KENTUCKY BANCSHARES INC /KY/
Under the Company's Amended and Restated Articles of Incorporation, the Board of Directors consists of three different classes (Class I, Class II and Class III), each member of a class to serve, subject to the provisions of the Amended and Restated Articles of Incorporation and Bylaws, for a three-year term and until the member's successor is duly elected and qualified.  Except as listed below, each nominee for a Class I directorship has held the specified position for the last five years.  The names of the nominees proposed for election as Class I directors, all of whom are presently directors of the Company, are set forth below.  The Company is not aware of any other individual who may be nominated for election to the Board of Directors at the Annual Meeting.   Betty J. Long is the retired President and CEO of First Federal, Cynthiana. She was appointed to the board of the Company in 2003.  Ted McClain is an agent with Hopewell Insurance Company. He became a director of the Company in 2003.  Buckner Woodford IV is Chairman of both Kentucky Bank and Kentucky Bancshares, Inc. He became a director of the Company in 1982.   The Board of Directors does not contemplate that any of the nominees will be unable to accept election as a director for any reason.  However, if one or more of such nominees is unable or unwilling to accept or is unavailable to serve, the persons named in the proxies or their substitutes shall have authority, according to their judgment, to vote or to refrain from voting for other individuals as directors.   The Board recommends that shareholders vote "FOR" each of the above nominees for election as Class I directors of the Company.
There are factors, many beyond our control, which may significantly change the results or expectations of the Company.  Some of these factors are described below in the sections titled financial risk, business risk and operational risk.  These risks are not totally independent of each other. Some factors affect more than one type of risk.  These include regulatory, economic, and competitive environments.  As part of the annual audit plan, our internal risk management department meets with management to assess these risks throughout the Company.  Many risks are further addressed in other sections of this Form 10-K document.  The exercise of regulatory power may have negative impact on the Company's results of operations and financial condition.  The Company is subject to extensive regulation, supervision and examination by federal and state banking authorities.  Any change in applicable regulations or federal or state legislation could have a substantial impact on our operations. Additional legislation and regulations may be enacted or adopted in the future that could significantly affect the Company's powers, authority and operations, which could have a material adverse effect on the financial condition and results of operations.  Further, regulators have significant discretion and power to prevent or remedy unsafe or unsound practices or violations of laws by banks and bank holding companies in the performance of their supervisory and enforcement duties.  Significant decline in general economic conditions, locally and nationally, will negatively affect the financial results of the Company's banking operations.  The Company's success depends on general economic conditions both locally and nationally.  Most of our customers are in the Central Kentucky area.  Our customers are directly impacted by the local economy, as well as the national or global economies.  Local economic conditions (such as the effect of the tobacco buyout on the agricultural industry) have an impact on the demand of customers for loans, the ability of some borrowers to repay these loans and the value of the collateral securing these loans. Factors influencing general national economic conditions include the change in interest rates (particularly mortgage lending rates), oil prices, inflation, recession and unemployment.  As these factors impact the overall business climate, they can have a significant effect on loan demand.  Loan growth is critical to our profitability.  The Company faces vigorous competition from banks and other financial institutions.  This competition may reduce or limit our margins on banking services, reduce market share and adversely affect results of operations and financial condition.  A number of these banks and other financial institutions have substantially greater resources and lending limits, larger branch systems and a wider array of banking services.  Additionally, the Company encounters competition from both de novo and smaller community banks entering the markets we are currently in.  The Company also competes with other providers of financial services, such as money market mutual funds, brokerage firms, consumer finance companies and insurance companies.    Financial Risk  Financial risk components include, but are not limited to, credit risk, interest rate risk, market risk and liquidity risk.  The Company has adopted various policies to minimize potential adverse effects of interest rate, market and liquidity risks.  However, even with these policies in place, a change in interest rates could negatively impact the Company's results of operations or financial position.  Defaults in the repayment of loans may negatively impact our business. Credit risk is most closely associated with lending activities at financial institutions.  Credit risk is the risk to earnings and capital when a customer fails to meet the terms of any contract or otherwise fails to perform as agreed.  Credit risk arises from all activities where the Company is dependent on issuer, borrower, or counterparty performance, not just traditional lending activities.  For example, the investment security portfolio has inherent credit risk as do counterparties in derivative contracts.  Credit risk encompasses a broad range of financial institution activities and includes items reflected both on and off the balance sheet.  Management makes various assumptions and judgments about the collectibility of the Company's loan portfolio, including the creditworthiness of its borrowers and the value of real estate and other assets serving as collateral for repayment of many of the loans.  In determining the size of the allowance for loan losses, management considers, among other factors, the Company's loan loss experience and an evaluation of economic conditions. If these assumptions prove to be incorrect, the current allowance may not be sufficient to cover future loan losses and adjustments may be necessary to allow for different economic conditions or adverse developments in the loan portfolio.  Material additions to the Company's allowance would materially decrease our net income.  Fluctuations in interest rates may negatively impact our banking business. Interest rate risk focuses on the impact to earnings and capital arising from movements in interest rates.  Interest rate risk focuses on the value implications for accrual portfolios (e.g., held-to-maturity and available- for-sale portfolios) and includes the potential impact to the Company's accrual earnings as well as the economic perspective of the market value of portfolio equity.  The interest rate risk is comprised of repricing risk, basis risk, yield curve risk and options risk.  Repricing risk represents the risk associated with the differences in timing of cash flows and rate changes with the Company's products.  Basis risk represents the risk associated with changing rate relationships among varying yield curves. Yield curve risk is associated with changing rate relationships over the maturity structure.  Options risk is associated with interest-related options, which are embedded in our products.  Changes in market factors may negatively affect the value of our investment assets.  Market risk focuses on the impact to earnings and capital arising from changes in market factors (e.g., interest rates, market liquidity, volatilities, etc.) that affect the value of traded instruments.  Market risk includes items reflected both on and off the balance sheet.  Market risk focuses primarily on mark-to-market portfolios (e.g., accounts revalued for financial statement presentation), including trading accounts and certain derivatives.  Our inability to maintain appropriate levels of liquidity may have a negative impact on our results of operations and financial condition. Liquidity risk focuses on the impact to earnings and capital resulting from the Company's inability to meet its obligations as they become due in the normal course of business without incurring significant losses.  It also includes the management of unplanned decreases or changes in funding sources as well as managing changes in market conditions, which could affect the ability to liquidate assets in the normal course of business without incurring significant losses.  Liquidity risk includes items both on and off the balance sheet.    Business Risk  Business risk is composed mainly of legal (compliance) risk, strategic risk and reputation risk.  Our results of operations and financial condition are susceptible to legal or compliance risks.  Legal or compliance risk is the risk to earnings or capital arising from the impact of unenforceable contracts, lawsuits, adverse judgments, violations or nonconformance with laws, rules, regulations, prescribed practices, or ethical standards.  The risk also arises in situations where laws or rules governing certain products or activities of our customers may be ambiguous or untested.  This risk is not limited to the traditional thinking that legal/compliance risk is only associated with consumer protection laws.  It includes the exposure to litigation from all aspects of both traditional and nontraditional financial institution activities.  Incorrect strategic decisions may have a negative impact on our results of operations and financial condition.  Strategic risk is the risk to earnings and capital arising from adverse business decisions or improper implementation of those decisions.  Strategic risk focuses on more than an analysis of the written strategic plan.  Its focus is on how plans, systems and implementation affect franchise value.  It also incorporates how management analyzes external factors that affect the Company's strategic direction.  Adverse publicity may have a negative impact on our business.  Reputation risk is the risk to earnings and capital arising from negative public opinion.  This affects the ability to establish new relationships or services or to continue servicing existing relationships.  Examiners will assess reputation risk by recognizing the potential effect the public's opinion could have on the Company's franchise value.  Operational Risk  An inability to process transactions may have a negative impact on our business.  Operational risk is present on a daily basis through the Company's processing of transactions and is pervasive in all products and services provided to our customers.  It can be defined as the impact to earnings and capital from problems encountered in processing transactions. Operational risk is a function of internal controls, operating processes, management information systems, and employee integrity.
None.
