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, 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___
Indicate by check mark whether the registrant is a shell company (as defined
in Rule 12b-2 of the Exchange Act). Yes No X___
Number of shares of Common Stock outstanding as of November 10, 2005:
2,665,022.
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 20
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) 9/30/2005 12/31/2004
Assets
Cash and due from banks $ 13,194 $ 12,249
Federal funds sold 19,924 3,206
Cash and cash equivalents 33,118 15,455
Securities available for sale 133,869 126,767
Mortgage loans held for sale 214 175
Loans 359,524 358,282
Allowance for loan losses (4,510) (4,163)
Net loans 355,014 354,119
Federal Home Loan Bank stock 5,321 5,137
Bank premises and equipment, net 10,803 11,378
Interest receivable 3,845 3,226
Goodwill 9,111 9,111
Other intangible assets 790 861
Mortgage servicing rights 834 876
Other assets 1,029 1,439
Total assets $ 553,948 $ 528,544
Liabilities and Stockholders' Equity
Deposits
Non-interest bearing $ 74,593 $ 74,048
Time deposits, $100,000 and over 59,478 59,469
Other interest bearing 280,741 254,438
Total deposits 414,812 387,955
Repurchase agreements and other borrowings 15,911 25,593
Federal Home Loan Bank advances 67,001 59,750
Subordinated debentures 7,217 7,217
Interest payable 1,897 1,849
Other liabilities 873 1,153
Total liabilities 507,711 483,517
Stockholders' equity
Common stock 6,542 6,819
Retained earnings 40,174 37,884
Accumulated other comprehensive income (loss) (479) 324
Total stockholders' equity 46,237 45,027
Total liabilities & stockholders' equity $ 553,948 $ 528,544
See Accompanying Notes
KENTUCKY BANCSHARES, INC.
CONSOLIDATED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME (unaudited)
(thousands, except per share amounts) Nine Months Ending
9/30/2005 9/30/2004
INTEREST INCOME:
Loans, including fees $ 17,265 $ 15,038
Securities available for sale 3,637 4,167
Other 172 30
Total interest income 21,074 19,235
INTEREST EXPENSE:
Deposits 5,527 4,219
Other 2,695 2,426
Total interest expense 8,222 6,645
Net interest income 12,852 12,590
Loan loss provision 583 620
Net interest income after provision 12,269 11,970
NON-INTEREST INCOME:
Service charges 3,377 3,424
Loan service fee income 197 182
Trust department income 332 220
Securities available for sale gains (losses), net 63 239
Gain on sale of mortgage loans 265 295
Other 873 788
Total other income 5,107 5,148
NON-INTEREST EXPENSE:
Salaries and employee benefits 6,420 6,101
Occupancy expenses 1,686 1,704
Amortization 259 433
Advertising and marketing 330 294
Taxes other than payroll, property and income 407 373
Other 2,499 2,410
Total other expenses 11,601 11,315
Income before taxes 5,775 5,803
Income taxes 1,496 1,635
Net income $ 4,279 $ 4,168
Other Comprehensive Income, net of tax:
Change in Unrealized Gains on Securities (803) (745)
Comprehensive Income $ 3,476 $ 3,423
Earnings per share
Basic $ 1.60 $ 1.50
Diluted 1.59 1.49
See Accompanying Notes
KENTUCKY BANCSHARES, INC.
