UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
(Mark One)
[ X ] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 2006
or
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from ____________________ to ___________________
Commission File Number: 33-96358
KENTUCKY BANCSHARES, INC.
(Exact name of registrant as specified in its charter)
Kentucky 61-0993464
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
P.O. Box 157, Paris, Kentucky 40362-0157
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (859)987-1795
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act: None
Indicate by check mark if the registrant is a well-known seasoned issuer, as
defined in Rule 405 of the Securities Act. Yes No _X_
Indicate by check mark if the registrant is not required to file reports to
Section 13 or Section 15(d) of the Exchange Act. Yes No _X_
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act
of 1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days. Yes X No ___
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to
the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [ X ]
Indicate by check mark whether the registrant is a large accelerated filer,
an accelerated filer, or a non-accelerated filer. See definition of
"accelerated filer and large accelerated filer" in Rule 12b-2 of the
Exchange Act.
Large accelerated filer _ Accelerated filer _ Non-accelerated filer X
Aggregate market value of voting stock held by non-affiliates as of June 30,
2006 was approximately $59.4 million. For purposes of this calculation, it
is assumed that the Bank's Trust Department, directors, executive officers
and beneficial owners of more than 5% of the registrant's outstanding voting
stock are affiliates.
Number of shares of Common Stock outstanding as of March 23, 2007:
2,871,090.
PART I
Item 1. Business
General
Kentucky Bancshares, Inc. ("Company" or "Kentucky") is a Kentucky
corporation organized in 1981 and a bank holding company registered under
the Bank Holding Company Act of 1956, as amended ("BHCA") and the Home
Owners Loan Act of 1933, as amended ("HOLA").
The Company conducts business in the state of Kentucky through one banking
subsidiary, Kentucky Bank. Kentucky Bank is a commercial bank and trust
company organized under the laws of Kentucky. Kentucky Bank has its main
office in Paris (Bourbon County), with additional offices in Paris,
Cynthiana (Harrison County), Georgetown (Scott County), Morehead (Rowan
County), Nicholasville (Jessamine County), North Middletown (Bourbon
County), Sandy Hook (Elliott County), Versailles (Woodford County), Wilmore
(Jessamine County) and Winchester (Clark County). The deposits of Kentucky
Bank are insured up to prescribed limits by the Bank Insurance Fund ("BIF")
and the Savings Association Insurance Fund ("SAIF"), both of the Federal
Deposit Insurance Corporation ("FDIC"). Kentucky Bank is engaged in general
full-service commercial and consumer banking. Kentucky Bank makes
commercial, agricultural and real estate loans to its commercial customers,
with emphasis on small-to-medium-sized industrial, service and agricultural
businesses. Kentucky Bank makes residential mortgage, installment and other
loans to its individual and other non-commercial customers. Kentucky Bank
also offers its customers the opportunity to obtain a credit card. Kentucky
Bank offers its customers a variety of other services, including checking,
savings, money market accounts, certificates of deposits, safe deposit
facilities and other consumer-oriented financial services. Kentucky Bank
has Internet banking, including bill payment available to its customers at
www.kybank.com. Through its Wealth Management Department, Kentucky Bank
provides brokerage services, annuities, life and long term care insurance,
personal trust and agency services (including management agency services).
Competition
The Company and its subsidiary face vigorous competition from a number of
sources, including other bank holding companies and commercial banks,
consumer finance companies, thrift institutions, other financial
institutions and financial intermediaries. In addition to commercial banks,
savings and loan associations, savings banks and credit unions actively
compete to provide a wide variety of banking services. Mortgage banking
firms, finance companies, insurance companies, brokerage companies,
financial affiliates of industrial companies and government agencies provide
additional competition for loans and for many other financial services. The
subsidiary also currently competes for interest-bearing funds with a number
of other financial intermediaries, including brokerage firms and mutual
funds, which offer a diverse range of investment alternatives. Some of the
Company's competitors are not subject to the same degree of regulatory
review and restrictions that apply to the Company and its subsidiary bank.
In addition, the Company must compete with much larger financial
institutions that have greater financial resources than the Company.
Supervision and Regulation
As a bank holding company, the Company is subject to the regulation and
supervision of the Federal Reserve Board. The Company's subsidiary is
subject to supervision and regulation by applicable state and federal
banking agencies, including the Federal Reserve Board, the Federal Deposit
Insurance Corporation and the Kentucky Office of Financial Institutions.
The subsidiary is also subject to various requirements and restrictions
under federal and state law, including requirements to maintain reserves
against deposits, restrictions on the types and amounts of loans that may be
granted and the interest that may be charged thereon, and limitations on the
types of investments that may be made and the types of services that may be
offered. In addition to the impact of regulation, the subsidiary is
affected significantly by the actions of the Federal Reserve Board as it
attempts to control the money supply and credit availability in order to
influence the economy.
There are a number of obligations and restrictions imposed on bank holding
companies and their depository institution subsidiaries by federal law and
regulatory policy that are designed to reduce potential loss exposure to the
depositors of such depository institutions and to the FDIC insurance funds
in the event the depository institution becomes in danger of default or is
in default. For example, under a policy of the Federal Reserve Board with
respect to bank holding company operations, a bank holding company is
required to serve as a source of financial strength to its subsidiary
depository institutions and commit resources to support such institutions in
circumstances where it might not do so absent such policy. In addition, the
"cross-guarantee" provisions of federal law require insured depository
institutions under common control to reimburse the FDIC for any loss
suffered or reasonably anticipated as a result of the default of a commonly
controlled insured depository institution or for any assistance provided by
the FDIC to a commonly controlled insured depository institution in danger
of default.
The federal banking agencies have broad powers under current federal law to
take prompt corrective action to resolve problems of insured depository
institutions. The extent of these powers depends upon whether the
institutions in question are "well capitalized", "adequately capitalized",
"undercapitalized", "significantly undercapitalized" or "critically
undercapitalized", as such terms are defined under uniform regulation
defining such capital levels issued by each of the federal banking agencies.
In addition to the laws and regulations discussed above, Kentucky Bank is
also subject to certain consumer laws and regulations that are designed to
protect consumers in transactions with banks. While the list set forth
herein is not exhaustive, these laws and regulations include the Truth in
Lending Act, the Truth in Savings Act, the Electronic Funds Transfer Act,
the Expedited Funds Availability Act, the Equal Credit Opportunity Act, the
Real Estate Settlement Procedures Act, the Fair Housing Act and the Fair and
Accurate Transactions Act, among others. These laws and regulations mandate
certain disclosure requirements and regulate the manner in which financial
institutions must deal with clients when taking deposits or making loans.
These laws also limit Kentucky Bank's ability to share information with
affiliated and unaffiliated entities. The bank must comply with the
applicable provisions of these consumer protection laws and regulations as
part of its ongoing business operations.
There are various legal and regulatory limits on the extent to which the
Company's subsidiary bank may pay dividends or otherwise supply funds to the
Company. In addition, federal and state regulatory agencies also have the
authority to prevent a bank or bank holding company from paying a dividend
or engaging in any other activity that, in the opinion of the agency, would
constitute an unsafe or unsound practice. Dividends paid by the subsidiary
bank have provided substantially all of the Company's operating funds, and
this may reasonably be expected to continue for the foreseeable future.
Employees
At December 31, 2006, the number of full time equivalent employees of the
Company was 203.
Item 1A. Risk Factors
There are factors, many beyond our control, which may significantly change
the results or expectations of the Company. Some of these factors are
described below in the sections titled financial risk, business risk and
operational risk. These risks are not totally independent of each other.
Some factors affect more than one type of risk. These include regulatory,
economic, and competitive environments. As part of the annual audit plan,
our internal risk management department meets with management to assess
these risks throughout the Company. Many risks are further addressed in
other sections of this Form 10-K document.
The exercise of regulatory power may have negative impact on the Company's
results of operations and financial condition. The Company is subject to
extensive regulation, supervision and examination by federal and state
banking authorities. Any change in applicable regulations or federal or
state legislation could have a substantial impact on our operations.
Additional legislation and regulations may be enacted or adopted in the
future that could significantly affect the Company's powers, authority and
operations, which could have a material adverse effect on the financial
condition and results of operations. Further, regulators have significant
discretion and power to prevent or remedy unsafe or unsound practices or
violations of laws by banks and bank holding companies in the performance of
their supervisory and enforcement duties.
Significant decline in general economic conditions, locally and nationally,
will negatively affect the financial results of the Company's banking
operations. The Company's success depends on general economic conditions
both locally and nationally. Most of our customers are in the Central
Kentucky area. Our customers are directly impacted by the local economy, as
well as the national or global economies. Local economic conditions (such
as the effect of the tobacco buyout on the agricultural industry) have an
impact on the demand of customers for loans, the ability of some borrowers
to repay these loans and the value of the collateral securing these loans.
Factors influencing general national economic conditions include the change
in interest rates (particularly mortgage lending rates), oil prices,
inflation, recession and unemployment. As these factors impact the overall
business climate, they can have a significant effect on loan demand. Loan
growth is critical to our profitability.
The Company faces vigorous competition from banks and other financial
institutions. This competition may reduce or limit our margins on banking
services, reduce market share and adversely affect results of operations and
financial condition. A number of these banks and other financial
institutions have substantially greater resources and lending limits, larger
branch systems and a wider array of banking services. Additionally, the
Company encounters competition from both de novo and smaller community banks
entering the markets we are currently in. The Company also competes with
other providers of financial services, such as money market mutual funds,
brokerage firms, consumer finance companies and insurance companies.
Financial Risk
Financial risk components include, but are not limited to, credit risk,
interest rate risk, market risk and liquidity risk. The Company has adopted
various policies to minimize potential adverse effects of interest rate,
market and liquidity risks. However, even with these policies in place, a
change in interest rates could negatively impact the Company's results of
operations or financial position.
Defaults in the repayment of loans may negatively impact our business.
Credit risk is most closely associated with lending activities at financial
institutions. Credit risk is the risk to earnings and capital when a
customer fails to meet the terms of any contract or otherwise fails to
perform as agreed. Credit risk arises from all activities where the Company
is dependent on issuer, borrower, or counterparty performance, not just
traditional lending activities. For example, the investment security
portfolio has inherent credit risk as do counterparties in derivative
contracts. Credit risk encompasses a broad range of financial institution
activities and includes items reflected both on and off the balance sheet.
Management makes various assumptions and judgments about the collectibility
of the Company's loan portfolio, including the creditworthiness of its
borrowers and the value of real estate and other assets serving as
collateral for repayment of many of the loans. In determining the size of
the allowance for loan losses, management considers, among other factors,
the Company's loan loss experience and an evaluation of economic conditions.
If these assumptions prove to be incorrect, the current allowance may not be
sufficient to cover future loan losses and adjustments may be necessary to
allow for different economic conditions or adverse developments in the loan
portfolio. Material additions to the Company's allowance would materially
decrease our net income.
Fluctuations in interest rates may negatively impact our banking business.
Interest rate risk focuses on the impact to earnings and capital arising
from movements in interest rates. Interest rate risk focuses on the value
implications for accrual portfolios (e.g., held-to-maturity and available-
for-sale portfolios) and includes the potential impact to the Company's
accrual earnings as well as the economic perspective of the market value of
portfolio equity. The interest rate risk is comprised of repricing risk,
basis risk, yield curve risk and options risk. Repricing risk represents
the risk associated with the differences in timing of cash flows and rate
changes with the Company's products. Basis risk represents the risk
associated with changing rate relationships among varying yield curves.
Yield curve risk is associated with changing rate relationships over the
maturity structure. Options risk is associated with interest-related
options, which are embedded in our products.
Changes in market factors may negatively affect the value of our investment
assets. Market risk focuses on the impact to earnings and capital arising
from changes in market factors (e.g., interest rates, market liquidity,
volatilities, etc.) that affect the value of traded instruments. Market
risk includes items reflected both on and off the balance sheet. Market
risk focuses primarily on mark-to-market portfolios (e.g., accounts revalued
for financial statement presentation), including trading accounts and
certain derivatives.
Our inability to maintain appropriate levels of liquidity may have a
negative impact on our results of operations and financial condition.
Liquidity risk focuses on the impact to earnings and capital resulting from
the Company's inability to meet its obligations as they become due in the
normal course of business without incurring significant losses. It also
includes the management of unplanned decreases or changes in funding sources
as well as managing changes in market conditions, which could affect the
ability to liquidate assets in the normal course of business without
incurring significant losses. Liquidity risk includes items both on and off
the balance sheet.
Business Risk
Business risk is composed mainly of legal (compliance) risk, strategic risk
and reputation risk.
Our results of operations and financial condition are susceptible to legal
or compliance risks. Legal or compliance risk is the risk to earnings or
capital arising from the impact of unenforceable contracts, lawsuits,
adverse judgments, violations or nonconformance with laws, rules,
regulations, prescribed practices, or ethical standards. The risk also
arises in situations where laws or rules governing certain products or
activities of our customers may be ambiguous or untested. This risk is not
limited to the traditional thinking that legal/compliance risk is only
associated with consumer protection laws. It includes the exposure to
litigation from all aspects of both traditional and nontraditional financial
institution activities.
