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, 2008
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, a non-accelerated filer, or a smaller reporting company.
See definitions of "large accelerated filer," "accelerated filer" and "smaller
reporting company" in Rule 12b-2 of the Exchange Act.
Large accelerated filer ____
Accelerated filer ____
Non-accelerated filer X (Do not check if a smaller reporting company)
Smaller reporting company ____
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 June 30, 2008: 2,757,965.
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 21
Signatures 22
Exhibits
31.1 Certifications of Chief Executive Officer pursuant
to Section 302 of the Sarbanes-Oxley Act of 2002. 23
31.2 Certifications of Chief Financial Officer pursuant
to Section 302 of the Sarbanes-Oxley Act of 2002. 25
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. 27
Item 1 - Financial Statements
KENTUCKY BANCSHARES, INC.
CONSOLIDATED BALANCE SHEETS (unaudited)
(thousands) 6/30/2008 12/31/2007
Assets
Cash and due from banks $ 15,226 $ 15,446
Federal funds sold 98 10,361
Cash and cash equivalents 15,324 25,807
Securities available for sale 160,963 147,750
Mortgage loans held for sale 80 -
Loans 418,820 417,388
Allowance for loan losses (5,394) (4,879)
Net loans 413,426 412,509
Federal Home Loan Bank stock 6,641 6,468
Bank premises and equipment, net 17,146 16,323
Interest receivable 4,846 5,220
Goodwill 13,117 13,117
Other intangible assets 1,655 1,787
Mortgage servicing rights 730 697
Other assets 2,577 1,261
Total assets $ 636,505 $ 630,939
Liabilities and Stockholders' Equity
Deposits
Non-interest bearing $ 93,376 $ 88,521
Time deposits, $100,000 and over 72,365 78,060
Other interest bearing 289,458 319,424
Total deposits 455,199 486,005
Repurchase agreements and other borrowings 14,060 6,735
Federal Funds Purchased 10,853 -
Federal Home Loan Bank advances 87,016 63,993
Subordinated debentures 7,217 7,217
Interest payable 3,165 4,984
Other liabilities 2,894 3,161
Total liabilities 580,404 572,095
Stockholders' equity
Common stock 12,104 12,517
Additional paid-in capital 223 156
Retained earnings 45,440 46,759
Accumulated other comprehensive income (loss) (1,666) (588)
Total stockholders' equity 56,101 58,844
Total liabilities & stockholders' equity $ 636,505 $ 630,939
See Accompanying Notes
KENTUCKY BANCSHARES, INC.
CONSOLIDATED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME (unaudited)
(thousands, except per share amounts) Six Months Ending
6/30/2008 6/30/2007
INTEREST INCOME:
Loans, including fees $ 14,083 $ 16,094
Securities available for sale 3,589 3,184
Other 256 562
Total interest income 17,928 19,840
INTEREST EXPENSE:
Deposits 6,202 7,710
Other 1,793 2,011
Total interest expense 7,995 9,721
Net interest income 9,933 10,119
Loan loss provision 900 320
Net interest income after provision 9,033 9,799
NON-INTEREST INCOME:
Service charges 2,560 2,773
Loan service fee income 45 32
Trust department income 270 274
Securities available for sale gains (losses), net 15 3
Gain on sale of mortgage loans 278 210
Other 867 645
Total other income 4,035 3,937
NON-INTEREST EXPENSE:
Salaries and employee benefits 5,230 5,382
Occupancy expenses 1,378 1,243
Amortization 133 136
Advertising and marketing 253 270
Taxes other than payroll, property and income 358 342
Other 2,264 1,575
Total other expenses 9,616 8,948
Income before taxes 3,452 4,788
Income taxes 773 1,308
Net income $ 2,679 $ 3,480
Other Comprehensive Income, net of tax:
Change in Unrealized Gains on Securities (851) (1,381)
Comprehensive Income $ 1,828 $ 2,099
Earnings per share
Basic $ 0.95 $ 1.22
Diluted 0.95 1.21
See Accompanying Notes
KENTUCKY BANCSHARES, INC.
