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, 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 August 12, 2006:
2,868,638.
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 12
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. 25
Item 1 - Financial Statements
KENTUCKY BANCSHARES, INC.
CONSOLIDATED BALANCE SHEETS (unaudited)
(thousands) 6/30/2006 12/31/2005
Assets
Cash and due from banks $ 14,803 $ 11,456
Federal funds sold 127 2,708
Cash and cash equivalents 14,930 14,164
Securities available for sale 125,497 160,652
Mortgage loans held for sale 104 -
Loans 384,193 370,912
Allowance for loan losses (4,408) (4,310)
Net loans 379,785 366,602
Federal Home Loan Bank stock 5,553 5,398
Bank premises and equipment, net 10,568 10,702
Interest receivable 4,433 3,719
Goodwill 9,111 9,111
Other intangible assets 803 766
Mortgage servicing rights 766 802
Other assets 1,794 834
Total assets $ 553,344 $ 572,750
Liabilities and Stockholders' Equity
Deposits
Non-interest bearing $ 77,261 $ 72,193
Time deposits, $100,000 and over 51,944 61,597
Other interest bearing 259,424 297,841
Total deposits 388,629 431,631
Repurchase agreements and other borrowings 16,047 16,838
Federal Funds Purchased 11,923 -
Federal Home Loan Bank advances 79,237 66,749
Subordinated debentures 7,217 7,217
Interest payable 2,441 2,714
Other liabilities 1,047 1,055
Total liabilities 506,541 526,204
Stockholders' equity
Common stock 6,879 6,813
Retained earnings 42,339 40,666
Accumulated other comprehensive income (loss) (2,415) (933)
Total stockholders' equity 46,803 46,546
Total liabilities & stockholders' equity $ 553,344 $ 572,750
See Accompanying Notes
KENTUCKY BANCSHARES, INC.
CONSOLIDATED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME (unaudited)
(thousands, except per share amounts) Six Months Ending
6/30/2006 6/30/2005
INTEREST INCOME:
Loans, including fees $ 13,185 $ 11,328
Securities available for sale 3,028 2,403
Other 83 22
Total interest income 16,296 13,753
INTEREST EXPENSE:
Deposits 5,319 3,336
Other 1,990 1,811
Total interest expense 7,309 5,147
Net interest income 8,987 8,606
Loan loss provision 240 416
Net interest income after provision 8,747 8,190
NON-INTEREST INCOME:
Service charges 2,293 2,195
Loan service fee income 133 131
Trust department income 317 215
Securities available for sale gains (losses), net (23) 53
Gain on sale of mortgage loans 104 187
Other 477 607
Total other income 3,301 3,388
NON-INTEREST EXPENSE:
Salaries and employee benefits 4,449 4,301
Occupancy expenses 1,077 1,120
Amortization 161 171
Advertising and marketing 240 220
Taxes other than payroll, property and income 289 272
Other 1,611 1,690
Total other expenses 7,827 7,774
Income before taxes 4,221 3,804
Income taxes 1,212 955
Net income $ 3,009 $ 2,849
Other Comprehensive Income, net of tax:
Change in Unrealized Gains on Securities (1,482) (199)
Comprehensive Income $ 1,527 $ 2,650
Earnings per share
Basic $ 1.13 $ 1.06
Diluted 1.12 1.05
See Accompanying Notes
KENTUCKY BANCSHARES, INC.
