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, 2005
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 May 13, 2005: 2,682,698.
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 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 16
Item 4. Controls and Procedures 17
Part II - Other Information 18
Signatures 19
Exhibits
31.1 Certifications of Chief Executive Officer pursuant
to Section 302 of the Sarbanes-Oxley Act of 2002. 20
31.2 Certifications of Chief Financial Officer pursuant
to Section 302 of the Sarbanes-Oxley Act of 2002. 22
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. 24
Item 1 - Financial Statements
KENTUCKY BANCSHARES, INC.
CONSOLIDATED BALANCE SHEETS (unaudited)
(thousands) 3/31/2005 12/31/2004
Assets
Cash and due from banks $ 8,802 $ 12,249
Federal funds sold - 3,206
Cash and cash equivalents 8,802 15,455
Securities available for sale 121,946 126,767
Mortgage loans held for sale - 175
Loans 359,522 358,282
Allowance for loan losses (4,327) (4,163)
Net loans 355,195 354,119
Federal Home Loan Bank stock 5,193 5,137
Bank premises and equipment, net 11,354 11,378
Interest receivable 3,312 3,226
Goodwill 9,111 9,111
Other intangible assets 837 861
Mortgage servicing rights 866 876
Other assets 1,773 1,439
Total assets $ 518,389 $ 528,544
Liabilities and Stockholders' Equity
Deposits
Non-interest bearing $ 69,981 $ 74,048
Time deposits, $100,000 and over 54,147 59,469
Other interest bearing 248,749 254,438
Total deposits 372,877 387,955
Repurchase agreements and other borrowings 33,702 25,593
Federal Home Loan Bank advances 57,500 59,750
Subordinated debentures 7,217 7,217
Interest payable 1,831 1,849
Other liabilities 657 1,153
Total liabilities 473,784 483,517
Stockholders' equity
Common stock 6,770 6,819
Retained earnings 38,600 37,884
Accumulated other comprehensive income (loss) (765) 324
Total stockholders' equity 44,605 45,027
Total liabilities & stockholders' equity $ 518,389 $ 528,544
See Accompanying Notes
KENTUCKY BANCSHARES, INC.
CONSOLIDATED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME (unaudited)
(thousands, except per share amounts) Three Months Ending
3/31/2005 3/31/2004
INTEREST INCOME:
Loans, including fees $ 5,510 $ 4,808
Securities available for sale 1,202 1,441
Other 8 18
Total interest income 6,720 6,267
INTEREST EXPENSE:
Deposits 1,619 1,436
Other 880 760
Total interest expense 2,499 2,196
Net interest income 4,221 4,071
Loan loss provision 250 255
Net interest income after provision 3,971 3,816
OTHER INCOME:
Service charges 1,017 1,055
Loan service fee income 65 59
Trust department income 103 82
Securities available for sale gains (losses), net - 16
Gain on sale of mortgage loans 97 102
Other 272 248
Total other income 1,554 1,562
OTHER EXPENSES:
Salaries and employee benefits 2,152 2,042
Occupancy expenses 570 589
Amortization 84 145
Advertising and marketing 110 100
Taxes other than payroll, property and income 137 123
Other 766 825
Total other expenses 3,819 3,824
Income before taxes 1,706 1,554
Income taxes 373 404
Net income $ 1,333 $ 1,150
Other Comprehensive Income, net of tax:
Change in Unrealized Gains on Securities (1,089) 372
Comprehensive Income $ 244 $ 1,522
Earnings per share
Basic $ 0.50 $ 0.41
Diluted 0.49 0.41
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, 2004 2,684,498 $ 6,819 $ 37,884 $ 324 $ 45,027
Common stock issued 200 2 - - 2
Common stock purchased (1,720) (51) - - (51)
Net change in unrealized gain (loss)
on securities available for sale,
net of tax - - - (1,089) (1,089)
Net income - - 1,333 - 1,333
Dividends declared - $0.23 per share - - (617) - (617)
Balances, March 31, 2005 2,682,978 $ 6,770 $ 38,600 $ (765) $ 44,605
KENTUCKY BANCSHARES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS (unaudited)
