-----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, RdsIyeT6UVwdyHDfKUyGOp06ygd+urPCr+5Yvq9Gk2/UKz7ZKX6gKCHuSpjts52Z bh7yvaRmdNKxAyKvb1r1OQ== 0001000232-09-000011.txt : 20090813 0001000232-09-000011.hdr.sgml : 20090813 20090813110519 ACCESSION NUMBER: 0001000232-09-000011 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 5 CONFORMED PERIOD OF REPORT: 20090630 FILED AS OF DATE: 20090813 DATE AS OF CHANGE: 20090813 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: 091008917 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 q092.txt FORM 10Q UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-Q (Mark One) [ X ] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended June 30, 2009 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 has submitted electronically and posted on its corporate web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (Section 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes No X _ 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 July 31, 2009: 2,742,661. 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 21 Item 3. Quantitative and Qualitative Disclosures About Market Risk 29 Item 4. Controls and Procedures 30 Part II - Other Information 30 Signatures 32 Exhibits 10.1 2009 Stock Award Plan. 33 31.1 Certifications of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. 47 31.2 Certifications of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. 49 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. 51 Item 1 - Financial Statements KENTUCKY BANCSHARES, INC. CONSOLIDATED BALANCE SHEETS (unaudited) (thousands) 6/30/2009 12/31/2008 Assets Cash and due from banks $ 13,675 $ 16,411 Federal funds sold 25 20,695 Cash and cash equivalents 13,700 37,106 Securities available for sale 172,075 172,834 Loans 417,556 424,276 Allowance for loan losses (6,373) (5,465) Net loans 411,183 418,811 Federal Home Loan Bank stock 6,731 6,731 Bank premises and equipment, net 17,720 17,875 Interest receivable 4,420 5,156 Goodwill 13,117 13,117 Other intangible assets 1,392 1,523 Mortgage servicing rights 728 465 Other assets 7,661 5,157 Total assets $ 648,727 $ 678,775 Liabilities and Stockholders' Equity Deposits Non-interest bearing $ 95,084 $ 90,480 Time deposits, $100,000 and over 104,852 108,465 Other interest bearing 294,159 321,863 Total deposits 494,095 520,808 Repurchase agreements and other borrowings 12,548 10,717 Federal Funds Purchased 2,639 - Federal Home Loan Bank advances 63,848 77,301 Subordinated debentures 7,217 7,217 Interest payable 4,188 2,874 Other liabilities 5,382 2,817 Total liabilities 589,917 621,734 Stockholders' equity Common stock 12,337 12,053 Retained earnings 45,640 44,974 Accumulated other comprehensive income (loss) 833 14 Total stockholders' equity 58,810 57,041 Total liabilities & stockholders' equity $ 648,727 $ 678,775 See Accompanying Notes KENTUCKY BANCSHARES, INC. CONSOLIDATED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME (unaudited) (thousands, except per share amounts) Six Months Ending 6/30/2009 6/30/2008 INTEREST INCOME: Loans, including fees $ 12,303 $ 14,083 Securities available for sale 3,787 3,589 Other 14 256 Total interest income 16,104 17,928 INTEREST EXPENSE: Deposits 4,896 6,202 Other 1,783 1,793 Total interest expense 6,679 7,995 Net interest income 9,425 9,933 Loan loss provision 900 900 Net interest income after provision 8,525 9,033 NON-INTEREST INCOME: Service charges 2,522 2,560 Loan service fee income 50 45 Trust department income 235 270 Securities available for sale gains (losses), net 203 15 Gain on sale of mortgage loans 811 278 Other 799 867 Total other income 4,620 4,035 NON-INTEREST EXPENSE: Salaries and employee benefits 5,986 5,230 Occupancy expenses 1,301 1,378 Amortization 131 133 Advertising and marketing 253 253 Taxes other than payroll, property and income 366 358 Other 2,867 2,264 Total other expenses 10,904 9,616 Income before taxes 2,241 3,452 Income taxes 170 773 Net income $ 2,071 $ 2,679 Other Comprehensive Income, net of tax: Change in Unrealized Gains on Securities 819 (851) Comprehensive Income $ 2,890 $ 1,828 Earnings per share Basic $ 0.76 $ 0.95 Diluted 0.76 0.95 See Accompanying Notes KENTUCKY BANCSHARES, INC. CONSOLIDATED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME (unaudited) (thousands, except per share amounts) Three Months Ending 6/30/2009 6/30/2008 INTEREST INCOME: Loans, including fees $ 6,224 $ 6,775 Securities available for sale 1,679 1,855 Other 4 45 Total interest income 7,907 8,675 INTEREST EXPENSE: Deposits 2,363 2,696 Other 871 942 Total interest expense 3,234 3,638 Net interest income 4,673 5,037 Loan loss provision 450 500 Net interest income after provision 4,223 4,537 NON-INTEREST INCOME: Service charges 1,376 1,371 Loan service fee income 23 21 Trust department income 126 150 Securities available for sale gains (losses), net 199 8 Gain on sale of mortgage loans 433 117 Other 458 393 Total other income 2,615 2,060 NON-INTEREST EXPENSE: Salaries and employee benefits 3,437 2,581 Occupancy expenses 640 644 Amortization 65 66 Advertising and marketing 129 113 Taxes other than payroll, property and income 178 179 Other 1,567 1,071 Total other expenses 6,016 4,654 Income before taxes 822 1,943 Income taxes (82) 457 Net income $ 904 $ 1,486 Other Comprehensive Income, net of tax: Change in Unrealized Gains on Securities (217) (1,342) Comprehensive Income $ 687 $ 144 Earnings per share Basic $ 0.33 $ 0.53 Diluted 0.33 0.53 See Accompanying Notes KENTUCKY BANCSHARES, INC.
CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY (unaudited) (thousands, except share information) Accumulated Other Total ----Common Stock---- Retained Comprehensive Stockholders' Shares Amount (1) Earnings Income Equity Balances, December 31, 2008 2,745,729 $ 12,344 $ 44,683 $ 14 $ 57,041 Common stock issued, including tax benefit, net (including stock grants of 3,714 shares) 3,732 - - - - Stock based compensation expense - 57 - - 57 Common stock purchased and retired (4,700) (64) (15) - (79) Net change in unrealized gain (loss) on securities available for sale, net of tax - - - 819 819 Net income - - 2,071 - 2,071 Dividends declared - $0.40 per share - - (1,099) - (1,099) Balances, June 30, 2009 2,744,761 $ 12,337 $ 45,640 $ 833 $ 58,810
(1) Common Stock has no par value; amount includes Additional Paid-in Capital See Accompanying Notes KENTUCKY BANCSHARES, INC. CONSOLIDATED STATEMENTS OF CASH FLOWS (unaudited) (thousands) Six Months Ending 6/30/2009 6/30/2008 Cash Flows From Operating Activities Net Income $ 2,071 $ 2,679 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation & Amortization 691 797 Securities amortization (accretion), net 811 (165) Noncash compensation expense 57 68 Provision for loan losses 900 900 Securities (gains) losses, net (203) (15) Originations of loans held for sale (36,455) (13,503) Proceeds from sale of loans 37,266 13,701 Federal Home Loan Bank stock dividends - (173) Losses (gains) on sale of bank premises and equipment - (5) Gain on sale of mortgage loans (811) (278) Changes in: Interest receivable 736 374 Other assets (2,872) (1,449) Interest payable 1,314 (1,819) Other liabilities 2,143 (57) Net cash from operating activities 5,648 1,055 Cash Flows From Investing Activities Purchases of securities available for sale (53,208) (63,690) Proceeds from sales of securities available for sale 17,515 - Proceeds from principal payments, maturities and calls of securities available for sale 37,085 49,369 Net change in loans 6,728 (1,817) Purchases of bank premises and equipment (336) (1,402) Proceeds from the sale of bank premises and equipment - 5 Net cash from investing activities 7,784 (17,535) Cash Flows From Financing Activities: Net change in deposits (26,713) (30,806) Net change in securities sold under agreements to repurchase, federal funds purchased and other borrowings 4,670 15,478 Advances from Federal Home Loan Bank - 35,000 Payments on Federal Home Loan Bank advances (13,417) (11,964) Proceeds from note payable - 5,000 Payment on note payable (200) (2,300) Proceeds from issuance of common stock - 15 Purchase of common stock (79) (2,842) Dividends paid (1,099) (1,584) Net cash from financing activities (36,838) 5,997 Net change in cash and cash equivalents (23,406) (10,483) Cash and cash equivalents at beginning of period 37,106 25,807 Cash and cash equivalents at end of period 13,700 15,324 Supplemental disclosures of cash flow information Cash paid during the year for: Interest expense $ 6,679 $ 7,995 Income taxes 200 700 Supplemental schedules of non-cash investing activities Real estate acquired through foreclosure $ 3,941 $ 950 See Accompanying Notes KENTUCKY BANCSHARES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES The preparation of financial statements for Kentucky Bancshares, Inc. (the "Company") 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, 2008. Recently Issued But Not Yet Effective Accounting Standards In June 2009, the Financial Accounting Standards Board ("FASB") issued Statement of Financial Accounting Standards "(SFAS") No. 166, "Accounting for Transfers of Financial Assets-an amendment of FASB Statement No. 140". This statement is a revision to SFAS No. 140, "Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities" and requires more information about transfers of financial assets, including securitization transactions, and where entities have continuing exposure to the risks related to transferred financial assets. It eliminates the concept of a "qualifying special-purpose entity," changes the requirements for derecognizing financial assets, and requires additional disclosures. SFAS No. 166 enhances information reported to users of financial statements by providing greater transparency about transfers of financial assets and an entity's continuing involvement in transferred financial assets. This statement is effective at the beginning of a reporting entity's first fiscal year beginning after November 15, 2009, or January 1, 2010, for the Company. Early application is not permitted. The Company does not expect this statement to have a material impact on its consolidated results of operations or financial position upon adoption. In June 2009, the FASB issued SFAS No. 167, "Amendments to FASB Interpretation No. 46(R)". SFAS No. 167 is a revision to FIN 46 (Revised December 2003), Consolidation of Variable Interest Entities, and changes how a reporting entity determines when an entity that is insufficiently capitalized or is not controlled through voting (or similar rights) should be consolidated. The determination of whether a reporting entity is required to consolidate another entity is based on, among other things, the other entity's purpose and design and the reporting entity's ability to direct the activities of the other entity that most significantly impact the other entity's economic performance. SFAS No. 167 requires a number of new disclosures. SFAS No. 167 requires a reporting entity to provide additional disclosures about its involvement with variable interest entities and any significant changes in risk exposure due to that involvement. A reporting entity will be required to disclose how its involvement with a variable interest entity affects the reporting entity's financial statements. SFAS No. 167 is effective at the beginning of a reporting entity's first fiscal year beginning after November 15, 2009, or January 1, 2010, for the Company. Early application is not permitted. The Company does not expect this statement to have a material impact on its consolidated results of operations or financial position upon adoption. In June 2009, the FASB issued SFAS No. 168, "FASB Accounting Standards CodificationTM" and the Hierarchy of Generally Accepted Accounting Principles." SFAS No. 168 establishes the FASB Accounting Standards CodificationTM ("Codification") as the single source of authoritative U.S. generally accepted accounting principles ("GAAP") recognized by the FASB to be applied by nongovernmental entities. Rules and interpretive releases of the SEC under authority of federal securities laws are also sources of authoritative U.S. GAAP for SEC registrants. SFAS No. 168 and the Codification are effective for financial statements issued for interim and annual periods ending after September 15, 2009. When effective, the Codification will supersede all existing non-SEC accounting and reporting standards. All other non-SEC accounting and other nongrandfathered literature not included in the Codification will become nonauthoritative. Subsequent to SFAS No. 168, the FASB will not issue new standards in the form of SFAS's, FSP's, or Emerging Issues Task Force Abstracts. Instead, the FASB will issue Accounting Standards Updates ("ASU"), which will serve only to: (a) update the Codification; (b) provide background information about the guidance; and (c) provide the bases for conclusions on changes in the Codification. The Company does not expect this statement to have a material impact