CONSOLIDATED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME (unaudited)
(thousands, except per share amounts) Three Months Ending
6/30/2008 6/30/2007
INTEREST INCOME:
Loans, including fees $ 6,775 $ 8,137
Securities available for sale 1,855 1,612
Other 45 285
Total interest income 8,675 10,034
INTEREST EXPENSE:
Deposits 2,696 3,916
Other 942 971
Total interest expense 3,638 4,887
Net interest income 5,037 5,147
Loan loss provision 500 170
Net interest income after provision 4,537 4,977
NON-INTEREST INCOME:
Service charges 1,371 1,470
Loan service fee income 21 16
Trust department income 150 125
Securities available for sale gains (losses), net 8 4
Gain on sale of mortgage loans 117 144
Other 393 333
Total other income 2,060 2,092
NON-INTEREST EXPENSE:
Salaries and employee benefits 2,581 2,606
Occupancy expenses 644 610
Amortization 66 68
Advertising and marketing 113 135
Taxes other than payroll, property and income 179 171
Other 1,071 811
Total other expenses 4,654 4,401
Income before taxes 1,943 2,668
Income taxes 457 750
Net income $ 1,486 $ 1,918
Other Comprehensive Income, net of tax:
Change in Unrealized Gains on Securities (1,342) (1,339)
Comprehensive Income $ 144 $ 579
Earnings per share
Basic $ 0.53 $ 0.67
Diluted 0.53 0.67
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
Balances, December 31, 2007 2,849,056 $ 12,517 $ 155 $ 46,759 $ (588) $ 58,843
Common stock issued, including tax
benefit, net(including stock grants
of 4,025 shares and employee gifts
of 91 shares) 10,821 15 - - - 15
Stock based compensation expense - - 68 - - 68
Common stock purchased and retired (101,912) (428) - (2,414) - (2,842)
Net change in unrealized gain (loss)
on securities available for sale,
net of tax - - - - (850) (850)
Net change in SFAS No. 158, net of tax - - - - (228) (228)
Net income - - - 2,679 - 2,679
Dividends declared - $0.56 per share - - - (1,584) - (1,584)
Balances, June 30, 2008 2,757,965 $ 12,104 $ 223 $ 45,440 $ (1,666) $ 56,101
See Accompanying Notes
KENTUCKY BANCSHARES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS (unaudited)
(thousands) Six Months Ending
6/30/2008 6/30/2007
Cash Flows From Operating Activities
Net Income $ 2,679 $ 3,480
Adjustments to reconcile net income to
net cash provided by operating activities:
Depreciation and amortization 797 736
Securities amortization (accretion), net (165) (78)
Noncash compensation expense 68 50
Provision for loan losses 900 320
Securities (gains) losses, net (15) (3)
Originations of loans held for sale (13,503) (5,936)
Proceeds from sale of loans 13,701 6,017
Federal Home Loan Bank stock dividends (173) -
Losses (gains) on sale of bank premises and equipment (5) -
Gain on sale of mortgage loans (278) (210)
Changes in:
Interest receivable 374 535
Other assets (1,449) (320)
Interest payable (1,819) 87
Other liabilities (57) 153
Net cash from operating activities 1,055 4,831
Cash Flows From Investing Activities
Purchases of securities available for sale (63,690) (39,763)
Proceeds from sales of securities available for sale - 19,324
Proceeds from principal payments, maturities and
calls of securities available for sale 49,369 21,768
Net change in loans (1,817) 13,257
Purchases of bank premises and equipment (1,402) (1,456)
Proceeds from the sale of bank premises and equipment 5 -
Net cash from investing activities (17,535) 13,130
Cash Flows From Financing Activities:
Net change in deposits (30,806) 23,196
Net change in securities sold under agreements to
repurchase, federal funds purchased and other
borrowings 15,478 749
Advances from Federal Home Loan Bank 35,000 -
Payments on Federal Home Loan Bank advances (11,964) (10,372)
Proceeds from note payable 5,000 -
Payment on note payable (2,300) (500)
Proceeds from issuance of common stock 15 32
Purchase of common stock (2,842) (378)
Dividends paid (1,584) (1,548)
Net cash from financing activities 5,997 11,179
Net change in cash and cash equivalents (10,483) 29,140
Cash and cash equivalents at beginning of period 25,807 19,011
Cash and cash equivalents at end of period 15,324 48,151
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, 2007.