As of the date of this Proxy Statement, the Company knows of no business that will be presented for consideration at the Annual Meeting other than that referred to above.  At the Annual Meeting, only such business will be conducted, and only such proposals or director nominations will be acted upon, as have been properly brought before the meeting in accordance with the Company's Bylaws.  Proxies in the enclosed form will be voted in respect of any other business that is properly brought before the Annual Meeting in accordance with the judgment of the person or persons voting the proxies.         By Order of the Board of Directors                                       /s/Gregory J. Dawson       Gregory J. Dawson, Secretary        March 27, 2006      This Proxy Form is Solicited by the Board of Directors  Kentucky Bancshares, Inc. Paris, Kentucky  The undersigned hereby appoints Buckner Woodford IV and Gregory J. Dawson, or either one of them (with full power to act alone), my proxy, each with the power to appoint his substitute, to represent me to vote all of the Corporation's Common Shares which I held of record or am otherwise entitled to vote at the close of business on March 17, 2006, at the 2006 Annual Meeting of Shareholders to be held on May 12, 2006 and at any adjournments thereof, with all powers the undersigned would possess if personally present, as follows:  1. ELECTION OF DIRECTORS    FOR all nominees listed below (except as otherwise indicated below)    AGAINST all nominees listed below  Betty J. Long, Ted McClain, and Buckner Woodford IV  (INSTRUCTION:  To withhold authority to vote for any individual nominee, write the nominee's name on the line)  _________________________________________________________  2. OTHER BUSINESS.  In their discretion, the Proxies are authorized to act upon such other matters as may properly be brought before the Annual Meeting or any adjournment thereof.  THE BOARD OF DIRECTORS RECOMMENDS A VOTE "FOR" ALL OF THE NOMINEES LISTED IN ITEM 1.  (PLEASE DATE, MARK, SIGN AND RETURN IMMEDIATELY)  This proxy form relates to ALL shares owned by the undersigned.  This proxy form is solicited by the Board of Directors and will be voted as specified and in accordance with the accompanying proxy statement. If no instruction is indicated on a duly executed proxy form, all shares will be voted "FOR" the nominees listed in Item 1.  A vote FOR the election of nominees listed above includes discretionary authority to cumulate votes, selectively among the nominees as to whom authority to vote has not been withheld and to vote for a substitute nominee if any nominee becomes unavailable for election for any reason.  Please sign exactly as name appears.  When shares are held by joint tenants, both should sign.  When signing as attorney, as executor, administrator, trustee, or guardian, please give full title as such.  If a corporation, please sign full corporate name by President or other authorized officer.  If a partnership, please sign partnership name by authorized person.  DATE___________, 2006      ________________________________       Signature       ________________________________       Signature if held jointly       74     EX-21 5 exhibit21subsidiaries.txt SUBISIDARY  Exhibit 21   Subsidiaries of Registrant  Kentucky Bancshares, Inc.'s Subsidiary  Kentucky Bank  92     EX-23 6 exhibit23.txt AUDITOR'S CONSENT  EXHIBIT 23  CONSENT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM  We hereby consent to the incorporation by reference in the Form S-8 Registration Statement No. 333-92725 and No. 333-130791 of Kentucky Bancshares, Inc., of our report dated January 27, 2006, except for Note 21 with respect to a pending acquisition, as to which the date is February 24, 2006, on the consolidated financial statements of Kentucky Bancshares, Inc. as of December 31, 2005 and 2004 and for each of the three years in the period ended December 31, 2005, as included in the registrant's annual report on Form 10-K.   /s/Crowe Chizek and Company LLC Crowe Chizek and Company LLC  Lexington, Kentucky March 21, 2006  93    EX-31 7 exhibit311.txt CEO EXCHANGE ACT CERTIFICATION  Exhibit 31.1 CERTIFICATION OF CHIEF EXECUTIVE OFFICER PURSUANT TO SECTION 302 OF SARBANES-OXLEY ACT  I, Louis Prichard, certify that: 1. I have reviewed this annual report on Form 10-K of Kentucky Bancshares, Inc.; 2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; 3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report; 4. The registrant's other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and have: a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; b) Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and c) Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and 5. The registrant's other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of registrant's board of directors (or persons performing the equivalent functions): a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal controls over financial reporting. Date:   March 24, 2006 BY  /s/ Louis Prichard Louis Prichard President & Chief Executive Officer 92 94    EX-31 8 exhibit312.txt CFO EXCHANGE ACT CERTIFICATION  Exhibit 31.2 CERTIFICATION OF CHIEF FINANCIAL OFFICER PURSUANT TO SECTION 302 OF SARBANES-OXLEY ACT  I, Gregory J. Dawson, certify that: 1. I have reviewed this annual report on Form 10-K of Kentucky Bancshares, Inc.; 2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; 3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report; 4. The registrant's other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and have: a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; b) Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and c) Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and 5. The registrant's other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of registrant's board of directors (or persons performing the equivalent functions): a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal controls over financial reporting. Date:   March 28, 2006 BY  /s/ Gregory J. Dawson Gregory J. Dawson Chief Financial Officer 95    EX-32 9 exhibit321.txt CEO SOX CERTIFICATION  Exhibit 32.1 CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350, AS ADOPTED PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002        In connection with the Annual Report of Kentucky Bancshares, Inc. (the "Company") on Form 10-K for the period ended December 31, 2005 as filed with the Securities and Exchange Commission on the date hereof (the "Report"), I, Louis Prichard, Chief Executive Officer of the Company, certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes- Oxley Act of 2002, that to my knowledge:       (1)  The Report fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act of 1934; and       (2)  The information contained in the Report fairly presents, in all material respects, the financial condition and result of operations of the Company.                                  ___/s/ Louis Prichard_______                               Chief Executive Officer                                March 24, 2006  A signed original of this written statement required by Section 906 has been provided to Kentucky Bancshares, Inc. and will be retained by Kentucky Bancshares, Inc. and furnished to the Securities and Exchange Commission or its staff upon request.    96    EX-32 10 exhibit322.txt CFO SOX CERTIFICATION  Exhibit 32.2 CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350, AS ADOPTED PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002        In connection with the Annual Report of Kentucky Bancshares, Inc. (the "Company") on Form 10-K for the period ended December 31, 2005 as filed with the Securities and Exchange Commission on the date hereof (the "Report"), I, Gregory J. Dawson, Chief Financial Officer of the Company, certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that to my knowledge:       (1)  The Report fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act of 1934; and       (2)  The information contained in the Report fairly presents, in all material respects, the financial condition and result of operations of the Company.                                  ___/s/ Gregory J. Dawson____                               Chief Financial Officer                                March 28, 2006  A signed original of this written statement required by Section 906 has been provided to Kentucky Bancshares, Inc. and will be retained by Kentucky Bancshares, Inc. and furnished to the Securities and Exchange Commission or its staff upon request.    97    -----END PRIVACY-ENHANCED MESSAGE-----
The Company and its subsidiary are from time to time involved in routine legal proceedings occurring in the ordinary course of business that, in the aggregate, management believes will not have a material impact on the Company's financial condition and results of operation.
Not Applicable.  PART II
There is no established public trading market for the Company's Common Stock.  The Company's Common Stock is not listed on any national securities exchange nor is it quoted on the NASDAQ system.  However, it is traded on the OTC Bulletin Board under the symbol "KTYB.OB".  Trading in the Common Stock has been infrequent, with retail brokerage firms making the market. The following table sets forth the high and low closing sales prices of the Common Stock from the OTC Bulletin Board and the dividends declared thereon, for the periods indicated below:                           High              Low            Dividend        2005  Quarter 4   $30.50            $29.25            $.23             Quarter 3    30.50             29.50             .23             Quarter 2    30.50             28.05             .23             Quarter 1    31.00             29.25             .23        2004  Quarter 4   $32.50            $30.50            $.21             Quarter 3    33.00             31.00             .21             Quarter 2    34.00             31.00             .21             Quarter 1    34.77             31.79             .21  Note 16 to the Company's consolidated financial statements included in this report contains additional information relating to amounts available to be paid as dividends.  As of December 31, 2005 the Company had 2,666,897 shares of Common Stock outstanding and approximately 478 holders of record of its Common Stock.  The table below lists issuer purchases of equity securities.  Period    (a) Total       (b)       (c) Total Number      (d) Maximum Number           Number of     Average   of Shares (or Units)  (or Approximate Dollar           Shares (or  Price Paid    Purchased as Part    Value) of Shares (or             Units)     Per Share       of Publicly      Units) that May Yet Be           Purchased    (or Unit)     Announced Plans     Purchased Under the                                        Or Programs        Plans of Programs  10/1/05 -  10/31/05    6,400      $30.25           6,400              94,691 shares  11/1/05 -  11/30/05      -0-         N/A             N/A              94,691 shares  12/1/05 -  12/31/05      -0-         N/A             N/A              94,691 shares  Total        6,400                       6,400              94,691 shares  On October 25, 2000, the Company announced that its Board of Directors approved a stock repurchase program.  The Company is authorized to purchase up to 100,000 shares of its outstanding common stock.  On November 11, 2002, the Board of Directors approved and authorized the Company's repurchase of an additional 100,000 shares.  Shares will be purchased from time to time in the open market depending on market prices and other considerations. Through December 31, 2005, 105,309 shares have been purchased, with the most recent share repurchase under the Board-approved stock repurchase program having occurred on October 31, 2005.
