Exhibit 13
KENTUCKY BANCSHARES, INC.
ANNUAL REPORT 2004
LETTER TO THE SHAREHOLDERS
Financial results for Kentucky Bancshares, Inc. improved significantly with
$2.07 earnings per share. I am pleased we have this positive momentum as my
period of time as CEO ends. As previously announced, Louis Prichard assumed
that position beginning in 2005. This change has my complete support. It has
put into place excellent leadership for our future. I have stepped back and am
now Chairman. For me it is not retirement as I still have an office and
continue to work, but on a reduced schedule. My plans are to continue to help
Louis build our franchise.
I am deeply grateful to both current and past directors for the opportunity
they gave me to lead this organization. The job of being a community bank CEO
is both enjoyable and fulfilling. It enabled me to live in my hometown, raise
a family, earn a living and help build a growing business enterprise. I had
the opportunity to work with a wonderful group of fellow employees and build
lasting friendships. Many of you are aware that I am the fourth generation of
my family to be involved in this same bank. That has meant a lot to me also.
It feels as if I am sharing an experience with them, contributing to a
business enterprise they began before me. Those directors who gave me this
opportunity enriched my life, and I can't thank them enough for that.
Retiring from our board of directors at year-end were two men who made great
contributions to our success over the years. William R. Stamler provided the
company with thoughtful advice and guidance on many important issues
throughout his service. He was instrumental in 1984 in the merger of Peoples
Deposit Bank and Bourbon Agricultural Bank in Paris, creating a bank that has
a market share in Bourbon County of over 65%. Dr. James L. Ferrell has been
our Chairman since 1990. He has shown valuable leadership through the years.
During that time our bank has expanded from one county to six counties
surrounding Lexington. We are fortunate that Dr. Ferrell will remain on the
board of our subsidiary, Kentucky Bank.
I expect that I will find continued satisfaction in my new position as
Chairman. It is with optimism about our future that I look forward to serving
our company in that role.
Sincerely,
Buck Woodford
Chairman of the Board
Kentucky Bancshares, Inc.
LETTER TO THE SHAREHOLDERS
Dear Shareholders:
The financial results of your company in 2004 were significantly improved over
the performance of 2003. Assets increased 5.5% from $501.9 million to $528.5
million. Much of that increase was fueled by a 14.5% increase in the bank's
loan portfolio. Our net interest income increased from $14.5 million to $16.8
million, a 16.1% increase.
Along with this strong loan growth, we implemented a number of measures to
control costs. Those were extremely beneficial in limiting the growth of non-
interest expense to 4.1%.
As a result, net income increased 36.1% from $4.2 million to $5.7 million.
This bottom line increase allowed us to improve our return on average assets
and our return on average equity to 1.11% and 12.6%, respectively. Our
improved operating results, along with the repurchase of a large block of
stock, ultimately led to a 38% increase in earnings per share to $2.07 on a
diluted basis.
As is the case in most well run businesses, success is the result of a team
effort. This is true at Kentucky Bancshares as well. Your company is fortunate
to have an experienced, well qualified group of people committed to the goal
of enhancing the value of your company. People like James Ferrell and William
R. Stamler, as directors, have been extremely dedicated to providing guidance
to assist management in creating and implementing strong strategic
initiatives. They have been invaluable to our success, and we would like to
thank them for their past commitment to our institution. Mr. Stamler will be
retiring from both the bank board as well as the holding company board, and
Dr. Ferrell will be retiring from the holding company board, but will be
continuing as a member of the Kentucky Bank board. We want to thank Mr.
Stamler for his long-standing commitment to our institution and we want to
thank Dr. Ferrell for his contributions as chairman of our holding company and
we look forward to his future involvement as he continues as a bank board
director.
As shareholders, we should appreciate the outstanding leadership that Buck
Woodford has provided over his past 31 years as Chief Executive Officer. We
have expanded from a bank located in one county to a bank holding company with
13 locations in 6 counties throughout Central Kentucky. In those years, the
shareholder equity of your bank has grown from $750 thousand to a market
capitalization value of nearly $80 million. The value of your stock has
increased from approximately $0.30 a share over that 31 year period to a value
of almost $30 per share. I want to take this time to thank Buck on behalf of
all of us, for his vision and the significant financial results that have been
brought to all of us.
I look forward to working with Buck in his new role as chairman of both
Kentucky Bank and Kentucky Bancshares. His insight and knowledge will be of
great value to me.
In closing, I would say that our eye is on the future and that our goal will
be to continue to build our franchise as has been done so successfully in the
past.
Sincerely,
Louis Prichard
President and Chief Executive Officer
Financial Highlights...
Kentucky Bancshares, Inc. 2004 2003 2002
Assets ($ thousands) $ 528,544 $ 500,852 $ 397,257
Net Income ($ thousands) $ 5,762 $ 4,233 $ 5,903
Per Share Results...
Earnings (assuming dilution) $ 2.07 $ 1.50 $ 2.10
Dividend $ .84 $ .76 $ .68
Shareholder Information...
Corporate Headquarters
Kentucky Bancshares, Inc.
4th and Main Streets
Paris, Kentucky 40361
859-987-1795
Transfer, Registrar and Dividend Agent
Registrar and Transfer Company
10 Commerce Drive
Cranford, New Jersey 07016
800-368-5948
rtco.com
Kentucky Bancshares, Inc. - KTYB.OB
Active Market Makers
Hilliard Lyons
West Vine Street, Suite 400
Lexington, Kentucky 40507
800-944-2663
Howe Barnes Investments, Inc.
135 South LaSalle Street, Suite 150
Chicago, Illinois, 60603-4398
312-655-2995
Morgan Keegan & Company
489 E. Main Street
Lexington, Kentucky 40507
800-937-0161
Annual Meeting
The annual meeting of Kentucky Bancshares, Inc. will be held Tuesday, May 10,
2005 at 11:00 in the corporate headquarters.
Investor Information
Any individual requesting a copy of the Corporation's 2004 Form 10-K Report may
obtain these by writing to Investor Relations at the Corporate Headquarters.
