-----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, Bom1RM+qu34A50axmTqknb682HEU6Zbh2jRZhFfj2Rk7kT3uhinmODP5ORx2knx/ Bt2rOVVyVlYJoYfDZc4mSg== 0001000232-05-000008.txt : 20050513 0001000232-05-000008.hdr.sgml : 20050513 20050513135145 ACCESSION NUMBER: 0001000232-05-000008 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 4 CONFORMED PERIOD OF REPORT: 20050331 FILED AS OF DATE: 20050513 DATE AS OF CHANGE: 20050513 FILER: COMPANY DATA: COMPANY CONFORMED NAME: KENTUCKY BANCSHARES INC /KY/ CENTRAL INDEX KEY: 0001000232 STANDARD INDUSTRIAL CLASSIFICATION: STATE COMMERCIAL BANKS [6022] IRS NUMBER: 610993464 STATE OF INCORPORATION: KY FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: 1934 Act SEC FILE NUMBER: 033-96358 FILM NUMBER: 05828101 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 q051.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 March 31, 2005 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 May 13, 2005: 2,682,698. KENTUCKY BANCSHARES, INC. Table of Contents Part I - Financial Information Item 1. Financial Statements Consolidated Balance Sheets 3 Consolidated Statements of Income and Comprehensive Income 4 Consolidated Statements of Changes in Stockholders' Equity 5 Consolidated Statements of Cash Flows 6 Notes to Consolidated Financial Statements 7 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 10 Item 3. Quantitative and Qualitative Disclosures About Market Risk 16 Item 4. Controls and Procedures 17 Part II - Other Information 18 Signatures 19 Exhibits 31.1 Certifications of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. 20 31.2 Certifications of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. 22 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. 24 Item 1 - Financial Statements KENTUCKY BANCSHARES, INC. CONSOLIDATED BALANCE SHEETS (unaudited) (thousands) 3/31/2005 12/31/2004 Assets Cash and due from banks $ 8,802 $ 12,249 Federal funds sold - 3,206 Cash and cash equivalents 8,802 15,455 Securities available for sale 121,946 126,767 Mortgage loans held for sale - 175 Loans 359,522 358,282 Allowance for loan losses (4,327) (4,163) Net loans 355,195 354,119 Federal Home Loan Bank stock 5,193 5,137 Bank premises and equipment, net 11,354 11,378 Interest receivable 3,312 3,226 Goodwill 9,111 9,111 Other intangible assets 837 861 Mortgage servicing rights 866 876 Other assets 1,773 1,439 Total assets $ 518,389 $ 528,544 Liabilities and Stockholders' Equity Deposits Non-interest bearing $ 69,981 $ 74,048 Time deposits, $100,000 and over 54,147 59,469 Other interest bearing 248,749 254,438 Total deposits 372,877 387,955 Repurchase agreements and other borrowings 33,702 25,593 Federal Home Loan Bank advances 57,500 59,750 Subordinated debentures 7,217 7,217 Interest payable 1,831 1,849 Other liabilities 657 1,153 Total liabilities 473,784 483,517 Stockholders' equity Common stock 6,770 6,819 Retained earnings 38,600 37,884 Accumulated other comprehensive income (loss) (765) 324 Total stockholders' equity 44,605 45,027 Total liabilities & stockholders' equity $ 518,389 $ 528,544 See Accompanying Notes KENTUCKY BANCSHARES, INC. CONSOLIDATED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME (unaudited) (thousands, except per share amounts) Three Months Ending 3/31/2005 3/31/2004 INTEREST INCOME: Loans, including fees $ 5,510 $ 4,808 Securities available for sale 1,202 1,441 Other 8 18 Total interest income 6,720 6,267 INTEREST EXPENSE: Deposits 1,619 1,436 Other 880 760 Total interest expense 2,499 2,196 Net interest income 4,221 4,071 Loan loss provision 250 255 Net interest income after provision 3,971 3,816 OTHER INCOME: Service charges 1,017 1,055 Loan service fee income 65 59 Trust department income 103 82 Securities available for sale gains (losses), net - 16 Gain on sale of mortgage loans 97 102 Other 272 248 Total other income 1,554 1,562 OTHER EXPENSES: Salaries and employee benefits 2,152 2,042 Occupancy expenses 570 589 Amortization 84 145 Advertising and marketing 110 100 Taxes other than payroll, property and income 137 123 Other 766 825 Total other expenses 3,819 3,824 