UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
[ X ] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 2003
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
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 whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act). Yes No X___
Number of shares of Common Stock outstanding as of April 30, 2003: 2,777,270.
BOURBON BANCSHARES, INC.
Table of Contents
Part I - Financial Information
Item 1. Financial Statements
Consolidated Balance Sheets 3
Consolidated Statements of Income and
Comprehensive Income 4
Consolidated Statements of Changes in
Stockholders' Equity 5
Consolidated Statements of Cash Flows 6
Notes to Consolidated Financial Statements 7
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 10
Item 3. Quantitative and Qualitative Disclosures About
Market Risk 15
Item 4. Controls and Procedures 16
Part II - Other Information 17
Signatures 18
Certifications 19
Exhibits
11 Earnings Per Share Calculation 21
99.1 Certification of Chief Executive Officer pursuant
to 18 U.S.C. Section 1350, as adopted pursuant
to Section 906 of the Sarbanes-Oxley Act of 2002. 22
99.2 Certification of Chief Financial Officer pursuant
to 18 U.S.C. Section 1350, as adopted pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002. 23
99.3 Registrant's Notice of Annual Meeting, proxy
statement, and form of proxy dated May 19, 2003.
The registrant's proxy materials are furnished
for the information of the Commission and are not
to be deemed "filed" as part of this Form 10-Q. 24
Item 1 - Financial Statements
BOURBON BANCSHARES, INC.
CONSOLIDATED BALANCE SHEETS (unaudited)
(thousands) 3/31/2003 12/31/2002
Assets
Cash and due from banks $ 9,152 $ 10,493
Federal funds sold 3,022 18,683
Cash and cash equivalents 12,174 29,176
Securities available for sale 96,085 89,509
Mortgage loans held for sale 1,667 740
Loans 283,259 284,154
Allowance for loan losses (3,438) (3,395)
Net loans 279,821 280,759
Federal Home Loan Bank stock 4,067 4,027
Bank premises and equipment, net 10,446 10,332
Interest receivable 3,113 3,276
Intangible assets 1,359 1,367
Other assets 721 585
Total assets $ 409,453 $ 419,771
Liabilities and Stockholders' Equity
Deposits
Non-interest bearing $ 54,600 $ 53,366
Time deposits, $100 and over 42,597 46,904
Other interest bearing 217,483 222,566
Total deposits 314,680 322,836
Securities sold under agreements to repurchase 1,813 3,505
Other borrowed funds 1,085 1,772
Federal Home Loan Bank advances 43,295 43,937
Interest payable 1,886 1,844
Other liabilities 1,870 1,785
Total liabilities 364,629 375,679
Stockholders' equity
Common stock 6,863 6,807
Retained earnings 36,091 35,436
Accumulated other comprehensive income 1,870 1,849
Total stockholders' equity 44,824 44,092
Total liabilities & stockholders' equity $ 409,453 $ 419,771
BOURBON BANCSHARES, INC.
CONSOLIDATED STATEMENT OF INCOME AND COMPREHENSIVE INCOME (unaudited)
(thousands, except per share amounts) Three Months Ending
3/31/2003 3/31/2002
INTEREST INCOME:
Loans, including fees $ 4,728 $ 5,236
Investment securities 885 967
Other 49 73
Total interest income 5,662 6,276
INTEREST EXPENSE:
Deposits 1,450 2,009
Other 592 598
Total interest expense 2,042 2,607
Net interest income 3,620 3,669
Loan loss provision 225 201
Net interest income after provision 3,395 3,468
OTHER INCOME:
Service charges 983 903
Loan service fee income 62 57
Trust department income 95 98
Investment securities gains (losses), net 18 39
Gain on sale of mortgage loans 292 82
Other 267 199
Total other income 1,717 1,378
OTHER EXPENSES:
Salaries and employee benefits 1,895 1,637
Occupancy expenses 500 481
Amortization of intangibles 118 101
Advertising and marketing 100 75
Taxes other than payroll, property and income 110 99
Other 728 595
Total other expenses 3,451 2,988
Income before taxes 1,661 1,858
Income taxes 478 562
Net income $ 1,183 $ 1,296
Other Comprehensive Income, net of tax:
Change in Unrealized Gains on Securities 21 12
Comprehensive Income $ 1,204 $ 1,308
Earnings per share
Basic $ 0.43 $ 0.47
Diluted 0.42 0.46
BOURBON BANCSHARES, INC.