Incorrect strategic decisions may have a negative impact on our results of
operations and financial condition. Strategic risk is the risk to earnings
and capital arising from adverse business decisions or improper
implementation of those decisions. Strategic risk focuses on more than an
analysis of the written strategic plan. Its focus is on how plans, systems
and implementation affect franchise value. It also incorporates how
management analyzes external factors that affect the Company's strategic
direction.
Adverse publicity may have a negative impact on our business. Reputation
risk is the risk to earnings and capital arising from negative public
opinion. This affects the ability to establish new relationships or
services or to continue servicing existing relationships. Examiners will
assess reputation risk by recognizing the potential effect the public's
opinion could have on the Company's franchise value.
Operational Risk
An inability to process transactions may have a negative impact on our
business. Operational risk is present on a daily basis through the
Company's processing of transactions and is pervasive in all products and
services provided to our customers. It can be defined as the impact to
earnings and capital from problems encountered in processing transactions.
Operational risk is a function of internal controls, operating processes,
management information systems, and employee integrity.
Item 1B. Unresolved Staff Comments
None.
Item 2. Properties
The main banking office of Kentucky Bank, which also serves as the principal
office of Kentucky Bancshares, Inc., is located at 339 Main Street, Paris,
Kentucky 40361. In addition, Kentucky Bank serves customer needs at 13
other locations. All locations offer a full range of banking services.
Kentucky Bank owns all of the properties at which it conducts its business.
The Company owns approximately 83,000 square feet of office space.
Note 5 to the Company's consolidated financial statements included in this
report contains additional information relating to amounts invested in
premises and equipment.
Item 3. Legal Proceedings
The Company and its subsidiary are from time to time involved in routine
legal proceedings occurring in the ordinary course of business that, in the
aggregate, management believes will not have a material impact on the
Company's financial condition and results of operation.
Item 4. Submission of Matters to a Vote of Security Holders
Not Applicable.
PART II
Item 5. Market for Common Equity and Related Stockholder Matters
There is no established public trading market for the Company's Common
Stock. The Company's Common Stock is not listed on any national securities
exchange nor is it quoted on the NASDAQ system. However, it is traded on
the OTC Bulletin Board under the symbol "KTYB.OB". Trading in the Common
Stock has been infrequent, with retail brokerage firms making the market.
The following table sets forth the high and low closing sales prices of the
Common Stock from the OTC Bulletin Board and the dividends declared thereon,
for the periods indicated below:
High Low Dividend
2006 Quarter 4 $32.00 $29.50 $.25
Quarter 3 30.00 26.65 .25
Quarter 2 29.75 27.00 .25
Quarter 1 30.00 29.00 .25
2005 Quarter 4 $30.50 $29.25 $.23
Quarter 3 30.50 29.50 .23
Quarter 2 30.50 28.05 .23
Quarter 1 31.00 29.25 .23
Note 16 to the Company's consolidated financial statements included in this
report contains additional information relating to amounts available to be
paid as dividends.
As of December 31, 2006 the Company had 2,864,586 shares of Common Stock
outstanding and approximately 501 holders of record of its Common Stock.
The table below lists issuer purchases of equity securities.
Period (a) Total (b) (c) Total Number (d) Maximum Number
Number of Average of Shares (or Units) (or Approximate Dollar
Shares (or Price Paid Purchased as Part Value) of Shares (or
Units) Per Share of Publicly Units) that May Yet Be
Purchased (or Unit) Announced Plans Purchased Under the
Or Programs Plans or Programs
10/1/06 -
10/31/06 400 $29.50 400 82,140 shares
11/1/06 -
11/30/06 -0- N/A N/A 82,140 shares
12/1/06 -
12/31/06 350 31.00 350 81,790 shares
Total 750 750 81,790 shares
On October 25, 2000, the Company announced that its Board of Directors
approved a stock repurchase program. The Company is authorized to purchase
up to 100,000 shares of its outstanding common stock. On November 11, 2002,
the Board of Directors approved and authorized the Company's repurchase of
an additional 100,000 shares. Shares will be purchased from time to time in
the open market depending on market prices and other considerations.
Through December 31, 2006, 118,210 shares have been purchased, with the most
recent share repurchase under the Board-approved stock repurchase program
having occurred on December 20, 2006.
Item 6. Selected Financial Data
The following selected financial data should be read in conjunction with
the Company's Consolidated Financial Statements and the accompanying
notes presented elsewhere herein.
At or For the Year Ended December 31
(dollars and shares in thousands, except per share amounts)
2006 2005 2004 2003 2002
CONDENSED STATEMENT OF INCOME:
Total Interest Income $35,593 $28,897 $25,846 $22,329 $24,788
Total Interest Expense 16,718 11,766 9,067 7,875 9,367
Net Interest Income 18,875 17,131 16,779 14,454 15,421
Provision for Losses 475 508 840 1,300 1,204
Net Interest Income After
Provision for Losses 18,400 16,623 15,939 13,154 14,217
Noninterest Income 7,236 6,495 6,547 6,707 6,590
Noninterest Expense 16,682 15,220 14,506 14,171 12,433
Income Before Income
Tax Expense 8,954 7,898 7,980 5,690 8,374
Income Tax Expense 2,468 2,078 2,218 1,457 2,471
Net Income 6,486 5,820 5,762 4,233 5,903
SHARE DATA:
Basic Earnings per Share (EPS) $2.35 $2.17 $2.09 $1.52 $2.13
Diluted EPS 2.34 2.16 2.07 1.50 2.10
Cash Dividends Declared 1.00 0.92 0.84 0.76 0.68
Book Value 19.59 17.45 16.77 16.90 15.90
Average Common Shares-Basic 2,762 2,677 2,757 2,781 2,770
Average Common Shares-Diluted 2,774 2,692 2,777 2,827 2,806
SELECTED BALANCE SHEET DATA:
Loans, including loans held for sale $439,159 $366,602 $354,294 $316,941 $281,499
Investment Securities 127,891 160,652 126,767 128,790 89,509
Total Assets 629,542 572,750 528,544 500,852 419,771
Deposits 468,808 431,631 387,955 384,599 322,836
Securities sold under agreements to
repurchase and other borrowings 11,327 16,838 25,593 7,285 5,277
Federal Home Loan Bank advances 80,030 66,749 59,750 53,232 43,937
Stockholders' Equity 55,281 46,546 45,027 46,057 44,092
PERFORMANCE RATIOS:
(Average Balances)
Return on Assets 1.09% 1.08% 1.11% 1.00% 1.48%
Return on Stockholders' Equity 12.82% 12.69% 12.57% 9.31% 14.27%
Net Interest Margin (1) 3.48% 3.50% 3.60% 3.79% 4.23%
Equity to Assets (annual average) 8.48% 8.50% 8.82% 10.73% 10.36%
SELECTED STATISTICAL DATA:
Dividend Payout Ratio 42.68% 42.30% 39.97% 50.00% 31.94%
Number of Employees (at period end) 203 172 167 182 173
ALLOWANCE COVERAGE RATIOS:
Allowance to Total Loans 1.12% 1.16% 1.16% 1.19% 1.19%
Net Charge-offs as a Percentage of
Average Loans 0.14% 0.10% 0.15% 0.43% 0.43%
(1) Tax equivalent
Item 7. Management's Discussion and Analysis
The following discussion and analysis of financial condition and results
of operations should be read in conjunction with the Consolidated
Financial Statements and accompanying notes included as Exhibit 13.
When necessary, reclassifications have been made to prior years' data
throughout the following discussion and analysis for purposes of
comparability with 2006 data.
Critical Accounting Policies
The accounting and reporting policies of the Company and its
subsidiary are in accordance with accounting principles generally
accepted in the United States and conform to general practices within
the banking industry. Significant accounting policies are listed in
Note 1 in the "Notes to Consolidated Financial Statements". Critical
accounting and reporting policies include accounting for loans and
the allowance for loan losses. Different assumptions in the
application of these policies could result in material changes in the
consolidated financial position or consolidated results of
operations.
Loans are stated at the amount of unpaid principal, reduced by an
allowance for loan losses. Interest on loans is recognized on the
accrual basis, except for those loans on the nonaccrual status.
Interest income received on such loans is accounted for on the cash
basis or cost recovery method. The allowance for loan losses is a
valuation allowance for probable incurred credit losses. Management
estimates the allowance balance required using past loan loss
experience, the nature and volume of the portfolio, information about
specific borrower situations and estimated collateral values, economic
conditions, and other factors. The accounting policies relating to
the allowance for loan losses involve the use of estimates and
require significant judgments to be made by management.
Forward-Looking Statements
This discussion contains forward-looking statements under the Private
Securities Litigation Reform Act of 1995 that involve risks and
uncertainties. Although the Company believes that the assumptions
underlying the forward-looking statements contained herein are
reasonable, any of the assumptions could be inaccurate, and therefore,
there can be no assurance that the forward-looking statements included
herein will prove to be accurate. Factors that could cause actual
results to differ from the results discussed in the forward-looking
statements include, but are not limited to: economic conditions (both
generally and more specifically in the markets, including the tobacco
market, in which the Company and its bank operate); competition for the
Company's customers from other providers of financial and mortgage
services; government legislation, regulation and monetary policy (which
changes from time to time and over which the Company has no control);
changes in interest rates (both generally and more specifically mortgage
interest rates); material unforeseen changes in the liquidity, results
of operations, or financial condition of the Company's customers; and
other risks detailed in the Company's filings with the Securities and
Exchange Commission, all of which are difficult to predict and many of
which are beyond the control of the Company. The Company undertakes no
obligation to republish revised forward-looking statements to reflect
events or circumstances after the date hereof or to reflect the
occurrence of unanticipated events.
Overview
Net income for the year ended December 31, 2006 was $6.5 million, or
$2.35 per common share compared to $5.8 million, or $2.17 for 2005 and
$5.8 million, or $2.09 for 2004. Earnings per share assuming dilution
were $2.34, $2.16 and $2.07 for 2006, 2005 and 2004, respectively. For
2006, net income increased $666 thousand, or 11%. Net interest income
increased $1.7 million, the loan loss provision decreased $33 thousand,
other income increased $741 thousand, while total other expenses
increased $1.5 million. In July 2006, the Company purchased Peoples
Bancorp of Sandy Hook, Inc. (Peoples Bancorp) and its subsidiary,
Peoples Bank (Peoples) of Sandy Hook,to strengthen its business and grow
its customer base.
For 2005, net income increased $58 thousand, or 1%. Net interest income
increased $352 thousand, the loan loss provision decreased $332
thousand, other income decreased $52 thousand, while total other
expenses increased $715 thousand.
Return on average equity was 12.8% in 2006 compared to 12.7% in 2005 and
12.6% in 2004. Return on average assets was 1.09% in 2006 compared to
1.08% in 2005 and 1.11% in 2004.
Non-performing loans as a percentage of loans (including held for sale)
were 0.59%, 0.26% and 0.58% as of December 31, 2006, 2005 and 2004,
respectively.
RESULTS OF OPERATIONS
Net Interest Income
Net interest income, the Company's largest source of revenue, on a tax
equivalent basis increased from $17.4 million in 2004 to $17.7 million
in 2005 and to $19.5 million in 2006. The taxable equivalent adjustment
(nontaxable interest income on state and municipal obligations net of
the related non-deductible portion of interest expense) is based on our
Federal income tax rate of 34%.
Average earning assets and interest bearing liabilities both increased
from 2005 to 2006. Average earning assets increased $53 million, or
10%. Investment securities increased $15 million primarily due to the
Peoples acquisition in July 2006. Loans increased $46 million as a
result of the acquisition and improved loan demand. Average interest
bearing liabilities increased $44 million, or 10% during this same
period. This change was primarily from the acquisition less the loss of
some public funds on deposit. The Company continues to actively pursue
quality loans and fund these primarily with deposits and FHLB advances.
During the second half of 2004 rates started increasing and this pattern
continued into the middle of 2006. Bank prime rates increased 125 basis
points during 2004, another 200 basis points in 2005 and another 100
basis points in 2006. As a result of this, the tax equivalent yield on
earning assets increased from 5.82% in 2005 to 6.47% in 2006.
The volume rate analysis that follows, during 2006, indicates that $3.4
million of the increase in interest income is attributable to the change
in volume, while the higher level of rates contributed to an increase of
$3.3 million in interest income. This higher level of rates also caused
an increase in the cost of interest bearing liabilities. The average
rate of these liabilities increased from 2.82% in 2005 to 3.62% in 2006.
In addition, the change in volume contributed to an increase of $1.3
million in interest expense, while the higher level of rates was
responsible for a $3.7 million increase in interest expense. As a
result, the 2006 net interest income increase is primarily attributed to
increases in volume.
The volume rate analysis for 2005 that follows indicates that $1.4
million of the increase in interest income is attributable to the change
in volume, while the increase in rates contributed to an increase of
$1.7 million in interest income. The rate increase also caused an
increase in the cost of interest bearing liabilities. The average rate
of these liabilities increased from 2.25% in 2004 to 2.82% in 2005.
Based on the volume rate analysis that follows, the change in volume
contributed to an increase of $293 thousand to interest expense, while
the increase in rates was responsible for a $2.4 million increase in
interest expense. As a result, the 2005 net interest income increase is
attributed to increases in volume reduced by the negative impact of
increases in rates, more on the liability side than the asset side.
