Exhibit 13
KENTUCKY BANCSHARES, INC.
ANNUAL REPORT 2005
Kentucky Bank's Vision
Kentucky Bank will be the premier community financial institution in our
markets.
Kentucky Bank will create value for our shareholders by increasing our assets
to $800 million while maintaining a focus on the growth of our earnings per
share. We will focus on adding new customers through the sales efforts of our
staff, a strong program to increase referrals from a variety of sources and
expansion into additional high-valued markets. We will be opportunistic
regarding acquisitions while maintaining our focus on earnings.
Our customers will bank with us because we will provide consistent customer
service at the highest level. We will maintain our practice of providing
cutting-edge products and services for our customer. Because of our focus on
customer service, we will experience high customer loyalty and above average
retention.
Our employees will be a part of a single Kentucky Bank team. We will hire and
retain key talent in our marketplaces. We will recognize and reward success at
all levels of the organization. We will win as one team.
Communities
Our slogan "Call it Home" reflects our dedication to the communities we serve.
Collectively, the communities we call home have a population of over 175,000.
Kentucky Bancshares' strategy has been to locate itself within the growth
circle around Central Kentucky. This strategy has provided us with very
steady increases in market share. Our vision is to "focus on adding new
customers through the sales efforts of our staff, a strong program to increase
referrals from a variety of sources and expansion into additional high-valued
markets." One such opportunity, taking place in 2006, is a merger that will
allow us to serve Rowan and Elliott counties with their combined populations
totaling over 30,000.
Products
Kentucky Bank has always been progressive in developing and offering financial
products to our clients. This tradition has been an integral part of our
culture. Our vision directs us to "maintain our practice of providing cutting
edge products and services for our customers."
To help Kentucky Bank remain involved in the emergent face of Central
Kentucky, we have developed a Commercial Lending group. They have been
successful in providing the capital needed for many larger projects within the
communities we serve. Our Wealth Management group continues to make strides
in building their investment options and client base. We actively seek
innovative solutions for our consumer clients, particularly for the low income
housing market.
Service
This is the third year we have conducted "mystery shops" to measure branches
on their level of customer service. This research is sent to managers with
feedback identifying areas of improvement and successes. Our goal has been to
raise the level of service to our vision of "providing consistent customer
service at the highest level. Because of our focus on customer service, we
will experience high levels of customer loyalty and above average retention."
We are seeing success in realizing this vision.
Technology
Security is one of our highest priorities. Identity fraud, as well as many
other types of intrusions into security, are an increasing consumer
concern. Kentucky Bank's security measures are constantly tested and upgraded
to face new challenges. Our dedication to technology and customer service
allows us to offer the best of convenience and personal attention.
Spirit
We understand that in order for the bank to be strong, our communities need to
be strong. Throughout the year we are involved in many organizations within
our communities. We offer support through the involvement of Kentucky Bank
employees and financial support for hundreds of charitable and community
organizations including schools, YMCAs, Chambers of Commerce, local colleges,
hospitals, local sports teams, and a little bit of everything in between.
There are even times that we reach out beyond our border to help others.
The spirit of our employees was especially evident this year when Kentucky
Bank employees donated over $10,000 personally to the Katrina emergency
efforts. We recognize that for our employees to help us succeed we need to
help them succeed. We are all part of a single Kentucky Bank team. Our
commitment and vision includes "hiring and retaining key talent in our
marketplaces. We will recognize and reward success at all levels of the
organization. We will win as one team."
Dear Shareholder:
For the year ended December 31, 2005, the assets of your company reached a
record $572.7 million, which represents an 8.4% increase over last year's
total assets of $528.5 million. Loans increased 3.5% to $370.9 million, also
a new, year-end high.
Deposits grew 11.3% for the year to a record high of $431.6 million. Much of
that growth was fueled by a significant increase in depository relationships
with many public entities throughout our markets.
Earnings per share, on a diluted basis, were up 4.3% over the year ended
December 31, 2004. Net income reached $5.8 million, which represented a 1.0%
increase over the prior year-end. Net interest income was negatively impacted
throughout the year by the competitive pressures on our short term deposit
rates. With an anticipated slow down of the continued increase of short term
rates, and our budgeted loan growth, we should see improvement in our 2006 net
interest margins.
A noteworthy event concluded in 2005, that should contribute to the financial
success of your company, is the purchase of $14.9 million of tobacco
settlement payments which we were able to acquire for $11.7 million. We were
able to conclude these purchases in such a manner as to have a positive impact
on our bottom line in the upcoming years. We do expect to continue the
purchase of more of these payments, but not at the levels that we encountered
in 2005.
An extremely significant transaction that should be completed in 2006 is the
merger and acquisition of Peoples Bancorp, Inc. of Sandy Hook and Morehead
with Kentucky Bancshares, Inc. At year-end 2005, Peoples Bank had
approximately $87 million in assets, with one office each in Elliott and Rowan
Counties. The consideration of this transaction is $14 million, with 40% in
the form of Kentucky Bancshares stock, and 60% in the form of cash. Our
analysis indicates that this transaction should be accretive to earnings very
quickly.
This acquisition is somewhat different than prior mergers in that Morehead and
Rowan County are one hour east of Paris. Our prior acquisitions and mergers
have taken place in the counties that have surrounded Lexington and Fayette
County. However, the community of Morehead has had very steady growth, the
Peoples Bank itself has been growing significantly in its market share, and it
has been a very profitable institution throughout its history. The management
and board felt that this endeavor was an excellent opportunity for enhancing
shareholder value. As we look strategically to the future, Kentucky Bank will
continue to look for opportunities to enlarge our banking circle around
Bourbon and Fayette Counties.
B. Proctor Caudill, Jr. who is the Chairman and CEO of the Peoples Bank
holding company, will become a significant shareholder in Kentucky Bancshares.
Additionally, he will come to work for us with somewhat reduced
responsibilities, and we anticipate his being on the bank and holding company
boards of directors. We are very pleased about
this affiliation as we anticipate that he will be able to make a significant
contribution to the future success of your company.
We are extremely excited about this impending acquisition, and our financial
analysis of this transaction leads us to believe that, as a shareholder, you
will be pleased as well.
Sincerely, Sincerely,
/s/Louis Prichard /s/Buck Woodford
Louis Prichard Buck Woodford
President and Chief Executive Officer Chairman of the Board
Kentucky Bancshares, Inc. Kentucky Bancshares, Inc.
Financial Highlights...
Kentucky Bancshares, Inc. 2005 2004 2003
Assets ($ thousands) $ 572,750 $ 528,544 $ 500,852
Net Income ($ thousands) $ 5,820 $ 5,762 $ 4,233
Per Share Results...
Earnings (assuming dilution) $ 2.16 $ 2.07 $ 1.50
Dividend $ .92 $ .84 $ .76
Annual Meeting
The annual meeting of Kentucky Bancshares, Inc. will be held Friday, May 12,
2006 at 11:00 in the corporate headquarters.
Investor Information
Any individual requesting a copy of the Corporation's 2005 Form 10-K Report may
obtain these by visiting our website at www.kybank.com or writing to Investor
Relations at the Corporate Headquarters.
Shareholder Information...
Corporate Headquarters
Kentucky Bancshares, Inc.
4th and Main Streets
Paris, Kentucky 40361
859-987-1795
Transfer, Registrar and Dividend Agent
Registrar and Transfer Company
10 Commerce Drive
Cranford, New Jersey 07016
800-368-5948
rtco.com
Kentucky Bancshares, Inc. - KTYB.OB
Active Market Makers
Hilliard Lyons
West Vine Street, Suite 400
Lexington, Kentucky 40507
800-944-2663
Howe Barnes Investments, Inc.
135 South LaSalle Street, Suite 150
Chicago, Illinois, 60603-4398
800-800-4693
Morgan Keegan & Company
489 E. Main Street
Lexington, Kentucky 40507
800-937-0161
CONSOLIDATED BALANCE SHEETS
December 31
2005 2004
ASSETS
Cash and due from banks $ 11,456,496 $ 12,248,975
Federal funds sold 2,708,000 3,206,000
Cash and cash equivalents 14,164,496 15,454,975
Securities available for sale 160,652,346 126,766,861
Mortgage loans held for sale - 175,471
Loans 370,911,882 358,281,554
Allowance for loan losses (4,309,403) (4,163,315)
Net loans 366,602,479 354,118,239
Federal Home Loan Bank stock 5,398,100 5,136,500
Bank premises and equipment, net 10,701,541 11,378,012
Interest receivable 3,719,135 3,226,479
Mortgage servicing rights 801,501 875,633
Goodwill 9,110,524 9,110,524
Other intangible assets 765,885 861,621
Other assets 834,288 1,439,331
Total assets $ 572,750,295 $ 528,543,646
LIABILITIES AND STOCKHOLDERS' EQUITY
Deposits
Non-interest bearing $ 72,192,661 $ 74,048,291
Time deposits, $100,000 and over 61,597,420 59,468,813
Other interest bearing 297,841,297 254,437,718
Total deposits 431,631,378 387,954,822
Repurchase agreements and other borrowings 16,837,573 25,592,844
Federal Home Loan Bank advances 66,748,641 59,749,666
Subordinated debentures 7,217,000 7,217,000
Interest payable 2,714,506 1,849,468
Other liabilities 1,054,954 1,153,035
Total liabilities 526,204,052 483,516,835
Stockholders' equity
Preferred stock, 300,000 shares
authorized and unissued - -
Common stock, no par value; 10,000,000
shares authorized; 2,666,897 and
2,684,498 shares issued and
outstanding in 2005 and 2004 6,812,805 6,818,664
Retained earnings 40,666,332 37,884,215
Accumulated other comprehensive income (loss) (932,894) 323,932
Total stockholders' equity 46,546,243 45,026,811
Total liabilities and stockholders' equity $ 572,750,295 $ 528,543,646
See Accompanying notes.