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY (unaudited)
(thousands, except number of shares)
Accumulated
Other Total
----Common Stock---- Retained ComprehensiveStockholders'
Shares Amount Earnings Income Equity
Balances, December 31, 2002 2,772,754 $ 6,807 $ 35,436 $ 1,849 $ 44,092
Common stock issued 4,916 67 - - 67
Common stock purchased (400) (11) - - (11)
Net change in unrealized gain (loss)
on securities available for sale,
net of tax - - - 21 21
Net income - - 1,183 - 1,183
Dividends declared - $0.19 per share - - (528) - (528)
Balances, March 31, 2003 2,777,270 $ 6,863 $ 36,091 $ 1,870 $ 44,824
BOURBON BANCSHARES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS (unaudited)
(thousands) Three Months Ending
3/31/2003 3/31/2002
Cash Flows From Operating Activities
Net Income $ 1,183 $ 1,296
Adjustments to reconcile net income to
net cash provided by operating activities:
Depreciation 238 256
Amortization 118 101
Investment securities amortization (accretion), net 189 103
Provision for loan losses 225 201
Investment securities gains (losses), net (18) (39)
Originations of loans held for sale (11,225) (5,332)
Proceeds from sale of loans 10,590 6,627
Federal Home Loan Bank Stock Dividends (40) (43)
Gain on sale of mortgage loans (292) (82)
Changes in:
Interest receivable 163 334
Other assets (233) (261)
Interest payable 42 (534)
Other liabilities 63 298
Net cash from operating activities 1,003 2,925
Cash Flows From Investing Activities
Purchases of securities available for sale (19,490) (20,241)
Proceeds from sales of securities available for sale 3,055 2,051
Proceeds from principal payments, maturities and
calls of securities available for sale 9,618 5,797
Net change in loans 813 470
Purchases of bank premises and equipment, net (352) (89)
Net cash from investing activities (6,356) (12,012)
Cash Flows From Financing Activities:
Net change in deposits (8,156) (5,081)
Net change in securities sold under agreements to
repurchase and other borrowings (2,379) 1,556
Payments on Federal Home Loan Bank advances (642) (585)
Proceeds from issuance of common stock 67 29
Purchase of common stock (11) (84)
Dividends paid (528) (470)
Net cash from financing activities (11,649) (4,635)
Net change in cash and cash equivalents (17,002) (13,722)
Cash and cash equivalents at beginning of period 29,176 29,638
Cash and cash equivalents at end of period $ 12,174 $ 15,916
BOURBON BANCSHARES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. In Management's opinion, the financial information, which is unaudited,
reflects all adjustments, (consisting solely of normal recurring
adjustments) necessary for a fair presentation of the financial information
as of March 31, 2003 and December 31, 2002, and for three month periods
ended March 31, 2003 and March 31, 2002 in conformity with accounting
principles generally accepted in the United States of America. These
financial statements should be read in conjunction with Bourbon Bancshares,
Inc. (Company) Annual Report on Form 10-K. Our accounting and reporting
policies are in accordance with accounting principles generally accepted in
the United States of America, and they conform to general practices within
the applicable industries. The application of certain of these principles
involves a significant amount of judgment and the use of estimates based on
assumptions that involve significant uncertainty at the time of estimation.
We have identified the following policies as being particularly sensitive
in terms of judgments and the extent to which estimates are used: allowance
for loan losses, pensions, stock options, and income taxes. We periodically
review these policies, the estimation process involved and these
disclosures with the Audit Committee of our Board of Directors
2. INTANGIBLE ASSETS
Information concerning the Company's core deposit intangible follows:
Original Accumulated
Amount Amortization
3/31/2003
Core deposit intangible $2,890,404 $2,296,888
Amortization expense was $69,867 for the first three months of 2003 and for
the first quarter of 2002.
Estimated amortization expense for the next five years is: 2003 - $279,468;
2004 - $198,895; 2005 - $19,140; 2006 - $19,140; and 2007 - $19,140.
There are no Intangible assets not subject to amortization.