CONSOLIDATED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME (unaudited)
(thousands, except per share amounts) Three Months Ending
9/30/2005 9/30/2004
INTEREST INCOME:
Loans, including fees $ 5,937 $ 5,225
Securities available for sale 1,234 1,278
Other 150 2
Total interest income 7,321 6,505
INTEREST EXPENSE:
Deposits 2,191 1,371
Other 884 882
Total interest expense 3,075 2,253
Net interest income 4,246 4,252
Loan loss provision 167 170
Net interest income after provision 4,079 4,082
NON-INTEREST INCOME:
Service charges 1,182 1,207
Loan service fee income 66 63
Trust department income 117 73
Securities available for sale gains (losses), net 10 163
Gain on sale of mortgage loans 78 57
Other 266 247
Total other income 1,719 1,810
NON-INTEREST EXPENSE:
Salaries and employee benefits 2,119 1,999
Occupancy expenses 566 575
Amortization 88 139
Advertising and marketing 110 98
Taxes other than payroll, property and income 135 125
Other 809 722
Total other expenses 3,827 3,658
Income before taxes 1,971 2,234
Income taxes 541 655
Net income $ 1,430 $ 1,579
Other Comprehensive Income, net of tax:
Change in Unrealized Gains on Securities (604) 1,735
Comprehensive Income $ 826 $ 3,314
Earnings per share
Basic $ 0.54 $ 0.58
Diluted 0.54 0.57
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 19 - - 19
Common stock purchased (14,576) (296) (140) - (436)
Net change in unrealized gain (loss)
on securities available for sale,
net of tax - - - (803) (803)
Net income - - 4,279 - 4,279
Dividends declared - $0.69 per share - - (1,849) - (1,849)
Balances, September 30, 2005 2,671,322 $ 6,542 $ 40,174 $ (479) $ 46,237
See Accompanying Notes
KENTUCKY BANCSHARES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS (unaudited)
(thousands) Nine Months Ending
9/30/2005 9/30/2004
Cash Flows From Operating Activities
Net Income $ 4,279 $ 4,168
Adjustments to reconcile net income to
net cash provided by operating activities:
Depreciation 707 759
Amortization of core deposits & mortgage servicing 259 433
Amortization of premium on debt (74) (49)
Securities amortization (accretion), net 266 520
Provision for loan losses 583 620
Securities (gains) losses, net (64) (239)
Originations of loans held for sale (14,612) (16,775)
Proceeds from sale of loans 14,838 24,793
Federal Home Loan Bank stock dividends (184) (152)
Losses (gains) on sale of fixed assets (71) -
Gain on sale of mortgage loans (265) (295)
Changes in:
Interest receivable (619) (256)
Other assets 264 (254)
Interest payable 48 (139)
Other liabilities 134 2,805
Net cash from operating activities 5,489 15,939
Cash Flows From Investing Activities
Purchases of securities available for sale (23,520) (56,036)
Proceeds from sales of securities available for sale 1,323 37,891
Proceeds from principal payments, maturities and
calls of securities available for sale 13,676 27,430
Net change in loans (1,478) (38,755)
Purchases of bank premises and equipment (643) (849)
Proceeds from the sale of bank premises and equipment 582 -
Net cash from investing activities (10,060) (30,319)
Cash Flows From Financing Activities:
Net change in deposits 26,857 (19,090)
Net change in securities sold under agreements to
repurchase and other borrowings (9,682) 16,829
Advances from Federal Home Loan Bank 15,000 10,000
Payments on Federal Home Loan Bank advances (7,675) (188)
Proceeds from issuance of common stock 19 56
Purchase of common stock (436) (3,424)
Dividends paid (1,849) (1,740)
Net cash from financing activities 22,234 2,443
Net change in cash and cash equivalents 17,663 (11,937)
Cash and cash equivalents at beginning of period 15,455 21,388
Cash and cash equivalents at end of period $ 33,118 $ 9,451
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
September 30, 2005
U.S. Treasury $ 3,008 $ - $ (39) $ 2,969
U.S. government agencies 45,855 - (735) 45,120
States and political subdivisions 36,188 945 (233) 36,900
Mortgage-backed 49,018 20 (974) 48,064
Equity securities 525 291 - 816
Total 134,594 1,256 (1,981) 133,869
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)
9/30/2005 12/31/2004
Commercial $ 21,358 $ 19,999
Real estate construction 29,208 32,256
Real estate mortgage 240,696 238,476
Agricultural 58,953 57,498
Consumer 9,309 10,053
Total 359,524 358,282
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:
Nine Months Ended
Septmber 30
2005 2004