(thousands) Three Months Ending
3/31/2005 3/31/2004
Cash Flows From Operating Activities
Net Income $ 1,333 $ 1,150
Adjustments to reconcile net income to
net cash provided by operating activities:
Depreciation 231 301
Amortization 84 145
Amortization of premium on debt (25) (25)
Securities amortization (accretion), net 98 176
Provision for loan losses 250 255
Securities (gains) losses, net - (16)
Originations of loans held for sale (4,913) (5,164)
Proceeds from sale of loans 5,185 6,022
Federal Home Loan Bank stock dividends (56) (49)
Gain on sale of mortgage loans (97) (102)
Changes in:
Interest receivable (86) (21)
Other assets (384) 429
Interest payable (18) (57)
Other liabilities 65 81
Net cash from operating activities 1,667 3,125
Cash Flows From Investing Activities
Purchases of securities available for sale (1,988) (42,526)
Proceeds from sales of securities available for sale - 19
Proceeds from principal payments, maturities and
calls of securities available for sale 5,061 14,505
Net change in loans (1,326) (748)
Purchases of bank premises and equipment, net (207) (639)
Net cash from investing activities 1,540 (29,389)
Cash Flows From Financing Activities:
Net change in deposits (15,078) 920
Net change in securities sold under agreements to
repurchase and other borrowings 8,109 13,797
Advances from Federal Home Loan Bank - 10,000
Payments on Federal Home Loan Bank advances (2,225) (6,225)
Proceeds from issuance of common stock 2 34
Purchase of common stock (51) -
Dividends paid (617) (589)
Net cash from financing activities (9,860) 17,937
Net change in cash and cash equivalents (6,653) (8,327)
Cash and cash equivalents at beginning of period 15,455 21,388
Cash and cash equivalents at end of period $ 8,802 $ 13,061
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, 2004.
2. INVESTMENT SECURITIES
INVESTMENT SECURITIES
Period-end securities are as follows:
(in thousands)
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
Available for Sale
March 31, 2005
U.S. Treasury $ 3,013 $ - $ (51) $ 2,962
U.S. government agencies 38,403 - (800) 37,603
States and political subdivisions 33,876 915 (283) 34,508
Mortgage-backed 47,205 27 (1,281) 45,951
Equity securities 608 314 - 922
Total 123,105 1,256 (2,415) 121,946
December 31, 2004
U.S. Treasury $ 3,014 $ - $ (30) $ 2,984
U.S. government agencies 39,410 4 (384) 39,030
States and political subdivisions 34,026 1,297 (163) 35,160
Mortgage-backed 49,219 80 (678) 48,621
Equity securities 608 364 - 972
Total 126,277 1,745 (1,255) 126,767
3. LOANS
Loans at period-end are as follows:
(in thousands)
3/31/2005 12/31/2004
Commercial $ 19,680 $ 19,999
Real estate construction 35,098 32,256
Real estate mortgage 236,719 238,476
Agricultural 59,040 57,498
Consumer 8,985 10,053
Total 359,522 358,282
4. 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
2005 2004
(in thousands)
Basic Earnings Per Share
Net Income $1,333 $1,150
Weighted average common shares outstanding 2,684 2,801
Basic earnings per share $ 0.50 $ 0.41
Diluted Earnings Per Share
Net Income $1,333 $1,150
Weighted average common shares outstanding 2,684 2,801
Add dilutive effects of assumed exercise
of stock options 16 22
Weighted average common and dilutive
potential common shares outstanding 2,700 2,823
Diluted earnings per share $ 0.49 $ 0.41
5. 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
(in thousands)
2005 2004
Net income
As reported $ 1,333 $ 1,150
Deduct: Stock-based compensation
expense determined under fair
value based method (14) (5)
Pro forma 1,319 1,145
Basic earnings per share
As reported $ 0.50 $ 0.41
Pro forma 0.49 0.41
Diluted earnings per share
As reported $ 0.49 $ 0.41
Pro forma 0.49 0.41
6. Dividends per share paid for the quarter ended March 31, 2005 were $0.23
compared to $0.21 for March 31, 2004.