3. INVESTMENT SECURITIES
Period-end securities are as follows:
(in thousands)
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
Available for Sale
March 31, 2003
U.S. Treasury $ 3,030 $ 25 $ - $ 3,055
U.S. government agencies 14,251 173 - 14,424
States and political subdivisions 31,658 1,283 (6) 32,935
Mortgage-backed 38,837 907 (14) 39,730
Equity securities 1,259 255 (18) 1,496
Other 4,218 227 - 4,445
Total 93,253 2,870 (38) 96,085
December 31, 2002
U.S. Treasury $ 5,012 $ 47 $ - $ 5,059
U.S. government agencies 5,991 147 - 6,138
States and political subdivisions 29,730 1,300 (6) 31,024
Mortgage-backed 39,459 920 (58) 40,321
Equity securities 3,478 285 (15) 3,748
Other 3,038 197 (16) 3,219
Total 86,708 2,896 (95) 89,509
4. LOANS
Loans at period-end are as follows:
(in thousands)
3/31/2003 12/31/2002
Commercial $ 16,817 $ 16,803
Real estate construction 14,044 15,514
Real estate mortgage 186,224 182,206
Agricultural 50,924 52,188
Consumer 15,250 17,443
Total 283,259 284,154
5. 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.
The factors used in the earnings per share computation follow:
Three Months Ended
March 31
2003 2002
(in thousands)
Basic Earnings Per Share
Net Income $1,183 $1,296
Weighted average common shares outstanding 2,774 2,767
Basic earnings per share $ 0.43 $ 0.47
Diluted Earnings Per Share
Net Income $1,183 $1,296
Weighted average common shares outstanding 2,774 2,767
Add dilutive effects of assumed exercise
of stock options 31 39
Weighted average common and dilutive
Potential common shares outstanding 2,805 2,806
Diluted earnings per share $ 0.42 $ 0.46
Stock options for 1,300 shares (for the period ended March 31, 2003) and
5,020 shares (for the period ended March 31, 2002) of common stock were not
considered in computing earnings per share because they were antidilutive.
6. Stock Compensation
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.
Employee compensation expense under stock options is reported using the
intrinsic value method. No stock-based compensation cost is reflected in
net income, as all options granted had an exercise price equal to or greater
than the market price of the underlying common stock at date of grant. The
following table illustrates the effect on net income and earnings per share
if expense was measured using the fair value recognition provisions of FASB
Statement No. 123, Accounting for Stock-Based Compensation.
Three months ended
March 31
2003 2002
(In thousands)
Net income
As reported $ 1,183 $ 1,296
Deduct: Stock-based compensation
expense determined under fair
value based method (9) (28)
Pro forma 1,174 1,268
2003 2002
Basic earnings per share
As reported $ 0.43 $ 0.47
Pro forma 0.42 0.46
Diluted earnings per share
As reported $ 0.42 $ 0.46
Pro forma 0.42 0.46
7. Dividends per share paid for the quarter ended March 31, 2003 were $0.19
compared to $0.17 for March 31, 2002.
Item 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
Forward-Looking Statements
This discussion contains forward-looking statements under the Private
Securities Litigation Reform Act of 1995 that involve risks and uncertainties.
Words such as "believes," "anticipates," "expects," "intends," "plans,"
"targeted," and similar expressions are intended to identify forward-looking
statements but are not the exclusive means of identifying such statements.
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
Bourbon Bancshares, Inc. recorded net income of $1.2 million, or $0.43 basic
earnings per share and $0.42 diluted earnings per share for the first three
months ended March 31, 2003 compared to $1.3 million, or $0.47 basic earnings
per share and $0.46 diluted earnings per share for the three month period
ending March 31, 2002. The first three months reflects a decrease in net
income of 8.7% compared to the first quarter of the prior year.
Return on average assets was 1.14% for the three months ending March 31, 2003
and 1.31% for the same time period in 2002, a decrease of 13%. Return on
average equity was 10.6% for the three month period ended March 31, 2003 and
13.1% for the same period in 2002.
Loans decreased $895 thousand from $284.2 million on December 31, 2002 to
$283.3 million on March 31, 2003. An increase of $4.0 million in real estate
mortgage loans was offset by a decrease in real estate construction,
agricultural and consumer loans. Management attributes the decrease in loans
primarily to the sluggish economy. The decreased loan demand has contributed
to decreases in net interest income.
