UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
(Mark One)
[ X ] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 2005
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: 33-96358 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
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act: None
Indicate by check mark if the registrant is a well-known seasoned issuer, as
defined in Rule 405 of the Securities Act. Yes No _X_
Indicate by check mark if the registrant is not required to file reports to
Section 13 or Section 15(d) of the Exchange Act. Yes No _X_
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 if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [ X ]
Indicate by check mark whether the registrant is a large accelerated filer,
an accelerated filer, or a non-accelerated filer. See definition of
"accelerated filer and large accelerated filer" in Rule 12b-2 of the
Exchange Act.
Large accelerated filer _ Accelerated filer _ Non-accelerated filer X
Aggregate market value of voting stock held by non-affiliates as of June 30, 2005 was approximately $66.9 million. For purposes of this calculation, it is assumed that the Bank's Trust Department, directors, executive officers and beneficial owners of more than 5% of the registrant's outstanding voting stock are affiliates.
Number of shares of Common Stock outstanding as of March 28, 2006:
2,672,672.
PART I
Item 1. Business
General
Kentucky Bancshares, Inc. ("Company" or "Kentucky") is a Kentucky corporation organized in 1981 and a bank and savings and loan holding company registered under the Bank Holding Company Act of 1956, as amended ("BHCA") and the Home Owners Loan Act of 1933, as amended ("HOLA").
The Company conducts business in the state of Kentucky through one banking subsidiary, Kentucky Bank. Kentucky Bank is a commercial bank and trust company organized under the laws of Kentucky. Kentucky Bank has its main office in Paris (Bourbon County), with additional offices in Paris, North Middletown (Bourbon County), Winchester (Clark County), Cynthiana (Harrison County), Nicholasville (Jessamine County), Wilmore (Jessamine County), Georgetown (Scott County), and Versailles (Woodford County). The deposits of Kentucky Bank are insured up to prescribed limits by the Bank Insurance Fund ("BIF") and the Savings Association Insurance Fund ("SAIF"), both of the Federal Deposit Insurance Corporation ("FDIC"). Kentucky Bank is engaged in general full-service commercial and consumer banking. Kentucky Bank makes commercial, agricultural and real estate loans to its commercial customers, with emphasis on small-to-medium-sized industrial, service and agricultural businesses. Kentucky Bank makes residential mortgage, installment and other loans to its individual and other non-commercial customers. Kentucky Bank also offers its customers the opportunity to obtain a credit card. Kentucky Bank offers its customers a variety of other services, including checking, savings, money market accounts, certificates of deposits, safe deposit facilities and other consumer-oriented financial services. Kentucky Bank has Internet banking, including bill payment available to its customers at www.kybank.com. Through its Wealth Management Department, Kentucky Bank provides brokerage services, annuities, life and long term care insurance, personal trust and agency services (including management agency services).
Competition
The Company and its subsidiary face vigorous competition from a number of sources, including other bank holding companies and commercial banks, consumer finance companies, thrift institutions, other financial institutions and financial intermediaries. In addition to commercial banks, savings and loan associations, savings banks and credit unions actively compete to provide a wide variety of banking services. Mortgage banking firms, finance companies, insurance companies, brokerage companies, financial affiliates of industrial companies and government agencies provide additional competition for loans and for many other financial services. The subsidiary also currently competes for interest-bearing funds with a number of other financial intermediaries, including brokerage firms and mutual funds, which offer a diverse range of investment alternatives. Some of the Company's competitors are not subject to the same degree of regulatory review and restrictions that apply to the Company and its subsidiary bank. In addition, the Company must compete with much larger financial institutions that have greater financial resources than the Company.
Supervision and Regulation
As a bank holding company, the Company is subject to the regulation and supervision of the Federal Reserve Board. The Company's subsidiary is subject to supervision and regulation by applicable state and federal banking agencies, including the Federal Reserve Board, the Federal Deposit Insurance Corporation and the Kentucky Office of Financial Institutions. The subsidiary is also subject to various requirements and restrictions under federal and state law, including requirements to maintain reserves against deposits, restrictions on the types and amounts of loans that may be granted and the interest that may be charged thereon, and limitations on the types of investments that may be made and the types of services that may be offered. In addition to the impact of regulation, the subsidiary is affected significantly by the actions of the Federal Reserve Board as it attempts to control the money supply and credit availability in order to influence the economy.
There are a number of obligations and restrictions imposed on bank holding companies and their depository institution subsidiaries by federal law and regulatory policy that are designed to reduce potential loss exposure to the depositors of such depository institutions and to the FDIC insurance funds in the event the depository institution becomes in danger of default or is in default. For example, under a policy of the Federal Reserve Board with respect to bank holding company operations, a bank holding company is required to serve as a source of financial strength to its subsidiary depository institutions and commit resources to support such institutions in circumstances where it might not do so absent such policy. In addition, the "cross-guarantee" provisions of federal law require insured depository institutions under common control to reimburse the FDIC for any loss suffered or reasonably anticipated as a result of the default of a commonly controlled insured depository institution or for any assistance provided by the FDIC to a commonly controlled insured depository institution in danger of default.
The federal banking agencies have broad powers under current federal law to take prompt corrective action to resolve problems of insured depository institutions. The extent of these powers depends upon whether the institutions in question are "well capitalized", "adequately capitalized", "undercapitalized", "significantly undercapitalized" or "critically undercapitalized", as such terms are defined under uniform regulation defining such capital levels issued by each of the federal banking agencies.
In addition to the laws and regulations discussed above, Kentucky Bank is also subject to certain consumer laws and regulations that are designed to protect consumers in transactions with banks. While the list set forth herein is not exhaustive, these laws and regulations include the Truth in Lending Act, the Truth in Savings Act, the Electronic Funds Transfer Act, the Expedited Funds Availability Act, the Equal Credit Opportunity Act, the Real Estate Settlement Procedures Act, the Fair Housing Act and the Fair and Accurate Transactions Act, among others. These laws and regulations mandate certain disclosure requirements and regulate the manner in which financial institutions must deal with clients when taking deposits or making loans. These laws also limit Kentucky Bank's ability to share information with affiliated and unaffiliated entities. The bank must comply with the applicable provisions of these consumer protection laws and regulations as part of its ongoing business operations.
There are various legal and regulatory limits on the extent to which the Company's subsidiary bank may pay dividends or otherwise supply funds to the Company. In addition, federal and state regulatory agencies also have the authority to prevent a bank or bank holding company from paying a dividend or engaging in any other activity that, in the opinion of the agency, would constitute an unsafe or unsound practice. Dividends paid by the subsidiary bank have provided substantially all of the Company's operating funds, and this may reasonably be expected to continue for the foreseeable future.
Employees
At December 31, 2005, the number of full time equivalent employees of the Company was 172.
Item 1A. Risk Factors
There are factors, many beyond our control, which may significantly change the results or expectations of the Company. Some of these factors are described below in the sections titled financial risk, business risk and operational risk. These risks are not totally independent of each other. Some factors affect more than one type of risk. These include regulatory, economic, and competitive environments. As part of the annual audit plan, our internal risk management department meets with management to assess these risks throughout the Company. Many risks are further addressed in other sections of this Form 10-K document.
The exercise of regulatory power may have negative impact on the Company's results of operations and financial condition. The Company is subject to extensive regulation, supervision and examination by federal and state banking authorities. Any change in applicable regulations or federal or state legislation could have a substantial impact on our operations. Additional legislation and regulations may be enacted or adopted in the future that could significantly affect the Company's powers, authority and operations, which could have a material adverse effect on the financial condition and results of operations. Further, regulators have significant discretion and power to prevent or remedy unsafe or unsound practices or violations of laws by banks and bank holding companies in the performance of their supervisory and enforcement duties.
Significant decline in general economic conditions, locally and nationally, will negatively affect the financial results of the Company's banking operations. The Company's success depends on general economic conditions both locally and nationally. Most of our customers are in the Central Kentucky area. Our customers are directly impacted by the local economy, as well as the national or global economies. Local economic conditions (such as the effect of the tobacco buyout on the agricultural industry) have an impact on the demand of customers for loans, the ability of some borrowers to repay these loans and the value of the collateral securing these loans. Factors influencing general national economic conditions include the change in interest rates (particularly mortgage lending rates), oil prices, inflation, recession and unemployment. As these factors impact the overall business climate, they can have a significant effect on loan demand. Loan growth is critical to our profitability.
The Company faces vigorous competition from banks and other financial institutions. This competition may reduce or limit our margins on banking services, reduce market share and adversely affect results of operations and financial condition. A number of these banks and other financial institutions have substantially greater resources and lending limits, larger branch systems and a wider array of banking services. Additionally, the Company encounters competition from both de novo and smaller community banks entering the markets we are currently in. The Company also competes with other providers of financial services, such as money market mutual funds, brokerage firms, consumer finance companies and insurance companies.
Financial Risk
Financial risk components include, but are not limited to, credit risk, interest rate risk, market risk and liquidity risk. The Company has adopted various policies to minimize potential adverse effects of interest rate, market and liquidity risks. However, even with these policies in place, a change in interest rates could negatively impact the Company's results of operations or financial position.
Defaults in the repayment of loans may negatively impact our business. Credit risk is most closely associated with lending activities at financial institutions. Credit risk is the risk to earnings and capital when a customer fails to meet the terms of any contract or otherwise fails to perform as agreed. Credit risk arises from all activities where the Company is dependent on issuer, borrower, or counterparty performance, not just traditional lending activities. For example, the investment security portfolio has inherent credit risk as do counterparties in derivative contracts. Credit risk encompasses a broad range of financial institution activities and includes items reflected both on and off the balance sheet.
Management makes various assumptions and judgments about the collectibility of the Company's loan portfolio, including the creditworthiness of its borrowers and the value of real estate and other assets serving as collateral for repayment of many of the loans. In determining the size of the allowance for loan losses, management considers, among other factors, the Company's loan loss experience and an evaluation of economic conditions. If these assumptions prove to be incorrect, the current allowance may not be sufficient to cover future loan losses and adjustments may be necessary to allow for different economic conditions or adverse developments in the loan portfolio. Material additions to the Company's allowance would materially decrease our net income.
Fluctuations in interest rates may negatively impact our banking business. Interest rate risk focuses on the impact to earnings and capital arising from movements in interest rates. Interest rate risk focuses on the value implications for accrual portfolios (e.g., held-to-maturity and available- for-sale portfolios) and includes the potential impact to the Company's accrual earnings as well as the economic perspective of the market value of portfolio equity. The interest rate risk is comprised of repricing risk, basis risk, yield curve risk and options risk. Repricing risk represents the risk associated with the differences in timing of cash flows and rate changes with the Company's products. Basis risk represents the risk associated with changing rate relationships among varying yield curves. Yield curve risk is associated with changing rate relationships over the maturity structure. Options risk is associated with interest-related options, which are embedded in our products.
Changes in market factors may negatively affect the value of our investment assets. Market risk focuses on the impact to earnings and capital arising from changes in market factors (e.g., interest rates, market liquidity, volatilities, etc.) that affect the value of traded instruments. Market risk includes items reflected both on and off the balance sheet. Market risk focuses primarily on mark-to-market portfolios (e.g., accounts revalued for financial statement presentation), including trading accounts and certain derivatives.
Our inability to maintain appropriate levels of liquidity may have a negative impact on our results of operations and financial condition. Liquidity risk focuses on the impact to earnings and capital resulting from the Company's inability to meet its obligations as they become due in the normal course of business without incurring significant losses. It also includes the management of unplanned decreases or changes in funding sources as well as managing changes in market conditions, which could affect the ability to liquidate assets in the normal course of business without incurring significant losses. Liquidity risk includes items both on and off the balance sheet.
Business Risk
Business risk is composed mainly of legal (compliance) risk, strategic risk and reputation risk.
Our results of operations and financial condition are susceptible to legal or compliance risks. Legal or compliance risk is the risk to earnings or capital arising from the impact of unenforceable contracts, lawsuits, adverse judgments, violations or nonconformance with laws, rules, regulations, prescribed practices, or ethical standards. The risk also arises in situations where laws or rules governing certain products or activities of our customers may be ambiguous or untested. This risk is not limited to the traditional thinking that legal/compliance risk is only associated with consumer protection laws. It includes the exposure to litigation from all aspects of both traditional and nontraditional financial institution activities.
Incorrect strategic decisions may have a negative impact on our results of operations and financial condition. Strategic risk is the risk to earnings and capital arising from adverse business decisions or improper implementation of those decisions. Strategic risk focuses on more than an analysis of the written strategic plan. Its focus is on how plans, systems and implementation affect franchise value. It also incorporates how management analyzes external factors that affect the Company's strategic direction.
Adverse publicity may have a negative impact on our business. Reputation risk is the risk to earnings and capital arising from negative public opinion. This affects the ability to establish new relationships or services or to continue servicing existing relationships. Examiners will assess reputation risk by recognizing the potential effect the public's opinion could have on the Company's franchise value.
Operational Risk
An inability to process transactions may have a negative impact on our business. Operational risk is present on a daily basis through the Company's processing of transactions and is pervasive in all products and services provided to our customers. It can be defined as the impact to earnings and capital from problems encountered in processing transactions. Operational risk is a function of internal controls, operating processes, management information systems, and employee integrity.
Item 1B. Unresolved Staff Comments
None.
Item 2. Properties
The main banking office of Kentucky Bank, which also serves as the principal office of Kentucky Bancshares, Inc., is located at Fourth and Main Streets, Paris, Kentucky 40361. In addition, Kentucky Bank serves customer needs at 11 other locations. All locations offer a full range of banking services. Kentucky Bank owns all of the properties at which it conducts its business. The Company owns approximately 76,000 square feet of office space.
Note 5 to the Company's consolidated financial statements included in this
report contains additional information relating to amounts invested in
premises and equipment.
Item 3. Legal Proceedings
The Company and its subsidiary are from time to time involved in routine legal proceedings occurring in the ordinary course of business that, in the aggregate, management believes will not have a material impact on the Company's financial condition and results of operation.
Item 4. Submission of Matters to a Vote of Security Holders
Not Applicable.
PART II
Item 5. Market for Common Equity and Related Stockholder Matters
There is no established public trading market for the Company's Common Stock. The Company's Common Stock is not listed on any national securities exchange nor is it quoted on the NASDAQ system. However, it is traded on the OTC Bulletin Board under the symbol "KTYB.OB". Trading in the Common Stock has been infrequent, with retail brokerage firms making the market. The following table sets forth the high and low closing sales prices of the Common Stock from the OTC Bulletin Board and the dividends declared thereon, for the periods indicated below:
High Low Dividend
2005 Quarter 4 $30.50 $29.25 $.23
Quarter 3 30.50 29.50 .23
Quarter 2 30.50 28.05 .23
Quarter 1 31.00 29.25 .23
2004 Quarter 4 $32.50 $30.50 $.21
Quarter 3 33.00 31.00 .21
Quarter 2 34.00 31.00 .21
Quarter 1 34.77 31.79 .21
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Note 16 to the Company's consolidated financial statements included in this
report contains additional information relating to amounts available to be
paid as dividends.
As of December 31, 2005 the Company had 2,666,897 shares of Common Stock outstanding and approximately 478 holders of record of its Common Stock.
The table below lists 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
10/1/05 -
10/31/05 6,400 $30.25 6,400 94,691 shares
11/1/05 -
11/30/05 -0- N/A N/A 94,691 shares
12/1/05 -
12/31/05 -0- N/A N/A 94,691 shares
Total 6,400 6,400 94,691 shares
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On October 25, 2000, the Company announced that its Board of Directors approved a stock repurchase program. The Company is authorized to purchase up to 100,000 shares of its outstanding common stock. On November 11, 2002, the Board of Directors approved and authorized the Company's repurchase of an additional 100,000 shares. Shares will be purchased from time to time in the open market depending on market prices and other considerations. Through December 31, 2005, 105,309 shares have been purchased, with the most recent share repurchase under the Board-approved stock repurchase program having occurred on October 31, 2005.
Item 6. Selected Financial Data
The following selected financial data should be read in conjunction with the Company's Consolidated Financial Statements and the accompanying notes presented elsewhere herein.
At or For the Year Ended December 31
(dollars and shares in thousands, except per share amounts)
2005 2004 2003 2002 2001
CONDENSED STATEMENT OF INCOME:
Total Interest Income $28,897 $25,846 $22,329 $24,788 $28,046
Total Interest Expense 11,766 9,067 7,875 9,367 13,386
Net Interest Income 17,131 16,779 14,454 15,421 14,660
Provision for Losses 508 840 1,300 1,204 1,068
Net Interest Income After
Provision for Losses 16,623 15,939 13,154 14,217 13,592
Noninterest Income 6,749 6,796 6,707 6,590 5,672
Noninterest Expense 15,474 14,755 14,171 12,433 11,756
Income Before Income
Tax Expense 7,898 7,980 5,690 8,374 7,508
Income Tax Expense 2,078 2,218 1,457 2,471 1,984
Net Income 5,820 5,762 4,233 5,903 5,524
SHARE DATA:
Basic Earnings per Share (EPS) $2.17 $2.09 $1.52 $2.13 $1.98
Diluted EPS 2.16 2.07 1.50 2.10 1.95
Cash Dividends Declared 0.92 0.84 0.76 0.68 0.60
Book Value 17.45 16.77 16.90 15.90 14.13
Average Common Shares-Basic 2,677 2,757 2,781 2,770 2,790
Average Common Shares-Diluted 2,692 2,777 2,827 2,806 2,837
SELECTED BALANCE SHEET DATA:
Loans, including loans held for sale $366,602 $354,294 $316,941 $281,499 $272,129
Investment Securities 160,652 126,767 128,790 89,509 75,608
Total Assets 572,750 528,544 500,852 419,771 397,257
Deposits 431,631 387,955 384,599 322,836 308,915
Securities sold under agreements to
repurchase and other borrowings 16,838 25,593 7,285 5,277 1,602
Federal Home Loan Bank advances 66,749 59,750 53,232 43,937 43,598
Stockholders' Equity 46,546 45,027 46,057 44,092 39,100
PERFORMANCE RATIOS:
(Average Balances)
Return on Assets 1.08% 1.11% 1.00% 1.48% 1.46%
Return on Stockholders' Equity 12.69% 12.57% 9.31% 14.27% 14.60%
Net Interest Margin (1) 3.50% 3.60% 3.79% 4.23% 4.22%
Equity to Assets (annual average) 8.50% 8.82% 10.73% 10.36% 9.99%
SELECTED STATISTICAL DATA:
Dividend Payout Ratio 42.30% 39.97% 50.00% 31.94% 30.28%
Number of Employees (at period end) 172 167 182 173 180
ALLOWANCE COVERAGE RATIOS:
Allowance to Total Loans 1.16% 1.16% 1.19% 1.19% 1.24%
Net Charge-offs as a Percentage of
Average Loans 0.10% 0.15% 0.43% 0.43% 0.39%
(1) Tax equivalent
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Item 7. Management's Discussion and Analysis
The following discussion and analysis of financial condition and results of operations should be read in conjunction with the Consolidated Financial Statements and accompanying notes included as Exhibit 13. When necessary, reclassifications have been made to prior years' data throughout the following discussion and analysis for purposes of comparability with 2005 data.
Critical Accounting Policies
The accounting and reporting policies of the Company and its subsidiary are in accordance with accounting principles generally accepted in the United States and conform to general practices within the banking industry. Significant accounting policies are listed in Note 1 in the "Notes to Consolidated Financial Statements". Critical accounting and reporting policies include accounting for loans and the allowance for loan losses. Different assumptions in the application of these policies could result in material changes in the consolidated financial position or consolidated results of operations.
Loans are stated at the amount of unpaid principal, reduced by an allowance for loan losses. Interest on loans is recognized on the accrual basis, except for those loans on the nonaccrual status. Interest income received on such loans is accounted for on the cash basis or cost recovery method. The allowance for loan losses is a valuation allowance for probable incurred credit losses. 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. The accounting policies relating to the allowance for loan losses involve the use of estimates and require significant judgments to be made by management.
Forward-Looking Statements
This discussion contains forward-looking statements under the Private Securities Litigation Reform Act of 1995 that involve risks and uncertainties. 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 (both generally and more specifically in the markets, including the tobacco market, in which the Company and its bank operate); competition for the Company's customers from other providers of financial and mortgage services; government legislation, regulation and monetary policy (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 republish revised forward-looking statements to reflect events or circumstances after the date hereof or to reflect the occurrence of unanticipated events.
Recent Developments
On February 24, 2006, the Company entered into an Agreement and Plan
of Merger whereby Peoples Bancorp of Sandy Hook, Inc will merge with
and into the Company. Pursuant to the Agreement, the Company will
merge with Peoples Bancorp of Sandy Hook, Inc., a privately held $87
million asset bank holding company with offices in Morehead and Sandy
Hook, Kentucky. The consummation of the transaction is subject to
ordinary and customary closing conditions, including regulatory
approval and the approval of Peoples Bancorp stockholders. Pursuant
to the Agreement, in connection with the merger each share of Peoples
Bancorp common stock will be converted into cash and shares of
Kentucky Bancshares common stock. Total consideration for the
transaction will be $14,000,000. Based on the market price of
the Company's common stock on the date of the Agreement,
approximately 190,000 shares of the Company's common stock would be
issued to Peoples Bancorp shareholders; in no event will more than
215,385 shares or less than 164,706 shares be issued in the
transaction.
