-----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, TbGA9760Hx+BKJD+AJXerX+pOj2D6REVY7g/7mPSayEebQ9XKUaAsW+9D70Sc+tF gyWF0P9jRqmgbK2/kmM6qw== 0001000232-08-000022.txt : 20081114 0001000232-08-000022.hdr.sgml : 20081114 20081114092904 ACCESSION NUMBER: 0001000232-08-000022 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 4 CONFORMED PERIOD OF REPORT: 20080930 FILED AS OF DATE: 20081114 DATE AS OF CHANGE: 20081114 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: 081187328 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 q083.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 September 30, 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 shell company (as defined in Rule 12b-2 of the Exchange Act). Yes No X _ Number of shares of Common Stock outstanding as of October 31, 2008: 2,746,729. 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 15 Item 3. Quantitative and Qualitative Disclosures About Market Risk 21 Item 4. Controls and Procedures 22 Part II - Other Information 23 Signatures 24 Exhibits 31.1 Certifications of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. 25 31.2 Certifications of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. 27 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. 29 Item 1 - Financial Statements KENTUCKY BANCSHARES, INC. CONSOLIDATED BALANCE SHEETS (unaudited) (thousands) 9/30/2008 12/31/2007 Assets Cash and due from banks $ 14,192 $ 15,446 Federal funds sold 14,676 10,361 Cash and cash equivalents 28,868 25,807 Securities available for sale 145,135 147,750 Mortgage loans held for sale 40 - Loans 420,552 417,388 Allowance for loan losses (5,758) (4,879) Net loans 414,794 412,509 Federal Home Loan Bank stock 6,731 6,468 Bank premises and equipment, net 17,484 16,323 Interest receivable 5,166 5,220 Goodwill 13,117 13,117 Other intangible assets 1,588 1,787 Mortgage servicing rights 707 697 Other assets 3,049 1,261 Total assets $ 636,679 $ 630,939 Liabilities and Stockholders' Equity Deposits Non-interest bearing $ 93,860 $ 88,521 Time deposits, $100,000 and over 75,547 78,060 Other interest bearing 302,172 319,424 Total deposits 471,579 486,005 Repurchase agreements and other borrowings 9,643 6,735 Federal Funds Purchased - - Federal Home Loan Bank advances 83,669 63,993 Subordinated debentures 7,217 7,217 Interest payable 2,333 4,984 Other liabilities 6,526 3,161 Total liabilities 580,967 572,095 Stockholders' equity Common stock 12,057 12,517 Additional paid-in capital 257 156 Retained earnings 45,797 46,759 Accumulated other comprehensive income (loss) (2,399) (588) Total stockholders' equity 55,712 58,844 Total liabilities & stockholders' equity $ 636,679 $ 630,939 See Accompanying Notes KENTUCKY BANCSHARES, INC. CONSOLIDATED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME (unaudited) (thousands, except per share amounts) Nine Months Ending 9/30/2008 9/30/2007 INTEREST INCOME: Loans, including fees $ 20,976 $ 24,106 Securities available for sale 5,414 4,774 Other 327 761 Total interest income 26,717 29,641 INTEREST EXPENSE: Deposits 8,776 11,373 Other 2,907 3,001 Total interest expense 11,683 14,374 Net interest income 15,034 15,267 Loan loss provision 1,500 650 Net interest income after provision 13,534 14,617 NON-INTEREST INCOME: Service charges 3,969 4,194 Loan service fee income 65 46 Trust department income 371 395 Securities available for sale gains (losses), net 21 33 Gain on sale of mortgage loans 342 312 Other 1,243 1,002 Total other income 6,011 5,982 NON-INTEREST EXPENSE: Salaries and employee benefits 7,806 8,051 Occupancy expenses 2,066 1,864 Amortization 199 204 Advertising and marketing 365 405 Taxes other than payroll, property and income 538 513 Other 3,379 2,503 Total other expenses 14,353 13,540 Income before taxes 5,192 7,059 Income taxes 1,157 1,909 Net income $ 4,035 $ 5,150 Other Comprehensive Income (loss), net of tax: Change in Unrealized Gains on Securities (1,590) (112) Comprehensive Income $ 2,445 $ 5,038 Earnings per share Basic $ 1.44 $ 1.80 Diluted 1.44 1.79 See Accompanying Notes KENTUCKY BANCSHARES, INC. CONSOLIDATED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME (unaudited) (thousands, except per share amounts) Three Months Ending 9/30/2008 9/30/2007 INTEREST INCOME: Loans, including fees $ 6,893 $ 8,012 Securities available for sale 1,825 1,590 Other 71 199 Total interest income 8,789 9,801 INTEREST EXPENSE: - - Deposits 2,574 3,663 Other 1,114 990 Total interest expense 3,688 4,653 Net interest income 5,101 5,148 Loan loss provision 600 330 Net interest income after provision 4,501 4,818 NON-INTEREST INCOME: - - Service charges 1,409 1,421 Loan service fee income 20 14 Trust department income 101 121 Securities available for sale gains (losses), net 6 30 Gain on sale of mortgage loans 64 102 Other 376 357 Total other income 1,976 2,045 NON-INTEREST EXPENSE: Salaries and employee benefits 2,576 2,669 Occupancy expenses 688 621 Amortization 66 68 Advertising and marketing 112 135 Taxes other than payroll, property and income 180 171 Other 1,115 928 Total other expenses 4,737 4,592 Income before taxes 1,740 2,271 Income taxes 384 601 Net income $ 1,356 $ 1,670 Other Comprehensive Income (loss), net of tax: Change in Unrealized Gains on Securities (740) 1,269 Comprehensive Income $ 616 $ 2,939 Earnings per share Basic $ 0.49 0.58 Diluted 0.49 0.58 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 - - 102 - - 102 Common stock purchased and retired (112,638) (475) - (2,644) - (3,119) Net change in unrealized gain (loss) on securities available for sale, net of tax - - - - (1,590) (1,590) Net change in SFAS No. 158, net of tax - - - - (221) (221) Net income - - - 4,035 - 4,035 Dividends declared - $0.84 per share - - - (2,353) - (2,353) Balances, September 30, 2008 2,747,239 $ 12,057 $ 257 $ 45,797 $ (2,399) $ 55,712
See Accompanying Notes KENTUCKY BANCSHARES, INC. CONSOLIDATED STATEMENTS OF CASH FLOWS (unaudited) (thousands) Nine Months Ending 9/30/2008 9/30/2007 Cash Flows From Operating Activities Net Income 4,035 $ 5,150 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization 1,212 1,113 Securities amortization (accretion), net (184) (131) Noncash compensation expense 102 75 Provision for loan losses 1,500 650 Securities (gains) losses, net (21) (33) Originations of loans held for sale (16,296) (10,356) Proceeds from sale of loans 16,598 10,413 Federal Home Loan Bank stock dividends (263) - Losses (gains) on sale of bank premises and equipment (5) - Gain on sale of mortgage loans (342) (312) Changes in: Interest receivable 54 (52) Other assets (1,949) (422) Interest payable (2,651) 668 Other liabilities 3,963 (230) Net cash from operating activities 5,753 6,533 Cash Flows From Investing Activities Purchases of securities available for sale (63,690) (70,496) Proceeds from sales of securities available for sale 9,427 19,324 Proceeds from principal payments, maturities and calls of securities available for sale 54,674 53,461 Net change in loans (3,785) 20,160 Purchases of bank premises and equipment (2,038) (2,480) Proceeds from the sale of bank premises and equipment 5 - Net cash from investing activities (5,407) 19,969 Cash Flows From Financing Activities: Net change in deposits (14,426) (6,032) Net change in securities sold under agreements to repurchase, federal funds purchased and other borrowings (92) 2,215 Advances from Federal Home Loan Bank 51,000 - Payments on Federal Home Loan Bank advances (31,310) (15,704) Proceeds from note payable 5,500 - Payment on note payable (2,500) (500) Proceeds from issuance of common stock 15 56 Purchase of common stock (3,119) (621) Dividends paid (2,353) (2,319) Net cash from financing activities 2,715 (22,905) Net change in cash and cash equivalents 3,061 3,597 Cash and cash equivalents at beginning of period 25,807 19,011 Cash and cash equivalents at end of period 28,868 22,608 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 September 30, 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 2005. 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 September 30, 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 September 30, 2008 U.S. government agencies $ 16,783 $ 118 $ (93) $ 16,808 States and political subdivisions 63,345 529 (2,940) 60,934 Mortgage-backed 67,002 410 (305) 67,107 Equity securities 270 16 - 286 Total 147,400 1,073 (3,338) 145,135 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 The Company regularly evaluates its investment securities with significant declines in fair value to determine whether losses are other-than-temporary under the principles of SFAS No. 115, FSP No. 115, and Staff Accounting Bulletin ("SAB") No. 59. A decline in the market value of any available for sale security below cost that is deemed other-than-temporary results in a charge to earnings and the establishment of a new cost basis for the security. In estimating other-than-temporary losses, management considers each of the following: the length of time and extent that fair value has been less than cost, the financial condition and near term prospects of the issuer, and the Company's ability and intent to hold the security for a period sufficient to allow for any anticipated recovery in fair value. Based on this evaluation, the Company has determined it does not have any other-than-temporary impairment losses and has not recorded any other-than- temporary impairment charges. 