In spite of the positive impact on net interest income that may result
from the increasing rate environment beginning in 2004 and continued
into the first half of 2006, competitive pressures on interest rates
will continue and are likely to result in only modest changes in net
interest margins.
The accompanying analysis of changes in net interest income in the
following table shows the relationships of the volume and rate portions
of these changes in 2006 and 2005. Changes in interest income and
expenses due to both rate and volume are allocated on a pro rata basis.
2006 vs. 2005 2005 vs. 2004
Increase (Decrease) Due to Change in Increase (Decrease) Due to Change in
Volume Rate Net Change Volume Rate Net Change
INTEREST INCOME
Loans $ 3,169 $ 2,527 $ 5,696 $ 1,455 $ 1,448 $ 2,903
Investment Securities 618 691 1,309 (258) 54 (204)
Federal Funds Sold and
Securities Purchased under
Agreements to Resell (405) 90 (315) 173 177 350
Deposits with Banks 5 1 6 (9) 11 2
Total Interest Income 3,387 3,309 6,696 1,361 1,690 3,051
INTEREST EXPENSE
Deposits
Demand 204 1,345 1,549 54 994 1,048
Savings 68 214 282 8 103 111
Negotiable Certificates of
Deposit and Other
Time Deposits 351 1,754 2,105 111 1,145 1,256
Securities sold under
agreements to
repurchase and
other borrowings 298 261 559 (98) 291 193
Federal Home Loan
Bank advances 358 99 457 218 (127) 91
Total Interest Expense 1,279 3,673 4,952 293 2,406 2,699
Net Interest Income $ 2,108 $ (364) $ 1,744 $ 1,068 $ (716) $ 352
Average Consolidated Balance Sheets and Net Interest Analysis (dollars in thousands)
2006 2005 2004
Average Average Average Average Average Average
Balance Interest Rate Balance Interest Rate Balance Interest Rate
ASSETS
Interest-Earning Assets
Securities Available for Sale (1)
U.S. Treasury and Federal Agency Securities 101,130 4,354 4.31% 92,524 3,366 3.64% 97,486 3,510 3.60%
State and Municipal obligations 41,030 1,666 4.06% 34,888 1,444 4.14% 35,762 1,518 4.24%
Other Securities 6,622 384 5.80% 6,085 285 4.68% 7,035 271 3.85%
Total Securities Available for Sale 148,782 6,404 4.30% 133,497 5,095 3.82% 140,283 5,299 3.78%
Total Investment Securities 148,782 6,404 4.30% 133,497 5,095 3.82% 140,283 5,299 3.78%
Tax Equivalent Adjustment 624 0.42% 614 0.46% 638 0.45%
Tax Equivalent Total 7,028 4.72% 5,709 4.28% 5,937 4.23%
Federal Funds Sold and Agreements to Repurchase 2,212 102 4.61% 11,471 417 3.64% 4,620 67 1.45%
Interest-Bearing Deposits with Banks 432 18 4.17% 321 12 3.74% 827 10 1.21%
Loans, Net of Deferred Loan Fees (2)
Commercial 46,194 3,520 7.62% 31,151 1,958 6.29% 28,874 1,564 5.42%
Real Estate Mortgage 351,239 24,597 7.00% 321,619 20,660 6.42% 299,062 17,989 6.02%
Installment 10,698 952 8.90% 8,962 755 8.42% 10,529 917 8.71%
Total Loans 408,131 29,069 7.12% 361,732 23,373 6.46% 338,465 20,470 6.05%
Total Interest-Earning Assets 559,557 36,217 6.47% 507,021 29,511 5.82% 484,195 26,484 5.47%
Allowance for Loan Losses (4,766) (4,401) (4,090)
Cash and Due From Banks 11,844 10,927 10,642
Premises and Equipment 12,421 11,025 11,787
Other Assets 17,676 15,054 17,494
Total Assets 596,732 539,626 520,028
LIABILITIES
Interest-Bearing Deposits
Negotiable Order of Withdrawal ("NOW")
and Money Market Investment Accounts 114,195 3,381 2.96% 103,625 1,832 1.77% 97,267 784 0.81%
Savings 36,425 517 1.42% 29,303 235 0.80% 27,547 124 0.45%
Certificates of Deposit and Other Deposits 204,649 8,219 4.02% 193,986 6,114 3.15% 189,739 4,858 2.56%
Total Interest-Bearing Deposits 355,269 12,117 3.41% 326,914 8,181 2.50% 314,553 5,766 1.83%
Securities sold under agreements to
repurchase and other borrowings 33,213 1,657 4.99% 26,689 1,098 4.11% 29,664 905 3.05%
Federal Home Loan Bank advances 72,843 2,944 4.04% 63,918 2,487 3.89% 58,421 2,396 4.10%
Total Interest-Bearing Liabilities 461,325 16,718 3.62% 417,521 11,766 2.82% 402,638 9,067 2.25%
Noninterest-Bearing Earning Demand Deposits 80,904 73,320 68,730
Other Liabilities 3,919 2,929 2,814
Total Liabilities 546,148 493,770 474,182
STOCKHOLDERS' EQUITY 50,584 45,856 45,846
Total Liabilities and Shareholders' Equity 596,732 539,626 520,028
Average Equity to Average Total Assets 8.48% 8.50% 8.82%
Net Interest Income 18,875 17,131 16,779
Net Interest Income (tax equivalent) (3) 19,499 17,745 17,417
Net Interest Spread (tax equivalent) (3) 2.85% 3.00% 3.22%
Net Interest Margin (tax equivalent) (3) 3.48% 3.50% 3.60%
(1) Averages computed at amortized cost.
(2) Includes loans on a nonaccrual status and loans held for sale.
(3) Tax equivalent difference represents the nontaxable interest income on state and municipal securities net of the
related non-deductible portion of interest expense.
Noninterest Income and Expenses
Noninterest income was $7.2 million in 2006 compared to $6.5 million in
2005 and 2004. In 2006, increasing service charges and increasing trust
fees account for the majority of the increase. Similarly, service
charges and trust department income increased in 2005, but were offset
by a reduction in securities gains in 2005.
Securities gains were $34 thousand in 2006, $64 thousand in 2005 and
$289 thousand in 2004. The lower gains in 2006 and 2005 are more normal
and primarily attributable to rising interest rates and the related
inverse relationship of interest rates and market values. Some equity
gains were taken in 2006 and used to offset losses on sales of agency
and municipal securities. The gains in 2004 were primarily a result of
the Company taking advantage of the inverse relationship of interest
rates and market values, and municipal securities being called at
premiums before their maturities. In addition, U. S. Treasury
securities were sold before maturity to restructure the portfolio and
extend out the yield curve.
Gains on loans sold were $290 thousand, $334 thousand and $376 thousand
in 2006, 2005 and 2004, respectively. Loans held for sale are generally
sold after closing to the Federal Home Loan Mortgage Corporation.
During 2006, the loan service fee income increased $24 thousand,
compared to an increase of $12 thousand in 2005. Proceeds from the sale
of loans were $17 million, $18 million and $30 million in 2006, 2005 and
2004, respectively. The volume of loan originations is inverse to rate
changes. The volume of loan originations during 2006 was $17 million,
comparable to $18 million in 2005, but down from $22 million in 2004.
Other noninterest income excluding security net gains and gain on sale
of mortgage loans was $6.9 million in 2006, $6.1 million in 2005 and
$5.9 million in 2004. Service charge income, and more particularly
overdraft income, is the largest contributor to these numbers.
Overdraft income was $4.1 million in 2006, $3.4 million in 2005 and $3.4
million in 2004. The increase in 2006 is primarily attributable to the
Peoples acquisition in July 2006. Other income has remained steady with
$1.2 million in 2004, $1.1 million in 2005 and $1.1 million in 2006.
Noninterest expense increased $1.5 million in 2006 to $16.7 million, and
increased $715 thousand in 2005 to $15.2 million from $14.5 million in
2004. The increases in salaries and benefits from $8.1 million in 2004
to $8.5 million in 2005 and to $9.6 million in 2006 are attributable to
normal salary and benefit increases, and in 2006 to the Peoples
acquisition. Bonus compensation was $160 thousand higher in 2006
compared to 2005 and $124 thousand higher in 2005 compared to 2004. The
2006 increase is from higher compensation and improved net income, while
the 2005 increase is mainly a result of additional sales incentives.
Occupancy expense decreased $61 thousand in 2005 to $2.2 million and
increased $126 thousand, or 6% in 2006 to $2.3 million. The largest
expense, depreciation, decreased $69 thousand to $924 thousand in 2005,
but increased $32 thousand to $956 thousand in 2006. Other noninterest
expense increased from $4.2 million in 2004 to $4.5 million in 2005 and
increased to $4.7 million in 2006. Amortization of core deposits
related to the Peoples acquisition was $89 thousand in 2006. See Note 6
in the notes to consolidated financial statements included as Exhibit 13
for more detail of the goodwill and intangible assets.
The following table is a summary of noninterest income and expense for
the three-year period indicated.
For the Year Ended December 31
(in thousands)
2006 2005 2004
NON-INTEREST INCOME
Service Charges $ 5,224 $ 4,511 $ 4,358
Loan Service Fee Income, net 33 9 (3)
Trust Department Income 603 458 299
Investment Securities Gains (Losses),net 34 65 289
Gains on Sale of Mortgage Loans 290 334 376
Other 1,052 1,118 1,228
Total Non-interest Income 7,236 6,495 6,547
NON-INTEREST EXPENSE
Salaries and Employee Benefits 9,613 8,548 8,053
Occupancy Expenses 2,320 2,194 2,255
Other 4,749 4,478 4,198
Total Non-interest Expense 16,682 15,220 14,506
Net Non-interest Expense as a
Percentage of Average Assets 1.58% 1.62% 1.53%
Income Taxes
The Company had income tax expense of $2.5 million in 2006 and $2.1
million in 2005 and $2.2 million in 2004. This represents an effective
income tax rate of 27.6% in 2006, 26.3% in 2005 and 27.8% in 2004. The
difference between the effective tax rate and the statutory federal rate
of 34% is primarily due to tax exempt income on certain investment
securities and loans.
Balance Sheet Review
Assets grew from $573 million at December 31, 2005 to $630 million at
December 31, 2006. Loan growth was $73 million in 2006. Nearly $51
million was a result of the Peoples acquisition. See Note 15 in the
notes to consolidated financial statements included as Exhibit 13 for
additional information on the business combination. Deposits grew $37
million and FHLB borrowings grew $13 million. The gain in deposits is
primarily from $72 million obtained from the Peoples acquisition. The
other decrease is primarily from the loss of public money and a large
certificate of deposit customer. Assets at year-end 2005 totaled $573
million compared to $529 million in 2004. In 2005, loan growth was $13
million and deposit growth was $44 million. FHLB borrowings increased
$7 million.
Loans
Total loans (including loans held for sale) were $444 million at
December 31, 2006 compared to $371 million at the end of 2005 and $358
million in 2004. Loan growth continued to improve in 2006. The
increase is mainly attributable to improved loan demand and $51 million
from the Peoples acquisition. As of the end of 2006 and compared to the
prior year-end, commercial loans increased $2.0 million, real estate
construction loans decreased $.8 million, real estate mortgage loans
(including loans held for sale) increased $45.0 million, agricultural
loans increased $20.3 million and installment loans increased $6.7
million. As of the end of 2005 and compared to the prior year-end,
commercial loans increased $7.3 million, real estate construction loans
decreased $2.4 million, real estate mortgage loans (including loans held
for sale) increased $6.7 million, agricultural loans increased $1.8
million and installment loans decreased $109 thousand.
As of December 31, 2006, the real estate mortgage portfolio comprised
65% of total loans compared to 66% in 2005. Of this, 1-4 family
residential property represented 61% in 2006 and 65% in 2005.
Agricultural loans comprised 18% in 2006 and 16% in 2005 of the loan
portfolio. Approximately 72% of the agricultural loans are secured by
real estate in 2006 compared to 82% in 2005. The remainder of the
agricultural portfolio is used to purchase livestock, equipment and
other capital improvements and for general operation of the farm.
Generally, a secured interest is obtained in the capital assets,
equipment, livestock or crops. Automobile loans account for 40% in 2006
and 33% in 2005 of the consumer loan portfolio, while the purpose of the
remainder of this portfolio is used by customers for purchasing retail
goods, home improvement or other personal reasons. The commercial loan
portfolio is mainly for capital outlays and business operation.
Collateral is requested depending on the creditworthiness of the
borrower. Unsecured loans are made to individuals or companies mainly
based on the creditworthiness of the customer. Approximately 5% of the
loan portfolio is unsecured. Management is not aware of any significant
concentrations that may cause future material risks, which may result in
significant problems with future income and capital requirements.
The following table represents a summary of the Company's loan portfolio
by category for each of the last five years. There is no concentration
of loans (greater than 5% of the loan portfolio) in any industry. The
Company has no foreign loans or highly leveraged transactions in its
loan portfolio.
