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, 2006
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 a large accelerated filer, an
accelerated filer, or a non-accelerated filer. See definition of "accelerated
filer and large accelerated filer" in Rule 12b-2 of the Exchange Act.
Large accelerated filer _ Accelerated filer _ Non-accelerated filer 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 May 12, 2006: 2,672,672.
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 11
Item 3. Quantitative and Qualitative Disclosures About
Market Risk 16
Item 4. Controls and Procedures 18
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) 3/31/2006 12/31/2005
Assets
Cash and due from banks $ 11,788 $ 11,456
Federal funds sold 9 2,708
Cash and cash equivalents 11,797 14,164
Securities available for sale 139,515 160,652
Loans 379,233 370,912
Allowance for loan losses (4,393) (4,310)
Net loans 374,840 366,602
Federal Home Loan Bank stock 5,475 5,398
Bank premises and equipment, net 10,657 10,702
Interest receivable 4,142 3,719
Goodwill 9,111 9,111
Other intangible assets 742 766
Mortgage servicing rights 785 802
Other assets 854 834
Total assets $ 557,918 $ 572,750
Liabilities and Stockholders' Equity
Deposits
Non-interest bearing $ 77,169 $ 72,193
Time deposits, $100,000 and over 59,667 61,597
Other interest bearing 271,900 297,841
Total deposits 408,736 431,631
Repurchase agreements and other borrowings 15,389 16,838
Federal Funds Purchased 17,445 -
Federal Home Loan Bank advances 59,492 66,749
Subordinated debentures 7,217 7,217
Interest payable 2,601 2,714
Other liabilities 523 1,055
Total liabilities 511,403 526,204
Stockholders' equity
Common stock 6,860 6,813
Retained earnings 41,291 40,666
Accumulated other comprehensive income (loss) (1,636) (933)
Total stockholders' equity 46,515 46,546
Total liabilities & stockholders' equity $ 557,918 $ 572,750
See Accompanying Notes
KENTUCKY BANCSHARES, INC.
CONSOLIDATED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME (unaudited)
(thousands, except per share amounts) Three Months Ending
3/31/2006 3/31/2005
INTEREST INCOME:
Loans, including fees $ 6,436 $ 5,510
Securities available for sale 1,535 1,202
Other 80 8
Total interest income 8,051 6,720
INTEREST EXPENSE:
Deposits 2,736 1,619
Other 839 880
Total interest expense 3,575 2,499
Net interest income 4,476 4,221
Loan loss provision 132 250
Net interest income after provision 4,344 3,971
NON-INTEREST INCOME:
Service charges 1,049 1,017
Loan service fee income 66 65
Trust department income 172 103
Securities available for sale gains (losses), net 14 -
Gain on sale of mortgage loans 65 97
Other 230 272
Total other income 1,596 1,554
NON-INTEREST EXPENSE:
Salaries and employee benefits 2,260 2,152
Occupancy expenses 560 570
Amortization 80 84
Advertising and marketing 120 110
Taxes other than payroll, property and income 144 137
Other 934 766
Total other expenses 4,098 3,819
Income before taxes 1,842 1,706
Income taxes 549 373
Net income $ 1,293 $ 1,333
Other Comprehensive Income, net of tax:
Change in Unrealized Gains on Securities (703) (1,089)
Comprehensive Income $ 590 $ 244
Earnings per share
Basic $ 0.48 $ 0.50
Diluted 0.48 0.49
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, 2005 2,666,897 $ 6,813 $ 40,666 $ (933) $ 46,546
Common stock issued 5,775 47 - - 47
Net change in unrealized gain (loss)
on securities available for sale,
net of tax - - - (703) (703)
Net income - - 1,293 - 1,293
Dividends declared - $0.25 per share - - (668) - (668)
Balances, March 31, 2006 2,672,672 $ 6,860 $ 41,291 $ (1,636) $ 46,515
See Accompanying Notes
KENTUCKY BANCSHARES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS (unaudited)
(thousands) Three Months Ending
3/31/2006 3/31/2005
Cash Flows From Operating Activities
Net Income $ 1,293 $ 1,333
Adjustments to reconcile net income to
net cash provided by operating activities:
Depreciation 219 231
Amortization 80 84
Amortization of premium on debt (25) (25)
Securities amortization (accretion), net 39 98
Provision for loan losses 132 250
Securities (gains) losses, net (14) -
Originations of loans held for sale (3,866) (4,913)
Proceeds from sale of loans 3,931 5,185
Federal Home Loan Bank stock dividends (77) (56)
Gain on sale of mortgage loans (65) (97)