Income before taxes 1,706 1,554 Income taxes 373 404 Net income $ 1,333 $ 1,150 Other Comprehensive Income, net of tax: Change in Unrealized Gains on Securities (1,089) 372 Comprehensive Income $ 244 $ 1,522 Earnings per share Basic $ 0.50 $ 0.41 Diluted 0.49 0.41 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, 2004 2,684,498 $ 6,819 $ 37,884 $ 324 $ 45,027 Common stock issued 200 2 - - 2 Common stock purchased (1,720) (51) - - (51) Net change in unrealized gain (loss) on securities available for sale, net of tax - - - (1,089) (1,089) Net income - - 1,333 - 1,333 Dividends declared - $0.23 per share - - (617) - (617) Balances, March 31, 2005 2,682,978 $ 6,770 $ 38,600 $ (765) $ 44,605
KENTUCKY BANCSHARES, INC. CONSOLIDATED STATEMENTS OF CASH FLOWS (unaudited) (thousands) Three Months Ending 3/31/2005 3/31/2004 Cash Flows From Operating Activities Net Income $ 1,333 $ 1,150 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation 231 301 Amortization 84 145 Amortization of premium on debt (25) (25) Securities amortization (accretion), net 98 176 Provision for loan losses 250 255 Securities (gains) losses, net - (16) Originations of loans held for sale (4,913) (5,164) Proceeds from sale of loans 5,185 6,022 Federal Home Loan Bank stock dividends (56) (49) Gain on sale of mortgage loans (97) (102) Changes in: Interest receivable (86) (21) Other assets (384) 429 Interest payable (18) (57) Other liabilities 65 81 Net cash from operating activities 1,667 3,125 Cash Flows From Investing Activities Purchases of securities available for sale (1,988) (42,526) Proceeds from sales of securities available for sale - 19 Proceeds from principal payments, maturities and calls of securities available for sale 5,061 14,505 Net change in loans (1,326) (748) Purchases of bank premises and equipment, net (207) (639) Net cash from investing activities 1,540 (29,389) Cash Flows From Financing Activities: Net change in deposits (15,078) 920 Net change in securities sold under agreements to repurchase and other borrowings 8,109 13,797 Advances from Federal Home Loan Bank - 10,000 Payments on Federal Home Loan Bank advances (2,225) (6,225) Proceeds from issuance of common stock 2 34 Purchase of common stock (51) - Dividends paid (617) (589) Net cash from financing activities (9,860) 17,937 Net change in cash and cash equivalents (6,653) (8,327) Cash and cash equivalents at beginning of period 15,455 21,388 Cash and cash equivalents at end of period $ 8,802 $ 13,061 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, 2004. 2. INVESTMENT SECURITIES INVESTMENT SECURITIES Period-end securities are as follows: (in thousands) Amortized Unrealized Unrealized Fair Cost Gains Losses Value Available for Sale March 31, 2005 U.S. Treasury $ 3,013 $ - $ (51) $ 2,962 U.S. government agencies 38,403 - (800) 37,603 States and political subdivisions 33,876 915 (283) 34,508 Mortgage-backed 47,205 27 (1,281) 45,951 Equity securities 608 314 - 922 Total 123,105 1,256 (2,415) 121,946 December 31, 2004 U.S. Treasury $ 3,014 $ - $ (30) $ 2,984 U.S. government agencies 39,410 4 (384) 39,030 States and political subdivisions 34,026 1,297 (163) 35,160 Mortgage-backed 49,219 80 (678) 48,621 Equity securities 608 364 - 972 Total 126,277 1,745 (1,255) 126,767 3. LOANS Loans at period-end are as follows: (in thousands) 3/31/2005 12/31/2004 Commercial $ 19,680 $ 19,999 Real estate construction 35,098 32,256 Real estate mortgage 236,719 238,476 Agricultural 59,040 57,498 Consumer 8,985 10,053 Total 359,522 358,282 4. Basic earnings per common share is net income divided by the weighted average number of common shares outstanding during the period. Diluted earnings per common share includes the dilutive effect of additional potential common shares issuable under stock options. The factors used in the earnings per share computation follow: Three Months Ended March 31 2005 2004 (in thousands) Basic Earnings Per Share Net Income $1,333 $1,150 Weighted average common shares outstanding 2,684 2,801 Basic earnings per share $ 0.50 $ 0.41 Diluted Earnings Per Share Net Income $1,333 $1,150 Weighted