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, 2010
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 _____
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 April 30, 2010: 2,743,187.
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 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 17
Item 3. Quantitative and Qualitative Disclosures About
Market Risk 25
Item 4. Controls and Procedures 26
Part II - Other Information 27
Signatures 28
Exhibits
31.1 Certifications of Chief Executive Officer pursuant
to Section 302 of the Sarbanes-Oxley Act of 2002. 29
31.2 Certifications of Chief Financial Officer pursuant
to Section 302 of the Sarbanes-Oxley Act of 2002. 31
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. 33
Item 1 - Financial Statements
KENTUCKY BANCSHARES, INC.
CONSOLIDATED BALANCE SHEETS (unaudited)
(in thousands) 3/31/2010 12/31/2009
Assets
Cash and due from banks $ 16,088 $ 12,387
Federal funds sold 60,619 22,034
Cash and cash equivalents 76,707 34,421
Securities available for sale 191,089 168,411
Mortgage loans held for sale 899 191
Loans 422,270 425,418
Allowance for loan losses (5,763) (7,600)
Net loans 416,507 417,818
Federal Home Loan Bank stock 6,731 6,731
Real estate owned 5,739 4,542
Bank premises and equipment, net 17,964 17,610
Interest receivable 4,362 4,620
Mortgage servicing rights 810 822
Goodwill 13,117 13,117
Other intangible assets 1,198 1,263
Other assets 5,467 5,685
Total assets $ 740,590 $ 675,231
Liabilities and Stockholders' Equity
Deposits
Non-interest bearing $ 118,285 $ 97,005
Time deposits, $100,000 and over 153,358 105,036
Other interest bearing 333,965 334,405
Total deposits 605,608 536,446
Repurchase agreements and other borrowings 6,766 8,226
Federal Home Loan Bank advances 54,497 56,096
Subordinated debentures 7,217 7,217
Interest payable 2,977 2,123
Other liabilities 1,957 4,158
Total liabilities 679,022 614,266
Stockholders' equity
Preferred stock, 300,000 shares
authorized and unissued - -
Common stock, no par value; 10,000,000 shares
authorized; 2,743,471 and 2,739,511 shares
issued and outstanding on March 31, 2010 and
December 31, 2009 12,444 12,416
Retained earnings 47,582 47,213
Accumulated other comprehensive income 1,542 1,336
Total stockholders' equity 61,568 60,965
Total liabilities & stockholders' equity $ 740,590 $ 675,231
See Accompanying Notes
KENTUCKY BANCSHARES, INC.
CONSOLIDATED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME (unaudited)
(in thousands, except per share amounts) Three Months Ending
3/31/2010 3/31/2009
INTEREST INCOME:
Loans, including fees $ 5,910 $ 6,079
Securities available for sale 1,650 2,108
Other 11 10
Total interest income 7,571 8,197
INTEREST EXPENSE:
Deposits 2,092 2,533
Other 610 912
Total interest expense 2,702 3,445
Net interest income 4,869 4,752
Loan loss provision 450 450
Net interest income after provision 4,419 4,302
NON-INTEREST INCOME:
Service charges 1,096 1,146
Loan service fee income 25 27
Trust department income 115 109
Securities available for sale gains, net 3 4
Gain on sale of mortgage loans 126 378
Other 382 337
Total other income 1,747 2,001
NON-INTEREST EXPENSE:
Salaries and employee benefits 2,449 2,549
Occupancy expenses 688 657
Repossession expenses 336 90
FDIC insurance 242 231
Legal and professional fees 124 47
Data processing 203 202
Debit card expenses 143 139
Amortization 65 66
Advertising and marketing 129 124
Taxes other than payroll, property and income 195 188
Other 598 591
Total other expenses 5,172 4,884
Income before taxes 994 1,419
Income taxes 49 252
Net income $ 945 $ 1,167
Other Comprehensive Income, net of tax:
Change in Unrealized Gains on Securities 206 1,036
Comprehensive Income $ 1,151 $ 2,203
Earnings per share
Basic $ 0.35 $ 0.43
Diluted 0.35 0.43
Dividends per share 0.21 0.20
See Accompanying Notes
KENTUCKY BANCSHARES, INC.
CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY (unaudited)
(in thousands, except share information)
Accumulated
Other Total
--Common Stock(1)-- Retained Comprehensive Stockholders'
Shares Amount Earnings Income Equity
Balances, January 1, 2010 2,739,511 $ 12,416 $ 47,213 $ 1,336 $ 60,965
Common stock issued, including tax
benefit, net 3,960 - - - -
Stock based compensation expense - 28 - - 28
Net change in unrealized gain (loss)
on securities available for sale,
net of tax - - - 206 206
Net income - - 945 - 945
Dividends declared - $0.21 per share - - (576) - (576)
Balances, March 31, 2010 2,743,471 $ 12,444 $ 47,582 $ 1,542 $ 61,568
(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) Three Months Ending
3/31/2010 3/31/2009
Cash Flows From Operating Activities
Net Income $ 945 $ 1,167
Adjustments to reconcile net income to
net cash provided by operating activities:
Depreciation and amortization 394 334
Securities amortization, net 203 200
Stock based compensation expense 28 29
Provision for loan losses 450 450
Securities (gains), net (3) (4)
Originations of loans held for sale (5,179) (17,678)
Proceeds from sale of loans 4,597 18,056
Losses on sale of fixed assets 1 -
Losses (gains) on other real estate, net (5) 38
Gain on sale of mortgage loans (126) (378)
Changes in:
Interest receivable 258 651
Real estate owned, net 191 262
Other assets 182 (3,551)
Interest payable 854 842
Other liabilities (2,307) (623)
Net cash from operating activities 483 (205)
Cash Flows From Investing Activities
Purchases of securities (43,228) (42,811)
Proceeds from principal payments, maturities and
calls of securities 20,662 11,134
Net change in loans (532) 11,630
Purchases of bank premises and equipment (647) (237)
Proceeds from the sale of bank premises and equipment 3 -
Net cash from investing activities (23,742) (20,284)
Cash Flows From Financing Activities:
Net change in deposits 69,162 5,573
Net change repurchase agreements and other borrowings (1,260) 3,029
Payments on Federal Home Loan Bank advances (1,581) (10,560)
Payments on note payable (200) (200)
Dividends paid (576) (550)
Net cash from financing activities 65,545 (2,708)
Net change in cash and cash equivalents 42,286 (23,197)
Cash and cash equivalents at beginning of period 34,421 37,106
Cash and cash equivalents at end of period $ 76,707 $ 13,909
Supplemental disclosures of cash flow information
Cash paid during the year for:
Interest expense $ 1,848 $ 2,603
Income taxes - -
Supplemental disclosures of non-cash investing
activities
Real estate acquired through foreclosure $ 1,801 $ 2,890
See Accompanying Notes
KENTUCKY BANCSHARES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
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, 2009.
Basis of Presentation: The consolidated financial statements include the
accounts of Kentucky Bancshares, Inc. (the Company), its wholly-owned
subsidiary, Kentucky Bank (the Bank), and the Bank's wholly-owned
subsidiary, KB Special Assets Unit, LLC. Intercompany transactions and
balances have been eliminated in consolidation.
Nature of Operations: The Bank operates under a state bank charter and
provides full banking services, including trust services, to customers
located in Bourbon, Clark, Elliot, Harrison, Jessamine, Rowan, Scott,
Woodford and adjoining counties in Kentucky. As a state bank, the Bank is
subject to regulation by the Kentucky Department of Financial Institutions
and the Federal Deposit Insurance Corporation (FDIC). The Company, a bank
holding company, is regulated by the Federal Reserve.
Estimates in the Financial Statements: 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 at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates. The
allowance for loan losses, mortgage servicing rights, real estate owned,
goodwill and fair value of financial instruments are particularly subject to
change.
Adoption of New Accounting Standards
Accounting Standards Codification ("ASC") Topic 820, "Fair Value
Measurements and Disclosures". The Financial Accounting Standards Board
issued new accounting guidance under Accounting Standards Update (ASU) No.
2010-06 that requires new disclosures and clarifies existing disclosure
requirements about fair value measurement as set forth in ASC Subtopic 820-
10. The objective of the new guidance is to improve these disclosures and
increase transparency in financial reporting. Specifically, the new
guidance requires:
A reporting entity to disclose separately the amounts of significant
transfers in and out of Level 1 and Level 2 fair value measurements
and describe the reasons for the transfers; and
In the reconciliation for fair value measurements using significant
unobservable inputs, a reporting entity should present separately
information about purchases, sales, issuances, and settlements.
In addition, the guidance clarifies the requirements of the following
existing disclosures:
For purposes of reporting fair value measurement for each class of
assets and liabilities, a reporting entity needs to use judgment in
determining the appropriate classes of assets and liabilities; and
A reporting entity should provide disclosures about the valuation
techniques and inputs used to measure fair value for both recurring
and nonrecurring fair value measurements.
ASU 2010-06 is effective for interim and annual reporting periods beginning
after December 15, 2009, except for the disclosures about purchases, sales,
issuances, and settlements in the roll forward of activity in Level 3 fair
value measurements. Those disclosures are effective for fiscal years
beginning after December 15, 2010, and for interim periods within those
fiscal years. Early application is permitted. Additional disclosures have
been made.
ASC Topic 860, "Transfers and Servicing". Effective January 1, 2010, the
Company adopted new accounting guidance under ASC Topic 860 that 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. The guidance eliminates
the concept of a "qualifying special-purpose entity," changes the
requirements for derecognizing financial assets, and requires additional
disclosures about continuing involvements with transferred financial assets
including information about gains and losses resulting from transfers
during the period. The adoption of this accounting guidance did not have a
material impact on the Company's consolidated financial position or results
of operations.
ASC Topic 810, "Consolidation". Effective January 1, 2010, the Company
adopted new accounting guidance under ASC Topic 810 that amends prior
guidance to change 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. The new
guidance requires a number of new disclosures about an entity's involvement
with variable interest entities and any significant changes in risk
exposure due to that involvement. A reporting entity will also be required
to disclose how its involvement with a variable interest entity affects the
reporting entity's financial statements. The adoption of this accounting
guidance did not have a material impact on the Company's consolidated
financial position or results of operations.
2. SECURITIES AVAILABLE FOR SALE
Period-end securities are as follows:
(in thousands)
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
March 31, 2010
U.S. government agencies $ 63,705 $ 47 $ (171) $ 63,581
States and political subdivisions 84,080 1,742 (496) 85,326
Mortgage-backed - residential 40,698 1,294 (105) 41,887
Equity securities 270 25 - 295
Total $ 188,753 $ 3,108 $ (772) $ 191,089
December 31, 2009
U.S. government agencies $ 45,168 $ 13 $ (448) $ 44,733
States and political subdivisions 78,794 1,691 (362) 80,123
Mortgage-backed - residential 42,155 1,259 (151) 43,263
Equity securities 270 22 - 292
Total $ 166,387 $ 2,985 $ (961) $ 168,411
The amortized cost and fair value of securities at March 31, 2010, by
contractual maturity, are shown below. Expected maturities will differ from
contractual maturities because borrowers may have the right to call or prepay
obligations with or without call or prepayment penalties. Securities not due
at a single maturity are shown separately.
