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 September 30, 2004
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 November 12, 2004:
2,684,348.
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 13
Item 3. Quantitative and Qualitative Disclosures About
Market Risk 20
Item 4. Controls and Procedures 21
Part II - Other Information 22
Signatures 23
Exhibits
31.1 Certifications of Chief Executive Officer pursuant
to Section 302 of the Sarbanes-Oxley Act of 2002. 24
31.2 Certifications of Chief Financial Officer pursuant
to Section 302 of the Sarbanes-Oxley Act of 2002. 26
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. 28
Item 1 - Financial Statements
KENTUCKY BANCSHARES, INC.
CONSOLIDATED BALANCE SHEETS (unaudited)
(thousands) 9/30/2004 12/31/2003
Assets
Cash and due from banks $ 9,444 $ 15,225
Federal funds sold 7 6,163
Cash and cash equivalents 9,451 21,388
Securities available for sale 118,095 128,790
Mortgage loans held for sale 36 7,759
Loans 351,578 313,002
Allowance for loan losses (4,261) (3,820)
Net loans 347,317 309,182
Federal Home Loan Bank stock 5,082 4,930
Bank premises and equipment, net 11,696 11,606
Interest receivable 3,506 3,250
Goodwill 9,336 10,200
Other intangible assets 885 1,137
Other assets 2,129 2,610
Total assets $ 507,533 $ 500,852
Liabilities and Stockholders' Equity
Deposits
Non-interest bearing $ 65,743 $ 64,842
Time deposits, $100 and over 55,753 49,915
Other interest bearing 244,013 269,842
Total deposits 365,509 384,599
Securities sold under agreements to repurchase 19,143 1,791
Other borrowed funds 4,971 5,494
Subordinated debentures 7,217 7,217
Federal Home Loan Bank advances 62,995 53,232
Interest payable 1,497 1,636
Other liabilities 1,829 826
Total liabilities 463,161 454,795
Stockholders' equity
Common stock 3,617 6,985
Retained earnings 39,981 37,553
Accumulated other comprehensive income 774 1,519
Total stockholders' equity 44,372 46,057
Total liabilities & stockholders' equity $ 507,533 $ 500,852
See Accompanying Notes
KENTUCKY BANCSHARES, INC.
CONSOLIDATED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME (unaudited)
(thousands, except per share amounts) Nine Months Ending
9/30/2004 9/30/2003
INTEREST INCOME:
Loans, including fees $ 15,038 $ 13,949
Securities available for sale 4,167 2,589
Other 30 80
Total interest income 19,235 16,618
INTEREST EXPENSE:
Deposits 4,219 3,979
Other 2,426 1,830
Total interest expense 6,645 5,809
Net interest income 12,590 10,809
Loan loss provision 620 675
Net interest income after provision 11,970 10,134
OTHER INCOME:
Service charges 3,424 3,133
Loan service fee income 182 183
Trust department income 220 238
Securities available for sale gains (losses), net 239 131
Gain on sale of mortgage loans 295 787
Other 788 689
Total other income 5,148 5,161
OTHER EXPENSES:
Salaries and employee benefits 6,101 5,455
Occupancy expenses 1,704 1,530
Amortization 433 370
Advertising and marketing 294 300
Taxes other than payroll, property and income 373 332
Other 2,410 2,361
Total other expenses 11,315 10,348
Income before taxes 5,803 4,947
Income taxes 1,635 1,331
Net income $ 4,168 $ 3,616
Other Comprehensive Income, net of tax:
Change in Unrealized Gains on Securities (745) (313)
Comprehensive Income $ 3,423 $ 3,303
Earnings per share
Basic $ 1.50 $ 1.30
Diluted 1.49 1.29
See Accompanying Notes
KENTUCKY BANCSHARES, INC.