CONSOLIDATED STATEMENTS OF INCOME
Years Ended December 31
2005 2004 2003
Interest income
Loans, including fees $ 23,373,434 $ 20,470,306 $ 18,574,690
Securities
Taxable 3,388,793 3,574,235 2,049,835
Tax exempt 1,444,090 1,518,275 1,430,589
Other 690,660 283,196 274,003
28,896,977 25,846,012 22,329,117
Interest expense
Deposits 8,180,571 5,765,690 5,310,791
Repurchase agreements and other
borrowings 603,812 411,492 27,460
Federal Home Loan Bank advances 2,487,062 2,395,898 2,293,297
Subordinated debentures 494,227 494,052 169,000
Other - - 75,000
11,765,672 9,067,132 7,875,548
Net interest income 17,131,305 16,778,880 14,453,569
Provision for loan losses 508,100 840,000 1,300,000
Net interest income after provision
for loan losses 16,623,205 15,938,880 13,153,569
Other income
Service charges 4,511,270 4,357,658 4,065,210
Loan service fee income 262,629 246,356 242,479
Trust department income 458,328 299,448 301,612
Securities gains (losses), net 64,395 288,950 139,438
Gain on sale of mortgage loans 333,742 376,157 853,340
Other 1,118,289 1,227,614 1,105,534
6,748,653 6,796,183 6,707,613
Other expenses
Salaries and employee benefits 8,547,607 8,053,306 7,373,501
Occupancy expenses 2,194,431 2,255,071 2,044,515
Amortization 349,342 524,839 516,390
Advertising and marketing 473,848 378,410 399,483
Taxes other than payroll, property
and income 547,509 499,251 439,084
Other 3,361,280 3,044,294 3,398,292
15,474,017 14,755,171 14,171,265
Income before income taxes 7,897,841 7,979,892 5,689,917
Provision for income taxes 2,077,741 2,217,783 1,456,540
Net income $ 5,820,100 $ 5,762,109 $ 4,233,377
Earnings per share:
Basic $ 2.17 $ 2.09 $ 1.52
Diluted 2.16 2.07 1.50
See Accompanying notes.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
Years Ended December 31
2005 2004 2003
Net income $ 5,820,100 $ 5,762,109 $ 4,233,377
Other comprehensive income (loss)
Unrealized gains (losses) on
securities arising during
the period (1,839,887) (1,522,118) (360,141)
Reclassification of realized amount (64,395) (288,950) (139,438)
Net change in unrealized
gain (loss) on securities (1,904,282) (1,811,068) (499,579)
Less: Tax impact (647,456) (615,763) (169,857)
Comprehensive income $ 4,563,274 $ 4,566,804 $ 3,903,655
See Accompanying notes.
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
Years Ended December 31, 2005, 2004 and 2003
Accumulated
Other Total
Common Stock Retained Comprehensive Stockholders'
Shares Amount Earnings Income Equity
<s> <c> <c> <c> <c> <c>
Balances, January 1, 2003 2,772,754 $ 6,806,887 $ 35,435,996 $ 1,848,959 $ 44,091,842
Common stock issued (including
employee gifts of 54 shares) 36,410 507,071 - - 507,071
Common stock purchased (9,383) (329,174) - - (329,174)
Net change in unrealized gain (loss)
on securities available for sale,
net of tax - - - (329,722) (329,722)
Net income - - 4,233,377 - 4,233,377
Dividends declared - $.76 per share - - (2,116,753) - (2,116,753)
Balances, December 31, 2003 2,799,781 6,984,784 37,552,620 1,519,237 46,056,641
Common stock issued (including
employee gifts of 89 shares) 7,019 131,041 - - 131,041
Common stock purchased (122,302) (297,161) (3,127,295) - (3,424,456)
Net change in unrealized gain (loss)
on securities available for sale,
net of tax - - - (1,195,305) (1,195,305)
Net income - - 5,762,109 - 5,762,109
Dividends declared - $.84 per share - - (2,303,219) - (2,303,219)
Balances, December 31, 2004 2,684,498 6,818,664 37,884,215 323,932 45,026,811
Common stock issued (including
employee gifts of 75 shares) 3,375 47,595 - - 47,595
Common stock purchased (20,976) (53,454) (575,945) - (629,399)
Net change in unrealized gain (loss)
on securities available for sale,
net of tax - - - (1,256,826) (1,256,826)
Net income - - 5,820,100 - 5,820,100
Dividends declared - $.92 per share - - (2,462,038) - (2,462,038)
Balances, December 31, 2005 2,666,897 $ 6,812,805 $ 40,666,332 $ (932,894) $ 46,546,243
See Accompanying notes.
CONSOLIDATED STATEMENTS OF CASH FLOWS
Years Ended December 31
2005 2004 2003
<s> <c> <c> <c>
Cash flows from operating activities
Net income $ 5,820,100 $ 5,762,109 $ 4,233,377
Adjustments to reconcile net
income to net cash from
operating activities
Depreciation and amortization 1,174,954 1,419,794 1,460,429
Provision for loan losses 508,100 840,000 1,300,000
Securities amortization
(accretion), net 331,355 635,725 703,502
Securities (gains) losses, net (64,395) (288,950) (139,438)
Originations of loans held
for sale (18,036,701) (22,065,215) (42,872,837)
Proceeds from sale of loans 18,545,914 30,024,484 36,707,617
Gain on sale of mortgage loans (333,742) (376,157) (853,340)
Federal Home Loan Bank stock
dividends (261,600) (206,400) (170,800)
Losses (gain) on sale of fixed
assets (71,045) (16,722) 161,849
Changes in:
Interest receivable (492,656) 23,355 360,511
Other assets 425,569 1,135,547 451,918
Interest payable 865,038 213,684 (306,069)
Other liabilities 624,374 942,501 (1,390,747)
Net cash from operating activities 9,035,265 18,043,755 (354,028)
Cash flows from investing activities
Purchases of securities available
for sale (53,539,693) (70,689,970) (65,248,350)
Proceeds from sales of securities
available for sale 1,323,500 37,973,553 8,434,570
Proceeds from principal payments
and maturities of securities
available for sale 16,159,467 32,581,271 39,625,276
Cash paid for bank acquisition - - (7,000,205)
Net change in loans (13,067,340) (45,775,823) 1,481,580
Purchases of bank premises and equipment (758,929) (948,546) (1,632,487)
Proceeds from sale of bank premises and
Equipment 581,881 199,722 -
Net cash from investing activities (49,301,114) (46,659,793) (24,339,616)
Cash flows from financing activities
Net change in deposits 43,676,556 3,356,226 8,662,228
Net change in repurchase agreements and
other borrowings (8,755,271) 18,307,586 2,008,563
Proceeds from subordinated debentures - - 7,000,000
Advances from Federal Home Loan Bank 15,000,000 25,000,000 12,000,000
Payments on Federal Home Loan
Bank advances (7,902,073) (18,383,678) (10,827,273)
Proceeds from issuance of common stock 47,595 131,041 188,697
Purchase of common stock (629,399) (3,424,456) (10,800)
Dividends paid (2,462,038) (2,303,219) (2,116,753)
Net cash from financing activities 38,975,370 22,683,500 16,904,662
See Accompanying notes.
CONSOLIDATED STATEMENTS OF CASH FLOWS
Years Ended December 31
2005 2004 2003
Net change in cash and cash equivalents $ (1,290,479) $ (5,932,538) $ (7,788,982)
Cash and cash equivalents at
beginning of year 15,454,975 21,387,513 29,176,495
Cash and cash equivalents at end of year $ 14,164,496 $ 15,454,975 $ 21,387,513
Supplemental disclosures of cash flow information
Cash paid during the year for:
Interest expense $ 10,900,634 $ 8,853,448 $ 8,084,469
Income taxes 1,971,443 777,401 1,637,706
Supplemental schedules of non-cash investing
activities
Real estate acquired through foreclosure $ 391,743 $ 1,325,942 $ 349,748
See Accompanying notes.
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation: The consolidated financial statements include the
accounts of Kentucky Bancshares, Inc. (formerly Bourbon Bancshares, Inc.) (the
Company) and its wholly-owned subsidiary, Kentucky Bank (the Bank).
Intercompany transactions and balances have been eliminated in consolidation.
Nature of Operations: The Bank operates under a state bank charter and
provides full banking services, including trust services, to customers located
in Bourbon, Clark, Harrison, Jessamine, Scott, Woodford and adjoining counties
in Kentucky. As a state bank, the Bank is subject to regulation by the
Kentucky Department of Financial Institutions and the Federal Deposit Insurance
Corporation (FDIC). The Company, a bank holding company, is regulated by the
Federal Reserve.
Estimates in the Financial Statements: The preparation of financial statements
in conformity with accounting principles generally accepted in the United
States of America requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates. The allowance for loan
losses, mortgage servicing rights and fair value of financial instruments are
particularly subject to change.
Cash Flows: For purposes of reporting cash flows, cash and cash equivalents
include cash on hand, amounts due from banks, federal funds sold, and certain
short-term investments with maturities of less than three months. Generally,
federal funds are sold for one-day periods. Net cash flows are reported for
loan, deposit and short-term borrowing transactions.
Securities: The Company is required to classify its securities portfolio into
one of three categories: trading securities, securities available for sale and
securities held to maturity. Fair value adjustments are made to the securities
based on their classification with the exception of the held to maturity
category. The Company has no investments classified as trading securities, or
securities held to maturity. Securities available for sale are carried at fair
value, with unrealized holding gains and losses reported in other
comprehensive income.
