-----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, Gdx7829fduFlvJUN71isCirqDuJL8lLYKxoiy74XlbzjFp92WLkcnkTFBJ/58mNC fn4pVrXeskCsbPA8EkDhZw== 0001000232-08-000011.txt : 20080513 0001000232-08-000011.hdr.sgml : 20080513 20080513082232 ACCESSION NUMBER: 0001000232-08-000011 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 6 CONFORMED PERIOD OF REPORT: 20080331 FILED AS OF DATE: 20080513 DATE AS OF CHANGE: 20080513 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: 08825786 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 q081.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, 2008 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, a non-accelerated filer, or a smaller reporting company. See definitions of "large accelerated filer," "accelerated filer" and "smaller reporting company" in Rule 12b-2 of the Exchange Act. Large accelerated filer ____ Accelerated filer ____ Non-accelerated filer X (Do not check if a smaller reporting company) Smaller reporting company ____ 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 April 30, 2008: 2,804,725. 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 5 Consolidated Statements of Cash Flows 6 Notes to Consolidated Financial Statements 7 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 11 Item 3. Quantitative and Qualitative Disclosures About Market Risk 15 Item 4. Controls and Procedures 16 Part II - Other Information 16 Signatures 17 Exhibits 10.1 Kentucky Bancshares, Inc. 1993 Employee Stock Ownership Incentive Plan 18 10.2 Kentucky Bancshares, Inc. 1993 Non-Employee Directors Stock Ownership Incentive Plan 27 31.1 Certifications of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. 33 31.2 Certifications of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. 35 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. 37 Item 1 - Financial Statements KENTUCKY BANCSHARES, INC. CONSOLIDATED BALANCE SHEETS (unaudited) (thousands) 3/31/2008 12/31/2007 Assets Cash and due from banks $ 15,413 $ 15,446 Federal funds sold 13,451 10,361 Cash and cash equivalents 28,864 25,807 Securities available for sale 153,590 147,750 Loans 410,840 417,388 Allowance for loan losses (5,091) (4,879) Net loans 405,749 412,509 Federal Home Loan Bank stock 6,468 6,468 Bank premises and equipment, net 16,899 16,323 Interest receivable 4,603 5,220 Goodwill 13,117 13,117 Other intangible assets 1,721 1,787 Mortgage servicing rights 723 697 Other assets 1,773 1,261 Total assets $ 633,507 $ 630,939 Liabilities and Stockholders' Equity Deposits Non-interest bearing $ 91,843 $ 88,521 Time deposits, $100,000 and over 78,191 78,060 Other interest bearing 318,873 319,424 Total deposits 488,907 486,005 Repurchase agreements and other borrowings 8,700 6,735 Federal Home Loan Bank advances 62,382 63,993 Subordinated debentures 7,217 7,217 Interest payable 3,749 4,984 Other liabilities 2,998 3,161 Total liabilities 573,953 572,095 Stockholders' equity Common stock 12,501 12,517 Additional paid-in capital 189 156 Retained earnings 46,958 46,759 Accumulated other comprehensive income (loss) (94) (588) Total stockholders' equity 59,554 58,844 Total liabilities & stockholders' equity $ 633,507 $ 630,939 See Accompanying Notes 0KENTUCKY BANCSHARES, INC. CONSOLIDATED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME (unaudited) (thousands, except per share amounts) Three Months Ending 3/31/2008 3/31/2007 INTEREST INCOME: Loans, including fees $ 7,308 $ 7,957 Securities available for sale 1,650 1,572 Other 295 277 Total interest income 9,253 9,806 INTEREST EXPENSE: Deposits 3,506 3,794 Other 851 1,040 Total interest expense 4,357 4,834 Net interest income 4,896 4,972 Loan loss provision 400 150 Net interest income after provision 4,496 4,822 NON-INTEREST INCOME: Service charges 1,189 1,303 Loan service fee income 24 16 Trust department income 120 149 Securities available for sale gains (losses), net 7 (1) Gain on sale of mortgage loans 161 66 Other 474 312 Total other income 1,975 1,845 NON-INTEREST EXPENSE: Salaries and employee benefits 2,649 2,776 Occupancy expenses 734 633 Amortization 67 68 Advertising and marketing 140 135 Taxes other than payroll, property and income 179 171 Other 1,193 764 Total other expenses 4,962 4,547 Income before taxes 1,509 2,120 Income taxes 316 558 Net income $ 1,193 $ 1,562 Other Comprehensive Income, net of tax: Change in Unrealized Gains on Securities 492 (41) Comprehensive Income $ 1,685 $ 1,521 Earnings per share Basic $ 0.42 $ 0.55 Diluted 0.42 0.54 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, 2007 2,849,056 $ 12,517 $ 155 $ 46,759 $ (588) $ 58,843 Common stock issued, including tax benefit, net (including stock grants of 4,025 shares and employee gifts of 91 shares) 10,821 15 - - - 15 Stock based compensation expense - - 34 - - 34 Common stock purchased and retired (11,652) (31) - (195) - (226) Net change in unrealized gain (loss) on securities available for sale, net of tax - - - - 492 492 Net change in SFAS No. 158, net of tax - - - - 2 2 Net income - - - 1,193 - 1,193 Dividends declared - $0.28 per share - - - (799) - (799) Balances, March 31, 2008 2,848,225 $ 12,501 $ 189 $ 46,958 $ (94) $ 59,554
See Accompanying Notes KENTUCKY BANCSHARES, INC. CONSOLIDATED STATEMENTS OF CASH FLOWS (unaudited) (thousands) Three Months Ending 3/31/2008 3/31/2007 Cash Flows From Operating Activities Net Income $ 1,193 $ 1,562 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization 392 365 Securities amortization (accretion), net (147) (57) Noncash compensation expense 34 25 Provision for loan losses 400 150 Securities (gains) losses, net (7) 1 Originations of loans held for sale (7,590) (2,483) Proceeds from sale of loans 7,751 2,549 Gain on sale of mortgage loans (161) (66) Changes in: Interest receivable 617 722 Other assets (585) (260) Interest payable (1,235) (140) Other liabilities (416) (44) Net cash from operating activities 246 2,324 Cash Flows From Investing Activities Purchases of securities available for sale (43,700) (32,251) Proceeds from sales of securities available for sale - 14,539 Proceeds from principal payments, maturities and calls of securities available for sale 38,759 14,019 Net change in loans 6,360 2,564 Purchases of bank premises and equipment (861) (274) Net cash from investing activities 558 (1,403) Cash Flows From Financing Activities: Net change in deposits 2,902 15,549 Net change in securities sold under agreements to repurchase, federal funds purchased and other borrowings 1,965 (645) Advances from Federal Home Loan Bank 5,000 - Payments on Federal Home Loan Bank advances (6,604) (3,601) Proceeds from issuance of common stock 15 29 Purchase of common stock (226) - Dividends paid (799) (776) Net cash from financing activities 2,253 10,556 Net change in cash and cash equivalents 3,057 11,477 Cash and cash equivalents at beginning of period 25,807 19,011 Cash and cash equivalents at end of period 28,864 30,488 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, 2007. New accounting pronouncements - In September 2006, the FASB issued SFAS No. 157, Fair Value Measurements. This Statement defines fair value, establishes a framework for measuring fair value and expands disclosures about fair value measurements. This Statement establishes a fair value hierarchy about the assumptions used to measure fair value and clarifies assumptions about risk and the effect of a restriction on the sale or use of an asset. The Statement is effective for fiscal years beginning after November 15, 2007. The impact of adoption on January 1, 2008 was not material. In February 2007, the FASB issued SFAS No. 159, The Fair Value Option for Financial Assets and Financial Liabilities. The Statement provides companies with an option to report selected financial assets and liabilities at fair value and establishes presentation and disclosure requirements designed to facilitate comparisons between companies that choose different measurement attributes for similar types of assets and liabilities. The new Statement is effective for the Company on January 1, 2008. The Company did not elect the fair value option for any financial assets or financial liabilities as of January 1, 2008. 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 effect on the Company's financial statements, and the Company had no unrecognized tax benefits at December 31, 2007 or March 31, 2008. 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 December 31, 2007 or March 31, 2008. 