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, 2009
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 has submitted electronically and
posted on its corporate web site, if any, every Interactive Data File required
to be submitted and posted pursuant to Rule 405 of Regulation S-T (Section
232.405 of this chapter) during the preceding 12 months (or for such shorter
period that the registrant was required to submit and post such files).
Yes No X _
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 July 31, 2009: 2,742,661.
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 21
Item 3. Quantitative and Qualitative Disclosures About
Market Risk 29
Item 4. Controls and Procedures 30
Part II - Other Information 30
Signatures 32
Exhibits
10.1 2009 Stock Award Plan. 33
31.1 Certifications of Chief Executive Officer pursuant
to Section 302 of the Sarbanes-Oxley Act of 2002. 47
31.2 Certifications of Chief Financial Officer pursuant
to Section 302 of the Sarbanes-Oxley Act of 2002. 49
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. 51
Item 1 - Financial Statements
KENTUCKY BANCSHARES, INC.
CONSOLIDATED BALANCE SHEETS (unaudited)
(thousands) 6/30/2009 12/31/2008
Assets
Cash and due from banks $ 13,675 $ 16,411
Federal funds sold 25 20,695
Cash and cash equivalents 13,700 37,106
Securities available for sale 172,075 172,834
Loans 417,556 424,276
Allowance for loan losses (6,373) (5,465)
Net loans 411,183 418,811
Federal Home Loan Bank stock 6,731 6,731
Bank premises and equipment, net 17,720 17,875
Interest receivable 4,420 5,156
Goodwill 13,117 13,117
Other intangible assets 1,392 1,523
Mortgage servicing rights 728 465
Other assets 7,661 5,157
Total assets $ 648,727 $ 678,775
Liabilities and Stockholders' Equity
Deposits
Non-interest bearing $ 95,084 $ 90,480
Time deposits, $100,000 and over 104,852 108,465
Other interest bearing 294,159 321,863
Total deposits 494,095 520,808
Repurchase agreements and other borrowings 12,548 10,717
Federal Funds Purchased 2,639 -
Federal Home Loan Bank advances 63,848 77,301
Subordinated debentures 7,217 7,217
Interest payable 4,188 2,874
Other liabilities 5,382 2,817
Total liabilities 589,917 621,734
Stockholders' equity
Common stock 12,337 12,053
Retained earnings 45,640 44,974
Accumulated other comprehensive income (loss) 833 14
Total stockholders' equity 58,810 57,041
Total liabilities & stockholders' equity $ 648,727 $ 678,775
See Accompanying Notes
KENTUCKY BANCSHARES, INC.
CONSOLIDATED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME (unaudited)
(thousands, except per share amounts) Six Months Ending
6/30/2009 6/30/2008
INTEREST INCOME:
Loans, including fees $ 12,303 $ 14,083
Securities available for sale 3,787 3,589
Other 14 256
Total interest income 16,104 17,928
INTEREST EXPENSE:
Deposits 4,896 6,202
Other 1,783 1,793
Total interest expense 6,679 7,995
Net interest income 9,425 9,933
Loan loss provision 900 900
Net interest income after provision 8,525 9,033
NON-INTEREST INCOME:
Service charges 2,522 2,560
Loan service fee income 50 45
Trust department income 235 270
Securities available for sale gains (losses), net 203 15
Gain on sale of mortgage loans 811 278
Other 799 867
Total other income 4,620 4,035
NON-INTEREST EXPENSE:
Salaries and employee benefits 5,986 5,230
Occupancy expenses 1,301 1,378
Amortization 131 133
Advertising and marketing 253 253
Taxes other than payroll, property and income 366 358
Other 2,867 2,264
Total other expenses 10,904 9,616
Income before taxes 2,241 3,452
Income taxes 170 773
Net income $ 2,071 $ 2,679
Other Comprehensive Income, net of tax:
Change in Unrealized Gains on Securities 819 (851)
Comprehensive Income $ 2,890 $ 1,828
Earnings per share
Basic $ 0.76 $ 0.95
Diluted 0.76 0.95
See Accompanying Notes
KENTUCKY BANCSHARES, INC.
CONSOLIDATED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME (unaudited)
(thousands, except per share amounts) Three Months Ending
6/30/2009 6/30/2008
INTEREST INCOME:
Loans, including fees $ 6,224 $ 6,775
Securities available for sale 1,679 1,855
Other 4 45
Total interest income 7,907 8,675
INTEREST EXPENSE:
Deposits 2,363 2,696
Other 871 942
Total interest expense 3,234 3,638
Net interest income 4,673 5,037
Loan loss provision 450 500
Net interest income after provision 4,223 4,537
NON-INTEREST INCOME:
Service charges 1,376 1,371
Loan service fee income 23 21
Trust department income 126 150
Securities available for sale gains (losses), net 199 8
Gain on sale of mortgage loans 433 117
Other 458 393
Total other income 2,615 2,060
NON-INTEREST EXPENSE:
Salaries and employee benefits 3,437 2,581
Occupancy expenses 640 644
Amortization 65 66
Advertising and marketing 129 113
Taxes other than payroll, property and income 178 179
Other 1,567 1,071
Total other expenses 6,016 4,654
Income before taxes 822 1,943
Income taxes (82) 457
Net income $ 904 $ 1,486
Other Comprehensive Income, net of tax:
Change in Unrealized Gains on Securities (217) (1,342)
Comprehensive Income $ 687 $ 144
Earnings per share
Basic $ 0.33 $ 0.53
Diluted 0.33 0.53
See Accompanying Notes
KENTUCKY BANCSHARES, INC.
CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY (unaudited)
(thousands, except share information)
Accumulated
Other Total
----Common Stock---- Retained Comprehensive Stockholders'
Shares Amount (1) Earnings Income Equity
Balances, December 31, 2008 2,745,729 $ 12,344 $ 44,683 $ 14 $ 57,041
Common stock issued, including tax benefit, net
(including stock grants of 3,714 shares) 3,732 - - - -
Stock based compensation expense - 57 - - 57
Common stock purchased and retired (4,700) (64) (15) - (79)
Net change in unrealized gain (loss)
on securities available for sale,
net of tax - - - 819 819
Net income - - 2,071 - 2,071
Dividends declared - $0.40 per share - - (1,099) - (1,099)
Balances, June 30, 2009 2,744,761 $ 12,337 $ 45,640 $ 833 $ 58,810
(1) Common Stock has no par value; amount includes Additional Paid-in Capital
See Accompanying Notes
KENTUCKY BANCSHARES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS (unaudited)
(thousands) Six Months Ending
6/30/2009 6/30/2008
Cash Flows From Operating Activities
Net Income $ 2,071 $ 2,679
Adjustments to reconcile net income to
net cash provided by operating activities:
Depreciation & Amortization 691 797
Securities amortization (accretion), net 811 (165)
Noncash compensation expense 57 68
Provision for loan losses 900 900
Securities (gains) losses, net (203) (15)
Originations of loans held for sale (36,455) (13,503)
Proceeds from sale of loans 37,266 13,701
Federal Home Loan Bank stock dividends - (173)
Losses (gains) on sale of bank premises and equipment - (5)
Gain on sale of mortgage loans (811) (278)
Changes in:
Interest receivable 736 374
Other assets (2,872) (1,449)
Interest payable 1,314 (1,819)
Other liabilities 2,143 (57)
Net cash from operating activities 5,648 1,055
Cash Flows From Investing Activities
Purchases of securities available for sale (53,208) (63,690)
Proceeds from sales of securities available for sale 17,515 -
Proceeds from principal payments, maturities and
calls of securities available for sale 37,085 49,369
Net change in loans 6,728 (1,817)
Purchases of bank premises and equipment (336) (1,402)
Proceeds from the sale of bank premises and equipment - 5
Net cash from investing activities 7,784 (17,535)
Cash Flows From Financing Activities:
Net change in deposits (26,713) (30,806)
Net change in securities sold under agreements to
repurchase, federal funds purchased and other borrowings 4,670 15,478
Advances from Federal Home Loan Bank - 35,000
Payments on Federal Home Loan Bank advances (13,417) (11,964)
Proceeds from note payable - 5,000
Payment on note payable (200) (2,300)
Proceeds from issuance of common stock - 15
Purchase of common stock (79) (2,842)
Dividends paid (1,099) (1,584)
Net cash from financing activities (36,838) 5,997
Net change in cash and cash equivalents (23,406) (10,483)
Cash and cash equivalents at beginning of period 37,106 25,807
Cash and cash equivalents at end of period 13,700 15,324
Supplemental disclosures of cash flow information
Cash paid during the year for:
Interest expense $ 6,679 $ 7,995
Income taxes 200 700
Supplemental schedules of non-cash investing
activities
Real estate acquired through foreclosure $ 3,941 $ 950
See Accompanying Notes
KENTUCKY BANCSHARES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The preparation of financial statements for Kentucky Bancshares, Inc. (the
"Company") 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, 2008.
Recently Issued But Not Yet Effective Accounting Standards
In June 2009, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards "(SFAS") No. 166, "Accounting
for Transfers of Financial Assets-an amendment of FASB Statement No. 140".
This statement is a revision to SFAS No. 140, "Accounting for Transfers and
Servicing of Financial Assets and Extinguishments of Liabilities" and
requires more information about transfers of financial assets, including
securitization transactions, and where entities have continuing exposure to
the risks related to transferred financial assets. It eliminates the
concept of a "qualifying special-purpose entity," changes the requirements
for derecognizing financial assets, and requires additional disclosures.
SFAS No. 166 enhances information reported to users of financial statements
by providing greater transparency about transfers of financial assets and
an entity's continuing involvement in transferred financial assets. This
statement is effective at the beginning of a reporting entity's first
fiscal year beginning after November 15, 2009, or January 1, 2010, for the
Company. Early application is not permitted. The Company does not expect
this statement to have a material impact on its consolidated results of
operations or financial position upon adoption.
In June 2009, the FASB issued SFAS No. 167, "Amendments to FASB
Interpretation No. 46(R)". SFAS No. 167 is a revision to FIN 46 (Revised
December 2003), Consolidation of Variable Interest Entities, and changes
how a reporting entity determines when an entity that is insufficiently
capitalized or is not controlled through voting (or similar rights) should
be consolidated. The determination of whether a reporting entity is
required to consolidate another entity is based on, among other things, the
other entity's purpose and design and the reporting entity's ability to
direct the activities of the other entity that most significantly impact
the other entity's economic performance.
SFAS No. 167 requires a number of new disclosures. SFAS No. 167 requires a
reporting entity to provide additional disclosures about its involvement
with variable interest entities and any significant changes in risk
exposure due to that involvement. A reporting entity will be required to
disclose how its involvement with a variable interest entity affects the
reporting entity's financial statements. SFAS No. 167 is effective at the
beginning of a reporting entity's first fiscal year beginning after
November 15, 2009, or January 1, 2010, for the Company. Early application
is not permitted. The Company does not expect this statement to have a
material impact on its consolidated results of operations or financial
position upon adoption.
In June 2009, the FASB issued SFAS No. 168, "FASB Accounting Standards
CodificationTM" and the Hierarchy of Generally Accepted Accounting
Principles." SFAS No. 168 establishes the FASB Accounting Standards
CodificationTM ("Codification") as the single source of authoritative U.S.
generally accepted accounting principles ("GAAP") recognized by the FASB to
be applied by nongovernmental entities. Rules and interpretive releases of
the SEC under authority of federal securities laws are also sources of
authoritative U.S. GAAP for SEC registrants. SFAS No. 168 and the
Codification are effective for financial statements issued for interim and
annual periods ending after September 15, 2009.
When effective, the Codification will supersede all existing non-SEC
accounting and reporting standards. All other non-SEC accounting and other
nongrandfathered literature not included in the Codification will become
nonauthoritative. Subsequent to SFAS No. 168, the FASB will not issue new
standards in the form of SFAS's, FSP's, or Emerging Issues Task Force
Abstracts. Instead, the FASB will issue Accounting Standards Updates
("ASU"), which will serve only to: (a) update the Codification; (b) provide
background information about the guidance; and (c) provide the bases for
conclusions on changes in the Codification. The Company does not expect
this statement to have a material impact on its consolidated results of
operations or financial position upon adoption.
Adoption of New Accounting Standards
Effective January 1, 2009 the Company adopted SFAS No. 141(R), "Business
Combinations", SFAS No. 160, "Noncontrolling Interests in Consolidated
Financial Statements", SFAS No. 161, "Disclosures about Derivative
Instruments and Hedging Activities", and SFAS No. 163, "Accounting for
Financial Guarantee Insurance Contracts".
During the second quarter of 2009, the Company adopted FSP FAS 157-4,
"Determining Fair Value When the Volume and Level of Activity for the Asset
or Liability Have Significantly Decreased and Identifying Transactions That
Are Not Orderly", FSP FAS 115-2 and FAS 124-2, "Recognition and
Presentation of Other-Than-Temporary Impairments", FSP FAS 107-1 and APB
28-1, "Interim Disclosure about Fair Value of Financial Instruments" , SFAS
No. 165, "Subsequent Events", and FASB Staff Position ("FSP") FAS 141(R)-1,
"Accounting for Assets Acquired and Liabilities Assumed in a Business
Combination That Arise from Contingencies" .