CONSOLIDATED BALANCE SHEETS
December 31
2004 2003
ASSETS
Cash and due from banks $ 12,248,975 $ 15,224,513
Federal funds sold 3,206,000 6,163,000
Cash and cash equivalents 15,454,975 21,387,513
Securities available for sale 126,766,861 128,789,830
Mortgage loans held for sale 175,471 7,758,583
Loans 358,281,554 313,002,258
Allowance for loan losses (4,163,315) (3,819,842)
Net loans 354,118,239 309,182,416
Federal Home Loan Bank stock 5,136,500 4,930,100
Bank premises and equipment, net 11,378,012 11,606,373
Interest receivable 3,226,479 3,249,834
Goodwill 9,110,524 10,199,830
Other intangible assets 1,737,254 1,998,231
Other assets 1,439,331 1,749,434
Total assets $ 528,543,646 $ 500,852,144
LIABILITIES AND STOCKHOLDERS' EQUITY
Deposits
Non-interest bearing $ 74,048,291 $ 64,841,638
Time deposits, $100,000 and over 59,468,813 49,914,659
Other interest bearing 254,437,718 269,842,299
Total deposits 387,954,822 384,598,596
Repurchase agreements and other borrowings 25,592,844 7,285,258
Federal Home Loan Bank advances 59,749,666 53,232,296
Subordinated debentures 7,217,000 7,217,000
Interest payable 1,849,468 1,635,784
Other liabilities 1,153,035 826,569
Total liabilities 483,516,835 454,795,503
Stockholders' equity
Preferred stock, 300,000 shares
authorized and unissued - -
Common stock, no par value; 10,000,000
shares authorized; 2,684,498 and
2,799,781 shares issued and
outstanding in 2004 and 2003 6,818,664 6,984,784
Retained earnings 37,884,215 37,552,620
Accumulated other comprehensive income (loss) 323,932 1,519,237
Total stockholders' equity 45,026,811 46,056,641
Total liabilities and stockholders' equity $ 528,543,646 $ 500,852,144
CONSOLIDATED STATEMENTS OF INCOME
Years Ended December 31
2004 2003 2002
Interest income
Loans, including fees $ 20,470,306 $ 18,574,690 $ 20,632,003
Securities
Taxable 3,574,235 2,049,835 2,564,539
Tax exempt 1,518,275 1,430,589 1,254,065
Other 283,196 274,003 337,397
25,846,012 22,329,117 24,788,004
Interest expense
Deposits 5,765,690 5,310,791 6,977,969
Repurchase agreements and other
borrowings 411,492 27,460 42,148
Federal Home Loan Bank advances 2,395,898 2,293,297 2,257,413
Subordinated debentures 494,052 169,000 -
Other - 75,000 90,000
9,067,132 7,875,548 9,367,530
Net interest income 16,778,880 14,453,569 15,420,474
Provision for loan losses 840,000 1,300,000 1,204,000
Net interest income after provision
for loan losses 15,938,880 13,153,569 14,216,474
Other income
Service charges 4,357,658 4,065,210 3,848,055
Loan service fee income 246,356 242,479 228,121
Trust department income 299,448 301,612 345,730
Securities gains (losses), net 288,950 139,438 218,604
Gain on sale of mortgage loans 376,157 853,340 948,369
Other 1,227,614 1,105,534 1,000,716
6,796,183 6,707,613 6,589,595
Other expenses
Salaries and employee benefits 8,053,306 7,373,501 6,728,443
Occupancy expenses 2,255,071 2,044,515 1,908,479
Amortization 524,839 516,390 429,366
Advertising and marketing 378,410 399,483 330,069
Taxes other than payroll, property
and income 499,251 439,084 406,077
Other 3,044,294 3,398,292 2,630,321
14,755,171 14,171,265 12,432,755
Income before income taxes 7,979,892 5,689,917 8,373,314
Provision for income taxes 2,217,783 1,456,540 2,470,789
Net income $ 5,762,109 $ 4,233,377 $ 5,902,525
Earnings per share:
Basic $ 2.09 $ 1.52 $ 2.13
Diluted 2.07 1.50 2.10
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
Years Ended December 31
2004 2003 2002
Net income $ 5,762,109 $ 4,233,377 $ 5,902,525
Other comprehensive income (loss),
net of tax:
Unrealized gains (losses) on
securities arising during
the period (1,004,597) (237,693) 1,245,448
Reclassification of realized amount (190,708) (92,029) (144,279)
Net change in unrealized
gain (loss) on securities (1,195,305) (329,722) 1,101,169
Comprehensive income $ 4,566,804 $ 3,903,655 $ 7,003,694
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
Years Ended December 31, 2004, 2003 and 2002
Accumulated
Other Total
Common Stock Retained Comprehensive Stockholders'
Shares Amount Earnings Income Equity
<s> <c> <c> <c> <c> <c>
Balances, January 1, 2002 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
Common stock issued (including
employee gifts of 89 shares) 7,019 131,041 - - 131,041
Common stock purchased (122,302) (297,161) (3,127,295) - (3,424,456)
Net change in unrealized gain (loss)
on securities available for sale,
net of tax - - - (1,195,305) (1,195,305)
Net income - - 5,762,109 - 5,762,109
Dividends declared - $.84 per share - - (2,303,219) - (2,303,219)
Balances, December 31, 2004 2,684,498 $ 6,818,664 $ 37,884,215 $ 323,932 $ 45,026,811
CONSOLIDATED STATEMENTS OF CASH FLOWS
Years Ended December 31
2004 2003 2002
<s> <c> <c> <c>
Cash flows from operating activities
Net income $ 5,762,109 $ 4,233,377 $ 5,902,525
Adjustments to reconcile net
income to net cash from
operating activities
Depreciation and amortization 1,419,794 1,460,429 1,419,205
Provision for loan losses 840,000 1,300,000 1,204,000
Securities amortization
(accretion), net 635,725 703,502 385,050
Securities (gains) losses, net (288,950) (139,438) (218,604)
Originations of loans held
for sale (22,065,215) (42,872,837) (38,541,844)
Proceeds from sale of loans 30,024,484 36,707,617 40,702,420
Gain on sale of mortgage loans (376,157) (853,340) (948,369)
Federal Home Loan Bank stock
Dividends (206,400) (170,800) (180,800)
Losses (gain) on sale of fixed
assets (16,722) 161,849 -
Changes in:
Interest receivable 23,355 360,511 231,041
Other assets 1,135,547 451,918 32,115
Interest payable 213,684 (306,069) (969,876)
Other liabilities 942,501 (1,390,747) (9,331)
Net cash from operating activities 18,043,755 (354,028) 9,007,532
Cash flows from investing activities
Purchases of securities available
for sale (70,689,970) (65,248,350) (49,204,809)
Proceeds from sales of securities
available for sale 37,973,553 8,434,570 18,838,747
Proceeds from principal payments
and maturities of securities
available for sale 32,581,271 39,625,276 17,966,641
Cash paid for bank acquisition - (7,000,205) -
Net change in loans (45,775,823) 1,481,580 (12,176,153)
Purchases of bank premises and
equipment, net (748,824) (1,632,487) (816,553)
Net cash from investing activities (46,659,793) (24,339,616) (25,392,127)
Cash flows from financing activities
Net change in deposits 3,356,226 8,662,228 13,920,771
Net change in repurchase agreements and
other borrowings 18,307,586 2,008,563 3,674,713
Proceeds from Subordinated debentures - 7,000,000 -
Advances from Federal Home Loan Bank 25,000,000 12,000,000 6,980,000
Payments on Federal Home Loan
Bank advances (18,383,678) (10,827,273) (6,640,623)
Proceeds from issuance of common stock 131,041 188,697 187,889
Purchase of common stock (3,424,456) (10,800) (315,071)
Dividends paid (2,303,219) (2,116,753) (1,885,051)
Net cash from financing activities 22,683,500 16,904,662 15,922,628
CONSOLIDATED STATEMENTS OF CASH FLOWS
Years Ended December 31
2004 2003 2002
Net change in cash and cash equivalents $ (5,932,538) $(7,788,982) $ (461,967)
Cash and cash equivalents at
beginning of year 21,387,513 29,176,495 29,638,462
Cash and cash equivalents at end of year $ 15,454,975 $ 21,387,513 $ 29,176,495
Supplemental disclosures of cash flow information
Cash paid during the year for:
Interest expense $ 8,853,448 $ 8,084,469 $ 10,337,406
Income taxes 777,401 1,637,706 2,150,000
Supplemental schedules of non-cash investing
Activities
Real estate acquired through foreclosure $ 1,325,942 $ 349,748 $ -
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, or
securities held to maturity.