Changes in:
Interest receivable (423) (86)
Other assets (58) (384)
Interest payable (113) (18)
Other liabilities (170) 65
Net cash from operating activities 883 1,667
Cash Flows From Investing Activities
Purchases of securities available for sale (2,007) (1,988)
Proceeds from principal payments, maturities and
calls of securities available for sale 22,053 5,061
Net change in loans (8,370) (1,326)
Purchases of bank premises and equipment (174) (207)
Net cash from investing activities 11,502 1,540
Cash Flows From Financing Activities:
Net change in deposits (22,895) (15,078)
Net change in securities sold under agreements to
Repurchase, federal funds purchased
and other borrowings 15,996 8,109
Payments on Federal Home Loan Bank advances (7,232) (2,225)
Proceeds from issuance of common stock 47 2
Purchase of common stock - (51)
Dividends paid (668) (617)
Net cash from financing activities (14,752) (9,860)
Net change in cash and cash equivalents (2,367) (6,653)
Cash and cash equivalents at beginning of period 14,164 15,455
Cash and cash equivalents at end of period $ 11,797 $ 8,802
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, 2005.
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, 2006
U.S. Treasury $ 3,005 $ - $ (21) $ 2,984
U.S. government agencies 48,871 - (1,085) 47,786
States and political subdivisions 38,152 680 (402) 38,430
Mortgage-backed 51,441 2 (1,996) 49,447
Equity securities 525 343 - 868
Total 141,994 1,025 (3,504) 139,515
December 31, 2005
U.S. Treasury $ 3,006 $ - $ (32) $ 2,974
U.S. government agencies 67,845 14 (826) 67,033
States and political subdivisions 37,045 756 (338) 37,463
Mortgage-backed 53,645 4 (1,309) 52,340
Equity securities 524 318 - 842
Total 162,065 1,092 (2,505) 160,652
3. LOANS
Loans at period-end are as follows:
(in thousands)
3/31/2006 12/31/2005
Commercial $ 22,035 $ 27,302
Real estate construction 30,075 29,822
Real estate mortgage 248,157 245,138
Agricultural 69,685 59,328
Consumer 9,281 9,322
Total 379,233 370,912
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
2006 2005
(in thousands)
Basic Earnings Per Share
Net Income $1,293 $1,333
Weighted average common shares outstanding 2,671 2,684
Basic earnings per share $ 0.48 $ 0.50
Diluted Earnings Per Share
Net Income $1,293 $1,333
Weighted average common shares outstanding 2,671 2,684
Add dilutive effects of assumed exercise
of stock options 13 16
Weighted average common and dilutive
potential common shares outstanding 2,684 2,700
Diluted earnings per share $ 0.48 $ 0.49
Stock options for 31,100 shares of common stock for the three months ended
March 31, 2006, and for 26,700 shares of common stock for the three months
ended March 31, 2005 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. The Company also provides to certain officers
and key employees restricted stock grants, which fully vest at the end of
five years. The Company records employee expense ratably over the five year
period, based on the market price of the common stock on the date of grant.
Total shares issuable under the restricted stock grant plan are 50,000
shares. In January 2006, 3,875 shares were granted under the plan.
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.
Compensation cost will also be recorded for previously awarded options to
the extent that they vest after the effective date.
The following table summarizes stock activity:
Three Months Ended
March 31, 2006
Weighted Average
Shares Exercise Price
Outstanding, beginning of year 77,064 $ 25.32
Granted 1,300 29.50
Exercised (1,900) 15.34
Outstanding, end of period 76,464 25.64
Options exercisable at period end 41,516 21.91
The following details stock options outstanding:
March 31, 2006 December 31, 2005
Stock options vested and currently exercisable:
Number 41,516 42,116
Weighted average exercise price $ 21.91 $ 21.38
Aggregate intrinsic value $ 311,915 $ 358,646
Weighted average remaining
contractual life 48.4 months 47.7 months
The intrinsic value for stock options is calculated based on the exercise
price of the underlying awards and the market price of our common stock as
of the reporting date. The Company recorded $19 thousand in stock
compensation expense during the three months ended March 31, 2006 to
salaries and employee benefits.