The following selected financial data should be read in conjunction with the Company's Consolidated Financial Statements and the accompanying notes presented elsewhere herein.                                             At or For the Year Ended December 31 (dollars and shares in thousands, except per share amounts)                                         2005      2004      2003      2002      2001       CONDENSED STATEMENT OF INCOME: Total Interest Income                 $28,897   $25,846   $22,329   $24,788   $28,046 Total Interest Expense                 11,766     9,067     7,875     9,367    13,386 Net Interest Income                    17,131    16,779    14,454    15,421    14,660 Provision for Losses                      508       840     1,300     1,204     1,068 Net Interest Income After  Provision for Losses                  16,623    15,939    13,154    14,217    13,592 Noninterest Income                      6,749     6,796     6,707     6,590     5,672 Noninterest Expense                    15,474    14,755    14,171    12,433    11,756 Income Before Income  Tax Expense                            7,898     7,980     5,690     8,374     7,508 Income Tax Expense                      2,078     2,218     1,457     2,471     1,984 Net Income                              5,820     5,762     4,233     5,903     5,524  SHARE DATA: Basic Earnings per Share (EPS)          $2.17     $2.09     $1.52     $2.13     $1.98 Diluted EPS                              2.16      2.07      1.50      2.10      1.95 Cash Dividends Declared                  0.92      0.84      0.76      0.68      0.60 Book Value                              17.45     16.77     16.90     15.90     14.13 Average Common Shares-Basic             2,677     2,757     2,781     2,770     2,790 Average Common Shares-Diluted           2,692     2,777     2,827     2,806     2,837  SELECTED BALANCE SHEET DATA: Loans, including loans held for sale $366,602  $354,294  $316,941  $281,499  $272,129 Investment Securities                 160,652   126,767   128,790    89,509    75,608 Total Assets                          572,750   528,544   500,852   419,771   397,257 Deposits                              431,631   387,955   384,599   322,836   308,915 Securities sold under agreements to  repurchase and other borrowings       16,838    25,593     7,285     5,277     1,602 Federal Home Loan Bank advances        66,749    59,750    53,232    43,937    43,598 Stockholders' Equity                   46,546    45,027    46,057    44,092    39,100  PERFORMANCE RATIOS: (Average Balances) Return on Assets                        1.08%     1.11%     1.00%     1.48%     1.46% Return on Stockholders' Equity         12.69%    12.57%     9.31%    14.27%    14.60% Net Interest Margin (1)                 3.50%     3.60%     3.79%     4.23%     4.22% Equity to Assets (annual average)       8.50%     8.82%    10.73%    10.36%     9.99%  SELECTED STATISTICAL DATA: Dividend Payout Ratio                  42.30%    39.97%    50.00%    31.94%    30.28% Number of Employees (at period end)       172       167       182       173       180  ALLOWANCE COVERAGE RATIOS: Allowance to Total Loans                1.16%     1.16%     1.19%     1.19%     1.24% Net Charge-offs as a Percentage of  Average Loans                          0.10%     0.15%     0.43%     0.43%     0.39%  (1) Tax equivalent
The following discussion and analysis of financial condition and results of operations should be read in conjunction with the Consolidated Financial Statements and accompanying notes included as Exhibit 13. When necessary, reclassifications have been made to prior years' data throughout the following discussion and analysis for purposes of comparability with 2005 data.  Critical Accounting Policies  The accounting and reporting policies of the Company and its subsidiary are in accordance with accounting principles generally accepted in the United States and conform to general practices within the banking industry.  Significant accounting policies are listed in Note 1 in the "Notes to Consolidated Financial Statements".  Critical accounting and reporting policies include accounting for loans and the allowance for loan losses.  Different assumptions in the application of these policies could result in material changes in the consolidated financial position or consolidated results of operations.  Loans are stated at the amount of unpaid principal, reduced by an allowance for loan losses.  Interest on loans is recognized on the accrual basis, except for those loans on the nonaccrual status. Interest income received on such loans is accounted for on the cash basis or cost recovery method.  The allowance for loan losses is a valuation allowance for probable incurred credit losses.  Management estimates the allowance balance required using past loan loss experience, the nature and volume of the portfolio, information about specific borrower situations and estimated collateral values, economic conditions, and other factors.  The accounting policies relating to the allowance for loan losses involve the use of estimates and require significant judgments to be made by management.  Forward-Looking Statements  This discussion contains forward-looking statements under the Private Securities Litigation Reform Act of 1995 that involve risks and uncertainties.  Although the Company believes that the assumptions underlying the forward-looking statements contained herein are reasonable, any of the assumptions could be inaccurate, and therefore, there can be no assurance that the forward-looking statements included herein will prove to be accurate.  Factors that could cause actual results to differ from the results discussed in the forward-looking statements include, but are not limited to:  economic conditions (both generally and more specifically in the markets, including the tobacco market, in which the Company and its bank operate); competition for the Company's customers from other providers of financial and mortgage services; government legislation, regulation and monetary policy (which changes from time to time and over which the Company has no control); changes in interest rates (both generally and more specifically mortgage interest rates); material unforeseen changes in the liquidity, results of operations, or financial condition of the Company's customers; and other risks detailed in the Company's filings with the Securities and Exchange Commission, all of which are difficult to predict and many of which are beyond the control of the Company.  The Company undertakes no obligation to republish revised forward-looking statements to reflect events or circumstances after the date hereof or to reflect the occurrence of unanticipated events.    Recent Developments On February 24, 2006, the Company entered into an Agreement and Plan of Merger whereby Peoples Bancorp of Sandy Hook, Inc will merge with and into the Company.  Pursuant to the Agreement, the Company will merge with Peoples Bancorp of Sandy Hook, Inc., a privately held $87 million asset bank holding company with offices in Morehead and Sandy Hook, Kentucky. The consummation of the transaction is subject to ordinary and customary closing conditions, including regulatory approval and the approval of Peoples Bancorp stockholders.  Pursuant to the Agreement, in connection with the merger each share of Peoples Bancorp common stock will be converted into cash and shares of Kentucky Bancshares common stock.  Total consideration for the transaction will be $14,000,000. Based on the market price of the Company's common stock on the date of the Agreement, approximately 190,000 shares of the Company's common stock would be issued to Peoples Bancorp shareholders; in no event will more than 215,385 shares or less than 164,706 shares be issued in the transaction. Overview  Net income for the year ended December 31, 2005 was $5.8 million, or $2.17 per common share compared to $5.8 million, or $2.09 for 2004 and $4.2 million, or $1.52 for 2003.  Earnings per share assuming dilution were $2.16, $2.07 and $1.50 for 2005, 2004 and 2003, respectively.  For 2005, net income increased $58 thousand, or 1%.  Net interest income increased $352 thousand, the loan loss provision decreased $332 thousand, other income decreased $48 thousand, while total other expenses increased $719 thousand.  For 2004, net income increased $1.5 million, or 36%.  Net interest income increased $2.3 million, the loan loss provision decreased $460 thousand, other income increased $89 thousand, while other expenses increased $584 thousand.  During 2003, the Company completed a strategic acquisition to strengthen its business and grow its customer base.  In November 2003, the Company purchased Kentucky First Bancorp, Inc. (Kentucky First) and its subsidiary, First Federal Savings Bank (First Federal) of Cynthiana.  Lack of loan demand, tightening margins and one time expenses related to closing the original leased facility in Georgetown and the merger of Kentucky First adversely affected 2003 earnings.  Return on average equity was 12.7% in 2005 compared to 12.6% in 2004 and 9.3% in 2003.  Return on average assets was 1.08% in 2005 compared to 1.11% in 2004 and 1.00% in 2003.  Non-performing loans as a percentage of loans (including held for sale) were 0.26%, 0.58% and 0.82% as of December 31, 2005, 2004 and 2003, respectively.  RESULTS OF OPERATIONS  Net Interest Income  Net interest income, the Company's largest source of revenue, on a tax equivalent basis increased from $15.1 million in 2003 to $17.4 million in 2004 and to $17.7 million in 2005.  The taxable equivalent adjustment (nontaxable interest income on state and municipal obligations net of the related non-deductible portion of interest expense) is based on our Federal income tax rate of 34%.  Average earning assets and interest bearing liabilities both increased from 2004 to 2005.  Average earning assets increased $23 million, or 5%. Investment securities decreased $7 million primarily due to maturities and calls of securities.  These proceeds were used primarily to fund loans.  Loans increased $23 million as a result of improved loan demand. Average interest bearing liabilities increased $15 million, or 4% during this same period.  The Company continues to actively pursue quality loans and fund these primarily with deposits and FHLB advances.  During the second half of 2004 rates started increasing and this pattern has continued.  Bank prime rates increased 125 basis points during 2004 and another 200 basis points in 2005.  As a result of this, the tax equivalent yield on earning assets increased from 5.47% in 2004 to 5.82% in 2005.  The volume rate analysis for 2005 that follows indicates that $1.4 million of the increase in interest income is attributable to the change in volume, while the increase in rates contributed to an increase of $1.7 million in interest income.  