-----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, PjqcBEjHoBsJgAJRqJLWKwaZhMerxuC+TeQmA58SS7OgzU8wIWfbBbvl7yhftSeE p9tm2OcJEMWac6hoV0WEsQ== 0001000232-07-000012.txt : 20070814 0001000232-07-000012.hdr.sgml : 20070814 20070814151320 ACCESSION NUMBER: 0001000232-07-000012 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 4 CONFORMED PERIOD OF REPORT: 20070630 FILED AS OF DATE: 20070814 DATE AS OF CHANGE: 20070814 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: 071054421 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 q072.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 June 30, 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 August 6, 2007: 2,855,253. 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 Statement of Changes in Stockholders' Equity 6 Consolidated Statements of Cash Flows 7 Notes to Consolidated Financial Statements 8 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 13 Item 3. Quantitative and Qualitative Disclosures About Market Risk 19 Item 4. Controls and Procedures 20 Part II - Other Information 20 Signatures 21 Exhibits 31.1 Certifications of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. 22 31.2 Certifications of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. 24 32 Certifications of Chief Executive Officer and Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. 26 Item 1 - Financial Statements KENTUCKY BANCSHARES, INC. CONSOLIDATED BALANCE SHEETS (unaudited) (thousands) 6/30/2007 12/31/2006 Assets Cash and due from banks $ 13,815 $ 14,905 Federal funds sold 34,336 4,106 Cash and cash equivalents 48,151 19,011 Securities available for sale 124,552 127,891 Mortgage loans held for sale 129 - Loans 430,538 444,150 Allowance for loan losses (4,956) (4,991) Net loans 425,582 439,159 Federal Home Loan Bank stock 6,468 6,468 Bank premises and equipment, net 15,273 14,327 Interest receivable 5,119 5,654 Goodwill 13,117 13,117 Other intangible assets 1,922 2,058 Mortgage servicing rights 701 746 Other assets 1,271 1,111 Total assets $ 642,285 $ 629,542 Liabilities and Stockholders' Equity Deposits Non-interest bearing $ 98,266 $ 87,503 Time deposits, $100,000 and over 75,016 67,255 Other interest bearing 318,722 314,050 Total deposits 492,004 468,808 Repurchase agreements and other borrowings 11,576 11,327 Federal Home Loan Bank advances 69,645 80,030 Subordinated debentures 7,217 7,217 Interest payable 3,770 3,683 Other liabilities 2,537 3,196 Total liabilities 586,749 574,261 Stockholders' equity Common stock 12,451 12,474 Additional paid-in capital 109 59 Retained earnings 45,671 44,062 Accumulated other comprehensive income (loss) (2,695) (1,314) Total stockholders' equity 55,536 55,281 Total liabilities & stockholders' equity $ 642,285 $ 629,542 See Accompanying Notes KENTUCKY BANCSHARES, INC. CONSOLIDATED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME (unaudited) (thousands, except per share amounts) Six Months Ending 6/30/2007 6/30/2006 INTEREST INCOME: Loans, including fees $ 16,094 $ 13,185 Securities available for sale 3,184 3,028 Other 562 83 Total interest income 19,840 16,296 INTEREST EXPENSE: Deposits 7,710 5,319 Other 2,011 1,990 Total interest expense 9,721 7,309 Net interest income 10,119 8,987 Loan loss provision 320 240 Net interest income after provision 9,799 8,747 NON-INTEREST INCOME: Service charges 2,773 2,293 Loan service fee income 32 20 Trust department income 274 317 Securities available for sale gains (losses), net 3 (23) Gain on sale of mortgage loans 210 104 Other 645 477 Total other income 3,937 3,188 NON-INTEREST EXPENSE: Salaries and employee benefits 5,382 4,449 Occupancy expenses 1,243 1,077 Amortization 136 48 Advertising and marketing 270 240 Taxes other than payroll, property and income 342 289 Other 1,575 1,611 Total other expenses 8,948 7,714 Income before taxes 4,788 4,221 Income taxes 1,308 1,212 Net income $ 3,480 $ 3,009 Other Comprehensive Income, net of tax: Change in Unrealized Gains on Securities (1,381) (1,482) Comprehensive Income $ 2,099 $ 1,527 Earnings per share Basic $ 1.22 $ 1.13 Diluted 1.21 1.12 See Accompanying Notes KENTUCKY BANCSHARES, INC. CONSOLIDATED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME (unaudited) (thousands, except per share amounts) Three Months Ending 6/30/2007 6/30/2006 INTEREST INCOME: Loans, including fees $ 8,137 $ 6,749 Securities available for sale 1,612 1,493 Other 285 3 Total interest income 10,034 8,245 INTEREST EXPENSE: Deposits 3,916 2,583 Other 971 1,151 Total interest expense 4,887 3,734 Net interest