Total deposits decreased from $322.8 million on December 31, 2002 to $314.7
million on March 31, 2003, a decrease of $8.2 million. The decrease is mainly
attributable to time deposits of $100,000 and more decreasing $4.3 million and
other interest bearing deposits decreasing $5.1 million. This decrease was
partially offset by an increase in non-interest bearing deposits of $1.2
million. The decline in total deposits is primarily attributable to our
decision to be less aggressive in our deposit gathering activities in light of
softening loan demand.
Net Interest Income
Net interest income was $3.6 million for the three months ending March 31,
2003 and $3.7 million for the three months ending March 31, 2002, resulting in
a decrease of $49 thousand. The interest spread was 3.64% for the first three
months of 2003 compared to 3.83% for the same period in 2002, a decrease of 19
basis points. The low interest rates have resulted in tighter net interest
margins.
For the first three months, the yield on assets decreased from 6.80% in 2002
to 5.86% in 2003. The cost of liabilities decreased from 2.96% in 2002 to
2.22% in 2003. Rates have remained stable during the first three months of
2003 and have resulted in the yield on assets and the cost of liabilities to
stabilize over the first three months of 2003. Year to date average loans are
up $2.3 million, or 0.8% from March 31, 2002 to March 31, 2003, while loan
interest income has decreased $508 thousand for the first three months of 2003
compared to the first three months of 2002. Year to date average deposits
also increased from March 31, 2002 to March 31, 2003, up $12.5 million, or
4.0%. Deposit interest expense has decreased $559 thousand for the first
three months of 2003 compared to the same period in 2002.
The declining rate environment in recent years has resulted in tighter margins
in 2002 and 2003. However, this decline has been offset with balance sheet
growth, and this decline has resulted in net interest income remaining
relatively level for the first three months of 2003 compared to the same
period in 2002. The banking industry continues to battle competition for loan
and deposit dollars, and this trend is expected to continue.
Non-Interest Income
Non-interest income increased $339 thousand for the three month period ended
March 31, 2003 from $1.4 million to $1.7 million. An increase of $80 thousand
in service charges from the first three months of 2002 to the comparable 2003
period is mainly attributable to an increase in checking overdraft charges of
$71 thousand. Overdraft income increased principally due to the
implementation of a "Kentucky Courtesy" overdraft program. This non-
contractual program is applied to qualified accounts, and is an overdraft
protection program whereby the Company may, but is not obligated to, pay
checks up to a pre-determined limit.
Gain on sale of mortgage loans increased $210 thousand during the first three
months of 2003 compared to the same 2002 period. Decreasing rates result in
an increase in loan originations and refinances. Volume of loan originations
and sales are inverse to rate changes. The low level of loan rates have
resulted in the gain from the sale of mortgage loans increasing during the
three month period ending March 31, 2003 compared to the same period in 2002.
The stabilizing or increasing of interest rates may cause the income from the
sale of loans to be lower in future periods than in the first three months of
2003.
Non-Interest Expense
The increase of $463 thousand in non-interest expenses from $3.0 million for
the three months ended March 31, 2002 to $3.5 million for the same period in
2003 was a result of several factors. Salaries and benefits increased $258
thousand for the first three months of 2003 compared to 2002, an increase of
16%. The increase is due to annual salary increases, and increased number of
employees. A one-time market salary adjustment was made effective January 1,
2003. Employee benefits represented $93 thousand of the increase in salaries
and employee benefits expense during these comparable periods.
Other expenses increased $133 thousand to $728 thousand for the first three
months of 2003 compared to the same period in 2002. Legal and professional
costs have increased $64 thousand. Consulting fees related to salary reviews
and legal fees related to loan collections account for this increase.
Income Taxes
The tax equivalent rate for the three months ended March 31 was 29% for 2003
and 30% for 2002. These rates are less than the statutory rate as a result of
the tax-free securities and loans held by the Company.