Securities available for sale are carried at fair value, with unrealized
holding gains and losses reported in other comprehensive income. Other
securities such as Federal Home Loan Bank stock are carried at cost.
Interest income includes amortization of purchase premium or discount.
Premiums and discounts on securities are amortized on the level-yield method
without anticipating prepayments. Gains and losses on sales are recorded on
the settlement date and determined using the specific identification method.
Declines in the fair value of securities below their cost that are other than
temporary are reflected as realized losses. In estimating
other-than-temporary losses, management considers: (1) the length of time and
extent that fair value has been less than cost, (2) the financial condition
and near term prospects of the issuer, and (3) the Company's ability and
intent to hold the security for a period sufficient to allow for any
anticipated recovery in fair value.
Loans Held for Sale: Loans held for sale are valued at the lower of cost or
market as determined by outstanding commitments from investors or current
secondary market prices, calculated on the aggregate loan basis. The Company
also provides for any losses on uncovered commitments to lend or sell.
Loans: Loans are stated at the amount of unpaid principal, reduced by an
allowance for loan losses. Interest income on loans is recognized on the
accrual basis except for those loans on a nonaccrual status. The accrual of
interest on impaired loans is discontinued when management believes, after
consideration of economic and business conditions and collection efforts, that
the borrowers' financial condition is such that collection of interest is
doubtful. Interest income on mortgage and consumer loans is discontinued at
the time the loan is 90 days delinquent, and interest income on commercial
loans is discontinued at the time the loan is 120 days delinquent, unless the
loan is well-secured and in process of collection. Past due status is based
on the contractual terms of the loan. When interest accrual is discontinued,
interest income received on such loans is accounted for on the cash-basis or
cost-recovery method, until qualifying for return to accrual. Loans are
returned to accrual status when all the principal and interest amounts
contractually due are brought current and future payments are reasonably
assured. Consumer and credit card loans are typically charged off no later
than 120 days past due. Loans are placed on nonaccrual or charged-off at an
earlier date if collection of principal or interest is considered doubtful.
Loan origination fees and certain direct origination costs are capitalized and
recognized as an adjustment of the yield on the related loan.
Allowance for Loan Losses: The allowance for loan losses is a valuation
allowance for probable incurred credit losses, increased by the provision for
loan losses and decreased by charge-offs less recoveries. Management estimates
the allowance balance required using past loan loss experience, the nature and
volume of the portfolio, information about specific borrower situations and
estimated collateral values, economic conditions, and other factors.
Allocations of the allowance may be made for specific loans, but the entire
allowance is available for any loan that, in management's judgment, should be
charged-off. Loan losses are charged against the allowance when management
believes the uncollectibility of a loan balance is confirmed.
A loan is impaired when full payment under the loan terms is not expected.
Impairment is evaluated in total for smaller-balance loans of similar nature
such as residential mortgage, consumer, and credit card loans, and on an
individual loan basis for other loans. If a loan is impaired, a portion of the
allowance is allocated so that the loan is reported, net, at the present value
of estimated future cash flows using the loan's existing rate or at the fair
value of collateral if repayment is expected solely from the collateral. Large
groups of smaller balance homogenous loans, such as consumer and residential
real estate loans are collectively evaluated for impairment, and accordingly,
they are not separately identified for impairment disclosures.
Mortgage Servicing Rights: The Bank has sold 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 represent
the allocated value of retained servicing rights on loans sold and the cost of
purchased rights. Servicing assets are expensed in proportion to, and over
the period of, estimated net servicing revenues. Impairment is evaluated
based on the fair value of the assets, using interest rates, and geographic
and prepayment characteristics. Fair value is determined using prices for
similar assets with similar characteristics, when available, or based upon
discounted cash flows using market-based assumptions. Any impairment of a
grouping is reported as a valuation allowance, to the extent that fair value
is less than the capitalized amount for a grouping.
Federal Home Loan Bank 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.
2004 2003 2002
Net income
As reported $ 5,762,109 $ 4,233,377 $ 5,902,525
Deduct: Stock-based compensation
expense determined under fair
value based method (20,997) (31,972) (129,172)
Pro forma 5,741,112 4,201,405 5,773,353
2004 2003 2002
Basic earnings per share
As reported $ 2.09 $ 1.52 $ 2.13
Pro forma 2.08 1.51 2.08
Diluted earnings per share
As reported $ 2.07 $ 1.50 $ 2.10
Pro forma 2.07 1.49 2.06
Weighted averages
Fair value of options granted $ 3.01 $ 1.07 $ 2.43
Risk free interest rate 3.86% 3.40% 4.30%
Expected life 8 years 8 years 8 years
Expected volatility 13.74% 16.90% 22.28%
Expected dividend yield 2.47% 2.96% 2.72%
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, 2004 and 2003.
Adoption of New Accounting Standards: During 2004, 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, 2004 and 2003 was $144,000
and $51,000.
NOTE 3 - SECURITIES
Year-end securities available for sale are as follows:
Fair Unrealized Unrealized
Value Gains Losses
2004
U. S. Treasury $ 2,984,375 $ - $ (30,033)
U. S. government agencies 39,029,910 4,220 (384,112)
States and political subdivisions 35,160,329 1,297,405 (163,285)
Mortgage-backed 48,620,711 79,835 (677,298)
Equity securities 971,536 363,589 -
Total $ 126,766,861 $ 1,745,049 $(1,254,728)
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)
The fair value of securities available for sale at December 31, 2004, 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 $ 2,169,979
Due after one year through five years 34,877,005
Due after five years through ten years 23,322,989
Due after ten years 16,804,641
77,174,614
Mortgage-backed 48,620,711
Equity 971,536
Total $ 126,766,861
Proceeds from sales of securities during 2004, 2003 and 2002 were $37,973,553,
$8,434,570 and $18,838,747. Gross gains of $483,888, $157,474 and $260,096 and
gross losses of $194,938, $18,036 and $41,492, were realized on those sales,
resprectively. The tax provision related to these realized gains and losses
was $98,243, $47,409 and $74,325, respectively.
