UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
[ X ] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 2007
or
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from ____________________ to ___________________
Commission File Number: 000-52598
KENTUCKY BANCSHARES, INC.
(Exact name of registrant as specified in its charter)
Kentucky 61-0993464
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
P.O. Box 157, Paris, Kentucky 40362-0157
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (859)987-1795
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days.
Yes X No _____
Indicate by check mark whether the registrant is a large accelerated filer, an
accelerated filer, or a non-accelerated filer. See definition of "accelerated
filer and large accelerated filer" in Rule 12b-2 of the Exchange Act.
Large accelerated filer _ Accelerated filer _ Non-accelerated filer X
Indicate by check mark whether the registrant is a shell company (as defined
in Rule 12b-2 of the Exchange Act). Yes No X___
Number of shares of Common Stock outstanding as of May 7, 2007: 2,868,248.
KENTUCKY BANCSHARES, INC.
Table of Contents
Part I - Financial Information
Item 1. Financial Statements
Consolidated Balance Sheets 3
Consolidated Statements of Income and
Comprehensive Income 4
Consolidated Statements of Changes in
Stockholders' Equity 5
Consolidated Statements of Cash Flows 6
Notes to Consolidated Financial Statements 7
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 10
Item 3. Quantitative and Qualitative Disclosures About
Market Risk 15
Item 4T. Controls and Procedures 16
Part II - Other Information 16
Signatures 17
Exhibits
31.1 Certifications of Chief Executive Officer pursuant
to Section 302 of the Sarbanes-Oxley Act of 2002. 18
31.2 Certifications of Chief Financial Officer pursuant
to Section 302 of the Sarbanes-Oxley Act of 2002. 20
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. 22
Item 1 - Financial Statements
KENTUCKY BANCSHARES, INC.
CONSOLIDATED BALANCE SHEETS (unaudited)
(thousands) 3/31/2007 12/31/2006
Assets
Cash and due from banks $ 13,125 $ 14,905
Federal funds sold 17,363 4,106
Cash and cash equivalents 30,488 19,011
Securities available for sale 131,577 127,891
Loans 441,488 444,150
Allowance for loan losses (5,043) (4,991)
Net loans 436,445 439,159
Federal Home Loan Bank stock 6,468 6,468
Bank premises and equipment, net 14,348 14,327
Interest receivable 4,931 5,654
Goodwill 13,117 13,117
Other intangible assets 1,990 2,058
Mortgage servicing rights 717 746
Other assets 1,250 1,111
Total assets $ 641,331 $ 629,542
Liabilities and Stockholders' Equity
Deposits
Non-interest bearing $ 86,967 $ 87,503
Time deposits, $100,000 and over 74,633 67,255
Other interest bearing 322,757 314,050
Total deposits 484,357 468,808
Repurchase agreements and other borrowings 10,682 11,327
Federal Home Loan Bank advances 76,422 80,030
Subordinated debentures 7,217 7,217
Interest payable 3,544 3,683
Other liabilities 3,029 3,196
Total liabilities 585,251 574,261
Stockholders' equity
Common stock 12,503 12,474
Additional paid-in capital 84 59
Retained earnings 44,848 44,062
Accumulated other comprehensive income (loss) (1,355) (1,314)
Total stockholders' equity 56,080 55,281
Total liabilities & stockholders' equity $ 641,331 $ 629,542
See Accompanying Notes
KENTUCKY BANCSHARES, INC.
CONSOLIDATED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME (unaudited)
(thousands, except per share amounts) Three Months Ending
3/31/2007 3/31/2006
INTEREST INCOME:
Loans, including fees $ 7,957 $ 6,436
Securities available for sale 1,572 1,535
Other 277 80
Total interest income 9,806 8,051
INTEREST EXPENSE:
Deposits 3,794 2,736
Other 1,040 839
Total interest expense 4,834 3,575
Net interest income 4,972 4,476
Loan loss provision 150 132
Net interest income after provision 4,822 4,344
NON-INTEREST INCOME:
Service charges 1,303 1,049
Loan service fee income 16 10
Trust department income 149 172
Securities available for sale gains (losses), net (1) 14
Gain on sale of mortgage loans 66 65
Other 312 230
Total other income 1,845 1,540
NON-INTEREST EXPENSE:
Salaries and employee benefits 2,776 2,260
Occupancy expenses 633 560
Amortization 68 24
Advertising and marketing 135 120
Taxes other than payroll, property and income 171 144
Other 764 934
Total other expenses 4,547 4,042
Income before taxes 2,120 1,842
Income taxes 558 549
Net income $ 1,562 $ 1,293
Other Comprehensive Income, net of tax:
Change in Unrealized Gains on Securities (41) (703)
Comprehensive Income $ 1,521 $ 590
Earnings per share
Basic $ 0.55 $ 0.48
Diluted 0.54 0.48
See Accompanying Notes
KENTUCKY BANCSHARES, INC.