CONSOLIDATED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME (unaudited)
(thousands, except per share amounts) Three Months Ending
6/30/2006 6/30/2005
INTEREST INCOME:
Loans, including fees $ 6,749 $ 5,818
Securities available for sale 1,493 1,201
Other 3 14
Total interest income 8,245 7,033
INTEREST EXPENSE:
Deposits 2,583 1,717
Other 1,151 931
Total interest expense 3,734 2,648
Net interest income 4,511 4,385
Loan loss provision 108 166
Net interest income after provision 4,403 4,219
NON-INTEREST INCOME:
Service charges 1,244 1,178
Loan service fee income 67 66
Trust department income 145 112
Securities available for sale gains (losses), net (37) 53
Gain on sale of mortgage loans 39 90
Other 247 335
Total other income 1,705 1,834
NON-INTEREST EXPENSE:
Salaries and employee benefits 2,189 2,149
Occupancy expenses 517 550
Amortization 81 87
Advertising and marketing 120 110
Taxes other than payroll, property and income 145 135
Other 677 924
Total other expenses 3,729 3,955
Income before taxes 2,379 2,098
Income taxes 663 582
Net income $ 1,716 $ 1,516
Other Comprehensive Income, net of tax:
Change in Unrealized Gains on Securities (779) 890
Comprehensive Income $ 937 $ 2,406
Earnings per share
Basic $ 0.65 $ 0.56
Diluted 0.64 0.56
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 5,975 33 - - 33
Common stock purchased - - - - -
Noncash compensation expense
attributed to stock option and
employee stock purchase plan grants - 33 - - 33
Net change in unrealized gain (loss)
on securities available for sale,
net of tax - - - (1,482) (1,482)
Net income - - 3,009 - 3,009
Dividends declared - $0.50 per share - - (1,336) - (1,336)
Balances, June 30, 2006 2,672,872 $ 6,879 $ 42,339 $ (2,415) $ 46,803
See Accompanying Notes
KENTUCKY BANCSHARES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS (unaudited)
(thousands) Six Months Ending
6/30/2006 6/30/2005
Cash Flows From Operating Activities
Net Income $ 3,009 $ 2,849
Adjustments to reconcile net income to
net cash provided by operating activities:
Depreciation 440 468
Amortization 161 171
Amortization of premium on debt (49) (49)
Securities amortization (accretion), net 64 173
Noncash compensation expense 33 -
Provision for loan losses 240 416
Securities (gains) losses, net 23 (53)
Originations of loans held for sale (8,140) (10,103)
Proceeds from sale of loans 8,140 10,465
Federal Home Loan Bank stock dividends (155) (120)
Losses (gains) on sale of fixed assets - (84)
Gain on sale of mortgage loans (104) (187)
Changes in:
Interest receivable (714) (181)
Other assets (1,121) (175)
Interest payable (273) 218
Other liabilities 755 569
Net cash from operating activities 2,309 4,377
Cash Flows From Investing Activities
Purchases of securities available for sale (3,176) (4,428)
Proceeds from sales of securities available for sale 3,960 1,324
Proceeds from principal payments, maturities and
calls of securities available for sale 32,038 9,064
Net change in loans (13,423) (8,706)
Purchases of bank premises and equipment (306) 137
Net cash from investing activities 19,093 (2,609)
Cash Flows From Financing Activities:
Net change in deposits (43,002) (2,963)
Net change in securities sold under agreements to
repurchase, federal funds purchased and other
borrowing 11,132 (9,247)
Advances from Federal Home Loan Bank 45,000 15,000
Payments on Federal Home Loan Bank advances (32,463) (7,450)
Proceeds from issuance of common stock 33 18
Purchase of common stock - (154)
Dividends paid (1,336) (1,234)
Net cash from financing activities (20,636) (6,030)
Net change in cash and cash equivalents 766 (4,262)
Cash and cash equivalents at beginning of period 14,164 15,455
Cash and cash equivalents at end of period $ 14,930 $ 11,193
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.
New Accounting Pronouncement - In June 2006, FASB Interpretation No. 48 ("FIN
48"), Accounting for Uncertainty in Income Taxes - an interpretation of FAS
109 was issued. FIN 48 clarifies the accounting for uncertainty in income
taxes recognized in an entity's financial statements in accordance with FASB
Statement No. 109, Accounting for Income Taxes. FIN 48 prescribes a
recognition threshold and measurement attribute for the financial statement
recognition and measurement of a tax position taken or expected to be taken in
a tax return. FIN 48 also provides guidance on de-recognition,
classification, interest and penalties, accounting in interim periods,
disclosure, and transition. FIN 48 is effective for fiscal years beginning
after December 15, 2006. Earlier application is encouraged if an entity has
not yet issued financial statements, including interim financial statements,
in the period FIN 48 is adopted. The Company is currently evaluating the
impact, if any, the adoption of FIN 48 will have on its consolidated financial
position, results of operations or cash flows.
