-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, RRHXY8OYLE6UdJHOQzY3rSTzZmQQ4YaOzw8ZXv9tpvttd2ezJ1Vkjql2lcW+iiAi nuv7sJVxI/RfUhpWcnsqBA== 0001000232-04-000008.txt : 20040813 0001000232-04-000008.hdr.sgml : 20040813 20040813073545 ACCESSION NUMBER: 0001000232-04-000008 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 4 CONFORMED PERIOD OF REPORT: 20040630 FILED AS OF DATE: 20040813 FILER: COMPANY DATA: COMPANY CONFORMED NAME: KENTUCKY BANCSHARES INC /KY/ CENTRAL INDEX KEY: 0001000232 STANDARD INDUSTRIAL CLASSIFICATION: SAVINGS INSTITUTION, FEDERALLY CHARTERED [6035] IRS NUMBER: 610993464 FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: 1934 Act SEC FILE NUMBER: 033-96358 FILM NUMBER: 04971814 BUSINESS ADDRESS: STREET 1: 4TH & MAIN ST STREET 2: P O BOX 157 CITY: PARIS STATE: KY ZIP: 40362-0157 BUSINESS PHONE: 859-987-1795 MAIL ADDRESS: STREET 1: 4TH & MAIN ST STREET 2: PO BOX 157 CITY: PARIS STATE: KY ZIP: 40362-0157 FORMER COMPANY: FORMER CONFORMED NAME: BOURBON BANCSHARES INC /KY/ DATE OF NAME CHANGE: 19950907 10-Q 1 q042.txt 10Q UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-Q (Mark One) [ X ] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended June 30, 2004 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: 33-96358 KENTUCKY BANCSHARES, INC. (Exact name of registrant as specified in its charter) Kentucky 61-0993464 (State or other jurisdiction of (I.R.S. Employer Identification No.) incorporation or organization) P.O. Box 157, Paris, Kentucky 40362-0157 (Address of principal executive offices) (Zip Code) Registrant's telephone number, including area code: (859)987-1795 Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No _____ Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act). Yes No X___ Number of shares of Common Stock outstanding as of August 3, 2004: 2,801,877. KENTUCKY BANCSHARES, INC. Table of Contents Part I - Financial Information Item 1. Financial Statements Consolidated Balance Sheets 3 Consolidated Statements of Income and Comprehensive Income 4 Consolidated Statements of Changes in Stockholders' Equity 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 13 Item 3. Quantitative and Qualitative Disclosures About Market Risk 20 Item 4. Controls and Procedures 21 Part II - Other Information 22 Signatures 23 Exhibits 31.1 Certifications of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. 24 31.2 Certifications of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. 26 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. 28 Item 1 - Financial Statements KENTUCKY BANCSHARES, INC. CONSOLIDATED BALANCE SHEETS (unaudited) (thousands) 6/30/2004 12/31/2003 Assets Cash and due from banks $ 12,186 $ 15,225 Federal funds sold - 6,163 Cash and cash equivalents 12,186 21,388 Securities available for sale 133,224 128,790 Mortgage loans held for sale 6,903 7,759 Loans 334,690 313,002 Allowance for loan losses (4,093) (3,820) Net loans 330,597 309,182 Federal Home Loan Bank stock 5,029 4,930 Bank premises and equipment, net 11,859 11,606 Interest receivable 3,147 3,250 Goodwill 10,200 10,200 Other intangible assets 959 1,137 Other assets 2,988 2,610 Total assets $ 517,092 $ 500,852 Liabilities and Stockholders' Equity Deposits Non-interest bearing $ 68,641 $ 64,842 Time deposits, $100 and over 49,815 49,915 Other interest bearing 260,625 269,842 Total deposits 379,081 384,599 Securities sold under agreements to repurchase 20,420 1,791 Other borrowed funds 8,722 5,494 Subordinated debentures 7,217 7,217 Federal Home Loan Bank advances 54,239 53,232 Interest payable 1,648 1,636 Other liabilities 732 826 Total liabilities 472,059 454,795 Stockholders' equity Common stock 7,029 6,985 Retained earnings 38,965 37,553 Accumulated other comprehensive income (961) 1,519 Total stockholders' equity 45,033 46,057 Total liabilities & stockholders' equity $ 517,092 $ 500,852 See Accompanying Notes KENTUCKY BANCSHARES, INC. CONSOLIDATED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME (unaudited) (thousands, except per share amounts) Six Months Ending 6/30/2004 6/30/2003 INTEREST INCOME: Loans, including fees $ 9,813 $ 9,417 Securities available for sale 2,889 1,797 Other 28 59 Total interest income 12,730 11,273 INTEREST EXPENSE: Deposits 2,848 2,785 Other 1,544 1,183 Total interest expense 4,392 3,968 Net interest income 8,338 7,305 Loan loss provision 450 450 Net interest income after provision 7,888 6,855 OTHER INCOME: Service charges 2,217 2,075 Loan service fee income 119 124 Trust department income 147 156 Securities available for sale gains (losses), net 76 20 Gain on sale of mortgage loans 238 531 Other 541 468 Total other income 3,338 3,374 OTHER EXPENSES: Salaries and employee benefits 4,102 3,762 Occupancy expenses 1,129 1,034 Amortization of intangibles 294 241 Advertising and marketing 196 200 Taxes other than payroll, property and income 248 221 Other 1,688 1,479 Total other expenses 7,657 6,937 Income before taxes 3,569 3,292 Income taxes 980 937 Net income $ 2,589 $ 2,355 Other Comprehensive Income, net of tax: Change in Unrealized Gains on Securities (2,480) 293 Comprehensive Income $ 109 $ 2,648 Earnings per share Basic $ 0.92 $ 0.85 Diluted 0.92 0.84 See Accompanying Notes KENTUCKY BANCSHARES, INC. CONSOLIDATED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME (unaudited) (thousands, except per share amounts) Three Months Ending 6/30/2004 6/30/2003 INTEREST INCOME: Loans, including fees $ 5,005 $ 4,689 Securities available for sale 1,448 912 Other 10 10 Total interest income 6,463 5,611 INTEREST EXPENSE: Deposits 1,412 1,335 Other 784 591 Total interest