Prior to 2006, employee compensation expense under stock options is
reported using the intrinsic value method. No stock-based compensation
cost was 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. Effective January 1, 2006, the Company adopted the
fair value recognition provision of FASB Statement No. 123(r), Accounting
for Stock-Based Compensation, and recognizes stock option expense based on
fair value at date of grant. The following table illustrates for 2005 the
effect on net income and earnings per share if expense was measured using
the fair value recognition provisions of FAS 123.
2005
(In thousands, except per share amounts)
Net income as reported $ 1,333
Less: Stock-based compensation expense
determined under fair value based method (14)
Pro forma net income $ 1,319
Basic earnings per share as reported $ 0.50
Pro forma basic earnings per share 0.49
Diluted earnings per share as reported 0.49
Pro forma diluted earnings per share 0.49
The weighted-average assumptions for options granted during the year and
the resulting estimated weighted average fair values per share used in
computing 2006 recognized compensation expense and 2005 for pro forma
disclosures are as follows.
2006 2005
Weighted-average fair value of options
granted during the year $3.14 $4.82
Risk-free interest rate 4.60% 3.98%
Expected option life 8 years 8 years
Expected stock price volatility 7.99% 15.11%
Expected dividend yield 3.39% 3.03%
The fair value of each stock option granted is estimated on the date of
grant using the Black-Scholes based stock option valuation model. This
model requires the input of subjective assumptions that will usually have a
significant impact on the fair value estimate. Expected volatilities are
based on historical volatility of the Company's stock, and other factors.
Expected dividends are based on dividend trends and the market price of the
Company's stock price at grant. The Company uses historical data to
estimate option exercises and employee terminations within the valuation
model. The risk-free rate for periods within the contractual life of the
option is based on the U.S. Treasury yield curve in effect at the time of
grant.
6. Dividends per share paid for the quarter ended March 31, 2006 were $0.25
compared to $0.23 for March 31, 2005.
7. Components of Net Periodic Benefit Cost
Three months ended March 31
(in thousands)
Pension Benefits
2006 2005
Service cost $ 118 $ 108
Interest cost 91 87
Expected return on plan assets (99) (94)
(Gain) loss amortization 10 10
Net Periodic Benefit Cost $ 120 $ 111
Employer Contributions
The Company previously disclosed in its financial statements for the year
ended December 31, 2005 that it expected to contribute $204 thousand as its
2006 annual contribution to the Pension Plan. No contributions to the Pension
Plan were made for the quarter ended March 31, 2006, and the Company
anticipates making its annual contribution in the third quarter of 2006.
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 (the Company and its bank operate in areas affected by various
markets, including the tobacco market); 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 $0.48 basic
and $0.48 diluted earnings per share for the first three months ended March
31, 2006 compared to $1.3 million, or $0.50 basic earnings per share and $0.49
diluted earnings per share for the three month period ending March 31, 2005.
The first three months earnings reflects a decrease of 3.0% compared to the
same time period in 2005.
Return on average assets was 0.91% for the three months ended March 31, 2006
and 1.02% for the three month period ended March 31, 2005. Return on average
equity was 11.0% for the three month period ended March 31, 2006 and 11.8% for
the same period in 2005.
Loans increased $8.3 million from $370.9 million on December 31, 2005 to
$379.2 million on March 31, 2006. Increases in real estate construction, real
estate mortgage and agricultural loans were offset by a decrease in commercial
and consumer loans. Management attributes the growth in loans primarily to
the improving economy.
Total deposits decreased from $431.6 million on December 31, 2005 to $408.7
million on March 31, 2006, a decrease of $22.9 million, primarily the result
of a decline in public fund deposits, reported in other interest bearing
deposits.
Net Interest Income
Net interest income was $4.5 million for the three months ended March 31, 2006
compared to $4.2 million for the three months ended March 31, 2005, an
increase of 6.0%. The interest spread was 3.27% for the first three months of
2006 compared to 3.41% for the same period in 2005, a decrease of 14 basis
points. Generally, the increasing interest rate environment and the increased
cost related to public fund deposits have contributed to declining net
interest margins in the first three months of 2006 compared to 2005.