3. LOANS Loans at period-end are as follows: (in thousands) 9/30/2008 12/31/2007 Commercial $ 22,213 $ 22,924 Real estate construction 20,141 26,172 Real estate mortgage 275,442 270,494 Agricultural 83,218 80,774 Consumer 19,538 17,024 Total 420,552 417,388 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: Nine Months Ended September 30 2008 2007 (in thousands, except per share information) Basic Earnings Per Share Net Income $4,035 $5,150 Weighted average common shares outstanding 2,792 2,855 Basic earnings per share $ 1.44 $ 1.80 Diluted Earnings Per Share Net Income $4,035 $5,150 Weighted average common shares outstanding 2,792 2,855 Add dilutive effects of assumed exercise of stock options 2 10 Weighted average common and dilutive potential common shares outstanding 2,794 2,865 Diluted earnings per share $ 1.44 $ 1.79 Three Months Ended September 30 2008 2007 (in thousands, except per share information) Basic Earnings Per Share Net Income $1,356 $1,670 Weighted average common shares outstanding 2,767 2,845 Basic earnings per share $ 0.49 $ 0.58 Diluted Earnings Per Share Net Income $1,356 $1,670 Weighted average common shares outstanding 2,767 2,845 Add dilutive effects of assumed exercise of stock options 3 10 Weighted average common and dilutive potential common shares outstanding 2,770 2,855 Diluted earnings per share $ 0.49 $ 0.58 Stock options for 39,761 shares of common stock for the nine months and three months ended September 30, 2008, and for 10,407 shares of common stock for nine months and the three months ended September 30, 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 nine months ended September 30, 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 57.7 months $40,845 Vested and expected to vest 50,849 28.58 57.7 months 40,845 Options exercisable at period end 42,159 28.06 54.5 months 40,845 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 $102 thousand in stock compensation expense during the nine months ended September 30, 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 (1,744) (52,691) Forfeited - - Nonvested at September 30, 2008 10,318 $ 315,558 6. DIVIDENDS Dividends per share paid for the quarter ended September 30, 2008 were $0.28 compared to $0.27 for September 30, 2007. This is the same rate of dividend paid for the first three quarters of the respective years. 7. RETIREMENT PLAN Components of Net Periodic Benefit Cost Nine months ended September 30 (in thousands) Pension Benefits 2008 2007 Service cost $ 386 $ 355 Interest cost 350 304 Expected return on plan assets (361) (328) (Gain) loss amortization 24 26 Net Periodic Benefit Cost $ 399 $ 357 Three months ended September 30 (in thousands) Pension Benefits 2008 2007 Service cost $ 132 $ 118 Interest cost 119 91 Expected return on plan assets (120) (99) (Gain) loss amortization 10 10 Net Periodic Benefit Cost $ 141 $ 120 Employer Contributions The estimates are based on assuming the Company's 2008 annual contribution to the Pension Plan to be zero. No contributions to the Pension Plan were made for the quarter ended September 30, 2008. The Company has decided to terminate the retirement plan at the end of 2008. Future material contributions to the plan are expected to be determined in the fourth quarter of 2008. 8. Fair Value Measurements Effective January 1, 2008 the Company adopted SFAS No. 157 and SFAS No. 159. SFAS No. 157 defines fair value, establishes a framework for measuring fair value, and expands disclosures about fair value measurements. SFAS No. 157 applies whenever other standards require or permit assets or liabilities to be measured at fair value, but does not require any new fair value measurements. The Company applied SFAS No. 157 prospectively as of the beginning of the year. SFAS No. 159 permits entities to choose to measure certain financial assets and liabilities at fair value. The Company has not elected the fair value option for any financial assets or liabilities. In February 2008, the FASB issued Staff Position ("FSP") 157-2, "Effective Date of FASB Statement No. 157". This FSP delays the effective date of SFAS No. 157 for all nonfinancial assets and nonfinancial liabilities, except those that are recognized or disclosed at fair value on a recurring basis (at least annually) to fiscal years beginning after November 15, 2008, and interim periods within those fiscal years. SFAS No. 157 defines fair value