-----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, OYFwBYu2wI2iNb+d5qN98XOMGfGvVK1I3U0OjyG2DHZPDxcYj0g+gG1Usx7Hx64f ksd5BumLmPd1kNLZTLyhcw== 0001000232-05-000011.txt : 20050815 0001000232-05-000011.hdr.sgml : 20050815 20050815081835 ACCESSION NUMBER: 0001000232-05-000011 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 4 CONFORMED PERIOD OF REPORT: 20050630 FILED AS OF DATE: 20050815 DATE AS OF CHANGE: 20050815 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: 051023530 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 q052.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, 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 August 12, 2005: 2,671,322. 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 11 Item 3. Quantitative and Qualitative Disclosures About Market Risk 18 Item 4. Controls and Procedures 19 Part II - Other Information 20 Signatures 21 Exhibits 31.1 Certifications of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. 22 31.2 Certifications of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. 24 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. 26 Item 1 - Financial Statements KENTUCKY BANCSHARES, INC. CONSOLIDATED BALANCE SHEETS (unaudited) (thousands) 6/30/2005 12/31/2004 Assets Cash and due from banks $ 10,977 $ 12,249 Federal funds sold 216 3,206 Cash and cash equivalents 11,193 15,455 Securities available for sale 120,385 126,767 Mortgage loans held for sale - 175 Loans 366,840 358,282 Allowance for loan losses (4,431) (4,163) Net loans 362,409 354,119 Federal Home Loan Bank stock 5,257 5,137 Bank premises and equipment, net 10,857 11,378 Interest receivable 3,407 3,226 Goodwill 9,111 9,111 Other intangible assets 814 861 Mortgage servicing rights 859 876 Other assets 1,507 1,439 Total assets $ 525,799 $ 528,544 Liabilities and Stockholders' Equity Deposits Non-interest bearing $ 69,856 $ 74,048 Time deposits, $100,000 and over 54,834 59,469 Other interest bearing 260,302 254,438 Total deposits 384,992 387,955 Repurchase agreements and other borrowings 16,346 25,593 Federal Home Loan Bank advances 67,251 59,750 Subordinated debentures 7,217 7,217 Interest payable 2,067 1,849 Other liabilities 1,619 1,153 Total liabilities 479,492 483,517 Stockholders' equity Common stock 6,824 6,819 Retained earnings 39,358 37,884 Accumulated other comprehensive income (loss) 125 324 Total stockholders' equity 46,307 45,027 Total liabilities & stockholders' equity $ 525,799 $ 528,544 See Accompanying Notes KENTUCKY BANCSHARES, INC. CONSOLIDATED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME (unaudited) (thousands, except per share amounts) Six Months Ending 6/30/2005 6/30/2004 INTEREST INCOME: Loans, including fees $ 11,328 $ 9,813 Securities available for sale 2,403 2,889 Other 22 28 Total interest income 13,753 12,730 INTEREST EXPENSE: Deposits 3,336 2,848 Other 1,811 1,544 Total interest expense 5,147 4,392 Net interest income 8,606 8,338 Loan loss provision 416 450 Net interest income after provision 8,190 7,888 NON-INTEREST INCOME: Service charges 2,195 2,217 Loan service fee income 131 119 Trust department income 215 147 Securities available for sale gains (losses), net 53 76 Gain on sale of mortgage loans 187 238 Other 607 541 Total other income 3,388 3,338 NON-INTEREST EXPENSE: Salaries and employee benefits 4,301 4,102 Occupancy expenses 1,120 1,129 Amortization 171 294 Advertising and marketing 220 196 Taxes other than payroll, property and income 272 248 Other 1,690 1,688 Total other expenses 7,774 7,657 Income before taxes 3,804 3,569 Income taxes 955 980 Net income $ 2,849 $ 2,589 Other Comprehensive Income, net of tax: Change in Unrealized Gains on Securities (199) (2,480) Comprehensive Income $ 2,650 $ 109 Earnings per share Basic $ 1.06 $ 0.92 Diluted 1.05 0.92 See Accompanying Notes KENTUCKY BANCSHARES, INC. CONSOLIDATED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME (unaudited) (thousands, except per share amounts) Three Months Ending 6/30/2005 