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, 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 August 12, 2005:
2,671,322.
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 11
Item 3. Quantitative and Qualitative Disclosures About
Market Risk 18
Item 4. Controls and Procedures 19
Part II - Other Information 20
Signatures 21
Exhibits
31.1 Certifications of Chief Executive Officer pursuant
to Section 302 of the Sarbanes-Oxley Act of 2002. 22
31.2 Certifications of Chief Financial Officer pursuant
to Section 302 of the Sarbanes-Oxley Act of 2002. 24
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. 26
Item 1 - Financial Statements
KENTUCKY BANCSHARES, INC.
CONSOLIDATED BALANCE SHEETS (unaudited)
(thousands) 6/30/2005 12/31/2004
Assets
Cash and due from banks $ 10,977 $ 12,249
Federal funds sold 216 3,206
Cash and cash equivalents 11,193 15,455
Securities available for sale 120,385 126,767
Mortgage loans held for sale - 175
Loans 366,840 358,282
Allowance for loan losses (4,431) (4,163)
Net loans 362,409 354,119
Federal Home Loan Bank stock 5,257 5,137
Bank premises and equipment, net 10,857 11,378
Interest receivable 3,407 3,226
Goodwill 9,111 9,111
Other intangible assets 814 861
Mortgage servicing rights 859 876
Other assets 1,507 1,439
Total assets $ 525,799 $ 528,544
Liabilities and Stockholders' Equity
Deposits
Non-interest bearing $ 69,856 $ 74,048
Time deposits, $100,000 and over 54,834 59,469
Other interest bearing 260,302 254,438
Total deposits 384,992 387,955
Repurchase agreements and other borrowings 16,346 25,593
Federal Home Loan Bank advances 67,251 59,750
Subordinated debentures 7,217 7,217
Interest payable 2,067 1,849
Other liabilities 1,619 1,153
Total liabilities 479,492 483,517
Stockholders' equity
Common stock 6,824 6,819
Retained earnings 39,358 37,884
Accumulated other comprehensive income (loss) 125 324
Total stockholders' equity 46,307 45,027
Total liabilities & stockholders' equity $ 525,799 $ 528,544
See Accompanying Notes
KENTUCKY BANCSHARES, INC.
CONSOLIDATED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME (unaudited)
(thousands, except per share amounts) Six Months Ending
6/30/2005 6/30/2004
INTEREST INCOME:
Loans, including fees $ 11,328 $ 9,813
Securities available for sale 2,403 2,889
Other 22 28
Total interest income 13,753 12,730
INTEREST EXPENSE:
Deposits 3,336 2,848
Other 1,811 1,544
Total interest expense 5,147 4,392
Net interest income 8,606 8,338
Loan loss provision 416 450
Net interest income after provision 8,190 7,888
NON-INTEREST INCOME:
Service charges 2,195 2,217
Loan service fee income 131 119
Trust department income 215 147
Securities available for sale gains (losses), net 53 76
Gain on sale of mortgage loans 187 238
Other 607 541
Total other income 3,388 3,338
NON-INTEREST EXPENSE:
Salaries and employee benefits 4,301 4,102
Occupancy expenses 1,120 1,129
Amortization 171 294
Advertising and marketing 220 196
Taxes other than payroll, property and income 272 248
Other 1,690 1,688
Total other expenses 7,774 7,657
Income before taxes 3,804 3,569
Income taxes 955 980
Net income $ 2,849 $ 2,589
Other Comprehensive Income, net of tax:
Change in Unrealized Gains on Securities (199) (2,480)
Comprehensive Income $ 2,650 $ 109
Earnings per share
Basic $ 1.06 $ 0.92
Diluted 1.05 0.92
See Accompanying Notes
KENTUCKY BANCSHARES, INC.