as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. SFAS No. 157 also establishes a fair value hierarchy which requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value. The standard describes three levels of inputs that may be used to measure fair value: Level 1 - Quoted prices for identical assets or liabilities in active markets that the entity has the ability to access at the measurement date. Level 2 - Significant other observable inputs other than Level 1 prices such as quoted prices for similar assets or liabilities; quoted prices in markets that are not active; or other inputs that are observable or can be corroborated by observable market data. Level 3 - Significant unobservable inputs that reflect a reporting entity's own assumptions about the assumptions that market participants would use in pricing the asset or liability. Following is a description of the valuation method used for instruments measured at fair value on a recurring basis. For this disclosure, the Company only has available for sale investment securities that meet the requirement. Available for sale investment securities valued primarily by independent third party pricing services under the market valuation approach that include, but not limited to, the following inputs: Marketable equity securities are priced utilizing real-time data feeds from active market exchanges for identical securities. Government-sponsored agency debt securities and obligations of states and political subdivisions are priced with available market information through processes using benchmark yields, matrix pricing, prepayment speeds, cash flows, live trading data, and market spreads sourced from new issues, dealer quotes, and trade prices, among others sources. Investments in the Federal Home Loan Bank totaling $6.7 million at September 30, 2008 is carried at cost and not included in the table below, as they are outside the scope of SFAS No. 157. Available for sale investment securities are the Company's only balance sheet item that meet the disclosure requirements for instruments measured at fair value on a recurring basis. Disclosures are as follows in the table below. (In thousands) Fair Value Measurements at September 30, 2008 Using Quoted Prices In Active Markets for Significant Other Significant Identical Observable Unobservable Fair Value Assets Inputs Inputs Description 9/30/08 (Level 1) (Level 2) (Level 3) Available for Sale $145,135 $ 286 $144,849 $ - The Company may be required to measure and disclose certain other assets and liabilities at fair value on a nonrecurring basis to comply with GAAP, primarily to adjust assets to fair value under the application of lower of cost or fair value accounting. Disclosures may also include financial assets and liabilities acquired in a business combination, which are initially measured at fair value and evaluated periodically for impairment. For disclosures about assets and liabilities measured at fair value on a nonrecurring basis, the Company's only current disclosure obligation consists of impaired loans. Loans are considered impaired when full payment under the contractual terms is not expected. In general, impaired loans are also on nonaccrual status. Impaired loans are measured at the present value of expected future cash flows discounted at the loan's effective interest rate, at the loan's observable market price, or at the fair value of the collateral if the loan is collateral dependent. If the value of an impaired loan is less than the unpaid balance, the difference is credited to the allowance for loan losses with a corresponding charge to provision for loan losses. Loan losses are charged against the allowance for loan losses when management believes the uncollectibility of a loan is confirmed. Impaired loans in the amount of $10.0 million have been written down to their estimated fair value of $8.7 million at September 30, 2008. At December 31, 2007 impaired loans of $6.4 million had an estimated fair value of $5.4 million. Impaired loans are measured at fair value based on the underlying collateral and are considered level 3 inputs. 