-----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, JbNOaY9VAHBNwh9Z0FnbH/HhnUbBAiyuOl0RwF6mAyWMy4+m6gLlbD9UaTp7yHla Xucij/mNhY8Q1ceVHzkyQQ== 0001000232-06-000008.txt : 20060515 0001000232-06-000008.hdr.sgml : 20060515 20060515101354 ACCESSION NUMBER: 0001000232-06-000008 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 4 CONFORMED PERIOD OF REPORT: 20060331 FILED AS OF DATE: 20060515 DATE AS OF CHANGE: 20060515 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: 06837434 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 q061.txt FORM 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, 2006 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 a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of "accelerated filer and large accelerated filer" in Rule 12b-2 of the Exchange Act. Large accelerated filer _ Accelerated filer _ Non-accelerated filer X Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes No X___ Number of shares of Common Stock outstanding as of May 12, 2006: 2,672,672. 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 11 Item 3. Quantitative and Qualitative Disclosures About Market Risk 16 Item 4. Controls and Procedures 18 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) 3/31/2006 12/31/2005 Assets Cash and due from banks $ 11,788 $ 11,456 Federal funds sold 9 2,708 Cash and cash equivalents 11,797 14,164 Securities available for sale 139,515 160,652 Loans 379,233 370,912 Allowance for loan losses (4,393) (4,310) Net loans 374,840 366,602 Federal Home Loan Bank stock 5,475 5,398 Bank premises and equipment, net 10,657 10,702 Interest receivable 4,142 3,719 Goodwill 9,111 9,111 Other intangible assets 742 766 Mortgage servicing rights 785 802 Other assets 854 834 Total assets $ 557,918 $ 572,750 Liabilities and Stockholders' Equity Deposits Non-interest bearing $ 77,169 $ 72,193 Time deposits, $100,000 and over 59,667 61,597 Other interest bearing 271,900 297,841 Total deposits 408,736 431,631 Repurchase agreements and other borrowings 15,389 16,838 Federal Funds Purchased 17,445 - Federal Home Loan Bank advances 59,492 66,749 Subordinated debentures 7,217 7,217 Interest payable 2,601 2,714 Other liabilities 523 1,055 Total liabilities 511,403 526,204 Stockholders' equity Common stock 6,860 6,813 Retained earnings 41,291 40,666 Accumulated other comprehensive income (loss) (1,636) (933) Total stockholders' equity 46,515 46,546 Total liabilities & stockholders' equity $ 557,918 $ 572,750 See Accompanying Notes KENTUCKY BANCSHARES, INC. CONSOLIDATED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME (unaudited) (thousands, except per share amounts) Three Months Ending 3/31/2006 3/31/2005 INTEREST INCOME: Loans, including fees $ 6,436 $ 5,510 Securities available for sale 1,535 1,202 Other 80 8 Total interest income 8,051 6,720 INTEREST EXPENSE: Deposits 2,736 1,619 Other 839 880 Total interest expense 3,575 2,499 Net interest income 4,476 4,221 Loan loss provision 132 250 Net interest income after provision 4,344 3,971 NON-INTEREST INCOME: Service charges 1,049 1,017 Loan service fee income 66 65 Trust department income 172 103 Securities available for sale gains (losses), net 14 - Gain on sale of mortgage loans 65 97 Other 230 272 Total other income 1,596 1,554 NON-INTEREST EXPENSE: Salaries and employee benefits 2,260 2,152 Occupancy expenses 560 570 Amortization 80 84 Advertising and marketing 120 110 Taxes other than payroll, property and income 144 137 Other 934 766 Total other expenses 4,098 3,819 Income before taxes 1,842 1,706 Income taxes 549 373 Net income $ 1,293 $ 1,333 Other Comprehensive Income, net of tax: Change in Unrealized Gains on Securities (703) (1,089) Comprehensive Income $ 590 $ 244 Earnings per share Basic $ 0.48 $ 0.50 Diluted 0.48 0.49 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, 2005 2,666,897 $ 6,813 $ 40,666 $ (933) $ 46,546 Common stock issued 5,775 47 - - 47 Net change in unrealized gain (loss) on securities available for sale, net of tax - - - (703) (703) Net income - - 1,293 - 1,293 Dividends declared - $0.25 per share - - (668) - (668) Balances, March 31, 2006 2,672,672 $ 6,860 $ 41,291 $ (1,636) $ 46,515