Overview
Net income for the year ended December 31, 2005 was $5.8 million, or $2.17 per common share compared to $5.8 million, or $2.09 for 2004 and $4.2 million, or $1.52 for 2003. Earnings per share assuming dilution were $2.16, $2.07 and $1.50 for 2005, 2004 and 2003, respectively. For 2005, net income increased $58 thousand, or 1%. Net interest income increased $352 thousand, the loan loss provision decreased $332 thousand, other income decreased $48 thousand, while total other expenses increased $719 thousand.
For 2004, net income increased $1.5 million, or 36%. Net interest income increased $2.3 million, the loan loss provision decreased $460 thousand, other income increased $89 thousand, while other expenses increased $584 thousand. During 2003, the Company completed a strategic acquisition to strengthen its business and grow its customer base. In November 2003, the Company purchased Kentucky First Bancorp, Inc. (Kentucky First) and its subsidiary, First Federal Savings Bank (First Federal) of Cynthiana. Lack of loan demand, tightening margins and one time expenses related to closing the original leased facility in Georgetown and the merger of Kentucky First adversely affected 2003 earnings.
Return on average equity was 12.7% in 2005 compared to 12.6% in 2004 and 9.3% in 2003. Return on average assets was 1.08% in 2005 compared to 1.11% in 2004 and 1.00% in 2003.
Non-performing loans as a percentage of loans (including held for sale) were 0.26%, 0.58% and 0.82% as of December 31, 2005, 2004 and 2003, respectively.
RESULTS OF OPERATIONS
Net Interest Income
Net interest income, the Company's largest source of revenue, on a tax equivalent basis increased from $15.1 million in 2003 to $17.4 million in 2004 and to $17.7 million in 2005. The taxable equivalent adjustment (nontaxable interest income on state and municipal obligations net of the related non-deductible portion of interest expense) is based on our Federal income tax rate of 34%.
Average earning assets and interest bearing liabilities both increased from 2004 to 2005. Average earning assets increased $23 million, or 5%. Investment securities decreased $7 million primarily due to maturities and calls of securities. These proceeds were used primarily to fund loans. Loans increased $23 million as a result of improved loan demand. Average interest bearing liabilities increased $15 million, or 4% during this same period. The Company continues to actively pursue quality loans and fund these primarily with deposits and FHLB advances.
During the second half of 2004 rates started increasing and this pattern has continued. Bank prime rates increased 125 basis points during 2004 and another 200 basis points in 2005. As a result of this, the tax equivalent yield on earning assets increased from 5.47% in 2004 to 5.82% in 2005.
The volume rate analysis for 2005 that follows indicates that $1.4 million of the increase in interest income is attributable to the change in volume, while the increase in rates contributed to an increase of $1.7 million in interest income. The rate increase also caused an increase in the cost of interest bearing liabilities. The average rate of these liabilities increased from 2.25% in 2004 to 2.82% in 2005. Based on the volume rate analysis that follows, the change in volume contributed to an increase of $293 thousand to interest expense, while the increase in rates was responsible for a $2.4 million increase in interest expense. As a result, the 2005 net interest income increase is attributed to increases in volume reduced by the negative impact of increases in rates, more on the liability side than the asset side.
The volume rate analysis that follows, during 2004, indicates that $4.5 million of the increase in interest income is attributable to the change in volume, while the lower level of rates contributed to a decrease of $995 thousand in interest income. This low level of rates also caused a decrease in the cost of interest bearing liabilities. The average rate of these liabilities decreased from 2.49% in 2003 to 2.25% in 2004. In addition, the change in volume contributed to an increase of $2.3 million in interest expense, while the low level of rates was responsible for a $1.1 million decrease in interest expense. As a result, the 2004 net interest income increase is primarily attributed to increases in volume.
Following the 2004 enactment of federal legislation to end the federal tobacco program and to compensate quota owners and producers, the Company offered tobacco quota owners and producers upfront, lump- sum payment buyouts ranging from 75% to 80% of the future stream of federal buyout payments during 2005. The Company made $11.7 million in lump-sum payments in January 2006 under successor in interest contracts. Similar types of buyouts are expected to continue over the next few years, but on a smaller scale. These buyouts will generate additional net interest income starting in January 2006.
In spite of the positive impact on net interest income that may result from the increasing rate environment beginning in 2004 and continuing into 2006, competitive pressures on interest rates will continue and are likely to result in only modest increases in net interest margins.
The accompanying analysis of changes in net interest income in the following table shows the relationships of the volume and rate portions of these changes in 2005 and 2004. Changes in interest income and expenses due to both rate and volume are allocated on a pro rata basis.
2005 vs. 2004 2004 vs. 2003
Increase (Decrease) Due to Change in Increase (Decrease) Due to Change in
Volume Rate Net Change Volume Rate Net Change
INTEREST INCOME
Loans $ 1,455 $ 1,448 $ 2,903 $ 2,942 $ (1,047) $ 1,895
Investment Securities (258) 54 (204) 1,626 24 1,650
Federal Funds Sold and
Securities Purchased under
Agreements to Resell 173 177 350 (61) 27 (34)
Deposits with Banks (9) 11 2 5 1 6
Total Interest Income 1,361 1,690 3,051 4,512 (995) 3,517
INTEREST EXPENSE
Deposits
Demand 54 994 1,048 88 54 142
Savings 8 103 111 38 0 38
Negotiable Certificates of
Deposit and Other
Time Deposits 111 1,145 1,256 776 (501) 275
Securities sold under
agreements to
repurchase and
other borrowings (98) 291 193 780 (147) 633
Federal Home Loan
Bank advances 218 (127) 91 575 (472) 103
Total Interest Expense 293 2,406 2,699 2,257 (1,066) 1,191
Net Interest Income $ 1,068 $ (716) $ 352 $ 2,255 $ 71 $ 2,326
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Average Consolidated Balance Sheets and Net Interest Analysis (dollars in thousands)
2005 2004 2003
Average Average Average Average Average Average
Balance Interest Rate Balance Interest Rate Balance Interest Rate
ASSETS
Interest-Earning Assets
Securities Available for Sale (1)
U.S. Treasury and Federal Agency Securities 92,524 3,366 3.64% 97,486 3,510 3.60% 56,559 1,907 3.37%
State and Municipal obligations 34,888 1,444 4.14% 35,762 1,518 4.24% 32,702 1,431 4.38%
Other Securities 6,085 285 4.68% 7,035 271 3.85% 7,971 311 3.90%
Total Securities Available for Sale 133,497 5,095 3.82% 140,283 5,299 3.78% 97,232 3,649 3.75%
Total Investment Securities 133,497 5,095 3.82% 140,283 5,299 3.78% 97,232 3,649 3.75%
Tax Equivalent Adjustment 614 0.46% 638 0.45% 611 0.63%
Tax Equivalent Total 5,709 4.28% 5,937 4.23% 4,260 4.38%
Federal Funds Sold and Agreements to Repurchase 11,471 417 3.64% 4,620 67 1.45% 9,307 101 1.09%
Interest-Bearing Deposits with Banks 321 12 3.74% 827 10 1.21% 441 4 0.91%
Loans, Net of Deferred Loan Fees (2)
Commercial 31,151 1,958 6.29% 28,874 1,564 5.42% 26,871 1,522 5.66%
Real Estate Mortgage 321,619 20,660 6.42% 299,062 17,989 6.02% 249,924 15,779 6.31%
Installment 8,962 755 8.42% 10,529 917 8.71% 13,707 1,274 9.29%
Total Loans 361,732 23,373 6.46% 338,465 20,470 6.05% 290,502 18,575 6.39%
Total Interest-Earning Assets 507,021 29,511 5.82% 484,195 26,484 5.47% 397,482 22,940 5.77%
Allowance for Loan Losses (4,401) (4,090) (3,324)
Cash and Due From Banks 10,927 10,642 9,252
Premises and Equipment 11,025 11,787 10,840
Other Assets 15,054 17,494 9,713
Total Assets 539,626 520,028 423,963
LIABILITIES
Interest-Bearing Deposits
Negotiable Order of Withdrawal ("NOW")
and Money Market Investment Accounts 103,625 1,832 1.77% 97,267 784 0.81% 86,039 642 0.75%
Savings 29,303 235 0.80% 27,547 124 0.45% 19,213 86 0.45%
Certificates of Deposit and Other Deposits 193,986 6,114 3.15% 189,739 4,858 2.56% 160,651 4,583 2.85%
Total Interest-Bearing Deposits 326,914 8,181 2.50% 314,553 5,766 1.83% 265,903 5,311 2.00%
Securities sold under agreements to
repurchase and other borrowings 26,689 1,098 4.11% 29,664 905 3.05% 5,385 272 5.05%
Federal Home Loan Bank advances 63,918 2,487 3.89% 58,421 2,396 4.10% 45,561 2,293 5.03%
Total Interest-Bearing Liabilities 417,521 11,766 2.82% 402,638 9,067 2.25% 316,849 7,876 2.49%
Noninterest-Bearing Earning Demand Deposits 73,320 68,730 58,263
Other Liabilities 2,929 2,814 3,371
Total Liabilities 493,770 474,182 378,483
STOCKHOLDERS' EQUITY 45,856 45,846 45,480
Total Liabilities and Shareholders' Equity 539,626 520,028 423,963
Average Equity to Average Total Assets 8.50% 8.82% 10.73%
Net Interest Income 17,131 16,779 14,453
Net Interest Income (tax equivalent) (3) 17,745 17,417 15,064
Net Interest Spread (tax equivalent) (3) 3.00% 3.22% 3.28%
Net Interest Margin (tax equivalent) (3) 3.50% 3.60% 3.79%
(1) Averages computed at amortized cost.
(2) Includes loans on a nonaccrual status and loans held for sale.
(3) Tax equivalent difference represents the nontaxable interest income on state and municipal securities net of the
related non-deductible portion of interest expense.
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Noninterest Income and Expenses
Noninterest income was $6.7 million in 2005 compared to $6.8 million in 2004 and $6.7 million in 2003. Increased service charges and trust department income in 2005 have been offset by a reduction in securities gains in 2005. The increase in 2004 is primarily from an increase in service charges.
Securities gains were $64 thousand in 2005, $289 thousand in 2004 and $139 thousand in 2003. The lower gains in 2005 are primarily attributable to rising interest rates and the related inverse relationship of interest rates and market values. The gains in 2004 were primarily a result of the Company taking advantage of the inverse relationship of interest rates and market values, and municipal securities being called at premiums before their maturities. In addition, U. S. Treasury securities were sold before maturity to recognize some gains and extend out the yield curve.
Gains on loans sold were $334 thousand, $376 thousand and $853 thousand in 2005, 2004 and 2003, respectively. Loans held for sale are generally sold after closing to the Federal Home Loan Mortgage Corporation. During 2005, the loan service fee income increased $16 thousand, compared to an increase of $4 thousand in 2004. Proceeds from the sale of loans were $19 million, $30 million and $37 million in 2005, 2004 and 2003, respectively. The volume of loan originations is inverse to rate changes. The increasing rate environment during 2004 and 2005 unfavorably impacted our mortgage loan originations. The volume of loan originations during 2005 decreased to $18 million from $22 million in 2004.
Other noninterest income excluding security net gains and gain on sale of mortgage loans was $6.4 million in 2005, $6.1 million in 2004 and $5.7 million in 2003. Service charge income, and more particularly overdraft income, is the largest contributor to these numbers. Overdraft income was $3.4 million in 2005, $3.4 million in 2004 and $3.1 million in 2003. Other income has remained steady with $1.1 million in 2003, $1.2 million in 2004 and $1.1 million in 2005.
Noninterest expense increased $719 thousand in 2005 to $15.5 million, and increased $584 thousand in 2004 to $14.8 million from $14.2 million in 2003. The increases in salaries and benefits from $7.4 million in 2003 to $8.1 million in 2004 and to $8.5 million in 2005 are attributable to normal salary and benefit increases. Bonus compensation was $124 thousand higher in 2005 compared to 2004 and $108 thousand higher in 2004 compared to 2003. The 2005 increase is mainly a result of additional sales incentives, while the 2004 increase is mainly a result of improved net income. Occupancy expense decreased $61 thousand in 2004 to $2.2 million and increased $136 thousand, or 10% in 2004 to $2.2 million. The largest expense, depreciation, increased slightly from $961 thousand in 2003, to $994 thousand in 2004 and decreased $69 thousand to $925 thousand in 2005. Other noninterest expense decreased from $4.8 million in 2003 to $4.4 million in 2004 and increased to $4.7 million in 2005. The 2003 total includes $350 thousand in legal and professional expenses, including merger related legal and consulting expenses amounted of $230 thousand. The subsequent decrease in 2004 is mainly from the legal and professional expenses in 2003 related to the merger. During 2005, marketing increased $95 thousand from $378 thousand to $474 thousand, and other taxes increased $51 thousand.
The following table is a summary of noninterest income and expense for the three-year period indicated.
For the Year Ended December 31
(in thousands)
2005 2004 2003
NON-INTEREST INCOME
Service Charges $ 4,511 $ 4,358 $ 4,065
Loan Service Fee Income 263 246 242
Trust Department Income 458 299 302
Investment Securities Gains (Losses),net 65 289 139
Gains on Sale of Mortgage Loans 334 376 853
Other 1,118 1,228 1,106
Total Non-interest Income 6,749 6,796 6,707
NON-INTEREST EXPENSE
Salaries and Employee Benefits 8,548 8,053 7,373
Occupancy Expenses 2,194 2,255 2,045
Other 4,732 4,447 4,753
Total Non-interest Expense 15,474 14,755 14,171
Net Non-interest Expense as a
Percentage of Average Assets 1.62% 1.53% 1.76%
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Income Taxes
The Company had income tax expense of $2.1 million in 2005 and $2.2 million in 2004 and $1.5 million in 2003. This represents an effective income tax rate of 26.3% in 2005, 27.8% in 2004 and 25.6% in 2003. The difference between the effective tax rate and the statutory federal rate of 34% is primarily due to tax exempt income on certain investment securities and loans.
Balance Sheet Review
Assets grew from $529 million at December 31, 2004 to $573 million at December 31, 2005. Loan growth was $13 million in 2005. Deposits grew $44 million and FHLB borrowings grew $7 million. Assets at year-end 2004 totaled $529 million compared to $501 million in 2003. In 2004, loan growth was $45 million and deposit growth was $3 million. FHLB borrowings increased $7 million.
Loans
Total loans (including loans held for sale) were $371 million at December 31, 2005 compared to $358 million at the end of 2004 and $321 million in 2003. Loan growth continued to improve in 2005. The increase is mainly attributable to improved loan demand. As of the end of 2005 and compared to the prior year-end, commercial loans increased $7.3 million, real estate construction loans decreased $2.4 million, real estate mortgage loans (including loans held for sale) increased $6.7 million, agricultural loans increased $1.8 million and installment loans decreased $108 thousand. As of the end of 2004 and compared to the prior year-end, commercial loans increased $5.7 million, real estate construction loans increased $17.9 million, real estate mortgage loans (including loans held for sale) increased $16.3 million, agricultural loans increased $882 thousand and installment loans decreased $3.9 million.
As of December 31, 2005, the real estate mortgage portfolio comprised 66% of total loans compared to 67% in 2004. Of this, 1-4 family residential property represented 65% in 2005 and 67% in 2004. Agricultural loans comprised 16% in 2005 and 16% in 2004 of the loan portfolio. Approximately 82% of the agricultural loans are secured by real estate in 2005 compared to 80% in 2004. The remainder of the agricultural portfolio is used to purchase livestock, equipment and other capital improvements and for general operation of the farm. Generally, a secured interest is obtained in the capital assets, equipment, livestock or crops. Automobile loans account for 33% in 2005 and 31% in 2004 of the consumer loan portfolio, while the purpose of the remainder of this portfolio is used by customers for purchasing retail goods, home improvement or other personal reasons. The commercial loan portfolio is mainly for capital outlays and business operation. Collateral is requested depending on the creditworthiness of the borrower. Unsecured loans are made to individuals or companies mainly based on the creditworthiness of the customer. Approximately 3% of the loan portfolio is unsecured. Management is not aware of any significant concentrations that may cause future material risks, which may result in significant problems with future income and capital requirements.
The following table represents a summary of the Company's loan portfolio by category for each of the last five years. There is no concentration of loans (greater than 5% of the loan portfolio) in any industry. The Company has no foreign loans or highly leveraged transactions in its loan portfolio.
Loans Outstanding
At December 31 (in thousands)
2005 2004 2003 2002 2001
Commercial $ 27,302 $ 19,999 $ 14,278 $ 16,803 $ 18,618
Real Estate Construction 29,822 32,256 14,313 15,514 12,302
Real Estate Mortgage 245,326 238,661 222,342 182,958 168,684
Agricultural 59,328 57,497 56,615 52,188 53,640
Installment 8,954 9,062 12,978 17,134 21,952
Other 368 991 289 309 338
Total Loans 371,100 358,466 320,815 284,906 275,534
Less Deferred Loan Fees 188 10 54 12 19
Total Loans, Net of
Deferred Loan Fees 370,912 358,456 320,761 284,894 275,515
Less loans held for sale 0 175 7,759 740 2,343
Less Allowance For Loan Losses 4,310 4,163 3,820 3,395 3,386
Net Loans 366,602 354,118 309,182 280,759 269,786
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The following table sets forth the maturity distribution and interest sensitivity of selected loan categories at December 31, 2005. Maturities are based upon contractual term. The total loans in this report represent loans net of deferred loan fees, including loans held for sale but excluding the allowance for loan losses. In addition, deferred loan fees on the above schedule is netted with real estate mortgage loans on the following schedule.
Loan Maturities and Interest Sensitivity
At December 31, 2005 (in thousands)
One Year One Through Over Total
or Less Five Years Five Years Loans
Commercial $ 15,547 $ 9,175 $ 2,580 $ 27,302
Real Estate Construction 21,771 6,425 1,626 29,822
Real Estate Mortgage 28,467 123,726 92,945 245,138
Agricultural 11,970 41,753 5,605 59,328
Installment 3,710 5,035 209 8,954
Other 368 0 0 368
Total Loans, Net of
Deferred Loan Fees 81,833 186,114 102,965 370,912
Fixed Rate Loans 20,885 160,735 33,481 215,101
Floating Rate Loans 60,948 25,379 69,484 155,811
Total Loans, Net of
Deferred Loan Fees 81,833 186,114 102,965 370,912
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Mortgage Banking
The Company has been in Mortgage Banking since the early 1980's. The activity in origination and sale of these loans fluctuates, mainly due to changes in interest rates. Mortgage loan originations decreased from $43 million in 2003 to $22 million in 2004, to $18 million in 2005. Proceeds from the sale of loan were $19 million, $30 million and $37 million for the years 2005, 2004 and 2003, respectively. Mortgage loans held for sale decreased from $175 thousand at December 31, 2004 to zero at December 31, 2005. Loans are generally sold when they are made. The volume of loan originations is inverse to rate changes. The rate environment in 2004 and 2005 has been rising, and therefore resulting in decreased loan originations in 2005 and 2004. The effect of these changes was also reflected on the income statement. As a result, the gain on sale of mortgage loans was $333 thousand in 2005 compared to $376 thousand in 2004 and $853 thousand in 2003.
The Bank has sold various loans to the Federal Home Loan Mortgage Corporation (FHLMC) while retaining the servicing rights. Gains and losses on loan sales are recorded at the time of the cash sale, which represents the premium or discount paid by the FHLMC. The Bank receives a servicing fee from the FHLMC on each loan sold. Servicing rights are capitalized based on the relative fair value of the rights and the expected life of the loan and are included in intangible assets on the balance sheet and expensed in proportion to, and over the period of, estimated net servicing revenues. Mortgage servicing rights were $802 thousand at December 31, 2005, $876 thousand at December 31, 2004 and $861 thousand at December 31, 2003. Amortization of mortgage servicing rights was $253 thousand, $249 thousand and $224 thousand for the years ended December 31, 2005, 2004 and 2003, respectively. See Note 4 in the notes to consolidated financial statements included as Exhibit 13 for additional information.
Deposits
Total deposits increased to $432 million in 2005, up $44 million from 2004. Noninterest bearing deposits decreased $1.9 million, time deposits of $100 thousand and over increased $2.1 million, and other interest bearing deposits increased $43.4 million. Public funds totaled $85 million at the end of 2005 ($84 million was interest bearing), an increase of $46 million over the end of 2004.
For 2004, total deposits increased $3 million to $388 million. Noninterest bearing deposits increased $9 million, while time deposits of $100 thousand and over increased $10 million, and other interest bearing deposits decreased $15 million. Public funds totaled $39 million at the end of 2004 ($37 million was interest bearing).
