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, 2004
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 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 an accelerated filer
(as defined in Exchange Act Rule 12b-2). Yes No _X_
Aggregate market value of voting stock held by non-affiliates as of June
30, 2004 was approximately $74.2 million. For purposes of this
calculation, it is assumed that 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 29, 2005:
2,683,178.
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, 2004, the number of full time equivalent employees of
the Company was 167.
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 listed 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 Bulleting Board
and the dividends declared thereon, for the periods indicated below:
High Low Dividend
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
2003 Quarter 4 $38.00 $31.00 $.19
Quarter 3 35.00 28.30 .19
Quarter 2 29.00 28.00 .19
Quarter 1 28.50 25.50 .19
Note 15 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, 2004 the Company had 2,684,498 shares of Common Stock
outstanding and approximately 482 holders of record of its Common Stock.
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. In August 2004,
the Board of Directors approved and the Company repurchased 122,302
shares from a third-party shareholder at a price of $28 per share.
These shares were outside of the previously mentioned stock repurchase
programs. Shares will be purchased from time to time in the open
market depending on market prices and other considerations. Through
December 31, 2004, 84,333 shares have been purchased, with the most
recent share repurchase under the Board-approved stock repurchase
program having occurred on February 5, 2003.
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)
2004 2003 2002 2001 2000
CONDENSED STATEMENT OF INCOME:
Total Interest Income $25,846 $22,329 $24,788 $28,046 $28,207
Total Interest Expense 9,067 7,875 9,367 13,386 13,597
Net Interest Income 16,779 14,454 15,421 14,660 14,610
Provision for Losses 840 1,300 1,204 1,068 750
Net Interest Income After
Provision for Losses 15,939 13,154 14,217 13,592 13,860
Noninterest Income 6,796 6,707 6,590 5,672 3,798
Noninterest Expense 14,755 14,171 12,433 11,756 10,374
Income Before Income
Tax Expense 7,980 5,690 8,374 7,508 7,284
Income Tax Expense 2,218 1,457 2,471 1,984 2,031
Net Income 5,762 4,233 5,903 5,524 5,253
SHARE DATA:
Basic Earnings per Share (EPS) $2.09 $1.52 $2.13 $1.98 $1.87
Diluted EPS 2.07 1.50 2.10 1.95 1.83
Cash Dividends Declared 0.84 0.76 0.68 0.60 0.52
Book Value 16.77 16.90 15.90 14.13 12.77
Average Common Shares-Basic 2,757 2,781 2,770 2,790 2,812
Average Common Shares-Diluted 2,777 2,827 2,806 2,837 2,868
SELECTED BALANCE SHEET DATA:
Loans, including loans held for sale $354,294 $316,941 $281,499 $272,129 $269,757
Investment Securities 126,767 128,790 89,509 75,608 68,054
Total Assets 528,544 500,852 419,771 397,257 371,847
Deposits 387,955 384,599 322,836 308,915 300,816
Securities sold under agreements to
repurchase and other borrowings 25,593 7,285 5,277 1,602 9,446
Federal Home Loan Bank advances 59,750 53,232 43,937 43,598 21,644
Stockholders' Equity 45,027 46,057 44,092 39,100 35,860
PERFORMANCE RATIOS:
(Average Balances)
Return on Assets 1.11% 1.00% 1.48% 1.46% 1.49%
Return on Stockholders' Equity 12.57% 9.31% 14.27% 14.60% 15.63%
Net Interest Margin (1) 3.60% 3.79% 4.23% 4.22% 4.47%
Equity to Assets (annual average) 8.82% 10.73% 10.36% 9.99% 9.51%
SELECTED STATISTICAL DATA:
Dividend Payout Ratio 39.97% 50.00% 31.94% 30.28% 27.84%
Number of Employees (at period end) 167 182 173 180 159
ALLOWANCE COVERAGE RATIOS:
Allowance to Total Loans 1.16% 1.19% 1.19% 1.24% 1.24%
Net Charge-offs as a Percentage of
Average Loans 0.15% 0.43% 0.43% 0.39% 0.18%
(1) Tax equivalent
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 2004 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.
Overview
Net income for the year ended December 31, 2004 was $5.8 million, or
$2.09 per common share compared to $4.2 million, or $1.52 for 2003 and
$5.9 million, or $2.13 for 2002. Earnings per share assuming dilution
were $2.07, $1.50 and $2.10 for 2004, 2003 and 2002, respectively. 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. Management implemented various revenue improvement and cost
controlling measures with the continuing expectation of improving net
income.
During 2003, net income decreased $1.7 million, down 28%. Net interest
income decreased $967 thousand, the loan loss provision increased $96
thousand, while other income increased $118 thousand and other expenses
increased $1.7 million. 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 12.6% in 2004 compared to 9.3% in 2003 and
14.3% in 2002. Return on average assets was 1.11% in 2004 compared to
1.00% in 2003 and 1.48% in 2002.
Non-performing loans as of a percentage of loans (including held for
sale) were 0.58%, 0.82% and 0.83% as of December 31, 2004, 2003 and
2002, respectively.