(in thousands)
Basic Earnings Per Share
Net Income $4,279 $4,168
Weighted average common shares outstanding 2,680 2,782
Basic earnings per share $ 1.60 $ 1.50
Diluted Earnings Per Share
Net Income $4,279 $4,168
Weighted average common shares outstanding 2,680 2,782
Add dilutive effects of assumed exercise
of stock options 15 21
Weighted average common and dilutive
potential common shares outstanding 2,695 2,803
Diluted earnings per share $ 1.59 $ 1.49
Three Months Ended
September 30
2005 2004
(in thousands)
Basic Earnings Per Share
Net Income $1,430 $1,579
Weighted average common shares outstanding 2,682 2,745
Basic earnings per share $ 0.54 $ 0.58
Diluted Earnings Per Share
Net Income $1,430 $1,579
Weighted average common shares outstanding 2,682 2,745
Add dilutive effects of assumed exercise
of stock options 15 19
Weighted average common and dilutive
potential common shares outstanding 2,697 2,764
Diluted earnings per share $ 0.54 $ 0.57
Stock options for 31,100 shares common stock for the nine months ended
September 30, 2005 and for 27,600 shares common stock for the three months
ended September 30, 2005, and for 11,550 shares of common stock for the nine
and three months ended September 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.
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)
2005 2004
Net income
As reported $ 4,279 $ 4,168
Deduct: Stock-based compensation
expense determined under fair
value based method (41) (16)
Pro forma 4,238 4,152
Basic earnings per share
As reported $ 1.60 $ 1.50
Pro forma 1.58 1.49
Diluted earnings per share
As reported $ 1.59 $ 1.49
Pro forma 1.57 1.48
Three months ended September 30
(in thousands)
2005 2004
Net income
As reported $ 1,430 $ 1,579
Deduct: Stock-based compensation
expense determined under fair
value based method (14) (6)
Pro forma 1,416 1,573
Basic earnings per share
As reported $ 0.54 $ 0.58
Pro forma 0.53 0.57
Diluted earnings per share
As reported $ 0.54 $ 0.57
Pro forma 0.53 0.57
In December 2004, the Financial Accounting Standards Board issued a revised
version of Statement of Financial Accounting Standards No. 123. It
requires that the fair value of stock options and other share-based
compensation be measured as of the date the grant is awarded and expensed
over the period of employee service, typically the vesting period. It will
be required for the Company starting January 1, 2006. Compensation cost
will also be recorded for previously awarded options to the extent that
they vest after the effective date. The effect on results of operations
will depend on the level of future option grants and the calculation of the
fair value of the options granted. The effect of existing options that
will continue to vest after the adoption date is anticipated to be
immaterial.
6. Dividends per share paid for the quarter ended September 30, 2005 were
$0.23 compared to $0.21 for September 30, 2004. This is the same rate
of dividend paid for the first two quarters of the respective years.
7. Components of Net Periodic Benefit Cost
Nine months ended September 30
(in thousands)
Pension Benefits
2005 2004
Service cost $ 324 $ 277
Interest cost 260 215
Expected return on plan assets (282) (240)
(Gain) loss amortization 30 -
Net Periodic Benefit Cost $ 332 $ 252
Three months ended September 30
(in thousands)
Pension Benefits
2005 2004
Service cost $ 108 $ 92
Interest cost 87 72
Expected return on plan assets (94) (80)
(Gain) loss amortization 10 -
Net Periodic Benefit Cost $ 111 $ 84
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. The Company's actual annual
contribution was $211 thousand, and was made 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 $4.3 million, or $1.60 basic
and $1.59 diluted earnings per share for the first nine months ended September
30, 2005 compared to $4.2 million, or $1.50 basic earnings per share and $1.49
diluted earnings per share for the nine month period ending September 30,
2004. The first nine months earnings reflects an increase of 2.7% compared to
the same time period in 2004. The earnings for the three months ended
September 30, 2005 were $1.4 million compared to $1.6 million for the same
time period in 2004. The basic and diluted earnings per share were both $0.54
for the three months ended September 30, 2005 and $0.58 basic and $0.57
diluted for the three months ended September 30, 2004.