(in thousands) Amortized Fair
Cost Value
Due in one year or less $ 1,178 $ 1,284
Due after one year through five years 46,820 46,949
Due after five years through ten years 43,371 44,257
Due after ten years 56,416 56,417
147,785 148,907
Mortgage-backed - residential 40,698 41,887
Equity 270 295
Total $ 188,753 $ 191,089
Securities with unrealized losses at March 31, 2010 and at December 31, 2009
not recognized in income are as follows:
March 31, 2010
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 agencies $46,282 $ (171) $ - $ - $46,282 $ (171)
States and municipals 30,233 (484) 761 (12) 30,994 (496)
Mortgage-backed - residential 14,698 (105) - - 14,698 (105)
Total temporarily impaired $91,213 $ (760) $ 761 $ (12) $91,974 $ (772)
December 31, 2009
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 agencies $35,216 $ (448) $ - $ - $35,216 $ (448)
States and municipals 25,126 (348) 870 (14) 25,996 (362)
Mortgage-backed - residential 11,930 (151) - - 11,930 (151)
Total temporarily impaired $72,272 $ (947) $ 870 $ (14) $73,142 $ (961)
The Company evaluates securities for other than temporary impairment at
least on a quarterly basis, and more frequently when economic or market
concerns warrant such evaluation. In analyzing an issuer's financial
condition, the Company 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.
Unrealized losses on securities have not been recognized into income
because the issues are of high credit quality, management does not intend
to sell and it is more likely than not that management would be required to
sell the securities prior to their anticipated recovery, and the decline in
fair value is largely due to changes in interest rates. The fair value is
expected to recover as the securities approach maturity.
Management believes the declines in fair value are largely due to changes
in interest rates. The Company believes there is no other than temporary
impairment and does not have the intent to sell these securities and it is
likely that it will not be required to sell the securities before their
anticipated recovery.
3. LOANS
Loans at period-end are as follows:
(in thousands)
3/31/10 12/31/09
Commercial $ 27,812 $ 21,933
Real estate construction 15,475 16,865
Real estate mortgage 283,849 287,444
Agricultural 78,836 80,619
Consumer 16,040 18,277
Other 258 280
Total $ 422,270 $ 425,418
Activity in the allowance for loan losses was as follows:
(in thousands)
3/31/10 3/31/09
Beginning balance $ 7,600 $ 5,465
Charge-offs (2,589) (328)
Recoveries 302 412
Provision for loan losses 450 450
Ending balance $ 5,763 $ 5,999
Individually impaired loans were as follows:
(in thousands)
3/31/10 12/31/09
Period-end loans with no allocated
allowance for loan losses $18,389 $19,206
Period-end loans with allocated
Allowance for loan losses 12,045 14,266
Total $30,434 $33,472
Amount of the allowance for loan
losses allocated $ 2,130 $ 4,064
Nonperforming loans were as follows:
3/31/10 12/31/09
Loans past due over 90 days still
on accrual $ 121,000 $ 2,526,000
Nonaccrual loans 15,408,000 12,038,000
Nonaccrual loans are included in impaired loans.
Nonaccrual loans and loans past due 90 days still on accrual include both
smaller balance homogeneous loans that are collectively evaluated for
impairment and individually classified impaired loans.
The decrease in impaired loans is primarily from $1.2 million transferred to
real estate owned and $2.5 million recorded in chargeoffs during the first
quarter of 2010. The increase in nonaccrual loans was primarily from various
smaller balance loans being added during the first quarter of 2010.
The Company has no troubled debt restructurings as of March 31, 2010 and
December 31, 2009.
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:
Three Months Ended
March 31
2010 2009
(in thousands, except per share information)
Basic Earnings Per Share
Net Income $ 945 $1,167
Weighted average common shares outstanding 2,732 2,736
Basic earnings per share $ 0.35 $ 0.43
Diluted Earnings Per Share
Net Income $ 945 $1,167
Weighted average common shares outstanding 2,732 2,736
Add dilutive effects of assumed exercise
of stock options - 1
Weighted average common and dilutive
potential common shares outstanding 2,732 2,737
Diluted earnings per share $ 0.35 $ 0.43
Stock options of 33,490 shares common stock for the three month period ended
March 31, 2010 and 37,844 shares common stock for the three month period ended
March 31, 2009 were excluded from diluted earnings per share because their
impact was antidilutive. Stock grants of 21,705 shares common stock for the
three month period ended March 31, 2010 and 13,505 shares common stock for the
three month period ended March 31, 2009 were excluded from diluted earnings
per share because their impact was antidilutive.
5. STOCK COMPENSATION
The Company has four share based compensation plans as described below.
Two Stock Option Plans
Under its expired 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 provided for issuance of up to
100,000 options. Under the expired 1993 Non-Employee Directors Stock Ownership
Incentive Plan, the Company had also granted certain directors stock option
awards which vest and become fully exercisable immediately and provided for
issuance 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.