SFAS No. 141(R) establishes principals and requirements for how an acquirer
recognizes and measures in its financial statements the identifiable assets
acquired, liabilities assumed, and any noncontrolling interest in an
acquiree. The statement also provides guidance for recognizing and
measuring goodwill or gain from a bargain purchase in a business
combination and determines what information to disclose to enable users of
the financial statements to evaluate the nature and financial effects of
the business combination. The provisions of this statement will only impact
the Company if it enters into a business combination on or after January 1,
2009.
FSP FAS 141(R)-1, "Accounting for Assets Acquired and Liabilities Assumed
in a Business Combination That Arise from Contingencies" was issued in
April 2009 and amends the guidance in SFAS No. 141(R) as follows:
? Requires that assets acquired and liabilities assumed in a business
combination that arise from contingencies be recognized at fair value if
fair value can be reasonably estimated. If fair value of such an asset
or liability cannot be reasonably estimated, the asset or liability
would generally be recognized in accordance with SFAS No. 5, "Accounting
for Contingencies", and FASB Interpretation No. 14, "Reasonable
Estimation of the Amount of a Loss". Further, the FASB decided to remove
the subsequent accounting guidance for assets and liabilities arising
from contingencies from Statement 141(R), and carry forward without
significant revision the guidance in SFAS No. 141.
? Eliminates the requirement to disclose an estimate of the range of
outcomes of recognized contingencies at the acquisition date. For
unrecognized contingencies, the FASB decided to require that entities
include only the disclosures required by Statement 5 and that those
disclosures be included in the business combination footnote.
? Requires that contingent consideration arrangements of an acquiree
assumed by the acquirer in a business combination be treated as
contingent consideration of the acquirer and should be initially and
subsequently measured at fair value in accordance with SFAS No. 141(R).
This FSP is effective for assets or liabilities arising from contingencies
in business combinations for which the acquisition date is on or after the
beginning of the first annual reporting period beginning on or after
December 15, 2008. The impact of adopting this FSP will depend on the
timing of future acquisitions, if any, and the nature of any contingencies
associated with such acquisitions.
SFAS No. 160 amends Accounting Research Bulletin ("ARB") No. 51,
"Consolidated Financial Statements" to establish accounting and reporting
standards for the noncontrolling interest in a subsidiary and for the
deconsolidation of a subsidiary. The statement also amends certain of ARB
No. 51's consolidation procedures for consistency with the requirements of
SFAS No. 141(R). The adoption of this statement did not have an impact on
the Company's consolidated financial position or results of operations.
SFAS No. 161 amends and expands the disclosure requirements of SFAS No.
133, "Accounting for Derivative Instruments and Hedging Activities" to
provide enhanced disclosures about 1) how and why an entity uses derivative
instruments; 2) how derivative instruments and related hedged items are
accounted for under SFAS No. 133 and related interpretations; and 3) how
derivative instruments and related hedged items affect an entity's
financial position, financial performance, and cash flows. The adoption of
this statement did not have an impact on the Company's consolidated
financial position or results of operations.
SFAS No. 163 clarifies how SFAS No. 60, "Accounting and Reporting by
Insurance Enterprises", applies to financial guarantee insurance contracts
issued by insurance enterprises, including the recognition and measurement
of premium revenue and claim liabilities. It also requires expanded
disclosures about financial guarantee insurance contracts. The adoption of
this statement did not have an impact on the Company's consolidated
financial position or results of operations.
FSP FAS 157-4, adopted in the second quarter of 2009:
? Affirms that the objective of fair value when the market for an asset
is not active is the price that would be received to sell the asset in
an orderly transaction.
? Clarifies and includes additional factors for determining whether
there has been a significant decrease in market activity for an asset
when the market for that asset is not active.
? Eliminates the proposed presumption that all transactions are
distressed (not orderly) unless proven otherwise. The FSP instead
requires an entity to base its conclusion about whether a transaction
was not orderly on the weight of the evidence.
? Includes an example that provides additional explanation on
estimating fair value when the market activity for an asset has declined
significantly.
? Requires an entity to disclose a change in valuation technique (and
the related inputs) resulting from the application of the FSP and to
quantify its effects, if practicable.
? Applies to all fair value measurements when appropriate.
The adoption of FSP FAS 157-4 did not have a material impact on the
Company's consolidated financial position or results of operations.
FSP FAS 115-2 and FAS 124-2, adopted in the second quarter of 2009:
? Changes existing guidance for determining whether an impairment is
other than temporary to debt securities;
? Replaces the existing requirement that the entity's management assert
it has both the intent and ability to hold an impaired security until
recovery with a requirement that management assert: (a) it does not have
the intent to sell the security; and (b) it is more likely than not it
will not have to sell the security before recovery of its cost basis;
? Incorporates examples of factors from existing literature that should
be considered in determining whether a debt security is other-than-
temporarily impaired;
? Requires that an entity recognize noncredit losses on held-to-
maturity debt securities in other comprehensive income and amortize that
amount over the remaining life of the security in a prospective manner
by offsetting the recorded value of the asset unless the security is
subsequently sold or there are additional credit losses;
? Requires an entity to present the total other-than-temporary
impairment in the statement of earnings with an offset for the amount
recognized in other comprehensive income; and
? When adopting FSP FAS 115-2 and FAS 124-2, an entity is required to
record a cumulative-effect adjustment as of the beginning of the period
of adoption to reclassify the noncredit component of a previously
recognized other-temporary impairment from retained earnings to
accumulated other comprehensive income if the entity does not intend to
sell the security and it is not more likely than not that the entity
will be required to sell the security before recovery.
The adoption of FSP FAS 115-2 and FAS 124-2 did not have a material impact
on the Company's consolidated financial position or results of operations.
Reference is made to Note 7 for additional disclosures required by FSP FAS
115-2 and FAS 124-2.
The Company adopted FSP FAS 107-1 and APB 28-1, "Interim Disclosures about
Fair Value of Financial Instruments" during the second quarter of 2009.
This FSP amends SFAS No. 107, "Disclosures about Fair Value of Financial
Instruments", to require an entity to provide disclosures about fair value
of financial instruments in interim financial information. This FSP also
amends APB Opinion No. 28, "Interim Financial Reporting", to require those
disclosures in summarized financial information at interim reporting
periods. Under this FSP, a publicly traded company shall include
disclosures about the fair value of its financial instruments whenever it
issues summarized financial information for interim reporting periods. In
addition, an entity shall disclose in the body or in the accompanying notes
of its summarized financial information for interim reporting periods and
in its financial statements for annual reporting periods the fair value of
all financial instruments for which it is practicable to estimate that
value, whether recognized or not recognized in the statement of financial
position, as required by SFAS No. 107.
The adoption of this FSP did not have a material impact on the Company's
consolidated financial position or results of operations. Please refer to
Note 6 for additional information related to the impact of adopting this
FSP.