The rate increase also caused an increase in the cost of interest bearing liabilities.  The average rate of these liabilities increased from 2.25% in 2004 to 2.82% in 2005. Based on the volume rate analysis that follows, the change in volume contributed to an increase of $293 thousand to interest expense, while the increase in rates was responsible for a $2.4 million increase in interest expense.  As a result, the 2005 net interest income increase is attributed to increases in volume reduced by the negative impact of increases in rates, more on the liability side than the asset side.  The volume rate analysis that follows, during 2004, indicates that $4.5 million of the increase in interest income is attributable to the change in volume, while the lower level of rates contributed to a decrease of $995 thousand in interest income.  This low level of rates also caused a decrease in the cost of interest bearing liabilities.  The average rate of these liabilities decreased from 2.49% in 2003 to 2.25% in 2004.  In addition, the change in volume contributed to an increase of $2.3 million in interest expense, while the low level of rates was responsible for a $1.1 million decrease in interest expense.  As a result, the 2004 net interest income increase is primarily attributed to increases in volume.  Following the 2004 enactment of federal legislation to end the federal tobacco program and to compensate quota owners and producers, the Company offered tobacco quota owners and producers upfront, lump- sum payment buyouts ranging from 75% to 80% of the future stream of federal buyout payments during 2005.  The Company made $11.7 million in lump-sum payments in January 2006 under successor in interest contracts.  Similar types of buyouts are expected to continue over the next few years, but on a smaller scale.  These buyouts will generate additional net interest income starting in January 2006.  In spite of the positive impact on net interest income that may result from the increasing rate environment beginning in 2004 and continuing into 2006, competitive pressures on interest rates will continue and are likely to result in only modest increases in net interest margins.    The accompanying analysis of changes in net interest income in the following table shows the relationships of the volume and rate portions of these changes in 2005 and 2004.  Changes in interest income and expenses due to both rate and volume are allocated on a pro rata basis.                                            2005 vs. 2004                          2004 vs. 2003                             Increase (Decrease) Due to Change in   Increase (Decrease) Due to Change in                               Volume        Rate      Net Change     Volume        Rate      Net Change        INTEREST INCOME Loans                       $     1,455  $     1,448  $     2,903  $     2,942  $    (1,047) $     1,895 Investment Securities              (258)          54         (204)       1,626           24        1,650 Federal Funds Sold and  Securities Purchased under  Agreements to Resell               173          177          350          (61)          27          (34) Deposits with Banks                  (9)          11            2            5            1            6   Total Interest Income           1,361        1,690        3,051        4,512         (995)       3,517 INTEREST EXPENSE Deposits Demand                               54          994        1,048           88           54          142 Savings                               8          103          111           38            0           38 Negotiable Certificates of  Deposit and Other  Time Deposits                      111        1,145        1,256          776         (501)         275 Securities sold under  agreements to  repurchase and  other borrowings                   (98)         291          193          780         (147)         633 Federal Home Loan  Bank advances                      218         (127)          91          575         (472)         103   Total Interest Expense            293        2,406        2,699        2,257       (1,066)       1,191     Net Interest Income     $     1,068  $      (716) $       352  $     2,255  $        71  $     2,326       Average Consolidated Balance Sheets and Net Interest Analysis  (dollars in thousands)                                                              2005                       2004                       2003                                                 Average           Average  Average           Average  Average           Average                                                 Balance  Interest  Rate    Balance  Interest  Rate    Balance  Interest  Rate           ASSETS Interest-Earning Assets Securities Available for Sale (1)  U.S. Treasury and Federal Agency Securities     92,524    3,366     3.64%  97,486    3,510     3.60%  56,559    1,907     3.37%  State and Municipal obligations                 34,888    1,444     4.14%  35,762    1,518     4.24%  32,702    1,431     4.38%  Other Securities                                 6,085      285     4.68%   7,035      271     3.85%   7,971      311     3.90%   Total Securities Available for Sale           133,497    5,095     3.82% 140,283    5,299     3.78%  97,232    3,649     3.75%    Total Investment Securities                  133,497    5,095     3.82% 140,283    5,299     3.78%  97,232    3,649     3.75%    Tax Equivalent Adjustment                                 614     0.46%              638     0.45%              611     0.63%    Tax Equivalent Total                                    5,709     4.28%            5,937     4.23%            4,260     4.38% Federal Funds Sold and Agreements to Repurchase  11,471      417     3.64%   4,620       67     1.45%   9,307      101     1.09% Interest-Bearing Deposits with Banks                321       12     3.74%     827       10     1.21%     441        4     0.91% Loans, Net of Deferred Loan Fees (2)  Commercial                                      31,151    1,958     6.29%  28,874    1,564     5.42%  26,871    1,522     5.66%  Real Estate Mortgage                           321,619   20,660     6.42% 299,062   17,989     6.02% 249,924   15,779     6.31%  Installment                                      8,962      755     8.42%  10,529      917     8.71%  13,707    1,274     9.29%   Total Loans                                   361,732   23,373     6.46% 338,465   20,470     6.05% 290,502   18,575     6.39% Total Interest-Earning Assets                   507,021   29,511     5.82% 484,195   26,484     5.47% 397,482   22,940     5.77% Allowance for Loan Losses                        (4,401)                    (4,090)                    (3,324) Cash and Due From Banks                          10,927                     10,642                      9,252 Premises and Equipment                           11,025                     11,787                     10,840 Other Assets                                     15,054                     17,494                      9,713   Total Assets                                  539,626                    520,028                    423,963  LIABILITIES Interest-Bearing Deposits Negotiable Order of Withdrawal ("NOW")  and Money Market Investment Accounts           103,625    1,832     1.77%  97,267      784     0.81%  86,039      642     0.75% Savings                                          29,303      235     0.80%  27,547      124     0.45%  19,213       86     0.45% Certificates of Deposit and Other Deposits      193,986    6,114     3.15% 189,739    4,858     2.56% 160,651    4,583     2.85%  Total Interest-Bearing Deposits                326,914    8,181     2.50% 314,553    5,766     1.83% 265,903    5,311     2.00% Securities sold under agreements to   repurchase and other borrowings                26,689    1,098     4.11%  29,664      905     3.05%   5,385      272     5.05% Federal Home Loan Bank advances                  63,918    2,487     3.89%  58,421    2,396     4.10%  45,561    2,293     5.03%  Total Interest-Bearing Liabilities             417,521   11,766     2.82% 402,638    9,067     2.25% 316,849    7,876     2.49% Noninterest-Bearing Earning Demand Deposits      73,320                     68,730                     58,263 Other Liabilities                                 2,929                      2,814                      3,371  Total Liabilities                              493,770                    474,182                    378,483 STOCKHOLDERS' EQUITY                             45,856                     45,846                     45,480  Total Liabilities and Shareholders' Equity     539,626                    520,028                    423,963 Average Equity to Average Total Assets             8.50%                      8.82%                     10.73% Net Interest Income                                       17,131                     16,779                     14,453 Net Interest Income (tax equivalent) (3)                  17,745                     17,417                     15,064 Net Interest Spread (tax equivalent) (3)                             3.00%                      3.22%                      3.28% Net Interest Margin (tax equivalent) (3)                             3.50%                      3.60%                      3.79%  (1) Averages computed at amortized cost. (2) Includes loans on a nonaccrual status and loans held for sale. (3) Tax equivalent difference represents the nontaxable interest income on state and municipal securities net of the related non-deductible portion of interest expense.     Noninterest Income and Expenses  Noninterest income was $6.7 million in 2005 compared to $6.8 million in 2004 and $6.7 million in 2003.  Increased service charges and trust department income in 2005 have been offset by a reduction in securities gains in 2005.  The increase in 2004 is primarily from an increase in service charges.  Securities gains were $64 thousand in 2005, $289 thousand in 2004 and $139 thousand in 2003.  The lower gains in 2005 are primarily attributable to rising interest rates and the related inverse relationship of interest rates and market values.  The gains in 2004 were primarily a result of the Company taking advantage of the inverse relationship of interest rates and market values, and municipal securities being called at premiums before their maturities.  In addition, U. S. Treasury securities were sold before maturity to recognize some gains and extend out the yield curve.  Gains on loans sold were $334 thousand, $376 thousand and $853 thousand in 2005, 2004 and 2003, respectively.  Loans held for sale are generally sold after closing to the Federal Home Loan Mortgage Corporation. During 2005, the loan service fee income increased $16 thousand, compared to an increase of $4 thousand in 2004.  Proceeds from the sale of loans were $19 million, $30 million and $37 million in 2005, 2004 and 2003, respectively.  