RESULTS OF OPERATIONS
Net Interest Income
Net interest income, the Company's largest source of revenue, on a tax
equivalent basis decreased from $15.9 million in 2002 to $15.1 million
in 2003 but increased to $17.4 million in 2004. 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 2003 to 2004. Average earning assets increased $87 million, or
22%. Investment securities increased $43 million primarily due to the
addition of $30 million leverage transactions, including $20 million of
securities purchased and funded by repurchase agreements. Loans
increased $48 million as a result of improved loan demand and the
Cynthiana acquisition in November 2003. Average interest bearing
liabilities increased $86 million, or 27% 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. Bank prime
rates increased 125 basis points during this period. However, the
declining rate environment commencing in 2001 resulted in a decrease in
yields on assets and liabilities in 2002, 2003 and 2004 due to sustained
repricing opportunities. As a result of this, the tax equivalent yield
on earning assets decreased from 5.77% in 2003 to 5.47% in 2004.
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.
The volume rate analysis for 2003 that follows indicates that $3.5
million of the increase in interest income is attributable to the change
in volume, while the decrease in rates contributed to a decrease of $6.0
million in interest income. The rate decrease also caused a decrease in
the cost of interest bearing liabilities. The average rate of these
liabilities decreased from 3.09% in 2002 to 2.49% in 2003. Based on the
volume rate analysis that follows, the change in volume contributed to
an increase of $399 thousand to interest expense, while the decrease in
rates was responsible for a $1.9 million decrease in interest expense.
As a result, the 2003 net interest income decrease is attributed to
increases in volume reduced by the negative impact of decreases in
rates. In spite of the positive impact on net interest income that may
result from the increasing rate environment beginning in 2004 and
continuing in 2005, competitive pressures on interest rates will
continue and are likely to result in tighter 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 2004 and 2003. Changes in interest income and
expenses due to both rate and volume are allocated on a pro rata basis.
2004 vs. 2003 2003 vs. 2002
Increase (Decrease) Due to Change in Increase (Decrease) Due to Change in
Volume Rate Net Change Volume Rate Net Change
INTEREST INCOME
Loans $ 2,942 $ (1,047) $ 1,895 $ 3,065 $ (5,122) $ (2,057)
Investment Securities 1,626 24 1,650 440 (791) (351)
Federal Funds Sold and
Securities Purchased under
Agreements to Resell (61) 27 (34) 30 (33) (3)
Deposits with Banks 5 1 6 17 (65) (48)
Total Interest Income 4,512 (995) 3,517 3,552 (6,011) (2,459)
INTEREST EXPENSE
Deposits
Demand 88 54 142 42 (602) (560)
Savings 38 0 38 20 (92) (72)
Negotiable Certificates of
Deposit and Other
Time Deposits 776 (501) 275 122 (1,157) (1,035)
Securities sold under
agreements to
repurchase and
other borrowings 780 (147) 633 80 59 139
Federal Home Loan
Bank advances 575 (472) 103 135 (99) 36
Total Interest Expense 2,257 (1,066) 1,191 399 (1,891) (1,492)
Net Interest Income $ 2,255 $ 71 $ 2,326 $ 3,153 $ (4,120) $ (967)
Average Consolidated Balance Sheets and Net Interest Analysis (dollars in thousands)
2004 2003 2002
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 97,486 3,510 3.60% 56,559 1,907 3.37% 47,090 2,241 4.76%
State and Municipal obligations 35,762 1,518 4.24% 32,702 1,431 4.38% 26,476 1,254 4.74%
Other Securities 7,035 271 3.85% 7,971 311 3.90% 13,364 505 3.78%
Total Securities Available for Sale 140,283 5,299 3.78% 97,232 3,649 3.75% 86,930 4,000 4.60%
Total Investment Securities 140,283 5,299 3.78% 97,232 3,649 3.75% 86,930 4,000 4.60%
Tax Equivalent Adjustment 638 0.45% 611 0.63% 516 0.59%
Tax Equivalent Total 5,937 4.23% 4,260 4.38% 4,516 5.19%
Federal Funds Sold and Agreements to Repurchase 4,620 67 1.45% 9,307 101 1.09% 6,912 104 1.50%
Interest-Bearing Deposits with Banks 827 10 1.21% 441 4 0.91% 1,620 52 3.21%
Loans, Net of Deferred Loan Fees (2)
Commercial 28,874 1,564 5.42% 26,871 1,522 5.66% 31,952 2,016 6.31%
Real Estate Mortgage 299,062 17,989 6.02% 249,924 15,779 6.31% 230,455 16,788 7.28%
Installment 10,529 917 8.71% 13,707 1,274 9.29% 18,698 1,828 9.78%
Total Loans 338,465 20,470 6.05% 290,502 18,575 6.39% 281,105 20,632 7.34%
Total Interest-Earning Assets 484,195 26,484 5.47% 397,482 22,940 5.77% 376,567 25,304 6.72%
Allowance for Loan Losses (4,090) (3,324) (3,555)
Cash and Due From Banks 10,642 9,252 9,312
Premises and Equipment 11,787 10,840 10,270
Other Assets 17,494 9,713 6,654
Total Assets 520,028 423,963 399,248
LIABILITIES
Interest-Bearing Deposits
Negotiable Order of Withdrawal ("NOW")
and Money Market Investment Accounts 97,267 784 0.81% 86,039 642 0.75% 83,025 1,202 1.45%
Savings 27,547 124 0.45% 19,213 86 0.45% 16,853 158 0.94%
Certificates of Deposit and Other Deposits 189,739 4,858 2.56% 160,651 4,583 2.85% 157,167 5,618 3.57%
Total Interest-Bearing Deposits 314,553 5,766 1.83% 265,903 5,311 2.00% 257,045 6,978 2.71%
Securities sold under agreements to
repurchase and other borrowings 29,664 905 3.05% 5,385 272 5.05% 3,585 132 3.68%
Federal Home Loan Bank advances 58,421 2,396 4.10% 45,561 2,293 5.03% 42,923 2,257 5.26%
Total Interest-Bearing Liabilities 402,638 9,067 2.25% 316,849 7,876 2.49% 303,553 9,367 3.09%
Noninterest-Bearing Earning Demand Deposits 68,730 58,263 50,782
Other Liabilities 2,814 3,371 3,539
Total Liabilities 474,182 378,483 357,874
STOCKHOLDERS' EQUITY 45,846 45,480 41,374
Total Liabilities and Shareholders' Equity 520,028 423,963 399,248
Average Equity to Average Total Assets 8.82% 10.73% 10.36%
Net Interest Income 16,779 14,453 15,421
Net Interest Income (tax equivalent) (3) 17,417 15,064 15,937
Net Interest Spread (tax equivalent) (3) 3.22% 3.28% 3.63%
Net Interest Margin (tax equivalent) (3) 3.60% 3.79% 4.23%
(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.