See Accompanying Notes KENTUCKY BANCSHARES, INC. CONSOLIDATED STATEMENTS OF CASH FLOWS (unaudited) (thousands) Three Months Ending 3/31/2006 3/31/2005 Cash Flows From Operating Activities Net Income $ 1,293 $ 1,333 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation 219 231 Amortization 80 84 Amortization of premium on debt (25) (25) Securities amortization (accretion), net 39 98 Provision for loan losses 132 250 Securities (gains) losses, net (14) - Originations of loans held for sale (3,866) (4,913) Proceeds from sale of loans 3,931 5,185 Federal Home Loan Bank stock dividends (77) (56) Gain on sale of mortgage loans (65) (97) Changes in: Interest receivable (423) (86) Other assets (58) (384) Interest payable (113) (18) Other liabilities (170) 65 Net cash from operating activities 883 1,667 Cash Flows From Investing Activities Purchases of securities available for sale (2,007) (1,988) Proceeds from principal payments, maturities and calls of securities available for sale 22,053 5,061 Net change in loans (8,370) (1,326) Purchases of bank premises and equipment (174) (207) Net cash from investing activities 11,502 1,540 Cash Flows From Financing Activities: Net change in deposits (22,895) (15,078) Net change in securities sold under agreements to Repurchase, federal funds purchased and other borrowings 15,996 8,109 Payments on Federal Home Loan Bank advances (7,232) (2,225) Proceeds from issuance of common stock 47 2 Purchase of common stock - (51) Dividends paid (668) (617) Net cash from financing activities (14,752) (9,860) Net change in cash and cash equivalents (2,367) (6,653) Cash and cash equivalents at beginning of period 14,164 15,455 Cash and cash equivalents at end of period $ 11,797 $ 8,802 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, 2005. 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, 2006 U.S. Treasury $ 3,005 $ - $ (21) $ 2,984 U.S. government agencies 48,871 - (1,085) 47,786 States and political subdivisions 38,152 680 (402) 38,430 Mortgage-backed 51,441 2 (1,996) 49,447 Equity securities 525 343 - 868 Total 141,994 1,025 (3,504) 139,515 December 31, 2005 U.S. Treasury $ 3,006 $ - $ (32) $ 2,974 U.S. government agencies 67,845 14 (826) 67,033 States and political subdivisions 37,045 756 (338) 37,463 Mortgage-backed 53,645 4 (1,309) 52,340 Equity securities 524 318 - 842 Total 162,065 1,092 (2,505) 160,652 3. LOANS Loans at period-end are as follows: (in thousands) 3/31/2006 12/31/2005 Commercial $ 22,035 $ 27,302 Real estate construction 30,075 29,822 Real estate mortgage 248,157 245,138 Agricultural 69,685 59,328 Consumer 9,281 9,322 Total 379,233 370,912 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 2006 2005 (in thousands) Basic Earnings Per Share Net Income $1,293 $1,333 Weighted average common shares outstanding 2,671 2,684 Basic earnings per share $ 0.48 $ 0.50 Diluted Earnings Per Share Net Income $1,293 $1,333 Weighted average common shares outstanding 2,671 2,684 Add dilutive effects of assumed exercise of stock options 13 16 Weighted average common and dilutive potential common shares outstanding 2,684 2,700 Diluted earnings per share $ 0.48 $ 0.49 Stock options for 31,100 shares of common stock for the three months ended March 31, 2006, and for 26,700 shares of common stock for the three months ended March 31, 2005 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. The Company also provides to certain officers and key employees restricted stock grants, which fully vest at the end of five years. The Company records employee expense ratably over the five year period, based on the market price of the common stock on the date of grant. Total shares issuable under the restricted stock grant plan are 50,000 shares. In January 2006, 3,875 shares were granted under the plan. In December 2004, the Financial Accounting Standards Board issued a revised version of Statement of Financial Accounting Standards No. 123. It requires that the fair value of stock options and other share-based compensation be measured as of the date the grant is awarded and expensed over the period of employee service, typically the vesting period. Compensation cost will also be recorded for previously awarded options to the extent that they vest after the effective date. The following table summarizes stock activity: Three Months Ended March 31, 2006 Weighted Average Shares Exercise Price Outstanding, beginning of year 77,064 $ 25.32 Granted 1,300 29.50 Exercised (1,900) 15.34 Outstanding, end of period 76,464 25.64 Options exercisable at period end 41,516 21.91 The following details stock options outstanding: March 31, 2006 December 31, 2005 Stock options vested and currently exercisable: Number 41,516 42,116 Weighted average exercise price $ 21.91 $ 21.38 Aggregate