2. BUSINESS COMBINATION
On July 7, 2006, the Company acquired 100% of the outstanding shares of
Peoples Bancorp of Sandy Hook, Inc. (Peoples), a $91 million asset bank
holding company. On the merger date, Peoples had loans of $51 million and
deposits of $72 million.
3. 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, 2006
U.S. Treasury $ 1,003 $ - $ (10) $ 993
U.S. government agencies 41,878 - (1,235) 40,643
States and political subdivisions 38,907 460 (695) 38,672
Mortgage-backed 46,843 - (2,542) 44,301
Equity securities 525 363 - 888
Total 129,156 823 (4,482) 125,497
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
4. LOANS
Loans at period-end are as follows:
(in thousands)
6/30/2006 12/31/2005
Commercial $ 24,904 $ 27,302
Real estate construction 30,465 29,822
Real estate mortgage 246,934 245,138
Agricultural 72,199 59,328
Consumer 9,691 9,322
Total 384,193 370,912
5. 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
2006 2005
(in thousands)
Basic Earnings Per Share
Net Income $3,009 $2,849
Weighted average common shares outstanding 2,668 2,683
Basic earnings per share $ 1.13 $ 1.06
Diluted Earnings Per Share
Net Income $3,009 $2,849
Weighted average common shares outstanding 2,668 2,683
Add dilutive effects of assumed exercise
of stock options 12 16
Weighted average common and dilutive
potential common shares outstanding 2,680 2,699
Diluted earnings per share $ 1.12 $ 1.05
Three Months Ended
June 30
2006 2005
(in thousands)
Basic Earnings Per Share
Net Income $1,716 $1,516
Weighted average common shares outstanding 2,665 2,682
Basic earnings per share $ 0.65 $ 0.56
Diluted Earnings Per Share
Net Income $1,716 $1,516
Weighted average common shares outstanding 2,665 2,682
Add dilutive effects of assumed exercise
of stock options 12 15
Weighted average common and dilutive
potential common shares outstanding 2,677 2,697
Diluted earnings per share $ 0.64 $ 0.56
Stock options for 32,400 shares of common stock for the six and three months
ended June 30, 2006, and for 31,100 shares of common stock for the six and
three months ended June 30, 2005 were excluded from diluted earnings per
share because their impact was antidilutive.
6. 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 option activity:
Six Months Ended
June 30, 2006
Option Weighted Average
Shares Exercise Price
Outstanding, beginning of year 77,064 $ 25.32
Granted 1,300 29.50
Exercised (2,100) 16.19
Outstanding, end of period 76,264 25.64
Options exercisable at period end 50,242 23.23
The aggregate intrinsic value of the stock options exercised totaling 2,100
shares was $27,788 and the total intrinsic value of the stock options
outstanding of 76,264 shares is $253,116.
The following details stock options outstanding:
June 30, 2006 December 31, 2005
Stock options vested and currently exercisable:
Number 50,242 42,116
Weighted average exercise price $ 23.23 $ 21.38
Aggregate intrinsic value $ 245,864 $ 358,646
Weighted average remaining
contractual life 53.2 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 $33 thousand in stock
compensation expense during the six months ended June 30, 2006 to salaries
and employee benefits. The after tax effect on net income for the six
months ended June 30, 2006 was $22 thousand, resulting in a one cent
decline in earnings per share on both the basic and diluted basis.
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 $ 2,849
Less: Stock-based compensation expense
determined under fair value based method (27)
Pro forma net income $ 2,822
Basic earnings per share as reported $ 1.06
Pro forma basic earnings per share 1.05
Diluted earnings per share as reported 1.05
Pro forma diluted earnings per share 1.04
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 at the time of grant.
7. Dividends per share paid for the quarter ended June 30, 2006 were $0.25
compared to $0.23 for June 30, 2005. This is the same rate of dividend
paid for the first quarters of the respective years.
