Attached files
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, 2011
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. (Check
one):
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, 2011:
2,742,929.
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 24
Item 3. Quantitative and Qualitative Disclosures About
Market Risk 32
Item 4. Controls and Procedures 33
Part II - Other Information 33
Signatures 34
Exhibits
31.1 Certifications of Chief Executive Officer pursuant
to Section 302 of the Sarbanes-Oxley Act of 2002. 35
31.2 Certifications of Chief Financial Officer pursuant
to Section 302 of the Sarbanes-Oxley Act of 2002. 37
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. 39
Item 1 - Financial Statements
KENTUCKY BANCSHARES, INC.
CONSOLIDATED BALANCE SHEETS (unaudited)
(in thousands) 3/31/2011 12/31/2010
Assets
Cash and due from banks $ 14,468 $ 12,517
Federal funds sold 151 5,108
Cash and cash equivalents 14,619 17,625
Securities available for sale 176,318 176,867
Loans 414,143 411,830
Allowance for loan losses (5,641)
(4,925)
Net loans 408,502 406,905
Federal Home Loan Bank stock 6,731 6,731
Real estate owned, net 9,550 8,424
Bank premises and equipment, net 17,266 17,308
Interest receivable 3,868 4,526
Mortgage servicing rights 972 958
Goodwill 13,117 13,117
Other intangible assets 945 1,009
Other assets 4,613 5,473
Total assets $ 656,501 $ 658,943
Liabilities and Stockholders' Equity
Deposits
Non-interest bearing $ 132,006 $ 105,519
Time deposits, $100,000 and over 88,508 111,239
Other interest bearing 318,265 320,643
Total deposits 538,779 537,401
Repurchase agreements and other borrowings 6,222 7,179
Federal Funds Purchased 2,256 -
Federal Home Loan Bank advances 36,605 43,206
Subordinated debentures 7,217 7,217
Interest payable 1,191 1,257
Other liabilities 1,226 1,640
Total liabilities 593,496 597,900
Stockholders' equity
Preferred stock, 300,000 shares
authorized and unissued - -
Common stock, no par value; 10,000,000 shares
authorized; 2,742,929 and 2,738,039 shares
issued and outstanding on March 31,2011 and
December 31, 2010 12,519 12,498
Retained earnings 50,444 49,797
Accumulated other comprehensive income /(loss) 42
(1,252)
Total stockholders' equity 63,005 61,043
Total liabilities & stockholders' equity $ 656,501 $ 658,943
See Accompanying Notes
CONSOLIDATED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME (unaudited)
(in thousands, except per share amounts)
Three Months Ending
3/31/2011 3/31/2010
INTEREST INCOME:
Loans, including fees $ 5,818 $ 5,910
Securities
Taxable 796 760
Tax exempt 763 814
Other 81 87
Total interest income 7,458 7,571
INTEREST EXPENSE:
Deposits 1,192 2,092
Repurchase agreements and other borrowings 21 40
Federal Home Loan Bank advances 367 514
Subordinated debentures 58 56
Total interest expense 1,638 2,702
Net interest income 5,820 4,869
Loan loss provision 750 450
Net interest income after provision 5,070 4,419
NON-INTEREST INCOME:
Service charges 1,003 1,096
Loan service fee income 44 25
Trust department income 166 115
Securities available for sale gains (losses), net 3 3
Gain on sale of mortgage loans 148 126
Brokerage Income 39 22
Debit Card Interchange Income 392 332
Other 32 28
Total other income 1,827 1,747
NON-INTEREST EXPENSE:
Salaries and employee benefits 2,716 2,449
Occupancy expenses 755 688
Repossession expenses (net) 79 260
FDIC Insurance 229 242
Legal and professional fees 170 124
Data processing 217 203
Debit Card Expenses 170 143
Amortization 64 65
Advertising and marketing 152 129
Taxes other than payroll, property and income 210 195
Telephone 162 85
Postage 77 76
Loan fees 30 45
Other 399 468
Total other expenses 5,430 5,172
Income before taxes 1,467 994
Income taxes 205 49
Net income $ 1,262 $ 945
Other Comprehensive Income, net of tax
and reclassifications:
Change in Unrealized Gains on Securities 1,294 206
Comprehensive Income $ 2,556 $ 1,151
Earnings per share
Basic $ 0.46 $ 0.35
Diluted 0.46 0.35
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 / (Loss) Equity
Balances, January 1, 2011 2,738,039 $ 12,498 $ 49,797 $(1,252) $ 61,043
Common stock issued, including tax
benefit, net 5,890 - - - -
Stock based compensation expense - 26 - - 26
Common stock purchased and retired (1,000) (5) (12) - (17)
Net change in unrealized gain (loss)
on securities available for sale,
net of tax and reclassifications - - - 1,294 1,294
Net income - - 1,262 - 1,262
Dividends declared - $0.22 per share - - (603) - (603)
Balances, March 31, 2011 2,742,929 $ 12,519 $ 50,444 $ 42 $ 63,005
(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)
(in thousands) Three Months Ended
3/31/2011 3/31/2010
Cash Flows From Operating Activities
Net Income $ 1,262 $ 945
Adjustments to reconcile net income to
net cash provided by operating activities:
Depreciation and amortization 398 394
Securities amortization (accretion), net (17) 203
Stock based compensation expense 26 28
Provision for loan losses 750 450
Securities gains, net (3)
(3)
Originations of loans held for sale (5,980)
(5,179)
Proceeds from sale of loans 6,128 4,597
Gains on sale of fixed assets - 1
Losses (gains)on other real estate 2
(5)
Gain on sale of mortgage loans (148)
(126)
Changes in:
Interest receivable 658 258
Real estate owned, net - 279
Other assets 797 182
Interest payable (66) 854
Other liabilities (1,081)
(2,307)
Net cash from operating activities 2,726 571
Cash Flows From Investing Activities
Purchases of securities (7,473)
(43,228)
Proceeds from principal payments, maturities and
calls of securities 10,003 20,662
Net change in loans (4,245)
(950)
Purchases of bank premises and equipment (263)
(647)
Proceeds from the sale of bank premises - 3
Proceeds from the sale of other real estate 772 330
Net cash from investing activities (1,206)
(23,830)
Cash Flows From Financing Activities:
Net change in deposits 1,378 69,162
Net change in repurchase agreements
and other borrowings 1,499
(1,260)
Payments on Federal Home Loan Bank advances (6,583)
(1,581)
Payments on note payable (200)
(200)
Purchase of common stock (17) -
Dividends paid (603)
(576)
Net cash from financing activities (4,526) 65,545
Net change in cash and cash equivalents (3,006) 42,286
Cash and cash equivalents at beginning of period 17,625 34,421
Cash and cash equivalents at end of period $ 14,619 $ 76,707
Supplemental disclosures of cash flow information
Cash paid during the year for:
Interest expense $ 1,704 $ 1,848
Income taxes - -
Supplemental disclosures of non-cash investing
activities
Real estate acquired through foreclosure $ 1,898 $ 1,801
See Accompanying Notes
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, 2010.