expense 2,196 1,926 Net interest income 4,267 3,685 Loan loss provision 195 225 Net interest income after provision 4,072 3,460 OTHER INCOME: Service charges 1,162 1,092 Loan service fee income 60 62 Trust department income 65 61 Securities available for sale gains (losses), net 60 2 Gain on sale of mortgage loans 136 239 Other 293 201 Total other income 1,776 1,657 OTHER EXPENSES: Salaries and employee benefits 2,060 1,867 Occupancy expenses 540 534 Amortization of intangibles 149 123 Advertising and marketing 96 100 Taxes other than payroll, property and income 125 111 Other 863 751 Total other expenses 3,833 3,486 Income before taxes 2,015 1,631 Income taxes 576 459 Net income $ 1,439 $ 1,172 Other Comprehensive Income, net of tax: Change in Unrealized Gains on Securities (2,852) 272 Comprehensive Income $ (1,413) $ 1,444 Earnings per share Basic $ 0.51 $ 0.42 Diluted 0.51 0.42 See Accompanying Notes KENTUCKY BANCSHARES, INC.
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY (unaudited) (thousands, except number of shares) Accumulated Other Total ----Common Stock---- Retained Comprehensive Stockholders' Shares Amount Earnings Income Equity Balances, December 31, 2003 2,799,781 $ 6,985 $ 37,553 $ 1,519 $ 46,057 Common stock issued 2,096 44 - - 44 Common stock purchased - - - - - Net change in unrealized gain (loss) on securities available for sale, net of tax - - - (2,480) (2,480) Net income - - 2,589 - 2,589 Dividends declared - $0.42 per share - - (1,177) - (1,177) Balances, June 30, 2004 2,801,877 $ 7,029 $ 38,965 $ (961) $ 45,033
KENTUCKY BANCSHARES, INC. CONSOLIDATED STATEMENTS OF CASH FLOWS (unaudited) (thousands) Six Months Ending 6/30/2004 6/30/2003 Cash Flows From Operating Activities Net Income $ 2,589 $ 2,355 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation 541 490 Amortization 294 241 Securities available for sale amortization (accretion) 390 341 Provision for loan losses 450 450 Securities available for sale (gains) losses, net (76) (20) Originations of loans held for sale (12,301) (22,040) Proceeds from sale of loans 13,395 18,983 Federal Home Loan Bank Stock dividends (99) (81) Gain on sale of mortgage loans (238) (531) Changes in: Interest receivable 103 330 Other assets (311) (433) Interest payable 12 (38) Other liabilities 1,001 (358) Net cash from operating activities 5,750 (311) Cash Flows From Investing Activities Purchases of securities available for sale (56,036) (23,831) Proceeds from sales of securities available for sale 26,807 5,355 Proceeds from principal payments, maturities and calls of securities available for sale 20,723 18,246 Net change in loans (21,865) 310 Purchases of bank premises and equipment, net (794) (642) Proceeds from the sale of bank premises and equipment Net cash from investing activities (31,165) (562) Cash Flows From Financing Activities: Net change in deposits (5,518) (17,498) Net change in securities sold under agreements to repurchase and other borrowings 21,857 (1,824) Advances from Federal Home Loan Bank 10,000 8,000 Payments on Federal Home Loan Bank advances (8,993) (4,967) Proceeds from issuance of common stock 44 76 Purchase of common stock - (11) Dividends paid (1,177) (1,056) Net cash from financing activities 16,213 (17,280) Net change in cash and cash equivalents (9,202) (18,153) Cash and cash equivalents at beginning of period 21,388 29,176 Cash and cash equivalents at end of period $ 12,186 $ 11,023 KENTUCKY BANCSHARES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 1. The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities as of the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Estimates used in the preparation of the financial statements are based on various factors including the current interest rate environment and the general strength of the local economy. Changes in the overall interest rate environment can significantly affect the Company's net interest income and the value of its recorded assets and liabilities. Actual results could differ from those estimates used in the preparation of the financial statements. The financial information presented as of any date other than December 31 has been prepared from the Company's books and records without audit. The accompanying consolidated financial statements have been prepared in accordance with the instructions to Form 10-Q and Rule 10-01 of Regulation S-X. Certain financial information that is normally included in annual financial statements prepared in accordance with accounting principles generally accepted in the United States of America, but is not required for interim reporting purposes, has been condensed or omitted. In the opinion of management, all adjustments, consisting of normal recurring adjustments, necessary for a fair presentation of such financial statements, have been included. The results of operations for the interim periods are not necessarily indicative of the results to be expected for the full year. For further information, refer to the consolidated financial statements and footnotes thereto included in the Company's Annual Report on Form 10-K for the year ended December 31, 2003. 