Noninterest Income and Expenses
Noninterest income was $6.8 million in 2004 compared to $6.7 million in
2003 and $6.6 million in 2002. The 2004 and 2003 increase is mainly a
result of increased service charges.
Securities gains were $289 thousand in 2004, $139 thousand in 2003 and
$219 thousand in 2002. The gains in 2004 were primarily as 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 $376 thousand, $853 thousand and $948 thousand
in 2004, 2003 and 2002, respectively. Loans held for sale are generally
sold after closing to the Federal Home Loan Mortgage Corporation.
During 2004, the loan service fee income increased $4 thousand, compared
to an increase of $14 thousand in 2003. The sales of loans were $30
million, $37 million and $41 million in 2004, 2003 and 2002,
respectively. The volume of loan originations is inverse to rate
changes. The low rate environment during 2003 and 2002 favorably
impacted our mortgage loan originations. The volume of loan
originations during 2004 decreased to $22 million from $43 million in
2003.
Other noninterest income excluding security net gains and gain on sale
of mortgage loans was $6.1 million in 2004, $5.7 million in 2003 and
$5.4 million in 2002. Service charge income has been a big contributor
to this increase in income over this three-year period. Overdraft
income increased $336 thousand in 2004 and $195 thousand in 2003,
principally the result of increases in deposits and implementation of a
new "Kentucky Courtesy" overdraft in the last quarter of 2000. Other
income increased from $1.0 million in 2002 to $1.1 million in 2003 to
$1.2 million in 2004.
Noninterest expense increased $584 thousand in 2004 to $14.8 million,
and increased $1.8 million in 2003 to $14.2 million from $12.4 million
in 2002. The increases in salaries and benefits from $6.7 million in
2002 to $7.4 million in 2003 and to $8.1 million in 2004 are
attributable to normal salary and benefit increases. Bonus compensation
was $108 thousand higher in 2004 compared to 2003 and $191 thousand
lower in 2003 compared to 2002. The 2004 increase is mainly a result of
improved net income, while the 2003 decrease is mainly a result of lower
net income. Occupancy expense increased $211 thousand, or 10% in 2004
to $2.3 million and increased $136 thousand, or 7% in 2003 to $2.0
million. The Company completed its construction of a new full service
facility in Cynthiana in October 2001. Since 1999, 3 new facilities
have been constructed and 2 facilities have been substantially
renovated. In 2001, land was purchased in Georgetown to construct a
full service facility, and relocate one of our branches in Georgetown,
and this facility was opened in March 2003. As part of this relocation,
the Company incurred a one time expense of $163 thousand in 2003 for the
loss on the leased premises. This overall improvement of our facilities
has led to the increase in occupancy expenses. The largest expense,
depreciation, declined slightly from $990 thousand in 2002, to $961
thousand in 2003 and increased to $994 thousand in 2004. Other
noninterest expense increased from $3.8 million in 2002 to $4.8 million
in 2003 and decreased to $4.4 million in 2004. The increase in 2003 and
subsequent decrease in 2004 is mainly from the legal and professional
expenses in 2003 related to the merger. Of the 2003 increase, $350
thousand is attributable to legal and professional expenses, including
merger related legal and consulting expenses amounted of $230 thousand.
In addition, mortgage servicing rights amortization increased $74
thousand, and marketing increased $69 thousand from 2002 to 2003.
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)
2004 2003 2002
NON-INTEREST INCOME
Service Charges $ 4,358 $ 4,065 $ 3,848
Loan Service Fee Income 246 242 228
Trust Department Income 299 302 346
Investment Securities Gains (Losses),net 289 139 219
Gains on Sale of Mortgage Loans 376 853 948
Other 1,228 1,106 1,001
Total Non-interest Income 6,796 6,707 6,590
NON-INTEREST EXPENSE
Salaries and Employee Benefits 8,053 7,373 6,728
Occupancy Expenses 2,255 2,045 1,909
Other 4,447 4,753 3,796
Total Non-interest Expense 14,755 14,171 12,433
Net Non-interest Expense as a
Percentage of Average Assets 1.53% 1.76% 1.46%
Income Taxes
The Company had income tax expense of $2.2 million in 2004 and $1.5
million in 2003 and $2.5 million in 2002. This represents an effective
income tax rate of 27.8% in 2004, 25.6% in 2003 and 29.5% in 2002. 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 $501 million at December 31, 2003 to $529 million at
December 31, 2004. Loan growth was $45 million in 2004. Deposits grew
$3 million and borrowings grew $25 million. Assets at year-end 2003
totaled $501 million compared to $420 million in 2002. In 2003, loan
growth was $29 million and deposit growth was $62 million. Other
borrowings increased $19 million. The acquisition of Kentucky First
added $31 million in loans and $53 million in deposits. See Note 17 in
the "Notes to Consolidated Financial Statements" for more details of
this business combination.