CONSOLIDATED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME (unaudited)
(thousands, except per share amounts) Three Months Ending
6/30/2005 6/30/2004
INTEREST INCOME:
Loans, including fees $ 5,818 $ 5,005
Securities available for sale 1,201 1,448
Other 14 10
Total interest income 7,033 6,463
INTEREST EXPENSE:
Deposits 1,717 1,412
Other 931 784
Total interest expense 2,648 2,196
Net interest income 4,385 4,267
Loan loss provision 166 195
Net interest income after provision 4,219 4,072
NON-INTEREST INCOME:
Service charges 1,178 1,162
Loan service fee income 66 60
Trust department income 112 65
Securities available for sale gains (losses), net 53 60
Gain on sale of mortgage loans 90 136
Other 335 293
Total other income 1,834 1,776
NON-INTEREST EXPENSE:
Salaries and employee benefits 2,149 2,060
Occupancy expenses 550 540
Amortization 87 149
Advertising and marketing 110 96
Taxes other than payroll, property and income 135 125
Other 924 863
Total other expenses 3,955 3,833
Income before taxes 2,098 2,015
Income taxes 582 576
Net income $ 1,516 $ 1,439
Other Comprehensive Income, net of tax:
Change in Unrealized Gains on Securities 890 (2,852)
Comprehensive Income $ 2,406 $ (1,413)
Earnings per share
Basic $ 0.56 $ 0.51
Diluted 0.56 0.51
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 1,400 18 - - 18
Common stock purchased (5,209) (13) (141) - (154)
Net change in unrealized gain (loss)
on securities available for sale,
net of tax - - - (199) (199)
Net income - - 2,849 - 2,849
Dividends declared - $0.46 per share - - (1,234) - (1,234)
Balances, June 30, 2005 2,680,689 $ 6,824 $ 39,358 $ 125 $ 46,307
See Accompanying Notes
KENTUCKY BANCSHARES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS (unaudited)
(thousands) Six Months Ending
6/30/2005 6/30/2004
Cash Flows From Operating Activities
Net Income $ 2,849 $ 2,589
Adjustments to reconcile net income to
net cash provided by operating activities:
Depreciation 468 541
Amortization 171 294
Amortization of premium on debt (49) (49)
Securities amortization (accretion), net 173 390
Provision for loan losses 416 450
Securities (gains) losses, net (53) (76)
Originations of loans held for sale (10,103) (12,301)
Proceeds from sale of loans 10,465 13,395
Federal Home Loan Bank stock dividends (120) (99)
Losses (gains) on sale of fixed assets (84) -
Gain on sale of mortgage loans (187) (238)
Changes in:
Interest receivable (181) 103
Other assets (175) (311)
Interest payable 218 12
Other liabilities 569 1,001
Net cash from operating activities 4,377 5,701
Cash Flows From Investing Activities
Purchases of securities available for sale (4,428) (56,036)
Proceeds from sales of securities available for sale 1,324 26,807
Proceeds from principal payments, maturities and
calls of securities available for sale 9,064 20,723
Net change in loans (8,706) (21,865)
Purchases of bank premises and equipment, net 137 (794)
Proceeds from the sale of bank premises and equipment
Net cash from investing activities (2,609) (31,165)
Cash Flows From Financing Activities:
Net change in deposits (2,963) (5,518)
Net change in securities sold under agreements to
repurchase and other borrowings (9,247) 21,857
Advances from Federal Home Loan Bank 15,000 10,000
Payments on Federal Home Loan Bank advances (7,450) (8,944)
Proceeds from issuance of common stock 18 44
Purchase of common stock (154) -
Dividends paid (1,234) (1,177)
Net cash from financing activities (6,030) 16,262
Net change in cash and cash equivalents (4,262) (9,202)
Cash and cash equivalents at beginning of period 15,455 21,388
Cash and cash equivalents at end of period $ 11,193 $ 12,186
See Accompanying Notes
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
June 30, 2005
U.S. Treasury $ 3,011 $ - $ (38) $ 2,973
U.S. government agencies 37,859 - (484) 37,375
States and political subdivisions 35,325 1,217 (128) 36,414
