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 June 30, 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
KENTUCKY BANCSHARES, INC.
(Exact name of registrant as specified in its charter)
Kentucky 61-0993464
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
P.O. Box 157, Paris, Kentucky 40362-0157
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (859)987-1795
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days.
Yes 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 July 31, 2003: 2,780,616.
KENTUCKY 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 6
Consolidated Statements of Cash Flows 7
Notes to Consolidated Financial Statements 8
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 12
Item 3. Quantitative and Qualitative Disclosures About
Market Risk 19
Item 4. Controls and Procedures 20
Part II - Other Information 21
Signatures 22
Exhibits
2 Agreement and Plan of Merger dated as of July 8,
2003, among (a) the Registrant, (b) Bourbon
Acquisition Corp., a Delaware corporation which
is wholly owned by the Registrant, and (c) Kentucky
First Bancorp, Inc., a Delaware corporation. 23
31.1 Certifications of Chief Executive Officer pursuant
to Section 302 of the Sarbanes-Oxley Act of 2002. 81
31.2 Certifications of Chief Financial Officer pursuant
to Section 302 of the Sarbanes-Oxley Act of 2002. 83
32 Certifications of Chief Executive Officer and Chief
Financial Officer pursuant to 18 U.S.C. Section 1350,
as adopted pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002. 85
Item 1 - Financial Statements
KENTUCKY BANCSHARES, INC.
CONSOLIDATED BALANCE SHEETS
(thousands) 6/30/2003 12/31/2002
(unaudited)
Assets
Cash and due from banks $ 10,823 $ 10,493
Federal funds sold 200 18,683
Cash and cash equivalents 11,023 29,176
Securities available for sale 89,859 89,509
Mortgage loans held for sale 4,328 740
Loans 283,040 284,154
Allowance for loan losses (3,041) (3,395)
Net loans 279,999 280,759
Federal Home Loan Bank stock 4,108 4,027
Bank premises and equipment, net 10,484 10,332
Interest receivable 2,946 3,276
Intangible assets 1,319 1,367
Other assets 1,019 585
Total assets $ 405,085 $ 419,771
Liabilities and Stockholders' Equity
Deposits
Non-interest bearing $ 56,839 $ 53,366
Time deposits, $100 and over 37,864 46,904
Other interest bearing 210,635 222,566
Total deposits 305,338 322,836
Securities sold under agreements to repurchase 1,392 3,505
Other borrowed funds 2,061 1,772
Federal Home Loan Bank advances 46,970 43,937
Interest payable 1,806 1,844
Other liabilities 1,769 1,785
Total liabilities 359,336 375,679
Stockholders' equity
Common stock 6,872 6,807
Retained earnings 36,735 35,436
Accumulated other comprehensive income 2,142 1,849
Total stockholders' equity 45,749 44,092
Total liabilities & stockholders' equity $ 405,085 $ 419,771
KENTUCKY BANCSHARES, INC.
CONSOLIDATED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME (unaudited)
(thousands, except per share amounts) Six Months Ending
6/30/2003 6/30/2002
INTEREST INCOME:
Loans, including fees $ 9,417 $ 10,369
Investment securities 1,797 1,998
Other 59 102
Total interest income 11,273 12,469
INTEREST EXPENSE:
Deposits 2,785 3,825
Other 1,183 1,191
Total interest expense 3,968 5,016
Net interest income 7,305 7,453
Loan loss provision 450 702
Net interest income after provision 6,855 6,751
OTHER INCOME:
Service charges 2,075 1,913
Loan service fee income 124 112
Trust department income 156 177
Investment securities gains (losses), net 20 181
Gain on sale of mortgage loans 531 169
Other 468 385
Total other income 3,374 2,937
OTHER EXPENSES:
Salaries and employee benefits 3,762 3,323
Occupancy expenses 1,034 943
Amortization of intangibles 241 205
Advertising and marketing 200 150
Taxes other than payroll, property and income 221 200
Other 1,479 1,255
Total other expenses 6,937 6,076
Income before taxes 3,292 3,612
Income taxes 937 1,095
Net income $ 2,355 $ 2,517
Other Comprehensive Income, net of tax:
Change in Unrealized Gains on Securities 293 570
Comprehensive Income $ 2,648 $ 3,087
Earnings per share
Basic $ 0.85 $ 0.91
Diluted 0.84 0.90
KENTUCKY BANCSHARES, INC.