6/30/2004 INTEREST INCOME: Loans, including fees $ 5,818 $ 5,005 Securities available for sale 1,201 1,448 Other 14 10 Total interest income 7,033 6,463 INTEREST EXPENSE: Deposits 1,717 1,412 Other 931 784 Total interest expense 2,648 2,196 Net interest income 4,385 4,267 Loan loss provision 166 195 Net interest income after provision 4,219 4,072 NON-INTEREST INCOME: Service charges 1,178 1,162 Loan service fee income 66 60 Trust department income 112 65 Securities available for sale gains (losses), net 53 60 Gain on sale of mortgage loans 90 136 Other 335 293 Total other income 1,834 1,776 NON-INTEREST EXPENSE: Salaries and employee benefits 2,149 2,060 Occupancy expenses 550 540 Amortization 87 149 Advertising and marketing 110 96 Taxes other than payroll, property and income 135 125 Other 924 863 Total other expenses 3,955 3,833 Income before taxes 2,098 2,015 Income taxes 582 576 Net income $ 1,516 $ 1,439 Other Comprehensive Income, net of tax: Change in Unrealized Gains on Securities 890 (2,852) Comprehensive Income $ 2,406 $ (1,413) Earnings per share Basic $ 0.56 $ 0.51 Diluted 0.56 0.51 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 1,400 18 - - 18 Common stock purchased (5,209) (13) (141) - (154) Net change in unrealized gain (loss) on securities available for sale, net of tax - - - (199) (199) Net income - - 2,849 - 2,849 Dividends declared - $0.46 per share - - (1,234) - (1,234) Balances, June 30, 2005 2,680,689 $ 6,824 $ 39,358 $ 125 $ 46,307
See Accompanying Notes KENTUCKY BANCSHARES, INC. CONSOLIDATED STATEMENTS OF CASH FLOWS (unaudited) (thousands) Six Months Ending 6/30/2005 6/30/2004 Cash Flows From Operating Activities Net Income $ 2,849 $ 2,589 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation 468 541 Amortization 171 294 Amortization of premium on debt (49) (49) Securities amortization (accretion), net 173 390 Provision for loan losses 416 450 Securities (gains) losses, net (53) (76) Originations of loans held for sale (10,103) (12,301) Proceeds from sale of loans 10,465 13,395 Federal Home Loan Bank stock dividends (120) (99) Losses (gains) on sale of fixed assets (84) - Gain on sale of mortgage loans (187) (238) Changes in: Interest receivable (181) 103 Other assets (175) (311) Interest payable 218 12 Other liabilities 569 1,001 Net cash from operating activities 4,377 5,701 Cash Flows From Investing Activities Purchases of securities available for sale (4,428) (56,036) Proceeds from sales of securities available for sale 1,324 26,807 Proceeds from principal payments, maturities and calls of securities available for sale 9,064 20,723 Net change in loans (8,706) (21,865) Purchases of bank premises and equipment, net 137 (794) Proceeds from the sale of bank premises and equipment Net cash from investing activities (2,609) (31,165) Cash Flows From Financing Activities: Net change in deposits (2,963) (5,518) Net change in securities sold under agreements to repurchase and other borrowings (9,247) 21,857 Advances from Federal Home Loan Bank 15,000 10,000 Payments on Federal Home Loan Bank advances (7,450) (8,944) Proceeds from issuance of common stock 18 44 Purchase of common stock (154) - Dividends paid (1,234) (1,177) Net cash from financing activities (6,030) 16,262 Net change in cash and cash equivalents (4,262) (9,202) Cash and cash equivalents at beginning of period 15,455 21,388 Cash and cash equivalents at end of period $ 11,193 $ 12,186 See Accompanying Notes 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 June 30, 2005 U.S. Treasury $ 3,011 $ - $ (38) $ 2,973 U.S. government agencies 37,859 - (484) 37,375 States and political subdivisions 35,325 1,217 (128) 36,414 Mortgage-backed 43,476 49 (703) 42,822 Equity securities 525 276 - 801 Total 120,196 1,542 (1,353) 120,385 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) 6/30/2005 12/31/2004 Commercial $ 22,336 $ 19,999 Real estate construction 29,994 32,256 Real estate mortgage 244,472 238,476 Agricultural 60,384 57,498 Consumer 