The table below provides information on the maturities of time deposits of $100,000 or more at December 31, 2005:
Maturity of Time Deposits of $100,000 or More
At December 31, 2005
(in thousands)
Maturing 3 Months or Less $14,266
Maturing over 3 Months through 6 Months 17,247
Maturing over 6 Months through 12 Months 19,011
Maturing over 12 Months 11,073
Total $61,597
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Borrowings
The Company utilizes both long and short term borrowing. Long term borrowing at the Bank is mainly from the Federal Home Loan Bank (FHLB). This borrowing is mainly used to fund longer term, fixed rate mortgages, as part of a leverage strategy and to assist in asset/liability management. Advances are either paid monthly or at maturity. FHLB advances were $66.7 million at December 31, 2004. During 2005, $7.9 million of FHLB borrowing was paid, and advances were made for an additional $15 million. The 2005 advances were obtained mainly to fund fixed rate loans, as detailed above. As of December 31, 2004, $59.7 million was borrowed from FHLB, an increase of $6.5 million from 2003. In 2004, $18.4 million of FHLB advances were paid, and advances were made for an additional $25 million. During 2004, repurchase agreements were obtained as part of a $20 million leverage transaction. The following table depicts relevant information concerning our short term borrowings.
Short Term Borrowings
As of and for the year ended
December 31 (in thousands)
2005 2004 2003
Federal Funds Purchased:
Balance at Year end $ 1,470 $ 6,383 $ 5,266
Average Balance During the Year 3,001 3,706 249
Maximum Month End Balance 15,919 11,306 5,266
Year end rate 4.25% 2.50% 1.19%
Average annual rate 2.95% 1.52% 1.46%
Repurchase Agreements:
Balance at Year end $14,346 $18,314 $ 1,791
Average Balance During the Year 16,014 18,398 1,691
Maximum Month End Balance 18,072 21,947 2,411
Year end rate 3.18% 2.94% 1.65%
Average annual rate 3.13% 1.90% 1.34%
Other Borrowed Funds:
Balance at Year end $ 1,021 $ 896 $ 228
Average Balance During the Year 457 343 1,048
Maximum Month End Balance 1,021 1,011 1,777
Year end rate 4.00% 1.87% 0.73%
Average annual rate 3.10% 1.51% 7.27%
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Contractual Obligations
The Bank has required future payments for a defined benefit retirement plan, time deposits and long-term debt. See Note 13 to the consolidated financial statements for further information on the defined benefit retirement plan. The other required payments under such commitments at December 31, 2005 are as follows:
Payments due by period (in thousands)
Less More
than 1 1-3 3-5 than 5
Contractual Obligations Total year years years years
FHLB advances $ 66,749 $ 13,183 $20,435 $22,555 $10,576
Subordinated debentures 7,217 - - - 7,217
Time deposits 192,951 149,083 41,719 2,149 -
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Asset Quality
With respect to asset quality, management considers three categories of assets to merit close scrutiny. These categories include: loans that are currently nonperforming, other real estate, and loans that are currently performing but which management believes require special attention.
During periods of economic slowdown, the Company may experience an increase in nonperforming loans.
The Company discontinues the accrual of interest on loans that become 90 days past due as to principal or interest unless reasons for delinquency are documented such as the loan being well collateralized and in the process of collection. A loan remains in a non-accrual status until factors indicating doubtful collection no longer exist. A loan is classified as a restructured loan when the interest rate is materially reduced or the term is extended beyond the original maturity date because of the inability of the borrower to service the interest payments at market rates. Other real estate is recorded at the lower of cost or fair market value less estimated costs to sell. A summary of the components of nonperforming assets, including several ratios using period-end data, is shown below.
Nonperforming Assets
At December 31 (dollars in thousands)
2005 2004 2003 2002 2001
Non-accrual Loans $ 774 $1,781 $1,844 $1,573 $ 935
Accruing Loans which are
Contractually past due
90 days or more 206 308 779 789 1,278
Restructured Loans 0 0 0 0 0
Total Nonperforming Loans 980 2,089 2,623 2,362 2,213
Other Real Estate 141 676 375 172 212
Total Nonperforming Assets 1,121 2,765 2,998 2,534 2,425
Total Nonperforming Loans as a
Percentage of Loans (including
loans held for sale) (1) 0.26% 0.58% 0.82% 0.83% 0.80%
Total Nonperforming Assets
as a Percentage of Total Assets 0.20% 0.52% 0.60% 0.60% 0.61%
Allowance to nonperforming assets 3.84 1.51 1.27 1.34 1.40
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(1) Net of deferred loan fees
Total nonperforming assets at December 31, 2005 were $1.1 million compared to $2.8 million at December 31, 2004 and $3.0 million at December 31, 2003. The decrease from 2004 to 2005 is attributable to the decrease in various loans being put on non-accrual and less in other real estate. Total nonperforming loans were $1.0 million, $2.1 million and $2.6 million at December 31, 2005, 2004 and 2003, respectively. The non-accrual loan decrease from 2004 to 2005 is mainly attributable to more concentration on improving loan quality. The amount of lost interest on our non-accrual loans is immaterial. At December 31, 2005, loans currently performing but which management believes require special attention were not significant. The Company continues to follow its long-standing policy of not engaging in international lending and not concentrating lending activity in any one industry.
Impaired loans as of December 31, 2005 were $800 thousand compared to $1.8 million in 2004 and $1.8 million in 2003. These amounts are included in the total nonperforming and restructured loans presented in the table above. See Note 4 in the notes to consolidated financial statements included as Exhibit 13.
A loan is considered impaired when it is probable that all principal and interest amounts will not be collected according to the loan contract. The allowance for loan losses on impaired loans is determined using the present value of estimated future cash flows of the loan, discounted at the loan's effective interest rate or the fair value of the underlying collateral. The entire change in present value of expected cash flows is reported as a provision for loan losses in the same manner in which impairment initially was recognized or as a reduction in the amount of provision for loan losses that otherwise would be reported. The total allowance for loan losses related to these loans was $240 thousand, $416 thousand and $345 thousand on December 31, 2005, 2004 and 2003, respectively.
Loan Losses
The following table is a summary of the Company's loan loss experience for each of the past five years.
For the Year Ended December 31 (in thousands)
2005 2004 2003 2002 2001
Balance at Beginning of Year $ 4,163 $ 3,820 $ 3,395 $ 3,386 $ 3,388
Balance of Allowance for Loan
Losses of Acquired Bank
at Acquisition Date 0 0 363 0 0
Amounts Charged-off:
Commercial 146 197 569 536 178
Real Estate Construction 0 0 0 18 0
Real Estate Mortgage 134 110 276 69 171
Agricultural 21 88 24 5 46
Consumer 225 293 529 701 751
Total Charged-off Loans 526 688 1,398 1,329 1,146
Recoveries on Amounts
Previously Charged-off:
Commercial 3 10 11 15 4
Real Estate Mortgage 11 42 1 19 2
Agricultural 16 21 21 10 1
Consumer 135 118 127 90 69
Total Recoveries 165 191 160 134 76
Net Charge-offs 361 497 1,238 1,195 1,070
Provision for Loan Losses 508 840 1,300 1,204 1,068
Balance at End of Year 4,310 4,163 3,820 3,395 3,386
Total Loans (1)
Average 361,732 338,465 290,502 281,105 273,504
At December 31 370,912 358,456 320,761 284,894 275,515
As a Percentage of Average Loans (1):
Net Charge-offs 0.10% 0.15% 0.43% 0.43% 0.39%
Provision for Loan Losses 0.14% 0.25% 0.45% 0.43% 0.39%
Allowance as a Percentage of
Year-end Loans (1) 1.16% 1.16% 1.19% 1.19% 1.23%
Beginning Allowance as a Multiple
of Net Charge-offs 11.5 7.7 2.7 2.8 3.2
Ending Allowance as a Multiple
of Nonperforming Assets 3.84 1.51 1.27 1.34 1.40
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(1) Including loans held for sale, net of deferred loan fees
Loans are typically charged-off after being 120 days delinquent. Limited exceptions for not charging-off a loan would be well documented and approved by the appropriate responsible party or committee. The provision for loan losses for 2005 was $508 thousand compared to $840 thousand in 2004 and $1.3 million in 2003. Net charge-offs were $362 thousand in 2005, $497 thousand in 2004 and $1.3 million in 2003. Net charge-offs to average loans were 0.10%, 0.15% and 0.43% in 2005, 2004 and 2003, respectively. Based on the quality of the loan portfolio, the loan loss provision decreased $332 thousand from 2004 to 2005 and decreased $460 thousand from 2003 to 2004. In evaluating the allowance for loan losses, management considers the composition of the loan portfolio, the historical loan loss experience, the overall quality of the loans and an assessment of current economic conditions. The recent improvement in the economy along with management's emphasis on improving the lending process resulted in fewer loan losses, lower loan loss provision and improved loan quality numbers in 2005 and 2004. At December 31, 2005, the allowance for loan losses was 1.16% of loans outstanding compared to 1.16% at year-end 2004 and 1.19% in 2003. Management believes the allowance for loan losses at the end of 2005 is adequate to cover probable and incurred credit losses within the portfolio.
The following tables set forth an allocation for the allowance for loan losses and loans by category and a percentage distribution of the allowance allocation. In making the allocation, management evaluates the risk in each category, current economic conditions and charge-off experience. An allocation for the allowance for loan losses is an estimate of the portion of the allowance that will be used to cover future charge-offs in each loan category, but it does not preclude any portion of the allowance allocated to one type of loan being used to absorb losses of another loan type.
Allowance for Loan Losses
At December 31 (in thousands)
2005 2004 2003 2002 2001
Dollars Percentage Dollars Percentage Dollars Percentage Dollars Percentage Dollars Percentage
Commercial $ 507 11.77% $ 350 8.41% $ 262 6.86% $ 820 24.15% $ 291 8.59%
Real Estate Construction 566 13.14% 566 13.60% 266 6.96% 216 6.36% 194 5.73%
Real Estate Mortgage 1,785 41.42% 1,801 43.26% 1,804 47.23% 1,166 34.34% 1,602 47.31%
Agricultural 1,023 23.74% 1,028 24.69% 995 26.05% 698 20.56% 693 20.47%
Consumer 428 9.93% 418 10.04% 493 12.91% 495 14.58% 606 17.90%
Total $ 4,309 100.00% $ 4,163 100.00% $ 3,820 100.00% $ 3,395 100.00% $ 3,386 100.00%
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Loans
2005 2004 2003 2002 2001
Dollars Percentage Dollars Percentage Dollars Percentage Dollars Percentage Dollars Percentage
Percentage
Commercial $ 27,302 7.36% $ 19,999 5.58% $ 14,278 4.45% $ 16,803 5.90% $ 18,618 6.76%
Real Estate Construction 29,822 8.04% 32,256 9.00% 14,313 4.46% 15,514 5.45% 12,302 4.47%
Real Estate Mortgage 245,138 66.09% 238,651 66.58% 222,288 69.30% 182,946 64.22% 168,665 61.22%
Agricultural 59,328 16.00% 57,497 16.04% 56,615 17.65% 52,188 18.32% 53,640 19.47%
Consumer 8,954 2.41% 9,062 2.53% 12,978 4.05% 17,134 6.01% 21,952 7.97%
Other 368 0.10% 991 0.28% 289 0.09% 309 0.11% 338 0.12%
Total, Net (1) $370,912 100.00% $358,456 100.00% $320,761 100.00% $284,894 100.00% $275,515 100.00%
(1) Including loans held for sale, net of deferred loan fees
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Off-balance Sheet Arrangements
Some financial instruments, such as loan commitments, credit lines, letters of credit, and overdraft protection, are issued to meet customer financing needs. These are agreements to provide credit or to support the credit of others, as long as conditions established in the contract are met, and usually have expiration dates. Commitments may expire without being used. Off-balance sheet risk to credit loss exists up to the face amount of these instruments, although material losses are not anticipated. The same credit policies are used to make such commitments as are used for loans, including obtaining collateral at exercise of the commitment.
Financial instruments with off-balance sheet risk were as follows at year-end:
2005 2004
Unused lines of credit $ 56,354,000 $ 54,785,000
Commitments to make loans 156,000 1,272,000
Letters of credit 183,000 145,000
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Unused lines of credit are substantially all at variable rates. Commitments to make loans are generally made for a period of 60 days or less and are primarily fixed at current market rates ranging from 5.625% to 6.125% with maturities ranging from 15 to 30 years and are intended to be sold.
Capital
As displayed by the following table, the Company's Tier I capital (as defined by the Federal Reserve Board under the Board's risk-based guidelines) at December 31, 2005 increased $2.9 million to $44.6 million. During 2005, the Company purchased 20,976 shares of its stock for $629 thousand. These repurchases partially offset the $5.8 million in net income for 2005. Stockholders' equity, excluding accumulated other comprehensive income, was $47.5 million at December 31, 2005. Included in Tier I capital is $7 million of trust preferred securities issued in August 2003. The disallowed amount of stockholders' equity is mainly attributable to the goodwill and core deposit intangible, resulting from the Kentucky First acquisition (see Note 6 in the Notes to Consolidated Financial Statements for more information on the goodwill and core deposit intangible assets). The Company's risk-based capital and leverage ratios, as shown in the following table, exceeded the levels required to be considered "well capitalized". The leverage ratio compares Tier I capital to total average assets less disallowed amounts of goodwill.
At December 31 (dollars in thousands)
2005 2004 Change
Stockholders' Equity (1) $ 47,479 $ 44,703 2,776
Trust Preferred Securities 7,000 7,000 0
Less Disallowed Amount 9,877 10,043 (166)
Tier I Capital 44,602 41,660 2,942
Allowance for Loan Losses 4,385 4,163 222
Other 143 164 (21)
Tier II Capital 4,528 4,327 201
Total Capital 49,130 45,987 3,143
Total Risk Weighted Assets 366,393 348,191 18,202
Ratios:
Tier I Capital to Risk-weighted Assets 12.2% 12.0% 0.2%
Total Capital to Risk-weighted Assets 13.4% 13.2% 0.2%
Leverage 8.0% 8.2% -0.2%
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(1) Excluding accumulated other comprehensive income.
The Federal Deposit Insurance Corporation Improvement Act of 1991 ("FDICIA") established five capital categories for insured depository institutions under its Prompt Corrective Action Provisions. The bank regulatory agencies adopted regulations, which became effective in 1992, defining these five capital categories for banks they regulate. The categories vary from "well capitalized" to "critically undercapitalized". A "well capitalized" bank is defined as one with a total risk-based capital ratio of 10% or more, a Tier I risk-based capital ratio of 6% or more, a leverage ratio of 5% or more, and one not subject to any order, written agreement, capital directive, or prompt corrective action directive to meet or maintain a specific capital level. At December 31, 2005, the bank had ratios that exceeded the minimum requirements established for the "well capitalized" category.
In management's opinion, there are no other known trends, events or uncertainties that will have or that are reasonably likely to have a material effect on the Company's liquidity, capital resources or operations.
Securities and Federal Funds Sold
Securities, classified as available for sale, increased from $126.8 million at December 31, 2004 to $160.7 million at December 31, 2005. The increase is mainly attributable to a short term increase in deposits. Federal funds sold totaled $2.7 million at December 31, 2005 and $3.2 million at December 31, 2004.
Per Company policy, fixed rate asset backed securities will not have an average life exceeding seven years, but final maturity may be longer. Adjustable rate securities shall adjust within three years per Company policy. Of the $1.4 million of adjustable asset backed securities held on December 31, 2005, $303 thousand are repriceable monthly and the remaining $1.1 million are repriceable annually. Of the $2.3 million of adjustable asset backed securities held on December 31, 2004, $650 thousand are repriceable monthly and the remaining $1.6 million are repriceable annually. Unrealized gains (losses) on investment securities are temporary and change inversely with movements in interest rates. In addition, some prepayment risk exists on mortgage-backed securities and prepayments are likely to increase with decreases in interest rates. The following tables present the investment securities for each of the past three years and the maturity and yield characteristics of securities as of December 31, 2005.
Investment Securities at market value
At December 31 (in thousands)
2005 2004 2003
Available for Sale
U.S. treasury $ 2,974 $ 2,984 $ 3,033
U.S. government agencies 67,033 39,031 36,634
States and political subdivisions 37,463 35,160 39,142
Mortgage-backed
Fixed -
GNMA, FNMA, FHLMC Passthroughs 33,566 35,013 29,079
GNMA, FNMA, FHLMC CMO's 17,390 11,335 12,940
Total 50,956 46,348 42,019
Variable -
GNMA, FNMA, FHLMC Passthroughs 1,081 1,623 4,161
GNMA, FNMA, FHLMC CMO's 303 649 1,202
Total 1,384 2,272 5,363
Total mortgage-backed 52,340 48,620 47,382
Other 842 972 2,599
Total 160,652 126,767 128,790
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Maturity Distribution of Securities
December 31, 2005 (in thousands)
Over One Over Five Asset
Year Years Backed
One Year Through Through Over Ten & Equity
or Less Five Years Ten Years Years Securities Total
Available for Sale
U.S. treasury $ 2,974 $ - $ - $ - $ - $ 2,974
U.S. government agencies 24,735 36,753 5,545 0 0 67,033
States and political subdivisions 1,409 4,796 14,317 16,941 0 37,463
Mortgage-backed 0 0 0 0 52,340 52,340
Equity Securities 0 0 0 0 842 842
Other 0 0 0 0
Total 29,118 41,549 19,862 16,941 53,182 160,652
Percent of Total 18.1% 25.9% 12.4% 10.5% 33.1% 100.0%
Weighted Average Yield (1) 3.42% 4.15% 6.08% 6.54% 4.39% 4.59%
(1) Tax Equivalent Yield
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Impact of Inflation and Changing Prices
The majority of the Company's assets and liabilities are monetary in nature. Therefore, the Company differs greatly from most commercial and industrial companies that have significant investments in nonmonetary assets and inventories. However, inflation does have an important impact on the growth of assets in the banking industry and the resulting need to increase equity capital at higher than normal rates in order to maintain an appropriate equity to assets ratio. Inflation also affects other expenses, which tend to rise during periods of inflation.
Other Accounting Issues
FAS 123, Revised, requires companies to record compensation cost for stock options provided to employees in return for employment service. The cost is measured at the fair value of the options when granted, and this cost is expensed over the employment service period, which is normally the vesting period of the options. This will apply to awards granted or modified in fiscal years beginning in 2006. Compensation cost will also be recorded for prior option grants that vest after the date of adoption. The effect on results of operations will depend on the level of future option grants and the calculation of the fair value of the options granted at such future date, as well as the vesting periods provided, and so cannot currently be predicted. Existing options that will vest after adoption date are expected to result in additional compensation expense of approximately $48,000 in 2006 and $41,000 in 2007.
Item 7A. Asset/Liability Management, Interest Rate Sensitivity, Market Risk and Liquidity
Asset/Liability management control is designed to ensure safety and soundness, maintain liquidity and regulatory capital standards, and achieve acceptable net interest income. The Company's exposure to market risk is reviewed on a regular basis by the Asset/Liability Committee.
Management considers interest rate risk to be the most significant market risk. Interest rate risk is the potential of economic losses due to future interest rate changes. These economic losses can be reflected as a loss of future net interest income and/or a loss of current fair market values. The objective is to measure the effect on net interest income and to adjust the balance sheet to minimize the inherent risk while at the same time maximize income.
Management realizes certain risks are inherent and that the goal is to identify and minimize the risks. The primary tool used by management is an interest rate shock simulation model. Certain assumptions, such as prepayment risks, are included in the model. However, actual prepayments may differ from those assumptions. In addition, immediate withdrawal of interest checking and other savings accounts may have an effect on the results of the model. The Bank has no market risk sensitive instruments held for trading purposes.
The following table depicts the change in net interest income resulting from 100 and 300 basis point changes in rates. The projections are based on balance sheet growth assumptions and repricing opportunities for new, maturing and adjustable rate amounts. In addition, the projected percentage changes from level rates are outlined below along with the Board of Directors approved limits. As of December 31, 2005 the projected net interest income percentages are within the Board of Directors limits. The projected net interest income report summarizing the Company's interest rate sensitivity as of December 31, 2005 and December 31, 2004 is as follows:
Projected Net Interest Income (December 31, 2005)
Level
-300 -100 Rates +100 +300
Year One (1/06 - 12/06)
Interest Income $27,781 $31,881 $33,928 $35,909 $39,702
Interest Expense 11,679 14,376 15,864 17,352 20,328
Net Interest Income 16,102 17,505 18,064 18,557 19,374
Net interest income dollar change (1,962) (559) 493 1,310
Net interest income percentage change -10.9% -3.1% N/A 2.7% 7.3%
Limitation on % Change >-18.0% >-6.0% N/A >-4.0% >-10.0%
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Projected Net Interest Income (December 31, 2004)
Level
-300 -100 Rates +100 +300
Year One (1/05 - 12/05)
Interest Income $21,816 $25,843 $27,887 $29,798 $33,486
Interest Expense 8,899 9,538 10,762 11,985 14,433
Net Interest Income 12,917 16,305 17,125 17,813 19,053
Net interest income dollar change (4,208) (820) 688 1,928
Net interest income percentage change -24.6% -4.8% N/A 4.0% 11.3%
Limitation on % Change >-10.0% >-4.0% N/A >-4.0% >-10.0%
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The numbers in 2005 show less fluctuation when compared to 2004. In 2005, year one reflected a decrease in net interest income of 3.1% compared to 4.8% projected decrease from 2004 with a 100 basis point decline. The 300 basis point increase in rates reflected a 7.3% increase in net interest income in 2005 compared to an 11.3% increase in 2004. The risk is less in 2005 due to the current status of existing interest rates and their effect on rate sensitive assets and rate sensitive liabilities. An increase in rates would improve net interest income.