8. Components of Net Periodic Benefit Cost
Six months ended June 30
(in thousands)
Pension Benefits
2006 2005
Service cost $ 236 $ 216
Interest cost 182 173
Expected return on plan assets (199) (188)
(Gain) loss amortization 21 20
Net Periodic Benefit Cost $ 240 $ 221
Three months ended June 30
(in thousands)
Pension Benefits
2006 2005
Service cost $ 118 $ 108
Interest cost 91 86
Expected return on plan assets (100) (94)
(Gain) loss amortization 11 10
Net Periodic Benefit Cost $ 120 $ 110
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 during the six months ended June 30, 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 $3.0 million, or $1.13 basic
and $1.12 diluted earnings per share for the six months ended June 30, 2006
compared to $2.8 million, or $1.06 basic and $1.05 diluted earnings for the
six month period ended June 30, 2005. The first six months earnings reflect
an increase of 5.6% compared to the same time period in 2005. The earnings
for the three months ended June 30, 2006 were $1.7 million, or $0.65 basic and
$0.64 diluted earnings per share for the three months ended June 30, 2006
compared to $1.5 million, or $0.56 basic earnings per share and $0.56 diluted
earnings per share for the three month period ending June 30, 2005. This
three months period earnings reflects an increase of 13.2% compared to the
same time period in 2005.
Return on average assets was 1.07% for the six months ended June 30, 2006 and
1.09% for the six month period ended June 30, 2005. Return on average equity
was 12.8% for the six month period ended June 30, 2006 and 12.6% for the same
period in 2005. Return on average assets was 1.23% for the three months ended
June 30, 2006 and 1.23% for the three month period ended June 30, 2005.
Return on average equity was 14.6% for the three month period ended June 30,
2006 and 14.2% for the same period in 2005.
Loans increased $13.3 million from $370.9 million on December 31, 2005 to
$384.2 million on June 30, 2006. Increases in real estate construction, real
estate mortgage, agricultural and consumer loans were offset by a decrease in
commercial loans. Management attributes the growth in loans primarily to the
$11.7 million in lump-sum tobacco buyouts completed in January 2006.
Total deposits decreased from $431.6 million on December 31, 2005 to $388.6
million on June 30, 2006, a decrease of $43.0 million, primarily the result of
a decline in public fund deposits, reported in other interest bearing
deposits.
Net Interest Income
Net interest income was $9.0 million for the six months ended June 30, 2006
compared to $8.6 million for the six months ended June 30, 2005, an increase
of 4.4%. The interest spread was 3.30% for the first six months of 2006
compared to 3.46% for the same period in 2005, a decrease of 16 basis points.
Net interest income was $4.5 million for the three months ended June 30, 2006
compared to $4.4 million for the three months ended June 30, 2005, an increase
of 2.9%. The interest spread was 3.34% for the three month period ended June
30, 2006 compared to 3.51% for the same period in 2005, a decrease of 17 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 2006 compared to 2005.
For the first six months, the yield on assets increased from 5.64% in 2005 to
6.18% in 2006. The cost of liabilities increased from 2.18% in 2005 to 2.88%
in 2006. Year to date average loans are up $18.9 million, or 5.2% from June
30, 2005 to June 30, 2006. Loan interest income has increased $1.9 million
for the first six months of 2006 compared to the first six months of 2005.
Year to date average deposits increased from June 30, 2005 to June 30, 2006,
up $30.1 million, or 7.8%. Deposit interest expense has increased $2.0
million for the first six 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 decreased $87 thousand for the six months ended June 30,
2006 compared to the same period in 2005 to $3.3 million. Increases in
service charges of $98 thousand and trust department income (the collection of
certain estate fees) of $102 thousand are offset by decreases in net gains
(losses) on securities of $76 thousand, and gains on sale of premises of $84
thousand. The $129 thousand decrease in non-interest income for the three
months ended June 30, 2006 compared to the same time period in 2005 is mainly
attributable to the decrease in net gains (losses) on securities and in gains
on sale of premises mentioned above.