CONSOLIDATED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME (unaudited)
(thousands, except per share amounts) Three Months Ending
9/30/2004 9/30/2003
INTEREST INCOME:
Loans, including fees $ 5,225 $ 4,532
Securities available for sale 1,278 792
Other 2 21
Total interest income 6,505 5,345
INTEREST EXPENSE:
Deposits 1,371 1,194
Other 882 647
Total interest expense 2,253 1,841
Net interest income 4,252 3,504
Loan loss provision 170 225
Net interest income after provision 4,082 3,279
OTHER INCOME:
Service charges 1,207 1,058
Loan service fee income 63 59
Trust department income 73 82
Securities available for sale gains (losses), net 163 111
Gain on sale of mortgage loans 57 256
Other 247 221
Total other income 1,810 1,787
OTHER EXPENSES:
Salaries and employee benefits 1,999 1,693
Occupancy expenses 575 496
Amortization 139 129
Advertising and marketing 98 100
Taxes other than payroll, property and income 125 111
Other 722 882
Total other expenses 3,658 3,411
Income before taxes 2,234 1,655
Income taxes 655 394
Net income $ 1,579 $ 1,261
Other Comprehensive Income, net of tax:
Change in Unrealized Gains on Securities 1,735 (606)
Comprehensive Income $ 3,314 $ 655
Earnings per share
Basic $ 0.58 $ 0.45
Diluted 0.57 0.45
See Accompanying Notes
KENTUCKY BANCSHARES, INC.
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY (unaudited)
(thousands, except number of shares)
Accumulated
Other Total
----Common Stock---- Retained Comprehensive Stockholders'
Shares Amount Earnings Income Equity
<s> <c> <c> <c> <c> <c>
Balances, December 31, 2003 2,799,781 $ 6,985 $ 37,553 $ 1,519 $ 46,057
Common stock issued 2,680 56 - - 56
Common stock purchased (122,302) (3,424) - - (3,424)
Net change in unrealized gain (loss)
on securities available for sale,
net of tax - - - (745) (745)
Net income - - 4,168 - 4,168
Dividends declared - $0.63 per share - - (1,740) - (1,740)
Balances, September 30, 2004 2,680,159 $ 3,617 $ 39,981 $ 774 $ 44,372
KENTUCKY BANCSHARES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS (unaudited)
(thousands) Nine Months Ending
9/30/2004 9/30/2003
Cash Flows From Operating Activities
Net Income $ 4,168 $ 3,616
Adjustments to reconcile net income to
net cash provided by operating activities:
Depreciation 759 718
Amortization 433 370
Securities available for sale amortization (accretion) 520 559
Provision for loan losses 620 675
Securities available for sale (gains) losses, net (239) (131)
Originations of loans held for sale (16,775) (36,555)
Proceeds from sale of loans 24,793 30,914
Federal Home Loan Bank Stock dividends (152) (122)
Gain on sale of mortgage loans (295) (787)
Changes in:
Interest receivable (256) 71
Other assets (254) (502)
Interest payable (139) (470)
Other liabilities 2,805 138
Net cash from operating activities 15,988 (1,506)
Cash Flows From Investing Activities
Purchases of securities available for sale (56,036) (42,066)
Proceeds from sales of securities available for sale 37,891 6,520
Proceeds from principal payments, maturities and
calls of securities available for sale 27,430 27,280
Net change in loans (38,755) 5,553
Purchases of bank premises and equipment, net (849) (1,431)
Net cash from investing activities (30,319) (4,144)
Cash Flows From Financing Activities:
Net change in deposits (19,090) (17,063)
Net change in securities sold under agreements to
repurchase and other borrowings 16,829 (2,601)
Proceeds from subordinated debentures - 7,000
Advances from Federal Home Loan Bank 10,000 12,000
Payments on Federal Home Loan Bank advances (237) (9,146)
Proceeds from issuance of common stock 56 176
Purchase of common stock (3,424) (11)
Dividends paid (1,740) (1,584)
Net cash from financing activities 2,394 (11,229)
Net change in cash and cash equivalents (11,937) (16,879)
Cash and cash equivalents at beginning of period 21,388 29,176
Cash and cash equivalents at end of period $ 9,451 $ 12,297
KENTUCKY BANCSHARES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. 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 as of the date of the financial statements and the reported
amounts of revenues and expenses during the reporting period. Estimates
used in the preparation of the financial statements are based on various
factors including the current interest rate environment and the general
strength of the local economy. Changes in the overall interest rate
environment can significantly affect the Company's net interest income and
the value of its recorded assets and liabilities. Actual results could
differ from those estimates used in the preparation of the financial
statements.