2. GOODWILL AND OTHER INTANGIBLE ASSETS The balance for goodwill was $10,199,830 as of June 30, 2004. Goodwill will not be amortized but instead evaluated periodically for impairment. Acquired intangible assets were as follows: Original Accumulated Amount Amortization 6/30/2004 Core deposit intangible $3,656,403 $2,697,324 Amortization expense was $178,032 for the first six months of 2004 and $139,734 for the first six months of 2003. Estimated amortization expense for the next five years is: 2004 - $275,491; 2005 - $95,736; 2006 - $95,736; 2007 - $95,736; and 2008 - $95,736. The change in balance for intangible assets during the period is as follows: Beginning of year $1,137,111 Amortization (178,032) End of period 959,079 3. INVESTMENT SECURITIES INVESTMENT SECURITIES Period-end securities are as follows: (in thousands) Amortized Unrealized Unrealized Fair Cost Gains Losses Value Available for Sale June 30, 2004 U.S. Treasury $ 3,018 $ - $ (36) $ 2,982 U.S. government agencies 35,922 2 (822) 35,102 States and political subdivisions 36,285 741 (337) 36,689 Mortgage-backed 58,262 293 (1,711) 56,844 Equity securities 1,193 414 - 1,607 Total 134,680 1,450 (2,906) 133,224 December 31, 2003 U.S. Treasury $ 3,022 $ 11 $ - $ 3,033 U.S. government agencies 36,642 125 (133) 36,634 States and political subdivisions 37,656 1,536 (50) 39,142 Mortgage-backed 46,944 631 (193) 47,382 Equity securities 1,215 327 (8) 1,534 Other 1,009 56 - 1,065 Total 126,488 2,686 (384) 128,790 4. LOANS Loans at period-end are as follows: (in thousands) 6/30/2004 12/31/2003 Commercial $ 16,398 $ 14,278 Real estate construction 21,126 14,313 Real estate mortgage 229,266 214,529 Agricultural 56,696 56,615 Consumer 11,204 13,267 Total 334,690 313,002 5. On August 28, 2003, Kentucky Bancshares Statutory Trust I, a trust subsidiary of the Company, issued 7,000 shares of cumulative trust preferred securities with a liquidation preference of $1,000 per security. The proceeds of the offering were loaned to the Company in exchange for subordinated debentures with terms that are similar to the trust preferred securities; these debentures are the sole asset of the trust subsidiary. Distributions on the securities are payable quarterly at a rate per annum equal to 7.06% through September 17, 2008, and thereafter quarterly in arrears at the annual rate (adjusted quarterly) equal to the 3-month LIBOR plus 3.00%. The Company has guaranteed that the trust subsidiary will make the required distributions to the holders of the trust preferred securities. The trust preferred securities, which mature September 17, 2033, are subject to mandatory redemption, in whole or in part, upon repayment of the subordinated debentures at maturity or their earlier redemption at the liquidation preference. Subject to regulatory approval, the subordinated debentures are redeemable before the maturity date at the Company's option on or after September 17, 2008, at their principal amount plus accrued interest. The subordinated debentures are also redeemable in whole or in part, from time to time, upon the occurrence of specific events defined in the debenture indenture. The Company undertook the issuance of these securities to enhance its regulatory capital position as they are considered as Tier I capital under current regulatory guidelines. The Company intends to use the proceeds to assist in funding continued growth and development of the business, including the November 7, 2003 acquisition of Kentucky First Bancorp. 6. On November 7, 2003, the Company acquired 100% of the outstanding shares of Kentucky First Bancorp, Inc., parent of First Federal Savings Bank. Operating results of Kentucky First Bancorp, Inc. are included in the consolidated financial statements since the date of the acquisition. As a result of this acquisition, the Company expects to further solidify its market share in central Kentucky. The purchase price in cash was $23.25 per share or $22,271,000. The purchase price resulted in approximately $10,200,000 in goodwill, and $766,000 in core deposit intangible. The core deposit intangible asset will be amortized over 10 years, using the straight line method. Goodwill will not be amortized but instead evaluated periodically for impairment. The following table summarizes the estimated fair value of assets acquired and liabilities assumed at the date of acquisition. Securities available for sale $ 23,156,000 Loans 31,205,000 Goodwill 10,200,000 Core deposit intangible 766,000 Other assets 18,468,000 Total assets acquired $ 83,795,000 Deposits (52,939,000) Other liabilities (8,585,000) Total liabilities assumed $ (61,524,000) Net assets acquired $ 22,271,000 7. Basic earnings per common share is net income divided by the weighted average number of common shares outstanding during the period. Diluted earnings per common share includes the dilutive effect of additional potential common shares issuable under stock options. The factors used in the earnings per share computation follow: Six Months Ended June 30 2004 2003 (in thousands) Basic Earnings Per Share Net Income $2,589 $2,355 Weighted average common shares outstanding 2,801 2,776 Basic earnings per share $ 0.92 $ 0.85 Diluted Earnings Per Share Net Income $2,589 $2,355 Weighted average common shares outstanding 2,801 2,776 Add dilutive effects of assumed exercise of stock options 22 17 Weighted average common and dilutive potential common shares outstanding 2,823 2,793 Diluted earnings per share $ 0.92 $ 0.84 Three Months Ended June 30 2004 2003 (in thousands) Basic Earnings Per Share Net Income $1,439 $1,172 Weighted average common shares outstanding 2,802 2,777 Basic earnings per share $ 0.51 $ 0.42 Diluted Earnings Per Share Net Income $1,439 $1,172 Weighted average common shares outstanding 2,802 2,777 Add dilutive effects of assumed exercise of stock options 21 33 Weighted average common and dilutive potential common shares outstanding 2,823 2,810 Diluted earnings per share $ 0.51 $ 0.42 8. Stock Compensation The Company grants certain officers and key employees stock option