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 September 30, 2009
or
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from ____________________ to ___________________
Commission File Number: 000-52598
KENTUCKY BANCSHARES, INC.
(Exact name of registrant as specified in its charter)
Kentucky 61-0993464
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
P.O. Box 157, Paris, Kentucky 40362-0157
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (859)987-1795
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days.
Yes X No _____
Indicate by check mark whether the registrant has submitted electronically and
posted on its corporate web site, if any, every Interactive Data File required
to be submitted and posted pursuant to Rule 405 of Regulation S-T (Section
232.405 of this chapter) during the preceding 12 months (or for such shorter
period that the registrant was required to submit and post such files).
Yes No X _
Indicate by check mark whether the registrant is a large accelerated filer, an
accelerated filer, a non-accelerated filer, or a smaller reporting company.
See definitions of "large accelerated filer," "accelerated filer" and "smaller
reporting company" in Rule 12b-2 of the Exchange Act.
Large accelerated filer ____
Accelerated filer ____
Non-accelerated filer X (Do not check if a smaller reporting company)
Smaller reporting company _____
Indicate by check mark whether the registrant is a shell company (as defined
in Rule 12b-2 of the Exchange Act). Yes No X _
Number of shares of Common Stock outstanding as of November 6, 2009:
2,739,607.
KENTUCKY BANCSHARES, INC.
Table of Contents
Part I - Financial Information
Item 1. Financial Statements
Consolidated Balance Sheets 3
Consolidated Statements of Income and
Comprehensive Income 4
Consolidated Statement of Changes in
Stockholders' Equity 6
Consolidated Statements of Cash Flows 7
Notes to Consolidated Financial Statements 8
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 20
Item 3. Quantitative and Qualitative Disclosures About
Market Risk 28
Item 4. Controls and Procedures 29
Part II - Other Information
Item 1. Legal Proceedings 29
Item 1A. Risk Factors 29
Item 2. Unregistered Sales of Equity Securities and
Use of Proceeds 29
Item 6. Exhibits 30
Signatures 30
Exhibits
31.1 Certifications of Chief Executive Officer pursuant
to Section 302 of the Sarbanes-Oxley Act of 2002. 31
31.2 Certifications of Chief Financial Officer pursuant
to Section 302 of the Sarbanes-Oxley Act of 2002. 33
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. 35
Item 1 - Financial Statements
KENTUCKY BANCSHARES, INC.
CONSOLIDATED BALANCE SHEETS (unaudited)
(thousands) 9/30/2009 12/31/2008
Assets
Cash and due from banks $ 11,484 $ 16,411
Federal funds sold 102 20,695
Cash and cash equivalents 11,586 37,106
Securities available for sale 169,558 172,834
Loans 427,921 424,276
Allowance for loan losses (6,338) (5,465)
Net loans 421,583 418,811
Federal Home Loan Bank stock 6,731 6,731
Bank premises and equipment, net 17,612 17,875
Interest receivable 5,078 5,156
Goodwill 13,117 13,117
Other intangible assets 1,328 1,523
Mortgage servicing rights 751 465
Other assets 7,649 5,157
Total assets $ 654,993 $ 678,775
Liabilities and Stockholders' Equity
Deposits
Non-interest bearing $ 91,338 $ 90,480
Time deposits, $100,000 and over 102,192 108,465
Other interest bearing 303,053 321,863
Total deposits 496,583 520,808
Repurchase agreements and other borrowings 13,487 10,717
Federal Funds Purchased 4,687 -
Federal Home Loan Bank advances 63,430 77,301
Subordinated debentures 7,217 7,217
Interest payable 2,588 2,874
Other liabilities 4,137 2,817
Total liabilities 592,129 621,734
Stockholders' equity
Common stock 12,391 12,344
Retained earnings 46,350 44,683
Accumulated other comprehensive income (loss) 4,123 14
Total stockholders' equity 62,864 57,041
Total liabilities & stockholders' equity $ 654,993 $ 678,775
See Accompanying Notes
KENTUCKY BANCSHARES, INC.
CONSOLIDATED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME (unaudited)
(thousands, except per share amounts)
Nine Months Ending
9/30/2009 9/30/2008
INTEREST INCOME:
Loans, including fees $ 18,640 $ 20,976
Securities available for sale 5,361 5,414
Other 15 327
Total interest income 24,016 26,717
INTEREST EXPENSE:
Deposits 7,100 8,776
Other 2,566 2,907
Total interest expense 9,666 11,683
Net interest income 14,350 15,034
Loan loss provision 1,350 1,500
Net interest income after provision 13,000 13,534
NON-INTEREST INCOME:
Service charges 3,918 3,969
Loan service fee income 69 65
Trust department income 377 371
Securities available for sale gains (losses), net 351 21
Gain on sale of mortgage loans 1,026 342
Other 1,235 1,243
Total other income 6,976 6,011
NON-INTEREST EXPENSE:
Salaries and employee benefits 8,618 7,806
Occupancy expenses 2,042 2,066
Amortization 195 199
Advertising and marketing 372 365
Taxes other than payroll, property and income 553 538
Other 4,494 3,379
Total other expenses 16,274 14,353
Income before taxes 3,702 5,192
Income taxes 277 1,157
Net income $ 3,425 $ 4,035
Other Comprehensive Income, net of tax:
Change in Unrealized Gains on Securities 4,109 (1,590)
Comprehensive Income $ 7,534 $ 2,445
Earnings per share
Basic $ 1.25 $ 1.44
Diluted 1.25 1.44
See Accompanying Notes
KENTUCKY BANCSHARES, INC.
CONSOLIDATED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME (unaudited)
(thousands, except per share amounts) Three Months Ending
9/30/2009 9/30/2008
INTEREST INCOME:
Loans, including fees $ 6,337 $ 6,893
Securities available for sale 1,574 1,825
Other 1 71
Total interest income 7,912 8,789
INTEREST EXPENSE:
Deposits 2,204 2,574
Other 783 1,114
Total interest expense 2,987 3,688
Net interest income 4,925 5,101
Loan loss provision 450 600
Net interest income after provision 4,475 4,501
NON-INTEREST INCOME:
Service charges 1,396 1,409
Loan service fee income 19 20
Trust department income 142 101
Securities available for sale gains (losses), net 148 6
Gain on sale of mortgage loans 215 64
Other 436 376
Total other income 2,356 1,976
NON-INTEREST EXPENSE:
Salaries and employee benefits 2,632 2,576
Occupancy expenses 741 688
Amortization 64 66
Advertising and marketing 119 112
Taxes other than payroll, property and income 187 180
Other 1,627 1,115
Total other expenses 5,370 4,737
Income before taxes 1,461 1,740
Income taxes 108 384
Net income $ 1,353 $ 1,356
Other Comprehensive Income, net of tax:
Change in Unrealized Gains on Securities 3,290 (740)
Comprehensive Income $ 4,643 $ 616
Earnings per share
Basic $ 0.49 $ 0.49
Diluted 0.49 0.49
See Accompanying Notes
KENTUCKY BANCSHARES, INC.
CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY (unaudited)
(thousands, except share information)
Accumulated
Other Total
----Common Stock---- Retained Comprehensive Stockholders'
Shares Amount (1) Earnings Income Equity
Balances, December 31, 2008 2,745,729 $ 12,344 $ 44,683 $ 14 $ 57,041
Common stock issued, including tax benefit, net
(including stock grants of 3,660 shares) 3,678 - - - -
Stock based compensation expense - 86 - - 86
Common stock purchased and retired (8,800) (39) (111) - (150)
Net change in unrealized gain (loss)
on securities available for sale,
net of tax - - - 4,109 4,109
Net income - - 3,425 - 3,425
Dividends declared - $0.60 per share - - (1,647) - (1,647)
Balances, September 30, 2009 2,740,607 $ 12,391 $ 46,350 $ 4,123 $ 62,864
(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) Nine Months Ending
9/30/2009 9/30/2008
Cash Flows From Operating Activities
Net Income $ 3,425 $ 4,035
Adjustments to reconcile net income to
net cash provided by operating activities:
Depreciation & amortization 1,128 1,212
Securities amortization (accretion), net 1,156 (184)
Noncash compensation expense 86 101
Provision for loan losses 1,350 1,500
Securities (gains) losses, net (351) (21)
Originations of loans held for sale (45,213) (16,296)
Proceeds from sale of loans 46,239 16,598
Federal Home Loan Bank stock dividends - (263)
Losses (gains) on sale of bank premises and equipment - (5)
Gain on sale of mortgage loans (1,026) (342)
Changes in:
Interest receivable 78 54
Other assets (2,947) (1,948)
Interest payable (286) (2,651)
Other liabilities (797) 3,963
Net cash from operating activities 2,842 5,753
Cash Flows From Investing Activities
Purchases of securities available for sale (60,799) (63,690)
Proceeds from sales of securities available for sale 20,646 9,427
Proceeds from principal payments, maturities and
calls of securities available for sale 48,850 54,674
Net change in loans (4,122) (3,785)
Purchases of bank premises and equipment (555) (2,038)
Proceeds from the sale of bank premises and equipment - 5
Net cash from investing activities 4,020 (5,407)
Cash Flows From Financing Activities:
Net change in deposits (24,225) (14,426)
Net change in securities sold under agreements to
repurchase, federal funds purchased and other borrow 7,657 (92)
Advances from Federal Home Loan Bank 10,000 51,000
Payments on Federal Home Loan Bank advances (23,817) (31,310)
Proceeds from note payable - 5,500
Payment on note payable (200) (2,500)
Proceeds from issuance of common stock - 15
Purchase of common stock (150) (3,119)
Dividends paid (1,647) (2,353)
Net cash from financing activities (32,382) 2,715
Net change in cash and cash equivalents (25,520) 3,061
Cash and cash equivalents at beginning of period 37,106 25,807
Cash and cash equivalents at end of period 11,586 28,868
Supplemental disclosures of cash flow information
Cash paid during the year for:
Interest expense $ 9,952 $ 14,334
Income taxes 400 1,200
Supplemental schedules of non-cash investing
Activities
Real estate acquired through foreclosure $ 4,109 $ 1,057
See Accompanying Notes
KENTUCKY BANCSHARES, INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The preparation of financial statements for Kentucky Bancshares, Inc., a
bank holding company in Paris, Kentucky, (the "Company") in conformity with
accounting principles generally accepted in the United States of America
requires management to make estimates and assumptions that affect the
reported amounts of assets and liabilities and disclosure of contingent
assets and liabilities as of the date of the financial statements and the
reported amounts of revenues and expenses during the reporting period.
Estimates used in the preparation of the financial statements are based on
various factors including the current interest rate environment and the
general strength of the local economy. Changes in the overall interest
rate environment can significantly affect the Company's net interest income
and the value of its recorded assets and liabilities. Actual results could
differ from those estimates used in the preparation of the financial
statements.
The financial information presented as of any date other than December 31
has been prepared from the Company's unaudited books and records. The
accompanying consolidated financial statements have been prepared in
accordance with the instructions to Form 10-Q and Rule 10-01 of Regulation
S-X. Certain financial information that is normally included in annual
financial statements prepared in accordance with accounting principles
generally accepted in the United States of America, but is not required for
interim reporting purposes, has been condensed or omitted. In the opinion
of management, all adjustments, consisting of normal recurring adjustments,
necessary for a fair presentation of such financial statements, have been
included. The results of operations for the interim periods are not
necessarily indicative of the results to be expected for the full year.
For further information, refer to the consolidated financial statements and
footnotes thereto included in the Company's Annual Report on Form 10-K for
the year ended December 31, 2008.
Recently Issued But Not Yet Effective Accounting Standards
ASC Topic 860, "Transfers and Servicing". Effective January 1, 2010, new
accounting guidance under ASC Topic 860 will require more information about
transfers of financial assets, including securitization transactions, and
where entities have continuing exposure to the risks related to transferred
financial assets. It eliminates the concept of a "qualifying special-
purpose entity," changes the requirements for derecognizing financial
assets, and requires additional disclosures about continuing involvements
with transferred financial assets including information about gains and
losses resulting from transfers during the period. The Company does not
expect the guidance under this Topic to have a material impact on its
consolidated results of operations or financial position upon adoption.
ASC Topic 820, "Fair Value Measurements and Disclosures". In August 2009,
the FASB issued ASU 2009-05, "Fair Value Measurements and Disclosures
(Topic 820)-Measuring Liabilities at Fair Value". ASU 2009-05 includes
amendments to Topic 820 for the fair value measurement of liabilities and
provides clarification that in circumstances in which a quoted price in an
active market for the identical liability is not available, a reporting
entity is required to measure fair value using one or more of the
techniques provided for in Topic 820. The guidance under ASU 2009-05
became effective October 1, 2009. The Company does not expect the guidance
under this ASU to have a material impact on its consolidated results of
operations or financial position upon adoption.
ASC Topic 260, "Earnings Per Share". In September 2009, the FASB issued
ASU 2009-08, "Earnings Per Share-Amendments to Section 260-10-S99". ASU
2009-08 includes technical corrections to Topic 260, based on EITF Topic D-
53, "Computation of Earnings Per Share for a Period that Includes a
Redemption or an Induced Conversion of a Portion of a Class of Preferred
Stock" and EITF Topic D-42, "The Effect of the Calculation of Earnings Per
Share for the Redemption or Induced Conversion of Preferred Stock". The
Company does not expect the guidance under this ASU to have a material
impact on its consolidated results of operations or financial position upon
adoption.
Adoption of New Accounting Standards
In June 2009 the Financial Accounting Standards Board ("FASB") issued an
accounting pronouncement establishing FASB Accounting Standards
CodificationTM ("ASC") as the source of authoritative U.S. generally
accepted accounting principles ("GAAP") applicable to all nongovernmental
entities effective July 1, 2009. ASC superseded then-existing FASB,
American Institute of Certified Public Accountants, Emerging Issues Task
Force ("EITF"), and related literature. Rules and interpretive releases of
the Securities and Exchange Commission ("SEC") under the authority of
federal securities laws are also sources of GAAP for SEC registrants. All
other accounting literature is non-authoritative.
The FASB will no longer issue new standards in the form of Statements of
Financial Accounting Standards, FASB Staff Position's, or EITF Abstracts.
Instead, the FASB will issue Accounting Standards Updates ("ASU"), which
will serve only to: (a) update the ASC; (b) provide background information
about the guidance; and (c) provide the bases for conclusions on changes in
the ASC. The change to ASC changes how companies refer to GAAP in
financial statements and accounting policies. Companies will now cite
relevant accounting content by referring to the specific Topic, Subtopic,
Section, or Paragraph structure of the ASC. The adoption of this
accounting pronouncement did not have a material impact on the Company's
consolidated financial position or results of operations.
ASC Topic 820, "Fair Value Measurements and Disclosures". Effective for
the second quarter of 2009, the Company adopted new accounting guidance
under ASC Topic 820. New guidance under this Topic:
? Affirms that the objective of fair value when the market for an asset
is not active is the price that would be received to sell the asset in
an orderly transaction.