The volume of loan originations is inverse to rate changes.  The increasing rate environment during 2004 and 2005 unfavorably impacted our mortgage loan originations.  The volume of loan originations during 2005 decreased to $18 million from $22 million in 2004.  Other noninterest income excluding security net gains and gain on sale of mortgage loans was $6.4 million in 2005, $6.1 million in 2004 and $5.7 million in 2003.  Service charge income, and more particularly overdraft income, is the largest contributor to these numbers. Overdraft income was $3.4 million in 2005, $3.4 million in 2004 and $3.1 million in 2003.  Other income has remained steady with $1.1 million in 2003, $1.2 million in 2004 and $1.1 million in 2005.  Noninterest expense increased $719 thousand in 2005 to $15.5 million, and increased $584 thousand in 2004 to $14.8 million from $14.2 million in 2003.  The increases in salaries and benefits from $7.4 million in 2003 to $8.1 million in 2004 and to $8.5 million in 2005 are attributable to normal salary and benefit increases.  Bonus compensation was $124 thousand higher in 2005 compared to 2004 and $108 thousand higher in 2004 compared to 2003.  The 2005 increase is mainly a result of additional sales incentives, while the 2004 increase is mainly a result of improved net income.  Occupancy expense decreased $61 thousand in 2004 to $2.2 million and increased $136 thousand, or 10% in 2004 to $2.2 million.  The largest expense, depreciation, increased slightly from $961 thousand in 2003, to $994 thousand in 2004 and decreased $69 thousand to $925 thousand in 2005.  Other noninterest expense decreased from $4.8 million in 2003 to $4.4 million in 2004 and increased to $4.7 million in 2005.  The 2003 total includes $350 thousand in legal and professional expenses, including merger related legal and consulting expenses amounted of $230 thousand.  The subsequent decrease in 2004 is mainly from the legal and professional expenses in 2003 related to the merger.  During 2005, marketing increased $95 thousand from $378 thousand to $474 thousand, and other taxes increased $51 thousand.    The following table is a summary of noninterest income and expense for the three-year period indicated.                                                 For the Year Ended December 31                                                       (in thousands)                                               2005       2004       2003 NON-INTEREST INCOME Service Charges                             $   4,511  $   4,358  $   4,065 Loan Service Fee Income                           263        246        242 Trust Department Income                           458        299        302 Investment Securities Gains (Losses),net           65        289        139 Gains on Sale of Mortgage Loans                   334        376        853 Other                                           1,118      1,228      1,106 Total Non-interest Income                       6,749      6,796      6,707  NON-INTEREST EXPENSE Salaries and Employee Benefits                  8,548      8,053      7,373 Occupancy Expenses                              2,194      2,255      2,045 Other                                           4,732      4,447      4,753 Total Non-interest Expense                     15,474     14,755     14,171  Net Non-interest Expense as a Percentage of Average Assets                     1.62%      1.53%      1.76%   Income Taxes  The Company had income tax expense of $2.1 million in 2005 and $2.2 million in 2004 and $1.5 million in 2003.  This represents an effective income tax rate of 26.3% in 2005, 27.8% in 2004 and 25.6% in 2003.  The difference between the effective tax rate and the statutory federal rate of 34% is primarily due to tax exempt income on certain investment securities and loans.    Balance Sheet Review  Assets grew from $529 million at December 31, 2004 to $573 million at December 31, 2005.  Loan growth was $13 million in 2005.  Deposits grew $44 million and FHLB borrowings grew $7 million.  Assets at year-end 2004 totaled $529 million compared to $501 million in 2003.  In 2004, loan growth was $45 million and deposit growth was $3 million.  FHLB borrowings increased $7 million.  Loans  Total loans (including loans held for sale) were $371 million at December 31, 2005 compared to $358 million at the end of 2004 and $321 million in 2003.  Loan growth continued to improve in 2005.  The increase is mainly attributable to improved loan demand.  As of the end of 2005 and compared to the prior year-end, commercial loans increased $7.3 million, real estate construction loans decreased $2.4 million, real estate mortgage loans (including loans held for sale) increased $6.7 million, agricultural loans increased $1.8 million and installment loans decreased $108 thousand.  As of the end of 2004 and compared to the prior year-end, commercial loans increased $5.7 million, real estate construction loans increased $17.9 million, real estate mortgage loans (including loans held for sale) increased $16.3 million, agricultural loans increased $882 thousand and installment loans decreased $3.9 million.  As of December 31, 2005, the real estate mortgage portfolio comprised 66% of total loans compared to 67% in 2004.  Of this, 1-4 family residential property represented 65% in 2005 and 67% in 2004. Agricultural loans comprised 16% in 2005 and 16% in 2004 of the loan portfolio.  Approximately 82% of the agricultural loans are secured by real estate in 2005 compared to 80% in 2004.  The remainder of the agricultural portfolio is used to purchase livestock, equipment and other capital improvements and for general operation of the farm. Generally, a secured interest is obtained in the capital assets, equipment, livestock or crops.  Automobile loans account for 33% in 2005 and 31% in 2004 of the consumer loan portfolio, while the purpose of the remainder of this portfolio is used by customers for purchasing retail goods, home improvement or other personal reasons.  The commercial loan portfolio is mainly for capital outlays and business operation. Collateral is requested depending on the creditworthiness of the borrower.  Unsecured loans are made to individuals or companies mainly based on the creditworthiness of the customer.  Approximately 3% of the loan portfolio is unsecured.  Management is not aware of any significant concentrations that may cause future material risks, which may result in significant problems with future income and capital requirements.    The following table represents a summary of the Company's loan portfolio by category for each of the last five years.  There is no concentration of loans (greater than 5% of the loan portfolio) in any industry.  The Company has no foreign loans or highly leveraged transactions in its loan portfolio.  Loans Outstanding                                          At December 31 (in thousands)                                  2005      2004      2003      2002      2001 Commercial                     $ 27,302  $ 19,999  $ 14,278  $ 16,803  $ 18,618 Real Estate Construction         29,822    32,256    14,313    15,514    12,302 Real Estate Mortgage            245,326   238,661   222,342   182,958   168,684 Agricultural                     59,328    57,497    56,615    52,188    53,640 Installment                       8,954     9,062    12,978    17,134    21,952 Other                               368       991       289       309       338   Total Loans                   371,100   358,466   320,815   284,906   275,534 Less Deferred Loan Fees             188        10        54        12        19   Total Loans, Net of    Deferred Loan Fees           370,912   358,456   320,761   284,894   275,515 Less loans held for sale              0       175     7,759       740     2,343 Less Allowance For Loan Losses    4,310     4,163     3,820     3,395     3,386   Net Loans                     366,602   354,118   309,182   280,759   269,786  The following table sets forth the maturity distribution and interest sensitivity of selected loan categories at December 31, 2005. Maturities are based upon contractual term.  The total loans in this report represent loans net of deferred loan fees, including loans held for sale but excluding the allowance for loan losses.  In addition, deferred loan fees on the above schedule is netted with real estate mortgage loans on the following schedule.  Loan Maturities and Interest Sensitivity                                   At December 31, 2005 (in thousands)                              One Year   One Through    Over       Total                              or Less    Five Years  Five Years    Loans Commercial                   $ 15,547    $  9,175    $  2,580    $ 27,302 Real Estate Construction       21,771       6,425       1,626      29,822 Real Estate Mortgage           28,467     123,726      92,945     245,138 Agricultural                   11,970      41,753       5,605      59,328 Installment                     3,710       5,035         209       8,954 Other                             368           0           0         368   Total Loans, Net of    Deferred Loan Fees          81,833     186,114     102,965     370,912 Fixed Rate Loans               20,885     160,735      33,481     215,101 Floating Rate Loans            60,948      25,379      69,484     155,811   Total Loans, Net of    Deferred Loan Fees          81,833     186,114     102,965     370,912     Mortgage Banking  The Company has been in Mortgage Banking since the early 1980's.  The activity in origination and sale of these loans fluctuates, mainly due to changes in interest rates.  Mortgage loan originations decreased from $43 million in 2003 to $22 million in 2004, to $18 million in 2005. Proceeds from the sale of loan were $19 million, $30 million and $37 million for the years 2005, 2004 and 2003, respectively.  Mortgage loans held for sale decreased from $175 thousand at December 31, 2004 to zero at December 31, 2005.  Loans are generally sold when they are made.  The volume of loan originations is inverse to rate changes.  The rate environment in 2004 and 2005 has been rising, and therefore resulting in decreased loan originations in 2005 and 2004.  The effect of these changes was also reflected on the income statement.  As a result, the gain on sale of mortgage loans was $333 thousand in 2005 compared to $376 thousand in 2004 and $853 thousand in 2003.  The Bank has sold various loans to the Federal Home Loan Mortgage Corporation (FHLMC) while retaining the servicing rights.  Gains and losses on loan sales are recorded at the time of the cash sale, which represents the premium or discount paid by the FHLMC.  The Bank receives a servicing fee from the FHLMC on each loan sold.  Servicing rights are capitalized based on the relative fair value of the rights and the expected life of the loan and are included in intangible assets on the balance sheet and expensed in proportion to, and over the period of, estimated net servicing revenues.  