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UNITED STATESSECURITIES AND EXCHANGE COMMISSION
 Washington, D.C. 20549
 FORM 10-KSB
 (Mark One)
 þ
    
    Annual report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
 For the fiscal year ended December 31, 2005.
 o
    
    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: 333-89952
 KENSINGTON BANKSHARES, INC.
 (Exact Name of Registrant as Specified in Its Charter)
 Florida
    
    59-3709535(State of Incorporation)
    
    (IRS Employer Identification No.)
 13246 North Dale Mabry Hwy., Tampa, FL 33618  (Address of Principal Executive Offices, Zip Code)
 (813) 961-6200  (Registrants Telephone Number, Including Area Code)
 
  o x
 x
 o x
   o x
 DOCUMENTS INCORPORATED BY REFERENCE




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TABLE OF CONTENTS  INTRODUCTIONPART IPART IIPART IIIPART IVEx-10.2(a) Copy of AmendmentEx-10.3 Copy of Agreement With Superior BancorpEx-10.4  Code of EthicsEx-31.1 Section 302 CertificationEx-31.2 Section 302 CertificationEx-32.1 Section 906 CertificationEx-32.2 Section 906 Certification 
 INTRODUCTION
   
 PART I
 Item 1. Description of Business
 Kensington Bankshares, Inc.




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Kensington Bank
  Banking Services
    Primary Market Area
  2




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Competition
   Employees
  Supervision and Regulations
 General
  3




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Company Activities
   4




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Regulation of Payment of Dividend
    5




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Capital Adequacy Requirements
  Restrictions on the Making of Loans
  Statistical Information about Kensington Bankshares
  Average Daily Balance Sheets
  Table 1
 Average Daily Balance Sheet
(in thousands)
 Year Ended December 31,2005
    
    
    2004
    
    
    2003Assets:Cash and due from banks
    
    $
    4,326
    
    
    $
    3,420
    
    
    $
    2,571Federal funds sold
    
    
    2,722
    
    
    
    3,541
    
    
    
    3,404Taxable securities
    
    
    164,925
    
    
    
    183,750
    
    
    
    174,003Loans (Net)
    
    
    112,315
    
    
    
    94,852
    
    
    
    87,873Premises and equipment (Net)
    
    
    3,138
    
    
    
    2,594
    
    
    
    2,715Other
    
    
    2,628
    
    
    
    2,722
    
    
    
    2,727Total Assets
    
    $
    290,054
    
    
    $
    290,879
    
    
    $
    273,293
 6




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##### Table of Contents



Year Ended December 31,2005
    
    
    2004
    
    
    2003Liabilities and equity:Non-interest-bearing demand deposits
    
    $
    32,398
    
    
    $
    22,318
    
    
    $
    13,561Interest-bearing demand deposits
    
    
    31,740
    
    
    
    36,981
    
    
    
    22,944Savings deposits
    
    
    15,440
    
    
    
    15,647
    
    
    
    11,196Other time deposits
    
    
    171,968
    
    
    
    183,541
    
    
    
    190,393Total deposits
    
    
    251,546
    
    
    
    258,487
    
    
    
    238,094Other borrowed funds
    
    
    10,426
    
    
    
    6,546
    
    
    
    11,654Other liabilities
    
    
    786
    
    
    
    456
    
    
    
    573Stockholders equity
    
    
    27,296
    
    
    
    25,390
    
    
    
    22,972Total Liabilities and Stockholders Equity
    
    $
    290,054
    
    
    $
    290,879
    
    
    $
    273,293
 Income and Average Yield on Interest Earning Assets and Interest
Expense and Average Rate on Interest Bearing Liabilities
  Table 2
 Interest Income and Expenses
(dollars in thousands)
 Year Ended December 31,2005
    
    
    2004
    
    
    2003Interest
    
    
    Avg. Rate
    
    
    Interest
    
    
    Avg. Rate
    
    
    Interest
    
    
    Avg. RateAssets:Taxable securities
    
    $
    7,603
    
    
    
    4.61
    %
    
    $
    7,513
    
    
    
    4.09
    %
    
    $
    6,916
    
    
    
    3.97
    %Loans
    
    
    8,374
    
    
    
    7.39
    %
    
    
    6,616
    
    
    
    6.91
    %
    
    
    6,392
    
    
    
    7.20
    %Federal funds sold
    
    
    81
    
    
    
    2.98
    %
    
    
    45
    
    
    
    1.27
    %
    
    
    38
    
    
    
    1.12
    %Total interest  earning assets
    
    $
    16,058
    
    
    
    5.72
    %
    
    $
    14,174
    
    
    
    5.01
    %
    
    $
    13,346
    
    
    
    5.03
    %Liabilities:Interest-bearing demand
deposits
    
    $
    407
    
    
    
    1.28
    %
    
    $
    416
    
    
    
    1.12
    %
    
    $
    243
    
    
    
    1.06
    %Savings deposits
    
    
    206
    
    
    
    1.33
    %
    
    
    156
    
    
    
    1.00
    %
    
    
    120
    
    
    
    1.07
    %Time deposits
    
    
    5,284
    
    
    
    3.07
    %
    
    
    4,454
    
    
    
    2.43
    %
    
    
    5,376
    
    
    
    2.82
    %Other borrowed funds
    
    
    350
    
    
    
    3.36
    %
    
    
    93
    
    
    
    1.42
    %
    
    
    152
    
    
    
    1.30
    %Total interest  bearing
liabilities
    
    $
    6,247
    
    
    
    2.72
    %
    
    $
    5,119
    
    
    
    2.11
    %
    
    $
    5,891
    
    
    
    2.49
    %
 7




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Table 3
 Rate/Volume Variance Analysis
(dollars in thousands)
 2005 Compared to 2004
    
    
    2004 Compared to 2003Increase (Decrease) Due to
    
    
    Increase (Decrease) Due toVolume (1)
    
    
    Rate
    
    
    Change
    
    
    Volume (1)
    
    
    Rate
    
    
    ChangeInterest earned on:Taxable securities
    
    $
    (368
    )
    
    $
    458
    
    
    $
    90
    
    
    $
    395
    
    
    $
    202
    
    
    $
    597Loans, net(1)
    
    
    1,276
    
    
    
    482
    
    
    
    1,758
    
    
    
    475
    
    
    
    (251
    )
    
    
    224Federal funds sold
    
    
    (7
    )
    
    
    43
    
    
    
    36
    
    
    
    2
    
    
    
    5
    
    
    
    7Total interest income
    
    $
    900
    
    
    $
    984
    
    
    $
    1,884
    
    
    $
    871
    
    
    $
    (43
    )
    
    $
    828Interest paid on:Interest-bearing demand
deposits
    
    $
    (706
    )
    
    $
    697
    
    
    $
    (9
    )
    
    $
    157
    
    
    $
    16
    
    
    $
    173Savings deposits
    
    
    (2
    )
    
    
    52
    
    
    
    50
    
    
    
    44
    
    
    
    (8
    )
    
    
    36Time deposits
    
    
    (258
    )
    
    
    1,088
    
    
    
    830
    
    
    
    (188
    )
    
    
    (734
    )
    
    
    (922
    )Other borrowed funds
    
    
    78
    
    
    
    179
    
    
    
    257
    
    
    
    (74
    )
    
    
    15
    
    
    
    (59
    )Total interest expense
    
    $
    (888
    )
    
    $
    2,016
    
    
    $
    1,128
    
    
    $
    (61
    )
    
    $
    (711
    )
    
    $
    (772
    )Change in net interest income
    
    $
    1,788
    
    
    $
    (1,032
    )
    
    $
    756
    
    
    $
    933
    
    
    $
    667
    
    
    $
    1,600
  Composition of Investment Securities
  Table 4
 Book Value of Investment Securities
 December 31,2005
    
    
    2004
    
    
    2003U.S. government agencies
    
    $
    184,025
    
    
    $
    158,399
    
    
    $
    173,280
 8




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WeightedMaturity
    
    Par
    
    
    Book
    
    
    Market
    
    
    Average Yield3 Months or less
    
    $
    
    
    
    $
    
    
    
    $
    
    
    
    
    
    %Over 3 through 12 months
    
    
    15,560
    
    
    
    15,541
    
    
    
    15,231
    
    
    
    5.40
    %Over 1 year through 5 years
    
    
    37,370
    
    
    
    37,341
    
    
    
    36,687
    
    
    
    4.62
    %Over 5 years through 10 years
    
    
    119,116
    
    
    
    119,083
    
    
    
    117,454
    
    
    
    4.99
    %Over 10 years
    
    
    12,110
    
    
    
    12,060
    
    
    
    11,839
    
    
    
    4.72
    %Total
    
    $
    184,156
    
    
    $
    184,025
    
    
    $
    181,211
    
    
    
    4.94
    %
 Lending Activities
     9




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Table 5
 Loans Outstanding as of:
 December 31,2005
    
    
    2004
    
    
    2003Amount
    
    
    Percent
    
    
    Amount
    
    
    Percent
    
    
    Amount
    
    
    PercentReal estate
    
    $
    119,488
    
    
    
    94.86
    %
    
    
    93,380
    
    
    
    95.21
    %
    
    
    80,343
    
    
    
    88.92
    %Commercial
    
    
    4,529
    
    
    
    3.60
    %
    
    
    3,574
    
    
    
    3.64
    %
    
    
    7,686
    
    
    
    8.51
    %Consumer
    
    
    1,952
    
    
    
    1.55
    %
    
    
    1,129
    
    
    
    1.15
    %
    
    
    2,324
    
    
    
    2.57
    %Gross loans
    
    
    125,969
    
    
    
    100.00
    %
    
    
    98,083
    
    
    
    100.00
    %
    
    
    90,353
    
    
    
    100.00
    %Net deferred loan fees
    
    
    (434
    )
    
    
    
    
    
    
    (313
    )
    
    
    
    
    
    
    (283
    )Allowance for possible
credit loss
    
    
    (1,017
    )
    
    
    
    
    
    
    (1,000
    )
    
    
    
    
    
    
    (900
    )Net loans
    
    $
    124,518
    
    
    
    
    
    
    $
    96,770
    
    
    
    
    
    
    $
    89,170
 10




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Loan Maturities and Sensitivity to Changes in Interest Rates
  Table 6
 Aggregate Maturities of Loan Balances
as of December 31, 2005
 In One Year
    
    
    After One Year But
    
    
    After FiveOr Less
    
    
    Within Five Years
    
    
    YearsReal Estate:Residential
    
    $
    5,601
    
    
    $
    6,775
    
    
    $
    499Commercial
    
    
    14,652
    
    
    
    53,085
    
    
    
    3,462Construction
    
    
    24,464
    
    
    
    10,828
    
    
    
    236All Other Loans
    
    
    3,010
    
    
    
    3,357
    
    
    
    Total
    
    $
    47,727
    
    
    $
    74,045
    
    
    $
    4,197Fixed Rate
    
    $
    9,661
    
    
    $
    13,824
    
    
    $
    4,197Variable Rate (1)
    
    
    38,066
    
    
    
    60,221
    
    
    
    Total
    
    $
    47,727
    
    
    $
    74,045
    
    
    $
    4,197
 
 (1)
    
    These loans are generally tied to the prime rate or a similar index. The range of interest
rate charges is governed by State usury ceilings. Risk Elements
   11




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12




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Table 7
 Loan Loss Experience and Provision for Possible Credit Losses
(dollars in thousands)
 Year Ended December 31,2005
    
    
    2004
    
    
    2003Daily average amount of net loans outstanding
    
    $
    112,315
    
    
    $
    94,852
    
    
    $
    87,873Balance of allowance for loan losses at beginning of period
    
    $
    1,000
    
    
    $
    900
    
    
    $
    700Loans charged off:Commercial, financial and agricultural
    
    
    