Securities with an approximate carrying value of $103,979,000 and $83,220,000
at December 31, 2004 and 2003, 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 2004 and 2003 not recognized in
income are as follows:
2004
Less than 12 Months 12 Months or More Total
Fair Unrealized Fair Unrealized Fair Unrealized
Description of Securities Value Loss Value Loss Value Loss
<s> <c> <c> <c> <c> <c> <c>
U.S. Treasury $ 2,984,375 $ (30,033) $ - $ - $ 2,984,375 $ (30,033)
U.S. Government securities 33,139,473 (384,112) - - 33,139,473 (384,112)
States and political subdivisions 4,156,727 (91,011) 2,811,479 (72,274) 6,968,206 (163,285)
Mortgage-backed 36,918,846 (571,246) 4,705,311 (106,052) 41,624,157 (677,298)
Total temporarily impaired $77,199,421 $(1,076,402) $ 7,516,790 $ (178,326) $ 84,716,211 $(1,254,728)
2003
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)
Other 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)
The Company evaluates securities for other-than-temporary impairment-at least
on an annual basis, and more frequently when economic or market concerns
warrant such evaluation. Consideration is given to the length of time and the
extent to which the fair value has been less than cost, the financial
condition and near-term prospects of the issuer, and the intent and ability of
the Company to retain its investment in the issuer for a period of time
sufficient to allow for any anticipated recovery in fair value. In analyzing
an issuer's financial condition, the Company may consider whether the
securities are issued by the federal government or its agencies, whether
downgrades by bond rating agencies have occurred, and the results of reviews
of the issuer's financial condition.
NOTE 4 - LOANS
Loans at year-end were as follows:
2004 2003
Commercial $ 19,999,038 $ 14,277,927
Real estate construction 32,256,168 14,313,068
Real estate mortgage 238,475,554 214,529,347
Agricultural 57,497,465 56,615,266
Consumer 9,062,518 12,977,419
Other 990,811 289,231
$ 358,281,554 $ 313,002,258
Activity in the allowance for loan losses was as follows:
2004 2003 2002
Beginning balance $ 3,819,842 $ 3,395,075 $ 3,386,425
Allowance from acquisition - 362,900 -
Charge-offs (687,798) (1,397,822) (1,329,218)
Recoveries 191,271 159,689 133,868
Provision for loan losses 840,000 1,300,000 1,204,000
Ending balance $ 4,163,315 $ 3,819,842 $ 3,395,075
Impaired loans totaled $1,781,000 and $1,844,000 at December 31, 2004 and 2003.
The average recorded investment in impaired loans during 2004, 2003 and 2002
was $1,781,000, $1,051,000 and $1,441,000. The total allowance for loan losses
related to these loans was $416,000 and $345,000 at December 31, 2004 and 2003.
Interest income on impaired loans of $22,000, $14,000 and $8,000 was
recognized for cash payments received in 2004, 2003 and 2002.
Nonperforming loans were as follows:
2004 2003 2002
Loans past due over 90 days still
on accrual $ 308,000 $ 779,000 $ 789,000
Nonaccrual loans 1,781,000 1,844,000 1,573,000
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 $102,024,000 and $91,789,000 at December
31, 2004 and 2003. Custodial escrow balances maintained in connection with the
foregoing loan servicing, and included in demand deposits, were approximately
$467,000 and $658,000 at December 31, 2004 and 2003.
Changes in mortgage servicing rights were as follows:
2004 2003 2002
Beginning balance $ 861,120 $ 704,034 $ 463,067
Additions 263,861 381,205 390,865
Amortization (249,348) (224,119) (149,898)
Ending balance $ 875,633 $ 861,120 $ 704,034
Certain directors and executive officers of the Company and companies in which
they have beneficiary ownership were loan customers of the Bank during 2004 and
2003. 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:
2004 2003
Balance, beginning of year $ 2,486,000 $ 1,626,000
Additions, including loans now meeting
disclosure requirements 1,054,000 1,648,000
Amounts collected, including loans no
longer meeting disclosure requirements (1,636,000) (788,000)
Balance, end of year $ 1,904,000 $ 2,486,000
NOTE 5 - PREMISES AND EQUIPMENT
Year-end premises and equipment were as follows:
2004 2003
Land and buildings $ 12,804,599 $ 12,242,809
Furniture and equipment 9,732,639 9,241,247
22,537,238 21,484,056
Less accumulated depreciation (11,159,226) (9,877,683)
$ 11,378,012 $ 11,606,373
Depreciation expense was $993,907, $960,512 and $989,839 in 2004, 2003, and
2002.
NOTE 6 - GOODWILL AND INTANGIBLE ASSETS
The change in balance for goodwill during the year is as follows:
2004 2003
Beginning of year $ 10,199,830 $ -
Acquired goodwill 10,199,830
Adjustment to goodwill (1,089,306) -
End of year $ 9,110,524 $ 10,199,830
The adjustment to goodwill is a result of post merger
Goodwill will not be amortized but instead evaluated periodically for
impairment.
Acquired intangible assets were as follows at year-end:
2004 2003
Gross Gross
Carrying Accumulated Carrying Accumulated
Amount Amortization Amount Amortization
Amortized intangible assets:
Core deposit intangibles $3,656,403 $2,794,782 $3,656,403 $2,519,292
Aggregate amortization expense was $275,490, $292,271 and $279,468 for 2004,
2003 and 2002.
Estimated amortization expense for each of the next five years:
2005 $ 95,736
2006 95,736
2007 95,736
2008 95,736
2009 95,736
The change in balance for intangible assets during the year is as follows:
2004 2003
Beginning of year $ 1,137,111 $ 663,382
Amortization (275,490) (292,271)
Acquired core deposit intangible - 766,000
End of year $ 861,621 $1,137,111
NOTE 7 - DEPOSITS
At December 31, 2004, the scheduled maturities of time deposits are as follows:
2005 $ 147,472,621
2006 31,979,796
2007 14,097,399
2008 3,477,497
2009 1,264,782
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 $3,421,000 and $1,397,000 at December 31, 2004
and 2003.
NOTE 8 - REPURCHASE AGREEMENTS
Securities sold under agreements to repurchase are secured by U.S. Government
securities with a carrying amount of $27,275,000 and $3,022,000 at year-end
2004 and 2003
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
2004 and 2003 is summarized as follows:
2004 2003
Average daily balance during the year $ 18,398,243 $ 1,691,154
Average interest rate during the year 1.90% 1.34%
Maximum month-end balance during the year $ 21,946,746 $ 2,411,269
Weighted average interest rate at year end 2.94% 1.65%
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,
2004 and 2003, $59,749,666 and $53,232,296 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 two months to twenty-six years, with fixed
interest rates ranging from 1.52% 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, 2004 are as follows:
2005 $ 8,256,036
2006 12,928,179
2007 7,953,684
2008 9,980,527
2009 14,010,028
Thereafter 6,621,212
$ 59,749,666
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:
2004 2003 2002
Current $ 2,179,238 $ 1,166,575 $ 2,189,931
Deferred 38,545 289,965 280,858
$ 2,217,783 $ 1,456,540 $ 2,470,789
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.