Basis of Presentation: The consolidated financial statements include the
accounts of Kentucky Bancshares, Inc. (the ?Company?, ?we?, ?our? or ?us?),
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, Elliott, 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.
Reclassifications: Some items in the prior year financial statements were
reclassified to conform to the current presentation.
Adoption of New Accounting Standards
ASU 2011-01 - Receivables (Topic 310) ? Deferral of the Effective Date of
Disclosures about Troubled Debt Restructurings in Update 2010-20. The
FASB issued this ASU to address concerns that the introduction of the new
disclosure requirements of ASC 310-10-50-31 through 50-34 (i.e. ASU 2010-
20) for troubled debt restructurings in one reporting period followed by a
change in the definition of what constitutes a troubled debt restructuring
(see ASU 2011-02 below) shortly thereafter would be burdensome. This ASU
provided that such disclosures would be deferred until the effective date
of ASU 2011-02 which is discussed in further detail immediately below.
ASU No. 2011-02 - Receivables (Topic 310) ? A Creditor?s Determination of
Whether a Restructuring Is a Troubled Debt Restructuring. This ASU was
issued to improve financial reporting by creating greater consistency in
the way GAAP is applied for various types of debt restructurings. The ASU
clarifies which loan modifications constitute troubled debt restructurings
(TDRs). It is intended to assist creditors in determining whether a
modification of the terms of a receivable meets the criteria to be
considered a troubled debt restructuring, both for purposes of recording
an impairment loss and for disclosure of troubled debt restructurings.
Although, the ASU does not amend the accounting for troubled debt
restructurings, it is expected that application of the clarifications
contained in the ASU will result in more modifications being considered
troubled debt restructurings.
In evaluating whether a restructuring constitutes a troubled debt
restructuring, a creditor must separately conclude that both of the
following exist: (a) the restructuring constitutes a concession; and (b)
the debtor is experiencing financial difficulties. The provisions of this
ASU clarify the guidance on a creditor?s evaluation of whether it has
granted a concession and whether a debtor is experiencing financial
difficulties. With regard to determining whether a concession has been
granted, the ASU clarifies that creditors are precluded from using the
effective interest method to determine whether a concession has been
granted. In the absence of using the effective interest method, a creditor
must now focus on other considerations such as the value of the underlying
collateral, evaluation of other collateral or guarantees, the debtor?s
ability to access other funds at market rates, interest rate increases and
whether the restructuring results in a delay in payment that is
insignificant. In addition, the ASU provides ?a not all inclusive? list
of six indicators for creditors to consider when determining if a debtor
is experiencing financial difficulties which can be found in 310-40-15-20.
For public companies, the new guidance is effective for interim and annual
periods beginning on or after June 15, 2011, and applies retrospectively
to restructurings occurring on or after the beginning of the fiscal year
of adoption. As a result of applying the amendments, an entity may
identify receivables that are newly considered impaired. For purposes of
measuring impairment of those receivables, an entity should apply the
amendments prospectively. For example, a December 31, year-end company
public company will be required to adopt the provisions of the ASU on July
1, 2011. If the company entered into a loan modification between the
dates of January 1 and June 30, the company would be required to apply the
provisions contained in the ASU to that loan modification to determine if
the modification is a TDR. Any impairment resulting from a receivable now
considered a TDR, would be recognized in the period ending September 30,
2011. For nonpublic entities, the ASU is effective for annual periods
ending on or after December 15, 2012, including interim periods within
those annual periods. Early application is permitted.
2. SECURITIES AVAILABLE FOR SALE
INVESTMENT SECURITIES
Period-end securities are as follows:
(in thousands)
Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gains Losses
Value
Available for Sale
March 31, 2011
U.S. government agencies $ 38,317 $ 32 $ (384) $ 37,965
States and political subdivisions 81,323 1,752 (455) 82,620
Mortgage-backed - residential 56,345 16 (922) 55,439
Equity securities 270 24 - 294
Total $ 176,255 $ 1,824 $ (1,761) $ 176,318
December 31, 2010
U.S. government agencies $ 43,238 $ 49 $ (309) $ 42,978
States and political subdivisions 81,887 1,039 (1,773) 81,153
Mortgage-backed - residential 53,369 20 (948) 52,441
Equity securities 270 25 - 295
Total $ 178,764 $ 1,133 $ (3,030) $ 176,867
The amortized cost and fair value of securities at March 31, 2011 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 $ 227 $ 328
Due after one year through five years 26,431 26,303
Due after five years through ten years 32,352 32,703
Due after ten years 60,630 61,251
119,640 120,585
Mortgage-backed - residential 56,345 55,439
Equity 270 294
Total $ 176,255 $ 176,318
The Company reported recognized gross gains on securities available for sale
of $3 thousand for the three months ending March 31, 2011 and March 31, 2010.
During these periods, the Company had no sales of securities. The reported
gains were due to securities that were called during the period.
Securities with unrealized losses at March 31, 2011 and at December 31, 2010
not recognized in income are as follows:
March 31, 2011
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 $ 24,854 $ (384) $ - $ - $24,854 $ (384)
States and municipals 17,039 (447) 588 (8) 17,627 (455)
Mortgage-backed - residential 50,462 (922) - - 50,462 (922)
Total temporarily impaired $ 92,355 $(1,753) $ 588 $ (8) $92,943 $(1,761)
December 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 $ 29,904 $ (309) $ - $ - $ 29,904 $ (309)
States and municipals 45,084 (1,649) 1,939 (124) 47,022 (1,773)
Mortgage-backed - residential 48,421 (948) - - 48,421 (948)
Total temporarily impaired $123,409 $(2,906) $ 1,939 $ (124) $125,347 $ (3,030)
We evaluate 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, we may
consider many factors including, (1) whether the securities are issued by the
federal government or its agencies, (2) whether downgrades by bond rating
agencies have occurred, (3) the results of reviews of the issuer?s financial
condition and near-term prospects, (4) the length of time and the extent to
which the fair value has been less than cost, and (5) whether we intend to
sell the investment security or more likely than not will be required to sell
the investment security before its anticipated recovery.
Unrealized losses on securities included in the tables above have not been
recognized into income because (1) all rated securities are investment grade
and are of high credit quality, (2) management does not intend to sell and it
is more likely than not that management would not be required to sell the
securities prior to their anticipated recovery, (3) management believes the
decline in fair value is largely due to changes in interest rates and (4)
management believes the declines in fair value are temporary. The Company
believes the fair value is expected to recover as the securities approach
maturity.