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY (unaudited)
(thousands, except number of shares)
Accumulated
Additional Other Total
----Common Stock---- Paid-in Retained Comprehensive Stockholders'
Shares Amount Capital Earnings Income Equity
Balances, December 31, 2006 2,864,586 $ 12,474 $ 59 $ 44,062 $ (1,314) $ 55,281
Common stock issued, including tax
benefit, net (including stock grants
of 5,095 shares) 6,504 29 - - - 29
Stock based compensation expense - - 25 - - 25
Net change in unrealized gain (loss)
on securities available for sale,
net of tax - - - - (41) (41)
Net income - - - 1,562 - 1,562
Dividends declared - $0.27 per share - - - (776) - (776)
Balances, March 31, 2007 2,871,090 $ 12,503 $ 84 $ 44,848 $ (1,355) $ 56,080
See Accompanying Notes
KENTUCKY BANCSHARES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS (unaudited)
(thousands) Three Months Ending
3/31/2007 3/31/2006
Cash Flows From Operating Activities
Net Income $ 1,562 $ 1,293
Adjustments to reconcile net income to
net cash provided by operating activities:
Depreciation and Amortization 365 274
Securities amortization (accretion), net (57) 39
Noncash compensation expense 25 19
Provision for loan losses 150 132
Securities (gains) losses, net 1 (14)
Originations of loans held for sale (2,483) (3,866)
Proceeds from sale of loans 2,549 3,931
Federal Home Loan Bank stock dividends - (77)
Gain on sale of mortgage loans (66) (65)
Changes in:
Interest receivable 723 (423)
Other assets (262) (77)
Interest payable (139) (113)
Other liabilities (44) (170)
Net cash from operating activities 2,324 883
Cash Flows From Investing Activities
Purchases of securities available for sale (32,251) (2,007)
Proceeds from sales of securities available for sale 14,539 -
Proceeds from principal payments, maturities and
calls of securities available for sale 14,019 22,053
Net change in loans 2,564 (8,370)
Purchases of bank premises and equipment (274) (174)
Net cash from investing activities (1,403) 11,502
Cash Flows From Financing Activities:
Net change in deposits 15,549 (22,895)
Net change in securities sold under agreements to
repurchase, federal funds purchased
and other borrowings (645) 15,996
Payments on Federal Home Loan Bank advances (3,601) (7,232)
Proceeds from issuance of common stock 29 47
Dividends paid (776) (668)
Net cash from financing activities 10,556 (14,752)
Net change in cash and cash equivalents 11,477 (2,367)
Cash and cash equivalents at beginning of period 19,011 14,164
Cash and cash equivalents at end of period $ 30,488 $11,797
See Accompanying Notes
KENTUCKY BANCSHARES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. The preparation of financial statements in conformity with accounting
principles generally accepted in the United States of America requires
management to make estimates and assumptions that affect the reported
amounts of assets and liabilities and disclosure of contingent assets and
liabilities as of the date of the financial statements and the reported
amounts of revenues and expenses during the reporting period. Estimates
used in the preparation of the financial statements are based on various
factors including the current interest rate environment and the general
strength of the local economy. Changes in the overall interest rate
environment can significantly affect the Company's net interest income and
the value of its recorded assets and liabilities. Actual results could
differ from those estimates used in the preparation of the financial
statements.