Stock Repurchase Program
On October 25, 2000, the Company announced that its Board of Directors
approved a stock repurchase program. The Company is authorized to purchase up
to 100,000 shares of its outstanding common stock. On November 11, 2002, The
Board of Directors approved and authorized the Company's repurchase of an
additional 100,000 shares. Shares will be purchased from time to time in the
open market depending on market prices and other considerations. Through
March 31, 2003, 84,333 shares have been purchased. The repurchase program has
had a positive effect on earnings per share calculations.
Liquidity and Funding
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 as a result of the lower yields on short-term assets.
Cash and cash equivalents were $12.2 million as of March 31, 2003 compared to
$29.2 million at December 31, 2002. The decrease in cash and cash equivalents
is mainly attributable to a decrease in federal funds sold. Total cash and
cash equivalents decreased $17 million since the end of the year, mainly
attributable to this money being used to purchase investment securities. In
addition to cash and cash equivalents, the securities portfolio provides an
important source of liquidity. Total investment securities available for sale
totaled $96.1 million at March 31, 2003. The available for sale securities
are available to meet liquidity needs on a continuing basis.
The Company maintains a relatively stable base of customer deposits, which 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.
Generally, the Company 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 flow from operations to meet investing and liquidity needs related to
reasonable borrower, depositor and creditor needs in the present economic
environment.
Management is aware of the potential problem of funding sustained loan growth.
Therefore, in addition to deposits, other sources of funds, such as Federal
Home Loan Bank (FHLB) advances, may be used. The Company 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. As of March 31, 2003, we have sufficient collateral to borrow an
additional $35 million from the FHLB. In addition, as of March 31, 2003, over
$55 million is available in overnight borrowing through various correspondent
banks. In light of this, management believes there is sufficient liquidity to
meet all reasonable borrower, depositor and creditor needs in the present
economic environment.
Non-Performing Assets
As of March 31, 2003, the Company's non-performing loans totaled $3.3 million
or 1.2% of loans compared to $2.4 million or 0.8% of loans at December 31,
2002. (See table below) The increase in loans past due 90 days or more is
mainly attributable to a large real estate construction loan customer with
indebtedness of $349 thousand. Minimal loss, if any, is expected on this
loan. Real estate loans composed 64% and 65% of the non-performing loans as
of March 31, 2003 and December 31, 2002, respectively. Forgone interest
income on the non-accrual loans for both 2003 and 2002 is immaterial.
Nonperforming Assets
3/31/03 12/31/02
(in thousands)
Non-accrual Loans $ 1,524 $ 1,573
Accruing Loans which are
Contractually past due
90 days or more 1,759 789
Restructured Loans - -
Total Nonperforming and Restructured 3,283 2,362
Other Real Estate 221 172
Total Nonperforming and Restructured
Loans and Other Real Estate $ 3,504 $ 2,534
Nonperforming and Restructured Loans
as a Percentage of Loans 1.16% 0.83%
Nonperforming and Restructured Loans
and Other Real Estate as a Percentage
of Total Assets 0.86% 0.60%
Provision for Loan Losses
The first three months 2003 provision for loan losses of $225 thousand is
higher than the comparable 2002 period by $24 thousand. An increase in
nonperforming loans has required management to increase the provision in order
to maintain an allowance for loan losses that is representative of the risk of
loss based on the quality of loans currently in the portfolio. Net charge-
offs for the three month period ending March 31, 2003 were $182 thousand
compared to $119 thousand for the same period in 2002. These losses are
mainly attributable to several small consumer loans. Future levels of charge-
offs will be determined by the economic environment surrounding individual
loans. Management feels the current loan loss reserve is sufficient to meet
expected loan losses.
