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, 2007
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: 000-52598
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 6, 2007: 2,855,253.
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 Statement 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 13
Item 3. Quantitative and Qualitative Disclosures About
Market Risk 19
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) 6/30/2007 12/31/2006
Assets
Cash and due from banks $ 13,815 $ 14,905
Federal funds sold 34,336 4,106
Cash and cash equivalents 48,151 19,011
Securities available for sale 124,552 127,891
Mortgage loans held for sale 129 -
Loans 430,538 444,150
Allowance for loan losses (4,956) (4,991)
Net loans 425,582 439,159
Federal Home Loan Bank stock 6,468 6,468
Bank premises and equipment, net 15,273 14,327
Interest receivable 5,119 5,654
Goodwill 13,117 13,117
Other intangible assets 1,922 2,058
Mortgage servicing rights 701 746
Other assets 1,271 1,111
Total assets $ 642,285 $ 629,542
Liabilities and Stockholders' Equity
Deposits
Non-interest bearing $ 98,266 $ 87,503
Time deposits, $100,000 and over 75,016 67,255
Other interest bearing 318,722 314,050
Total deposits 492,004 468,808
Repurchase agreements and other borrowings 11,576 11,327
Federal Home Loan Bank advances 69,645 80,030
Subordinated debentures 7,217 7,217
Interest payable 3,770 3,683
Other liabilities 2,537 3,196
Total liabilities 586,749 574,261
Stockholders' equity
Common stock 12,451 12,474
Additional paid-in capital 109 59
Retained earnings 45,671 44,062
Accumulated other comprehensive income (loss) (2,695) (1,314)
Total stockholders' equity 55,536 55,281
Total liabilities & stockholders' equity $ 642,285 $ 629,542
See Accompanying Notes
KENTUCKY BANCSHARES, INC.
CONSOLIDATED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME (unaudited)
(thousands, except per share amounts) Six Months Ending
6/30/2007 6/30/2006
INTEREST INCOME:
Loans, including fees $ 16,094 $ 13,185
Securities available for sale 3,184 3,028
Other 562 83
Total interest income 19,840 16,296
INTEREST EXPENSE:
Deposits 7,710 5,319
Other 2,011 1,990
Total interest expense 9,721 7,309
Net interest income 10,119 8,987
Loan loss provision 320 240
Net interest income after provision 9,799 8,747
NON-INTEREST INCOME:
Service charges 2,773 2,293
Loan service fee income 32 20
Trust department income 274 317
Securities available for sale gains (losses), net 3 (23)
Gain on sale of mortgage loans 210 104
Other 645 477
Total other income 3,937 3,188
NON-INTEREST EXPENSE:
Salaries and employee benefits 5,382 4,449
Occupancy expenses 1,243 1,077
Amortization 136 48
Advertising and marketing 270 240
Taxes other than payroll, property and income 342 289
Other 1,575 1,611
Total other expenses 8,948 7,714
Income before taxes 4,788 4,221
Income taxes 1,308 1,212
Net income $ 3,480 $ 3,009
Other Comprehensive Income, net of tax:
Change in Unrealized Gains on Securities (1,381) (1,482)
Comprehensive Income $ 2,099 $ 1,527
Earnings per share
Basic $ 1.22 $ 1.13
Diluted 1.21 1.12
See Accompanying Notes
KENTUCKY BANCSHARES, INC.
CONSOLIDATED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME (unaudited)
(thousands, except per share amounts) Three Months Ending
6/30/2007 6/30/2006
INTEREST INCOME:
Loans, including fees $ 8,137 $ 6,749
Securities available for sale 1,612 1,493
Other 285 3
Total interest income 10,034 8,245
INTEREST EXPENSE:
Deposits 3,916 2,583
Other 971 1,151
Total interest expense 4,887 3,734
Net interest income 5,147 4,511
Loan loss provision 170 108
Net interest income after provision 4,977 4,403
NON-INTEREST INCOME:
Service charges 1,470 1,244
Loan service fee income 16 10
Trust department income 125 145
Securities available for sale gains (losses), net 4 (37)
Gain on sale of mortgage loans 144 39
Other 333 247
Total other income 2,092 1,648
NON-INTEREST EXPENSE:
Salaries and employee benefits 2,606 2,189
Occupancy expenses 610 517
Amortization 68 24
Advertising and marketing 135 120
Taxes other than payroll, property and income 171 145
Other 811 677
Total other expenses 4,401 3,672
Income before taxes 2,668 2,379
Income taxes 750 663
Net income $ 1,918 $ 1,716
Other Comprehensive Income, net of tax:
Change in Unrealized Gains on Securities (1,340) (779)
Comprehensive Income $ 578 $ 937
Earnings per share
Basic $ 0.67 $ 0.65
Diluted 0.67 0.64
See Accompanying Notes
KENTUCKY BANCSHARES, INC.
CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY (unaudited)
(thousands, except share information)
Accumulated
Additional Other Total
----Common Stock---- Paid-in Retained Comprehensive Stockholders'
Shares Amount Capital Earnings Income Equity
<s> <c> <c> <c> <c> <c> <c>
Balances, December 31, 2006 2,864,586 $ 12,474 $ 59 $ 44,062 $ (1,314) $ 55,281
Common stock issued, including tax
benefit, net (including stock grants
of 5,605 shares and employee gifts
of 93 shares) 7,034 32 - - - 32
Stock based compensation expense - - 50 - - 50
Common stock purchased and retired (12,613) (55) - (323) - (378)
Net change in unrealized gain (loss)
on securities available for sale,
net of tax - - - - (1,381) (1,381)
Net income - - - 3,480 - 3,480
Dividends declared - $0.54 per share - - - (1,548) - (1,548)
Balances, June 30, 2007 2,859,007 $ 12,451 $ 109 $ 45,671 $ (2,695) $ 55,536
See Accompanying Notes
KENTUCKY BANCSHARES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS (unaudited)
(thousands) Six Months Ending
6/30/2007 6/30/2006
Cash Flows From Operating Activities
Net Income $ 3,480 $ 3,009
Adjustments to reconcile net income to
net cash provided by operating activities:
Depreciation 510 440
Amortization 239 161
Amortization of premium on debt (13) (49)
Securities amortization (accretion), net (78) 64
Noncash compensation expense 50 33
Provision for loan losses 320 240
Securities (gains) losses, net (3) 23
Originations of loans held for sale (5,936) (8,140)
Proceeds from sale of loans 6,017 8,140
Federal Home Loan Bank stock dividends - (155)
Gain on sale of mortgage loans (210) (104)
Changes in:
Interest receivable 535 (714)
Other assets (320) (1,121)
Interest payable 87 (273)
Other liabilities 153 755
Net cash from operating activities 4,831 2,309
Cash Flows From Investing Activities
Purchases of securities available for sale (39,763) (3,176)
Proceeds from sales of securities available for sale 19,324 3,960
Proceeds from principal payments, maturities and
calls of securities available for sale 21,768 32,038
Net change in loans 13,257 (13,423)
Purchases of bank premises and equipment (1,456) (306)
Net cash from investing activities 13,130 19,093
Cash Flows From Financing Activities:
Net change in deposits 23,196 (43,002)
Net change in securities sold under agreements to
repurchase, federal funds purchased
and other borrowings 749 11,132
Advances from Federal Home Loan Bank - 45,000
Payments on Federal Home Loan Bank advances (10,372) (32,463)
Payment on note payable (500) -
Proceeds from issuance of common stock 32 33
Purchase of common stock (378) -
Dividends paid (1,548) (1,336)
Net cash from financing activities 11,179 (20,636)
Net change in cash and cash equivalents 29,140 766
Cash and cash equivalents at beginning of period 19,011 14,164
Cash and cash equivalents at end of period $ 48,151 $ 14,930
See Accompanying Notes
KENTUCKY BANCSHARES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
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, 2006.
New accounting pronouncements -
In September 2006, the FASB issued SFAS No. 157, "Fair Value Measurements".