7. Components of Net Periodic Benefit Cost
Three months ended March 31
(in thousands)
Pension Benefits
2005 2004
Service cost $ 108 $ 102
Interest cost 87 76
Expected return on plan assets (94) (80)
Amortization 10 3
Net Periodic Benefit Cost $ 111 $ 101
Employer Contributions
The Company previously disclosed in its financial statements for the year
ended December 31, 2004 that it expected to contribute $255 thousand as its
2005 annual contribution to the Pension Plan. No contributions to the Pension
Plan were made for the quarter ended March 31, 2005, and the Company
anticipates making its annual contribution in the third quarter of 2005.
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 $1.3 million, or $0.50 basic
and $0.49 diluted earnings per share for the first three months ended March
31, 2005 compared to $1.1 million, or $0.41 basic earnings per share and $0.41
diluted earnings per share for the three month period ending March 31, 2004.
The first three months earnings reflects an increase of 15.9% compared to the
same time period in 2004.
Return on average assets was 1.02% for the three months ended March 31, 2005
and 0.89% for the three month period ended March 31, 2004. Return on average
equity was 11.8% for the three month period ended March 31, 2005 and 9.6% for
the same period in 2004.
Loans increased $1.2 million from $358.3 million on December 31, 2004 to
$359.5 million on March 31, 2005. Increases in real estate construction and
agricultural loans were offset by a decrease in real estate mortgage and
consumer loans. Management attributes the slower growth in loans primarily to
increasing rates.
Total deposits decreased from $388.0 million on December 31, 2004 to $372.9
million on March 31, 2005, a decrease of $15.1 million, primarily the result
of general competition for deposits. The decrease is mainly attributable to a
decrease in non-interest bearing deposits of $4.1 million, time deposits
($100,000 and over) of $5.3 million, and other interest bearing deposits of
$5.7 million.
Net Interest Income
Net interest income was $4.2 million for the three months ended March 31, 2005
compared to $4.1 million for the three months ended March 31, 2004, an
increase of 3.7%. The interest spread was 3.41% for the first three months of
2005 compared to 3.37% for the same period in 2004, an increase of 4 basis
points. Generally, the increasing interest rate environment has contributed
to improved net interest margins in the first three months of 2005 compared to
2004.
For the first three months, the yield on assets increased from 5.25% in 2004
to 5.54% in 2005. The cost of liabilities increased from 1.88% in 2004 to
2.13% in 2005. Year to date average loans are up $46.9 million, or 15.0% from
March 31, 2004 to March 31, 2005. Loan interest income has increased $702
thousand for the first three months of 2005 compared to the first three months
of 2004. Year to date average deposits decreased from March 31, 2004 to March
31, 2005, down $6.0 million, or 1.6%. Deposit interest expense has increased
$183 thousand for the first three months of 2005 compared to the same period
in 2004.
The declining rate environment in recent years resulted in tighter margins in
2003 and 2004. The rising rate environment in the past year has contributed
to improved margins. However, the banking industry continues to battle
competition for loan and deposit dollars, and this trend is expected to
continue, as well as downward pressure on margins.
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 $57 thousand to net income before taxes
for the first three months of 2005, and $108 thousand for the first three
months of 2004.
Non-Interest Income
Non-interest income decreased $8 thousand for the three months ended March 31,
2005 compared to the same period in 2004 to $1.6 million, due primarily to a
decrease in service charges. A decrease of $38 thousand in service charges
from the first three months of 2004 to the comparable 2005 period is mainly
attributable to a decrease in checking overdraft charges of $37 thousand.
Gain on sale of mortgage loans decreased $5 thousand during the first three
months of 2005 compared to the same period in 2004. The volume of mortgage
loan originations and sales is 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 2005 than in 2004.
Non-Interest Expense
Total non-interest expenses decreased $5 thousand for the three month period
ended March 31, 2005 compared to the same period in 2004.
For the comparable three month periods, salaries and benefits increased $110
thousand, an increase of 5%. Incentives represented $74 thousand and employee
benefits represented $37 thousand of the increase in salaries and employee
benefits expense during these comparable periods. The reduction of part time
hours and the salary reduction of the current Chairman, who was the previous
President and CEO, helped keep base salaries in 2005 comparable to 2004.
Occupancy expenses decreased $19 thousand to $570 thousand for the first three
months of 2005 compared to the same period in 2004. The decrease in 2005 is
mainly attributable to a decrease in depreciation of $70 thousand compared to
2004, offset somewhat by an increase in repairs and maintenance on buildings
and equipment.
