Exhibit 13
KENTUCKY BANCSHARES, INC.
ANNUAL REPORT 2003
Letter to the Shareholders
Dear Shareholders,
During 2003 we were able to complete a strategic acquisition that has
strengthened our franchise. With the purchase of First Federal Savings Bank
in Cynthiana, our customer base is substantially larger. We continue to
actively seek good business opportunities throughout Central Kentucky.
Regrettably, our year-end operating results were down when compared to the
prior year. Net income for the year was $4,233,377, down from $5,902,525 for
year-end 2002. Diluted earnings per share were $1.50, also lower than the
$2.10 figure of a year earlier. The major factors that contributed to the
drop in net income were the lack of loan growth and the continued tightening
of net interest margins. Beyond that, there were some one-time expenses
related to closing our original location in Scott County, and merger related
expenses associated with the acquisition of First Federal Savings Bank of
Cynthiana. On a positive note, the dividend to shareholders rose again. The
company is quite proud of increasing the dividend every year since 1982.
There are some encouraging signs that the economy may be improving. We would
expect an increase in loan demand as well as an improvement in margins if the
stronger economy continues throughout 2004.
Because we are now over $500,000,000 in assets, management also feels that
this is an opportune time to examine our current organizational structure to
determine whether we are positioned to deliver services and products to our
customers in the most efficient way. Also, we have already begun to put into
place measures to continually improve revenues and control costs in a more
disciplined manner. We expect that these actions will improve our bottom
line.
Our Wealth Management Department recently completed an evaluation of both its
structure and the services it provides. The strength of this department has
always been evident in the dedication to its clientele. Under the leadership
of new department head Clark Nyberg, who has over twenty years of investment
management experience, we offer an even stronger team of committed
professionals.
In the later part of the year we added two new directors to the board of your
company: Betty Long, the former CEO of First Federal and Dr. Woodford Van
Meter, a Lexington ophthalmologist with long time ties to our bank and
Bourbon County.
Finally, Senior Vice President James P. Shipp has announced his decision to
retire in April. Since his banking career started in 1979, J. P. has made many
important contributions to our growth and success. Most recently he has been
our leader in branch administration and was named a Senior Vice President in
1997. He will be missed, but we all wish him well.
Sincerely,
Louis Prichard Buckner Woodford
President and COO President and CEO
Kentucky Bank Kentucky Bancshares, Inc.
FINANCIAL HIGHLIGHTS
Kentucky Bancshares, Inc. 2003 2002 2001
Assets ($ thousands) $500,852 $419,771 $397,257
Net Income ($ thousands) $ 4,233 $ 5,903 $ 5,524
Per Share Results
Earnings(assuming dilution) $ 1.50 $ 2.10 $ 1.95
Dividends $ .76 $ .68 $ .60
Shareholder Information
CORPORATE HEADQUARTERS
Kentucky Bancshares, Inc.
4th and Main Street
Paris, Kentucky 40361
859-987-1795
MARKET MAKERS
Morgan Keegan & Company
489 East Main Street
Lexington, Kentucky 40507
800-937-0161
Hilliard Lyons
West Vine Street, Suite 400
Lexington, Kentucky 40507
800-944-2663
Howe Barnes Investments, Inc.
135 South LaSalle Street, Suite 150
Chicago, Illinois 60603-4398
800-800-4693
TRANSFER, REGISTRAR AND DIVIDEND AGENT
Registrar and Transfer Company
10 Commerce Drive
Cranford, New Jersey 07016-3572
800-368-5948
rtco.com
Kentucky Bancshares, Inc. - KTYB.OB
ANNUAL MEETING
The annual meeting of Kentucky Bancshares, Inc. will be held Wednesday,
May 5, 2004 at 11:00 in the corporate headquarters.
INVESTOR INFORMATION
Any individual requesting a copy of the Corporation's 2003 Form 10-K
Report may obtain these by writing to Investor Relations at the
Corporate Headquarters.
CONSOLIDATED BALANCE SHEETS
December 31
2003 2002
ASSETS
Cash and due from banks $ 15,224,513 $ 10,493,495
Federal funds sold 6,163,000 18,683,000
Cash and cash equivalents 21,387,513 29,176,495
Securities available for sale 128,789,830 89,509,140
Mortgage loans held for sale 7,758,583 740,023
Loans 313,002,258 284,153,605
Allowance for loan losses (3,819,842) (3,395,075)
Net loans 309,182,416 280,758,530
Federal Home Loan Bank stock 4,930,100 4,027,300
Bank premises and equipment, net 11,606,373 10,331,618
Interest receivable 3,249,834 3,276,432
Goodwill 10,199,830 -
Other intangible assets 1,998,231 1,367,417
Other assets 1,749,434 584,441
Total assets $ 500,852,144 $ 419,771,396
LIABILITIES AND STOCKHOLDERS' EQUITY
Deposits
Non-interest bearing $ 64,841,638 $ 53,366,283
Time deposits, $100,000 and over 49,914,659 46,903,641
Other interest bearing 269,842,299 222,566,031
Total deposits 384,598,596 322,835,955
Repurchase agreements and other borrowings 7,285,258 5,276,695
Federal Home Loan Bank advances 53,232,296 43,937,306
Subordinated debentures 7,217,000 -
Interest payable 1,635,784 1,844,705
Other liabilities 826,569 1,784,893
Total liabilities 454,795,503 375,679,554
Stockholders' equity
Preferred stock, 300,000 shares
authorized and unissued - -
Common stock, no par value; 10,000,000
shares authorized; 2,799,781 and
2,772,754 shares issued and
outstanding in 2003 and 2002 6,984,784 6,806,887
Retained earnings 37,552,620 35,435,996
Accumulated other comprehensive income (loss) 1,519,237 1,848,959
Total stockholders' equity 46,056,641 44,091,842
Total liabilities and stockholders' equity $ 500,852,144 $ 419,771,396
CONSOLIDATED STATEMENTS OF INCOME
Years Ended December 31
2003 2002 2001
Interest income
Loans, including fees $ 18,574,690 $ 20,632,003 $ 23,658,873
Securities
Taxable 2,049,835 2,564,539 2,591,330
Tax exempt 1,430,589 1,254,065 1,124,620
Other 274,003 337,397 671,231
22,329,117 24,788,004 28,046,054
Interest expense
Deposits 5,310,791 6,977,969 11,306,963
Repurchase agreements and other
borrowings 27,460 42,148 131,913
Federal Home Loan Bank advances 2,293,297 2,257,413 1,857,061
Subordinated debentures 169,000 - -
Other 75,000 90,000 90,000
7,875,548 9,367,530 13,385,937
Net interest income 14,453,569 15,420,474 14,660,117
Provision for loan losses 1,300,000 1,204,000 1,068,000
Net interest income after provision
for loan losses 13,153,569 14,216,474 13,592,117
Other income
Service charges 4,065,210 3,848,055 3,663,990
Loan service fee income 242,479 228,121 257,823
Trust department income 301,612 345,730 346,554
Securities gains (losses), net 139,438 218,604 287,262
Gain on sale of mortgage loans 853,340 948,369 382,532
Other 1,105,534 1,000,716 734,043
6,707,613 6,589,595 5,672,204
Other expenses
Salaries and employee benefits 7,373,501 6,728,443 6,019,279
Occupancy expenses 2,044,515 1,908,479 1,890,878
Amortization 516,390 429,366 419,486
Advertising and marketing 399,483 330,069 428,229
Taxes other than payroll, property
and income 439,084 406,077 370,537
Other 3,398,292 2,630,321 2,627,444
14,171,265 12,432,755 11,755,853
Income before income taxes 5,689,917 8,373,314 7,508,468
Provision for income taxes 1,456,540 2,470,789 1,983,978