intrinsic value $ 311,915 $ 358,646 Weighted average remaining contractual life 48.4 months 47.7 months The intrinsic value for stock options is calculated based on the exercise price of the underlying awards and the market price of our common stock as of the reporting date. The Company recorded $19 thousand in stock compensation expense during the three months ended March 31, 2006 to salaries and employee benefits. Prior to 2006, employee compensation expense under stock options is reported using the intrinsic value method. No stock-based compensation cost was 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. Effective January 1, 2006, the Company adopted the fair value recognition provision of FASB Statement No. 123(r), Accounting for Stock-Based Compensation, and recognizes stock option expense based on fair value at date of grant. The following table illustrates for 2005 the effect on net income and earnings per share if expense was measured using the fair value recognition provisions of FAS 123. 2005 (In thousands, except per share amounts) Net income as reported $ 1,333 Less: Stock-based compensation expense determined under fair value based method (14) Pro forma net income $ 1,319 Basic earnings per share as reported $ 0.50 Pro forma basic earnings per share 0.49 Diluted earnings per share as reported 0.49 Pro forma diluted earnings per share 0.49 The weighted-average assumptions for options granted during the year and the resulting estimated weighted average fair values per share used in computing 2006 recognized compensation expense and 2005 for pro forma disclosures are as follows. 2006 2005 Weighted-average fair value of options granted during the year $3.14 $4.82 Risk-free interest rate 4.60% 3.98% Expected option life 8 years 8 years Expected stock price volatility 7.99% 15.11% Expected dividend yield 3.39% 3.03% The fair value of each stock option granted is estimated on the date of grant using the Black-Scholes based stock option valuation model. This model requires the input of subjective assumptions that will usually have a significant impact on the fair value estimate. Expected volatilities are based on historical volatility of the Company's stock, and other factors. Expected dividends are based on dividend trends and the market price of the Company's stock price at grant. The Company uses historical data to estimate option exercises and employee terminations within the valuation model. The risk-free rate for periods within the contractual life of the option is based on the U.S. Treasury yield curve in effect at the time of grant. 6. Dividends per share paid for the quarter ended March 31, 2006 were $0.25 compared to $0.23 for March 31, 2005. 7. Components of Net Periodic Benefit Cost Three months ended March 31 (in thousands) Pension Benefits 2006 2005 Service cost $ 118 $ 108 Interest cost 91 87 Expected return on plan assets (99) (94) (Gain) loss amortization 10 10 Net Periodic Benefit Cost $ 120 $ 111 Employer Contributions The Company previously disclosed in its financial statements for the year ended December 31, 2005 that it expected to contribute $204 thousand as its 2006 annual contribution to the Pension Plan. No contributions to the Pension Plan were made for the quarter ended March 31, 2006, and the Company anticipates making its annual contribution in the third quarter of 2006. 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 (the Company and its bank operate in areas affected by various markets, including the tobacco market); 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 $0.48 basic and $0.48 diluted earnings per share for the first three months ended March 31, 2006 compared to $1.3 million, or $0.50 basic earnings per share and $0.49 diluted earnings per share for the three month period ending March 31, 2005. The first three months earnings reflects a decrease of 3.0% compared to the same time period in 2005. Return on average assets was 0.91% for the three months ended March 31, 2006 and 1.02% for the three month period ended March 31, 2005. Return on average equity was 11.0% for the three month period ended March 31, 2006 and 11.8% for the same period in 2005. Loans increased $8.3 million from $370.9 million on December 31, 2005 to $379.2 million on March 31, 2006. Increases in real estate construction, real estate mortgage and agricultural loans were offset by a decrease in commercial and consumer loans. Management attributes the growth in loans