on its consolidated results of operations or financial position upon adoption. Adoption of New Accounting Standards Effective January 1, 2009 the Company adopted SFAS No. 141(R), "Business Combinations", SFAS No. 160, "Noncontrolling Interests in Consolidated Financial Statements", SFAS No. 161, "Disclosures about Derivative Instruments and Hedging Activities", and SFAS No. 163, "Accounting for Financial Guarantee Insurance Contracts". During the second quarter of 2009, the Company adopted FSP FAS 157-4, "Determining Fair Value When the Volume and Level of Activity for the Asset or Liability Have Significantly Decreased and Identifying Transactions That Are Not Orderly", FSP FAS 115-2 and FAS 124-2, "Recognition and Presentation of Other-Than-Temporary Impairments", FSP FAS 107-1 and APB 28-1, "Interim Disclosure about Fair Value of Financial Instruments" , SFAS No. 165, "Subsequent Events", and FASB Staff Position ("FSP") FAS 141(R)-1, "Accounting for Assets Acquired and Liabilities Assumed in a Business Combination That Arise from Contingencies" . SFAS No. 141(R) establishes principals and requirements for how an acquirer recognizes and measures in its financial statements the identifiable assets acquired, liabilities assumed, and any noncontrolling interest in an acquiree. The statement also provides guidance for recognizing and measuring goodwill or gain from a bargain purchase in a business combination and determines what information to disclose to enable users of the financial statements to evaluate the nature and financial effects of the business combination. The provisions of this statement will only impact the Company if it enters into a business combination on or after January 1, 2009. FSP FAS 141(R)-1, "Accounting for Assets Acquired and Liabilities Assumed in a Business Combination That Arise from Contingencies" was issued in April 2009 and amends the guidance in SFAS No. 141(R) as follows: ? Requires that assets acquired and liabilities assumed in a business combination that arise from contingencies be recognized at fair value if fair value can be reasonably estimated. If fair value of such an asset or liability cannot be reasonably estimated, the asset or liability would generally be recognized in accordance with SFAS No. 5, "Accounting for Contingencies", and FASB Interpretation No. 14, "Reasonable Estimation of the Amount of a Loss". Further, the FASB decided to remove the subsequent accounting guidance for assets and liabilities arising from contingencies from Statement 141(R), and carry forward without significant revision the guidance in SFAS No. 141. ? Eliminates the requirement to disclose an estimate of the range of outcomes of recognized contingencies at the acquisition date. For unrecognized contingencies, the FASB decided to require that entities include only the disclosures required by Statement 5 and that those disclosures be included in the business combination footnote. ? Requires that contingent consideration arrangements of an acquiree assumed by the acquirer in a business combination be treated as contingent consideration of the acquirer and should be initially and subsequently measured at fair value in accordance with SFAS No. 141(R). This FSP is effective for assets or liabilities arising from contingencies in business combinations for which the acquisition date is on or after the beginning of the first annual reporting period beginning on or after December 15, 2008. The impact of adopting this FSP will depend on the timing of future acquisitions, if any, and the nature of any contingencies associated with such acquisitions. SFAS No. 160 amends Accounting Research Bulletin ("ARB") No. 51, "Consolidated Financial Statements" to establish accounting and reporting standards for the noncontrolling interest in a subsidiary and for the deconsolidation of a subsidiary. The statement also amends certain of ARB No. 51's consolidation procedures for consistency with the requirements of SFAS No. 141(R). The adoption of this statement did not have an impact on the Company's consolidated financial position or results of operations. SFAS No. 161 amends and expands the disclosure requirements of SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities" to provide enhanced disclosures about 1) how and why an entity uses derivative instruments; 2) how derivative instruments and related hedged items are accounted for under SFAS No. 133 and related interpretations; and 3) how derivative instruments and related hedged items affect an entity's financial position, financial performance, and cash flows. The adoption of this statement did not have an impact on the Company's consolidated financial position or results of operations. SFAS No. 163 clarifies how SFAS No. 60, "Accounting and Reporting by Insurance Enterprises", applies to financial guarantee insurance contracts issued by insurance enterprises, including the recognition and measurement of premium revenue and claim liabilities. It also requires expanded disclosures about financial guarantee insurance contracts. The adoption of this statement did not have an impact on the Company's consolidated financial position or results of operations. FSP FAS 157-4, adopted in the second quarter of 2009: ? Affirms that the objective of fair value when the market for an asset is not active is the price that would be received to sell the asset in an orderly transaction. ? Clarifies and includes additional factors for determining whether there has been a significant decrease in market activity for an asset when the market for that asset is not active. ? Eliminates the proposed presumption that all transactions are distressed (not orderly) unless proven otherwise. The FSP instead requires an entity to base its conclusion about whether a transaction was not orderly on the weight of the evidence. ? Includes an example that provides additional explanation on estimating fair value when the market activity for an asset has declined significantly. ? Requires an entity to disclose a change in valuation technique (and the related inputs) resulting from the application of the FSP and to quantify its effects, if practicable. ? Applies to all fair value measurements when appropriate. The adoption of FSP FAS 157-4 did not have a material impact on the Company's consolidated financial position or results of operations. FSP FAS 115-2 and FAS 124-2, adopted in the second quarter of 2009: ? Changes existing guidance for determining whether an impairment is other than temporary to debt securities; ? Replaces the existing requirement that the entity's management assert it has both the intent and ability to hold an impaired security until recovery with a requirement that management assert: (a) it does not have the intent to sell the security; and (b) it is more likely than not it will not have to sell the security before recovery of its cost basis; ? Incorporates examples of factors from existing literature that should be considered in determining whether a debt security is other-than- temporarily impaired; ? Requires that an entity recognize noncredit losses on held-to- maturity debt securities in other comprehensive income and amortize that amount over the remaining life of the security in a prospective manner by offsetting the recorded value of the asset unless the security is subsequently sold or there are additional credit losses; ? Requires an entity to present the total other-than-temporary impairment in the statement of earnings with an offset for the amount recognized in other comprehensive income; and ? When adopting FSP FAS 115-2 and FAS 124-2, an entity is required to record a cumulative-effect adjustment as of the beginning of the period of adoption to reclassify the noncredit component of a previously recognized other-temporary impairment from retained earnings to accumulated other comprehensive income if the entity does not intend to sell the security and it is not more likely than not that the entity will be required to sell the security before recovery. The adoption of FSP FAS 115-2 and FAS 124-2 did not have a material impact on the Company's consolidated financial position or results of operations. Reference is made to Note 7 for additional disclosures required by FSP FAS 115-2 and FAS 124-2. The Company adopted FSP FAS 107-1 and APB 28-1, "Interim Disclosures about Fair Value of Financial Instruments" during the second quarter of 2009. This FSP amends SFAS No. 107, "Disclosures about Fair Value of Financial Instruments", to require an entity to provide disclosures about fair value of financial instruments in interim financial information. This FSP also amends APB Opinion No. 28, "Interim Financial Reporting", to require those disclosures in summarized financial information at interim reporting periods. Under this FSP, a publicly traded company shall include disclosures about the fair value of its financial instruments whenever it issues summarized financial information for interim reporting periods. In addition, an entity shall disclose in the body or in the accompanying notes of its summarized financial information for interim reporting periods and in its financial statements for annual reporting periods the fair value of all financial instruments for which it is practicable to estimate that value, whether recognized or not recognized in the statement of financial position, as required by SFAS No. 107. The adoption of this FSP did not have a material impact on the Company's consolidated financial position or results of operations. Please refer to Note 6 for additional information related to the impact of adopting this FSP. The Company adopted SFAS No. 165, "Subsequent Events" during the second quarter of 2009. This statement establishes general standards of accounting for and disclosures of events that occur after the balance sheet date, but before financial statements are issued or are available to be issued. Specifically, SFAS No. 165 provides: ? The period after the balance sheet date during which management of a reporting entity should evaluate events or transactions that may occur for potential recognition or disclosure in the financial statements; ? The circumstances under which an entity should recognize events or transactions occurring after the balance sheet date in its financial statements; and ? The disclosures that an entity should make about events or transactions that occurred after the balance sheet date. The adoption of SFAS No. 165 did not have a material impact on the Company's consolidated financial position or results of operations. The Company evaluated subsequent events through August 13, 2009, the date its financial statements were issued, and believes that no events have occurred requiring further disclosure or adjustment to the consolidated financial statements. 2. INVESTMENT SECURITIES Period-end securities are as follows: (in thousands) Amortized Unrealized Unrealized Fair Cost Gains Losses Value Available for Sale June 30, 2009 U.S. government agencies $ 23,514 $ 45 $ (55) $ 23,504 States and political subdivisions 74,026 1,078 (1,460) 73,644 Mortgage-backed 73,003 1,686 (54) 74,635 Equity securities 270 22 - 292 Total 170,813 2,831 (1,569) 172,075 December 31, 2008 U.S. government agencies $ 19,138 $ 212 $ - $ 19,350 States and political subdivisions 65,091 1,061 (2,181) 63,971 Mortgage-backed 88,314 1,142 (233) 89,223 Equity securities 270 20 - 290 Total 172,813 2,435 (2,414) 172,834 Securities with unrealized losses at June 30, 2009 and December 31, 2008 not recognized in income are as follows:
June 30, 2009 (in thousands) Less than 12 Months 12 Months or More Total Fair Unrealized Fair Unrealized Fair Unrealized Description of Securities Value Loss Value Loss Value Loss U.S. Government securities $ 8,971 $ (55) $ - $ - $ 8,971 $ (55) States and municipals 13,800 (397) 30,002 (1,063) 43,802 (1,460) Mortgage-backed 4,277 (54) - - 4,277 (54) Total temporarily impaired $27,048 $ (506) $30,002 $(1,063) $57,050 $(1,569) December 31, 2008 (in thousands) Less than 12 Months 12 Months or More Total Fair Unrealized Fair Unrealized Fair Unrealized Description of Securities Value Loss Value Loss Value Loss U.S. Government securities $ - $ - $ - $ - $ - $ - States and municipals $13,055 $ (587) $23,023 $(1,594) $36,078 $(2,181) Mortgage-backed 30,903 (165) 1,565 (68) 32,468 (233) Total temporarily impaired $43,958 $ (752) $24,588 $(1,662) $68,546 $(2,414)