Net income $ 4,233,377 $ 5,902,525 $ 5,524,490
Earnings per share:
Basic $ 1.52 $ 2.13 $ 1.98
Diluted 1.50 2.10 1.95
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
Years Ended December 31
2003 2002 2001
Net income $ 4,233,377 $ 5,902,525 $ 5,524,490
Other comprehensive income (loss),
net of tax:
Unrealized gains (losses) on
securities arising during
the period (237,693) 1,245,448 945,748
Reclassification of realized amount (92,029) (144,279) (189,593)
Net change in unrealized
gain (loss) on securities (329,722) 1,101,169 756,155
Comprehensive income $ 3,903,655 $ 7,003,694 $ 6,280,645
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
Years Ended December 31, 2003, 2002 and 2001
Accumulated
Other Total
Common Stock Retained Comprehensive Stockholders'
Shares Amount Earnings Income Equity
<s> <c> <c> <c> <c> <c>
Balances, January 1, 2001 2,808,067 $ 6,627,255 $ 29,241,091 $ (8,365) $ 35,859,981
Common stock issued (including
employee gifts of 77 shares) 29,149 319,530 - - 319,530
Common stock purchased (70,299) (297,767) (1,388,960) - (1,686,727)
Net change in unrealized gain (loss)
on securities available for sale,
net of tax - - - 756,155 756,155
Net income - - 5,524,490 - 5,524,490
Dividends declared - $.60 per share - - (1,673,048) - (1,673,048)
Balances, December 31, 2001 2,766,917 6,649,018 31,703,573 747,790 39,100,381
Common stock issued (including
employee gifts of 85 shares) 20,879 260,183 - - 260,183
Common stock purchased (15,042) (102,314) (285,051) - (387,365)
Net change in unrealized gain (loss)
on securities available for sale,
net of tax - - - 1,101,169 1,101,169
Net income - - 5,902,525 - 5,902,525
Dividends declared - $.68 per share - - (1,885,051) - (1,885,051)
Balances, December 31, 2002 2,772,754 6,806,887 35,435,996 1,848,959 44,091,842
Common stock issued (including
employee gifts of 54 shares) 36,410 507,071 - - 507,071
Common stock purchased (9,383) (329,174) - - (329,174)
Net change in unrealized gain (loss)
on securities available for sale,
net of tax - - - (329,722) (329,722)
Net income - - 4,233,377 - 4,233,377
Dividends declared - $.76 per share - - (2,116,753) - (2,116,753)
Balances, December 31, 2003 2,799,781 $ 6,984,784 $ 37,552,620 $ 1,519,237 $ 46,056,641
CONSOLIDATED STATEMENTS OF CASH FLOWS
Years Ended December 31
2003 2002 2001
<s> <c> <c> <c>
Cash flows from operating activities
Net income $ 4,233,377 $ 5,902,525 $ 5,524,490
Adjustments to reconcile net
income to net cash from
operating activities
Depreciation and amortization 1,460,429 1,419,205 1,380,148
Provision for loan losses 1,300,000 1,204,000 1,068,000
Securities amortization
(accretion), net 703,502 385,050 155,678
Securities (gains) losses, net (139,438) (218,604) (287,262)
Originations of loans held
for sale (42,872,837) (38,541,844) (29,054,241)
Proceeds from sale of loans 36,707,617 40,702,420 27,879,863
Gain on sale of mortgage loans (853,340) (948,369) (382,532)
Federal Home Loan Bank stock
Dividends (170,800) (180,800) (248,600)
Losses (gain) on sale of fixed
Assets 161,849 - -
Changes in:
Interest receivable 360,511 231,041 754,770
Other assets 451,918 32,115 (99,188)
Interest payable (306,069) (969,876) (612,908)
Other liabilities (1,390,747) (9,331) 573,565
Net cash from operating activities (354,028) 9,007,532 6,651,783
Cash flows from investing activities
Purchases of securities available
for sale (65,248,350) (49,204,809) (52,945,350)
Proceeds from sales of securities
available for sale 8,434,570 18,838,747 12,344,139
Proceeds from principal payments
and maturities of securities
available for sale 39,625,276 17,966,641 34,325,320
Cash paid for bank acquisition (7,000,205) - -
Net change in loans 1,481,580 (12,176,153) (2,083,841)
Purchases of bank premises and
equipment, net (1,632,487) (816,553) (3,167,061)
Net cash from investing activities (24,339,616) (25,392,127) (11,526,793)
Cash flows from financing activities
Net change in deposits 8,662,228 13,920,771 8,099,599
Net change in repurchase agreements and
other borrowings 2,008,563 3,674,713 (7,844,411)
Proceeds from Subordinated debentures 7,000,000 - -
Advances from Federal Home Loan Bank 12,000,000 6,980,000 22,200,000
Payments on Federal Home Loan
Bank advances (10,827,273) (6,640,623) (246,349)
Proceeds from issuance of common stock 188,697 187,889 344,280
Purchase of common stock (10,800) (315,071) (1,711,477)
Dividends paid (2,116,753) (1,885,051) (1,673,048)
Net cash from financing activities 16,904,662 15,922,628 19,168,594
CONSOLIDATED STATEMENTS OF CASH FLOWS
Years Ended December 31
2003 2002 2001
Net change in cash and cash equivalents $ (7,788,982) $ (461,967) $ 14,293,584
Cash and cash equivalents at
beginning of year 29,176,495 29,638,462 15,344,878
Cash and cash equivalents at end of year $ 21,387,513 $ 29,176,495 $ 29,638,462
Supplemental disclosures of cash flow information
Cash paid during the year for:
Interest expense $ 8,084,469 $ 10,337,406 $ 13,998,845
Income taxes 1,637,706 2,150,000 1,930,000
Supplemental schedules of non-cash investing
Activities
Real estate acquired through foreclosure $ 349,748 $ - $ 118,860
Transfer of held to maturity portfolio
to available for sale - - 15,231,406
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation: The consolidated financial statements include the
accounts of Kentucky Bancshares, Inc. (formerly Bourbon Bancshares, Inc.) (the
Company) and its wholly-owned subsidiary, Kentucky Bank (the Bank).
Intercompany transactions and balances have been eliminated in consolidation.
On November 7, 2003, the Company acquired 100% of Kentucky First Bancorp, Inc.,
parent of First Federal Savings Bank, Cynthiana, Harrison County, Kentucky, as
discussed in Note 17.
Nature of Operations: The Bank operates under a state bank charter and
provides full banking services, including trust services, to customers located
in Bourbon, Clark, Harrison, Jessamine, Scott, Woodford and adjoining counties
in Kentucky. As a state bank, the Bank is subject to regulation by the
Kentucky Department of Financial Institutions and the Federal Deposit Insurance
Corporation (FDIC). The Company, a bank holding company, is regulated by the
Federal Reserve.
Estimates in the Financial Statements: The preparation of financial statements
in conformity with accounting principles generally accepted in the United
States of America requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates. The allowance for loan
losses, mortgage servicing rights and fair value of financial instruments are
particularly subject to change.
Cash Flows: For purposes of reporting cash flows, cash and cash equivalents
include cash on hand, amounts due from banks, federal funds sold, and certain
short-term investments with maturities of less than three months. Generally,
federal funds are sold for one-day periods. Net cash flows are reported for
loan, deposit and short-term borrowing transactions.
Securities: The Company is required to classify its securities portfolio into
three categories: trading securities, securities available for sale and
securities held to maturity. Fair value adjustments are made to the securities
based on their classification with the exception of the held to maturity
category. The Company has no investments classified as trading.