Mortgage servicing rights were $802 thousand at December 31, 2005, $876 thousand at December 31, 2004 and $861 thousand at December 31, 2003.  Amortization of mortgage servicing rights was $253 thousand, $249 thousand and $224 thousand for the years ended December 31, 2005, 2004 and 2003, respectively.  See Note 4 in the notes to consolidated financial statements included as Exhibit 13 for additional information.  Deposits  Total deposits increased to $432 million in 2005, up $44 million from 2004.  Noninterest bearing deposits decreased $1.9 million, time deposits of $100 thousand and over increased $2.1 million, and other interest bearing deposits increased $43.4 million.  Public funds totaled $85 million at the end of 2005 ($84 million was interest bearing), an increase of $46 million over the end of 2004.  For 2004, total deposits increased $3 million to $388 million. Noninterest bearing deposits increased $9 million, while time deposits of $100 thousand and over increased $10 million, and other interest bearing deposits decreased $15 million.  Public funds totaled $39 million at the end of 2004 ($37 million was interest bearing).     The table below provides information on the maturities of time deposits of $100,000 or more at December 31, 2005:  Maturity of Time Deposits of $100,000 or More                                                  At December 31, 2005                                                    (in thousands) Maturing 3 Months or Less                             $14,266 Maturing over 3 Months through 6 Months                17,247 Maturing over 6 Months through 12 Months               19,011 Maturing over 12 Months                                11,073  Total                                                 $61,597   Borrowings  The Company utilizes both long and short term borrowing.  Long term borrowing at the Bank is mainly from the Federal Home Loan Bank (FHLB). This borrowing is mainly used to fund longer term, fixed rate mortgages, as part of a leverage strategy and to assist in asset/liability management.  Advances are either paid monthly or at maturity.  FHLB advances were $66.7 million at December 31, 2004.  During 2005, $7.9 million of FHLB borrowing was paid, and advances were made for an additional $15 million.  The 2005 advances were obtained mainly to fund fixed rate loans, as detailed above.  As of December 31, 2004, $59.7 million was borrowed from FHLB, an increase of $6.5 million from 2003. In 2004, $18.4 million of FHLB advances were paid, and advances were made for an additional $25 million.  During 2004, repurchase agreements were obtained as part of a $20 million leverage transaction.  The following table depicts relevant information concerning our short term borrowings.  Short Term Borrowings                                       As of and for the year ended                                        December 31 (in thousands)                                         2005     2004     2003 Federal Funds Purchased:   Balance at Year end                  $ 1,470  $ 6,383  $ 5,266   Average Balance During the Year        3,001    3,706      249   Maximum Month End Balance             15,919   11,306    5,266   Year end rate                           4.25%    2.50%    1.19%   Average annual rate                     2.95%    1.52%    1.46% Repurchase Agreements:   Balance at Year end                  $14,346  $18,314  $ 1,791   Average Balance During the Year       16,014   18,398    1,691   Maximum Month End Balance             18,072   21,947    2,411   Year end rate                           3.18%    2.94%    1.65%   Average annual rate                     3.13%    1.90%    1.34% Other Borrowed Funds:   Balance at Year end                  $ 1,021  $   896  $   228   Average Balance During the Year          457      343    1,048   Maximum Month End Balance              1,021    1,011    1,777   Year end rate                           4.00%    1.87%    0.73%   Average annual rate                     3.10%    1.51%    7.27%    Contractual Obligations  The Bank has required future payments for a defined benefit retirement plan, time deposits and long-term debt.  See Note 13 to the consolidated financial statements for further information on the defined benefit retirement plan.  The other required payments under such commitments at December 31, 2005 are as follows:                                 Payments due by period (in thousands)                                        Less                       More                                       than 1    1-3      3-5     than 5 Contractual Obligations     Total      year    years    years    years  FHLB advances             $ 66,749  $ 13,183  $20,435  $22,555  $10,576 Subordinated debentures      7,217         -        -        -    7,217 Time deposits              192,951   149,083   41,719    2,149        -  Asset Quality  With respect to asset quality, management considers three categories of assets to merit close scrutiny.  These categories include:  loans that are currently nonperforming, other real estate, and loans that are currently performing but which management believes require special attention.  During periods of economic slowdown, the Company may experience an increase in nonperforming loans.  The Company discontinues the accrual of interest on loans that become 90 days past due as to principal or interest unless reasons for delinquency are documented such as the loan being well collateralized and in the process of collection.  A loan remains in a non-accrual status until factors indicating doubtful collection no longer exist.  A loan is classified as a restructured loan when the interest rate is materially reduced or the term is extended beyond the original maturity date because of the inability of the borrower to service the interest payments at market rates.  Other real estate is recorded at the lower of cost or fair market value less estimated costs to sell.  A summary of the components of nonperforming assets, including several ratios using period-end data, is shown below.  Nonperforming Assets                                        At December 31 (dollars in thousands)                                        2005    2004    2003    2002    2001 Non-accrual Loans                     $  774  $1,781  $1,844  $1,573  $  935 Accruing Loans which are  Contractually past due  90 days or more                         206     308     779     789   1,278 Restructured Loans                         0       0       0       0       0  Total Nonperforming Loans               980   2,089   2,623   2,362   2,213 Other Real Estate                        141     676     375     172     212 Total Nonperforming Assets             1,121   2,765   2,998   2,534   2,425 Total Nonperforming Loans as a  Percentage of Loans (including  loans held for sale) (1)               0.26%   0.58%   0.82%   0.83%   0.80% Total Nonperforming Assets  as a Percentage of Total Assets        0.20%   0.52%   0.60%   0.60%   0.61% Allowance to nonperforming assets       3.84    1.51    1.27    1.34    1.40   (1)  Net of deferred loan fees    Total nonperforming assets at December 31, 2005 were $1.1 million compared to $2.8 million at December 31, 2004 and $3.0 million at December 31, 2003.  The decrease from 2004 to 2005 is attributable to the decrease in various loans being put on non-accrual and less in other real estate.  Total nonperforming loans were $1.0 million, $2.1 million and $2.6 million at December 31, 2005, 2004 and 2003, respectively.  The non-accrual loan decrease from 2004 to 2005 is mainly attributable to more concentration on improving loan quality.  The amount of lost interest on our non-accrual loans is immaterial.  At December 31, 2005, loans currently performing but which management believes require special attention were not significant.  The Company continues to follow its long-standing policy of not engaging in international lending and not concentrating lending activity in any one industry.  Impaired loans as of December 31, 2005 were $800 thousand compared to $1.8 million in 2004 and $1.8 million in 2003.  These amounts are included in the total nonperforming and restructured loans presented in the table above.  See Note 4 in the notes to consolidated financial statements included as Exhibit 13.  A loan is considered impaired when it is probable that all principal and interest amounts will not be collected according to the loan contract. The allowance for loan losses on impaired loans is determined using the present value of estimated future cash flows of the loan, discounted at the loan's effective interest rate or the fair value of the underlying collateral.  The entire change in present value of expected cash flows is reported as a provision for loan losses in the same manner in which impairment initially was recognized or as a reduction in the amount of provision for loan losses that otherwise would be reported.  The total allowance for loan losses related to these loans was $240 thousand, $416 thousand and $345 thousand on December 31, 2005, 2004 and 2003, respectively.    Loan Losses  The following table is a summary of the Company's loan loss experience for each of the past five years.                                    For the Year Ended December 31 (in thousands)                                     2005     2004     2003     2002     2001 Balance at Beginning of Year       $ 4,163  $ 3,820  $ 3,395  $ 3,386  $ 3,388 Balance of Allowance for Loan Losses of Acquired Bank  at Acquisition Date                     0        0      363        0        0 Amounts Charged-off:  Commercial                            146      197      569      536      178  Real Estate Construction                0        0        0       18        0  Real Estate Mortgage                  134      110      276       69      171  Agricultural                           21       88       24        5       46  Consumer                              225      293      529      701      751   Total Charged-off Loans              526      688    1,398    1,329    1,146 Recoveries on Amounts  Previously Charged-off:   Commercial                             3       10       11       15        4   Real Estate Mortgage                  11       42        1       19        2   Agricultural                          16       21       21       10        1   Consumer                             135      118      127       90       69    Total Recoveries                    165      191      160      134       76 Net Charge-offs                        361      497    1,238    1,195    1,070 Provision for Loan Losses              508      840    1,300    1,204    1,068 Balance at End of Year               4,310    4,163    3,820    3,395    3,386 Total Loans (1)   Average                          361,732  338,465  290,502  281,105  273,504   At December 31                   370,912  358,456  320,761  284,894  275,515 As a Percentage of Average Loans (1):  Net Charge-offs                      0.10%    0.15%    0.43%    0.43%    0.39%  Provision for Loan Losses            0.14%    0.25%    0.45%    0.43%    0.39% Allowance as a Percentage of  Year-end Loans (1)                   1.16%    1.16%    1.19%    1.19%    1.23% Beginning Allowance as a Multiple  of Net Charge-offs                   11.5      7.7      2.7      2.8      3.2 Ending Allowance as a Multiple  of Nonperforming Assets              3.84     1.51     1.27     1.34     1.40   (1)  Including loans held for sale, net of deferred loan fees   Loans are typically charged-off after being 120 days delinquent. Limited exceptions for not charging-off a loan would be well documented and approved by the appropriate responsible party or committee.  