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, 2008 U.S. government agencies 24,195 584 (26) 24,753 States and political subdivisions 62,841 1,085 (1,227) 62,699 Mortgage-backed 65,396 627 (177) 65,846 Equity securities 270 22 - 292 Total 152,702 2,318 (1,430) 153,590 December 31, 2007 U.S. government agencies 35,535 496 (10) 36,021 States and political subdivisions 59,332 691 (662) 59,361 Mortgage-backed 52,470 218 (610) 52,078 Equity securities 270 20 - 290 Total 147,607 1,425 (1,282) 147,750 3. LOANS Loans at period-end are as follows: (in thousands) 3/31/2008 3/31/2007 Commercial $ 23,839 $ 25,072 Real estate construction 23,211 29,297 Real estate mortgage 270,011 293,028 Agricultural 77,218 78,424 Consumer 16,561 15,667 Total 410,840 441,488 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: Three Months Ended March 31 2008 2007 (in thousands, except per share information) Basic Earnings Per Share Net Income $1,193 $1,562 Weighted average common shares outstanding 2,841 2,862 Basic earnings per share $ 0.42 $ 0.55 Diluted Earnings Per Share Net Income $1,193 $1,562 Weighted average common shares outstanding 2,841 2,862 Add dilutive effects of assumed exercise of stock options 6 10 Weighted average common and dilutive potential common shares outstanding 2,847 2,872 Diluted earnings per share $ 0.42 $ 0.54 Stock options for 30,300 shares of common stock for the and three months ended March 31, 2008, and for 30,500 shares of common stock for the three months ended March 31, 2007 were excluded from diluted earnings per share because their impact was antidilutive. 5. STOCK COMPENSATION The Company has two share based compensation plans as described below. Stock Option Plan The Company grants certain officers and key employees stock option awards which vest and become fully exercisable at the end of five years and provides for issue of up to 220,000 options. The Company also grants certain directors stock option awards which vest and become fully exercisable immediately and provides for issue of up to 20,000 options. 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 fair value of each option award is estimated on the date of grant using a closed form option valuation (Black-Scholes) model that uses the assumptions noted in the table below. Expected volatilities are based on historical volatilities of the Company's common stock. The Company uses historical data to estimate option exercise and post-vesting termination behavior. The expected term of options granted is based on historical data and represents the period of time that options granted are expected to be outstanding, which takes into account that the options are not transferable. The risk-free interest rate for the expected term of the option is based on the U.S. Treasury yield curve in effect at the time of the grant. The fair value of options granted was determined using the following weighted-average assumptions as of grant date. 2008 2007 Weighted-average fair value of options granted during the year $2.38 $4.22 Risk-free interest rate 2.96% 4.51% Expected option life 8 years 8 years Expected stock price volatility 11.05% 12.69% Expected dividend yield 3.61% 3.48% Summary of activity in the stock option plan for the three months ended March 31, 2008 follows: Weighted Weighted Average Average Remaining Aggregate Exercise Contractual Intrinsic Shares Price Term Value Outstanding, beginning of year 58,774 $27.80 Granted 800 31.00 Forfeited or expired (2,020) 28.40 Exercised (6,705) 22.12 Outstanding, end of period 50,849 28.58 63.7 months $108,517 Vested and expected to vest 50,849 28.58 63.7 months 108,517 Options exercisable at period end 42,159 28.06 60.5 months 108,517 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 $34 thousand in stock compensation expense during the three months ended March 31, 2008 to salaries and employee benefits. Stock Grant Plan On February 15, 2005, the Company's Board of Directors adopted a restricted stock grant plan. Total shares issuable under the plan are 50,000. A summary of changes in the Company's nonvested shares for the year follows: Weighted-Average Grant-Date Nonvested Shares Shares Fair Value Nonvested at December 31, 2007 8,037 $ 243,494 Granted 4,025 124,755 Vested (1,642) (49,707) Forfeited - - Nonvested at March 31, 2008 10,420 $ 318,542 6. DIVIDENDS Dividends per share paid for the quarter ended March 31, 2008 were $0.28 compared to $0.27 for March 31, 2007. 7. RETIREMENT PLAN Components of Net Periodic Benefit Cost Three months ended March 31 (in thousands) Pension Benefits 2008 2007 Service cost $ 121 $ 114 Interest cost 112 101 Expected return on plan assets (120) (109) (Gain) loss amortization 4 8 Net Periodic Benefit Cost $ 117 $ 114 Employer Contributions The estimates are based on assuming the Company's 2008 annual contribution to the Pension Plan is to be zero. No contributions to the Pension Plan were made for the quarter ended March 31, 2008, and the Company anticipates making its annual contribution, if any, in the third quarter of 2008. 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 $1.2 million, or $.42 basic earnings per share and $.42 diluted earnings per share for the three months ended March 31, 2008 compared to $1.6 million, or $.55 basic earnings per share and $.54 diluted earnings per share for the three month period ending March 31, 2007. The first three months earnings reflects a decrease of 23.6% compared to the same time period in 2007, due primarily to an increase in the loan loss provision of $250 thousand, an increase in other expenses of $415 thousand and a reduction in income tax expense of $242 thousand. Return on average assets was 0.75% for the three months ended March 31, 2008 and 0.97% for the three month period ended March 31, 2007. Return on average equity was 8.0% for the three month period ended March 31, 2008 and 11.1% for the same period in 2007. Loans decreased $6.5 million from $417.3 million on December 31, 2007 to $410.8 million on March 31, 2008. Decreases in commercial, real estate construction, real estate mortgage and agricultural loans were offset slightly by an increase in consumer loans. Management attributes the decline in loans to the slow down in the real estate economy and to competitive pressures. Total deposits increased from $486.0 million on December 31, 2007 to $488.9 million on March 31, 2008, an increase of $2.9 million. This increase is primarily the result of an increase in non-interest bearing deposits. Net Interest Income Net interest income was $4.9 million for the three months ended March 31, 2008 compared to $5.0 million for the three months ended March 31, 2007, a decrease of 1.5%. The interest spread was 3.26% for the first three months of 2008 comparable to 3.26% for the same period in 2007. Net interest margins have thusfar remained flat in 2008 compared to 2007. For the first three months, the yield on assets decreased from 6.62% in 2007 to 6.34% in 2008. The cost of liabilities decreased from 3.36% in 2007 to 3.08% in 2008. Year to date average loans are down $30.9 million, or 7.0% from March 31, 2007 to March 31, 2008. Loan interest income has decreased $649 thousand for the first three months of 2008 compared to the first three months of 2007. Year to date average deposits increased from March 31, 2007 to March 31, 2008, up $3.0 million, or 0.6%. The slight increase is a result of growth in non-interest bearing deposits. Interest bearing deposits, including time deposits, have remained relatively flat for the first three months of 2008. Deposit interest expense has decreased $288 thousand for the first three months of 2008 compared to the same period in 2007. Non-Interest Income Non-interest income increased $130 thousand for the three months ended March 31, 2008 compared to the same period in 2007 to $2.0 million, due primarily to an increase in brokerage income of $89 thousand and increase in the gain on the sale of mortgage loans of $95 thousand. These increases were partially offset by a decrease in overdraft income of $110 thousand for the first three months of 2008 compared to the same time period in 2007. Gain on sale of mortgage loans increased from $66 thousand in the first three months of 2007 to $161 thousand during the first three months of 2008. 