Securities available for sale are carried at fair value. The difference
between amortized cost and fair value is recorded in stockholders' equity, net
of related income tax, under accumulated other comprehensive income. Changes in
this difference are recorded as a component of comprehensive income.
Amortization of premiums and accretion of discounts are recorded as adjustments
to interest income using the constant yield method.
Securities for which the Company has the positive intent and ability to hold to
maturity are stated at cost, adjusted for amortization of premiums and
accretion of discounts which are recorded as adjustments to interest income
using the constant yield method.
Gains or losses on dispositions are based on the net proceeds and the adjusted
carrying amount of the securities sold, using the specific identification
method.
Loans Held for Sale: Loans held for sale are valued at the lower of cost or
market as determined by outstanding commitments from investors or current
secondary market prices, calculated on the aggregate loan basis. The Company
also provides for any losses on uncovered commitments to lend or sell.
Loans: Loans are stated at the amount of unpaid principal, reduced by an
allowance for loan losses. Interest income on loans is recognized on the
accrual basis except for those loans on a nonaccrual status. The accrual of
interest on impaired loans is discontinued when management believes, after
consideration of economic and business conditions and collection efforts, that
the borrowers' financial condition is such that collection of interest is
doubtful. When interest accrual is discontinued, interest income received on
such loans is accounted for on the cash-basis or cost-recovery method, until
qualifying for return to accrual. Loans are returned to accrual status when
all the principal and interest amounts contractually due are brought current
and future payments are reasonably assured.
Loan origination fees and certain direct origination costs are capitalized and
recognized as an adjustment of the yield on the related loan.
Allowance for Loan Losses: The allowance for loan losses is a valuation
allowance for probable incurred credit losses, increased by the provision for
loan losses and decreased by charge-offs less recoveries. Management estimates
the allowance balance required using past loan loss experience, the nature and
volume of the portfolio, information about specific borrower situations and
estimated collateral values, economic conditions, and other factors.
Allocations of the allowance may be made for specific loans, but the entire
allowance is available for any loan that, in management's judgment, should be
charged-off. Loan losses are charged against the allowance when management
believes the uncollectibility of a loan balance is confirmed.
A loan is impaired when full payment under the loan terms is not expected.
Impairment is evaluated in total for smaller-balance loans of similar nature
such as residential mortgage, consumer, and credit card loans, and on an
individual loan basis for other loans. If a loan is impaired, a portion of the
allowance is allocated so that the loan is reported, net, at the present value
of estimated future cash flows using the loan's existing rate or at the fair
value of collateral if repayment is expected solely from the collateral. Large
groups of smaller balance homogenous loans, such as consumer and residential
real estate loans are collectively evaluated for impairment, and accordingly,
they are not separately identified for impairment disclosures.
Mortgage Servicing Rights: The Bank has sold 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 loans'
estimated lives and are included in intangible assets on the balance sheet and
expensed in proportion to, and over the period of, estimated net servicing
revenues. Impairment is evaluated based on the fair value of the assets, using
interest rates, and geographic and prepayment characteristics.
Federal Home Loan Bank Stock: Amount is carried at cost.
Bank Premises and Equipment: Land is carried at cost. Bank premises and
equipment are stated at cost less accumulated depreciation. Depreciation is
recorded principally by the straight-line method over the estimated useful
lives of the bank premises and equipment with useful lives ranging from 3 to 50
years.
Real Estate Acquired Through Foreclosure: Real estate acquired through
foreclosure is carried at the lower of the recorded investment in the property
or its fair value. The value of the underlying loan is written down to the fair
value of the real estate to be acquired by a charge to the allowance for loan
losses, if necessary. Any subsequent write-downs are charged to operating
expenses. Operating expenses of such properties, net of related income, and
gains and losses on their disposition are included in other expenses.
Repurchase Agreements: Substantially all repurchase agreement liabilities
represent amounts advanced by various customers. Securities are pledged to
cover these liabilities, which are not covered by federal deposit insurance.
Stock Compensation: Employee compensation expense under stock options is
reported using the intrinsic value method. No stock-based compensation cost is
reflected in net income, as all options granted had an exercise price equal to
or greater than the market price of the underlying common stock at date of
grant. The following table illustrates the effect on net income and earnings
per share if expense was measured using the fair value recognition provisions
of FASB Statement No. 123, Accounting for Stock-Based Compensation.
2003 2002 2001
Net income
As reported $ 4,233,377 $ 5,902,525 $ 5,524,490
Deduct: Stock-based compensation
expense determined under fair
value based method (31,972) (129,172) (76,748)
Pro forma 4,201,405 5,773,353 5,447,742
2003 2002 2001
Basic earnings per share
As reported $ 1.52 $ 2.13 $ 1.98
Pro forma 1.51 2.08 1.94
Diluted earnings per share
As reported $ 1.50 $ 2.10 $ 1.95
Pro forma 1.49 2.06 1.91
Weighted averages
Fair value of options granted $ 1.07 $ 2.43 $ 4.58
Risk free interest rate 3.40% 4.30% 4.93%
Expected life 8 years 8 years 8 years
Expected volatility 16.90% 22.28% 25.42%
Expected dividend yield 2.96% 2.72% 2.54%
Income Taxes: Income tax expense is the total of the current year income tax
due or refundable and the change in deferred tax assets and liabilities. The
Company uses the liability method for computing deferred income taxes. Under
the liability method, deferred income taxes are based on the change during the
year in the deferred tax liability or asset established for the expected future
tax consequences of differences in the financial reporting and tax bases of
assets and liabilities.
Goodwill: Goodwill results from prior business acquisitions and represents
the excess of the purchase price over the fair value of acquired tangible
assets and liabilities and identifiable intangible assets. Goodwill is
assessed at least annually for impairment and any such impairment will be
recognized in the period identified.
Intangible Assets: Intangible assets include a premium on deposits paid in
connection with the acquisition of a bank and branches which is being amortized
on a straight-line basis over ten or fifteen years and capitalized mortgage
servicing rights which are being amortized over the life of the related loans.
Earnings Per Common Share: Basic earnings per common share is net income
divided by the weighted average number of common shares outstanding during the
period. Diluted earnings per common share include the dilutive effect of
additional potential common shares issuable under stock options. Earnings and
dividends per share are restated for all stock splits and dividends through the
date of issuance of the financial statements.
Comprehensive Income: Comprehensive income consists of net income and other
comprehensive income. Other comprehensive income includes unrealized gains and
losses on securities available for sale which are also recognized as a separate
component of equity.
Derivatives: The Company periodically enters into non-exchange traded
mandatory forward sales contracts in conjunction with its mortgage banking
operation. These contracts, considered derivatives, typically last 60 to 90
days and are used to offset the risk of interest rate changes between the time
of the commitment to make a loan to a borrower at a stated rate and when the
loan is sold. The Company did not have any mandatory forward sales contracts
at December 31, 2003 and 2002.
Adoption of New Accounting Standards: During 2003, the Company adopted FASB
Statement 149, Amendment of Statement 133 on Derivative Instruments and
Hedging Activities, FASB Statement 150, Accounting for Certain Financial
Instruments with Characteristics of both Liabilities and Equities, FASB
Statement 132 (revised 2003), Employers' Disclosures about Pensions and Other
Postretirement Benefits, FASB Interpretation 45, Guarantor's Accounting and
Disclosure Requirements for Guarantees, and FASB Interpretation 46,
Consolidation of Variable Interest Entities. Adoption of the new standards
did not materially affect the Company's operating results or financial
condition.
Industry Segments: While the Company's chief decision makers monitor the
revenue streams of the various Company products and services, operations are
managed and financial performance is evaluated on a Company-wide basis.
Accordingly, all of the Company's operations are considered by management to be
aggregated into one reportable operating segment.