CONSOLIDATED STATEMENT OF INCOME AND COMPREHENSIVE INCOME (unaudited)
(thousands, except per share amounts) Three Months Ending
6/30/2003 6/30/2002
INTEREST INCOME:
Loans, including fees $ 4,689 $ 5,133
Investment securities 912 1,031
Other 10 29
Total interest income 5,611 6,193
INTEREST EXPENSE:
Deposits 1,335 1,816
Other 591 593
Total interest expense 1,926 2,409
Net interest income 3,685 3,784
Loan loss provision 225 501
Net interest income after provision 3,460 3,283
OTHER INCOME:
Service charges 1,092 1,010
Loan service fee income 62 55
Trust department income 61 79
Investment securities gains (losses), net 2 142
Gain on sale of mortgage loans 239 87
Other 201 186
Total other income 1,657 1,559
OTHER EXPENSES:
Salaries and employee benefits 1,867 1,686
Occupancy expenses 534 462
Amortization of intangibles 123 104
Advertising and marketing 100 75
Taxes other than payroll, property and income 111 101
Other 751 660
Total other expenses 3,486 3,088
Income before taxes 1,631 1,754
Income taxes 459 533
Net income $ 1,172 $ 1,221
Other Comprehensive Income, net of tax:
Change in Unrealized Gains on Securities 272 558
Comprehensive Income $ 1,444 $ 1,779
Earnings per share
Basic $ 0.42 $ 0.44
Diluted 0.42 0.44
KENTUCKY 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
<s> <c> <c> <c> <c> <c>
Balances, December 31, 2002 2,772,754 $ 6,807 $ 35,436 $ 1,849 $ 44,092
Common stock issued 5,516 76 - - 76
Common stock purchased (400) (11) - - (11)
Net change in unrealized gain (loss)
on securities available for sale,
net of tax - - - 293 293
Net income - - 2,355 - 2,355
Dividends declared - $0.38 per share - - (1,056) - (1,056)
Balances, June 30, 2003 2,777,870 $ 6,872 $ 36,735 $ 2,142 $ 45,749
KENTUCKY BANCSHARES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS (unaudited)
(thousands) Six Months Ending
6/30/2003 6/30/2002
Cash Flows From Operating Activities
Net Income $ 2,355 $ 2,517
Adjustments to reconcile net income to
net cash provided by operating activities:
Depreciation 490 503
Amortization 241 205
Investment securities amortization (accretion), net 342 192
Provision for loan losses 450 702
Investment securities (gains) losses, net (21) (181)
Originations of loans held for sale (22,040) (9,898)
Proceeds from sale of loans 18,983 11,879
Federal Home Loan Bank Stock Dividends (81) (89)
Gain on sale of mortgage loans (531) (169)
Changes in:
Interest receivable 330 195
Other assets (433) (305)
Interest payable (38) (921)
Other liabilities (358) 41
Net cash from operating activities (311) 4,671
Cash Flows From Investing Activities
Purchases of securities available for sale (23,831) (29,959)
Proceeds from sales of securities available for sale 5,355 12,348
Proceeds from principal payments, maturities and
calls of securities available for sale 18,246 7,807
Net change in loans 310 (9,806)
Purchases of bank premises and equipment, net (642) (185)
Net cash from investing activities (562) (19,795)
Cash Flows From Financing Activities:
Net change in deposits (17,498) (7,584)
Net change in securities sold under agreements to
repurchase and other borrowings (1,824) 4,787
Advances from Federal Home Loan Bank 8,000 4,250
Payments on Federal Home Loan Bank advances (4,967) (5,396)
Proceeds from issuance of common stock 76 135
Purchase of common stock (11) (84)
Dividends paid (1,056) (942)
Net cash from financing activities (17,280) (4,834)
Net change in cash and cash equivalents (18,153) (19,958)
Cash and cash equivalents at beginning of period 29,176 29,638
Cash and cash equivalents at end of period $ 11,023 $ 9,680
KENTUCKY 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 June 30, 2003 and December 31, 2002, and for the six and three month
periods ended June 30, 2003 and June 30, 2002 in conformity with accounting
principles generally accepted in the United States of America. These
financial statements should be read in conjunction with Kentucky
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