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 $415 thousand for the three month period ended March 31, 2008 compared to the same period in 2007. For the comparable three month periods, salaries and benefits decreased $127 thousand, a decrease of 4.6%. Incentives decreased $164 thousand, due to the lower level of net income reported by the Company. Occupancy expenses increased $101 thousand to $734 thousand for the first three months of 2008 compared to the same time period in 2007. The increase in year to date 2008 is mainly attributable to two additional facilities; the first being opened in the fourth quarter of 2007 and the second being opened during the first quarter of 2008. The relocation of the Nicholasville branch, scheduled to be complete in the fourth quarter of 2008, is expected to result in a slight increase in occupancy expense starting in the first quarter of 2009. Other expenses increased $429 thousand for the three months ended March 31, 2008 compared to the same time period in 2007. The year to date increase is mainly a result of an increase of data processing fees of $185 thousand and an increase in legal and professional fees of $60 thousand. In August 2007, the Company starting outsourcing its account processing to Fiserv, Inc. causing the data processing to be more in 2008 compared to 2007. Higher legal and professional fees are mainly a result of outsourcing loan review and other corporate matters. Income Taxes The effective tax rate for the three months ended March 31, 2008 was 21% compared to 26% in 2007. These rates are less than the statutory rate as a result of the tax-free securities and loans held by the Company. The current period rate is lower due to the lower level of income for 2008. 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, 2008 155,661 shares have been purchased under the program. The most recent share repurchase occurred on April 28, 2008. 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 to meet 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 $28.9 million as of March 31, 2008 compared to $25.8 million at December 31, 2007. 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. In addition to cash and cash equivalents, the securities portfolio provides an important source of liquidity. Securities available for sale totaled $153.6 million at March 31, 2008. 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, 2008, we have sufficient collateral to borrow an additional $47 million from the FHLB. In addition, as of March 31, 2008, 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, 2008, the Company's non-performing loans totaled $6.5 million or 1.32% of loans compared to $7.3 million or 1.57% of loans at December 31, 2007. (See table below) The Company experienced a decrease of $2.6 million in non-accrual loans from December 31, 2007 to March 31, 2008, mainly from a commercial real estate loan moving from non-accrual to accrual during the quarter. As of March 31, 2008, non-accrual loans include $2.2 million in loans secured by 1-4 family residential real estate and $862 thousand in real estate construction. Real estate loans composed 98% of the non-performing loans as of March 31, 2008 and 98% as of December 31, 2007. Forgone interest income on the non-accrual loans for both 2008 and 2007 is immaterial. Nonperforming Assets 3/31/08 12/31/07 (in thousands) Non-accrual Loans $ 3,780 $ 6,358 Accruing Loans which are Contractually past due 90 days or more 1,648 195 Total Nonperforming and Restructured 5,428 6,553 Other Real Estate 1,095 768 Total Nonperforming and Restructured Loans and Other Real Estate $ 6,523 $ 7,321 Nonperforming and Restructured Loans as a Percentage of Loans 1.32% 1.57% Nonperforming and Restructured Loans and Other Real Estate as a Percentage of Total Assets 1.03% 1.16% Allowance as a Percentage of Period-end Loans 1.24% 1.17% Allowance as a Percentage of Non-performing and Restructured Loans 94% 74% Provision for Loan Losses The loan loss provision for the first three months was $400 thousand for 2008 and $150 thousand for the same period in 2007. The current level of nonperforming loans has caused management to increase the 2008 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, 2008 were $188 thousand compared to $98 thousand for the same period in 2007. 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, 2008 (in thousands) 2008 2007 Balance at Beginning of Period $ 4,879 $ 4,991 Amounts Charged-off: Real Estate Construction 125 - Real Estate Mortgage 24 56 Agricultural 12 - Consumer 358 221 Total Charged-off Loans 519 277 Recoveries on Amounts Previously Charged-off: Commercial 4 1 Real Estate Construction 2 5 Real Estate Mortgage 7 2 Agricultural 29 15 Consumer 289 156 Total Recoveries 331 179 Net Charge-offs 188 98 Provision for Loan Losses 400 150 Balance at End of Period 5,091 5,043 Loans Average 411,258 442,181 At March 31 410,840 441,488 As a Percentage of Average Loans: Net Charge-offs 0.05% 0.02% Provision for Loan Losses 0.10% 0.03% Allowance as a Multiple of Net Charge-offs 6.8 12.9 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. Using interest rate shock simulations, 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, 2008 the projected percentage changes are within the Board approved limits. This period's volatility is slightly lower 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, 2008 is as follows: (dollars in thousands) PROJECTED NET INTEREST INCOME Level Change in basis points: - 300 - 100 Rates + 100 + 300 Year One (4/08 - 3/09) Net interest income $21,052 $21,807 $22,534 $22,861 $23,256 Net interest income dollar change (1,482) (727) N/A 327 722 Net interest income percentage change -6.6% -3.2% N/A 1.5% 3.2% 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 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% These projected changes in net interest income as of March 31, 2008 are slightly lower when compared to the projected changes in net interest income as March 31, 2007 for the 100 and 300 basis point changes. Projections from March 31, 2008, year one reflected a decline in net interest income of 3.2% with a 100 basis point decline compared to the 3.4% decline in 2007. The 100 basis point increase in rates reflected a 1.5% increase in net interest income in 2008 compared to 2.8% in 2007. 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 March 31, 2008 balance sheet, a 300 basis point increase in rates results in an 18% decline in EVE. A 300 basis point decrease in rates results in a 20% 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, 2007 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 1/1/08 - 1/31/08 80 $31.93 80 51,508 shares 2/1/08 - 2/29/08 3,027 31.38 3,027 48,481 shares 3/1/08 - 3/31/08 4,142 31.10 4,142 44,339 shares Total 7,249 7,249 44,339 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, 2008 155,661 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 10.1 Kentucky Bancshares, Inc. 1993 Employee Stock Ownership Incentive Plan 10.2 Kentucky Bancshares, Inc. 1993 Non-Employee Directors Stock Ownership Incentive Plan 31.1 Certifications of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. 31.2 Certifications of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. 32 Certifications of Chief Executive Officer and Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. KENTUCKY BANCSHARES, INC. Date _____5/13/08_______ __/s/Louis Prichard______________ Louis Prichard, President and C.E.O. Date _____5/13/08_______ __/s/Gregory J. Dawson___________ Gregory J. Dawson, Chief Financial Officer 2 3 17 Lexlibrary/197885.1 EX-10 2 ex1011993employee.txt 1993 EMPLOYEE STOCK OPTION PLAN Exhibit 10.1 BOURBON BANCSHARES, INC. 1993 EMPLOYEE STOCK OWNERSHIP INCENTIVE PLAN ARTICLE 1. PURPOSE. The purpose of this 1993 Employee Stock Ownership Incentive Plan ("Plan") is to advance the interest of Bourbon Bancshares, Inc., a Kentucky corporation ("Company"), and its subsidiaries, by encouraging employees who will largely be responsible for the long-term success and development of the Company to acquire and retain an ownership interest in the Company. The Plan is also intended to provide flexibility to the Company in attracting and retaining such employees and stimulating their efforts on behalf of the Company. ARTICLE 2. DEFINITIONS AND CONSTRUCTION. 