NOTE 2 - RESTRICTIONS ON CASH AND DUE FROM BANKS
Included in cash and due from banks are certain non-interest bearing deposits
that are held at the Federal Reserve or maintained in vault cash in accordance
with average balance requirements specified by the Federal Reserve Board of
Governors. The reserve requirement at December 31, 2003 and 2002 was $51 and
$0.
NOTE 3 - SECURITIES
Year-end securities available for sale are as follows:
Fair Unrealized Unrealized
Value Gains Losses
2003
U. S. Treasury $ 3,033,125 $ 11,262 $ -
U. S. government agencies 36,633,788 125,206 (132,778)
States and political subdivisions 39,141,793 1,536,367 (49,808)
Mortgage-backed 47,381,940 630,553 (192,657)
Equity securities 1,534,666 326,787 (8,289)
Other 1,064,518 55,503 -
Total $ 128,789,830 $ 2,685,678 $(383,532)
2002
U. S. Treasury $ 5,059,063 $ 47,096 $ -
U. S. government agencies 6,138,499 147,012 -
States and political subdivisions 31,024,014 1,299,516 (6,143)
Mortgage-backed 40,321,450 919,850 (57,387)
Equity securities 3,747,550 285,695 (15,355)
Other 3,218,564 197,169 (15,786)
Total $ 89,509,140 $ 2,896,338 $ (94,671)
The fair value of securities available for sale at December 31, 2003, by
contractual maturity, are shown below. Expected maturities will differ from
contractual maturities because borrowers may have the right to call or prepay
obligations with or without call or prepayment penalties. Securities not due
at a single maturity are shown separately.
Fair
Value
Due in one year or less $ 6,624,244
Due after one year through five years 33,500,677
Due after five years through ten years 20,940,540
Due after ten years 18,807,763
79,873,224
Mortgage-backed 47,381,940
Equity 1,534,666
Total $ 128,789,830
Proceeds from sales of securities during 2003, 2002 and 2001 were $8,434,570,
$18,838,747 and $12,344,139. Gross gains of $157,474, $260,096 and $288,105
and gross losses of $18,036, $41,492 and $843, were realized on those sales.
Securities with an approximate carrying value of $83,220,000 and $70,076,000 at
December 31, 2003 and 2002, were pledged to secure public deposits, trust
funds, securities sold under agreements to repurchase and for other purposes as
required or permitted by law.
Securities with unrealized losses at year end 2003 not recognized in income
are as follows:
Less than 12 Months 12 Months or More Total
Fair Unrealized Fair Unrealized Fair Unrealized
Description of Securities Value Loss Value Loss Value Loss
<s> <c> <c> <c> <c> <c> <c>
U.S. Government securities $ 1,023,844 $ (3,186) $ 15,971,530 $ (129,592) $ 16,995,374 $ (132,778)
States and political subdivisions 681,517 (4,057) 4,129,333 (45,751) 4,810,850 (49,808)
Mortgage-backed - - 16,190,489 (192,657) 16,190,489 (192,657)
Equity securities 170,050 (8,289) - - 170,050 (8,289)
Total temporarily impaired $ 1,875,411 $ (15,532) $ 36,291,352 $ (368,000) $ 38,166,763 $ (383,532)
Unrealized losses have not been recognized into income because management has
the intent and ability to hold for the foreseeable future, and the decline in
fair value is largely due to increases in market interest rates. The fair
value is expected to recover as the bonds approach their maturity date and/or
market rates decline.
NOTE 4 - LOANS
Loans at year-end were as follows:
2003 2002
Commercial $ 14,277,927 $ 16,802,888
Real estate construction 14,313,068 15,513,702
Real estate mortgage 214,529,347 182,206,697
Agricultural 56,615,266 52,187,812
Consumer 12,977,419 17,133,717
Other 289,231 308,789
$ 313,002,258 $ 284,153,605
Activity in the allowance for loan losses was as follows:
2003 2002 2001
Beginning balance $ 3,395,075 $ 3,386,425 $ 3,388,380
Allowance from acquisition 362,900 - -
Charge-offs (1,397,822) (1,329,218) (1,145,942)
Recoveries 159,689 133,868 75,987
Provision for loan losses 1,300,000 1,204,000 1,068,000
Ending balance $ 3,819,842 $ 3,395,075 $ 3,386,425
Impaired loans totaled $1,844,000 and $1,573,000 at December 31, 2003 and 2002.
The average recorded investment in impaired loans during 2003, 2002 and 2001
was $1,051,000, $1,441,000 and $457,000. The total allowance for loan losses
related to these loans was $345,000 and $675,000 at December 31, 2003 and 2002.
Interest income on impaired loans of $14,000, $8,000 and $31,000 was recognized
for cash payments received in 2003, 2002 and 2001.
Nonperforming loans were as follows:
2003 2002 2001
Loans past due over 90 days still
on accrual $ 779,000 $ 789,000 $ 1,278,000
Nonaccrual loans 1,844,000 1,573,000 935,000
Nonperforming loans include impaired loans and smaller balance homogeneous
loans, such as residential mortgage and consumer loans, that are collectively
evaluated for impairment.
Mortgage loans serviced for others are not included in the accompanying
consolidated balance sheets. The unpaid principal balances of mortgage loans
serviced for others was approximately $91,789,000 and $93,530,000 at December
31, 2003 and 2002. Custodial escrow balances maintained in connection with the
foregoing loan servicing, and included in demand deposits, were approximately
$658,000 and $714,000 at December 31, 2003 and 2002.
Changes in mortgage servicing rights were as follows:
2003 2002 2001
Beginning balance $ 704,034 $ 463,067 $ 521,467
Additions 381,205 390,865 81,619
Amortization (224,119) (149,898) (140,019)
Ending balance $ 861,120 $ 704,034 $ 463,067
Certain directors and executive officers of the Company and companies in which
they have beneficiary ownership were loan customers of the Bank during 2003 and
2002. Such loans were made in the ordinary course of business at the Bank's
normal credit terms and interest rates. An analysis of the activity with
respect to all director and executive officer loans is as follows:
2003 2002
Balance, beginning of year $ 1,626,000 $ 1,529,000
Additions, including loans now meeting
disclosure requirements 1,648,000 1,346,000
Amounts collected, including loans no
longer meeting disclosure requirements (788,000) (1,249,000)
Balance, end of year $ 2,486,000 $ 1,626,000
NOTE 5 - PREMISES AND EQUIPMENT
Year-end premises and equipment were as follows:
2003 2002
Land and buildings $ 12,242,809 $ 10,790,642
Furniture and equipment 9,241,247 8,001,811
Construction in process - 534,659
21,484,056 19,327,112
Less accumulated depreciation (9,877,683) (8,995,494)
$ 11,606,373 $ 10,331,618
Depreciation expense was $960,512, $989,839 and $960,661 in 2003, 2002, and
2001.
NOTE 6 - GOODWILL AND INTANGIBLE ASSETS
The change in balance for goodwill during the year is as follows:
2003
Beginning of year $ -
Acquired goodwill 10,199,830
End of year $ 10,199,830
Goodwill will not be amortized but instead evaluated periodically for
impairment.
Acquired intangible assets were as follows at year-end:
2003
Gross
Carrying Accumulated
Amount Amortization
Amortized intangible assets:
Core deposit intangibles $ 3,656,403 $ 2,519,292
Aggregate amortization expense was $292,271, $279,468 and $279,468 for 2003,
2002 and 2001.