average common shares outstanding 2,684 2,801 Add dilutive effects of assumed exercise of stock options 16 22 Weighted average common and dilutive potential common shares outstanding 2,700 2,823 Diluted earnings per share $ 0.49 $ 0.41 5. Stock Compensation The Company grants certain officers and key employees stock option awards which vest and become fully exercisable at the end of five years. The Company also grants certain directors stock option awards which vest and become fully exercisable immediately. The exercise price of each option, which has a ten year life, was equal to the market price of the Company's stock on the date of grant; 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. Three months ended March 31 (in thousands) 2005 2004 Net income As reported $ 1,333 $ 1,150 Deduct: Stock-based compensation expense determined under fair value based method (14) (5) Pro forma 1,319 1,145 Basic earnings per share As reported $ 0.50 $ 0.41 Pro forma 0.49 0.41 Diluted earnings per share As reported $ 0.49 $ 0.41 Pro forma 0.49 0.41 6. Dividends per share paid for the quarter ended March 31, 2005 were $0.23 compared to $0.21 for March 31, 2004. 7. Components of Net Periodic Benefit Cost Three months ended March 31 (in thousands) Pension Benefits 2005 2004 Service cost $ 108 $ 102 Interest cost 87 76 Expected return on plan assets (94) (80) Amortization 10 3 Net Periodic Benefit Cost $ 111 $ 101 Employer Contributions The Company previously disclosed in its financial statements for the year ended December 31, 2004 that it expected to contribute $255 thousand as its 2005 annual contribution to the Pension Plan. No contributions to the Pension Plan were made for the quarter ended March 31, 2005, and the Company anticipates making its annual contribution in the third quarter of 2005. 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 $1.3 million, or $0.50 basic and $0.49 diluted earnings per share for the first three months ended March 31, 2005 compared to $1.1 million, or $0.41 basic earnings per share and $0.41 diluted earnings per share for the three month period ending March 31, 2004. The first three months earnings reflects an increase of 15.9% compared to the same time period in 2004. Return on average assets was 1.02% for the three months ended March 31, 2005 and 0.89% for the three month period ended March 31, 2004. Return on average equity was 11.8% for the three month period ended March 31, 2005 and 9.6% for the same period in 2004. Loans increased $1.2 million from $358.3 million on December 31, 2004 to $359.5 million on March 31, 2005. Increases in real estate construction and agricultural loans were offset by a decrease in real estate mortgage and consumer loans. Management attributes the slower growth in loans primarily to increasing rates. Total deposits decreased from $388.0 million on December 31, 2004 to $372.9 million on March 31, 2005, a decrease of $15.1 million, primarily the result of general competition for deposits. The decrease is mainly attributable to a decrease in non-interest bearing deposits of $4.1 million, time deposits ($100,000 and over) of $5.3 million, and other interest bearing deposits of $5.7 million. Net Interest Income Net interest income was $4.2 million for the three months ended March 31, 2005 compared to $4.1 million for the three months ended March 31, 2004, an increase of 3.7%. The interest spread was 3.41% for the first three months of 2005 compared to 3.37% for the same period in 2004, an increase of 4 basis points. Generally, the increasing interest rate environment has contributed to improved net interest margins in the first three months of 2005 compared to 2004. For the first three months, the yield on assets increased from 5.25% in 2004 to 5.54% in 2005. The cost of liabilities increased from 1.88% in 2004 to 2.13% in 2005. Year to date average loans are up $46.9 million, or 15.0% from March 31, 2004 to March 31, 2005. Loan interest income has increased $702 thousand for the first three months of 2005 compared to the first three months of 2004. Year to date average deposits decreased from March 31, 2004 to March 31, 2005, down $6.0 million, or 1.6%. Deposit interest expense has increased $183 thousand for the first three months of 2005 compared to the same period in 2004. The declining rate environment in recent years resulted in tighter margins in 2003 and 2004. The rising rate environment in the past year has contributed to improved margins. However, the banking industry continues to battle competition for loan and deposit dollars, and this trend is expected to continue, as well as downward pressure on margins. 