2004 2003
Deferred tax assets
Allowance for loan losses $ 1,241,615 $ 942,354
Core deposit intangibles 46,720 18,569
Other 358,420 174,723
Deferred tax liabilities
Unrealized gain on securities (166,874) (782,909)
Bank premises and equipment (511,174) (460,980)
FHLB stock (929,394) (859,218)
Mortgage servicing rights (297,715) (292,781)
Other (299,235) (401,183)
Net deferred tax asset (liability) $ (557,637) $ (1,661,425)
Effective tax rates differ from federal statutory rates applied to financial
statement income due to the following:
2004 2003 2002
U. S. federal income tax rate 34.0% 34.0% 34.0%
Changes from the statutory rate
Tax-exempt investment income (7.0) (9.3) (5.7)
Non-deductible interest expense related to
carrying tax-exempt investments .6 .8 .6
Other .2 .1 .6
27.8% 25.6% 29.5%
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, 2004. 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:
2004 2003 2002
Basic Earnings Per Share
Net income $ 5,762,109 $ 4,233,377 $ 5,902,525
Weighted average common
shares outstanding 2,757,233 2,781,146 2,770,282
Basic earnings per share $ 2.09 $ 1.52 $ 2.13
Diluted Earnings Per Share
Net income $ 5,762,109 $ 4,233,377 $ 5,902,525
Weighted average common
shares outstanding 2,757,233 2,781,146 2,770,282
Add dilutive effects of
assumed exercise of
stock options 20,203 45,640 35,836
Weighted average common and
dilutive potential common
shares outstanding 2,777,436 2,826,786 2,806,118
Diluted earnings per share $ 2.07 $ 1.50 $ 2.10
Stock options for 3,050 shares common stock from 2002 and for 11,350 shares of
common stock were excluded from 2004 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:
2004 2003
Change in benefit obligation:
Beginning benefit obligation $ 4,290,391 $ 4,385,567
Service cost 369,481 314,935
Interest cost 286,326 265,034
Actuarial adjustment 630,729 (601,900)
Benefits paid (95,414) (73,245)
Ending benefit obligation 5,481,513 4,290,391
Change in plan assets, at fair value:
Beginning plan assets 4,075,719 3,397,218
Actual return 541,419 358,868
Employer contribution 276,984 392,878
Benefits paid (95,414) (73,245)
Ending plan assets 4,798,708 4,075,719
Funded status (682,805) (214,672)
Unrecognized net actuarial (gain) loss 932,175 523,815
Unrecognized prior transition asset (1,485) (1,857)
Net pension prepaid benefit $ 247,885 $ 307,286
Amounts recognized in the balance sheet consist of:
Prepaid benefit cost $ 247,885
Accrued benefit cost -
Net amount recognized $ 247,885
The accumulated benefit obligation for defined benefit pension plans was
$3,976,697 at year-end 2004.
The projected benefit obligation, accumulated benefit obligation, and fair
value of plan assets for the pension plans were $5,481,513, $3,976,697, and
$4,798,708 respectively, as of year end 2004.
Net periodic pension cost include the following components:
2004 2003 2002
Service cost $ 369,481 $ 314,935 $ 299,744
Interest cost 286,326 265,034 245,253
Expected return on plan assets (319,050) (265,117) (255,964)
Amortization (372) 16,758 5,221
Net periodic cost $ 336,385 $ 331,610 $ 294,254
Weighted-average assumptions used to determine net cost
2004 2003 2002
Discount rate on benefit obligation 6% 7% 7%
Long-term expected rate of return
on plan assets 8% 8% 8%
Rate of compensation increase 4% 5% 5%
The Company's pension plan asset allocation at year-end 2004, target allocation
for 2005, and expected long-term rate of return by asset category are as
follows:
Weighted
Percentage Percentage Average
of Plan of Plan Expected
Target Assets at Assets at Long-Term
Allocation Year-End Year-End Rate of Return
Asset Category 2005 2004 2003 2004
Equity securities 55-65 64.9 51.7 10%
Debt securities 35-45 34.6 38.1 6
Cash 5-15 0.5 10.2 4
Total 100.0 100.0
The asset allocation objective for 2005 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 $255,000 to its pension plan in 2005.
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 $309,741,
$271,684 and $270,048 in 2004, 2003 and 2002.
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:
2004 2003 2002
Weighted Weighted Weighted
Option Option Option
Options Price Options Price Options Price
<s> <c> <c> <c> <c> <c> <c>
Outstanding, beginning of year 57,560 $20.23 83,114 $16.72 103,484 $15.52
Granted 12,250 33.65 14,500 25.72 6,520 25.85
Expired (2,316) 27.03 (3,698) 25.00 (6,096) 20.84
Exercised (6,930) 17.55 (36,356) 13.89 (20,794) 12.41
Outstanding, end of year 60,564 $23.00 57,560 $20.23 83,114 $16.72
Weighted remaining contractual
Life 67.0 months 67.9 months 64.7 months
Options outstanding at year-end 2004 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 15,320 26.6 $14.02 15,320 $14.02
From $18.00 to $20.63 per share 13,640 48.1 20.52 13,640 20.52
From $23.50 to $28.00 per share 20,354 87.1 25.37 8,216 25.32
From $33.90 to $34.00 per share 11,250 108.3 33.91 1,100 34.00
60,564 38,276
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 2005 the Bank could, without prior
approval, declare dividends of approximately $4,015,000 plus any 2005 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, 2004 and
2003 are as follows:
2004 2003
Carrying Carrying
Amount Fair Value Amount Fair Value
(In Thousands)
Financial assets
Cash and cash equivalents $ 15,455 $ 15,455 $ 21,388 $ 21,388
Securities 126,767 126,767 128,790 128,790
Mortgage loans held for sale 176 178 7,759 7,851
Loans, net 354,118 350,912 309,182 312,596
FHLB stock 5,136 5,136 4,930 4,930
Interest receivable 3,226 3,226 3,250 3,250
Financial liabilities
Deposits $ 387,955 $ 390,296 $ 384,599 $ 387,083
Securities sold under
agreements to repurchase
and other borrowings 25,593 25,467 7,285 7,285
FHLB advances 59,750 59,281 53,232 53,747
Subordinated debentures 7,217 7,354 7,217 7,385
Interest payable 1,849 1,849 1,636 1,636
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 $9,111,000 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 9,111,000
Core deposit intangible 766,000
Other assets 19,557,000
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 2004 and 2003. 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 $ 16,368,000
Net income $ 4,838,000 $ 4,838,000
Basic earnings per share $ 1.74 $ 1.74
Diluted earnings per share $ 1.71 $ 1.71
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:
2004 2003
Unused lines of credit $ 54,930,000 $ 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.