? Clarifies and includes additional factors for determining whether
there has been a significant decrease in market activity for an asset
when the market for that asset is not active.
? Eliminates the proposed presumption that all transactions are
distressed (not orderly) unless proven otherwise. The new guidance
instead requires an entity to base its conclusion about whether a
transaction was not orderly on the weight of the evidence.
? Includes an example that provides additional explanation on
estimating fair value when the market activity for an asset has declined
significantly.
? Requires an entity to disclose a change in valuation technique (and
the related inputs) resulting from the application of the FSP and to
quantify its effects, if practicable.
? Applies to all fair value measurements when appropriate.
The adoption of this accounting guidance did not have a material impact on
the Company's consolidated financial position or results of operations.
ASC Topic 320, "Investments-Debt and Equity Securities". Effective for the
second quarter of 2009, the Company adopted new accounting guidance under
ASC Topic 320. New guidance under this Topic:
? Changes existing guidance for determining whether impairment is other
than temporary for debt securities;
? Replaces the existing requirement that the entity's management assert
it has both the intent and ability to hold an impaired security until
recovery with a requirement that management assert: (a) it does not have
the intent to sell the security; and (b) it is more likely than not it
will not have to sell the security before recovery of its cost basis;
? Incorporates examples of factors from existing literature that should
be considered in determining whether a debt security is other-than-
temporarily impaired;
Under ASC Topic 320, declines in the fair value of held-to-maturity and
available-for-sale securities below their cost that are deemed to be other
than temporary are reflected in earnings as realized losses to the extent
the impairment is related to credit losses. The amount of the impairment
related to other factors is recognized in other comprehensive income. The
adoption of this accounting guidance did not have a material impact on the
Company's consolidated financial position or results of operations.
Reference is made to Note 2 for additional disclosures required by this
Topic.
ASC Topic 825, "Financial Instruments". Effective for the second quarter
of 2009, the Company adopted new accounting guidance under ASC Topic 825.
New accounting guidance under this Topic requires an entity to provide
disclosures about fair value of financial instruments in interim financial
information. It also amends prior guidance to require those disclosures in
summarized financial information at interim reporting periods. Under the
new guidance, a publicly traded company shall include disclosures about the
fair value of its financial instruments whenever it issues summarized
financial information for interim reporting periods. In addition, an
entity shall disclose in the body or in the accompanying notes of its
summarized financial information for interim reporting periods and in its
financial statements for annual reporting periods the fair value of all
financial instruments for which it is practicable to estimate that value,
whether recognized or not recognized in the statement of financial
position. The adoption of this accounting guidance did not have a material
impact on the Company's consolidated financial position or results of
operations. Please refer to Note 8 for additional information related to
the impact of adopting this guidance.
ASC Topic 855, "Subsequent Events". Effective for the second quarter of
2009, the Company adopted new accounting guidance under ASC Topic 855. New
accounting guidance under this Topic establishes general standards of
accounting for and disclosures of events that occur after the balance sheet
date, but before financial statements are issued or are available to be
issued. This Topic defines 1) the period after the balance sheet date
during which management of a reporting entity should evaluate events or
transactions that may occur for potential recognition or disclosure in the
financial statements; 2) the circumstances under which an entity should
recognize events or transactions occurring after the balance sheet date in
its financial statements; and 3) the disclosures that an entity should make
about events or transactions that occurred after the balance sheet date.
The adoption of this accounting guidance did not have a material impact on
the Company's consolidated financial position or results of operations.
The Company evaluated subsequent events through November 13, 2009, the date
its financial statements were issued, and believes that no events have
occurred requiring further disclosure or adjustment to the consolidated
financial statements.
2. INVESTMENT SECURITIES
Period-end securities are as follows:
(in thousands)
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
Available for Sale
September 30, 2009
U.S. government agencies $ 22,979 $ 83 $ (1) $ 23,061
States and political subdivisions 72,608 3,498 (7) 76,099
Mortgage-backed 67,455 2,689 (42) 70,102
Equity securities 270 26 - 296
Total 163,312 6,296 (50) 169,558
December 31, 2008
U.S. government agencies $ 19,138 $ 212 $ - $ 19,350
States and political subdivisions 65,091 1,061 (2,181) 63,971
Mortgage-backed 88,314 1,142 (233) 89,223
Equity securities 270 20 - 290
Total 172,813 2,435 (2,414) 172,834
Securities with unrealized losses at September 30, 2009 and December 31, 2008
not recognized in income are as follows:
September 30, 2009
(in thousands) Less than 12 Months 12 Months or More Total
Fair Unrealized Fair Unrealized Fair Unrealized
Description of Securities Value Loss Value Loss Value Loss
U.S. Government securities $ 3,014 $ (2) $ - $ - $ 3,014 $ (2)
States and municipals - - 982 (6) 982 (6)
Mortgage-backed 2,975 (3) 1,176 (39) 4,151 (42)
Total temporarily impaired $ 5,989 $ (5) $ 2,158 $ (45) $ 8,147 $ (50)
December 31, 2008
(in thousands) Less than 12 Months 12 Months or More Total
Fair Unrealized Fair Unrealized Fair Unrealized
Description of Securities Value Loss Value Loss Value Loss
U.S. Government securities $ - $ - $ - $ - $ - $ -
States and municipals $13,055 $ (587) $23,023 $(1,594) $36,078 $(2,181)
Mortgage-backed 30,903 (165) 1,565 (68) 32,468 (233)
Total temporarily impaired $43,958 $ (752) $24,588 $(1,662) $68,546 $(2,414)
Other-than-temporary impairment ("OTTI")
All unrealized losses are reviewed on at least a quarterly basis to determine
whether the losses are other than temporary and are reviewed more frequently
when economic or market concerns warrant such evaluation. Consideration is
given to the length of time and the extent to which the fair value has been
less than cost, the financial condition and near-term prospects of the issuer,
and our intent and ability to retain the investment in the issuer for a period
of time sufficient to allow for any anticipated recovery in fair value. In
analyzing an issuer's financial condition, we may consider whether the
securities are issued by the federal government or its agencies, whether
downgrades by bond rating agencies have occurred, and the results of reviews
of the issuer's financial condition.
The term "other-than-temporary" is not intended to indicate that the decline
is permanent, but indicates that the prospects for a near-term recovery of
value are not necessarily favorable, or that there is a general lack of
evidence to support a realizable value equal to or greater than the carrying
value of the investment. Once a decline in value is determined to be other-
than-temporary, the value of the security is reduced and a corresponding
charge to earnings is recognized for anticipated credit losses. The
unrealized losses in the above charts are due primarily from the changes
interest rates.
3. LOANS
Loans at period-end are as follows:
(in thousands)
9/30/2009 12/31/2008
Commercial $ 26,323 $ 21,505
Real estate construction 17,312 16,819
Real estate mortgage 283,316 286,846
Agricultural 82,333 80,779
Consumer 18,637 18,328
Total 427,921 424,277
Activity in the allowance for loan losses for the nine month period ended was
as follows:
2009 2008
Beginning balance $ 5,464,864 $ 4,878,732
Charge-offs (956,397) (716,622)
Recoveries 479,335 95,548
Provision for loan losses 1,350,000 1,500,000
Ending balance $ 6,337,802 $ 5,757,658
Impaired loans totaled $8,380,000 at September 30, 2009 and $6,562,000 at
December 31, 2008. As of September 30, 2009, the Company approached the
calculation for specific allocations differently than as of December 31, 2008.