9,654 10,053 Total 366,840 358,282 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: Six Months Ended June 30 2005 2004 (in thousands) Basic Earnings Per Share Net Income $2,849 $2,589 Weighted average common shares outstanding 2,683 2,801 Basic earnings per share $ 1.06 $ 0.92 Diluted Earnings Per Share Net Income $2,849 $2,589 Weighted average common shares outstanding 2,683 2,801 Add dilutive effects of assumed exercise of stock options 16 22 Weighted average common and dilutive potential common shares outstanding 2,699 2,823 Diluted earnings per share $ 1.05 $ 0.92 Three Months Ended June 30 2005 2004 (in thousands) Basic Earnings Per Share Net Income $1,516 $1,439 Weighted average common shares outstanding 2,682 2,802 Basic earnings per share $ 0.56 $ 0.51 Diluted Earnings Per Share Net Income $1,516 $1,439 Weighted average common shares outstanding 2,682 2,802 Add dilutive effects of assumed exercise of stock options 15 21 Weighted average common and dilutive potential common shares outstanding 2,697 2,823 Diluted earnings per share $ 0.56 $ 0.51 Stock options for 31,100 shares common stock for the six and three months ended June 30, 2005 and for 11,750 shares of common stock for the six and three months ended June 30, 2004 were excluded from diluted earnings per share because their impact was antidilutive. 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. Six months ended June 30 (in thousands) 2005 2004 Net income As reported $ 2,849 $ 2,589 Deduct: Stock-based compensation expense determined under fair value based method (27) (10) Pro forma 2,822 2,579 Basic earnings per share As reported $ 1.06 $ 0.92 Pro forma 1.05 0.92 Diluted earnings per share As reported $ 1.05 $ 0.92 Pro forma 1.04 0.91 Three months ended June 30 (in thousands) 2005 2004 Net income As reported $ 1,516 $ 1,439 Deduct: Stock-based compensation expense determined under fair value based method (13) (5) Pro forma 1,503 1,434 Basic earnings per share As reported $ 0.56 $ 0.51 Pro forma 0.56 0.51 Diluted earnings per share As reported $ 0.56 $ 0.51 Pro forma 0.55 0.50 6. Dividends per share paid for the quarter ended June 30, 2005 were $0.23 compared to $0.21 for June 30, 2004. This is the same rate of dividend paid for the first quarters of the respective years. 7. Components of Net Periodic Benefit Cost Six months ended June 30 (in thousands) Pension Benefits 2005 2004 Service cost $ 216 $ 185 Interest cost 173 143 Expected return on plan assets (188) (160) Amortization 20 - Net Periodic Benefit Cost $ 221 $ 168 Three months ended June 30 (in thousands) Pension Benefits 2005 2004 Service cost $ 108 $ 83 Interest cost 86 67 Expected return on plan assets (94) (80) Amortization 10 (3) Net Periodic Benefit Cost $ 110 $ 67 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 six months ended June 30, 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 $2.8 million, or $1.06 basic and $1.05 diluted earnings per share for the first six months ended June 30, 2005 compared to $2.6 million, or $0.92 basic earnings per share and $0.92 diluted earnings per share for the six month period ending June 30, 2004. The first six months earnings reflects an increase of 10.0% compared to the same time period in 2004. The earnings for the three months ended June 30, 2005 were $1.5 million compared to $1.4 million for the same time period in 2004. The basic and diluted earnings per share were both $0.56 for the three months ended June 30, 2005 and $0.51 for the three months ended June 30, 2004. Return on average assets was 1.09% for the six months ended June 30, 2005 and 0.99% for the six month period ended June 30, 2004. Return on average equity was 12.6% for the six month period ended June 30, 2005 and 11.0% for the same period in 2004. Return on average assets was 1.23% for the three months ended June 30, 2005 and 1.20% for the three month period ended June 30, 2004. Return on average equity was 14.2% for the three month period ended June 30, 2005 and 