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 $57 thousand to net income before taxes for the first three months of 2005, and $108 thousand for the first three months of 2004. Non-Interest Income Non-interest income decreased $8 thousand for the three months ended March 31, 2005 compared to the same period in 2004 to $1.6 million, due primarily to a decrease in service charges. A decrease of $38 thousand in service charges from the first three months of 2004 to the comparable 2005 period is mainly attributable to a decrease in checking overdraft charges of $37 thousand. Gain on sale of mortgage loans decreased $5 thousand during the first three months of 2005 compared to the same period in 2004. The volume of mortgage loan originations and sales is inverse to rate changes. The stabilizing of long term interest rates, along with the significant decrease in refinancing activity, has caused the income to be lower in 2005 than in 2004. Non-Interest Expense Total non-interest expenses decreased $5 thousand for the three month period ended March 31, 2005 compared to the same period in 2004. For the comparable three month periods, salaries and benefits increased $110 thousand, an increase of 5%. Incentives represented $74 thousand and employee benefits represented $37 thousand of the increase in salaries and employee benefits expense during these comparable periods. The reduction of part time hours and the salary reduction of the current Chairman, who was the previous President and CEO, helped keep base salaries in 2005 comparable to 2004. Occupancy expenses decreased $19 thousand to $570 thousand for the first three months of 2005 compared to the same period in 2004. The decrease in 2005 is mainly attributable to a decrease in depreciation of $70 thousand compared to 2004, offset somewhat by an increase in repairs and maintenance on buildings and equipment. Amortization decreased for the first three months of 2005 compared to 2004 by $61 thousand, mainly from the deposit premium from a previous acquisition being fully amortized in 2004. Other expenses decreased $59 thousand for the three months ended March 31, 2005 compared to the same time period in 2004. The decrease is primarily from the decrease in repossession expenses of $28 thousand and fraud losses of $24 thousand. Income Taxes The tax equivalent rate for the three months ended March 31, 2005 was 22% compared to 26% in 2004. These rates are less than the statutory rate as a result of the tax-free securities and loans held by the Company. Recognizing the remainder of the net operating loss carryforward from the Cynthiana acquisition in 2003 also contributed to the lower rate in 2005. 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. In August 2004, the Board of Directors approved and the Company repurchased 122,302 shares from a third-party shareholder. These shares were outside of the previously mentioned stock repurchase programs. Shares will be purchased from time to time in the open market depending on market prices and other considerations. Through March 31, 2005, 86,053 shares have been purchased, with the most recent share repurchase having occurred on March 31, 2005. 