Summary of activity in the stock option plan for 2010 follows:
Weighted
Weighted Average
Average Remaining Aggregate
Exercise Contractual Intrinsic
Shares Price Term Value
Outstanding, beginning of year 36,250 $29.42
Granted - -
Forfeited or expired (2,760) 27.93
Exercised - -
Outstanding, end of period 33,490 $29.54 47.4 months $ -
Vested and expected to vest 33,490 $29.54 47.4 months $ -
Exercisable, end of period 33,490 $29.54 47.4 months $ -
As of March 31, 2010, there was $0 of total unrecognized compensation cost
related to nonvested stock options granted under the Plan. Since both stock
option plans have expired, as of March 31, 2010 no additional options can be
granted.
2005 Restricted Stock Grant Plan
On May 10, 2005, the Company's stockholders approved a restricted stock grant
plan. Total shares issuable under the plan are 50,000. There were 4,020
shares issued during 2010 and 4,150 shares issued during 2009. There were 60
shares forfeited during 2010 and 516 shares forfeited during 2009. As of March
31, 2010, the restricted stock grant plan allows for additional restricted
stock share awards of up to 29,887 shares.
A summary of changes in the Company's nonvested shares for the year follows:
Weighted-Average
Grant-Date
Nonvested Shares Shares Fair Value
Nonvested at January 1, 2010 10,122 $ 261,033
Granted 4,020 65,928
Vested (2,740) (73,936)
Forfeited (60) (1,507)
Nonvested at March 31, 2010 11,342 $ 251,518
As of March 31, 2010, there was $264,264 of total unrecognized compensation
cost related to nonvested shares granted under the Plan. The cost is expected
to be recognized over a weighted-average period of 5 years.
2009 Stock Award Plan
On May 13, 2009, the Company's stockholders approved a stock award plan that
provides for the granting of both incentive and nonqualified stock options and
other share based awards. Total shares issuable under the plan are 150,000.
As of March 31, 2010 no awards have been granted under the plan and 150,000
shares are still available.
6. FAIR VALUE MEASUREMENTS
ASC Topic 820, "Fair Value Measurements and Disclosures", defines fair value,
establishes a framework for measuring fair value, and sets forth disclosures
about fair value measurements. ASC Topic 825, "Financial Instruments", allows
entities to choose to measure certain financial assets and liabilities at fair
value. The Company has not elected the fair value option for any financial
assets or liabilities.
ASC Topic 820 defines fair value as the price that would be received to sell
an asset or paid to transfer a liability in an orderly transaction between
market participants at the measurement date. It also 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. This
Topic 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 company's own
assumptions about the assumptions that market participants would use in
pricing an asset or liability.
The Company used the following methods and significant assumptions to estimate
the fair value:
Investment Securities: The fair values for available for sale investment
securities are determined by quoted market prices, if available (Level 1).
For securities where quoted prices are not available, fair values are
calculated based on market prices of similar securities (Level 2). For
securities where quoted prices or market prices of similar securities are not
available, fair values are calculated using discounted cash flows or other
market indicators (Level 3).
Impaired Loans: 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 usually significant and typically result in a Level 3
classification of the inputs for determining fair value.
Other Real Estate Owned: Nonrecurring adjustments to certain commercial and
residential real estate properties classified as other real estate owned
(OREO) are measured at the lower of carrying amount or fair value, less costs
to sell. Fair values are generally based on third party appraisals of the
property, resulting in a Level 3 classification. In cases where the carrying
amount exceeds the fair value, less costs to sell, an impairment loss is
recognized.
Mortgage Servicing Rights: Fair value is based on market prices for
comparable mortgage servicing contracts, when available, or alternatively
based on a valuation model that calculates the present value of estimated
future net servicing income, resulting in a Level 3 classification.
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 tables below.
(In thousands) Fair Value Measurements at March 31, 2010 Using:
Quoted Prices
In Active
Markets for Significant Other Significant
Identical Observable Unobservable
Carrying Assets Inputs Inputs
Description Value (Level 1) (Level 2) (Level 3)
U. S. government agencies $ 63,581 $ - $ 63,581 $ -
States and municipals 85,326 - 85,326 -
Mortgage-backed - residential 41,887 - 41,887 -
Equity securities 295 295 - -
Total $191,089 $ 295 $190,794 $ -
(In thousands) Fair Value Measurements at December 31, 2009 Using:
Quoted Prices
In Active
Markets for Significant Other Significant
Identical Observable Unobservable
Carrying Assets Inputs Inputs
Description Value (Level 1) (Level 2) (Level 3)
U. S. government agencies $ 44,733 $ - $ 44,733 $ -
States and municipals 80,123 - 80,123 -
Mortgage-backed - residential 43,263 - 43,263 -
Equity securities 292 292 - -
Total $168,411 $ 292 $168,119 $ -
Assets measured at fair value on a non-recurring basis are summarized below:
(In thousands) Fair Value Measurements at March 31, 2010 Using:
Quoted Prices
In Active
Markets for Significant Other Significant
Identical Observable Unobservable
Carrying Assets Inputs Inputs
Description Value (Level 1) (Level 2) (Level 3)
Impaired loans $ 210 $ - $ - $ 210
Other real estate
Owned 2,553 - - 2,553
(In thousands) Fair Value Measurements at December 31, 2009 Using:
Quoted Prices
In Active
Markets for Significant Other Significant
Identical Observable Unobservable
Carrying Assets Inputs Inputs
Description Value (Level 1) (Level 2) (Level 3)
Impaired loans $10,202 $ - $ - $ 10,202
Other real estate
Owned 68 - - 68
Mortgage servicing
rights 626 - - 626
Impaired loans, which are measured for impairment using the fair value of the
collateral for collateral dependent loans, had a carrying amount of $233
thousand, with a valuation allowance of $23 thousand at March 31, 2010,
resulting in an additional provision of $23 thousand for loan losses for the
period ending March 31, 2010.