New accounting pronouncements -
In September 2006, the FASB issued SFAS No. 157, Fair Value Measurements.
This Statement defines fair value, establishes a framework for measuring
fair value and expands disclosures about fair value measurements. This
Statement establishes a fair value hierarchy about the assumptions used to
measure fair value and clarifies assumptions about risk and the effect of a
restriction on the sale or use of an asset. The Statement is effective for
fiscal years beginning after November 15, 2007. The impact of adoption on
January 1, 2008 was not material.
In February 2007, the FASB issued SFAS No. 159, The Fair Value Option for
Financial Assets and Financial Liabilities. The Statement provides
companies with an option to report selected financial assets and
liabilities at fair value and establishes presentation and disclosure
requirements designed to facilitate comparisons between companies that
choose different measurement attributes for similar types of assets and
liabilities. The new Statement is effective for the Company on January 1,
2008. The Company did not elect the fair value option for any financial
assets or financial liabilities as of January 1, 2008.
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 effect on the
Company's financial statements, and the Company had no unrecognized tax
benefits at December 31, 2007 or June 30, 2008.
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
December 31, 2007 or June 30, 2008.
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, 2008
U.S. government agencies 18,758 400 (140) 19,018
States and political subdivisions 65,677 636 (1,284) 65,029
Mortgage-backed 77,404 239 (1,013) 76,630
Equity securities 270 16 - 286
Total 162,109 1,291 (2,437) 160,963
December 31, 2007
U.S. government agencies 35,535 496 (10) 36,021
States and political subdivisions 59,332 691 (662) 59,361
Mortgage-backed 52,470 218 (610) 52,078
Equity securities 270 20 - 290
Total 147,607 1,425 (1,282) 147,750
3. LOANS
Loans at period-end are as follows:
(in thousands)
6/30/2008 12/31/2007
Commercial $ 21,847 $ 22,924
Real estate construction 21,850 26,172
Real estate mortgage 274,074 270,494
Agricultural 82,976 80,774
Consumer 18,073 17,024
Total 418,820 417,388
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
2008 2007
(in thousands, except per share information)
Basic Earnings Per Share
Net Income $2,679 $3,480
Weighted average common shares outstanding 2,819 2,860
Basic earnings per share $ 0.95 $ 1.22
Diluted Earnings Per Share
Net Income $2,679 $3,480
Weighted average common shares outstanding 2,819 2,860
Add dilutive effects of assumed exercise
of stock options 4 10
Weighted average common and dilutive
potential common shares outstanding 2,823 2,870
Diluted earnings per share $ 0.95 $ 1.21
Three Months Ended
June 30
2008 2007
(in thousands, except per share information)
Basic Earnings Per Share
Net Income $1,486 $1,918
Weighted average common shares outstanding 2,797 2,858
Basic earnings per share $ 0.53 $ 0.67
Diluted Earnings Per Share
Net Income $1,486 $1,918
Weighted average common shares outstanding 2,797 2,858
Add dilutive effects of assumed exercise
of stock options 3 10
Weighted average common and dilutive
potential common shares outstanding 2,800 2,868
Diluted earnings per share $ 0.53 $ 0.67
Stock options for 31,900 shares of common stock for the six and three months
ended June 30, 2008, and for 10,035 shares of common stock for the three
months ended June 30, 2007 were excluded from diluted earnings per share
because their impact was antidilutive.
5. STOCK COMPENSATION
The Company has two share based compensation plans as described below.
Stock Option Plan
The Company grants certain officers and key employees stock option awards
which vest and become fully exercisable at the end of five years and
provides for issue of up to 220,000 options. The Company also grants
certain directors stock option awards which vest and become fully
exercisable immediately and provides for issue of up to 20,000 options. 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 fair value of each option award is estimated on the date of grant using
a closed form option valuation (Black-Scholes) model that uses the
assumptions noted in the table below. Expected volatilities are based on
historical volatilities of the Company's common stock. The Company uses
historical data to estimate option exercise and post-vesting termination
behavior. The expected term of options granted is based on historical data
and represents the period of time that options granted are expected to be
outstanding, which takes into account that the options are not
transferable. The risk-free interest rate for the expected term of the
option is based on the U.S. Treasury yield curve in effect at the time of
the grant.
