-----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, WgMNOPLfz0Z36zsPhwm+iyGkcoztY+oJVYyGNVtHaKj57xySkVcf7Kuzl2eTvtM8 gsoiBElhOMFrg3AenZD4Ew== 0001000232-07-000009.txt : 20070514 0001000232-07-000009.hdr.sgml : 20070514 20070514133243 ACCESSION NUMBER: 0001000232-07-000009 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 4 CONFORMED PERIOD OF REPORT: 20070331 FILED AS OF DATE: 20070514 DATE AS OF CHANGE: 20070514 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: 000-52598 FILM NUMBER: 07845304 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 q071.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, 2007 or [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from ____________________ to ___________________ Commission File Number: 000-52598 KENTUCKY BANCSHARES, INC. (Exact name of registrant as specified in its charter) Kentucky 61-0993464 (State or other jurisdiction of (I.R.S. Employer Identification No.) incorporation or organization) P.O. Box 157, Paris, Kentucky 40362-0157 (Address of principal executive offices) (Zip Code) Registrant's telephone number, including area code: (859)987-1795 Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No _____ Indicate by check mark whether the registrant 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 7, 2007: 2,868,248. KENTUCKY BANCSHARES, INC. Table of Contents Part I - Financial Information Item 1. Financial Statements Consolidated Balance Sheets 3 Consolidated Statements of Income and Comprehensive Income 4 Consolidated Statements of Changes in Stockholders' Equity 5 Consolidated Statements of Cash Flows 6 Notes to Consolidated Financial Statements 7 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 10 Item 3. Quantitative and Qualitative Disclosures About Market Risk 15 Item 4T. Controls and Procedures 16 Part II - Other Information 16 Signatures 17 Exhibits 31.1 Certifications of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. 18 31.2 Certifications of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. 20 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. 22 Item 1 - Financial Statements KENTUCKY BANCSHARES, INC. CONSOLIDATED BALANCE SHEETS (unaudited) (thousands) 3/31/2007 12/31/2006 Assets Cash and due from banks $ 13,125 $ 14,905 Federal funds sold 17,363 4,106 Cash and cash equivalents 30,488 19,011 Securities available for sale 131,577 127,891 Loans 441,488 444,150 Allowance for loan losses (5,043) (4,991) Net loans 436,445 439,159 Federal Home Loan Bank stock 6,468 6,468 Bank premises and equipment, net 14,348 14,327 Interest receivable 4,931 5,654 Goodwill 13,117 13,117 Other intangible assets 1,990 2,058 Mortgage servicing rights 717 746 Other assets 1,250 1,111 Total assets $ 641,331 $ 629,542 Liabilities and Stockholders' Equity Deposits Non-interest bearing $ 86,967 $ 87,503 Time deposits, $100,000 and over 74,633 67,255 Other interest bearing 322,757 314,050 Total deposits 484,357 468,808 Repurchase agreements and other borrowings 10,682 11,327 Federal Home Loan Bank advances 76,422 80,030 Subordinated debentures 7,217 7,217 Interest payable 3,544 3,683 Other liabilities 3,029 3,196 Total liabilities 585,251 574,261 Stockholders' equity Common stock 12,503 12,474 Additional paid-in capital 84 59 Retained earnings 44,848 44,062 Accumulated other comprehensive income (loss) (1,355) (1,314) Total stockholders' equity 56,080 55,281 Total liabilities & stockholders' equity $ 641,331 $ 629,542 See Accompanying Notes KENTUCKY BANCSHARES, INC. CONSOLIDATED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME (unaudited) (thousands, except per share amounts) Three Months Ending 3/31/2007 3/31/2006 INTEREST INCOME: Loans, including fees $ 7,957 $ 6,436 Securities available for sale 1,572 1,535 Other 277 80 Total interest income 9,806 8,051 INTEREST EXPENSE: Deposits 3,794 2,736 Other 1,040 839 Total interest expense 4,834 3,575 Net interest income 4,972 4,476 Loan loss provision 150 132 Net interest income after provision 4,822 4,344 NON-INTEREST INCOME: Service charges 1,303 1,049 Loan service fee income 16 10 Trust department income 149 172 Securities available for sale gains (losses), net (1) 14 Gain on sale of mortgage loans 66 65 Other 312 230 Total other income 1,845 1,540 NON-INTEREST EXPENSE: Salaries and employee benefits 2,776 2,260 Occupancy expenses 633 560 Amortization 68 24 Advertising and marketing 135 120 Taxes other than payroll, property and income 171 144 Other 764 934 Total other expenses 4,547 4,042 Income before taxes 2,120 1,842 Income taxes 558 549 Net income $ 1,562 $ 1,293 Other Comprehensive Income, net of tax: Change in Unrealized Gains on Securities (41) (703) Comprehensive Income $ 1,521 $ 590 Earnings per share Basic $ 0.55 $ 0.48 Diluted 0.54 0.48 See Accompanying Notes KENTUCKY BANCSHARES, INC.