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, 2004 and
2003, 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
2004 (Dollars in Thousands)
<s> <c> <c> <c> <c> <c> <c>
Consolidated
Total Capital (to Risk-Weighted Assets) $ 45,987 13.2% $ 27,855 8% $ 34,819 10%
Tier I Capital (to Risk-Weighted Assets) 41,660 12.0 13,928 4 20,891 6
Tier I Capital (to Average Assets) 41,660 8.2 20,410 4 25,512 5
Bank Only
Total Capital (to Risk-Weighted Assets) $ 44,512 12.8% $ 27,791 8% $ 34,739 10%
Tier I Capital (to Risk-Weighted Assets) 40,338 11.6 13,895 4 20,843 6
Tier I Capital (to Average Assets) 40,338 7.9 20,368 4 25,460 5
2003
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 8.8 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
NOTE 21 - PARENT COMPANY FINANCIAL STATEMENTS
Condensed Balance Sheets
December 31
2004 2003
(In Thousands)
ASSETS
Cash on deposit with subsidiary $ 721 $ 1,783
Investment in subsidiary 50,481 49,593
Securities available for sale 698 1,247
Other assets 363 670
Total assets $ 52,263 $ 53,293
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities
Subordinated debentures $ 7,217 $ 7,217
Other Liabilities 19 19
Stockholders' equity
Preferred stock - -
Common stock 6,819 6,985
Retained earnings 37,884 37,553
Accumulated other comprehensive income 324 1,519
Total liabilities and stockholders' equity $ 52,263 $ 53,293
Condensed Statements of Income and Comprehensive Income
Years Ended December 31
2004 2003 2002
(In Thousands)
Income
Dividends from subsidiary $ 3,650 $ 13,025 $ 3,400
Securities gains (losses), net 82 7 145
Interest income 24 20 32
Total income 3,756 13,052 3,577
Expenses
Interest expense 494 169 -
Other expenses 157 360 55
Income before income taxes and equity in
undistributed income of subsidiary 3,105 12,523 3,522
Applicable income tax (expense) benefits 177 175 (29)
Income before equity in undistributed
income of subsidiary 3,282 12,698 3,493
Equity in undistributed income of subsidiary 2,480 (8,465) 2,410
Net income 5,762 4,233 5,903
Other comprehensive income (loss), net of tax:
Unrealized gains (losses) on securities
arising during the period (1,004) (237) 1,245
Reclassification of realized amount (191) (92) (144)
Net change in unrealized gain (loss)
on securities (1,195) (329) 1,101
Comprehensive income $ 4,567 $ 3,904 $ 7,004
Condensed Statements of Cash Flows
Years Ended December 31
2004 2003 2002
(In Thousands)
Cash flows from operating activities
Net income $ 5,762 $ 4,233 $ 5,903
Adjustments to reconcile net income to net
cash from operating activities
Equity in undistributed earnings of
Subsidiary (2,480) 8,465 (2,410)
Securities (gains) losses, net (82) (7) (145)
Change in other assets 659 (553) (100)
Change in other liabilities - (10) 103
Net cash from operating activities 3,859 12,128 3,351
Cash flows from investing activities
Purchase of securities available for sale - (82) (109)
Proceeds from sales of securities
available for sale 675 65 869
Acquisition of Kentucky First Bancorp, Inc. - (20,998) -
Net cash from investing activities 675 (21,015) 760
Cash flows from financing activities
Proceeds from subordinated debentures - 7,000 -
Dividends paid (2,303) (2,117) (1,885)
Proceeds from issuance of common stock 131 189 188
Purchase of common stock (3,424) (11) (315)
Net cash from financing activities (5,596) 5,061 (2,012)
Net change in cash (1,062) (3,826) 2,099
Cash at beginning of year 1,783 5,609 3,510
Cash at end of year $ 721 $ 1,783 $ 5,609
NOTE 22 - QUARTERLY FINANCIAL DATA (UNAUDITED)
Interest Net Interest Net Earnings Per Share
Income Income Income Basic Fully Diluted
2004
First quarter $ 6,267 $ 4,071 $ 1,150 $ .41 $ .41
Second quarter 6,463 4,267 1,439 .51 .51
Third quarter 6,506 4,252 1,579 .58 .57
Fourth quarter 6,610 4,189 1,594 .59 .58
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
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 REGISTERED PUBLIC ACCOUNTING FIRM
Board of Directors
Kentucky Bancshares, Inc.
Paris, Kentucky
We have audited the accompanying consolidated balance sheets of Kentucky
Bancshares, Inc. as of December 31, 2004 and 2003, 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, 2004.
These financial statements are the responsibility of the Company's management.
Our responsibility is to express an opinion on these financial statements based
on our audits.
We conducted our audits in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we
plan and perform the audit to obtain reasonable assurance about whether the
financial statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the financial statements. An audit also includes assessing the accounting
principles used and significant estimates made by management, as well as
evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Kentucky
Bancshares, Inc. as of December 31, 2004 and 2003, and the results of its
operations and its cash flows for each of the three years in the period ended
December 31, 2004, in conformity with accounting principles generally accepted
in the United States of America.
Crowe Chizek and Company LLC
Lexington, Kentucky
March 1, 2005
Meet Our Officers...
SENIOR MANAGEMENT
Louis Prichard, President and Chief Executive Officer
Norman J. Fryman, Sr. Vice President, Director of Sales and Service
Greg Dawson, VP, Chief Financial Officer
Brenda Bragonier, VP, Director of Marketing and Human Resources
Hugh Crombie, VP, Director of Operations
Clark Nyberg, VP, Director of Wealth Management
OFFICERS
BOURBON COUNTY
Karen Anderson, Electronic Banking Officer
Heather Barger, VP, Director of Risk Management
Melinda Biddle, Government Reporting Officer
Brenda Berry, AVP, Senior Accountant
Rhonda Brown, Consumer Lender
Wallis Brooks, Branch Manager, CRA Officer
Patricia Carpenter, AVP, Data Management Officer
R.W. Collins, VP, Agricultural Lender
Robbie Cox, Senior Auditor
Cynthia Criswell, Data Processing Officer
Brandon Eason, Consumer Lender
Nancye Fightmaster, VP, Bourbon County Regional Manager
David Foster, VP, Agricultural Lender
Janice Hash, AVP, Senior Accountant, Purchasing
Lisa Highley, Personal Trust Officer
Philip Hurst, Assistant Branch Manager
Perry Ingram, AVP, Network Manager
Susan Lemons, AVP, Branch Manager, Consumer Lender
Jane Mogge, Document Management Officer
Donnie Roe, AVP, Senior Data Processing Officer
Lydia Sosby, AVP, Director of Training and Sales
Judith Taylor, VP, Human Resource Manager
George Wilder, VP, Commercial Lender
Buckner Woodford, Chairman of the Board
Martha Woodford, VP, Assistant Director of Operations
Jan Worth, AVP, Personal Trust Officer
CLARK COUNTY
Nick Carter, VP, Clark County Regional Manager
Darren Henry, VP, Director of Commercial Lending
Kathy Newkirk, Branch Manager, Consumer Lender
Rowena Ruff, Investment Advisor
Teresa Shimfessel, AVP, Consumer Lender
James Brandon Sumpter, Consumer Lender
Carolyn Wilkins, Overdraft Management Officer
HARRISON COUNTY
Ken DeVasher, VP, Harrison County Regional Manager
Dreama Harris, AVP, Consumer Lender
Catherine Hill, VP, Collections Officer
Mary Moreland, AVP, Collections Officer
Iva Joyce Rainey, Consumer Lender
Arnita Willoughby, Mortgage Operations Manager
JESSAMINE COUNTY
Mike Lovell, VP, Commercial Lender
Rick Walling, VP, Jessamine County Regional Manager
SCOTT COUNTY
Shane Foley, VP, Mortgage Lender
Pam Jessie, VP, Scott County Regional Manager
Sharon Whitlock, Branch Manager, Consumer Lender
WOODFORD COUNTY
Duncan Gardiner, VP, Woodford County Regional Manager
A. J. Gullett, VP, Commercial Lender
Board of Directors - Kentucky Bank
William M. Arvin, Attorney
Dan Brewer, President and CEO Bluegrass Energy
Gus Bynum, Physician
Loren Carl, Field Representative, Congressman Ben Chandler
James Ferrell, Physician
Mary Beth Hendricks, Director of Clark County Child Support Services
Henry Hinkle, President, Hinkle Contracting Corporation
Theodore Kuster, Farmer and Thoroughbred Breeder, Westview-Hillside Farms
Ted McClain, Agent, Hopewell Insurance Company
Louis Prichard, President and CEO, Kentucky Bank
William R. Stamler, Chairman, Signal Investments, Inc.