2.1 Definitions. As used in the Plan, terms defined parenthetically immediately after their use shall have the respective meanings provided by such definitions, and the terms set forth below shall have the following meanings (in either case, such meanings shall apply equally to both the singular and plural forms of the terms defined): a. "Award" shall mean a grant of Options under the Plan. b. "Board" shall mean the Board of Directors of the Company. c. "Cause" shall mean a felony conviction of a Participant or the failure of a Participant to contest prosecution for a felony, or the Participant's willful misconduct or dishon- esty, any of which is determined by the Committee to be directly and materially harmful to the business or reputation of the Company or its Subsidiaries. d. A "Change in Control" shall mean any of the following events: 1. An acquisition (other than directly from the Company) of any voting securities of the Company (the "Voting Securities") by any Person immediately after which such Person has "Beneficial Ownership" (within the meaning of Rule 13d-3 promulgated under the Exchange Act) of twenty-five percent (25%) or more of the combined voting power of the Company's then outstanding Voting Securities; provided, however, that in determining whether a Change in Control has occurred, Voting Securities that are acquired in a "Non-Control Acquisition" (as hereinafter defined) shall not constitute an acquisition that would cause a Change in Control. A "Non-Control Acquisition" shall mean an acquisition by (i) the Company or any Subsidiary, (ii) an employee benefit plan (or a trust forming a part thereof) maintained by the Company or any Subsidiary or (iii) any Person in connection with a "Non- Control Transaction" (as hereinafter defined). 2. The individuals who, as of the Effective Date, are members of the Board (the "Incumbent Board"), cease for any reason to constitute at least a majority of the Board; provided, however, that if the election, or nomination for election by the Company's shareholders, of any new director was approved by a vote of at least a majority of the Incumbent Board, such new directors shall, for purposes of the Plan, be considered as a member of the Incumbent Board; provided, further, however, that no individual shall be considered a member of the Incumbent Board if such individual initially assumed office as a result of either an actual or threatened "election contest" (as described in Rule 14a-11 promulgated under the Exchange Act) or other actual or threatened solicitation of proxies or consents by or on behalf of a Person other than the Board (a "Proxy Contest"), including by reason of any agreement intended to avoid or settle any Election Contest or Proxy Contest; or 3. Approval by shareholders of the Company of: (A) A merger, consolidation or reorganization involving the Company, unless (i) the shareholders of the Company, immediately before such merger, consolidation or reorganization, own, directly or indirectly immediately following such merger, consolidation or reorganization, at least a majority of the combined voting power of the outstanding voting securities of the corporation resulting from such merger, consolidation or reorganization (the "Surviving Corpo- ration") in substantially the same proportion as their ownership of the Voting Securities immediately before such merger, consolidation or reorga- nization, (ii) The individuals who were members of the Incumbent Board immediately prior to the execution of the agreement providing for such merger, consolidation or reorganization constitute at least a majority of the members of the board of directors of the Surviving Corporation, (iii) No Person (other than the Company, any Subsidiary, any employee benefit plan (or any trust forming a part thereof) maintained by the Company, the Surviving Corporation or any Subsidiary, or any Person who (immediately prior to such merger, consolidation or reorganization had Beneficial Ownership of twenty percent (20%) or more of the then outstanding Voting Securities) has Beneficial Ownership of twenty percent (20%) or more of the combined voting power of the Surviving Corporation's then- outstanding voting securities, and (iv) a transaction described in clauses (i) through (iii) shall herein be referred to as a "Non-Control Transaction"; (B) A complete liquidation or dissolution of the Company; or (C) An agreement for the sale or other disposition of all or substantially all of the assets of the Company to any Person (other than a transfer to a Subsidiary). Notwithstanding the foregoing, a Change in Control shall not be deemed to occur solely because any Person (the "Subject Person") acquired Beneficial Ownership of more than the permitted amount of the outstanding Voting Securities as a result of the acquisition of Voting Securities by the Company which, by reducing the number of Voting Securities outstanding, increased the proportional number of shares Beneficially Owned by the Subject Person; provided that if a Change in Control would occur (but for the operation of this sentence) as a result of the acquisition of Voting Securities by the Company, and after such share acquisition by the Company, the Subject Person becomes the Beneficial Owner of any additional Voting Securities that increases the percentage of the then outstanding Voting Securities Beneficially Owned by the Subject Person, then a Change in Control shall occur. e. "Code" shall mean the Internal Revenue Code of 1986, as amended from time to time, or any successor thereto, together with any regulations promulgated thereunder. f. "Committee" shall mean the committee described in Section 3.1. g. "Disability" shall mean a physical or mental infirmity that the Committee determines impairs the Participant's ability to perform substantially his or her duties for a period of 180 consecutive days. h. "Effective Date" shall mean the date described in Section 7.1. i. "Employee" shall mean an individual who is a full-time employee of the Company or a Subsidiary. j. "Exchange Act" shall mean the Securities Exchange Act of 1934, as amended from time to time. k. "Fair Market Value" of the Shares shall mean, as of any applicable date, the midpoint between the "bid" and "ask" price of the Shares as quoted by J.J.B. Hilliard, W.L. Lyons, Inc. ("Hilliard-Lyons"), or if no such "bid" and "ask" price of the Shares shall have occurred on such date, on the next preceding date on which there was such quoted prices. If there shall be any material alteration in the present system of quoting sale prices of the Shares, or if the Shares shall no longer be quoted by Hilliard-Lyons, the fair market value of the Shares as of a particular date shall be determined by such method as shall be determined by the Committee. l. "ISOs" shall have the meaning given such term in Section 6.1. m. "NQSOs" shall have the meaning given such term in Section 6.1. n. "Option" shall mean an option to purchase Shares granted pursuant to Article 6. o. "Option Agreement" shall mean an agreement evidencing the grant of an Option, as described in Section 6.2. p. "Option Exercise Price" shall mean the purchase price per share subject to an Option, which shall not be less than the Fair Market Value of the Share on the date of grant. q. "Participant" shall mean any Employee selected by the Committee to receive an Award under the Plan. r. "Person" shall have the meaning ascribed to such term in Section 3(a)(9) of the Exchange Act and as used in Sections 13(d) and 14(d) thereof, including a "group" as defined in Section 13(d) thereof. s. "Plan" shall mean this Bourbon Bancshares, Inc. 1993 Employee Stock Ownership Incentive Plan as the same may be amended from time to time. t. "Retirement" shall mean retirement by a Participant in accordance with the terms of the Company's retirement policy applicable to directors of the Company or any Subsidiary. u. "Shares" shall mean the Company's Common Shares. v. "Subsidiary" shall mean, with respect to any company, any corporation or other Person of which a majority of its voting power, equity securities, or equity interest is owned directly or indirectly by such company. 2.2 Gender and Number. Except where otherwise indicated by the context, reference to the masculine gender shall include the feminine gender, the plural shall include the singular and the singular shall include the plural. 2.3 Severability. In the event any provision of the Plan shall be held illegal or invalid for any reason, the illegality or invalidity shall not affect the remaining parts of the Plan, and the Plan shall be construed and enforced as if the illegal or invalid provision had not been included. ARTICLE 3. ADMINISTRATION. 3.1 The Committee. The Plan shall be administered by a committee (the "Committee") appointed by the Board. In the event the Shares of the Company are hereafter registered under Section 12 of the Exchange Act, the Committee shall include two or more directors of the Company who are "disinterested persons" within the meaning of Rule 16b-3 (or any successor provision) promulgated under the Exchange Act. The members of the Committee shall be appointed from time to time by, and shall serve at the discretion of, the Board. 