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 $8.8 million as of March 31, 2005 compared to $15.5 million at December 31, 2004. The decrease in cash and cash equivalents is mainly attributable to a decrease in federal funds sold and the correspondent bank balances as of the last day of the quarter. In addition to cash and cash equivalents, the securities portfolio provides an important source of liquidity. Total securities available for sale totaled $121.9 million at March 31, 2005. The available for sale securities are available to meet liquidity needs on a continuing basis. The Company expects the customers' deposits to be adequate to meet its funding demands. Generally, the Company relies upon net cash inflows from financing activities, supplemented by net cash inflows from operating activities, to provide cash used in its investing activities. As is typical of many financial institutions, significant financing activities include deposit gathering, and the use of short-term borrowings, such as federal funds purchased and securities sold under repurchase agreements along with long-term debt. The Company's primary investing activities include purchasing investment securities and loan originations. 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 challenge of funding sustained loan growth. Therefore, in addition to deposits, other sources of funds, such as Federal Home Loan Bank (FHLB) advances, may be used. The Company relies on FHLB advances for both liquidity and asset/liability management purposes. These advances are used primarily to fund long-term fixed rate residential mortgage loans. As of March 31, 2005, we have sufficient collateral to borrow an additional $44 million from the FHLB. In addition, as of March 31, 2005, 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 March 31, 2005, the Company's non-performing loans totaled $1.9 million or 0.51% of loans compared to $2.1 million or 0.58% of loans at December 31, 2004. (See table below) The changes in non-accrual loans and in accruing loans past due 90 days or more are attributable to various smaller consumer and real estate loans. Real estate loans composed 83% of the non-performing loans as of March 31, 2005 and 84% as of December 31, 2004. Forgone interest income on the non-accrual loans for both 2005 and 2004 is immaterial. Nonperforming Assets 3/31/05 12/31/04 (in thousands) Non-accrual Loans $ 1,411 $ 1,781 Accruing Loans which are Contractually past due 90 days or more 440 308 Total Nonperforming and Restructured 1,851 2,089 Other Real Estate 921 676 Total Nonperforming and Restructured Loans and Other Real Estate $ 2,772 $ 2,765 Nonperforming and Restructured Loans as a Percentage of Loans 0.51% 0.58% Nonperforming and Restructured Loans and Other Real Estate as a Percentage of Total Assets 0.53% 0.52% Provision for Loan Losses The loan loss provision for the first three months was $250 thousand for 2005 and $255 thousand for 2004. A decrease in nonperforming loans and the lower level of net charge-offs have caused management to decrease the 2005 provision in order to maintain an allowance for loan losses that is representative of the risk of loss based on the quality of loans currently in the portfolio. Management estimates the allowance balance required using past loan loss experience, the nature and volume of the portfolio, information about specific borrower situations and estimated collateral values, economic conditions, and other factors. Net charge-offs for the three month period ended March 31, 2005 were $86 thousand compared to $138 thousand for the same period in 2004. 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 Three Months Ended March 31 (in thousands) 2005 2004 Balance at Beginning of Period $ 4,163 $ 3,820 Amounts Charged-off: Commercial 43 15 Real Estate Mortgage 22 - Agricultural - 83 Consumer 66 112 Total Charged-off Loans 131 210 Recoveries on Amounts Previously Charged-off: Commercial 1 4 Real Estate Mortgage - 34 Agricultural - 4 Consumer 44 30 Total Recoveries 45 72 Net Charge-offs 86 138 Provision for Loan Losses 250 255 Balance at End of Period 4,327 3,937 Loans Average 359,262 312,334 At March 31 359,522 313,612 As a Percentage of Average Loans: Net Charge-offs 0.02% 0.04% Provision for Loan Losses 0.07% 0.08% Allowance as a Percentage of Period-end Loans 1.20% 1.26% Allowance as a Multiple of Net Charge-offs 12.6 7.1 Allowance as a Percentage of Non-performing and Restructured Loans 234% 149% Item 