The Company adopted SFAS No. 165, "Subsequent Events" during the second
quarter of 2009. This statement establishes general standards of accounting
for and disclosures of events that occur after the balance sheet date, but
before financial statements are issued or are available to be issued.
Specifically, SFAS No. 165 provides:
? The period after the balance sheet date during which management of
a reporting entity should evaluate events or transactions that may occur
for potential recognition or disclosure in the financial statements;
? The circumstances under which an entity should recognize events or
transactions occurring after the balance sheet date in its financial
statements; and
? The disclosures that an entity should make about events or
transactions that occurred after the balance sheet date.
The adoption of SFAS No. 165 did not have a material impact on the
Company's consolidated financial position or results of operations. The
Company evaluated subsequent events through August 13, 2009, the date its
financial statements were issued, and believes that no events have occurred
requiring further disclosure or adjustment to the consolidated financial
statements.
2. INVESTMENT SECURITIES
Period-end securities are as follows:
(in thousands)
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
Available for Sale
June 30, 2009
U.S. government agencies $ 23,514 $ 45 $ (55) $ 23,504
States and political subdivisions 74,026 1,078 (1,460) 73,644
Mortgage-backed 73,003 1,686 (54) 74,635
Equity securities 270 22 - 292
Total 170,813 2,831 (1,569) 172,075
December 31, 2008
U.S. government agencies $ 19,138 $ 212 $ - $ 19,350
States and political subdivisions 65,091 1,061 (2,181) 63,971
Mortgage-backed 88,314 1,142 (233) 89,223
Equity securities 270 20 - 290
Total 172,813 2,435 (2,414) 172,834
Securities with unrealized losses at June 30, 2009 and December 31, 2008 not
recognized in income are as follows:
June 30, 2009
(in thousands) Less than 12 Months 12 Months or More Total
Fair Unrealized Fair Unrealized Fair Unrealized
Description of Securities Value Loss Value Loss Value Loss
U.S. Government securities $ 8,971 $ (55) $ - $ - $ 8,971 $ (55)
States and municipals 13,800 (397) 30,002 (1,063) 43,802 (1,460)
Mortgage-backed 4,277 (54) - - 4,277 (54)
Total temporarily impaired $27,048 $ (506) $30,002 $(1,063) $57,050 $(1,569)
December 31, 2008
(in thousands) Less than 12 Months 12 Months or More Total
Fair Unrealized Fair Unrealized Fair Unrealized
Description of Securities Value Loss Value Loss Value Loss
U.S. Government securities $ - $ - $ - $ - $ - $ -
States and municipals $13,055 $ (587) $23,023 $(1,594) $36,078 $(2,181)
Mortgage-backed 30,903 (165) 1,565 (68) 32,468 (233)
Total temporarily impaired $43,958 $ (752) $24,588 $(1,662) $68,546 $(2,414)
Other-than-temporary impairment ("OTTI")
All unrealized losses are reviewed on at least a quarterly basis to determine
whether the losses are other than temporary and are reviewed more frequently
when economic or market concerns warrant such evaluation. Consideration is
given to the length of time and the extent to which the fair value has been
less than cost, the financial condition and near-term prospects of the issuer,
and our intent and ability to retain the investment in the issuer for a period
of time sufficient to allow for any anticipated recovery in fair value. In
analyzing an issuer's financial condition, we may consider whether the
securities are issued by the federal government or its agencies, whether
downgrades by bond rating agencies have occurred, and the results of reviews
of the issuer's financial condition.
The term "other-than-temporary" is not intended to indicate that the decline
is permanent, but indicates that the prospects for a near-term recovery of
value are not necessarily favorable, or that there is a general lack of
evidence to support a realizable value equal to or greater than the carrying
value of the investment. Once a decline in value is determined to be other-
than-temporary, the value of the security is reduced and a corresponding
charge to earnings is recognized for anticipated credit losses.
3. LOANS
Loans at period-end are as follows:
(in thousands)
6/30/2009 12/31/2008
Commercial $ 22,490 $ 21,505
Real estate construction 17,937 16,818
Real estate mortgage 276,299 286,846
Agricultural 82,468 80,779
Consumer 18,362 18,328
Total 417,556 424,276
Activity in the allowance for loan losses for the six month period ended was as
follows:
2009 2008
Beginning balance $ 5,464,864 $ 4,878,732
Charge-offs (458,414) (457,199)
Recoveries 466,479 72,227
Provision for loan losses 900,000 900,000
Ending balance $ 6,372,929 $ 5,393,760
Impaired loans totaled $7,790,000 at June 30, 2009 and $5,131,000 at December
31, 2008.
Nonperforming loans were as follows:
6/30/09 12/31/08
Loans past due over 90 days still
on accrual $ 375,000 $ 779,000
Nonaccrual loans 8,227,000 6,562,000
Nonperforming loans include impaired loans and smaller balance homogeneous
loans, such as residential mortgage and consumer loans, that are collectively
evaluated for impairment.
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
2009 2008
(in thousands, except per share information)
Basic Earnings Per Share
Net Income $2,071 $2,679
Weighted average common shares outstanding 2,737 2,819
Basic earnings per share $ 0.76 $ 0.95
Diluted Earnings Per Share
Net Income $2,071 $2,679
Weighted average common shares outstanding 2,737 2,819
Add dilutive effects of assumed exercise
of stock options 1 4
Weighted average common and dilutive
potential common shares outstanding 2,738 2,823
Diluted earnings per share $ 0.76 $ 0.95
Three Months Ended
June 30
2009 2008
(in thousands, except per share information)
Basic Earnings Per Share
Net Income $ 904 $1,486
Weighted average common shares outstanding 2,738 2,797
Basic earnings per share $ 0.33 $ 0.53
Diluted Earnings Per Share
Net Income $ 904 $1,486
Weighted average common shares outstanding 2,738 2,797
Add dilutive effects of assumed exercise
of stock options 1 3
Weighted average common and dilutive
potential common shares outstanding 2,739 2,800
Diluted earnings per share $ 0.33 $ 0.53
Stock options for 37,844 shares of common stock for the six and three months
ended June 30, 2009, and for 31,900 shares of common stock for the three
months ended June 30, 2008 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
Under its 1999 Employee Stock Option Plan, the Company has granted 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 100,000
options. Under the expired 1993 Non-Employee Directors Stock Ownership
Incentive Plan, the Company has also granted certain directors stock option
awards which vest and become fully exercisable immediately and provided 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. No options have been
granted in 2009.