Interest income includes amortization of purchase premium or discount.
Premiums and discounts on securities are amortized on the level-yield method
without anticipating prepayments, except for mortgage backed securities where
prepayments are anticipated. Gains and losses on sales are recorded on the
settlement date and determined using the specific identification method.
Declines in the fair value of securities below their cost that are other than
temporary are reflected as realized losses. In estimating other than
temporary losses, management considers: (1) the length of time and extent that
fair value has been less than cost, (2) the financial condition and near term
prospects of the issuer, and (3) the Company's ability and intent to hold the
security for a period sufficient to allow for any anticipated recovery in fair
value.
Loans Held for Sale: Loans held for sale are valued at the lower of cost or
market as determined by outstanding commitments from investors or current
secondary market prices, calculated on the aggregate loan basis. The Company
also provides for any losses on uncovered commitments to lend or sell.
Loans: Loans are stated at the amount of unpaid principal, reduced by an
allowance for loan losses. Interest income on loans is recognized on the
accrual basis except for those loans on a nonaccrual status. The accrual of
interest on impaired loans is discontinued when management believes, after
consideration of economic and business conditions and collection efforts, that
the borrowers' financial condition is such that collection of interest is
doubtful. Interest income on mortgage and consumer loans is discontinued at
the time the loan is 90 days delinquent, and interest income on commercial
loans is discontinued at the time the loan is 120 days delinquent, unless the
loan is well-secured and in process of collection. Past due status is based
on the contractual terms of the loan. When interest accrual is discontinued,
interest income received on such loans is accounted for on the cash-basis or
cost-recovery method, until qualifying for return to accrual. Loans are
returned to accrual status when all the principal and interest amounts
contractually due are brought current and future payments are reasonably
assured. Consumer and credit card loans are typically charged off no later
than 120 days past due. Loans are placed on nonaccrual or charged-off at an
earlier date if collection of principal or interest is considered doubtful.
Loan origination fees and certain direct origination costs are capitalized and
recognized as an adjustment of the yield on the related loan.
Allowance for Loan Losses: The allowance for loan losses is a valuation
allowance for probable incurred credit losses, increased by the provision for
loan losses and decreased by charge-offs less recoveries. Management estimates
the allowance balance required using past loan loss experience, the nature and
volume of the portfolio, information about specific borrower situations and
estimated collateral values, economic conditions, and other factors.
Allocations of the allowance may be made for specific loans, but the entire
allowance is available for any loan that, in management's judgment, should be
charged-off. Loan losses are charged against the allowance when management
believes the uncollectibility of a loan balance is confirmed.
A loan is impaired when full payment under the loan terms is not expected.
Impairment is evaluated in total for smaller-balance loans of similar nature
such as residential mortgage, consumer, and credit card loans, and on an
individual loan basis for other loans. If a loan is impaired, a portion of the
allowance is allocated so that the loan is reported, net, at the present value
of estimated future cash flows using the loan's existing rate or at the fair
value of collateral if repayment is expected solely from the collateral. Large
groups of smaller balance homogenous loans, such as consumer and residential
real estate loans are collectively evaluated for impairment, and accordingly,
they are not separately identified for impairment disclosures.
Mortgage Servicing Rights: The Bank has sold certain residential mortgage
loans to the Federal Home Loan Mortgage Corporation (FHLMC) while retaining the
servicing rights. Gains and losses on sales of mortgage loans are based on
the difference between the selling price and the carrying value of the related
loan sold. The Bank receives a servicing fee from the FHLMC on each loan sold.
Servicing rights represent the allocated value of retained servicing rights
on loans sold and the cost of purchased rights. Servicing assets are expensed
in proportion to, and over the period of, estimated net servicing revenues.
Impairment is evaluated based on the fair value of the assets, using interest
rates, and prepayment characteristics. Fair value is determined using prices
for similar assets with similar characteristics, when available, or based upon
discounted cash flows using market-based assumptions. Any impairment of a
grouping is reported as a valuation allowance, to the extent that fair value
is less than the capitalized amount for a grouping.
Federal Home Loan Bank (FHLB) Stock: The Bank is a member of the FHLB system.
Members are required to own a certain amount of stock based on the level of
borrowings and other factors, and may invest in additional amounts. FHLB
stock is carried at cost, classified as a restricted security, and
periodically evaluated for impairment based on ultimate recovery of par value.
Both cash and stock dividends are reported as income.
Bank Premises and Equipment: Land is carried at cost. Bank premises and
equipment are stated at cost less accumulated depreciation. Buildings and
related components are depreciated using the straight-line method with useful
lives ranging from 5 to 50 years. Furniture, fixtures and equipment are
depreciated using the straight-line (or accelerated) method with useful lives
ranging from 3 to 10.
Real Estate Acquired Through Foreclosure: Real estate acquired through
foreclosure is carried at the lower of the recorded investment in the property
or its fair value. The value of the underlying loan is written down to the
fair value of the real estate to be acquired by a charge to the allowance for
loan losses, if necessary. Any subsequent write-downs are charged to operating
expenses. Operating expenses of such properties, net of related income, and
gains and losses on their disposition are included in other expenses.
Repurchase Agreements: Substantially all repurchase agreement liabilities
represent amounts advanced by various customers. Securities are pledged to
cover these liabilities, which are not covered by federal deposit insurance.
Stock Compensation: Employee compensation expense under stock options is
reported using the intrinsic value method. No stock-based compensation cost is
reflected in net income, as all options granted had an exercise price equal to
or greater than the market price of the underlying common stock at date of
grant. The following table illustrates the effect on net income and earnings
per share if expense was measured using the fair value recognition provisions
of FASB Statement No. 123, Accounting for Stock-Based Compensation.
2005 2004 2003
Net income
As reported $ 5,820,100 $ 5,762,109 $ 4,233,377
Deduct: Stock-based compensation
expense determined under fair
value based method (56,241) (42,178) (48,317)
Pro forma 5,763,859 5,719,931 4,185,060
2005 2004 2003
Basic earnings per share
As reported $ 2.17 $ 2.09 $ 1.52
Pro forma 2.15 2.07 1.50
Diluted earnings per share
As reported $ 2.16 $ 2.07 $ 1.50
Pro forma 2.14 2.06 1.48
Weighted averages
Fair value of options granted $ 4.82 $ 5.68 $ 4.14
Risk free interest rate 3.98% 3.86% 3.40%
Expected life 8 years 8 years 8 years
Expected volatility 15.11% 13.74% 16.90%
Expected dividend yield 3.03% 2.47% 2.96%
Income Taxes: Income tax expense is the total of the current year income tax
due or refundable and the change in deferred tax assets and liabilities. The
Company uses the liability method for computing deferred income taxes. Under
the liability method, deferred income taxes are based on the change during the
year in the deferred tax liability or asset established for the expected future
tax consequences of differences in the financial reporting and tax bases of
assets and liabilities.
Retirement Plans: Pension expense is the net of service and interest cost,
return on plan assets and amortization of gains and losses not immediately
recognized. Employee 401(k) and profit sharing plan expense is the amount of
matching contributions.
Goodwill: Goodwill results from prior business acquisitions and represents
the excess of the purchase price over the fair value of acquired tangible
assets and liabilities and identifiable intangible assets. Goodwill is
assessed at least annually for impairment and any such impairment will be
recognized in the period identified.
Intangible Assets: Intangible assets include a premium on deposits paid in
connection with the acquisition of a bank and branches which is being amortized
on a straight-line basis over ten or fifteen years.
Earnings Per Common Share: Basic earnings per common share is net income
divided by the weighted average number of common shares outstanding during the
period. Diluted earnings per common share include the dilutive effect of
additional potential common shares issuable under stock options. Earnings and
dividends per share are restated for all stock splits and dividends through the
date of issuance of the financial statements.
Comprehensive Income: Comprehensive income consists of net income and other
comprehensive income. Other comprehensive income includes unrealized gains and
losses on securities available for sale which are also recognized as a separate
component of equity.
Derivatives: The Company periodically enters into non-exchange traded
mandatory forward sales contracts in conjunction with its mortgage banking
operation. These contracts, considered derivatives, typically last 60 to 90
days and are used to offset the risk of interest rate changes between the time
of the commitment to make a loan to a borrower at a stated rate and when the
loan is sold. The Company did not have any mandatory forward sales contracts
at December 31, 2005 and 2004.
Effect of Newly Issued But Not Yet Effective Accounting Standards: FAS 123,
Revised, requires companies to record compensation cost for stock options
provided to employees in return for employment service. The cost is measured
at the fair value of the options when granted, and this cost is expensed over
the employment service period, which is normally the vesting period of the
options. This will apply to awards granted or modified in fiscal years
beginning in 2006. Compensation cost will also be recorded for prior option
grants that vest after the date of adoption. The effect on results of
operations will depend on the level of future option grants and the
calculation of the fair value of the options granted at such future date, as
well as the vesting periods provided, and so cannot currently be predicted.
Existing options that will vest after adoption date are expected to result in
additional compensation expense of approximately $48,000 in 2006 and $41,000
in 2007.
Operating Segments: While the Company's chief decision makers monitor the
revenue streams of the various Company products and services, operations are
managed and financial performance is evaluated on a Company-wide basis.
Accordingly, all of the Company's operations are considered by management to be
aggregated into one reportable operating segment.
NOTE 2 - RESTRICTIONS ON CASH AND DUE FROM BANKS
Included in cash and due from banks are certain non-interest bearing deposits
that are held at the Federal Reserve or maintained in vault cash in accordance
with average balance requirements specified by the Federal Reserve Board of
Governors. The reserve requirement at December 31, 2005 and 2004 was $156,000
and $144,000.