3. LOANS
Loans at period-end are as follows:
(in thousands)
3/31/11 12/31/10
Commercial $ 26,426 $ 22,840
Real estate construction 14,130 13,518
Real estate mortgage:
1-4 family residential 158,134 158,877
Multi-family residential 12,538 13,519
Non-farm & non-residential 104,322 105,580
Agricultural 79,606 78,375
Consumer 18,756 18,830
Other 231 291
Total $ 414,143 $ 411,830
Activity in the allowance for loan losses for the three month periods indicated
was as follows:
Three Months Ended March 31, 2011
(in thousands)
Beginning Ending
Balance Charge-offs Recoveries Provision Balance
Commercial $ 235 $ 18 $ - $ 6 $ 223
Real estate Construction 721 - - (50) 671
Real estate mortgage:
1-4 family residential 1,827 90 4 548 2,289
Multi-family residential 148 - 144 (27) 265
Non-farm & non-residential 889 15 14 16 904
Agricultural 265 - 11 (37) 239
Consumer 582 53 6 50 585
Other 58 222 185 16 37
Unallocated 200 - - 228 428
$ 4,925 $ 398 $ 364 $ 750 $ 5,641
Three Months Ended March 31, 2010
(in thousands)
Balance at Beginning of Period $ 7,600
Amounts Charged-off:
Commercial 19
Real estate Construction 547
Real estate mortgage:
1-4 family residential 260
Multi-family residential -
Non-farm & non-residential 1,453
Agricultural 74
Consumer 236
Total Charged-off Loans 2,589
Recoveries on Amounts
Previously Charged-off:
Commercial 43
Real estate Construction -
Real estate mortgage:
1-4 family residential 5
Multi-family residential -
Non-farm & non-residential 98
Agricultural 8
Consumer 148
Total Recoveries 302
Net Charge-offs 2,287
Provision for Loan Losses 450
Balance at End of Period 5,763
The following tables present the balance in the allowance for loan losses and
the recorded investment (excluding accrued interest receivable amounting to
$2.5 million as of March 31, 2011 and $3.3 million at December 31, 2010) in
loans by portfolio segment and based on impairment method as of March 31,
2011 and December 31 2010:
As of March 31, 2011
(in thousands)
Individually Collectively
Evaluated for Evaluated for
Impairment Impairment Total
Allowance for Loan Losses:
Commercial $ - $ 223 $ 223
Real estate construction 372 299 671
Real estate mortgage:
1-4 family residential 522 1,767 2,289
Multi-family residential 94 171 265
Non-farm & non-residential 290 614 904
Agricultural 6 233 239
Consumer - 585 585
Other - 37 37
Unallocated - 428 428
$ 1,284 $ 4,357 $ 5,641
Loans:
Commercial $ - $ 26,426 $ 26,426
Real estate construction 6,132 7,998 14,130
Real estate mortgage:
1-4 family residential 4,652 153,482 158,134
Multi-family residential 1,577 10,961 12,538
Non-farm & non-residential 5,870 98,452 104,322
Agricultural 6,276 73,330 79,606
Consumer - 18,756 18,756
Other - 231 231
$ 24,507 $ 389,636 $ 414,143
As of December 31, 2010
(in thousands)
Individually Collectively
Evaluated for Evaluated for
Impairment Impairment Total
Allowance for Loan Losses:
Commercial $ - $ 235 $ 235
Real estate construction 382 339 721
Real estate mortgage:
1-4 family residential 272 1,555 1,827
Multi-family residential 12 136 148
Non-farm & non-residential 127 762 889
Agricultural 6 259 265
Consumer - 582 582
Other - 58 58
Unallocated - 200 200
$ 799 $ 4,126 $ 4,925
Loans:
Commercial $ - $ 22,840 $ 22,840
Real estate construction 6,288 7,230 13,518
Real estate mortgage:
1-4 family residential 3,886 154,991 158,877
Multi-family residential 2,484 11,035 13,519
Non-farm & non-residential 6,347 99,233 105,580
Agricultural 792 77,583 78,375
Consumer - 18,830 18,830
Other - 291 291
$ 19,797 $ 392,033 $ 411,830
The following table presents individually impaired average loan balances
by class as of March 31, 2011:
(in thousands) 3/31/11
Average
Commercial $ -
Real Estate construction 6,348
Real estate mortgage:
1-4 family residential 3,611
Multi-family residential 2,031
Non-farm & non-residential 5,807
Agricultural 3,534
Installment -
Other -
Total $ 21,331
Cash-basis interest income recognized during impairment for the three
months ending March 31, 2011 is shown below:
(in thousands)
3/31/11
Commercial $ -
Real estate construction -
Real estate mortgage:
1-4 family residential 5
Multi-family residential -
Non-farm & non-residential -
Agricultural 29
Consumer -
Other -
Total $ 34
The annual average of individually impaired loans as of December 31,
2010 was $11.7 million and $149 thousand was recognized during 2010 as
interest income on a cash-basis.
The following tables present loans individually evaluated for impairment
by class of loans as of March 31, 2011 and December 31, 2010:
As of March 31, 2011
(in thousands)
Unpaid Allowance for
Principal Recorded Loan Losses
Balance Investment Allocated
With no related allowance recorded:
Commercial $ - $ - $ -
Real estate construction 2,973 2,973 -
Real estate mortgage:
1-4 family residential 1,179 1,179 -
Multi-family residential 889 889 -
Non-farm & non-residential 5,015 5,015 -
Agricultural 6,180 6,180 -
Consumer - - -
Other - - -
Total 16,236 16,236 -
With an allowance recorded:
Commercial - - -
Real estate construction 3,159 3,159 372
Real estate mortgage:
1-4 family residential 3,473 3,473 522
Multi-family residential 688 688 94
Non-farm & non-residential 855 855 290
Agricultural 96 96 6
Consumer - - -
Other - - -
Total 8,271 8,271 1,284
Total impaired loans $ 24,507 $ 24,507 $ 1,284
As of December 31, 2010
(in thousands) Unpaid Allowance for
Principal Recorded Loan Losses
Balance Investment Allocated
With no related allowance recorded:
Commercial $ - $ - $ -
Real estate construction 2,178 2,178 -
Real estate mortgage:
1-4 family residential 1,404 1,404 -
Multi-family residential 1,381 1,381 -
Non-farm & non-residential 4,464 4,464 -
Agricultural 696 696 -
Consumer - - -
Other - - -
Total 10,123 10,123 -
With an allowance recorded:
Commercial - - -
Real estate construction 4,109 4,109 382
Real estate mortgage:
1-4 family residential 2,482 2,482 272
Multi-family residential 1,103 1,103 12
Non-farm & non-residential 1,884 1,884 127
Agricultural 96 96 6
Consumer - - -
Other - - -
Total 9,674 9,674 799
Total Impaired Loans $ 19,797 $ 19,797 $ 799
The following tables present the recorded investment in nonaccrual and
loans past due over 90 days still on accrual by class of loans as of
March 31, 2011 and December 31, 2010:
As of March 31, 2011
(in thousands) Loans Past Due
Over 90 Days
Still
Nonaccrual Accruing
Commercial $ - $ -
Real estate construction 3,296 -
Real estate mortgage:
1-4 family residential 3,345 353
Multi-family residential 1,577 -
Non-farm & non-residential 654 -
Agricultural 1,668 348
Consumer 17 -
Other - -
Total $ 10,557 $ 701
As of December 31, 2010
(in thousands) Loans Past Due
Over 90 Days
Still
Nonaccrual Accruing
Commercial $ 18 $ -
Real estate construction 3,451 -
Real estate mortgage:
1-4 family residential 3,381 684
Multi-family residential 2,484 -
Non-farm & non-residential 2,115 3
Agricultural 1,016 -
Consumer 14 19
Other - -
Total $ 12,479 $ 706
Nonaccrual loans secured by real estate make up 99.7% of the total
nonaccruals.