income 5,147 4,511 Loan loss provision 170 108 Net interest income after provision 4,977 4,403 NON-INTEREST INCOME: Service charges 1,470 1,244 Loan service fee income 16 10 Trust department income 125 145 Securities available for sale gains (losses), net 4 (37) Gain on sale of mortgage loans 144 39 Other 333 247 Total other income 2,092 1,648 NON-INTEREST EXPENSE: Salaries and employee benefits 2,606 2,189 Occupancy expenses 610 517 Amortization 68 24 Advertising and marketing 135 120 Taxes other than payroll, property and income 171 145 Other 811 677 Total other expenses 4,401 3,672 Income before taxes 2,668 2,379 Income taxes 750 663 Net income $ 1,918 $ 1,716 Other Comprehensive Income, net of tax: Change in Unrealized Gains on Securities (1,340) (779) Comprehensive Income $ 578 $ 937 Earnings per share Basic $ 0.67 $ 0.65 Diluted 0.67 0.64 See Accompanying Notes KENTUCKY BANCSHARES, INC.
CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY (unaudited) (thousands, except share information) 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 5,605 shares and employee gifts of 93 shares) 7,034 32 - - - 32 Stock based compensation expense - - 50 - - 50 Common stock purchased and retired (12,613) (55) - (323) - (378) Net change in unrealized gain (loss) on securities available for sale, net of tax - - - - (1,381) (1,381) Net income - - - 3,480 - 3,480 Dividends declared - $0.54 per share - - - (1,548) - (1,548) Balances, June 30, 2007 2,859,007 $ 12,451 $ 109 $ 45,671 $ (2,695) $ 55,536
See Accompanying Notes KENTUCKY BANCSHARES, INC. CONSOLIDATED STATEMENTS OF CASH FLOWS (unaudited) (thousands) Six Months Ending 6/30/2007 6/30/2006 Cash Flows From Operating Activities Net Income $ 3,480 $ 3,009 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation 510 440 Amortization 239 161 Amortization of premium on debt (13) (49) Securities amortization (accretion), net (78) 64 Noncash compensation expense 50 33 Provision for loan losses 320 240 Securities (gains) losses, net (3) 23 Originations of loans held for sale (5,936) (8,140) Proceeds from sale of loans 6,017 8,140 Federal Home Loan Bank stock dividends - (155) Gain on sale of mortgage loans (210) (104) Changes in: Interest receivable 535 (714) Other assets (320) (1,121) Interest payable 87 (273) Other liabilities 153 755 Net cash from operating activities 4,831 2,309 Cash Flows From Investing Activities Purchases of securities available for sale (39,763) (3,176) Proceeds from sales of securities available for sale 19,324 3,960 Proceeds from principal payments, maturities and calls of securities available for sale 21,768 32,038 Net change in loans 13,257 (13,423) Purchases of bank premises and equipment (1,456) (306) Net cash from investing activities 13,130 19,093 Cash Flows From Financing Activities: Net change in deposits 23,196 (43,002) Net change in securities sold under agreements to repurchase, federal funds purchased and other borrowings 749 11,132 Advances from Federal Home Loan Bank - 45,000 Payments on Federal Home Loan Bank advances (10,372) (32,463) Payment on note payable (500) - Proceeds from issuance of common stock 32 33 Purchase of common stock (378) - Dividends paid (1,548) (1,336) Net cash from financing activities 11,179 (20,636) Net change in cash and cash equivalents 29,140 766 Cash and cash equivalents at beginning of period 19,011 14,164 Cash and cash equivalents at end of period $ 48,151 $ 14,930 See Accompanying Notes KENTUCKY BANCSHARES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES 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. 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. The Company adopted FASB Interpretation 48, Accounting for Uncertainty in Income Taxes ("FIN 48"), as of January 1, 2007. A tax position is recognized as a benefit only if it is "more likely than not" that the tax position would be sustained in a tax examination, with a tax examination being presumed to occur. The amount recognized is the largest amount of tax benefit that is greater than 50% likely of being realized on examination. For tax positions not meeting the "more likely than not" test, no tax benefit is recorded. The adoption had no affect on the Company's financial statements, and the Company had no unrecognized tax benefits at January 1, 2007 or June 30, 2007. The Company and its subsidiaries are subject to U.S. federal income tax. The Company is no longer subject to examination by taxing authorities for years before 2002. The Company does not expect the total amount of unrecognized tax benefits to significantly increase in the next twelve months. The Company recognizes interest related to income tax matters as interest expense and penalties related to income tax matters as other expense. The Company did not have any amounts accrued for interest and penalties at January 1, 2007. 