6/30/2003
Core deposit intangible $2,890,404 $2,366,755
Amortization expense was $139,734 for the first six months of 2003 and for
the first six months 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
June 30, 2003
U.S. Treasury $ 3,041 $ 34 $ - $ 3,075
U.S. government agencies 14,498 208 (3) 14,703
States and political subdivisions 32,768 1,894 (40) 34,622
Mortgage-backed 33,032 784 (49) 33,767
Equity securities 1,259 243 (19) 1,483
Other 2,017 192 - 2,209
Total 86,615 3,355 (111) 89,859
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)
6/30/2003 12/31/2002
Commercial $ 14,961 $ 16,803
Real estate construction 11,540 15,514
Real estate mortgage 190,380 182,206
Agricultural 52,350 52,188
Consumer 13,809 17,443
Total 283,040 284,154
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:
Six Months Ended
June 30
2003 2002
(in thousands)
Basic Earnings Per Share
Net Income $2,355 $2,517
Weighted average common shares outstanding 2,776 2,767
Basic earnings per share $ 0.85 $ 0.91
Diluted Earnings Per Share
Net Income $2,355 $2,517
Weighted average common shares outstanding 2,776 2,767
Add dilutive effects of assumed exercise
of stock options 17 39
Weighted average common and dilutive
potential common shares outstanding 2,793 2,806
Diluted earnings per share $ 0.84 $ 0.90
Stock options for 4,720 shares (for the period ended June 30, 2002) of
common stock were not considered in computing earnings per share because
they were antidilutive.
Three Months Ended
June 30
2003 2002
(in thousands)
Basic Earnings Per Share
Net Income $1,172 $1,221
Weighted average common shares outstanding 2,777 2,767
Basic earnings per share $ 0.42 $ 0.44
Diluted Earnings Per Share
Net Income $1,172 $1,221
Weighted average common shares outstanding 2,777 2,767
Add dilutive effects of assumed exercise
of stock options 33 40
Weighted average common and dilutive
potential common shares outstanding 2,810 2,807
Diluted earnings per share $ 0.42 $ 0.44
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.
Six months ended
June 30
2003 2002
(In thousands)
Net income
As reported $ 2,355 $ 2,517
Deduct: Stock-based compensation
expense determined under fair
value based method (17) (55)
Pro forma 2,338 2,462
2003 2002
Basic earnings per share
As reported $ 0.85 $ 0.91
Pro forma 0.84 0.89
Diluted earnings per share
As reported $ 0.84 $ 0.90
Pro forma 0.84 0.88
7. Dividends per share paid for the quarter ended June 30, 2003 were $0.19
compared to $0.17 for June 30, 2002. This is the same rate of dividend
paid for the first quarters of the respective years.
8. The Financial Accounting Standards Board (FASB) recently issued two new
accounting standards, Statement 149, Amendment of Statement 133 on
Derivative Instruments and Hedging Activities, and Statement 150,
Accounting for Certain Financial Instruments with Characteristics of both
Liabilities and Equities, both of which generally become effective in the
quarter beginning July 1, 2003. Management determined that, upon adopting
the new standards, they will not materially affect the Company's operating
results or financial condition (because the Company does not have these
instruments or engage in these
activities).
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.
Recent Developments
On July 8, 2003, Bourbon Bancshares, Inc. and Kentucky First Bancorp, Inc.,
announced the execution of a definitive agreement providing for the Company's
acquisition of Kentucky First Bancorp and its wholly-owned subsidiary, First
Federal Savings Bank. The transaction, approved by directors of both
companies, provides for Bourbon Bancshares to pay Kentucky First Bancorp
stockholders $23.25 in cash per share of common stock. Total cash
consideration paid by the Company in the transaction is expected to be
approximately $23.5 million. The transaction is expected to close in the
fourth quarter of 2003, subject to regulatory approvals and the approval of
the stockholders of Kentucky First Bancorp.