The financial information presented as of any date other than December 31
has been prepared from the Company's books and records without audit. The
accompanying consolidated financial statements have been prepared in
accordance with the instructions to Form 10-Q and Rule 10-01 of Regulation
S-X. Certain financial information that is normally included in annual
financial statements prepared in accordance with accounting principles
generally accepted in the United States of America, but is not required for
interim reporting purposes, has been condensed or omitted. In the opinion
of management, all adjustments, consisting of normal recurring adjustments,
necessary for a fair presentation of such financial statements, have been
included. The results of operations for the interim periods are not
necessarily indicative of the results to be expected for the full year.
For further information, refer to the consolidated financial statements and
footnotes thereto included in the Company's Annual Report on Form 10-K for
the year ended December 31, 2003.
2. GOODWILL AND OTHER INTANGIBLE ASSETS
The balance for goodwill was $9,335,524 as of September 30, 2004. During the
third quarter of 2004, the goodwill from Kentucky First Bancorp, Inc. was
reduced by $864 thousand for items arising after the initial calculation of
goodwill. Goodwill will not be amortized but instead evaluated periodically
for impairment.
Acquired intangible assets were as follows:
Original Accumulated
Amount Amortization
9/30/2004
Core deposit intangible $3,656,403 $2,770,848
Amortization expense was $251,556 for the first nine months of 2004 and
$209,601 for the first nine months of 2003.
Estimated amortization expense for the next five years is: 2004 - $275,491;
2005 - $95,736; 2006 - $95,736; 2007 - $95,736; and 2008 - $95,736.
The change in balance for intangible assets during the period is as follows:
Beginning of year $1,137,111
Amortization (251,556)
End of period 885,555
3. INVESTMENT SECURITIES
INVESTMENT SECURITIES
Period-end securities are as follows:
(in thousands)
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
Available for Sale
September 30, 2004
U.S. Treasury $ 3,016 $ 1 $ (14) $ 3,003
U.S. government agencies 29,180 45 (315) 28,910
States and political subdivisions 35,144 1,570 (97) 36,617
Mortgage-backed 48,911 117 (497) 48,531
Equity securities 671 363 - 1,034
Total 116,922 2,096 (923) 118,095
December 31, 2003
U.S. Treasury $ 3,022 $ 11 $ - $ 3,033
U.S. government agencies 36,642 125 (133) 36,634
States and political subdivisions 37,656 1,536 (50) 39,142
Mortgage-backed 46,944 631 (193) 47,382
Equity securities 1,215 327 (8) 1,534
Other 1,009 56 - 1,065
Total 126,488 2,686 (384) 128,790
4. LOANS
Loans at period-end are as follows:
(in thousands)
9/30/2004 12/31/2003
Commercial $ 17,445 $ 14,278
Real estate construction 30,494 14,313
Real estate mortgage 234,677 214,529
Agricultural 58,802 56,615
Consumer 10,160 13,267
Total 351,578 313,002
5. On August 28, 2003, Kentucky Bancshares Statutory Trust I, a trust
subsidiary of the Company, issued 7,000 shares of cumulative trust
preferred securities with a liquidation preference of $1,000 per security.
The proceeds of the offering were loaned to the Company in exchange for
subordinated debentures with terms that are similar to the trust preferred
securities; these debentures are the sole asset of the trust subsidiary.
Distributions on the securities are payable quarterly at a rate per annum
equal to 7.06% through September 17, 2008, and thereafter quarterly in
arrears at the annual rate (adjusted quarterly) equal to the 3-month LIBOR
plus 3.00%. The Company has guaranteed that the trust subsidiary will make
the required distributions to the holders of the trust preferred
securities. The trust preferred securities, which mature September 17,
2033, are subject to mandatory redemption, in whole or in part, upon
repayment of the subordinated debentures at maturity or their earlier
redemption at the liquidation preference. Subject to regulatory approval,
the subordinated debentures are redeemable before the maturity date at the
Company's option on or after September 17, 2008, at their principal amount
plus accrued interest. The subordinated debentures are also redeemable in
whole or in part, from time to time, upon the occurrence of specific events
defined in the debenture indenture. The Company undertook the issuance of
these securities to enhance its regulatory capital position as they are
considered as Tier I capital under current regulatory guidelines. The
Company intends to use the proceeds to assist in funding continued growth
and development of the business, including the November 7, 2003 acquisition
of Kentucky First Bancorp.