The fair value of options granted was determined using the following
weighted-average assumptions as of grant date.
2008 2007
Weighted-average fair value of options
granted during the year $2.38 $4.22
Risk-free interest rate 2.96% 4.51%
Expected option life 8 years 8 years
Expected stock price volatility 11.05% 12.69%
Expected dividend yield 3.61% 3.48%
Summary of activity in the stock option plan for the six months ended June
30, 2008 follows:
Weighted
Weighted Average
Average Remaining Aggregate
Exercise Contractual Intrinsic
Shares Price Term Value
Outstanding, beginning of year 58,774 $27.80
Granted 800 31.00
Forfeited or expired (2,020) 28.40
Exercised (6,705) 22.12
Outstanding, end of period 50,849 28.58 60.7 months $64,532
Vested and expected to vest 50,849 28.58 60.7 months 64,532
Options exercisable at period end 42,159 28.06 57.5 months 64,532
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 $68 thousand in stock
compensation expense during the six months ended June 30, 2008 to salaries
and employee benefits.
Stock Grant Plan
On February 15, 2005, the Company's Board of Directors adopted a restricted
stock grant plan. Total shares issuable under the plan are 50,000. A
summary of changes in the Company's nonvested shares for the year follows:
Weighted-Average
Grant-Date
Nonvested Shares Shares Fair Value
Nonvested at December 31, 2007 8,037 $ 243,494
Granted 4,025 124,755
Vested (1,744) (52,691)
Forfeited - -
Nonvested at June 30, 2008 10,318 $ 315,558
6. DIVIDENDS
Dividends per share paid for the quarter ended June 30, 2008 were $0.28
compared to $0.27 for June 30, 2007. This is the same rate of dividend
paid for the first quarter of the respective years.
7. RETIREMENT PLAN
Components of Net Periodic Benefit Cost
Six months ended June 30
(in thousands)
Pension Benefits
2008 2007
Service cost $ 254 $ 227
Interest cost 231 202
Expected return on plan assets (241) (217)
(Gain) loss amortization 14 17
Net Periodic Benefit Cost $ 258 $ 229
Three months ended June 30
(in thousands)
Pension Benefits
2008 2007
Service cost $ 132 $ 113
Interest cost 119 101
Expected return on plan assets (120) (108)
(Gain) loss amortization 10 9
Net Periodic Benefit Cost $ 141 $ 115
Employer Contributions
The estimates are based on assuming the Company's 2008 annual contribution
to the Pension Plan is to be zero. No contributions to the Pension Plan
were made for the quarter ended June 30, 2008, and the Company anticipates
making its annual contribution, if any, in the third quarter of 2008.
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 $2.7 million, or $.95 basic
earnings and diluted earnings per share for the first six months ending June
30, 2008 compared to $3.5 million, or $1.22 basic earnings per share and $1.21
diluted earnings per share for the six month period ending June 30, 2007. The
first six months earnings reflects a decrease of 23.0% compared to the same
time period in 2007, due primarily to an increase in the loan loss provision
of $580 thousand and an increase in other expenses of $668 thousand. These
increases in expenses were somewhat offset by a reduction in income tax
expense of $535 thousand. The earnings for the three months ended June 30,
2008 were $1.5 million, or $.53 basic and diluted earnings per share for the
three month period ending June 30, 2008 compared to $1.9 million, or $.67
basic and diluted earnings per share for the three month period ending June
30, 2007. This three months period earnings reflects a decrease of 22.5%
compared to the same time period in 2007.
Return on average assets was 0.85% for the six months ended June 30, 2008 and
1.08% for the six month period ended June 30, 2007. Return on average assets
was .94% for the three months ended June 30, 2008 and 1.20% for the three
month period ended June 30, 2007. Return on average equity was 9.1% for the
six month period ended June 30, 2008 and 12.3% for the same period in 2007.
Return on average equity was 10.1% for the three months ended June 30, 2008
and 13.6% for the same time period in 2007.
Loans increased $1.4 million from $417.4 million on December 31, 2007 to
$418.8 million on June 30, 2008. Decreases in commercial & real estate
construction loans were offset by an increase in real estate mortgage,
agricultural & consumer loans.