Effective July 15, 2003, the Company changed its name from Bourbon Bancshares,
Inc. to Kentucky Bancshares, Inc.
Summary
Kentucky Bancshares, Inc. recorded net income of $2.4 million, or $0.85 basic
earnings per share and $0.84 diluted earnings per share for the first six
months ended June 30, 2003 compared to $2.5 million, or $0.91 basic earnings
per share and $0.90 diluted earnings per share for the six month period ending
June 30, 2002. The first six months reflects a decrease in net income per
share of 6.6% compared to the first six months of the prior year. For the
three month period ending June 30, 2003, net income was $1.2 million ($0.42
basic earnings and diluted earnings per share) compared to $1.2 million ($0.44
basic earnings and diluted earnings per share) for the same period in 2002.
This was a decrease in earnings per share of 4.5%.
Return on average assets was 1.14% for the six months ended June 30, 2003 and
1.27% for the same time period in 2002, a decrease of 10%. Return on average
assets was 1.14% for the three months ended June 30, 2003 compared to 1.22%
for the same time period in 2002, a decrease of 7%. Return on average equity
was 10.5% for the six month period ended June 30, 2003 and 12.6% for the same
period in 2002. Return on average equity was 10.4% and 12.1% for the three
months ended June 30, 2003 and 2002, respectively.
Loans decreased $1.1 million from $284.1 million on December 31, 2002 to
$283.0 million on June 30, 2003. An increase of $8.2 million in real estate
mortgage loans was offset by a decrease in real estate construction,
commercial 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 $305.3
million on June 30, 2003, a decrease of $17.5 million. The decrease is mainly
attributable to time deposits of $100,000 and more decreasing $9.0 million and
other interest bearing deposits decreasing $11.9 million. This decrease was
partially offset by an increase in non-interest bearing deposits of $3.5
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 $7.3 million for the six months ended June 30, 2003
and $7.5 million for the six months ending June 30, 2002, resulting in a
decrease of $148 thousand. Net interest income was $3.7 million for the three
months ended June 30, 2003 and $3.8 million for the three months ended June
30, 2002, resulting in a decrease of $99 thousand. The interest spread was
3.70% for the first six months of 2003 compared to 3.88% for the same period
in 2002, a decrease of 17 basis points. On June 27, 2003, the Federal Reserve
lowered short term interest rates another 25 basis points. The low interest
rates have contributed to tighter net interest margins.
For the first six months, the yield on assets decreased from 6.72% in 2002 to
5.86% in 2003. The cost of liabilities decreased from 2.84% in 2002 to 2.17%
in 2003. Year to date average loans are up $8.6 million, or 3.1% from June
30, 2002 to June 30, 2003. Loan interest income has decreased $952 thousand
for the first six months of 2003 compared to the first six months of 2002,
primarily due to increased loan originations and loan refinances at lower
rates. Year to date average deposits also increased from June 30, 2002 to
June 30, 2003, up $12.5 million, or 4.0%. Deposit interest expense has
decreased $1.0 million for the first six months of 2003 compared to the same
period in 2002, primarily due to lower rates.
For the three months ended June 30, the yield on assets decreased from 6.65%
in 2002 to 5.86% in 2003. The cost of liabilities decreased from 2.71% in
2002 to 2.11% in 2003, primarily due to the decrease in rates. Loan interest
income has decreased $444 thousand for three months ended June 30, 2003
compared to the three months ended June 30, 2002. Deposit interest expense
has decreased $481 thousand during the three months ended June 30, 2003
compared to the same time period in 2002.