Loans Outstanding
At December 31 (in thousands)
2006 2005 2004 2003 2002
Commercial $ 29,335 $ 27,302 $ 19,999 $ 14,278 $ 16,803
Real Estate Construction 29,034 29,822 32,256 14,313 15,514
Real Estate Mortgage 290,324 245,326 238,661 222,342 182,958
Agricultural 79,627 59,328 57,497 56,615 52,188
Installment 15,684 8,954 9,062 12,978 17,134
Other 402 368 991 289 309
Total Loans 444,406 371,100 358,466 320,815 284,906
Less Deferred Loan Fees 256 188 10 54 12
Total Loans, Net of
Deferred Loan Fees 444,150 370,912 358,456 320,761 284,894
Less loans held for sale 0 0 175 7,759 740
Less Allowance For Loan Losses 4,991 4,310 4,163 3,820 3,395
Net Loans 439,159 366,602 354,118 309,182 280,759
The following table sets forth the maturity distribution and interest
sensitivity of selected loan categories at December 31, 2006.
Maturities are based upon contractual term. The total loans in this
report represent loans net of deferred loan fees, including loans held
for sale but excluding the allowance for loan losses. In addition,
deferred loan fees on the above schedule is netted with real estate
mortgage loans on the following schedule.
Loan Maturities and Interest Sensitivity
At December 31, 2006 (in thousands)
One Year One Through Over Total
or Less Five Years Five Years Loans
Commercial $ 15,917 $ 10,685 $ 2,733 $ 29,335
Real Estate Construction 23,662 5,290 82 29,034
Real Estate Mortgage 32,213 152,256 105,599 290,068
Agricultural 15,510 45,568 18,549 79,627
Installment 5,339 9,428 917 15,684
Other 402 0 0 402
Total Loans, Net of
Deferred Loan Fees 93,043 223,227 127,880 444,150
Fixed Rate Loans 29,972 194,095 41,825 265,892
Floating Rate Loans 63,071 29,132 86,055 178,258
Total Loans, Net of
Deferred Loan Fees 93,043 223,227 127,880 444,150
Mortgage Banking
The Company has been in Mortgage Banking since the early 1980's. The
activity in origination and sale of these loans fluctuates, mainly due
to changes in interest rates. Mortgage loan originations decreased from
$22 million in 2004 to $18 million in 2005, to $17 million in 2006.
Proceeds from the sale of loans were $17 million, $18 million and $30
million for the years 2006, 2005 and 2004, respectively. Mortgage loans
held for sale were zero at December 31, 2006 and December 31, 2005.
Loans are generally sold when they are made. The volume of loan
originations is inverse to rate changes. The rate environment has been
rising, resulting in decreased loan originations in 2006 and 2005. The
effect of these changes was also reflected on the income statement. As
a result, the gain on sale of mortgage loans was $290 thousand in 2006
compared to $334 thousand in 2005 and $376 thousand in 2004.
The Bank has sold various loans to the Federal Home Loan Mortgage
Corporation (FHLMC) while retaining the servicing rights. Gains and
losses on loan sales are recorded at the time of the cash sale, which
represents the premium or discount paid by the FHLMC. The Bank receives
a servicing fee from the FHLMC on each loan sold. Servicing rights are
capitalized based on the relative fair value of the rights and the
expected life of the loan and are included in intangible assets on the
balance sheet and expensed in proportion to, and over the period of,
estimated net servicing revenues. Mortgage servicing rights were $746
thousand at December 31, 2006, $802 thousand at December 31, 2005 and
$876 thousand at December 31, 2004. Amortization of mortgage servicing
rights was $235 thousand, $254 thousand and $249 thousand for the years
ended December 31, 2006, 2005 and 2004, respectively. See Note 4 in the
notes to consolidated financial statements included as Exhibit 13 for
additional information.
Deposits
Total deposits increased to $469 million in 2006, up $37 million from
2005. Noninterest bearing deposits increased $15 million, time deposits
of $100 thousand and over increased $6 million, and other interest
bearing deposits increased $16 million. Public funds totaled $60
million at the end of 2006 ($59 million were interest bearing), a
decrease of $25 million from the end of 2005.
For 2005, total deposits increased $44 million to $432 million.
Noninterest bearing deposits decreased $2 million, while time deposits
of $100 thousand and over increased $2 million, and other interest
bearing deposits decreased $44 million. Public funds totaled $85
million at the end of 2005 ($84 million were interest bearing).
The table below provides information on the maturities of time deposits
of $100,000 or more at December 31, 2006:
Maturity of Time Deposits of $100,000 or More
At December 31, 2006
(in thousands)
Maturing 3 Months or Less $14,408
Maturing over 3 Months through 6 Months 16,958
Maturing over 6 Months through 12 Months 23,400
Maturing over 12 Months 12,489
Total $67,255
Borrowings
The Company utilizes both long and short term borrowing. Long term
borrowing at the Bank is mainly from the Federal Home Loan Bank (FHLB).
This borrowing is mainly used to fund longer term, fixed rate mortgages,
as part of a leverage strategy and to assist in asset/liability
management. Advances are either paid monthly or at maturity. As of
December 31, 2006, $80 million was borrowed from FHLB, an increase of
$13 million from 2005. In 2006, $83 million of FHLB advances were paid,
and advances were made for an additional $90 million. The remaining $7
million was obtained in the Peoples acquisition. FHLB advances were $67
million at December 31, 2005. During 2005, $8 million of FHLB borrowing
was paid, and advances were made for an additional $15 million. The
2005 advances were obtained mainly to fund fixed rate loans, as detailed
above. The following table depicts relevant information concerning our
short term borrowings.
Short Term Borrowings
As of and for the year ended
December 31 (in thousands)
2006 2005 2004
Federal Funds Purchased:
Balance at Year end $ - $ 1,470 $ 6,383
Average Balance During the Year 8,616 3,001 3,706
Maximum Month End Balance 27,723 15,919 11,306
Year end rate 0.00% 4.25% 2.50%
Average annual rate 5.37% 2.95% 1.52%
Repurchase Agreements:
Balance at Year end $ 9,628 $14,346 $18,314
Average Balance During the Year 15,661 16,014 18,398
Maximum Month End Balance 18,372 18,072 21,947
Year end rate 3.83% 3.18% 2.94%
Average annual rate 3.79% 3.19% 1.90%
Other Borrowed Funds:
Balance at Year end $ 1,699 $ 1,021 $ 896
Average Balance During the Year 1,719 457 343
Maximum Month End Balance 8,508 1,021 1,011
Year end rate 5.90% 4.00% 1.87%
Average annual rate 6.15% 3.10% 1.51%
Contractual Obligations
The Bank has required future payments for a defined benefit retirement
plan, time deposits and long-term debt. See Note 13 in the notes to
consolidated financial statements included as Exhibit 13 for further
information on the defined benefit retirement plan. The other required
payments under such commitments at December 31, 2006 are as follows:
Payments due by period (in thousands)
Less More
than 1 1-3 3-5 than 5
Contractual Obligations Total year years years years
FHLB advances $ 79,980 $ 15,909 $52,201 $ 7,181 $ 4,689
Subordinated debentures 7,217 - - - 7,217
Time deposits 229,277 193,592 33,931 1,754 -
Asset Quality
With respect to asset quality, management considers three categories of
assets to merit close scrutiny. These categories include: loans that
are currently nonperforming, other real estate, and loans that are
currently performing but which management believes require special
attention.
During periods of economic slowdown, the Company may experience an
increase in nonperforming loans.
The Company discontinues the accrual of interest on loans that become 90
days past due as to principal or interest unless reasons for delinquency
are documented such as the loan being well collateralized and in the
process of collection. A loan remains in a non-accrual status until
factors indicating doubtful collection no longer exist. A loan is
classified as a restructured loan when the interest rate is materially
reduced or the term is extended beyond the original maturity date
because of the inability of the borrower to service the interest
payments at market rates. Other real estate is recorded at fair market
value less estimated costs to sell. A summary of the components of
nonperforming assets, including several ratios using period-end data, is
shown below.
Nonperforming Assets
At December 31 (dollars in thousands)
2006 2005 2004 2003 2002
Non-accrual Loans $2,379 $ 774 $1,781 $1,844 $1,573
Accruing Loans which are
Contractually past due
90 days or more 253 206 308 779 789
Restructured Loans 0 0 0 0 0
Total Nonperforming Loans 2,632 980 2,089 2,623 2,362
Other Real Estate 411 141 676 375 172
Total Nonperforming Assets 3,043 1,121 2,765 2,998 2,534
Total Nonperforming Loans as a
Percentage of Loans (including
loans held for sale) (1) 0.59% 0.26% 0.58% 0.82% 0.83%
Total Nonperforming Assets
as a Percentage of Total Assets 0.48% 0.20% 0.52% 0.60% 0.60%
Allowance to nonperforming assets 1.64 3.84 1.51 1.27 1.34
(1) Net of deferred loan fees
Total nonperforming assets at December 31, 2006 were $3.0 million
compared to $1.1 million at December 31, 2005 and $2.8 million at
December 31, 2004. The increase from 2005 to 2006 is attributable to
the increase in various loans being put on non-accrual and additions to
other real estate. Total nonperforming loans were $2.6 million, $1.0
million, and $2.1 million at December 31, 2006, 2005 and 2004,
respectively. The non-accrual loan increase from 2005 to 2006 is mainly
attributable to 6 loans secured by real estate greater than $100,000,
but less than $325,000. The amount of lost interest on our non-accrual
loans is immaterial. At December 31, 2006, loans currently performing
but which management believes require special attention were not
significant. The Company continues to follow its long-standing policy
of not engaging in international lending and not concentrating lending
activity in any one industry.
Impaired loans as of December 31, 2006 were $2.4 million compared to
$800 thousand in 2005 and $1.8 million in 2004. These amounts are
included in the total nonperforming and restructured loans presented in
the table above. See Note 4 in the notes to consolidated financial
statements included as Exhibit 13.
A loan is considered impaired when it is probable that all principal and
interest amounts will not be collected according to the loan contract.
The allowance for loan losses on impaired loans is determined using the
present value of estimated future cash flows of the loan, discounted at
the loan's effective interest rate or the fair value of the underlying
collateral. The entire change in present value of expected cash flows
is reported as a provision for loan losses in the same manner in which
impairment initially was recognized or as a reduction in the amount of
provision for loan losses that otherwise would be reported. The total
allowance for loan losses related to these loans was $553 thousand, $240
thousand and $416 thousand on December 31, 2006, 2005 and 2004,
respectively.
Loan Losses
The following table is a summary of the Company's loan loss experience
for each of the past five years.
For the Year Ended December 31 (in thousands)
2006 2005 2004 2003 2002
Balance at Beginning of Year $ 4,310 $ 4,163 $ 3,820 $ 3,395 $ 3,386
Balance of Allowance for Loan
Losses of Acquired Bank
at Acquisition Date 775 0 0 363 0
Amounts Charged-off:
Commercial 15 146 197 569 536
Real Estate Construction 28 0 0 0 18
Real Estate Mortgage 232 134 110 276 69
Agricultural 3 21 88 24 5
Consumer 365 225 293 529 701
Total Charged-off Loans 643 526 688 1,398 1,329
Recoveries on Amounts
Previously Charged-off:
Commercial 2 3 10 11 15
Real Estate Mortgage 2 11 42 1 19
Agricultural 21 16 21 21 10
Consumer 49 135 118 127 90
Total Recoveries 74 165 191 160 134
Net Charge-offs 569 361 497 1,238 1,195
Provision for Loan Losses 475 508 840 1,300 1,204
Balance at End of Year 4,991 4,310 4,163 3,820 3,395
Total Loans (1)
Average 408,131 361,732 338,465 290,502 281,105
At December 31 444,150 370,912 358,456 320,761 284,894
As a Percentage of Average Loans (1):
Net Charge-offs 0.14% 0.10% 0.15% 0.43% 0.43%
Provision for Loan Losses 0.12% 0.14% 0.25% 0.45% 0.43%
Allowance as a Percentage of
Year-end Loans (1) 1.12% 1.16% 1.16% 1.19% 1.19%
Beginning Allowance as a Multiple
of Net Charge-offs 7.6 11.5 7.7 2.7 2.8
Ending Allowance as a Multiple
of Nonperforming Assets 1.64 3.84 1.51 1.27 1.34
(1) Including loans held for sale, net of deferred loan fees
Loans are typically charged-off after being 120 days delinquent.
Limited exceptions for not charging-off a loan would be well documented
and approved by the appropriate responsible party or committee. The
provision for loan losses for 2006 was $475 thousand compared to $508
thousand in 2005 and $840 thousand in 2004. Net charge-offs were $569
thousand in 2006, $361 thousand in 2005 and $497 thousand in 2004. Net
charge-offs to average loans were 0.14%, 0.10% and 0.15% in 2006, 2005
and 2004, respectively. Based on the quality of the loan portfolio, the
loan loss provision decreased $33 thousand from 2005 to 2006 and
decreased $332 thousand from 2004 to 2005. In evaluating the allowance
for loan losses, management considers the composition of the loan
portfolio, the historical loan loss experience, the overall quality of
the loans and an assessment of current economic conditions. The recent
improvement in the economy along with management's emphasis on improving
the lending process resulted in fewer loan losses, lower loan loss
provision and improved loan quality numbers over the past 3 years. At
December 31, 2006, the allowance for loan losses was 1.12% of loans
outstanding compared to 1.16% at year-end 2005 and 1.16% at year-end
2004. Management believes the allowance for loan losses at the end of
2006 is adequate to cover probable incurred credit losses within the
portfolio.