    
    
    
    23
    
    
    
    Real estate  construction
    
    
    
    
    
    
    
    
    
    
    Real estate  mortgage
    
    
    
    
    
    
    
    
    
    
    Installment loans to individuals
    
    
    2
    
    
    
    4
    
    
    
    3Recoveries of loans previously charged off
    
    
    19
    
    
    
    
    
    
    
    Net loans charged off (recovered)
    
    
    (17
    )
    
    
    27
    
    
    
    3Additions to allowance charged to operations(1)
    
    
    
    
    
    
    127
    
    
    
    203Balance at end of period
    
    $
    1,017
    
    
    $
    1,000
    
    
    $
    900Ratio of net charge offs to the daily average of loans
outstanding
    
    
    -0.02
    %
    
    
    0.03
    %
    
    
    0.00
    %
 
 (1)
    
    Additions to the allowance were based primarily on current economic conditions and the
condition of the loan portfolio. Allocation of Allowance
  Table 8
 Allocation of Allowance for Possible Credit Losses
(dollars in thousands)
 Year Ended December 31,2005
    
    
    2004
    
    
    2003Real estate  commercial
    
    $
    572,740
    
    
    $
    576,933
    
    
    $
    445,370Real estate  construction
    
    
    281,567
    
    
    
    271,720
    
    
    
    250,954Real estate  residential
    
    
    93,896
    
    
    
    91,157
    
    
    
    110,840Real estate  multifamily
    
    
    12,116
    
    
    
    12,956
    
    
    
    25,190Commercial
    
    
    48,177
    
    
    
    38,545
    
    
    
    48,483Consumer
    
    
    8,242
    
    
    
    8,689
    
    
    
    19,163Total allowance for possible loan losses
    
    $
    1,016,738
    
    
    $
    1,000,000
    
    
    $
    900,000
 13




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Table 9
 Delinquent Loan Table
(dollars in thousands)
 December 31,2005
    
    
    2004
    
    
    2003Real estate loans
    
    $
    247
    
    
    $
    
    
    
    $
    152Commercial loans
    
    
    608
    
    
    
    
    
    
    
    Other loan
    
    
    12
    
    
    
    
    
    
    
    Total
    
    $
    867
    
    
    $
    
    
    
    $
    152
 Deposits
  Table 10
 Year Ended December 31,2005
    
    
    2004
    
    
    2003Average
    
    
    Average
    
    
    Average
    
    
    Average
    
    
    Average
    
    
    AverageBalance
    
    
    Rate
    
    
    Balance
    
    
    Rate
    
    
    Balance
    
    
    RateNon interest-bearing demand
deposits
    
    $
    32,398
    
    
    
    
    
    
    $
    22,318
    
    
    
    
    
    
    $
    13,561Interest-bearing demand
deposits
    
    
    31,740
    
    
    
    1.28
    %
    
    
    36,981
    
    
    
    1.12
    %
    
    
    22,944
    
    
    
    1.06
    %Savings deposits
    
    
    15,440
    
    
    
    1.33
    %
    
    
    15,647
    
    
    
    1.00
    %
    
    
    11,196
    
    
    
    1.07
    %Time deposits
    
    
    171,968
    
    
    
    3.07
    %
    
    
    183,541
    
    
    
    2.43
    %
    
    
    190,393
    
    
    
    2.82
    %Total Deposits
    
    $
    251,546
    
    
    
    2.34
    %
    
    $
    258,487
    
    
    
    1.94
    %
    
    $
    238,094
    
    
    
    2.41
    %
  Under 3 Months
    
    $
    9,1753 to 12 Months
    
    
    29,709Over 12 Months
    
    
    42,961Total
    
    $
    81,845
 14




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Other Borrowed Funds
  Table 11
 Year Ended December 31,2005
    
    
    2004
    
    
    2003Average
    
    
    Average
    
    
    Average
    
    
    Average
    
    
    Average
    
    
    AverageBalance
    
    
    Rate
    
    
    Balance
    
    
    Rate
    
    
    Balance
    
    
    RateSecurities sold
under agreement
to repurchase
    
    $
    9,423
    
    
    
    3.36
    %
    
    $
    5,383
    
    
    
    1.52
    %
    
    $
    10,516
    
    
    
    1.33
    %Other (Federal
Funds Purchased)
    
    
    1,003
    
    
    
    3.29
    %
    
    
    1,163
    
    
    
    0.95
    %
    
    
    1,138
    
    
    
    1.05
    %Total Other
Borrowed Funds
    
    $
    10,426
    
    
    
    3.36
    %
    
    $
    6,546
    
    
    
    1.42
    %
    
    $
    11,654
    
    
    
    1.30
    %
 Return on Equity
  Table 12
 Year Ended December 31,2005
    
    
    2004
    
    
    2003Percentage of net income to:Average total assets
    
    
    1.01
    %
    
    
    0.93
    %
    
    
    0.76
    %Average shareholders equity
    
    
    10.54
    %
    
    
    10.63
    %
    
    
    8.97
    %Percentage of average shareholders equity to
daily average total assets
    
    
    9.41
    %
    
    
    8.73
    %
    
    
    8.41
    %
 15




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Item 2. Description of Property
  Address
    
    Size
    
    
    Owned/Leased
    
    
    ExpirationCarrollwood (Main Office)
    
    2,400 SF
    
    Leased
    
    
    7/31/201013246 N. Dale Mabry HighwayTampa, FL 33618Spring Hill
    
    4,000 SF
    
    Owned1300 Pinehurst DriveSpring Hill, FL 34606Sun City Center
    
    2,400 SF
    
    Leased
    
    
    9/30/20104842 State Road 674Sun City Center, FL 33573Sun City Satellite Offices:Aston Gardens
    
    160 SF
    
    Leased
    
    
    Prepaid annually1311 Aston Gardens Ct.Courtyards
    
    160 SF
    
    Leased
    
    
    Prepaid annually231 Courtyards Blvd.Sun Towers
    
    117 SF
    
    Leased
    
    
    renewed annually101 Trinity Lakes DriveBarclay
    
    1,050 SF
    
    Leased
    
    
    11/30/200614363 Spring Hill Drive
    
    
    
    
    
    
    
    
    
    
    In process of renewingSpring Hill, FL 34609Regency Crossings
    
    4,875 SF
    
    Leased
    
    
    11/30/2006(a)8623 Regency Park Blvd.
    
    
    
    
    
    
    
    
    
    
    In process of renewingPort Richey, FL 34668Trinity (New)
    
    2,400 SF
    
    Leased
    
    
    2/28/2010(a)4010 Little RoadPort Richey, FL 34655Wesley Chapel
    
    3,772 SF
    
    Leased
    
    
    2/6/2008(b)1932 Bruce B. DownsWesley Chapel, FL 33543Clearwater
    
    3,780 SF
    
    Owned2440 Sunset Point RoadClearwater, FL 33765
 16




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Item 2. Description of Property (continued)
 Address
    
    Size
    
    Owned/Leased
    
    ExpirationPalm Harbor
    
    2,500 SF
    
    Owned36301 US Highway 19 NorthPalm Harbor, FL 34684
 Former Office
 Trinity
    
    1,900 SF
    
    Leased
    
    10/15/20078805 Mitchell Blvd.New Port Richey, FL 34655
  
   Item 3. Legal Proceedings
  Item 4. Submission of Matters to a Vote of Security Holders
  PART II
 Item 5. Market for Common Equity and Related Stockholder Matters
   17




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Item 6. Managements Discussion and Analysis of Financial Condition and Results of Operations
  General
  Critical Accounting Policies and Estimates
     18




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Results of Operations and Financial Condition
 Comparison of year ended December 31, 2005 to the year ended December 31, 2004.
   Comparison of year ended December 31, 2004 to the year ended December 31, 2003.
   19




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Net Interest Income
    Provision for Possible Credit Losses
  20




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Non-Interest Income and Expenses
 Table 13
 Non-Interest Income
(dollars in thousands)
 Year Ended December 31,2005
    
    
    2004
    
    
    2003Service charges on deposit accounts
    
    $
    218
    
    
    $
    190
    
    
    $
    142Securities gains
    
    
    3
    
    
    
    1
    
    
    
    118Other income
    
    
    36
    
    
    
    33
    
    
    
    84Total non-interest income
    
    $
    257
    
    
    $
    224
    
    
    $
    344
   Table 14
 Non-Interest Expense
(dollars in thousands)
 Year Ended December 31,2005
    
    
    2004
    
    
    2003Salaries and employee benefits
    
    $
    3,017
    
    
    $
    2,536
    
    
    $
    2,280Occupancy expense
    
    
    589
    
    
    
    506
    
    
    
    462Equipment expense
    
    
    429
    
    
    
    453
    
    
    
    391Data processing
    
    
    312
    
    
    
    367
    
    
    
    337Professional and directors fees
    
    
    288
    
    
    
    253
    
    
    
    192Office expense
    
    
    155
    
    
    
    151
    
    
    
    154Advertising and marketing expense
    
    
    136
    
    
    
    89
    
    
    
    101Other expense
    
    
    504
    
    
    
    486
    
    
    
    415Total non-interest expense
    
    $
    5,430
    
    
    $
    4,841
    
    
    $
    4,332
 21




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##### Table of Contents



Income Tax Expense (Benefit)
  Asset/Liability Management
     22




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##### Table of Contents



Table 15
 Interest Sensitivity Due to Maturing or RepricingMore90 Days
    
    
    90-180
    
    
    181 Days
    
    
    
    
    
    
    
    
    
    
    than 5or Less
    
    
    Days
    
    
    to 1 Year
    
    
    1-3 Years
    
    
    3-5 Years
    
    
    Years
    
    
    TotalInterest-earning assets:Federal funds sold
    
    $
    1,953
    
    
    $
    
    
    
    $
    
    
    
    $
    
    
    
    $
    
    
    
    $
    
    
    
    $
    1,953Investment securities
    
    
    
    
    
    
    1,000
    
    
    
    
    
    
    
    9,060
    
    
    
    24,720
    
    
    
    149,376
    
    
    
    184,156Loans
    
    
    37,317
    
    
    
    5,946
    
    
    
    9,510
    
    
    
    53,920
    
    
    
    17,377
    
    
    
    1,195
    
    
    
    125,265Total interest-earning assets
    
    $
    39,270
    
    
    $
    6,946
    
    
    $
    9,510
    
    
    $
    62,980
    
    
    $
    42,097
    
    
    $
    150,571
    
    
    $
    311,374Interest-bearing liabilities:Interest-bearing demand deposits
    
    $
    5,889
    
    
    $
    1,224
    
    
    $
    2,448
    
    
    $
    9,792
    
    
    $
    9,743
    
    
    
    
    
    
    $
    29,096Savings deposits
    
    
    633
    
    
    
    633
    
    
    
    1,266
    
    
    
    5,068
    
    
    
    5,042
    
    
    
    
    
    
    
    12,642Time deposits
    
    
    34,696
    
    
    
    30,728
    
    
    
    46,809
    
    
    
    85,889
    
    
    
    3,468
    
    
    
    
    
    
    
    201,590Customer repurchase agreements
    
    
    2,118
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    2,118Securities sold under agreements
to repurchase
    
    
    15,203
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    15,203Total interest-bearing liabilities
    
    $
    58,539
    
    
    $
    32,585
    
    
    $
    50,523
    
    
    $
    100,749
    
    
    $
    18,253
    
    
    
    
    
    
    $
    260,649Interest-sensitivity gap per period
    
    
    (19,269
    )
    
    
    (25,639
    )
    
    
    (41,013
    )
    
    
    (37,769
    )
    
    
    23,844
    
    
    
    150,571
    
    
    