2008
Weighted-average fair value of options
granted during the year $2.38
Risk-free interest rate 2.96%
Expected option life 8 years
Expected stock price volatility 11.05%
Expected dividend yield 3.61%
Summary of activity in the stock option plan for the six months ended June
30, 2009 follows:
Weighted
Weighted Average
Average Remaining Aggregate
Exercise Contractual Intrinsic
Shares Price Term Value
Outstanding, beginning of year 50,169 $28.57
Forfeited or expired (12,325) 25.86
Outstanding, end of period 37,844 29.45 54.6 months $ -
Vested and expected to vest 37,844 29.45 54.6 months -
Options exercisable at period end 35,374 29.38 53.8 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 $57 thousand in stock
compensation expense during the six months ended June 30, 2009 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
Per Share
Nonvested Shares Shares Fair Value
Nonvested at December 31, 2008 10,006 $ 30.58
Granted 4,150 17.15
Vested (2,804) 30.16
Forfeited (334) 25.40
Nonvested at June 30, 2009 11,018 $ 25.79
6. DIVIDENDS
Dividends per share paid for the quarter ended June 30, 2009 were $0.20
compared to $0.28 for June 30, 2008. 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
2009 2008
Service cost $ - $ 254
Interest cost - 231
Expected return on plan assets - (241)
(Gain) loss amortization - 14
Net Periodic Benefit Cost $ - $ 258
Three months ended June 30
(in thousands)
Pension Benefits
2009 2008
Service cost $ - $ 132
Interest cost - 119
Expected return on plan assets - (120)
(Gain) loss amortization - 10
Net Periodic Benefit Cost $ - $ 141
Employer Contributions
The defined benefit plan offered to employees by the Company was terminated
effective December 31, 2008. Therefore, the company had no contributions
to the plan during the first quarter of this year and will also have no
contributions going forward.
As of December 31, 2008, the date of termination, the projected benefit
obligation was $6,749,694 and the fair value of the plan assets was
$5,206,908. The difference of $1,542,786 is recognized in other
liabilities on the consolidated balance sheet. During the third quarter of
2009, distributions from the defined benefit plan will be made to those
employees in which the Company had an obligation to as of the December 31,
2008, the plan's termination date. Once all funds have been distributed,
the Company will no longer have any liabilities associated with the plan.
During the second quarter of 2009, the Company recognized $860 thousand for
the final expenses related to terminating the plan.
8. Fair Value Measurements
Statement 157 establishes a fair value hierarchy which requires an entity to
maximize the use of observable inputs and minimize the use of unobservable
inputs when measuring fair value. The standard describes three levels of
inputs that may be used to measure fair value:
Level 1: Quoted prices (unadjusted) for identical assets or liabilities
in active markets that the entity has the ability to access as of the
measurement date.
Level 2: Significant other observable inputs other than Level 1 prices
such as quoted prices for similar assets or liabilities; quoted prices
in markets that are not active; or other inputs that are observable or
can be corroborated by observable market data.
Level 3: Significant unobservable inputs that reflect a reporting
entity's own assumptions about the assumptions that market participants
would use in pricing an asset or liability.
The fair values of securities available for sale are determined by obtaining
quoted prices on nationally recognized securities exchanges (Level 1 inputs)
or matrix pricing, which is a mathematical technique widely used in the
industry to value debt securities without relying exclusively on quoted prices
for the specific securities but rather by relying on the securities'
relationship to other benchmark quoted securities (Level 2 inputs).
The fair value of servicing rights is based on a valuation model that
calculates the present value of estimated net servicing income. The valuation
model incorporates assumptions that market participants would use in
estimating future net servicing income. The Company is able to compare the
valuation model inputs and results to widely available published industry data
for reasonableness (Level 2 inputs).
The fair value of impaired loans with specific allocations of the allowance
for loan losses is generally based on recent real estate appraisals. These
appraisals may utilize a single valuation approach or a combination of
approaches including comparable sales and the income approach. Adjustments
are routinely made in the appraisal process by the appraisers to adjust for
differences between the comparable sales and income data available. Such
adjustments are typically significant and result in a Level 3 classification
of the inputs for determining fair value.
Assets and Liabilities Measured on a Recurring Basis
For this disclosure, the Company only has available for sale investment
securities that meet the requirement.
Available for sale investment securities are the Company's only balance
sheet item that meet the disclosure requirements for instruments measured
at fair value on a recurring basis. Disclosures are as follows in the
table below.
(In thousands) Fair Value Measurements at June 30, 2009 Using
Quoted Prices
In Active
Markets for Significant Other Significant
Identical Observable Unobservable
Fair Value Assets Inputs Inputs
Description 6/30/09 (Level 1) (Level 2) (Level 3)
Available for Sale
Securities $172,075 $ 292 $ 171,783 $ -
(In thousands) Fair Value Measurements at December 31, 2008 Using
Quoted Prices
In Active
Markets for Significant Other Significant
Identical Observable Unobservable
Fair Value Assets Inputs Inputs
Description 12/31/08 (Level 1) (Level 2) (Level 3)
Available for Sale
Securities $172,834 $ 290 $172,544 $ -
Assets and Liabilities Measured on a Non-Recurring Basis
Servicing rights are carried at lower of cost or fair value. The current
value of $728 thousand includes a valuation allowance of $213 thousand, which
was recorded during the fourth quarter of 2008.
Impaired loans totaled $7,790,000 at June 30, 2009 and $5,131,000 at December
31, 2008. The total allowance for loan losses related to these loans was
$600,000 and $320,000 at June 30, 2009 and December 31, 2008. Impaired loans
are measured at fair value based on the underlying collateral and are
considered level 3 inputs.
Fair Value of Financial Instruments
In accordance with FSP SFAS 107-1, the carrying amounts and estimated fair
values of financial instruments, at June 30, 2009 and December 31, 2008 are as
follows:
June 30, 2009 December 31, 2008
Carrying Carrying
Amount Fair Value Amount Fair Value
(In Thousands)
Financial assets
Cash and cash equivalents $ 13,700 $ 13,700 $ 37,106 $ 37,106
Securities 172,075 172,075 172,834 172,834
Loans, net 411,183 411,678 418,811 418,635
FHLB stock 6,731 6,731 6,731 6,731
Interest receivable 4,420 4,420 5,156 5,156
Financial liabilities
Deposits $ 494,095 $ 501,500 $ 520,808 $ 528,949
Securities sold under
agreements to repurchase
and other borrowings 12,548 12,814 10,717 10,983
FHLB advances 63,848 65,735 77,301 79,665
Subordinated debentures 7,217 4,472 7,217 4,253
Interest payable 4,188 4,188 2,874 2,874
The methods and assumptions used to estimate fair value are described as
follows: Carrying amount is the estimated fair value for cash and cash
equivalents, short-term borrowings, Federal Home Loan Bank stock, accrued
interest receivable and payable, demand deposits, short-term debt, and variable
rate loans or deposits that reprice frequently and fully. For fixed rate loans
or deposits and for variable rate loans or deposits with infrequent repricing
or repricing limits, fair value is based on discounted cash flows using current
market rates applied to the estimated life and credit risk. Fair value of debt
is based on current rates for similar financing. The fair value of commitments
to extend credit and standby letters of credit is not considered material.