This Statement provides clarification of the definition of fair value,
methods used to measure fair value, and additional disclosures about fair
value measurements. This Standard is applicable in circumstances in which
other Standards require or permit assets or liabilities to be measured at
fair value. Therefore, this Standard does not require any new fair value
measurements. This Standard is effective for financial statements issued
for fiscal years beginning after November 15, 2007, and interim periods
within those fiscal years. The Company does not expect the adoption of
this Statement on January 1, 2008 to have a material impact on its results
of operations and consolidated financial condition.
On February 15, 2007, the FASB issued SFAS No. 159, "The Fair Value Option
for Financial Assets and Financial Liabilities". SFAS No. 159 allows
companies to record certain financial assets and financial liabilities at
full fair value if they so choose. SFAS No. 159 was issued to mitigate
volatility in reported earnings caused by an accounting model utilizing
multiple measurement attributes. The adoption of the fair value option is
recorded as a cumulative-effect adjustment to the opening balance of
retained earnings. Upon adoption, the difference between the carrying
amount and the fair value of the items chosen is included in the
cumulative-effect adjustment. Subsequent changes in fair value are recorded
through the income statement. SFAS No. 159 is effective as of the beginning
of the first fiscal year after November 15, 2007, which is January 1, 2008
for the Company. The Company does not expect the adoption of this
Statement to have a material impact on its results of operations and
consolidated financial condition.
The Company adopted FASB Interpretation 48, Accounting for Uncertainty in
Income Taxes ("FIN 48"), as of January 1, 2007. A tax position is
recognized as a benefit only if it is "more likely than not" that the tax
position would be sustained in a tax examination, with a tax examination
being presumed to occur. The amount recognized is the largest amount of
tax benefit that is greater than 50% likely of being realized on
examination. For tax positions not meeting the "more likely than not"
test, no tax benefit is recorded. The adoption had no affect on the
Company's financial statements, and the Company had no unrecognized tax
benefits at January 1, 2007 or June 30, 2007.
The Company and its subsidiaries are subject to U.S. federal income tax.
The Company is no longer subject to examination by taxing authorities for
years before 2002. The Company does not expect the total amount of
unrecognized tax benefits to significantly increase in the next twelve
months.
The Company recognizes interest related to income tax matters as interest
expense and penalties related to income tax matters as other expense. The
Company did not have any amounts accrued for interest and penalties at
January 1, 2007.
2. INVESTMENT SECURITIES
INVESTMENT SECURITIES
Period-end securities are as follows:
(in thousands)
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
Available for Sale
June 30, 2007
U.S. government agencies $ 19,060 $ 69 $ (57) $ 19,072
States and political subdivisions 54,411 279 (1,389) 53,301
Mortgage-backed 53,590 - (1,719) 51,871
Equity securities 270 13 - 283
Other 25 - - 25
Total 127,356 361 (3,165) 124,552
December 31, 2006
U.S. government agencies 31,524 93 (125) 31,492
States and political subdivisions 43,609 703 (182) 44,130
Mortgage-backed 53,200 - (1,218) 51,982
Equity securities 270 17 - 287
Total 128,603 813 (1,525) 127,891
3. LOANS
Loans at period-end are as follows:
(in thousands)
6/30/2007 12/31/2006
Commercial $ 21,360 $ 29,335
Real estate construction 31,218 29,034
Real estate mortgage 283,881 290,068
Agricultural 77,891 79,627
Consumer 16,188 16,086
Total 430,538 444,150
4. EARNINGS PER SHARE
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
2007 2006
(in thousands, except per share information)
Basic Earnings Per Share
Net Income $3,480 $3,009
Weighted average common shares outstanding 2,860 2,668
Basic earnings per share $ 1.22 $ 1.13
Diluted Earnings Per Share
Net Income $3,480 $3,009
Weighted average common shares outstanding 2,860 2,668
Add dilutive effects of assumed exercise
of stock options 10 12
Weighted average common and dilutive
potential common shares outstanding 2,870 2,680
Diluted earnings per share $ 1.21 $ 1.12
Three Months Ended
June 30
2007 2006
(in thousands, except per share information)
Basic Earnings Per Share
Net Income $1,918 $1,716
Weighted average common shares outstanding 2,858 2,665
Basic earnings per share $ 0.67 $ 0.65
Diluted Earnings Per Share
Net Income $1,918 $1,716
Weighted average common shares outstanding 2,858 2,665
Add dilutive effects of assumed exercise
of stock options 10 12
Weighted average common and dilutive
potential common shares outstanding 2,868 2,677
Diluted earnings per share $ 0.67 $ 0.64
Stock options for 10,035 shares of common stock for the six months and three
months ended June 30, 2007, and for 32,400 shares of common stock for the six
and three months ended June 30, 2006 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 2007, 5,095 shares were granted under the plan and in
May 2007, 510 shares were granted under the plan.