The financial information presented as of any date other than December 31
has been prepared from the Company's books and records without audit. The
accompanying consolidated financial statements have been prepared in
accordance with the instructions to Form 10-Q and Rule 10-01 of Regulation
S-X. Certain financial information that is normally included in annual
financial statements prepared in accordance with accounting principles
generally accepted in the United States of America, but is not required for
interim reporting purposes, has been condensed or omitted. In the opinion
of management, all adjustments, consisting of normal recurring adjustments,
necessary for a fair presentation of such financial statements, have been
included. The results of operations for the interim periods are not
necessarily indicative of the results to be expected for the full year.
For further information, refer to the consolidated financial statements and
footnotes thereto included in the Company's Annual Report on Form 10-K for
the year ended December 31, 2006.
New accounting pronouncements -
In September 2006, the FASB issued SFAS No. 157, "Fair Value Measurements".
This Statement provides clarification of the definition of fair value,
methods used to measure fair value, and additional disclosures about fair
value measurements. This Standard is applicable in circumstances in which
other Standards require or permit assets or liabilities to be measured at
fair value. Therefore, this Standard does not require any new fair value
measurements. This Standard is effective for financial statements issued
for fiscal years beginning after November 15, 2007, and interim periods
within those fiscal years. The Company does not expect the adoption of
this Statement on January 1, 2008 to have a material impact on its results
of operations and consolidated financial condition.
On February 15, 2007, the FASB issued SFAS No. 159, "The Fair Value Option
for Financial Assets and Financial Liabilities". SFAS No. 159 allows
companies to record certain financial assets and financial liabilities at
full fair value if they so choose. SFAS No. 159 was issued to mitigate
volatility in reported earnings caused by an accounting model utilizing
multiple measurement attributes. The adoption of the fair value option is
recorded as a cumulative-effect adjustment to the opening balance of
retained earnings, which would be January 1 for the Company. Upon
adoption, the difference between the carrying amount and the fair value of
the items chosen is included in the cumulative-effect adjustment.
Subsequent changes in fair value are recorded through the income statement.
SFAS No. 159 is effective as of the beginning of the first fiscal year
after November 15, 2007, which is January 1, 2008 for the Company. The
Company does not expect the adoption of this Statement to have a material
impact on its results of operations and consolidated financial condition.
In June 2006, the FASB issued FASB Interpretation No. ("FIN") 48
"Accounting for Uncertainty in Income Taxes - an interpretation of FASB
Statement No. 109", to clarify certain aspects of accounting for uncertain
tax positions, including issues related to the recognition and measurement
of those tax positions taken or expected to be taken in a tax return. FIN
48 also provides guidance on derecognition, classification, interest and
penalties, accounting in interim periods, disclosure, and transition.
Adoption of FIN 48 on January 1, 2007 did not have a material impact on the
Company's results of operations and consolidated financial condition. It
is the Company's policy to recognize interest and penalties accrued
relative to unrecognized tax benefits in their respective federal or state
income taxes accounts.
2. INVESTMENT SECURITIES
INVESTMENT SECURITIES
Period-end securities are as follows:
(in thousands)
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
Available for Sale
March 31, 2007
U.S. government agencies $ 23,338 $ 158 $ (14) $ 23,482
States and political subdivisions 50,863 465 (265) 51,063
Mortgage-backed 52,960 6 (1,142) 51,824
Equity securities 270 18 - 288
Other 4,920 - - 4,920
Total 132,351 647 (1,421) 131,577
December 31, 2006
U.S. government agencies 31,524 93 (125) 31,492
States and political subdivisions 43,609 703 (182) 44,130
Mortgage-backed 53,200 - (1,218) 51,982
Equity securities 270 17 - 287
Total 128,603 813 (1,525) 127,891
3. LOANS
Loans at period-end are as follows:
(in thousands)
3/31/2007 12/31/2006
Commercial $ 25,072 $ 29,335
Real estate construction 29,297 29,034
Real estate mortgage 293,028 290,068
Agricultural 78,424 79,627
Consumer 15,667 16,086
Total 441,488 444,150
4. Basic earnings per common share is net income divided by the weighted
average number of common shares outstanding during the period. Diluted
earnings per common share includes the dilutive effect of additional
potential common shares issuable under stock options.