primarily to the improving economy. Total deposits decreased from $431.6 million on December 31, 2005 to $408.7 million on March 31, 2006, a decrease of $22.9 million, primarily the result of a decline in public fund deposits, reported in other interest bearing deposits. Net Interest Income Net interest income was $4.5 million for the three months ended March 31, 2006 compared to $4.2 million for the three months ended March 31, 2005, an increase of 6.0%. The interest spread was 3.27% for the first three months of 2006 compared to 3.41% for the same period in 2005, a decrease of 14 basis points. Generally, the increasing interest rate environment and the increased cost related to public fund deposits have contributed to declining net interest margins in the first three months of 2006 compared to 2005. For the first three months, the yield on assets increased from 5.54% in 2005 to 6.06% in 2006. The cost of liabilities increased from 2.28% in 2005 to 2.80% in 2006. Year to date average loans are up $18.5 million, or 5.1% from March 31, 2005 to March 31, 2006. Loan interest income has increased $926 thousand for the first three months of 2006 compared to the first three months of 2005. Year to date average deposits increased from March 31, 2005 to March 31, 2006, up $45.1 million, or 11.6%. Deposit interest expense has increased $1.1 million for the first three months of 2006 compared to the same period in 2005. Following the 2004 enactment of federal legislation to end the federal tobacco program and to compensate quota owners and producers, the Company offered tobacco quota owners and producers upfront, lump-sum payment buyouts ranging from 75% to 80% of the future stream of federal buyout payments during 2005. The Company made $11.7 million in lump-sum payments in January 2006 under successor in interest contracts. Similar types of buyouts are expected to continue over the next few years, but on a smaller scale. Starting in January 2006, these buyouts have generated additional net interest income. Non-Interest Income Non-interest income increased $42 thousand for the three months ended March 31, 2006 compared to the same period in 2005 to $1.6 million, due primarily to an increase in trust department income (the collection of certain estate fees) of $69 thousand. Gain on sale of mortgage loans decreased $32 thousand during the first three months of 2006 compared to the same period in 2005. The volume of mortgage loan originations and sales is generally inverse to rate changes. The increasing rate environment has caused the originations of mortgage loans to be lower and the related gain on sale of mortgage loans to be lower in 2006 than in 2005. Non-Interest Expense Total non-interest expenses increased $279 thousand for the three month period ended March 31, 2006 compared to the same period in 2005. For the comparable three month periods, salaries and benefits increased $108 thousand, an increase of 5%. Salaries represented $49 thousand and employee benefits represented $66 thousand of the increase in salaries and employee benefits expense during these comparable periods. Occupancy expenses decreased $10 thousand to $560 thousand for the first three months of 2006 compared to the same period in 2005. The decrease in 2006 is mainly attributable to a decrease in depreciation of $13 thousand compared to 2005. Other expenses increased $168 thousand for the three months ended March 31, 2006 compared to the same time period in 2005. This is mainly a result of costs related to the Peoples Bank merger, which have been approximately $90 thousand to date. Income Taxes The tax equivalent rate for the three months ended March 31, 2006 was 30% compared to 22% in 2005. 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 2003 Cynthiana acquisition 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, 2006, 105,309 shares have been purchased. The most recent share repurchase occurred on October 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 $11.8 million as of March 31, 2006 compared to $14.2 million at December 31, 2005. The decrease in cash and cash equivalents is mainly attributable to a decrease in federal funds sold resulting primarily from a decrease in public deposits. In addition to cash and cash equivalents, the securities portfolio provides an important source of liquidity. Total securities available for sale totaled $139.5 million at March 31, 2006. The available for sale securities are