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 $2.1 million, or $0.76 basic
and diluted earnings per share for the first six months ending June 30, 2009
compared to $2.7 million, or $0.95 basic and diluted earnings per share for
the six month period ending June 30, 2008. The first six months earnings
reflects a decrease of 23% compared to the same time period in 2008, due
primarily to a decrease in net interest income of $508 thousand, an increase
in salaries and benefits of $756 thousand and an increase in other expenses of
$603 thousand. The increase in salaries and benefits was primarily due to
final costs of $860 thousand related to the terminating the pension plan. The
increase in other expenses was mainly due to an increase of $684 thousand in
FDIC insurance expense. These reductions to income were partially offset by
an increase on the gain on securities of $188 thousand, the gain on sold loans
of $533 thousand and a reduction in income tax expense of $603 thousand. The
earnings for the three months ended June 30, 2009 were $0.9 million, or $.33
basic and diluted earnings per share for the three month period ending June
30, 2009 compared to $1.5 million, or $.53 basic and diluted earnings per
share for the three month period ending June 30, 2008. This three month
period earnings reflects a 39% decrease compared to the same time period in
2008.
Return on average assets was 0.61% for the six months ended June 30, 2009 and
0.85% for the six month period ended June 30, 2008. Return on average assets
was 0.54% for the three months ended June 30, 2009 and 0.94% for the three
month period ended June 30, 2008. Return on average equity was 7.1% for the
six month period ended June 30, 2009 compared to 9.1% for the six month period
ended June 30, 2008. Return on average equity was 6.1% for the three months
ended June 30, 2009 and 10.1% for the same time period in 2008.
Loans decreased $6.7 million from $424.3 million on December 31, 2008 to
$417.6 million on June 30, 2009. Decreases in real estate mortgage loans were
offset by an increase in real estate construction, agricultural, commercial &
consumer loans.
Total deposits decreased from $520.8 million on December 31, 2008 to $494.1
million on June 30, 2009, a decrease of $26.7 million. This decrease is
primarily the result of a decrease in interest bearing deposit accounts,
excluding time deposits. Management attributes the decrease mainly due to
large dollar public fund accounts that have rolled off during 2009 and
increased competition for deposits.
Net Interest Income
Net interest income was $9.4 million for the six months ended June 30, 2009
compared to $9.9 million for the six months ended June 30, 2008, a decrease of
5.1%. The interest spread was 2.94% for the first six months of 2009
comparable to 3.32% for the same period in 2008, a decrease of 38 basis
points. Net interest income was $4.7 million for the three month period
ending June 30, 2009 compared to $5.0 million for the three month period
ending June 30, 2008, a decrease of 7.2%. The interest spread was 2.93% for
the three month period ending June 30, 2009 compared to 3.38% for the three
month period in 2008, a decrease of 45 basis points. For the first three
months in 2009, the prime interest rate was 200 basis points less than the
first 3 months in 2008. During the second quarter of 2009, the prime interest
rate was 175 basis points less than the same period a year ago. These
declines in rates have significantly impacted the Company's interest spread.
In addition to lower rates and tightening interest margins, the net interest
spread for 2009 is also lower than 2008 due to an increase in "lost" loan
interest during 2009 that can be attributed to an increase in non-performing
loans in our loan portfolio.
For the first six months, the yield on assets decreased from 6.15% in 2008 to
5.13% in 2009. The cost of liabilities decreased from 2.83% in 2008 to 2.19%
in 2009. Year to date average loans increased $5.8 million, or 1.4% from June
30, 2008 to June 30, 2009. Loan interest income has decreased $1.8 million
for the first six months of 2009 compared to the first six months of 2008.
Year to date average deposits increased from June 30, 2008 to June 30, 2008,
up $44.6 million or 9.3%. The increase is primarily the result of an increase
in interest bearing public funds. Deposit interest expense has decreased $1.3
million for the first six months of 2009 compared to the same period in 2008.
Non-Interest Income
Non-interest income increased $585 thousand for the six months ended June 30,
2009 compared to the same period in 2008 to $4.6 million, due primarily to an
increase of $533 thousand on the gain of the sale of mortgage loans and an
increase of $188 thousand on gains recognized from the sale of securities.
These increases were partially offset by a decrease in service charges of $38
thousand, trust department income of $35 thousand and other income of $68
thousand. The decrease in service charges was primarily the result of a
decrease in overdraft income of $65 thousand for the first six months of 2009.
The decrease in other non-interest income was primarily due to a decrease in
brokerage income of $139 thousand partially offset by an increase in building
rents of $43 thousand and an increase of $34 thousand in debit card
interchange income. The $555 thousand increase in non-interest income for the
three months ended June 30, 2009 compared to same time period in 2008 is
primarily due to an increase of $316 thousand on the gain of the sale of
mortgage loans and an increase of $191 thousand on gains recognized from the
sale of securities. These gains were partially offset by a decrease in trust
fees of $24 thousand for the three months ending June 30, 2009 compared to the
same period a year ago.
Gain on sale of mortgage loans increased from $278 thousand in the first six
months of 2008 to $811 thousand during the first six months of 2009. For the
three months ended June 30, 2009 compared to the same time period in 2008, the
gain on sale of mortgage loans increased $316 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 $1.3 million for the six month period
ended June 30, 2009 compared to the same period in 2008. For the three month
period ended June 30, 2009, total non-interest expense increased $1.4 million.
For the comparable six month periods, salaries and benefits increased $756
thousand, an increase of 14%. The increase in salaries & benefits is
primarily attributed to the Company terminating the defined benefit plan
offered to employees of the Company as of December 31, 2008. During the
second quarter of 2009, the Company recognized $860 thousand for the final
expenses related to terminating the plan. In addition, the Company has
offered a voluntary separation option to various employees effective as early
as August 31, 2009 and as late as October 31, 2009. The payouts for those
electing this option are expected to occur in 2009, with future salary and
benefit savings from those electing this option to be realized in the latter
part of this year and in future periods. Salaries & benefits increased $856
thousand for the three month period ending June 30, 2009 compared to the same
time period in 2008.
Occupancy expenses decreased $77 thousand to $1,301 thousand for the first six
months of 2009 compared to the same time period in 2008. Occupancy expenses
decreased $4 thousand for the three month period ended June 30, 2009 compared
to the same time period in 2008. The decrease in year to date occupancy
expense during 2009 is mainly due to a reduction in depreciation expense. For
the first six months ending June 30, 2009, depreciation expense decreased $88
thousand compared to the first six months 2008. The decrease in depreciation
expense is due to assets with a high cost basis becoming fully depreciated at
the end of 2008. In April of 2009, construction on the new Nicholasville
location was completed and is expected to cause a slight increase in occupancy
expense going forward.