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY (unaudited) (thousands, except number of shares) Accumulated Additional Other Total ----Common Stock---- Paid-in Retained Comprehensive Stockholders' Shares Amount Capital Earnings Income Equity Balances, December 31, 2006 2,864,586 $ 12,474 $ 59 $ 44,062 $ (1,314) $ 55,281 Common stock issued, including tax benefit, net (including stock grants of 5,095 shares) 6,504 29 - - - 29 Stock based compensation expense - - 25 - - 25 Net change in unrealized gain (loss) on securities available for sale, net of tax - - - - (41) (41) Net income - - - 1,562 - 1,562 Dividends declared - $0.27 per share - - - (776) - (776) Balances, March 31, 2007 2,871,090 $ 12,503 $ 84 $ 44,848 $ (1,355) $ 56,080
See Accompanying Notes KENTUCKY BANCSHARES, INC. CONSOLIDATED STATEMENTS OF CASH FLOWS (unaudited) (thousands) Three Months Ending 3/31/2007 3/31/2006 Cash Flows From Operating Activities Net Income $ 1,562 $ 1,293 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and Amortization 365 274 Securities amortization (accretion), net (57) 39 Noncash compensation expense 25 19 Provision for loan losses 150 132 Securities (gains) losses, net 1 (14) Originations of loans held for sale (2,483) (3,866) Proceeds from sale of loans 2,549 3,931 Federal Home Loan Bank stock dividends - (77) Gain on sale of mortgage loans (66) (65) Changes in: Interest receivable 723 (423) Other assets (262) (77) Interest payable (139) (113) Other liabilities (44) (170) Net cash from operating activities 2,324 883 Cash Flows From Investing Activities Purchases of securities available for sale (32,251) (2,007) Proceeds from sales of securities available for sale 14,539 - Proceeds from principal payments, maturities and calls of securities available for sale 14,019 22,053 Net change in loans 2,564 (8,370) Purchases of bank premises and equipment (274) (174) Net cash from investing activities (1,403) 11,502 Cash Flows From Financing Activities: Net change in deposits 15,549 (22,895) Net change in securities sold under agreements to repurchase, federal funds purchased and other borrowings (645) 15,996 Payments on Federal Home Loan Bank advances (3,601) (7,232) Proceeds from issuance of common stock 29 47 Dividends paid (776) (668) Net cash from financing activities 10,556 (14,752) Net change in cash and cash equivalents 11,477 (2,367) Cash and cash equivalents at beginning of period 19,011 14,164 Cash and cash equivalents at end of period $ 30,488 $11,797 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, 2006. New accounting pronouncements - In September 2006, the FASB issued SFAS No. 157, "Fair Value Measurements". This Statement provides clarification of the definition of fair value, methods used to measure fair value, and additional disclosures about fair value measurements. This Standard is applicable in circumstances in which other Standards require or permit assets or liabilities to be measured at fair value. Therefore, this Standard does not require any new fair value measurements. This Standard is effective for financial statements issued for fiscal years beginning after November 15, 2007, and interim periods within those fiscal years. The Company does not expect the adoption of this Statement on January 1, 2008 to have a material impact on its results of operations and consolidated financial condition. On February 15, 2007, the FASB issued SFAS No. 159, "The Fair Value Option for Financial Assets and Financial Liabilities". SFAS No. 159 allows companies to record certain financial assets and financial liabilities at full fair value if they so choose. SFAS No. 159 was issued to mitigate volatility in reported earnings caused by an accounting