Management measures the Company's interest rate risk by computing estimated changes in net interest income in the event of a range of assumed changes in market interest rates. The Company's exposure to interest rates is reviewed on a monthly basis by senior management and quarterly with the Board of Directors. Exposure to interest rate risk is measured with the use of interest rate sensitivity analysis to determine the change in net interest income in the event of hypothetical changes in interest rates, while interest rate sensitivity gap analysis is used to determine the repricing characteristics of the Company's assets and liabilities. If estimated changes to net interest income are not within the limits established by the Board, the Board may direct management to adjust the Company's asset and liability mix to bring interest rate risk within Board approved limits.
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 meet the needs of borrowers, depositors and creditors. Excess liquidity has a negative impact on earnings resulting from the lower yields on short-term assets.
In addition to cash and cash equivalents, the securities portfolio provides an important source of liquidity. Total securities maturing within one year along with cash and cash equivalents totaled $43.3 million at December 31, 2005. Additionally, securities available-for- sale with maturities greater than one year totaled $131.6 million at December 31, 2005. The available for sale securities are available to meet liquidity needs on a continuing basis.
The Company maintains a relatively stable base of customer deposits and its steady growth is expected to be adequate to meet its funding demands. In addition, management believes the majority of its $100,000 or more certificates of deposit are no more volatile than its core deposits. At December 31, 2005 these balances totaled $61.6 million, approximately 14% of total deposits.
The Company also 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. We have sufficient collateral to borrow an additional $20 million from the FHLB at December 31, 2005.
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 believes there is sufficient cash flow from operations to meet investing and liquidity needs related to reasonable borrower, depositor and creditor needs in the present economic environment.
The cash flow statements for the periods presented provide an indication of the Company's sources and uses of cash as well as an indication of the ability of the Company to maintain an adequate level of liquidity.
A number of other techniques are used to measure the liquidity position, including the ratios presented below. These ratios are calculated based on annual averages for each year.
Liquidity Ratios
December 31
2005 2004 2003
Average Loans (including loans held
for sale)/Average Deposits 90.4% 88.3% 89.6%
Average Securities sold under
agreements to repurchase and other
borrowings/Average Assets 4.9% 5.7% 1.3%
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This chart shows that the loan to deposit ratio increased in 2005 and decreased in 2004. The increase in the ratio in 2005 compared to 2004 is mainly attributable a larger increase in deposits compared to loans. The increase in the latter ratio in 2004 above is mainly a result of the leverage transaction entered into in the beginning on 2004. Twenty million dollars of securities were purchased and were funded by repurchase agreements.
Item 8. Financial Statements
The consolidated financial statements of the Company together with the notes thereto and report of independent auditors are contained in the Company's 2005 Annual Report to Stockholders included as Exhibit 13, and are incorporated herein by reference. No other portion of the 2005 Annual Report to Stockholders is to be deemed "filed" as part of this filing.
Item 9. Changes In and Disagreements with Accountants on Accounting and Financial Disclosure
None
Item 9A. Controls and Procedures
The Company's management, with participation of the Company's Chief Executive Officer and Chief Financial Officer, has evaluated the effectiveness of the Company's disclosure controls and procedures as of December 31, 2005. Based on the evaluation, the Company's Chief Executive Officer and Chief Financial Officer concluded that the Company's disclosure controls and procedures were effective as of December 31, 2005. There was no change in the Company's internal control over financial reporting during the fourth quarter of 2005 that has materially affected, or is reasonably likely to materially affect, such internal control over financial reporting.
Item 9B. Other Information
None
PART III
Item 10. Directors and Executive Officers of the Registrant
Under the Company's Articles of Incorporation, the Board of Directors consists of three different classes, each to serve, subject to the provisions of the Articles of Incorporation and Bylaws, for a three year term and until his successor is duly elected and qualified. The names of the directors and their terms are set forth below.
Terms expiring in 2006:
Betty J. Long, age 58, is retired President and CEO of First Federal, Cynthiana. She has been a director of the Company since 2003.
Ted McClain, age 54, is an insurance agent with Hopewell Insurance Company. He has been a director of Kentucky Bank since 2002 and the Company since 2003.
Buckner Woodford, age 61, is Chairman of the Board of Kentucky Bancshares, Inc. and Kentucky Bank. He was President and Chief Executive Officer of the Company from 1991 to 2004, and President and Chief Executive Officer of the Kentucky Bank from 1984 to 2004. He has been a director of Kentucky Bank since 1971 and the Company since inception.
Terms expiring in 2007:
William Arvin, age 65, is an attorney. He has been a director of Kentucky Bank and the Company since 1995.
Louis Prichard, age 52, is President and Chief Executive Officer of Kentucky Bank. He was President and Chief Operating Officer of Kentucky Bank from 2003 to 2004. He has been a director of Kentucky Bank and the Company since 2003. Since 1983, he was in banking in Danville and was the Chairman and Chief Executive Officer of Boyle Bancshares, Inc. and their banking subsidiary, Farmers Bank for 7 years before joining the Company in 2003.
Woodford Van Meter, age 52, is an opthalmologist. He has been a director of Kentucky Bank and the Company since 2004.
Terms expiring in 2008:
Henry Hinkle, age 54, is President of Hinkle Construction Company. He has been a director of Kentucky Bank and the Company since 1989.
Theodore Kuster, age 62, is a farmer and thoroughbred horse breeder. He has been a director of Kentucky Bank since 1979 and the Company since 1985.
Robert G. Thompson, age 56, is a farmer and thoroughbred horse breeder. He has been a director of Kentucky Bank and the Company since 1991.
The Company's other executive officers are Norman J. Fryman, age 56 and Gregory J. Dawson, age 45. Mr. Fryman is the Vice President of Sales and Service of Kentucky Bank and has been with the Company since 1977. Mr. Dawson is the Chief Financial Officer and has been with the Company since 1985.
The Company has adopted a code of ethics for its Chief Executive Officer and its Chief Financial Officer. A copy of the code of ethics may be obtained, without charge, by contacting the CFO.
The Company has named Betty J. Long of the audit committee as its financial expert and she is independent as that term is used in Item 7(d)(3)(iv) of Schedule 14A under the Securities Exchange Act of 1934.
Item 11. Executive Compensation
The following table sets forth information with respect to the compensation of the Chairman of the Board (Buckner Woodford), President and Chief Executive Officer (Louis Prichard), Vice President of Sales and Service (Norman J. Fryman) and Chief Financial Officer (Gregory J. Dawson) of the Company (the "Named Executive Officers"). No other executive officer earned total salary and bonus in excess of $100,000.
Summary Compensation Table
Long Term
Annual Compensation Compensation
Options All Other
Name Salary Bonus Granted Compensation(1)
Buckner Woodford
2005 $ 80,000 $10,500 1,000 $ 7,682
2004 203,000 39,585 1,000 13,653
2003 200,000 24,000 1,000 14,000
Louis Prichard
2005 175,000 30,625 4,000 12,231
2004 140,000 20,475 1,000 9,160
2003 125,000 11,700 3,000 7,605
Norman J. Fryman
2005 113,949 12,306 500 7,971
2004 105,265 17,958 500 6,871
2003 97,057 8,371 500 6,763
Gregory J. Dawson
2005 87,064 13,060 500 6,083
2004 83,000 13,554 400 5,124
2003 73,531 4,044 400 4,983
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(1) Represents the Company's matching contribution to the qualified profit sharing plan that includes a 401(k) provision
The following table contains information regarding the grant of stock options under the Company's stock option plan to the Named Executive Officers during the year ended December 31, 2005. In addition, in accordance with rules of the Securities and Exchange Commission, the following table sets forth the hypothetical grant date present value with respect to the referenced options, using the Black-Scholes Option Pricing Model.
Option Grants in the Last Fiscal Year
% of Total
Options Grant
Shares Granted to Exercise Date
Granted Employees Price Expiration Present
Name (#) in 2005 ($/Sh) Date Value($)
Buckner Woodford 1,000 5.3% $30.50 1/3/15 $ 4,820
Louis Prichard 4,000 21.4 30.50 1/3/15 19,280
Norman J. Fryman 500 2.7 30.50 1/3/15 2,410
Gregory J. Dawson 500 2.7 30.50 1/3/15 2,410
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The following table sets forth certain information regarding options exercised by the Named Executive Officers during calendar year 2005 and unexercised stock options held by them as of December 31, 2005.
Aggregated Option Exercises in Calendar 2005
and Year-end Stock Option Values
Shares Number of Securities Value of Unexercised
Acquired Value Underlying Unexercised In-the-Money
on Exercise Realized Options at 12/31/05 Options at 12/31/05
Name (#) ($) Exercisable/Unexercisable Exercisable/Unexercisable
Buckner Woodford n/a n/a 5,400/2,700 $ 40,010/$ 3,745
Louis Prichard n/a n/a 1,400/6,600 4,860/ 7,290
Norman J. Fryman n/a n/a 1,420/1,380 10,186/ 2,004
Gregory J. Dawson 1,000 $16,100 2,700/1,150 28,194/ 1,366
No SAR's exist for the Company.
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Compensation of Directors
Each director of the Company is a director of Kentucky Bank, except for Betty J. Long. Company Directors are paid $400 for each Company and Kentucky Bank board meeting attended ($400 for one paid absence per year) and non-employee Company directors are paid $100 for each Kentucky Bank committee meeting attended. Each Company Director is paid an annual retainer of $1,500 plus the audit committee chairman is paid an additional annual retainer of $2,000. Non-employee Directors of Kentucky Bank are also granted a 10-year option to purchase 100 shares of the Company's common stock following each year in which Kentucky Bank has a return on assets of 1 percent or greater. The option's exercise price is the fair market value per share on the date of grant.
Pension Plan
The following table sets forth the annual benefits which an eligible employee would receive under the Company's qualified defined benefit pension plan based on remuneration that is covered under the plan and years of service with the Company and its subsidiaries.
Years of Service
Remuneration 5 10 15 20 25 30 35
$ 25,000 $ 1,250 $ 2,500 $ 3,750 $ 5,000 $ 6,250 $ 7,500 $ 8,750
50,000 2,500 5,000 7,500 10,000 12,500 15,000 17,500
75,000 3,750 7,500 11,250 15,000 18,750 22,500 26,250
100,000 5,000 10,000 15,000 20,000 25,000 30,000 35,000
125,000 6,250 12,500 18,750 25,000 31,250 37,500 43,750
150,000 7,500 15,000 22,500 30,000 37,500 45,000 52,500
175,000 8,750 17,500 26,250 35,000 43,750 52,500 61,250
200,000 10,000 20,000 30,000 40,000 50,000 60,000 70,000
225,000 11,250 22,500 33,750 45,000 56,250 67,500 78,750
250,000 12,500 25,000 37,500 50,000 62,500 75,000 87,500
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In general, a participant's remuneration covered by the Company's pension plan is his or her average annual cash compensation (W-2 earnings) for the highest 5 years. The years of service are 34 years for Mr. Woodford, 2 years for Mr. Prichard, 21 years for Mr. Fryman and 20 years for Mr. Dawson. The normal benefit is a life annuity based on the 1984 Unisex Pension pre-retirement mortality table and a pre- retirement interest rate of 7%. The benefits are not subject to a deduction for Social Security or other offset amounts.
Item 12. Security Ownership of Certain Beneficial Owners and Management
Set forth below are the number of shares of the Company's common stock beneficially owned by each director and executive officer, and all current directors and executive officers as a group as of December 31, 2005.
Name Shares Beneficially Owned(1)
Number Percentage
William Arvin (2) 30,171 1.1%
Gregory J. Dawson (3) 9,733 *
Norman J. Fryman (4) 2,825 *
Henry Hinkle (5) 30,755 1.1%
Theodore Kuster (6) 18,030 *
Betty J. Long (7) 1,600 *
Ted McClain (8) 1,475 *
Louis Prichard (9) 3,510 *
Robert G. Thompson (10) 6,050 *
Woodford Van Meter (11) 31,400 1.1%
Buckner Woodford (12) 245,791 9.0%
All directors and officers
(11 persons) as a group
(consisting of those
persons named above)(13) 381,340 13.9%
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* Less than 1%
1) Beneficial ownership as reported in the above table has been
determined in accordance with Rule 13d-3 under the Exchange Act. Unless
otherwise indicated, beneficial ownership includes both sole or shared
voting and sole or shared investment power.
2) Includes 11,858 shares held in a retirement account, 11,968 shares
held of record by Mr. Arvin's wife, as to which Mr. Arvin disclaims
beneficial ownership, 5,465 shares held jointly with his wife and 750
shares that Mr. Arvin may acquire upon exercise of outstanding stock
options.
3) Includes 2,700 shares that Mr. Dawson may acquire upon exercise of
outstanding stock options.
4) Includes 1,420 shares that Mr. Fryman may acquire upon exercise of
outstanding stock options.
5) Includes 1,000 shares held by his wife and 640 shares held by three
sons, as to which Mr. Hinkle disclaims beneficial ownership. Includes
26,500 shares held of record by Hinkle Contracting Company, as to which
Mr. Hinkle, as president, has shared voting power. Also includes 850
shares that Mr. Hinkle may acquire upon exercise of outstanding stock
options.
6) Includes 6,250 shares held of record by Mr. Kuster's wife, as to
which Mr. Kuster disclaims beneficial ownership. Also includes 5,500
shares held in a retirement account and 450 shares that Mr. Kuster may
acquire upon exercise of outstanding stock options.
7) Includes 1,600 shares held in a retirement account.
8) Includes 300 shares that Mr. McClain may acquire upon exercise of
outstanding stock options.
9) Includes 2,110 shares held jointly with his wife and 1,400 shares
that Mr. Prichard may acquire upon exercise of outstanding stock
options.
10) Includes 200 shares held of record by Mr. Thomprson's wife, as to
which Mr. Thompson disclaims beneficial ownership. Includes 650 shares
that Mr. Thompson may acquire upon exercise of outstanding stock
options.
11) Includes 2,200 shares held of record by Mr. Van Meter's wife, as to
which Mr. Van Meter disclaims beneficial ownership. Includes 100 shares
that Mr. Van Meter may acquire upon exercise of outstanding stock
options.
12) Includes 8,000 shares held by his wife, as to which Mr. Woodford
disclaims beneficial ownership. Also includes 208 shares held in a
retirement account and 5,400 shares that Mr. Woodford may acquire upon
exercise of outstanding stock options.
13) Includes 14,020 shares that may be acquired upon exercise of
outstanding stock options.
The following table sets forth as of December 31, 2005 the only person known by the Company to own beneficially (as determined in accordance with the rules and regulations of the Commission) more than 5% of the outstanding common stock. See note 12 in the preceding table for further information.
Name and Address Shares Beneficially of Beneficial Owner Owned Percentage Buckner Woodford 245,791 9.0% 340 Stoner Avenue Paris, Kentucky 40361 |
The following table sets forth as of December 31, 2005 the Company's common stock authorized for issuance under equity compensation plans. The Company's shareholders have approved all of the Company's equity compensation plans.
Number of Securities
Number of Securities remaining available for
To be issued Weighted average future issuance under
Upon exercise of exercise price of equity compensation plans
Outstanding options, outstanding options, (excluding securities
Plan category warrants and rights warrants and rights reflected in column (a)
Equity compensation plans
Approved by security holders:
Employee Gift Program 0 $ n/a 572
1993 Employee Stock Ownership
Incentive Plan 24,060 17.59 0
1993 Non-Employee Directors
Stock Ownership Plan 6,100 26.26 9,300
1999 Employee Stock Option Plan 46,904 29.16 51,744
2005 Restricted Stock Grant Plan 0 n/a 50,000
Total 77,064 $25.32 111,616
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Item 13. Certain Relationships and Related Transactions
Directors and officers of the Company and their associates were customers of and had transactions with the Company's subsidiary bank in the ordinary course of business during the year ended December 31, 2005. Similar transactions may be expected to take place with the Company's subsidiary bank in the future. Outstanding loans and commitments made by such subsidiary bank in transactions with the Company's directors and officers and their associates were made on substantially the same terms, including interest rates and collateral, as those prevailing at the time for comparable transactions with other persons and did not involve more than a normal risk of collectibility or present other unfavorable features. Certain directors and executive officers were loan customers of Kentucky Bank and outstanding loans were $4.7 million as of December 31, 2005 and $4.4 million as of December 31, 2004. See Note 4 in the notes to consolidated financial statements included as Exhibit 13. The Company purchased various types of insurance with aggregate premiums amounting to $218 thousand in 2005 from Hopewell Insurance Company. Director Ted McClain owns 33% of this company and is one of their insurance agents.
Item 14. Principal Accountant Fees and Services
The Audit Committee has pre-approved that management of the Company may consult with the primary independent auditor concerning certain additional services outside of the audit work that was specifically approved in the engagement letter for those services. Included were services such as:
1. Discussions related to accounting for mergers and acquisitions,
2. Tax return preparation
3. Discussions concerning loan review,
4. Discussions regarding regulatory requirements,
5. Data processing and retirement plan audits, and
6. Profit enhancement and other consulting.
The fees for services provided by the primary independent auditor, Crowe Chizek for 2005 and for 2004 were as follows:
Audit fees - Fees for the financial statement audit, and the review of the Company's Form 10-Q's were $92,050 for 2005 and $99,250 for 2004.
Audit related fees - Aggregate fees for all assurance and related services were $14,600 for 2005 and $12,950 for 2004. These fees were incurred for audits of benefit plans. The 2005 and 2004 amounts were preapproved by the audit committee.
Tax fees - Fees related to tax compliance, advice and planning were $14,450 for 2005 and $14,145 for 2004. The 2005 and 2004 amounts were preapproved by the audit committee.
All other fees - Consulting fees related to acquisitions, profitability and risk management were $14,400 for 2005 and $16,000 for 2004. The 2005 and 2004 amounts were preapproved by the audit committee.
All services provided by the Corporation's primary independent auditor in 2005 and 2004 were approved by the Audit Committee.
Part IV
Item 15. Exhibits, Financial Statement Schedules and Reports on Form 8-K
(a) The following exhibits are incorporated by reference herein or made a part of this Form 10-K:
2.1 Agreement and Plan of Merger with Peoples Bancorp of Sandy Hook is incorporated by reference to Exhibit 2.1 of the Registrant's Current Report on Form 8-K dated February 24, 2006 (File No. 33-96358).
3.1 Articles of Incorporation of the Registrant are incorporated by reference to Exhibit 3.1 of the Registrant's Quarterly Report on Form 10-Q for the quarterly period ending March 31, 2000 (File No. 33-96358).
3.2 Bylaws of the Registrant are incorporated by reference to Exhibit 3.1 of the Registrant's Quarterly Report on Form 10-Q for the quarterly period ending June 30, 2000 (File No. 33-96358).
3.3 Articles of Amendment to Amended and Restated Articles of Incorporation of the Registrant.
10.1 Kentucky Bancshares, Inc. 1993 Employee Stock Ownership Incentive Plan is incorporated by reference to Exhibit 10.2 of the Registrant's Registration Statement on Form S-4 (File No. 33-96358).*
10.2 Kentucky Bancshares, Inc. 1993 Non-Employee Directors Stock Ownership Incentive Plan is incorporated by reference to Exhibit 10.3 of the Registrant's Registration Statement on Form S-4 (File No. 33-96358).*
10.3 Kentucky Bancshares, Inc. 1999 Employee Stock Option Plan is incorporated by reference to Exhibit 99.1 of the Registrant's Form 10-K for the fiscal year ended December 31, 1998.*
10.4 Schedule of 2006 Compensation Arrangements for Named Executive Officers is incorporated by reference to the Registrant's Current Report on Form 8-K dated December 20, 2005 (File No. 33-96358).*
10.5 Schedule of 2006 Compensation Arrangement for Named Executive Officer.*
10.6 2005 Restricted Stock Grant Plan, including form of Award Agreement, as incorporated by reference to Exhibit 10.1 of the Registrant's Current Report on Form 8-K dated February 15, 2005 (File No. 33-96358).*
11 Computation of earnings per share - See Note 12 in the notes to consolidated financial statements included as Exhibit 13.
13 Kentucky Bancshares, Inc. 2005 Annual Report and Proxy
Statement, including Financial Statements:
Consolidated Balance Sheets
Consolidated Statements of Income
Consolidated Statements of Comprehensive Income
Consolidated Statements of Changes in Stockholders' Equity
Consolidated Statements of Cash Flows
Notes to Consolidated Financial Statements
Report of Independent Auditors
21 Subsidiaries of Registrant
23 Consent of Crowe Chizek and Company LLC
31.1 Certification of Chief Executive Officer pursuant to Rule 13a- 14(a) and Rule 15d-14(a) of the Securities Exchange Act, as amended.