2. INVESTMENT SECURITIES INVESTMENT SECURITIES Period-end securities are as follows: (in thousands) Amortized Unrealized Unrealized Fair Cost Gains Losses Value Available for Sale June 30, 2007 U.S. government agencies $ 19,060 $ 69 $ (57) $ 19,072 States and political subdivisions 54,411 279 (1,389) 53,301 Mortgage-backed 53,590 - (1,719) 51,871 Equity securities 270 13 - 283 Other 25 - - 25 Total 127,356 361 (3,165) 124,552 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) 6/30/2007 12/31/2006 Commercial $ 21,360 $ 29,335 Real estate construction 31,218 29,034 Real estate mortgage 283,881 290,068 Agricultural 77,891 79,627 Consumer 16,188 16,086 Total 430,538 444,150 4. EARNINGS PER SHARE Basic earnings per common share is net income divided by the weighted average number of common shares outstanding during the period. Diluted earnings per common share includes the dilutive effect of additional potential common shares issuable under stock options. The factors used in the earnings per share computation follow: Six Months Ended June 30 2007 2006 (in thousands, except per share information) Basic Earnings Per Share Net Income $3,480 $3,009 Weighted average common shares outstanding 2,860 2,668 Basic earnings per share $ 1.22 $ 1.13 Diluted Earnings Per Share Net Income $3,480 $3,009 Weighted average common shares outstanding 2,860 2,668 Add dilutive effects of assumed exercise of stock options 10 12 Weighted average common and dilutive potential common shares outstanding 2,870 2,680 Diluted earnings per share $ 1.21 $ 1.12 Three Months Ended June 30 2007 2006 (in thousands, except per share information) Basic Earnings Per Share Net Income $1,918 $1,716 Weighted average common shares outstanding 2,858 2,665 Basic earnings per share $ 0.67 $ 0.65 Diluted Earnings Per Share Net Income $1,918 $1,716 Weighted average common shares outstanding 2,858 2,665 Add dilutive effects of assumed exercise of stock options 10 12 Weighted average common and dilutive potential common shares outstanding 2,868 2,677 Diluted earnings per share $ 0.67 $ 0.64 Stock options for 10,035 shares of common stock for the six months and three months ended June 30, 2007, and for 32,400 shares of common stock for the six and three months ended June 30, 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 and in May 2007, 510 shares were granted under the plan. The following table summarizes stock option activity: Six Months Ended June 30, 2007 Weighted Average Options Exercise Price Outstanding, beginning of year 69,914 $ 26.54 Granted 800 31.00 Expired (880) 31.59 Exercised (1,440) 20.17 Outstanding, end of period 68,394 26.66 Options exercisable at period end 51,504 25.37 The following details stock options outstanding: June 30, 2007 December 31, 2006 Stock options vested and currently exercisable: Number 51,504 44,072 Weighted average exercise price $ 25.37 $ 24.35 Aggregate intrinsic value $ 266,286 $ 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 $50 thousand in stock compensation expense during the six months ended June 30, 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 Dividends per share paid for the quarter ended June 30, 2007 were $0.27 compared to $0.25 for June 30, 2006. This is the same rate of dividend paid for the first quarters of the respective years. 7. RETIREMENT PLAN Components of Net Periodic Benefit Cost Six months ended June 30 (in thousands) Pension Benefits 2007 2006 Service cost $ 227 $ 236 Interest cost 202 182 Expected return on plan assets (217) (199) (Gain) loss amortization 17 21 Net Periodic Benefit Cost $ 229 $ 240 Three months ended June 30 (in thousands) Pension Benefits 2007 2006 Service cost $ 113 $ 118 Interest cost 101 91 Expected return on plan assets (108) (100) (Gain) loss amortization 9 11 Net Periodic Benefit Cost $ 115 $ 120 Employer Contributions The Company contributed $503 thousand as its 2007 annual contribution to the Pension Plan in July 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); 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 $3.5 million, or $1.22 basic earnings per share and $1.21 diluted earnings per share for the first six months ended June 30, 2007 compared to $3.0 million, or $1.13 basic earnings per share and $1.12 