3.2 Authority of the Committee. Subject to the provisions of the Plan, the Committee shall have full authority to administer the Plan, including without limitation, the authority to: a. select Participants to whom Awards are granted; b. determine the size and frequency of Awards granted under the Plan; c. determine the terms and conditions of Awards, including any restrictions or conditions to the Award, which need not be identical; d. cancel or modify, with the consent of the Participant, outstanding Awards and to grant new Awards in substitution therefor; e. accelerate the exercise ability of, and accelerate or waive any or all the restrictions and conditions applicable to, any Award, for any reason; f. extend the duration of an Option exercise period or term of an Award; g. construe and interpret the Plan and any agreement or instrument entered into under the Plan; h. establish, amend and rescind rules and regulations for the Plan's administration; and i. amend the terms and conditions of any outstanding Award to the extent such terms and conditions are within the discretion of the Committee as provided in the Plan. The Committee shall have sole discretion to make all other determinations that may be necessary or advisable for the administration of the Plan including, without limitation, the discretion to construe and interpret the Plan and any Award and establish, amend and revoke rules and regulations for the administration of the Plan. To the extent permitted by law, the Committee may delegate its authority as identified hereunder. 3.3 Decisions Bindinq. All determinations and decisions made by the Committee pursuant to the provisions of the Plan, and all related orders or resolutions of the Board, shall be final, conclusive and binding on all persons, including the Company, its shareholders, employees, participants and their estates and beneficiaries. 3.4 Section 16 Compliance; Bifurcation of Plan. In the event the Shares of the Company are hereafter registered under Section 12 of the Exchange Act and therefore the Plan and its administration becomes subject to Section 16 of the Exchange Act, it is the intention of the Company that the Plan and the administration of the Plan in such event comply in all respects with Section 16 of the Exchange Act and the rules and regulations promulgated thereunder. In such event, if any plan provision, or any aspect of the administration of the Plan, is thereafter found not to be in compliance with Section 16 of the Exchange Act, the provision or administration shall be deemed null and void, and the Plan shall be construed in favor of its meeting the requirements of Rule 16b-3 promulgated under the Exchange Act. Notwithstanding anything in the Plan to the contrary, the Board or the Committee, in its discretion, may bifurcate the Plan so as to restrict, limit or condition the use of any provision of the Plan to Participants who are subject to Section 16 of the Exchange Act without so restricting, limiting or conditioning the Plan with respect to other Participants. ARTICLE 4. SHARES AVAILABLE UNDER THE PLAN. 4.1 Number of Shares. Subject to adjustment as provided in Section 4.2, the number of Shares reserved for issuance upon the exercise of Awards is 30,000 Shares. Any Shares issued under the Plan may consist, in whole or in part, of authorized and unissued Shares or treasury shares. If and to the extent Awards shall expire or terminate for any reason without having been exercised in full (including a cancellation and regrant of an Option), or shall be forfeited, without, in either case, the Participant having realized any of the economic benefits of a shareholder, the Shares associated with such Awards (to the extent not fully exercised, forfeited or as to which no economic benefit was realized) shall again become available for Awards under the Plan. 4.2 Adjustments in Authorized Shares and Outstandinq Awards. In the event of a merger, reorganization, consolidation, recapitalization, reclassification, split-up, spin-off, separation, liquidation, share dividend, stock split, reverse stock split, cash dividend, property dividend, share repurchase, share combination, share exchange, issuance of warrants, rights or debentures, or other change in the corporate structure of the Company affecting the Shares, the Committee may substitute or adjust the total number and class of Shares or other stock or securities that may be issued under the Plan, and the number, class and/or price of Shares or other stock or securities subject to outstanding Awards, as it determines to be appropriate and equitable to prevent dilution or enlargement of the rights of Participants and to preserve, without exceeding, the value of any outstanding Awards; and further provided, that the number of Shares or other stock or securities subject to any Award shall always be a whole number. ARTICLE 5. ELIGIBILITY AND PARTICIPATION. All Employees of the Company and its Subsidiaries are eligible to receive Awards under the Plan. In selecting Employees to receive Awards under the Plan, as well as in determining the number of Shares subject to and the other terms and conditions applicable to, each Award, the Committee shall take into consideration such factors as it deems relevant in promoting the purposes of the Plan, including the duties of the Employees, their present and potential contribution to the success of the Company and their anticipated number of years of active service remaining with the Company or a Subsidiary. ARTICLE 6. STOCK OPTIONS. 6.1 Grant of Options. Subject to the terms and provisions of the Plan, the Committee may grant Options to Participants at any time and from time to time in the form of options that are intended to qualify as incentive stock options within the meaning of Section 422 of the Code ("ISOs"), Options that are not intended to so qualify ("NQSOs") or a combination thereof. 6.2 Option Agreement. Each Award shall be evidenced by an Option Agreement that shall specify the Option Exercise Price, the duration of the Option, the number of Shares to which the Option relates and such other provisions as the Committee may determine or that are required by the Plan. The Option Agreement shall also specify whether the Option is intended to be an ISO or a NQSO and shall include such provisions applicable to the particular type of Option granted. 6.3 Duration of Options. Subject to Section 3.2(f) and Section 6.7, each Option shall expire at such time as is determined by the Committee at the time of grant; provided, however, that no Option shall be exercised later than the tenth (10th) anniversary of its grant. 6.4 Exercise of Options. Options shall be exercisable at such times and be subject to such restrictions and conditions as the Committee shall approve at the time of grant, which need not be the same for each grant or for each Participant. Options shall be exercised by delivery to the Company of a written notice of exercise, setting forth the number of Shares with respect to which the Option is to be exercised and accompanied by full payment of the Option Exercise Price and all applicable withholding taxes. 6.5 Payment of Option Exercise Price. The Option Exercise Price for Shares as to which an Option is exercised shall be paid to the Company in full at the time of exercise, at the discretion of the Committee, either (a) in cash in the form of currency or other cash equivalent acceptable to the Company, (b) by tendering Shares having a Fair Market Value at the time of exercise equal to the Option Exercise Price, (c) any other reasonable consideration that the Committee may deem appropriate or (d) by a combination of the forms of consideration described in (a), (b) and (c) of this Section 6.5. The Committee may permit the cashless exercise of Options as described in Regulation T promulgated by the Federal Reserve Board, subject to applicable securities law restrictions, or by any other means that the Committee determines to be consistent with the Plan's purpose and applicable law. 6.6 Vesting Upon Change in Control. Upon a Change in Control, any then outstanding Options held by a Participant shall become fully vested and immediately exercisable. 