The following table summarizes stock option activity:
Six Months Ended
June 30, 2007
Weighted Average
Options Exercise Price
Outstanding, beginning of year 69,914 $ 26.54
Granted 800 31.00
Expired (880) 31.59
Exercised (1,440) 20.17
Outstanding, end of period 68,394 26.66
Options exercisable at period end 51,504 25.37
The following details stock options outstanding:
June 30, 2007 December 31, 2006
Stock options vested and currently exercisable:
Number 51,504 44,072
Weighted average exercise price $ 25.37 $ 24.35
Aggregate intrinsic value $ 266,286 $ 308,190
Weighted average remaining
contractual life 56.2 months 52.3 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 $50 thousand in stock
compensation expense during the six months ended June 30, 2007 to salaries
and employee benefits.
The weighted-average assumptions for options granted during the year and
the resulting estimated weighted average fair values per share used in
computing 2007 and 2006 recognized compensation expense as follows.
2007 2006
Weighted-average fair value of options
granted during the year $4.22 $3.14
Risk-free interest rate 4.51% 4.59%
Expected option life 8 years 8 years
Expected stock price volatility 12.69% 7.99%
Expected dividend yield 3.48% 3.39%
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
Dividends per share paid for the quarter ended June 30, 2007 were $0.27
compared to $0.25 for June 30, 2006. This is the same rate of dividend
paid for the first quarters of the respective years.
7. RETIREMENT PLAN
Components of Net Periodic Benefit Cost
Six months ended June 30
(in thousands)
Pension Benefits
2007 2006
Service cost $ 227 $ 236
Interest cost 202 182
Expected return on plan assets (217) (199)
(Gain) loss amortization 17 21
Net Periodic Benefit Cost $ 229 $ 240
Three months ended June 30
(in thousands)
Pension Benefits
2007 2006
Service cost $ 113 $ 118
Interest cost 101 91
Expected return on plan assets (108) (100)
(Gain) loss amortization 9 11
Net Periodic Benefit Cost $ 115 $ 120
Employer Contributions
The Company contributed $503 thousand as its 2007 annual contribution to
the Pension Plan in July 2007.
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); 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 update or revise
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 $3.5 million, or $1.22 basic
earnings per share and $1.21 diluted earnings per share for the first six
months ended June 30, 2007 compared to $3.0 million, or $1.13 basic earnings
per share and $1.12 diluted earnings per share for the six month period ending
June 30, 2006. The first six months earnings reflects an increase of 15.6%
compared to the same time period in 2006. The earnings for the three months
ended June 30, 2007 were $1.9 million, or $0.67 basic and diluted earnings per
share for the three month period ending June 30, 2007 compared to $1.7
million, or $0.65 basic earnings per share and $0.64 diluted earnings per
share for the three month period ending June 30, 2006. This three months
period earnings reflects an increase of 11.8% compared to the same time period
in 2006. The issuance of 198,836 shares of common stock, in connection with
our merger with Peoples Bancorp, Inc., had a slightly dilutive effect on
earnings per share.
Return on average assets was 1.08% for the six months ended June 30, 2007 and
1.07% for the six month period ended June 30, 2006. Return on average equity
was 12.3% for the six month period ended June 30, 2007 and 12.8% for the same
period in 2006. Return on average assets was 1.20% for the three months ended
June 30, 2007 and 1.23% for the three month period June 30, 2006. Return on
average equity was 13.6% for the three months ended June 30, 2007 and 14.6%
for the same time period in 2006.
Loans decreased $13.6 million from $444.1 million on December 31, 2006 to
$430.5 million on June 30, 2007. Increases in real estate construction and
consumer loans were offset by a decrease in commercial, real estate mortgage
and agricultural loans. Management attributes the decline in loans to the
slow down in the real estate economy and to competitive pressures.