The change in the method of calculation did not have a significant effect on
the allowance calculation.
Nonperforming loans were as follows:
9/30/09 12/31/08
Loans past due over 90 days still
on accrual $1,596,000 $ 779,000
Nonaccrual loans 7,278,000 6,562,000
Nonperforming loans include impaired loans and smaller balance homogeneous
loans, such as residential mortgage and consumer loans, that are collectively
evaluated for impairment.
4. EARNINGS PER SHARE
Basic earnings per common share is net income divided by the weighted
average number of common shares outstanding during the period. Diluted
earnings per common share includes the dilutive effect of additional
potential common shares issuable under stock options.
The factors used in the earnings per share computation follow:
Nine Months Ended
September 30
2009 2008
(in thousands, except per share information)
Basic Earnings Per Share
Net Income $3,425 $4,035
Weighted average common shares outstanding 2,736 2,792
Basic earnings per share $ 1.25 $ 1.44
Diluted Earnings Per Share
Net Income $3,425 $4,035
Weighted average common shares outstanding 2,736 2,792
Add dilutive effects of assumed exercise
of stock options - 2
Weighted average common and dilutive
potential common shares outstanding 2,736 2,794
Diluted earnings per share $ 1.25 $ 1.44
Three Months Ended
September 30
2009 2008
(in thousands, except per share information)
Basic Earnings Per Share
Net Income $1,353 $1,356
Weighted average common shares outstanding 2,732 2,767
Basic earnings per share $ 0.49 $ 0.49
Diluted Earnings Per Share
Net Income $1,353 $1,356
Weighted average common shares outstanding 2,732 2,767
Add dilutive effects of assumed exercise
of stock options - 3
Weighted average common and dilutive
potential common shares outstanding 2,732 2,770
Diluted earnings per share $ 0.49 $ 0.49
Stock options for 37,844 shares of common stock for the six and three months
ended September 30, 2009, and for 39,761 shares of common stock for the three
months ended September 30, 2008 were excluded from diluted earnings per share
because their impact was antidilutive.
5. STOCK COMPENSATION
The Company has two share based compensation plans, including a Stock
Option Plan and a Stock Grant Plan, as described in more detail below.
Stock Option Plan
Under its 1999 Employee Stock Option Plan, the Company has granted certain
officers and key employees stock option awards which vest and become fully
exercisable at the end of five years and provides for issue of up to 100,000
options. Under the expired 1993 Non-Employee Directors Stock Ownership
Incentive Plan, the Company had also granted certain directors stock option
awards which vest and become fully exercisable immediately and provided for
issue of up to 20,000 options. The exercise price of each option, which has
a ten year life, was equal to the market price of the Company's stock on the
date of grant.
The fair value of each option award is estimated on the date of grant using
a closed form option valuation (Black-Scholes) model that uses the
assumptions noted in the table below. Expected volatilities are based on
historical volatilities of the Company's common stock. The Company uses
historical data to estimate option exercise and post-vesting termination
behavior. The expected term of options granted is based on historical data
and represents the period of time that options granted are expected to be
outstanding, which takes into account that the options are not
transferable. The risk-free interest rate for the expected term of the
option is based on the U.S. Treasury yield curve in effect at the time of
the grant.
The fair value of options granted was determined using the following
weighted-average assumptions as of grant date. No options have been
granted in 2009.
2008
Weighted-average fair value of options
granted during the year $2.38
Risk-free interest rate 2.96%
Expected option life 8 years
Expected stock price volatility 11.05%
Expected dividend yield 3.61%
Summary of activity in the stock option plan for the nine months ended
September 30, 2009 follows:
Weighted
Weighted Average
Average Remaining Aggregate
Exercise Contractual Intrinsic
Shares Price Term Value
Outstanding, beginning of year 50,169 $28.57
Forfeited or expired (12,325) 25.86
Outstanding, end of period 37,844 29.45 51.6 months $ -
Vested and expected to vest 37,844 29.45 51.6 months -
Options exercisable at period end 35,374 29.38 50.8 months -
The intrinsic value for stock options is calculated based on the exercise
price of the underlying awards and the market price of our common stock as
of the reporting date. The Company recorded $86 thousand in stock
compensation expense during the nine months ended September 30, 2009 to
salaries and employee benefits.
Stock Grant Plan
On February 15, 2005, the Company's Board of Directors adopted a restricted
stock grant plan. Total shares issuable under the plan are 50,000. A
summary of changes in the Company's nonvested shares for the year follows:
Weighted-Average
Grant-Date
Per Share
Nonvested Shares Shares Fair Value
Nonvested at December 31, 2008 10,006 $ 30.58
Granted 4,150 17.15
Vested (2,702) 29.65
Forfeited (280) 25.80
Nonvested at September 30, 2009 11,174 $ 25.94
6. DIVIDENDS
Dividends per share paid for the quarter ended September 30, 2009 were
$0.20 compared to $0.28 for September 30, 2008. This is the same rate of
dividend paid for the first quarter of the respective years.
7. RETIREMENT PLAN
Components of Net Periodic Benefit Cost
Nine months ended September 30
(in thousands)
Pension Benefits
2009 2008
Service cost $ - $ 386
Interest cost - 350
Expected return on plan assets - (361)
(Gain) loss amortization - 24
Net Periodic Benefit Cost $ - $ 399
Three months ended September 30
(in thousands)
Pension Benefits
2009 2008
Service cost $ - $ 132
Interest cost - 119
Expected return on plan assets - (120)
(Gain) loss amortization - 10
Net Periodic Benefit Cost $ - $ 141
Employer Contributions
The defined benefit plan offered to employees by the Company was terminated
effective December 31, 2008. Therefore, the Company had no contributions
to the plan during the first quarter of this year and will also have no
contributions going forward.
As of December 31, 2008, the date of termination, the projected benefit
obligation was $6,749,694 and the fair value of the plan assets was
$5,206,908. The difference of $1,542,786 was recognized in other
liabilities on the consolidated balance sheet. During the third quarter of
2009, distributions from the defined benefit plan was made to those
employees in which the Company had an obligation to as of the December 31,
2008, the plan's termination date. All funds have been distributed and the
Company no longer has any liabilities associated with the plan. During the
second quarter of 2009, the Company recognized $860 thousand for the final
expenses related to terminating the plan.
8. Fair Value Measurements
Statement 157 establishes a fair value hierarchy which requires an entity to
maximize the use of observable inputs and minimize the use of unobservable
inputs when measuring fair value. The standard describes three levels of
inputs that may be used to measure fair value:
Level 1: Quoted prices (unadjusted) for identical assets or liabilities
in active markets that the entity has the ability to access as of the
measurement date.
Level 2: Significant other observable inputs other than Level 1 prices
such as quoted prices for similar assets or liabilities; quoted prices
in markets that are not active; or other inputs that are observable or
can be corroborated by observable market data.
Level 3: Significant unobservable inputs that reflect a reporting
entity's own assumptions about the assumptions that market participants
would use in pricing an asset or liability.
The fair values of securities available for sale are determined by obtaining
quoted prices on nationally recognized securities exchanges (Level 1 inputs)
or matrix pricing, which is a mathematical technique widely used in the
industry to value debt securities without relying exclusively on quoted prices
for the specific securities but rather by relying on the securities'
relationship to other benchmark quoted securities (Level 2 inputs).
The fair value of servicing rights is based on a valuation model that
calculates the present value of estimated net servicing income. The valuation
model incorporates assumptions that market participants would use in
estimating future net servicing income. The Company is able to compare the
valuation model inputs and results to widely available published industry data
for reasonableness (Level 2 inputs).