diluted earnings per share for the six month period ending June 30, 2006. The first six months earnings reflects an increase of 15.6% compared to the same time period in 2006. The earnings for the three months ended June 30, 2007 were $1.9 million, or $0.67 basic and diluted earnings per share for the three month period ending June 30, 2007 compared to $1.7 million, or $0.65 basic earnings per share and $0.64 diluted earnings per share for the three month period ending June 30, 2006. This three months period earnings reflects an increase of 11.8% compared to the same time period in 2006. The issuance of 198,836 shares of common stock, in connection with our merger with Peoples Bancorp, Inc., had a slightly dilutive effect on earnings per share. Return on average assets was 1.08% for the six months ended June 30, 2007 and 1.07% for the six month period ended June 30, 2006. Return on average equity was 12.3% for the six month period ended June 30, 2007 and 12.8% for the same period in 2006. Return on average assets was 1.20% for the three months ended June 30, 2007 and 1.23% for the three month period June 30, 2006. Return on average equity was 13.6% for the three months ended June 30, 2007 and 14.6% for the same time period in 2006. Loans decreased $13.6 million from $444.1 million on December 31, 2006 to $430.5 million on June 30, 2007. Increases in real estate construction and consumer loans were offset by a decrease in commercial, real estate mortgage and agricultural loans. Management attributes the decline in loans to the slow down in the real estate economy and to competitive pressures. Total deposits increased from $468.8 million on December 31, 2006 to $492.0 million on June 30, 2007, an increase of $23.2 million, primarily the result of an increase in certificates of deposit, reported in time deposits, $100,000 or greater and non-interest bearing deposits. Net Interest Income Net interest income was $10.1 million for the six months ended June 30, 2007 compared to $9.0 million for the six months ended June 30, 2006, an increase of 12.6%. The interest spread was 3.31% for the first six months of 2007 compared to 3.30% for the same period in 2006, an increase of 1 basis point. Net interest income was $5.1 million for the three months ended June 30, 2007 compared to $4.5 million for the three months ended June 30, 2006, an increase of 14.1%. The interest spread 3.36% for the three month period ended June 30, 2007 compared to 3.34% for the same period in 2006, an increase of 2 basis points. Net interest margins have remained virtually unchanged in 2007 compared to 2006. For the first six months, the yield on assets increased from 6.18% in 2006 to 6.68% in 2007. The cost of liabilities increased from 2.88% in 2006 to 3.37% in 2007. Year to date average loans are up $59.4 million, or 15.6% from June 30, 2006 to June 30, 2007. Approximately $51 million in loans were acquired with the Peoples Bancorp, Inc. (Peoples) merger in July 2006. Loan interest income has increased $2.9 million for the first six months of 2007 compared to the first six months of 2006. Year to date average deposits increased from June 30, 2006 to June 30, 2007, up $72.5 million, or 17.5%. About $72 million in deposits were acquired in the Peoples merger in July 2006. The slight increase, excluding the Peoples merger, is a result of slower deposit growth, resulting from the loss of a large certificate of deposit customer and public funds placed by competitive bid. Deposit interest expense has increased $2.4 million for the first six months of 2007 compared to the same period in 2006. As of June 30, 2007, the Company has over $23 million in public fund bid deposits that it anticipates losing during the third quarter. This decrease in deposits will be offset by a decrease in federal funds sold. Because of the higher rate paid on these deposits, no negative impact on net interest income is expected. Non-Interest Income Non-interest income increased $749 thousand for the six months ended June 30, 2007 compared to the same period in 2006 to $3.9 million, due primarily to an increase in overdraft income of $456 thousand (primarily from the deposit relationships acquired with the Peoples merger in July 2006). The $444 thousand increase in non-interest income for the three months ended June 30, 2007 compared to the same time period in 2006 is due primarily to an increase in service charges of $226 thousand. Gain on sale of mortgage loans increased from $104 thousand in the first six months of 2006 to $210 thousand during the first six months of 2007. The increase was $105 thousand for the three month period June 30, 2007 compared to the same time period in 2006. A selected group of loans sold servicing released account for most of the increase. 