awards which vest and become fully exercisable at the end of five years. The Company also grants certain directors stock option awards which vest and become fully exercisable immediately. The exercise price of each option, which has a ten year life, was equal to the market price of the Company's stock on the date of grant; therefore, no compensation expense was recognized. Employee compensation expense under stock options is reported using the intrinsic value method. No stock-based compensation cost is reflected in net income, as all options granted had an exercise price equal to or greater than the market price of the underlying common stock at date of grant. The following table illustrates the effect on net income and earnings per share if expense was measured using the fair value recognition provisions of FASB Statement No. 123, Accounting for Stock-Based Compensation. Six months ended June 30 (in thousands) 2004 2003 Net income As reported $ 2,589 $ 2,355 Deduct: Stock-based compensation expense determined under fair value based method (10) (17) Pro forma 2,579 2,338 Basic earnings per share As reported $ 0.92 $ 0.85 Pro forma 0.92 0.84 Diluted earnings per share As reported $ 0.92 $ 0.84 Pro forma 0.91 0.84 9. Dividends per share paid for the quarter ended June 30, 2004 were $0.21 compared to $0.19 for June 30, 2003. This is the same rate of dividend paid for the first quarters of the respective years. 10. Components of Net Periodic Cost Six months ended June 30 (in thousands) Pension Benefits 2004 2003 Service cost $ 185 $ 158 Interest cost 143 133 Expected return on plan assets (160) (133) Amortization - 8 Net Periodic Cost $ 168 $ 166 Employer Contributions The Company previously disclosed in its financial statements for the year ended December 31, 2003 that it expected to contribute $375 thousand to its Pension Plan. No contributions to the Pension Plan were made for the six months ended June 30, 2004, and the Company anticipates making its annual contribution in the third quarter of 2004. Item 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Forward-Looking Statements This discussion contains forward-looking statements under the Private Securities Litigation Reform Act of 1995 that involve risks and uncertainties. Words such as "believes," "anticipates," "expects," "intends," "plans," "targeted," and similar expressions are intended to identify forward-looking statements but are not the exclusive means of identifying such statements. Although the Company believes that the assumptions underlying the forward-looking statements contained herein are reasonable, any of the assumptions could be inaccurate, and therefore, there can be no assurance that the forward-looking statements included herein will prove to be accurate. Factors that could cause actual results to differ from the results discussed in the forward-looking statements include, but are not limited to: economic conditions (both generally and more specifically in the markets, including the tobacco market, in which the Company and its bank operate); competition for the Company's customers from other providers of financial and mortgage services; government legislation and regulation (which changes from time to time and over which the Company has no control); changes in interest rates (both generally and more specifically mortgage interest rates); material unforeseen changes in the liquidity, results of operations, or financial condition of the Company's customers; and other risks detailed in the Company's filings with the Securities and Exchange Commission, all of which are difficult to predict and many of which are beyond the control of the Company. The Company undertakes no obligation to republish revised forward-looking statements to reflect events or circumstances after the date hereof or to reflect the occurrence of unanticipated events. Summary Kentucky Bancshares, Inc. recorded net income of $2.6 million, or $0.92 basic and diluted earnings per share for the first six months ended June 30, 2004 compared to $2.4 million, or $0.85 basic earnings per share and $0.84 diluted earnings per share for the six month period ending June 30, 2003. The first six months earnings reflects an increase of 9.9% compared to the same time period in 2003. The net income for the three months ended June 30, 2004 was $1.4 million, or $0.51 basic and diluted earnings per share compared to $1.2 million, or $0.42 basic and diluted earnings per share for the three month period ending June 30, 2003. This three month period reflects an increase in net income of 22.8% compared to the three months of the prior year. Return on average assets was 0.99% for the six months ended June 30, 2004 and 1.14% for the six month period ended June 30, 2003. Return on average assets was 1.20% for the three months ended June 30, 2004 and 1.14% for the same time period in 2003. Return on average equity was 11.0% for the six month period ended June 30, 2004 and 10.5% for the same period in 2003. Return on average equity for the three month period ended June 30, 2004 was 13.7% compared to 10.4% for the same time period in 2003. Loans increased $21.7 million from $313.0 million on December 31, 2003 to $334.7 million on June 30, 2004. Increases in commercial, real estate construction and real estate mortgage loans were offset somewhat by a decrease in consumer loans. Management attributes the overall growth in loans primarily to an improvement in the economy. Total deposits decreased from $384.6 million on December 31, 2003 to $379.1 million on June 30, 2004, a decrease of $5.5 million. The decrease