The fair value of impaired loans with specific allocations of the allowance
for loan losses is generally based on recent real estate appraisals. These
appraisals may utilize a single valuation approach or a combination of
approaches including comparable sales and the income approach. Adjustments
are routinely made in the appraisal process by the appraisers to adjust for
differences between the comparable sales and income data available. Such
adjustments are typically significant and result in a Level 3 classification
of the inputs for determining fair value.
Assets and Liabilities Measured on a Recurring Basis
For this disclosure, the Company only has available for sale investment
securities that meet the requirement.
Available for sale investment securities are the Company's only balance
sheet item that meet the disclosure requirements for instruments measured
at fair value on a recurring basis. Disclosures are as follows in the
table below.
(In thousands) Fair Value Measurements at September 30, 2009 Using
Quoted Prices
In Active
Markets for Significant Other Significant
Identical Observable Unobservable
Fair Value Assets Inputs Inputs
Description 9/30/09 (Level 1) (Level 2) (Level 3)
U.S. government
agencies $ 23,061 $ - $ 23,061 $ -
States and political
subdivisions 76,099 - 76,099 -
Mortgage-backed 70,102 - 70,102 -
Equity securities 296 296 - -
Total $169,558 $ 296 $ 169,262 $ -
(In thousands) Fair Value Measurements at December 31, 2008 Using
Quoted Prices
In Active
Markets for Significant Other Significant
Identical Observable Unobservable
Fair Value Assets Inputs Inputs
Description 12/31/08 (Level 1) (Level 2) (Level 3)
U.S. government
agencies $ 19,350 $ - $ 19,350 $ -
States and political
subdivisions 63,971 - 63,971 -
Mortgage-backed 89,223 - 89,223 -
Equity securities 290 290 - -
Total $172,834 $ 290 $ 172,544 $ -
Assets and Liabilities Measured on a Non-Recurring Basis
Servicing rights are carried at lower of cost or fair value. The current
value of $751 thousand includes a valuation allowance of $213 thousand, which
was recorded during the fourth quarter of 2008.
Impaired loans totaled $8,380,000 at September 30, 2009 and $6,562,000 at
December 31, 2008. The total allowance for loan losses related to these loans
was $607,000 and $320,000 at September 30, 2009 and December 31, 2008.
Impaired loans are measured at fair value based on the underlying collateral
and are considered level 3 inputs.
Fair Value of Financial Instruments
In accordance with FSP SFAS 107-1, the carrying amounts and estimated fair
values of financial instruments, at September 30, 2009 and December 31, 2008
are as follows:
September 30, 2009 December 31, 2008
Carrying Carrying
Amount Fair Value Amount Fair Value
(In Thousands)
Financial assets
Cash and cash equivalents $ 11,586 $ 11,586 $ 37,106 $ 37,106
Securities 169,558 169,558 172,834 172,834
Loans, net 421,583 421,451 418,812 418,635
FHLB stock 6,731 6,731 6,731 6,731
Interest receivable 5,078 5,078 5,156 5,156
Financial liabilities
Deposits $ 496,583 $ 503,848 $ 520,808 $ 528,949
Securities sold under
agreements to repurchase
and other borrowings 13,487 13,772 10,717 10,983
FHLB advances 63,430 65,566 77,301 79,665
Subordinated debentures 7,217 5,400 7,217 4,253
Interest payable 2,588 2,588 2,874 2,874
The methods and assumptions used to estimate fair value are described as
follows: Carrying amount is the estimated fair value for cash and cash
equivalents, short-term borrowings, Federal Home Loan Bank stock, accrued
interest receivable and payable, demand deposits, short-term debt, and variable
rate loans or deposits that reprice frequently and fully. For fixed rate loans
or deposits and for variable rate loans or deposits with infrequent repricing
or repricing limits, fair value is based on discounted cash flows using current
market rates applied to the estimated life and credit risk. Fair value of debt
is based on current rates for similar financing. The fair value of commitments
to extend credit and standby letters of credit is not considered material.
9. 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 September 30, 2009
and December 31, 2008, 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)
September 30, 2009
Consolidated
Total Capital (to Risk-Weighted Assets) $ 57,012 12.5% $ 36,459 8% $ 45,573 N/A
Tier I Capital (to Risk-Weighted Assets) 51,297 11.3 18,229 4 27,344 N/A
Tier I Capital (to Average Assets) 51,297 8.0 25,554 4 31,943 N/A
Bank Only
Total Capital (to Risk-Weighted Assets) $ 59,565 13.1% $ 36,446 8% $ 45,557 10%
Tier I Capital (to Risk-Weighted Assets) 53,850 11.8 18,223 4 27,334 6
Tier I Capital (to Average Assets) 53,850 8.4 25,549 4 31,936 5
December 31, 2008
Consolidated
Total Capital (to Risk-Weighted Assets) $ 59,913 13.5% $ 35,618 8% $ 44,522 N/A
Tier I Capital (to Risk-Weighted Assets) 54,364 12.2 17,809 4 26,713 N/A
Tier I Capital (to Average Assets) 54,364 8.3 26,073 4 32,591 N/A
Bank Only
Total Capital (to Risk-Weighted Assets) $ 62,615 14.1% $ 35,593 8% $ 44,491 10%
Tier I Capital (to Risk-Weighted Assets) 57,066 12.8 17,796 4 26,695 6
Tier I Capital (to Average Assets) 57,066 8.8 26,063 4 32,578 5
Item 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
Forward-Looking Statements
This discussion contains forward-looking statements, with the meaning of
Section 27A of the Securities Act of 1933, as amended (the "Securities Act")
and Section 21E of the Securities Exchange Act of 1934, as amended (the
"Exchange Act"), under the Private Securities Litigation Reform Act of 1995
that involve risks and uncertainties. In general, forward-looking statements
related to a discussion of future financial results or projections, future
economic performance, future operational plans and objectives, and statements
regarding the underlying assumptions of such statements. Words such as
"believes," "anticipates," "expects," "intends," "plans," "targeted," and
similar expressions are intended to identify forward-looking statements but
are not the exclusive means of identifying such statements. Although the
Company believes that the assumptions underlying the forward-looking
statements contained herein are reasonable, any of the assumptions could be
inaccurate, and therefore, there can be no assurance that the forward-looking
statements included herein will prove to be accurate. Factors that could
cause actual results to differ from the results discussed in the
forward-looking statements include, but are not limited to: economic
conditions (the Company and its bank operate in areas affected by various
markets); competition for the Company's customers from other providers of
financial and mortgage services; government legislation and regulation (which
changes from time to time and over which the Company has no control); changes
in interest rates (both generally and more specifically mortgage interest
rates); material unforeseen changes in the liquidity, results of operations,
or financial condition of the Company's customers; technological or
operational difficulties; acts of war or terrorism; unexpected claims or
litigation against the Company; changes in the level of non-performing assets
and charge-offs; and other risks detailed in the Company's filings with the
SEC, all of which are difficult to predict and many of which are beyond the
control of the Company. The Company expressly disclaims any intent or
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
The Company recorded net income of $3.4 million, or $1.25 basic and diluted
earnings per share for the first nine months ending September 30, 2009
compared to $4.0 million, or $1.44 basic and diluted earnings per share for
the nine month period ending September 30, 2008. The first nine months
earnings reflects a decrease of 15% compared to the same time period in 2008,
due primarily to a decrease in net interest income of $684 thousand, an
increase in salaries and benefits of $812 thousand and an increase in other
expenses of $1.1 million. The increase in salaries and benefits was primarily
due to final costs of $874 thousand related to terminating the pension plan.