model utilizing multiple measurement attributes. The adoption of the fair value option is recorded as a cumulative-effect adjustment to the opening balance of retained earnings, which would be January 1 for the Company. Upon adoption, the difference between the carrying amount and the fair value of the items chosen is included in the cumulative-effect adjustment. Subsequent changes in fair value are recorded through the income statement. SFAS No. 159 is effective as of the beginning of the first fiscal year after November 15, 2007, which is January 1, 2008 for the Company. The Company does not expect the adoption of this Statement to have a material impact on its results of operations and consolidated financial condition. In June 2006, the FASB issued FASB Interpretation No. ("FIN") 48 "Accounting for Uncertainty in Income Taxes - an interpretation of FASB Statement No. 109", to clarify certain aspects of accounting for uncertain tax positions, including issues related to the recognition and measurement of those tax positions taken or expected to be taken in a tax return. FIN 48 also provides guidance on derecognition, classification, interest and penalties, accounting in interim periods, disclosure, and transition. Adoption of FIN 48 on January 1, 2007 did not have a material impact on the Company's results of operations and consolidated financial condition. It is the Company's policy to recognize interest and penalties accrued relative to unrecognized tax benefits in their respective federal or state income taxes accounts. 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, 2007 U.S. government agencies $ 23,338 $ 158 $ (14) $ 23,482 States and political subdivisions 50,863 465 (265) 51,063 Mortgage-backed 52,960 6 (1,142) 51,824 Equity securities 270 18 - 288 Other 4,920 - - 4,920 Total 132,351 647 (1,421) 131,577 December 31, 2006 U.S. government agencies 31,524 93 (125) 31,492 States and political subdivisions 43,609 703 (182) 44,130 Mortgage-backed 53,200 - (1,218) 51,982 Equity securities 270 17 - 287 Total 128,603 813 (1,525) 127,891 3. LOANS Loans at period-end are as follows: (in thousands) 3/31/2007 12/31/2006 Commercial $ 25,072 $ 29,335 Real estate construction 29,297 29,034 Real estate mortgage 293,028 290,068 Agricultural 78,424 79,627 Consumer 15,667 16,086 Total 441,488 444,150 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 2007 2006 (in thousands) Basic Earnings Per Share Net Income $1,562 $1,293 Weighted average common shares outstanding 2,862 2,671 Basic earnings per share $ 0.55 $ 0.48 Diluted Earnings Per Share Net Income $1,562 $1,293 Weighted average common shares outstanding 2,862 2,671 Add dilutive effects of assumed exercise of stock options 10 13 Weighted average common and dilutive potential common shares outstanding 2,872 2,684 Diluted earnings per share $ 0.54 $ 0.48 Stock options for 30,500 shares of common stock for the three months ended March 31, 2007, and for 31,100 shares of common stock for the three months ended March 31, 2006 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 2007, 5,095 shares were granted under the plan. The following table summarizes activity in the stock option plan for the first quarter of 2007: Three Months Ended March 31, 2007 Weighted Average Options Exercise Price Outstanding, beginning of year 69,914 $ 26.54 Granted 800 31.00 Exercised (1,420) 20.46 Outstanding, end of period 69,294 26.72 Options exercisable at period end 51,924 25.42 The following details stock options outstanding: March 31, 2007 December 31, 2006 Stock options vested and currently exercisable: Number 51,924 44,072 Weighted average exercise price $ 25.42 $ 24.35 Aggregate intrinsic value $ 269,596 $ 308,190 Weighted average remaining contractual life 56.2 months 52.3 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 $25 thousand in stock compensation expense during the three months ended March 31, 2007 to salaries and employee benefits. The weighted-average assumptions for options granted during the year and the resulting estimated weighted average fair values per share used in computing 2007 and 2006 recognized compensation expense as follows. 