The factors used in the earnings per share computation follow:
Three Months Ended
March 31
2007 2006
(in thousands)
Basic Earnings Per Share
Net Income $1,562 $1,293
Weighted average common shares outstanding 2,862 2,671
Basic earnings per share $ 0.55 $ 0.48
Diluted Earnings Per Share
Net Income $1,562 $1,293
Weighted average common shares outstanding 2,862 2,671
Add dilutive effects of assumed exercise
of stock options 10 13
Weighted average common and dilutive
potential common shares outstanding 2,872 2,684
Diluted earnings per share $ 0.54 $ 0.48
Stock options for 30,500 shares of common stock for the three months ended
March 31, 2007, and for 31,100 shares of common stock for the three months
ended March 31, 2006 were excluded from diluted earnings per share because
their impact was antidilutive.
5. Stock Compensation
The Company grants certain officers and key employees stock option awards,
which vest and become fully exercisable at the end of five years. The
Company also grants certain directors stock option awards, which vest and
become fully exercisable immediately. The exercise price of each option,
which has a ten year life, was equal to the market price of the Company's
stock on the date of grant. The Company also provides to certain officers
and key employees restricted stock grants, which fully vest at the end of
five years. The Company records employee expense ratably over the five year
period, based on the market price of the common stock on the date of grant.
Total shares issuable under the restricted stock grant plan are 50,000
shares. In January 2007, 5,095 shares were granted under the plan.
The following table summarizes activity in the stock option plan for the
first quarter of 2007:
Three Months Ended
March 31, 2007
Weighted Average
Options Exercise Price
Outstanding, beginning of year 69,914 $ 26.54
Granted 800 31.00
Exercised (1,420) 20.46
Outstanding, end of period 69,294 26.72
Options exercisable at period end 51,924 25.42
The following details stock options outstanding:
March 31, 2007 December 31, 2006
Stock options vested and currently exercisable:
Number 51,924 44,072
Weighted average exercise price $ 25.42 $ 24.35
Aggregate intrinsic value $ 269,596 $ 308,190
Weighted average remaining
contractual life 56.2 months 52.3 months
The intrinsic value for stock options is calculated based on the exercise
price of the underlying awards and the market price of our common stock as
of the reporting date. The Company recorded $25 thousand in stock
compensation expense during the three months ended March 31, 2007 to
salaries and employee benefits.
The weighted-average assumptions for options granted during the year and
the resulting estimated weighted average fair values per share used in
computing 2007 and 2006 recognized compensation expense as follows.
2007 2006
Weighted-average fair value of options
granted during the year $4.22 $3.14
Risk-free interest rate 4.51% 4.59%
Expected option life 8 years 8 years
Expected stock price volatility 12.69% 7.99%
Expected dividend yield 3.48% 3.39%
The fair value of each stock option granted is estimated on the date of
grant using the Black-Scholes based stock option valuation model. This
model requires the input of subjective assumptions that will usually have a
significant impact on the fair value estimate. Expected volatilities are
based on historical volatility of the Company's stock, and other factors.
Expected dividends are based on dividend trends and the market price of the
Company's stock price at grant. The Company uses historical data to
estimate option exercises and employee terminations within the valuation
model. The risk-free rate for periods within the contractual life of the
option is based on the U.S. Treasury yield curve in effect at the time of
grant.
6. Dividends per share paid for the quarter ended March 31, 2007 were $0.27
compared to $0.25 for March 31, 2006.
7. Components of Net Periodic Benefit Cost
Three months ended March 31
(in thousands)
Pension Benefits
2007 2006
Service cost $ 114 $ 118
Interest cost 101 91
Expected return on plan assets (109) (99)
(Gain) loss amortization 8 10
Net Periodic Benefit Cost $ 114 $ 120
Employer Contributions
The Company expects to contribute $503 thousand as its 2007 annual
contribution to the Pension Plan. No contributions to the Pension Plan were
made for the quarter ended March 31, 2007, and the Company anticipates making
its annual contribution in the third quarter of 2007.
Item 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
Forward-Looking Statements
This discussion contains forward-looking statements under the Private
Securities Litigation Reform Act of 1995 that involve risks and uncertainties.