is mainly attributable to other interest bearing deposits decreasing $9.2 million and non-interest bearing deposits increasing $3.8 million. Net Interest Income Net interest income was $8.3 million for the six months ended June 30, 2004 and $7.3 million for the six months ended June 30, 2003, an increase of 14.1%. Net interest income was $4.3 million for the three months ended June 30, 2004 and $3.7 million for the three months ending June 30, 2003, resulting in an increase of $582 thousand. The interest spread was 3.41% for the first six months of 2004 compared to 3.69% for the same period in 2003, a decrease of 28 basis points. Generally, the low interest rate environment, in conjunction with the addition of the trust preferred securities with their 7.06% fixed rate of interest have contributed to tighter net interest margins in the first six months of 2004 compared to 2003. For the first six months, the yield on assets decreased from 5.86% in 2003 to 5.26% in 2004. The cost of liabilities decreased from 2.17% in 2003 to 1.86% in 2004. Year to date average loans are up $34.4 million, or 12.1% from June 30, 2003 to June 30, 2004. On November 7, 2004, the acquisition of Kentucky First Bancorp, Inc. resulted in $31.2 million being added to the outstanding balance of loans. Loan interest income has increased $396 thousand for the first six months of 2004 compared to the first six months of 2003. Year to date average deposits also increased from June 30, 2003 to June 30, 2004, up $70.0 million, or 21.7%. The above mentioned acquisition added $52.9 million in deposits. Deposit interest expense has increased $63 thousand for the first six months of 2004 compared to the same period in 2003. The declining rate environment in recent years has resulted in tighter margins in 2003 and 2004. However, due to the acquisition, net interest income has increased $1.0 million for the first six months of 2004 compared to the same period in 2003. The banking industry continues to battle competition for loan and deposit dollars, and this trend is expected to continue. During the first quarter of 2004, the Company determined that it was in its best interest to purchase additional investment securities. The Company implemented leverage strategies amounting to $30 million. Investments were purchased and funded by repurchase agreements and Federal Home Loan Bank advances. These strategies have added $232 thousand to net income before taxes for the first six months of 2004. Non-Interest Income Non-interest income decreased $36 thousand for the six months ended June 30, 2004 compared to the same period in 2003 from $3.4 million to $3.3 million, due primarily to the decrease in gain on sale of mortgage loans discussed below. Non-interest income increased $119 thousand for the three month period ended June 30, 2004 compared to the same period in 2003. An increase of $142 thousand in service charges from the first six months of 2003 to the comparable 2004 period is mainly attributable to an increase in checking overdraft charges of $192 thousand, offset mainly by a decrease in title insurance of $19 thousand and merchant processing of $23 thousand. The accounts acquired through the acquisition of Kentucky First in November 2003 have also added to the increase. Gain on sale of mortgage loans decreased $293 thousand during the first six months of 2004 compared to the same period in 2003. The gain on sale of mortgage loans decreased $103 thousand for the three month period ended June 30, 2004 compared to the same three month period in 2003. The volume of loan originations and sales are inverse to rate changes. The stabilizing or increasing of interest rates has caused the income to be lower in 2004 than in 2003, and thus we expect the income from the sale of loans to be lower in future periods than in the 2003, if interest rates continue to rise. Non-Interest Expense Total non-interest expenses increased $720 thousand for the six month period ended June 30, 2004 compared to the same period in 2003, including an increase of $347 thousand in non-interest expenses from $3.5 million for the three months ended June 30, 2003 to $3.8 million for the same period in 2004. For the comparable six month periods, salaries and benefits increased $340 thousand, an increase of 9%. The increase is due to annual salary increases and an increased number of employees. Employee benefits represented $67 thousand of the increase in salaries and employee benefits expense during these comparable periods. Occupancy expenses increased $95 thousand from $1.0 million for the first six months of 2003 compared to $1.1 million for the same period in 2004. Occupancy expenses increased $6 thousand for the three month period ended June 30, 2004 compared to June 30, 2003. Other expenses increased $209 thousand for the six months ended June 30, 2004 compared to the same time period in 2003. Other expenses increased $112 thousand for the three months ended June 30, 2004 compared to the same period in 2003. Debit card expenses, amortization expenses and repossession expenses have increased $32 thousand, $38 thousand and $52 thousand, respectively, when compared to the same six month period in 2003. The acquisition of Kentucky First in November 2003 was a main contributor in the expenses increasing from 2003 to 2004. Income Taxes The tax equivalent rate for the six months ended June 30, 2004 was 27% compared to 28% in 2003. The tax equivalent rate for the three months ended June 30 was 29% for 2004 and 28% for 2003. These rates are less than the statutory rate as a result of the tax-free