Return on average assets was 1.08% for the nine months ended September 30,
2005 and 1.08% for the nine month period ended September 30, 2004. Return on
average equity was 12.5% for the nine month period ended September 30, 2005
and 12.0% for the same period in 2004. Return on average assets was 1.05% for
the three months ended September 30, 2005 and 1.27% for the three month period
ended September 30, 2004. Return on average equity was 12.3% for the three
month period ended September 30, 2005 and 14.1% for the same period in 2004.
Loans increased $1.2 million from $358.3 million on December 31, 2004 to
$359.5 million on September 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 growth in loans
primarily to the improving economy, offset recently by the continuing rising
interest rates and competitive pressure
Total deposits increased from $388.0 million on December 31, 2004 to $414.8
million on September 30, 2005, an increase of $26.8 million, primarily the
result of the addition of public fund deposits, reported in other interest
bearing deposits.
Net Interest Income
Net interest income was $12.9 million for the nine months ended September 30,
2005 compared to $12.6 million for the nine months ended September 30, 2004,
an increase of 2.1%. The interest spread was 3.38% for the first nine months
of 2005 compared to 3.41% for the same period in 2004, a decrease of 3 basis
points. For the three months ended September 30, 2005, the net interest
income was $4.2 million compared to $4.2 million for the same time period in
2004. The interest spread was 3.20% for the three month period ended
September 30, 2005 compared to 3.47% for the same period in 2004, a decrease
of 27 basis points. Generally, the increasing interest rate environment,
increased cost of public fund deposits and stronger competitive rates have
contributed to declining net interest margins in the first nine months of 2005
compared to 2004, and more specifically to the recent quarter.
For the first nine months, the yield on assets increased from 5.31% in 2004 to
5.67% in 2005. The cost of liabilities increased from 1.91% in 2004 to 2.28%
in 2005. Year to date average loans are up $35.9 million, or 11.0% from
September 30, 2004 to September 30, 2005. Loan interest income has increased
$2.2 million for the first nine months of 2005 compared to the first nine
months of 2004. Year to date average deposits increased from September 30,
2004 to September 30, 2005, up $6.8 million, or 1.8%. Deposit interest
expense has increased $1.3 million for the first nine months of 2005 compared
to the same period in 2004.
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 $134 thousand to net income before
taxes for the first nine months of 2005, and $337 thousand for the first nine
months of 2004.
Following the 2004 enactment of federal legislation to end the federal tobacco
program and to compensate quota owners and producers, the Company began to
offer tobacco quota owners and producers upfront, lump-sum payment buyouts
ranging from 75% to 80% of the future stream of federal buyout payments. The
Company anticipates making approximately $10 million in lump-sum payments
beginning in January 2006 under successor in interest contracts. This program
will generate additional net interest income starting in January 2006.
Non-Interest Income
Non-interest income decreased $41 thousand for the nine months ended September
30, 2005 compared to the same period in 2004 to $5.1 million, due primarily to
a decrease in securities net gains of $176 thousand. This is offset by the
increase in trust department income from the collection of certain estate fees
and the net gains on sale of premises of $71 thousand. A decrease of $47
thousand in service charges from the first nine months of 2004 to the
comparable 2005 period is mainly attributable to a decrease in checking
overdraft charges of $37 thousand. The $91 thousand decrease in non-interest
income for the three months ended September 30, 2005 compared to the same
period in 2004 is mainly attributable to the decrease in securities net gains
of $153 thousand.
Gain on sale of mortgage loans decreased $30 thousand during the first nine
months of 2005 compared to the same period in 2004. For the three month
period ended September 30, 2005, gain on sale of mortgage loans decreased $21
thousand compared to the same period in 2004. The volume of mortgage loan
originations and sales is generally inverse to rate changes. The significant
decrease in refinancing activity, along with the stable long term interest
rates, have caused the originations of mortgage loans to be lower and the
related gain on sale of mortgage loans to be lower in 2005 than in 2004.