13.7% for the same period in 2004. Loans increased $8.5 million from $358.3 million on December 31, 2004 to $366.8 million on June 30, 2005. Increases in commercial, real estate mortgage and agricultural loans were offset by a decrease in real estate construction and consumer loans. Management attributes the improved growth in loans primarily to the improving economy. Total deposits decreased from $388.0 million on December 31, 2004 to $385.0 million on June 30, 2005, a decrease of $3.0 million, primarily the result of general competition for deposits. The decrease is mainly attributable to a decrease in non-interest bearing deposits of $4.2 million and time deposits ($100,000 and over) of $4.6 million, offset by an increase in other interest bearing deposits of $5.8 million. Net Interest Income Net interest income was $8.6 million for the six months ended June 30, 2005 compared to $8.3 million for the six months ended June 30, 2004, an increase of 3.2%. The interest spread was 3.46% for the first six months of 2005 compared to 3.41% for the same period in 2004, an increase of 5 basis points. Generally, the increasing interest rate environment has contributed to improved net interest margins in the first six months of 2005 compared to 2004. For the three months ended June 30, 2005, the net interest income was $4.4 million compared to $4.3 million for the same time period in 2004. The interest spread was 3.51% for the three month period ended June 30, 2005 compared to 3.44% for the same period in 2004, an increase of 7 basis points. For the first six months, the yield on assets increased from 5.26% in 2004 to 5.64% in 2005. The cost of liabilities increased from 1.86% in 2004 to 2.18% in 2005. Year to date average loans are up $36.5 million, or 11.2% from June 30, 2004 to June 30, 2005. Loan interest income has increased $1.5 million for the first six months of 2005 compared to the first six months of 2004. Year to date average deposits decreased from June 30, 2004 to June 30, 2005, down $7.2 million, or 1.9%. Deposit interest expense has increased $488 thousand for the first six 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, resulting in 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 $112 thousand to net income before taxes for the first six months of 2005, and $185 thousand for the first six months of 2004. Non-Interest Income Non-interest income increased $50 thousand for the six months ended June 30, 2005 compared to the same period in 2004 to $3.4 million, due primarily to an increase in trust department income of $68 thousand from the collection of certain estate fees and a gain on sale of premises of $83 thousand. A decrease of $22 thousand in service charges from the first six months of 2004 to the comparable 2005 period is mainly attributable to a decrease in checking overdraft charges of $38 thousand. The $58 thousand increase in non-interest income for the three months ended June 30, 2005 compared to the same period in 2004 is mainly attributable to the trust fees and sale of real estate mentioned previously. Gain on sale of mortgage loans decreased $51 thousand during the first six months of 2005 compared to the same period in 2004. For the three month period ended June 30, 2005, gain on sale of mortgage loans decreased $46 thousand 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 gain on sale of mortgage loans to be lower in 2005 than in 2004. Non-Interest Expense Total non-interest expenses increased $117 thousand for the six month period ended June 30, 2005 compared to the same period in 2004. For the three month period ended June 30, 2005, total non-interest expenses increased $122 thousand compared to the same three month period in 2004. For the comparable six month periods, salaries and benefits increased $199 thousand, an increase of 5%. Salaries represented $96 thousand, incentives represented $74 thousand and employee benefits represented $29 thousand of the increase in salaries and