The following tables set forth an allocation for the allowance for loan
losses and loans by category and a percentage distribution of the
allowance allocation. In making the allocation, management evaluates
the risk in each category, current economic conditions and charge-off
experience. An allocation for the allowance for loan losses is an
estimate of the portion of the allowance that will be used to cover
future charge-offs in each loan category, but it does not preclude any
portion of the allowance allocated to one type of loan being used to
absorb losses of another loan type.
Allowance for Loan Losses
At December 31 (in thousands)
2006 2005 2004 2003 2002
Dollars Percentage Dollars Percentage Dollars Percentage Dollars Percentage Dollars Percentage
Commercial $ 594 11.90% $ 507 11.77% $ 350 8.41% $ 262 6.86% $ 820 24.15%
Real Estate Construction 638 12.78% 566 13.14% 566 13.60% 266 6.96% 216 6.36%
Real Estate Mortgage 1,806 36.19% 1,785 41.42% 1,801 43.26% 1,804 47.23% 1,166 34.34%
Agricultural 1,241 24.86% 1,023 23.74% 1,028 24.69% 995 26.05% 698 20.56%
Consumer 712 14.27% 428 9.93% 418 10.04% 493 12.91% 495 14.58%
Total 4,991 100.00% 4,309 100.00% 4,163 100.00% 3,820 100.00% 3,395 100.00%
Loans
2006 2005 2004 2003 2002
Dollars Percentage Dollars Percentage Dollars Percentage Dollars Percentage Dollars Percentage
Commercial $ 29,335 6.60% $ 27,302 7.36% $ 19,999 5.58% $ 14,278 4.45% $ 16,803 5.90%
Real Estate Construction 29,034 6.54% 29,822 8.04% 32,256 9.00% 14,313 4.46% 15,514 5.45%
Real Estate Mortgage 290,068 65.31% 245,138 66.09% 238,651 66.58% 222,288 69.30% 182,946 64.22%
Agricultural 79,627 17.93% 59,328 16.00% 57,497 16.04% 56,615 17.65% 52,188 18.32%
Consumer 15,684 3.53% 8,954 2.41% 9,062 2.53% 12,978 4.05% 17,134 6.01%
Other 402 0.09% 368 0.10% 991 0.28% 289 0.09% 309 0.11%
Total, Net (1) 444,150 100.00% 370,912 100.00% 358,456 100.00% 320,761 100.00% 284,894 100.00%
(1) Including loans held for sale, net of deferred loan fees
Off-balance Sheet Arrangements
Some financial instruments, such as loan commitments, credit lines, letters of
credit, and overdraft protection, are issued to meet customer financing needs.
These are agreements to provide credit or to support the credit of others, as
long as conditions established in the contract are met, and usually have
expiration dates. Commitments may expire without being used. Off-balance
sheet risk to credit loss exists up to the face amount of these instruments,
although material losses are not anticipated. The same credit policies are
used to make such commitments as are used for loans, including obtaining
collateral at exercise of the commitment.
Financial instruments with off-balance sheet risk were as follows at year-end:
2006 2005
Unused lines of credit $ 67,921,443 $ 56,354,000
Commitments to make loans 658,000 156,000
Letters of credit 639,538 183,000
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 5.625% to 6.125% with maturities
ranging from 15 to 30 years and are intended to be sold.
Capital
As displayed by the following table, the Company's Tier I capital (as
defined by the Federal Reserve Board under the Board's risk-based
guidelines) at December 31, 2006 increased $3.8 million to $48.4
million. During 2006, the Company purchased 12,901 shares of its stock
for $378 thousand. These repurchases partially offset the $6.5 million
in net income for 2006. Stockholders' equity, excluding accumulated
other comprehensive income, was $56.6 million at December 31, 2006.
Included in Tier I capital is $7 million of trust preferred securities
issued in August 2003. The disallowed amount of stockholders' equity is
mainly attributable to the goodwill and core deposit intangible,
resulting from the Peoples acquisition in 2006 and the Kentucky First
acquisition in 2003(see Note 6 in the notes to consolidated financial
statements included as Exhibit 13 for more information on the goodwill
and core deposit intangible assets). The Company's risk-based capital
and leverage ratios, as shown in the following table, exceeded the
levels required to be considered "well capitalized". The leverage ratio
compares Tier I capital to total average assets less disallowed amounts
of goodwill.
At December 31 (dollars in thousands)
2006 2005 Change
Stockholders' Equity (1) $ 56,595 $ 47,479 9,116
Trust Preferred Securities 7,000 7,000 0
Less Disallowed Amount 15,175 9,877 5,298
Tier I Capital 48,420 44,602 3,818
Allowance for Loan Losses 5,067 4,385 682
Other 5 143 (138)
Tier II Capital 5,072 4,528 544
Total Capital 53,492 49,130 4,362
Total Risk Weighted Assets 426,900 366,393 60,507
Ratios:
Tier I Capital to Risk-weighted Assets 11.3% 12.2% -0.8%
Total Capital to Risk-weighted Assets 12.5% 13.4% -0.9%
Leverage 7.8% 8.0% -0.2%
(1) Excluding accumulated other comprehensive income.
The Federal Deposit Insurance Corporation Improvement Act of 1991
("FDICIA") established five capital categories for insured depository
institutions under its Prompt Corrective Action Provisions. The bank
regulatory agencies adopted regulations, which became effective in 1992,
defining these five capital categories for banks they regulate. The
categories vary from "well capitalized" to "critically
undercapitalized". A "well capitalized" bank is defined as one with a
total risk-based capital ratio of 10% or more, a Tier I risk-based
capital ratio of 6% or more, a leverage ratio of 5% or more, and one not
subject to any order, written agreement, capital directive, or prompt
corrective action directive to meet or maintain a specific capital
level. At December 31, 2006, the bank had ratios that exceeded the
minimum requirements established for the "well capitalized" category.
In management's opinion, there are no other known trends, events or
uncertainties that will have or that are reasonably likely to have a
material effect on the Company's liquidity, capital resources or
operations.
Securities and Federal Funds Sold
Securities, classified as available for sale, decreased from $160.7
million at December 31, 2005 to $127.9 million at December 31, 2006.
The decrease is mainly attributable to a short term decrease in
deposits. Federal funds sold totaled $4.1 million at December 31, 2006
and $2.7 million at December 31, 2005.
Per Company policy, fixed rate asset backed securities will not have an
average life exceeding seven years, but final maturity may be longer.
Adjustable rate securities shall adjust within three years per Company
policy. As of December 31, 2006, the Company held no adjustable rate
mortgage backed securities. Of the $1.4 million of adjustable asset
backed securities held on December 31, 2005, $303 thousand were
repriceable monthly and the remaining $1.1 million were repriceable
annually. Unrealized gains (losses) on investment securities are
temporary and change inversely with movements in interest rates. In
addition, some prepayment risk exists on mortgage-backed securities and
prepayments are likely to increase with decreases in interest rates.
The following tables present the investment securities for each of the
past three years and the maturity and yield characteristics of
securities as of December 31, 2006.
Investment Securities at market value
At December 31 (in thousands)
2006 2005 2004
Available for Sale
U.S. treasury $ 0 $ 2,974 $ 2,984
U.S. government agencies 31,492 67,033 39,031
States and political subdivisions 44,130 37,463 35,160
Mortgage-backed
Fixed -
GNMA, FNMA, FHLMC Passthroughs 38,262 33,566 35,013
GNMA, FNMA, FHLMC CMO's 13,720 17,390 11,335
Total 51,982 50,956 46,348
Variable -
GNMA, FNMA, FHLMC Passthroughs 0 1,081 1,623
GNMA, FNMA, FHLMC CMO's 0 303 649
Total 0 1,384 2,272
Total mortgage-backed 51,982 52,340 48,620
Other 287 842 972
Total 127,891 160,652 126,767
Maturity Distribution of Securities
December 31, 2006 (in thousands)
Over One Over Five Asset
Year Years Backed
One Year Through Through Over Ten & Equity
or Less Five Years Ten Years Years Securities Total
Available for Sale
U.S. government agencies 12,890 15,614 2,988 0 0 31,492
States and political subdivisions 1,066 9,045 18,772 15,247 0 44,130
Mortgage-backed 0 0 0 0 51,982 51,982
Equity Securities 0 0 0 0 287 287
Total 13,956 24,659 21,760 15,247 52,269 127,891
Percent of Total 10.9% 19.3% 17.0% 11.9% 40.9% 100.0%
Weighted Average Yield (1) 4.53% 5.90% 6.18% 6.52% 4.75% 5.40%
(1) Tax Equivalent Yield
Impact of Inflation and Changing Prices
The majority of the Company's assets and liabilities are monetary in
nature. Therefore, the Company differs greatly from most commercial and
industrial companies that have significant investments in nonmonetary
assets and inventories. However, inflation does have an important
impact on the growth of assets in the banking industry and the resulting
need to increase equity capital at higher than normal rates in order to
maintain an appropriate equity to assets ratio. Inflation also affects
other expenses, which tend to rise during periods of inflation.
Item 7A. Asset/Liability Management, Interest Rate Sensitivity, Market
Risk and Liquidity
Asset/Liability management control is designed to ensure safety and
soundness, maintain liquidity and regulatory capital standards, and
achieve acceptable net interest income. The Company's exposure to
market risk is reviewed on a regular basis by the Asset/Liability
Committee.
Management considers interest rate risk to be the most significant
market risk. Interest rate risk is the potential of economic losses due
to future interest rate changes. These economic losses can be reflected
as a loss of future net interest income and/or a loss of current fair
market values. The objective is to measure the effect on net interest
income and to adjust the balance sheet to minimize the inherent risk
while at the same time maximize income.
Management realizes certain risks are inherent and that the goal is to
identify and minimize the risks. The primary tool used by management is
an interest rate shock simulation model. Certain assumptions, such as
prepayment risks, are included in the model. However, actual
prepayments may differ from those assumptions. In addition, immediate
withdrawal of interest checking and other savings accounts may have an
effect on the results of the model. The Bank has no market risk
sensitive instruments held for trading purposes.
The following table depicts the change in net interest income resulting
from 100 and 300 basis point changes in rates. The projections are
based on balance sheet growth assumptions and repricing opportunities
for new, maturing and adjustable rate amounts. In addition, the
projected percentage changes from level rates are outlined below along
with the Board of Directors approved limits. As of December 31, 2006
the projected net interest income percentages are within the Board of
Directors limits. The projected net interest income report summarizing
the Company's interest rate sensitivity as of December 31, 2006 and
December 31, 2005 is as follows:
Projected Net Interest Income (December 31, 2006)
Level
-300 -100 Rates +100 +300
Year One (1/07 - 12/07)
Net Interest Income $16,102 $17,505 $18,064 $18,557 $19,374
Net interest income dollar change (1,962) (559) 493 1,310
Net interest income percentage change -10.9% -3.1% N/A 2.7% 7.3%
Limitation on % Change >-18.0% >-6.0% N/A >-4.0% >-10.0%
Projected Net Interest Income (December 31, 2005)
Level
-300 -100 Rates +100 +300
Year One (1/06 - 12/06)
Net interest income $21,476 $21,970 $22,473 $22,925 $23,361
Net interest income dollar change (997) (503) 452 888
Net interest income percentage change -4.4% -2.2% N/A 2.0% 4.0%
Limitation on % Change >-18.0% >-6.0% N/A >-4.0% >-10.0%
The numbers in 2006 show more fluctuation when compared to 2005. In
2006, year one reflected a decrease in net interest income of 3.1%
compared to 2.2% projected decrease from 2005 with a 100 basis point
decline. The 300 basis point increase in rates reflected a 7.3%
increase in net interest income in 2006 compared to a 4.0% increase in
2005. The risk is more in 2006 due to the current status of existing
interest rates and their effect on rate sensitive assets and rate
sensitive liabilities. Based on the model, an increase in rates should
improve net interest income.
Management measures the Company's interest rate risk by computing
estimated changes in net interest income in the event of a range of
assumed changes in market interest rates. The Company's exposure to
interest rates is reviewed on a monthly basis by senior management and
quarterly with the Board of Directors. Exposure to interest rate risk
is measured with the use of interest rate sensitivity analysis to
determine the change in net interest income in the event of hypothetical
changes in interest rates, while interest rate sensitivity gap analysis
is used to determine the repricing characteristics of the Company's
assets and liabilities. If estimated changes to net interest income are
not within the limits established by the Board, the Board may direct
management to adjust the Company's asset and liability mix to bring
interest rate risk within Board approved limits.
Liquidity risk is the possibility that the Company may not be able to
meet its cash requirements. Management of liquidity risk includes
maintenance of adequate cash and sources of cash to fund operations and
meet the needs of borrowers, depositors and creditors. Excess liquidity
generally has a negative impact on earnings resulting from the lower
yields on short-term assets.
In addition to cash and cash equivalents, the securities portfolio
provides an important source of liquidity. Total securities maturing
within one year along with cash and cash equivalents totaled $33.0
million at December 31, 2006. Additionally, securities available-for-
sale with maturities greater than one year totaled $113.9 million at
December 31, 2006. The available for sale securities are available to
meet liquidity needs on a continuing basis.