Total deposits increased from $468.8 million on December 31, 2006 to $492.0
million on June 30, 2007, an increase of $23.2 million, primarily the result
of an increase in certificates of deposit, reported in time deposits, $100,000
or greater and non-interest bearing deposits.
Net Interest Income
Net interest income was $10.1 million for the six months ended June 30, 2007
compared to $9.0 million for the six months ended June 30, 2006, an increase
of 12.6%. The interest spread was 3.31% for the first six months of 2007
compared to 3.30% for the same period in 2006, an increase of 1 basis point.
Net interest income was $5.1 million for the three months ended June 30, 2007
compared to $4.5 million for the three months ended June 30, 2006, an increase
of 14.1%. The interest spread 3.36% for the three month period ended June 30,
2007 compared to 3.34% for the same period in 2006, an increase of 2 basis
points. Net interest margins have remained virtually unchanged in 2007
compared to 2006.
For the first six months, the yield on assets increased from 6.18% in 2006 to
6.68% in 2007. The cost of liabilities increased from 2.88% in 2006 to 3.37%
in 2007. Year to date average loans are up $59.4 million, or 15.6% from June
30, 2006 to June 30, 2007. Approximately $51 million in loans were acquired
with the Peoples Bancorp, Inc. (Peoples) merger in July 2006. Loan interest
income has increased $2.9 million for the first six months of 2007 compared to
the first six months of 2006. Year to date average deposits increased from
June 30, 2006 to June 30, 2007, up $72.5 million, or 17.5%. About $72 million
in deposits were acquired in the Peoples merger in July 2006. The slight
increase, excluding the Peoples merger, is a result of slower deposit growth,
resulting from the loss of a large certificate of deposit customer and public
funds placed by competitive bid. Deposit interest expense has increased $2.4
million for the first six months of 2007 compared to the same period in 2006.
As of June 30, 2007, the Company has over $23 million in public fund bid
deposits that it anticipates losing during the third quarter. This decrease
in deposits will be offset by a decrease in federal funds sold. Because of
the higher rate paid on these deposits, no negative impact on net interest
income is expected.
Non-Interest Income
Non-interest income increased $749 thousand for the six months ended June 30,
2007 compared to the same period in 2006 to $3.9 million, due primarily to an
increase in overdraft income of $456 thousand (primarily from the deposit
relationships acquired with the Peoples merger in July 2006). The $444
thousand increase in non-interest income for the three months ended June 30,
2007 compared to the same time period in 2006 is due primarily to an increase
in service charges of $226 thousand.
Gain on sale of mortgage loans increased from $104 thousand in the first six
months of 2006 to $210 thousand during the first six months of 2007. The
increase was $105 thousand for the three month period June 30, 2007 compared
to the same time period in 2006. A selected group of loans sold servicing
released account for most of the increase. The volume of mortgage loan
originations and sales is generally inverse to rate changes. A change in the
mortgage loan rate environment can have a significant impact on the related
gain on sale of mortgage loans.
Non-Interest Expense
Total non-interest expenses increased $1.2 million for the six month period
ended June 30, 2007 compared to the same period in 2006. For the three month
period ended June 30, 2007 total non-interest expense increased $729 thousand.
For the comparable six month periods, salaries and benefits increased $933
thousand, an increase of 21.0%. Salaries and incentives represented $700
thousand and employee benefits represented $233 thousand of the increase in
salaries and employee benefits expense during these comparable periods.
Salaries and benefits increased $417 thousand for the three month period ended
June 30, 2007 compared to the same time period in 2006. These increases are
primarily attributable to the Peoples merger completed in July 2006.
Occupancy expenses increased $166 thousand to $1.2 million for the first six
months of 2007 compared to the same time period in 2006. Occupancy expenses
increased $93 thousand for the three month period ended June 30, 2007 compared
to the same time period in 2006. The increase in 2007 is mainly attributable
to two additional facilities acquired in the Peoples merger in July 2006.
With the upcoming opening of additional facilities in Paris, Morehead and
Nicholasville, occupancy expense is expected to increase starting in the
fourth quarter of 2007.