31.2 Certification of Chief Financial Officer pursuant to Rule 13a- 14(a) and Rule 15d-14(a) of the Securities Exchange Act, as amended.
32.1 Certification of Chief Executive Officer pursuant to 18 U.S.C.
Section 1350, as adopted pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002.
32.2 Certification of Chief Financial Officer pursuant to 18 U.S.C.
Section 1350, as adopted pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002.
* Denotes a management contract or compensatory plan or arrangement
of the Registrant required to be filed as an exhibit pursuant to Item
601(10) (iii) of Regulation S-K.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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.
By: __/s/Louis Prichard __ Louis Prichard, President and Chief Executive Officer, Director March 24, 2006 |
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.
__/s/Louis Prichard _______ March 24, 2006 Louis Prichard, President and Chief Executive Officer, Director __/s/Gregory J. Dawson_______ March 28, 2006 Gregory J. Dawson, Chief Financial and Accounting Officer __/s/Buckner Woodford________ March 28, 2006 Buckner Woodford, Chairman of the Board, Director _____________________________ March 28, 2006 William Arvin, Director __/s/Henry Hinkle_ _ __ ____ March 28, 2006 Henry Hinkle, Director _____________________________ March 28, 2006 Theodore Kuster, Director __/s/Betty J. Long___________ March 21, 2006 Betty J. Long, Director __/s/Ted McClain____________ March 21, 2006 Ted McClain, Director __/s/Robert G. Thompson______ March 21, 2006 Robert G. Thompson, Director _____________________________ March 28, 2006 Woodford Van Meter, Director |
SUPPLEMENTAL INFORMATION TO BE FURNISHED WITH REPORTS FILED PURSUANT TO
SECTION 15(d) OF THE ACT BY REGISTRANTS WHICH HAVE NOT REGISTERED
SECURITIES PURSUANT TO SECTION 12 OF THE ACT.
The Registrant refers to Exhibit 13 to the Form 10-K.
INDEX TO EXHIBITS
Exhibit
Number Description of Document
2.1 Agreement and Plan of Merger with Peoples Bancorp of Sandy Hook is incorporated by reference to Exhibit 2.1 of the Registrant's Current Report on Form 8-K dated February 24, 2006 (File No. 33-96358).
3.1 Articles of Incorporation of the Registrant are incorporated by reference to Exhibit 3.1 of the Registrant's Quarterly Report on Form 10-Q for the quarterly period ending March 31, 2000 (File No. 33-96358).
3.2 Bylaws of the Registrant are incorporated by reference to Exhibit 3.1 of the Registrant's Quarterly Report on Form 10- Q for the quarterly period ending June 30, 2000 (File No. 33-96358).
3.3 Articles of Amendment to Amended and Restated Articles of Incorporation of the Registrant.
10.1 Kentucky Bancshares, Inc. 1993 Employee Stock Ownership Incentive Plan is incorporated by reference to Exhibit 10.2 of the Registrant's Registration Statement on Form S-4 (File No. 33-96358).*
10.2 Kentucky Bancshares, Inc. 1993 Non-Employee Directors Stock Ownership Incentive Plan is incorporated by reference to Exhibit 10.3 of the Registrant's Registration Statement on Form S-4 (File No. 33-96358).*
10.3 Kentucky Bancshares, Inc. 1999 Employee Stock Option Plan is incorporated by reference to Exhibit 99.1 of the Registrant's Form 10-K for the fiscal year ended December 31, 1998.*
10.4 Schedule of 2006 Compensation Arrangements for Named Executive Officers is incorporated by reference to the Registrant's Current Report on Form 8-K dated December 20, 2005 (File No. 33-96358).*
10.5 Schedule of 2006 Compensation Arrangement for Named Executive Officer.*
10.6 2005 Restricted Stock Grant Plan, including form of Award Agreement, as incorporated by reference to Exhibit 10.1 of the Registrant's Current Report on Form 8-K dated February 15, 2005 (File No. 33-96358).*
11 Computation of earnings per share - See Note 10 in the notes to consolidated financial statements included as Exhibit 13.
13 Kentucky Bancshares, Inc. 2005 Annual Report and Proxy
Statement, including Financial Statements:
Consolidated Balance Sheets
Consolidated Statements of Income
Consolidated Statements of Comprehensive Income
Consolidated Statements of Changes in Stockholders' Equity
Consolidated Statements of Cash Flows
Notes to Consolidated Financial Statements
Report of Independent Auditors
21 Subsidiaries of Registrant
23 Consent of Crowe Chizek and Company LLC
31.1 Certification of Chief Executive Officer pursuant to Rule 13a-14(a) and Rule 15d-14(a) of the Securities Exchange Act, as amended.
31.2 Certification of Chief Financial Officer pursuant to Rule 13a-14(a) and Rule 15d-14(a) of the Securities Exchange Act, as amended.
32.1 Certification of Chief Executive Officer pursuant to 18 U.S.C.
Section 1350, as adopted pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002.
32.2 Certification of Chief Financial Officer pursuant to 18 U.S.C.
Section 1350, as adopted pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002.
* Denotes a management contract or compensatory plan or arrangement of the Registrant required to be filed as an exhibit pursuant to Item 601(10) (iii) of Regulation S-K.
6 25
BOURBON BANCSHARES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2000, 1999 and 1998
44
Exhibit 3.3
ARTICLES OF AMENDMENT
TO THE
AMENDED AND RESTATED ARTICLES OF INCORPORATION
OF
BOURBON BANCSHARES, INC.
As contemplated by KRS 271B.10-030 and KRS 271B.10-060 the following Articles of Amendment to the Amended and Restated Articles of Incorporation of Bourbon Bancshares, Inc., a Kentucky corporation (the "Corporation"), are hereby adopted:
1. The name of the Corporation is Bourbon Bancshares, Inc..
2. The Corporation adopts the following amendment to its Amended and Restated Articles of Incorporation:
Article I of the Corporation's Amended and Restated Articles of Incorporation is amended to read, in its entirety, as follows:
"The Corporation's name shall be Kentucky Bancshares, Inc."
3. (a) The foregoing amendment to the Corporation's Amended and Restated Articles of Incorporation was adopted at a meeting of the shareholders of the Corporation held on June 25, 2003, upon written notice of such meeting as provided in the Kentucky Business Corporation Act, at which two million one hundred four thousand nine hundred thirty-nine (2,104,939) of the two million seven hundred seventy-seven thousand two hundred seventy (2,777,270) outstanding Common Shares of the Corporation were indisputably represented.
(b) With respect to the foregoing amendment, two million nine thousand two hundred ninety-five (2,009,295) shares indisputably represented at such meeting were cast for the amendment and seventy-eight thousand five hundred fifty-two (78,552) shares were cast against the amendment. The number of votes cast for approval of this amendment was sufficient for approval thereof.
4. The effective time and date of the foregoing amendment shall be 9:00 a.m. on July 15, 2003.
IN WITNESS WHEREOF, I have signed this certificate on June 25, 2003.
BOURBON BANCSHARES, INC.
___/s/Buckner Woodford_______ Buckner Woodford, President 46 |
Exhibit 10.5
Schedule of 2006 Compensation Arrangement for Named Executive Officer
With respect to compensation in 2006, the salary of Gregory J. Dawson, Chief Financial Officer, will be $90,155 effective as of January 1, 2006. The President and CEO established the salary of Mr. Dawson on December 19, 2005. The Compensation Committee granted stock grants of 165 shares to Mr. Dawson effective January 3, 2006. Also, on December 16, 2005, the Compensation Committee approved targets for the Registrant's management incentive program for its executive officers. Based upon the Registrant's net income performance relative to 2006 budget, Mr. Dawson may earn up to 22.5% of his annual salary in bonus compensation; based upon his performance relative to individual performance measures established by the President and CEO, Mr. Dawson may earn up to an additional 7.5% of his annual salary in bonus compensation.
Exhibit 13
KENTUCKY BANCSHARES, INC.
ANNUAL REPORT 2005
Kentucky Bank's Vision
Kentucky Bank will be the premier community financial institution in our markets.
Kentucky Bank will create value for our shareholders by increasing our assets to $800 million while maintaining a focus on the growth of our earnings per share. We will focus on adding new customers through the sales efforts of our staff, a strong program to increase referrals from a variety of sources and expansion into additional high-valued markets. We will be opportunistic regarding acquisitions while maintaining our focus on earnings.
Our customers will bank with us because we will provide consistent customer service at the highest level. We will maintain our practice of providing cutting-edge products and services for our customer. Because of our focus on customer service, we will experience high customer loyalty and above average retention.
Our employees will be a part of a single Kentucky Bank team. We will hire and retain key talent in our marketplaces. We will recognize and reward success at all levels of the organization. We will win as one team.
Communities
Our slogan "Call it Home" reflects our dedication to the communities we serve.
Collectively, the communities we call home have a population of over 175,000.
Kentucky Bancshares' strategy has been to locate itself within the growth
circle around Central Kentucky. This strategy has provided us with very
steady increases in market share. Our vision is to "focus on adding new
customers through the sales efforts of our staff, a strong program to increase
referrals from a variety of sources and expansion into additional high-valued
markets." One such opportunity, taking place in 2006, is a merger that will
allow us to serve Rowan and Elliott counties with their combined populations
totaling over 30,000.
Products
Kentucky Bank has always been progressive in developing and offering financial
products to our clients. This tradition has been an integral part of our
culture. Our vision directs us to "maintain our practice of providing cutting
edge products and services for our customers."
To help Kentucky Bank remain involved in the emergent face of Central Kentucky, we have developed a Commercial Lending group. They have been successful in providing the capital needed for many larger projects within the communities we serve. Our Wealth Management group continues to make strides in building their investment options and client base. We actively seek innovative solutions for our consumer clients, particularly for the low income housing market.
Service
This is the third year we have conducted "mystery shops" to measure branches
on their level of customer service. This research is sent to managers with
feedback identifying areas of improvement and successes. Our goal has been to
raise the level of service to our vision of "providing consistent customer
service at the highest level. Because of our focus on customer service, we
will experience high levels of customer loyalty and above average retention."
We are seeing success in realizing this vision.
Technology
Security is one of our highest priorities. Identity fraud, as well as many
other types of intrusions into security, are an increasing consumer
concern. Kentucky Bank's security measures are constantly tested and upgraded
to face new challenges. Our dedication to technology and customer service
allows us to offer the best of convenience and personal attention.
Spirit
We understand that in order for the bank to be strong, our communities need to
be strong. Throughout the year we are involved in many organizations within
our communities. We offer support through the involvement of Kentucky Bank
employees and financial support for hundreds of charitable and community
organizations including schools, YMCAs, Chambers of Commerce, local colleges,
hospitals, local sports teams, and a little bit of everything in between.
There are even times that we reach out beyond our border to help others.
The spirit of our employees was especially evident this year when Kentucky
Bank employees donated over $10,000 personally to the Katrina emergency
efforts. We recognize that for our employees to help us succeed we need to
help them succeed. We are all part of a single Kentucky Bank team. Our
commitment and vision includes "hiring and retaining key talent in our
marketplaces. We will recognize and reward success at all levels of the
organization. We will win as one team."
Dear Shareholder:
For the year ended December 31, 2005, the assets of your company reached a record $572.7 million, which represents an 8.4% increase over last year's total assets of $528.5 million. Loans increased 3.5% to $370.9 million, also a new, year-end high.
Deposits grew 11.3% for the year to a record high of $431.6 million. Much of that growth was fueled by a significant increase in depository relationships with many public entities throughout our markets.
Earnings per share, on a diluted basis, were up 4.3% over the year ended December 31, 2004. Net income reached $5.8 million, which represented a 1.0% increase over the prior year-end. Net interest income was negatively impacted throughout the year by the competitive pressures on our short term deposit rates. With an anticipated slow down of the continued increase of short term rates, and our budgeted loan growth, we should see improvement in our 2006 net interest margins.
A noteworthy event concluded in 2005, that should contribute to the financial success of your company, is the purchase of $14.9 million of tobacco settlement payments which we were able to acquire for $11.7 million. We were able to conclude these purchases in such a manner as to have a positive impact on our bottom line in the upcoming years. We do expect to continue the purchase of more of these payments, but not at the levels that we encountered in 2005.
An extremely significant transaction that should be completed in 2006 is the merger and acquisition of Peoples Bancorp, Inc. of Sandy Hook and Morehead with Kentucky Bancshares, Inc. At year-end 2005, Peoples Bank had approximately $87 million in assets, with one office each in Elliott and Rowan Counties. The consideration of this transaction is $14 million, with 40% in the form of Kentucky Bancshares stock, and 60% in the form of cash. Our analysis indicates that this transaction should be accretive to earnings very quickly.
This acquisition is somewhat different than prior mergers in that Morehead and Rowan County are one hour east of Paris. Our prior acquisitions and mergers have taken place in the counties that have surrounded Lexington and Fayette County. However, the community of Morehead has had very steady growth, the Peoples Bank itself has been growing significantly in its market share, and it has been a very profitable institution throughout its history. The management and board felt that this endeavor was an excellent opportunity for enhancing shareholder value. As we look strategically to the future, Kentucky Bank will continue to look for opportunities to enlarge our banking circle around Bourbon and Fayette Counties.
B. Proctor Caudill, Jr. who is the Chairman and CEO of the Peoples Bank
holding company, will become a significant shareholder in Kentucky Bancshares.
Additionally, he will come to work for us with somewhat reduced
responsibilities, and we anticipate his being on the bank and holding company
boards of directors. We are very pleased about
this affiliation as we anticipate that he will be able to make a significant
contribution to the future success of your company.
We are extremely excited about this impending acquisition, and our financial analysis of this transaction leads us to believe that, as a shareholder, you will be pleased as well.
Sincerely, Sincerely, /s/Louis Prichard /s/Buck Woodford Louis Prichard Buck Woodford President and Chief Executive Officer Chairman of the Board Kentucky Bancshares, Inc. Kentucky Bancshares, Inc. |
Financial Highlights... Kentucky Bancshares, Inc. 2005 2004 2003 Assets ($ thousands) $ 572,750 $ 528,544 $ 500,852 Net Income ($ thousands) $ 5,820 $ 5,762 $ 4,233 Per Share Results... Earnings (assuming dilution) $ 2.16 $ 2.07 $ 1.50 Dividend $ .92 $ .84 $ .76 |
Annual Meeting
The annual meeting of Kentucky Bancshares, Inc. will be held Friday, May 12,
2006 at 11:00 in the corporate headquarters.
Investor Information
Any individual requesting a copy of the Corporation's 2005 Form 10-K Report may
obtain these by visiting our website at www.kybank.com or writing to Investor
Relations at the Corporate Headquarters.
Shareholder Information...
Corporate Headquarters
Kentucky Bancshares, Inc.
4th and Main Streets
Paris, Kentucky 40361
859-987-1795
Transfer, Registrar and Dividend Agent
Registrar and Transfer Company
10 Commerce Drive
Cranford, New Jersey 07016
800-368-5948
rtco.com
Kentucky Bancshares, Inc. - KTYB.OB
Active Market Makers
Hilliard Lyons
West Vine Street, Suite 400
Lexington, Kentucky 40507
800-944-2663
Howe Barnes Investments, Inc.
135 South LaSalle Street, Suite 150
Chicago, Illinois, 60603-4398
800-800-4693
Morgan Keegan & Company
489 E. Main Street
Lexington, Kentucky 40507
800-937-0161
CONSOLIDATED BALANCE SHEETS
December 31
2005 2004
ASSETS
Cash and due from banks $ 11,456,496 $ 12,248,975
Federal funds sold 2,708,000 3,206,000
Cash and cash equivalents 14,164,496 15,454,975
Securities available for sale 160,652,346 126,766,861
Mortgage loans held for sale - 175,471
Loans 370,911,882 358,281,554
Allowance for loan losses (4,309,403) (4,163,315)
Net loans 366,602,479 354,118,239
Federal Home Loan Bank stock 5,398,100 5,136,500
Bank premises and equipment, net 10,701,541 11,378,012
Interest receivable 3,719,135 3,226,479
Mortgage servicing rights 801,501 875,633
Goodwill 9,110,524 9,110,524
Other intangible assets 765,885 861,621
Other assets 834,288 1,439,331
Total assets $ 572,750,295 $ 528,543,646
LIABILITIES AND STOCKHOLDERS' EQUITY
Deposits
Non-interest bearing $ 72,192,661 $ 74,048,291
Time deposits, $100,000 and over 61,597,420 59,468,813
Other interest bearing 297,841,297 254,437,718
Total deposits 431,631,378 387,954,822
Repurchase agreements and other borrowings 16,837,573 25,592,844
Federal Home Loan Bank advances 66,748,641 59,749,666
Subordinated debentures 7,217,000 7,217,000
Interest payable 2,714,506 1,849,468
Other liabilities 1,054,954 1,153,035
Total liabilities 526,204,052 483,516,835
Stockholders' equity
Preferred stock, 300,000 shares
authorized and unissued - -
Common stock, no par value; 10,000,000
shares authorized; 2,666,897 and
2,684,498 shares issued and
outstanding in 2005 and 2004 6,812,805 6,818,664
Retained earnings 40,666,332 37,884,215
Accumulated other comprehensive income (loss) (932,894) 323,932
Total stockholders' equity 46,546,243 45,026,811
Total liabilities and stockholders' equity $ 572,750,295 $ 528,543,646
|
See Accompanying notes.
CONSOLIDATED STATEMENTS OF INCOME
Years Ended December 31
2005 2004 2003
Interest income
Loans, including fees $ 23,373,434 $ 20,470,306 $ 18,574,690
Securities
Taxable 3,388,793 3,574,235 2,049,835
Tax exempt 1,444,090 1,518,275 1,430,589
Other 690,660 283,196 274,003
28,896,977 25,846,012 22,329,117
Interest expense
Deposits 8,180,571 5,765,690 5,310,791
Repurchase agreements and other
borrowings 603,812 411,492 27,460
Federal Home Loan Bank advances 2,487,062 2,395,898 2,293,297
Subordinated debentures 494,227 494,052 169,000
Other - - 75,000
11,765,672 9,067,132 7,875,548
Net interest income 17,131,305 16,778,880 14,453,569
Provision for loan losses 508,100 840,000 1,300,000
Net interest income after provision
for loan losses 16,623,205 15,938,880 13,153,569
Other income
Service charges 4,511,270 4,357,658 4,065,210
Loan service fee income 262,629 246,356 242,479
Trust department income 458,328 299,448 301,612
Securities gains (losses), net 64,395 288,950 139,438
Gain on sale of mortgage loans 333,742 376,157 853,340
Other 1,118,289 1,227,614 1,105,534
6,748,653 6,796,183 6,707,613
Other expenses
Salaries and employee benefits 8,547,607 8,053,306 7,373,501
Occupancy expenses 2,194,431 2,255,071 2,044,515
Amortization 349,342 524,839 516,390
Advertising and marketing 473,848 378,410 399,483
Taxes other than payroll, property
and income 547,509 499,251 439,084
Other 3,361,280 3,044,294 3,398,292
15,474,017 14,755,171 14,171,265
Income before income taxes 7,897,841 7,979,892 5,689,917
Provision for income taxes 2,077,741 2,217,783 1,456,540
Net income $ 5,820,100 $ 5,762,109 $ 4,233,377
Earnings per share:
Basic $ 2.17 $ 2.09 $ 1.52
Diluted 2.16 2.07 1.50
|
See Accompanying notes.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
Years Ended December 31
2005 2004 2003
Net income $ 5,820,100 $ 5,762,109 $ 4,233,377
Other comprehensive income (loss)
Unrealized gains (losses) on
securities arising during
the period (1,839,887) (1,522,118) (360,141)
Reclassification of realized amount (64,395) (288,950) (139,438)
Net change in unrealized
gain (loss) on securities (1,904,282) (1,811,068) (499,579)
Less: Tax impact (647,456) (615,763) (169,857)
Comprehensive income $ 4,563,274 $ 4,566,804 $ 3,903,655
|
See Accompanying notes.
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
Years Ended December 31, 2005, 2004 and 2003
Accumulated
Other Total
Common Stock Retained Comprehensive Stockholders'
Shares Amount Earnings Income Equity
Balances, January 1, 2003 2,772,754 $ 6,806,887 $ 35,435,996 $ 1,848,959 $ 44,091,842
Common stock issued (including
employee gifts of 54 shares) 36,410 507,071 - - 507,071
Common stock purchased (9,383) (329,174) - - (329,174)
Net change in unrealized gain (loss)
on securities available for sale,
net of tax - - - (329,722) (329,722)
Net income - - 4,233,377 - 4,233,377
Dividends declared - $.76 per share - - (2,116,753) - (2,116,753)
Balances, December 31, 2003 2,799,781 6,984,784 37,552,620 1,519,237 46,056,641
Common stock issued (including
employee gifts of 89 shares) 7,019 131,041 - - 131,041
Common stock purchased (122,302) (297,161) (3,127,295) - (3,424,456)
Net change in unrealized gain (loss)
on securities available for sale,
net of tax - - - (1,195,305) (1,195,305)
Net income - - 5,762,109 - 5,762,109
Dividends declared - $.84 per share - - (2,303,219) - (2,303,219)
Balances, December 31, 2004 2,684,498 6,818,664 37,884,215 323,932 45,026,811
Common stock issued (including
employee gifts of 75 shares) 3,375 47,595 - - 47,595
Common stock purchased (20,976) (53,454) (575,945) - (629,399)
Net change in unrealized gain (loss)
on securities available for sale,
net of tax - - - (1,256,826) (1,256,826)
Net income - - 5,820,100 - 5,820,100
Dividends declared - $.92 per share - - (2,462,038) - (2,462,038)
Balances, December 31, 2005 2,666,897 $ 6,812,805 $ 40,666,332 $ (932,894) $ 46,546,243
|
See Accompanying notes.