2007 2006 Weighted-average fair value of options granted during the year $4.22 $3.14 Risk-free interest rate 4.51% 4.59% Expected option life 8 years 8 years Expected stock price volatility 12.69% 7.99% Expected dividend yield 3.48% 3.39% 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, 2007 were $0.27 compared to $0.25 for March 31, 2006. 7. Components of Net Periodic Benefit Cost Three months ended March 31 (in thousands) Pension Benefits 2007 2006 Service cost $ 114 $ 118 Interest cost 101 91 Expected return on plan assets (109) (99) (Gain) loss amortization 8 10 Net Periodic Benefit Cost $ 114 $ 120 Employer Contributions The Company expects to contribute $503 thousand as its 2007 annual contribution to the Pension Plan. No contributions to the Pension Plan were made for the quarter ended March 31, 2007, and the Company anticipates making its annual contribution in the third quarter of 2007. 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 update or revise 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 $1.6 million, or $0.55 basic and $0.54 diluted earnings per share for the first three months ended March 31, 2007 compared to $1.3 million, or $0.48 basic earnings per share and $0.48 diluted earnings per share for the three month period ending March 31, 2006. The first three months earnings reflects an increase of 20.8% compared to the same time period in 2006. Return on average assets was 0.97% for the three months ended March 31, 2007 and 0.91% for the three month period ended March 31, 2006. Return on average equity was 11.1% for the three month period ended March 31, 2007 and 11.0% for the same period in 2006. Loans decreased $2.7 million from $444.2 million on December 31, 2006 to $441.5 million on March 31, 2007. Increases in real estate construction and real estate mortgage were offset by a decrease in commercial, agricultural and consumer loans. Management attributes the decline in loans primarily to competitive pressures. Total deposits increased from $468.8 million on December 31, 2006 to $484.4 million on March 31, 2007, an increase of $15.5 million, primarily the result of an increase in certificates of deposit, reported in time deposits, $100,000 or greater and other interest bearing deposits. Net Interest Income Net interest income was $5.0 million for the three months ended March 31, 2007 compared to $4.5 million for the three months ended March 31, 2006, an increase of 11.1%. The interest spread was 3.26% for the first three months of 2007 compared to 3.27% for the same period in 2006, a decrease of 1 basis point. Generally, net interest margins have remained virtually unchanged in the first three months of 2007 compared to 2006. For the first three months, the yield on assets increased from 6.06% in 2006 to 6.62% in 2007. The cost of liabilities increased from 2.80% in 2006 to 3.36% in 2007. Year to date average loans are up $64.1 million, or 17.0% from March 31, 2006 to March 31, 2007. Approximately $51 million in loans were acquired with the Peoples Bancorp, Inc. (Peoples) merger in July 2006. Loan interest income has increased $1.5 million for the first three months of 2007 compared to the first three months of 2006. Year to date average deposits increased from March 31, 2006 to March 31, 2007, up $53.6 million, or 12.4%. About $72 million in deposits were acquired in the Peoples merger in July 2006. The decrease, excluding the Peoples merger, is a result of the loss of a public fund bid deposit and another large certificate of deposit customer. Deposit interest expense has increased $1.1 million for the first three months of 2007 compared to the same period in 2006. Non-Interest Income Non-interest income increased $305 thousand for the three months ended March 31, 2007 compared to the same period in 2006 to $1.8 million, due primarily to an increase in overdraft income of $258 thousand (primarily from the deposit relationships acquired with the Peoples merger in July 2006). Gain on sale of mortgage loans were similar during the first three months of 2007 compared to the same period in 2006. The volume of mortgage loan originations and sales is generally inverse to rate changes. A change in the mortgage loan rate environment can have a significant impact on the related gain on sale of mortgage loans. Non-Interest Expense Total non-interest expenses