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 $4.0 million, or $1.44 basic earnings and diluted earnings per share for the first nine months ending September 30, 2008 compared to $5.1 million, or $1.80 basic earnings per share and $1.79 diluted earnings per share for the nine month period ending September 30, 2007. The first nine months earnings reflects a decrease of 21.6% compared to the same time period in 2007, due primarily to a decrease in net interest income of $233 thousand, an increase in the loan loss provision of $850 thousand and an increase in other expenses of $813 thousand. These decreases to net income were partially offset by a reduction in income tax expense of $752 thousand. The earnings for the three months ended September 30, 2008 were $1.4 million, or $.49 basic and diluted earnings per share compared to $1.7 million, or $.58 basic and diluted earnings per share for the three month period ending September 30, 2007. This three months period earnings reflects a decrease of 18.8% compared to the same time period in 2007. Return on average assets was 0.85% for the nine months ended September 30, 2008 and 1.08% for the nine month period ended September 30, 2007. Return on average assets was 0.85% for the three months ended September 30, 2008 and 1.08% for the three month period ended September 30, 2007. Return on average equity was 9.3% for the nine month period ended September 30, 2008 and 12.2% for the same period in 2007. Return on average equity was 9.4% for the three months ended September 30, 2008 and 12.0% for the same time period in 2007. Loans increased $3.2 million from $417.4 million on December 31, 2007 to $420.6 million on September 30, 2008. Decreases in commercial & real estate construction loans were partially offset by an increase in real estate mortgage, agricultural & consumer loans. Total deposits decreased from $486.0 million on December 31, 2007 to $471.6 million on September 30, 2008, a decrease of $14.4 million. This decrease is primarily the result of a decrease in interest bearing deposit accounts with balances less than $100 thousand. Management attributes the decrease mainly to increased competition for deposits. As a result of this, management has utilized other lower costing funding sources, such as Federal Home Loan Bank advances. Net Interest Income Net interest income was $15.0 million for the nine months ended September 30, 2008 compared to $15.3 million for the nine months ended September 30, 2007, a decrease of 1.5%. The interest spread of 3.33% for the first nine months of 2008 is comparable to 3.35% for the same period in 2007, a decrease of 2 basis points. Net interest income was $5.1 million for the three month period ending September 30, 2008 and $5.1 million for the three month period ending September 30, 2007. The interest spread was 3.35% for the three month period ending September 30, 2008 compared to 3.44% for the three month period in 2007, a decrease of 9 basis points. Net interest margins have thus far remained steady in 2008. The year to date net interest spread for 2008 is lower than 2007 primarily due to an increase in "lost" loan interest during 2008 that can be attributed to an increase in non-performing loans in our loan portfolio. For the first nine months, the yield on assets decreased from 6.70% in 2007 to 6.06% in 2008. The cost of liabilities decreased from 3.35% in 2007 to 2.72% in 2008. Year to date average loans are down $20.0 million, or 4.6% from September 30, 2007 to September 30, 2008. Loan interest income has decreased $3.1 million for the first nine months of 2008 compared to the first nine months of 2007. Year to date average deposits decreased from September 30, 2007 to September 30, 2008, down $2.9 million or 0.6%. The slight decrease is primarily the result of a decline in interest bearing deposits with balances less than $100 thousand. The decline in interest bearing deposit accounts was offset by a slight increase in non-interest bearing deposits. Deposit interest expense has decreased $2.6 million for the first nine months of 2008 compared to the same period in 2007. Non-Interest Income Non-interest income increased $29 thousand for the nine months ended September 30, 2008 compared to the same period in 2007 to $6.0 million, due primarily to an increase in other non-interest income of $241 thousand, offset by a decrease in service charges of $225 thousand. The decrease in service charges was primarily due to a decrease in overdraft income of $264 thousand for the first nine months of 2008. The other non-interest income increase was primarily due to an increase of $125 thousand in debit card interchange income and an increase in brokerage income of $92 thousand. The $69 thousand decrease in non-interest income for the three months ended September 30, 2008 compared to same time period in 2007 is primarily due to a decrease in the gains on the sale of mortgage loans of $38 thousand and a decrease in gains of $24 thousand on the sale of securities available for sale. Gain on sale of mortgage loans increased from $312 thousand in the first nine months of 2007 to $342 thousand during the first nine months of 2008. For the three months ended September 30, 2008 compared to the same time period in 2007, the gain on sale of mortgage loans decreased $38 thousand. 