    50,725Cumulative gap
    
    
    (19,269
    )
    
    
    (44,908
    )
    
    
    (85,921
    )
    
    
    (123,690
    )
    
    
    (99,846
    )
    
    
    50,725Cumulative ratio of interestEarning assets to interest-bearing
Liabilities
    
    
    .67
    
    
    
    .21
    
    
    
    0.19
    
    
    
    .63
    
    
    
    2.31Cumulative gap to total assets
    
    
    (0.06
    )
    
    
    (0.14
    )
    
    
    (0.26
    )
    
    
    (0.38
    )
    
    
    (0.31
    )
    
    
    .16
 Rate Sensitive Assets/Rate Sensitive Liabilities (RSA/RSL)
  Liquidity and Capital Resources
  23




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##### Table of Contents



Table 16
 December 31,2005
    
    
    2004
    
    
    2003Liquidity ratio
    
    
    57.89
    %
    
    
    59.18
    %
    
    
    65.88
    %Net loan to deposit ratio
    
    
    44.29
    %
    
    
    40.05
    %
    
    
    35.26
    %
     24




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##### Table of Contents



Table 17
 Tier I CapitalCommon Shareholders equity less intangible assets
    
    $
    27,426Tier II CapitalAllowance for possible credit loss
    
    
    1,017Total Capital
    
    $
    28,443Risk-adjusted assets
    
    $
    171,473Risk-based capital ratios:Tier I Capital
    
    
    15.99
    %Total Capital
    
    
    16.59
    %Leverage Ratio
    
    
    9.75
    %
  Table 18
 December 31,2005
    
    
    2004
    
    
    2003Equity capital
    
    $
    27,426
    
    
    $
    26,940
    
    
    $
    24,194Allowance for possible credit loss
    
    $
    1,017
    
    
    $
    1,000
    
    
    $
    900Primary capital
    
    $
    28,443
    
    
    $
    27,940
    
    
    $
    25,094Primary capital to total assets
    
    
    8.76
    %
    
    
    10.40
    %
    
    
    8.74
    %Equity capital to total assets
    
    
    8.45
    %
    
    
    10.03
    %
    
    
    8.42
    %
 Contractual Obligations
   25




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##### Table of Contents



Credit Extension Commitments
  Accounting Pronouncements
 Share Based Payments
 Accounting
For Changes and Error Corrections Reporting Accounting Changes in Interim Financial
Statementsan amendment of APB Opinion No. 28
 Accounting
for Uncertain Tax Positions.
  26




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##### Table of Contents



Effects of Inflation
  Net Unrealized Depreciation on Available-For-Sale (AFS) Securities
  Item 7. Financial Statements
  Item 8. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
  Item 8a. Controls and Procedures
  27




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##### Table of Contents



Item 8b. Other Information
  PART III
 Item 9. Directors, Executive Officers, Promoters and Control Persons; Compliance with Section
16(a) of the Exchange Act
  PositionKensington
    
    KensingtonName
    
    Age
    
    Bankshares
    
    BankGerald K. Archibald (1)(3)(4)(5)
    
    
    66
    
    
    President, Chief
Executive Officer and
Chairman
    
    President, Chief
Executive Officer and
ChairmanWilliam R. Bender, Jr.(1)(2)(3)(4)
    
    
    59
    
    
    Secretary and Treasurer
    
    Executive Vice
President and Chief
Financial Officer,
Secretary and DirectorGary L. Blackwell (1)(3)(4)(5*)
    
    
    62
    
    
    Director
    
    DirectorBryan Gates (2)(5)
    
    
    62
    
    
    
    
    DirectorRonald S. Hockman (1)(2)
    
    
    54
    
    
    Director
    
    DirectorD. Dewey Mitchell (1)(2)(5)
    
    
    49
    
    
    Director
    
    Director
 
 *
    
    Alternate(1)
    
    Member of Executive Committee of Bank.(2)
    
    Member of Audit Committee of Bank. The Audit Committee assists the Board in such areas as
accounting and financial reporting practices, internal controls and compliance with financial
policies of Kensington Bank.(3)
    
    Member of the Executive Management Loan Committee of the Bank. 28




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##### Table of Contents



(4)
    
    Member of Investment Committee of Bank.(5)
    
    Member of Compensation Committee of Bank.  Gerald K. Archibald
 William R. Bender, Jr
 Gary L. Blackwell
 Bryan Gates
 Ronald S. Hockman
 D. Dewey Mitchell
 29




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##### Table of Contents



Key Employees
 Arthur E. Williams
 Michael R. Nemetz
 Audit Committee
  Code of Ethics
  
    
    Honest and ethical conduct, including the ethical handling of actual or apparent
conflicts of interest between personal and professional relationships.
    
    Full, fair, accurate, timely and understandable disclosure in reports and documents
that a small business issuer files with, or submits to, the Commission and in other
public communications made by the small business issuer.
    
    Compliance with applicable governmental laws, rules and regulations.
    
    The prompt internal reporting of violations of the code to an appropriate person or
persons identified in the code.
    
    Accountability for adherence to the code.
 30




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##### Table of Contents



Indemnification
  Stock Option Plan
    31




---



##### Table of Contents



Number of securitiesNumber of securities
    
    Weighted-average
    
    remaining availableto be issued upon
    
    exercise price of
    
    for future issuanceexercise of
    
    outstanding options,
    
    under equityPlan Category
    
    outstanding options
    
    warrants and rights
    
    compensation plansEquity Compensation Plan
Approved by Security HoldersIncentive and Non-Statutory
Stock Option Plan
    
    
    328,750
    
    
    $
    8.14
    
    
    
    270,750
 Item 10. Executive Compensation
  Annual CompensationLong TermCompensationAward/SharesUnderlyingName and Principal Position
    
    Year
    
    
    Salary
    
    
    Bonus
    
    
    Options GrantedGerald K. Archibald, President (1) President and
    
    
    2005
    
    
    $
    261,368
    (2)
    
    $
    25,000
    
    
    
    30,000CEO of Kensington Bankshares and Kensington Bank
    
    
    2004
    
    
    
    198,265
    
    
    
    25,000
    
    
    
    5,0002003
    
    
    
    187,750
    
    
    
    25,000
    
    
    
    5,000Arthur E. Williams, Senior Vice President and
    
    
    2005
    
    
    
    100,044
    
    
    
    3,000
    
    
    
    25,000Chief Operations Officer of Kensington Bank
    
    
    2004
    
    
    
    
    
    
    
    
    
    
    
    17,5002003
    
    
    
    
    
    
    
    
    
    
    
    17,500Michael Nemetz, Senior Vice President of
    
    
    2005
    
    
    
    95,907
    
    
    
    5,000
    
    
    
    12,500Kensington Bank
    
    
    2004
    
    
    
    
    
    
    
    
    
    
    
    7,5002003
    
    
    
    
    
    
    
    
    
    
    
    7,500
 
 (1)
    
    Kensington Bank has a $500,000 key-man life insurance policy on Mr. Archibald, payable
to Kensington Bank.(2)
    
    Includes directors fees of $21,000 in 2005, $12,750 in 2004 and $12,750 in 2003. Directors
of Kensington Bankshares, Inc. and Kensington Bank receive a fee of $1,000 per board meeting
and $250 per bank committee meetings attended. 32




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##### Table of Contents





Option Grants In Last Fiscal Year
 Number of Securities
    
    Percent of Total OptionsUnderlying Options
    
    Granted to Employees in
    
    Exercise
    
    ExpirationName
    
    Granted
    
    Fiscal Year
    
    Price
    
    DateGerald K. Archibald
    
    
    25,000
    
    
    
    40.5
    %
    
    $
    8.50
    
    
    December 2010Arthur E. Williams
    
    
    7,500
    
    
    
    12.2
    %
    
    
    8.50
    
    
    December 2010Michael Nemetz
    
    
    5,000
    
    
    
    8.1
    %
    
    
    8.50
    
    
    December 2010
 Year End Option Values
 Number of Securities Underlying
    
    Value of UnexercisedUnexercised Options
    
    In-the-Money Options at Year-EndName
    
    Exercisable/Unexercisable
    
    Exercisable/UnexercisableGerald K. Archibald
    
    
    30,000/0
    
    
    $
    227,700/0Arthur E. Williams
    
    
    25,000/0
    
    
    $
    189,750/0Michael Nemetz
    
    
    12,500/0
    
    
    $
    94,875/0
 Item 11. Security Ownership of Certain Beneficial Owners and Management and Related
Stockholder Matters
  33




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##### Table of Contents



Number and Percent of SharesBeneficially OwnedName and Address
    
    Number
    
    
    PercentGerald K. Archibald(a)
    
    
    304,977
    
    
    
    7.14William R. Bender, Jr.(a)
    
    
    19,250
    
    
    
    0.50Gary L. Blackwell
    
    
    274,372
    
    
    
    7.396915 SR 54
New Port Richey, Florida 34653Ronald S. Hockman
    
    
    164,827
    
    
    
    4.443438 Colwell Avenue
Tampa, Florida 33614D. Dewey Mitchell
    
    
    158,894
    
    
    
    4.284532 US Highway 19, 2nd Floor
New Port Richey, Florida 34652Carl Minieri
    
    
    200,000
    
    
    
    5.3929656 US Highway 19 No.
Clearwater, Florida 33761Joseph Idicula, M.D.
    
    
    200,000
    
    
    
    5.3910065 Cortez, Boulevard
Brooksville, Florida 34613Director and executive officers as a
group (5 persons)
    
    
    922,320
    
    
    
    24.85
 
 (a)
    
    The address of Messrs. Archibald and Bender is the address of Kensington Bankshares executive
offices, 13246 N. Dale Mabry Highway, Tampa, Florida 33618. Item 12. Certain Relationships and Related Transactions
   34




---



##### Table of Contents



PART IV
 Item 13. Exhibits, Financial Statement Schedules and Reports on Form 8-K
  3.1
    
    
    Articles of Incorporation of Kensington Bankshares, Inc.*3.2
    
    
    By-Laws of Kensington Bankshares, Inc.*10.1
    
    
    Copy of Agreement for Stock Exchange between the Registrant and First Kensington Bank*10.2
    
    
    Copy of Registrants Incentive and Non-Statutory Stock Option Plan*10.2a
    
    
    Copy of Amendment to Registrants Incentive and Non-Statutory Stock Option Plan10.3
    
    
    Copy of Agreement and Plan of Merger by and between Kensington Bankshares, Inc. and The
Banc Corporation dated as of March 6, 2006.10.4
    
    
    Code of Ethics31.1
    
    
    Rule 13a-14(a) Certification of the Principal Executive Officer.31.2
    
    
    Rule 13a-14(a) Certification of the Principal Financial Officer.32.1
    
    
    Section 1350 Certification of the Principal Executive Officer.32.2
    
    
    Section 1350 Certification of the Principal Financial Officer.
 