Mortgage-backed 43,476 49 (703) 42,822
Equity securities 525 276 - 801
Total 120,196 1,542 (1,353) 120,385
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)
6/30/2005 12/31/2004
Commercial $ 22,336 $ 19,999
Real estate construction 29,994 32,256
Real estate mortgage 244,472 238,476
Agricultural 60,384 57,498
Consumer 9,654 10,053
Total 366,840 358,282
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:
Six Months Ended
June 30
2005 2004
(in thousands)
Basic Earnings Per Share
Net Income $2,849 $2,589
Weighted average common shares outstanding 2,683 2,801
Basic earnings per share $ 1.06 $ 0.92
Diluted Earnings Per Share
Net Income $2,849 $2,589
Weighted average common shares outstanding 2,683 2,801
Add dilutive effects of assumed exercise
of stock options 16 22
Weighted average common and dilutive
potential common shares outstanding 2,699 2,823
Diluted earnings per share $ 1.05 $ 0.92
Three Months Ended
June 30
2005 2004
(in thousands)
Basic Earnings Per Share
Net Income $1,516 $1,439
Weighted average common shares outstanding 2,682 2,802
Basic earnings per share $ 0.56 $ 0.51
Diluted Earnings Per Share
Net Income $1,516 $1,439
Weighted average common shares outstanding 2,682 2,802
Add dilutive effects of assumed exercise
of stock options 15 21
Weighted average common and dilutive
potential common shares outstanding 2,697 2,823
Diluted earnings per share $ 0.56 $ 0.51
Stock options for 31,100 shares common stock for the six and three months
ended June 30, 2005 and for 11,750 shares of common stock for the six and
three months ended June 30, 2004 were excluded from diluted earnings per
share because their impact was antidilutive.
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.
Six months ended June 30
(in thousands)
2005 2004
Net income
As reported $ 2,849 $ 2,589
Deduct: Stock-based compensation
expense determined under fair
value based method (27) (10)
Pro forma 2,822 2,579
Basic earnings per share
As reported $ 1.06 $ 0.92
Pro forma 1.05 0.92
Diluted earnings per share
As reported $ 1.05 $ 0.92
Pro forma 1.04 0.91
Three months ended June 30
(in thousands)
2005 2004
Net income
As reported $ 1,516 $ 1,439
Deduct: Stock-based compensation
expense determined under fair
value based method (13) (5)
Pro forma 1,503 1,434
Basic earnings per share
As reported $ 0.56 $ 0.51
Pro forma 0.56 0.51
Diluted earnings per share
As reported $ 0.56 $ 0.51
Pro forma 0.55 0.50
6. Dividends per share paid for the quarter ended June 30, 2005 were $0.23
compared to $0.21 for June 30, 2004. This is the same rate of dividend
paid for the first quarters of the respective years.
7. Components of Net Periodic Benefit Cost
Six months ended June 30
(in thousands)
Pension Benefits
2005 2004
Service cost $ 216 $ 185
Interest cost 173 143
Expected return on plan assets (188) (160)
Amortization 20 -
Net Periodic Benefit Cost $ 221 $ 168
Three months ended June 30
(in thousands)
Pension Benefits
2005 2004
Service cost $ 108 $ 83
Interest cost 86 67
Expected return on plan assets (94) (80)
Amortization 10 (3)
Net Periodic Benefit Cost $ 110 $ 67
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 six months ended June 30, 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 $2.8 million, or $1.06 basic
and $1.05 diluted earnings per share for the first six months ended June 30,
2005 compared to $2.6 million, or $0.92 basic earnings per share and $0.92
diluted earnings per share for the six month period ending June 30, 2004. The
first six months earnings reflects an increase of 10.0% compared to the same
time period in 2004. The earnings for the three months ended June 30, 2005
were $1.5 million compared to $1.4 million for the same time period in 2004.
The basic and diluted earnings per share were both $0.56 for the three months
ended June 30, 2005 and $0.51 for the three months ended June 30, 2004.