Total deposits decreased from $486.0 million on December 31, 2007 to $455.2
million on June 30, 2008, a decrease of $30.8 million. This decrease is
primarily the result of a decrease in interest bearing deposit accounts less
than $100 thousand. Management attributes the decrease mainly to increased
competition for deposits. As a result of this, management has utilized other
lower costing funding sources, such as Federal Home Loan Bank advances.
Net Interest Income
Net interest income was $9.9 million for the six months ended June 30, 2008
compared to $10.1 million for the six months ended June 30, 2007, a decrease
of 1.8%. The interest spread was 3.32% for the first six months of 2008
comparable to 3.31% for the same period in 2007, an increase of 1 basis point.
Net interest income was $5.0 million for the three month period ending June
30, 2008 compared to $5.1 million for the three month period ending June 30,
2007, a decrease of 2.1%. The interest spread was 3.38% for the three month
period ending June 30, 2008 compared to 3.36% for the three month period in
2007, an increase of 2 basis points. Net interest margins have thus far
remained steady in 2008. The net interest spread during the second quarter of
2008 was lowered, primarily due to interest income that was placed into non-
accrual status.
For the first six months, the yield on assets decreased from 6.68% in 2007 to
6.15% in 2008. The cost of liabilities decreased from 3.37% in 2007 to 2.83%
in 2008. Year to date average loans are down $27.0 million, or 6.1% from June
30, 2007 to June 30, 2008. Loan interest income has decreased $2.0 million
for the first six months of 2008 compared to the first six months of 2007.
Year to date average deposits decreased from June 30, 2007 to June 30, 2008,
down $6.5 million or 1.3%. The slight decrease is primarily the result of a
decline in interest bearing deposits less than $100 thousand during the second
quarter. The decline in interest bearing deposit accounts was offset slightly
with an increase in non-interest bearing deposits. Deposit interest expense
has decreased $1.5 million for the first six months of 2008 compared to the
same period in 2007.
Non-Interest Income
Non-interest income increased $98 thousand for the six months ended June 30,
2008 compared to the same period in 2007 to $4.0 million, due primarily to a
decrease in service charges of $213 thousand offset by an increase in other
non-interest income of $222 thousand. The decrease in service charges was
primarily from a decrease in overdraft income of $251 thousand for the first
six months of 2008. The other non-interest income increase was primarily due
to an increase in brokerage income of $141 thousand and an increase of $75
thousand in debit card interchange income. The $32 thousand decrease in non-
interest income for the three months ended June 30, 2008 compared to same time
period in 2007 is primarily due to a decrease in service charges of $99
thousand.
Gain on sale of mortgage loans increased from $210 thousand in the first six
months of 2007 to $278 thousand during the first six months of 2008. For the
three months ended June 30, 2008 compared to the same time period in 2007, the
gain on sale of mortgage loans decreased $27 thousand. 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 $668 thousand for the six month period
ended June 30, 2008 compared to the same period in 2007. For the three month
period ended June 30, 2008, total non-interest expense increased $253
thousand.
For the comparable six month periods, salaries and benefits decreased $152
thousand, a decrease of 2.8%. Incentives decreased $309 thousand, due to the
lower level of net income reported by the Company. Salaries & benefits
decreased $25 thousand for the three month period ending June 30, 2008
compared to the same time period in 2007.
Occupancy expenses increased $135 thousand to $1,378 thousand for the first
six months of 2008 compared to the same time period in 2007. Occupancy
expenses increased $34 thousand for the three month period ended June 30, 2008
compared to the same time period in 2007. The increase in year to date 2008
is mainly attributable to two additional facilities; the first being opened in
the fourth quarter of 2007 and the second being opened during the first
quarter of 2008. The relocation of the Nicholasville branch, scheduled to be
complete in the fourth quarter of 2008, is expected to result in a slight
increase in occupancy expense starting in the first quarter of 2009.