Loan Losses
Three Months Ended March 31
(in thousands)
2003 2002
Balance at Beginning of Period $ 3,395 $ 3,386
Amounts Charged-off:
Commercial 42 23
Real Estate Mortgage - 8
Agricultural 20 -
Consumer 157 130
Total Charged-off Loans 219 161
Recoveries on Amounts
Previously Charged-off:
Commercial 4 14
Agricultural 1 7
Consumer 32 21
Total Recoveries 37 42
Net Charge-offs 182 119
Provision for Loan Losses 225 201
Balance at End of Period 3,438 3,468
Loans
Average 283,128 272,356
At March 31 283,159 272,584
As a Percentage of Average Loans:
Net Charge-offs 0.06% 0.04%
Provision for Loan Losses 0.08% 0.07%
Allowance as a Percentage of
Period-end Loans 1.21% 1.27%
Allowance as a Multiple of
Net Charge-offs 18.9 29.1
Allowance as a Percentage of
Non-performing and Restructured Loans 105% 154%
Item 3 - QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
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. 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 on the Company's interest earning
assets and interest bearing liabilities. The projections are based on balance
sheet growth assumptions and repricing opportunities for new, maturing and
adjustable rate amounts. As of March 31, 2003 the projected percentage
changes are within the Board approved limits, except for the "- 300". In the
"- 300" scenario, most of the rates used in the model cannot decline 300 basis
points because of the current low level of rates. This has an effect on
causing the net interest income changes falling outside the Board approved
limit. In addition, management has made some asset/liability decisions that
would take advantage of rising interest rates. Therefore, the Company
currently has more volatility to changing rates than existing a year ago. The
projected net interest income report summarizing the Company's interest rate
sensitivity as of March 31, 2003 is as follows:
(dollars in thousands)
PROJECTED NET INTEREST INCOME
Level
Change in basis points: - 300 - 100 Rates + 100 + 300
Year One (4/03 - 3/04)
Interest Income $19,248 $21,849 $23,291 $24,733 $27,624
Interest Expense 6,224 6,821 7,734 8,652 10,487
Net Interest Income 13,024 15,028 15,557 16,081 17,137
PROJECTED DOLLAR INCREASE (DECREASE) FROM "LEVEL RATES"
Year One (4/03 - 3/04)
Interest Income $(4,043) $(1,442) N/A $ 1,442 $ 4,333
Interest Expense (1,510) (913) N/A 918 2,753
Net Interest Income (2,533) (529) N/A 524 1,580
PROJECTED PERCENTAGE INCREASE (DECREASE) FROM "LEVEL RATES"
Year One (4/03 - 3/04)
Interest Income -17.4% -6.2% N/A 6.2% 18.6%
Interest Expense -19.5% -11.8% N/A 11.9% 35.6%
Net Interest Income -16.3% -3.4% N/A 3.4% 10.2%
Board approved limit >-10.0% >-4.0% N/A >-4.0% >-10.0%
The projected net interest income report summarizing the Company's interest
rate sensitivity as of March 31, 2002 is as follows:
(dollars in thousands)
PROJECTED NET INTEREST INCOME
Level
Change in basis points: - 300 - 100 Rates + 100 + 300
Year One (4/02 - 3/03)
Interest Income $ 21,564 $ 23,938 $ 25,189 $ 26,442 $ 28,950
Interest Expense 6,731 8,684 9,836 10,988 13,291
Net Interest Income 14,833 15,254 15,353 15,454 15,659
PROJECTED DOLLAR INCREASE (DECREASE) FROM "LEVEL RATES"
Year One (4/02 - 3/03)
Interest Income $ (3,625) $ (1,251) N/A $ 1,253 $ 3,761
Interest Expense (3,105) (1,152) N/A 1,152 3,455
Net Interest Income (520) (99) N/A 101 306
PROJECTED PERCENTAGE INCREASE (DECREASE) FROM "LEVEL RATES"
Year One (4/02 - 3/03)
Interest Income -14.4% -5.0% N/A 5.0% 14.9%
Interest Expense -31.6% -11.7% N/A 11.7% 35.1%
Net Interest Income -3.4% -0.6% N/A 0.7% 2.0%
Board approved limit >-10.0% >-4.0% N/A >-4.0% >-10.0%
These projected changes in net interest income as of March 31, 2003 are
greater when compared to the projected changes in net interest income as of
March 31, 2002. Projections from March 31, 2003, year one reflected a decline
in net interest income of 16.3% with a 300 basis point decline compared to the
3.4% decline in 2002. The 300 basis point increase in rates reflected a 10.2%
increase in net interest income in 2003 compared to 2.0% in 2002. Percentage
changes in 2003 are greater when compared to 2002. Therefore, changes in
interest rates should have a larger effect on net interest income. With the
current lower level of interest rates, management has positioned the Company
to be slightly more sensitive to rising rates, and net interest income should
increase with these rising rates.