Other real estate owned which is measured at fair value less costs to sell,
had a net carrying amount of $2.6 million, which is made up of the outstanding
balance of $2.8 million, net of a valuation allowance of $291 thousand at
March 31, 2010, resulting in a write-down of $279 thousand for the period
ending March 31, 2010.
Fair Value of Financial Instruments
The fair values of the Company's financial instruments at March 31, 2010 and
December 31, 2009 are as follows:
March 31, 2010 December 31, 2009
Carrying Carrying
Amount Fair Value Amount Fair Value
(In Thousands)
Financial assets
Cash and cash equivalents $ 76,707 $ 76,707 $ 34,421 $ 34,421
Securities 191,089 191,089 168,411 168,411
Mortgage loans held for sale 899 899 191 191
Loans, net 416,507 416,152 417,818 417,759
FHLB stock 6,731 N/A 6,731 N/A
Interest receivable 4,362 4,362 4,620 4,620
Financial liabilities
Deposits $ 605,608 $ 609,988 $ 536,446 $ 541,691
Securities sold under
agreements to repurchase
and other borrowings 6,766 6,792 8,226 8,252
FHLB advances 54,497 56,123 56,096 57,633
Subordinated debentures 7,217 6,566 7,217 6,029
Interest payable 2,977 2,977 2,123 2,123
The methods and assumptions, not previously presented, used to estimate fair
value are described as follows: Carrying amount is the estimated fair value
for cash and cash equivalents, interest bearing deposits, accrued interest
receivable and payable, demand deposits, short-term debt, and variable rate
loans or deposits that reprice frequently and fully. The methods for
determining the fair values for securities were described previously. 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 (including consideration of widening credit spreads). Fair value of debt
is based on current rates for similar financing. It was not practicable to
determine the fair value of FHLB stock due to restrictions placed on its
transferability. The fair value of off-balance sheet items 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.
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 (both generally and more specifically in the markets, including the
tobacco market and the thoroughbred horse industry, in which the Company and
its bank operate); competition for the Company's customers from other
providers of financial and mortgage services; government legislation,
regulation and monetary policy (which changes from time to time and over which
the Company has no control); changes in interest rates (both generally and
more specifically mortgage interest rates); material unforeseen changes in the
liquidity, results of operations, or financial condition of the Company's
customers; and other risks detailed in the Company's filings with the
Securities and Exchange Commission, all of which are difficult to predict and
many of which are beyond the control of the Company. The Company undertakes
no obligation to republish revised forward-looking statements to reflect
events or circumstances after the date hereof or to reflect the occurrence of
unanticipated events.
Summary
Kentucky Bancshares, Inc. recorded net income of $945 thousand, or $0.35 basic
earnings and diluted earnings per share for the first three months ending
March 31, 2010 compared to $1.2 million, or $0.43 basic earnings and diluted
earnings per share for the three month period ending March 31, 2009. The
first three months earnings reflects a decrease of 19.1% compared to the same
time period in 2009, due primarily to a decrease on the gain of sold loans of
$252 thousand and an increase in other non-interest expenses of $346 thousand.
These reductions to net income were partially offset by an increase in net
interest income of $117 thousand, a reduction in employee salaries and
benefits of $100 thousand and a reduction in income tax expense of $203
thousand.
Return on average assets was 0.54% for the three months ended March 31, 2010
and 0.68% for the three month period ended March 31, 2009. Return on average
equity was 6.1% for the three month period ended March 31, 2010 and 8.1% for
the same period in 2009.
Loans decreased $3.1 million from $425.4 million on December 31, 2009 to
$422.3 million on March 31, 2010. The overall decrease is attributed to
decreases in real estate construction loans, real estate mortgage loans,
agricultural and consumer loans. Decreases to these sectors of the loan
portfolio were partially offset by an increase of $6.3 million in commercial
loans.
Total deposits increased from $536.4 million on December 31, 2009 to $605.6
million on March 31, 2010, an increase of $69.2 million. This increase is
primarily the result of an increase in non-interest bearing deposit accounts
of $21.3 million and an increase in interest bearing time deposit accounts
over $100 thousand of $48.3 million. Deposits are up due to temporary cash
influxes in our existing deposit base. Of this increase, $30 million is
expected to be withdrawn during the second quarter of 2010, and an additional
$18 million is short term and may also be withdrawn.
Net Interest Income
Net interest income was $4.9 million for the three months ended March 31, 2010
compared to $4.8 million for the three months ended March 31, 2009, an
increase of 2.5%. The interest spread of 3.02% for the first three months of
2010 is up from 2.95% reported for the same period in 2009, an increase of 7
basis points. Rates have remained fairly low in the past year. In addition
to lower rates and tightening margins, the net interest spread for 2010 is
affected by an increase in "lost" loan interest during 2010 that can be
attributed to an increase in non-performing loans in our loan portfolio.