CONSOLIDATED STATEMENTS OF CASH FLOWS
Years Ended December 31
2005 2004 2003
Cash flows from operating activities
Net income $ 5,820,100 $ 5,762,109 $ 4,233,377
Adjustments to reconcile net
income to net cash from
operating activities
Depreciation and amortization 1,174,954 1,419,794 1,460,429
Provision for loan losses 508,100 840,000 1,300,000
Securities amortization
(accretion), net 331,355 635,725 703,502
Securities (gains) losses, net (64,395) (288,950) (139,438)
Originations of loans held
for sale (18,036,701) (22,065,215) (42,872,837)
Proceeds from sale of loans 18,545,914 30,024,484 36,707,617
Gain on sale of mortgage loans (333,742) (376,157) (853,340)
Federal Home Loan Bank stock
dividends (261,600) (206,400) (170,800)
Losses (gain) on sale of fixed
assets (71,045) (16,722) 161,849
Changes in:
Interest receivable (492,656) 23,355 360,511
Other assets 425,569 1,135,547 451,918
Interest payable 865,038 213,684 (306,069)
Other liabilities 624,374 942,501 (1,390,747)
Net cash from operating activities 9,035,265 18,043,755 (354,028)
Cash flows from investing activities
Purchases of securities available
for sale (53,539,693) (70,689,970) (65,248,350)
Proceeds from sales of securities
available for sale 1,323,500 37,973,553 8,434,570
Proceeds from principal payments
and maturities of securities
available for sale 16,159,467 32,581,271 39,625,276
Cash paid for bank acquisition - - (7,000,205)
Net change in loans (13,067,340) (45,775,823) 1,481,580
Purchases of bank premises and equipment (758,929) (948,546) (1,632,487)
Proceeds from sale of bank premises and
Equipment 581,881 199,722 -
Net cash from investing activities (49,301,114) (46,659,793) (24,339,616)
Cash flows from financing activities
Net change in deposits 43,676,556 3,356,226 8,662,228
Net change in repurchase agreements and
other borrowings (8,755,271) 18,307,586 2,008,563
Proceeds from subordinated debentures - - 7,000,000
Advances from Federal Home Loan Bank 15,000,000 25,000,000 12,000,000
Payments on Federal Home Loan
Bank advances (7,902,073) (18,383,678) (10,827,273)
Proceeds from issuance of common stock 47,595 131,041 188,697
Purchase of common stock (629,399) (3,424,456) (10,800)
Dividends paid (2,462,038) (2,303,219) (2,116,753)
Net cash from financing activities 38,975,370 22,683,500 16,904,662
See Accompanying notes.
CONSOLIDATED STATEMENTS OF CASH FLOWS
Years Ended December 31
2005 2004 2003
Net change in cash and cash equivalents $ (1,290,479) $ (5,932,538) $ (7,788,982)
Cash and cash equivalents at
beginning of year 15,454,975 21,387,513 29,176,495
Cash and cash equivalents at end of year $ 14,164,496 $ 15,454,975 $ 21,387,513
Supplemental disclosures of cash flow information
Cash paid during the year for:
Interest expense $ 10,900,634 $ 8,853,448 $ 8,084,469
Income taxes 1,971,443 777,401 1,637,706
Supplemental schedules of non-cash investing
activities
Real estate acquired through foreclosure $ 391,743 $ 1,325,942 $ 349,748
|
See Accompanying notes.
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation: The consolidated financial statements include the accounts of Kentucky Bancshares, Inc. (formerly Bourbon Bancshares, Inc.) (the Company) and its wholly-owned subsidiary, Kentucky Bank (the Bank). Intercompany transactions and balances have been eliminated in consolidation.
Nature of Operations: The Bank operates under a state bank charter and provides full banking services, including trust services, to customers located in Bourbon, Clark, Harrison, Jessamine, Scott, Woodford and adjoining counties in Kentucky. As a state bank, the Bank is subject to regulation by the Kentucky Department of Financial Institutions and the Federal Deposit Insurance Corporation (FDIC). The Company, a bank holding company, is regulated by the Federal Reserve.
Estimates in the Financial Statements: The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. The allowance for loan losses, mortgage servicing rights and fair value of financial instruments are particularly subject to change.
Cash Flows: For purposes of reporting cash flows, cash and cash equivalents include cash on hand, amounts due from banks, federal funds sold, and certain short-term investments with maturities of less than three months. Generally, federal funds are sold for one-day periods. Net cash flows are reported for loan, deposit and short-term borrowing transactions.
Securities: The Company is required to classify its securities portfolio into one of three categories: trading securities, securities available for sale and securities held to maturity. Fair value adjustments are made to the securities based on their classification with the exception of the held to maturity category. The Company has no investments classified as trading securities, or securities held to maturity. Securities available for sale are carried at fair value, with unrealized holding gains and losses reported in other comprehensive income.
Interest income includes amortization of purchase premium or discount. Premiums and discounts on securities are amortized on the level-yield method without anticipating prepayments, except for mortgage backed securities where prepayments are anticipated. Gains and losses on sales are recorded on the settlement date and determined using the specific identification method.
Declines in the fair value of securities below their cost that are other than temporary are reflected as realized losses. In estimating other than temporary losses, management considers: (1) the length of time and extent that fair value has been less than cost, (2) the financial condition and near term prospects of the issuer, and (3) the Company's ability and intent to hold the security for a period sufficient to allow for any anticipated recovery in fair value.
Loans Held for Sale: Loans held for sale are valued at the lower of cost or market as determined by outstanding commitments from investors or current secondary market prices, calculated on the aggregate loan basis. The Company also provides for any losses on uncovered commitments to lend or sell.
Loans: Loans are stated at the amount of unpaid principal, reduced by an allowance for loan losses. Interest income on loans is recognized on the accrual basis except for those loans on a nonaccrual status. The accrual of interest on impaired loans is discontinued when management believes, after consideration of economic and business conditions and collection efforts, that the borrowers' financial condition is such that collection of interest is doubtful. Interest income on mortgage and consumer loans is discontinued at the time the loan is 90 days delinquent, and interest income on commercial loans is discontinued at the time the loan is 120 days delinquent, unless the loan is well-secured and in process of collection. Past due status is based on the contractual terms of the loan. When interest accrual is discontinued, interest income received on such loans is accounted for on the cash-basis or cost-recovery method, until qualifying for return to accrual. Loans are returned to accrual status when all the principal and interest amounts contractually due are brought current and future payments are reasonably assured. Consumer and credit card loans are typically charged off no later than 120 days past due. Loans are placed on nonaccrual or charged-off at an earlier date if collection of principal or interest is considered doubtful.
Loan origination fees and certain direct origination costs are capitalized and recognized as an adjustment of the yield on the related loan.
Allowance for Loan Losses: The allowance for loan losses is a valuation allowance for probable incurred credit losses, increased by the provision for loan losses and decreased by charge-offs less recoveries. 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. Allocations of the allowance may be made for specific loans, but the entire allowance is available for any loan that, in management's judgment, should be charged-off. Loan losses are charged against the allowance when management believes the uncollectibility of a loan balance is confirmed.
A loan is impaired when full payment under the loan terms is not expected. Impairment is evaluated in total for smaller-balance loans of similar nature such as residential mortgage, consumer, and credit card loans, and on an individual loan basis for other loans. If a loan is impaired, a portion of the allowance is allocated so that the loan is reported, net, at the present value of estimated future cash flows using the loan's existing rate or at the fair value of collateral if repayment is expected solely from the collateral. Large groups of smaller balance homogenous loans, such as consumer and residential real estate loans are collectively evaluated for impairment, and accordingly, they are not separately identified for impairment disclosures.
Mortgage Servicing Rights: The Bank has sold certain residential mortgage
loans to the Federal Home Loan Mortgage Corporation (FHLMC) while retaining the
servicing rights. Gains and losses on sales of mortgage loans are based on
the difference between the selling price and the carrying value of the related
loan sold. The Bank receives a servicing fee from the FHLMC on each loan sold.
Servicing rights represent the allocated value of retained servicing rights
on loans sold and the cost of purchased rights. Servicing assets are expensed
in proportion to, and over the period of, estimated net servicing revenues.
Impairment is evaluated based on the fair value of the assets, using interest
rates, and prepayment characteristics. Fair value is determined using prices
for similar assets with similar characteristics, when available, or based upon
discounted cash flows using market-based assumptions. Any impairment of a
grouping is reported as a valuation allowance, to the extent that fair value
is less than the capitalized amount for a grouping.
Federal Home Loan Bank (FHLB) Stock: The Bank is a member of the FHLB system.
Members are required to own a certain amount of stock based on the level of
borrowings and other factors, and may invest in additional amounts. FHLB
stock is carried at cost, classified as a restricted security, and
periodically evaluated for impairment based on ultimate recovery of par value.
Both cash and stock dividends are reported as income.
Bank Premises and Equipment: Land is carried at cost. Bank premises and equipment are stated at cost less accumulated depreciation. Buildings and related components are depreciated using the straight-line method with useful lives ranging from 5 to 50 years. Furniture, fixtures and equipment are depreciated using the straight-line (or accelerated) method with useful lives ranging from 3 to 10.
Real Estate Acquired Through Foreclosure: Real estate acquired through foreclosure is carried at the lower of the recorded investment in the property or its fair value. The value of the underlying loan is written down to the fair value of the real estate to be acquired by a charge to the allowance for loan losses, if necessary. Any subsequent write-downs are charged to operating expenses. Operating expenses of such properties, net of related income, and gains and losses on their disposition are included in other expenses.
Repurchase Agreements: Substantially all repurchase agreement liabilities represent amounts advanced by various customers. Securities are pledged to cover these liabilities, which are not covered by federal deposit insurance.
Stock Compensation: Employee compensation expense under stock options is reported using the intrinsic value method. No stock-based compensation cost is reflected in net income, as all options granted had an exercise price equal to or greater than the market price of the underlying common stock at date of grant. The following table illustrates the effect on net income and earnings per share if expense was measured using the fair value recognition provisions of FASB Statement No. 123, Accounting for Stock-Based Compensation.
2005 2004 2003
Net income
As reported $ 5,820,100 $ 5,762,109 $ 4,233,377
Deduct: Stock-based compensation
expense determined under fair
value based method (56,241) (42,178) (48,317)
Pro forma 5,763,859 5,719,931 4,185,060
2005 2004 2003
Basic earnings per share
As reported $ 2.17 $ 2.09 $ 1.52
Pro forma 2.15 2.07 1.50
Diluted earnings per share
As reported $ 2.16 $ 2.07 $ 1.50
Pro forma 2.14 2.06 1.48
Weighted averages
Fair value of options granted $ 4.82 $ 5.68 $ 4.14
Risk free interest rate 3.98% 3.86% 3.40%
Expected life 8 years 8 years 8 years
Expected volatility 15.11% 13.74% 16.90%
Expected dividend yield 3.03% 2.47% 2.96%
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Income Taxes: Income tax expense is the total of the current year income tax due or refundable and the change in deferred tax assets and liabilities. The Company uses the liability method for computing deferred income taxes. Under the liability method, deferred income taxes are based on the change during the year in the deferred tax liability or asset established for the expected future tax consequences of differences in the financial reporting and tax bases of assets and liabilities.
Retirement Plans: Pension expense is the net of service and interest cost, return on plan assets and amortization of gains and losses not immediately recognized. Employee 401(k) and profit sharing plan expense is the amount of matching contributions.
Goodwill: Goodwill results from prior business acquisitions and represents the excess of the purchase price over the fair value of acquired tangible assets and liabilities and identifiable intangible assets. Goodwill is assessed at least annually for impairment and any such impairment will be recognized in the period identified.
Intangible Assets: Intangible assets include a premium on deposits paid in connection with the acquisition of a bank and branches which is being amortized on a straight-line basis over ten or fifteen years.
Earnings Per Common 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 include the dilutive effect of additional potential common shares issuable under stock options. Earnings and dividends per share are restated for all stock splits and dividends through the date of issuance of the financial statements.
Comprehensive Income: Comprehensive income consists of net income and other comprehensive income. Other comprehensive income includes unrealized gains and losses on securities available for sale which are also recognized as a separate component of equity.
Derivatives: The Company periodically enters into non-exchange traded mandatory forward sales contracts in conjunction with its mortgage banking operation. These contracts, considered derivatives, typically last 60 to 90 days and are used to offset the risk of interest rate changes between the time of the commitment to make a loan to a borrower at a stated rate and when the loan is sold. The Company did not have any mandatory forward sales contracts at December 31, 2005 and 2004.
Effect of Newly Issued But Not Yet Effective Accounting Standards: FAS 123, Revised, requires companies to record compensation cost for stock options provided to employees in return for employment service. The cost is measured at the fair value of the options when granted, and this cost is expensed over the employment service period, which is normally the vesting period of the options. This will apply to awards granted or modified in fiscal years beginning in 2006. Compensation cost will also be recorded for prior option grants that vest after the date of adoption. The effect on results of operations will depend on the level of future option grants and the calculation of the fair value of the options granted at such future date, as well as the vesting periods provided, and so cannot currently be predicted. Existing options that will vest after adoption date are expected to result in additional compensation expense of approximately $48,000 in 2006 and $41,000 in 2007.
Operating Segments: While the Company's chief decision makers monitor the revenue streams of the various Company products and services, operations are managed and financial performance is evaluated on a Company-wide basis. Accordingly, all of the Company's operations are considered by management to be aggregated into one reportable operating segment.
NOTE 2 - RESTRICTIONS ON CASH AND DUE FROM BANKS
Included in cash and due from banks are certain non-interest bearing deposits that are held at the Federal Reserve or maintained in vault cash in accordance with average balance requirements specified by the Federal Reserve Board of Governors. The reserve requirement at December 31, 2005 and 2004 was $156,000 and $144,000.
NOTE 3 - SECURITIES
Year-end securities available for sale are as follows:
Fair Unrealized Unrealized
Value Gains Losses
2005
U. S. Treasury $ 2,974,354 $ - $ (32,397)
U. S. government agencies 67,032,587 14,427 (825,849)
States and municipals 37,462,770 756,298 (337,944)
Mortgage-backed 52,340,502 4,150 (1,309,489)
Equity securities 842,133 317,329 -
Total $ 160,652,346 $ 1,092,204 $(2,505,679)
2004
U. S. Treasury $ 2,984,375 $ - $ (30,033)
U. S. government agencies 39,029,910 4,220 (384,112)
States and municipals 35,160,329 1,297,405 (163,285)
Mortgage-backed 48,620,711 79,835 (677,298)
Equity securities 971,536 363,589 -
Total $ 126,766,861 $ 1,745,049 $(1,254,728)
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The fair value of securities available for sale at December 31, 2005, by contractual maturity, are shown below. Expected maturities will differ from contractual maturities because borrowers may have the right to call or prepay obligations with or without call or prepayment penalties. Securities not due at a single maturity are shown separately.
Fair
Value
Due in one year or less $ 29,117,864
Due after one year through five years 41,549,332
Due after five years through ten years 19,861,663
Due after ten years 16,940,852
107,469,711
Mortgage-backed 52,340,502
Equity 842,133
Total $ 160,652,346
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Proceeds from sales of securities during 2005, 2004 and 2003 were $1,323,500, $37,973,553 and $8,434,570. Gross gains of $89,943, $483,888 and $157,474 and gross losses of $25,548, $194,938 and $18,036, were realized on those sales, respectively. The tax provision related to these realized gains and losses was $21,894, $98,243 and $47,409, respectively.
Securities with an approximate carrying value of $122,961,000 and $103,979,000 at December 31, 2005 and 2004, were pledged to secure public deposits, trust funds, securities sold under agreements to repurchase and for other purposes as required or permitted by law.
Securities with unrealized losses at year end 2005 and 2004 not recognized in income are as follows:
2005
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. Treasury $ - $ - $ 2,974,354 $ (32,397) $ 2,974,354 $ (32,397)
U.S. Government securities 38,032,999 (289,833) 23,442,038 (536,016) 61,475,037 (825,849)
States and municipals 11,774,597 (186,615) 4,210,864 (151,329) 15,985,461 (337,944)
Mortgage-backed 17,876,194 (187,827) 32,745,358 (1,121,662) 50,621,552 (1,309,489)
Total temporarily impaired $67,683,790 $ (664,275) $63,372,614 $(1,841,404) $131,056,404 $(2,505,679)
2004
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. Treasury $ 2,984,375 $ (30,033) $ - $ - $ 2,984,375 $ (30,033)
U.S. Government securities 33,139,473 (384,112) - - 33,139,473 (384,112)
States and municipals 4,156,727 (91,011) 2,811,479 (72,274) 6,968,206 (163,285)
Mortgage-backed 36,918,846 (571,246) 4,705,311 (106,052) 41,624,157 (677,298)
Total temporarily impaired $77,199,421 $(1,076,402) $ 7,516,790 $ (178,326) $ 84,716,211 $(1,254,728)
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The Company evaluates securities for other than temporary impairment at least on an annual basis, and 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 the intent and ability of the Company to retain its 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, the Company 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.
At December 31, 2005, eight mortgage-backed securities have unrealized losses with aggregate depreciation of 3% from their amortized cost basis. The decline in fair value from these and other securities is largely due to changes in interest rates. As management has the ability to hold debt securities until maturity, or for the foreseeable future, no declines are deemed to be other than temporary.
NOTE 4 - LOANS
Loans at year-end were as follows:
2005 2004
Commercial $ 27,301,633 $ 19,999,038
Real estate construction 29,822,067 32,256,168
Real estate mortgage 245,138,321 238,475,554
Agricultural 59,327,772 57,497,465
Consumer 8,953,943 9,062,518
Other 368,146 990,811
$ 370,911,882 $ 358,281,554
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Activity in the allowance for loan losses was as follows:
2005 2004 2003
Beginning balance $ 4,163,315 $ 3,819,842 $ 3,395,075
Allowance from acquisition - - 362,900
Charge-offs (526,735) (687,798) (1,397,822)
Recoveries 164,723 191,271 159,689
Provision for loan losses 508,100 840,000 1,300,000
Ending balance $ 4,309,403 $ 4,163,315 $ 3,819,842
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Impaired loans totaled $774,000 and $1,781,000 at December 31, 2005 and 2004.
The average recorded investment in impaired loans during 2005, 2004 and 2003
was $1,547,000, $1,444,000 and $1,051,000. The total allowance for loan losses
related to these loans was $240,000 and $416,000 at December 31, 2005 and 2004.
Interest income on impaired loans of $25,000, $22,000 and $14,000 was
recognized for cash payments received in 2005, 2004 and 2003.
Nonperforming loans were as follows:
2005 2004
Loans past due over 90 days still
on accrual $ 206,000 $ 308,000
Nonaccrual loans 774,000 1,781,000
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Nonperforming loans include impaired loans and smaller balance homogeneous loans, such as residential mortgage and consumer loans, that are collectively evaluated for impairment.
Mortgage loans serviced for others are not included in the accompanying consolidated balance sheets. The unpaid principal balances of mortgage loans serviced for others was approximately $104,575,000 and $102,024,000 at December 31, 2005 and 2004. Custodial escrow balances maintained in connection with the foregoing loan servicing, and included in demand deposits, were approximately $509,000 and $467,000 at December 31, 2005 and 2004.
Changes in mortgage servicing rights were as follows:
2005 2004 2003
Beginning balance $ 875,633 $ 861,120 $ 704,034
Additions 179,474 263,861 381,205
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Amortization (253,606) (249,348) (224,119)
Ending balance $ 801,501 $ 875,633 $ 861,120
Certain directors and executive officers of the Company and companies in which they have beneficiary ownership were loan customers of the Bank during 2005 and 2004. Such loans were made in the ordinary course of business at the Bank's normal credit terms and interest rates. An analysis of the activity with respect to all director and executive officer loans is as follows:
2005
Balance, beginning of year $ 4,410,000
New Loans 1,051,000
Effect of changes in composition of Related parties (381,000)
Repayments (373,000)
Balance, end of year $ 4,707,000
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NOTE 5 - PREMISES AND EQUIPMENT
Year-end premises and equipment were as follows:
2005 2004
Land and buildings $ 12,560,227 $ 12,804,599
Furniture and equipment 10,200,440 9,732,639
Construction projects 9,500 -
22,770,167 22,537,238
Less accumulated depreciation (12,068,626) (11,159,226)
$ 10,701,541 $ 11,378,012
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Depreciation expense was $924,564, $993,907 and $960,512 in 2005, 2004, and 2003.