Other-than-temporary impairment ("OTTI") All unrealized losses are reviewed on at least a quarterly basis to determine whether the losses are other than temporary and are reviewed more frequently when economic or market concerns warrant such evaluation. Consideration is given to the length of time and the extent to which the fair value has been less than cost, the financial condition and near-term prospects of the issuer, and our intent and ability to retain the investment in the issuer for a period of time sufficient to allow for any anticipated recovery in fair value. In analyzing an issuer's financial condition, we may consider whether the securities are issued by the federal government or its agencies, whether downgrades by bond rating agencies have occurred, and the results of reviews of the issuer's financial condition. The term "other-than-temporary" is not intended to indicate that the decline is permanent, but indicates that the prospects for a near-term recovery of value are not necessarily favorable, or that there is a general lack of evidence to support a realizable value equal to or greater than the carrying value of the investment. Once a decline in value is determined to be other- than-temporary, the value of the security is reduced and a corresponding charge to earnings is recognized for anticipated credit losses. 3. LOANS Loans at period-end are as follows: (in thousands) 6/30/2009 12/31/2008 Commercial $ 22,490 $ 21,505 Real estate construction 17,937 16,818 Real estate mortgage 276,299 286,846 Agricultural 82,468 80,779 Consumer 18,362 18,328 Total 417,556 424,276 Activity in the allowance for loan losses for the six month period ended was as follows: 2009 2008 Beginning balance $ 5,464,864 $ 4,878,732 Charge-offs (458,414) (457,199) Recoveries 466,479 72,227 Provision for loan losses 900,000 900,000 Ending balance $ 6,372,929 $ 5,393,760 Impaired loans totaled $7,790,000 at June 30, 2009 and $5,131,000 at December 31, 2008. Nonperforming loans were as follows: 6/30/09 12/31/08 Loans past due over 90 days still on accrual $ 375,000 $ 779,000 Nonaccrual loans 8,227,000 6,562,000 Nonperforming loans include impaired loans and smaller balance homogeneous loans, such as residential mortgage and consumer loans, that are collectively evaluated for impairment. 4. EARNINGS PER SHARE Basic earnings per common share is net income divided by the weighted average number of common shares outstanding during the period. Diluted earnings per common share includes the dilutive effect of additional potential common shares issuable under stock options. The factors used in the earnings per share computation follow: Six Months Ended June 30 2009 2008 (in thousands, except per share information) Basic Earnings Per Share Net Income $2,071 $2,679 Weighted average common shares outstanding 2,737 2,819 Basic earnings per share $ 0.76 $ 0.95 Diluted Earnings Per Share Net Income $2,071 $2,679 Weighted average common shares outstanding 2,737 2,819 Add dilutive effects of assumed exercise of stock options 1 4 Weighted average common and dilutive potential common shares outstanding 2,738 2,823 Diluted earnings per share $ 0.76 $ 0.95 Three Months Ended June 30 2009 2008 (in thousands, except per share information) Basic Earnings Per Share Net Income $ 904 $1,486 Weighted average common shares outstanding 2,738 2,797 Basic earnings per share $ 0.33 $ 0.53 Diluted Earnings Per Share Net Income $ 904 $1,486 Weighted average common shares outstanding 2,738 2,797 Add dilutive effects of assumed exercise of stock options 1 3 Weighted average common and dilutive potential common shares outstanding 2,739 2,800 Diluted earnings per share $ 0.33 $ 0.53 Stock options for 37,844 shares of common stock for the six and three months ended June 30, 2009, and for 31,900 shares of common stock for the three months ended June 30, 2008 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 Under its 1999 Employee Stock Option Plan, the Company has granted 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 100,000 options. Under the expired 1993 Non-Employee Directors Stock Ownership Incentive Plan, the Company has also granted certain directors stock option awards which vest and become fully exercisable immediately and provided 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. No options have been granted in 2009. 2008 Weighted-average fair value of options granted during the year $2.38 Risk-free interest rate 2.96% Expected option life 8 years Expected stock price volatility 11.05% Expected dividend yield 3.61% Summary of activity in the stock option plan for the six months ended June 30, 2009 follows: Weighted Weighted Average Average Remaining Aggregate Exercise Contractual Intrinsic Shares Price Term Value Outstanding, beginning of year 50,169 $28.57 Forfeited or expired (12,325) 25.86 Outstanding, end of period 37,844 29.45 54.6 months $ - Vested and expected to vest 37,844 29.45 54.6 months - Options exercisable at period end 35,374 29.38 53.8 months - The intrinsic value for stock options is calculated based on the exercise price of the underlying awards and the market price of our common stock as of the reporting date. The Company recorded $57 thousand in stock compensation expense during the six months ended June 30, 2009 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 Per Share Nonvested Shares Shares Fair Value Nonvested at December 31, 2008 10,006 $ 30.58 Granted 4,150 17.15 Vested (2,804) 30.16 Forfeited (334) 25.40 Nonvested at June 30, 2009 11,018 $ 25.79 6. DIVIDENDS Dividends per share paid for the quarter ended June 30, 2009 were $0.20 compared to $0.28 for June 30, 2008. This is the same rate of dividend paid for the first quarter of the respective years. 7. RETIREMENT PLAN Components of Net Periodic Benefit Cost Six months ended June 30 (in thousands) Pension Benefits 2009 2008 Service cost $ - $ 254 Interest cost - 231 Expected return on plan assets - (241) (Gain) loss amortization - 14 Net Periodic Benefit Cost $ - $ 258 Three months ended June 30 (in thousands) Pension Benefits 2009 2008 Service cost $ - $ 132 Interest cost - 119 Expected return on plan assets - (120) (Gain) loss amortization - 10 Net Periodic Benefit Cost $ - $ 141 Employer Contributions The defined benefit plan offered to employees by the Company was terminated effective December 31, 2008. Therefore, the company had no contributions to the plan during the first quarter of this year and will also have no contributions going forward. As of December 31, 2008, the date of termination, the projected benefit obligation was $6,749,694 and the fair value of the plan assets was $5,206,908. The difference of $1,542,786 is recognized in other liabilities on the consolidated balance sheet. During the third quarter of 2009, distributions from the defined benefit plan will be made to those employees in which the Company had an obligation to as of the December 31, 2008, the plan's termination date. Once all funds have been distributed, the Company will no longer have any liabilities associated with the plan. During the second quarter of 2009, the Company recognized $860 thousand for the final expenses related to terminating the plan. 8. Fair Value Measurements Statement 157 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 (unadjusted) for identical assets or liabilities in active markets that the entity has the ability to access as of 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 an asset or liability. The fair values of securities available for sale are determined by obtaining quoted prices on nationally recognized securities exchanges (Level 1 inputs) or matrix pricing, which is a mathematical technique widely used in the industry to value debt securities without relying exclusively on quoted prices for the specific securities but rather by relying on the securities' relationship to other benchmark quoted securities (Level 2 inputs). The fair value of servicing rights is based on a valuation model that calculates the present value of estimated net servicing income. The valuation model incorporates assumptions that market participants would use in estimating future net servicing income. The Company is able to compare the valuation model inputs and results to widely available published industry data for reasonableness (Level 2 inputs). The fair value of impaired loans with specific allocations of the allowance for loan losses is generally based on recent real estate appraisals. These appraisals may utilize a single valuation approach or a combination of approaches including comparable sales and the income approach. Adjustments are routinely made in the appraisal process by the appraisers to adjust for differences between the comparable sales and income data available. Such adjustments are typically significant and result in a Level 3 classification of the inputs for determining fair value. Assets and Liabilities Measured 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 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 June 30, 2009 Using Quoted Prices In Active Markets for Significant Other Significant Identical Observable Unobservable Fair Value Assets Inputs Inputs Description 6/30/09 (Level 1) (Level 2) (Level 3) Available for Sale Securities $172,075 $ 292 $ 171,783 $ - (In thousands) Fair Value Measurements at December 31, 2008 Using Quoted Prices In Active Markets for Significant Other Significant Identical Observable Unobservable Fair Value Assets Inputs Inputs Description 12/31/08 (Level 1) (Level 2) (Level 3) Available for Sale Securities $172,834 $ 290 $172,544 $ - Assets and Liabilities Measured on a Non-Recurring Basis Servicing rights are carried at lower of cost or fair value. The current value of $728 thousand includes a valuation allowance of $213 thousand, which was recorded during the fourth quarter of 2008. Impaired loans totaled $7,790,000 at June 30, 2009 and $5,131,000 at December 31, 2008. The total allowance for loan losses related to these loans was $600,000 and $320,000 at June 30, 2009 and December 31, 2008. Impaired loans are measured at fair value based on the underlying collateral and are considered level 3 inputs. Fair Value of Financial Instruments In accordance with FSP SFAS 107-1, the carrying amounts and estimated fair values of financial instruments, at June 30, 2009 and December 31, 2008 are as follows: June 30, 2009 December 31, 2008 Carrying Carrying Amount Fair Value Amount Fair Value (In Thousands) Financial assets Cash and cash equivalents $ 13,700 $ 13,700 $ 37,106 $ 37,106 Securities 172,075 172,075 172,834 172,834 Loans, net 411,183 411,678 418,811 418,635 FHLB stock 6,731 6,731 6,731 6,731 Interest receivable 4,420 4,420 5,156 5,156 Financial liabilities Deposits $ 494,095 $ 501,500 $ 520,808 $ 528,949 Securities sold under agreements to repurchase and other borrowings 12,548 12,814 10,717 10,983 FHLB advances 63,848 65,735 77,301 79,665 Subordinated debentures 7,217 4,472 7,217 4,253 Interest payable 4,188 4,188 2,874 2,874 The methods and assumptions used to estimate fair value are described as follows: Carrying amount is the estimated fair value for cash and cash equivalents, short-term borrowings, Federal Home Loan Bank stock, accrued interest receivable and payable, demand deposits, short-term debt, and variable rate loans or deposits that reprice frequently and fully. For fixed rate loans or deposits and for variable rate loans or deposits with infrequent repricing or repricing limits, fair value is based on discounted cash flows using current market rates applied to the estimated life and credit risk. Fair value of debt is based on current rates for similar financing. The fair value of commitments to extend credit and standby letters of credit is not considered material. 