For the first three months, the yield on assets decreased from 5.18% in 2009
to 4.74% in 2010. The cost of liabilities decreased from 2.23% in 2009 to
1.72% in 2010. Year to date average loans increased $4.4 million, or 1.0%
from March 31, 2009 to March 31, 2010. Loan interest income has decreased
$169 thousand for the first three months of 2010 compared to the first three
months of 2009. Year to date average deposits increased from March 31, 2009
to March 31, 2010, up $32.2 million or 6.0%. The increase is primarily the
result of an increase in non-interest bearing deposits and time deposits with
balances greater than $100 thousand. Deposit interest expense has decreased
$441 thousand for the first three months of 2010 compared to the same period
in 2009.
Non-Interest Income
Non-interest income decreased $254 thousand for the three months ended March
31, 2010 compared to the same period in 2009 to $1.7 million, due primarily to
a decrease in the gains on the sale of mortgage loans of $252 thousand and a
decrease in service charges of $50 thousand. These reductions to income were
partially offset by an increase in other non-interest income of $45 thousand.
The decrease in service charges was primarily due to a decrease in fees
collected for title insurance of $35 thousand. The increase in other non-
interest income was primarily due to an increase of $41 thousand in debit card
interchange income.
Gain on sale of mortgage loans decreased from $378 thousand in the first three
months of 2009 to $126 thousand during the first three months of 2010. The
volume of loans sold during the first three month of 2010 decreased $13
million compared to the same time period in 2009. 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 $288 thousand for the three month period
ended March 31, 2010 compared to the same period in 2009.
For the comparable three month periods, salaries and benefits decreased $100
thousand, a decrease of 3.9%. The decrease in salaries & benefits is
primarily attributed to the company offering voluntary separation options to
certain employees during the third and fourth quarters of 2009. The number of
full time equivalent employees decreased from 203 at March 31, 2009 to 178 at
March 31, 2010.
Occupancy expenses increased $31 thousand to $688 thousand for the first three
months of 2010 compared to the same time period in 2009. The increase during
2010 is mainly attributable to an increase in depreciation expense of $51
thousand.
Legal and professional fees increased $77 thousand for the first three months
ended March 31, 2010 compared to the same time period in 2009. Repossession
expenses increased $246 thousand for the first three months ended March 31,
2010 compared to the same time period in 2009. These increases were partially
offset by a decrease in the loss of foreclosed property of $43 thousand. Due
to the downturn in the financial industry and related bank failures, the FDIC
increased the FDIC insurance premiums.
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 five basis points as of June 30, 2009. The special
assessment amounted to $296 thousand and was paid on September 30, 2009. 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. On November 12, 2009, the FDIC adopted a final
rule requiring insured depository institutions to prepay their estimated
quarterly risk-based assessments for the fourth quarter of 2009, and for all
of 2010, 2011, and 2012. The prepaid amount will be amortized over the
prepayment period. The Company's prepayment was $3.1 million.
Financing Corporation ("FICO") Assessments. FICO assessment costs were $14
thousand for the three months ended March 31, 2010 and $53 thousand for 2009.
FICO is a mixed-ownership government corporation established by the
Competitive Equality Banking Act of 1987 possessing assessment powers in
addition to the FDIC. The FDIC acts as a collection agent for FICO, whose
sole purpose is to function as a financing vehicle for the now defunct Federal
Savings & Loan Insurance Corporation.
Income Taxes
The effective tax rate for the three months ended March 31, 2010 was 4.9%
compared to 17.8% in 2009. These rates are less than the statutory rate as a
result of the tax-free securities and loans held by the Company. The rates
for 2010 are lower due to the lower level of income for 2010 and increased tax
free income. Nontaxable interest income increased $194 thousand for the first
three months of 2010 compared to the same time period in 2009.
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 $76.7 million as of March 31, 2010 compared to
$34.4 million at December 31, 2009. The increase in cash and cash equivalents
is mainly attributable to an increase in federal funds sold resulting
primarily from an increase in the Company's short term deposits. In addition
to cash and cash equivalents, the securities portfolio provides an important
source of liquidity. Securities available for sale totaled $191.1 million at
March 31, 2010 compared to $168.4 million at December 31, 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.
For the first three months of 2010, deposits have increased $69 million. With
loan demand being slow, we have been able to increase our investment portfolio
by $23 million and our fed funds sold position by $39 million. And to a
lesser degree, we have paid down and will continue to pay down maturing FHLB
advances.
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, 2010, we have sufficient collateral to borrow an
additional $57 million from the FHLB. In addition, as of March 31, 2010, over
$33 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.
Capital Requirements
The Company and the Bank are subject to various regulatory capital
requirements administered by the federal banking agencies. Failure to meet
minimum capital requirements can initiate certain mandatory and possible
additional discretionary actions by regulators that, if undertaken, could have
a direct material effect on the Company's financial statements. Under capital
adequacy guidelines and the regulatory framework for prompt corrective action,
the Company and the Bank must meet specific capital guidelines that involve
quantitative measures of the Company's and the Bank's assets, liabilities, and
certain off-balance sheet items as calculated under regulatory accounting
practices. The Company and Bank capital amounts and classifications are also
subject to qualitative judgments by regulators about components, risk
weightings, and other factors.
Quantitative measures established by regulation to ensure capital adequacy
require the Company and the Bank to maintain minimum amounts and ratios (set
forth in the following table) of Total and Tier I capital (as defined in the
regulations) to risk-weighted assets (as defined), and of Tier I capital to
average assets (as defined). Management believes, as of March 31, 2010 and
December 31, 2009, that the Company and the Bank meet all capital adequacy
requirements to which they are subject.