securities and loans held by the Company. Stock Repurchase Program On October 25, 2000, the Company announced that its Board of Directors approved a stock repurchase program. The Company is authorized to purchase up to 100,000 shares of its outstanding common stock. On November 11, 2002, the Board of Directors approved and authorized the Company's repurchase of an additional 100,000 shares. Shares will be purchased from time to time in the open market depending on market prices and other considerations. Through June 30, 2004, 84,333 shares have been purchased, with the most recent share repurchase having occurred on February 5, 2003. The repurchase program has had a positive effect on earnings per share calculations. Liquidity and Funding Liquidity risk is the possibility that the Company may not be able to meet its cash requirements. Management of liquidity risk includes maintenance of adequate cash and sources of cash to fund operations and meeting the needs of borrowers, depositors and creditors. Excess liquidity has a negative impact on earnings as a result of the lower yields on short-term assets. Cash and cash equivalents were $12.2 million as of June 30, 2004 compared to $21.4 million at December 31, 2003. The decrease in cash and cash equivalents is mainly attributable to a decrease in federal funds sold. In addition to cash and cash equivalents, the securities portfolio provides an important source of liquidity. Total securities available for sale totaled $133.2 million at June 30, 2004. The available for sale securities are available to meet liquidity needs on a continuing basis. The Company maintains a relatively stable base of customer deposits, which is expected 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. To assist in funding the Company's continued growth and development of its business, including the November 7, 2003 acquisition of Kentucky First Bancorp, on August 28, 2003, Kentucky Bancshares Statutory Trust I, a trust subsidiary of the Company, issued 7,000 shares of cumulative trust preferred securities with a liquidation preference of $1,000 per security. The proceeds of the offering were loaned to the Company in exchange for subordinated debentures with terms that are similar to the trust preferred securities; these debentures are the sole asset of the trust subsidiary. Distributions on the securities are payable quarterly at a rate per annum equal to 7.06% through September 17, 2008, and thereafter quarterly in arrears at the annual rate (adjusted quarterly) equal to the 3-month LIBOR plus 3.00%. The Company has guaranteed that the trust subsidiary will make the required distributions to the holders of the trust preferred securities. The trust preferred securities, which mature September 17, 2033, are subject to mandatory redemption, in whole or in part, upon repayment of the subordinated debentures at maturity or their earlier redemption at the liquidation preference. Subject to regulatory approval, the subordinated debentures are redeemable before the maturity date at the Company's option on or after September 17, 2008, at their principal amount plus accrued interest. The subordinated debentures are also redeemable in whole or in part, from time to time, upon the occurrence of specific events defined in the debenture indenture. The Company undertook the issuance of these securities to enhance its regulatory capital position as they are considered as Tier I capital under current regulatory guidelines. Management is aware of the potential problem of funding sustained loan growth. Therefore, in addition to deposits, other sources of funds, such as Federal Home Loan Bank (FHLB) advances, may be used. The Company relies on FHLB advances for both liquidity and asset/liability management purposes. These advances are used primarily to fund long-term fixed rate residential mortgage loans. As of June 30, 2004, we have sufficient collateral to borrow an additional $35 million from the FHLB. In addition, as of June 30, 2004, over $53 million is available in overnight borrowing through various correspondent banks. In light of this, management believes there is sufficient liquidity to meet all reasonable borrower, depositor and creditor needs in the present economic environment. Non-Performing Assets As of June 30, 2004, the Company's non-performing loans totaled $1.9 million or 0.6% of loans compared to $2.6 million or 0.8% of loans at December 31, 2003. (See table below) The changes in non-accrual loans and in accruing loans past due 90 days or more is attributable to various smaller consumer and real estate loans. Real estate loans composed 89% of the non-performing loans as of June 30, 2004 and 69% as of December 31, 2003. Forgone interest income on the non-accrual loans for both 2004 and 2003 is immaterial. Nonperforming Assets 6/30/04 12/31/03 (in thousands) Non-accrual Loans $ 882 $ 1,844 Accruing Loans which are Contractually past due 90 days or more 1,007 779 Total Nonperforming and Restructured 1,889 2,623 Other Real Estate 537 375 Total Nonperforming and Restructured Loans and Other Real Estate $ 2,426 $ 2,998 Nonperforming and Restructured Loans as a Percentage of Loans 0.56% 0.82% Nonperforming and Restructured Loans and Other Real Estate as a Percentage of Total Assets 0.47% 0.60% Provision for Loan Losses The loan loss provision for the first six months was $450 thousand for 2004 and 2003. The provision for the three months ended June 30, 2004 was $195 thousand compared to $225 thousand for the same period in 2003. A decrease in nonperforming loans caused management to decrease the 