NOTE 3 - SECURITIES
Year-end securities available for sale are as follows:
Fair Unrealized Unrealized
Value Gains Losses
2005
U. S. Treasury $ 2,974,354 $ - $ (32,397)
U. S. government agencies 67,032,587 14,427 (825,849)
States and municipals 37,462,770 756,298 (337,944)
Mortgage-backed 52,340,502 4,150 (1,309,489)
Equity securities 842,133 317,329 -
Total $ 160,652,346 $ 1,092,204 $(2,505,679)
2004
U. S. Treasury $ 2,984,375 $ - $ (30,033)
U. S. government agencies 39,029,910 4,220 (384,112)
States and municipals 35,160,329 1,297,405 (163,285)
Mortgage-backed 48,620,711 79,835 (677,298)
Equity securities 971,536 363,589 -
Total $ 126,766,861 $ 1,745,049 $(1,254,728)
The fair value of securities available for sale at December 31, 2005, by
contractual maturity, are shown below. Expected maturities will differ from
contractual maturities because borrowers may have the right to call or prepay
obligations with or without call or prepayment penalties. Securities not due
at a single maturity are shown separately.
Fair
Value
Due in one year or less $ 29,117,864
Due after one year through five years 41,549,332
Due after five years through ten years 19,861,663
Due after ten years 16,940,852
107,469,711
Mortgage-backed 52,340,502
Equity 842,133
Total $ 160,652,346
Proceeds from sales of securities during 2005, 2004 and 2003 were $1,323,500,
$37,973,553 and $8,434,570. Gross gains of $89,943, $483,888 and $157,474 and
gross losses of $25,548, $194,938 and $18,036, were realized on those sales,
respectively. The tax provision related to these realized gains and losses was
$21,894, $98,243 and $47,409, respectively.
Securities with an approximate carrying value of $122,961,000 and $103,979,000
at December 31, 2005 and 2004, were pledged to secure public deposits, trust
funds, securities sold under agreements to repurchase and for other purposes as
required or permitted by law.
Securities with unrealized losses at year end 2005 and 2004 not recognized in
income are as follows:
2005
Less than 12 Months 12 Months or More Total
Fair Unrealized Fair Unrealized Fair Unrealized
Description of Securities Value Loss Value Loss Value Loss
<s> <c> <c> <c> <c> <c> <c>
U.S. Treasury $ - $ - $ 2,974,354 $ (32,397) $ 2,974,354 $ (32,397)
U.S. Government securities 38,032,999 (289,833) 23,442,038 (536,016) 61,475,037 (825,849)
States and municipals 11,774,597 (186,615) 4,210,864 (151,329) 15,985,461 (337,944)
Mortgage-backed 17,876,194 (187,827) 32,745,358 (1,121,662) 50,621,552 (1,309,489)
Total temporarily impaired $67,683,790 $ (664,275) $63,372,614 $(1,841,404) $131,056,404 $(2,505,679)
2004
Less than 12 Months 12 Months or More Total
Fair Unrealized Fair Unrealized Fair Unrealized
Description of Securities Value Loss Value Loss Value Loss
U.S. Treasury $ 2,984,375 $ (30,033) $ - $ - $ 2,984,375 $ (30,033)
U.S. Government securities 33,139,473 (384,112) - - 33,139,473 (384,112)
States and municipals 4,156,727 (91,011) 2,811,479 (72,274) 6,968,206 (163,285)
Mortgage-backed 36,918,846 (571,246) 4,705,311 (106,052) 41,624,157 (677,298)
Total temporarily impaired $77,199,421 $(1,076,402) $ 7,516,790 $ (178,326) $ 84,716,211 $(1,254,728)
The Company evaluates securities for other than temporary impairment at least
on an annual basis, and more frequently when economic or market concerns
warrant such evaluation. Consideration is given to the length of time and the
extent to which the fair value has been less than cost, the financial
condition and near-term prospects of the issuer, and the intent and ability of
the Company to retain its investment in the issuer for a period of time
sufficient to allow for any anticipated recovery in fair value. In analyzing
an issuer's financial condition, the Company may consider whether the
securities are issued by the federal government or its agencies, whether
downgrades by bond rating agencies have occurred, and the results of reviews
of the issuer's financial condition.
At December 31, 2005, eight mortgage-backed securities have unrealized losses
with aggregate depreciation of 3% from their amortized cost basis. The decline
in fair value from these and other securities is largely due to changes in
interest rates. As management has the ability to hold debt securities until
maturity, or for the foreseeable future, no declines are deemed to be other
than temporary.
NOTE 4 - LOANS
Loans at year-end were as follows:
2005 2004
Commercial $ 27,301,633 $ 19,999,038
Real estate construction 29,822,067 32,256,168
Real estate mortgage 245,138,321 238,475,554
Agricultural 59,327,772 57,497,465
Consumer 8,953,943 9,062,518
Other 368,146 990,811
$ 370,911,882 $ 358,281,554
Activity in the allowance for loan losses was as follows:
2005 2004 2003
Beginning balance $ 4,163,315 $ 3,819,842 $ 3,395,075
Allowance from acquisition - - 362,900
Charge-offs (526,735) (687,798) (1,397,822)
Recoveries 164,723 191,271 159,689
Provision for loan losses 508,100 840,000 1,300,000
Ending balance $ 4,309,403 $ 4,163,315 $ 3,819,842
Impaired loans totaled $774,000 and $1,781,000 at December 31, 2005 and 2004.
The average recorded investment in impaired loans during 2005, 2004 and 2003
was $1,547,000, $1,444,000 and $1,051,000. The total allowance for loan losses
related to these loans was $240,000 and $416,000 at December 31, 2005 and 2004.
Interest income on impaired loans of $25,000, $22,000 and $14,000 was
recognized for cash payments received in 2005, 2004 and 2003.
Nonperforming loans were as follows:
2005 2004
Loans past due over 90 days still
on accrual $ 206,000 $ 308,000
Nonaccrual loans 774,000 1,781,000
Nonperforming loans include impaired loans and smaller balance homogeneous
loans, such as residential mortgage and consumer loans, that are collectively
evaluated for impairment.
Mortgage loans serviced for others are not included in the accompanying
consolidated balance sheets. The unpaid principal balances of mortgage loans
serviced for others was approximately $104,575,000 and $102,024,000 at December
31, 2005 and 2004. Custodial escrow balances maintained in connection with the
foregoing loan servicing, and included in demand deposits, were approximately
$509,000 and $467,000 at December 31, 2005 and 2004.
Changes in mortgage servicing rights were as follows:
2005 2004 2003
Beginning balance $ 875,633 $ 861,120 $ 704,034
Additions 179,474 263,861 381,205
Amortization (253,606) (249,348) (224,119)
Ending balance $ 801,501 $ 875,633 $ 861,120
Certain directors and executive officers of the Company and companies in which
they have beneficiary ownership were loan customers of the Bank during 2005 and
2004. Such loans were made in the ordinary course of business at the Bank's
normal credit terms and interest rates. An analysis of the activity with
respect to all director and executive officer loans is as follows:
2005
Balance, beginning of year $ 4,410,000
New Loans 1,051,000
Effect of changes in composition of Related parties (381,000)
Repayments (373,000)
Balance, end of year $ 4,707,000
NOTE 5 - PREMISES AND EQUIPMENT
Year-end premises and equipment were as follows:
2005 2004
Land and buildings $ 12,560,227 $ 12,804,599
Furniture and equipment 10,200,440 9,732,639
Construction projects 9,500 -
22,770,167 22,537,238
Less accumulated depreciation (12,068,626) (11,159,226)
$ 10,701,541 $ 11,378,012
Depreciation expense was $924,564, $993,907 and $960,512 in 2005, 2004, and
2003.
NOTE 6 - GOODWILL AND INTANGIBLE ASSETS
The change in balance for goodwill during the year is as follows:
2005 2004
Beginning of year $ 9,110,524 $ 10,199,830
Adjustment to goodwill - (1,089,306)
End of year $ 9,110,524 $ 9,110,524
Goodwill was reduced in 2004 primarily for unanticipated tax benefits arising
after the initial calculation of goodwill from the business combination in
2003.
Goodwill will not be amortized but instead evaluated periodically for
impairment.
Acquired intangible assets were as follows at year-end:
2005 2004
Gross Gross
Carrying Accumulated Carrying Accumulated
Amount Amortization Amount Amortization
Amortized intangible assets:
Core deposit intangibles $3,656,403 $2,890,518 $3,656,403 $2,794,782
Aggregate amortization expense was $95,736, $275,490 and $292,271 for 2005,
2004 and 2003. The core deposit from the 1994 Clark County branch acquisition
was completely amortized in 2004.
Estimated amortization expense for each of the next five years:
2006 $ 95,736
2007 95,736
2008 95,736
2009 95,736
2010 95,736
NOTE 7 - DEPOSITS
At December 31, 2005, the scheduled maturities of time deposits are as follows:
2006 $ 149,082,622
2007 38,020,991
2008 3,697,971
2009 1,188,208
2010 960,955
Certain directors and executive officers of the Company and companies in which
they have beneficial ownership are deposit customers of the Bank. The amount of
these deposits was approximately $1,700,000 and $3,421,000 at December 31, 2005
and 2004.
NOTE 8 - REPURCHASE AGREEMENTS
Securities sold under agreements to repurchase are secured by U.S. Government
securities with a carrying amount of $23,246,420 and $27,275,000 at year-end
2005 and 2004.