The provision for loan losses for 2005 was $508 thousand compared to $840 thousand in 2004 and $1.3 million in 2003.  Net charge-offs were $362 thousand in 2005, $497 thousand in 2004 and $1.3 million in 2003.  Net charge-offs to average loans were 0.10%, 0.15% and 0.43% in 2005, 2004 and 2003, respectively.  Based on the quality of the loan portfolio, the loan loss provision decreased $332 thousand from 2004 to 2005 and decreased $460 thousand from 2003 to 2004.  In evaluating the allowance for loan losses, management considers the composition of the loan portfolio, the historical loan loss experience, the overall quality of the loans and an assessment of current economic conditions.  The recent improvement in the economy along with management's emphasis on improving the lending process resulted in fewer loan losses, lower loan loss provision and improved loan quality numbers in 2005 and 2004.  At December 31, 2005, the allowance for loan losses was 1.16% of loans outstanding compared to 1.16% at year-end 2004 and 1.19% in 2003. Management believes the allowance for loan losses at the end of 2005 is adequate to cover probable and incurred credit losses within the portfolio.  The following tables set forth an allocation for the allowance for loan losses and loans by category and a percentage distribution of the allowance allocation.  In making the allocation, management evaluates the risk in each category, current economic conditions and charge-off experience.  An allocation for the allowance for loan losses is an estimate of the portion of the allowance that will be used to cover future charge-offs in each loan category, but it does not preclude any portion of the allowance allocated to one type of loan being used to absorb losses of another loan type.    Allowance for Loan Losses                                                                    At December 31 (in thousands)                                  2005                 2004                  2003                 2002                 2001                           Dollars  Percentage  Dollars  Percentage  Dollars  Percentage  Dollars  Percentage  Dollars  Percentage            Commercial                $    507     11.77%  $    350      8.41%  $    262      6.86%  $    820     24.15%  $    291     8.59% Real Estate Construction       566     13.14%       566     13.60%       266      6.96%       216      6.36%       194     5.73% Real Estate Mortgage         1,785     41.42%     1,801     43.26%     1,804     47.23%     1,166     34.34%     1,602    47.31% Agricultural                 1,023     23.74%     1,028     24.69%       995     26.05%       698     20.56%       693    20.47% Consumer                       428      9.93%       418     10.04%       493     12.91%       495     14.58%       606    17.90% Total                     $  4,309    100.00%  $  4,163    100.00%  $  3,820    100.00%  $  3,395    100.00%  $  3,386   100.00%    Loans                                     2005                 2004                 2003                 2002                 2001                           Dollars  Percentage  Dollars  Percentage  Dollars  Percentage  Dollars  Percentage  Dollars  Percentage Percentage            Commercial                $ 27,302    7.36%    $ 19,999    5.58%    $ 14,278    4.45%    $ 16,803    5.90%    $ 18,618    6.76% Real Estate Construction    29,822    8.04%      32,256    9.00%      14,313    4.46%      15,514    5.45%      12,302    4.47% Real Estate Mortgage       245,138   66.09%     238,651   66.58%     222,288   69.30%     182,946   64.22%     168,665   61.22% Agricultural                59,328   16.00%      57,497   16.04%      56,615   17.65%      52,188   18.32%      53,640   19.47% Consumer                     8,954    2.41%       9,062    2.53%      12,978    4.05%      17,134    6.01%      21,952    7.97% Other                          368    0.10%         991    0.28%         289    0.09%         309    0.11%         338    0.12% Total, Net (1)            $370,912  100.00%    $358,456  100.00%    $320,761  100.00%    $284,894  100.00%    $275,515  100.00%   (1)  Including loans held for sale, net of deferred loan fees      Off-balance Sheet Arrangements  Some financial instruments, such as loan commitments, credit lines, letters of credit, and overdraft protection, are issued to meet customer financing needs. These are agreements to provide credit or to support the credit of others, as long as conditions established in the contract are met, and usually have expiration dates.  Commitments may expire without being used.  Off-balance sheet risk to credit loss exists up to the face amount of these instruments, although material losses are not anticipated.  The same credit policies are used to make such commitments as are used for loans, including obtaining collateral at exercise of the commitment.  Financial instruments with off-balance sheet risk were as follows at year-end:                                   2005             2004  Unused lines of credit       $ 56,354,000     $ 54,785,000 Commitments to make loans         156,000        1,272,000 Letters of credit                 183,000          145,000  Unused lines of credit are substantially all at variable rates.  Commitments to make loans are generally made for a period of 60 days or less and are primarily fixed at current market rates ranging from 5.625% to 6.125% with maturities ranging from 15 to 30 years and are intended to be sold.  Capital  As displayed by the following table, the Company's Tier I capital (as defined by the Federal Reserve Board under the Board's risk-based guidelines) at December 31, 2005 increased $2.9 million to $44.6 million.  During 2005, the Company purchased 20,976 shares of its stock for $629 thousand.  These repurchases partially offset the $5.8 million in net income for 2005.  Stockholders' equity, excluding accumulated other comprehensive income, was $47.5 million at December 31, 2005. Included in Tier I capital is $7 million of trust preferred securities issued in August 2003.  The disallowed amount of stockholders' equity is mainly attributable to the goodwill and core deposit intangible, resulting from the Kentucky First acquisition (see Note 6 in the Notes to Consolidated Financial Statements for more information on the goodwill and core deposit intangible assets).  The Company's risk-based capital and leverage ratios, as shown in the following table, exceeded the levels required to be considered "well capitalized".  The leverage ratio compares Tier I capital to total average assets less disallowed amounts of goodwill.                                           At December 31 (dollars in thousands)                                                 2005       2004      Change Stockholders' Equity (1)                      $  47,479  $  44,703      2,776 Trust Preferred Securities                        7,000      7,000          0   Less Disallowed Amount                          9,877     10,043       (166) Tier I Capital                                   44,602     41,660      2,942   Allowance for Loan Losses                       4,385      4,163        222   Other                                             143        164        (21) Tier II Capital                                   4,528      4,327        201   Total Capital                                  49,130     45,987      3,143 Total Risk Weighted Assets                      366,393    348,191     18,202 Ratios: Tier I Capital to Risk-weighted Assets             12.2%      12.0%       0.2% Total Capital to Risk-weighted Assets              13.4%      13.2%       0.2% Leverage                                            8.0%       8.2%      -0.2%  (1)  Excluding accumulated other comprehensive income.    The Federal Deposit Insurance Corporation Improvement Act of 1991 ("FDICIA") established five capital categories for insured depository institutions under its Prompt Corrective Action Provisions.  The bank regulatory agencies adopted regulations, which became effective in 1992, defining these five capital categories for banks they regulate.  The categories vary from "well capitalized" to "critically undercapitalized".  A "well capitalized" bank is defined as one with a total risk-based capital ratio of 10% or more, a Tier I risk-based capital ratio of 6% or more, a leverage ratio of 5% or more, and one not subject to any order, written agreement, capital directive, or prompt corrective action directive to meet or maintain a specific capital level.  At December 31, 2005, the bank had ratios that exceeded the minimum requirements established for the "well capitalized" category.  In management's opinion, there are no other known trends, events or uncertainties that will have or that are reasonably likely to have a material effect on the Company's liquidity, capital resources or operations.  Securities and Federal Funds Sold  Securities, classified as available for sale, increased from $126.8 million at December 31, 2004 to $160.7 million at December 31, 2005. The increase is mainly attributable to a short term increase in deposits.  Federal funds sold totaled $2.7 million at December 31, 2005 and $3.2 million at December 31, 2004.  Per Company policy, fixed rate asset backed securities will not have an average life exceeding seven years, but final maturity may be longer. Adjustable rate securities shall adjust within three years per Company policy.  Of the $1.4 million of adjustable asset backed securities held on December 31, 2005, $303 thousand are repriceable monthly and the remaining $1.1 million are repriceable annually.  Of the $2.3 million of adjustable asset backed securities held on December 31, 2004, $650 thousand are repriceable monthly and the remaining $1.6 million are repriceable annually.  Unrealized gains (losses) on investment securities are temporary and change inversely with movements in interest rates.  In addition, some prepayment risk exists on mortgage-backed securities and prepayments are likely to increase with decreases in interest rates.  