The declining rate environment in recent years has resulted in tighter margins
in 2002 and 2003. However, these tighter margins have been partially offset
with balance sheet growth, resulting in net interest income remaining
relatively level for the first six 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 $437 thousand for the six month period ended
June 30, 2003 from $2.9 million to $3.4 million. Non-interest income
increased $98 thousand for the three month period ended June 30, 2003 compared
to the same time period in 2002. An increase of $162 thousand in service
charges from the first six months of 2002 to the comparable 2003 period is
mainly attributable to an increase in checking overdraft charges of $136
thousand (the increase was $82 thousand for the three month period ended June
30, 2003 compared to June 30, 2002). Overdraft income increased principally
due to the increased utilization 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 $362 thousand during the first six
months of 2003 compared to the same 2002 period (the three month period ended
June 30, 2003 increase was $152 thousand compared to the same time period in
2002). 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 six month period ending June 30, 2003
compared to the same period in 2002. The stabilizing or increasing of
interest rates is expected to cause the income from the sale of loans to be
lower in future periods than in the first six months of 2003.
Non-Interest Expense
The increase of $861 thousand in non-interest expenses from $6.1 million for
the six months ended June 30, 2002 to $6.9 million for the same period in 2003
was a result of several factors. For the three month period ended June 30,
2003, total non-interest expenses increased $398 thousand to $3.5 million in
2003. Salaries and benefits increased $439 thousand for the first six months
of 2003 compared to 2002, an increase of 13%. The increase is due to annual
salary increases, and increased number of employees. In addition, A market
salary adjustment was made effective January 1, 2003. Employee benefits
represented $137 thousand of the increase in salaries and employee benefits
expense during these comparable periods.
Other expenses increased $224 thousand to $1.5 million for the first six
months of 2003 compared to the same period in 2002. Legal and professional
costs have increased $138 thousand. On July 8, 2003, the Company announced
that it had entered into an agreement to acquire Kentucky First Bancorp, Inc.
of Cynthiana, Kentucky. Merger related legal and consulting fees have
amounted to over $60 thousand through the period ended June 30, 2003 (see
Exhibit 2 for details of this merger). In addition, consulting fees related
to salary reviews, and legal fees related to loan collections account for the
remainder of this increase.
Income Taxes
The tax equivalent rate for the six months ended June 30 was 28% for 2003 and
30% for 2002. The tax equivalent rate for the three months ended June 30 was
28% 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 June
30, 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 $11.0 million as of June 30, 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. In addition to
cash and cash equivalents, the securities portfolio provides an important
source of liquidity. Total investment securities available for sale totaled
$89.9 million at June 30, 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.
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 is currently evaluating its
opportunities to raise capital to fund continued growth and development of the
business. 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 June 30, 2003, we have sufficient collateral to borrow an
additional $41 million from the FHLB. In addition, as of June 30, 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 June 30, 2003, the Company's non-performing loans totaled $1.7 million
or 0.6% of loans compared to $2.4 million or 0.8% of loans at December 31,
2002. (See table below) The decrease in non-accrual loans is mainly
attributable to the charge-off amounting to $481 thousand for a large
commercial loan customer with indebtedness of $750 thousand. Real estate
loans composed 70% and 65% of the non-performing loans as of June 30, 2003 and
December 31, 2002, respectively. Forgone interest income on the non-accrual
loans for both 2003 and 2002 is immaterial.
Nonperforming Assets
6/30/03 12/31/02
(in thousands)
Non-accrual Loans $ 565 $ 1,573
Accruing Loans which are
Contractually past due
90 days or more 1,174 789
Total Nonperforming and Restructured 1,739 2,362
Other Real Estate 305 172
Total Nonperforming and Restructured
Loans and Other Real Estate $ 2,044 $ 2,534
Nonperforming and Restructured Loans
as a Percentage of Loans 0.61% 0.83%
Nonperforming and Restructured Loans
and Other Real Estate as a Percentage
of Total Assets 0.50% 0.60%
Provision for Loan Losses
The first six months 2003 provision for loan losses of $450 thousand is lower
than the comparable 2002 period by $252 thousand. The June 30, 2003 three
month provision of $225 thousand is lower than the three month provision for
the period ended June 30, 2002 by $276 thousand. An increase in nonperforming
loans required management to increase the provision in 2002 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 six month period ended June 30, 2003 were $804 thousand compared
to $248 thousand for the same time period in 2002. Net charge-offs for the
three month period ending June 30, 2003 were $622 thousand compared to $129
thousand for the same period in 2002. The charged-off commercial loan
mentioned previously was reserved for in prior periods, and is the main reason
for the amount of charge-offs this period. 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 incurred
loan losses.