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 $813 thousand for the nine month period ended September 30, 2008 compared to the same period in 2007. For the three month period ended September 30, 2008, total non-interest expense increased $145 thousand. For the comparable nine month periods, salaries and benefits decreased $245 thousand, a decrease of 3.0%. Incentives decreased $445 thousand, due to the lower level of net income reported by the Company. Salaries & benefits decreased $93 thousand for the three month period ending September 30, 2008 compared to the same time period in 2007. As mentioned previously, the retirement plan will be terminated in December 2008, which will result in some reduction in the benefit cost starting in 2009. Occupancy expenses increased $202 thousand to $2.1 million for the first nine months of 2008 compared to the same time period in 2007. Occupancy expenses increased $67 thousand for the three month period ended September 30, 2008 compared to the same time period in 2007. The increase in the 2008 year to date occupancy expense 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 $876 thousand for the first nine months ended September 30, 2008 compared to the same time period in 2007. For the three month period ended September 30, 2008 other expenses increased $187 thousand compared to the three month period ended September 30, 2007. The year to date increase is mainly a result of an increase of data processing fees of $474 thousand, an increase in ATM & debit card processing of $97 thousand, and an increase in legal and professional fees of $81 thousand. In August 2007, the Company started outsourcing its account processing to Fiserv, Inc. causing the data processing to be more in 2008 compared to 2007. The increase in ATM and debit card processing is a result of more customer usage. Higher legal and professional fees are mainly a result of outsourcing loan review, loan collection costs and other corporate matters. Due to the downturn in the financial industry and related bank failures, the FDIC is expected to increase the FDIC insurance premiums in 2009. Although the amount of the increase is unknown at this time, the increase in expense to the Company is expected to be significant. Income Taxes The effective tax rate for the nine months ended September 30, 2008 was 22.3% compared to 27.0% in 2007. The effective tax rate for the three months ended September 30, 2008 was 22.1% compared to 26.5% for the three month period ended September 30, 2007. These rates are less than the statutory rate as a result of the tax-free securities and loans held by the Company. The rates for 2008 are lower due to the lower level of income for 2008. Nontaxable interest income increased $295 thousand for the first nine months of 2008 compared to the same time period in 2007. 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. On May 20, 2008, the Board of Directors approved and authorized the Company to repurchase 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 September 30, 2008, 256,491 shares have been purchased under the program. The most recent share repurchase occurred on October 29, 2008. 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 September 30, 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 slight decrease in the Company's security portfolio. In addition to cash and cash equivalents, the securities portfolio provides an important source of liquidity. Securities available for sale totaled $145.1 million at September 30, 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. In early July 2008, the Company received deposits from being the successful bidder on $20 million in public deposits. As of October 30, 2008, these deposits had declined $4.7 million, with the remainder expected to roll off by June 2009. As of September 30, 2008, we have sufficient collateral to borrow an additional $2 million from the FHLB. Additional real estate collateral has been pledged to the FHLB and we now have an additional borrowing capacity of $20 million. In addition, as of September 30, 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 September 30, 2008, the Company's non-performing loans totaled $10.7 million or 2.54% of loans compared to $6.5 million or 1.57% of loans at December 31, 2007. (See table below) The Company experienced an increase of $3.7 