The Company maintains a relatively stable base of customer deposits and
its steady growth is expected to be adequate to meet its funding
demands. In addition, management believes the majority of its $100,000
or more certificates of deposit are no more volatile than its core
deposits. At December 31, 2006 these balances totaled $67.3 million,
approximately 14% of total deposits.
The Company also relies on FHLB advances for both liquidity and
asset/liability management purposes. These advances are used primarily
to fund long-term fixed rate residential mortgage loans. We have
sufficient collateral to borrow an additional $28 million from the FHLB
at December 31, 2006.
Generally, the Company relies upon net cash inflows from financing
activities, supplemented by net cash inflows from operating activities,
to provide cash used in its investing activities. As is typical of many
financial institutions, significant financing activities include deposit
gathering, and the use of short-term borrowings, such as federal funds
purchased and securities sold under repurchase agreements along with
long-term debt. The Company's primary investing activities include
purchasing investment securities and loan originations. Management
believes there is sufficient cash flow from operations to meet investing
and liquidity needs related to reasonable borrower, depositor and
creditor needs in the present economic environment.
The cash flow statements for the periods presented provide an indication
of the Company's sources and uses of cash as well as an indication of
the ability of the Company to maintain an adequate level of liquidity.
A number of other techniques are used to measure the liquidity position,
including the ratios presented below. These ratios are calculated based
on annual averages for each year.
Liquidity Ratios
December 31
2006 2005 2004
Average Loans (including loans held
for sale)/Average Deposits 93.6% 90.4% 88.3%
Average Securities sold under
agreements to repurchase and other
borrowings/Average Assets 5.6% 4.9% 5.7%
This chart shows that the loan to deposit ratio increased in 2006 and
increased in 2005. The increase in the ratio in 2006 compared to 2005,
and in 2005 compared to 2004 is mainly attributable to a larger increase
in loans compared to deposits.
Item 8. Financial Statements
The consolidated financial statements of the Company together with the
notes thereto and report of independent registered public accountants
are contained in the Company's 2006 Annual Report to Stockholders
included as Exhibit 13, and are incorporated herein by reference. No
other portion of the 2006 Annual Report to Stockholders is to be deemed
"filed" as part of this filing.
Item 9. Changes In and Disagreements with Accountants on Accounting and
Financial Disclosure
None
Item 9A. Controls and Procedures
The Company's management, with participation of the Company's Chief
Executive Officer and Chief Financial Officer, has evaluated the
effectiveness of the Company's disclosure controls and procedures as of
December 31, 2006. Based on the evaluation, the Company's Chief
Executive Officer and Chief Financial Officer concluded that the
Company's disclosure controls and procedures were effective as of
December 31, 2006. There was no change in the Company's internal
control over financial reporting during the fourth quarter of 2006 that
has materially affected, or is reasonably likely to materially affect,
such internal control over financial reporting.
Item 9B. Other Information
None
PART III
Item 10. Directors and Executive Officers of the Registrant
Under the Company's Articles of Incorporation, the Board of Directors
consists of three different classes, each to serve, subject to the
provisions of the Articles of Incorporation and Bylaws, for a three year
term and until his successor is duly elected and qualified. The names
of the directors and their terms are set forth below.
Terms expiring in 2007:
William Arvin, age 67, is an attorney. He has been a director of
Kentucky Bank and the Company since 1995.
B. Proctor Caudill, age 57, is Special Projects Manager of Kentucky
Bank. He was President and Chief Executive Officer of the Peoples
Bancorp from 1981 to 2006, and President from 1999 to 2006 and Chief
Executive Officer from 1981 to 2006 of Peoples Bank. He has been a
director of Kentucky Bank and the Company since 2006.
Louis Prichard, age 53, is President and Chief Executive Officer of
Kentucky Bank. He was President and Chief Operating Officer of Kentucky
Bank from 2003 to 2004. He has been a director of Kentucky Bank and the
Company since 2003. Since 1983, he was in banking in Danville and was
the Chairman and Chief Executive Officer of Boyle Bancshares, Inc. and
their banking subsidiary, Farmers Bank for 7 years before joining the
Company in 2003.
Woodford Van Meter, age 53, is an ophthalmologist. He has been a
director of Kentucky Bank and the Company since 2004.
Terms expiring in 2008:
Henry Hinkle, age 55, is President of Hinkle Construction Company. He
has been a director of Kentucky Bank and the Company since 1989.
Theodore Kuster, age 63, is a farmer and thoroughbred horse breeder. He
has been a director of Kentucky Bank since 1979 and the Company since
1985.
Robert G. Thompson, age 57, is a farmer and thoroughbred horse breeder.
He has been a director of Kentucky Bank and the Company since 1991.
Terms expiring in 2009:
Betty J. Long, age 59, is retired President and CEO of First Federal,
Cynthiana. She has been a director of Kentucky Bank since 2006 and the
Company since 2003.
Ted McClain, age 55, is an insurance agent with Hopewell Insurance
Company. He has been a director of Kentucky Bank since 2002 and the
Company since 2003.
Edwin S. Saunier, age 49, is President of Saunier North American, Inc.
He has been a director of Kentucky Bank and the Company since 2007.
Buckner Woodford, age 62, is Chairman of the Board of Kentucky
Bancshares, Inc. and Kentucky Bank. He was President and Chief
Executive Officer of the Company from 1991 to 2004, and President and
Chief Executive Officer of the Kentucky Bank from 1984 to 2004. He has
been a director of Kentucky Bank since 1971 and the Company since
inception.
The Company's other executive officers are Norman J. Fryman, age 57,
Gregory J. Dawson, age 46 and Darren M. Henry, age 44. Mr. Fryman is
the Vice President of Sales and Service of Kentucky Bank and has been
with the Company since 1977. Mr. Dawson is the Chief Financial Officer
and has been with the Company since 1985. Mr. Henry is Vice President,
Director of Commercial Lending and has been with the Company since 2002.
The Company has adopted a code of ethics for its Chief Executive Officer
and its Chief Financial Officer. A copy of the code of ethics may be
obtained, without charge, by contacting the CFO.
The Company has named Betty J. Long of the audit committee as its
financial expert and she is independent as that term is used in Item
7(d)(3)(iv) of Schedule 14A under the Securities Exchange Act of 1934.
Item 11. Compensation Discussion and Analysis
EXECUTIVE COMPENSATION
Compensation Discussion and Analysis
Overview of Compensation Program
The Compensation Committee ("Committee") of the Board has responsibility for
establishing, implementing and continually monitoring adherence with the
Company's compensation philosophy. The Committee ensures that the total
compensation paid is fair, reasonable and competitive. The individuals who
served as the Company's Chief Executive Officer and Chief Financial Officer
during fiscal 2006, as well as the other individuals included in the Summary
Compensation Table, are referred to as the "named executive officers".
Compensation Philosophy and Objectives
The Committee believes that the most effective executive compensation program
is one that is designed to reward the achievement of specific annual, long-
term and strategic goals by the Company, and which aligns executives'
interests with those of the stockholders by rewarding performance above
established corporate and individual goals, with the ultimate objective of
improving stockholder value. The Committee evaluates both performance and
compensation to ensure that the Company maintains its ability to attract and
retain superior employees in key positions and that compensation provided to
key employees remains competitive relative to the compensation paid to
similarly situated executives of our peer companies. To that end, the
Committee believes executive compensation packages provided by the Company to
its executives, including the named executive officers, should include both
cash and stock-based compensation that reward performance as measured against
established goals. The Committee, and the President and Chief Executive
Officer ("CEO"), evaluate the information in the annual Kentucky Bankers
Association Financial Institution Compensation Survey ("KBA Survey") and then
use their subjective judgment to determine a percentage increase in the
Company's total base pay. Each manager, based on this aggregate percentage
increase, is allocated a pool of funds to allocate increases among the
employees the manager supervises.
Role of Executive Officers in Compensation Decisions
The Committee makes all compensation decisions for the CEO and approves
recommendations regarding equity awards to all officers of the Company.
Decisions regarding the non-equity compensation of other executive officers
are made by the CEO, in his discretion using the pool of funds allocated to
the other executive officers based on the overall corporate percentage
increase.
Setting Executive Compensation
Based on the foregoing objectives, the Committee has structured the Company's
annual and long-term incentive-based cash and non-cash executive compensation
to motivate executives to achieve the business goals set by the Company and
reward the executives for achieving such goals. A significant percentage of
total compensation is allocated to incentives.
The Committee reviews relevant market data and alternatives when making
compensation decisions for the CEO. Up to 40% of base compensation may be
earned in performance-based incentive compensation as a result of the
performance of the Company, compared to established goals.
2006 Executive Compensation Components
For the fiscal year ended December 31, 2006, the principal components of
compensation for named executive officers were base salary, performance-based
incentive compensation, long-term equity incentive compensation, and
retirement and other benefits.
Base Salary
The Company provides named executive officers and other employees with base
salary to compensate them for services rendered during the fiscal year. Base
salary ranges for named executive officers are determined for each executive
based on his or her position and responsibility. Salary levels are typically
considered annually as part of the Company's performance review process as
well as upon a promotion or other change in job responsibility. The Committee
and the CEO primarily use the annual KBA Survey in setting salary ranges on an
annual basis. Every five years, the Committee recalibrates salary ranges
based on the overall value of each job by comparing current market rates of
bench mark jobs and assigning all jobs to salary grades, after considering
their market value and internal value. During his review of base salaries for
other executives, the CEO primarily focuses on the individual's performance.
Performance-Based Incentive Compensation
The Management Incentive Plan ("MIP") was created to promote high performance
by officers of the Company by achievement of corporate goals and encouragement
of growth of stockholder value. The Company currently has approximately 61
officers (including the named executive officers) who are eligible to receive
cash awards under MIP. The MIP provides guidelines for the calculation of
annual non-equity incentive based compensation, subject to Committee oversight
and modification. Annually, the Committee considers whether any changes
should be made with the MIP. The MIP includes various incentive levels based
on the participant's accountability and impact on Company operations, with
target award opportunities that are established as a percentage of base
salary. These maximum targets range from 20% of base salary to 40% of base
salary for the Company's named executive officers.
For fiscal 2006, 50-100% of a named executive officer's MIP award was based
upon achievement of corporate financial objectives relating to Company
earnings on a quarterly basis, with goals set for threshold, target and
maximum levels. The remaining percentage of an executive's MIP award was
based upon individual performance goals (such as investment yield, net
interest spread, loan volume, loan margin) also with threshold, target and
maximum levels, determined by the CEO. Only the CEO's MIP award was based on
100% of the Company's earnings. The remaining executive's MIP awards were
either 50% or 75% based on Company's earnings. Payment of awards under the
MIP are based upon the achievement of such objectives for the current year.
Named executive officers participating in the MIP receive: 50% of the maximum
award if threshold levels are met, 75% of the maximum award if target levels
are met and 100% of the maximum award if maximum levels are met.
Generally, the Committee sets the target level for earnings at the Company's
earnings objective for the current year. Threshold and maximum levels are set
below and above the target level (generally five to seven percentage points,
as applicable). In making the annual determination of the threshold, target
and maximum levels, the Committee may consider the specific circumstances
facing the Company during the coming year. In 2006, the established targets
for each quarter were:
Threshold Target Maximum Actual
1st quarter $ 1,391,000 $ 1,464,000 $ 1,566,000 $ 1,474,000
2nd quarter 1,587,000 1,671,000 1,788,000 1,780,000
3rd quarter 1,812,000 1,907,000 2,041,000 1,880,000
4th quarter 1,820,000 1,916,000 2,050,000 1,830,000
This plan has been in place for the last two years. The payout percentages
for the Company's earnings over these two years have been between 43% and 63%
of the participant's maximum. Generally, the Committee sets the threshold,
target and maximum levels such that the relative difficulty of achieving the
target level is consistent from year to year.
Awards made to named executive officers under the MIP for performance in 2006
are reflected in column (g) of the Summary Compensation Table.
Long-Term Incentive Compensation
Stock Grant Plan
The Stock Grant Plan encourages participants to focus on long-term Company
performance and provides an opportunity for executives and other officers to
increase their stake in the Company through grants of the Company's Common
Stock. Starting in 2006, the Committee utilized the Stock Grant Plan to
compensate executives and other officers for sustained increases in the
Company's stock performance. Twenty percent of each grant vests annually on
anniversary date of the grant. Upon a change of control while an employee is
employed by the Company, any restriction period will expire immediately and
the employee will hold the restricted stock free of any restrictions.
Based on its subjective judgment, the Committee annually establishes the
awards to the executive officers under the Stock Grant Plan based on the
salary level of each employee. These awards are reflected in the Summary
Compensation Table and the Grants of Plan Based Awards Table.
Stock Option Plan
The Employee Stock Option Plan assists the Company to enhance the link between
the creation of stockholder value and long-term executive incentive
compensation, provide an opportunity for increased equity ownership by
executives and maintain competitive levels of total compensation. Since the
establishment of the Stock Grant Plan in 2006, the Committee has not awarded
any stock options. Currently, the committee anticipates that stock option
awards for officers will be primarily used for newly hired or promoted
executives. Options are awarded at the current closing price of the Company's
Common Stock on the date of the grant. The options granted by the Committee
vest at a rate of 20% per year over the first five years of the ten-year
option term. Vesting and exercise rights expire 90 days after termination of
employment, except in the case of death (subject to a one year limitation),
disability or retirement. Prior to the exercise of an option, the holder has
no rights as a stockholder with respect to the shares subject to such option,
including voting rights and the right to receive dividends or dividend
equivalents. In the event of a change of control of the Company, each
outstanding option will become fully vested and immediately exercisable.