In addition to the relocation of the Nicholasville branch, during the second
quarter of this year, the downtown Cynthiana location was consolidated with
the Company's newer location in Cynthiana. On July 31, 2009, the North
Middletown branch was closed. Management believes that consolidating these
locations will reduce costs and improve net income.
Other expenses increased $603 thousand for the first six months ended June
30, 2009 compared to the same time period in 2008. For the three month period
ended June 30, 2009 other expenses increased $496 thousand compared to the
three month period ended June 30, 2008. Increases in other expenses for both
year to date and the three months ending June 30 are related to an increase in
FDIC insurance expense. FDIC insurance expense increased $684 thousand for
the first six months in 2009 compared to the same period a year ago and
increased $466 thousand for the three months ending June 30, 2009 compared to
the three months ending June 30, 2008. The increase in FDIC insurance is
primarily the result of two things. The first being an increase in FDIC
insurance premiums(see below for more details). The other being a special
assessment that the FDIC assessed on all FDIC insured banks. This additional
expense was not made formal until May of this year and cost the Company
approximately $300 thousand which was expensed during the three months ending
June 30, 2009.
Deposit Insurance: In February 2009, the FDIC adopted a long-term deposit
insurance fund ("DIF") restoration plan as well as an additional emergency
assessment for 2009. The restoration plan increases base assessment rates for
banks in all risk categories with the goal of raising the DIF reserve ratio
from its current 0.40% to 1.15% within seven years. Banks in the best risk
category, which include the Company's subsidiary bank, will pay initial base
rates ranging from 12 to 16 basis points of assessable deposits beginning
April 1, 2009, up from the initial base rate range of 12 to 14 basis points.
Additionally, the FDIC approved an interim rule imposing a special emergency
assessment to all financial institutions of 20 basis points of insured
deposits as of June 30, 2009. The interim rule was subject to a 30-day
comment period and in early March 2009 a proposal was introduced in Congress
to lower the special emergency assessment to 10 basis points from the initial
20 basis points. The special emergency assessment is estimated to be $1.1
million for the Company as currently adopted under the 20 basis point rule and
will be collected on September 30, 2009. The amount of the special emergency
assessment would decrease to $530 thousand if the 10 basis point scenario is
adopted. The FDIC is also permitted to impose an emergency special assessment
after June 30, 2009 of up to 10 basis points if necessary to maintain public
confidence in federal deposit insurance. The increase in assessments by the
FDIC could have a material adverse effect on the Company's earnings.
Temporary Liquidity Guarantee Program ("TLGP"): The TLGP consists of two
separate programs implemented by the FDIC in October 2008. This includes the
Debt Guarantee Program ("DGP") and the Transaction Account Guarantee Program
("TAGP"). These programs were initially provided at no cost to participants
during the first 30 days. Eligible institutions that do not "opt out" of
either of these programs become participants by default and will incur the
fees assessed for taking part.
Under the DGP, the FDIC will guarantee senior unsecured debt issued on or
after October 14, 2008 through June 30, 2009 up to certain limits by
participating entities. The FDIC will provide guarantee coverage for debt
issued between those dates until the earlier of the maturity date of the debt
or June 30, 2012. The Company chose to opt out of the DGP.
Under the TAGP, the FDIC guarantees 100% of certain noninterest bearing
transaction accounts up to any amount to participating FDIC insured
institutions. The unlimited coverage is applicable until December 31, 2009.
The Company opted to participate in the TAGP; as such, it will incur an
additional quarterly-assessed 10 basis point fee on balances in noninterest
bearing transaction accounts exceeding the recently increased $250 thousand
deposit limit that became effective on November 13, 2008. The previous
deposit insurance limit amount was $100 thousand.
Emergency Economic Stabilization Act of 2008 ("EESA"): EESA was signed into
law by the President on October 3, 2008 as a measure to stabilize and provide
liquidity to the U.S. financial markets. Under EESA, the Troubled Asset
Relief Program ("TARP") was created. TARP granted the Treasury authority to,
among other things, invest in financial institutions and purchase troubled
assets in an aggregate amount up to $700 billion.
In connection with TARP, the Capital Purchase Program ("CPP") was launched on
October 14, 2008. Under the CPP, the Treasury announced a plan to use up to
$250 billion of TARP funds to purchase equity stakes in certain eligible
financial institutions, including the Company. The Company was preliminarily
approved for $13 million of equity capital in December 2008, and subsequently
withdrew its application.
Income Taxes
The effective tax rate for the six months ended June 30, 2009 was 7.6%
compared to 22.4% in 2008. The effective tax rate for the three months ended
June 30, 2009 was (10.0%) compared to 23.5% for the three month period ended
June 30, 2008. These rates are less than the statutory rate as a result of
the tax-free securities and loans held by the Company. In addition, beginning
in June of 2009, the Company began recognizing tax benefits the Company will
receive from historic and low income housing credits. The rates for 2009 are
lower due to the lower level of income for 2009. Nontaxable interest income
increased $152 thousand for the first six months of 2009 compared to the same
time period in 2008.
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, 2009, 262,701 shares have been purchased
under the program. The most recent share repurchase occurred on June 1, 2009.
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 $13.7 million as of June 30, 2009 compared to
$37.1 million at December 31, 2008. 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 a decrease in borrowings from the Federal
Home Loan Bank. In addition to cash and cash equivalents, the securities
portfolio provides an important source of liquidity. Securities available for
sale totaled $172.1 million at June 30, 2009. 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 a public fund account which brought $20 million in
deposits to the Company. The full $20 million was expected to roll off by
June 30, 2009. As of June 30, 2009, $4 million remains with the Company. In
addition, in early January 2009, the Company received deposits in the amount
of $18 million as a result of being the successful bidder on a public fund
account. As of June 30 2009, $9.2 million has rolled off with the remaining
$6.8 million to roll off during the remainder of 2009 and another $2 million
is expected to roll of during the first quarter of 2010. In July 2009, the
Company was again successful with bidding on a public fund account and was
rewarded with additional public fund deposits totaling $16 million. As of
June 30, 2009, we have sufficient collateral to borrow an additional $41
million from the FHLB. In addition, as of June 30, 2009, over $30 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, 2009, the Company's non-performing loans totaled $13.4 million
or 2.06% of loans compared to $9.2 million or 1.73% of loans at December 31,
2008. (See table below) The Company experienced an increase of $1.7 million
in non-accrual loans from December 31, 2008 to June 30, 2009. As of June 30,
2009, non-accrual loans include $2.9 million in loans secured by 1-4 family
residential real estate, $2.1 million in real estate construction and $2.0
million in loans secured by non-farm non-residential properties. Real estate
loans composed 93% of the non-performing loans as of June 30, 2009 and 96% as
of December 31, 2008. Forgone interest income on the non-accrual loans was
$367 thousand for the first six months of 2009 compared to $312 thousand for
the same time period in 2008.