Joel Techau, CEO, Techau Inc.
Robert G. Thompson, Farmer and Thoroughbred Breeder, Snowhill Farm
Woodford Van Meter, Ophthalmologist
Buckner Woodford, Chairman, Kentucky Bank
CLARK
Mary Beth Hendricks, Director, Clark County Child Support Services
Donald Pace, Executive Director, Central Kentucky Educational Co-op with UK
John Roche, Optician
Edwin Saunier, President, Saunier North American, Inc.
HARRISON
K. Bruce Florence, Director, Licking Valley College
Betty Long, Retired President, First Federal Savings Bank of Cynthiana
Brad Marshall, Farmer and Owner, Marshall's Tractor Supply
Joel Techau, CEO, Techau Inc.
Gerry Whalen, Broker, Whalen and Company
JESSAMINE
William M. Arvin, Attorney
Dan Brewer, President and CEO, Bluegrass Energy
Tom Buford, State Senator
Jonah Mitchell, President, Jonah Mitchell Real Estate and Auction Company
Eva McDaniel, Jessamine County Clerk
SCOTT
Gus Bynum, Physician
Mike Hockensmith, Owner and President, The Hockensmith Agency, Inc.
R. C. Johnson, Jr., Owner and President, Johnson's Funeral Home
George Lusby, County Judge Executive
Everette Varney, Mayor
WOODFORD
Loren Carl, Field Representative, Congressman Ben Chandler
William Graul, Physician
James Kay, Businessman, Farmer
Tricia Kittinger, Woodford County Circuit Clerk
27
Kentucky Bancshares, Inc.
LOUIS PRICHARD
President and CEO, Kentucky Bank and Kentucky Bancshares, Inc.
JAMES FERRELL
Physician
BUCKNER WOODFORD
Chairman, Kentucky Bank and Kentucky Bancshares, Inc.
WILLIAM STAMLER
Chairman, Signal Investments, Inc.
TED McCLAIN
Agent, Hopewell Insurance Company
BETTY LONG
Retired President, First Federal Savings of Cynthiana
ROBERT G. THOMPSON
Farmer and Thoroughbred Breeder, Snowhill Farm
HENRY HINKLE
President, Hinkle Contacting Corporation
THEODORE KUSTER
Farmer and Thoroughbred Breeder, Westview-Hillside Farms
WILLIAM M. ARVIN
Attorney, William M. Arvin Associates
WOODFORD VAN METER
Opthalmologist
KENTUCKY BANCSHARES, INC.
PROXY STATEMENT
Introduction
This Proxy Statement is being furnished to shareholders of Kentucky
Bancshares, Inc., a Kentucky corporation (the "Company"), in connection with
the solicitation of proxies by the Board of Directors of the Company (the
"Board") from holders of record of the Company's outstanding Common Shares
(the "Common Shares") as of the close of business on March 18, 2005 (the
"Annual Meeting Record Date"), for use at the Annual Meeting of Shareholders
of the Company (the "Annual Meeting") to be held on Tuesday, May 10, 2005, at
11:00 a.m. (Eastern Daylight Time) in the Board Room of Kentucky Bank, Fourth
and Main Streets, Paris, Kentucky, and at any adjournment or postponement
thereof. This Proxy Statement is first being mailed to the Company's
shareholders on or about March 28, 2005. The principal executive offices of
the Company are located at Fourth and Main Streets, Paris, Kentucky 40361.
Its telephone number is (859) 987-1795.
Purposes of the Annual Meeting
At the Annual Meeting, holders of Common Shares will be asked to consider and
to vote upon the following matters:
(1) To elect three Class III directors;
(2) To approve the adoption of the 2005 Restricted Stock Grant Plan
(the "Stock Grant Plan") and
(3) To transact such other business as may properly come before the
meeting.
The Board recommends that shareholders vote FOR the election of the Board's
nominees for Class III directors and FOR the adoption of the Stock Grant Plan.
As of the date of this Proxy Statement, the Board knows of no other business
to come before the Annual Meeting.
Voting Rights and Proxy Information
Only holders of record of Common Shares as of the close of business on the
Annual Meeting Record Date will be entitled to notice of and to vote at the
Annual Meeting or any adjournment or postponement thereof. As of the Annual
Meeting Record Date, there were 2,684,698 Common Shares outstanding and
entitled to vote at the Annual Meeting. The presence, either in person or by
properly executed proxy, of the holders of a majority of the outstanding
Common Shares as of the Annual Meeting Record Date is necessary to constitute
a quorum at the Annual Meeting. Holders of Common Shares are entitled to one
vote per share on any matter, other than the election of directors, that may
properly come before the Annual Meeting. In the election of directors,
holders of Common Shares have cumulative voting rights whereby each holder is
entitled to vote the number of Common Shares owned multiplied by three (the
number of directors to be elected at the Annual Meeting), and each holder may
cast the whole number of votes for one candidate or distribute such votes
among two or more candidates. The Board of Directors is soliciting
discretionary authority for the individuals appointed in the proxies to
cumulate votes represented by properly executed proxies and to vote for less
than all the Company's nominees to the Board if deemed appropriate to ensure
the election of as many of the Company's nominees to the Board as possible.
Those persons receiving the three highest number of votes in the election of
directors will be elected to the Board. The Stock Grant Plan will be approved
if the holders of a majority of the Common Shares represented in person or by
proxy at the Annual Meeting vote in favor of its adoption.
All Common Shares that are represented at the Annual Meeting by properly
executed proxies received before or at the Annual Meeting and not revoked will
be voted at the Annual Meeting in accordance with the instructions indicated
in such proxies. If no instructions are indicated, such proxies will be voted
"FOR" the election of the Board's three nominees as Class III directors of the
Company (or, if deemed appropriate by the individuals appointed in the
proxies, cumulatively voted for less than all of the Board's nominees), and
"FOR" the adoption of the Stock Grant Plan.
Any proxy given pursuant to this solicitation may be revoked by the person
giving it at any time before it is voted. Proxies may be revoked by (i)
filing with the Company, to the attention of Gregory J. Dawson, Secretary, at
or before the Annual Meeting, a written notice of revocation bearing a later
date than the proxy, (ii) duly executing a subsequent proxy relating to the
same Common Shares and delivering it to the Company at or before the Annual
Meeting or (iii) attending the Annual Meeting and voting in person (although
attendance at the Annual Meeting will not in and of itself constitute a
revocation of a proxy). Any written notice revoking a proxy should be sent to
Kentucky Bancshares, Inc., P. O. Box 157, Paris, Kentucky 40362-0157,
Attention Gregory J. Dawson, Secretary.
The Company will bear the cost of the solicitation of proxies by the Board in
connection with the Annual Meeting. In addition to solicitation by mail, the
Company will request banks, brokers and other custodian nominees and
fiduciaries to supply proxy material to the beneficial owners of Common
Shares, and will reimburse them for their expenses in so doing. Certain
directors, officers and other employees of the Company, not specially employed
for this purpose, may solicit proxies without additional remuneration
therefore, by personal interview, mail, telephone, facsimile or other
electronic means.