6. On November 7, 2003, the Company acquired 100% of the outstanding shares of
Kentucky First Bancorp, Inc., parent of First Federal Savings Bank.
Operating results of Kentucky First Bancorp, Inc. are included in the
consolidated financial statements since the date of the acquisition. As a
result of this acquisition, the Company expects to further solidify its
market share in central Kentucky.
The purchase price in cash was $23.25 per share or $22,271,000. The
purchase price resulted in approximately $9,335,000 in goodwill, and
$766,000 in core deposit intangible. The core deposit intangible asset
will be amortized over 10 years, using the straight line method. Goodwill
will not be amortized but instead evaluated periodically for impairment.
The following table summarizes the estimated fair value of assets acquired
and liabilities assumed at the date of acquisition.
Securities available for sale $ 23,156,000
Loans 31,205,000
Goodwill 9,335,000
Core deposit intangible 766,000
Other assets 19,333,000
Total assets acquired $ 83,795,000
Deposits (52,939,000)
Other liabilities (8,585,000)
Total liabilities assumed $ (61,524,000)
Net assets acquired $ 22,271,000
7. 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:
Nine Months Ended
September 30
2004 2003
(in thousands)
Basic Earnings Per Share
Net Income $4,168 $3,616
Weighted average common shares outstanding 2,782 2,778
Basic earnings per share $ 1.50 $ 1.30
Diluted Earnings Per Share
Net Income $4,168 $3,616
Weighted average common shares outstanding 2,782 2,778
Add dilutive effects of assumed exercise
of stock options 21 33
Weighted average common and dilutive
potential common shares outstanding 2,803 2,811
Diluted earnings per share $ 1.49 $ 1.29
Three Months Ended
September 30
2004 2003
(in thousands)
Basic Earnings Per Share
Net Income $1,579 $1,261
Weighted average common shares outstanding 2,745 2,782
Basic earnings per share $ 0.58 $ 0.45
Diluted Earnings Per Share
Net Income $1,579 $1,261
Weighted average common shares outstanding 2,745 2,782
Add dilutive effects of assumed exercise
of stock options 19 34
Weighted average common and dilutive
potential common shares outstanding 2,764 2,816
Diluted earnings per share $ 0.57 $ 0.45
8. 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.
Nine months ended September 30
(in thousands)
2004 2003
Net income
As reported $ 4,168 $ 3,616
Deduct: Stock-based compensation
expense determined under fair
value based method (16) (25)
Pro forma 4,152 3,591
Basic earnings per share
As reported $ 1.50 $ 1.30
Pro forma 1.49 1.29
Diluted earnings per share
As reported $ 1.49 $ 1.29
Pro forma 1.48 1.28
9. Dividends per share paid for the quarter ended September 30, 2004 were
$0.21 compared to $0.19 for September 30, 2003. This is the same rate of
dividend paid for the first and second quarters of the respective years.
10. Components of Net Periodic Benefit Cost
Nine months ended September 30
(in thousands)
Pension Benefits
2004 2003
Service cost $ 277 $ 236
Interest cost 215 199
Expected return on plan assets (239) (199)
Amortization - 13
Net Periodic Benefit Cost $ 253 $ 249
Employer Contributions
The Company previously disclosed in its financial statements for the year
ended December 31, 2003 that it expected to contribute $375 thousand as its
annual contribution to the Pension Plan. The Company made its actual annual
contribution amounting to $277 thousand in the third quarter of 2004.
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
Kentucky Bancshares, Inc. recorded net income of $4.2 million, or $1.50 basic
and $1.49 diluted earnings per share for the first nine months ended September
30, 2004 compared to $3.6 million, or $1.30 basic earnings per share and $1.29
diluted earnings per share for the nine month period ending September 30,
2003. The first nine months earnings reflects an increase of 15.3% compared
to the same time period in 2003. The net income for the three months ended
September 30, 2004 was $1.6 million, or $0.58 basic and $0.57 diluted earnings
per share compared to $1.3 million, or $0.45 basic and diluted earnings per
share for the three month period ending September 30, 2003. This three month
period reflects an increase in net income of 25.2% compared to the three
months of the prior year.