The increase in other expenses was mainly due to an increase of $873 thousand
in FDIC insurance expense. These reductions to income were partially offset
by an increase on the gain on securities of $330 thousand, the gain on sold
loans of $394 thousand and a reduction in income tax expense of $942 thousand.
The earnings were $1.4 million, or $0.49 basic and diluted earnings per share
for the three month period ending September 30, 2009 compared to $1.4 million,
or $0.49 basic and diluted earnings per share for the three month period
ending September 30, 2008. This three month period earnings reflects no
change in earnings compared to the same time period in 2008.
Return on average assets was 0.68% for the nine months ended September 30,
2009 and 0.85% for the nine month period ended September 30, 2008. Return on
average assets was 0.82% for the three months ended September 30, 2009 and
0.85% for the three month period ended September 30, 2008. Return on average
equity was 7.8% for the nine month period ended September 30, 2009 compared to
9.3% for the nine month period ended September 30, 2008. Return on average
equity was 9.1% for the three months ended September 30, 2009 and 9.4% for the
same time period in 2008.
Loans increased $3.6 million from $424.3 million on December 31, 2008 to
$427.9 million on September 30, 2009. Decreases in real estate mortgage loans
were offset by an increase in real estate construction, agricultural,
commercial & consumer loans.
Total deposits decreased from $520.8 million on December 31, 2008 to $496.6
million on September 30, 2009, a decrease of $24.2 million. This decrease is
primarily the result of a decrease in interest bearing deposit accounts,
excluding time deposits and time deposits with balances of $100 thousand and
greater. Management attributes the decrease mainly due to large dollar public
fund accounts that have rolled off during 2009 and increased competition for
deposits.
Net Interest Income
Net interest income was $14.4 million for the nine months ended September 30,
2009 compared to $15.0 million for the nine months ended September 30, 2008, a
decrease of 4.5%. The interest spread was 3.04% for the first nine months of
2009 comparable to 3.33% for the same period in 2008, a decrease of 29 basis
points. Net interest income was $4.9 million for the three month period
ending September 30, 2009 compared to $5.1 million for the three month period
ending September 30, 2008, a decrease of 3.5%. The interest spread was 3.23%
for the three month period ending September 30, 2009 compared to 3.35% for the
three month period in 2008, a decrease of 12 basis points. For the first
three months in 2009, the prime interest rate was 200 basis points less than
the first 3 months in 2008. During the second and third quarters of 2009, the
prime interest rate was 175 basis points less than the same period a year ago.
These declines in rates have significantly impacted the Company's interest
spread. In addition to lower rates and tightening interest margins, the net
interest spread for 2009 is also lower than 2008 due to an increase in "lost"
loan interest during 2009 that can be attributed to an increase in non-
performing loans in the Company's loan portfolio.
For the first nine months, the yield on assets decreased from 6.06% in 2008 to
5.17% in 2009. The cost of liabilities decreased from 2.72% in 2008 to 2.13%
in 2009. Year to date average loans increased $4.6 million, or 1.1% from
September 30, 2008 to September 30, 2009. Loan interest income has decreased
$2.3 million for the first nine months of 2009 compared to the first nine
months of 2008. Year to date average deposits increased from September 30,
2008 to September 30, 2009, up $40.0 million or 8.3%. The increase is
primarily the result of an increase in interest bearing public funds. Deposit
interest expense has decreased $1.7 million for the first nine months of 2009
compared to the same period in 2008.
Non-Interest Income
Non-interest income increased $965 thousand for the nine months ended
September 30, 2009 compared to the same period in 2008 to $7.0 million, due
primarily to an increase of $684 thousand on the gain of the sale of mortgage
loans and an increase of $330 thousand on gains recognized from the sale of
securities. These increases were partially offset by a decrease in service
charges of $51 thousand. The decrease in service charges was primarily the
result of a decrease in overdraft income of $106 thousand for the first nine
months of 2009. Non-interest income increased $380 thousand for the three
months ended September 30, 2009. The increase in non-interest income for the
three months ended September 30, 2009 compared to same time period in 2008 is
primarily due to an increase of $151 thousand on the gain of the sale of
mortgage loans and an increase of $142 thousand on gains recognized from the
sale of securities.
Gain on sale of mortgage loans increased from $342 thousand in the first nine
months of 2008 to $1.0 million during the first nine months of 2009. For the
three months ended September 30, 2009 compared to the same time period in
2008, the gain on sale of mortgage loans increased $151 thousand. The volume
of mortgage loan originations and sales is generally inverse to rate changes.
A change in the mortgage loan rate environment can have a significant impact
on the related gain on sale of mortgage loans.
Non-Interest Expense
Total non-interest expenses increased $1.9 million for the nine month period
ended September 30, 2009 compared to the same period in 2008. For the three
month period ended September 30, 2009, total non-interest expense increased
$633 thousand.
For the comparable nine month periods, salaries and benefits increased $812
thousand, an increase of 10%. The increase in salaries and benefits is
primarily attributed to the Company terminating the defined benefit plan
offered to employees of the Company as of December 31, 2008. During the
second quarter of 2009, the Company recognized $860 thousand for the final
expenses related to terminating the plan. In addition, the Company had
offered a voluntary separation option to various employees effective as early
as August 31, 2009 and as late as October 31, 2009. The first payouts for
those electing this option occurred in September 2009 with the remaining
payouts to be completed in the fourth quarter of 2009, with future salary and
benefit savings from those electing this option to be realized in the latter
part of this year and in future periods. Salaries and benefits increased $56
thousand for the three month period ending September 30, 2009 compared to the
same time period in 2008 as a result of the voluntary separation offers.
Occupancy expenses decreased $24 thousand to $2,042 thousand for the first
nine months of 2009 compared to the same time period in 2008. Occupancy
expenses increased $53 thousand for the three month period ended September 30,
2009 compared to the same time period in 2008. The decrease in year to date
occupancy expense during 2009 is mainly due to a reduction in depreciation
expense. For the first nine months ending September 30, 2009, depreciation
expense decreased $59 thousand compared to the first nine months 2008. The
decrease in depreciation expense is due to assets with a high cost basis
becoming fully depreciated at the end of 2008. During the third quarter of
2009, the Company accrued an additional $60 thousand in depreciation expense
for the estimated loss on the disposal of the fixed assets associated with the
North Middletown building which was closed in July 2009. In April 2009,
construction on the new Nicholasville location was completed and is expected
to cause a slight increase in occupancy expenses going forward.
In addition to the relocation of the Nicholasville branch, during the second
quarter of 2009, the downtown Cynthiana location was consolidated with the
Company's newer location in Cynthiana. On July 31, 2009, the North Middletown
branch was closed, and accounts moved to the main office in Paris. Management
believes that consolidating these locations will reduce costs and improve net
income.
Other expenses increased $1,115 thousand for the first nine months ended
September 30, 2009 compared to the same time period in 2008. For the three
month period ended September 30, 2009 other expenses increased $512 thousand
compared to the three month period ended September 30, 2008. Increases in
other expenses for both year to date and the three months ending September 30
are related to an increase in FDIC insurance expense. FDIC insurance expense
increased $873 thousand for the first nine months in 2009 compared to the same
period a year ago and increased $189 thousand for the three months ending
September 30, 2009 compared to the three months ending September 30, 2008.