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 $2.1 million, or $0.76 basic and diluted earnings per share for the first six months ending June 30, 2009 compared to $2.7 million, or $0.95 basic and diluted earnings per share for the six month period ending June 30, 2008. The first six months earnings reflects a decrease of 23% compared to the same time period in 2008, due primarily to a decrease in net interest income of $508 thousand, an increase in salaries and benefits of $756 thousand and an increase in other expenses of $603 thousand. The increase in salaries and benefits was primarily due to final costs of $860 thousand related to the terminating the pension plan. The increase in other expenses was mainly due to an increase of $684 thousand in FDIC insurance expense. These reductions to income were partially offset by an increase on the gain on securities of $188 thousand, the gain on sold loans of $533 thousand and a reduction in income tax expense of $603 thousand. The earnings for the three months ended June 30, 2009 were $0.9 million, or $.33 basic and diluted earnings per share for the three month period ending June 30, 2009 compared to $1.5 million, or $.53 basic and diluted earnings per share for the three month period ending June 30, 2008. This three month period earnings reflects a 39% decrease compared to the same time period in 2008. Return on average assets was 0.61% for the six months ended June 30, 2009 and 0.85% for the six month period ended June 30, 2008. Return on average assets was 0.54% for the three months ended June 30, 2009 and 0.94% for the three month period ended June 30, 2008. Return on average equity was 7.1% for the six month period ended June 30, 2009 compared to 9.1% for the six month period ended June 30, 2008. Return on average equity was 6.1% for the three months ended June 30, 2009 and 10.1% for the same time period in 2008. Loans decreased $6.7 million from $424.3 million on December 31, 2008 to $417.6 million on June 30, 2009. Decreases in real estate mortgage loans were offset by an increase in real estate construction, agricultural, commercial & consumer loans. Total deposits decreased from $520.8 million on December 31, 2008 to $494.1 million on June 30, 2009, a decrease of $26.7 million. This decrease is primarily the result of a decrease in interest bearing deposit accounts, excluding time deposits. Management attributes the decrease mainly due to large dollar public fund accounts that have rolled off during 2009 and increased competition for deposits. Net Interest Income Net interest income was $9.4 million for the six months ended June 30, 2009 compared to $9.9 million for the six months ended June 30, 2008, a decrease of 5.1%. The interest spread was 2.94% for the first six months of 2009 comparable to 3.32% for the same period in 2008, a decrease of 38 basis points. Net interest income was $4.7 million for the three month period ending June 30, 2009 compared to $5.0 million for the three month period ending June 30, 2008, a decrease of 7.2%. The interest spread was 2.93% for the three month period ending June 30, 2009 compared to 3.38% for the three month period in 2008, a decrease of 45 basis points. For the first three months in 2009, the prime interest rate was 200 basis points less than the first 3 months in 2008. During the second quarter of 2009, the prime interest rate was 175 basis points less than the same period a year ago. These declines in rates have significantly impacted the Company's interest spread. In addition to lower rates and tightening interest margins, the net interest spread for 2009 is also lower than 2008 due to an increase in "lost" loan interest during 2009 that can be attributed to an increase in non-performing loans in our loan portfolio. For the first six months, the yield on assets decreased from 6.15% in 2008 to 5.13% in 2009. The cost of liabilities decreased from 2.83% in 2008 to 2.19% in 2009. Year to date average loans increased $5.8 million, or 1.4% from June 30, 2008 to June 30, 2009. Loan interest income has decreased $1.8 million for the first six months of 2009 compared to the first six months of 2008. Year to date average deposits increased from June 30, 2008 to June 30, 2008, up $44.6 million or 9.3%. The increase is primarily the result of an increase in interest bearing public funds. Deposit interest expense has decreased $1.3 million for the first six months of 2009 compared to the same period in 2008. Non-Interest Income Non-interest income increased $585 thousand for the six months ended June 30, 2009 compared to the same period in 2008 to $4.6 million, due primarily to an increase of $533 thousand on the gain of the sale of mortgage loans and an increase of $188 thousand on gains recognized from the sale of securities. These increases were partially offset by a decrease in service charges of $38 thousand, trust department income of $35 thousand and other income of $68 thousand. The decrease in service charges was primarily the result of a decrease in overdraft income of $65 thousand for the first six months of 2009. The decrease in other non-interest income was primarily due to a decrease in brokerage income of $139 thousand partially offset by an increase in building rents of $43 thousand and an increase of $34 thousand in debit card interchange income. The $555 thousand increase in non-interest income for the three months ended June 30, 2009 compared to same time period in 2008 is primarily due to an increase of $316 thousand on the gain of the sale of mortgage loans and an increase of $191 thousand on gains recognized from the sale of securities. These gains were partially offset by a decrease in trust fees of $24 thousand for the three months ending June 30, 2009 compared to the same period a year ago. Gain on sale of mortgage loans increased from $278 thousand in the first six months of 2008 to $811 thousand during the first six months of 2009. For the three months ended June 30, 2009 compared to the same time period in 2008, the gain on sale of mortgage loans increased $316 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 $1.3 million for the six month period ended June 30, 2009 compared to the same period in 2008. For the three month period ended June 30, 2009, total non-interest expense increased $1.4 million. For the comparable six month periods, salaries and benefits increased $756 thousand, an increase of 14%. The increase in salaries & benefits is primarily attributed to the Company terminating the defined benefit plan offered to employees of the Company as of December 31, 2008. During the second quarter of 2009, the Company recognized $860 thousand for the final expenses related to terminating the plan. In addition, the Company has offered a voluntary separation option to various employees effective as early as August 31, 2009 and as late as October 31, 2009. The payouts for those electing this option are expected to occur in 2009, with future salary and benefit savings from those electing this option to be realized in the latter part of this year and in future periods. Salaries & benefits increased $856 thousand for the three month period ending June 30, 2009 compared to the same time period in 2008. Occupancy expenses decreased $77 thousand to $1,301 thousand for the first six months of 2009 compared to the same time period in 2008. Occupancy expenses decreased $4 thousand for the three month period ended June 30, 2009 compared to the same time period in 2008. The decrease in year to date occupancy expense during 2009 is mainly due to a reduction in depreciation expense. For the first six months ending June 30, 2009, depreciation expense decreased $88 thousand compared to the first six months 2008. The decrease in depreciation expense is due to assets with a high cost basis becoming fully depreciated at the end of 2008. In April of 2009, construction on the new Nicholasville location was completed and is expected to cause a slight increase in occupancy expense going forward. In addition to the relocation of the Nicholasville branch, during the second quarter of this year, the downtown Cynthiana location was consolidated with the Company's newer location in Cynthiana. On July 31, 2009, the North Middletown branch was closed. Management believes that consolidating these locations will reduce costs and improve net income. Other expenses increased $603 thousand for the first six months ended June 30, 2009 compared to the same time period in 2008. For the three month period ended June 30, 2009 other expenses increased $496 thousand compared to the three month period ended June 30, 2008. Increases in other expenses for both year to date and the three months ending June 30 are related to an increase in FDIC insurance expense. FDIC insurance expense increased $684 thousand for the first six months in 2009 compared to the same period a year ago and increased $466 thousand for the three months ending June 30, 2009 compared to the three months ending June 30, 2008. The increase in FDIC insurance is primarily the result of two things. The first being an increase in FDIC insurance premiums(see below for more details). The other being a special assessment that the FDIC assessed on all FDIC insured banks. This additional expense was not made formal until May of this year and cost the Company approximately $300 thousand which was expensed during the three months ending June 30, 2009. Deposit Insurance: In February 2009, the FDIC adopted a long-term deposit insurance fund ("DIF") restoration plan as well as an additional emergency assessment for 2009. The restoration plan increases base assessment rates for banks in all risk categories with the goal of raising the DIF reserve ratio from its current 0.40% to 1.15% within seven years. Banks in the best risk category, which include the Company's subsidiary bank, will pay initial base rates ranging from 12 to 16 basis points of assessable deposits beginning April 1, 2009, up from the initial base rate range of 12 to 14 basis points. Additionally, the FDIC approved an interim rule imposing a special emergency assessment to all financial institutions of 20 basis points of insured deposits as of June 30, 2009. The interim rule was subject to a 30-day comment period and in early March 2009 a proposal was introduced in Congress to lower the special emergency assessment to 10 basis points from the initial 20 basis points. The special emergency assessment is estimated to be $1.1 million for the Company as currently adopted under the 20 basis point rule and will be collected on September 30, 2009. The amount of the special emergency assessment would decrease to $530 thousand if the 10 basis point scenario is adopted. The FDIC is also permitted to impose an emergency special assessment after June 30, 2009 of up to 10 basis points if necessary to maintain public confidence in federal deposit insurance. The increase in assessments by the FDIC could have a material adverse effect on the Company's earnings. Temporary Liquidity Guarantee Program ("TLGP"): The TLGP consists of two separate programs implemented by the FDIC in October 2008. This includes the Debt Guarantee Program ("DGP") and the Transaction Account Guarantee Program ("TAGP"). These programs were initially provided at no cost to participants during the first 30 days. Eligible institutions that do not "opt out" of either of these programs become participants by default and will incur the fees assessed for taking part. Under the DGP, the FDIC will guarantee senior unsecured debt issued on or after October 14, 2008 through June 30, 2009 up to certain limits by participating entities. The FDIC will provide guarantee coverage for debt issued between those dates until the earlier of the maturity date of the debt or June 30, 2012. The Company chose to opt out of the DGP. Under the TAGP, the FDIC guarantees 100% of certain noninterest bearing transaction accounts up to any amount to participating FDIC insured institutions. The unlimited coverage is applicable until December 31, 2009. The Company opted to participate in the TAGP; as such, it will incur an additional quarterly-assessed 10 basis point fee on balances in noninterest bearing transaction accounts exceeding the recently increased $250 thousand deposit limit that became effective on November 13, 2008. The previous deposit insurance limit amount was $100 thousand. Emergency Economic Stabilization Act of 2008 ("EESA"): EESA was signed into law by the President on October 3, 2008 as a measure to stabilize and provide liquidity to the U.S. financial markets. Under EESA, the Troubled Asset Relief Program ("TARP") was created. TARP granted the Treasury authority to, among other things, invest in financial institutions and purchase troubled assets in an aggregate amount up to $700 billion. In connection with TARP, the Capital Purchase Program ("CPP") was launched on October 14, 2008. Under the CPP, the Treasury announced a plan to use up to $250 billion of TARP funds to purchase equity stakes in certain eligible financial institutions, including the Company. The Company was preliminarily approved for $13 million of equity capital in December 2008, and subsequently withdrew its application. Income Taxes The effective tax rate for the six months ended June 30, 2009 was 7.6% compared to 22.4% in 2008. The effective tax rate for the three months ended June 30, 2009 was (10.0%) compared to 23.5% for the three month period ended June 30, 2008. These rates are less than the statutory rate as a result of the tax-free securities and loans held by the Company. In addition, beginning in June of 2009, the Company began recognizing tax benefits the Company will receive from historic and low income housing credits. The rates for 2009 are lower due to the lower level of income for 2009. Nontaxable interest income increased $152 thousand for the first six months of 2009 compared to the same time period in 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. 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 June 30, 2009, 262,701 shares have been purchased under the program. The most recent share repurchase occurred on June 1, 2009. 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 $13.7 million as of June 30, 2009 compared to $37.1 million at December 31, 2008. The decrease in cash and cash equivalents is mainly attributable to a decrease in federal funds sold resulting primarily from a decrease in deposits and also a decrease in borrowings from the Federal Home Loan Bank. In addition to cash and cash equivalents, the securities portfolio provides an important source of liquidity. Securities available for sale totaled $172.1 million at June 30, 2009. 