Repurchase agreements generally mature within one year from the transaction
date and range in maturities from 1 day to 3 years. The securities underlying
the agreements are maintained in a third-party custodian's account under a
written custodial agreement. Information concerning repurchase agreements for
2005 and 2004 is summarized as follows:
2005 2004
Average daily balance during the year $ 16,014,304 $ 18,398,243
Average interest rate during the year 3.19% 1.90%
Maximum month-end balance during the year $ 18,071,544 $ 21,946,746
Weighted average interest rate at year end 3.18% 2.94%
NOTE 9 - FEDERAL HOME LOAN BANK ADVANCES
At year-end, advances from the Federal Home Loan Bank were as follows:
2005 2004
Maturities February 2005 through March
2030, fixed rates from 1.52% to 3.08% $ 19,802,691 $ 21,644,956
Maturities March 2005 through February
2026, fixed rates from 3.55% to 4.38% 30,781,074 16,846,606
Maturities June 2005 through November
2022, fixed rates from 4.82% to 7.23% 16,164,876 21,258,104
Total $ 66,748,641 $ 59,749,666
Advances are paid either on a monthly basis or at maturity. All advances
require a prepayment penalty and certain advances are callable by the FHLB at
various call dates throughout the term of the advance. Advances are secured by
the FHLB stock and substantially all first mortgage loans.
Scheduled principal payments due on advances during the years subsequent to
December 31, 2005 are as follows:
2006 $ 13,182,609
2007 9,203,106
2008 11,231,617
2009 15,261,901
2010 7,293,215
Thereafter 10,576,193
$ 66,748,641
NOTE 10 - SUBORDINATED DEBENTURES
In August 2003, the Company formed Kentucky Bancshares, Statutory Trust I
("Trust"). The Trust issued $217,000 of common securities to the Company and
$7,000,000 of trust preferred securities as part of a pooled offering of such
securities. The Company issued $7,217,000 subordinated debentures to the Trust
in exchange for the proceeds of the offering, which debentures represent the
sole asset of the Trust. The debentures pay interest quarterly at 7.06% for
the first 5 years. Starting September 2008, the rate converts to three-month
LIBOR plus 3.00 adjusted quarterly. The Company may redeem the subordinated
debentures, in whole or in part, beginning September 2008 at a price of 100% of
face value. The subordinated debentures must be redeemed no later than 2033.
In accordance with FASB Interpretation No. 46, the Trust is not consolidated
with the Company. Accordingly, the Company does not report the securities
issued by the Trust as liabilities, and instead reports as liabilities the
subordinated debentures issued by the Company and held by the Trust, as these
are no longer eliminated in consolidation.
NOTE 11 - INCOME TAXES
Income tax expense was as follows:
2005 2004 2003
Current $ 1,969,865 $ 2,063,949 $ 1,166,575
Deferred 107,876 153,834 289,965
$ 2,077,741 $ 2,217,783 $ 1,456,540
Year-end deferred tax assets and liabilities were due to the following. No
valuation allowance for the realization of deferred tax assets is considered
necessary.
2005 2004
Deferred tax assets
Allowance for loan losses $ 1,355,432 $ 1,241,615
Unrealized loss on securities 480,581 -
Core deposit intangibles 13,753 46,720
Other 121,049 358,420
Deferred tax liabilities
Unrealized gain on securities - (166,874)
Bank premises and equipment (429,886) (428,414)
FHLB stock (1,018,338) (929,394)
Mortgage servicing rights (272,510) (297,715)
Other (188,099) (301,955)
Net deferred tax asset (liability) $ 61,982 $ (477,597)
Effective tax rates differ from federal statutory rates applied to financial
statement income due to the following:
2005 2004 2003
U. S. federal income tax rate 34.0% 34.0% 34.0%
Changes from the statutory rate
Tax-exempt investment income (7.3) (7.0) (9.3)
Non-deductible interest expense related to
carrying tax-exempt investments .8 .6 .8
Other (1.2) .2 .1
26.3% 27.8% 25.6%
Federal income tax laws provided the Federal Savings Bank, acquired by the
Company in 2003, with additional bad debt deductions through 1987, totaling
$1.3 million. Accounting standards do not require a deferred tax liability to
be recorded on this amount, which otherwise would total a $441,000 liability at
December 31, 2005. The Company's acquisition of First Federal Savings Bank did
not require the recapture of the bad debt reserve. However, if Kentucky Bank
was liquidated or otherwise ceased to be a bank, or if tax laws were to change,
the $441,000 would be recorded as expense.
NOTE 12 - EARNINGS PER SHARE
The factors used in the earnings per share computation follow:
2005 2004 2003
Basic Earnings Per Share
Net income $ 5,820,100 $ 5,762,109 $ 4,233,377
Weighted average common
shares outstanding 2,676,890 2,757,233 2,781,146
Basic earnings per share $ 2.17 $ 2.09 $ 1.52
Diluted Earnings Per Share
Net income $ 5,820,100 $ 4,233,377 $ 5,902,525
Weighted average common
shares outstanding 2,676,890 2,781,146 2,770,282
Add dilutive effects of
assumed exercise of
stock options 14,965 45,640 35,836
Weighted average common and
dilutive potential common
shares outstanding 2,691,855 2,826,786 2,806,118
Diluted earnings per share $ 2.16 $ 2.07 $ 1.50
Stock options of 31,100 shares common stock from 2005 and 11,350 shares of
common stock from 2004 were excluded from diluted earnings per share because
their impact was antidilutive. There were no shares that were antidilutive in
2003.
NOTE 13 - RETIREMENT PLANS
The Company has a defined benefit pension plan covering substantially all of
its employees. The Company's funding policy is to contribute annually the
maximum amount that can be deducted for federal income tax purposes. Benefits
are based on one percent of employee average earnings for the previous five
years times years of credited service.
Information about the pension plan was as follows:
2005 2004
Change in benefit obligation:
Beginning benefit obligation $ 5,481,513 $ 4,290,391
Service cost 432,429 369,481
Interest cost 346,223 286,326
Actuarial adjustment 581,964 630,729
Benefits paid (104,770) (95,414)
Ending benefit obligation 6,737,359 5,481,513
Change in plan assets, at fair value:
Beginning plan assets 4,798,708 4,075,719
Actual return 166,535 541,419
Employer contribution 211,031 276,984
Benefits paid (104,770) (95,414)
Ending plan assets 5,071,504 4,798,708
Funded status (1,665,855) (682,805)
Unrecognized net actuarial (gain) loss 1,683,609 932,175
Unrecognized prior transition asset (1,113) (1,485)
Net pension prepaid benefit $ 16,641 $ 247,885
Amounts recognized in the balance sheet consist of:
Prepaid benefit cost $ 16,641 $ 247,885
Accrued benefit cost - -
Net amount recognized $ 16,641 $ 247,885
The accumulated benefit obligation for defined benefit pension plans was
$4,973,145 and $3,976,697 at year-end 2005 and 2004.
Net periodic pension cost include the following components:
2005 2004 2003
Service cost $ 432,429 $ 369,481 $ 314,935
Interest cost 346,223 286,326 265,034
Expected return on plan assets (376,195) (319,050) (265,117)
Amortization 39,818 (372) 16,758
Net periodic cost $ 442,275 $ 336,385 $ 331,610
Weighted-average assumptions used to determine net cost
2005 2004 2003
Discount rate on benefit obligation 5.75% 6.00% 7.00%
Long-term expected rate of return
on plan assets 8.00% 8.00% 8.00%
Rate of compensation increase 4.00% 4.00% 5.00%
The assumptions described above were determined using various factors. Based
on the history of domestic investment experience, the expected long-term rate
of return on assets for the income segment is assumed to be 6.0%. The
expected long-term return on assets for the growth segment is assumed to be
10.0%. Thus, the assumed rate of return on the total portfolio is 8.0% per
year. The rate of compensation increase assumption of 4.0% is based upon
historical compensation increases at the Bank. The discount rate assumption
of 5.75% is based on the expected movements of interest rates from economic
forecasts, Federal Reserve monetary actions and commentary, the expected pace
of economic activity, the issuance of new debt to finance significant fiscal
policy deficits, and the benchmark Moody's AA rated long term corporate bond
rate.
The Company's pension plan asset allocation at year-end and expected long-term
rate of return by asset category are as follows:
Weighted
Percentage Percentage Average
of Plan of Plan Expected
Assets at Assets at Long-Term
Year-End Year-End Rate of Return
Asset Category 2005 2004 2005
Equity securities 62.3 64.9 10%
Debt securities 35.9 34.6 6
Cash 1.8 0.5 4
Total 100.0 100.0
The asset allocation objective for 2005 and thereafter is to be 60% in equity
securities and 40% in debt securities. These percentages may vary 5-10 basis
points based on market conditions of equity and bond markets. There is no
target allocation for cash balances.
The Company expects to contribute $204,000 to its pension plan in 2006.
The following benefit payments, which reflect expected future service, are
expected:
Pension Benefits
2006 $ 121,559
2007 160,556
2008 176,305
2009 187,972
2010 241,301
Years 2011-2015 1,527,087
The Company also has a qualified profit sharing plan which covers substantially
all employees and includes a 401(k) provision. Profit sharing contributions,
excluding the 401(k) provision, are at the discretion of the Company's Board of
Directors. Expense recognized in connection with the plan was $320,670,
$309,741 and $271,684 in 2005, 2004 and 2003.
NOTE 14 - STOCK OPTION PLAN
The Company grants certain officers and key employees stock option awards which
vest and become fully exercisable at the end of five years and provides for
issue of up to 220,000 options. The Company also grants certain directors
stock option awards which vest and become fully exercisable immediately and
provides for issue of up to 20,000 options. The exercise price of each option,
which has a ten year life, was equal to the market price of the Company's stock
on the date of grant; therefore, no compensation expense was recognized.