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 $1.2 million for the six month period ended June 30, 2007 compared to the same period in 2006. For the three month period ended June 30, 2007 total non-interest expense increased $729 thousand. For the comparable six month periods, salaries and benefits increased $933 thousand, an increase of 21.0%. Salaries and incentives represented $700 thousand and employee benefits represented $233 thousand of the increase in salaries and employee benefits expense during these comparable periods. Salaries and benefits increased $417 thousand for the three month period ended June 30, 2007 compared to the same time period in 2006. These increases are primarily attributable to the Peoples merger completed in July 2006. Occupancy expenses increased $166 thousand to $1.2 million for the first six months of 2007 compared to the same time period in 2006. Occupancy expenses increased $93 thousand for the three month period ended June 30, 2007 compared to the same time period in 2006. The increase in 2007 is mainly attributable to two additional facilities acquired in the Peoples merger in July 2006. With the upcoming opening of additional facilities in Paris, Morehead and Nicholasville, occupancy expense is expected to increase starting in the fourth quarter of 2007. The increases in amortization, advertising and marketing, and taxes are also primarily attributable to the Peoples merger completed in July 2006. Other expenses decreased $36 thousand for the six months ended June 30, 2007 compared to the same time period in 2006. For the three month period ended June 30, 2007 other expenses increased $134 thousand compared to the three month period ended June 30, 2006. The year to date decrease is mainly a result of a one time credit of $80 thousand received in the first quarter of 2007 for debit card expenses. In addition, one-time costs (approximately $41 thousand in the first six months of 2006), related to the Peoples Bank merger, incurred in 2006 inflated 2006 expenses. In August 2007, the Company will outsource its account processing to 0Fiserv, Inc. Alternative uses for the mainframe computer are being investigated, but currently there are not any definite plans. The Company does not expect this to have a material impact on its results of operations and consolidated financial condition. Income Taxes The effective tax rate for the six months ended June 30, 2007 was 27% compared to 29% in 2006. The effective tax rates for the three months ended June 30, 2007 and June 30, 2006 were 28%. 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 June 30, 2007, 130,823 shares have been purchased under the program. The most recent share repurchase occurred on August 1, 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 $48.2 million as of June 30, 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 deposits. These excess federal funds sold are held in anticipation of the withdrawal during the third quarter of 2007 of public funds placed by competitive bid. In addition to cash and cash equivalents, the securities portfolio provides an important source of liquidity. Total securities available for sale totaled $124.6 million at June 30, 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 June 30, 2007, we have sufficient collateral to borrow an additional $36 million from the FHLB. In addition, as of June 30, 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 June 30, 2007, the Company's non-performing loans totaled $5.2 million or 1.20% of loans compared to $2.6 million or 0.59% of loans at December 31, 2006. (See table below) The Company experienced an increase of $2.5 million in non-accrual loans secured by various real estate loans. As of June 30, 2007, non-accruals loans include $3.2 million in loans secured by 1-4 property and $1.0 million in real estate construction. The Company believes these increases are attributable to the general softening of the real estate market. Real estate loans composed 99% of the non-performing loans as of June 30, 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 6/30/07 12/31/06 (in thousands) Non-accrual Loans $ 4,622 $ 2,379 Accruing Loans which are Contractually past due 90 days or more 540 253 Total Nonperforming and Restructured 5,162 2,632 Other Real Estate 299 