 *
    
    Filed as Exhibits to the Companys Registration Statement on Form SB-2 (File No. 333-89952)
ordered effective August 7, 2002.     Item 14. Principal Accountant Fees and Services
   Audit fees
    
    $
    125,000Audit-related fees
    
    
    Tax fees
    
    
    All other fees
    
    
    Total Fees
    
    $
    125,000
 35




---



##### Table of Contents



Audit Fees
  Audit-Related Fees
  Tax Fees
  All Other Fees
  36




---



##### Table of Contents



SIGNATURES
   KENSINGTON BANKSHARES, INC.By:
    /s/ Gerald K. ArchibaldGerald K. ArchibaldPresident & CEO By:
    /s/ William R. Bender, Jr.William R. Bender, Jr.Chief Financial Officer  Signatures
    
    Title/s/  Gerald K. Archibald

Gerald K. Archibald
    
    Director/s/   Gary L. Blackwell

Gary L. Blackwell
    
    Director/s/  D. Dewey Mitchell

D. Dewey Mitchell
    
    Director/s/  Ronald S. Hockman

Ronald S. Hockman
    
    Director
 37




---



##### 



Index to Financial Statements
    
    PAGEIndependent Auditors Report
    
    
    F1Consolidated Statements of Financial Condition
as of December 31, 2005, 2004, and 2003
    
    
    F2Consolidated Statements of Income for the years ended
December 31, 2005, 2004, and 2003
    
    
    F3Consolidated Statements of Changes in Stockholders Equity and Comprehensive
Income for the years ended December 31, 2005, 2004, and 2003
    
    
    F4Consolidated Statements of Cash Flows for the years ended
December 31, 2005, 2004, and 2003
    
    
    F5Notes to Consolidated Financial Statements  December 31, 2005, 2004, and 2003
    
    
    F6




---



##### Table of Contents



REPORT OF INDEPENDENT REGISTERED
PUBLIC ACCOUNTING FIRM
 
     
 F-1




---



##### Table of Contents



KENSINGTON BANKSHARES, INC. AND SUBSIDIARY
 
 CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
 DECEMBER 31, 2005, 2004, AND 2003
 2005
    
    
    2004
    
    
    2003ASSETSCash and due from banks
    
    $
    5,177,112
    
    
    $
    3,527,305
    
    
    $
    4,297,610Interest-bearing deposits due from banks
    
    
    
    
    
    
    62,189
    
    
    
    61,519Federal funds sold
    
    
    1,953,326
    
    
    
    4,279,612
    
    
    
    14,865,821Cash and cash equivalents
    
    
    7,130,438
    
    
    
    7,869,106
    
    
    
    19,224,950Securities available for sale
    
    
    
    
    
    
    5,062,000
    
    
    
    5,117,200Securities held to maturity
    
    
    184,025,332
    
    
    
    153,337,768
    
    
    
    168,163,298Loans, net of unearned fees
    
    
    125,534,310
    
    
    
    97,770,318
    
    
    
    90,070,413Less allowance for possible credit losses
    
    
    1,016,738
    
    
    
    1,000,000
    
    
    
    900,000Loans, net
    
    
    124,517,572
    
    
    
    96,770,318
    
    
    
    89,170,413Accrued interest receivable
    
    
    2,606,687
    
    
    
    2,163,940
    
    
    
    2,484,674Premises and equipment, net
    
    
    5,609,780
    
    
    
    3,101,276
    
    
    
    2,627,313Deferred tax assets
    
    
    247,887
    
    
    
    232,708
    
    
    
    252,858Other real estate
    
    
    407,951
    
    
    
    
    
    
    
    Other assets
    
    
    108,733
    
    
    
    136,561
    
    
    
    216,742Total Assets
    
    $
    324,654,380
    
    
    $
    268,673,677
    
    
    $
    287,257,448LIABILITIES AND STOCKHOLDERS EQUITYLiabilities:Noninterest-bearing demand deposits
    
    $
    35,801,529
    
    
    $
    29,313,370
    
    
    $
    15,167,580Interest-bearing demand deposits
    
    
    29,096,458
    
    
    
    36,405,899
    
    
    
    30,434,468Savings deposits
    
    
    12,621,732
    
    
    
    17,315,151
    
    
    
    12,081,108Time deposits
    
    
    201,168,004
    
    
    
    157,411,626
    
    
    
    194,427,405Total deposits
    
    
    278,687,723
    
    
    
    240,446,046
    
    
    
    252,110,561Securities sold under agreements to repurchase
    
    
    15,203,225
    
    
    
    
    
    
    
    9,737,000Customer repurchase agreements
    
    
    2,118,072
    
    
    
    990,865
    
    
    
    937,660Dividends payable
    
    
    742,100
    
    
    
    
    
    
    
    Accrued interest payable
    
    
    315,191
    
    
    
    169,541
    
    
    
    239,125Accrued expenses and other liabilities
    
    
    161,572
    
    
    
    126,962
    
    
    
    39,162Total liabilities
    
    
    297,227,883
    
    
    
    241,733,414
    
    
    
    263,063,508Commitments and Contingencies
    
    
    
    
    
    
    
    
    
    
    Stockholders Equity:Common stock, $.01 par value; 10,000,000 shares
authorized, 3,710,500, 3,710,000, and 3,710,000
shares issued and outstanding in 2005, 2004,
and 2003, respectively
    
    
    37,105
    
    
    
    37,100
    
    
    
    37,100Additional paid-in capital
    
    
    21,111,647
    
    
    
    21,107,902
    
    
    
    21,107,902Retained earnings
    
    
    6,277,745
    
    
    
    5,809,458
    
    
    
    3,124,810Accumulated other comprehensive loss
    
    
    
    
    
    
    (14,197
    )
    
    
    (75,872
    )Total stockholders equity
    
    
    27,426,497
    
    
    
    26,940,263
    
    
    
    24,193,940Total Liabilities and Stockholders Equity
    
    $
    324,654,380
    
    
    $
    268,673,677
    
    
    $
    287,257,448
 
 F-2




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##### Table of Contents



KENSINGTON BANKSHARES, INC. AND SUBSIDIARY
 
 CONSOLIDATED STATEMENTS OF INCOME
 FOR THE YEARS ENDED DECEMBER 31, 2005, 2004, AND 2003
 2005
    
    
    2004
    
    
    2003Interest Income:Loans receivable and fees on loans
    
    $
    8,373,575
    
    
    $
    6,615,483
    
    
    $
    6,391,823Investment securities
    
    
    7,603,142
    
    
    
    7,512,796
    
    
    
    6,915,633Federal funds sold
    
    
    81,306
    
    
    
    45,483
    
    
    
    37,961Total interest income
    
    
    16,058,023
    
    
    
    14,173,762
    
    
    
    13,345,417Interest Expense:Deposits
    
    
    5,896,781
    
    
    
    5,026,451
    
    
    
    5,738,653Other borrowed funds
    
    
    349,869
    
    
    
    92,630
    
    
    
    152,792Total interest expense
    
    
    6,246,650
    
    
    
    5,119,081
    
    
    
    5,891,445Net interest income
    
    
    9,811,373
    
    
    
    9,054,681
    
    
    
    7,453,972Provision for Possible Credit Losses
    
    
    
    
    
    
    127,151
    
    
    
    203,000Net interest income after provision for
possible credit losses
    
    
    9,811,373
    
    
    
    8,927,530
    
    
    
    7,250,972Noninterest Income:Service charges on deposit accounts
    
    
    218,446
    
    
    
    190,429
    
    
    
    141,651Securities gains
    
    
    2,500
    
    
    
    606
    
    
    
    118,244Other income
    
    
    36,108
    
    
    
    33,094
    
    
    
    84,002Total noninterest income
    
    
    257,054
    
    
    
    224,129
    
    
    
    343,897Noninterest Expense:Salaries and employee benefits
    
    
    3,016,581
    
    
    
    2,536,363
    
    
    
    2,279,629Occupancy expense
    
    
    589,490
    
    
    
    505,861
    
    
    
    462,452Equipment expense
    
    
    429,447
    
    
    
    452,691
    
    
    
    391,288Data processing
    
    
    311,542
    
    
    
    366,998
    
    
    
    336,498Professional and director fees
    
    
    287,441
    
    
    
    253,281
    
    
    
    191,291Office expense
    
    
    155,220
    
    
    
    150,554
    
    
    
    154,174Advertising and marketing expense
    
    
    136,538
    
    
    
    88,656
    
    
    
    100,974Other expenses
    
    
    504,102
    
    
    
    486,552
    
    
    
    415,425Total noninterest expense
    
    
    5,430,361
    
    
    
    4,840,956
    
    
    
    4,331,731Income Before Income Tax Expense
    
    
    4,638,066
    
    
    
    4,310,703
    
    
    
    3,263,138Income Tax Expense
    
    
    1,758,104
    
    
    
    1,626,055
    
    
    
    1,233,985Net Income
    
    $
    2,879,962
    
    
    $
    2,684,648
    
    
    $
    2,029,153Earnings Per ShareBasic
    
    $
    0.78
    
    
    $
    0.72
    
    
    $
    0.55Diluted
    
    $
    0.77
    
    
    $
    0.72
    
    
    $
    0.55
 
 F-3




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##### Table of Contents



KENSINGTON BANKSHARES, INC. AND SUBSIDIARY
 
 CONSOLIDATED STATEMENTS OF CHANGES IN
 STOCKHOLDERS EQUITY AND COMPREHENSIVE INCOME
 FOR THE YEARS ENDED DECEMBER 31, 2005, 2004, AND 2003
 AccumulatedOtherNumber
    
    
    
    
    
    
    Additional
    
    
    
    
    
    
    Comprehensiveof
    
    
    Common
    
    
    Paid-in
    
    
    Retained
    
    
    IncomeShares
    
    
    Stock
    
    
    Capital
    
    
    Earnings
    
    
    (Loss)
    
    
    TotalBalance, January 1, 2003
    
    
    3,710,000
    
    
    $
    37,100
    
    
    $
    21,107,902
    
    
    $
    1,095,657
    
    
    $
    58,824
    
    
    $
    22,299,483Net income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    2,029,153
    
    
    
    
    
    
    
    2,029,153Other comprehensive income
(loss), net of tax:Change in unrealized gain
(loss) on securities
available-for-sale, net
of tax of $84,322
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (134,696
    )
    
    
    (134,696
    )TOTAL COMPREHENSIVE INCOME
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1,894,457Balance, December 31, 2003
    
    
    3,710,000
    
    
    
    37,100
    
    
    
    21,107,902
    
    
    
    3,124,810
    
    
    
    (75,872
    )
    
    
    24,193,940Net income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    2,684,648
    
    
    
    
    
    
    
    2,684,648Other comprehensive income
(loss), net of tax:Change in unrealized gain
(loss) on securities
available-for-sale, net
of tax of $38,609
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    61,675
    
    
    
    61,675TOTAL COMPREHENSIVE INCOME
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    2,746,323Balance, December 31, 2004
    
    
    3,710,000
    
    
    
    37,100
    
    
    
    21,107,902
    
    
    
    5,809,458
    
    
    
    (14,197
    )
    
    
    26,940,263Net income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    2,879,962
    
    
    
    
    
    
    
    2,879,962Other comprehensive income
(loss), net of tax:Change in unrealized gain
(loss) on securities
available-for-sale, net
of tax of $8,888
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    14,197
    
    
    
    14,197TOTAL COMPREHENSIVE INCOME
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    2,894,159Exercise of stock option
    
    
    500
    
    
    
    5
    
    
    
    3,745
    
    
    
    
    
    
    
    
    
    
    
    3,750Cash dividends paid,
$.45 per share
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (1,669,575
    )
    
    
    
    
    
    
    (1,669,575
    )Cash dividends declared,
$.20 per share
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (742,100
    )
    
    
    
    
    
    
    (742,100
    )Balance, December 31, 2005
    
    
    3,710,500
    
    
    $
    37,105
    
    
    $
    21,111,647
    
    
    $
    6,277,745
    
    
    $
    
    
    
    $
    27,426,497
 
 F-4




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##### Table of Contents



KENSINGTON BANKSHARES, INC. AND SUBSIDIARY
 
 CONSOLIDATED STATEMENTS OF CASH FLOWS
 FOR THE YEARS ENDED DECEMBER 31, 2005, 2004, AND 2003
 2005
    
    
    2004
    
    
    2003Cash Flows From Operating Activities:Net Income
    
    $
    2,879,962
    
    
    $
    2,684,648
    
    
    $
    2,029,153Adjustments to reconcile net income to net cash
provided by operating activities -Depreciation and amortization
    