increased $505 thousand for the three month period ended March 31, 2007 compared to the same period in 2006. For the comparable three month periods, salaries and benefits increased $516 thousand, an increase of 22.8%. Salaries and incentives represented $371 thousand and employee benefits represented $145 thousand of the increase in salaries and employee benefits expense during these comparable periods. These increases are primarily attributable to the Peoples merger completed in July 2006. Occupancy expenses increased $73 thousand to $633 thousand for the first three months of 2007 compared to the same period in 2006. The increase in 2007 is mainly attributable to two additional facilities acquired in the Peoples merger in July 2006. The increase in amortization, advertising and marketing, and taxes are also primarily attributable to the Peoples merger completed in July 2006. Other expenses decreased $170 thousand for the three months ended March 31, 2007 compared to the same time period in 2006. This is mainly a result of a one time credit of $80 thousand received in 2007 for debit card expenses, and costs related to the Peoples Bank merger incurred in the first quarter of 2006 (which were approximately $90 thousand in 2006). Income Taxes The tax equivalent rate for the three months ended March 31, 2007 was 26% compared to 30% in 2006. These rates are less than the statutory rate as a result of the tax-free securities and loans held by the Company. Stock Repurchase Program On October 25, 2000, the Company announced that its Board of Directors approved a stock repurchase program to purchase up to 100,000 shares of its outstanding common stock. On November 11, 2002, the Board of Directors approved and authorized the Company's repurchase of an additional 100,000 shares. Shares will be purchased from time to time in the open market depending on market prices and other considerations. Through March 31, 2007, 108,379 shares have been purchased under the program. The most recent share repurchase occurred on April 18, 2007. 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 $30.5 million as of March 31, 2007 compared to $19.0 million at December 31, 2006. The increase in cash and cash equivalents is mainly attributable to an increase in federal funds sold resulting primarily from a decrease in loan demand and an increase in certificates of deposit. In addition to cash and cash equivalents, the securities portfolio provides an important source of liquidity. Total securities available for sale totaled $131.6 million at March 31, 2007. 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, 2007, we have sufficient collateral to borrow an additional $28 million from the FHLB. In addition, as of March 31, 2007, 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, 2007, the Company's non-performing loans totaled $3.9 million or 0.88% of loans compared to $2.6 million or 0.59% of loans at December 31, 2006. (See table below) The increase in non-accrual loans is attributable to an increase in the number of various real estate loans ($463 thousand of which is real estate construction). Real estate loans composed 84% of the non- performing loans as of March 31, 2007 and 91% as of December 31, 2006. Forgone interest income on the non-accrual loans for both 2007 and 2006 is immaterial. Nonperforming Assets 3/31/07 12/31/06 (in thousands) Non-accrual Loans $ 3,424 $ 2,379 Accruing Loans which are Contractually past due 90 days or more 482 253 Total Nonperforming and Restructured Loans 3,906 2,632 Other Real Estate 321 411 Total Nonperforming and Restructured Loans and Other Real Estate $ 4,227 $ 3,043 Nonperforming and Restructured Loans as a Percentage of Loans 0.88% 0.59% Nonperforming and Restructured Loans and Other Real Estate as a Percentage of Total Assets 0.66% 0.48% Allowance as a Percentage of Period-end Loans 1.14% 1.12% Allowance as a Percentage of Non-performing and Restructured Loans 129% 164% Provision for Loan Losses The loan loss provision for the first three months was $150 thousand for 2007 and $132 thousand for 2006. The current level of nonperforming loans has caused management to increase the 2007 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, 2007 were $98 thousand compared to $49 thousand for the same period in 2006. 