Estimated amortization expense for each of the next five years:
2004 $ 275,491
2005 95,736
2006 95,736
2007 95,736
2008 95,736
The change in balance for intangible assets during the year is as follows:
2003 2002
Beginning of year $ 663,382 $ 942,850
Amortization (292,271) (279,468)
Acquired core deposit intangible 766,000 -
End of year $ 1,137,111 $ 663,382
NOTE 7 - DEPOSITS
At December 31, 2003, the scheduled maturities of time deposits are as follows:
2004 $ 130,497,174
2005 24,002,136
2006 23,312,636
2007 9,530,375
2008 3,015,207
Certain directors and executive officers of the Company and companies in which
they have beneficial ownership are deposit customers of the Bank. The amount of
these deposits was approximately $1,397,000 and $1,178,000 at December 31, 2003
and 2002.
NOTE 8 - REPURCHASE AGREEMENTS
Repurchase agreements generally mature within one year from the transaction
date and range in maturities from 1 day to 3 years. The securities underlying
the agreements are maintained in a third-party custodian's account under a
written custodial agreement. Information concerning repurchase agreements for
2003 and 2002 is summarized as follows:
2003 2002
Average daily balance during the year $ 1,691,154 $ 2,097,456
Average interest rate during the year 1.34% 1.22%
Maximum month-end balance during the year $ 2,411,269 $ 3,504,562
Weighted average interest rate at year end 1.65% 0.84%
NOTE 9 - FEDERAL HOME LOAN BANK ADVANCES
The Bank owns stock of the Federal Home Loan Bank (FHLB) of Cincinnati, Ohio.
This stock allows the Bank to borrow advances from the FHLB. At December 31,
2003 and 2002, $53,232,296 and $43,937,306 represented the balance due on
advances from the FHLB. All advances are paid either on a monthly basis or at
maturity, over remaining terms of one month to twenty-seven years, with fixed
interest rates ranging from 2.65% to 7.23%. All advances require a prepayment
penalty and certain advances are callable by the FHLB at various call dates
throughout the term of the advance. Advances are secured by the FHLB stock and
substantially all first mortgage loans.
Scheduled principal payments due on advances during the years subsequent to
December 31, 2003 are as follows:
2004 $ 18,409,558
2005 6,933,551
2006 10,931,461
2007 954,273
2008 4,981,617
Thereafter 11,021,836
$ 53,232,296
NOTE 10 - SUBORDINATED DEBENTURES
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
debentures pay interest quarterly at 7.06% for the first 5 years. Starting
September 2008, the rate converts to three-month LIBOR plus 3.00 adjusted
quarterly. The Company may redeem the subordinated debentures, in whole or in
part, beginning September 2008 at a price of 100% of face value. The
subordinated debentures must be redeemed no later than 2033.
In accordance with FASB Interpretation No. 46, the Trust is not consolidated
with the Company. Accordingly, the Company does not report the securities
issued by the Trust as liabilities, and instead reports as liabilities the
subordinated debentures issued by the Company and held by the Trust, as these
are no longer eliminated in consolidation.
NOTE 11 - INCOME TAXES
Income tax expense was as follows:
2003 2002 2001
Current $ 1,166,575 $ 2,189,931 $ 1,878,784
Deferred 289,965 280,858 105,194
$ 1,456,540 $ 2,470,789 $ 1,983,978
Year-end deferred tax assets and liabilities were due to the following. No
valuation allowance for the realization of deferred tax assets is considered
necessary.
2003 2002
Deferred tax assets
Allowance for loan losses $ 942,354 $ 889,158
Core deposit intangibles 18,569 245,154
Other 174,723 181
Deferred tax liabilities
Unrealized gain on securities (782,909) (952,708)
Bank premises and equipment (460,980) (251,461)
FHLB stock (859,218) (687,803)
Mortgage servicing rights (292,781) (239,372)
Other (401,183) (105,546)
Net deferred tax asset (liability) $ (1,661,425) $ (1,102,397)
Effective tax rates differ from federal statutory rates applied to financial
statement income due to the following:
2003 2002 2001
U. S. federal income tax rate 34.0% 34.0% 34.0%
Changes from the statutory rate
Tax-exempt investment income (9.3) (5.7) (5.2)
Non-deductible interest expense related to
carrying tax-exempt investments .8 .6 .6
Rehabilitation tax credit - - (2.1)
Other .1 .6 (.9)
25.6% 29.5% 26.4%
Federal income tax laws provided First Federal Savings Bank with additional bad
debt deductions through 1987, totaling $1.3 million. Accounting standards do
not require a deferred tax liability to be recorded on this amount, which
otherwise would total a $441,000 liability at December 31, 2003. The Company's
acquisition of First Federal Savings Bank did not require the recapture of the
bad debt reserve. However, if Kentucky Bank was liquidated or otherwise ceased
to be a bank, or if tax laws were to change, the $441,000 would be recorded as
expense.
NOTE 12 - EARNINGS PER SHARE
The factors used in the earnings per share computation follow:
2003 2002 2001
Basic Earnings Per Share
Net income $ 4,233,377 $ 5,902,525 $ 5,524,490
Weighted average common
shares outstanding 2,781,146 2,770,282 2,790,238
Basic earnings per share $ 1.52 $ 2.13 $ 1.98
Diluted Earnings Per Share
Net income $ 4,233,377 $ 5,902,525 $ 5,524,490
Weighted average common
shares outstanding 2,781,146 2,770,282 2,790,238
Add dilutive effects of
assumed exercise of
stock options 45,640 35,836 47,080
Weighted average common and
dilutive potential common
shares outstanding 2,826,786 2,806,118 2,837,318
Diluted earnings per share $ 1.50 $ 2.10 $ 1.95
Stock options for 3,050 shares common stock were excluded from 2002 diluted
earnings per share because their impact was antidilutive. There were no shares
that were antidilutive in 2003.
NOTE 13 - RETIREMENT PLANS
The Company has a defined benefit pension plan covering substantially all of
its employees. The Company's funding policy is to contribute annually the
maximum amount that can be deducted for federal income tax purposes. Benefits
are based on one percent of employee average earnings for the previous five
years times years of credited service.
Information about the pension plan was as follows:
2003 2002
Change in benefit obligation:
Beginning benefit obligation $ 4,385,567 $ 3,583,257
Service cost 314,935 299,744
Interest cost 265,034 245,253
Actuarial adjustment (601,900) 323,543
Benefits paid (73,245) (66,230)
Ending benefit obligation 4,290,391 4,385,567
Change in plan assets, at fair value:
Beginning plan assets 3,397,218 3,279,471
Actual return 358,868 (176,162)
Employer contribution 392,878 360,139
Benefits paid (73,245) (66,230)
Ending plan assets 4,075,719 3,397,218
Funded status (214,672) (988,349)
Unrecognized net actuarial (gain) loss 523,815 1,236,596
Unrecognized prior transition asset (1,857) (2,229)
Net pension prepaid benefit $ 307,286 $ 246,018
Amounts recognized in the balance sheet consist of:
Prepaid benefit cost $ 307,286
Accrued benefit cost -
Net amount recognized $ 307,286
The accumulated benefit obligation for defined benefit pension plans was
$2,976,205 at year-end 2003.
The projected benefit obligation, accumulated benefit obligation, and fair
value of plan assets for the pension plans were $4,290,391, $2,976,205, and
$4,075,719 respectively, as of year end 2003.