The most recent notification from the Federal Deposit Insurance Corporation
categorized the Bank as well capitalized under the regulatory framework for
prompt corrective action. To be categorized as well capitalized, the Bank
must maintain minimum Total risk-based, Tier I risk-based and Tier I leverage
ratios as set forth in the following table. There are no conditions or events
since that notification that management believes have changed the
institution's category.
The Company's and the Bank's actual amounts and ratios are presented in the
table below:
To Be Well
Capitalized
Under Prompt
For Capital Corrective
Actual Adequacy Purposes Action Provisions
Amount Ratio Amount Ratio Amount Ratio
(Dollars in Thousands)
March 31, 2010
Consolidated
Total Capital (to Risk-Weighted Assets) $ 58,938 12.3% $ 38,325 8% $ 47,906 N/A
Tier I Capital (to Risk-Weighted Assets) 53,089 11.1 19,162 4 28,743 N/A
Tier I Capital (to Average Assets) 53,089 7.7 27,541 4 34,427 N/A
Bank Only
Total Capital (to Risk-Weighted Assets) $ 61,051 12.8% $ 38,314 8% $ 47,893 10%
Tier I Capital (to Risk-Weighted Assets) 55,202 11.5 19,157 4 28,736 6
Tier I Capital (to Average Assets) 55,202 8.0 27,531 4 34,414 5
December 31, 2009
Consolidated
Total Capital (to Risk-Weighted Assets) $ 58,398 12.6% $ 36,957 8% $ 46,196 N/A
Tier I Capital (to Risk-Weighted Assets) 52,593 11.4 18,478 4 27,718 N/A
Tier I Capital (to Average Assets) 52,593 8.0 26,201 4 32,752 N/A
Bank Only
Total Capital (to Risk-Weighted Assets) $ 60,675 13.1% $ 36,941 8% $ 46,177 10%
Tier I Capital (to Risk-Weighted Assets) 54,869 11.9 18,471 4 27,706 6
Tier I Capital (to Average Assets) 54,869 8.4 26,200 4 32,750 5
Non-Performing Assets
As of March 31, 2010, the Company's non-performing assets totaled $21.3
million or 2.87% of assets compared to $19.1 million or 2.83% of assets at
December 31, 2009. (See table below) The Company experienced an increase of
$3.4 million in non-accrual loans from December 31, 2009 to March 31, 2010,
largely due to an increase in non-accrual loans secured by real estate of $3.4
million. As of March 31, 2010, non-accrual loans include $3.0 million in
loans secured by 1-4 family residential real estate, $4.2 million in real
estate construction and $6.4 million in loans secured by non-farm non-
residential properties. Real estate loans composed 99% of the non-performing
loans as of March 31, 2010 and 98% as of December 31, 2009. Forgone interest
income on the non-accrual loans was $253 thousand for the first three months
of 2010 compared to $205 thousand for the same time period in 2009. Accruing
loans that are contractually 90 days or more past due as of March 31, 2010
totaled $121 thousand compared to $2.5 million at December 31, 2009, a
decrease of $2.4 million. The total nonperforming loans increased $965
thousand from December 31, 2009 to March 31, 2010, resulting in a slight
increase in the ratio of nonperforming loans to loans of 26 basis points to
3.68%. In addition, the amount the Company has booked as "Other Real Estate"
has increased $1.2 million from December 31, 2009 to March 31, 2010. As of
March 31, 2010 the amount booked as "Other Real Estate" totaled $5.7 million
compared to $4.5 million at December 31, 2009. The increase is largely
attributed to one loan customer who specialized in commercial & land
development properties that totaled $1.2 million. The allowance as a
percentage of non-performing and restructured loans decreased slightly from
40% at December 31, 2009 to 37% at March 31, 2010.
Nonperforming Assets
3/31/10 12/31/09
(in thousands)
Non-accrual Loans $ 15,408 $ 12,038
Accruing Loans which are
Contractually past due
90 days or more 121 2,526
Total Nonperforming and Restructured Loans 15,529 14,564
Other Real Estate 5,739 4,542
Total Nonperforming and Restructured
Loans and Other Real Estate $ 21,268 $ 19,106
Nonperforming and Restructured Loans
as a Percentage of Loans 3.68% 3.42%
Nonperforming and Restructured Loans
and Other Real Estate as a Percentage
of Total Assets 2.87% 2.83%
Allowance as a Percentage of
Period-end Loans 1.36% 1.79%
Allowance as a Percentage of
Non-performing and Restructured Loans 37% 40%
The Company maintains a "watch list" of agricultural, commercial, real estate
mortgage, and real estate construction loans and reviews those loans on a
regular basis. Generally, assets are designated as "watch list" loans to
ensure more frequent monitoring. If it is determined that there is serious
doubt as to performance in accordance with original terms of the contract,
then the loan is generally downgraded and often placed on non-accrual status.
We review and evaluate nonaccrual loans, past due loans, and loans graded
substandard or worse on a regular basis to determine if specific allocations
are needed.
Provision for Loan Losses
The loan loss provision for the first three months was $450 thousand for 2010
and 2009. Management evaluates the loan portfolio by reviewing the historical
loss rate for each respective loan type and assigns risk multiples to certain
categories to account for qualitative factors including current economic
conditions. The average loss rates are reviewed in the analysis, as well as
comparisons to peer group loss rates. Management makes allocations within the
allowance for loan losses for specifically classified loans regardless of loan
amount, collateral or loan type. Loan categories are evaluated utilizing
subjective factors in addition to the historical loss calculations to
determine a loss allocation for each of those types. As this analysis, or any
similar analysis, is an imprecise measure of loss, the allowance is subject to
ongoing adjustments. Therefore, management will often take into account other
significant factors that may be necessary or prudent in order to reflect
probable incurred losses in the total loan portfolio.