Non-Interest Expense
Total non-interest expenses increased $286 thousand for the nine month period
ended September 30, 2005 compared to the same period in 2004. For the three
month period ended September 30, 2005, total non-interest expenses increased
$169 thousand compared to the same three month period in 2004.
For the comparable nine month periods, salaries and benefits increased $319
thousand, an increase of 5%. Salaries represented $143 thousand, incentives
represented $71 thousand and employee benefits represented $105 thousand of
the increase in salaries and employee benefits expense during these comparable
periods. Salaries and employee benefits increased $120 thousand for the three
month period ended September 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 nine months ended September 30, 2005 to 3% when
compared to 2004.
Occupancy expenses decreased $18 thousand to $1.7 million for the first nine
months of 2005 compared to the same period in 2004. The decrease in 2005 is
mainly attributable to a decrease in depreciation of $52 thousand compared to
2004, offset by an increase of $57 thousand in repairs and maintenance on
buildings and equipment, including computers. Occupancy expenses decreased $9
thousand for the three month period ended September 30, 2005 compared to the
same period in 2004.
Amortization decreased for the first nine months of 2005 compared to 2004 by
$174 thousand, and decreased $51 thousand for the three month period ended
September 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 $89 thousand for the nine months ended September 30,
2005 compared to the same time period in 2004. The increase in losses on
foreclosed property of $106 thousand is offset primarily from the decrease in
repossession expenses of $47 thousand. Other expenses increased $87 thousand
for the three months ended September 30, 2005 compared to the same time period
in 2004.
Income Taxes
The tax equivalent rate for the nine months ended September 30, 2005 was 26%
compared to 28% in 2004. The tax equivalent rate for the three months ended
September 30, 2005 was 27% 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 2003 Cynthiana acquisition 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 September 30,
2005, 98,909 shares have been purchased. An additional 6,400 shares were
purchased in October, with the most recent share repurchase having occurred on
October 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 $33.1 million as of September 30, 2005 compared
to $15.5 million at December 31, 2004. The increase in cash and cash
equivalents is mainly attributable to an increase in federal funds sold
resulting primarily from a short term increase in public deposits. In
addition to cash and cash equivalents, the securities portfolio provides an
important source of liquidity. Total securities available for sale totaled
$133.9 million at September 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.
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 September 30, 2005, we have sufficient collateral to borrow an
additional $23 million from the FHLB. In addition, as of September 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 September 30, 2005, the Company's non-performing loans totaled $1.3
million or 0.37% of loans compared to $2.1 million or 0.58% of loans at
December 31, 2004. (See table below) The decreases in non-accrual loans and
in accruing loans past due 90 days or more are attributable to overall
improvement in loan quality. Real estate loans composed 83% of the non-
performing loans as of September 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
9/30/05 12/31/04
(in thousands)
Non-accrual Loans $ 1,202 $ 1,781
Accruing Loans which are
Contractually past due
90 days or more 114 308
Total Nonperforming and Restructured 1,316 2,089
Other Real Estate 368 676
Total Nonperforming and Restructured
Loans and Other Real Estate $ 1,684 $ 2,765
Nonperforming and Restructured Loans
as a Percentage of Loans 0.37% 0.58%
Nonperforming and Restructured Loans
and Other Real Estate as a Percentage
of Total Assets 0.30% 0.52%
Provision for Loan Losses
The loan loss provision for the first nine months was $583 thousand for 2005