    
    327,573
    
    
    
    322,951
    
    
    
    299,405Provision for possible credit losses
    
    
    
    
    
    
    127,151
    
    
    
    203,000Deferred tax benefit
    
    
    (24,067
    )
    
    
    (18,459
    )
    
    
    (13,203
    )Net amortization of securities
    
    
    299,923
    
    
    
    1,630,837
    
    
    
    2,105,102Securities gains
    
    
    (2,500
    )
    
    
    (606
    )
    
    
    (118,244
    )Changes in -Accrued interest receivable
    
    
    (442,747
    )
    
    
    320,734
    
    
    
    679,181Other assets
    
    
    27,828
    
    
    
    80,181
    
    
    
    5,892Accrued interest payable and other liabilities
    
    
    180,260
    
    
    
    18,216
    
    
    
    (86,756
    )Net cash provided by operating activities
    
    
    3,246,232
    
    
    
    5,165,653
    
    
    
    5,103,530Cash Flows From Investing Activities:Purchases of available for sale securities
    
    
    (4,997,500
    )
    
    
    
    
    
    
    (7,830,156
    )Purchases of held to maturity securities
    
    
    (70,082,402
    )
    
    
    (144,686,286
    )
    
    
    (252,461,006
    )Proceeds from sales of available for sale securities
    
    
    5,000,000
    
    
    
    550,000
    
    
    
    7,468,750Proceeds from maturities and calls of available for sale securities
    
    
    5,000,000
    
    
    
    
    
    
    
    28,990,000Proceeds from maturities and calls of held to maturity securities
    
    
    39,180,000
    
    
    
    157,487,069
    
    
    
    232,811,791Net increase in loans
    
    
    (27,747,254
    )
    
    
    (7,727,056
    )
    
    
    (9,600,601
    )Purchase of other real estate
    
    
    (407,951
    )
    
    
    
    
    
    
    Purchase of premises and equipment
    
    
    (2,836,077
    )
    
    
    (796,914
    )
    
    
    (297,106
    )Net cash (used in) provided by investing activities
    
    
    (56,891,184
    )
    
    
    4,826,813
    
    
    
    (918,328
    )Cash Flows From Financing Activities:Net (decrease) increase in demand and savings deposits
    
    
    (5,514,701
    )
    
    
    25,351,264
    
    
    
    16,832,364Net increase (decrease) in time deposits
    
    
    43,756,378
    
    
    
    (37,015,779
    )
    
    
    (2,968,620
    )Net increase (decrease) in securities sold under agreements to repurchase
    
    
    15,203,225
    
    
    
    (9,737,000
    )
    
    
    (263,000
    )Net decrease in federal funds purchased
    
    
    
    
    
    
    
    
    
    
    (1,000,000
    )Net increase in customer repurchase agreements
    
    
    1,127,207
    
    
    
    53,205
    
    
    
    74,603Proceeds from common stock options exercised
    
    
    3,750
    
    
    
    
    
    
    
    Dividends paid
    
    
    (1,669,575
    )
    
    
    
    
    
    
    Net cash provided by (used in) financing activities
    
    
    52,906,284
    
    
    
    (21,348,310
    )
    
    
    12,675,347Net Change in Cash and Cash Equivalents
    
    
    (738,668
    )
    
    
    (11,355,844
    )
    
    
    16,860,549Cash and Cash Equivalents at Beginning of Year
    
    
    7,869,106
    
    
    
    19,224,950
    
    
    
    2,364,401Cash and Cash Equivalents at End of Year
    
    $
    7,130,438
    
    
    $
    7,869,106
    
    
    $
    19,224,950Supplemental Disclosures of Cash Flow Information:Interest paid on deposits
    
    $
    5,776,149
    
    
    $
    5,081,699
    
    
    $
    5,789,572Other interest paid
    
    $
    324,851
    
    
    $
    106,966
    
    
    $
    152,800Income taxes paid
    
    $
    1,775,030
    
    
    $
    1,639,258
    
    
    $
    1,102,097
 
 F-5




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##### Table of Contents



KENSINGTON BANKSHARES, INC. AND SUBSIDIARY
 
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 DECEMBER 31, 2005, 2004, AND 2003
 NOTE 1  SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
 Organization:
  Principles of Consolidation:
  Nature of Business:
  Summary of Significant Accounting and Reporting Policies
  Use of Estimates:
   F-6




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##### Table of Contents



KENSINGTON BANKSHARES, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2005, 2004, AND 2003
 Use of Estimates (Continued):
  Cash Equivalents:
  Cash and Due from Banks:
   Investment Securities:
  F-7




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##### Table of Contents



KENSINGTON BANKSHARES, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2005, 2004, AND 2003
 Investment Securities(Continued):
   Investment Risk:
  Concentrations of Credit:
  Interest Rate Risk:
  F-8




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##### Table of Contents



KENSINGTON BANKSHARES, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2005, 2004, AND 2003
 Loans:
  Non-Performing and Past Due Loans:
      Allowance for Possible Credit Losses:
  F-9




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##### Table of Contents



KENSINGTON BANKSHARES, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2005, 2004, AND 2003
 Allowance for Possible Credit Losses (Continued):
    Premises and Equipment:
  Advertising Costs:
  F-10




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##### Table of Contents



KENSINGTON BANKSHARES, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2005, 2004, AND 2003
 Real Estate Acquired Through Foreclosure:
  Income Taxes:
  Share-Based Compensation:
 Accounting for Stock Issued to
Employees
 Earnings Per Share of Common Stock:
  F-11




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##### Table of Contents



KENSINGTON BANKSHARES, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2005, 2004, AND 2003
 Recently Issued Accounting Standards:
 Share Based Payments
 Accounting
For Changes and Error Corrections Reporting Accounting Changes in
Interim Financial Statementsan amendment of APB Opinion No. 28
 Accounting
for Uncertain Tax Positions.
 F-12




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##### Table of Contents



KENSINGTON BANKSHARES, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2005, 2004, AND 2003
 Recently Issued Accounting Standards (Continued):
  NOTE 2  INVESTMENT SECURITIES
  Gross
    
    
    GrossAmortized
    
    
    Unrealized
    
    
    Unrealized
    
    
    FairCost
    
    
    Gains
    
    
    Losses
    
    
    ValueHeld To Maturity:December 31, 2005 -
U.S. government agency securities
    
    $
    184,025,332
    
    
    $
    2,500
    
    
    $
    (2,817,174
    )
    
    $
    181,210,658December 31,
2004 -
U.S. government agency securities
    
    $
    153,337,768
    
    
    $
    120,909
    
    
    $
    (446,323
    )
    
    $
    153,012,354December 31, 2003 -
U.S. government agency securities
    
    $
    168,163,298
    
    
    $
    591,334
    
    
    $
    (779,891
    )
    
    $
    167,974,741
 F-13




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##### Table of Contents



KENSINGTON BANKSHARES, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2005, 2004, AND 2003
 Gross
    
    
    GrossAmortized
    
    
    Unrealized
    
    
    Unrealized
    
    
    FairCost
    
    
    Gains
    
    
    Losses
    
    
    ValueAvailable For Sale:December 31, 2004 - U.S.
government agency securities
    
    $
    5,085,085
    
    
    $
    
    
    
    $
    (23,085
    )
    
    $
    5,062,000December 31, 2003 - U.S.
government agency securities
    
    $
    5,240,570
    
    
    $
    
    
    
    $
    (123,370
    )
    
    $
    5,117,200
   Held To MaturityAmortized
    
    
    FairCost
    
    
    ValueDue in one year or less
    
    $
    
    
    
    $
    Due from one to five years
    
    
    28,554,488
    
    
    
    28,097,430Due from five to ten years
    
    
    133,830,566
    
    
    
    131,961,281Due after ten years
    
    
    21,640,278
    
    
    
    21,151,947$
    184,025,332
    
    
    $
    181,210,658
   Less Than Twelve Months
    
    
    Over Twelve MonthsGross
    
    
    
    
    
    
    GrossUnrealized
    
    
    Fair
    
    
    Unrealized
    
    
    FairLosses
    
    
    Value
    
    
    Losses
    
    
    ValueU.S. government agency securities
    
    $
    (2,117,347
    )
    
    $
    143,990,714
    
    
    $
    (699,827
    )
    
    $
    31,217,447
 F-14




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##### Table of Contents



KENSINGTON BANKSHARES, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2005, 2004, AND 2003
   NOTE 3  LOANS RECEIVABLE
  2005
    
    
    2004
    
    
    2003Real estate -Commercial
    
    $
    99,660,103
    
    
    $
    75,757,698
    
    
    $
    61,971,947Residential
    
    
    19,827,693
    
    
    
    17,622,256
    
    
    
    18,371,056Commercial
    
    
    4,528,606
    
    
    
    3,574,498
    
    
    
    7,685,812Consumer
    
    
    1,951,805
    
    
    
    1,129,283
    
    
    
    2,324,287125,968,207
    
    
    
    98,083,735
    
    
    
    90,353,102Deferred loan fees
    
    
    (433,897
    )
    
    
    (313,417
    )
    
    
    (282,689
    )Allowance for possible credit losses
    
    
    (1,016,738
    )
    
    
    (1,000,000
    )
    
    
    (900,000
    )$
    124,517,572
    
    
    $
    96,770,318
    
    
    $
    89,170,413
  F-15




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##### Table of Contents



KENSINGTON BANKSHARES, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2005, 2004, AND 2003
 NOTE 4  ALLOWANCE FOR POSSIBLE CREDIT LOSSES AND NON PERFORMING LOANS
  2005
    
    
    2004
    
    
    2003Balance at January 1
    
    $
    1,000,000
    
    
    $
    900,000
    
    
    $
    700,000Loans charged-off
    
    
    (1,362
    )
    
    
    (27,151
    )
    
    
    (3,000
    )Recoveries
    
    
    18,100
    
    
    
    
    
    
    
    Net loans recovered (charged-off)
    
    
    16,738
    
    
    
    (27,151
    )
    
    
    (3,000
    )Provision charged to operations
    
    
    
    
    
    
    127,151
    
    
    
    203,000Balance at December 31
    
    $
    1,016,738
    
    
    $
    1,000,000
    
    
    $
    900,000
   NOTE 5  PREMISES AND EQUIPMENT
  2005
    
    
    2004
    
    
    2003Land
    
    $
    2,075,000
    
    
    $
    750,000
    
    
    $
    350,000Buildings and improvements
    
    
    760,584
    
    
    
    760,584
    
    
    
    475,584Leasehold improvements
    
    
    1,023,308
    
    
    
    1,021,934
    
    
    
    1,013,365Furniture, fixtures & equipment
    
    
    1,743,902
    
    
    
    1,602,926
    
    
    
    1,511,508Construction in process
    
    
    1,361,750
    
    
    
    11,926
    
    
    
    6,964,544
    
    
    
    4,147,370
    
    
    
    3,350,457Less: accumulated depreciation and amortization
    
    
    (1,354,764
    )
    
    
    (1,046,094
    )
    
    
    (723,144
    )$
    5,609,780
    
    
    $
    3,101,276
    
    
    $
    2,627,313
 F-16




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##### Table of Contents



KENSINGTON BANKSHARES, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2005, 2004, AND 2003
    Leases:
   2006
    
    $
    469,4282007
    
    
    462,6122008
    
    
    441,6352009
    
    
    350,2302010
    
    
    354,078Thereafter
    
    
    637,000$
    2,714,983
  NOTE 6  ACCRUED INTEREST RECEIVABLE
  2005
    
    
    2004
    
    
    2003Loans
    
    $
    447,088
    
    
    $
    290,159
    
    
    $
    286,579Investments and other
    
    
    2,159,599
    
    
    
    1,873,781
    
    
    