Words such as "believes," "anticipates," "expects," "intends," "plans,"
"targeted," and similar expressions are intended to identify forward-looking
statements but are not the exclusive means of identifying such statements.
Although the Company believes that the assumptions underlying the
forward-looking statements contained herein are reasonable, any of the
assumptions could be inaccurate, and therefore, there can be no assurance that
the forward-looking statements included herein will prove to be accurate.
Factors that could cause actual results to differ from the results discussed
in the forward-looking statements include, but are not limited to: economic
conditions (the Company and its bank operate in areas affected by various
markets, including the tobacco market); competition for the Company's
customers from other providers of financial and mortgage services; government
legislation and regulation (which changes from time to time and over which the
Company has no control); changes in interest rates (both generally and more
specifically mortgage interest rates); material unforeseen changes in the
liquidity, results of operations, or financial condition of the Company's
customers; and other risks detailed in the Company's filings with the
Securities and Exchange Commission, all of which are difficult to predict and
many of which are beyond the control of the Company. The Company undertakes
no obligation to 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 $1.6 million, or $0.55 basic
and $0.54 diluted earnings per share for the first three months ended March
31, 2007 compared to $1.3 million, or $0.48 basic earnings per share and $0.48
diluted earnings per share for the three month period ending March 31, 2006.
The first three months earnings reflects an increase of 20.8% compared to the
same time period in 2006.
Return on average assets was 0.97% for the three months ended March 31, 2007
and 0.91% for the three month period ended March 31, 2006. Return on average
equity was 11.1% for the three month period ended March 31, 2007 and 11.0% for
the same period in 2006.
Loans decreased $2.7 million from $444.2 million on December 31, 2006 to
$441.5 million on March 31, 2007. Increases in real estate construction and
real estate mortgage were offset by a decrease in commercial, agricultural and
consumer loans. Management attributes the decline in loans primarily to
competitive pressures.
Total deposits increased from $468.8 million on December 31, 2006 to $484.4
million on March 31, 2007, an increase of $15.5 million, primarily the result
of an increase in certificates of deposit, reported in time deposits, $100,000
or greater and other interest bearing deposits.
Net Interest Income
Net interest income was $5.0 million for the three months ended March 31, 2007
compared to $4.5 million for the three months ended March 31, 2006, an
increase of 11.1%. The interest spread was 3.26% for the first three months
of 2007 compared to 3.27% for the same period in 2006, a decrease of 1 basis
point. Generally, net interest margins have remained virtually unchanged in
the first three months of 2007 compared to 2006.
For the first three months, the yield on assets increased from 6.06% in 2006
to 6.62% in 2007. The cost of liabilities increased from 2.80% in 2006 to
3.36% in 2007. Year to date average loans are up $64.1 million, or 17.0% from
March 31, 2006 to March 31, 2007. Approximately $51 million in loans were
acquired with the Peoples Bancorp, Inc. (Peoples) merger in July 2006. Loan
interest income has increased $1.5 million for the first three months of 2007
compared to the first three months of 2006. Year to date average deposits
increased from March 31, 2006 to March 31, 2007, up $53.6 million, or 12.4%.
About $72 million in deposits were acquired in the Peoples merger in July
2006. The decrease, excluding the Peoples merger, is a result of the loss of
a public fund bid deposit and another large certificate of deposit customer.
Deposit interest expense has increased $1.1 million for the first three months
of 2007 compared to the same period in 2006.
Non-Interest Income
Non-interest income increased $305 thousand for the three months ended March
31, 2007 compared to the same period in 2006 to $1.8 million, due primarily to
an increase in overdraft income of $258 thousand (primarily from the deposit
relationships acquired with the Peoples merger in July 2006).
Gain on sale of mortgage loans were similar during the first three months of
2007 compared to the same period in 2006. 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 $505 thousand for the three month period
ended March 31, 2007 compared to the same period in 2006.
For the comparable three month periods, salaries and benefits increased $516
thousand, an increase of 22.8%. Salaries and incentives represented $371
thousand and employee benefits represented $145 thousand of the increase in
salaries and employee benefits expense during these comparable periods. These
increases are primarily attributable to the Peoples merger completed in July
2006.