Nonaccrual loans are included in impaired loans. A loan is impaired when
full payment under the contractual terms is not expected.
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.
During the first three months of 2011, $1.9 million of impaired loans
were transferred to other real estate owned and $398 thousand recorded in
charge offs which contributed to a reduction in nonaccrual loan balances.
The following tables present the aging of the recorded investment in
past due and non-accrual loans as of March 31, 2011 and December 31,
2010 by class of loans:
As of March 31, 2011
(in thousands)
30?59 60?89 Loans Past Due Total
Days Days Over 90 Days Past Due & Loans Not
Past Due Past Due Still Accruing Non-accrual Non-accrual Past Due
Commercial $ 32 $ 46 $ - $ - $ 78 $ 26,348
Real estate construction 81 - - 3,296 3,377 10,753
Real estate mortgage:
1-4 family residential 2,682 65 353 3,345 6,445 151,689
Multi-family residential - - 1,577 1,577 10,961
Non-farm & non-residential 193 237 - 654 1,084 103,327
Agricultural 813 436 348 1,668 3,265 76,341
Consumer 102 16 - 17 135 18,621
Other - - - - - 231
Total $ 3,903 $ 800 $ 701 $ 10,557 $ 15,961 $398,271
As of December 31, 2010
(in thousands)
30?59 60?89 Loans Past Due Total
Days Days Over 90 Days Past Due & Loans Not
Past Due Past Due Still Accruing Non-accrual Non-accrual Past Due
Commercial $ 246 $ - $ - $ 18 $ 264 $ 22,576
Real estate construction 192 - - 3,452 3,644 9,874
Real estate mortgage:
1-4 family residential 4,215 224 684 3,381 8,504 150,373
Multi-family residential 49 - - 2,484 2,533 10,986
Non-farm & non-residential 121 113 3 2,114 2,351 103,229
Agricultural 1,101 141 - 1,016 2,258 76,117
Consumer 192 29 19 14 254 18,576
Other - - - - - 291
Total $ 6,116 $ 507 $ 706 $ 12,479 $ 19,808 $392,022
Credit Quality Indicators:
The Company categorizes loans into risk categories based on relevant
information about the ability of borrowers to service their debt such
as: current financial information, historical payment experience,
credit documentation, public information, and current economic trends,
among other factors. The Company analyzes loans individually by
classifying the loans as to credit risk. This analysis includes loans
with an outstanding balance greater than $200,000 primarily non-
homogeneous loans, such as commercial and commercial real estate loans.
This analysis is performed on a quarterly basis. The Company uses the
following definitions for risk ratings:
Special Mention. Loans classified as special mention have a potential
weakness that deserves management's close attention. If left
uncorrected, these potential weaknesses may result in deterioration of
the repayment prospects for the loan or of the institution's credit
position at some future date.
Substandard. Loans classified as substandard are inadequately protected
by the current net worth and paying capacity of the obligor or of the
collateral pledged, if any. Loans so classified have a well-defined
weakness or weaknesses that jeopardize the liquidation of the debt.
They are characterized by the distinct possibility that the institution
will sustain some loss if the deficiencies are not corrected.
Doubtful. Loans classified as doubtful have all the weaknesses inherent
in those classified as substandard, with the added characteristic that
the weaknesses make collection or liquidation in full, on the basis of
currently existing facts, conditions, and values, highly questionable
and improbable.
Loans not meeting the criteria above that are analyzed individually as
part of the above described process are considered to be pass rated
loans. As of March 31, 2011 and December 31, 2010, and based on the
most recent analysis performed, the risk category of loans by class of
loans is as follows:
As of March 31, 2011
(in thousands)
Special
Pass Mention Substandard Doubtful
Commercial $ 32,806 $ 1,302 $ 279 $ 16
Real estate construction 4,620 3,178 6,207 125
Real estate mortgage:
1-4 family residential 136,975 10,486 10,615 57
Multi-family residential 10,805 44 1,689 -
Non-farm & non-residential 88,466 1,539 6,053 287
Agricultural 65,378 6,939 7,289 -
Total $339,050 $23,488 $32,132 $ 485
As of December 31, 2010
(in thousands)
Special
Pass Mention Substandard Doubtful
Commercial $ 21,225 $ 1,310 $ 305 $ -
Real estate construction 3,412 3,620 6,486 -
Real estate mortgage:
1-4 family residential 138,066 11,029 9,721 60
Multi-family residential 10,872 44 2,603 -
Non-farm & non-residential 98,032 1,071 6,478 -
Agricultural 72,091 4,664 1,620 -
Total $343,698 $21,738 $27,213 $ 60
For consumer loans, the Company evaluates the credit quality based on
the aging of the recorded investment in loans, which was previously
presented. Non-performing consumer loans are loans which are greater
than 90 days past due or on non-accrual status, and total $17 thousand
at March 31, 2011 and $33 thousand at December 31, 2010.
The Company has no troubled debt restructurings as of March 31, 2011 and
December 31, 2010.
4. REAL ESTATE OWNED
Activity in the valuation allowance was as follows:
For the three months ending:
2011 2010
(in thousands)
Beginning of year $ 799 $ 12
Additions charged to expense - 279
Recovery from sale (3) -
End of period $ 796 $ 291
Expenses related to foreclosed assets include:
2011 2010
Net loss (gain) on sales $ 2 $ (5)
Provision for unrealized losses - 279
Operating expenses (receipts),
net of rental income 78 (19)
End of period $ 80 $ 255
5. 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
2011 2010
(in thousands)
Basic Earnings Per Share
Net Income $ 1,262 $ 945
Weighted average common shares outstanding 2,731 2,732
Basic earnings per share $ 0.46 $ 0.35
Diluted Earnings Per Share
Net Income $ 1,262 $ 945
Weighted average common shares outstanding 2,731 2,732
Add dilutive effects of assumed exercise
of stock options 4 -
Weighted average common and dilutive
potential common shares outstanding 2,735 2,732
Diluted earnings per share $ 0.46 $ 0.35
Stock options for 31,540 shares of common stock for three months ended
March 31, 2011 and 33,490 shares of common stock for the three months
ended March 31, 2010 was excluded from diluted earnings per share
because their impact was antidilutive. Stock grants of 17,655 shares of
common stock for the three months ended March 31, 2011 and 21,705 shares
of common stock for the three months ended March 31, 2010 was excluded
from diluted earnings per share because their impact was antidilutive.
6. STOCK COMPENSATION
We have four share based compensation plans as described below.