The increase in FDIC insurance is primarily the result of two things. First,
there has been an increase in FDIC insurance premiums (see below for more
details). Second, a special assessment has been assessed by the FDIC on all
FDIC insured banks. The special assessment was not made formal until May of
this year and cost the Company $296 thousand which was expensed during the
three months ending June 30, 2009.
Deposit Insurance: In February 2009, the FDIC adopted a long-term deposit
insurance fund ("DIF") restoration plan as well as an additional emergency
assessment for 2009. The restoration plan increases base assessment rates for
banks in all risk categories with the goal of raising the DIF reserve ratio
from its current 0.40% to 1.15% within seven years. Banks in the best risk
category, which include the Company's subsidiary bank, will pay initial base
rates ranging from 12 to 16 basis points of assessable deposits beginning
April 1, 2009, up from the initial base rate range of 12 to 14 basis points.
Additionally, the FDIC approved an interim rule imposing a special emergency
assessment to all financial institutions of 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, on December 30, 2009,
along with each institution's risk-based deposit insurance assessment for the
third quarter of 2009. The prepaid amount would be amortized over the
prepayment period. The Company's estimated prepayment would be approximately
$3.3 million. The increase in assessments by the FDIC could have a material
adverse effect on the Company's earnings.
Temporary Liquidity Guarantee Program ("TLGP"): The TLGP consists of two
separate programs implemented by the FDIC in October 2008. This includes the
Debt Guarantee Program ("DGP") and the Transaction Account Guarantee Program
("TAGP"). These programs were initially provided at no cost to participants
during the first 30 days. Eligible institutions that do not "opt out" of
either of these programs become participants by default and will incur the
fees assessed for taking part.
Under the DGP, the FDIC will guarantee senior unsecured debt issued on or
after October 14, 2008 through June 30, 2009 up to certain limits by
participating entities. The FDIC will provide guarantee coverage for debt
issued between those dates until the earlier of the maturity date of the debt
or June 30, 2012. The Company chose to opt out of the DGP.
Under the TAGP, the FDIC guarantees 100% of certain noninterest bearing
transaction accounts up to any amount to participating FDIC insured
institutions. The unlimited coverage is applicable until December 31, 2009.
The Company opted to participate in the TAGP; as such, it will incur an
additional quarterly-assessed 10 basis point fee on balances in noninterest
bearing transaction accounts exceeding the recently increased $250 thousand
deposit limit that became effective on November 13, 2008. The previous
deposit insurance limit amount was $100 thousand.
Emergency Economic Stabilization Act of 2008 ("EESA"): EESA was signed into
law by the President on October 3, 2008 as a measure to stabilize and provide
liquidity to the U.S. financial markets. Under EESA, the Troubled Asset
Relief Program ("TARP") was created. TARP granted the Treasury authority to,
among other things, invest in financial institutions and purchase troubled
assets in an aggregate amount up to $700 billion.
In connection with TARP, the Capital Purchase Program ("CPP") was launched on
October 14, 2008. Under the CPP, the Treasury announced a plan to use up to
$250 billion of TARP funds to purchase equity stakes in certain eligible
financial institutions, including the Company. The Company was preliminarily
approved for $13 million of equity capital in December 2008, and subsequently
withdrew its application.
Income Taxes
The effective tax rate for the nine months ended September 30, 2009 was 7.5%
compared to 22.3% in 2008. The effective tax rate for the three months ended
September 30, 2009 was 7.4% compared to 22.1% for the three month period ended
September 30, 2008. These rates are less than the statutory rate as a result
of the tax-free securities and loans held by the Company. In addition,
beginning in June 2009, the Company began recognizing tax benefits the Company
will receive from historic and low income housing credits. The rates for 2009
are lower due to the lower level of income for 2009. Nontaxable interest
income increased $265 thousand for the first nine months of 2009 compared to
the same time period in 2008.
Stock Repurchase Program
On October 25, 2000, the Company announced that its Board of Directors
approved a stock repurchase program to purchase up to 100,000 shares of its
outstanding common stock. On November 11, 2002, the Board of Directors
approved and authorized the Company's repurchase of an additional 100,000
shares. On May 20, 2008, the Board of Directors approved and authorized the
Company to repurchase an additional 100,000 shares. Shares will be purchased
from time to time in the open market depending on market prices and other
considerations. Through September 30, 2009, 266,801 shares have been
purchased under the program. The most recent share repurchase occurred on
October 5, 2009. The repurchase program has had a positive effect on earnings
per share calculations.
Liquidity and Funding
Liquidity risk is the possibility that the Company may not be able to meet its
cash requirements. Management of liquidity risk includes maintenance of
adequate cash and sources of cash to fund operations and to meet the needs of
borrowers, depositors and creditors. Excess liquidity has a negative impact
on earnings as a result of the lower yields on short-term assets.
Cash and cash equivalents were $11.6 million as of September 30, 2009 compared
to $37.1 million at December 31, 2008. The decrease in cash and cash
equivalents is mainly attributable to a decrease in federal funds sold
resulting primarily from a decrease in deposits and also a decrease in
borrowings from the Federal Home Loan Bank. In addition to cash and cash
equivalents, the securities portfolio provides an important source of
liquidity. Securities available for sale totaled $170.0 million at September
30, 2009. The available for sale securities are available to meet liquidity
needs on a continuing basis. The Company expects the customers' deposits to
be adequate to meet its funding demands.
Generally, the Company relies upon net cash inflows from financing activities,
supplemented by net cash inflows from operating activities, to provide cash
used in its investing activities. As is typical of many financial
institutions, significant financing activities include deposit gathering and
the use of short-term borrowings, such as federal funds purchased and
securities sold under repurchase agreements along with long-term debt. The
Company's primary investing activities include purchasing investment
securities and loan originations.
Management is aware of the challenge of funding sustained loan growth.
Therefore, in addition to deposits, other sources of funds, such as Federal
Home Loan Bank (FHLB) advances, may be used. The Company relies on FHLB
advances for both liquidity and asset/liability management purposes. These
advances are used primarily to fund long-term fixed rate residential mortgage
loans. In early July 2008, the Company received deposits from being the
successful bidder on a public fund account which brought $20 million in
deposits to the Company. The full $20 million was expected to roll off by
June 30, 2009. As of September 30, 2009, $4 million remains with the Company.
In addition, in early January 2009, the Company received deposits in the
amount of $18 million as a result of being the successful bidder on a public
fund account. As of September 30, 2009, $14.9 million has rolled off with the
remaining $2.6 million to roll off during the remainder of 2009 and another
$2.5 million is expected to roll of during the first quarter of 2010. In July
2009, the Company successfully bid on another public fund account and was
rewarded with additional public fund deposits totaling $16 million. As of
September 30, 2009, the Company has sufficient collateral to borrow an
additional $37 million from the FHLB. In addition, as of September 30, 2009,
over $30 million is available in overnight borrowing through various
correspondent banks. In light of this, management believes there is
sufficient liquidity to meet all reasonable borrower, depositor and creditor
needs in the present economic environment.
Non-Performing Assets
As of September 30, 2009, the Company's non-performing loans totaled $13.8
million or 2.07% of loans compared to $9.2 million or 1.73% of loans at
December 31, 2008. (See table below) The Company experienced an increase of
$716 thousand in non-accrual loans from December 31, 2008 to September 30,
2009. As of September 30, 2009, non-accrual loans include $2.3 million in
loans secured by 1-4 family residential real estate, $2.1 million in real
estate construction and $1.8 million in loans secured by non-farm non-
residential properties. Real estate loans composed 94% of the non-performing
loans as of September 30, 2009 and 96% as of December 31, 2008. Forgone
interest income on the non-accrual loans was $394 thousand for the first nine
months of 2009 compared to $455 thousand for the same time period in 2008.