Loans
Total loans (including loans held for sale) were $358 million at
December 31, 2004 compared to $321 million at the end of 2003 and $285
million in 2002. Loan growth improved in 2004 compared to 2003. The
increase is mainly attributable to improved loan demand. During 2003,
$31.2 million was added to the loan portfolio through the Kentucky First
acquisition. This accounts for the majority of the 2003 growth. 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 the end of 2003 and
compared to the prior year-end, commercial loans decreased $2.5 million,
real estate construction loans decreased $1.2 million, real estate
mortgage loans (including loans held for sale) increased $39.3 million,
agricultural loans increased $4.4 million and consumer loans decreased
$4.2 million.
As of December 31, 2004, the real estate mortgage portfolio comprised
67% of total loans compared to 69% in 2003. Of this, 1-4 family
residential property represented 67% in 2004 and 70% in 2003.
Agricultural loans comprised 16% in 2004 and 18% in 2003 of the loan
portfolio. Approximately 80% of the agricultural loans are secured by
real estate in 2004 compared to 78% in 2003. 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 31% in 2004
and 36% in 2003 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)
2004 2003 2002 2001 2000
Commercial $ 19,999 $ 14,278 $ 16,803 $ 18,618 $ 17,452
Real Estate Construction 32,256 14,313 15,514 12,302 15,270
Real Estate Mortgage 238,661 222,342 182,958 168,684 163,190
Agricultural 57,497 56,615 52,188 53,640 52,008
Installment 9,062 12,978 17,134 21,952 24,807
Other 991 289 309 338 434
Total Loans 358,466 320,815 284,906 275,534 273,161
Less Deferred Loan Fees 10 54 12 19 16
Total Loans, Net of
Deferred Loan Fees 358,456 320,761 284,894 275,515 273,145
Less loans held for sale 175 7,759 740 2,343 868
Less Allowance For Loan Losses 4,163 3,820 3,395 3,386 3,388
Net Loans 354,118 309,182 280,759 269,786 268,889
The following table sets forth the maturity distribution and interest
sensitivity of selected loan categories at December 31, 2004.
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, 2004 (in thousands)
One Year One Through Over Total
or Less Five Years Five Years Loans
Commercial $ 8,523 $ 8,634 $ 2,842 $ 19,999
Real Estate Construction 23,101 7,253 1,902 32,256
Real Estate Mortgage 23,808 116,363 98,480 238,651
Agricultural 15,208 37,101 5,188 57,497
Installment 3,507 5,390 165 9,062
Other 991 0 0 991
Total Loans, Net of
Deferred Loan Fees 75,138 174,741 108,577 358,456
Fixed Rate Loans 23,136 136,850 35,643 195,629
Floating Rate Loans 52,002 37,891 72,934 162,827
Total Loans, Net of
Deferred Loan Fees 75,138 174,741 108,577 358,456
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 increased from
$39 million in 2002 to $43 million in 2003, but dropped to $22 million
in 2004. The sale of loans were $41 million, $37 million and $30
million for the year 2004, 2003 and 2002, respectively. Mortgage loans
held for sale decreased from $7.8 million at December 31, 2003 to $175
thousand at December 31, 2004. The decrease is a result of management's
decision to sell $7 million of fifteen year loans held at December 31,
2003. The volume of loan originations is inverse to rate changes. The
rate environment in 2001 was falling, and continued into 2002 and 2003
before leveling in 2004, and therefore resulted in increased loan
originations in 2003 and 2002, and decreased loan originations in 2004.
The effect of these changes was also reflected on the income statement.
As a result, the gain on sale of mortgage loans was $376 thousand in
2004 compared to $853 thousand in 2003 and $948 thousand in 2002.
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 $876
thousand at December 31, 2004, $861 thousand at December 31, 2003 and
$704 thousand at December 31, 2002. Amortization of mortgage servicing
rights was $249 thousand, $224 thousand and $150 thousand for the years
ended December 31, 2004, 2003 and 2002, respectively. See Note 4 in the
notes to consolidated financial statements included as Exhibit 13 for
additional information.
Deposits
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).
Total deposits increased to $385 million in 2003, up $62 million from
2002. Noninterest bearing deposits increased $11.5 million, time
deposits of $100 thousand and over increased $3.0 million, and other
interest bearing deposits increased $47.3 million. Public funds totaled
$45 million at the end of 2003 ($43 million was interest bearing). In
November 2003, $53 million in deposits were obtained through the
Kentucky First acquisition.