The increases in amortization, advertising and marketing, and taxes are also
primarily attributable to the Peoples merger completed in July 2006.
Other expenses decreased $36 thousand for the six months ended June 30, 2007
compared to the same time period in 2006. For the three month period ended
June 30, 2007 other expenses increased $134 thousand compared to the three
month period ended June 30, 2006. The year to date decrease is mainly a
result of a one time credit of $80 thousand received in the first quarter of
2007 for debit card expenses. In addition, one-time costs (approximately $41
thousand in the first six months of 2006), related to the Peoples Bank merger,
incurred in 2006 inflated 2006 expenses.
In August 2007, the Company will outsource its account processing to 0Fiserv,
Inc. Alternative uses for the mainframe computer are being investigated, but
currently there are not any definite plans. The Company does not expect this
to have a material impact on its results of operations and consolidated
financial condition.
Income Taxes
The effective tax rate for the six months ended June 30, 2007 was 27% compared
to 29% in 2006. The effective tax rates for the three months ended June 30,
2007 and June 30, 2006 were 28%. These rates are less than the statutory
rate as a result of the tax-free securities and loans held by the Company.
Stock Repurchase Program
On October 25, 2000, the Company announced that its Board of Directors
approved a stock repurchase program 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. Shares will be purchased from time to time in the open market
depending on market prices and other considerations. Through June 30, 2007,
130,823 shares have been purchased under the program. The most recent share
repurchase occurred on August 1, 2007. 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 $48.2 million as of June 30, 2007 compared to
$19.0 million at December 31, 2006. The increase in cash and cash equivalents
is mainly attributable to an increase in federal funds sold resulting
primarily from a decrease in loan demand and an increase in deposits. These
excess federal funds sold are held in anticipation of the withdrawal during
the third quarter of 2007 of public funds placed by competitive bid. In
addition to cash and cash equivalents, the securities portfolio provides an
important source of liquidity. Total securities available for sale totaled
$124.6 million at June 30, 2007. 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, 2007, we have sufficient collateral to borrow an
additional $36 million from the FHLB. In addition, as of June 30, 2007, 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, 2007, the Company's non-performing loans totaled $5.2 million
or 1.20% of loans compared to $2.6 million or 0.59% of loans at December 31,
2006. (See table below) The Company experienced an increase of $2.5 million
in non-accrual loans secured by various real estate loans. As of June 30,
2007, non-accruals loans include $3.2 million in loans secured by 1-4 property
and $1.0 million in real estate construction. The Company believes these
increases are attributable to the general softening of the real estate market.
Real estate loans composed 99% of the non-performing loans as of June 30, 2007
and 91% as of December 31, 2006. Forgone interest income on the non-accrual
loans for both 2007 and 2006 is immaterial.
Nonperforming Assets
6/30/07 12/31/06
(in thousands)
Non-accrual Loans $ 4,622 $ 2,379
Accruing Loans which are
Contractually past due
90 days or more 540 253
Total Nonperforming and Restructured 5,162 2,632
Other Real Estate 299 411
Total Nonperforming and Restructured
Loans and Other Real Estate $ 5,461 $ 3,043
Nonperforming and Restructured Loans
as a Percentage of Loans 1.20% 0.59%
Nonperforming and Restructured Loans
and Other Real Estate as a Percentage
of Total Assets 0.85% 0.48%
Allowance as a Percentage of
Period-end Loans 1.15% 1.12%
Allowance as a Percentage of
Non-performing and Restructured Loans 96% 164%
Provision for Loan Losses
The loan loss provision for the first six months was $320 thousand for 2007
and $240 thousand for the same period in 2006. The loan loss provision for
the three months ended June 30, 2007 was $170 thousand and $108 thousand for
the same period in 2006. The current level of nonperforming loans has caused
management to increase the 2007 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, 2007 were $355 thousand