3 - QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK Asset/Liability management control is designed to ensure safety and soundness, maintain liquidity and regulatory capital standards, and achieve acceptable net interest income. Management considers interest rate risk to be the most significant market risk. The Company's exposure to market risk is reviewed on a regular basis by the Asset/Liability Committee. Interest rate risk is the potential of economic losses due to future interest rate changes. These economic losses can be reflected as a loss of future net interest income and/or a loss of current fair market values. The objective is to measure the effect on net interest income and to adjust the balance sheet to minimize the inherent risk while at the same time maximize income. Management realizes certain risks are inherent and that the goal is to identify and minimize the risks. The primary tool used by management is an interest rate shock simulation model. The Bank has no market risk sensitive instruments held for trading purposes. The following table depicts the change in net interest income resulting from 100 and 300 basis point changes in rates on the Company's interest earning assets and interest bearing liabilities. The projections are based on balance sheet growth assumptions and repricing opportunities for new, maturing and adjustable rate amounts. As of March 31, 2005 the projected percentage changes are within the Board approved limits, except for the "-100" and "- 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. The Company is also slightly outside the Board approved limit in the "-100" environment. In these scenarios, the net interest income changes are outside the Board approved limit for such net interest income changes, and are monitored by and reported to the Board on a monthly basis. In addition, management has made some recent asset/liability decisions that would lessen the impact of changing interest rates. This period's volatility is comparable to the same periods a year ago. The projected net interest income report summarizing the Company's interest rate sensitivity as of March 31, 2005 is as follows: (dollars in thousands) PROJECTED NET INTEREST INCOME Level Change in basis points: - 300 - 100 Rates + 100 + 300 Year One (4/05 - 3/06) Interest Income $22,890 $26,843 $28,825 $30,758 $34,475 Interest Expense 8,964 9,621 10,869 12,117 14,612 Net Interest Income 13,926 17,222 17,956 18,641 19,863 PROJECTED DOLLAR INCREASE (DECREASE) FROM "LEVEL RATES" Year One (4/05 - 3/06) Interest Income $(5,935) $(1,982) N/A $ 1,933 $ 5,650 Interest Expense (1,905) (1,248) N/A 1,248 3,743 Net Interest Income (4,030) (734) N/A 685 1,907 PROJECTED PERCENTAGE INCREASE (DECREASE) FROM "LEVEL RATES" Year One (4/05 - 3/06) Interest Income -20.6% -6.9% N/A 6.7% 19.6% Interest Expense -17.5% -11.5% N/A 11.5% 34.4% Net Interest Income -22.4% -4.1% N/A 3.8% 10.6% Net Interest Income 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, 2004 is as follows: (dollars in thousands) PROJECTED NET INTEREST INCOME Level Change in basis points: - 300 - 100 Rates + 100 + 300 Year One (4/04 - 3/05) Interest Income $ 21,641 $ 24,670 $ 26,301 $ 27,932 $ 31,197 Interest Expense 6,959 7,203 8,365 9,533 11,868 Net Interest Income 14,682 17,467 17,936 18,399 19,329 PROJECTED DOLLAR INCREASE (DECREASE) FROM "LEVEL RATES" Year One (4/04 - 3/05) Interest Income $ (4,660) $ (1,631) N/A $ 1,631 $ 4,896 Interest Expense (1,406) (1,162) N/A 1,168 3,503 Net Interest Income (3,254) (469) N/A 463 1,393 PROJECTED PERCENTAGE INCREASE (DECREASE) FROM "LEVEL RATES" Year One (4/04 - 3/05) Interest Income -17.7% -6.2% N/A 6.2% 18.6% Interest Expense -16.8% -13.9% N/A 14.0% 41.9% Net Interest Income -18.1% -2.6% N/A 2.6% 7.8% Net Interest Income Board approved limit >-10.0% >-4.0% N/A >-4.0% >-10.0% These projected changes in net interest income as of March 31, 2005 are slightly more when compared to the projected changes in net interest income as of March 31, 2004. Projections from March 31, 2005, year one reflected a decline in net interest income of 4.1% with a 100 basis point decline compared to the 2.6% decline in 2004. The 300 basis point increase in rates reflected a 10.6% increase in net interest income in 2005 compared to 7.8% in 2004. 