available to meet liquidity needs on a continuing basis. The Company expects the customers' deposits to be adequate to meet its funding demands. Generally, the Company relies upon net cash inflows from financing activities, supplemented by net cash inflows from operating activities, to provide cash used in its investing activities. As is typical of many financial institutions, significant financing activities include deposit gathering, and the use of short-term borrowings, such as federal funds purchased and securities sold under repurchase agreements along with long-term debt. The Company's primary investing activities include purchasing investment securities and loan originations. Management is aware of the challenge of funding sustained loan growth. Therefore, in addition to deposits, other sources of funds, such as Federal Home Loan Bank (FHLB) advances, may be used. The Company relies on FHLB advances for both liquidity and asset/liability management purposes. These advances are used primarily to fund long-term fixed rate residential mortgage loans. As of March 31, 2006, we have sufficient collateral to borrow an additional $47 million from the FHLB. In addition, as of March 31, 2006, over $48 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, 2006, the Company's non-performing loans totaled $1.3 million or 0.34% of loans compared to $1.0 million or 0.26% of loans at December 31, 2005. (See table below) The increase in non-accrual loans is attributable to an increase in the number of various real estate loans. Real estate loans composed 84% of the non-performing loans as of March 31, 2006 and 79% as of December 31, 2005. Forgone interest income on the non-accrual loans for both 2006 and 2005 is immaterial. Nonperforming Assets 3/31/06 12/31/05 (in thousands) Non-accrual Loans $ 1,170 $ 774 Accruing Loans which are Contractually past due 90 days or more 105 206 Total Nonperforming and Restructured 1,275 980 Other Real Estate 141 141 Total Nonperforming and Restructured Loans and Other Real Estate $ 1,416 $ 1,121 Nonperforming and Restructured Loans as a Percentage of Loans 0.34% 0.26% Nonperforming and Restructured Loans and Other Real Estate as a Percentage of Total Assets 0.25% 0.20% Provision for Loan Losses The loan loss provision for the first three months was $132 thousand for 2006 and $250 thousand for 2005. The continuing lower level of nonperforming loans has caused management to decrease the 2006 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, 2006 were $49 thousand compared to $86 thousand for the same period in 2005. Future levels of charge-offs will be determined by the particular facts and circumstances surrounding individual loans. Management believes the current loan loss allowance is sufficient to meet probable incurred loan losses. Loan Losses Three Months Ended March 31 (in thousands) 2006 2005 Balance at Beginning of Period $ 4,310 $ 4,163 Amounts Charged-off: Commercial 6 43 Real Estate Mortgage 54 22 Consumer 201 66 Total Charged-off Loans 261 131 Recoveries on Amounts Previously Charged-off: Commercial 1 1 Agricultural 21 - Consumer 190 44 Total Recoveries 212 45 Net Charge-offs 49 86 Provision for Loan Losses 132 250 Balance at End of Period 4,393 4,327 Loans Average 362,029 359,262 At March 31 379,233 359,522 As a Percentage of Average Loans: Net Charge-offs 0.01% 0.02% Provision for Loan Losses 0.04% 0.07% Allowance as a Percentage of Period-end Loans 1.16% 1.20% Allowance as a Multiple of Net Charge-offs 22.4 12.6 Allowance as a Percentage of Non-performing and Restructured Loans 345% 234% 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, 2006 the projected percentage changes are within the Board approved limits. This period's volatility is lower when compared to the same period a year ago. The projected net interest income report summarizing the Company's interest rate sensitivity as of March 31, 2006 is as follows: (dollars in thousands) PROJECTED NET INTEREST INCOME Level Change in basis points: - 300 - 100 Rates + 100 + 300 Year One (4/06 - 3/07) Interest Income $27,690 $31,520 $33,436 $35,275 $38,788 Interest Expense 11,902 14,470 15,876 17,281 20,092 Net Interest Income 15,788 17,050 17,560 17,994 18,696 PROJECTED DOLLAR INCREASE (DECREASE) FROM "LEVEL RATES" Year One (4/06 - 3/07) Interest Income $(5,746) $(1,916) N/A $ 1,839 $ 5,352 Interest Expense (3,974) (1,406) N/A 1,405 4,216 Net Interest Income (1,772) (510) N/A 434 1,136 PROJECTED PERCENTAGE