Occupancy expenses increased $73 thousand to $633 thousand for the first three
months of 2007 compared to the same period in 2006. The increase in 2007 is
mainly attributable to two additional facilities acquired in the Peoples
merger in July 2006.
The increase in amortization, advertising and marketing, and taxes are also
primarily attributable to the Peoples merger completed in July 2006.
Other expenses decreased $170 thousand for the three months ended March 31,
2007 compared to the same time period in 2006. This is mainly a result of a
one time credit of $80 thousand received in 2007 for debit card expenses, and
costs related to the Peoples Bank merger incurred in the first quarter of 2006
(which were approximately $90 thousand in 2006).
Income Taxes
The tax equivalent rate for the three months ended March 31, 2007 was 26%
compared to 30% in 2006. These rates are less than the statutory rate as a
result of the tax-free securities and loans held by the Company.
Stock Repurchase Program
On October 25, 2000, the Company announced that its Board of Directors
approved a stock repurchase program to purchase up to 100,000 shares of its
outstanding common stock. On November 11, 2002, the Board of Directors
approved and authorized the Company's repurchase of an additional 100,000
shares. Shares will be purchased from time to time in the open market
depending on market prices and other considerations. Through March 31, 2007,
108,379 shares have been purchased under the program. The most recent share
repurchase occurred on April 18, 2007. The repurchase program has had a
positive effect on earnings per share calculations.
Liquidity and Funding
Liquidity risk is the possibility that the Company may not be able to meet its
cash requirements. Management of liquidity risk includes maintenance of
adequate cash and sources of cash to fund operations and meeting the needs of
borrowers, depositors and creditors. Excess liquidity has a negative impact
on earnings as a result of the lower yields on short-term assets.
Cash and cash equivalents were $30.5 million as of March 31, 2007 compared to
$19.0 million at December 31, 2006. The increase in cash and cash equivalents
is mainly attributable to an increase in federal funds sold resulting
primarily from a decrease in loan demand and an increase in certificates of
deposit. In addition to cash and cash equivalents, the securities portfolio
provides an important source of liquidity. Total securities available for
sale totaled $131.6 million at March 31, 2007. The available for sale
securities are available to meet liquidity needs on a continuing basis. The
Company expects the customers' deposits to be adequate to meet its funding
demands.
Generally, the Company relies upon net cash inflows from financing activities,
supplemented by net cash inflows from operating activities, to provide cash
used in its investing activities. As is typical of many financial
institutions, significant financing activities include deposit gathering, and
the use of short-term borrowings, such as federal funds purchased and
securities sold under repurchase agreements along with long-term debt. The
Company's primary investing activities include purchasing investment
securities and loan originations.
Management is aware of the challenge of funding sustained loan growth.
Therefore, in addition to deposits, other sources of funds, such as Federal
Home Loan Bank (FHLB) advances, may be used. The Company relies on FHLB
advances for both liquidity and asset/liability management purposes. These
advances are used primarily to fund long-term fixed rate residential mortgage
loans. As of March 31, 2007, we have sufficient collateral to borrow an
additional $28 million from the FHLB. In addition, as of March 31, 2007, over
$48 million is available in overnight borrowing through various correspondent
banks. In light of this, management believes there is sufficient liquidity to
meet all reasonable borrower, depositor and creditor needs in the present
economic environment.
Non-Performing Assets
As of March 31, 2007, the Company's non-performing loans totaled $3.9 million
or 0.88% of loans compared to $2.6 million or 0.59% of loans at December 31,
2006. (See table below) The increase in non-accrual loans is attributable to
an increase in the number of various real estate loans ($463 thousand of which
is real estate construction). Real estate loans composed 84% of the non-
performing loans as of March 31, 2007 and 91% as of December 31, 2006.
Forgone interest income on the non-accrual loans for both 2007 and 2006 is
immaterial.