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 a public fund account which brought $20 million in deposits to the Company. The full $20 million was expected to roll off by June 30, 2009. As of June 30, 2009, $4 million remains with the Company. In addition, in early January 2009, the Company received deposits in the amount of $18 million as a result of being the successful bidder on a public fund account. As of June 30 2009, $9.2 million has rolled off with the remaining $6.8 million to roll off during the remainder of 2009 and another $2 million is expected to roll of during the first quarter of 2010. In July 2009, the Company was again successful with bidding on a public fund account and was rewarded with additional public fund deposits totaling $16 million. As of June 30, 2009, we have sufficient collateral to borrow an additional $41 million from the FHLB. In addition, as of June 30, 2009, over $30 million is available in overnight borrowing through various correspondent banks. In light of this, management believes there is sufficient liquidity to meet all reasonable borrower, depositor and creditor needs in the present economic environment. Non-Performing Assets As of June 30, 2009, the Company's non-performing loans totaled $13.4 million or 2.06% of loans compared to $9.2 million or 1.73% of loans at December 31, 2008. (See table below) The Company experienced an increase of $1.7 million in non-accrual loans from December 31, 2008 to June 30, 2009. As of June 30, 2009, non-accrual loans include $2.9 million in loans secured by 1-4 family residential real estate, $2.1 million in real estate construction and $2.0 million in loans secured by non-farm non-residential properties. Real estate loans composed 93% of the non-performing loans as of June 30, 2009 and 96% as of December 31, 2008. Forgone interest income on the non-accrual loans was $367 thousand for the first six months of 2009 compared to $312 thousand for the same time period in 2008. Nonperforming Assets 6/30/09 12/31/08 (in thousands) Non-accrual Loans $ 8,227 $ 6,562 Accruing Loans which are Contractually past due 90 days or more 375 779 Total Nonperforming and Restructured 8,602 7,341 Other Real Estate 4,838 1,840 Total Nonperforming and Restructured Loans and Other Real Estate $ 13,440 $ 9,181 Nonperforming and Restructured Loans as a Percentage of Loans 2.06% 1.73% Nonperforming and Restructured Loans and Other Real Estate as a Percentage of Total Assets 2.07% 1.35% Allowance as a Percentage of Period-end Loans 1.53% 1.29% Allowance as a Percentage of Non-performing and Restructured Loans 74% 60% Provision for Loan Losses The loan loss provision for the first six months ending June 30 was $900 thousand for both 2009 and 2008 The loan loss provision for the three months ended June 30, 2009 was $450 thousand and $500 thousand for the same period in 2008. The current level of nonperforming loans has caused management to keep the 2009 year to date the same as in 2008 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 recoveries for the six month period ended June 30, 2009 were $8 thousand compared to net charge-offs of $385 thousand for the same period in 2008. Net charge-offs for the three month period ended June 30, 2009 were $76 thousand compared to $197 thousand during the same time period in 2008. Future levels of charge-offs will be determined by the particular facts and circumstances surrounding individual loans. Management believes the current loan loss allowance is sufficient to meet probable incurred loan losses. Loan Losses Six Months Ended June 30, 2009 (in thousands) 2009 2008 Balance at Beginning of Period $ 5,465 $ 4,879 Amounts Charged-off: Commercial 67 5 Real Estate Construction 39 217 Real Estate Mortgage 82 55 Agricultural 6 12 Consumer 624 612 Total Charged-off Loans 818 901 Recoveries on Amounts Previously Charged-off: Commercial 2 5 Real Estate Construction 35 2 Real Estate Mortgage 387 12 Agricultural - 30 Consumer 402 467 Total Recoveries 826 516 Net Charge-offs (8) 385 Provision for Loan Losses 900 900 Balance at End of Period 6,373 5,394 Loans Average 418,375 412,549 At June 30 417,556 418,820 As a Percentage of Average Loans: Net Charge-offs 0.00% 0.09% Provision for Loan Losses 0.22% 0.22% Allowance as a Multiple of Net Charge-offs (398.3) 7.0 Loan Losses Quarter Ended June 30 (in thousands) 2009 2008 Balance at Beginning of Period $ 5,999 $ 5,091 Amounts Charged-off: Commercial 67 5 Real Estate Construction 36 92 Real Estate Mortgage 34 31 Consumer 353 254 Total Charged-off Loans 490 382 Recoveries on Amounts Previously Charged-off: Commercial 2 1 Real Estate Construction 35 - Real Estate Mortgage 152 5 Agricultural - 1 Consumer 225 178 Total Recoveries 414 185 Net Charge-offs 76 197 Provision for Loan Losses 450 500 Balance at End of Period 6,373 5,394 Loans Average 418,038 413,840 At June 30 417,556 418,820 As a Percentage of Average Loans: Net Charge-offs 0.02% 0.05% Provision for Loan Losses 0.11% 0.12% Allowance as a Multiple of Net Charge-offs 21.0 6.6 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 June 30, 2009 the projected percentage changes are within the Board approved limits with the only exception being rates falling 100 basis points. This period's volatility is higher in each rate shock in a falling rate environment when compared to the same period a year ago. In a rising rate environment, there is little change in the projected net interest income volatility between the two periods. The projected net interest income report summarizing the Company's interest rate sensitivity as of June 30, 2009 is as follows: PROJECTED NET INTEREST INCOME (dollars in thousands) Level Change in basis points: - 300 - 100 Rates + 100 + 300 Year One (7/09 - 6/10) Net interest income 20,407 21,487 22,415 22,957 23,420 Net interest income dollar change (2,008) (928) N/A 542 1,005 Net interest income percentage change -9.0% -4.1% N/A 2.4% 4.5% 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 June 30, 2008 is as follows: PROJECTED NET INTEREST INCOME (dollars in thousands) Level Change in basis points: - 300 - 100 Rates + 100 + 300 Year One (7/08 - 6/09) Net interest income 23,304 24,135 25,061 25,481 25,816 Net interest income dollar change (1,757) (926) N/A 420 755 Net interest income percentage change -7.0% -3.7% N/A 1.7% 3.0% Board approved limit >-10.0% >-4.0% N/A >-4.0% >-10.0% Projections from June 30, 2009, year one reflected a decline in net interest income of 4.1% with a 100 basis point decline compared to the 3.7% decline in 2008. The 100 basis point increase in rates reflected a 2.4% increase in net interest income in 2009 compared to 1.7% in 2008. EVE applies discounting techniques to future cash flows to determine the present value of assets, liabilities, and therefore equity. Based on applying these techniques to the June 30, 2009 balance sheet, a 300 basis point increase in rates results in a 11% decline in EVE. A 300 basis point decrease in rates results in a 1.5% 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, 2008 Form 10-K. Item 2. Unregistered Sales of Equity Securities and Use of Proceeds ISSUER PURCHASES OF EQUITY SECURITIES Period (a) Total (b) (c) Total Number (d) Maximum Number Number of Average of Shares (or Units) (or Approximate Dollar Shares (or Price Paid Purchased as Part Value) of Shares (or Units) Per Share of Publicly Units) that May Yet Be Purchased (or Unit) Announced Plans Purchased Under the Or Programs Plans of Programs 4/1/09 - 4/30/09 - - - 41,999 shares 5/1/09 - 5/31/09 2,000 17.60 2,000 39,999 shares 6/1/09 - 6/30/09 2,700 16.34 2,700 37,299 shares Total 4,700 4,700 37,299 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 June 30, 2009 262,701 shares have been purchased. Item 3. Defaults upon Senior Securities None Item 4. Submission of Matters to a Vote of Security Holders The registrant's 2009 Annual Meeting of Shareholders was held May 13, 2009. Proxies were solicited by the registrant's Board of Directors. There was no solicitation in opposition to the Board's nominees as listed in the proxy statement, and all of the nominees were elected by vote of the shareholders. Voting results for each nominee were as follows: Votes For Votes Withheld Betty J. Long 1,951,643 11,634 Ted McClain 1,936,253 27,024 Edwin S. Saunier 1,959,017 4,260 Buckner Woodford, IV 1,919,719 43,558 The following directors have a term of office that will continue following the Annual Meeting: Louis Prichard, B. Proctor Caudill, William Arvin, Henry Hinkle, Theodore Kuster, Robert Thompson and Woodford Van Meter. A proposal to approve the 2009 Stock Award Plan (attached hereto as Exhibit 10.1 and incorporated herein by reference) was approved by a majority of the outstanding shares of the registrant's common stock. A total of 1,383,809 shares were voted in favor of the proposal; 79,118 shares were voted against; 29,407 shares abstained; and 508,141 shares were broker non-votes. The total number of Common Shares outstanding as of May 13, 2009, the record date for the Annual Meeting of Shareholders, was 2,749,443. Item 5. Other Information None Item 6. Exhibits 10.1 2009 Stock Award 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 _____7/13/09_______ __/s/Louis Prichard______________ Louis Prichard, President and C.E.O. Date _____7/13/09_______ __/s/Gregory J. Dawson___________ Gregory J. Dawson, Chief Financial Officer 2 3 32 Lexlibrary/197885.1 EX-10 2 ex101.txt 2009 STOCK AWARD PLAN Exhibit 10.1 Kentucky Bancshares, Inc. 2009 Stock Award Plan SECTION 1 Purpose The purpose of the Kentucky Bancshares, Inc. 2009 Stock Award Plan (the "Plan") is to motivate and reward key employees, directors, advisory directors, consultants and advisers by giving them a proprietary interest in the Company's success. SECTION 2 Definitions As used in the Plan, the following terms shall have the meanings set forth below: "Award" shall mean any Option, Stock Appreciation Right, Restricted Stock or Other Stock-Based Award. "Award Agreement" shall mean any written or electronic notice of grant, agreement, contract or other instrument or document evidencing any Award, which may, but need not, be required to be executed, acknowledged or accepted by a Participant. "Board" shall mean the Board of Directors of the Company. "Code" shall mean the Internal Revenue Code of 1986, as amended from time to time. "Committee" shall mean, until otherwise determined by the Board, the Compensation Committee of the Board. "Common Stock" shall mean shares of common stock, no par value per share, of the Company. "Company" shall mean Kentucky Bancshares, Inc. "Designated Beneficiary" shall mean the beneficiary designated by the Participant, in a manner determined by the Board or Committee, to receive the benefits due the Participant under the Plan in the event of the Participant's death. In the absence of an effective designation by the Participant, Designated Beneficiary shall mean the Participant's estate. "Eligible Individual" shall mean (i) any person providing services as an officer and/or director or advisory director of the Company or a Subsidiary, whether or not employed by such entity, (ii) any employee of the Company or a Subsidiary, including any director who is also an employee of the Company or a Subsidiary, (iii) any officer or employee of an entity with which the Company has contracted to receive executive, management or legal services who provides services to the Company or a Subsidiary through such arrangement, (iv) any consultant or adviser to the Company, a Subsidiary or to an entity described in clause (iii) hereof who provides services to the Company or a Subsidiary through such arrangement and (v) any person who has agreed in writing to become a person described in clauses (i), (ii), (iii) or (iv) within not more than 30 days following the date of grant of such person's first Award under the Plan. "Exchange Act" shall mean the Securities Exchange Act of 1934, as amended from time to time. "Incentive Stock Option" shall mean an option granted under Section 6 of the Plan that is intended to meet the requirements of Section 422 of the Code or any successor provision thereto. "Nonqualified Stock Option" shall mean an option granted under Section 6 of the Plan that is not intended to be an Incentive Stock Option. "Option" shall mean an Incentive Stock Option or a Nonqualified Stock Option. "Other Stock-Based Award" shall mean any right or award granted under Section 9 of the Plan. "Participant" shall mean any Eligible Individual granted an Award under the Plan. "Person" shall mean any individual, corporation, partnership, limited liability company, association, joint-stock company, trust, unincorporated organization, government or political subdivision thereof or other entity. "Restricted Stock" shall mean any restricted stock granted under Section 8 of the Plan. "Section 162(m)" shall mean Section 162(m) of the Code and all regulations promulgated thereunder as in effect from time to time. "Shares" shall mean the shares of Common Stock and such other securities of the