    2,198,095$
    2,606,687
    
    
    $
    2,163,940
    
    
    $
    2,484,674
 F-17




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##### Table of Contents



KENSINGTON BANKSHARES, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2005, 2004, AND 2003
 NOTE 7  TIME DEPOSITS
   2006
    
    $
    111,811,3942007
    
    
    82,100,5272008
    
    
    3,781,4472009
    
    
    2,611,3812010
    
    
    863,255$
    201,168,004
 NOTE 8  SECURITIES SOLD UNDER AGREEMENTS TO REPURCHASE
  2005
    
    
    2004
    
    
    2003Securities sold under agreements to repurchase
    
    $
    15,203,225
    
    
    $
    
    
    
    $
    9,737,000Average amount outstanding during the year
    
    $
    9,423,451
    
    
    $
    5,382,807
    
    
    $
    10,516,193Weighted average interest rate of the agreements
    
    
    3.36
    %
    
    
    1.53
    %
    
    
    1.25
    %
  F-18




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##### Table of Contents



KENSINGTON BANKSHARES, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2005, 2004, AND 2003
 NOTE 9  CUSTOMER REPURCHASE AGREEMENTS
  NOTE 10  EARNINGS PER SHARE
 Earnings per Share
 2005
    
    
    2004
    
    
    2003Numerator for earnings per share:Net income
    
    $
    2,879,962
    
    
    $
    2,684,648
    
    
    $
    2,029,153Denominator for earnings per share:Weighted average common shares outstanding:Basic
    
    
    3,710,167
    
    
    
    3,710,000
    
    
    
    3,710,000Diluted
    
    
    3,724,943
    
    
    
    3,710,000
    
    
    
    3,710,000Earning Per Share:Basic
    
    $
    .78
    
    
    $
    .72
    
    
    $
    .55Diluted
    
    $
    .77
    
    
    $
    .72
    
    
    $
    .55
 F-19




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##### Table of Contents



KENSINGTON BANKSHARES, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2005, 2004, AND 2003
 NOTE 11  STOCK OPTIONS
 Accounting for Stock-Based Compensation, Accounting for Stock Issued to Employees,
   2005
    
    
    2004
    
    
    2003Weighted
    
    
    
    
    
    
    Weighted
    
    
    
    
    
    
    WeightedAverage
    
    
    
    
    
    
    Average
    
    
    
    
    
    
    AverageExercise
    
    
    
    
    
    
    Exercise
    
    
    
    
    
    
    ExerciseNumber
    
    
    Price
    
    
    Number
    
    
    Price
    
    
    Number
    
    
    PriceOutstanding at beginning of year
    
    
    140,000
    
    
    $
    7.50
    
    
    
    140,000
    
    
    $
    7.50
    
    
    
    104,700
    
    
    $
    7.50Granted
    
    
    211,650
    
    
    
    8.50
    
    
    
    
    
    
    
    
    
    
    
    36,300
    
    
    
    7.50Forfeited
    
    
    (22,400
    )
    
    
    7.50
    
    
    
    
    
    
    
    
    
    
    
    (1,000
    )
    
    
    7.50Exercised
    
    
    (500
    )
    
    
    7.50
    
    
    
    
    
    
    
    
    
    
    
    Outstanding at end of year
    
    
    328,750
    
    
    $
    8.14
    
    
    
    140,000
    
    
    $
    7.50
    
    
    
    140,000
    
    
    $
    7.50Exercisable at end of year
    
    
    31,910
    
    
    $
    8.14
    
    
    
    20,200
    
    
    $
    7.50
    
    
    
    8,490
    
    
    $
    7.50
  2005
    
    2004
    
    2003Reported net earnings
    
    $
    2,879,962
    
    
    $
    2,684,648
    
    
    $
    2,029,153Compensation expense, net of taxes
    
    
    12,104
    
    
    
    12,104
    
    
    
    8,646Pro forma net earnings
    
    
    2,867,858
    
    
    
    2,672,544
    
    
    
    2,020,507Reported basic earnings per share
    
    
    0.78
    
    
    
    0.72
    
    
    
    0.55Proforma basic earnings per share
    
    
    0.77
    
    
    
    0.72
    
    
    
    0.54Reported diluted earnings per share
    
    
    0.77
    
    
    
    0.72
    
    
    
    0.55Pro forma diluted earnings per share
    
    
    0.77
    
    
    
    0.72
    
    
    
    0.54
 F-20




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##### Table of Contents



KENSINGTON BANKSHARES, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2005, 2004, AND 2003
   NOTE 12  EMPLOYEE BENEFIT PLAN
  NOTE 13  INCOME TAXES
  2005
    
    
    2004
    
    
    2003Current:Federal
    
    $
    1,535,189
    
    
    $
    1,404,311
    
    
    $
    1,065,311State
    
    
    246,982
    
    
    
    240,203
    
    
    
    181,8771,782,171
    
    
    
    1,644,514
    
    
    
    1,247,188Deferred:Federal
    
    
    (20,550
    )
    
    
    (15,690
    )
    
    
    (11,273
    )State
    
    
    (3,517
    )
    
    
    (2,769
    )
    
    
    (1,930
    )(24,067
    )
    
    
    (18,459
    )
    
    
    (13,203
    )$
    1,758,104
    
    
    $
    1,626,055
    
    
    $
    1,233,985
 F-21




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##### Table of Contents



KENSINGTON BANKSHARES, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2005, 2004, AND 2003
  2005
    
    
    2004
    
    
    2003Tax based on statutory rate
    
    $
    1,576,942
    
    
    $
    1,465,639
    
    
    $
    1,109,467State tax, net of federal benefit
    
    
    160,687
    
    
    
    156,706
    
    
    
    118,765Other, net
    
    
    20,475
    
    
    
    3,710
    
    
    
    5,753$
    1,758,104
    
    
    $
    1,626,055
    
    
    $
    1,233,985
  2005
    
    
    2004
    
    
    2003Deferred tax assets:Allowance for loan losses
    
    $
    382,599
    
    
    $
    381,035
    
    
    $
    345,570Pre-opening expenses
    
    
    
    
    
    
    3,920
    
    
    
    32,236Net unrealized loss on securities available for sale
    
    
    
    
    
    
    8,888
    
    
    
    47,497382,599
    
    
    
    393,843
    
    
    
    425,303Deferred tax liabilities:Depreciation
    
    
    (134,712
    )
    
    
    (161,135
    )
    
    
    (172,445
    )Net deferred tax asset
    
    $
    247,887
    
    
    $
    232,708
    
    
    $
    252,858
  NOTE 14  COMMITMENTS AND CONTINGENCIES
 Unused Lines of Credit:
  Credit Related Financial Instruments:
  F-22




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##### Table of Contents



KENSINGTON BANKSHARES, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2005, 2004, AND 2003
 Credit Related Financial Instruments (Continued):
   2005
    
    
    2004
    
    
    2003Commitments to extend credit
    
    $
    21,353,806
    
    
    $
    21,096,747
    
    
    $
    25,428,638Standby letters of credit
    
    $
    2,024,759
    
    
    $
    2,134,506
    
    
    $
    3,958,468
    Other:
  NOTE 15  RELATED PARTY TRANSACTIONS
  F-23




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##### Table of Contents



KENSINGTON BANKSHARES, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2005, 2004, AND 2003
 Loans
  2005
    
    
    2004
    
    
    2003Balance, beginning of period
    
    $
    1,328,460
    
    
    $
    2,202,488
    
    
    $
    2,201,019New loans during the period
    
    
    225,000
    
    
    
    900,000
    
    
    
    328,000Repayments during the period
    
    
    (114,623
    )
    
    
    (1,774,028
    )
    
    
    (326,531
    )Balance, December 31
    
    $
    1,438,837
    
    
    $
    1,328,460
    
    
    $
    2,202,488Unfunded commitments to related parties
    
    $
    64,389
    
    
    $
    50,000
    
    
    $
    50,000
 Deposits
 NOTE 16  REGULATORY MATTERS
   F-24




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##### Table of Contents



KENSINGTON BANKSHARES, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2005, 2004, AND 2003
  MinimumTo Be WellMinimum
    
    Capitalized UnderCapital
    
    Prompt CorrectiveActual
    
    Requirement:
    
    Action Provisions:Amount
    
    Ratio
    
    Amount
    
    Ratio
    
    Amount
    
    RatioAs of December 31, 2005:Total Capital(to Risk Weighted Assets)Consolidated
    
    $
    28,443,235
    
    
    
    16.59
    %
    
    $
    13,717,829
    
    
    
    8.0
    %
    
    $
    N/ABank
    
    $
    28,282,439
    
    
    
    16.49
    %
    
    $
    13,717,829
    
    
    
    8.0
    %
    
    $
    17,147,286
    
    
    
    10.0
    %Tier I Capital(to Risk Weighted Assets)Consolidated
    
    $
    27,426,497
    
    
    
    15.99
    %
    
    $
    6,858,914
    
    
    
    4.0
    %
    
    $
    N/ABank
    
    $
    27,265,701
    
    
    
    15.90
    %
    
    $
    6,858,914
    
    
    
    4.0
    %
    
    $
    10,288,372
    
    
    
    6.0
    %Tier I Capital(to Average Assets)Consolidated
    
    $
    27,426,497
    
    
    
    9.75
    %
    
    $
    11,246,893
    
    
    
    4.0
    %
    
    $
    N/ABank
    
    $
    27,265,701
    
    
    
    9.70
    %
    
    $
    11,246,893
    
    
    
    4.0
    %
    
    $
    14,058,616
    
    
    
    5.0
    %As of December 31, 2004:Total Capital(to Risk Weighted Assets)Consolidated
    
    $
    27,954,460
    
    
    
    20.46
    %
    
    $
    10,932,804
    
    
    
    8.0
    %
    
    $
    N/ABank
    
    $
    27,880,187
    
    
    
    20.40
    %
    
    $
    10,932,804
    
    
    
    8.0
    %
    
    $
    13,666,005
    
    
    
    10.0
    %Tier I Capital(to Risk Weighted Assets)Consolidated
    
    $
    26,954,460
    
    
    
    19.72
    %
    
    $
    5,466,402
    
    
    
    4.0
    %
    
    $
    N/ABank
    
    $
    26,880,187
    
    
    
    19.67
    %
    
    $
    5,466,402
    
    
    
    4.0
    %
    
    $
    8,199,603
    
    
    
    6.0
    %Tier I Capital(to Average Assets)Consolidated
    
    $
    26,954,460
    
    
    
    10.03
    %
    
    $
    10,746,575
    
    
    
    4.0
    %
    
    $
    N/ABank
    
    $
    26,880,187
    
    
    
    10.01
    %
    
    $
    10,746,575
    
    
    
    4.0
    %
    
    $
    13,433,218
    
    
    
    5.0
    %As of December 31, 2003:Total Capital(to Risk Weighted Assets)Consolidated
    
    $
    25,169,812
    
    
    
    17.78
    %
    
    $
    11,322,726
    
    
    
    8.0
    %
    
    $
    N/ABank
    
    $
    25,065,470
    
    
    
    17.71
    %
    
    $
    11,322,726
    
    
    
    8.0
    %
    
    $
    14,153,408
    
    
    
    10.0
    %Tier I Capital(to Risk Weighted Assets)Consolidated
    
    $
    24,269,812
    
    
    
    17.15
    %
    
    $
    5,661,363
    
    
    
    4.0
    %
    
    $
    N/ABank
    
    $
    24,165,470
    
    
    
    17.07
    %
    
    $
    5,661,363
    
    
    
    4.0
    %
    
    $
    8,492,045
    
    
    
    6.0
    %Tier I Capital(to Average Assets)Consolidated
    
    $
    24,269,812
    
    
    