Return on average assets was 1.08% for the nine months ended September 30,
2004 and 1.17% for the nine month period ended September 30, 2003. Return on
average assets was 1.27% for the three months ended September 30, 2004 and
1.22% for the same time period in 2003. Return on average equity was 12.0%
for the nine month period ended September 30, 2004 and 10.7% for the same
period in 2003. Return on average equity for the three month period ended
September 30, 2004 was 14.1% compared to 11.0% for the same time period in
2003.
Loans increased $38.6 million from $313.0 million on December 31, 2003 to
$351.6 million on September 30, 2004. Increases in commercial, real estate
construction and real estate mortgage loans were offset somewhat by a decrease
in consumer loans. Management attributes the overall growth in loans
primarily to an improvement in the economy.
Total deposits decreased from $384.6 million on December 31, 2003 to $365.5
million on September 30, 2004, a decrease of $19.1 million. The decrease is
mainly attributable to other interest bearing deposits decreasing $25.8
million, partially offset by a $5.8 million increase in time deposits of $100
thousand and over.
Net Interest Income
Net interest income was $12.6 million for the nine months ended September 30,
2004 and $10.8 million for the nine months ended September 30, 2003, an
increase of 16.5%. Net interest income was $4.3 million for the three months
ended September 30, 2004 and $3.5 million for the three months ending
September 30, 2003, resulting in an increase of $748 thousand. The interest
spread was 3.51% for the first nine months of 2004 compared to 3.65% for the
same period in 2003, a decrease of 14 basis points. Generally, the low
interest rate environment, in conjunction with the addition of the trust
preferred securities with their 7.06% fixed rate of interest, have contributed
to tighter net interest margins in the first nine months of 2004 compared to
2003.
For the first nine months, the yield on assets decreased from 5.74% in 2003 to
5.31% in 2004. The cost of liabilities decreased from 2.09% in 2003 to 1.80%
in 2004. Year to date average loans are up $44.2 million, or 15.7% from
September 30, 2003 to September 30, 2004. On November 7, 2003, the
acquisition of Kentucky First Bancorp, Inc. resulted in $31.2 million being
added to the outstanding balance of loans. Loan interest income has increased
$1.1 million for the first nine months of 2004 compared to the first nine
months of 2003. Year to date average deposits also increased from September
30, 2003 to September 30, 2004, up $64.2 million, or 20.0%. The above
mentioned acquisition added $52.9 million in deposits. Deposit interest
expense has increased $240 thousand for the first nine months of 2004 compared
to the same period in 2003.
The declining rate environment in recent years has resulted in tighter margins
in 2003 and 2004. However, due to the acquisition, net interest income has
increased $1.8 million for the first nine months of 2004 compared to the same
period in 2003. The banking industry continues to battle competition for loan
and deposit dollars, and this trend is expected to continue.
During the first quarter of 2004, the Company determined that it was in its
best interest to purchase additional investment securities. The Company
implemented leverage strategies amounting to $30 million. Investments were
purchased and funded by repurchase agreements and Federal Home Loan Bank
advances. These strategies have added $337 thousand to net income before
taxes for the first nine months of 2004.
Non-Interest Income
Non-interest income decreased $13 thousand for the nine months ended September
30, 2004 compared to the same period in 2003 from $5.2 million to $5.1
million, due primarily to the decrease in gain on sale of mortgage loans
discussed below. Non-interest income increased $23 thousand for the three
month period ended September 30, 2004 compared to the same period in 2003. An
increase of $291 thousand in service charges from the first nine months of
2003 to the comparable 2004 period is mainly attributable to an increase in
checking overdraft charges of $335 thousand, offset mainly by a decrease in
merchant processing of $55 thousand. The accounts acquired through the
acquisition of Kentucky First in November 2003 have also added to the
increase.
Gain on sale of mortgage loans decreased $492 thousand during the first nine
months of 2004 compared to the same period in 2003. The gain on sale of
mortgage loans decreased $199 thousand for the three month period ended
September 30, 2004 compared to the same three month period in 2003. The
volume of loan originations and sales are inverse to rate changes. The
stabilizing of long term interest rates, along with the significant decrease
in refinancing activity, has caused the income to be lower in 2004 than in
2003.