NOTE 6 - GOODWILL AND INTANGIBLE ASSETS
The change in balance for goodwill during the year is as follows:
2005 2004
Beginning of year $ 9,110,524 $ 10,199,830
Adjustment to goodwill - (1,089,306)
End of year $ 9,110,524 $ 9,110,524
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Goodwill was reduced in 2004 primarily for unanticipated tax benefits arising after the initial calculation of goodwill from the business combination in 2003.
Goodwill will not be amortized but instead evaluated periodically for impairment.
Acquired intangible assets were as follows at year-end:
2005 2004
Gross Gross
Carrying Accumulated Carrying Accumulated
Amount Amortization Amount Amortization
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Amortized intangible assets:
Core deposit intangibles $3,656,403 $2,890,518 $3,656,403 $2,794,782
Aggregate amortization expense was $95,736, $275,490 and $292,271 for 2005, 2004 and 2003. The core deposit from the 1994 Clark County branch acquisition was completely amortized in 2004.
Estimated amortization expense for each of the next five years:
2006 $ 95,736 2007 95,736 2008 95,736 2009 95,736 2010 95,736 |
NOTE 7 - DEPOSITS
At December 31, 2005, the scheduled maturities of time deposits are as follows:
2006 $ 149,082,622 2007 38,020,991 2008 3,697,971 2009 1,188,208 2010 960,955 |
Certain directors and executive officers of the Company and companies in which they have beneficial ownership are deposit customers of the Bank. The amount of these deposits was approximately $1,700,000 and $3,421,000 at December 31, 2005 and 2004.
NOTE 8 - REPURCHASE AGREEMENTS
Securities sold under agreements to repurchase are secured by U.S. Government securities with a carrying amount of $23,246,420 and $27,275,000 at year-end 2005 and 2004.
Repurchase agreements generally mature within one year from the transaction date and range in maturities from 1 day to 3 years. The securities underlying the agreements are maintained in a third-party custodian's account under a written custodial agreement. Information concerning repurchase agreements for 2005 and 2004 is summarized as follows:
2005 2004
Average daily balance during the year $ 16,014,304 $ 18,398,243
Average interest rate during the year 3.19% 1.90%
Maximum month-end balance during the year $ 18,071,544 $ 21,946,746
Weighted average interest rate at year end 3.18% 2.94%
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NOTE 9 - FEDERAL HOME LOAN BANK ADVANCES
At year-end, advances from the Federal Home Loan Bank were as follows:
2005 2004
Maturities February 2005 through March
2030, fixed rates from 1.52% to 3.08% $ 19,802,691 $ 21,644,956
Maturities March 2005 through February
2026, fixed rates from 3.55% to 4.38% 30,781,074 16,846,606
Maturities June 2005 through November
2022, fixed rates from 4.82% to 7.23% 16,164,876 21,258,104
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Total $ 66,748,641 $ 59,749,666
Advances are paid either on a monthly basis or at maturity. All advances require a prepayment penalty and certain advances are callable by the FHLB at various call dates throughout the term of the advance. Advances are secured by the FHLB stock and substantially all first mortgage loans.
Scheduled principal payments due on advances during the years subsequent to December 31, 2005 are as follows:
2006 $ 13,182,609
2007 9,203,106
2008 11,231,617
2009 15,261,901
2010 7,293,215
Thereafter 10,576,193
$ 66,748,641
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NOTE 10 - SUBORDINATED DEBENTURES
In August 2003, the Company formed Kentucky Bancshares, Statutory Trust I ("Trust"). The Trust issued $217,000 of common securities to the Company and $7,000,000 of trust preferred securities as part of a pooled offering of such securities. The Company issued $7,217,000 subordinated debentures to the Trust in exchange for the proceeds of the offering, which debentures represent the sole asset of the Trust. The debentures pay interest quarterly at 7.06% for the first 5 years. Starting September 2008, the rate converts to three-month LIBOR plus 3.00 adjusted quarterly. The Company may redeem the subordinated debentures, in whole or in part, beginning September 2008 at a price of 100% of face value. The subordinated debentures must be redeemed no later than 2033.
In accordance with FASB Interpretation No. 46, the Trust is not consolidated with the Company. Accordingly, the Company does not report the securities issued by the Trust as liabilities, and instead reports as liabilities the subordinated debentures issued by the Company and held by the Trust, as these are no longer eliminated in consolidation.
NOTE 11 - INCOME TAXES
Income tax expense was as follows:
2005 2004 2003
Current $ 1,969,865 $ 2,063,949 $ 1,166,575
Deferred 107,876 153,834 289,965
$ 2,077,741 $ 2,217,783 $ 1,456,540
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Year-end deferred tax assets and liabilities were due to the following. No valuation allowance for the realization of deferred tax assets is considered necessary.
2005 2004
Deferred tax assets
Allowance for loan losses $ 1,355,432 $ 1,241,615
Unrealized loss on securities 480,581 -
Core deposit intangibles 13,753 46,720
Other 121,049 358,420
Deferred tax liabilities
Unrealized gain on securities - (166,874)
Bank premises and equipment (429,886) (428,414)
FHLB stock (1,018,338) (929,394)
Mortgage servicing rights (272,510) (297,715)
Other (188,099) (301,955)
Net deferred tax asset (liability) $ 61,982 $ (477,597)
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Effective tax rates differ from federal statutory rates applied to financial statement income due to the following:
2005 2004 2003
U. S. federal income tax rate 34.0% 34.0% 34.0%
Changes from the statutory rate
Tax-exempt investment income (7.3) (7.0) (9.3)
Non-deductible interest expense related to
carrying tax-exempt investments .8 .6 .8
Other (1.2) .2 .1
26.3% 27.8% 25.6%
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Federal income tax laws provided the Federal Savings Bank, acquired by the Company in 2003, with additional bad debt deductions through 1987, totaling $1.3 million. Accounting standards do not require a deferred tax liability to be recorded on this amount, which otherwise would total a $441,000 liability at December 31, 2005. The Company's acquisition of First Federal Savings Bank did not require the recapture of the bad debt reserve. However, if Kentucky Bank was liquidated or otherwise ceased to be a bank, or if tax laws were to change, the $441,000 would be recorded as expense.
NOTE 12 - EARNINGS PER SHARE
The factors used in the earnings per share computation follow:
2005 2004 2003
Basic Earnings Per Share
Net income $ 5,820,100 $ 5,762,109 $ 4,233,377
Weighted average common
shares outstanding 2,676,890 2,757,233 2,781,146
Basic earnings per share $ 2.17 $ 2.09 $ 1.52
Diluted Earnings Per Share
Net income $ 5,820,100 $ 4,233,377 $ 5,902,525
Weighted average common
shares outstanding 2,676,890 2,781,146 2,770,282
Add dilutive effects of
assumed exercise of
stock options 14,965 45,640 35,836
Weighted average common and
dilutive potential common
shares outstanding 2,691,855 2,826,786 2,806,118
Diluted earnings per share $ 2.16 $ 2.07 $ 1.50
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Stock options of 31,100 shares common stock from 2005 and 11,350 shares of common stock from 2004 were excluded from diluted earnings per share because their impact was antidilutive. There were no shares that were antidilutive in 2003.
NOTE 13 - RETIREMENT PLANS
The Company has a defined benefit pension plan covering substantially all of its employees. The Company's funding policy is to contribute annually the maximum amount that can be deducted for federal income tax purposes. Benefits are based on one percent of employee average earnings for the previous five years times years of credited service.
Information about the pension plan was as follows:
2005 2004
Change in benefit obligation:
Beginning benefit obligation $ 5,481,513 $ 4,290,391
Service cost 432,429 369,481
Interest cost 346,223 286,326
Actuarial adjustment 581,964 630,729
Benefits paid (104,770) (95,414)
Ending benefit obligation 6,737,359 5,481,513
Change in plan assets, at fair value:
Beginning plan assets 4,798,708 4,075,719
Actual return 166,535 541,419
Employer contribution 211,031 276,984
Benefits paid (104,770) (95,414)
Ending plan assets 5,071,504 4,798,708
Funded status (1,665,855) (682,805)
Unrecognized net actuarial (gain) loss 1,683,609 932,175
Unrecognized prior transition asset (1,113) (1,485)
Net pension prepaid benefit $ 16,641 $ 247,885
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Amounts recognized in the balance sheet consist of:
Prepaid benefit cost $ 16,641 $ 247,885 Accrued benefit cost - - Net amount recognized $ 16,641 $ 247,885 |
The accumulated benefit obligation for defined benefit pension plans was $4,973,145 and $3,976,697 at year-end 2005 and 2004.
Net periodic pension cost include the following components:
2005 2004 2003
Service cost $ 432,429 $ 369,481 $ 314,935
Interest cost 346,223 286,326 265,034
Expected return on plan assets (376,195) (319,050) (265,117)
Amortization 39,818 (372) 16,758
Net periodic cost $ 442,275 $ 336,385 $ 331,610
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Weighted-average assumptions used to determine net cost
2005 2004 2003
Discount rate on benefit obligation 5.75% 6.00% 7.00%
Long-term expected rate of return
on plan assets 8.00% 8.00% 8.00%
Rate of compensation increase 4.00% 4.00% 5.00%
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The assumptions described above were determined using various factors. Based on the history of domestic investment experience, the expected long-term rate of return on assets for the income segment is assumed to be 6.0%. The expected long-term return on assets for the growth segment is assumed to be 10.0%. Thus, the assumed rate of return on the total portfolio is 8.0% per year. The rate of compensation increase assumption of 4.0% is based upon historical compensation increases at the Bank. The discount rate assumption of 5.75% is based on the expected movements of interest rates from economic forecasts, Federal Reserve monetary actions and commentary, the expected pace of economic activity, the issuance of new debt to finance significant fiscal policy deficits, and the benchmark Moody's AA rated long term corporate bond rate.
The Company's pension plan asset allocation at year-end and expected long-term rate of return by asset category are as follows:
Weighted
Percentage Percentage Average
of Plan of Plan Expected
Assets at Assets at Long-Term
Year-End Year-End Rate of Return
Asset Category 2005 2004 2005
Equity securities 62.3 64.9 10%
Debt securities 35.9 34.6 6
Cash 1.8 0.5 4
Total 100.0 100.0
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The asset allocation objective for 2005 and thereafter is to be 60% in equity securities and 40% in debt securities. These percentages may vary 5-10 basis points based on market conditions of equity and bond markets. There is no target allocation for cash balances.
The Company expects to contribute $204,000 to its pension plan in 2006.
The following benefit payments, which reflect expected future service, are expected:
Pension Benefits
2006 $ 121,559
2007 160,556
2008 176,305
2009 187,972
2010 241,301
Years 2011-2015 1,527,087
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The Company also has a qualified profit sharing plan which covers substantially all employees and includes a 401(k) provision. Profit sharing contributions, excluding the 401(k) provision, are at the discretion of the Company's Board of Directors. Expense recognized in connection with the plan was $320,670, $309,741 and $271,684 in 2005, 2004 and 2003.
NOTE 14 - STOCK OPTION PLAN
The Company grants certain officers and key employees stock option awards which vest and become fully exercisable at the end of five years and provides for issue of up to 220,000 options. The Company also grants certain directors stock option awards which vest and become fully exercisable immediately and provides for issue of up to 20,000 options. The exercise price of each option, which has a ten year life, was equal to the market price of the Company's stock on the date of grant; therefore, no compensation expense was recognized.
Summary of stock option transactions are as follows:
2005 2004 2003
Weighted Weighted Weighted
Option Option Option
Options Price Options Price Options Price
Outstanding, beginning of year 60,564 $23.00 57,560 $20.23 83,114 $16.72
Granted 19,850 30.40 12,250 33.65 14,500 25.72
Expired (50) 26.00 (2,316) 27.03 (3,698) 25.00
Exercised (3,300) 13.23 (6,930) 17.55 (36,356) 13.89
Outstanding, end of year 77,064 $25.32 60,564 $23.00 57,560 $20.23
Exercisable, end of year 42,116 $21.38 38,676 $19.41 36,824 $17.80
Weighted remaining contractual
Life 71.1 months 67.0 months 67.9 months
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Options outstanding at year-end 2005 were as follows:
Outstanding Exercisable
Weighted
Average Weighted Weighted
Remaining Average Average
Contractual Exercise Exercise
Range of Exercise Prices Options Life Price Options Price
From $12.50 to $15.50 per share 12,020 18.4 $14.24 12,020 $14.24
From $18.00 to $20.63 per share 13,640 36.1 20.52 13,640 20.52
From $23.50 to $28.00 per share 20,304 75.1 25.37 12,126 25.30
From $30.00 to $30.50 per share 19,850 108.6 30.40 1,200 30.25
From $33.90 to $34.00 per share 11,250 96.3 33.91 3,130 33.94
77,064 42,116
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NOTE 15 - 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. There was no activity in the plan during 2005.
NOTE 16 - LIMITATION ON BANK DIVIDENDS
The Company's principal source of funds is dividends received from the Bank. Banking regulations limit the amount of dividends that may be paid by the Bank without prior approval of regulatory agencies. Under these regulations, the amount of dividends that may be paid in any calendar year is limited to the current year's net profits, as defined, combined with the retained net profits of the preceding two years. During 2006 the Bank could, without prior approval, declare dividends of approximately $4,928,000 plus any 2006 net profits retained to the date of the dividend declaration.
NOTE 17 - DISCLOSURES ABOUT FAIR VALUE OF FINANCIAL INSTRUMENTS
The fair values of the Company's financial instruments at December 31, 2005 and 2004 are as follows:
2005 2004
Carrying Carrying
Amount Fair Value Amount Fair Value
(In Thousands)
Financial assets
Cash and cash equivalents $ 14,164 $ 14,164 $ 15,455 $ 15,455
Securities 160,652 160,652 126,767 126,767
Mortgage loans held for sale - - 176 178
Loans, net 366,602 362,686 354,118 350,912
FHLB stock 5,398 5,398 5,136 5,136
Interest receivable 3,719 3,719 3,226 3,226
Financial liabilities
Deposits $ 431,631 $ 432,560 $ 387,955 $ 390,296
Securities sold under
agreements to repurchase
and other borrowings 16,838 16,612 25,593 25,467
FHLB advances 66,749 64,937 59,750 59,281
Subordinated debentures 7,217 7,328 7,217 7,354
Interest payable 2,715 2,715 1,849 1,849
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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. Security fair values are based on market prices or dealer quotes, and if no such information is available, on the rate and term of the security and information about the issuer. 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 values for impaired loans are estimated using discounted cash flow analysis or underlying collateral values. 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.
NOTE 18 - OFF-BALANCE SHEET ACTIVITIES AND COMMITMENTS
Some financial instruments, such as loan commitments, credit lines, letters of credit, and overdraft protection, are issued to meet customer financing needs. These are agreements to provide credit or to support the credit of others, as long as conditions established in the contract are met, and usually have expiration dates. Commitments may expire without being used. Off-balance sheet risk to credit loss exists up to the face amount of these instruments, although material losses are not anticipated. The same credit policies are used to make such commitments as are used for loans, including obtaining collateral at exercise of the commitment.
Financial instruments with off-balance sheet risk were as follows at year-end:
2005 2004
Unused lines of credit $ 56,354,000 $ 54,785,000
Commitments to make loans 156,000 1,272,000
Letters of credit 183,000 145,000
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Unused lines of credit are substantially all at variable rates. Commitments to make loans are generally made for a period of 60 days or less and are primarily fixed at current market rates ranging from 6.125% to 6.25% with maturities ranging from 15 to 30 years and are intended to be sold.
NOTE 19 - CONTINGENT LIABILITIES
The Bank is a defendant in legal actions arising from normal business activities. Management believes these actions are without merit or that the ultimate liability, if any, resulting from them will not materially affect the Company's consolidated financial position or results of operations.
NOTE 20 - CAPITAL REQUIREMENTS
The Company and the Bank are subject to various regulatory capital requirements administered by the federal banking agencies. Failure to meet minimum capital requirements can initiate certain mandatory and possible additional discretionary actions by regulators that, if undertaken, could have a direct material effect on the Company's financial statements. Under capital adequacy guidelines and the regulatory framework for prompt corrective action, the Company and the Bank must meet specific capital guidelines that involve quantitative measures of the Company's and the Bank's assets, liabilities, and certain off-balance sheet items as calculated under regulatory accounting practices. The Company and Bank capital amounts and classifications are also subject to qualitative judgments by regulators about components, risk weightings, and other factors.
Quantitative measures established by regulation to ensure capital adequacy require the Company and the Bank to maintain minimum amounts and ratios (set forth in the following table) of Total and Tier I capital (as defined in the regulations) to risk-weighted assets (as defined), and of Tier I capital to average assets (as defined). Management believes, as of December 31, 2005 and 2004, that the Company and the Bank meet all capital adequacy requirements to which they are subject.
The most recent notification from the Federal Deposit Insurance Corporation categorized the Bank as well capitalized under the regulatory framework for prompt corrective action. To be categorized as well capitalized, the Bank must maintain minimum Total risk-based, Tier I risk-based and Tier I leverage ratios as set forth in the following table. There are no conditions or events since that notification that management believes have changed the institution's category.
The Company's and the Bank's actual amounts and ratios are presented in the table below:
To Be Well
Capitalized
Under Prompt
For Capital Corrective
Actual Adequacy Purposes Action Provisions
Amount Ratio Amount Ratio Amount Ratio
(Dollars in Thoursands)
2004
Consolidated
Total Capital (to Risk-Weighted Assets) $ 45,987 13.2% $ 27,855 8% $ 34,819 N/A
Tier I Capital (to Risk-Weighted Assets) 41,660 12.0 13,928 4 20,891 N/A
Tier I Capital (to Average Assets) 41,660 8.2 20,410 4 25,512 N/A
Bank Only
Total Capital (to Risk-Weighted Assets) $ 44,512 12.8% $ 27,791 8% $ 34,739 10%
Tier I Capital (to Risk-Weighted Assets) 40,338 11.6 13,895 4 20,843 6
Tier I Capital (to Average Assets) 40,338 7.9 20,368 4 25,460 5
2005
Consolidated
Total Capital (to Risk-Weighted Assets) $ 49,130 13.4% $ 29,311 8% $ 36,639 N/A
Tier I Capital (to Risk-Weighted Assets) 44,602 12.2 14,656 4 21,984 N/A
Tier I Capital (to Average Assets) 44,602 8.0 22,342 4 27,928 N/A
Bank Only
Total Capital (to Risk-Weighted Assets) $ 47,346 13.0% $ 29,251 8% $ 36,564 10%
Tier I Capital (to Risk-Weighted Assets) 42,952 11.8 14,626 4 21,938 6
Tier I Capital (to Average Assets) 42,952 7.7 22,309 4 27,887 5
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NOTE 21 - SUBSEQUENT EVENT - BUSINESS COMBINATION
On February 24, 2006, the Company announced the signing of a definitive merger
agreement with Peoples Bancorp of Sandy Hook, Inc. (Peoples Bancorp). Under
the terms of the merger agreement, Peoples Bancorp will merge into the Company
and Peoples Bank, a subsidiary of Peoples Bancorp, will merge into the Bank.
Peoples Bancorp is a privately held bank holding company with offices in Sandy
Hook and Morehead, Kentucky. On December 31, 2005 it had assets, deposits and
shareholders equity of $87 million, $68 million and $8.6 million, respectively.
As a result of this merger, the Company expects to expand its customer base to
enhance deposit fee income, provide an opportunity to market additional
products and services to new customers, and reduce operating costs through
economies of scale.
Subject to regulatory approval, as well as approval of Peoples Bancorp stockholders, under the terms of the definitive agreement, each share of Peoples Bancorp common stock will be converted into consideration, sixty percent of which to be in the form of cash and forty percent of which to be in the form of shares of Kentucky Bancshares common stock. Based on the current market price of Kentucky Bancshares common stock, approximately 190,000 shares of Kentucky Bancshares common stock would be issued to Peoples Bancorp shareholders. The total purchase price will be approximately $14 million.