Amortization decreased for the first three months of 2005 compared to 2004 by
$61 thousand, mainly from the deposit premium from a previous acquisition
being fully amortized in 2004.
Other expenses decreased $59 thousand for the three months ended March 31,
2005 compared to the same time period in 2004. The decrease is primarily from
the decrease in repossession expenses of $28 thousand and fraud losses of $24
thousand.
Income Taxes
The tax equivalent rate for the three months ended March 31, 2005 was 22%
compared to 26% in 2004. These rates are less than the statutory rate as a
result of the tax-free securities and loans held by the Company. Recognizing
the remainder of the net operating loss carryforward from the Cynthiana
acquisition in 2003 also contributed to the lower rate in 2005.
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 March 31, 2005,
86,053 shares have been purchased, with the most recent share repurchase
having occurred on March 31, 2005. 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 $8.8 million as of March 31, 2005 compared to
$15.5 million at December 31, 2004. The decrease in cash and cash equivalents
is mainly attributable to a decrease in federal funds sold and the
correspondent bank balances as of the last day of the quarter. In addition to
cash and cash equivalents, the securities portfolio provides an important
source of liquidity. Total securities available for sale totaled $121.9
million at March 31, 2005. The available for sale securities are available to
meet liquidity needs on a continuing basis. The Company expects the
customers' deposits 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 challenge 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, 2005, we have sufficient collateral to borrow an
additional $44 million from the FHLB. In addition, as of March 31, 2005, 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 March 31, 2005, the Company's non-performing loans totaled $1.9 million
or 0.51% of loans compared to $2.1 million or 0.58% of loans at December 31,
2004. (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 83% of the non-performing
loans as of March 31, 2005 and 84% as of December 31, 2004. Forgone interest
income on the non-accrual loans for both 2005 and 2004 is immaterial.
Nonperforming Assets
3/31/05 12/31/04
(in thousands)
Non-accrual Loans $ 1,411 $ 1,781
Accruing Loans which are
Contractually past due
90 days or more 440 308
Total Nonperforming and Restructured 1,851 2,089
Other Real Estate 921 676
Total Nonperforming and Restructured
Loans and Other Real Estate $ 2,772 $ 2,765
Nonperforming and Restructured Loans
as a Percentage of Loans 0.51% 0.58%
Nonperforming and Restructured Loans
and Other Real Estate as a Percentage
of Total Assets 0.53% 0.52%
Provision for Loan Losses
The loan loss provision for the first three months was $250 thousand for 2005
and $255 thousand for 2004. A decrease in nonperforming loans and the lower
level of net charge-offs have caused management to decrease the 2005 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 three month period ended March 31,
2005 were $86 thousand compared to $138 thousand for the same period in 2004.
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
Three Months Ended March 31
(in thousands)
2005 2004
Balance at Beginning of Period $ 4,163 $ 3,820
Amounts Charged-off:
Commercial 43 15
Real Estate Mortgage 22 -
Agricultural - 83
Consumer 66 112
Total Charged-off Loans 131 210
Recoveries on Amounts
Previously Charged-off:
Commercial 1 4
Real Estate Mortgage - 34
Agricultural - 4
Consumer 44 30
Total Recoveries 45 72
Net Charge-offs 86 138
Provision for Loan Losses 250 255
Balance at End of Period 4,327 3,937
Loans
Average 359,262 312,334
At March 31 359,522 313,612
As a Percentage of Average Loans:
Net Charge-offs 0.02% 0.04%
Provision for Loan Losses 0.07% 0.08%
Allowance as a Percentage of
Period-end Loans 1.20% 1.26%
Allowance as a Multiple of
Net Charge-offs 12.6 7.1
Allowance as a Percentage of
Non-performing and Restructured Loans 234% 149%