Summary of stock option transactions are as follows:
2005 2004 2003
Weighted Weighted Weighted
Option Option Option
Options Price Options Price Options Price
<s> <c> <c> <c> <c> <c> <c>
Outstanding, beginning of year 60,564 $23.00 57,560 $20.23 83,114 $16.72
Granted 19,850 30.40 12,250 33.65 14,500 25.72
Expired (50) 26.00 (2,316) 27.03 (3,698) 25.00
Exercised (3,300) 13.23 (6,930) 17.55 (36,356) 13.89
Outstanding, end of year 77,064 $25.32 60,564 $23.00 57,560 $20.23
Exercisable, end of year 42,116 $21.38 38,676 $19.41 36,824 $17.80
Weighted remaining contractual
Life 71.1 months 67.0 months 67.9 months
Options outstanding at year-end 2005 were as follows:
Outstanding Exercisable
Weighted
Average Weighted Weighted
Remaining Average Average
Contractual Exercise Exercise
Range of Exercise Prices Options Life Price Options Price
<s> <c> <c> <c> <c> <c>
From $12.50 to $15.50 per share 12,020 18.4 $14.24 12,020 $14.24
From $18.00 to $20.63 per share 13,640 36.1 20.52 13,640 20.52
From $23.50 to $28.00 per share 20,304 75.1 25.37 12,126 25.30
From $30.00 to $30.50 per share 19,850 108.6 30.40 1,200 30.25
From $33.90 to $34.00 per share 11,250 96.3 33.91 3,130 33.94
77,064 42,116
NOTE 15 - STOCK GRANT PLAN
On February 15, 2005, the Company's Board of Directors adopted a restricted
stock grant plan. Total shares issuable under the plan are 50,000. There
was no activity in the plan during 2005.
NOTE 16 - LIMITATION ON BANK DIVIDENDS
The Company's principal source of funds is dividends received from the Bank.
Banking regulations limit the amount of dividends that may be paid by the Bank
without prior approval of regulatory agencies. Under these regulations, the
amount of dividends that may be paid in any calendar year is limited to the
current year's net profits, as defined, combined with the retained net profits
of the preceding two years. During 2006 the Bank could, without prior
approval, declare dividends of approximately $4,928,000 plus any 2006 net
profits retained to the date of the dividend declaration.
NOTE 17 - DISCLOSURES ABOUT FAIR VALUE OF FINANCIAL INSTRUMENTS
The fair values of the Company's financial instruments at December 31, 2005 and
2004 are as follows:
2005 2004
Carrying Carrying
Amount Fair Value Amount Fair Value
(In Thousands)
Financial assets
Cash and cash equivalents $ 14,164 $ 14,164 $ 15,455 $ 15,455
Securities 160,652 160,652 126,767 126,767
Mortgage loans held for sale - - 176 178
Loans, net 366,602 362,686 354,118 350,912
FHLB stock 5,398 5,398 5,136 5,136
Interest receivable 3,719 3,719 3,226 3,226
Financial liabilities
Deposits $ 431,631 $ 432,560 $ 387,955 $ 390,296
Securities sold under
agreements to repurchase
and other borrowings 16,838 16,612 25,593 25,467
FHLB advances 66,749 64,937 59,750 59,281
Subordinated debentures 7,217 7,328 7,217 7,354
Interest payable 2,715 2,715 1,849 1,849
Carrying amount is the estimated fair value for cash and cash equivalents,
short-term borrowings, Federal Home Loan Bank stock, accrued interest
receivable and payable, demand deposits, short-term debt, and variable rate
loans or deposits that reprice frequently and fully. Security fair values are
based on market prices or dealer quotes, and if no such information is
available, on the rate and term of the security and information about the
issuer. For fixed rate loans or deposits and for variable rate loans or
deposits with infrequent repricing or repricing limits, fair value is based on
discounted cash flows using current market rates applied to the estimated life
and credit risk. Fair values for impaired loans are estimated using discounted
cash flow analysis or underlying collateral values. Fair value of debt is
based on current rates for similar financing. The fair value of commitments to
extend credit and standby letters of credit is not considered material.
NOTE 18 - OFF-BALANCE SHEET ACTIVITIES AND COMMITMENTS
Some financial instruments, such as loan commitments, credit lines, letters of
credit, and overdraft protection, are issued to meet customer financing needs.
These are agreements to provide credit or to support the credit of others, as
long as conditions established in the contract are met, and usually have
expiration dates. Commitments may expire without being used. Off-balance
sheet risk to credit loss exists up to the face amount of these instruments,
although material losses are not anticipated. The same credit policies are
used to make such commitments as are used for loans, including obtaining
collateral at exercise of the commitment.
Financial instruments with off-balance sheet risk were as follows at year-end:
2005 2004
Unused lines of credit $ 56,354,000 $ 54,785,000
Commitments to make loans 156,000 1,272,000
Letters of credit 183,000 145,000
Unused lines of credit are substantially all at variable rates. Commitments to
make loans are generally made for a period of 60 days or less and are primarily
fixed at current market rates ranging from 6.125% to 6.25% with maturities
ranging from 15 to 30 years and are intended to be sold.
NOTE 19 - CONTINGENT LIABILITIES
The Bank is a defendant in legal actions arising from normal business
activities. Management believes these actions are without merit or that the
ultimate liability, if any, resulting from them will not materially affect the
Company's consolidated financial position or results of operations.
NOTE 20 - CAPITAL REQUIREMENTS
The Company and the Bank are subject to various regulatory capital
requirements administered by the federal banking agencies. Failure to meet
minimum capital requirements can initiate certain mandatory and possible
additional discretionary actions by regulators that, if undertaken, could have
a direct material effect on the Company's financial statements. Under capital
adequacy guidelines and the regulatory framework for prompt corrective action,
the Company and the Bank must meet specific capital guidelines that involve
quantitative measures of the Company's and the Bank's assets, liabilities, and
certain off-balance sheet items as calculated under regulatory accounting
practices. The Company and Bank capital amounts and classifications are also
subject to qualitative judgments by regulators about components, risk
weightings, and other factors.
Quantitative measures established by regulation to ensure capital adequacy
require the Company and the Bank to maintain minimum amounts and ratios (set
forth in the following table) of Total and Tier I capital (as defined in the
regulations) to risk-weighted assets (as defined), and of Tier I capital to
average assets (as defined). Management believes, as of December 31, 2005 and
2004, that the Company and the Bank meet all capital adequacy requirements to
which they are subject.
The most recent notification from the Federal Deposit Insurance Corporation
categorized the Bank as well capitalized under the regulatory framework for
prompt corrective action. To be categorized as well capitalized, the Bank
must maintain minimum Total risk-based, Tier I risk-based and Tier I leverage
ratios as set forth in the following table. There are no conditions or events
since that notification that management believes have changed the
institution's category.
The Company's and the Bank's actual amounts and ratios are presented in the
table below:
To Be Well
Capitalized
Under Prompt
For Capital Corrective
Actual Adequacy Purposes Action Provisions
Amount Ratio Amount Ratio Amount Ratio
(Dollars in Thoursands)
2004
Consolidated
<s> <c> <c> <c> <c> <c> <c>
Total Capital (to Risk-Weighted Assets) $ 45,987 13.2% $ 27,855 8% $ 34,819 N/A
Tier I Capital (to Risk-Weighted Assets) 41,660 12.0 13,928 4 20,891 N/A
Tier I Capital (to Average Assets) 41,660 8.2 20,410 4 25,512 N/A
Bank Only
Total Capital (to Risk-Weighted Assets) $ 44,512 12.8% $ 27,791 8% $ 34,739 10%
Tier I Capital (to Risk-Weighted Assets) 40,338 11.6 13,895 4 20,843 6
Tier I Capital (to Average Assets) 40,338 7.9 20,368 4 25,460 5
2005
Consolidated
Total Capital (to Risk-Weighted Assets) $ 49,130 13.4% $ 29,311 8% $ 36,639 N/A
Tier I Capital (to Risk-Weighted Assets) 44,602 12.2 14,656 4 21,984 N/A
Tier I Capital (to Average Assets) 44,602 8.0 22,342 4 27,928 N/A
Bank Only
Total Capital (to Risk-Weighted Assets) $ 47,346 13.0% $ 29,251 8% $ 36,564 10%
Tier I Capital (to Risk-Weighted Assets) 42,952 11.8 14,626 4 21,938 6
Tier I Capital (to Average Assets) 42,952 7.7 22,309 4 27,887 5
NOTE 21 - SUBSEQUENT EVENT - BUSINESS COMBINATION
On February 24, 2006, the Company announced the signing of a definitive merger
agreement with Peoples Bancorp of Sandy Hook, Inc. (Peoples Bancorp). Under
the terms of the merger agreement, Peoples Bancorp will merge into the Company
and Peoples Bank, a subsidiary of Peoples Bancorp, will merge into the Bank.
Peoples Bancorp is a privately held bank holding company with offices in Sandy
Hook and Morehead, Kentucky. On December 31, 2005 it had assets, deposits and
shareholders equity of $87 million, $68 million and $8.6 million, respectively.
As a result of this merger, the Company expects to expand its customer base to
enhance deposit fee income, provide an opportunity to market additional
products and services to new customers, and reduce operating costs through
economies of scale.
Subject to regulatory approval, as well as approval of Peoples Bancorp
stockholders, under the terms of the definitive agreement, each share of
Peoples Bancorp common stock will be converted into consideration, sixty
percent of which to be in the form of cash and forty percent of which to be in
the form of shares of Kentucky Bancshares common stock. Based on the current
market price of Kentucky Bancshares common stock, approximately 190,000
shares of Kentucky Bancshares common stock would be issued to Peoples Bancorp
shareholders. The total purchase price will be approximately $14 million.