Nonperforming Assets
6/30/09 12/31/08
(in thousands)
Non-accrual Loans $ 8,227 $ 6,562
Accruing Loans which are
Contractually past due
90 days or more 375 779
Total Nonperforming and Restructured 8,602 7,341
Other Real Estate 4,838 1,840
Total Nonperforming and Restructured
Loans and Other Real Estate $ 13,440 $ 9,181
Nonperforming and Restructured Loans
as a Percentage of Loans 2.06% 1.73%
Nonperforming and Restructured Loans
and Other Real Estate as a Percentage
of Total Assets 2.07% 1.35%
Allowance as a Percentage of
Period-end Loans 1.53% 1.29%
Allowance as a Percentage of
Non-performing and Restructured Loans 74% 60%
Provision for Loan Losses
The loan loss provision for the first six months ending June 30 was $900
thousand for both 2009 and 2008 The loan loss provision for the three months
ended June 30, 2009 was $450 thousand and $500 thousand for the same period in
2008. The current level of nonperforming loans has caused management to keep
the 2009 year to date the same as in 2008 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
recoveries for the six month period ended June 30, 2009 were $8 thousand
compared to net charge-offs of $385 thousand for the same period in 2008. Net
charge-offs for the three month period ended June 30, 2009 were $76 thousand
compared to $197 thousand during the same time period in 2008. 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, 2009
(in thousands)
2009 2008
Balance at Beginning of Period $ 5,465 $ 4,879
Amounts Charged-off:
Commercial 67 5
Real Estate Construction 39 217
Real Estate Mortgage 82 55
Agricultural 6 12
Consumer 624 612
Total Charged-off Loans 818 901
Recoveries on Amounts
Previously Charged-off:
Commercial 2 5
Real Estate Construction 35 2
Real Estate Mortgage 387 12
Agricultural - 30
Consumer 402 467
Total Recoveries 826 516
Net Charge-offs (8) 385
Provision for Loan Losses 900 900
Balance at End of Period 6,373 5,394
Loans
Average 418,375 412,549
At June 30 417,556 418,820
As a Percentage of Average Loans:
Net Charge-offs 0.00% 0.09%
Provision for Loan Losses 0.22% 0.22%
Allowance as a Multiple of
Net Charge-offs (398.3) 7.0
Loan Losses
Quarter Ended June 30
(in thousands)
2009 2008
Balance at Beginning of Period $ 5,999 $ 5,091
Amounts Charged-off:
Commercial 67 5
Real Estate Construction 36 92
Real Estate Mortgage 34 31
Consumer 353 254
Total Charged-off Loans 490 382
Recoveries on Amounts
Previously Charged-off:
Commercial 2 1
Real Estate Construction 35 -
Real Estate Mortgage 152 5
Agricultural - 1
Consumer 225 178
Total Recoveries 414 185
Net Charge-offs 76 197
Provision for Loan Losses 450 500
Balance at End of Period 6,373 5,394
Loans
Average 418,038 413,840
At June 30 417,556 418,820
As a Percentage of Average Loans:
Net Charge-offs 0.02% 0.05%
Provision for Loan Losses 0.11% 0.12%
Allowance as a Multiple of
Net Charge-offs 21.0 6.6
Item 3 - QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Asset/Liability management control is designed to ensure safety and soundness,
maintain liquidity and regulatory capital standards, and achieve acceptable
net interest income. Management considers interest rate risk to be the most
significant market risk. The Company's exposure to market risk is reviewed on
a regular basis by the Asset/Liability Committee. Interest rate risk is the
potential of economic losses due to future interest rate changes. These
economic losses can be reflected as a loss of future net interest income
and/or a loss of current fair market values. The objective is to measure the
effect on net interest income and to adjust the balance sheet to minimize the
inherent risk, while at the same time, maximize income.
Management realizes certain risks are inherent and that the goal is to
identify and minimize the risks. The primary 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,
2009 the projected percentage changes are within the Board approved limits
with the only exception being rates falling 100 basis points. 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, 2009 is as follows:
PROJECTED NET INTEREST INCOME
(dollars in thousands)
Level
Change in basis points: - 300 - 100 Rates + 100 + 300
Year One (7/09 - 6/10)
Net interest income 20,407 21,487 22,415 22,957 23,420
Net interest income dollar change (2,008) (928) N/A 542 1,005
Net interest income percentage change -9.0% -4.1% N/A 2.4% 4.5%
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, 2008 is as follows:
PROJECTED NET INTEREST INCOME
(dollars in thousands)
Level
Change in basis points: - 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%
Projections from June 30, 2009, year one reflected a decline in net interest
income of 4.1% with a 100 basis point decline compared to the 3.7% decline in
2008. The 100 basis point increase in rates reflected a 2.4% increase in net
interest income in 2009 compared to 1.7% in 2008.
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, 2009 balance sheet, a 300 basis point
increase in rates results in a 11% decline in EVE. A 300 basis point decrease
in rates results in a 1.5% 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, 2008 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
4/1/09 -
4/30/09 - - - 41,999 shares
5/1/09 -
5/31/09 2,000 17.60 2,000 39,999 shares
6/1/09 -
6/30/09 2,700 16.34 2,700 37,299 shares
Total 4,700 4,700 37,299 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, 2009 262,701 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 2009 Annual Meeting of Shareholders was held May 13,
2009. Proxies were solicited by the registrant's Board of Directors.
There was no solicitation in opposition to the Board's nominees as
listed in the proxy statement, and all of the nominees were elected by
vote of the shareholders. Voting results for each nominee were as
follows:
Votes For Votes Withheld
Betty J. Long 1,951,643 11,634
Ted McClain 1,936,253 27,024
Edwin S. Saunier 1,959,017 4,260
Buckner Woodford, IV 1,919,719 43,558
The following directors have a term of office that will continue
following the Annual Meeting: Louis Prichard, B. Proctor Caudill,
William Arvin, Henry Hinkle, Theodore Kuster, Robert Thompson and
Woodford Van Meter.
A proposal to approve the 2009 Stock Award Plan (attached hereto as
Exhibit 10.1 and incorporated herein by reference) was approved by a
majority of the outstanding shares of the registrant's common stock. A
total of 1,383,809 shares were voted in favor of the proposal; 79,118
shares were voted against; 29,407 shares abstained; and 508,141 shares
were broker non-votes.
The total number of Common Shares outstanding as of May 13, 2009, the
record date for the Annual Meeting of Shareholders, was 2,749,443.
Item 5. Other Information
None
Item 6. Exhibits
10.1 2009 Stock Award Plan.
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 _____7/13/09_______ __/s/Louis Prichard______________
Louis Prichard, President and C.E.O.
Date _____7/13/09_______ __/s/Gregory J. Dawson___________
Gregory J. Dawson, Chief Financial Officer
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