The table below provides information on the maturities of time deposits
of $100,000 or more at December 31, 2004:
Maturity of Time Deposits of $100,000 or More
At December 31, 2004
(in thousands)
Maturing 3 Months or Less $10,616
Maturing over 3 Months through 6 Months 13,421
Maturing over 6 Months through 12 Months 23,480
Maturing over 12 Months 11,952
Total $59,469
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 $59.7 million at December 31, 2004. During 2004, $18.4
million of FHLB borrowing was paid, and advances were made for an
additional $25 million ($10 million for a leverage transaction). The
2004 advances were obtained mainly to fund fixed rate mortgages, as
detailed above. As of December 31, 2003, $53.2 million was borrowed
from FHLB, an increase of $1.2 million from 2002. In 2003, $10.8
million of FHLB advances were paid, and advances were made for an
additional $12 million. In August 2003, the Company formed Kentucky
Bancshares, Statutory Trust I ("Trust"). The Trust issued $7,000,000 of
fixed/variable rate 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 Company used
the trust preferred proceeds mainly to assist in funding the acquisition
of Kentucky First, and to supplement regulatory capital ratios. 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)
2004 2003 2002
Federal Funds Purchased:
Balance at Year end $ 6,383 $ 5,266 $ -
Average Balance During the Year 3,706 249 240
Maximum Month End Balance 11,306 5,266 6,852
Year end rate 2.50% 1.19% 0.00%
Average annual rate 1.52% 1.46% 1.97%
Repurchase Agreements:
Balance at Year end $18,314 $ 1,791 $ 3,505
Average Balance During the Year 18,398 1,691 2,097
Maximum Month End Balance 21,947 2,411 3,505
Year end rate 2.94% 1.65% 0.84%
Average annual rate 1.90% 1.34% 1.22%
Other Borrowed Funds:
Balance at Year end $ 896 $ 228 $ 1,772
Average Balance During the Year 343 1,048 1,248
Maximum Month End Balance 1,011 1,777 1,883
Year end rate 1.87% 0.73% 6.56%
Average annual rate 1.51% 7.27% 8.16%
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, 2004 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 $ 59,750 $ 8,256 $20,882 $23,991 $ 6,621
Subordinated debentures 7,217 - - - 7,217
Time deposits 198,292 147,473 46,077 4,742 -
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)
2004 2003 2002 2001 2000
Non-accrual Loans $1,781 $1,844 $1,573 $ 935 $ 307
Accruing Loans which are
Contractually past due
90 days or more 308 779 789 1,278 1,365
Restructured Loans 0 0 0 0 130
Total Nonperforming Loans 2,089 2,623 2,362 2,213 1,802
Other Real Estate 676 375 172 212 165
Total Nonperforming Assets 2,765 2,998 2,534 2,425 1,967
Total Nonperforming Loans as a
Percentage of Loans (including
loans held for sale) (1) 0.58% 0.82% 0.83% 0.80% 0.66%
Total Nonperforming Assets
as a Percentage of Total Assets 0.52% 0.60% 0.60% 0.61% 0.53%
Allowance to nonperforming assets 1.51 1.27 1.34 1.40 1.72
(1) Net of deferred loan fees
Total nonperforming assets at December 31, 2004 were $2.8 million
compared to $3.0 million at December 31, 2003 and $2.5 million at
December 31, 2002. The decrease from 2003 to 2004 is attributable to
the decrease in various loans being put on non-accrual offset by a $301
thousand increase in other real estate. Total nonperforming loans were
$2.1 million, $2.6 million and $2.4 million at December 31, 2004, 2003
and 2002, respectively. The non-accrual loan decrease from 2003 to 2004
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, 2004, 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, 2004 were $1.8 million compared to
$1.8 million in 2003 and $1.6 million in 2002. 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 $416 thousand, $345
thousand and $675 thousand on December 31, 2004, 2003 and 2002,
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)
2004 2003 2002 2001 2000
Balance at Beginning of Year $ 3,820 $ 3,395 $ 3,386 $ 3,388 $ 3,103
Balance of Allowance for Loan
Losses of Acquired Bank
at Acquisition Date 363
Amounts Charged-off:
Commercial 197 569 536 178 14
Real Estate Construction 0 0 18 0 0
Real Estate Mortgage 110 276 69 171 115
Agricultural 88 24 5 46 30
Consumer 293 529 701 751 400
Total Charged-off Loans 688 1,398 1,329 1,146 559
Recoveries on Amounts
Previously Charged-off:
Commercial 10 11 15 4 14
Real Estate Construction 0 0 0 0 0
Real Estate Mortgage 42 1 19 2 7
Agricultural 21 21 10 1 8
Consumer 118 127 90 69 65
Total Recoveries 191 160 134 76 94
Net Charge-offs 497 1,238 1,195 1,070 465
Provision for Loan Losses 840 1,300 1,204 1,068 750
Balance at End of Year 4,163 3,820 3,395 3,386 3,388
Total Loans (1)
Average 338,465 290,502 281,105 273,504 257,711
At December 31 358,456 320,761 284,894 275,515 273,145
As a Percentage of Average Loans (1):
Net Charge-offs 0.15% 0.43% 0.43% 0.39% 0.18%
Provision for Loan Losses 0.25% 0.45% 0.43% 0.39% 0.29%
Allowance as a Percentage of
Year-end Loans (1) 1.16% 1.19% 1.19% 1.23% 1.24%
Beginning Allowance as a Multiple
of Net Charge-offs 7.7 2.7 2.8 3.2 6.7
Ending Allowance as a Multiple
of Nonperforming Assets 1.51 1.27 1.34 1.40 1.72
(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 2004 was $840 thousand compared to $1.3
million in 2003 and $1.2 million in 2002. Net charge-offs were $497
thousand in 2004, $1.3 million in 2003 and $1.2 million in 2002. Net
charge-offs to average loans were 0.15%, 0.43% and 0.43% in 2004, 2003
and 2002, respectively. Based on the quality of the loan portfolio, the
loan loss provision decreased $460 thousand from 2003 to 2004 and
increased $96 thousand from 2002 to 2003. The loan loss provision
decreasing for 2004 is a result of considering our probable losses and
risk analysis of our loan portfolio. In evaluating the allowance for