6.7 Termination of Employment. If the employment of a Participant is terminated for Cause, all then outstanding Options of such Participant, whether or not exercisable, shall terminate immediately. If the employment of a Participant is terminated for any reason other than for Cause, death, Disability or Retirement, to the extent then outstanding Options of such Participant are exercisable, such Options may be exercised by such Participant or his personal representative at any time prior to the earlier of the expiration date of the Options or the date that is ninety (90) days after the date of such termination of employment. In the event of the Retirement of a Participant, to the extent then outstanding Options of such Participant are exercisable, such Options may be exercised by the Participant (a) in the case NQSOs, within one (1) year after the date of Retirement and (b) in the case of ISOs, within ninety (90) days after Retirement; provided, however, that no such Options may be exercised on a date subsequent to their expiration. In the event of the death or Disability of a Participant while employed by the Company or a Subsidiary, all then outstanding Options of such Participant shall become fully vested and immediately exercisable, and may be exercised at any time within one (1) year after the date of death or determination of Disability; provided, however, that no such Options may be exercised on a date subsequent to their expiration. Options may be exercised as provided in this Section 6.7 (x) in the event of the death of a Participant, by the person or persons to whom rights pass by will or by the laws of descent and distribution, or if appropriate, the legal representative of his estate and (y) in the event of the Disability of a Participant, by the Participant, or if such Participant is incapacitated, by his legal representative. ARTICLE 7. EFFECTIVE DATE, AMENDMENT, MODIFICATION AND TERMINATION. 7.1 Effective Date. The Plan shall become effective on July 1, 1993 if, prior to such date, the Plan shall have been approved by the holders of a majority of the Shares of the Company represented in person or by proxy at a meeting of shareholders of the Company at which the Plan is submitted for approval. 7.2 Termination Date. The Plan shall terminate on the earliest to occur of (a) the tenth (10th) anniversary of the date on which the Plan is adopted by the Board of the Company, (b) the date when all Shares available under the Plan shall have been acquired pursuant to the exercise of Awards or (c) such other date as the Board may determine in accordance with Section 7.3. 7.3 Amendment, Modification and Termination. The Board may, at any time, amend, modify or terminate the Plan. However, without the approval of shareholders of the Company (as may be required by the Code or Section 16 of the Exchange Act and the rules promulgated thereunder), no such amendment, modification or termination may: a. materially increase the benefits accruing to Participants under the Plan; b. materially increase the total amount of Shares that may be issued under the Plan, except as provided in Section 4.2; or c. materially modify the class of Employees eligible to participate in the Plan. The Committee may amend the terms of any Award, prospectively or retroactively, but no such amendment shall impair the rights of any Participant without such Participant's consent. 7.4 Awards Previously Granted. No amendment, modification or termination of the Plan shall in any manner adversely affect any outstanding Award without the written consent of the Participant holding such Award. ARTICLE 8. NON-TRANSFERABILITY. A Participant's rights under this Plan may not be assigned, pledged or otherwise transferred other than by will or the laws of descent and distribution. ARTICLE 9. NO GRANTING OF EMPLOYMENT RIGHTS. Neither the Plan, nor any action taken under the Plan, shall be construed as giving any employee the right to become a Participant, nor shall any Award under the Plan be construed as giving a Participant any right with respect to continuance of employment by the Company. The Company expressly reserves the right to terminate, whether by dismissal, discharge or otherwise, a Participant's employment at any time, with or without Cause, except as may otherwise be provided by any written agreement between the Company and the Participant. ARTICLE 10. WITHHOLDING. 10.1 Tax Withholdinq. A Participant shall remit to the Company an amount sufficient to satisfy Federal and state taxes (including the Participant's FICA obligation) required by law to be withheld with respect to any grant or exercise made under or as a result of the Plan. 10.2 Share Withholdinq. With respect to withholding required upon the exercise of Options or upon any other taxable event under the Plan pursuant to which Shares are to be received by the Participant ("Taxable Event"), a Participant may, subject to the discretion of the Committee, make an election (a "Tax Election") to satisfy the withholding requirement with respect to such Shares, in whole or in part, by having the Company withhold Shares having a Fair Market Value on the date the withholding tax is to be determined equal to the amount required to be withheld under applicable law. ARTICLE 11. INDEMNIFICATION. No member of the Board or the Committee, nor any officer or Employee acting on behalf of the Board or the Committee, shall be personally liable for any action, determination or interpretation taken or made with respect to the Plan, and all members of the Board, the Committee and each and any officer or Employee of the Company acting on their behalf shall, to the extent permitted by law, be fully indemnified and protected by the Company with respect to any such action, determination or interpretation. ARTICLE 12. SUCCESSORS. All obligations of the Company with respect to Awards granted under the Plan shall be binding on any successor to the Company, whether the existence of such successor is a result of a direct or indirect purchase, merger, consolidation or otherwise, of all or substantially all of the business and/or assets of the Company. ARTICLE 13. GOVERNING LAW. To the extent not preempted by Federal law, the Plan, and all agreements under the Plan, shall be governed by, and construed in accordance with, the laws of the Commonwealth of Kentucky without regard to its conflict of law rules. IN WITNESS WHEREOF, Bourbon Bancshares, Inc. has caused this 1993 Employee Stock Ownership Incentive Plan to be executed by the undersigned officer this 9th day of March, 1993. BOURBON BANKSHARES, INC. By: /s/Buckner Woodford Bucker Woodford, President and Chief Executive Officer ATTEST: /s/Joe Allen Joe Allen, Secretary 27 EX-10 3 ex1021993director.txt 1993 DIRECTOR STOCK OPTION PLAN Exhibit 10.2 BOURBON BANCSHARES, INC. 1993 NONEMPLOYEE DIRECTORS STOCK OWNERSHIP INCENTIVE PLAN ARTICLE 1. PURPOSE. The purpose of this 1993 Nonemployee Directors Stock Ownership Incentive Plan ("Plan") is to advance the interest of Bourbon Bancshares, Inc., a Kentucky corporation ("Company"), and its subsidiaries, by providing nonemployee directors of subsidiaries of the Company with an incentive that may enable them to acquire and retain an ownership interest in the Company. The Plan is also intended to enhance the Company's ability to attract and retain persons of outstanding ability to serve as directors of subsidiaries of the Company. ARTICLE 2. DEFINITIONS AND CONSTRUCTION. 2.1 Definitions. As used in the Plan, terms defined parenthetically immediately after their use shall have the respective meanings provided by such definitions, and the terms set forth below shall have the following meanings (in either case, such meanings shall apply equally to both the singular and plural forms of the terms defined): a. "Award" shall mean a grant of Options under the Plan. b. "Award Date" shall mean March 1 of any fiscal year immediately following a fiscal year end of a Subsidiary as to which a Performance Event has occurred. c. "Board" shall mean the Board of Directors of the Company. d. "Code" shall mean the Internal Revenue Code of 1986, as amended from time to time, or any successor thereto, together with any regulations promulgated thereunder. e. "Committee" shall mean the committee described in Section 3.1. f. "Disability" shall mean a physical or mental infirmity that the Committee determines impairs the Participant's ability to perform substantially his or her duties for a period of 180 consecutive days. g. "Director" shall mean any member of the Board of any Subsidiary of the Company who is not an employee of the Company or any Subsidiary of the Company. h. "Effective Date" shall mean the date described in Section 6.1. i. "Exchange Act" shall mean the Securities Exchange Act of 1934, as amended from time to time. j. "Fair Market Value" of the Shares shall mean, as of any Award Date, the midpoint between the "bid" and "ask" price of the Shares as quoted by J.J.B. Hilliard, W.L. Lyons, Inc. ("Hilliard-Lyons"), or if no such "bid" and "ask" price of the Shares shall have occurred on such date, on the next preceding date on which there was such quoted prices. If there shall be any material alteration in the present system of quoting sale prices of the Shares, or if the Shares shall no longer be