Return on average assets was 1.09% for the six months ended June 30, 2005 and
0.99% for the six month period ended June 30, 2004. Return on average equity
was 12.6% for the six month period ended June 30, 2005 and 11.0% for the same
period in 2004. Return on average assets was 1.23% for the three months ended
June 30, 2005 and 1.20% for the three month period ended June 30, 2004.
Return on average equity was 14.2% for the three month period ended June 30,
2005 and 13.7% for the same period in 2004.
Loans increased $8.5 million from $358.3 million on December 31, 2004 to
$366.8 million on June 30, 2005. Increases in commercial, real estate
mortgage and agricultural loans were offset by a decrease in real estate
construction and consumer loans. Management attributes the improved growth in
loans primarily to the improving economy.
Total deposits decreased from $388.0 million on December 31, 2004 to $385.0
million on June 30, 2005, a decrease of $3.0 million, primarily the result of
general competition for deposits. The decrease is mainly attributable to a
decrease in non-interest bearing deposits of $4.2 million and time deposits
($100,000 and over) of $4.6 million, offset by an increase in other interest
bearing deposits of $5.8 million.
Net Interest Income
Net interest income was $8.6 million for the six months ended June 30, 2005
compared to $8.3 million for the six months ended June 30, 2004, an increase
of 3.2%. The interest spread was 3.46% for the first six months of 2005
compared to 3.41% for the same period in 2004, an increase of 5 basis points.
Generally, the increasing interest rate environment has contributed to
improved net interest margins in the first six months of 2005 compared to
2004. For the three months ended June 30, 2005, the net interest income was
$4.4 million compared to $4.3 million for the same time period in 2004. The
interest spread was 3.51% for the three month period ended June 30, 2005
compared to 3.44% for the same period in 2004, an increase of 7 basis points.
For the first six months, the yield on assets increased from 5.26% in 2004 to
5.64% in 2005. The cost of liabilities increased from 1.86% in 2004 to 2.18%
in 2005. Year to date average loans are up $36.5 million, or 11.2% from June
30, 2004 to June 30, 2005. Loan interest income has increased $1.5 million
for the first six months of 2005 compared to the first six months of 2004.
Year to date average deposits decreased from June 30, 2004 to June 30, 2005,
down $7.2 million, or 1.9%. Deposit interest expense has increased $488
thousand for the first six 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, resulting in 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 $112 thousand to net income before
taxes for the first six months of 2005, and $185 thousand for the first six
months of 2004.
Non-Interest Income
Non-interest income increased $50 thousand for the six months ended June 30,
2005 compared to the same period in 2004 to $3.4 million, due primarily to an
increase in trust department income of $68 thousand from the collection of
certain estate fees and a gain on sale of premises of $83 thousand. A
decrease of $22 thousand in service charges from the first six months of 2004
to the comparable 2005 period is mainly attributable to a decrease in checking
overdraft charges of $38 thousand. The $58 thousand increase in non-interest
income for the three months ended June 30, 2005 compared to the same period in
2004 is mainly attributable to the trust fees and sale of real estate
mentioned previously.
Gain on sale of mortgage loans decreased $51 thousand during the first six
months of 2005 compared to the same period in 2004. For the three month
period ended June 30, 2005, gain on sale of mortgage loans decreased $46
thousand 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 gain on sale of mortgage loans to be lower in 2005
than in 2004.
Non-Interest Expense
Total non-interest expenses increased $117 thousand for the six month period
ended June 30, 2005 compared to the same period in 2004. For the three month
period ended June 30, 2005, total non-interest expenses increased $122
thousand compared to the same three month period in 2004.
For the comparable six month periods, salaries and benefits increased $199
thousand, an increase of 5%. Salaries represented $96 thousand, incentives
represented $74 thousand and employee benefits represented $29 thousand of the
increase in salaries and employee benefits expense during these comparable
periods. Salaries and employee benefits increased $89 thousand for the three
month period ended June 30, 2005 compared to the same period in 2004. The
reduction of part time hours and the salary reduction of the current Chairman,
who was the previous President and CEO, helped limit the base salaries
increase for the six months ended June 30, 2005 to 3% when compared to 2004.