and $620 thousand for 2004. The loan loss provision for the three months
ended September 30, 2005 was $167 thousand and $170 thousand for the same time
period in 2004. The decrease in nonperforming loans has 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 nine month period ended September 30, 2005 were $236 thousand compared
to $179 thousand for the same period in 2004. Net charge-offs for the three
month period ended September 30, 2005 were $88 thousand compared to $2
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
Nine Months Ended September 30
(in thousands)
2005 2004
Balance at Beginning of Period $ 4,163 $ 3,820
Amounts Charged-off:
Commercial 77 50
Real Estate Mortgage 96 26
Agricultural - 88
Consumer 180 179
Total Charged-off Loans 353 343
Recoveries on Amounts
Previously Charged-off:
Commercial 3 9
Real Estate Mortgage 7 38
Agricultural 1 21
Consumer 106 96
Total Recoveries 117 164
Net Charge-offs 236 179
Provision for Loan Losses 583 620
Balance at End of Period 4,510 4,261
Loans
Average 362,029 326,162
At September 30 359,524 351,578
As a Percentage of Average Loans:
Net Charge-offs 0.07% 0.05%
Provision for Loan Losses 0.16% 0.19%
Allowance as a Percentage of
Period-end Loans 1.25% 1.21%
Allowance as a Multiple of
Net Charge-offs 14.3 17.9
Allowance as a Percentage of
Non-performing and Restructured Loans 343% 179%
Loan Losses
Quarter Ended September 30
(in thousands)
2005 2004
Balance at Beginning of Period $ 4,431 $ 4,093
Amounts Charged-off:
Commercial 15 5
Real Estate Mortgage 23 7
Agricultural - 5
Consumer 97 30
Total Charged-off Loans 135 47
Recoveries on Amounts
Previously Charged-off:
Commercial 1 3
Real Estate Mortgage 5 1
Agricultural 1 16
Consumer 40 25
Total Recoveries 47 45
Net Charge-offs 88 2
Provision for Loan Losses 167 170
Balance at End of Period 4,510 4,261
Loans
Average 363,999 343,292
At September 30 359,524 351,578
As a Percentage of Average Loans:
Net Charge-offs 0.02% 0.00%
Provision for Loan Losses 0.05% 0.05%
Allowance as a Multiple of
Net Charge-offs 12.8 532.6
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, 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 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 September 30,
2005 is as follows:
(dollars in thousands)
PROJECTED NET INTEREST INCOME
Level
Change in basis points: - 300 - 100 Rates + 100 + 300
Year One (10/05 - 9/06)
Interest Income $25,295 $29,367 $31,404 $33,378 $37,171
Interest Expense 10,116 12,103 13,260 14,416 16,730
Net Interest Income 15,179 17,264 18,144 18,962 20,441
PROJECTED DOLLAR INCREASE (DECREASE) FROM "LEVEL RATES"
Year One (10/05 - 9/06)
Interest Income $(6,109) $(2,037) N/A $ 1,974 $ 5,767
Interest Expense (3,144) (1,157) N/A 1,156 3,470
Net Interest Income (2,965) (880) N/A 818 2,297
PROJECTED PERCENTAGE INCREASE (DECREASE) FROM "LEVEL RATES"
Year One (10/05 - 9/06)
Interest Income -19.5% -6.5% N/A 6.3% 18.4%
Interest Expense -23.7% -8.7% N/A 8.7% 26.2%
Net Interest Income -16.3% -4.9% N/A 4.5% 12.7%
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 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%
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 September 30, 2005 are
slightly more when compared to the projected changes in net interest income as
of September 30, 2004. Projections from September 30, 2005, year one
reflected a decline in net interest income of 4.9% with a 100 basis point
decline compared to the 4.3% decline in 2004. The 300 basis point increase in
rates reflected a 12.7% increase in net interest income in 2005 compared to
11.2% 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
7/1/05 -
7/31/05 9,367 $30.06 9,367 101,091 shares
8/1/05 -
8/31/05 -0- N/A N/A 101,091 shares
9/1/05 -
9/30/05 -0- N/A N/A 101,091 shares
Total 9,367 9,367 101,091 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
September 30, 2005, 98,909 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 ____11/14/05________ __/s/Louis Prichard______________
Louis Prichard, President and C.E.O.
Date ____11/14/05________ __/s/Gregory J. Dawson___________
Gregory J. Dawson, Chief Financial Officer
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