Net charge-offs for the three month period ended March 31, 2010 were $2.3
million compared to net recoveries of $84 thousand for the same period in
2009. Based on our internal loan review as of December 31, 2009, an addition
of $1.8 million was made to the allowance for loan losses in the fourth
quarter of 2009. Many of the charge-off loans recorded in the first quarter
of 2010 were directly related to the additional provision in the fourth
quarter of 2009. Future levels of charge-offs will be determined by the
particular facts and circumstances surrounding individual loans. Based on the
above information, Management believes the current loan loss allowance is
sufficient to meet probable incurred loan losses.
Loan Losses
Three Months Ended March 31, 2010
(in thousands)
2010 2009
Balance at Beginning of Period $ 7,600 $ 5,465
Amounts Charged-off:
Commercial 19 -
Real Estate Construction 547 3
Real Estate Mortgage 1,713 48
Agricultural 74 6
Consumer 236 271
Total Charged-off Loans 2,589 328
Recoveries on Amounts
Previously Charged-off:
Commercial 43 -
Real Estate Mortgage 103 235
Agricultural 8 -
Consumer 148 177
Total Recoveries 302 412
Net Charge-offs 2,287 (84)
Provision for Loan Losses 450 450
Balance at End of Period $ 5,763 $ 5,999
Loans
Average $ 423,164 $ 418,712
At March 31 422,270 415,638
As a Percentage of Average Loans:
Net Charge-offs 0.54% -0.02%
Provision for Loan Losses 0.11% 0.11%
Allowance as a Multiple of
Net Charge-offs 0.6 (17.9)
Item 3 - QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Asset/Liability management control is designed to ensure safety and soundness,
maintain liquidity and regulatory capital standards, and achieve acceptable
net interest income. Management considers interest rate risk to be the most
significant market risk. The Company's exposure to market risk is reviewed on
a regular basis by the Asset/Liability Committee. Interest rate risk is the
potential of economic losses due to future interest rate changes. These
economic losses can be reflected as a loss of future net interest income
and/or a loss of current fair market values. The objective is to measure the
effect on net interest income and to adjust the balance sheet to minimize the
inherent risk, while at the same time, maximize income.
Management realizes certain risks are inherent and that the goal is to
identify and minimize the risks. The primary 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 March 31,
2010, the projected percentage changes are within the Board approved limits
except when assuming rates declining 100 basis points. Although management
does analyze and monitor the projected percentage change in a declining
interest rate environment, due to the current rate environment many of the
current deposit rates cannot decline an additional 100 basis points.
Therefore, management places more emphasis in the rising rate environment
scenarios. This period's volatility is higher in each rate shock simulation
both in a falling and rising rate environment 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, 2010 is as follows:
PROJECTED NET INTEREST INCOME
(dollars in thousands)
Level
Change in basis points: - 300 - 100 Rates + 100 + 300
Year One (4/10 - 3/11)
Net interest income $22,644 $23,402 $23,808 $24,334 $24,795
Net interest income dollar change (1,164) (406) N/A 526 987
Net interest income percentage change -4.9% -1.7% N/A 2.2% 4.1%
Board approved limit >-10.0% >-4.0% N/A >-4.0% >-10.0%
The projected net interest income report summarizing the Company's interest
rate sensitivity as March 31, 2009 is as follows:
PROJECTED NET INTEREST INCOME
(dollars in thousands)
Level
Change in basis points: - 300 - 100 Rates + 100 + 300
Year One (4/09 - 3/10)
Net interest income $20,351 $21,431 $22,359 $22,901 $23,364
Net interest income dollar change (2,008) (928) N/A 542 1,005
Net interest income percentage change -8.9% -4.1% N/A 2.4% 4.5%
Board approved limit >-10.0% >-4.0% N/A >-4.0% >-10.0%
Projections from March 31, 2010, year one reflected a decline in net interest
income of 1.7% with a 100 basis point decline compared to the 4.1% decline in
2009. The 100 basis point increase in rates reflected a 2.2% increase in net
interest income in 2010 compared to 2.4% in 2009.
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 March 31, 2010 balance sheet, a 100 basis point
increase in rates results in an 8.6% decrease in EVE. A 100 basis point
decrease in rates results in a 2.2% decrease 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, 2009 Form 10-K.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
ISSUER PURCHASES OF EQUITY SECURITIES
(a) (b) (c) Total Number (d) Maximum Number
Total of Shares (or Units) (or Approximate Dollar
Number of Average Purchased as Part Value) of Shares (or
Shares (or Price Paid of Publicly Units) that May Yet Be
Units) Per Share Announced Plans Purchased Under the
Period Purchased (or Unit) Or Programs Plans of Programs
1/1/10 -
1/31/10 - $ - - 32,199 shares
2/1/10 -
2/28/10 - - - 32,199 shares
3/1/10 -
3/31/10 - - - 32,199 shares
Total - - - 32,199 shares
On October 25, 2000, the Company announced that its Board of Directors
approved a stock repurchase program and authorized the Company 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 purchase 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, 2010, 267,801 shares have
been purchased.
Item 4. (Removed and Reserved)
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 _____5/14/10_______ __/s/Louis Prichard______________
Louis Prichard, President and C.E.O.
Date _____5/14/10_______ __/s/Gregory J. Dawson___________
Gregory J. Dawson, Chief Financial Officer
29
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