Gain on sale of mortgage loans decreased $83 thousand during the first six
months of 2006 compared to the same period in 2005. The decrease was $51
thousand for the three month period June 30, 2006 compared to the same time
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 $53 thousand for the six month period
ended June 30, 2006 compared to the same period in 2005. For the three month
period ended June 30, 2006, total non-interest expense decreased $226
thousand.
For the comparable six month periods, salaries and benefits increased $148
thousand, an increase of 3.4%. Salaries represented $27 thousand and employee
benefits represented $119 thousand of the increase in salaries and employee
benefits expense during these comparable periods. Salaries and benefits
increased $40 thousand for the three month period ended June 30, 2006 compared
to the same period in 2005.
Occupancy expenses decreased $43 thousand to $1.1 million for the first six
months of 2006 compared to the same period in 2005. The decrease in 2006 is
mainly attributable to a decrease in depreciation of $28 thousand compared to
2005. Occupancy expenses decreased $33 thousand for the three month period
ended June 30, 2006 compared to the same period in 2005.
Other expenses decreased $79 thousand for the six months ended June 30, 2006
compared to the same time period in 2005. This is mainly a result of a
reduction of losses on other real estate and repossession expenses of $65
thousand, and other losses of $44 thousand.
Income Taxes
The tax equivalent rate for the six months ended June 30, 2006 was 29%
compared to 25% in 2005. The tax equivalent rate for the three months ended
June 30, 2006 was 28% compared to 29% 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 June 30, 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 $14.9 million as of June 30, 2006 compared to
$14.2 million at December 31, 2005. In addition to cash and cash equivalents,
the securities portfolio provides an important source of liquidity. Total
securities available for sale totaled $125.5 million at June 30, 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 June 30, 2006, we have sufficient collateral to borrow an
additional $27 million from the FHLB. In addition, as of June 30, 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 June 30, 2006, the Company's non-performing loans totaled $1.2 million
or 0.30% 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 June 30, 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
6/30/06 12/31/05
(in thousands)
Non-accrual Loans $ 1,137 $ 774
Accruing Loans which are
Contractually past due
90 days or more 13 206
Total Nonperforming and Restructured 1,150 980
Other Real Estate 176 141
Total Nonperforming and Restructured
Loans and Other Real Estate $ 1,326 $ 1,121
Nonperforming and Restructured Loans
as a Percentage of Loans 0.30% 0.26%
Nonperforming and Restructured Loans
and Other Real Estate as a Percentage
of Total Assets 0.24% 0.20%
Provision for Loan Losses
The loan loss provision for the first six months was $240 thousand for 2006
and $416 thousand for 2005. The loan loss provision for the three months
ended June 30, 2006 was $108 thousand and $166 thousand for the same time
period in 2005. The continuing lower levels of nonperforming loans has
allowed 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 six month period ended June 30, 2006 were $142 thousand
compared to $148 thousand for the same period in 2005. Net charge-offs for
the three month period ended June 30, 2006 were $93 thousand compared to $62
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
Six Months Ended June 30
(in thousands)
2006 2005
Balance at Beginning of Period $ 4,310 $ 4,163
Amounts Charged-off:
Commercial 15 62
Real Estate Mortgage 54 73
Agricultural 3 -
Consumer 524 83
Total Charged-off Loans 596 218
Recoveries on Amounts
Previously Charged-off:
Commercial 1 2
Real Estate Mortgage - 2
Agricultural 21 -
Consumer 432 66
Total Recoveries 454 70
Net Charge-offs 142 148
Provision for Loan Losses 240 416
Balance at End of Period 4,408 4,431
Loans
Average 380,172 361,044
At June 30 384,193 366,840
As a Percentage of Average Loans:
Net Charge-offs 0.04% 0.04%
Provision for Loan Losses 0.06% 0.12%
Allowance as a Percentage of
Period-end Loans 1.15% 1.21%
Allowance as a Multiple of
Net Charge-offs 15.5 15.0
Allowance as a Percentage of
Non-performing and Restructured Loans 383% 248%
Loan Losses
Quarter Ended June 30
(in thousands)
2006 2005
Balance at Beginning of Period $ 4,393 $ 4,327
Amounts Charged-off:
Commercial 9 19
Real Estate Mortgage - 51
Agricultural 3 -
Consumer 323 17
Total Charged-off Loans 335 87
Recoveries on Amounts
Previously Charged-off:
Commercial - 1
Real Estate Mortgage - 2
Consumer 242 22
Total Recoveries 242 25
Net Charge-offs 93 62
Provision for Loan Losses 108 166
Balance at End of Period 4,408 4,431
Loans
Average 398,315 362,826
At June 30 384,193 366,840
As a Percentage of Average Loans:
Net Charge-offs 0.02% 0.02%
Provision for Loan Losses 0.03% 0.05%
Allowance as a Multiple of
Net Charge-offs 11.8 17.9
Item 3 - QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Asset/Liability management control is designed to ensure safety and soundness,
maintain liquidity and regulatory capital standards, and achieve acceptable
net interest income. Management considers interest rate risk to be the most
significant market risk. The Company's exposure to market risk is reviewed on
a regular basis by the Asset/Liability Committee. Interest rate risk is the
potential of economic losses due to future interest rate changes. These
economic losses can be reflected as a loss of future net interest income
and/or a loss of current fair market values. The objective is to measure the
effect on net interest income and to adjust the balance sheet to minimize the
inherent risk while at the same time maximize income.