Two Stock Option Plans
Under our now expired 1999 Employee Stock Option Plan (the ?1999 Plan?),
we granted certain officers and key employees stock option awards which
vest and become fully exercisable at the end of five years and provide
for issuance of up to 100,000 options. Under the now expired 1993 Non-
Employee Directors Stock Ownership Incentive Plan (together with the 1999
Plan, the ?Stock Option Plans?), we also granted certain directors stock
option awards which vest and become fully exercisable immediately and
provide for issuance of up to 20,000 options. For each Stock Option
Plan, the exercise price of each option, which has a ten year life, was
equal to the market price of our stock on the date of grant.
The combined summary of activity for 2011 in the expired Stock Option
Plans follows:
Weighted
Weighted Average
Average Remaining
Aggregate
Exercise Contractual
Intrinsic
Shares Price Term Value
Outstanding, beginning of year 32,640 $29.48
Granted - -
Forfeited or expired (1,100) 23.61
Exercised - -
Outstanding, end of period 31,540 $29.69 36.7 months $
-
Vested and expected to vest 31,540 $29.69 36.7 months $
-
Exercisable, end of period 31,540 $29.69 36.7 months $
-
As of March 31, 2011, there was $0 of total unrecognized compensation
cost related to nonvested stock options granted under either Plan.
Since both Stock Option Plans have expired, as of March 31, 2011 no
additional options can be granted under either of these plans.
2005 Restricted Stock Grant Plan
On May 10, 2005, our stockholders approved a restricted stock grant plan.
Total shares issuable under the plan are 50,000. There were 5,955 shares
issued during 2011 and 4,020 shares issued during 2010. There were 65
shares forfeited during the first three months of 2011 and 60 shares
forfeited during the first three months of 2010. As of March 31, 2011,
the restricted stock grant plan allows for additional restricted stock
share awards of up to 24,611 shares.
A summary of changes in the Company?s nonvested shares for the year
follows:
Weighted-Average Fair
Grant-Date Value
Nonvested Shares Shares Fair Value Per
Share
Nonvested at January 1, 2011 10,486 $ 231,659 $22.09
Granted 5,955 100,496 16.88
Vested (3,311) (81,435) 24.60
Forfeited (65) (1,089) 16.75
Nonvested at March 31, 2011 13,065 $ 249,631 19.11
As of March 31, 2011, there was $209,106 of total unrecognized
compensation cost related to nonvested shares granted under the
restricted stock grant plan. The cost is expected to be recognized over
a weighted-average period of 5 years.
2009 Stock Award Plan
On May 13, 2009, our 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, 2011 no awards have been granted under
the plan and 150,000 shares are still available.
7. 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
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, 2011 Using:
Quoted Prices
In Active
Markets for Significant Other Significant
Identical Observable Unobservable
Fair Assets Inputs Inputs
Description Value (Level 1) (Level 2) (Level 3)
U. S. government agencies $ 37,965 $ - $ 37,965 $ -
States and municipals 82,620 - 82,620 -
Mortgage-backed - residential 55,439 - 55,439 -
Equity securities 294 294 - -
Total $176,318 $ 294 $176,024 $ -
(In thousands) Fair Value Measurements at December 31, 2010 Using:
Quoted Prices
In Active
Markets for Significant Other Significant
Identical Observable Unobservable
Fair Assets Inputs Inputs
Description Value (Level 1) (Level 2) (Level 3)
U. S. government agencies $ 42,978 $ - $ 42,978 $ -
States and municipals 81,153 - 81,153 -
Mortgage-backed - residential 52,441 - 52,441 -
Equity securities 295 295 - -
Total $176,867 $ 295 $176,572 $ -
Assets measured at fair value on a non-recurring basis are summarized below:
(In thousands) Fair Value Measurements at March 31, 2011 Using:
Quoted Prices
In Active
Markets for Significant Other
Significant
Identical Observable
Unobservable
Fair Assets Inputs Inputs
Description Value (Level 1) (Level 2) (Level
3)
Impaired loans:
Real estate commercial $ - $ - $ - $
-
Real estate construction 2,787 - -
2,787
Real Estate Mortgage:
1-4 family residential 2,951 - -
2,951
Multi-family residential 594 - -
594
Non-farm & non-residential 565 - -
565
Agricultural 90 - -
90
Total impaired loans 6,987 - -
6,987
Other real estate owned:
Residential 3,158 - -
3,158
Commercial real estate 1,665 - -
1,665
Total other real estate owned 4,823 - -
4,823
Loan servicing rights 177 - -
177
(In thousands) Fair Value Measurements at December 31, 2010 Using:
Quoted Prices
In Active
Markets for Significant Other
Significant
Identical Observable
Unobservable
Fair Assets Inputs Inputs
Description Value (Level 1) (Level 2) (Level
3)
Impaired loans:
Real estate commercial $ - $ - $ - $
-
Real estate construction 3,727 - -
3,727
Real Estate Mortgage:
1-4 family residential 2,209 - -
2,209
Multi-family residential 1,092 - -
1,092
Non-farm & non-residential 1,757 - -
1,757
Agricultural 90 - -
90
Total impaired loans 8,875 - -
8,875
Other real estate owned:
Residential 3,365 - -
3,365
Commercial real estate 1,668 - -
1,668
Total other real estate owned: 5,033 - -
5,033
Loan servicing rights 138 - -
138
Impaired loans, which are measured for impairment using the fair value
of the collateral for collateral dependent loans, had a carrying amount
of $7.9 million, with a valuation allowance of $1.4 million at March 31,
2011, resulting in an additional provision of $614 thousand for loan
losses for the three months ending March 31, 2011. The provision for
the three months ending March 31, 2011 is $750 thousand.
Other real estate owned which is measured at fair value less costs to
sell, had a net carrying amount of $4.0 million, which is made up of the
outstanding balance of $4.8 million, net of a valuation allowance of
$796 thousand at March 31, 2011. The write-down for the three months
ending March 31, 2011 is $0.
Mortgage loans serviced for others are not included in the accompanying
consolidated balance sheets. The unpaid principal balances of mortgage
loans serviced for others were approximately $143.0 million at March 31,
2011 and $142.1 million at December 31, 2010. The fair value of
servicing rights was approximately $1.2 million at March 31, 2011 and
$1.1 million at December 31, 2010. During the first quarter of 2011,
the carrying value of the servicing rights was written up $20 thousand
due to a positive valuation adjustment.
Fair Value of Financial Instruments
The fair values of the Company?s financial instruments at March 31, 2011 and
December 31, 2010 are as follows:
March 31, 2011 December 31, 2010
Carrying Carrying
Amount Fair Value Amount Fair Value
(In Thousands)
Financial assets
Cash and cash equivalents $ 14,619 $ 14,619 $ 17,625 $ 17,625
Securities 176,318 176,318 176,867 176,867
Loans, net 408,591 409,283 406,905 407,925
FHLB stock 6,731 N/A 6,731 N/A
Interest receivable 3,868 3,868 4,526 4,526
Financial liabilities
Deposits $ 538,779 $ 541,546 $ 537,401 $ 539,939
Securities sold under
agreements to repurchase
and other borrowings 6,222 6,221 7,179 7,178
FHLB advances 36,605 38,163 43,206 45,071
Subordinated debentures 7,217 6,971 7,217 6,151
Interest payable 1,191 1,191 1,257 1,257
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. These statements are not historical facts, but rather
statements based on our current expectations regarding our business
strategies and their intended results and our future performance.