Net periodic pension cost include the following components:
2003 2002 2001
Service cost $ 314,935 $ 299,744 $ 240,644
Interest cost 265,034 245,253 219,979
Expected return on plan assets (265,117) (255,964) (246,285)
Amortization 16,758 5,221 (372)
Net periodic cost $ 331,610 $ 294,254 $ 213,966
Weighted-average assumptions used to determine net cost
2003 2002 2001
Discount rate on benefit obligation 7% 7% 7%
Long-term expected rate of return
on plan assets 8% 8% 8%
Rate of compensation increase 5% 5% 5%
The Company's pension plan asset allocation at year-end 2003, target allocation
for 2004, and expected long-term rate of return by asset category are as
follows:
Weighted
Percentage Average
of Plan Expected
Target Assets at Long-Term
Allocation Year-End Rate of Return
Asset Category 2004 2003 2003
Equity securities 55-65 51.7 10%
Debt securities 35-45 38.1 6
Cash 5-15 10.2 4
Total 100.0
The asset allocation objective for 2004 and following is to be 60% in equity
securities and 40% in debt securities. These percentages may vary 5-10 basis
points based on market conditions of equity and bond markets.
The Company expects to contribute $375,000 to its pension plan in 2004.
The Company also has a qualified profit sharing plan which covers substantially
all employees and includes a 401(k) provision. Profit sharing contributions,
excluding the 401(k) provision, are at the discretion of the Company's Board of
Directors. Expense recognized in connection with the plan was $271,684,
$270,048 and $237,661 in 2003, 2002 and 2001.
NOTE 14 - STOCK OPTION PLAN
The Company grants certain officers and key employees stock option awards which
vest and become fully exercisable at the end of five years and provides for
issue of up to 220,000 options. The Company also grants certain directors
stock option awards which vest and become fully exercisable immediately and
provides for issue of up to 20,000 options. The exercise price of each option,
which has a ten year life, was equal to the market price of the Company's stock
on the date of grant; therefore, no compensation expense was recognized.
Summary of stock option transactions are as follows:
2003 2002 2001
Weighted Weighted Weighted
Option Option Option
Options Price Options Price Options Price
<s> <c> <c> <c> <c> <c> <c>
Outstanding, beginning of year 83,114 $16.72 103,484 $15.52 131,730 $14.32
Granted 14,500 25.72 6,520 25.85 4,160 23.58
Expired (3,698) 25.00 (6,096) 20.84 (3,334) 18.34
Exercised (36,356) 13.89 (20,794) 12.41 (29,072) 10.92
Outstanding, end of year 57,560 $20.23 83,114 $16.72 103,484 $15.52
Weighted remaining contractual
Life 67.9 months 64.7 months 62.3 months
Options outstanding at year-end 2003 were as follows:
Outstanding Exercisable
Weighted
Average Weighted Weighted
Remaining Average Average
Contractual Exercise Exercise
Range of Exercise Prices Options Life Price Options Price
<s> <c> <c> <c> <c> <c>
From $12.50 to $15.50 per share 19,120 36.9 $13.91 19,120 $13.91
From $18.00 to $20.63 per share 15,706 60.1 20.52 12,308 20.49
From $23.50 to $28.00 per share 22,734 99.3 25.35 5,396 25.46
57,560 36,824
NOTE 15 - LIMITATION ON BANK DIVIDENDS
The Company's principal source of funds is dividends received from the Bank.
Banking regulations limit the amount of dividends that may be paid by the Bank
without prior approval of regulatory agencies. Under these regulations, the
amount of dividends that may be paid in any calendar year is limited to the
current year's net profits, as defined, combined with the retained net profits
of the preceding two years. During 2004 the Bank could, without prior approval,
declare dividends of approximately $3,945,000 plus any 2004 net profits
retained to the date of the dividend declaration.
NOTE 16 - DISCLOSURES ABOUT FAIR VALUE OF FINANCIAL INSTRUMENTS
The fair values of the Company's financial instruments at December 31, 2003 and
2002 are as follows:
2003 2002
Carrying Carrying
Amount Fair Value Amount Fair Value
(In Thousands)
Financial assets
Cash and cash equivalents $ 21,388 $ 21,388 $ 29,176 $ 29,176
Securities 128,790 128,790 89,509 89,509
Mortgage loans held for sale 7,759 7,851 740 740
Loans, net 309,182 312,596 280,759 287,447
FHLB stock 4,930 4,930 4,027 4,027
Interest receivable 3,250 3,250 3,276 3,276
Financial liabilities
Deposits $ 384,599 $ 387,083 $ 322,836 $ 325,454
Securities sold under
agreements to repurchase
and other borrowings 7,285 7,285 5,277 5,277
FHLB advances 53,232 53,747 43,937 45,343
Subordinated debentures 7,000 7,168 - -
Interest payable 1,636 1,636 1,845 1,845
Carrying amount is the estimated fair value for cash and cash equivalents,
short-term borrowings, Federal Home Loan Bank stock, accrued interest
receivable and payable, demand deposits, short-term debt, and variable rate
loans or deposits that reprice frequently and fully. Security fair values are
based on market prices or dealer quotes, and if no such information is
available, on the rate and term of the security and information about the
issuer. For fixed rate loans or deposits and for variable rate loans or
deposits with infrequent repricing or repricing limits, fair value is based on
discounted cash flows using current market rates applied to the estimated life
and credit risk. Fair values for impaired loans are estimated using discounted
cash flow analysis or underlying collateral values. Fair value of debt is
based on current rates for similar financing. The fair value of commitments to
extend credit and standby letters of credit is not considered material.
NOTE 17 - BUSINESS COMBINATION
On November 7, 2003, the Company acquired 100% of the outstanding shares of
Kentucky First Bancorp, Inc., parent of First Federal Savings Bank. Operating
results of Kentucky First Bancorp, Inc. are included in the consolidated
financial statements since the date of the acquisition. As a result of this
acquisition, the Company expects to further solidify its market share in
central Kentucky.
The purchase price in cash was $23.25 per share or $22,271,000. The purchase
price resulted in approximately $10,200,000 in goodwill, and $766,000 in core
deposit intangible. The core deposit intangible asset will be amortized over
10 years, using the straight line method. Goodwill will not be amortized but
instead evaluated periodically for impairment.
The following table summarizes the estimated fair value of assets acquired and
liabilities assumed at the date of acquisition.
Securities available for sale $ 23,156,000
Loans 31,205,000
Goodwill 10,200,000
Core deposit intangible 766,000
Other assets 18,468,000
Total assets acquired $ 83,795,000
Deposits (52,939,000)
Other liabilities (8,585,000)
Total liabilities assumed $ (61,524,000)
Net assets acquired $ 22,271,000
The following table presents pro forma information as if the acquisition had
occurred at the beginning of 2003 and 2002. The pro forma information includes
adjustments for interest income on loans and securities acquired, amortization
of intangibles arising from the transaction, depreciation expense on property
acquired, interest expense on deposits acquired, and the related income tax
effects. The pro forma financial information is not necessarily indicative of
the results of operations as they would have been had the transactions been
effected on the assumed dates.
2003 2002
Net interest income $ 16,368,000 $ 18,187,000
Net income $ 4,838,000 $ 6,794,000
Basic earnings per share $ 1.74 $ 2.45
Diluted earnings per share $ 1.71 $ 2.42
NOTE 18 - OFF-BALANCE SHEET ACTIVITIES AND COMMITMENTS
Some financial instruments, such as loan commitments, credit lines, letters of
credit, and overdraft protection, are issued to meet customer financing needs.
These are agreements to provide credit or to support the credit of others, as
long as conditions established in the contract are met, and usually have
expiration dates. Commitments may expire without being used. Off-balance
sheet risk to credit loss exists up to the face amount of these instruments,
although material losses are not anticipated. The same credit policies are
used to make such commitments as are used for loans, including obtaining
collateral at exercise of the commitment.
Financial instruments with off-balance sheet risk were as follows at year-end:
2003 2002
Unused lines of credit $ 47,148,000 $ 44,943,000
Commitments to make loans 1,379,000 -
Letters of credit 252,000 345,000
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 6.50% with maturities
ranging from 15 to 30 years and are intended to be sold.