Company or a Subsidiary as the Board or Committee may from time to time designate. "Stock Appreciation Right" shall mean any right granted under Section 7 of the Plan. "Subsidiary" shall mean (i) any corporation or other entity in which the Company possesses directly or indirectly equity interests representing at least 50% of the total ordinary voting power or at least 50% of the total value of all classes of equity interests of such corporation or other entity and (ii) any other entity in which the Company has a direct or indirect economic interest that is designated as a Subsidiary by the Board or the Committee. SECTION 3 Administration and Delegation (a) Administration. The Board or Committee shall administer the Plan. Subject to the terms of the Plan and applicable law, and in addition to other express powers and authorizations conferred on the Board or Committee by the Plan, the Board and the Committee shall each have full power and authority to: 1. designate Participants; 2. determine the type or types of Awards to be granted to an Eligible Individual; 3. determine the number of Shares to be covered by, or with respect to which payments, rights or other matters are to be calculated in connection with, Awards; 4. determine the terms and conditions of any Award; 5. determine whether, to what extent, and under what circumstances Awards may be settled or exercised in cash, whole Shares, other whole securities, other Awards, other property or other cash amounts payable by the Company upon the exercise of that or other Awards, or canceled, forfeited or suspended and the method or methods by which Awards may be settled, exercised, canceled, forfeited or suspended; 6. determine whether, to what extent, and under what circumstances cash, Shares, other securities, other Awards, other property, and other amounts payable by the Company with respect to an Award shall be deferred either automatically or at the election of the holder thereof, the Board or the Committee; 7. interpret and administer the Plan and any instrument or agreement relating to, or Award made under, the Plan; 8. establish, amend, suspend or waive such rules and regulations and appoint such agents as it shall deem appropriate for the proper administration of the Plan; and 9. make any other determination and take any other action that the Board or Committee deems necessary or desirable for the administration of the Plan. Unless otherwise expressly provided in the Plan, all designations, determinations, interpretations and other decisions under or with respect to the Plan or any Award shall be within the sole discretion of the Committee. Such designations, determinations, interpretations and other decisions may be made at any time and shall be final, conclusive and binding upon all Persons, including the Company, any Subsidiary, any Participant, any holder or beneficiary of any Award, any stockholder of the Company and any Eligible Individual. (b) Delegation. Subject to the terms of the Plan and applicable law, the Board and the Committee may each delegate to one or more or their members, or to one or more agents, such administrative duties as they may deem advisable. The Board or the Committee, or any person to whom either has delegated duties as aforesaid, may employ one or more persons to render advice with respect to any responsibility of the Board, the Committee, or such person may have under the Plan. The Board and the Committee may each employ such legal or other counsel, consultants and agents as they may deem desirable for the administration of the Plan and may rely upon any opinion or computation received from any such counsel, consultant or agent. Expenses incurred by the Board and by the Committee in the engagement of such counsel, consultant or agent shall be paid by the Company, or the subsidiary or affiliate whose employees have benefitted from the Plan, as determined by the Board or the Committee. (c) Board Action. A majority of the whole Board shall constitute a quorum, and the acts of a majority of the members of the Board present at a meeting at which a quorum is present, or acts approved in writing by all of the members of the Board, shall be the acts of the Board for purposes of any action the Board takes permitted by this Plan. SECTION 4 Eligibility Any Eligible Individual shall be eligible to be granted an Award. SECTION 5 Shares Available; Adjustment (a) Shares Available for Awards. Subject to adjustment as provided in Section 5(b): 1. Calculation of Number of Shares Available. (i) Subject to the other provisions of this Section 5(a), the number of Shares with respect to which Awards payable in Shares may be granted under the Plan shall be 150,000 Awards that by their terms may be settled only in cash shall not be counted against the maximum number of Shares provided herein. (ii) The number of Shares that may be issued pursuant to Incentive Stock Options may not exceed 100,000 Shares. (iii) To the extent any Shares covered by an Award are not issued because the Award is forfeited or canceled or the Award is settled in cash, such Shares shall again be available for grant pursuant to new Awards under the Plan. (iv) In the event that Shares are issued as Restricted Stock or Other Stock-Based Awards under the Plan and thereafter are forfeited or reacquired by the Company pursuant to rights reserved upon issuance thereof, such Shares shall again be available for grant pursuant to new Awards under the Plan. (v) If the exercise price of any Option is satisfied by tendering Shares to the Company, only the number of Shares issued net of the Shares tendered shall be deemed issued for purposes of determining the maximum number of Shares available for issuance under Section 5(a)(i)(A). However, all of the Shares issued upon exercise shall be deemed issued for purposes of determining the maximum number of Shares that may be issued pursuant to Incentive Stock Options. 2. Shares Deliverable Under Awards. Any Shares delivered pursuant to an Award may consist of authorized and unissued Shares, Shares held by the Company or a Subsidiary and Shares acquired in the open market or otherwise obtained by the Company or a Subsidiary. The issuance of Shares may be effected on a non-certificated basis, to the extent not prohibited by applicable law or the applicable rules of any stock exchange. 3. Individual Limit. Any provision of the Plan to the contrary notwithstanding, no individual may receive in any year Awards under the Plan, whether payable in cash or Shares, that relate to more than 5000 Shares. 4. Use of Shares. Subject to the terms of the Plan and the overall limitation on the number of Shares that may be delivered under the Plan, the Board and the Committee may each use available Shares as the form of payment for compensation, grants or rights earned or due under any other compensation plans or arrangements of the Company or a Subsidiary and the plans or arrangements of the Company or a Subsidiary assumed in business combinations. (b) Adjustments. In the event that the Board or Committee determines that any dividend or other distribution (whether in the form of cash, Shares, Subsidiary securities, other securities or other property), recapitalization, stock split, reverse stock split, reorganization, merger, consolidation, split-up, spin-off, combination, repurchase or exchange of Shares or other securities of the Company, issuance of warrants or other rights to purchase Shares or other securities of the Company, or other similar corporate transaction or event affects the Shares such that an adjustment is determined by the Board or Committee to be appropriate to prevent dilution or enlargement of the benefits or potential benefits intended to be made available under the Plan, then the Board or Committee shall, in such manner as it may deem equitable, adjust any or all of (i) the number and type of Shares (or other securities or property) with respect to which Awards may be granted, (ii) the number and type of Shares (or other securities or property) subject to outstanding Awards, and (iii) the grant or exercise price with respect to any Award and, if deemed appropriate, make provision for a cash payment to the holder of an outstanding Award and, if deemed appropriate, adjust outstanding Awards to provide the rights contemplated by Section 10(b) hereof; provided, in each case, that with respect to Awards of Incentive Stock Options no such adjustment shall be authorized to the extent that such authority would cause the Plan to violate Section 422(b)(1) of the Code or any successor provision thereto and, with respect to all Awards under the Plan, no such adjustment shall be authorized to the extent that such authority would be inconsistent with the requirements for full deductibility under Section 162(m); and provided further that the number of Shares subject to any Award denominated in Shares shall always be a whole number. SECTION 6 Stock Options (a) Stock Options. Subject to the provisions of the Plan, the Board and the Committee shall each have the authority to determine the Eligible Individuals to whom Options shall be granted, the number of Shares to be covered by each Option, the option price thereof, the conditions and limitations applicable to the exercise of the Option and the other terms thereof. The Board and the Committee shall each have the authority to grant Incentive Stock Options, Nonqualified Stock Options or both. In the case of Incentive Stock Options, the terms and conditions of such grants shall be subject to and comply with such rules as may be required by Section 422 of the Code, as from time to time amended, and any implementing regulations; provided, however, that if, on the date of the grant of Incentive Stock Options, the Eligible Individual to whom such grant is to be made (together with persons whose stock ownership is attributed to such individual pursuant to Code Section 424(d)) owns securities possessing more than ten percent of the total combined voting power of all classes of stock of the Company or any of its subsidiaries, the exercise price will not be less than 110% of the fair market value of the Shares to which the Inventive Stock Option relates determined as of the date of the grant, and such Incentive Stock Options are not exercisable after the date five years from the date of the grant. Notwithstanding the foregoing, no Eligible Individual may be granted Incentive Stock Options which would result in Shares with an aggregate fair market value (measured on the date of the grant) of more than $100,000 first becoming exercisable in any one calendar year. (b) Exercise. Each Option shall be exercisable at such times and subject to such terms and conditions as the Board or Committee may specify in the applicable Award Agreement or thereafter, provided, however, that in no event may any Option granted hereunder be exercisable after the expiration of 10 years after the date of such grant. The Board or the Committee may each impose such conditions with respect to the exercise of Options, including without limitation, any condition relating to the application of Federal or state securities laws, as it may deem necessary or advisable. An Option may be exercised, in whole or in part, by giving written notice to the Company, specifying the number of Shares to be purchased. The exercise notice shall be accompanied by the full purchase price for the Shares. (c) Payment. The Option price shall be payable in United States dollars and may be paid by (i) cash or cash equivalent; (ii) delivery of shares of Common Stock, which shares shall be valued for this purpose at the fair market value (valued in accordance with procedures established by the Board or the Committee) as of the effective date of such exercise and, unless otherwise determined by the Board or the Committee, shall have been held by the optionee for at least six months; or (iii) in such other manner as may be authorized from time to time by the Board or the Committee. Prior to the issuance of Shares upon the exercise of an Option, a Participant shall have no rights as a shareholder. SECTION 7 Stock Appreciation Rights (a) Stock Appreciation Rights. Subject to the provisions of the Plan, the Board and the Committee shall each have authority to determine the Eligible Individuals to whom Stock Appreciation Rights shall be granted, the number of Shares to be covered by each Award of Stock Appreciation Rights, the grant price thereof, the conditions and limitations applicable to the exercise of the Stock Appreciation Right and the other terms thereof. Stock Appreciation Rights may be granted in tandem with another Award, in addition to another Award, or freestanding and unrelated to any other Award. Stock Appreciation Rights granted in tandem with or in addition to an Option or other Award may be granted either at the same time as the Option or other Award or at a later time. Stock Appreciation Rights shall not be exercisable after the expiration of 10 