loan losses, management considers the composition of the loan portfolio,
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 2004. The economic downturn in 2003
and 2002 resulted in higher loan losses and, as a result, higher
provisions in these years. At December 31, 2004, the allowance for loan
losses was 1.16% of loans outstanding compared to 1.19% at year-end 2003
and 1.19% in 2002. Management believes the allowance for loan losses at
the end of 2004 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)
2004 2003 2002 2001 2000
Dollars Percentage Dollars Percentage Dollars Percentage Dollars Percentage Dollars Percentage
Allowance for Loan Losses
Commercial $ 350 8.41% $ 262 6.86% $ 820 24.15% $ 291 8.59% $ 275 8.12%
Real Estate Construction 566 13.60% 266 6.96% 216 6.36% 194 5.73% 244 7.20%
Real Estate Mortgage 1,801 43.26% 1,804 47.23% 1,166 34.34% 1,602 47.31% 1,563 46.13%
Agricultural 1,028 24.69% 995 26.05% 698 20.56% 693 20.47% 668 19.72%
Consumer 418 10.04% 493 12.91% 495 14.58% 606 17.90% 638 18.83%
Total 4,163 100.00% 3,820 100.00% 3,395 100.00% 3,386 100.00% 3,388 100.00%
Loans
2004 2003 2002 2001 2000
Dollars Percentage Dollars Percentage Dollars Percentage Dollars Percentage Dollars Percentage
Commercial $ 19,999 5.58% $ 14,278 4.45% $ 16,803 5.90% $ 18,618 6.76% $ 17,452 6.39%
Real Estate Construction 32,256 9.00% 14,313 4.46% 15,514 5.45% 12,302 4.47% 15,270 5.59%
Real Estate Mortgage 238,651 66.58% 222,288 69.30% 182,946 64.22% 168,665 61.22% 163,174 59.74%
Agricultural 57,497 16.04% 56,615 17.65% 52,188 18.32% 53,640 19.47% 52,008 19.04%
Consumer 9,062 2.53% 12,978 4.05% 17,134 6.01% 21,952 7.97% 24,807 9.08%
Other 991 0.28% 289 0.09% 309 0.11% 338 0.12% 434 0.16%
Total, Net (1) 358,456 100.00% 320,761 100.00% 284,894 100.00% 275,515 100.00% 273,145 100.00%
(1) Including loans held for sale, net of deferred loan fees
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:
2004 2003
Unused lines of credit $ 54,785,000 $ 47,148,000
Commitments to make loans 1,272,000 1,379,000
Letters of credit 145,000 252,000
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 4.875% to 5.75% 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, 2004 increased $1.5 million to $41.7
million. During 2004, the Company purchased 122,302 shares of its stock
for $3.4 million. This partially offsets the $5.8 million in net income
for 2004. Stockholders' equity, excluding accumulated other
comprehensive income was $44.7 million at December 31, 2004. 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 and Note 17 in the Notes to
Consolidated Financial Statements for more information on the business
combination, and 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)
2004 2003 Change
Stockholders' Equity (1) $ 44,703 $ 44,538 165
Trust Preferred Securities 7,000 7,000 -
Less Disallowed Amount 10,043 11,423 (1,380)
Tier I Capital 41,660 40,115 1,545
Allowance for Loan Losses 4,163 3,820 343
Other 164 143 21
Tier II Capital 4,327 3,963 364
Total Capital 45,987 44,078 1,909
Total Risk Weighted Assets 348,191 316,982 31,209
Ratios:
Tier I Capital to Risk-weighted Assets 12.0% 12.7% -0.7%
Total Capital to Risk-weighted Assets 13.2% 13.9% -0.7%
Leverage 8.2% 8.8% -0.6%
(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, 2004, 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, decreased from $128.8
million at December 31, 2003 to $126.8 million at December 31, 2004.
The decrease is mainly attributable to higher loan demand. Federal
funds sold totaled $3.2 million at December 31, 2004 and $6.2 million at
December 31, 2003.
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 $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. Of the $7.4 million of
adjustable asset backed securities held on December 31, 2003, $3.3
million are repriceable monthly and the remaining $4.1 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, 2004.
Investment Securities at market value
At December 31 (in thousands)
2004 2003 2002
Available for Sale
U.S. treasury $ 2,984 $ 3,033 $ 5,059
U.S. government agencies 39,031 36,634 6,138
States and political subdivisions 35,160 39,142 31,024
Mortgage-backed
Fixed -
GNMA, FNMA, FHLMC Passthroughs 35,013 29,079 17,465
GNMA, FNMA, FHLMC CMO's 11,335 12,940 11,682
Total 46,348 42,019 29,147
Variable -
GNMA, FNMA, FHLMC Passthroughs 1,623 4,161 8,645
GNMA, FNMA, FHLMC CMO's 649 1,202 2,529
Total 2,272 5,363 11,174
Total mortgage-backed 48,620 47,382 40,321
Other 972 2,599 6,967
Total 126,767 128,790 89,509
Maturity Distribution of Securities
December 31, 2004 (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 $ - $ 2,984 $ - $ - $ - $ 2,984
U.S. government agencies 444 27,108 11,479 0 0 39,031
States and political subdivisions 1,726 4,785 11,844 16,805 0 35,160
Mortgage-backed 0 0 0 0 48,620 48,620
Equity Securities 0 0 0 0 972 972
Other 0 0 0 0
Total 2,170 34,877 23,323 16,805 49,592 126,767
Percent of Total 1.7% 27.5% 18.4% 13.3% 39.1% 100.0%
Weighted Average Yield (1) 6.13% 3.84% 5.31% 6.69% 4.13% 4.64%
(1) Tax Equivalent Yield
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 all public companies to record compensation cost
for stock options provided to employees in return for employee service. The
cost is measured at the fair value of the options when granted, and this cost
is expensed over the employee service period, which is normally the vesting
period of the options. This will apply to awards granted or modified after
the first quarter or year beginning after Jun 15, 2005. Compensation cost
will also be recorded for prior options granted 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 $30,000 during the balance of 2005. There will be no
significant effect on financial position as total equity will not change.