Management realizes certain risks are inherent and that the goal is to
identify and minimize the risks. The primary tool used by management is an
interest rate shock simulation model. The Bank has no market risk sensitive
instruments held for trading purposes.
The following table depicts the change in net interest income resulting from
100 and 300 basis point changes in rates on the Company's interest earning
assets and interest bearing liabilities. The projections are based on balance
sheet growth assumptions and repricing opportunities for new, maturing and
adjustable rate amounts. As of June 30, 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 June 30, 2006
is as follows:
(dollars in thousands)
PROJECTED NET INTEREST INCOME
Level
Change in basis points: - 300 - 100 Rates + 100 + 300
Year One (7/06 - 6/07)
Interest Income $31,812 $32,578 $33,728 $34,918 $35,794
Interest Expense 15,220 15,810 16,586 17,488 18,082
Net Interest Income 16,592 16,768 17,142 17,430 17,712
PROJECTED DOLLAR INCREASE (DECREASE) FROM "LEVEL RATES"
Year One (7/06 - 6/07)
Interest Income $(1,916) $(1,150) N/A $ 1,190 $ 2,066
Interest Expense (1,366) (776) N/A 902 1,496
Net Interest Income (550) (374) N/A 288 570
PROJECTED PERCENTAGE INCREASE (DECREASE) FROM "LEVEL RATES"
Year One (7/06 - 6/07)
Interest Income -5.7% -3.4% N/A 3.5% 6.1%
Interest Expense -8.2% -4.7% N/A 5.4% 9.0%
Net Interest Income -3.2% -2.2% N/A 1.7% 3.3%
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 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 9,150 10,704 11,825 12,945 15,186
Net Interest Income 14,956 17,152 17,909 18,606 19,843
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 -22.6% -9.5% N/A 9.5% 28.4%
Net Interest Income -16.5% -4.2% N/A 3.9% 10.8%
Board approved limit >-18.0% >-6.0% N/A >-4.0% >-10.0%
These projected changes in net interest income as of June 30, 2006 are less
when compared to the projected changes in net interest income as of June 30,
2005. Projections from June 30, 2006, year one reflected a decline in net
interest income of 2.2% with a 100 basis point decline compared to the 4.2%
decline in 2005. The 300 basis point increase in rates reflected a 3.3%
increase in net interest income in 2006 compared to 10.8% 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 (as defined in Rule 13a-15(e) or
Rule 15d-15(e) under the Exchange Act). 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
4/1/06 -
4/30/06 -0- N/A N/A 94,691 shares
5/1/06 -
5/31/06 -0- N/A N/A 94,691 shares
6/1/06 -
6/30/06 -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 June
30, 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
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 _____8/14/06________ __/s/Louis Prichard______________
Louis Prichard, President and C.E.O.
Date _____8/14/06________ __/s/Gregory J. Dawson___________
Gregory J. Dawson, Chief Financial Officer
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