411 Total Nonperforming and Restructured Loans and Other Real Estate $ 5,461 $ 3,043 Nonperforming and Restructured Loans as a Percentage of Loans 1.20% 0.59% Nonperforming and Restructured Loans and Other Real Estate as a Percentage of Total Assets 0.85% 0.48% Allowance as a Percentage of Period-end Loans 1.15% 1.12% Allowance as a Percentage of Non-performing and Restructured Loans 96% 164% Provision for Loan Losses The loan loss provision for the first six months was $320 thousand for 2007 and $240 thousand for the same period in 2006. The loan loss provision for the three months ended June 30, 2007 was $170 thousand and $108 thousand for the same period in 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 six month period ended June 30, 2007 were $355 thousand compared to $142 thousand for the same period in 2006. Net charge-offs for the three month period ended June 30, 2007 were $257 thousand compared to $93 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 Six Months Ended June 30 (in thousands) 2007 2006 Balance at Beginning of Period $ 4,991 $ 4,310 Amounts Charged-off: Commercial 127 15 Real Estate Mortgage 91 54 Agricultural - 3 Consumer 482 524 Total Charged-off Loans 700 596 Recoveries on Amounts Previously Charged-off: Commercial 1 1 Real Estate Construction 10 - Real Estate Mortgage 2 - Agricultural 29 21 Consumer 303 432 Total Recoveries 345 454 Net Charge-offs 355 142 Provision for Loan Losses 320 240 Balance at End of Period 4,956 4,408 Loans Average 439,559 380,172 At June 30 430,538 384,193 As a Percentage of Average Loans: Net Charge-offs 0.08% 0.04% Provision for Loan Losses 0.07% 0.06% Allowance as a Multiple of Net Charge-offs 7.0 15.5 Loan Losses Quarter Ended June 30 (in thousands) 2007 2006 Balance at Beginning of Period $ 5,043 $ 4,393 Amounts Charged-off: Commercial 127 9 Real Estate Mortgage 35 - Agricultural - 3 Consumer 261 323 Total Charged-off Loans 423 335 Recoveries on Amounts Previously Charged-off: Real Estate Construction 5 - Agricultural 14 - Consumer 147 242 Total Recoveries 166 242 Net Charge-offs 257 93 Provision for Loan Losses 170 108 Balance at End of Period 4,956 4,408 Loans Average 436,937 398,315 At June 30 430,538 384,193 As a Percentage of Average Loans: Net Charge-offs 0.06% 0.02% Provision for Loan Losses 0.04% 0.03% Allowance as a Multiple of Net Charge-offs 4.8 11.8 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 tools used by management are interest rate shock and economic value of equity (EVE) simulations. The Bank has no market risk sensitive instruments held for trading purposes. The following table depicts the change in net interest income resulting from 100 and 300 basis point changes in rates on the Company's interest earning assets and interest bearing liabilities. The projections are based on balance sheet growth assumptions and repricing opportunities for new, maturing and adjustable rate amounts. As of June 30, 2007 the projected percentage changes are within the Board approved limits. This period's volatility is similar to the same period a year ago. The projected net interest income report summarizing the Company's interest rate sensitivity as of June 30, 2007 is as follows: (dollars in thousands) PROJECTED NET INTEREST INCOME Level Change in basis points: - 300 - 100 Rates + 100 + 300 Year One (7/07 - 6/08) Net interest income 22,916 23,368 23,831 24,181 24,563 Net interest income dollar change (915) (463) N/A 350 732 Net interest income percentage change -3.8% -1.9% N/A 1.5% 3.1% Board approved limit >-10.0% >-4.0% N/A >-4.0% >-10.0% The projected net interest income report summarizing the Company's interest rate sensitivity as of June 30, 2006 is as follows: (dollars in thousands) PROJECTED NET INTEREST INCOME Level Change in basis points: - 300 - 100 Rates + 100 + 300 Year One (7/06 - 6/07) Net interest income 16,592 16,768 17,142 17,430 17,712 Net interest income dollar change (550) (374) N/A 288 570 Net interest income percentage change -3.2% -2.2% N/A 1.7% 3.3% Board approved limit >-18.0% >-6.0% N/A >-4.0% >-10.0% These projected changes in net interest income as of June 30, 2007 are slightly different when compared to the projected changes in net interest income as of June 30, 2006 for the 100 and 300 basis point changes. Projections from June 30, 2007, year one reflected a decline in net interest income of 1.9% with a 100 basis point decline compared to the 2.2% decline in 2006. The 100 basis point increase in rates reflected a 1.5% increase in net interest income in 2007 compared to 1.7% in 2006. EVE applies discounting techniques to future cash flows to determine the present value of assets, liabilities, and therefore equity. Based on applying these techniques to the June 30, 2007 balance sheet, a 300 basis point increase in rates results in a 28% decline in EVE. A 300 basis point decrease in rates results in a 14% increase in EVE. These are within the Board approved limits. 