compared to $142 thousand for the same period in 2006. Net charge-offs for
the three month period ended June 30, 2007 were $257 thousand compared to $93
thousand for the same period in 2006. 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)
2007 2006
Balance at Beginning of Period $ 4,991 $ 4,310
Amounts Charged-off:
Commercial 127 15
Real Estate Mortgage 91 54
Agricultural - 3
Consumer 482 524
Total Charged-off Loans 700 596
Recoveries on Amounts
Previously Charged-off:
Commercial 1 1
Real Estate Construction 10 -
Real Estate Mortgage 2 -
Agricultural 29 21
Consumer 303 432
Total Recoveries 345 454
Net Charge-offs 355 142
Provision for Loan Losses 320 240
Balance at End of Period 4,956 4,408
Loans
Average 439,559 380,172
At June 30 430,538 384,193
As a Percentage of Average Loans:
Net Charge-offs 0.08% 0.04%
Provision for Loan Losses 0.07% 0.06%
Allowance as a Multiple of
Net Charge-offs 7.0 15.5
Loan Losses
Quarter Ended June 30
(in thousands)
2007 2006
Balance at Beginning of Period $ 5,043 $ 4,393
Amounts Charged-off:
Commercial 127 9
Real Estate Mortgage 35 -
Agricultural - 3
Consumer 261 323
Total Charged-off Loans 423 335
Recoveries on Amounts
Previously Charged-off:
Real Estate Construction 5 -
Agricultural 14 -
Consumer 147 242
Total Recoveries 166 242
Net Charge-offs 257 93
Provision for Loan Losses 170 108
Balance at End of Period 4,956 4,408
Loans
Average 436,937 398,315
At June 30 430,538 384,193
As a Percentage of Average Loans:
Net Charge-offs 0.06% 0.02%
Provision for Loan Losses 0.04% 0.03%
Allowance as a Multiple of
Net Charge-offs 4.8 11.8
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 tools used by management are
interest rate shock and economic value of equity (EVE) simulations. 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, 2007 the projected percentage changes
are within the Board approved limits. This period's volatility is similar to
the same period a year ago. The projected net interest income report
summarizing the Company's interest rate sensitivity as of June 30, 2007 is as
follows:
(dollars in thousands)
PROJECTED NET INTEREST INCOME
Level
Change in basis points: - 300 - 100 Rates + 100 + 300
Year One (7/07 - 6/08)
Net interest income 22,916 23,368 23,831 24,181 24,563
Net interest income dollar change (915) (463) N/A 350 732
Net interest income percentage change -3.8% -1.9% N/A 1.5% 3.1%
Board approved limit >-10.0% >-4.0% N/A >-4.0% >-10.0%
The projected net interest income report summarizing the Company's interest
rate sensitivity as of June 30, 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)
Net interest income 16,592 16,768 17,142 17,430 17,712
Net interest income dollar change (550) (374) N/A 288 570
Net interest income percentage change -3.2% -2.2% N/A 1.7% 3.3%
Board approved limit >-18.0% >-6.0% N/A >-4.0% >-10.0%
These projected changes in net interest income as of June 30, 2007 are
slightly different when compared to the projected changes in net interest
income as of June 30, 2006 for the 100 and 300 basis point changes.
Projections from June 30, 2007, year one reflected a decline in net interest
income of 1.9% with a 100 basis point decline compared to the 2.2% decline in
2006. The 100 basis point increase in rates reflected a 1.5% increase in net
interest income in 2007 compared to 1.7% in 2006.
EVE applies discounting techniques to future cash flows to determine the
present value of assets, liabilities, and therefore equity. Based on applying
these techniques to the June 30, 2007 balance sheet, a 300 basis point
increase in rates results in a 28% decline in EVE. A 300 basis point decrease
in rates results in a 14% increase in EVE. These are within the Board
approved limits.
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, 2006 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
4/1/07 -
4/30/07 588 $29.71 588 81,202 shares
5/1/07 -
5/31/07 6,804 29.56 6,804 74,398 shares
6/1/07 -
6/30/07 5,221 30.44 5,221 69,177 shares
Total 12,613 12,613 69,177 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. Shares will be purchased from time to time in the
open market depending on market prices and other considerations. Through June
30, 2007, 130,823 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 _____8/14/07________ __/s/Louis Prichard______________
Louis Prichard, President and C.E.O.
Date _____8/14/07________ __/s/Gregory J. Dawson___________
Gregory J. Dawson, Chief Financial Officer
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