employee benefits expense during these comparable periods. Salaries and employee benefits increased $89 thousand for the three month period ended June 30, 2005 compared to the same period in 2004. The reduction of part time hours and the salary reduction of the current Chairman, who was the previous President and CEO, helped limit the base salaries increase for the six months ended June 30, 2005 to 3% when compared to 2004. Occupancy expenses decreased $9 thousand to $1.1 million for the first six months of 2005 compared to the same period in 2004. The decrease in 2005 is mainly attributable to a decrease in depreciation of $73 thousand compared to 2004, offset by an increase of $62 thousand in repairs and maintenance on buildings and equipment. Occupancy expenses increased $10 thousand for the three month period ended June 30, 2005 compared to the same period in 2004. Amortization decreased for the first six months of 2005 compared to 2004 by $123 thousand, and decreased $62 thousand for the three month period ended June 30, 2005 compared to the same period in 2004, mainly from the deposit premium from a previous acquisition being fully amortized in 2004. Other expenses increased $2 thousand for the six months ended June 30, 2005 compared to the same time period in 2004. Losses on foreclosed property of $53 thousand are offset primarily from the decrease in repossession expenses of $40 thousand and fraud losses of $9 thousand. Other expenses increased $61 thousand for the three months ended June 30, 2005 compared to the same time period in 2004. Income Taxes The tax equivalent rate for the six months ended June 30, 2005 was 25% compared to 27% in 2004. The tax equivalent rate for the three months ended June 30, 2005 was 28% compared to 29% 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 June 30, 2005, 89,542 shares have been purchased, with the most recent share repurchase having occurred on July 25, 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 $11.2 million as of June 30, 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 $120.4 million at June 30, 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 June 30, 2005, we have sufficient collateral to borrow an additional $33 million from the FHLB. In addition, as of June 30, 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 June 30, 2005, the Company's non-performing loans totaled $1.8 million or 0.49% 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 74% of the non-performing loans as of June 30, 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 6/30/05 12/31/04 (in thousands) Non-accrual Loans $ 1,564 $ 1,781 Accruing Loans which are Contractually past due 90 days or more 225 308 Total Nonperforming and Restructured 1,789 2,089 Other Real Estate 500 676 Total Nonperforming and Restructured Loans and Other Real Estate $ 2,289 $ 2,765 Nonperforming and Restructured Loans as a Percentage of Loans 0.49% 0.58% Nonperforming and Restructured Loans and Other Real Estate as a Percentage of Total Assets 0.44% 0.52% Provision for Loan Losses The loan loss provision for the first six months was $416 thousand for 2005 and $450 thousand for 2004. The loan loss provision for the three months ended June 30, 2005 was $166 thousand and $195 thousand for the same time period in 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 six month period ended June 30, 2005 were $149 thousand compared to $177 thousand for the same period in 2004. Net charge-offs for the three month period ended June 30, 2005 were $63 thousand compared to $39 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 Six Months Ended June 30 (in thousands) 2005 2004 Balance at Beginning of Period $ 4,163 $ 3,820 Amounts Charged-off: Commercial 62 45 Real Estate Mortgage 73 19 Agricultural - 83 Consumer 83 149 Total Charged-off Loans 218 296 Recoveries on Amounts Previously Charged-off: Commercial 2 6 Real Estate Mortgage 2 37 Agricultural - 5 Consumer 66 71 Total Recoveries 70 119 Net Charge-offs 