Nonperforming Assets
3/31/07 12/31/06
(in thousands)
Non-accrual Loans $ 3,424 $ 2,379
Accruing Loans which are
Contractually past due
90 days or more 482 253
Total Nonperforming and Restructured Loans 3,906 2,632
Other Real Estate 321 411
Total Nonperforming and Restructured
Loans and Other Real Estate $ 4,227 $ 3,043
Nonperforming and Restructured Loans
as a Percentage of Loans 0.88% 0.59%
Nonperforming and Restructured Loans
and Other Real Estate as a Percentage
of Total Assets 0.66% 0.48%
Allowance as a Percentage of
Period-end Loans 1.14% 1.12%
Allowance as a Percentage of
Non-performing and Restructured Loans 129% 164%
Provision for Loan Losses
The loan loss provision for the first three months was $150 thousand for 2007
and $132 thousand for 2006. The current level of nonperforming loans has
caused management to increase the 2007 provision in order to maintain an
allowance for loan losses that is representative of the risk of loss based on
the quality of loans currently in the portfolio. Management estimates the
allowance balance required using past loan loss experience, the nature and
volume of the portfolio, information about specific borrower situations and
estimated collateral values, economic conditions, and other factors. Net
charge-offs for the three month period ended March 31, 2007 were $98 thousand
compared to $49 thousand for the same period in 2006. Future levels of
charge-offs will be determined by the particular facts and circumstances
surrounding individual loans. Management believes the current loan loss
allowance is sufficient to meet probable incurred loan losses.
Loan Losses
Three Months Ended March 31
(in thousands)
2007 2006
Balance at Beginning of Period $ 4,991 $ 4,310
Amounts Charged-off:
Commercial - 6
Real Estate Mortgage 56 54
Consumer 221 201
Total Charged-off Loans 277 261
Recoveries on Amounts
Previously Charged-off:
Commercial 1 1
Real Estate Construction 5 -
Real Estate Mortgage 2 -
Agricultural 15 21
Consumer 156 190
Total Recoveries 179 212
Net Charge-offs 98 49
Provision for Loan Losses 150 132
Balance at End of Period 5,043 4,393
Loans
Average 442,181 362,029
At March 31 441,488 379,233
As a Percentage of Average Loans:
Net Charge-offs 0.02% 0.01%
Provision for Loan Losses 0.03% 0.04%
Allowance as a Multiple of
Net Charge-offs 12.9 22.4
Item 3 - QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Asset/Liability management control is designed to ensure safety and soundness,
maintain liquidity and regulatory capital standards, and achieve acceptable
net interest income. Management considers interest rate risk to be the most
significant market risk. The Company's exposure to market risk is reviewed on
a regular basis by the Asset/Liability Committee. Interest rate risk is the
potential of economic losses due to future interest rate changes. These
economic losses can be reflected as a loss of future net interest income
and/or a loss of current fair market values. The objective is to measure the
effect on net interest income and to adjust the balance sheet to minimize the
inherent risk while at the same time maximize income.
Management realizes certain risks are inherent and that the goal is to
identify and minimize the risks. The primary tool used by management is an
interest rate shock simulation model. The Bank has no market risk sensitive
instruments held for trading purposes.
The following table depicts the change in net interest income resulting from
100 and 300 basis point changes in rates on the Company's interest earning
assets and interest bearing liabilities. The projections are based on balance
sheet growth assumptions and repricing opportunities for new, maturing and
adjustable rate amounts. As of March 31, 2007 the projected percentage
changes are within the Board approved limits. This period's volatility is
lower when compared to the same period a year ago. The projected net interest
income report summarizing the Company's interest rate sensitivity as of March
31, 2007 is as follows:
(dollars in thousands)
PROJECTED NET INTEREST INCOME
Level
Change in basis points: - 300 - 100 Rates + 100 + 300
Year One (4/07 - 3/08)
Net interest income 21,125 21,798 22,565 23,198 23,808
Net interest income dollar change (1,440) (767) N/A 633 1,243
Net interest income percentage change -6.4% -3.4% N/A 2.8% 5.5%
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 of March 31, 2006 is as follows:
(dollars in thousands)
PROJECTED NET INTEREST INCOME
Level
Change in basis points: - 300 - 100 Rates + 100 + 300
Year One (4/06 - 3/07)
Net interest income 15,788 17,050 17,560 17,994 18,696
Net interest income dollar change (1,772) (510) N/A 434 1,136
Net interest income percentage change -10.1% -2.9% N/A 2.5% 6.5%
Board approved limit >-18.0% >-6.0% N/A >-4.0% >-10.0%
These projected changes in net interest income as of March 31, 2007 are
slightly more when compared to the projected changes in net interest income as
of March 31, 2006 for 100 basis point changes. The projected changes (for 300
basis point changes) in net interest income are less as of March 31, 2007
compared to March 31, 2006. Projections from March 31, 2007, year one
reflected a decline in net interest income of 3.4% with a 100 basis point
decline compared to the 2.9% decline in 2006. The 300 basis point increase in
rates reflected a 5.5% increase in net interest income in 2007 compared to
6.5% in 2006.