quoted by Hilliard-Lyons, the fair market value of the Shares as of a particular date shall be determined by such method as shall be determined by the Committee. k. "Option" shall mean an option to purchase Shares granted pursuant to Article 5. l. "Option Agreement" shall mean an agreement evidencing the grant of an Option, as described in Section 5.2. m. "Option Exercise Price" shall mean the purchase price per share subject to an Option, which shall be the Fair Market Value of the Share on the Award Date. n. "Participant" shall mean any Director that receives an Award under the Plan. o. "Performance Event," with respect to the financial performance of any Subsidiary of the Company for its fiscal year, shall mean the obtaining of net income for such fiscal year that equals or exceeds one percent (1%) of such Subsidiary's average total assets for such fiscal year, all as certified by the Company's independent accounting firm. p. "Person" shall have the meaning ascribed to such term in Section 3(a)(9) of the Exchange Act and as used in Sections 13(d) and 14(d) thereof, including a "group" as defined in Section 13(d) thereof. q. "Plan" shall mean this Bourbon Bancshares, Inc. 1993 Nonemployee Directors Stock Ownership Incentive Plan as the same may be amended from time to time. r. "Retirement" shall mean retirement by a Participant in accordance with the terms of the Company's retirement policy applicable to directors of the Company or any Subsidiary. s. "Shares" shall mean the Company's Common Shares. t. "Subsidiary" shall mean, with respect to any company, any corporation or other Person of which a majority of its voting power, equity securities, or equity interest is owned directly or indirectly by such company. 2.2 Gender and Number. Except where otherwise indicated by the context, reference to the masculine gender shall include the feminine gender, the plural shall include the singular and the singular shall include the plural. 2.3 Severability. In the event any provision of the Plan shall be held illegal or invalid for any reason, the illegality or invalidity shall not affect the remaining parts of the Plan, and the Plan shall be construed and enforced as if the illegal or invalid provision had not been included. ARTICLE 3. ADMINISTRATION. 3.1 The Committee. The Plan is designed to operate automatically and not require administration. However, to the extent administration is required, it shall be provided by a committee (the "Committee") appointed by the Board. In the event the Shares of the Company are hereafter registered under Section 12 of the Exchange Act, the Committee shall include two or more directors of the Company who are "disinterested persons" within the meaning of Rule 16b-3 (or any successor provision) promulgated under the Exchange Act. The members of the Committee shall be appointed from time to time by, and shall serve at the discretion of, the Board. 3.2 Authority of the Committee. Subject to the provisions of the Plan, the Committee shall have full authority to: a. construe and interpret the Plan and any agreement or instrument entered into under the Plan; and b. establish, amend and rescind rules and regulations for the Plan's administration. The Committee shall have sole discretion to make all other determinations that may be necessary or advisable for the administration of the Plan, including, without limitation, the discretion to construe and interpret the Plan and establish, amend and revoke rules and regulations for the administration of the Plan. To the extent permitted by law and, if applicable, Rule 16b-3 promulgated under the Exchange Act, the Committee may delegate its authority as identified hereunder. 3.3 Decisions Binding. All determinations and decisions made by the Committee pursuant to the provisions of the Plan, and all related orders or resolutions of the Board, shall be final, conclusive and binding on all persons, including the Company, its shareholders, employees, Participants and their estates and beneficiaries. 3.4 Section 16 Compliance. In the event the Shares of the Company are hereafter registered under Section 12 of the Exchange Act and therefore the Plan and its administration becomes subject to Section 16 of the Exchange Act, it is the intention of the Company that the Plan and the administration of the Plan in such event comply in all respects with Section 16 of the Exchange Act and the rules and regulations promulgated thereunder. In such event, if any plan provision, or any aspect of the administration of the Plan, is thereafter found not to be in compliance with Section 16 of the Exchange Act, the provision or administration shall be deemed null and void, and the Plan shall be construed in favor of its meeting the requirements of Rule 16b-3 promulgated under the Exchange Act. ARTICLE 4. SHARES AVAILABLE UNDER THE PLAN. 4.1 Number of Shares. Subject to adjustment as provided in Section 4.2, the number of Shares reserved for issuance upon the exercise of Awards is 5,000 Shares. Any Shares issued under the Plan may consist, in whole or in part, of authorized and unissued Shares or treasury shares. If and to the extent Awards shall expire or terminate for any reason without having been exercised in full, the Shares associated with such Awards to the extent not fully exercised shall again become available for Awards under the Plan. 4.2 Adjustments in Authorized Shares and Outstanding Awards. In the event of a merger, reorganization, consolidation, recapitalization, reclassification, split-up, spin-off, separation, liquidation, share dividend, stock split, reverse stock split, cash dividend, property dividend, share repurchase, share combination, share exchange, issuance of warrants, rights or debentures, or other change in the corporate structure of the Company affecting the Shares, the Committee may substitute or adjust the total number and class of Shares or other stock or securities that may be issued under the Plan, and the number, class and/or price of Shares or other stock or securities subject to outstanding Awards, as it determines to be appropriate and equitable to prevent dilution or enlargement of the rights of Participants and to preserve, without exceeding, the value of any outstanding Awards; and further provided, that the number of Shares or other stock or securities subject to any Award shall always be a whole number. ARTICLE 5. STOCK OPTIONS. 5.1 Automatic Grant of Options. Subject to the terms and provisions of the Plan, each Director of a Subsidiary of the Company who has served in such capacity for at least 180 days during the fiscal year for which a Performance Event with respect to that Subsidiary has occurred, and who serves in such capacity on the Award Date, shall automatically receive on the Award Date an Option for 50 Shares that is not intended to qualify as an incentive stock option within the meaning of Section 422 of the Code. Such Options shall be fully vested on the Award Date and shall be immediately exercisable. 5.2 Option Agreement. Each Award shall be evidenced by an Option Agreement that shall specify the Option Exercise Price, the duration of the Option, the number of Shares to which the Option relates and such other provisions as the Committee may determine or that are required by the Plan. 5.3 Duration of Options. Subject to Section 5.6, each Option shall expire on the tenth (10th) anniversary of the Award Date on which it was granted. 5.4 Exercise of Options. Options shall be exercised by delivery to the Company of a written notice of exercise, setting forth the number of Shares with respect to which the Option is to be exercised and accompanied by full payment of the Option Exercise Price and all applicable withholding taxes. 