Nonperforming Assets
9/30/09 12/31/08
(in thousands)
Non-accrual Loans $ 7,278 $ 6,562
Accruing Loans which are
Contractually past due
90 days or more 1,596 779
Total Nonperforming and Restructured 8,874 7,341
Other Real Estate 4,870 1,840
Total Nonperforming and Restructured
Loans and Other Real Estate $ 13,744 $ 9,181
Nonperforming and Restructured Loans
as a Percentage of Loans 2.07% 1.73%
Nonperforming and Restructured Loans
and Other Real Estate as a Percentage
of Total Assets 2.10% 1.35%
Allowance as a Percentage of
Period-end Loans 1.48% 1.29%
Allowance as a Percentage of
Non-performing and Restructured Loans 71% 60%
Provision for Loan Losses
The loan loss provision for the first nine months ending September 30, 2009
was $1.35 million for 2009 and $1.50 million for the same period in 2008 The
loan loss provision for the three months ended September 30, 2009 was $450
thousand and $600 thousand for the same period in 2008. 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 nine month period ended September 30, 2009 were $477
thousand compared to net charge-offs of $621 thousand for the same period in
2008. Net charge-offs for the three month period ended September 30, 2009
were $485 thousand compared to $236 thousand during the same time period in
2008. Future levels of charge-offs will be determined by the particular facts
and circumstances surrounding individual loans. Management believes the
current loan loss allowance is sufficient to meet probable incurred loan
losses.
Loan Losses
Nine Months Ended September 30
(in thousands)
2009 2008
Balance at Beginning of Period $ 5,465 4,879
Amounts Charged-off:
Commercial 289 57
Real Estate Construction 39 217
Real Estate Mortgage 221 171
Agricultural 6 12
Consumer 1,047 792
Total Charged-off Loans 1,602 1,249
Recoveries on Amounts
Previously Charged-off:
Commercial 2 6
Real Estate Construction 35 2
Real Estate Mortgage 393 13
Agricultural - 30
Consumer 695 577
Total Recoveries 1,125 628
Net Charge-offs 477 621
Provision for Loan Losses 1,350 1,500
Balance at End of Period 6,338 5,758
Loans
Average 420,364 415,785
At September 30 427,921 420,552
As a Percentage of Average Loans:
Net Charge-offs 0.11% 0.15%
Provision for Loan Losses 0.32% 0.36%
Allowance as a Multiple of
Net Charge-offs 10.0 7.0
Loan Losses
Quarter Ended September 30
(in thousands)
2009 2008
Balance at Beginning of Period $ 6,373 $ 5,394
Amounts Charged-off:
Commercial 222 52
Real Estate Mortgage 139 116
Consumer 423 180
Total Charged-off Loans 784 348
Recoveries on Amounts
Previously Charged-off:
Commercial - 1
Real Estate Mortgage 6 1
Consumer 293 110
Total Recoveries 299 112
Net Charge-offs 485 236
Provision for Loan Losses 450 600
Balance at End of Period 6,338 5,758
Loans
Average 424,342 422,257
At September 30 427,921 420,552
As a Percentage of Average Loans:
Net Charge-offs 0.11% 0.06%
Provision for Loan Losses 0.11% 0.14%
Allowance as a Multiple of
Net Charge-offs 3.3 6.1
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 its 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 September
30, 2009 the projected percentage changes are within the Board approved
limits. This period's volatility is lower in each rate shock 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 September 30, 2009 is as follows:
PROJECTED NET INTEREST INCOME
(dollars in thousands)
Level
Change in basis points: - 300 - 100 Rates + 100 + 300
Year One (10/09 - 9/10)
Net interest income 20,843 21,447 21,938 22,122 22,280
Net interest income dollar change (1,095) (491) N/A 184 342
Net interest income percentage change -5.0% -2.2% N/A .8% 1.6%
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 September 30, 2008 is as follows:
PROJECTED NET INTEREST INCOME
(dollars in thousands)
Level
Change in basis points: - 300 - 100 Rates + 100 + 300
Year One (10/08 - 9/09)
Net interest income 21,100 21,851 22,646 23,357 23,901
Net interest income dollar change (1,546) (795) N/A 711 1,255
Net interest income percentage change -6.8% -3.5% N/A 3.1% 5.5%
Board approved limit >-10.0% >-4.0% N/A >-4.0% >-10.0%
Projections from September 30, 2009, year one reflected a decline in net
interest income of 2.2% with a 100 basis point decline compared to the 3.5%
decline in 2008. The 100 basis point increase in rates reflected a .8%
increase in net interest income in 2009 compared to a 3.1% increase in 2008.
EVE applies discounting techniques to future cash flows to determine the
present value of assets, liabilities, and therefore equity. Based on applying
these techniques to the September 30, 2009 balance sheet, a 300 basis point
increase in rates results in a 13.8% decline in EVE. A 300 basis point
decrease in rates results in a .2% increase in EVE. These are within the
Board approved limits.
Item 4 - CONTROLS AND PROCEDURES
As of the end of the period covered by this report, the Company carried out an
evaluation, under the supervision and with the participation of the Company's
management, including the Company's Chief Executive Officer and Chief
Financial Officer, of the effectiveness of the design and operation of the
Company's disclosure controls and procedures. Based on the foregoing, the
Company's Chief Executive Officer and Chief Financial Officer concluded that
the Company's disclosure controls and procedures were effective, in all
material respects, to ensure that information required to be disclosed in the
reports the Company files and submits under the Exchange Act is recorded,
processed, summarized and reported as and when required.
The Company also conducted an evaluation of internal control over financial
reporting to determine whether any changes occurred during the quarter covered
by this report that have materially affected, or are reasonably likely to
materially affect, the Company's internal control over financial reporting.
Based on this evaluation, there has been no such change during the quarter
covered by this report.
Part II - Other Information
Item 1. Legal Proceedings
The Company is not a party to any material legal proceedings.
Item 1A. Risk Factors
There have been no material changes in risk factors, as previously
disclosed in the December 31, 2008 Form 10-K.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
ISSUER PURCHASES OF EQUITY SECURITIES
Period (a) Total (b) (c) Total Number (d) Maximum Number
Number of Average of Shares (or Units) (or Approximate Dollar
Shares (or Price Paid Purchased as Part Value) of Shares (or
Units) Per Share of Publicly Units) that May Yet Be
Purchased (or Unit) Announced Plans Purchased Under the
Or Programs Plans of Programs
7/1/09 -
7/31/09 2,100 17.95 2,100 35,199 shares
8/1/09 -
8/31/09 - - - 35,199 shares
9/1/09 -
9/30/09 2,000 16.61 2,000 33,199 shares
Total 4,100 4,100 33,199 shares
On October 25, 2000, the Company announced that its Board of Directors
approved a stock repurchase program. The Company is authorized to purchase up
to 100,000 shares of its outstanding common stock. On November 11, 2002, the
Board of Directors approved and authorized the Company's repurchase of an
additional 100,000 shares. On May 20, 2008, the Board of Directors approved
and authorized an additional 100,000 shares. Shares will be purchased from
time to time in the open market depending on market prices and other
considerations. Through September 30, 2009 266,801 shares have been
purchased.
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 _____11/16/09_______ __/s/Louis Prichard______________
Louis Prichard, President and C.E.O.
Date _____11/16/09_______ __/s/Gregory J. Dawson___________
Gregory J. Dawson, Chief Financial Officer
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