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. Unregistered Sales of Equity Securities and Use of Proceeds ISSUER PURCHASES OF EQUITY SECURITIES Period (a) Total (b) (c) Total Number (d) Maximum Number Number of Average of Shares (or Units) (or Approximate Dollar Shares (or Price Paid Purchased as Part Value) of Shares (or Units) Per Share of Publicly Units) that May Yet Be Purchased (or Unit) Announced Plans Purchased Under the Or Programs Plans of Programs 1/1/05 - 1/31/05 -0- N/A N/A 115,667 shares 2/1/05 - 2/28/05 -0- N/A N/A 115,667 shares 3/1/05 - 3/31/05 1,720 $29.61 1,720 113,947 shares Total 1,720 1,720 113,947 shares On October 25, 2000, the Company announced that its Board of Directors approved a stock repurchase program. The Company is authorized to purchase up to 100,000 shares of its outstanding common stock. On November 11, 2002, the Board of Directors approved and authorized the Company's repurchase of an additional 100,000 shares. In August 2004, the Board of Directors approved and the Company repurchased 122,302 shares from a third-party shareholder at a price of $28 per share. These shares were outside of the previously mentioned stock repurchase programs. Shares will be purchased from time to time in the open market depending on market prices and other considerations. Through March 31, 2005, 86,053 shares have been purchased, with the most recent share repurchase having occurred on March 31, 2005. Item 3. Defaults upon Senior Securities None Item 4. Submission of Matters to a Vote of Security Holders The registrant's 2005 Annual Meeting of Shareholders was held May 10, 2005. Proxies were solicited by the registrant's Board of Directors. There was no solicitation in opposition to the board's nominees as listed in the proxy statement, and all of the nominees were elected by vote of the shareholders. Voting results for each nominee were as follows: Votes For Votes Withheld Henry Hinkle 1,962,309 75,932 Theodore Kuster 1,971,989 66,252 Robert G. Thompson 1,972,589 65,652 The following directors have a term of office that will continue following the Annual Meeting: William M. Arvin, Betty J. Long, Ted McClain, Louis Prichard, Woodrow Van Meter and Buckner Woodford, IV. A proposal to approve the 2005 Restricted Stock Grant Plan was approved by a majority of the outstanding shares of the registrant's common stock. A total of 1,484,569 shares were voted in favor of the proposal; 113,663 shares were voted against; 77,434 shares abstained, and 362,575 shares were broker non-votes. The total number of Common Shares outstanding as of March 18, 2005, the record date for the Annual Meeting of Shareholders, was 2,684,698. Item 5. Other Information None Item 6. Exhibits 31.1 Certifications of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. 31.2 Certifications of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. 32 Certifications of Chief Executive Officer and Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. KENTUCKY BANCSHARES, INC. Date ____5/13/05_________ __/s/Louis Prichard______________ Louis Prichard, President and C.E.O. Date ____5/13/05_________ __/s/Gregory J. Dawson___________ Gregory J. Dawson, Chief Financial Officer 2 3 18 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, Louis Prichard, 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: May 13, 2005 BY /s/ Louis Prichard Louis Prichard President & Chief Executive Officer 21 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: May 13, 2005 BY /s/ Gregory J. Dawson Gregory J. Dawson Chief Financial Officer 23 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 March 31, 2005, 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: May 13, 2005 By /s/ Louis Prichard Louis Prichard President & Chief Executive Officer Date: May 13, 2005 By /s/ Gregory J. Dawson Gregory J. Dawson Chief Financial Officer 24 Lexlibrary/197885.1 -----END PRIVACY-ENHANCED MESSAGE-----