Forward-looking statements are preceded by terms such as ?expects,?
?believes,? ?anticipates,? ?intends? and similar expressions.
Although we believe 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 we and our bank operate); competition for our
subsidiary?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 we have 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 our subsidiary?s customers;
adequacy of the allowance for losses on loans and the level of future
provisions for losses on loans; and other risks detailed in our filings
with the Securities and Exchange Commission, all of which are difficult
to predict and many of which are beyond our control.
You are cautioned not to place undue reliance on any forward-looking
statements made by us or on our behalf. We undertake 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
The Company recorded net income of $1.3 million, or $0.46 basic earnings
and diluted earnings per share for the first three months ending March
31, 2011 compared to $945 thousand or $0.35 basic earnings and diluted
earnings per share for the three month period ending March 31, 2010.
The first three months earnings reflects an increase of 33.7% compared
to the same time period in 2010, due primarily to an increase in net
interest income of $951 thousand and a decrease in repossession expense
of $181 thousand. These positive changes to net income during 2011 were
partially offset by an increase of $300 thousand for the provision for
loan losses and an increase in employee salaries and benefits of $267
thousand.
Return on average assets was 0.76% for the three months ended March 31,
2011 and 0.54% for the three month period ended March 31, 2010. Return
on average equity was 8.2% for the three month period ended March 31,
2011 and 6.1% for the same period in 2010.
Gross Loans increased $2.4 million from $411.8 million on December 31,
2010 to $414.2 million on March 31, 2011. The overall increase is
attributed mostly an increase in commercial loans of $3.6 million, an
increase in agricultural loans of $1.2 million and an increase of $612
thousand in real estate construction loans. These increases were
partially offset by a decrease in non-farm & non-residential loans of
$1.2 million, a decrease in multi-family residential loans of $981
thousand and a decrease of $743 thousand in 1-4 family residential
property loans.
Total deposits increased from $537.4 million on December 31, 2010 to
$538.8 million on March 31, 2011, an increase of $1.4 million. This
increase is primarily the result of an increase in non-interest bearing
deposit accounts of $26.5 million. This increase is not all attributed
to additional deposits being placed with the bank as part of the
increase is attributed to deposit accounts changing from time deposits
to non-interest bearing demand deposit accounts. Time deposits $100
thousand and over decreased $22.7 million and other interest bearing
deposit accounts decreased $2.4 million.
Net Interest Income
Net interest income is the difference between interest income earned on
interest-earning assets and the interest expense paid on interest-
bearing liabilities.
Net interest income was $5.8 million for the three months ended March
31, 2011 compared to $4.9 million for the three months ended March 31,
2010, an increase of 19.5%. The interest spread of 3.85% for the first
three months of 2011 is up from 3.02% reported for the same period in
2010, an increase of 83 basis points. Rates have remained fairly low in
the past year. The significant increase in the net interest spread is
largely attributed to a decrease in the cost of certificate of deposit
accounts. For the first three months ending March 31, 2011, the cost of
total deposits was 0.88% compared to 1.50% for the same time period in
2010. Increasing non-interest bearing deposit accounts has also helped
to lower the cost of deposits.
For the first three months, the yield on assets increased from 4.74% in
2010 to 4.96% in 2011. The year to date average balance of federal
funds sold decreased $35.6 million for the first three months in 2011
compared to 2010 due to an influx of short term deposits in 2010. This
helped to increase the yield on earning assets in 2011 because of the
low rates earned on federal funds sold. Also, the yield on loans
increased ten basis points in the first three months of 2011 compared to
2010. The cost of liabilities decreased from 1.72% in 2010 to 1.11% in
2011. Year to date average loans decreased $13.8 million, or 3.25% from
March 31, 2010 to March 31, 2011. Loan interest income has decreased
$92 thousand for the first three months of 2011 compared to the first
three months of 2010. Year to date average deposits decreased from
March 31, 2010 to March 31, 2011, down $18.4 million or 3.25%. The
decrease is primarily the result of a decrease in time deposits that
matured during the fourth quarter of 2010. Deposit interest expense has
decreased $900 thousand for the first three months of 2011 compared to
the same period in 2010. Year to date average borrowings decreased
$17.3 million, or 24.81% from March 31, 2010 to March 31, 2011. The
decrease is primarily the result of paying off FHLB advances when they
come due and not replacing them. Interest expense on borrowed funds has
decreased $164 thousand for the first three months of 2011 compared to
the same period in 2010.
The volume rate analysis for 2011 that follows indicates that $460
thousand of the decrease in interest income is attributable to the
decrease in volume, while the change in rates contributed to an increase
of $347 thousand in interest income. Even more affected by volume and
rate changes was the liability side of the balance sheet. The average
rate of the Company?s total outstanding deposits and borrowing
liabilities decreased from 1.72% in 2010 to 1.11% in 2011. Based on the
volume rate analysis that follows, the lower level of interest rates
contributed to a decrease of $610 thousand in interest expense, while
the change in volume was responsible for a $454 thousand decrease in
interest expense. As a result, the 2011 net interest income increase is
mostly attributed to decreases in rates on deposits and an increase in
rates on loans.
The accompanying analysis of changes in net interest income in the
following table shows the relationships of the volume and rate portions
of these changes in 2010. Changes in interest income and expenses due
to both rate and volume are allocated on a pro rata basis.
Changes in Interest Income and Expense
(in thousands) 2011 vs. 2010
Increase (Decrease) Due to Change in
Volume Rate Net Change
INTEREST INCOME
Loans $ (599) $ 507 $ (92)
Investment Securities 165 (180) (15)
Federal Funds Sold and
Securities Purchased under
Agreements to Resell (25) 19 (6)
Deposits with Banks (1) 1 -
Total Interest Income (460) 347 (113)
INTEREST EXPENSE
Deposits
Demand 15 18 33
Savings 11 (21) (10)
Negotiable Certificates of
Deposit and Other
Time Deposits (301) (622) (923)
Securities sold under
agreements to
repurchase and
other borrowings (8) (9) (17)
Federal Home Loan
Bank advances (171) 24 (147)
Total Interest Expense (454) (610) (1,064)
Net Interest Income $ (6) $ 957 $ 951
Non-Interest Income
Non-interest income increased $80 thousand for the three months ended
March 31, 2011 compared to the same period in 2010 to $1.8 million, due
primarily to an increase in debit card interchange income of $60
thousand and an increase in trust fees and commissions of $51 thousand.
Service charges decreased $93 thousand for the comparable time. This
decrease was mostly due to a decrease of $104 thousand in overdraft fee
income.