NOTE 22 - PARENT COMPANY FINANCIAL STATEMENTS
Condensed Balance Sheets
December 31
2005 2004
(In Thousands)
ASSETS
Cash on deposit with subsidiary $ 1,163 $ 721
Investment in subsidiary 51,699 50,481
Securities available for sale 573 698
Other assets 345 363
Total assets $ 53,780 $ 52,263
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities
Subordinated debentures $ 7,217 $ 7,217
Other liabilities 17 19
Stockholders' equity
Preferred stock - -
Common stock 6,813 6,819
Retained earnings 40,666 37,884
Accumulated other comprehensive income (933) 324
Total liabilities and stockholders' equity $ 53,780 $ 52,263
Condensed Statements of Income and Comprehensive Income
Years Ended December 31
2005 2004 2003
(In Thousands)
Income
Dividends from subsidiary $ 3,750 $ 3,650 $ 13,025
Securities gains (losses), net 60 82 7
Interest income 13 24 20
Total income 3,823 3,756 13,052
Expenses
Interest expense 494 494 169
Other expenses 134 157 360
Total expenses 628 651 529
Income before income taxes and equity in
undistributed income of subsidiary 3,195 3,105 12,523
Applicable income tax (expense) benefits 178 177 175
Income before equity in undistributed
income of subsidiary 3,373 3,282 12,698
Equity in undistributed income of subsidiary 2,447 2,480 (8,465)
Net income 5,820 5,762 4,233
Other comprehensive income (loss), net of tax:
Unrealized gains (losses) on securities
arising during the period (1,215) (1,004) (237)
Reclassification of realized amount (42) (191) (92)
Net change in unrealized gain (loss)
on securities (1,257) (1,195) (329)
Comprehensive income $ 4,563 $ 4,567 $ 3,904
Condensed Statements of Cash Flows
Years Ended December 31
2005 2004 2003
(In Thousands)
Cash flows from operating activities
Net income $ 5,820 $ 5,762 $ 4,233
Adjustments to reconcile net income to net
cash from operating activities
Equity in undistributed earnings of
Subsidiary (2,447) (2,480) 8,465
Securities (gains) losses, net (60) (82) (7)
Change in other assets 32 659 (553)
Change in other liabilities (3) - (10)
Net cash from operating activities 3,342 3,859 12,128
Cash flows from investing activities
Purchase of securities available for sale - - (82)
Proceeds from sales of securities
available for sale 143 675 65
Acquisition of Kentucky First Bancorp, Inc. - - (20,998)
Net cash from investing activities 143 675 (21,015)
Cash flows from financing activities
Proceeds from subordinated debentures - - 7,000
Dividends paid (2,462) (2,303) (2,117)
Proceeds from issuance of common stock 48 131 189
Purchase of common stock (629) (3,424) (11)
Net cash from financing activities (3,043) (5,596) 5,061
Net change in cash 442 (1,062) (3,826)
Cash at beginning of year 721 1,783 5,609
Cash at end of year $ 1,163 $ 721 $ 1,783
NOTE 23 - QUARTERLY FINANCIAL DATA (UNAUDITED)
Interest Net Interest Net Earnings Per Share
Income Income Income Basic Fully Diluted
2005
First quarter $ 6,720 $ 4,221 $ 1,333 $ .50 $ .49
Second quarter 7,033 4,385 1,516 .56 .56
Third quarter 7,321 4,246 1,430 .54 .54
Fourth quarter 7,823 4,279 1,541 .57 .57
2004
First quarter $ 6,267 $ 4,071 $ 1,150 $ .41 $ .41
Second quarter 6,463 4,267 1,439 .51 .51
Third quarter 6,506 4,252 1,579 .58 .57
Fourth quarter 6,610 4,189 1,594 .59 .58
Report of Independent Registered Public Accounting Firm
Board of Directors
Kentucky Bancshares, Inc.
Paris, Kentucky
We have audited the accompanying consolidated balance sheets of Kentucky
Bancshares, Inc. as of December 31, 2005 and 2004, and the related statements
of operations, stockholders' equity, and cash flows for each of the three
years in the period ended December 31, 2005. These financial statements are
the responsibility of the Company's management. Our responsibility is to
express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we
plan and perform the audit to obtain reasonable assurance about whether the
financial statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the financial statements. An audit also includes assessing the accounting
principles used and significant estimates made by management, as well as
evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of the Company as of December
31, 2005 and 2004, and the results of its operations and its cash flows for
each of the three years in the period ended December 31, 2005, in conformity
with U.S. generally accepted accounting principles.
/s/Crowe Chizek and Company LLC
Crowe Chizek and Company LLC
Lexington, Kentucky
January 27, 2006, except for Note 21
with respect to a pending acquisition,
as to which the date is February 24, 2006
Senior Management
Louis Prichard, President and Chief Executive Officer
Brenda Bragonier, VP, Director of Marketing/Human Resources
Hugh Crombie, VP, Director of Operations
Gregory J. Dawson, VP, Chief Financial Officer
Norman J. Fryman, Sr. VP, Director of Sales & Service
Clark Nyberg, VP, Director of Wealth Management
Bourbon
Nancye Fightmaster, VP, Regional Manager
Wallis Brooks, Branch Manager/Community Reinvestment Act
Rhonda Brown, Sr. Consumer Lender
Brandon Eason, Sr. Consumer Lender
Philip Hurst, Branch Manager
Susan Lemons, AVP, Branch Manager/Consumer Lender
Clark
Nick Carter, VP, Regional Manager
Kathy Newkirk, Sr. Consumer Lender
Teresa Shimfessel, AVP, Branch Manager/Consumer Lender
Brandon Sumpter, Sr. Consumer Lender
Harrison
Ken Devasher, VP, Regional Manager
Dreama Harris, AVP, Sr. Consumer Lender
Joyce Rainey, Consumer Lender
Jessamine
Rick Walling, VP, Regional Manager
Scott
Pam Jessie, VP, Regional Manager
Sharon Whitlock, Branch Manager/Consumer Lender
Woodford
Duncan Gardiner, VP, Regional Manager
Shane Foley, VP, Mortgage Lender
Accounting/Risk Management
Gregory J. Dawson, VP, Chief Financial Officer
Heather Barger, VP, Director of Risk Management
Brenda Berry, AVP, Senior Accountant
Robbie Cox, Senior Auditor
Janice Hash, AVP, Sr. Accountant/Purchasing
Lydia Sosby, VP, Compliance
Collections
Catherine Hill, VP, Head of Collections
Mary Moreland, AVP, Collections Officer
Commercial Lending
Darren Henry, VP, Director of Commercial Lending
R. W. Collins, VP, Agricultural Lender
David Foster, VP, Agricultural Lender
A. J. Gullett, VP, Commercial Lender
James LeMaster, Business Development
Michael Lovell, VP, Commercial Lender
George R. Wilder, VP, Commercial Lender
Human Resources
Brenda Bragonier, VP, Director of Marketing/Human Resources
James Gray, AVP, Director of Training
Judith Taylor, VP, Human Resource Manager
Operations
Hugh Crombie, VP, Director of Operations
Karen Anderson, Electronic Banking
Melinda Biddle, Goverment Reporting
Patricia Carpenter, Data Management
Cynthia Criswell, Data Processing
Perry Ingram, AVP, Network Manager
Jane Mogge, Document Management
Donald Roe, AVP, Sr. Data Processing
Arnita Willoughby, Mortgage Operations Manager
Carolyn Wilkins, Overdraft Management
Martha Woodford, VP, Assistant Director of Operations
Wealth Management
Clark Nyberg, VP, Director of Wealth Management
Lisa Highley, Personal Trust
Janice Worth, AVP, Personal Trust
Kentucky Bank Board of Directors
William M. Arvin, Attorney
Proctor Blair, Partner, Ludwig, Blair and Bush, PLLC
James Ferrell, Physician
Henry Hinkle, President, Hinkle Contracting Corporation
Tricia Kittinger, Woodford County Circuit Clerk
Theodore Kuster, Westview-Hillside Farms
Betty Long, Retired President, First Federal Savings of Cynthiana
George Lusby, County Judge Executive
Ted McClain, Agent, Hopewell Insurance Company
Eva McDaniel, Jessamine County Clerk
Louis Prichard, President, CEO, Kentucky Bank
John Roche, Optician
Robert G. Thompson, Farmer, Thoroughbred Breeder, Snowhill Farm
Woodford Van Meter, Ophthalmologist
Buckner Woodford, Chairman, Kentucky Bank
Bourbon
Proctor Blair, Partner, Ludwig, Blair and Bush, PLLC
Allyson Eads, Co-owner, Eads Hardware
Rodes Shackelford Parrish, President, Clay Ward Agency
Clark
Mary Beth Hendricks, Director Clark County Child Support Services
Donald Pace, Executive Director Central Kentucky Educational Co-op with UK
John Roche, Optician
Edwin Saunier, President, Saunier North American, Inc.
Harrison
K. Bruce Florence, Director, Licking Valley College
Betty Long, Retired President, First Federal Savings of Cynthiana
Brad Marshall, Farmer, Owner Marshall's Tractor Supply
Joel Techau, CEO, Techau Inc.
Gerry Whalen, Broker Whalen and Company
Jessamine
William M. Arvin, Attorney
Dan Brewer, President and CEO, Blue Grass Energy
Tom Buford, State Senator
Jonah Mitchell, President, Jonah Mitchell Real Estate and Auction Company
Eva McDaniel, Jessamine County Clerk
Scott
Gus Bynum, Physician
Mike Hockensmith, Owner and President, The Hockensmith Agency, Inc.