NOTE 19 - CONTINGENT LIABILITIES
The Bank is a defendant in legal actions arising from normal business
activities. Management believes these actions are without merit or that the
ultimate liability, if any, resulting from them will not materially affect the
Company's consolidated financial position or results of operations.
NOTE 20 - CAPITAL REQUIREMENTS
Regulatory Matters: The Company and the Bank are subject to various
regulatory capital requirements administered by the federal banking agencies.
Failure to meet minimum capital requirements can initiate certain mandatory
and possible additional discretionary actions by regulators that, if
undertaken, could have a direct material effect on the Company's financial
statements. Under capital adequacy guidelines and the regulatory framework for
prompt corrective action, the Company and the Bank must meet specific capital
guidelines that involve quantitative measures of the Company's and the Bank's
assets, liabilities, and certain off-balance sheet items as calculated under
regulatory accounting practices. The Company and Bank capital amounts and
classifications are also subject to qualitative judgments by regulators about
components, risk weightings, and other factors.
Quantitative measures established by regulation to ensure capital adequacy
require the Company and the Bank to maintain minimum amounts and ratios (set
forth in the following table) of Total and Tier I capital (as defined in the
regulations) to risk-weighted assets (as defined), and of Tier I capital to
average assets (as defined). Management believes, as of December 31, 2003 and
2002, that the Company and the Bank meet all capital adequacy requirements to
which they are subject.
The most recent notification from the Federal Deposit Insurance Corporation
categorized the Bank as well capitalized under the regulatory framework for
prompt corrective action. To be categorized as well capitalized, the Bank
must maintain minimum Total risk-based, Tier I risk-based and Tier I leverage
ratios as set forth in the following table. There are no conditions or events
since that notification that management believes have changed the
institution's category.
The Company's and the Bank's actual amounts and ratios are presented in the
table below:
To Be Well
Capitalized
Under Prompt
For Capital Corrective
Actual Adequacy Purposes Action Provisions
Amount Ratio Amount Ratio Amount Ratio
2003 (Dollars in Thousands)
<s> <c> <c> <c> <c> <c> <c>
Consolidated
Total Capital (to Risk-Weighted Assets) $ 44,078 13.9% $ 25.359 8% $ 31.698 10%
Tier I Capital (to Risk-Weighted Assets) 40,115 12.7 12,679 4 19,019 6
Tier I Capital (to Average Assets) 40,115 8.2 18,154 4 22,692 5
Bank Only
Total Capital (to Risk-Weighted Assets) $ 40,762 12.9% $ 25,264 8% $ 31,580 10%
Tier I Capital (to Risk-Weighted Assets) 36,932 11.7 12,632 4 18,948 6
Tier I Capital (to Average Assets) 36,932 8.1 18,105 4 22,632 5
2002
Consolidated
Total Capital (to Risk-Weighted Assets) $ 45,041 15.5% $ 23,247 8% $ 29,059 10%
Tier I Capital (to Risk-Weighted Assets) 41,524 14.3 11,624 4 17,435 6
Tier I Capital (to Average Assets) 41,524 10.2 16,264 4 20,331 5
Bank Only
Total Capital (to Risk-Weighted Assets) $ 38,481 13.3% $ 23,164 8% $ 28,955 10%
Tier I Capital (to Risk-Weighted Assets) 35,073 12.1 11,582 4 17,373 6
Tier I Capital (to Average Assets) 35,073 8.6 16,292 4 20,306 5
NOTE 21 - PARENT COMPANY FINANCIAL STATEMENTS
Condensed Balance Sheets
December 31
2003 2002
(In Thousands)
ASSETS
Cash on deposit with subsidiary $ 1,783 $ 5,609
Investment in subsidiary 49,593 37,425
Securities available for sale 1,247 1,169
Other assets 670 -
Total assets $ 53,293 $ 44,203
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities
Subordinated debentures $ 7,217 $ -
Other Liabilities 19 111
Stockholders' equity
Preferred stock - -
Common stock 6,985 6,807
Retained earnings 37,553 35,436
Accumulated other comprehensive income 1,519 1,849
Total liabilities and stockholders' equity $ 53,293 $ 44,203
Condensed Statements of Income and Comprehensive Income
Years Ended December 31
2003 2002 2001
(In Thousands)
Income
Dividends from subsidiary $ 13,025 $ 3,400 $ 3,280
Securities gains (losses), net 7 145 72
Interest income 20 32 44
Total income 13,052 3,577 3,396
Expenses
Interest expense 169 - -
Other expenses 360 55 39
Income before income taxes and equity in
undistributed income of subsidiary 12,523 3,522 3,357
Applicable income tax (expense) benefits 175 (29) (26)
Income before equity in undistributed
income of subsidiary 12,698 3,493 3,331
Equity in undistributed income of subsidiary (8,465) 2,410 2,193
Net income 4,233 5,903 5,524
Other comprehensive income (loss), net of tax:
Unrealized gains (losses) on securities arising
during the period (237) 1,245 946
Reclassification of realized amount (92) (144) (189)
Net change in unrealized gain (loss)
on securities (329) 1,101 757
Comprehensive income $ 3,904 $ 7,004 $ 6,281
Condensed Statements of Cash Flows
Years Ended December 31
2003 2002 2001
(In Thousands)
Cash flows from operating activities
Net income $ 4,233 $ 5,903 $ 5,524
Adjustments to reconcile net income to net
cash from operating activities
Equity in undistributed earnings of
Subsidiary 8,465 (2,410) (2,193)
Securities (gains) losses, net (7) (145) (72)
Change in other assets (553) (100) 72
Change in other liabilities (10) 103 -
Net cash from operating activities 12,128 3,351 3,331
Cash flows from investing activities
Purchase of securities available for sale (82) (109) (311)
Proceeds from sales of securities
available for sale 65 869 820
Acquisition of Kentucky First Bancorp, Inc. (20,998) - -
Net cash from investing activities (21,015) 760 509
Cash flows from financing activities
Proceeds from subordinated debentures 7,000 - -
Dividends paid (2,117) (1,885) (1,673)
Proceeds from issuance of common stock 189 188 344
Purchase of common stock (11) (315) (1,711)
Net cash from financing activities 5,061 2,012) (3,040)
Net change in cash (3,826) 2,099 800
Cash at beginning of year 5,609 3,510 2,710
Cash at end of year $ 1,783 $ 5,609 $ 3,510
NOTE 22 - QUARTERLY FINANCIAL DATA (UNAUDITED)
Interest Net Interest Net Earnings Per Share
Income Income Income Basic Fully Diluted
2003
First quarter $ 5,662 $ 3,620 $ 1,183 $ .43 $ .42
Second quarter 5,611 3,685 1,172 .42 .42
Third quarter 5,345 3,505 1,261 .45 .45
Fourth quarter 5,711 3,644 617 .22 .21
2002
First quarter $ 6,233 $ 3,626 $ 1,296 $ .47 $ .46
Second quarter 6,104 3,695 1,221 .44 .44
Third quarter 6,141 3,932 1,625 .59 .58
Fourth quarter 6,310 4,167 1,761 .63 .62
The fourth quarter 2003 decrease in net income is mainly attributable to an
addition to the allowance for loan losses, business combination expenses and a
loss on sale of fixed assets.
REPORT OF INDEPENDENT AUDITORS
Board of Directors
Kentucky Bancshares, Inc.
Paris, Kentucky
We have audited the accompanying consolidated balance sheets of Kentucky
Bancshares, Inc. as of December 31, 2003 and 2002, and the related consolidated
statements of income, comprehensive income, changes in stockholders' equity and
cash flows for each of the three years in the period ended December 31, 2003.