    9.24
    %
    
    $
    10,511,097
    
    
    
    4.0
    %
    
    $
    N/ABank
    
    $
    24,165,470
    
    
    
    9.20
    %
    
    $
    10,511,097
    
    
    
    4.0
    %
    
    $
    13,138,871
    
    
    
    5.0
    %
 F-25




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##### Table of Contents



KENSINGTON BANKSHARES, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2005, 2004, AND 2003
 NOTE 17  FAIR VALUES OF FINANCIAL INSTRUMENTS
 Disclosure about Fair Value of Financial Instruments
  Cash and cash equivalents.
 Securities.
 Loans receivable.
 Deposit liabilities.
 Securities sold under agreements to repurchase.
 Customer repurchase agreements.
 Off-balance-sheet instruments
 F-26




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##### Table of Contents



KENSINGTON BANKSHARES, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2005, 2004, AND 2003
  2005
    
    2004
    
    2003Estimated
    
    
    
    
    
    Estimated
    
    
    
    
    
    EstimatedCarrying
    
    Fair
    
    Carrying
    
    Fair
    
    Carrying
    
    FairAmount
    
    Value
    
    Amount
    
    Value
    
    Amount
    
    ValueFinancial assets:Cash and cash equivalents
    
    $
    7,130,438
    
    
    $
    7,130,438
    
    
    $
    7,869,106
    
    
    $
    7,869,106
    
    
    $
    19,224,950
    
    
    $
    19,224,950Securities held to maturity
    
    
    184,025,332
    
    
    
    181,210,658
    
    
    
    153,337,768
    
    
    
    153,012,354
    
    
    
    168,163,298
    
    
    
    167,974,741Securities available for sale
    
    
    
    
    
    
    
    
    
    
    5,062,000
    
    
    
    5,062,000
    
    
    
    5,117,200
    
    
    
    5,117,200Loans receivable
    
    
    124,517,572
    
    
    
    124,304,747
    
    
    
    96,770,318
    
    
    
    97,006,630
    
    
    
    89,170,413
    
    
    
    89,516,763Financial liabilities:Deposits
    
    
    278,687,723
    
    
    
    277,646,137
    
    
    
    240,446,046
    
    
    
    240,443,697
    
    
    
    252,110,561
    
    
    
    253,207,897Securities sold under agreements
to repurchase
    
    
    15,203,225
    
    
    
    15,203,225
    
    
    
    
    
    
    
    
    
    
    
    9,737,000
    
    
    
    9,737,000Customer repurchase agreements
    
    
    2,118,072
    
    
    
    2,118,072
    
    
    
    990,865
    
    
    
    990,865
    
    
    
    937,660
    
    
    
    937,660
 NOTE 18  SUBSEQUENT EVENTS
  F-27




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##### Table of Contents



KENSINGTON BANKSHARES, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2005, 2004, AND 2003
 NOTE 19  CONDENSED PARENT COMPANY INFORMATION
  Balance Sheets
 2005
    
    
    2004
    
    
    2003Assets:Cash
    
    $
    170,990
    
    
    $
    48,673
    
    
    $
    78,742Other assets
    
    
    
    
    
    
    25,600
    
    
    
    25,600Investment in Bank subsidiary
    
    
    28,007,801
    
    
    
    26,865,990
    
    
    
    24,089,598Total Assets
    
    $
    28,178,791
    
    
    $
    26,940,263
    
    
    $
    24,193,940Liabilities & Stockholders Equity:Dividends payable and other liabilities
    
    $
    752,294
    
    
    $
    
    
    
    $
    Stockholders equity
    
    
    27,426,497
    
    
    
    26,940,263
    
    
    
    24,193,940Total Liabilities & Stockholders Equity
    
    $
    28,178,791
    
    
    $
    26,940,263
    
    
    $
    24,193,940
 Statements of Income
 2005
    
    
    2004
    
    
    2003Noninterest Income:Dividends from Bank subsidiary
    
    $
    1,776,000
    
    
    $
    
    
    
    $
    Noninterest Expense:Other expense
    
    
    38,083
    
    
    
    43,272
    
    
    
    68,031Income (loss) before income taxes and equity
in undistributed earnings of subsidiary
    
    
    1,737,917
    
    
    
    (43,272
    )
    
    
    (68,031
    )Income tax benefit
    
    
    (14,431
    )
    
    
    (13,203
    )
    
    
    (25,600
    )Income (loss) before equity in undistributed
earnings of subsidiary
    
    
    1,752,348
    
    
    
    30,069
    
    
    
    (42,431
    )Equity in undistributed earnings of subsidiary
    
    
    1,127,614
    
    
    
    2,714,717
    
    
    
    2,071,584Net income
    
    $
    2,879,962
    
    
    $
    2,684,648
    
    
    $
    2,029,153
 F-28




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##### Table of Contents



KENSINGTON BANKSHARES, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2005, 2004, AND 2003
 Statements of Cash Flows
 2005
    
    
    2004
    
    
    2003Cash Flows From Operating Activities:Net income
    
    $
    2,879,962
    
    
    $
    2,684,648
    
    
    $
    2,029,153Adjustments to reconcile net income
to net cash provided by (used in) operating activities:Net change in other assets
    
    
    25,600
    
    
    
    
    
    
    
    (3,740
    )Net change in other liabilities
    
    
    10,194
    
    
    
    
    
    
    
    Equity in undistributed earnings
of Bank subsidiary
    
    
    (1,127,614
    )
    
    
    (2,714,717
    )
    
    
    (2,071,584
    )Net cash provided by (used in) operating activities
    
    
    1,788,142
    
    
    
    (30,069
    )
    
    
    (46,171
    )Cash Flows From Financing Activities:Dividends paid
    
    
    (1,669,575
    )
    
    
    
    
    
    
    Proceeds from options exercised
    
    
    3,750
    
    
    
    
    
    
    
    Net cash used in financing activities
    
    
    (1,665,825
    )
    
    
    
    
    
    
    Net change in cash
    
    
    122,317
    
    
    
    (30,069
    )
    
    
    (46,171
    )Cash at beginning of year
    
    
    48,673
    
    
    
    78,742
    
    
    
    124,913Cash at end of year
    
    $
    170,990
    
    
    $
    48,673
    
    
    $
    78,742
 F-29




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##### Table of Contents



QUARTERLY FINANCIAL INFORMATION (UNAUDITED)
  KENSINGTON BANKSHARES, INC. AND SUBSIDIARY
CONDENSED CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
QUARTERLY FINANCIAL INFORMATION
FOR THE QUARTERS IN 2005
(UNAUDITED)
 3/31/2005
    
    
    6/30/2005
    
    
    9/30/2005
    
    
    12/31/2005Assets:Cash and due from banks
    
    $
    4,582,894
    
    
    $
    3,830,579
    
    
    $
    5,569,391
    
    
    $
    5,177,112Interest-bearing deposits in bank
    
    
    62,448
    
    
    
    62,695
    
    
    
    63,036
    
    
    
    Federal funds sold
    
    
    2,546,939
    
    
    
    1,927,842
    
    
    
    2,694,218
    
    
    
    1,953,326Cash and cash equivalents
    
    
    7,192,281
    
    
    
    5,821,116
    
    
    
    8,326,645
    
    
    
    7,130,438Securities available for sale
    
    
    5,032,000
    
    
    
    5,007,500
    
    
    
    
    
    
    
    Securities held to maturity
    
    
    153,668,300
    
    
    
    148,148,998
    
    
    
    175,923,507
    
    
    
    184,025,332Loans
    
    
    107,177,271
    
    
    
    116,105,287
    
    
    
    115,508,386
    
    
    
    125,534,310Less allowance for loans losses
    
    
    1,030,000
    
    
    
    1,085,000
    
    
    
    1,125,000
    
    
    
    1,016,738Net loans
    
    
    106,147,271
    
    
    
    115,020,287
    
    
    
    114,383,386
    
    
    
    124,517,572Premises and equipment, net
    
    
    3,158,619
    
    
    
    3,311,799
    
    
    
    3,779,385
    
    
    
    5,609,780Interest receivable and other assets
    
    
    2,351,909
    
    
    
    2,569,715
    
    
    
    2,445,596
    
    
    
    3,371,258Total assets
    
    $
    277,550,380
    
    
    $
    279,879,415
    
    
    $
    304,858,519
    
    
    $
    324,654,380Liabilities and Stockholders Equity:Deposits:Non-interest bearing
    
    $
    33,296,285
    
    
    $
    31,471,996
    
    
    $
    37,741,535
    
    
    $
    35,801,529Interest bearing
    
    
    199,521,244
    
    
    
    216,225,770
    
    
    
    232,170,816
    
    
    
    242,886,194Total deposits
    
    
    232,817,529
    
    
    
    247,697,766
    
    
    
    269,912,351
    
    
    
    278,687,723Securities sold under agreements to
repurchase
    
    
    14,767,000
    
    
    
    2,892,000
    
    
    
    5,210,000
    
    
    
    15,203,225Customer repurchase agreements
    
    
    1,276,852
    
    
    
    638,303
    
    
    
    837,943
    
    
    
    2,118,072Dividends payable
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    742,100Accrued expenses and other liabilities
    
    
    915,065
    
    
    
    761,914
    
    
    
    849,091
    
    
    
    476,763Total liabilities
    
    
    249,776,446
    
    
    
    251,989,983
    
    
    
    276,809,385
    
    
    
    297,227,883Stockholders equity:Common stock
    
    
    37,100
    
    
    
    37,100
    
    
    
    37,105
    
    
    
    37,105Additional paid-in capital
    
    
    21,107,902
    
    
    
    21,107,902
    
    
    
    21,111,647
    
    
    
    21,111,647Retained earnings
    
    
    6,637,673
    
    
    
    6,744,333
    
    
    
    6,900,382
    
    
    
    6,277,745Accumulated other comprehensive income
(loss)
    
    
    (8,741
    )
    
    
    97
    
    
    
    
    
    
    
    Total stockholders equity
    
    
    27,773,934
    
    
    
    27,889,432
    
    
    
    28,049,134
    
    
    
    27,426,497Total liabilities and stockholders equity
    
    $
    277,550,380
    
    
    $
    279,879,415
    
    
    $
    304,858,519
    
    
    $
    324,654,380
 F-30




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##### Table of Contents



KENSINGTON BANKSHARES, INC. AND SUBSIDIARY
CONDENSED CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
QUARTERLY FINANCIAL INFORMATION
FOR THE QUARTERS IN 2004
(UNAUDITED)
 3/31/2004
    
    
    6/30/2004
    
    
    9/30/2004
    
    
    12/31/2004Assets:Cash and due from banks
    
    $
    2,741,921
    
    
    $
    3,763,984
    
    
    $
    3,810,620
    
    
    $
    3,527,305Interest-bearing deposits in bank
    
    
    61,642
    
    
    
    61,726
    
    
    
    61,880
    
    
    
    62,189Federal funds sold
    
    
    316,625
    
    
    
    1,422,082
    
    
    
    76,245
    
    
    
    4,279,612Cash and cash equivalents
    
    
    3,120,188
    
    
    
    5,247,792
    
    
    
    3,948,745
    
    
    
    7,869,106Securities available for sale
    
    
    5,212,500
    
    
    
    5,017,200
    
    
    
    5,103,150
    
    
    
    5,062,000Securities held to maturity
    
    
    183,061,073
    
    
    
    173,564,184
    
    
    
    200,965,717
    
    
    
    153,337,768Loans
    
    
    97,345,863
    
    
    
    100,593,324
    
    
    
    93,146,916
    
    
    
    97,770,318Less allowance for loans losses
    
    
    935,000
    
    
    
    960,000
    
    
    
    980,000
    
    
    
    1,000,000Net loans
    
    
    96,410,863
    
    
    