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, 2005 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 for such net interest income changes, 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 March 31, 2005 is as
follows:
(dollars in thousands)
PROJECTED NET INTEREST INCOME
Level
Change in basis points: - 300 - 100 Rates + 100 + 300
Year One (4/05 - 3/06)
Interest Income $22,890 $26,843 $28,825 $30,758 $34,475
Interest Expense 8,964 9,621 10,869 12,117 14,612
Net Interest Income 13,926 17,222 17,956 18,641 19,863
PROJECTED DOLLAR INCREASE (DECREASE) FROM "LEVEL RATES"
Year One (4/05 - 3/06)
Interest Income $(5,935) $(1,982) N/A $ 1,933 $ 5,650
Interest Expense (1,905) (1,248) N/A 1,248 3,743
Net Interest Income (4,030) (734) N/A 685 1,907
PROJECTED PERCENTAGE INCREASE (DECREASE) FROM "LEVEL RATES"
Year One (4/05 - 3/06)
Interest Income -20.6% -6.9% N/A 6.7% 19.6%
Interest Expense -17.5% -11.5% N/A 11.5% 34.4%
Net Interest Income -22.4% -4.1% N/A 3.8% 10.6%
Net Interest Income
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, 2004 is as follows:
(dollars in thousands)
PROJECTED NET INTEREST INCOME
Level
Change in basis points: - 300 - 100 Rates + 100 + 300
Year One (4/04 - 3/05)
Interest Income $ 21,641 $ 24,670 $ 26,301 $ 27,932 $ 31,197
Interest Expense 6,959 7,203 8,365 9,533 11,868
Net Interest Income 14,682 17,467 17,936 18,399 19,329
PROJECTED DOLLAR INCREASE (DECREASE) FROM "LEVEL RATES"
Year One (4/04 - 3/05)
Interest Income $ (4,660) $ (1,631) N/A $ 1,631 $ 4,896
Interest Expense (1,406) (1,162) N/A 1,168 3,503
Net Interest Income (3,254) (469) N/A 463 1,393
PROJECTED PERCENTAGE INCREASE (DECREASE) FROM "LEVEL RATES"
Year One (4/04 - 3/05)
Interest Income -17.7% -6.2% N/A 6.2% 18.6%
Interest Expense -16.8% -13.9% N/A 14.0% 41.9%
Net Interest Income -18.1% -2.6% N/A 2.6% 7.8%
Net Interest Income
Board approved limit >-10.0% >-4.0% N/A >-4.0% >-10.0%
These projected changes in net interest income as of March 31, 2005 are
slightly more when compared to the projected changes in net interest income as
of March 31, 2004. Projections from March 31, 2005, year one reflected a
decline in net interest income of 4.1% with a 100 basis point decline compared
to the 2.6% decline in 2004. The 300 basis point increase in rates reflected
a 10.6% increase in net interest income in 2005 compared to 7.8% in 2004.
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
1/1/05 -
1/31/05 -0- N/A N/A 115,667 shares
2/1/05 -
2/28/05 -0- N/A N/A 115,667 shares
3/1/05 -
3/31/05 1,720 $29.61 1,720 113,947 shares
Total 1,720 1,720 113,947 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
price 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
March 31, 2005, 86,053 shares have been purchased, with the most recent share
repurchase having occurred on March 31, 2005.
Item 3. Defaults upon Senior Securities
None
Item 4. Submission of Matters to a Vote of Security Holders
The registrant's 2005 Annual Meeting of Shareholders was held May 10,
2005. 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
Henry Hinkle 1,962,309 75,932
Theodore Kuster 1,971,989 66,252
Robert G. Thompson 1,972,589 65,652
The following directors have a term of office that will continue
following the Annual Meeting: William M. Arvin, Betty J. Long, Ted
McClain, Louis Prichard, Woodrow Van Meter and Buckner Woodford, IV.
A proposal to approve the 2005 Restricted Stock Grant Plan was approved
by a majority of the outstanding shares of the registrant's common
stock. A total of 1,484,569 shares were voted in favor of the proposal;
113,663 shares were voted against; 77,434 shares abstained, and 362,575
shares were broker non-votes.
The total number of Common Shares outstanding as of March 18, 2005, the
record date for the Annual Meeting of Shareholders, was 2,684,698.
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 ____5/13/05_________ __/s/Louis Prichard______________
Louis Prichard, President and C.E.O.
Date ____5/13/05_________ __/s/Gregory J. Dawson___________
Gregory J. Dawson, Chief Financial Officer
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