INCREASE (DECREASE) FROM "LEVEL RATES" Year One (4/06 - 3/07) Interest Income -17.2% -5.7% N/A 5.5% 16.0% Interest Expense -25.0% -8.9% N/A 8.8% 26.6% Net Interest Income -10.1% -2.9% N/A 2.5% 6.5% Board approved limit >-18.0% >-6.0% N/A >-4.0% >-10.0% 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 9,458 10,115 11,363 12,611 15,106 Net Interest Income 13,432 16,728 17,462 18,147 19,369 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 -16.8% -11.0% N/A 11.0% 32.9% Net Interest Income -23.1% -4.2% N/A 3.9% 10.9% Board approved limit >-10.0% >-4.0% N/A >-4.0% >-10.0% These projected changes in net interest income as of March 31, 2006 are slightly less when compared to the projected changes in net interest income as of March 31, 2005. Projections from March 31, 2006, year one reflected a decline in net interest income of 2.9% with a 100 basis point decline compared to the 4.2% decline in 2005. The 300 basis point increase in rates reflected a 6.5% increase in net interest income in 2006 compared to 10.9% in 2005. Item 4 - CONTROLS AND PROCEDURES As of the end of the period covered by this report, the Company carried out an evaluation, under the supervision and with the participation of the Company's management, including the Company's Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of the Company's disclosure controls and procedures. Based on the foregoing, the Company's Chief Executive Officer and Chief Financial Officer concluded that the Company's disclosure controls and procedures were effective, in all material respects, to ensure that information required to be disclosed in the reports the Company files and submits under the Exchange Act is recorded, processed, summarized and reported as and when required. The Company also conducted an evaluation of internal control over financial reporting to determine whether any changes occurred during the quarter covered by this report that have materially affected, or are reasonably likely to materially affect, the Company's internal control over financial reporting. Based on this evaluation, there has been no such change during the quarter covered by this report. Part II - Other Information Item 1. Legal Proceedings The Company is not a party to any material legal proceedings. Item 1A. Risk Factors There have been no material changes in risk factors, as previously disclosed in the December 31, 2005 Form 10-K. Item 2. Unregistered Sales of Equity Securities and Use of Proceeds ISSUER PURCHASES OF EQUITY SECURITIES Period (a) Total (b) (c) Total Number (d) Maximum Number Number of Average of Shares (or Units) (or Approximate Dollar Shares (or Price Paid Purchased as Part Value) of Shares (or Units) Per Share of Publicly Units) that May Yet Be Purchased (or Unit) Announced Plans Purchased Under the Or Programs Plans of Programs 1/1/06 - 1/31/06 -0- N/A N/A 94,691 shares 2/1/06 - 2/28/06 -0- N/A N/A 94,691 shares 3/1/06 - 3/31/06 -0- N/A N/A 94,691 shares Total -0- N/A 94,691 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, 2006, 105,309 shares have been purchased. Item 3. Defaults upon Senior Securities None Item 4. Submission of Matters to a Vote of Security Holders The registrant's 2006 Annual Meeting of Shareholders was held May 12, 2006. 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 Betty J. Long 2,229,927 16,296 Ted McClain 2,206,641 39,582 Buckner Woodford IV 2,207,387 38,836 The following directors have a term of office that will continue following the Annual Meeting: William M. Arvin, Henry Hinkle, Theodore Kuster, Robert G. Thompson, Louis Prichard and Woodrow Van Meter. The total number of Common Shares outstanding as of March 17, 2006, the record date for the Annual Meeting of Shareholders, was 2,671,672. 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 _____5/15/06________ __/s/Louis Prichard______________ Louis Prichard, President and C.E.O. Date _____5/15/06________ __/s/Gregory J. Dawson___________ Gregory J. Dawson, Chief Financial Officer 1 3 19 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 15, 2006 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 15, 2006 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, 2006, 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 15, 2006 By /s/ Louis Prichard Louis Prichard President & Chief Executive Officer Date: May 15, 2006 By /s/ Gregory J. Dawson Gregory J. Dawson Chief Financial Officer 24 Lexlibrary/197885.1 -----END PRIVACY-ENHANCED MESSAGE-----