R. C. Johnson, Jr., Owner, President, Johnson's Funeral Home
George Lusby, County Judge Executive
Everette Varney, Mayor
Woodford
Loren Carl, Field Representative, Congressman Ben Chandler
William Graul, Physician
James Kay, Businessman, Farmer
Tricia Kittinger, Woodford County Circuit Clerk
Kentucky Bancshares, Inc. Directors
LOUIS PRICHARD
President and CEO, Kentucky Bank and Kentucky Bancshares, Inc.
BUCKNER WOODFORD
Chairman, Kentucky Bank and Kentucky Bancshares, Inc.
WILLIAM M. ARVIN
Attorney, Law Offices of William Arvin
WOODFORD VAN METER
Opthalmologist
THEODORE KUSTER
Farmer and Thoroughbred Breeder, Westview Hillside Farms
HENRY HINKLE
President, Hinkle Contacting Corporation
ROBERT G. THOMPSON
Farmer and Thoroughbred Breeder, Snowhill Farm
BETTY LONG
Retired President, First Federal Savings of Cynthiana
TED McCLAIN
Agent, Hopewell Insurance Company
KENTUCKY BANCSHARES, INC.
PROXY STATEMENT
Introduction
This Proxy Statement is being furnished to shareholders of Kentucky
Bancshares, Inc., a Kentucky corporation (the "Company"), in connection with
the solicitation of proxies by the Board of Directors of the Company (the
"Board") from holders of record of the Company's outstanding Common Shares
(the "Common Shares") as of the close of business on March 17, 2006 (the
"Annual Meeting Record Date"), for use at the Annual Meeting of Shareholders
of the Company (the "Annual Meeting") to be held on Friday, May 12, 2006, at
11:00 a.m. (Eastern Daylight Time) in the Board Room of Kentucky Bank, Fourth
and Main Streets, Paris, Kentucky, and at any adjournment or postponement
thereof. This Proxy Statement is first being mailed to the Company's
shareholders on or about March 27, 2006. The principal executive offices of
the Company are located at Fourth and Main Streets, Paris, Kentucky 40361.
Its telephone number is (859) 987-1795.
Purposes of the Annual Meeting
At the Annual Meeting, holders of Common Shares will be asked to consider
and to vote upon the following matters:
(1) To elect three Class I directors; and
(2) To transact such other business as may properly come before the
meeting.
The Board recommends that shareholders vote FOR the election of the
Board's nominees for Class I directors. As of the date of this Proxy
Statement, the Board knows of no other business to come before the Annual
Meeting.
Voting Rights and Proxy Information
Only holders of record of Common Shares as of the close of business on
the Annual Meeting Record Date will be entitled to notice of and to vote at
the Annual Meeting or any adjournment or postponement thereof. As of the
Annual Meeting Record Date, there were 2,671,672 Common Shares outstanding and
entitled to vote at the Annual Meeting. The presence, either in person or by
properly executed proxy, of the holders of a majority of the outstanding
Common Shares as of the Annual Meeting Record Date is necessary to constitute
a quorum at the Annual Meeting.
Holders of Common Shares are entitled to one vote per share on any
matter, other than the election of directors, that may properly come before
the Annual Meeting. In the election of directors, holders of Common Shares
have cumulative voting rights whereby each holder is entitled to vote the
number of Common Shares owned multiplied by three (the number of directors to
be elected at the Annual Meeting), and each holder may cast the whole number
of votes for one candidate or distribute such votes among two or more
candidates. The Board of Directors is soliciting discretionary authority for
the individuals appointed in the proxies to cumulate votes represented by
properly executed proxies and to vote for less than all the Company's nominees
to the Board if deemed appropriate to ensure the election of as many of the
Company's nominees to the Board as possible. Those persons receiving the
three highest number of votes in the election of directors will be elected to
the Board.
All Common Shares that are represented at the Annual Meeting by properly
executed proxies received before or at the Annual Meeting and not revoked will
be voted at the Annual Meeting in accordance with the instructions indicated
in such proxies. If no instructions are indicated, such proxies will be voted
"FOR" the election of the Board's three nominees as Class I directors of the
Company (or, if deemed appropriate by the individuals appointed in the
proxies, cumulatively voted for less than all of the Board's nominees).
Any proxy given pursuant to this solicitation may be revoked by the
person giving it at any time before it is voted. Proxies may be revoked by
(i) filing with the Company, to the attention of Gregory J. Dawson, Secretary,
at or before the Annual Meeting, a written notice of revocation bearing a
later date than the proxy, (ii) duly executing a subsequent proxy relating to
the same Common Shares and delivering it to the Company at or before the
Annual Meeting or (iii) attending the Annual Meeting and voting in person
(although attendance at the Annual Meeting will not in and of itself
constitute a revocation of a proxy). Any written notice revoking a proxy
should be sent to Kentucky Bancshares, Inc., P. O. Box 157, Paris, Kentucky
40362-0157, Attention Gregory J. Dawson, Secretary.
The Company will bear the cost of the solicitation of proxies by the
Board in connection with the Annual Meeting. In addition to solicitation by
mail, the Company will request banks, brokers and other custodian nominees and
fiduciaries to supply proxy material to the beneficial owners of Common
Shares, and will reimburse them for their expenses in so doing. Certain
directors, officers and other employees of the Company, not specially employed
for this purpose, may solicit proxies without additional remuneration
therefore, by personal interview, mail, telephone, facsimile or other
electronic means.
Item 1 - Election of Directors
Under the Company's Amended and Restated Articles of Incorporation, the
Board of Directors consists of three different classes (Class I, Class II and
Class III), each member of a class to serve, subject to the provisions of the
Amended and Restated Articles of Incorporation and Bylaws, for a three-year
term and until the member's successor is duly elected and qualified. Except
as listed below, each nominee for a Class I directorship has held the
specified position for the last five years. The names of the nominees
proposed for election as Class I directors, all of whom are presently
directors of the Company, are set forth below. The Company is not aware of
any other individual who may be nominated for election to the Board of
Directors at the Annual Meeting.
Betty J. Long is the retired President and CEO of First Federal,
Cynthiana. She was appointed to the board of the Company in 2003.
Ted McClain is an agent with Hopewell Insurance Company. He became a
director of the Company in 2003.
Buckner Woodford IV is Chairman of both Kentucky Bank and Kentucky
Bancshares, Inc. He became a director of the Company in 1982.
The Board of Directors does not contemplate that any of the nominees
will be unable to accept election as a director for any reason. However, if
one or more of such nominees is unable or unwilling to accept or is
unavailable to serve, the persons named in the proxies or their substitutes
shall have authority, according to their judgment, to vote or to refrain from
voting for other individuals as directors.
The Board recommends that shareholders vote "FOR" each of the above
nominees for election as Class I directors of the Company.
Item 2 - Other Matters
As of the date of this Proxy Statement, the Company knows of no business
that will be presented for consideration at the Annual Meeting other than that
referred to above. At the Annual Meeting, only such business will be
conducted, and only such proposals or director nominations will be acted upon,
as have been properly brought before the meeting in accordance with the
Company's Bylaws. Proxies in the enclosed form will be voted in respect of any
other business that is properly brought before the Annual Meeting in accordance
with the judgment of the person or persons voting the proxies.
By Order of the Board of Directors
/s/Gregory J. Dawson
Gregory J. Dawson, Secretary
March 27, 2006
This Proxy Form is Solicited by the Board of Directors
Kentucky Bancshares, Inc.
Paris, Kentucky
The undersigned hereby appoints Buckner Woodford IV and Gregory J. Dawson, or
either one of them (with full power to act alone), my proxy, each with the
power to appoint his substitute, to represent me to vote all of the
Corporation's Common Shares which I held of record or am otherwise entitled to
vote at the close of business on March 17, 2006, at the 2006 Annual Meeting of
Shareholders to be held on May 12, 2006 and at any adjournments thereof, with
all powers the undersigned would possess if personally present, as follows:
1. ELECTION OF DIRECTORS
FOR all nominees listed below (except as otherwise
indicated below)
AGAINST all nominees listed below
Betty J. Long, Ted McClain, and Buckner Woodford IV
(INSTRUCTION: To withhold authority to vote for any
individual nominee, write the nominee's name on the line)
_________________________________________________________
2. OTHER BUSINESS. In their discretion, the Proxies are authorized to act
upon such other matters as may properly be brought before the Annual
Meeting or any adjournment thereof.
THE BOARD OF DIRECTORS RECOMMENDS A VOTE "FOR" ALL OF THE NOMINEES LISTED IN
ITEM 1.
(PLEASE DATE, MARK, SIGN AND RETURN IMMEDIATELY)
This proxy form relates to ALL shares owned by the undersigned.
This proxy form is solicited by the Board of Directors and will be
voted as specified and in accordance with the accompanying proxy statement.
If no instruction is indicated on a duly executed proxy form, all shares will
be voted "FOR" the nominees listed in Item 1. A vote FOR the election of
nominees listed above includes discretionary authority to cumulate votes,
selectively among the nominees as to whom authority to vote has not been
withheld and to vote for a substitute nominee if any nominee becomes
unavailable for election for any reason.
Please sign exactly as name appears. When shares are held by joint
tenants, both should sign. When signing as attorney, as executor,
administrator, trustee, or guardian, please give full title as such. If a
corporation, please sign full corporate name by President or other authorized
officer. If a partnership, please sign partnership name by authorized
person.
DATE___________, 2006
________________________________
Signature
________________________________
Signature if held jointly
74