Non-Interest Expense
Total non-interest expenses increased $967 thousand for the nine month period
ended September 30, 2004 compared to the same period in 2003, including an
increase of $247 thousand in non-interest expenses from $3.4 million for the
three months ended September 30, 2003 to $3.7 million for the same period in
2004.
For the comparable nine month periods, salaries and benefits increased $646
thousand, an increase of 12%. The increase is due to annual salary increases
and an increased number of employees. Incentives represented $137 thousand
and employee benefits represented $103 thousand of the increase in salaries
and employee benefits expense during these comparable periods.
Occupancy expenses increased $174 thousand from $1.5 million for the first
nine months of 2003 compared to $1.7 million for the same period in 2004.
Occupancy expenses increased $79 thousand for the three month period ended
September 30, 2004 compared to September 30, 2003.
Other expenses increased $49 thousand for the nine months ended September 30,
2004 compared to the same time period in 2003. Other expenses decreased $160
thousand for the three months ended September 30, 2004 compared to the same
period in 2003. Debit card expenses, amortization expenses, other taxes and
repossession expenses have increased $28 thousand, $62 thousand, $41 thousand
and $54 thousand, respectively, when compared to the same nine month period in
2003.
The acquisition of Kentucky First in November 2003 was a main contributor in
the expenses increasing from 2003 to 2004.
Income Taxes
The tax equivalent rate for the nine months ended September 30, 2004 was 28%
compared to 27% in 2003. The tax equivalent rate for the three months ended
September 30 was 29% for 2004 and 24% for 2003. 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. In August 2004, the Board of Directors approved
and the Company repurchased 122,302 shares from a third-party shareholder.
These shares were outside of the previously mentioned stock repurchase
programs. Shares will be purchased from time to time in the open market
depending on market prices and other considerations. Through September 30,
2004, 84,333 shares have been purchased, with the most recent share repurchase
having occurred on February 5, 2003. 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 $9.5 million as of September 30, 2004 compared
to $21.4 million at December 31, 2003. 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 securities available for sale totaled
$118.1 million at September 30, 2004. 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.
To assist in funding the Company's continued growth and development of its
business, including the November 7, 2003 acquisition of Kentucky First
Bancorp, on August 28, 2003, Kentucky Bancshares Statutory Trust I, a trust
subsidiary of the Company, issued 7,000 shares of cumulative trust preferred
securities with a liquidation preference of $1,000 per security. The proceeds
of the offering were loaned to the Company in exchange for subordinated
debentures with terms that are similar to the trust preferred securities;
these debentures are the sole asset of the trust subsidiary. Distributions on
the securities are payable quarterly at a rate per annum equal to 7.06%
through September 17, 2008, and thereafter quarterly in arrears at the annual
rate (adjusted quarterly) equal to the 3-month LIBOR plus 3.00%. The Company
has guaranteed that the trust subsidiary will make the required distributions
to the holders of the trust preferred securities. The trust preferred
securities, which mature September 17, 2033, are subject to mandatory
redemption, in whole or in part, upon repayment of the subordinated debentures
at maturity or their earlier redemption at the liquidation preference.
Subject to regulatory approval, the subordinated debentures are redeemable
before the maturity date at the Company's option on or after September 17,
2008, at their principal amount plus accrued interest. The subordinated
debentures are also redeemable in whole or in part, from time to time, upon
the occurrence of specific events defined in the debenture indenture. The
Company undertook the issuance of these securities to enhance its regulatory
capital position as they are considered as Tier I capital under current
regulatory guidelines.
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 September 30, 2004, we have sufficient collateral to borrow an
additional $35 million from the FHLB. In addition, as of September 30, 2004,
over $53 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 September 30, 2004, the Company's non-performing loans totaled $2.4
million or 0.7% of loans compared to $2.6 million or 0.8% of loans at December
31, 2003. (See table below) The changes in non-accrual loans and in accruing
loans past due 90 days or more are attributable to various smaller consumer
and real estate loans. Real estate loans composed 81% of the non-performing
loans as of September 30, 2004 and 69% as of December 31, 2003. Forgone
interest income on the non-accrual loans for both 2004 and 2003 is immaterial.