5.5 Payment of Option Exercise Price. The Option Exercise Price for Shares as to which an Option is exercised shall be paid to the Company in full at the time of exercise, at the discretion of the Committee, either (a) in cash in the form of currency or other cash equivalent acceptable to the Company, (b) by tendering Shares having a Fair Market Value at the time of exercise equal to the Option Exercise Price, (c) any other reasonable consideration that the Committee may deem appropriate or (d) by a combination of the forms of consideration described in (a), (b) and (c) of this Section 6.5. The Committee may permit the cashless exercise of Options as described in Regulation T promulgated by the Federal Reserve Board, subject to applicable securities law restrictions, or by any other means that the Committee determines to be consistent with the Plan's purpose and applicable law. 5.6 Termination of Director Relationship. If a Participant for any reason other than Retirement, death or Disability shall cease to be a director of any Subsidiary and shall not then be (or shall later cease to be) a member of the Board, the outstanding Options of such Participant may be exercised by such Participant at any time prior to the earlier of the expiration date of the Options or the date that is ninety (90) days after the date on which such Participant ceases to be a director of any Subsidiary and is not (or later ceases to be) a member of the Board. If a Participant shall cease to be a director of any Subsidiary and shall not then be (or shall later cease to be) a member of the Board by reason of Retirement, death or Disability, the outstanding Options of such Participant may be exercised by such Participant at any time prior to the earlier of the expiration date of the Options or the date that is the first anniversary of the Participant's Retirement, death or determination of Disability. Options may be exercised as provided in this Section 5.6 (x) in the event of the death of a Participant, by the person or persons to whom rights pass by will or by the laws of descent and distribution, or if appropriate, the legal representative of his estate and (y) in the event of the Disability of a Participant, by the Participant, of if such Participant is incapacitated, by his legal representative. ARTICLE 6. EFFECTIVE DATE, AMENDMENT, MODIFICATION AND TERMINATION. 6.1 Effective Date. The Plan shall become effective on July 1, 1993 if, prior to such date, the Plan shall have been approved by the holders of a majority of the Shares of the Company represented in person or by proxy at a meeting of shareholders of the Company at which the Plan is submitted for approval. 6.2 Termination Date. The Plan shall terminate on the earliest to occur of (a) March 9, 2003, (b) the date when all Shares available under the Plan shall have been acquired pursuant to the exercise of Awards or (c) such other date as the Board may determine in accordance with Section 6.3. 6.3 Amendment, Modification and Termination. a. Except as provided in Section 6.1(b), the Board may, at any time, amend, modify or terminate the Plan. b. Without the approval of shareholders of the Company, no amendment, modification or termination may: (i) materially increase the benefits accruing to Participants under the Plan; (ii) materially increase the total number of Shares that may be issued under the Plan, except as provided in Section 4.2; or (iii) materially modify the eligibility or other requirements to receive an Award under the Plan. Furthermore, to the extent required to meet the conditions for exemption from Section 16(b) of the Exchange Act in the event the Common Shares of the Company are registered under Section 12 of the Exchange Act, no amendment that would change the amount, price or timing of Options, other than to comply with changes in the Code or the Employee Retirement Income Security Act of 1974, as amended (to which the Plan is not current subject), or the rules and regulations promulgated thereunder, shall be made more than once every six months. 6.4 Awards Previously Granted. No amendment, modification or termination of the Plan shall in any manner adversely affect any outstanding Award without the written consent of the Participant holding such Award. ARTICLE 7. NON-TRANSFERABILITY. A Participant's rights under this Plan may not be assigned, pledged or otherwise transferred other than by will or the laws of descent and distribution. ARTICLE 8. NO RIGHT OF REELECTION. Neither the Plan nor any action taken under the Plan shall be construed as conferring upon a Participant any right to continue as a director of the Company or any Subsidiary, to be renominated by the Board or reelected by the Company in its capacity as a shareholder of any Subsidiary. ARTICLE 9. WITHHOLDING. 9.1 Tax Withholding. A Participant shall remit to the Company an amount sufficient to satisfy Federal and state taxes (including the Participant's FICA obligation) required by law to be withheld with respect to any grant or exercise made under or as a result of the Plan. 9.2 Share Withholding. With respect to withholding required upon the exercise of Options or upon any other taxable event under the Plan pursuant to which Shares are to be received by the Participant ("Taxable Event"), a Participant may, subject to the discretion of the Committee, make an election (a "Tax Election") to satisfy the withholding requirement with respect to such Shares, in whole or in part, by having the Company withhold Shares having a Fair Market Value on the date the withholding tax is to be determined equal to the amount required to be withheld under applicable law. ARTICLE 10. INDEMNIFICATION. No member of the Board or the Committee, nor any officer or employee acting on behalf of the Board or the Committee, shall be personally liable for any action, determination or interpretation taken or made with respect to the Plan, and all members of the Board, the Committee and each and any officer or employee of the Company acting on their behalf shall, to the extent permitted by law, be fully indemnified and protected by the Company with respect to any such action, determination or interpretation. ARTICLE 11. SUCCESSORS. All obligations of the Company with respect to Awards granted under the Plan shall be binding on any successor to the Company, whether the existence of such successor is a result of a direct or indirect purchase, merger, consolidation or otherwise, of all or substantially all of the business and/or assets of the Company. ARTICLE 12. GOVERNING LAW. To the extent not preempted by Federal law, the Plan, and all agreements under the Plan, shall be governed by, and construed in accordance with, the laws of the Commonwealth of Kentucky without regard to its conflict of law rules. IN WITNESS WHEREOF, Bourbon Bancshares, Inc. has caused this 1993 Nonemployee Directors Stock Ownership Incentive Plan to be executed by the undersigned officer this 9th day of March, 1993. BOURBON BANCSHARES, INC. By: _/s/Buckner Woodford Buckner Woodford, President and Chief Executive Officer ATTEST: /s/Joe Allen Joe Allen, Secretary 33 EX-31 4 ex311.txt CEO 302 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 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 report; 3. Based on my knowledge, the financial statements, and other financial information included in this 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 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)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d- 15(f)) 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 report is being prepared; b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles; c) 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 d) 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 functions): 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 controls over financial reporting. Date: May 13, 2008 BY /s/ Louis Prichard Louis Prichard President & Chief Executive Officer 33 EX-31 5 ex312.txt CFO 302 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 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 report; 3. Based on my knowledge, the financial statements, and other financial information included in this 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 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)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d- 15(f)) 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 report is being prepared; b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles; c) 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 d) 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 functions): 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 controls over financial reporting. Date: May 13, 2008 BY /s/ Gregory J. Dawson Gregory J. Dawson Chief Financial Officer 35 EX-32 6 ex32.txt CEO & CFO 906 CERTIFICATIONS 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, 2008, as filed with the Securities and Exchange Commission on the date hereof (the "Report"), the undersigned, the Chief Executive Officer and Chief Financial Officer of the Company, certify, pursuant to 18 U.S.C. Section 1350, that: (1) The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and (2) The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company. Date: May 13, 2008 By /s/ Louis Prichard Louis Prichard President & Chief Executive Officer Date: May 13, 2008 By /s/ Gregory J. Dawson Gregory J. Dawson Chief Financial Officer 37 Lexlibrary/197885.1 -----END PRIVACY-ENHANCED MESSAGE-----