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, 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 4/1/07 - 4/30/07 588 $29.71 588 81,202 shares 5/1/07 - 5/31/07 6,804 29.56 6,804 74,398 shares 6/1/07 - 6/30/07 5,221 30.44 5,221 69,177 shares Total 12,613 12,613 69,177 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 June 30, 2007, 130,823 shares have been purchased. Item 3. Defaults upon Senior Securities None Item 4. Submission of Matters to a Vote of Security Holders None Item 5. Other Information None Item 6. Exhibits 31.1 Certifications of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. 31.2 Certifications of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. 32 Certifications of Chief Executive Officer and Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. KENTUCKY BANCSHARES, INC. Date _____8/14/07________ __/s/Louis Prichard______________ Louis Prichard, President and C.E.O. Date _____8/14/07________ __/s/Gregory J. Dawson___________ Gregory J. Dawson, Chief Financial Officer 2 3 13 Lexlibrary/197885.1 EX-31 2 ex311.txt CEO CERTIFICATION Exhibit 31.1 CERTIFICATIONS OF CHIEF EXECUTIVE OFFICER PURSUANT TO SECTION 302 OF SARBANES-OXLEY ACT I, Louis Prichard, certify that: 1. I have reviewed this quarterly report on Form 10-Q of Kentucky Bancshares, Inc.; 2. Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this quarterly report; 3. Based on my knowledge, the financial statements, and other financial information included in this quarterly report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this quarterly report; 4. The registrant's other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and have: (a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this quarterly report is being prepared; (b) Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and (c) Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and 5. The registrant's other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of registrant's board of directors (or persons performing the equivalent function): (a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and (b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting. Date: August 14, 2007 BY /s/ Louis Prichard Louis Prichard President & Chief Executive Officer 23 Lexlibrary/197885.1 EX-31 3 ex312.txt CFO CERTIFICATION Exhibit 31.2 CERTIFICATIONS OF CHIEF FINANCIAL OFFICER PURSUANT TO SECTION 302 OF SARBANES-OXLEY ACT I, Gregory J. Dawson, certify that: 1. I have reviewed this quarterly report on Form 10-Q of Kentucky Bancshares, Inc.; 2. Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this quarterly report; 3. Based on my knowledge, the financial statements, and other financial information included in this quarterly report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this quarterly report; 4. The registrant's other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and have: (a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this quarterly report is being prepared; (b) Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and (c) Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and 5. The registrant's other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of registrant's board of directors (or persons performing the equivalent function): (a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and (b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting. Date: August 14, 2007 BY /s/ Gregory J. Dawson Gregory J. Dawson Chief Financial Officer 25 Lexlibrary/197885.1 EX-32 4 ex32.txt CEO & CFO CERTIFICATION Exhibit 32 CERTIFICATIONS OF CHIEF EXECUTIVE OFFICER AND CHIEF FINANCIAL OFFICER PURSUANT TO 18 U.S.C. SECTION 1350 (AS ADOPTED PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002) In connection with the Quarterly Report of Kentucky Bancshares, Inc. (the "Company") on Form 10-Q for the period ended June 30, 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: August 14, 2007 By /s/ Louis Prichard Louis Prichard President & Chief Executive Officer Date: August 14, 2007 By /s/ Gregory J. Dawson Gregory J. Dawson Chief Financial Officer 26 Lexlibrary/197885.1 -----END PRIVACY-ENHANCED MESSAGE-----