Nonperforming Assets
9/30/04 12/31/03
(in thousands)
Non-accrual Loans $ 2,168 $ 1,844
Accruing Loans which are
Contractually past due
90 days or more 211 779
Total Nonperforming and Restructured 2,379 2,623
Other Real Estate 373 375
Total Nonperforming and Restructured
Loans and Other Real Estate $ 2,752 $ 2,998
Nonperforming and Restructured Loans
as a Percentage of Loans 0.68% 0.84%
Nonperforming and Restructured Loans
and Other Real Estate as a Percentage
of Total Assets 0.54% 0.60%
Provision for Loan Losses
The loan loss provision for the first nine months was $620 thousand for 2004
and $675 thousand for 2003. The provision for the three months ended
September 30, 2004 was $170 thousand compared to $225 thousand for the same
period in 2003. A decrease in nonperforming loans and the lower level of net
charge-offs have caused management to decrease the 2004 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. 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. Net charge-offs for the nine month period ended September 30, 2004
were $179 thousand compared to $904 thousand for the same period in 2003. Net
charge-offs for the three month period ended September 30, 2004 were $2
thousand compared to $100 thousand for the same time period in 2003. Future
levels of charge-offs will be determined by the particular facts and
circumstances surrounding individual loans. Management believes the current
loan loss reserve is sufficient to meet probable incurred loan losses.
Loan Losses
Nine Months Ended September 30
(in thousands)
2004 2003
Balance at Beginning of Period $ 3,820 $ 3,395
Amounts Charged-off:
Commercial 50 539
Real Estate Mortgage 26 112
Agricultural 88 20
Consumer 179 355
Total Charged-off Loans 343 1,026
Recoveries on Amounts
Previously Charged-off:
Commercial 9 9
Real Estate Mortgage 38 1
Agricultural 21 21
Consumer 96 91
Total Recoveries 164 122
Net Charge-offs 179 904
Provision for Loan Losses 620 675
Balance at End of Period 4,261 3,166
Loans
Average 326,162 281,944
At September 30 351,578 277,697
As a Percentage of Average Loans:
Net Charge-offs 0.05% 0.32%
Provision for Loan Losses 0.19% 0.24%
Allowance as a Percentage of
Period-end Loans 1.21% 1.14%
Allowance as a Multiple of
Net Charge-offs 17.9 2.6
Allowance as a Percentage of
Non-performing and Restructured Loans 179% 156%
Loan Losses
Quarter Ended September 30
(in thousands)
2004 2003
Balance at Beginning of Period $ 4,093 $ 3,041
Amounts Charged-off:
Commercial 5 10
Real Estate Mortgage 7 24
Agricultural 5 -
Consumer 30 98
Total Charged-off Loans 47 132
Recoveries on Amounts
Previously Charged-off:
Commercial 3 -
Real Estate Mortgage 1 -
Agricultural 16 -
Consumer 25 32
Total Recoveries 45 32
Net Charge-offs 2 100
Provision for Loan Losses 170 225
Balance at End of Period 4,261 3,166
Loans
Average 343,292 280,286
At September 30 351,578 277,697
As a Percentage of Average Loans:
Net Charge-offs 0.00% 0.04%
Provision for Loan Losses 0.05% 0.08%
Allowance as a Multiple of
Net Charge-offs 532.6 7.9
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 September 30, 2004 the projected percentage
changes are within the Board approved limits, except for the "-100" and "-
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. The
Company is also slightly outside the Board approved limit in the "-100"
environment. In these scenarios, the net interest income changes are outside
the Board approved limit, and are monitored by and reported to the Board on a
monthly basis. In addition, management has made some recent asset/liability
decisions that would lessen the impact of changing interest rates. This
period's volatility is comparable to the same periods a year ago. The
projected net interest income report summarizing the Company's interest rate
sensitivity as of September 30, 2004 is as follows:
(dollars in thousands)
PROJECTED NET INTEREST INCOME