Item 4 - CONTROLS AND PROCEDURES
Within the 90 days prior to the filing date of this report, the Company
carried out an evaluation, under the supervision and with the participation of
the Company's management, including the Company's Chief Executive Officer and
Chief Financial Officer, of the effectiveness of the design and operation of
our disclosure controls and procedures pursuant to Exchange Act Rule 12a-15.
Based upon that evaluation, the Company's Chief Executive Officer and Chief
Financial Officer concluded that the Company's disclosure controls and
procedures are effective. Disclosure controls and procedures are controls and
procedures that are designed to ensure that information required to be
disclosed in Company reports filed or submitted under the Exchange Act is
recorded, processed, summarized and reported within the time periods specified
in the Securities and Exchange Commission's rules and forms.
There have been no significant changes in our internal controls or in other
factors that could significantly affect internal controls subsequent to the
date we carried out this evaluation.
Part II - Other Information
Item 1. Legal Proceedings
The Company is not a party to any material legal proceedings.
Item 2. Changes in Securities
None
Item 3. Defaults upon Senior Securities
None
Item 4. Submission of Matters to a Vote of Security Holders
None
Item 5. Other Information
None
Item 6. Exhibits and Reports on Form 8-K
1. Exhibits as required by Item 601 of Regulation S-K.
11 Earnings Per Share Calculation
99.1 Certification of Chief Executive Officer pursuant to
18 U.S.C. Section 1350, as adopted pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002.
99.2 Certification of Chief Financial Officer pursuant to
18 U.S.C. Section 1350, as adopted pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002.
99.3 Registrant's Notice of Annual Meeting, proxy statement, and
form of proxy dated May 19, 2003. The registrant's proxy
materials are furnished for the information of the
Commission and are not to be deemed "filed" as part of this
Form 10-Q.
2. No reports on Form 8-K have been filed during the quarter for which
this report is filed.
SIGNATURES
In accordance with the requirements of the Exchange Act, the registrant caused
the report to be signed on its behalf by the undersigned, thereunto duly
authorized.
Bourbon Bancshares, Inc.
Date ___5/15/03_________ __/s/Buckner Woodford____________
Buckner Woodford, President and C.E.O.
Date ___5/15/03_________ __/s/Gregory J. Dawson___________
Gregory J. Dawson, Chief Financial Officer
CERTIFICATIONS
I, Buckner Woodford, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Bourbon Bancshares,
Inc.;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to
make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by
this quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
a) designed such disclosure controls and procedures to ensure that material
information relating to the registrant, including its consolidated
subsidiaries, is made known to us by others within those entities,
particularly during the period in which this quarterly report is being
prepared;
b) evaluated the effectiveness of the registrant's disclosure controls and
procedures as of a date within 90 days prior to the filing date of this
quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about the effectiveness
of the disclosure controls and procedures based on our evaluation as of the
Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based on
our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors (or persons performing the
equivalent function):
a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to record,
process, summarize and report financial data and have identified for the
registrant's auditors any material weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal controls;
and
6. The registrant's other certifying officers and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal controls
subsequent to the date of our most recent evaluation, including any corrective
actions with regard to significant deficiencies and material weaknesses.
Date: May 15, 2003
___/s/ Buckner Woodford_____
Buckner Woodford
President & Chief Executive Officer
I, Gregory J. Dawson, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Bourbon Bancshares,
Inc.;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to
make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by
this quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
a) designed such disclosure controls and procedures to ensure that material
information relating to the registrant, including its consolidated
subsidiaries, is made known to us by others within those entities,
particularly during the period in which this quarterly report is being
prepared;
b) evaluated the effectiveness of the registrant's disclosure controls and
procedures as of a date within 90 days prior to the filing date of this
quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about the effectiveness
of the disclosure controls and procedures based on our evaluation as of the
Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based on
our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors (or persons performing the
equivalent function):
a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to record,
process, summarize and report financial data and have identified for the
registrant's auditors any material weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal controls;
and
6. The registrant's other certifying officers and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal controls
subsequent to the date of our most recent evaluation, including any corrective
actions with regard to significant deficiencies and material weaknesses.
Date: May 15, 2003
___/s/ Gregory J. Dawson____
Gregory J. Dawson
Chief Financial Officer
20