The gain on the sale of mortgage loans increased from $126 thousand in
the first three months of 2010 to $148 thousand during the first three
months of 2011, an increase of $22 thousand. The volume of loans sold
during the first three months of 2011 increased $1.5 million compared to
the same time period in 2010. 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. Loan service fee income was $44
thousand for the three months ending March 31, 2011 compared to $25
thousand for the three months ending March 31, 2010, an increase of $19
thousand. During the first quarter of 2011, a positive valuation
adjustment was booked for $20 thousand for the Mortgage Servicing Right.
Non-Interest Expense
Total non-interest expenses increased $258 thousand for the three month
period ended March 31, 2011 compared to the same period in 2010.
For the comparable three month periods, salaries and benefits increased
$267 thousand, an increase of 10.9%. The increase is attributed largely
to additional employees being hired throughout 2010 and in the first
quarter of 2011. The number of full time equivalent employees at March
31, 2011 was 189 compared to 178 one year ago. In addition, $60
thousand was expensed in the first quarter of 2011 to accrue for unused
vacation time that employees can carry over into future periods and
unused major illness time that certain employees may be eligible to
receive upon retirement. The Company began accruing for this liability
in the second quarter of 2010.
Occupancy expenses increased $67 thousand to $755 thousand for the first
three months of 2011 compared to the same time period in 2010. The
increase in occupancy expense during 2011 is primarily the result of an
increase in depreciation expense of $16 thousand and an increase in
computer maintenance of $33 thousand.
Legal and professional fees increased $46 thousand for the first three
months ended March 31, 2011 compared to the same time period in 2010.
The increase is primarily from additional collection efforts for problem
loans. Repossession expenses decreased $181 thousand for the first
three months ended March 31, 2011 compared to the same time period in
2010. Repossession expenses are reported net of income earned on the
repossessed properties. Repossession expenses were higher during the
first quarter of 2010 when compared to the same time period in 2011 due
to $277 thousand being expensed for the write-downs of other real estate
owned properties in 2010 and $0 being expensed in 2011. In addition,
the rents earned on other real estate properties increased $77 thousand
from last year to $153 thousand.
Income Taxes
The effective tax rate for the three months ended March 31, 2011 was
14.0% compared to 4.9% in 2010. These rates are less than the statutory
rate as a result of the tax-free securities and loans and tax credits
generated by certain investments held by the Company. The rates for
2011 are higher due to the higher level of income for 2011. Tax-exempt
interest income decreased $51 thousand for the first three months of
2011 compared to the first three months of 2010.
Liquidity and Funding
Liquidity is the ability to meet current and future financial
obligations. The Company?s primary sources of funds consist of deposit
inflows, loan repayments, maturities and sales of investment securities
and FHLB borrowings.
Liquidity risk is the possibility that we may not be able to meet our
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 $14.6 million as of March 31, 2011
compared to $17.6 million at December 31, 2010. The decrease in cash
and cash equivalents is mainly attributable to a decrease in federal
funds sold of $5.0 million resulting primarily from an increase in our
loan portfolio and an increase in our cash and ?due from? accounts with
correspondent banks. In addition to cash and cash equivalents, the
securities portfolio provides an important source of liquidity.
Securities available for sale totaled $176.3 million at March 31, 2011
compared to $176.9 million at December 31, 2010. The available for sale
securities are available to meet liquidity needs on a continuing basis.
We expect our customers? deposits to be adequate to meet our funding
demands.
Generally, we rely upon net cash inflows from financing activities,
supplemented by net cash inflows from operating activities, to provide
cash used in our 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. Our primary investing activities include purchasing investment
securities and loan originations.
For the first three months of 2011, deposits have increased $1.4
million. The Company has been able to keep its investment portfolio
relatively flat with a $549 thousand decrease in the security portfolio
while the loan portfolio increased $2.4 million. In addition, the
Company has paid down FHLB advances by $6.6 million during the first
three months of 2011 and will continue to pay those down as they mature.
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. We rely 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, 2011, we have sufficient
collateral to borrow an additional $14 million from the FHLB. In
addition, as of March 31, 2011, over $29 million is available in
overnight borrowing through various correspondent banks and the Company
has access to $194 million in brokered deposits. 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, 2011 and December 31, 2010, 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, 2011
Consolidated
Total Capital (to Risk-Weighted Assets) $ 61,928 13.4% $ 36,887 8% $ N/A N/A
Tier I Capital (to Risk-Weighted Assets) 56,201 12.2 18,444 4 N/A N/A
Tier I Capital (to Average Assets) 56,201 8.7 25,995 4 N/A N/A
Bank Only
Total Capital (to Risk-Weighted Assets) $ 63,449 13.8% $ 36,898 8% $ 46,122 10%
Tier I Capital (to Risk-Weighted Assets) 57,722 12.5 18,449 4 27,673 6
Tier I Capital (to Average Assets) 57,722 8.9 25,986 4 32,482 5
December 31, 2010
Consolidated
Total Capital (to Risk-Weighted Assets) $ 60,500 13.1% $ 36,823 8% N/A N/A
Tier I Capital (to Risk-Weighted Assets) 55,489 12.1 18,412 4 N/A N/A
Tier I Capital (to Average Assets) 55,489 8.5 26,218 4 N/A N/A
Bank Only
Total Capital (to Risk-Weighted Assets) $ 62,143 13.5% $ 36,810 8% $ 46,013 10%
Tier I Capital (to Risk-Weighted Assets) 57,131 12.4 18,405 4 27,608 6
Tier I Capital (to Average Assets) 57,131 8.7 26,208 4 32,760 5
Non-Performing Assets
As of March 31, 2011, our non-performing assets totaled $20.7 million or
3.16% of assets compared to $21.6 million or 3.28% of assets at December 31,
2010 (See table below.) We experienced a decrease of $2.0 million in non-
accrual loans from December 31, 2010 to March 31, 2011, due to a decrease in
non-accrual loans secured by real estate of $1.9 million. As of March 31,
2011, non-accrual loans include $3.3 million in loans secured by real estate
construction, $1.7 million in loans secured by farmland, $3.3 million in
loans secured by 1-4 family residential properties, $1.6 million in loans
secured by multi-family real estate and $565 thousand in loans secured by
non-farm & non-residential real estate. Real estate loans composed 99.7% of
the non-performing loans as of March 31, 2011 and December 31, 2010. Forgone
interest income on the non-accrual loans was $54 thousand for the first three
months of 2011 compared to $253 thousand for the same time period in 2010.