million in non-accrual loans from December 31, 2007 to September 30, 2008, mainly due to some large dollar commercial real estate loans becoming classified as non-accrual. As of September 30, 2008, non-accrual loans include $2.9 million in loans secured by 1-4 family residential real estate, $2.3 million in real estate construction and $4.2 million in loans secured by non-farm non-residential properties. Real estate loans composed 99% of the non-performing loans as of September 30, 2008 and 98% as of December 31, 2007. Forgone interest income on the non-accrual loans was $455 thousand for the first nine months of 2008 compared to $177 thousand for the same time period in 2007. Nonperforming Assets 9/30/08 12/31/07 (in thousands) Non-accrual Loans $ 10,010 $ 6,358 Accruing Loans which are Contractually past due 90 days or more 693 195 Restructured Loans - - Total Nonperforming and Restructured 10,703 6,553 Other Real Estate 1,602 768 Total Nonperforming and Restructured Loans and Other Real Estate $ 12,305 $ 7,321 Nonperforming and Restructured Loans as a Percentage of Loans 2.54% 1.57% Nonperforming and Restructured Loans and Other Real Estate as a Percentage of Total Assets 1.93% 1.16% Allowance as a Percentage of Period-end Loans 1.37% 1.17% Allowance as a Percentage of Non-performing and Restructured Loans 54% 74% Provision for Loan Losses The loan loss provision for the first nine months was $1.5 million for 2008 and $650 thousand for the same period in 2007. The loan loss provision for the three months ended September 30, 2008 was $600 thousand and $330 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 nine month period ended September 30, 2008 were $621 thousand compared to $860 thousand for the same period in 2007. Net charge- offs for the three month period ended September 30, 2008 were $236 thousand compared to $505 thousand during the same time 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 Nine Months Ended September 30 (in thousands) 2008 2007 Balance at Beginning of Period $ 4,879 $ 4,991 Amounts Charged-off: Commercial 57 127 Real Estate Construction 217 330 Real Estate Mortgage 171 167 Agricultural 12 25 Consumer 792 693 Total Charged-off Loans 1,249 1,342 Recoveries on Amounts Previously Charged-off: Commercial 6 5 Real Estate Construction 2 14 Real Estate Mortgage 13 2 Agricultural 30 64 Consumer 577 397 Total Recoveries 628 482 Net Charge-offs 621 860 Provision for Loan Losses 1,500 650 Balance at End of Period 5,758 4,781 Loans Average 415,785 435,797 At September 30 420,552 423,130 As a Percentage of Average Loans: Net Charge-offs 0.15% 0.20% Provision for Loan Losses 0.36% 0.15% Allowance as a Multiple of Net Charge-offs 7.0 4.2 Loan Losses Quarter Ended September 30 (in thousands) 2008 2007 Balance at Beginning of Period $ 5,394 $ 4,956 Amounts Charged-off: Commercial 52 - Real Estate Construction - 330 Real Estate Mortgage 116 76 Agricultural - 25 Consumer 180 211 Total Charged-off Loans 348 642 Recoveries on Amounts Previously Charged-off: Commercial 1 4 Real Estate Construction - 4 Real Estate Mortgage 1 - Agricultural - 35 Consumer 110 94 Total Recoveries 112 137 Net Charge-offs 236 505 Provision for Loan Losses 600 330 Balance at End of Period 5,758 4,781 Loans Average 422,257 428,273 At September 30 420,552 423,130 As a Percentage of Average Loans: Net Charge-offs 0.06% 0.12% Provision for Loan Losses 0.14% 0.08% Allowance as a Multiple of Net Charge-offs 6.1 2.4 Item 3 - QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK Asset/Liability management control is designed to ensure safety and soundness, maintain liquidity and regulatory capital standards, and achieve acceptable net interest income. Management considers interest rate risk to be the most significant market risk. The Company's exposure to market risk is reviewed on a regular basis by the Asset/Liability Committee. Interest rate risk is the potential of economic losses due to future interest rate changes. These economic losses can be reflected as a loss of future net interest income and/or a loss of current fair market values. The objective is to measure the effect on net interest income and to adjust the balance sheet to minimize the inherent risk, while at the same time, maximize income. Management realizes certain risks are inherent and that the goal is to identify and minimize the risks. The primary tools used by management are interest rate shock and economic value of equity (EVE) simulations. The Company 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 September 30, 2008, the projected percentage changes are within the Board