Other expenses increased $689 thousand for the first six months ended June
30, 2008 compared to the same time period in 2007. For the three month period
ended June 30, 2008 other expenses increased $260 thousand compared to the
three month period ended June 30, 2007. The year to date increase is mainly a
result of an increase of data processing fees of $351 thousand, an increase in
ATM & debit card processing of $99 thousand, and an increase in legal and
professional fees of $76 thousand. In August 2007, the Company started
outsourcing its account processing to Fiserv, Inc. causing the data processing
to be more in 2008 compared to 2007. The increase in ATM and debit card
processing is a result of more customer usage. Higher legal and professional
fees are mainly a result of outsourcing loan review, loan collection costs and
other corporate matters.
Income Taxes
The effective tax rate for the six months ended June 30, 2008 was 22.4%
compared to 27.3% in 2007. The effective tax rate for the three months ended
June 30, 2008 was 23.5% compared to 28.1% for the three month period ended
June 30, 2007. These rates are less than the statutory rate as a result of
the tax-free securities and loans held by the Company. The rates for 2008 are
lower due to the lower level of income for 2008. Nontaxable interest income
increased $244 thousand for the first six months of 2008 compared to the same
time period in 2007.
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. On May 20, 2008, the Board of Directors approved and authorized the
Company to repurchase 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, 2008 245,921 shares have been purchased
under the program. The most recent share repurchase occurred on July 29,
2008. 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 to meet 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 $15.3 million as of June 30, 2008 compared to
$25.8 million at December 31, 2007. The decrease in cash and cash equivalents
is mainly attributable to a decrease in federal funds sold resulting primarily
from a decrease in deposits and also an increase in the Company's security
portfolio. In addition to cash and cash equivalents, the securities portfolio
provides an important source of liquidity. Securities available for sale
totaled $161.0 million at June 30, 2008. 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. In early July 2008, the Company received deposits from being the
successful bidder on $20 million in public deposits. These deposits will roll
off over the next 12 months. As of June 30, 2008, we have sufficient
collateral to borrow an additional $7 million from the FHLB. In addition, as
of June 30, 2008, over $37 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, 2008, the Company's non-performing loans totaled $10.1 million
or 2.40% of loans compared to $6.5 million or 1.57% of loans at December 31,
2007. (See table below) The Company experienced an increase of $2.5 million
in non-accrual loans from December 31, 2007 to June 30, 2008, mainly due to
some large dollar commercial loans being reclassified as non-accrual during
the second quarter. As of June 30, 2008, non-accrual loans include $2.0
million in loans secured by 1-4 family residential real estate, $2.3 million
in real estate construction and $4.0 million in loans secured by non-farm non-
residential properties. Real estate loans composed 99% of the non-performing
loans as of June 30, 2008 and 98% as of December 31, 2007. Forgone interest
income on the non-accrual loans was $312 thousand for the first six months of
2008 compared to $156 thousand for the same time period in 2007.
Nonperforming Assets
6/30/08 12/31/07
(in thousands)
Non-accrual Loans $ 8,862 $ 6,358
Accruing Loans which are
Contractually past due
90 days or more 1,190 195
Total Nonperforming and Restructured
Loans 10,052 6,553
Other Real Estate 1,514 768
Total Nonperforming and Restructured
Loans and Other Real Estate $ 11,566 $ 7,321
Nonperforming and Restructured Loans
as a Percentage of Loans 2.40% 1.57%
Nonperforming and Restructured Loans
and Other Real Estate as a Percentage
of Total Assets 1.82% 1.16%
Allowance as a Percentage of
Period-end Loans 1.29% 1.17%
Allowance as a Percentage of
Non-performing and Restructured Loans 54% 74%
Provision for Loan Losses
The loan loss provision for the first six months was $900 thousand for 2008
and $320 thousand for the same period in 2007. The loan loss provision for
the three months ended June 30, 2008 was $500 thousand and $170 thousand for
the same period in 2007. The current level of nonperforming loans has caused
management to increase the 2008 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, 2008 were $385 thousand
compared to $355 thousand for the same period in 2007. Net charge-offs for