Level
Change in basis points: - 300 - 100 Rates + 100 + 300
Year One (10/04 - 9/05)
Interest Income $21,112 $24,691 $26,519 $28,306 $31,731
Interest Expense 7,789 8,371 9,471 10,571 12,770
Net Interest Income 13,323 16,320 17,048 17,735 18,961
PROJECTED DOLLAR INCREASE (DECREASE) FROM "LEVEL RATES"
Year One (10/04 - 9/05)
Interest Income $(5,407) $(1,828) N/A $ 1,787 $ 5,212
Interest Expense (1,682) (1,100) N/A 1,100 3,299
Net Interest Income (3,725) (728) N/A 687 1,913
PROJECTED PERCENTAGE INCREASE (DECREASE) FROM "LEVEL RATES"
Year One (10/04 - 9/05)
Interest Income -20.4% -6.9% N/A 6.7% 19.7%
Interest Expense -17.8% -11.6% N/A 11.6% 34.8%
Net Interest Income -21.8% -4.3% N/A 4.0% 11.2%
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 September 30, 2003 is as follows:
(dollars in thousands)
PROJECTED NET INTEREST INCOME
Level
Change in basis points: - 300 - 100 Rates + 100 + 300
Year One (10/03 - 9/04)
Interest Income $ 18,440 $ 21,041 $ 22,459 $ 23,880 $ 26,723
Interest Expense 5,881 6,162 6,992 7,826 9,495
Net Interest Income 12,559 14,879 15,467 16,054 17,228
PROJECTED DOLLAR INCREASE (DECREASE) FROM "LEVEL RATES"
Year One (10/03 - 9/04)
Interest Income $ (4,019) $ (1,418) N/A $ 1,421 $ 4,264
Interest Expense (1,111) (830) N/A 834 2,503
Net Interest Income (2,908) (588) N/A 587 1,761
PROJECTED PERCENTAGE INCREASE (DECREASE) FROM "LEVEL RATES"
Year One (10/03 - 9/04)
Interest Income -17.9% -6.3% N/A 6.3% 19.0%
Interest Expense -15.9% -11.9% N/A 11.9% 35.8%
Net Interest Income -18.8% -3.8% N/A 3.8% 11.4%
Board approved limit >-10.0% >-4.0% N/A >-4.0% >-10.0%
These projected changes in net interest income as of September 30, 2004 are
slightly more when compared to the projected changes in net interest income as
of September 30, 2003. Projections from September 30, 2004, year one
reflected a decline in net interest income of 4.3% with a 100 basis point
decline compared to the 3.8% decline in 2003. The 300 basis point increase in
rates reflected a 11.2% increase in net interest income in 2004 compared to
11.4% in 2003. Percentage changes in 2004 are slightly different when
compared to 2003. These changes are also attributable in part to the $30
million leverage transactions discussed in Item 2 above.
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. Unregistered Sales of Equity Securities and Use of Proceeds
ISSUER PURCHASES OF EQUITY SECURITIES
Period (a) Total (b) (c) Total Number (d) Maximum Number
Number of Average of Shares (or Units) (or Approximate Dollar
Shares (or Price Paid Purchased as Part Value) of Shares (or
Units Per Share of Publicly Units) that May Yet Be
Purchased (or Unit) Announced Plans Purchased Under the
Or Programs Plans of Programs
7/1/04 -
7/31/04 -0- N/A N/A 115,667 shares
8/1/04 -
8/31/04 122,302 $28.00 N/A 115,667 shares
9/1/04 -
9/30/04 -0- N/A N/A 115,667 shares
Total 122,302 N/A 115,667 shares
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. In August 2004, the Board of Directors approved
and the Company repurchased 122,302 shares from a third-party shareholder at a
proce of $28 per share. These shares were outside of the previously mentioned
stock repurchase programs. Shares will be purchased from time to time in the
open market depending on market prices and other considerations. Through
September 30, 2004, 84,333 shares have been purchased, with the most recent
share repurchase having occurred on February 5, 2003.
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
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.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
KENTUCKY BANCSHARES, INC.
Date ___11/15/04_________ __/s/Buckner Woodford____________
Buckner Woodford, President and C.E.O.
Date ___11/15/04_________ __/s/Gregory J. Dawson___________
Gregory J. Dawson, Chief Financial Officer
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