the event that one or more of such nominees is unable or unwilling to accept or is unavailable to serve, the persons named in the proxies or their substitutes shall have authority, according to their judgment, to vote or to refrain from voting for other individuals as directors. The Board recommends that shareholders vote "FOR" each of the above nominees for election as Class III directors of the Company. OTHER MATTERS As of the date of this Proxy Statement, the Company knows of no business that will be presented for consideration at the Annual Meeting other than that referred to above. Proxies in the enclosed form will be voted in respect of any other business that is properly brought before the Annual Meeting in accordance with the judgment of the person or persons voting the proxies. By Order of the Board of Directors /s/William C. Reynolds William C. Reynolds, Secretary March 26, 2002 This Proxy Form is Solicited by the Board of Directors Bourbon Bancshares, Inc. Paris, Kentucky The undersigned hereby appoints Buckner Woodford and William Reynolds, or either one of them (with full power to act alone), my proxy, each with the power to appoint his substitute, to represent me to vote all of the Corporation's Common Stock which I held of record or am otherwise entitled to vote at the close of business on March 25, 2002, at the 2002 Annual Meeting of Shareholders to be held on May 1, 2002 and at any adjournments thereof, with all powers the undersigned would possess if personally present, as follows: I ELECTION OF DIRECTORS __ FOR all nominees listed below (except as otherwise indicated below) __ AGAINST all nominees listed below Henry Hinkle, Theodore Kuster, Robert Thompson (INSTRUCTION: To withhold authority to vote for any individual nominee, write the nominee's name on the line) II OTHER BUSINESS. In their discretion, the Proxies are authorized to act upon such other matters as may properly be brought before the Annual Meeting or any adjournment thereof. THE BOARD OF DIRECTORS RECOMMENDS A VOTE "FOR" ALL OF THE NOMINEES LISTED IN ITEM I. (PLEASE DATE, MARK, SIGN AND RETURN IMMEDIATELY) This proxy form relates to ALL shares owned by the undersigned. This proxy form is solicited by the Board of Directors and will be voted as specified and in accordance with the accompanying proxy statement. If no instruction is indicated, this proxy form will be voted "FOR" all of the nominees listed in Item 1. Please sign exactly as name appears. When shares are held by joint tenants, both should sign. When signing as attorney, as executor, administrator, trustee or guardian, please give full title as such. If a corporation, please sign full corporate name by President or other authorized officer. If a partnership, please sign partnership name by authorized person. DATE___________, 2002 ________________________________ Signature ________________________________ Signature if held jointly 6 5 BOURBON BANCSHARES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS December 31, 2000, 1999 and 1998 69 37 BOURBON BANCSHARES, INC. See accompanying notes. 41. See accompanying notes. 42. See accompanying notes. 44. (Continued) 45. See accompanying notes. 46. BOURBON BANCSHARES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS December 31, 2001, 2000 and 1999 (Continued) 68. 83. -----END PRIVACY-ENHANCED MESSAGE-----