approved limits. This period's volatility is higher in each rate shock both in a falling and rising rate environment when compared to the same period a year ago. The projected net interest income report summarizing the Company's interest rate sensitivity as of September 30, 2008 is as follows: (dollars in thousands) PROJECTED NET INTEREST INCOME Level Rate Change: - 300 - 100 Rates + 100 + 300 Year One (10/08 - 9/09) Net interest income $21,100 $21,851 $22,646 $23,357 $23,901 Net interest income dollar change (1,546) (795) N/A 711 1,255 Net interest income percentage change -6.8% -3.5% N/A 3.1% 5.5% Board approved limit >-10.0% >-4.0% N/A >-4.0% >-10.0% The projected net interest income report summarizing the Company's interest rate sensitivity as September 30, 2007 is as follows: PROJECTED NET INTEREST INCOME (dollars in thousands) Level Change in basis points: - 300 - 100 Rates + 100 + 300 Year One (10/07 - 9/08) Net interest income $21,742 $22,020 $22,373 $22,520 $22,675 Net interest income dollar change (631) (353) N/A 147 302 Net interest income percentage change -2.8% -1.6% N/A 0.7% 1.3% Board approved limit >-10.0% >-4.0% N/A >-4.0% >-10.0% Projections from September 30, 2008, year one reflected a decline in net interest income of 3.5% with a 100 basis point decline compared to the 1.6% decline in 2007. The 100 basis point increase in rates reflected a 3.1% increase in net interest income in 2008 compared to .7% in 2007. The additional volatility is due to lengthening our certificate of deposit maturities and having more federal funds sold. 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 September 30, 2008 balance sheet, a 100 basis point increase in rates results in a 2.6% decrease in EVE. A 100 basis point decrease in rates results in a .7% 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 The U.S. government's plan to purchase capital stock of financial institutions as part of the $700 billion bail-out program may not be effective and/or it may not be available to the Company. In response to the financial crises affecting the banking system and financial markets and the going concern threats to the ability of investment banks and other financial institutions, the U.S. Congress adopted the new Emergency Economic Stabilization Act of 2008 ("EESA") commonly referred to as a bailout of the US financial system. The primary feature of the EESA is the establishment of the Troubled Asset Relief Program ("TARP"), under which the U.S. Treasury Department will have up to $700 billion to purchase distressed assets from financial institutions and to purchase the capital stock of financial institutions. The purpose of the EESA and TARP is to stabilize the financial markets and improve liquidity. However, there can be no assurance as to the impact of the EESA and TARP on the stabilization of the financial markets. The failure of the U.S. government to execute this program expeditiously could have a material adverse effect on the financial markets, which in turn could materially and adversely affect the Company's business, financial condition and results of operations. The Company is currently evaluating the TARP guidelines and whether participation in the program will be beneficial. 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 7/1/08 - 7/31/08 10,570 $26.16 10,570 43,509 shares 8/1/08 - 8/31/08 - - - 43,509 shares 9/1/08 - 9/30/08 - - - 43,059 shares Total 10,570 10,570 43,059 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. On May 20, 2008, the Board of Directors approved and authorized 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 September 30, 2008, 256,491 shares have been purchased. Item 3. Defaults upon Senior Securities 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 _____11/14/08_______ __/s/Louis Prichard______________ Louis Prichard, President and C.E.O. Date _____11/14/08_______ __/s/Gregory J. Dawson___________ Gregory J. Dawson, Chief Financial Officer EX-31 2 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: November 14, 2008 BY /s/ Louis Prichard Louis Prichard President & Chief Executive Officer EX-31 3 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: November 14, 2008 BY /s/ Gregory J. Dawson Gregory J. Dawson Chief Financial Officer 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 September 30, 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: November 14, 2008 By /s/ Louis Prichard Louis Prichard President & Chief Executive Officer Date: November 14, 2008 By /s/ Gregory J. Dawson Gregory J. Dawson Chief Financial Officer -----END PRIVACY-ENHANCED MESSAGE-----