Loan Losses
Six Months Ended June 30
(in thousands)
2003 2002
Balance at Beginning of Period $ 3,395 $ 3,386
Amounts Charged-off:
Commercial 529 48
Real Estate Construction - 18
Real Estate Mortgage 88 8
Agricultural 20 -
Consumer 257 262
Total Charged-off Loans 894 336
Recoveries on Amounts
Previously Charged-off:
Commercial 9 15
Real Estate Construction - -
Real Estate Mortgage 1 20
Agricultural 21 8
Consumer 59 45
Total Recoveries 90 88
Net Charge-offs 804 248
Provision for Loan Losses 450 702
Balance at End of Period 3,041 3,840
Loans
Average 282,773 275,226
At June 30 283,040 282,731
As a Percentage of Average Loans:
Net Charge-offs 0.28% 0.09%
Provision for Loan Losses 0.16% 0.26%
Allowance as a Percentage of
Period-end Loans 1.07% 1.36%
Allowance as a Multiple of
Net Charge-offs 3.8 15.5
Allowance as a Percentage of
Non-performing and Restructured Loans 175% 138%
Loan Losses
Quarter Ended June 30
(in thousands)
2003 2002
Balance at Beginning of Period $ 3,438 $ 3,468
Amounts Charged-off:
Commercial 487 25
Real Estate Construction - 18
Real Estate Mortgage 88 -
Agricultural - -
Consumer 100 132
Total Charged-off Loans 675 175
Recoveries on Amounts
Previously Charged-off:
Commercial 5 1
Real Estate Construction - -
Real Estate Mortgage 1 20
Agricultural 20 1
Consumer 27 24
Total Recoveries 53 46
Net Charge-offs 622 129
Provision for Loan Losses 225 501
Balance at End of Period 3,041 3,840
Loans
Average 282,418 278,616
At June 30 283,040 282,731
As a Percentage of Average Loans:
Net Charge-offs 0.22% 0.05%
Provision for Loan Losses 0.08% 0.18%
Allowance as a Multiple of
Net Charge-offs 4.9 29.8
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 June 30, 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. In this scenario, the net interest
income changes are outside the Board approved limit, and are monitored by the
Board on a monthly basis. 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 June 30, 2003 is as follows:
(dollars in thousands)
PROJECTED NET INTEREST INCOME
Level
Change in basis points: - 300 - 100 Rates + 100 + 300
Year One (7/03 - 6/04)
Interest Income $18,524 $21,107 $22,525 $23,945 $26,793
Interest Expense 6,108 6,396 7,259 8,129 9,870
Net Interest Income 12,416 14,711 15,266 15,816 16,923
PROJECTED DOLLAR INCREASE (DECREASE) FROM "LEVEL RATES"
Year One (7/03 - 6/04)
Interest Income $(4,001) $(1,418) N/A $ 1,420 $ 4,268
Interest Expense (1,151) (863) N/A 870 2,611
Net Interest Income (2,850) (555) N/A 550 1,657
PROJECTED PERCENTAGE INCREASE (DECREASE) FROM "LEVEL RATES"
Year One (7/03 - 6/04)
Interest Income -17.8% -6.3% N/A 6.3% 18.9%
Interest Expense -15.9% -11.9% N/A 12.0% 36.0%
Net Interest Income -18.7% -3.6% N/A 3.6% 10.9%
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 June 30, 2002 is as follows:
(dollars in thousands)
PROJECTED NET INTEREST INCOME
Level
Change in basis points: - 300 - 100 Rates + 100 + 300
Year One (7/1/02 - 6/30/03)
Interest Income $ 21,518 $ 23,957 $ 25,251 $ 26,552 $ 29,157
Interest Expense 6,350 8,099 9,209 10,317 12,536
Net Interest Income 15,168 15,858 16,042 16,235 16,621
PROJECTED DOLLAR INCREASE (DECREASE) FROM "LEVEL RATES"
Year One (7/1/02 - 6/30/03)
Interest Income $ (3,733) $ (1,294) N/A $ 1,301 $ 3,906
Interest Expense (2,859) (1,110) N/A 1,108 3,327
Net Interest Income (874) (184) N/A 193 579
PROJECTED PERCENTAGE INCREASE (DECREASE) FROM "LEVEL RATES"
Year One (7/1/02 - 6/30/03)
Interest Income -14.8% -5.1% N/A 5.2% 15.5%
Interest Expense -31.0% -12.1% N/A 12.0% 36.1%
Net Interest Income -5.4% -1.1% N/A 1.2% 3.6%
Board approved limit >-10.0% >-4.0% N/A >-4.0% >-10.0%
These projected changes in net interest income as of June 30, 2003 are
greater when compared to the projected changes in net interest income as of
June 30, 2002. Projections from June 30, 2003, year one reflected a decline
in net interest income of 3.6% with a 100 basis point decline compared to the
1.1% decline in 2002. The 300 basis point increase in rates reflected a 10.9%
increase in net interest income in 2003 compared to 3.6% 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.