Item 4T - CONTROLS AND PROCEDURES
As of the end of the period covered by this report, the Company carried out an
evaluation, under the supervision and with the participation of the Company's
management, including the Company's Chief Executive Officer and Chief
Financial Officer, of the effectiveness of the design and operation of the
Company's disclosure controls and procedures. Based on the foregoing, the
Company's Chief Executive Officer and Chief Financial Officer concluded that
the Company's disclosure controls and procedures were effective, in all
material respects, to ensure that information required to be disclosed in the
reports the Company files and submits under the Exchange Act is recorded,
processed, summarized and reported as and when required.
The Company also conducted an evaluation of internal control over financial
reporting to determine whether any changes occurred during the quarter covered
by this report that have materially affected, or are reasonably likely to
materially affect, the Company's internal control over financial reporting.
Based on this evaluation, there has been no such change during the quarter
covered by this report.
Part II - Other Information
Item 1. Legal Proceedings
The Company is not a party to any material legal proceedings.
Item 1A. Risk Factors
There have been no material changes in risk factors, as previously
disclosed in the December 31, 2006 Form 10-K.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
ISSUER PURCHASES OF EQUITY SECURITIES
Period (a) Total (b) (c) Total Number (d) Maximum Number
Number of Average of Shares (or Units) (or Approximate Dollar
Shares (or Price Paid Purchased as Part Value) of Shares (or
Units) Per Share of Publicly Units) that May Yet Be
Purchased (or Unit) Announced Plans Purchased Under the
Or Programs Plans of Programs
1/1/07 -
1/31/07 -0- N/A N/A 91,621 shares
2/1/07 -
2/28/07 -0- N/A N/A 91,621 shares
3/1/07 -
3/31/07 -0- N/A N/A 91,621 shares
Total -0- N/A 91,621 shares
On October 25, 2000, the Company announced that its Board of Directors
approved a stock repurchase program. The Company is authorized to purchase up
to 100,000 shares of its outstanding common stock. On November 11, 2002, the
Board of Directors approved and authorized the Company's repurchase of an
additional 100,000 shares. Shares will be purchased from time to time in the
open market depending on market prices and other considerations. Through
March 31, 2007, 108,379 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 2007 Annual Meeting of Shareholders was held May 9,
2007. 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
William Arvin 2,220,506 33,892
B. Proctor Caudill 2,220,534 33,864
Louis Prichard 2,216,760 37,638
Woodford Van Meter 2,221,176 33,222
The following directors have a term of office that will continue
following the Annual Meeting: Henry Hinkle, Betty J. Long, Theodore
Kuster, Ted McClain, Edwin S. Saunier, Robert G. Thompson and Buck
Woodford.
The total number of Common Shares outstanding as of March 23, 2007, the
record date for the Annual Meeting of Shareholders, was 2,871,090.
Item 5. Other Information
None
Item 6. Exhibits
31.1 Certifications of Chief Executive Officer pursuant to
Section 302 of the Sarbanes-Oxley Act of 2002.
31.2 Certifications of Chief Financial Officer pursuant to
Section 302 of the Sarbanes-Oxley Act of 2002.
32 Certifications of Chief Executive Officer and Chief
Financial Officer pursuant to 18 U.S.C. Section 1350, as
adopted pursuant to Section 906 of the Sarbanes-Oxley
Act of 2002.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
KENTUCKY BANCSHARES, INC.
Date _____5/14/07________ __/s/Louis Prichard______________
Louis Prichard, President and C.E.O.
Date _____5/14/07________ __/s/Gregory J. Dawson___________
Gregory J. Dawson, Chief Financial Officer
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