Retirement and Other Benefits
All employees of the Company are eligible to participate in the Pension Plan
and the Profit Sharing (401k) Plan.
Pension Plan
Under the Retirement Plan, full or part-time employees working for the Company
who have completed five continuous years of employment with the Company,
including the named executive officers, earn the right to receive certain
benefits upon retirement at the normal retirement age of 65 or upon early
retirement on or after age 55. Retirement benefits are calculated as the
product of 1% times the years of service multiplied by the final average
eligible pay for the five highest consecutive years. If the employee retires
between the ages of 55 and 64, the amount of benefits is reduced such that if
the associate retires at age 55, he or she will be entitled to 50% of the
accrued benefits. Of the named executive officers, Mr. Woodford and Mr.
Fryman are eligible for early retirement benefits under the Retirement Plan.
Profit Sharing (401k) Plan
The Profit Sharing (401k) Plan is available to all employees, including the
named executive officers. The Company will match 100% of the first 6% of pay
that is contributed to the Savings. All employee contributions to the Savings
Plan are fully-vested upon contribution, and matching contributions are vested
after 3 years of service. The Company may, at its discretion, make a profit
sharing contribution to the plan. This has not been done since the 401k
feature was added to the plan.
Stock Gift Program
The Company provides stock gifts to full time Company employees, including the
named executive officers, who have completed at least 15 years of service.
Under the Stock Gift Program, participants may be awarded an increasing number
of shares of the Company's Common Stock for each five year anniversary
starting with 15 years for their continued dedicated service to the Company
Tax and Accounting Implications
Accounting for Stock-Based Compensation
Beginning on January 1, 2006, the Company began accounting for stock-
based payments including its Stock Option Program, Long-Term Stock Grant
Program, Restricted Stock Program and Stock Award Program in accordance
with the requirements of FASB Statement 123(R).
The following table sets forth information with respect to the compensation of
the Chairman of the Board (Buckner Woodford), President and Chief Executive
Officer (Louis Prichard), Vice President of Sales and Service (Norman J.
Fryman), Chief Financial Officer (Gregory J. Dawson) and Vice President
Director of Commercial Lending (Darren M. Henry) of the Company (the "Named
Executive Officers") for the fiscal year ended December 31, 2006. No other
executive officer earned total compensation in excess of $100,000.
Summary Compensation Table
(a) (b) (c) (d) (e) (f) (g) (h) (i) (j)
Change in
Pension
Value and
Non-Equity Nonqualified
Incentive Deferred
Stock Option Plan Compensation All Other
Name & Position Year Salary Bonus Awards Awards Compensation Earnings Compensation Total
(1) (2) (3) (4) (5)
Buckner Woodford 2006 $ 82,800 $ - $ 4,826 $ - $15,566 $48,273 $13,603 $116,795
Chairman
Louis Prichard 2006 185,000 - 10,238 - 46,250 12,751 21,361 262,849
President, CEO
Norman J. Fryman 2006 118,051 - 4,826 - 22,303 25,249 7,886 153,066
VP, Sales & Service
Gregory J. Dawson 2006 90,155 2,700 4,826 - 22,719 11,190 6,369 126,769
CFO
Darren M. Henry 2006 88,400 - 2,925 - 19,317 3,729 6,284 116,926
VP, Director of
Commercial Lending
(1) Represents compensation for work done on special project
(2) Represents the value from stock grants issued in 2006
(3) Represents cash incentives based on bank and/or individual
performance
(4) Represents change in value of pension benefits
(5) Represents the Company's matching contribution to the qualified
profit sharing plan that includes a 401(k) provision
The following table contains information regarding the grant of stock
options under the Company's stock option plan to the Named Executive
Officers during the year ended December 31, 2006.
Grants of Plan Based Awards
All Other Grant Date
Stock Awards: Fair Value
Estimated Future Payments Under Number of of Stock
Grant Non-Equity Incentive Plan Awards (1) Shares of and Option
Name Date Threshold Target Maximum Stock or Unit Awards
(2) (3)
($) ($) ($) (#) ($)
Buckner Woodford 1/3/2006 165 $ 4,826
N/A $12,731 $19,096 $25,461
Louis Prichard 1/3/2006 350 10,238
N/A 40,000 60,000 80,000
Norman J. Fryman 1/3/2006 165 4,826
N/A 18,327 27,491 36,655
Gregory J. Dawson 1/3/2006 165 4,826
N/A 16,755 25,133 33,511
Darren M. Henry 1/3/2006 100 2,925
N/A 9,172 13,757 18,343
(1) Represents incentive compensation from MIP plan
(2) Represents the shares granted from stock grant plan
(3) Represents the value of stock grant on grant date
Outstanding Equity Awards at Fiscal Year-end
Option Awards (1) Stock Awards (2)
Market
Number of Number of Number of Value of
Securities Securities Shares or Shares or
Underlying Underlying Units of Units of
Unexercised Unexercised Option Option Stock that Stock that
Options Options Exercise Expiration Have not Have not
Name Exercisable Unexercisable Price Date Vested Vested
Buckner Woodford 3,600 $20.63 1/12/09 165 $ 5,115
500 24.00 1/3/10
500 23.50 1/2/11
400 100 26.00 1/2/12
600 400 25.50 1/2/13
400 600 33.90 1/2/14
200 800 30.50 1/3/15
Louis Prichard 1,800 1,200 25.50 1/2/13 350 10,850
400 600 33.90 1/2/14
800 3,200 30.50 1/3/15
Norman J. Fryman 400 15.50 1/7/08 165 5,115
300 24.00 1/3/10
300 23.50 1/2/11
240 60 26.00 1/2/12
300 200 25.50 1/2/13
200 300 33.90 1/2/14
100 400 30.50 1/3/15
Gregory J. Dawson 400 15.50 1/7/08 165 5,115
1,100 20.63 1/12/09
150 24.00 1/3/10
150 23.50 1/2/11
120 30 26.00 1/2/12
240 160 25.50 1/2/13
160 240 33.90 1/2/14
100 400 30.50 1/3/15
Darren M. Henry 300 200 25.50 1/2/13 100 3,100
120 180 33.90 1/2/14
160 640 30.50 1/3/15
(1) Represents stock options granted under the stock option plan
(2) Represents grants of stock under the stock grant plan
The following table sets forth certain information regarding options
exercised by the Named Executive Officers during calendar year 2006.
Option Awards
Number of Shares Value Realized
Name Acquired on Exercise on Exercise
Gregory J. Dawson 600 $11,100
The table below shows the present value of accumulated benefits payable to
each of the named executive officers, including the number of years of service
credited to each such named executive officer, under the Pension Plan
determined using interest rate and mortality rate assumptions consistent with
those used in the Company's financial statements.
Payments
Present Value During
Number of Years of Accumulated Last Fiscal
Name Plan Name Credited Service Benefit Year
Buckner Woodford Kentucky Bancshares, Inc. 34 $ 589,272 $ -
Retirement Plan & Trust
Louis Prichard Kentucky Bancshares, Inc. 4 36,972 -
Retirement Plan & Trust
Norman J. Fryman Kentucky Bancshares, Inc. 21 169,523 -
Retirement Plan & Trust
Gregory J. Dawson Kentucky Bancshares, Inc. 20 65,180 -
Retirement Plan & Trust
Darren M. Henry Kentucky Bancshares, Inc. 4 11,200 -
Retirement Plan & Trust
In general, a participant's remuneration covered by the Company's
pension plan is his or her average annual cash compensation (W-2
earnings) for the highest 5 years. The years of service are 35 years
for Mr. Woodford, 3 years for Mr. Prichard, 22 years for Mr. Fryman, 21
years for Mr. Dawson and 4 years for Mr. Henry. The normal benefit is a
life annuity based on the 1984 Unisex Pension pre-retirement mortality
table and a pre-retirement interest rate of 7%. The benefits are not
subject to a deduction for Social Security or other offset amounts.
Compensation of Directors
Each director of the Company is a director of Kentucky Bank. Company
Directors are paid $400 for each Company and Kentucky Bank board meeting
attended ($400 for one paid absence per year) and non-employee Company
directors are paid $100 for each Kentucky Bank committee meeting
attended. Each Company Director is paid an annual retainer of $1,500
plus the audit committee chairman is paid an additional annual retainer
of $2,000. Thos compensation is shown in the table below as fees earned
or paid in cash. Non-employee Directors of Kentucky Bank are also
granted a 10-year option (shown under options awards in the table below)
to purchase 100 shares of the Company's common stock following each year
in which Kentucky Bank has a return on assets of 1 percent or greater.
The option's exercise price is the fair market value per share on the
date of grant.
Fees Earned
or Paid Option
Name in Cash Awards Total
William Arvin $12,200 $ 497 $ 12,697
Henry Hinkle 8,300 497 8,797
Theodore Kuster 13,400 497 13,897
Betty J. Long 12,300 497 12,797
Ted McClain 12,100 497 12,597
Edward Saunier 2,500 497 2,997
Robert G. Thompson 14,200 497 14,697
Woodford Van Meter 10,300 497 10,797
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
The compensation committee of the Board is comprised of Messrs. Arvin,
Hinkle and Kuster, each a non-employee director of the Company. None of our
executive officers serve on the compensation committee or board of directors
of any other company of which any members of our compensation committee or any
of our directors is an executive officer.
REPORT OF THE COMPENSATION COMMITTEE
The Compensation Committee of the company has reviewed and discussed the
Compensation Discussion and Analysis required by Item 402(b) of Regulation S-K
with management and, based on such review and discussions, the Compensation
Committee recommended to the Board that the Compensation Discussion and
Analysis be included in this proxy statement.
Members of the Compensation Committee:
William Arvin
Henry Hinkle
Theodore Kuster
Item 12. Security Ownership of Certain Beneficial Owners and Management
Set forth below are the number of shares of the Company's common stock
beneficially owned by each director and executive officer, and all
current directors and executive officers as a group as of December 31,
2006.
Name Shares Beneficially Owned(1)
Number Percentage
William Arvin (2) 30,271 1.0%
B. Proctor Caudill (3) 177,010 6.0
Gregory J. Dawson (4) 8,762 *
Norman J. Fryman (5) 3,935 *
Darren M. Henry (6) 1,100 *
Henry Hinkle (7) 38,135 1.3%
Theodore Kuster (8) 18,105 *
Betty J. Long (9) 1,700 *
Ted McClain (10) 2,575 *
Louis Prichard (11) 7,410 *
Edwin S. Saunier (12) 700 *
Robert G. Thompson (13) 6,250 *
Woodford Van Meter (14) 32,500 1.1%
Buckner Woodford (15) 250,429 8.5%
All directors and officers
(14 persons) as a group
(consisting of those
persons named above)(16) 578,882 19.7%
* Less than 1%
1) Beneficial ownership as reported in the above table has been
determined in accordance with Rule 13d-3 under the Exchange Act. Unless
otherwise indicated, beneficial ownership includes both sole or shared
voting and sole or shared investment power.
2) Includes 11,858 shares held in a retirement account, 11,968 shares
held of record by Mr. Arvin's wife, as to which Mr. Arvin disclaims
beneficial ownership, 5,465 shares held jointly with his wife and 750
shares that Mr. Arvin may acquire upon exercise of outstanding stock
options.
3) Includes 19,725 shares held of record by Mr. Caudill's wife, as to
which Mr. Caudill's disclaims beneficial ownership and 165 shares from
future vesting of stock grants.
4) Includes 2,710 shares that Mr. Dawson may acquire upon exercise of
outstanding stock options and 297 shares from future vesting of stock
grants.
5) Includes 2,200 shares that Mr. Fryman may acquire upon exercise of
outstanding stock options and 297 shares from future vesting of stock
grants.
6) Includes 900 shares that Mr. Henry may acquire upon exercise of
outstanding stock options and 180 shares from future vesting of stock
grants.
7) Includes 1,000 shares held by his wife and 2,545 shares held by
relatives, as to which Mr. Hinkle disclaims beneficial ownership.
Includes 31,875 shares held of record by Hinkle Contracting Company, as
to which Mr. Hinkle, as president, has shared voting power. Also
includes 750 shares that Mr. Hinkle may acquire upon exercise of
outstanding stock options.
8) Includes 6,250 shares held of record by Mr. Kuster's wife, as to
which Mr. Kuster disclaims beneficial ownership. Also includes 5,500
shares held in a retirement account and 550 shares that Mr. Kuster may
acquire upon exercise of outstanding stock options.
9) Includes 1,600 shares held in a retirement account and 100 shares
that Ms. Long may acquire upon exercise of outstanding stock options.
10) Includes 1,000 shares held of record by Hopewell Company, as to
which Mr. McClain, as a 1/3 owner, has voting power. Also includes 400
shares that Mr. McClain may acquire upon exercise of outstanding stock
options.
11) Includes 2,110 shares held jointly with his wife and 4,600 shares
that Mr. Prichard may acquire upon exercise of outstanding stock options
and 630 shares from future vesting of stock grants.