NOTE 22 - PARENT COMPANY FINANCIAL STATEMENTS
Condensed Balance Sheets
December 31
2005 2004
(In Thousands)
ASSETS
Cash on deposit with subsidiary $ 1,163 $ 721
Investment in subsidiary 51,699 50,481
Securities available for sale 573 698
Other assets 345 363
Total assets $ 53,780 $ 52,263
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LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities Subordinated debentures $ 7,217 $ 7,217 Other liabilities 17 19 Stockholders' equity Preferred stock - - Common stock 6,813 6,819 Retained earnings 40,666 37,884 Accumulated other comprehensive income (933) 324 Total liabilities and stockholders' equity $ 53,780 $ 52,263 |
Condensed Statements of Income and Comprehensive Income
Years Ended December 31
2005 2004 2003
(In Thousands)
Income
Dividends from subsidiary $ 3,750 $ 3,650 $ 13,025
Securities gains (losses), net 60 82 7
Interest income 13 24 20
Total income 3,823 3,756 13,052
Expenses
Interest expense 494 494 169
Other expenses 134 157 360
Total expenses 628 651 529
Income before income taxes and equity in
undistributed income of subsidiary 3,195 3,105 12,523
Applicable income tax (expense) benefits 178 177 175
Income before equity in undistributed
income of subsidiary 3,373 3,282 12,698
Equity in undistributed income of subsidiary 2,447 2,480 (8,465)
Net income 5,820 5,762 4,233
Other comprehensive income (loss), net of tax:
Unrealized gains (losses) on securities
arising during the period (1,215) (1,004) (237)
Reclassification of realized amount (42) (191) (92)
Net change in unrealized gain (loss)
on securities (1,257) (1,195) (329)
Comprehensive income $ 4,563 $ 4,567 $ 3,904
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Condensed Statements of Cash Flows
Years Ended December 31
2005 2004 2003
(In Thousands)
Cash flows from operating activities
Net income $ 5,820 $ 5,762 $ 4,233
Adjustments to reconcile net income to net
cash from operating activities
Equity in undistributed earnings of
Subsidiary (2,447) (2,480) 8,465
Securities (gains) losses, net (60) (82) (7)
Change in other assets 32 659 (553)
Change in other liabilities (3) - (10)
Net cash from operating activities 3,342 3,859 12,128
Cash flows from investing activities
Purchase of securities available for sale - - (82)
Proceeds from sales of securities
available for sale 143 675 65
Acquisition of Kentucky First Bancorp, Inc. - - (20,998)
Net cash from investing activities 143 675 (21,015)
Cash flows from financing activities
Proceeds from subordinated debentures - - 7,000
Dividends paid (2,462) (2,303) (2,117)
Proceeds from issuance of common stock 48 131 189
Purchase of common stock (629) (3,424) (11)
Net cash from financing activities (3,043) (5,596) 5,061
Net change in cash 442 (1,062) (3,826)
Cash at beginning of year 721 1,783 5,609
Cash at end of year $ 1,163 $ 721 $ 1,783
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NOTE 23 - QUARTERLY FINANCIAL DATA (UNAUDITED)
Interest Net Interest Net Earnings Per Share
Income Income Income Basic Fully Diluted
2005
First quarter $ 6,720 $ 4,221 $ 1,333 $ .50 $ .49
Second quarter 7,033 4,385 1,516 .56 .56
Third quarter 7,321 4,246 1,430 .54 .54
Fourth quarter 7,823 4,279 1,541 .57 .57
2004
First quarter $ 6,267 $ 4,071 $ 1,150 $ .41 $ .41
Second quarter 6,463 4,267 1,439 .51 .51
Third quarter 6,506 4,252 1,579 .58 .57
Fourth quarter 6,610 4,189 1,594 .59 .58
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Report of Independent Registered Public Accounting Firm
Board of Directors
Kentucky Bancshares, Inc.
Paris, Kentucky
We have audited the accompanying consolidated balance sheets of Kentucky Bancshares, Inc. as of December 31, 2005 and 2004, and the related statements of operations, stockholders' equity, and cash flows for each of the three years in the period ended December 31, 2005. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of the Company as of December 31, 2005 and 2004, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 2005, in conformity with U.S. generally accepted accounting principles.
/s/Crowe Chizek and Company LLC
Crowe Chizek and Company LLC
Lexington, Kentucky
January 27, 2006, except for Note 21
with respect to a pending acquisition,
as to which the date is February 24, 2006
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Senior Management
Louis Prichard, President and Chief Executive Officer
Brenda Bragonier, VP, Director of Marketing/Human Resources
Hugh Crombie, VP, Director of Operations
Gregory J. Dawson, VP, Chief Financial Officer
Norman J. Fryman, Sr. VP, Director of Sales & Service
Clark Nyberg, VP, Director of Wealth Management
Bourbon
Nancye Fightmaster, VP, Regional Manager
Wallis Brooks, Branch Manager/Community Reinvestment Act
Rhonda Brown, Sr. Consumer Lender
Brandon Eason, Sr. Consumer Lender
Philip Hurst, Branch Manager
Susan Lemons, AVP, Branch Manager/Consumer Lender
Clark
Nick Carter, VP, Regional Manager
Kathy Newkirk, Sr. Consumer Lender
Teresa Shimfessel, AVP, Branch Manager/Consumer Lender
Brandon Sumpter, Sr. Consumer Lender
Harrison
Ken Devasher, VP, Regional Manager
Dreama Harris, AVP, Sr. Consumer Lender
Joyce Rainey, Consumer Lender
Jessamine
Rick Walling, VP, Regional Manager
Scott
Pam Jessie, VP, Regional Manager
Sharon Whitlock, Branch Manager/Consumer Lender
Woodford
Duncan Gardiner, VP, Regional Manager
Shane Foley, VP, Mortgage Lender
Accounting/Risk Management
Gregory J. Dawson, VP, Chief Financial Officer
Heather Barger, VP, Director of Risk Management
Brenda Berry, AVP, Senior Accountant
Robbie Cox, Senior Auditor
Janice Hash, AVP, Sr. Accountant/Purchasing
Lydia Sosby, VP, Compliance
Collections
Catherine Hill, VP, Head of Collections
Mary Moreland, AVP, Collections Officer
Commercial Lending
Darren Henry, VP, Director of Commercial Lending
R. W. Collins, VP, Agricultural Lender
David Foster, VP, Agricultural Lender
A. J. Gullett, VP, Commercial Lender
James LeMaster, Business Development
Michael Lovell, VP, Commercial Lender
George R. Wilder, VP, Commercial Lender
Human Resources
Brenda Bragonier, VP, Director of Marketing/Human Resources
James Gray, AVP, Director of Training
Judith Taylor, VP, Human Resource Manager
Operations
Hugh Crombie, VP, Director of Operations
Karen Anderson, Electronic Banking
Melinda Biddle, Goverment Reporting
Patricia Carpenter, Data Management
Cynthia Criswell, Data Processing
Perry Ingram, AVP, Network Manager
Jane Mogge, Document Management
Donald Roe, AVP, Sr. Data Processing
Arnita Willoughby, Mortgage Operations Manager
Carolyn Wilkins, Overdraft Management
Martha Woodford, VP, Assistant Director of Operations
Wealth Management
Clark Nyberg, VP, Director of Wealth Management
Lisa Highley, Personal Trust
Janice Worth, AVP, Personal Trust
Kentucky Bank Board of Directors
William M. Arvin, Attorney
Proctor Blair, Partner, Ludwig, Blair and Bush, PLLC
James Ferrell, Physician
Henry Hinkle, President, Hinkle Contracting Corporation
Tricia Kittinger, Woodford County Circuit Clerk
Theodore Kuster, Westview-Hillside Farms
Betty Long, Retired President, First Federal Savings of Cynthiana
George Lusby, County Judge Executive
Ted McClain, Agent, Hopewell Insurance Company
Eva McDaniel, Jessamine County Clerk
Louis Prichard, President, CEO, Kentucky Bank
John Roche, Optician
Robert G. Thompson, Farmer, Thoroughbred Breeder, Snowhill Farm
Woodford Van Meter, Ophthalmologist
Buckner Woodford, Chairman, Kentucky Bank
Bourbon
Proctor Blair, Partner, Ludwig, Blair and Bush, PLLC
Allyson Eads, Co-owner, Eads Hardware
Rodes Shackelford Parrish, President, Clay Ward Agency
Clark
Mary Beth Hendricks, Director Clark County Child Support Services
Donald Pace, Executive Director Central Kentucky Educational Co-op with UK
John Roche, Optician
Edwin Saunier, President, Saunier North American, Inc.
Harrison
K. Bruce Florence, Director, Licking Valley College
Betty Long, Retired President, First Federal Savings of Cynthiana
Brad Marshall, Farmer, Owner Marshall's Tractor Supply
Joel Techau, CEO, Techau Inc.
Gerry Whalen, Broker Whalen and Company
Jessamine
William M. Arvin, Attorney
Dan Brewer, President and CEO, Blue Grass Energy
Tom Buford, State Senator
Jonah Mitchell, President, Jonah Mitchell Real Estate and Auction Company
Eva McDaniel, Jessamine County Clerk
Scott
Gus Bynum, Physician
Mike Hockensmith, Owner and President, The Hockensmith Agency, Inc.
R. C. Johnson, Jr., Owner, President, Johnson's Funeral Home
George Lusby, County Judge Executive
Everette Varney, Mayor
Woodford
Loren Carl, Field Representative, Congressman Ben Chandler
William Graul, Physician
James Kay, Businessman, Farmer
Tricia Kittinger, Woodford County Circuit Clerk
Kentucky Bancshares, Inc. Directors
LOUIS PRICHARD
President and CEO, Kentucky Bank and Kentucky Bancshares, Inc.
BUCKNER WOODFORD
Chairman, Kentucky Bank and Kentucky Bancshares, Inc.
WILLIAM M. ARVIN
Attorney, Law Offices of William Arvin
WOODFORD VAN METER
Opthalmologist
THEODORE KUSTER
Farmer and Thoroughbred Breeder, Westview Hillside Farms
HENRY HINKLE
President, Hinkle Contacting Corporation
ROBERT G. THOMPSON
Farmer and Thoroughbred Breeder, Snowhill Farm
BETTY LONG
Retired President, First Federal Savings of Cynthiana
TED McCLAIN
Agent, Hopewell Insurance Company
KENTUCKY BANCSHARES, INC.
PROXY STATEMENT
Introduction
This Proxy Statement is being furnished to shareholders of Kentucky Bancshares, Inc., a Kentucky corporation (the "Company"), in connection with the solicitation of proxies by the Board of Directors of the Company (the "Board") from holders of record of the Company's outstanding Common Shares (the "Common Shares") as of the close of business on March 17, 2006 (the "Annual Meeting Record Date"), for use at the Annual Meeting of Shareholders of the Company (the "Annual Meeting") to be held on Friday, May 12, 2006, at 11:00 a.m. (Eastern Daylight Time) in the Board Room of Kentucky Bank, Fourth and Main Streets, Paris, Kentucky, and at any adjournment or postponement thereof. This Proxy Statement is first being mailed to the Company's shareholders on or about March 27, 2006. The principal executive offices of the Company are located at Fourth and Main Streets, Paris, Kentucky 40361. Its telephone number is (859) 987-1795.
Purposes of the Annual Meeting
At the Annual Meeting, holders of Common Shares will be asked to consider and to vote upon the following matters:
(1) To elect three Class I directors; and
(2) To transact such other business as may properly come before the
meeting.
The Board recommends that shareholders vote FOR the election of the Board's nominees for Class I directors. As of the date of this Proxy Statement, the Board knows of no other business to come before the Annual Meeting.
Voting Rights and Proxy Information
Only holders of record of Common Shares as of the close of business on the Annual Meeting Record Date will be entitled to notice of and to vote at the Annual Meeting or any adjournment or postponement thereof. As of the Annual Meeting Record Date, there were 2,671,672 Common Shares outstanding and entitled to vote at the Annual Meeting. The presence, either in person or by properly executed proxy, of the holders of a majority of the outstanding Common Shares as of the Annual Meeting Record Date is necessary to constitute a quorum at the Annual Meeting.
Holders of Common Shares are entitled to one vote per share on any matter, other than the election of directors, that may properly come before the Annual Meeting. In the election of directors, holders of Common Shares have cumulative voting rights whereby each holder is entitled to vote the number of Common Shares owned multiplied by three (the number of directors to be elected at the Annual Meeting), and each holder may cast the whole number of votes for one candidate or distribute such votes among two or more candidates. The Board of Directors is soliciting discretionary authority for the individuals appointed in the proxies to cumulate votes represented by properly executed proxies and to vote for less than all the Company's nominees to the Board if deemed appropriate to ensure the election of as many of the Company's nominees to the Board as possible. Those persons receiving the three highest number of votes in the election of directors will be elected to the Board.
All Common Shares that are represented at the Annual Meeting by properly executed proxies received before or at the Annual Meeting and not revoked will be voted at the Annual Meeting in accordance with the instructions indicated in such proxies. If no instructions are indicated, such proxies will be voted "FOR" the election of the Board's three nominees as Class I directors of the Company (or, if deemed appropriate by the individuals appointed in the proxies, cumulatively voted for less than all of the Board's nominees).
Any proxy given pursuant to this solicitation may be revoked by the
person giving it at any time before it is voted. Proxies may be revoked by
(i) filing with the Company, to the attention of Gregory J. Dawson, Secretary,
at or before the Annual Meeting, a written notice of revocation bearing a
later date than the proxy, (ii) duly executing a subsequent proxy relating to
the same Common Shares and delivering it to the Company at or before the
Annual Meeting or (iii) attending the Annual Meeting and voting in person
(although attendance at the Annual Meeting will not in and of itself
constitute a revocation of a proxy). Any written notice revoking a proxy
should be sent to Kentucky Bancshares, Inc., P. O. Box 157, Paris, Kentucky
40362-0157, Attention Gregory J. Dawson, Secretary.
The Company will bear the cost of the solicitation of proxies by the Board in connection with the Annual Meeting. In addition to solicitation by mail, the Company will request banks, brokers and other custodian nominees and fiduciaries to supply proxy material to the beneficial owners of Common Shares, and will reimburse them for their expenses in so doing. Certain directors, officers and other employees of the Company, not specially employed for this purpose, may solicit proxies without additional remuneration therefore, by personal interview, mail, telephone, facsimile or other electronic means.
Item 1 - Election of Directors
Under the Company's Amended and Restated Articles of Incorporation, the Board of Directors consists of three different classes (Class I, Class II and Class III), each member of a class to serve, subject to the provisions of the Amended and Restated Articles of Incorporation and Bylaws, for a three-year term and until the member's successor is duly elected and qualified. Except as listed below, each nominee for a Class I directorship has held the specified position for the last five years. The names of the nominees proposed for election as Class I directors, all of whom are presently directors of the Company, are set forth below. The Company is not aware of any other individual who may be nominated for election to the Board of Directors at the Annual Meeting.
Betty J. Long is the retired President and CEO of First Federal, Cynthiana. She was appointed to the board of the Company in 2003.
Ted McClain is an agent with Hopewell Insurance Company. He became a director of the Company in 2003.
Buckner Woodford IV is Chairman of both Kentucky Bank and Kentucky Bancshares, Inc. He became a director of the Company in 1982.
The Board of Directors does not contemplate that any of the nominees will be unable to accept election as a director for any reason. However, if one or more of such nominees is unable or unwilling to accept or is unavailable to serve, the persons named in the proxies or their substitutes shall have authority, according to their judgment, to vote or to refrain from voting for other individuals as directors.
The Board recommends that shareholders vote "FOR" each of the above nominees for election as Class I directors of the Company.
Item 2 - Other Matters
As of the date of this Proxy Statement, the Company knows of no business that will be presented for consideration at the Annual Meeting other than that referred to above. At the Annual Meeting, only such business will be conducted, and only such proposals or director nominations will be acted upon, as have been properly brought before the meeting in accordance with the Company's Bylaws. Proxies in the enclosed form will be voted in respect of any other business that is properly brought before the Annual Meeting in accordance with the judgment of the person or persons voting the proxies.
By Order of the Board of Directors
/s/Gregory J. Dawson
Gregory J. Dawson, Secretary
March 27, 2006
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This Proxy Form is Solicited by the Board of Directors
Kentucky Bancshares, Inc.
Paris, Kentucky
The undersigned hereby appoints Buckner Woodford IV and Gregory J. Dawson, or either one of them (with full power to act alone), my proxy, each with the power to appoint his substitute, to represent me to vote all of the Corporation's Common Shares which I held of record or am otherwise entitled to vote at the close of business on March 17, 2006, at the 2006 Annual Meeting of Shareholders to be held on May 12, 2006 and at any adjournments thereof, with all powers the undersigned would possess if personally present, as follows:
1. ELECTION OF DIRECTORS
FOR all nominees listed below (except as otherwise indicated below)
AGAINST all nominees listed below
Betty J. Long, Ted McClain, and Buckner Woodford IV
(INSTRUCTION: To withhold authority to vote for any individual nominee, write the nominee's name on the line)
2. OTHER BUSINESS. In their discretion, the Proxies are authorized to act upon such other matters as may properly be brought before the Annual Meeting or any adjournment thereof.
THE BOARD OF DIRECTORS RECOMMENDS A VOTE "FOR" ALL OF THE NOMINEES LISTED IN ITEM 1.
(PLEASE DATE, MARK, SIGN AND RETURN IMMEDIATELY)
This proxy form relates to ALL shares owned by the undersigned.
This proxy form is solicited by the Board of Directors and will be voted as specified and in accordance with the accompanying proxy statement. If no instruction is indicated on a duly executed proxy form, all shares will be voted "FOR" the nominees listed in Item 1. A vote FOR the election of nominees listed above includes discretionary authority to cumulate votes, selectively among the nominees as to whom authority to vote has not been withheld and to vote for a substitute nominee if any nominee becomes unavailable for election for any reason.
Please sign exactly as name appears. When shares are held by joint tenants, both should sign. When signing as attorney, as executor, administrator, trustee, or guardian, please give full title as such. If a corporation, please sign full corporate name by President or other authorized officer. If a partnership, please sign partnership name by authorized person.
Exhibit 21 Subsidiaries of Registrant
Kentucky Bancshares, Inc.'s Subsidiary
Kentucky Bank
EXHIBIT 23
CONSENT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
We hereby consent to the incorporation by reference in the Form S-8 Registration Statement No. 333-92725 and No. 333-130791 of Kentucky Bancshares, Inc., of our report dated January 27, 2006, except for Note 21 with respect to a pending acquisition, as to which the date is February 24, 2006, on the consolidated financial statements of Kentucky Bancshares, Inc. as of December 31, 2005 and 2004 and for each of the three years in the period ended December 31, 2005, as included in the registrant's annual report on Form 10-K.
/s/Crowe Chizek and Company LLC Crowe Chizek and Company LLC Lexington, Kentucky March 21, 2006 |
Exhibit 31.1
CERTIFICATION OF CHIEF EXECUTIVE OFFICER
PURSUANT TO SECTION 302 OF SARBANES-OXLEY ACT
I, Louis Prichard, certify that:
1. I have reviewed this annual report on Form 10-K 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)) 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) Evaluated the effectiveness of the registrant's disclosure controls and
procedures and presented in this report our conclusions about the
effectiveness of the disclosure controls and procedures, as of the end of
the period covered by this report based on such evaluation; and
c) Disclosed in this report any change in the registrant's internal
control over financial reporting that occurred during the registrant's
most recent fiscal quarter that has materially affected, or is reasonably
likely to materially affect, the registrant's internal control over
financial reporting; and
5. The registrant's other certifying officer and I have disclosed, based on
our most recent evaluation of internal control over financial reporting, to
the registrant's auditors and the audit committee of registrant's board of
directors (or persons performing the equivalent 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: March 24, 2006 BY /s/ Louis Prichard Louis Prichard President & Chief Executive Officer 92 94 |
Exhibit 31.2
CERTIFICATION OF CHIEF FINANCIAL OFFICER
PURSUANT TO SECTION 302 OF SARBANES-OXLEY ACT
I, Gregory J. Dawson, certify that:
1. I have reviewed this annual report on Form 10-K 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)) 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) Evaluated the effectiveness of the registrant's disclosure controls and
procedures and presented in this report our conclusions about the
effectiveness of the disclosure controls and procedures, as of the end of
the period covered by this report based on such evaluation; and
c) Disclosed in this report any change in the registrant's internal
control over financial reporting that occurred during the registrant's
most recent fiscal quarter that has materially affected, or is reasonably
likely to materially affect, the registrant's internal control over
financial reporting; and
5. The registrant's other certifying officer and I have disclosed, based on
our most recent evaluation of internal control over financial reporting, to
the registrant's auditors and the audit committee of registrant's board of
directors (or persons performing the equivalent 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: March 28, 2006 BY /s/ Gregory J. Dawson Gregory J. Dawson Chief Financial Officer 95 |
Exhibit 32.1
CERTIFICATION 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 Annual Report of Kentucky Bancshares, Inc. (the "Company") on Form 10-K for the period ended December 31, 2005 as filed with the Securities and Exchange Commission on the date hereof (the "Report"), I, Louis Prichard, Chief Executive Officer of the Company, certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes- Oxley Act of 2002, that to my knowledge:
(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 result of operations of the Company.
___/s/ Louis Prichard_______ Chief Executive Officer March 24, 2006 |
A signed original of this written statement required by Section 906 has been provided to Kentucky Bancshares, Inc. and will be retained by Kentucky Bancshares, Inc. and furnished to the Securities and Exchange Commission or its staff upon request.
Exhibit 32.2
CERTIFICATION 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 Annual Report of Kentucky Bancshares, Inc. (the "Company") on Form 10-K for the period ended December 31, 2005 as filed with the Securities and Exchange Commission on the date hereof (the "Report"), I, Gregory J. Dawson, Chief Financial Officer of the Company, certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that to my knowledge:
(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 result of operations of the Company.
___/s/ Gregory J. Dawson____ Chief Financial Officer March 28, 2006 |
A signed original of this written statement required by Section 906 has been provided to Kentucky Bancshares, Inc. and will be retained by Kentucky Bancshares, Inc. and furnished to the Securities and Exchange Commission or its staff upon request.