For the first three months, the yield on assets increased from 5.54% in 2005
to 6.06% in 2006. The cost of liabilities increased from 2.28% in 2005 to
2.80% in 2006. Year to date average loans are up $18.5 million, or 5.1% from
March 31, 2005 to March 31, 2006. Loan interest income has increased $926
thousand for the first three months of 2006 compared to the first three months
of 2005. Year to date average deposits increased from March 31, 2005 to March
31, 2006, up $45.1 million, or 11.6%. Deposit interest expense has increased
$1.1 million for the first three months of 2006 compared to the same period in
2005.
Following the 2004 enactment of federal legislation to end the federal tobacco
program and to compensate quota owners and producers, the Company offered
tobacco quota owners and producers upfront, lump-sum payment buyouts ranging
from 75% to 80% of the future stream of federal buyout payments during 2005.
The Company made $11.7 million in lump-sum payments in January 2006 under
successor in interest contracts. Similar types of buyouts are expected to
continue over the next few years, but on a smaller scale. Starting in January
2006, these buyouts have generated additional net interest income.
Non-Interest Income
Non-interest income increased $42 thousand for the three months ended March
31, 2006 compared to the same period in 2005 to $1.6 million, due primarily to
an increase in trust department income (the collection of certain estate fees)
of $69 thousand.
Gain on sale of mortgage loans decreased $32 thousand during the first three
months of 2006 compared to the same period in 2005. The volume of mortgage
loan originations and sales is generally inverse to rate changes. The
increasing rate environment has caused the originations of mortgage loans to
be lower and the related gain on sale of mortgage loans to be lower in 2006
than in 2005.
Non-Interest Expense
Total non-interest expenses increased $279 thousand for the three month period
ended March 31, 2006 compared to the same period in 2005.
For the comparable three month periods, salaries and benefits increased $108
thousand, an increase of 5%. Salaries represented $49 thousand and employee
benefits represented $66 thousand of the increase in salaries and employee
benefits expense during these comparable periods.
Occupancy expenses decreased $10 thousand to $560 thousand for the first three
months of 2006 compared to the same period in 2005. The decrease in 2006 is
mainly attributable to a decrease in depreciation of $13 thousand compared to
2005.
Other expenses increased $168 thousand for the three months ended March 31,
2006 compared to the same time period in 2005. This is mainly a result of
costs related to the Peoples Bank merger, which have been approximately $90
thousand to date.
Income Taxes
The tax equivalent rate for the three months ended March 31, 2006 was 30%
compared to 22% in 2005. 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 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, 2006,
105,309 shares have been purchased. The most recent share repurchase 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 $11.8 million as of March 31, 2006 compared to
$14.2 million at December 31, 2005. The decrease in cash and cash equivalents
is mainly attributable to a decrease in federal funds sold resulting primarily
from a decrease 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 $139.5 million at March 31, 2006. 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 March 31, 2006, we have sufficient collateral to borrow an
additional $47 million from the FHLB. In addition, as of March 31, 2006, over
$48 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, 2006, the Company's non-performing loans totaled $1.3 million
or 0.34% of loans compared to $1.0 million or 0.26% of loans at December 31,
2005. (See table below) The increase in non-accrual loans is attributable to
an increase in the number of various real estate loans. Real estate loans
composed 84% of the non-performing loans as of March 31, 2006 and 79% as of
December 31, 2005. Forgone interest income on the non-accrual loans for both
2006 and 2005 is immaterial.
Nonperforming Assets
3/31/06 12/31/05
(in thousands)
Non-accrual Loans $ 1,170 $ 774
Accruing Loans which are
Contractually past due
90 days or more 105 206
Total Nonperforming and Restructured 1,275 980
Other Real Estate 141 141
Total Nonperforming and Restructured
Loans and Other Real Estate $ 1,416 $ 1,121
Nonperforming and Restructured Loans
as a Percentage of Loans 0.34% 0.26%
Nonperforming and Restructured Loans
and Other Real Estate as a Percentage
of Total Assets 0.25% 0.20%
Provision for Loan Losses
The loan loss provision for the first three months was $132 thousand for 2006
and $250 thousand for 2005. The continuing lower level of nonperforming loans
has caused management to decrease the 2006 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, 2006 were $49 thousand
compared to $86 thousand for the same period in 2005. Future levels of
charge-offs will be determined by the particular facts and circumstances
surrounding individual loans. Management believes the current loan loss
allowance is sufficient to meet probable incurred loan losses.