Occupancy expenses decreased $9 thousand to $1.1 million for the first six
months of 2005 compared to the same period in 2004. The decrease in 2005 is
mainly attributable to a decrease in depreciation of $73 thousand compared to
2004, offset by an increase of $62 thousand in repairs and maintenance on
buildings and equipment. Occupancy expenses increased $10 thousand for the
three month period ended June 30, 2005 compared to the same period in 2004.
Amortization decreased for the first six months of 2005 compared to 2004 by
$123 thousand, and decreased $62 thousand for the three month period ended
June 30, 2005 compared to the same period in 2004, mainly from the deposit
premium from a previous acquisition being fully amortized in 2004.
Other expenses increased $2 thousand for the six months ended June 30, 2005
compared to the same time period in 2004. Losses on foreclosed property of
$53 thousand are offset primarily from the decrease in repossession expenses
of $40 thousand and fraud losses of $9 thousand. Other expenses increased $61
thousand for the three months ended June 30, 2005 compared to the same time
period in 2004.
Income Taxes
The tax equivalent rate for the six months ended June 30, 2005 was 25%
compared to 27% in 2004. The tax equivalent rate for the three months ended
June 30, 2005 was 28% compared to 29% 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 June 30, 2005,
89,542 shares have been purchased, with the most recent share repurchase
having occurred on July 25, 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 $11.2 million as of June 30, 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 $120.4
million at June 30, 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 June 30, 2005, we have sufficient collateral to borrow an
additional $33 million from the FHLB. In addition, as of June 30, 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 June 30, 2005, the Company's non-performing loans totaled $1.8 million
or 0.49% 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 74% of the non-performing
loans as of June 30, 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
6/30/05 12/31/04
(in thousands)
Non-accrual Loans $ 1,564 $ 1,781
Accruing Loans which are
Contractually past due
90 days or more 225 308
Total Nonperforming and Restructured 1,789 2,089
Other Real Estate 500 676
Total Nonperforming and Restructured
Loans and Other Real Estate $ 2,289 $ 2,765
Nonperforming and Restructured Loans
as a Percentage of Loans 0.49% 0.58%
Nonperforming and Restructured Loans
and Other Real Estate as a Percentage
of Total Assets 0.44% 0.52%
Provision for Loan Losses
The loan loss provision for the first six months was $416 thousand for 2005
and $450 thousand for 2004. The loan loss provision for the three months
ended June 30, 2005 was $166 thousand and $195 thousand for the same time
period in 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 six month period ended June 30, 2005 were
$149 thousand compared to $177 thousand for the same period in 2004. Net
charge-offs for the three month period ended June 30, 2005 were $63 thousand
compared to $39 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
Six Months Ended June 30
(in thousands)
2005 2004
Balance at Beginning of Period $ 4,163 $ 3,820
Amounts Charged-off:
Commercial 62 45
Real Estate Mortgage 73 19
Agricultural - 83
Consumer 83 149
Total Charged-off Loans 218 296
Recoveries on Amounts
Previously Charged-off:
Commercial 2 6
Real Estate Mortgage 2 37
Agricultural - 5
Consumer 66 71
Total Recoveries 70 119
Net Charge-offs 148 177
Provision for Loan Losses 416 450
Balance at End of Period 4,431 4,093
Loans
Average 361,044 317,597
At June 30 366,840 334,690
As a Percentage of Average Loans:
Net Charge-offs 0.04% 0.06%
Provision for Loan Losses 0.12% 0.14%