Item 1 - Election of Directors
Under the Company's Amended and Restated Articles of Incorporation, the Board
of Directors consists of three different classes (Class I, Class II and Class
III), each to serve, subject to the provisions of the Amended and Restated
Articles of Incorporation and Bylaws, for a three year term and until his
successor is duly elected and qualified. Except as listed below, each nominee
for a Class III directorship has held the specified position for the last five
years. The names of the nominees proposed for election as Class III
directors, all of whom are presently directors of the Company, are set forth
below. The Company is not aware of any other individual who may be nominated
for election to the Board of Directors at the Annual Meeting.
Henry L. Hinkle is president of Hinkle Contracting Corporation. He became a
director of Kentucky Bank and the Company in 1989.
Theodore Kuster is a farmer and thoroughbred breeder with West View Equine.
He became a director of Kentucky Bank in 1979 and the Company in 1985.
Robert G. Thompson is a farmer and thoroughbred breeder with Snowhill Farm.
He became a director of Kentucky Bank and the Company in 1991.
The Board of Directors does not contemplate that any of the nominees will be
unable to accept election as a director for any reason. However, if one or
more of such nominees is unable or unwilling to accept or is unavailable to
serve, the persons named in the proxies or their substitutes shall have
authority, according to their judgment, to vote or to refrain from voting for
other individuals as directors.
The Board recommends that shareholders vote "FOR" each of the above nominees
for election as Class III directors of the Company.
Item 2 - Adoption of Stock Grant Plan
On February 15, 2005, the Company's Board of Directors adopted the 2005
Restricted Stock Grant Plan, subject to shareholder approval. A copy of the
Stock Grant Plan is attached to the Proxy Statement as Annex A. The purpose
of the Stock Grant Plan is to promote the growth and general prosperity of the
Company and its subsidiaries by granting Company stock to employees who will
largely be responsible for the long-term success and development of the
Company and to better align their interests with those of Company
shareholders. The Company further intends to use stock grants ("Restricted
Stock Awards") to attract and retain new employees and stimulate their efforts
on behalf of the Company.
The Stock Grant Plan will be administered by a committee (the "Committee")
appointed by the Board. Subject to the provisions of the Stock Grant Plan,
the Committee will have full authority to administer the Stock Grant Plan,
including without limitation, the authority to:
(a) select participants to whom Restricted Stock Awards are
granted;
(b) determine the size and frequency of Restricted Stock Awards
granted under the Stock Grant Plan;
(c) determine the terms and conditions of Restricted Stock
Awards, including any restrictions or conditions, which need not be identical;
(d) waive any or all the restrictions and conditions applicable
to, any Restricted Stock Award, for any reason;
(e) construe and interpret the Stock Grant Plan and any agreement
or instrument entered into under the Stock Grant Plan;
(f) establish, amend and rescind rules and regulations for the
Stock Grant Plan's administration; and
(g) amend the terms and conditions of any outstanding Restricted
Stock Award to the extent such terms and conditions are within the discretion
of the Committee as provided in the Stock Grant Plan.
The maximum number of shares which may be issued under to the Stock Grant Plan
is 50,000 Common Shares. The Restricted Stock Awards and the maximum number
of shares that may be issued under the Stock Grant Plan will be adjusted by
the Board, but only in order to prevent dilution or enlargement of such awards
in the event of a stock dividend, stock split-up or share combination,
exchange of shares, recapitalizations, merger, consolidation, acquisition of
property or shares, separation, reorganization, liquidation, or the like of or
by Company.
All employees of the Company and its subsidiaries are eligible to receive
awards under the Stock Grant Plan. In selecting employees to receive awards
under the Stock Grant Plan, as well as in determining the number of Common
Shares subject to and the other terms and conditions applicable to each award,
the Committee will take into consideration such factors as it deems relevant
in promoting the purposes of the Stock Grant Plan, including the duties of the
employees, their present and potential contribution to the success of Company
and their anticipated number of years in active service remaining with Company
or a subsidiary.
The Stock Grant Plan will become effective on January 1, 2006, if the Stock
Grant Plan has been approved by the Stockholders at the Annual Meeting.
The Board recommends that shareholders vote "FOR" the adoption of the Stock
Grant Plan.
Item 3 - Other Matters
As of the date of this Proxy Statement, the Company knows of no business that
will be presented for consideration at the Annual Meeting other than that
referred to above. At the Annual Meeting, only such business will be
conducted, and only such proposals or director nominations will be acted upon,
as have been properly brought before the meeting in accordance with the
Company's Bylaws. Proxies in the enclosed form will be voted in respect of any
other business that is properly brought before the Annual Meeting in accordance
with the judgment of the person or persons voting the proxies.
By Order of the Board of Directors
Gregory J. Dawson, Secretary
March 28, 2005
This Proxy Form is Solicited by the Board of Directors
Kentucky Bancshares, Inc.
Paris, Kentucky
The undersigned hereby appoints Buckner Woodford IV and Gregory J. Dawson, or
either one of them (with full power to act alone), my proxy, each with the
power to appoint his substitute, to represent me to vote all of the
Corporation's Common Stock which I held of record or am otherwise entitled to
vote at the close of business on March 18, 2005, at the 2005 Annual Meeting of
Shareholders to be held on May 10, 2005 and at any adjournments thereof, with
all powers the undersigned would possess if personally present, as follows:
1. ELECTION OF DIRECTORS
FOR all nominees listed below (except as otherwise indicated
below)
AGAINST all nominees listed below
Henry L. Hinkle, Theodore Kuster, and Robert G. Thompson
(INSTRUCTION: To withhold authority to vote for any individual
nominee, write the nominee's name on the line)
_________________________________________________________________
2. ADOPTION OF STOCK GRANT PLAN
FOR AGAINST ABSTAIN
3. OTHER BUSINESS. In their discretion, the Proxies are authorized to act
upon such other matters as may properly be brought before the Annual
Meeting or any adjournment thereof.
THE BOARD OF DIRECTORS RECOMMENDS A VOTE "FOR" ALL OF THE NOMINEES LISTED IN
ITEM I AND "FOR" THE ADOPTION OF THE STOCK GRANT PLAN IN ITEM 2.
(PLEASE DATE, MARK, SIGN AND RETURN IMMEDIATELY)
This proxy form relates to ALL shares owned by the undersigned.
This proxy form is solicited by the Board of Directors and will be voted as
specified and in accordance with the accompanying proxy statement. If no
instruction is indicated, this proxy form will be voted "FOR" all of the
nominees listed in Item 1 and "FOR" the adoption of the Stock Grant Plan in
Item 2.
Please sign exactly as name appears. When shares are held by joint tenants,
both should sign. When signing as attorney, as executor, administrator,
trustee, or guardian, please give full title as such. If a corporation,
please sign full corporate name by President or other authorized officer. If
a partnership, please sign partnership name by authorized person.
DATE___________, 2005
________________________________
Signature
________________________________
Signature if held jointly
89