2004 second quarter provision in order to maintain an allowance for loan losses that is representative of the risk of loss based on the quality of loans currently in the portfolio. Management estimates the allowance balance required using past loan loss experience, the nature and volume of the portfolio, information about specific borrower situations and estimated collateral values, economic conditions, and other factors. Net charge-offs for the six month period ended June 30, 2004 were $177 thousand compared to $804 thousand for the same period in 2003. Net charge-offs for the three month period ended June 30, 2004 were $39 thousand compared to $622 thousand for the same time period in 2003. Future levels of charge-offs will be determined by the particular facts and circumstances surrounding individual loans. Management believes the current loan loss reserve is sufficient to meet probable incurred loan losses. Loan Losses Six Months Ended June 30 (in thousands) 2004 2003 Balance at Beginning of Period $ 3,820 $ 3,395 Amounts Charged-off: Commercial 45 529 Real Estate Construction - - Real Estate Mortgage 19 88 Agricultural 83 20 Consumer 149 257 Total Charged-off Loans 296 894 Recoveries on Amounts Previously Charged-off: Commercial 6 9 Real Estate Construction - - Real Estate Mortgage 37 1 Agricultural 5 21 Consumer 71 59 Total Recoveries 119 90 Net Charge-offs 177 804 Provision for Loan Losses 450 450 Balance at End of Period 4,093 3,041 Loans Average 317,597 282,773 At June 30 334,690 283,040 As a Percentage of Average Loans: Net Charge-offs 0.06% 0.28% Provision for Loan Losses 0.14% 0.16% Allowance as a Percentage of Period-end Loans 1.22% 1.07% Allowance as a Multiple of Net Charge-offs 11.6 1.9 Allowance as a Percentage of Non-performing and Restructured Loans 217% 175% Loan Losses Quarter Ended June 30 (in thousands) 2004 2003 Balance at Beginning of Period $ 3,937 $ 3,438 Amounts Charged-off: Commercial 30 487 Real Estate Construction - - Real Estate Mortgage 19 88 Agricultural - - Consumer 37 100 Total Charged-off Loans 86 675 Recoveries on Amounts Previously Charged-off: Commercial 2 5 Real Estate Construction - - Real Estate Mortgage 3 1 Agricultural 1 20 Consumer 41 27 Total Recoveries 47 53 Net Charge-offs 39 622 Provision for Loan Losses 195 225 Balance at End of Period 4,093 3,041 Loans Average 322,860 282,418 At June 30 334,690 283,040 As a Percentage of Average Loans: Net Charge-offs 0.01% 0.22% Provision for Loan Losses 0.06% 0.08% Allowance as a Multiple of Net Charge-offs 26.2 1.2 Item 3 - QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK Asset/Liability management control is designed to ensure safety and soundness, maintain liquidity and regulatory capital standards, and achieve acceptable net interest income. Management considers interest rate risk to be the most significant market risk. The Company's exposure to market risk is reviewed on a regular basis by the Asset/Liability Committee. Interest rate risk is the potential of economic losses due to future interest rate changes. These economic losses can be reflected as a loss of future net interest income and/or a loss of current fair market values. The objective is to measure the effect on net interest income and to adjust the balance sheet to minimize the inherent risk while at the same time maximize income. Management realizes certain risks are inherent and that the goal is to identify and minimize the risks. The primary tool used by management is an interest rate shock simulation model. The Bank has no market risk sensitive instruments held for trading purposes. The following table depicts the change in net interest income resulting from 100 and 300 basis point changes in rates on the Company's interest earning assets and interest bearing liabilities. The projections are based on balance sheet growth assumptions and repricing opportunities for new, maturing and adjustable rate amounts. As of June 30, 2004 the projected percentage changes are within the Board approved limits, except for the "- 300". In the "- 300" scenario, most of the rates used in the model cannot decline 300 basis points because of the current low level of rates. In this scenario, the net interest income changes are outside the Board approved limit, and are monitored by the Board on a monthly basis. In addition, management has made some asset/liability decisions that would lessen the impact of changing interest rates. Therefore, the Company currently has slightly less volatility to changing rates than existing a year ago. The projected net interest income report summarizing the Company's interest rate sensitivity as of June 30, 2004 is as follows: (dollars in thousands) PROJECTED NET INTEREST INCOME Level Change in basis points: - 300 - 100 Rates + 100 + 300 Year One (7/04 - 6/05) Interest Income $21,667 $25,017 $26,735 $28,454 $31,896 Interest Expense 6,787 7,122 8,457 9,800 12,488 Net Interest Income 14,880 17,895 18,278 18,654 19,408 PROJECTED DOLLAR INCREASE (DECREASE) FROM "LEVEL RATES" Year One (7/04 - 6/05) Interest Income $(5,068) $(1,718) N/A $ 1,719 $ 5,161 Interest Expense (1,670) (1,335) N/A 1,343 4,031 Net Interest Income (3,398) (383) N/A 376 1,130 PROJECTED PERCENTAGE INCREASE (DECREASE) FROM "LEVEL RATES" Year One (7/04 - 6/05) Interest Income -19.0% -6.4% N/A 6.4% 19.3% Interest Expense -19.7% -15.8% N/A 15.9% 47.7% Net Interest Income -18.6% -2.1% N/A 2.1% 6.2% 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 June 30, 2003 is as follows: (dollars in thousands) PROJECTED NET INTEREST INCOME Level Change in basis points: - 300 - 100 Rates + 100 + 300 Year One (7/03 - 6/04) Interest Income $ 18,524 $ 21,107 $ 22,525 $ 23,945 $ 26,793 Interest Expense 6,108 6,396 7,259 8,129 9,870 Net Interest Income 12,416 14,711 15,266 15,816 16,923 PROJECTED DOLLAR INCREASE (DECREASE) FROM "LEVEL RATES" Year One (7/03 - 6/04) Interest Income $ (4,001) $ (1,418) N/A $ 1,420 $ 4,268 Interest Expense (1,151) (863) N/A 870 2,611 Net Interest Income (2,850) (555) N/A 550 1,657 PROJECTED PERCENTAGE INCREASE (DECREASE) FROM "LEVEL RATES" Year One (7/03 - 6/04) Interest Income -17.8% -6.3% N/A 6.3% 18.9% Interest Expense -15.9% -11.9% N/A 12.0% 36.0% Net Interest Income -18.7% -3.6% N/A 3.6% 10.9% Board approved limit >-10.0% >-4.0% N/A >-4.0% >-10.0% These projected changes in net interest income as of June 30, 2004 are less when compared to the projected changes in net interest income as of June 30, 2003. Projections from June 30, 2004, year one reflected a decline in net interest income of 2.1% with a 100 basis point decline compared to the 3.6% decline in 2003. The 300 basis point increase in rates reflected a 6.2% increase in net interest income in 2004 compared to 10.9% in 2003. Percentage changes in 2004 are less when compared to 2003. These changes are also attributable in part to the $30 million leverage transactions discussed in Item 2 above. Therefore, changes in interest rates should have a smaller effect on net interest income. 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 2. Changes in Securities, Use of Proceeds and Issuer Purchases of Equity Securities None Item 3. Defaults upon Senior Securities None Item 4. Submission of Matters to a Vote of Security Holders None Item 5. Other Information None Item 6. Exhibits and Reports on Form 8-K 1. Exhibits as required by Item 601 of Regulation S-K. 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. 2. Reports on Form 8-K The Company filed a Form 8-K dated May 5, 2004, Item 7 and Item 12 to report the mailing to its shareholders of its operating results for the three-month period ended March 31, 2004. 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 ____8/13/04_________ __/s/Buckner Woodford____________ Buckner Woodford, President and C.E.O. Date ____8/13/04_________ __/s/Gregory J. Dawson___________ Gregory J. Dawson, Chief Financial Officer 2 3 23 Lexlibrary/197885.1 EX-31 2 ex311.txt CEO CERTIFICATION Exhibit 31.1 CERTIFICATIONS OF CHIEF EXECUTIVE OFFICER PURSUANT TO SECTION 302 OF SARBANES-OXLEY ACT I, Buckner Woodford, certify that: 1. I have reviewed this quarterly report on Form 10-Q of Kentucky Bancshares, Inc.; 2. Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this quarterly report; 3. Based on my knowledge, the financial statements, and other financial information included in this quarterly report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this quarterly report; 4. The registrant's other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and have: (a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this quarterly report is being prepared; (b) Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and (c) Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and 5. The registrant's other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of registrant's board of directors (or persons performing the equivalent function): (a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and (b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting. Date: August 13, 2004 BY /s/ Buckner Woodford Buckner Woodford President & Chief Executive Officer 2 Lexlibrary/197885.1 EX-31 3 ex312.txt CFO CERTIFICATION Exhibit 31.2 CERTIFICATIONS OF CHIEF FINANCIAL OFFICER PURSUANT TO SECTION 302 OF SARBANES-OXLEY ACT I, Gregory J. Dawson, certify that: 1. I have reviewed this quarterly report on Form 10-Q of Kentucky Bancshares, Inc.; 2. Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this quarterly report; 3. Based on my knowledge, the financial statements, and other financial information included in this quarterly report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this quarterly report; 4. The registrant's other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and have: (a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this quarterly report is being prepared; (b) Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and (c) Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and 5. The registrant's other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of registrant's board of directors (or persons performing the equivalent function): (a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and (b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting. Date: August 13, 2004 BY /s/ Gregory J. Dawson Gregory J. Dawson Chief Financial Officer 2 Lexlibrary/197885.1 EX-32 4 ex32.txt CEO & CFO CERTIFICATION Exhibit 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) In connection with the Quarterly Report of Kentucky Bancshares, Inc. (the "Company") on Form 10-Q for the period ended June 30, 2004, as filed with the Securities and Exchange Commission on the date hereof (the "Report"), the undersigned, the Chief Executive Officer and Chief Financial Officer of the Company, certify, pursuant to 18 U.S.C. Section 1350, that: (1) The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and (2) The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company. Date: August 13, 2004 By /s/ Buckner Woodford Buckner Woodford President & Chief Executive Officer Date: August 13, 2004 By /s/ Gregory J. Dawson Gregory J. Dawson Chief Financial Officer 1 Lexlibrary/197885.1 -----END PRIVACY-ENHANCED MESSAGE-----