12) Includes 200 shares that Mr. Saunier may acquire upon exercise of
outstanding stock options.
13) Includes 200 shares held of record by Mr. Thompson's wife, as to
which Mr. Thompson disclaims beneficial ownership. Includes 750 shares
that Mr. Thompson may acquire upon exercise of outstanding stock
options.
14) Includes 2,200 shares held of record by Mr. Van Meter's wife, as to
which Mr. Van Meter disclaims beneficial ownership. Includes 200 shares
that Mr. Van Meter may acquire upon exercise of outstanding stock
options.
15) Includes 8,000 shares held by his wife, as to which Mr. Woodford
disclaims beneficial ownership. Also 6,900 shares that Mr. Woodford may
acquire upon exercise of outstanding stock options and 297 shares from
future vesting of stock grants.
16) Includes 21,010 shares that may be acquired upon exercise of
outstanding stock options and 1,866 shares from future vesting of stock
grants.
The following table sets forth as of December 31, 2006 the only persons
known by the Company to own beneficially (as determined in accordance
with the rules and regulations of the Commission) more than 5% of the
outstanding common stock. See notes 3 and 15 in the preceding table for
further information.
Name and Address Shares Beneficially
of Beneficial Owner Owned Percentage
Buckner Woodford 250,429 8.5%
340 Stoner Avenue
Paris, Kentucky 40361
B. Proctor Caudill 177,010 6.0
2075 Rice Road
Morehead, KY 40351
The following table sets forth as of December 31, 2006 the Company's
common stock authorized for issuance under equity compensation plans.
The Company's shareholders have approved all of the Company's equity
compensation plans.
Number of Securities
Number of Securities remaining available for
To be issued Weighted average future issuance under
Upon exercise of exercise price of equity compensation plans
Outstanding options, outstanding options, (excluding securities
Plan category warrants and rights warrants and rights reflected in column (a)
Equity compensation plans
Approved by security holders:
Employee Gift Program 0 $ n/a 572
1993 Employee Stock Ownership
Incentive Plan 16,510 18.89 0
1993 Non-Employee Directors
Stock Ownership Plan 7,100 27.10 8,000
1999 Employee Stock Option Plan 46,304 29.19 52,044
2005 Restricted Stock Grant Plan 0 n/a 46,155
Total 69,914 $26.54 106,771
Item 13. Certain Relationships and Related Transactions
Directors and officers of the Company and their associates were
customers of and had transactions with the Company's subsidiary bank in
the ordinary course of business during the year ended December 31, 2006.
Similar transactions may be expected to take place with the Company's
subsidiary bank in the future. Outstanding loans and commitments made
by such subsidiary bank in transactions with the Company's directors and
officers and their associates were made on substantially the same terms,
including interest rates and collateral, as those prevailing at the time
for comparable transactions with other persons and did not involve more
than a normal risk of collectibility or present other unfavorable
features. Certain directors and executive officers were loan customers
of Kentucky Bank and outstanding loans were $4.7 million as of December
31, 2006 and as of December 31, 2005. See Note 4 in the notes to
consolidated financial statements included as Exhibit 13. The Company
purchased various types of insurance with aggregate premiums amounting
to $256 thousand in 2006 from Hopewell Insurance Company. Director Ted
McClain owns 33% of this company and is one of their insurance agents.
Item 14. Principal Accountant Fees and Services
The Audit Committee has pre-approved that management of the Company may
consult with the primary independent auditor concerning certain additional
services outside of the audit work that was specifically approved in the
engagement letter for those services. Included were services such as:
1. Discussions related to accounting for mergers and acquisitions,
2. Tax return preparation
3. Discussions concerning loan review,
4. Discussions regarding regulatory requirements,
5. Data processing and retirement plan audits, and
6. Profit enhancement and other consulting.
The fees for services provided by the primary independent auditor, Crowe
Chizek and Company LLC for 2006 and for 2005 were as follows:
Audit fees - Fees for the financial statement audit, and the review of the
Company's Form 10-Q's were $115,000 for 2006 and $92,050 for 2005.
Audit related fees - Aggregate fees for all assurance and related services
were $14,450 for 2006 and $14,600 for 2005. These fees were incurred for
audits of benefit plans. The 2006 and 2005 amounts were preapproved by the
audit committee.
Tax fees - Fees related to tax compliance, advice and planning were $16,000
for 2006 and $14,450 for 2005. The 2006 and 2005 amounts were preapproved
by the audit committee.
All other fees - Consulting fees related to acquisitions, profitability and
risk management were $16,120 for 2006 and $14,400 for 2005. The 2006 and
2005 amounts were preapproved by the audit committee.
All services provided by the Corporation's primary independent auditor in
2006 and 2005 were approved by the Audit Committee.
Part IV
Item 15. Exhibits, Financial Statement Schedules and Reports on Form 8-K
(a) The following exhibits are incorporated by reference herein or made a
part of this Form 10-K:
2.1 Agreement and Plan of Merger with Peoples Bancorp of Sandy
Hook is incorporated by reference to Exhibit 2.1 of the
Registrant's Current Report on Form 8-K dated February 24,
2006 (File No. 33-96358).
3.1 Articles of Incorporation of the Registrant are incorporated by
reference to Exhibit 3.1 of the Registrant's Quarterly Report
on Form 10-Q for the quarterly period ending March 31, 2000
(File No. 33-96358).
3.2 Bylaws of the Registrant are incorporated by reference to
Exhibit 3.1 of the Registrant's Quarterly Report on Form 10-Q
for the quarterly period ending June 30, 2000 (File No.
33-96358).
3.3 Articles of Amendment to Amended and Restated Articles of
Incorporation of the Registrant are incorporated by reference
to Exhibit 3.3 of the Registrant's Annual Report on Form 10-K
for the period ending December 31, 2005 (File No. 33-96358).
10.1 Kentucky Bancshares, Inc. 1993 Employee Stock Ownership
Incentive Plan is incorporated by reference to Exhibit 10.2 of
the Registrant's Registration Statement on Form S-4 (File No.
33-96358).*
10.2 Kentucky Bancshares, Inc. 1993 Non-Employee Directors Stock
Ownership Incentive Plan is incorporated by reference to
Exhibit 10.3 of the Registrant's Registration Statement on Form
S-4 (File No. 33-96358).*
10.3 Kentucky Bancshares, Inc. 1999 Employee Stock Option Plan is
incorporated by reference to Exhibit 99.1 of the Registrant's
Form 10-K for the fiscal year ended December 31, 1998.*
10.4 Schedule of 2006 Compensation Arrangements for Named Executive
Officers is incorporated by reference to the Registrant's Current
Report on Form 8-K dated December 20, 2005 (File No. 33-96358).*
10.5 2005 Restricted Stock Grant Plan, including form of Award
Agreement, as incorporated by reference to Exhibit 10.1 of the
Registrant's Current Report on Form 8-K dated February 15, 2005
(File No. 33-96358).*
11 Computation of earnings per share - See Note 12 in the notes to
consolidated financial statements included as Exhibit 13.
13 Kentucky Bancshares, Inc. 2006 Annual Report and Proxy
Statement, including Financial Statements:
Consolidated Balance Sheets
Consolidated Statements of Income
Consolidated Statements of Comprehensive Income
Consolidated Statements of Changes in Stockholders' Equity
Consolidated Statements of Cash Flows
Notes to Consolidated Financial Statements
Report of Independent Auditors
21 Subsidiaries of Registrant
23 Consent of Crowe Chizek and Company LLC
31.1 Certification of Chief Executive Officer pursuant to Rule 13a-
14(a) and Rule 15d-14(a) of the Securities Exchange Act, as
amended.
31.2 Certification of Chief Financial Officer pursuant to Rule 13a-
14(a) and Rule 15d-14(a) of the Securities Exchange Act, as
amended.
32.1 Certification of Chief Executive Officer pursuant to 18 U.S.C.
Section 1350, as adopted pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002.
32.2 Certification of Chief Financial Officer pursuant to 18 U.S.C.
Section 1350, as adopted pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002.
* Denotes a management contract or compensatory plan or arrangement
of the Registrant required to be filed as an exhibit pursuant to Item
601(10) (iii) of Regulation S-K.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be
signed on its behalf by the undersigned, thereunto duly authorized.
Kentucky Bancshares, Inc.
By: ___/s/Louis Prichard __
Louis Prichard, President and Chief Executive Officer, Director
March 30, 2007
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed below by the following persons on behalf of
the registrant and in the capacities and on the dates indicated.
/s/Louis Prichard__ _______ March 30, 2007
Louis Prichard, President and Chief Executive Officer, Director
/s/Gregory J. Dawson_________ March 30, 2007
Gregory J. Dawson, Chief Financial and Accounting Officer
/s/Buckner Woodford__________ March 30, 2007
Buckner Woodford, Chairman of the Board, Director
_____________________________ March __, 2007
William Arvin, Director
/s/B. Proctor Caudill________ March 30, 2007
B. Proctor Caudill, Director
/s/Henry Hinkle___ _ __ ____ March 30, 2007
Henry Hinkle, Director
_____________________________ March __, 2007
Theodore Kuster, Director
/s/Betty J. Long_____________ March 30, 2007
Betty J. Long, Director
/s/Ted McClain______________ March 30, 2007
Ted McClain, Director
_____________________________ March __, 2007
Edwin S. Saunier, Director
/s/Robert G. Thompson________ March 30, 2007
Robert G. Thompson, Director
_____________________________ March __, 2007
Woodford Van Meter, Director
SUPPLEMENTAL INFORMATION TO BE FURNISHED WITH REPORTS FILED PURSUANT TO
SECTION 15(d) OF THE ACT BY REGISTRANTS WHICH HAVE NOT REGISTERED
SECURITIES PURSUANT TO SECTION 12 OF THE ACT.
The Registrant refers to Exhibit 13 to the Form 10-K.
INDEX TO EXHIBITS
Exhibit
Number Description of Document
2.1 Agreement and Plan of Merger with Peoples Bancorp of Sandy
Hook is incorporated by reference to Exhibit 2.1 of the
Registrant's Current Report on Form 8-K dated February 24,
2006 (File No. 33-96358).
3.1 Articles of Incorporation of the Registrant are incorporated
by reference to Exhibit 3.1 of the Registrant's Quarterly
Report on Form 10-Q for the quarterly period ending March
31, 2000 (File No. 33-96358).
3.2 Bylaws of the Registrant are incorporated by reference to
Exhibit 3.1 of the Registrant's Quarterly Report on Form 10-
Q for the quarterly period ending June 30, 2000 (File No.
33-96358).
3.3 Articles of Amendment to Amended and Restated Articles of
Incorporation of the Registrant are incorporated by reference
to Exhibit 3.3 of the Registrant's Annual Report on Form 10-K
for the period ending December 31, 2005 (File No. 33-96358).
10.1 Kentucky Bancshares, Inc. 1993 Employee Stock Ownership
Incentive Plan is incorporated by reference to Exhibit 10.2
of the Registrant's Registration Statement on Form S-4 (File
No. 33-96358).*
10.2 Kentucky Bancshares, Inc. 1993 Non-Employee Directors Stock
Ownership Incentive Plan is incorporated by reference to
Exhibit 10.3 of the Registrant's Registration Statement on
Form S-4 (File No. 33-96358).*
10.3 Kentucky Bancshares, Inc. 1999 Employee Stock Option Plan is
incorporated by reference to Exhibit 99.1 of the
Registrant's Form 10-K for the fiscal year ended December
31, 1998.*
10.4 Schedule of 2006 Compensation Arrangements for Named Executive
Officers is incorporated by reference to the Registrant's Current
Report on Form 8-K dated December 20, 2005 (File No. 33-96358).*
10.5 2005 Restricted Stock Grant Plan, including form of Award
Agreement, as incorporated by reference to Exhibit 10.1 of the
Registrant's Current Report on Form 8-K dated February 15, 2005
(File No. 33-96358).*
11 Computation of earnings per share - See Note 10 in the notes
to consolidated financial statements included as Exhibit 13.
13 Kentucky Bancshares, Inc. 2006 Annual Report and Proxy
Statement, including Financial Statements:
Consolidated Balance Sheets
Consolidated Statements of Income
Consolidated Statements of Comprehensive Income
Consolidated Statements of Changes in Stockholders' Equity
Consolidated Statements of Cash Flows
Notes to Consolidated Financial Statements
Report of Independent Auditors
21 Subsidiaries of Registrant
23 Consent of Crowe Chizek and Company LLC
31.1 Certification of Chief Executive Officer pursuant to Rule
13a-14(a) and Rule 15d-14(a) of the Securities Exchange Act,
as amended.
31.2 Certification of Chief Financial Officer pursuant to Rule
13a-14(a) and Rule 15d-14(a) of the Securities Exchange Act,
as amended.
32.1 Certification of Chief Executive Officer pursuant to 18 U.S.C.
Section 1350, as adopted pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002.
32.2 Certification of Chief Financial Officer pursuant to 18 U.S.C.
Section 1350, as adopted pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002.
* Denotes a management contract or compensatory plan or
arrangement of the Registrant required to be filed as an exhibit
pursuant to Item 601(10) (iii) of Regulation S-K.
6
25
BOURBON BANCSHARES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2000, 1999 and 1998
44
39