years after the date of grant. (b) A Stock Appreciation Right shall entitle the holder thereof to receive upon exercise, for each Share to which the Stock Appreciation Right relates, an amount equal to the excess, if any, of the fair market value of a Share on the date of exercise of the Stock Appreciation Right over the grant price. Any Stock Appreciation Right shall be settled in cash, unless the Board or the Committee shall determine at the time of grant of a Stock Appreciation Right that it shall or may be settled in cash, Shares or a combination of cash and Shares. SECTION 8 Restricted Stock (a) Grant of Restricted Stock. Subject to the provisions of the Plan, the Board and the Committee shall each have authority to determine the Eligible Individuals to whom Restricted Stock shall be granted, the number of Shares to be covered by each Award of Restricted Stock and the terms, conditions, and limitations applicable thereto. The Board and the Committee shall also each have authority to grant restricted stock units. Restricted stock units shall be subject to the requirements applicable to Other Stock- Based Awards under Section 9. An Award of Restricted Stock may be subject to the attainment of specified performance goals or targets, restrictions on transfer, forfeitability provisions and such other terms and conditions as the Board or Committee may determine, subject to the provisions of the Plan. An award of Restricted Stock may be made in lieu of the payment of cash compensation otherwise due to an Eligible Individual. To the extent that Restricted Stock is intended to qualify as "performance-based compensation" under Section 162(m), it must meet the additional requirements imposed thereby. (b) The Restricted Period. At the time that an Award of Restricted Stock is made, the Board or Committee shall establish a period of time during which the transfer of the Shares of Restricted Stock shall be restricted (the "Restricted Period"). Each Award of Restricted Stock may have a different Restricted Period. A Restricted Period of at least three years is required with incremental vesting of the Award over the three-year period permitted. However, if the grant or vesting of the Shares is subject to the attainment of specified performance goals, a Restricted Period of at least one year with incremental vesting is permitted. The expiration of the Restricted Period shall also occur as provided in the Award Agreement in accordance with Section 11(a) hereof. (c) Escrow. The Participant receiving Restricted Stock shall enter into an Award Agreement with the Company setting forth the conditions of the grant. Certificates representing Shares of Restricted Stock shall be registered in the name of the Participant and deposited with the Company, together with a stock power endorsed in blank by the Participant. Each such certificate shall bear a legend in substantially the following form: The transferability of this certificate and the shares of Common Stock represented by it are subject to the terms and conditions (including conditions of forfeiture) contained in the Kentucky Bancshares, Inc. Stock Award Plan (the "Plan") and a notice of grant issued thereunder to the registered owner by Kentucky Bancshares, Inc. Copies of the Plan and the notice of grant are on file at the principal office of Kentucky Bancshares, Inc. (d) Dividends on Restricted Stock. Any and all cash and stock dividends paid with respect to the Shares of Restricted Stock shall be subject to any restrictions on transfer, forfeitability provisions or reinvestment requirements as the Board or the Committee may, in its discretion, prescribe in the Award Agreement. (e) Forfeiture. In the event of the forfeiture of any Shares of Restricted Stock under the terms provided in the Award Agreement (including any additional Shares of Restricted Stock that may result from the reinvestment of cash and stock dividends, if so provided in the Award Agreement), such forfeited shares shall be surrendered and the certificates canceled. The Participants shall have the same rights and privileges, and be subject to the same forfeiture provisions, with respect to any additional Shares received pursuant to Section 5(b) or Section 10(b) due to a recapitalization, merger or other change in capitalization. (f) Expiration of Restricted Period. Upon the expiration or termination of the Restricted Period and the satisfaction of any other conditions prescribed by the Board or the Committee or at such earlier time as provided in the Award Agreement or an amendment thereto, the restrictions applicable to the Restricted Stock shall lapse and a stock certificate for the number of Shares of Restricted Stock with respect to which the restrictions have lapsed shall be delivered, free of all such restrictions and legends, except any that may be imposed by law, to the Participant or the Participant's estate, as the case may be. (g) Rights as a Shareholder. Subject to the terms and conditions of the Plan and subject to any restrictions on the receipt of dividends that may be imposed in the Award Agreement, each Participant receiving Restricted Stock shall have all the rights of a shareholder with respect to Shares of stock during any period in which such Shares are subject to forfeiture and restrictions on transfer, including without limitation, the right to vote such Shares. (h) Performance-Based Restricted Stock under Section 162(m). The Board or the Committee shall determine at the time of grant if a grant of Restricted Stock is intended to qualify as "performance-based compensation" as that term is used in Section 162(m). Any such grant shall be conditioned on the achievement of one or more performance measures. The performance measures pursuant to which the Other Stock-Based Award shall vest shall be any or a combination of the following: return on equity, earnings per share, total earnings, earnings growth, return on capital, return on assets, an economic value added measure, earnings before interest and taxes, sales growth, gross margin return on investment, share price (including, but not limited to, growth measures and total shareholder return), net operating profit, cash flow (including, but not limited to, operating cash flow and free cash flow), cash flow return on investments (which equals net cash flow divided by total capital), internal rate of return, increase in net present value or expense targets, reduction of expenses, containment of expenses within budget, reserve recognition, addition to reserves, of the Company or a Subsidiary. For any performance period, such performance objectives may be measured on an absolute basis or relative to a group of peer companies selected by the Board or the Committee, relative to internal goals or relative to levels attained in prior years. For grants of Restricted Stock intended to qualify as "performance-based compensation," the grants of Restricted Stock and the establishment of performance measures shall be made during the period required under Section 162(m). SECTION 9 Other Awards (a) Other Stock-Based Awards. The Board and the Committee each is hereby authorized to grant to Eligible Individuals an "Other Stock-Based Award", which shall consist of an Award that is not an instrument or Award specified in Sections 6 through 8 of this Plan, the value of which is based in whole or in part on the value of Shares, including a restricted stock unit. Other Stock-Based Awards may be awards of Shares or may be denominated or payable in, valued in whole or in part by reference to, or otherwise based on or related to, Shares (including, without limitation, securities convertible or exchangeable into or exercisable for Shares), as deemed by the Board or the Committee consistent with the purposes of the Plan. The Board or the Committee shall determine the terms and conditions of any such Other Stock-Based Award and may provide that such awards would be payable in whole or in part in cash. To the extent that an Other Stock-Based Award is intended to qualify as "performance-based compensation" under Section 162(m), it must be made subject to the attainment of one or more of the performance goals specified in Section 9(b) hereof and meet the additional requirements imposed by Section 162(m). Other Stock-Based Awards will comply with the timing and distribution requirements of Section 409A of the Code. (b) Performance-Based Other Stock-Based Awards under Section 162(m). The Board or the Committee shall determine at the time of grant if the grant of an Other Stock-Based Award is intended to qualify as "performance-based compensation" as that term is used in Section 162(m). Any such grant shall be conditioned on the achievement of one or more performance measures. The performance measures pursuant to which the Other Stock-Based Award shall vest shall be any or a combination of the following: return on equity, earnings per share, total earnings, earnings growth, return on capital, return on assets, an economic value added measure, earnings before interest and taxes, sales growth, gross margin return on investment, share price (including, but not limited to, growth measures and total shareholder return), net operating profit, cash flow (including, but not limited to, operating cash flow and free cash flow), cash flow return on investments (which equals net cash flow divided by total capital), internal rate of return, increase in net present value or expense targets, reduction of expenses, containment of expenses within budget, reserve recognition, addition to reserves, of the Company or a Subsidiary. For any performance period, such performance objectives may be measured on an absolute basis or relative to a group of peer companies selected by the Board or the Committee, relative to internal goals or relative to levels attained in prior years. For grants of Other Stock-Based Awards intended to qualify as "performance-based compensation," the grants of Other Stock-Based Awards and the establishment of performance measures shall be made during the period required under Section 162(m). (c) Equivalents. In the discretion of the Board or the Committee, an Award, whether made as an Other Stock-Based Award under this Section 9 or as an Award granted pursuant to Sections 6 through 8 hereof, may provide the holder thereof with dividends or dividend equivalents, payable in cash, Shares, Subsidiary securities, other securities or other property on a current or deferred basis. If paid on a deferred basis, then the timing and distribution requirements of an Award or Other Stock-Based Award will apply with Section 409A of the Code. SECTION 10 Amendment or Discontinuance of Plan; Adjustment of Awards; Cancellation of Awards (a) Amendment or Discontinuance of the Plan. The Board may amend or discontinue the Plan at any time; provided, however, that no such amendment may 1. without the approval of the stockholders, (i) increase, subject to adjustments permitted herein, the maximum number of shares of Common Stock that may be issued through the Plan, (ii) materially increase the benefits accruing to Participants under the Plan, (iii) materially expand the classes of persons eligible to participate in the Plan, or (iv) amend Section 10(c) to permit a reduction in the exercise price of Options; or 2. materially impair, without the consent of the recipient, an Award previously granted. (b) Adjustment of Awards Upon the Occurrence of Certain Unusual or Nonrecurring Events. The Board and the Committee is each hereby authorized to make adjustments in the terms and conditions of, and the criteria included in, Awards in recognition of unusual or nonrecurring events (including, without limitation, the events described in Section 5(b) hereof) affecting the Company, or the financial statements of the Company or any Subsidiary, or of changes in applicable laws, regulations, or accounting principles, whenever the Board or the Committee determines that such adjustments are appropriate to prevent dilution or enlargement of the benefits or potential benefits intended to be made available under the Plan. (c) Cancellation. Any provision of this Plan or any Award Agreement to the contrary notwithstanding, the Board or the Committee may cause any Award granted hereunder to be canceled in consideration of a cash payment or alternative Award made to the holder of such canceled Award equal in value to such canceled Award. Notwithstanding the foregoing, except for adjustments permitted under Sections 5(b) and 10(b) no action by the Board or the Committee shall cause a reduction in the exercise price of Options granted under the Plan without the approval of the stockholders of the Company. The determinations of value under this subparagraph shall be made by the Board or the Committee. SECTION 11 Provisions Applicable to All Awards (a) Award Agreements. Each Award hereunder shall be evidenced by an agreement or notice delivered to the Participant (by paper copy or electronically) that shall specify the terms and conditions thereof and any rules applicable thereto, including but not limited to the effect on such Award of the death, retirement or other termination of employment or cessation of consulting or advisory services of the Participant and the effect thereon, if any, of a change in control of the Company. (b) Withholding. 