Loan Losses
Three Months Ended March 31
(in thousands)
2006 2005
Balance at Beginning of Period $ 4,310 $ 4,163
Amounts Charged-off:
Commercial 6 43
Real Estate Mortgage 54 22
Consumer 201 66
Total Charged-off Loans 261 131
Recoveries on Amounts
Previously Charged-off:
Commercial 1 1
Agricultural 21 -
Consumer 190 44
Total Recoveries 212 45
Net Charge-offs 49 86
Provision for Loan Losses 132 250
Balance at End of Period 4,393 4,327
Loans
Average 362,029 359,262
At March 31 379,233 359,522
As a Percentage of Average Loans:
Net Charge-offs 0.01% 0.02%
Provision for Loan Losses 0.04% 0.07%
Allowance as a Percentage of
Period-end Loans 1.16% 1.20%
Allowance as a Multiple of
Net Charge-offs 22.4 12.6
Allowance as a Percentage of
Non-performing and Restructured Loans 345% 234%
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, 2006 the projected percentage
changes are within the Board approved limits. This period's volatility is
lower when compared to the same period a year ago. The projected net interest
income report summarizing the Company's interest rate sensitivity as of March
31, 2006 is as follows:
(dollars in thousands)
PROJECTED NET INTEREST INCOME
Level
Change in basis points: - 300 - 100 Rates + 100 + 300
Year One (4/06 - 3/07)
Interest Income $27,690 $31,520 $33,436 $35,275 $38,788
Interest Expense 11,902 14,470 15,876 17,281 20,092
Net Interest Income 15,788 17,050 17,560 17,994 18,696
PROJECTED DOLLAR INCREASE (DECREASE) FROM "LEVEL RATES"
Year One (4/06 - 3/07)
Interest Income $(5,746) $(1,916) N/A $ 1,839 $ 5,352
Interest Expense (3,974) (1,406) N/A 1,405 4,216
Net Interest Income (1,772) (510) N/A 434 1,136
PROJECTED PERCENTAGE INCREASE (DECREASE) FROM "LEVEL RATES"
Year One (4/06 - 3/07)
Interest Income -17.2% -5.7% N/A 5.5% 16.0%
Interest Expense -25.0% -8.9% N/A 8.8% 26.6%
Net Interest Income -10.1% -2.9% N/A 2.5% 6.5%
Board approved limit >-18.0% >-6.0% N/A >-4.0% >-10.0%
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 9,458 10,115 11,363 12,611 15,106
Net Interest Income 13,432 16,728 17,462 18,147 19,369
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 -16.8% -11.0% N/A 11.0% 32.9%
Net Interest Income -23.1% -4.2% N/A 3.9% 10.9%
Board approved limit >-10.0% >-4.0% N/A >-4.0% >-10.0%
These projected changes in net interest income as of March 31, 2006 are
slightly less when compared to the projected changes in net interest income as
of March 31, 2005. Projections from March 31, 2006, year one reflected a
decline in net interest income of 2.9% with a 100 basis point decline compared
to the 4.2% decline in 2005. The 300 basis point increase in rates reflected
a 6.5% increase in net interest income in 2006 compared to 10.9% in 2005.
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 1A. Risk Factors
There have been no material changes in risk factors, as previously
disclosed in the December 31, 2005 Form 10-K.
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
1/1/06 -
1/31/06 -0- N/A N/A 94,691 shares
2/1/06 -
2/28/06 -0- N/A N/A 94,691 shares
3/1/06 -
3/31/06 -0- N/A N/A 94,691 shares
Total -0- N/A 94,691 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, 2006, 105,309 shares have been purchased.
Item 3. Defaults upon Senior Securities
None
Item 4. Submission of Matters to a Vote of Security Holders
The registrant's 2006 Annual Meeting of Shareholders was held May 12,
2006. 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
Betty J. Long 2,229,927 16,296
Ted McClain 2,206,641 39,582
Buckner Woodford IV 2,207,387 38,836
The following directors have a term of office that will continue
following the Annual Meeting: William M. Arvin, Henry Hinkle, Theodore
Kuster, Robert G. Thompson, Louis Prichard and Woodrow Van Meter.
The total number of Common Shares outstanding as of March 17, 2006, the
record date for the Annual Meeting of Shareholders, was 2,671,672.
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 _____5/15/06________ __/s/Louis Prichard______________
Louis Prichard, President and C.E.O.
Date _____5/15/06________ __/s/Gregory J. Dawson___________
Gregory J. Dawson, Chief Financial Officer
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