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, 2004
the projected net interest income percentage change of down 100 and down
300 basis points is outside the Board of Directors limits. As of
January 31, 2005, the Company was within the Board limits in the down
100 basis point scenario. Because of the low level of rates, an across
the board drop of 300 basis points is impossible. This along with a
higher likelihood of increasing rates in the future have resulted in
Management believing this risk is acceptable under the current
conditions. This limit variation has been reviewed with the
Asset/Liability Committee and the Board of Directors. The projected net
interest income report summarizing the Company's interest rate
sensitivity as of December 31, 2004 and December 31, 2003 is as follows:
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%
Projected Net Interest Income (December 31, 2003)
Level
-300 -100 Rates +100 +300
Year One (1/04 - 12/04)
Interest Income $21,425 $24,482 $26,181 $27,883 $31,291
Interest Expense 7,484 7,856 8,991 10,126 12,396
Net Interest Income 13,941 16,626 17,190 17,757 18,895
Net interest income dollar change (3,249) (564) 567 1,705
Net interest income percentage change -18.9% -3.3% N/A 3.3% 9.9%
Limitation on % Change >-10.0% >-4.0% N/A >-4.0% >-10.0%
The numbers in 2004 show slightly greater fluctuation when compared to
2003. In 2004, year one reflected a decrease in net interest income of
4.8% compared to 3.3% projected decrease from 2003 with a 100 basis
point decline. The 300 basis point increase in rates reflected a 11.3%
increase in net interest income in 2004 compared to a 9.9% increase in
2003. The risk is more in 2004 due to the current status of existing
interest rates (being low) 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 $17.6
million at December 31, 2004. Additionally, securities available-for-
sale with maturities greater than one year totaled $124.6 million at
December 31, 2004. 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, 2004 these balances totaled $59.5 million,
approximately 15% 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 $38 million from the FHLB
at December 31, 2004.
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
2004 2003 2002
Average Loans (including loans held
for sale)/Average Deposits 88.3% 89.6% 91.3%
Average Securities sold under
agreements to repurchase and other
borrowings/Average Assets 5.7% 1.3% 0.9%
This chart shows that the loan to deposit ratio decreased in 2004 and
2003. The decline in 2003 compared to 2002 is mainly attributable to
the Kentucky First acquisition, in which the Company acquired $31.2
million in loans and $52.9 million in deposits. The increase in the
latter ratio 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 2004 Annual Report to Stockholders included as Exhibit 13, and
are incorporated herein by reference. No other portion of the 2004
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, 2004. 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, 2004. There was no change in the Company's internal
control over financial reporting during the fourth quarter of 2004 that
has materially affected, or is reasonably likely to materially affect,
such internal control over financial reporting.
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 2005:
Henry Hinkle, age 53, is President of Hinkle Construction Company. He
has been a director of Kentucky Bank and the Company since 1989.
Theodore Kuster, age 61, 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 55, is a farmer and thoroughbred horse breeder.
He has been a director of Kentucky Bank and the Company since 1991.
Terms expiring in 2006:
Betty J. Long, age 57, is retired President and CEO of First Federal,
Cynthiana. She has been a director of the Company since 2003.
Ted McClain, age 53, 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 60, 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 64, is an attorney. He has been a director of
Kentucky Bank and the Company since 1995.
Louis Prichard, age 51, 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.
The Company's other executive officers are Norman J. Fryman, age 55 and
Gregory J. Dawson, age 44. 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 and serves at the pleasure of the Board of Directors.
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) and Vice President of Sales
and Service (Joe Fryman) of the Company. No other executive officer
earned total salary and bonus in excess of $100,000.
Summary Compensation Table
Annual Compensation
Other Annual Options All Other
Name Salary Bonus Compensation Granted Compensation(2)
Buckner Woodford
2004 $203,000 $ 39,585 (1) 1,000 $ 13,653
2003 $200,000 $ 24,000 (1) 1,000 14,000
2002 $180,008 $ 39,825 (1) 500 12,000
Louis Prichard
2004 140,000 20,475 (1) 1,000 9,160
2003 125,000 11,700 (1) 3,000 7,605
Norman J. Fryman
2004 105,265 17,958 (1) 500 6,871
2003 97,057 8,371 (1) 500 6,763
(1) Less than the lesser of $50,000 or 10% of annual salary and bonuses
(2) Represents the Company's matching contribution to the qualified
profit sharing plan that includes a 401(k) provision
The following table contains information regarding the grant of stock
options under the Company's stock option plan to the Chairman of the
Board, President and Chief Executive Officer and Vice President of Sales
and Service during the year ended December 31, 2004. In addition, in
accordance with rules of the Securities and Exchange Commission, the
following table sets forth the hypothetical grant date present value
with respect to the referenced options, using the Black-Scholes Option
Pricing Model.