These financial statements are the responsibility of the Company's management.
Our responsibility is to express an opinion on these financial statements based
on our audits.
We conducted our audits in accordance with auditing standards generally
accepted in the United States of America. Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the
financial statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the financial statements. An audit also includes assessing the accounting
principles used and significant estimates made by management, as well as
evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Kentucky
Bancshares, Inc. as of December 31, 2003 and 2002, and the results of its
operations and its cash flows for each of the three years in the period ended
December 31, 2003, in conformity with accounting principles generally accepted
in the United States of America.
Crowe Chizek and Company LLC
Lexington, Kentucky
January 16, 2004
MEET OUR OFFICERS
BOURBON COUNTY.
PARIS
SENIOR MANAGEMENT
BUCKNER WOODFORD, Chairman and CEO
LOUIS PRICHARD, President and COO
NORMAN J. FRYMAN, Sr. Vice President, Director of Lending
JAMES P. SHIPP, JR., Sr. Vice President, Director of Branch Administration
BRENDA BRAGONIER, Vice President, Director of Marketing and Human Resources
HUGH CROMBIE, Vice President, Director of Operations
GREG DAWSON, Vice President, Chief Financial Officer
OFFICERS
KAREN ANDERSON, Corporate and Automated Officer
HEATHER BARGER, Vice President, Director of Risk Management
BRENDA BERRY, Accountant
WALLIS BROOKS, Branch Manager
PATTY CARPENTER, Assistant Vice President, Loan Operations Officer
R.W. COLLINS, JR., Vice President, Agricultural Lender
ROBBIE COX, Senior Auditor
CYNTHIA CRISWELL, Data Processing Officer
NANCYE FIGHTMASTER, Vice President, Loan Officer
DAVID FOSTER, Vice President, Agricultural Lender
JANICE HASH, Accountant & Purchasing Agent
LISA HIGHLEY, Jr. Personal Trust Officer
CATHY HILL, Vice President, Head of Collections
PERRY INGRAM, Assistant Vice President, Network Manager
JANE MOGGE, Head of Deposit Operations
MARY MORELAND, Assistant Vice President, Loan Officer
DONALD ROE, Assistant Vice President, Sr. Data Processing Officer
ROWENA RUFF, Investment Advisor
LYDIA SOSBY, Assistant Vice President, Director of Training and Sales
JUDY TAYLOR, Vice President, Human Resource Manager
RICK WAGNER, Maintenance Supervisor
GEORGE WILDER, Vice President, Loan Officer
ARNITA WILLOUGHBY, Mortgage Operations Manager
MARTHA WOODFORD, Assistant Vice President, Director of Corporate and Automated
Products
JAN WORTH, Assistant Vice President, Personal Trust Officer
Lexington Road Branch
Susan A. Lemons, Assistant Vice President, Branch Manager/Loan Officer
Pleasant Street Branch
Philip Hurst - Assistant Branch Manager
CLARK COUNTY.
WINCHESTER
RITA BUGG, Vice President, Regional Manager
MICHAEL SHANE FOLEY, Loan Officer
DARREN HENRY, Vice President, Commercial Lender
KATHY NEWKIRK, Branch Manager, Loan Officer
TERESA SHIMFESSEL, Assistant Vice President, Loan Officer
CAROLYN WILKINS, Overdraft Management Officer
HARRISON COUNTY.
CYNTHIANA
RHONDA BROWN, Loan Officer
KEN DEVASHER, Vice President, Regional Manager
DREAMA HARRIS, Loan Officer
IVA JOYCE RAINEY, Loan Officer
KEVIN TOLLE, Loan Officer
JESSAMINE COUNTY.
NICHOLASVILLE
MICHAEL LOVELL, Vice President, Regional Manager
RICK WALLING, Assistant Vice President, Loan Officer
SCOTT COUNTY.
Georgetown
PAMELA JESSIE, Vice President, Regional Manager
BEN SARGENT, Vice President, Branch Manager, Loan Officer
SHARON WHITLOCK, Branch Manager, Loan Officer
WOODFORD COUNTY.
VERSAILLES
DUNCAN B. GARDINER, Vice President, Regional Manager
A. J. GULLETT, Assistant Vice President, Loan Officer
Board of Directors
Kentucky Bank
William M. Arvin, Attorney
Tom Buford, State Senator
James Ferrell, Physician
William Graul, Physician
Henry Hinkle, President, Hinkle Contracting Corporation
R.C. Johnson, Jr., Owner, President, Johnson's Funeral Home
Theodore Kuster, Farmer and Thoroughbred Breeder, Westview Equine
Ted McClain, Agent, Hopewell Insurance Company
Brad Marshall, Farmer, Owner Marshall's Tractor Supply
Louis Prichard, President, COO, Kentucky Bank
Edwin Saunier, President, Saunier North American, Inc.
William R. Stamler, Chairman, Signal Investments, Inc.
Robert G. Thompson, Farmer and Thoroughbred Breeder, Snowhill Farm
Woodford Van Meter, Ophthalmologist
Gerald Whalen, President, Whalen and Company
Buckner Woodford, Chairman, CEO, Kentucky Bank
REGIONAL BOARD OF DIRECTORS
CLARK COUNTY
Mary Beth Hendricks, Director of Clark County Child Support Services
Donald Pace, Executive Director of Central Kentucky Educational Co-op with UK
John Roche, Optician
Edwin Saunier, President, Saunier North American, Inc.
James Taulbee, Farmer
REGIONAL BOARD OF DIRECTORS
HARRISON COUNTY
K. Bruce Florence, Director, Licking Valley College
Betty Long, Retired President, First Federal Savings Bank of Cynthiana
Brad Marshall Farmer, Owner Marshall's Tractor Supply
Joel Techau, CEO, Techau Inc.
Gerald Whalen, President, Whalen and Company
REGIONAL BOARD OF DIRECTORS
JESSAMINE COUNTY
William M. Arvin, Attorney
Dan Brewer, Bluegrass RECC
Tom Buford, State Senator
Jonah Mitchell, President, Jonah Mitchell Real Estate and Auction Company
Eva McDaniel, Jessamine County Clerk
REGIONAL BOARD OF DIRECTORS
SCOTT COUNTY
Gus Bynum, Physician
Mike Hockensmith, Owner and President, The Hockensmith Agency, Inc.
R.C. Johnson, Jr, Owner, President, Johnson's Funeral Home
George Lusby, County Judge Executive
Everette Varney, Major
REGIONAL BOARD OF DIRECTORS
WOODFORD COUNTY
Loren Carl, Woodford County Chief of Police
William Graul, Physician
James Kay, Businessman, Farmer
Tricia Kittinger, Woodford Circuit Clerk
Kentucky Bancshares, Inc.
Board of Directors
James Ferrell
Physician; Chairman, Kentucky Bancshares, Inc.
Class of 2004
William M. Arvin
Attorney, William M. Arvin Associates
Class of 2004
Louis Prichard
President & COO, Kentucky Bank
Appointed 2003
Woodford Van Meter
Ophthalmologist
Appointed 2004
Henry Hinkle
President, Hinkle Contracting Corporation
Class of 2005
Theodore Kuster
Farmer and Thoroughbred Breeder, West View Equine
Class of 2005
Robert G. Thompson
Farmer and Thoroughbred Breeder, Snowhill Farm
Class of 2005
Buckner Woodford
President & CEO, Kentucky Bancshares, Inc.
Class of 2006
Ted McClain
Agent, Hopewell Insurance Company
Class of 2006
William Stamler
Chairman, Signal Investments, Inc.
Class of 2006
Betty Long
Retired President, First Federal Savings Bank of Cynthiana
Appointed 2003
81