148 177 Provision for Loan Losses 416 450 Balance at End of Period 4,431 4,093 Loans Average 361,044 317,597 At June 30 366,840 334,690 As a Percentage of Average Loans: Net Charge-offs 0.04% 0.06% Provision for Loan Losses 0.12% 0.14% Allowance as a Percentage of Period-end Loans 1.21% 1.22% Allowance as a Multiple of Net Charge-offs 15.0 11.6 Allowance as a Percentage of Non-performing and Restructured Loans 248% 217% Loan Losses Quarter Ended June 30 (in thousands) 2005 2004 Balance at Beginning of Period $ 4,327 $ 3,937 Amounts Charged-off: Commercial 19 30 Real Estate Mortgage 51 19 Consumer 17 37 Total Charged-off Loans 87 86 Recoveries on Amounts Previously Charged-off: Commercial 1 2 Real Estate Mortgage 2 3 Agricultural - 1 Consumer 22 41 Total Recoveries 25 47 Net Charge-offs 62 39 Provision for Loan Losses 166 195 Balance at End of Period 4,431 4,093 Loans Average 362,826 322,860 At June 30 366,840 334,690 As a Percentage of Average Loans: Net Charge-offs 0.02% 0.01% Provision for Loan Losses 0.05% 0.06% Allowance as a Multiple of Net Charge-offs 17.6 26.2 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, 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. This period's volatility is comparable to the same period a year ago. The projected net interest income report summarizing the Company's interest rate sensitivity as of June 30, 2005 is as follows: (dollars in thousands) PROJECTED NET INTEREST INCOME Level Change in basis points: - 300 - 100 Rates + 100 + 300 Year One (7/05 - 6/06) Interest Income $24,106 $27,856 $29,734 $31,551 $35,029 Interest Expense 8,656 10,210 11,331 12,451 14,692 Net Interest Income 15,450 17,646 18,403 19,100 20,337 PROJECTED DOLLAR INCREASE (DECREASE) FROM "LEVEL RATES" Year One (7/05 - 6/06) Interest Income $(5,628) $(1,878) N/A $ 1,817 $ 5,295 Interest Expense (2,675) (1,121) N/A 1,120 3,361 Net Interest Income (2,953) (757) N/A 697 1,934 PROJECTED PERCENTAGE INCREASE (DECREASE) FROM "LEVEL RATES" Year One (7/05 - 6/06) Interest Income -18.9% -6.3% N/A 6.1% 17.8% Interest Expense -23.6% -9.9% N/A 9.9% 29.7% Net Interest Income -16.0% -4.1% N/A 3.8% 10.5% 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 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% 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 June 30, 2005 are slightly more when compared to the projected changes in net interest income as of June 30, 2004. Projections from June 30, 2005, year one reflected a decline in net interest income of 4.1% with a 100 basis point decline compared to the 2.1% decline in 2004. The 300 basis point increase in rates reflected a 10.5% increase in net interest income in 2005 compared to 6.2% 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 4/1/05 - 4/30/05 280 $29.62 280 113,667 shares 5/1/05 - 5/31/05 -0- N/A N/A 113,667 shares 6/1/05 - 6/30/05 3,209 $29.62 3,209 110,458 shares Total 3,489 3,489 110,458 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 June 30, 2005, 89,542 shares have been purchased. 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 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 ____8/15/05_________ __/s/Louis Prichard______________ Louis Prichard, President and C.E.O. Date ____8/15/05_________ __/s/Gregory J. Dawson___________ Gregory J. Dawson, Chief Financial Officer 2 3 21 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: August 15, 2005 BY /s/ Louis Prichard Louis Prichard President & Chief Executive Officer 23 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 15, 2005 BY /s/ Gregory J. Dawson Gregory J. Dawson Chief Financial Officer 25 Lexlibrary/197885.1 EX-32 4 ex32.txt JOINT 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, 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: August 15, 2005 By /s/ Louis Prichard Louis Prichard President & Chief Executive Officer Date: August 15, 2005 By /s/ Gregory J. Dawson Gregory J. Dawson Chief Financial Officer 26 Lexlibrary/197885.1 -----END PRIVACY-ENHANCED MESSAGE-----