    99,633,324
    
    
    
    92,166,916
    
    
    
    96,770,318Mortgage loans held for sale
    
    
    64,919
    
    
    
    396,786
    
    
    
    
    
    
    
    Premises and equipment, net
    
    
    2,589,246
    
    
    
    2,559,298
    
    
    
    2,490,425
    
    
    
    3,101,276Interest receivable and other assets
    
    
    2,799,334
    
    
    
    3,072,667
    
    
    
    2,893,581
    
    
    
    2,533,209Total assets
    
    $
    293,258,123
    
    
    $
    289,491,251
    
    
    $
    307,568,534
    
    
    $
    268,673,677Liabilities and Stockholders Equity:Deposits:Non-interest bearing
    
    $
    19,952,388
    
    
    $
    23,133,530
    
    
    $
    22,244,430
    
    
    $
    29,313,370Interest bearing
    
    
    232,970,810
    
    
    
    239,405,678
    
    
    
    240,995,367
    
    
    
    211,132,676Total deposits
    
    
    252,923,198
    
    
    
    262,539,208
    
    
    
    263,239,797
    
    
    
    240,446,046Securities sold under agreements to
repurchase
    
    
    12,616,406
    
    
    
    
    
    
    
    16,317,450
    
    
    
    Federal funds purchased
    
    
    1,000,000
    
    
    
    
    
    
    
    
    
    
    
    Customer repurchase agreements
    
    
    901,538
    
    
    
    877,877
    
    
    
    1,149,586
    
    
    
    990,865Accrued expenses and other liabilities
    
    
    796,229
    
    
    
    453,808
    
    
    
    498,572
    
    
    
    296,503Total liabilities
    
    
    268,237,371
    
    
    
    263,870,893
    
    
    
    281,205,405
    
    
    
    241,733,414Stockholders equity:Common stock
    
    
    37,100
    
    
    
    37,100
    
    
    
    37,100
    
    
    
    37,100Additional paid-in capital
    
    
    21,107,902
    
    
    
    21,107,902
    
    
    
    21,107,902
    
    
    
    21,107,902Retained earnings
    
    
    3,869,107
    
    
    
    4,564,917
    
    
    
    5,230,923
    
    
    
    5,809,458Accumulated other comprehensive income
(loss)
    
    
    6,643
    
    
    
    (89,561
    )
    
    
    (12,796
    )
    
    
    (14,197
    )Total stockholders equity
    
    
    25,020,752
    
    
    
    25,620,358
    
    
    
    26,363,129
    
    
    
    26,940,263Total liabilities and stockholders equity
    
    $
    293,258,123
    
    
    $
    289,491,251
    
    
    $
    307,568,534
    
    
    $
    268,673,677
 F-31




---



##### Table of Contents



KENSINGTON BANKSHARES, INC. AND SUBSIDIARY
CONDENSED CONSOLIDATED STATEMENTS
OF INCOME AND COMPREHENSIVE INCOME
QUARTERLY FINANCIAL INFORMATION
FOR THE QUARTERS IN 2005
(UNAUDITED)
 3/31/2005
    
    
    6/30/2005
    
    
    9/30/2005
    
    
    12/31/2005Interest income:Loans receivable and fees on loans
    
    $
    1,778,684
    
    
    $
    2,064,550
    
    
    $
    2,190,446
    
    
    $
    2,339,895Investment securities
    
    
    1,757,950
    
    
    
    1,782,851
    
    
    
    1,912,159
    
    
    
    2,150,182Federal funds sold
    
    
    18,986
    
    
    
    14,506
    
    
    
    29,275
    
    
    
    18,539Total interest income
    
    
    3,555,620
    
    
    
    3,861,907
    
    
    
    4,131,880
    
    
    
    4,508,616Interest expense:Deposits
    
    
    1,122,725
    
    
    
    1,292,838
    
    
    
    1,590,232
    
    
    
    1,890,986Other
    
    
    41,727
    
    
    
    152,153
    
    
    
    67,747
    
    
    
    88,242Total interest expense
    
    
    1,164,452
    
    
    
    1,444,991
    
    
    
    1,657,979
    
    
    
    1,979,228Net interest income
    
    
    2,391,168
    
    
    
    2,416,916
    
    
    
    2,473,901
    
    
    
    2,529,388Provision for loan losses
    
    
    11,900
    
    
    
    55,000
    
    
    
    39,087
    
    
    
    (105,987
    )Net interest income after provision for loan losses
    
    
    2,379,268
    
    
    
    2,361,916
    
    
    
    2,434,814
    
    
    
    2,635,375Noninterest income:Service charges on deposits accounts
    
    
    45,004
    
    
    
    60,912
    
    
    
    63,168
    
    
    
    49,362Securities gains
    
    
    2,500
    
    
    
    
    
    
    
    
    
    
    
    Other
    
    
    7,701
    
    
    
    8,625
    
    
    
    10,083
    
    
    
    9,699Total noninterest income
    
    
    55,205
    
    
    
    69,537
    
    
    
    73,251
    
    
    
    59,061Noninterest expense:Salaries and employee benefits
    
    
    677,362
    
    
    
    701,434
    
    
    
    762,299
    
    
    
    875,486Occupancy and equipment expense
    
    
    190,877
    
    
    
    228,283
    
    
    
    272,269
    
    
    
    327,508Other expenses
    
    
    302,019
    
    
    
    319,576
    
    
    
    355,948
    
    
    
    417,300Total noninterest expense
    
    
    1,170,258
    
    
    
    1,249,293
    
    
    
    1,390,516
    
    
    
    1,620,294Income before income tax expense
    
    
    1,264,215
    
    
    
    1,182,160
    
    
    
    1,117,549
    
    
    
    1,074,142Income tax expense
    
    
    436,000
    
    
    
    519,000
    
    
    
    405,000
    
    
    
    398,104Net Income
    
    $
    828,215
    
    
    $
    663,160
    
    
    $
    712,549
    
    
    $
    676,038Basic earnings per share
    
    $
    .22
    
    
    $
    .18
    
    
    $
    .19
    
    
    $
    .19Diluted earnings per share
    
    $
    .22
    
    
    $
    .18
    
    
    $
    .19
    
    
    $
    .18Basic weighted average shares outstanding
    
    
    3,710,000
    
    
    
    3,710,000
    
    
    
    3,710,167
    
    
    
    3,710,500Diluted weighted average shares outstanding
    
    
    3,710,000
    
    
    
    3,827,600
    
    
    
    3,827,267
    
    
    
    3,827,600Cash dividend per share
    
    $
    .15
    
    
    $
    .15
    
    
    $
    .15
    
    
    $
    .20Statement of Comprehensive IncomeNet Income
    
    $
    828,215
    
    
    $
    663,160
    
    
    $
    712,549
    
    
    $
    676,038Other Comprehensive Income (Loss), net of tax:Unrealized holding (losses) gain arising during the
period
    
    
    5,456
    
    
    
    8,838
    
    
    
    (97
    )
    
    
    Less: Reclassification adjustment for gains included
in net income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    5,456
    
    
    
    8,838
    
    
    
    (97
    )
    
    
    -0-Comprehensive income
    
    $
    833,671
    
    
    $
    671,998
    
    
    $
    712,452
    
    
    $
    676,038
 F-32




---



##### Table of Contents



KENSINGTON BANKSHARES, INC. AND SUBSIDIARY
CONDENSED CONSOLIDATED STATEMENTS
OF INCOME AND COMPREHENSIVE INCOME
QUARTERLY FINANCIAL INFORMATION
FOR THE QUARTERS IN 2004
(UNAUDITED)
 3/31/2004
    
    
    6/30/2004
    
    
    9/30/2004
    
    
    12/31/2004Interest income:Loans receivable and fees on loans
    
    $
    1,628,488
    
    
    $
    1,633,284
    
    
    $
    1,657,916
    
    
    $
    1,695,795Investment securities
    
    
    1,896,317
    
    
    
    1,781,300
    
    
    
    1,894,472
    
    
    
    1,940,707Federal funds sold
    
    
    9,697
    
    
    
    3,567
    
    
    
    14,829
    
    
    
    17,390Total interest income
    
    
    3,534,502
    
    
    
    3,418,151
    
    
    
    3,567,217
    
    
    
    3,653,892Interest expense:Deposits
    
    
    1,292,173
    
    
    
    1,233,713
    
    
    
    1,281,404
    
    
    
    1,219,161Other
    
    
    25,069
    
    
    
    15,860
    
    
    
    11,771
    
    
    
    39,930Total interest expense
    
    
    1,317,242
    
    
    
    1,249,573
    
    
    
    1,293,175
    
    
    
    1,259,091Net interest income
    
    
    2,217,260
    
    
    
    2,168,578
    
    
    
    2,274,042
    
    
    
    2,394,801Provision for loan losses
    
    
    35,000
    
    
    
    25,000
    
    
    
    23,958
    
    
    
    43,193Net interest income after provision for loan losses
    
    
    2,182,260
    
    
    
    2,143,578
    
    
    
    2,250,084
    
    
    
    2,351,608Noninterest income:Service charge on deposits accounts
    
    
    41,743
    
    
    
    51,145
    
    
    
    50,399
    
    
    
    47,142Securities gains
    
    
    8,000
    
    
    
    
    
    
    
    
    
    
    
    606Other
    
    
    4,808
    
    
    
    5,197
    
    
    
    7,710
    
    
    
    7,379Total noninterest income
    
    
    54,551
    
    
    
    56,342
    
    
    
    58,109
    
    
    
    55,127Noninterest expense:Salaries and employee benefits
    
    
    549,551
    
    
    
    594,813
    
    
    
    657,805
    
    
    
    734,194Occupancy and equipment expense
    
    
    195,447
    
    
    
    212,818
    
    
    
    239,850
    
    
    
    310,437Other expenses
    
    
    310,515
    
    
    
    318,479
    
    
    
    304,532
    
    
    
    412,515Total noninterest expense
    
    
    1,055,513
    
    
    
    1,126,110
    
    
    
    1,202,187
    
    
    
    1,457,146Income before income tax expense
    
    
    1,181,298
    
    
    
    1,073,810
    
    
    
    1,106,006
    
    
    
    949,589Income tax expense
    
    
    437,000
    
    
    
    378,000
    
    
    
    440,000
    
    
    
    371,055Net income
    
    $
    744,298
    
    
    $
    695,810
    
    
    $
    666,006
    
    
    $
    578,534Basic earnings per share
    
    $
    .20
    
    
    $
    .19
    
    
    $
    .18
    
    
    $
    .15Diluted earnings per share
    
    $
    .20
    
    
    $
    .19
    
    
    $
    .18
    
    
    $
    .15Basic weighted average shares outstanding
    
    
    3,710,000
    
    
    
    3,710,000
    
    
    
    3,710,000
    
    
    
    3,710,000Diluted weighted average shares outstanding
    
    
    3,710,000
    
    
    
    3,710,000
    
    
    
    3,710,000
    
    
    
    3,710,000Cash dividend per share
    
    $
    
    
    
    $
    
    
    
    $
    
    
    
    $
    Statement of Comprehensive IncomeNet Income
    
    $
    744,298
    
    
    $
    695,810
    
    
    $
    666,006
    
    
    $
    578,534Other Comprehensive Income (Loss), net of tax:Unrealized holding (losses) gain arising during the
period
    
    
    82,515
    
    
    
    (96,204
    )
    
    
    76,765
    
    
    
    (1,401
    )Less: Reclassification adjustment for gains included
in net income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    82,515
    
    
    
    (96,204
    )
    
    
    76,765
    
    
    
    (1,401
    )Comprehensive income
    
    $
    826,813
    
    
    $
    599,606
    
    
    $
    742,771
    
    
    $
    577,133
 F-33