the three month period ended June 30, 2008 were $197 thousand compared to $257
thousand during the same time period in 2007. 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, 2008
(in thousands)
2008 2007
Balance at Beginning of Period $ 4,879 $ 4,991
Amounts Charged-off:
Commercial 5 127
Real Estate Construction 217 -
Real Estate Mortgage 55 91
Agricultural 12 -
Consumer 612 482
Total Charged-off Loans 901 700
Recoveries on Amounts
Previously Charged-off:
Commercial 5 1
Real Estate Construction 2 10
Real Estate Mortgage 12 2
Agricultural 30 29
Consumer 467 303
Total Recoveries 516 345
Net Charge-offs 385 355
Provision for Loan Losses 900 320
Balance at End of Period 5,394 4,956
Loans
Average 412,549 439,559
At June 30 418,820 430,538
As a Percentage of Average Loans:
Net Charge-offs 0.09% 0.08%
Provision for Loan Losses 0.22% 0.07%
Allowance as a Multiple of
Net Charge-offs 7.0 7.0
Loan Losses
Quarter Ended June 30
(in thousands)
2008 2007
Balance at Beginning of Period $ 5,091 $ 5,043
Amounts Charged-off:
Commercial 5 127
Real Estate Construction 92 -
Real Estate Mortgage 31 35
Consumer 254 261
Total Charged-off Loans 382 423
Recoveries on Amounts
Previously Charged-off:
Commercial 1 -
Real Estate Construction - 5
Real Estate Mortgage 5 -
Agricultural 1 14
Consumer 178 147
Total Recoveries 185 166
Net Charge-offs 197 257
Provision for Loan Losses 500 170
Balance at End of Period 5,394 4,956
Loans
Average 413,840 436,937
At June 30 418,820 430,538
As a Percentage of Average Loans:
Net Charge-offs 0.05% 0.06%
Provision for Loan Losses 0.12% 0.04%
Allowance as a Multiple of
Net Charge-offs 6.6 4.8
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
Company has no market risk sensitive instruments held for trading purposes.
Using interest rate shock simulations, 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,
2008 the projected percentage changes are within the Board approved limits.
This period's volatility is higher in each rate shock in a falling rate
environment when compared to the same period a year ago. In a rising rate
environment, there is little change in the projected net interest income
volatility between the two periods. The projected net interest income report
summarizing the Company's interest rate sensitivity as of June 30, 2008 is as
follows:
(dollars in thousands)
PROJECTED NET INTEREST INCOME
Level
Rate Change: - 300 - 100 Rates + 100 + 300
Year One (7/08 - 6/09)
Net interest income 23,304 24,135 25,061 25,481 25,816
Net interest income dollar change (1,757) (926) N/A 420 755
Net interest income percentage change -7.0% -3.7% N/A 1.7% 3.0%
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 June 30, 2007 is as follows:
PROJECTED NET INTEREST INCOME
(dollars in thousands)
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%
Limitation on % Change >-10.0% >-4.0% N/A >-4.0% >-10.0%
Projections from June 30, 2008, year one reflected a decline in net interest
income of 3.7% with a 100 basis point decline compared to the 1.9% decline in
2007. The 100 basis point increase in rates reflected a 1.7% increase in net
interest income in 2008 compared to 1.5% in 2007.
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, 2008 balance sheet, a 300 basis point
increase in rates results in a 21% decline in EVE. A 300 basis point decrease
in rates results in a 19% 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, 2007 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
4/1/08 -
4/30/08 43,500 $30.76 43,500 839 shares
5/1/08 -
5/31/08 2,800 27.60 2,800 98,039 shares
6/1/08 -
6/30/08 43,960 27.33 43,960 54,079 shares
Total 90,260 90,260 54,079 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. On May 20, 2008, the Board of Directors approved
and authorized 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, 2008 245,921 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 2008 Annual Meeting of Shareholders was held May 14,
2008. 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
Henry Hinkle 2,199,806 98,934
Theodore Kuster 2,218,434 80,306
Robert G. Thompson 2,229,434 69,306
The following directors have a term of office that will continue
following the Annual Meeting: William Arvin, B. Proctor Caudill, Betty
J. Long, Ted McClain, Louis Prichard, Edwin S. Saunier, Woodford Van
Meter and Buck Woodford.
The total number of Common Shares outstanding as of March 20, 2008, the
record date for the Annual Meeting of Shareholders, was 2,852,367.
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 _____7/14/08_______ __/s/Louis Prichard______________
Louis Prichard, President and C.E.O.
Date _____7/14/08_______ __/s/Gregory J. Dawson___________
Gregory J. Dawson, Chief Financial Officer
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