Accruing loans that are contractually 90 days or more past due as of March
31, 2011 totaled $701 thousand compared to $706 thousand at December 31,
2010, a decrease of $5 thousand. The total nonperforming loans decreased
$2.0 million from December 31, 2010 to March 31, 2011, resulting in a
decrease in the ratio of nonperforming loans to loans of 50 basis points to
2.70%. In addition, the amount the Company has booked as ?Other Real Estate?
has increased $1.1 million from December 31, 2010 to March 31, 2011. As of
March 31, 2011, the amount booked as ?Other Real Estate? totaled $9.5 million
compared to $8.4 million at December 31, 2010. The overall increase is
largely attributed to one loan customer who specialized in commercial & land
development properties that totaled $1.6 million that was previously on non-
accrual. In March 2011, $1.1 million of the outstanding loan balance was
repossessed and booked into Other Real Estate Owned leaving $287 thousand of
the loan included in non-accrual loans, and this is fully reserved for as of
March 31, 2011. The allowance as a percentage of non-performing and
restructured loans and Other Real Estate Owned increased from 23% at December
31, 2010 to 27% at March 31, 2011.
Nonperforming Assets
3/31/11 12/31/10
(in thousands)
Non-accrual Loans $ 10,468 $ 12,479
Accruing Loans which are
Contractually past due
90 days or more 701 706
Total Nonperforming Loans 11,169 13,185
Other Real Estate 9,550 8,424
Total Nonperforming Loans
and Other Real Estate $ 20,719 $ 21,609
Nonperforming Loans as a
Percentage of Loans 2.70% 3.20%
Nonperforming Loans and Other
Real Estate as a Percentage
of Total Assets 3.16% 3.28%
Allowance as a Percentage of
Period-end Loans 1.36% 1.20%
Allowance as a Percentage of
Non-performing Loans and
Other Real Estate 27% 23%
We maintain a ?watch list? of agricultural, commercial, real estate mortgage,
and real estate construction loans and review those loans on a regular basis.
Generally, assets are designated as ?watch list? loans to ensure more
frequent monitoring. If we determine 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 $750 thousand for 2011
and $450 thousand for 2010. The increase of $300 thousand for the loan loss
provision in 2011 compared to 2010 is largely due to reserving for two loans
that are expected to be charged off during the second quarter of 2011 with
projected losses estimated to be $377 thousand. Based on recent information
obtained (i.e., signed sales contract, a decrease in occupancy levels during
the first quarter of 2011, etc.) these losses are $288 thousand greater than
calculated at December 31, 2010. 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
for trends 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, 2011 were $34
thousand compared to net charge-offs of $2.3 million for the same period in
2010. 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 charged-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
(in thousands)
2011 2010
Balance at Beginning of Period $ 4,925 $ 7,600
Amounts Charged-off:
Commercial 18 19
Real Estate Construction - 547
1-4 family residential 90 260
Multi-family residential - -
Non-farm & non-residential 15 1,453
Real Estate Mortgage - -
Agricultural - 74
Consumer 275 236
Total Charged-off Loans 398 2,589
Recoveries on Amounts
Previously Charged-off:
Commercial - 43
Real Estate Construction - -
1-4 family residential 4 6
Multi-family residential 144 -
Non-farm & non-residential 14 98
Real Estate Mortgage - -
Agricultural 11 8
Consumer 191 147
Total Recoveries 364 302
Net Charge-offs 34 2,287
Provision for Loan Losses 750 450
Balance at End of Period 5,641 5,763
Loans
Average 409,449 423,164
At March 31 414,232 422,270
As a Percentage of Average Loans:
Net Charge-offs for the period 0.01% 0.54%
Provision for Loan Losses for the period 0.18% 0.11%
Allowance as a Multiple of
Net Charge-offs (annualized) 41.5 0.6
Item 3 ? QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Asset/Liability management control is designed to ensure safety and
soundness, maintain liquidity and regulatory capital standards, and achieve
acceptable net interest income. Management considers interest rate risk to
be the most significant market risk. Our 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. We have
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, 2011, the projected percentage changes are within the Board
approved limits. 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 lower in
each rising rate shock simulation and higher in each falling rate shock
environment when compared to the same period a year ago. The projected net
interest income report summarizing our interest rate sensitivity as of March
31, 2011 is as follows:
PROJECTED NET INTEREST INCOME
(dollars in thousands)
Level
Change in basis points: - 300 - 100 Rates + 100 + 300
Year One (4/11 - 3/12)
Net interest income $23,882 $24,626 $25,132 $25,028 $24,930
Net interest income dollar change (1,250) (506) N/A (105) (202)
Net interest income percentage change -5.0% -2.0% N/A -0.4% -0.8%
Board approved limit >-10.0% >-4.0% N/A >-4.0% >-10.0%
The projected net interest income report summarizing the Company's interest
rate sensitivity as of March 31, 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%
Projections from March 31,, 2011, year one reflected a decline in net
interest income of 2.0% with a 100 basis point decline compared to the 1.7%
decline in 2010. The 100 basis point increase in rates reflected a 0.4%
decrease in net interest income in 2011 compared to an increase of 2.2% in
2010.
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, 2011 balance sheet, a 100 basis
point increase in rates results in an 8.3% decrease in EVE. A 100 basis
point decrease in rates results in a 4.1% 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, our management, including
the Chief Executive Officer and the Chief Financial Officer, carried out an
evaluation of the effectiveness of the design and operation of our disclosure
controls and procedures. Based on the foregoing, our 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.
We 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, our internal control over financial reporting. Based on this
evaluation, there has been no such change during the quarter covered by this
report.
Our management recognizes that any controls and procedures, no matter how
well designed and operated, can provide only reasonable assurance of
achieving the desired control objectives.
Part II - Other Information
Item 1. Legal Proceedings
We are not a party to any material legal proceedings.
Item 1A. Risk Factors
A wide range of regulatory initiatives directed at the financial
services industry have been proposed in recent months. One of those
initiatives, the Dodd-Frank Wall Street Reform and Consumer Protection
Act of 2010 (the ?Dodd-Frank Act?), was signed into law by President
Obama on July 21, 2010. The Dodd-Frank Act represents a comprehensive
overhaul of the financial services industry within the United States,
establishes the new federal Bureau of Consumer Financial Protection
(the ?BCFP?), and will require the BCFP and other federal agencies to
implement many new rules. At this time, it is difficult to predict the
extent to which the Dodd-Frank Act or the resulting regulations will
impact the Company?s business. However, compliance with these new
laws and regulations will result in additional costs, which may
adversely impact the Company?s results of operations, financial
condition or liquidity, any of which may impact the market price of the
Company?s common stock.
Other than the additional risk factor mentioned above, there are no
material changes from the risk factors set forth under Part I, Item 1A
?Risk Factors? in our Annual Report on Form 10-K for the year ended
December 31, 2010, which you are encouraged to carefully consider.
.
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 or Programs
1/1/11 ?
1/31/11 - $ - - 27,361 shares
2/1/11 ?
2/28/11 - - - 27,361 shares
3/1/11 ?
3/31/11 1,000 16.75 1,000 26,361 shares
Total 1,000 1,000 26,361 shares
On October 25, 2000, we announced that our 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, 2011, 273,639 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 ___5/16/11_______ __/s/Louis Prichard______________
Louis Prichard, President and C.E.O.
Date ___5/16/11_______ __/s/Gregory J. Dawson___________
Gregory J. Dawson, Chief Financial Officer
12
34
Lexlibrary/197885.