Item 4 - CONTROLS AND PROCEDURES
As of the end of the period covered by 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 the
Company's disclosure controls and procedures. Based on the foregoing, the
Company's Chief Executive Officer and Chief Financial Officer concluded that
the Company's disclosure controls and procedures were effective, in all
material respects, to ensure that information required to be disclosed in the
reports the Company files and submits under the Exchange Act is recorded,
processed, summarized and reported as and when required.
The Company also conducted an evaluation of internal control over financial
reporting to determine whether any changes occurred during the quarter covered
by this report that have materially affected, or are reasonably likely to
materially affect, the Company's internal control over financial reporting.
Based on this evaluation, there has been no such change during the quarter
covered by this report.
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
The registrant's 2003 Annual Meeting of Shareholders was held June 25,
2003. Proxies were solicited by the registrant's Board of Directors.
There was no solicitation in opposition to the board's nominees as
listed in the proxy statement, and all of the nominees were elected by
vote of the shareholders. Voting results for each nominee were as
follows:
Votes For Votes Withheld
Ted McClain 2,060,059 44,880
William R. Stamler 2,090,659 14,280
Buckner Woodford, IV 2,075,285 29,654
The following directors have a term of office that will continue
following the Annual Meeting: William M. Arvin, James L. Ferrell, Henry
Hinkle, Theodore Kuster, Louis Prichard and Robert G. Thompson.
The total number of Common Shares outstanding as of May 8, 2003, the
record date for the Annual Meeting of Shareholders, was 2,777,270.
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.
2 Agreement and Plan of Merger dated as of July 8, 2003, among
(a) the Registrant, (b) Bourbon Acquisition Corp., a Delaware
corporation which is wholly owned by the Registrant, and
(c) Kentucky First Bancorp, Inc., a Delaware corporation.
31.1 Certifications of Chief Executive Officer pursuant to
Section 302 of the Sarbanes-Oxley Act of 2002.
31.2 Certifications of Chief Financial Officer pursuant to
Section 302 of the Sarbanes-Oxley Act of 2002.
32 Certifications of Chief Executive Officer and Chief
Financial Officer pursuant to 18 U.S.C. Section 1350, as
adopted pursuant to Section 906 of the Sarbanes-Oxley
Act of 2002.
2. Reports on Form 8-K
The Company filed a Form 8-K dated April 15, 2003, Item 9 and
Item 12 to report the issuance of a press release announcing
its operating results for the three-month period ended
March 31, 2003.
The Company filed a Form 8-K dated May 1, 2003, Item 9 and
Item 12 to report the mailing to its shareholders of
its operating results for the three-month period ended
March 31, 2003.
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.
KENTUCKY BANCSHARES, INC.
Date ___8/14/03_________ __/s/Buckner Woodford____________
Buckner Woodford, President and C.E.O.
Date ___8/14/03_________ __/s/Gregory J. Dawson___________
Gregory J. Dawson, Chief Financial Officer
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