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) 2007 2006 Balance at Beginning of Period $ 4,991 $ 4,310 Amounts Charged-off: Commercial - 6 Real Estate Mortgage 56 54 Consumer 221 201 Total Charged-off Loans 277 261 Recoveries on Amounts Previously Charged-off: Commercial 1 1 Real Estate Construction 5 - Real Estate Mortgage 2 - Agricultural 15 21 Consumer 156 190 Total Recoveries 179 212 Net Charge-offs 98 49 Provision for Loan Losses 150 132 Balance at End of Period 5,043 4,393 Loans Average 442,181 362,029 At March 31 441,488 379,233 As a Percentage of Average Loans: Net Charge-offs 0.02% 0.01% Provision for Loan Losses 0.03% 0.04% Allowance as a Multiple of Net Charge-offs 12.9 22.4 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, 2007 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, 2007 is as follows: (dollars in thousands) PROJECTED NET INTEREST INCOME Level Change in basis points: - 300 - 100 Rates + 100 + 300 Year One (4/07 - 3/08) Net interest income 21,125 21,798 22,565 23,198 23,808 Net interest income dollar change (1,440) (767) N/A 633 1,243 Net interest income percentage change -6.4% -3.4% N/A 2.8% 5.5% Board approved limit >-10.0% >-4.0% N/A >-4.0% >-10.0% The projected net interest income report summarizing the Company's interest rate sensitivity as of March 31, 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) Net interest income 15,788 17,050 17,560 17,994 18,696 Net interest income dollar change (1,772) (510) N/A 434 1,136 Net interest income percentage change -10.1% -2.9% N/A 2.5% 6.5% Board approved limit >-18.0% >-6.0% N/A >-4.0% >-10.0% These projected changes in net interest income as of March 31, 2007 are slightly more when compared to the projected changes in net interest income as of March 31, 2006 for 100 basis point changes. The projected changes (for 300 basis point changes) in net interest income are less as of March 31, 2007 compared to March 31, 2006. Projections from March 31, 2007, year one reflected a decline in net interest income of 3.4% with a 100 basis point decline compared to the 2.9% decline in 2006. The 300 basis point increase in rates reflected a 5.5% increase in net interest income in 2007 compared to 6.5% in 2006. Item 4T - 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, 2006 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 1/1/07 - 1/31/07 -0- N/A N/A 91,621 shares 2/1/07 - 2/28/07 -0- N/A N/A 91,621 shares 3/1/07 - 3/31/07 -0- N/A N/A 91,621 shares Total -0- N/A 91,621 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. Shares will be purchased from time to time in the open market depending on market prices and other considerations. Through March 31, 2007, 108,379 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 2007 Annual Meeting of Shareholders was held May 9, 2007. 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 William Arvin 2,220,506 33,892 B. Proctor Caudill 2,220,534 33,864 Louis Prichard 2,216,760 37,638 Woodford Van Meter 2,221,176 33,222 The following directors have a term of office that will continue following the Annual Meeting: Henry Hinkle, Betty J. Long, Theodore Kuster, Ted McClain, Edwin S. Saunier, Robert G. Thompson and Buck Woodford. The total number of Common Shares outstanding as of March 23, 2007, the record date for the Annual Meeting of Shareholders, was 2,871,090. 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 _____5/14/07________ __/s/Louis Prichard______________ Louis Prichard, President and C.E.O. Date _____5/14/07________ __/s/Gregory J. Dawson___________ Gregory J. Dawson, Chief Financial Officer 2 3 17 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 14, 2007 BY /s/ Louis Prichard Louis Prichard President & Chief Executive Officer 19 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 14, 2007 BY /s/ Gregory J. Dawson Gregory J. Dawson Chief Financial Officer 21 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, 2007, 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 14, 2007 By /s/ Louis Prichard Louis Prichard President & Chief Executive Officer Date: May 14, 2007 By /s/ Gregory J. Dawson Gregory J. Dawson Chief Financial Officer 22 Lexlibrary/197885.1 -----END PRIVACY-ENHANCED MESSAGE-----