Option Grants in the Last Fiscal Year
% of Total
Options Grant
Shares Granted to Exercise Date
Granted Employees Price Expiration Present
Name (#) in 2004 ($/Sh) Date Value($)
Buckner Woodford 1,000 9.0% $33.90 1/2/14 $5,720
Louis Prichard 1,000 9.0 33.90 1/2/14 5,720
Norman J. Fryman 500 4.5 33.90 1/2/14 2,860
The following table sets forth certain information regarding options
exercised by the Chairman of the Board, President and Chief Executive
Officer and Vice President of Sales and Service during calendar year
2004 and unexercised stock options held by them as of December 31, 2004.
Aggregated Option Exercises in Calendar 2004
and Year-end Stock Option Values
Shares Number of Securities Value of Unexercised
Acquired Value Underlying Unexercised In-the-Money
on Exercise Realized Options at 12/31/04 Options at 12/31/04
Name (#) ($) Exercisable/Unexercisable Exercisable/Unexercisable
Buckner Woodford n/a n/a 4,700/2,400 $ 42,150/$ 7,400
Louis Prichard n/a n/a 600/3,400 3,000/ 12,000
Norman J. Fryman n/a n/a 1,040/1,260 9,860/ 4,040
No SAR's exist for the Company.
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 and non-employee Company directors
are paid $100 for each Kentucky Bank committee meeting attended. 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
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 last 5 years. The years of service are 32 years for
Mr. Woodford, 2 year for Mr. Prichard and 19 years for Mr. Fryman.
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,
2004.
Name Shares Beneficially Owned(1)
Number Percentage
William Arvin (2) 30,071 1.1%
Gregory J. Dawson (3) 9,475 *
Norman J. Fryman (4) 2,445 *
Henry Hinkle (5) 30,655 1.1%
Theodore Kuster (6) 17,960 *
Betty J. Long (7) 1,600 *
Ted McClain (8) 1,375 *
Louis Prichard (9) 910 *
Robert G. Thompson (10) 6,150 *
Woodford Van Meter (11) 31,300 1.1%
Buckner Woodford (12) 247,488 9.1%
All directors and officers
(11 persons) as a group
(consisting of those
persons named above)(13) 379,429 13.9%
* 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 held jointly with his wife and 650 shares
that Mr. Arvin may acquire upon exercise of outstanding stock options.
3) Includes 3,450 shares that Mr. Dawson may acquire upon exercise of
outstanding stock options.
4) Includes 1,040 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 750
shares that Mr. Hinkle may acquire upon exercise of outstanding stock
options.
6) Includes 6,260 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 350 shares that Mr. Kuster may
acquire upon exercise of outstanding stock options.
7) Includes 1,600 shares held in a retirement account.
8) Includes 200 shares that Mr. McClain may acquire upon exercise of
outstanding stock options.
9) Includes 600 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 750 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.
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 4,700 shares that Mr. Woodford may acquire upon
exercise of outstanding stock options.
13) Includes 11,450 shares that may be acquired upon exercise of
outstanding stock options.
The following table sets forth as of December 31, 2004 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 247,488 9.1%
340 Stoner Avenue
Paris, Kentucky 40361
The following table sets forth as of December 31, 2004 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 647
1993 Employee Stock Ownership
Incentive Plan 27,060 17.11 0
1993 Non-Employee Directors
Stock Ownership Plan 5,250 24.59 10,450
1999 Employee Stock Option Plan 28,254 28.33 70,394
Total 60,564 $23.00 81,491
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, 2004.
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 $1.9 million as of December
31, 2004 and $2.5 million as of December 31, 2003. 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 2004 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 2004 and for 2003 were as follows:
Audit fees - Fees for the financial statement audit, and the review of the
Company's Form 10-Q's were $99,250 for 2004 and $65,600 for 2003.
Audit related fees - Aggregate fees for all assurance and related services
were $12,950 for 2004 and $10,500 for 2003. These fees were incurred for
audits of benefit plans. The 2004 and 2003 amounts were preapproved by the
audit committee.
Tax fees - Fees related to tax compliance, advice and planning were $14,145
for 2004 and $6,400 for 2003. The 2004 and 2003 amounts were preapproved
by the audit committee.
All other fees - Consulting fees related to acquisitions and profitability
were $16,000 for 2004 and $17,095 for 2003. Loan review fees were $0 for
2004 and $23,800 for 2003. The 2004 and 2003 amounts were preapproved by
the audit committee.
All services provided by the Corporation's primary independent auditor in
2004 and 2003 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:
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).
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 2005 Compensation Arrangements for Named Executive
Officers.*
10.5 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. 2004 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 30, 2005
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 29, 2005
Louis Prichard, President and Chief Executive Officer, Director
__/s/Gregory J. Dawson_______ March 29, 2005
Gregory J. Dawson, Chief Financial and Accounting Officer
__/s/Buckner Woodford________ March 29, 2005
Buckner Woodford, Chairman of the Board, Director
_____________________________ March 29, 2005
William Arvin, Director
__/s/Henry Hinkle __ ____ March 29, 2005
Henry Hinkle, Director
_____________________________ March 29, 2005
Theodore Kuster, Director
__/s/Betty J. Long___________ March 29, 2005
Betty J. Long, Director
__/s/Ted McClain____________ March 29, 2005
Ted McClain, Director
__/s/Robert G. Thompson______ March 29, 2005
Robert G. Thompson, Director
_____________________________ March 29, 2005
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
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).
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 2005 Compensation Arrangements for Named Executive
Officers.*
10.5 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. 2004 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
22
BOURBON BANCSHARES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2000, 1999 and 1998
44
41