Allowance as a Percentage of
Period-end Loans 1.21% 1.22%
Allowance as a Multiple of
Net Charge-offs 15.0 11.6
Allowance as a Percentage of
Non-performing and Restructured Loans 248% 217%
Loan Losses
Quarter Ended June 30
(in thousands)
2005 2004
Balance at Beginning of Period $ 4,327 $ 3,937
Amounts Charged-off:
Commercial 19 30
Real Estate Mortgage 51 19
Consumer 17 37
Total Charged-off Loans 87 86
Recoveries on Amounts
Previously Charged-off:
Commercial 1 2
Real Estate Mortgage 2 3
Agricultural - 1
Consumer 22 41
Total Recoveries 25 47
Net Charge-offs 62 39
Provision for Loan Losses 166 195
Balance at End of Period 4,431 4,093
Loans
Average 362,826 322,860
At June 30 366,840 334,690
As a Percentage of Average Loans:
Net Charge-offs 0.02% 0.01%
Provision for Loan Losses 0.05% 0.06%
Allowance as a Multiple of
Net Charge-offs 17.6 26.2
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, 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. This period's volatility is comparable to
the same period a year ago. The projected net interest income report
summarizing the Company's interest rate sensitivity as of June 30, 2005 is as
follows:
(dollars in thousands)
PROJECTED NET INTEREST INCOME
Level
Change in basis points: - 300 - 100 Rates + 100 + 300
Year One (7/05 - 6/06)
Interest Income $24,106 $27,856 $29,734 $31,551 $35,029
Interest Expense 8,656 10,210 11,331 12,451 14,692
Net Interest Income 15,450 17,646 18,403 19,100 20,337
PROJECTED DOLLAR INCREASE (DECREASE) FROM "LEVEL RATES"
Year One (7/05 - 6/06)
Interest Income $(5,628) $(1,878) N/A $ 1,817 $ 5,295
Interest Expense (2,675) (1,121) N/A 1,120 3,361
Net Interest Income (2,953) (757) N/A 697 1,934
PROJECTED PERCENTAGE INCREASE (DECREASE) FROM "LEVEL RATES"
Year One (7/05 - 6/06)
Interest Income -18.9% -6.3% N/A 6.1% 17.8%
Interest Expense -23.6% -9.9% N/A 9.9% 29.7%
Net Interest Income -16.0% -4.1% N/A 3.8% 10.5%
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 June 30, 2004 is as follows:
(dollars in thousands)
PROJECTED NET INTEREST INCOME
Level
Change in basis points: - 300 - 100 Rates + 100 + 300
Year One (7/04 - 6/05)
Interest Income $ 21,667 $ 25,017 $ 26,735 $ 28,454 $ 31,896
Interest Expense 6,787 7,122 8,457 9,800 12,488
Net Interest Income 14,880 17,895 18,278 18,654 19,408
PROJECTED DOLLAR INCREASE (DECREASE) FROM "LEVEL RATES"
Year One (7/04 - 6/05)
Interest Income $ (5,068) $ (1,718) N/A $ 1,719 $ 5,161
Interest Expense (1,670) (1,335) N/A 1,343 4,031
Net Interest Income (3,398) (383) N/A 376 1,130
PROJECTED PERCENTAGE INCREASE (DECREASE) FROM "LEVEL RATES"
Year One (7/04 - 6/05)
Interest Income -19.0% -6.4% N/A 6.4% 19.3%
Interest Expense -19.7% -15.8% N/A 15.9% 47.7%
Net Interest Income -18.6% -2.1% N/A 2.1% 6.2%
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 June 30, 2005 are
slightly more when compared to the projected changes in net interest income as
of June 30, 2004. Projections from June 30, 2005, year one reflected a
decline in net interest income of 4.1% with a 100 basis point decline compared
to the 2.1% decline in 2004. The 300 basis point increase in rates reflected
a 10.5% increase in net interest income in 2005 compared to 6.2% 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
4/1/05 -
4/30/05 280 $29.62 280 113,667 shares
5/1/05 -
5/31/05 -0- N/A N/A 113,667 shares
6/1/05 -
6/30/05 3,209 $29.62 3,209 110,458 shares
Total 3,489 3,489 110,458 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 June
30, 2005, 89,542 shares have been purchased.
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 ____8/15/05_________ __/s/Louis Prichard______________
Louis Prichard, President and C.E.O.
Date ____8/15/05_________ __/s/Gregory J. Dawson___________
Gregory J. Dawson, Chief Financial Officer
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