1. A Participant shall be required to pay to the Company, and the Company shall have the right to deduct from all amounts paid to a Participant (whether under the Plan or otherwise), any taxes required by law to be paid or withheld in respect of Awards hereunder to such Participant. The Board or the Committee may provide for additional cash payments to holders of Awards to defray or offset any tax arising from the grant, vesting, exercise or payment of any Award. 2. At any time that a Participant is required to pay to the Company an amount required to be withheld under the applicable tax laws in connection with the issuance of Shares under the Plan, the Participant may, if permitted by the Board or the Committee, satisfy this obligation in whole or in part by delivering currently owned Shares or by electing (the "Election") to have the Company withhold from the issuance Shares, which Shares shall have a value equal to the minimum amount required to be withheld. The value of the Shares delivered or withheld shall be based on the fair market value of the Shares on the date as of which the amount of tax to be withheld shall be determined in accordance with applicable tax laws (the "Tax Date"). 3. Each Election to have Shares withheld must be made prior to the Tax Date. If a Participant wishes to deliver Shares in payment of taxes, the Participant must so notify the Company prior to the Tax Date. (c) Transferability. No Awards granted hereunder may be transferred, pledged, assigned or otherwise encumbered by a Participant except: (i) by will; (ii) by the laws of descent and distribution; (iii) pursuant to a domestic relations order, as defined in the Code, if permitted by the Board or the Committee and so provided in the Award Agreement or an amendment thereto; or (iv) if permitted by the Board or Committee and so provided in the Award Agreement or an amendment thereto. Options granted in tandem therewith may be transferred or assigned (w) to Immediate Family Members, (x) to a partnership in which Immediate Family Members, or entities in which Immediate Family Members are the owners, members or beneficiaries, as appropriate, are the partners, (y) to a limited liability company in which Immediate Family Members, or entities in which Immediate Family Members are the owners, members or beneficiaries, as appropriate, are the members, or (z) to a trust for the benefit of Immediate Family Members; provided, however, that no more than a de minimus beneficial interest in a partnership, limited liability company or trust described in (x), (y) or (z) above may be owned by a person who is not an Immediate Family Member or by an entity that is not beneficially owned solely by Immediate Family Members. "Immediate Family Members" shall be defined as the spouse and natural or adopted children or grandchildren of the Participant and their spouses. To the extent that an Incentive Stock Option is permitted to be transferred during the lifetime of the Participant, it shall be treated thereafter as a Nonqualified Stock Option. Any attempted assignment, transfer, pledge, hypothecation or other disposition of Awards, or levy of attachment or similar process upon Awards not specifically permitted herein, shall be null and void and without effect. The designation of a Designated Beneficiary shall not be a violation of this Section 11(c). (d) Share Certificates. All certificates for Shares or other securities delivered under the Plan pursuant to any Award or the exercise thereof shall be subject to such stop transfer orders and other restrictions as the Board or Committee may deem advisable under the Plan or the rules, regulations, and other requirements of the Securities and Exchange Commission, any stock exchange upon which such Shares or other securities are then listed, and any applicable federal or state laws, and the Board or Committee may cause a legend or legends to be put on any such certificates to make appropriate reference to such restrictions. (e) No Fractional Shares. No fractional Shares shall be issued or delivered pursuant to the Plan or any Award, and the Board or Committee shall determine whether cash, other securities or other property shall be paid or transferred in lieu of any fractional Shares or whether such fractional Shares or any rights thereto shall be canceled, terminated, or otherwise eliminated. (f) Deferral Permitted. Payment of cash or distribution of any Shares to which a Participant is entitled under any Award shall be made as provided in the Award Agreement. Payment may be deferred at the option of the Participant if provided in the Award Agreement and such deferral complies with the timing and distribution requirements of Section 409A of the Code. SECTION 12 Miscellaneous (a) No Limit on Other Compensation Arrangements. Nothing contained in the Plan shall prevent the Company from adopting or continuing in effect other compensation arrangements, which may, but need not, provide for the grant of options, stock appreciation rights and other types of Awards provided for hereunder (subject to stockholder approval of any such arrangement if approval is required), and such arrangements may be either generally applicable or applicable only in specific cases. (b) No Right to Employment. The grant of an Award shall not be construed as giving a Participant the right to be retained in the employ of or as a consultant or adviser to the Company or any Subsidiary or in the employ of or as a consultant or adviser to any other entity providing services to the Company. The Company or any Subsidiary or any such entity may at any time dismiss a Participant from employment, or terminate any arrangement pursuant to which the Participant provides services to the Company or a Subsidiary, free from any liability or any claim under the Plan, unless otherwise expressly provided in the Plan or in any Award Agreement. No Eligible Individual or other person shall have any claim to be granted any Award, and there is no obligation for uniformity of treatment of Eligible Individuals, Participants or holders or beneficiaries of Awards. (c) Governing Law. The validity, construction, and effect of the Plan, any rules and regulations relating to the Plan and any Award Agreement shall be determined in accordance with the laws of the Commonwealth of Kentucky. (d) Severability. If any provision of the Plan or any Award is or becomes or is deemed to be invalid, illegal, or unenforceable in any jurisdiction or as to any Person or Award, or would disqualify the Plan or any Award under any law deemed applicable by the Board or the Committee, such provision shall be construed or deemed amended to conform to applicable laws, or if it cannot be construed or deemed amended without, in the determination of the Board or the Committee, materially altering the intent of the Plan or the Award, such provision shall be stricken as to such jurisdiction, Person or Award and the remainder of the Plan and any such Award shall remain in full force and effect. (e) No Trust or Fund Created. Neither the Plan nor any Award shall create or be construed to create a trust or separate fund of any kind or a fiduciary relationship between the Company and a Participant or any other Person. To the extent that any Person acquires a right to receive payments from the Company pursuant to an Award, such right shall be no greater than the right of any unsecured general creditor of the Company. (f) Compliance with Law. The Company intends that Awards granted under the Plan, or any deferrals thereof, will comply with the requirements of Section 409A of the Code and all regulations and guidance promulgated thereunder, to the extent applicable. (g) Headings. Headings are given to the subsections of the Plan solely as a convenience to facilitate reference. Such headings shall not be deemed in any way material or relevant to the construction or interpretation of the Plan or any provision thereof. SECTION 13 Term of the Plan Subject to Section 10(a), no Awards may be granted under the Plan later than ten years after the date the Plan was adopted by the Board; provided, however, that Awards granted prior to such date shall remain in effect until such Awards have either been satisfied, expired or canceled under the terms of the Plan or the individual Award Agreement, and any restrictions imposed on Shares in connection with their issuance under the Plan have lapsed. SECTION 14 Liability and Indemnification (a) No Liability. No member of the Board or the Committee or any officer or employee of the Company or its subsidiaries shall be personally liable for any act or failure to act, decision or determination made in good faith in connection with the Plan hereunder, except in circumstances involving his or her bad faith, gross negligence or willful misconduct. By participating in the Plan, each Participant agrees to release and hold harmless the Company and its subsidiaries (and their respective directors, officers and employees), the Board and the Committee from and against any tax liability, including, but not limited to, interest and penalties, incurred by the Participant in connection with his or her receipt of an Award and the payment and exercise thereof. (b) Indemnification. Each person who is or has been a member of the Board or Committee will be indemnified and held harmless by the Company against and from: (a) any loss, cost, liability or expense (including, but not limited to, attorneys' fees) that may be imposed upon or reasonably incurred by him or her in connection with or resulting from any claim, action, suit or proceeding to which he or she may be a party or in which he or she may be involved by reason of any action taken or failure to act under the Plan or any Award Agreement; and (b) any and all amounts paid by him or her in settlement thereof, with the Company's prior written approval, or paid by him or her in satisfaction of any judgment in any such claim, action, suit or proceeding against him or her; provided, however, that he or she must give the Company an opportunity, at the Company's expense, to handle and defend such claim, action, suit or proceeding before he or she undertakes to handle and defend the same on his or her own behalf. The foregoing right of indemnification is not exclusive of any other rights of indemnification to which such persons may be entitled under the Company's Articles of Incorporation or Bylaws, by contract, as a matter of law or otherwise, or under any power that the Company may have to indemnify them or hold them harmless. SECTION 15 Effective Date of the Plan The Plan shall become effective on May 13, 2009, the date of its adoption by the Company's shareholders. ****** The foregoing is the full text of the Stock Award Plan adopted by the shareholders of Kentucky Bancshares, Inc. on May 13, 2009. 46 33 EX-31 3 ex311.txt CEO CERTIFICATION Exhibit 31.1 CERTIFICATIONS OF CHIEF EXECUTIVE OFFICER PURSUANT TO SECTION 302 OF SARBANES-OXLEY ACT I, Louis Prichard, certify that: 1. I have reviewed this quarterly report on Form 10-Q of Kentucky Bancshares, Inc.; 2. Based on my knowledge, this 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: August 13, 2009 BY /s/ Louis Prichard Louis Prichard President & Chief Executive Officer 47 EX-31 4 ex312.txt CFO CERTIFICATION Exhibit 31.2 CERTIFICATIONS OF CHIEF FINANCIAL OFFICER PURSUANT TO SECTION 302 OF SARBANES-OXLEY ACT I, Gregory J. Dawson, certify that: 1. I have reviewed this quarterly report on Form 10-Q of Kentucky Bancshares, Inc.; 2. Based on my knowledge, this 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: August 13, 2009 BY /s/ Gregory J. Dawson Gregory J. Dawson Chief Financial Officer 49 EX-32 5 ex32.txt CEO & CFO CERTIFICATION Exhibit 32 CERTIFICATIONS OF CHIEF EXECUTIVE OFFICER AND CHIEF FINANCIAL OFFICER PURSUANT TO 18 U.S.C. SECTION 1350 (AS ADOPTED PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002) In connection with the Quarterly Report of Kentucky Bancshares, Inc. (the "Company") on Form 10-Q for the period ended June 30, 2009, as filed with the Securities and Exchange Commission on the date hereof (the "Report"), the undersigned, the Chief Executive Officer and Chief Financial Officer of the Company, certify, pursuant to 18 U.S.C. Section 1350, that: (1) The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and (2) The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company. Date: August 13, 2009 By /s/ Louis Prichard Louis Prichard President & Chief Executive Officer Date: August 13, 2009 By /s/ Gregory J. Dawson Gregory J. Dawson Chief Financial Officer 51 Lexlibrary/197885.1 -----END PRIVACY-ENHANCED MESSAGE-----