The following tables present the investment securities for each of the past three years and the maturity and yield characteristics of securities as of December 31, 2005.  Investment Securities at market value                                       At December 31 (in thousands)                                        2005       2004       2003 Available for Sale  U.S. treasury                       $   2,974  $   2,984  $   3,033  U.S. government agencies               67,033     39,031     36,634  States and political subdivisions      37,463     35,160     39,142  Mortgage-backed   Fixed -    GNMA, FNMA, FHLMC Passthroughs       33,566     35,013     29,079    GNMA, FNMA, FHLMC CMO's              17,390     11,335     12,940     Total                               50,956     46,348     42,019   Variable -    GNMA, FNMA, FHLMC Passthroughs        1,081      1,623      4,161    GNMA, FNMA, FHLMC CMO's                 303        649      1,202     Total                                1,384      2,272      5,363      Total mortgage-backed              52,340     48,620     47,382  Other                                     842        972      2,599   Total                                160,652    126,767    128,790  Maturity Distribution of Securities                                       December 31, 2005 (in thousands)                                                Over One   Over Five               Asset                                                  Year       Years                Backed                                     One Year    Through    Through   Over Ten   & Equity                                      or Less   Five Years Ten Years    Years    Securities   Total        Available for Sale  U.S. treasury                      $   2,974  $     -    $     -    $     -    $     -    $   2,974  U.S. government agencies              24,735     36,753      5,545          0          0     67,033  States and political subdivisions      1,409      4,796     14,317     16,941          0     37,463  Mortgage-backed                            0          0          0          0     52,340     52,340  Equity Securities                          0          0          0          0        842        842  Other                                      0                                0          0          0   Total                                29,118     41,549     19,862     16,941     53,182    160,652 Percent of Total                         18.1%      25.9%      12.4%      10.5%      33.1%     100.0% Weighted Average Yield (1)               3.42%      4.15%      6.08%      6.54%      4.39%      4.59%   (1)  Tax Equivalent Yield   Impact of Inflation and Changing Prices  The majority of the Company's assets and liabilities are monetary in nature.  Therefore, the Company differs greatly from most commercial and industrial companies that have significant investments in nonmonetary assets and inventories.  However, inflation does have an important impact on the growth of assets in the banking industry and the resulting need to increase equity capital at higher than normal rates in order to maintain an appropriate equity to assets ratio.  Inflation also affects other expenses, which tend to rise during periods of inflation.  Other Accounting Issues  FAS 123, Revised, requires companies to record compensation cost for stock options provided to employees in return for employment service.  The cost is measured at the fair value of the options when granted, and this cost is expensed over the employment service period, which is normally the vesting period of the options.  This will apply to awards granted or modified in fiscal years beginning in 2006.  Compensation cost will also be recorded for prior option grants that vest after the date of adoption.  The effect on results of operations will depend on the level of future option grants and the calculation of the fair value of the options granted at such future date, as well as the vesting periods provided, and so cannot currently be predicted. Existing options that will vest after adoption date are expected to result in additional compensation expense of approximately $48,000 in 2006 and $41,000 in 2007.
Asset/Liability management control is designed to ensure safety and soundness, maintain liquidity and regulatory capital standards, and achieve acceptable net interest income.  The Company's exposure to market risk is reviewed on a regular basis by the Asset/Liability Committee.  Management considers interest rate risk to be the most significant market risk.  Interest rate risk is the potential of economic losses due to future interest rate changes.  These economic losses can be reflected as a loss of future net interest income and/or a loss of current fair market values.  The objective is to measure the effect on net interest income and to adjust the balance sheet to minimize the inherent risk while at the same time maximize income.  Management realizes certain risks are inherent and that the goal is to identify and minimize the risks.  The primary tool used by management is an interest rate shock simulation model.  Certain assumptions, such as prepayment risks, are included in the model.  However, actual prepayments may differ from those assumptions.  In addition, immediate withdrawal of interest checking and other savings accounts may have an effect on the results of the model.  The Bank has no market risk sensitive instruments held for trading purposes.  The following table depicts the change in net interest income resulting from 100 and 300 basis point changes in rates.  The projections are based on balance sheet growth assumptions and repricing opportunities for new, maturing and adjustable rate amounts.  In addition, the projected percentage changes from level rates are outlined below along with the Board of Directors approved limits.  As of December 31, 2005 the projected net interest income percentages are within the Board of Directors limits.  The projected net interest income report summarizing the Company's interest rate sensitivity as of December 31, 2005 and December 31, 2004 is as follows:   Projected Net Interest Income (December 31, 2005)                                                             Level                                         -300     -100     Rates    +100     +300        Year One  (1/06 - 12/06)    Interest Income                     $27,781  $31,881  $33,928  $35,909  $39,702    Interest Expense                     11,679   14,376   15,864   17,352   20,328         Net Interest Income              16,102   17,505   18,064   18,557   19,374  Net interest income dollar change       (1,962)    (559)              493    1,310  Net interest income percentage change    -10.9%    -3.1%    N/A       2.7%     7.3%     Limitation on % Change               >-18.0%   >-6.0%    N/A     >-4.0%  >-10.0%    Projected Net Interest Income (December 31, 2004)                                                             Level                                         -300     -100     Rates    +100     +300        Year One  (1/05 - 12/05)    Interest Income                     $21,816  $25,843  $27,887  $29,798  $33,486    Interest Expense                      8,899    9,538   10,762   11,985   14,433         Net Interest Income              12,917   16,305   17,125   17,813   19,053  Net interest income dollar change       (4,208)    (820)              688    1,928  Net interest income percentage change    -24.6%    -4.8%    N/A       4.0%    11.3%     Limitation on % Change               >-10.0%   >-4.0%    N/A     >-4.0%  >-10.0%       The numbers in 2005 show less fluctuation when compared to 2004.  In 2005, year one reflected a decrease in net interest income of 3.1% compared to 4.8% projected decrease from 2004 with a 100 basis point decline.  The 300 basis point increase in rates reflected a 7.3% increase in net interest income in 2005 compared to an 11.3% increase in 2004.  The risk is less in 2005 due to the current status of existing interest rates and their effect on rate sensitive assets and rate sensitive liabilities.  An increase in rates would improve net interest income.  Management measures the Company's interest rate risk by computing estimated changes in net interest income in the event of a range of assumed changes in market interest rates.  The Company's exposure to interest rates is reviewed on a monthly basis by senior management and quarterly with the Board of Directors.  Exposure to interest rate risk is measured with the use of interest rate sensitivity analysis to determine the change in net interest income in the event of hypothetical changes in interest rates, while interest rate sensitivity gap analysis is used to determine the repricing characteristics of the Company's assets and liabilities.  If estimated changes to net interest income are not within the limits established by the Board, the Board may direct management to adjust the Company's asset and liability mix to bring interest rate risk within Board approved limits.  Liquidity risk is the possibility that the Company may not be able to meet its cash requirements.  Management of liquidity risk includes maintenance of adequate cash and sources of cash to fund operations and meet the needs of borrowers, depositors and creditors.  Excess liquidity has a negative impact on earnings resulting from the lower yields on short-term assets.  In addition to cash and cash equivalents, the securities portfolio provides an important source of liquidity.  Total securities maturing within one year along with cash and cash equivalents totaled $43.3 million at December 31, 2005.  Additionally, securities available-for- sale with maturities greater than one year totaled $131.6 million at December 31, 2005.  The available for sale securities are available to meet liquidity needs on a continuing basis.  The Company maintains a relatively stable base of customer deposits and its steady growth is expected to be adequate to meet its funding demands.  In addition, management believes the majority of its $100,000 or more certificates of deposit are no more volatile than its core deposits.  At December 31, 2005 these balances totaled $61.6 million, approximately 14% of total deposits.  The Company also relies on FHLB advances for both liquidity and asset/liability management purposes.  These advances are used primarily to fund long-term fixed rate residential mortgage loans.  We have sufficient collateral to borrow an additional $20 million from the FHLB at December 31, 2005.  Generally, the Company relies upon net cash inflows from financing activities, supplemented by net cash inflows from operating activities, to provide cash used in its investing activities.  As is typical of many financial institutions, significant financing activities include deposit gathering, and the use of short-term borrowings, such as federal funds purchased and securities sold under repurchase agreements along with long-term debt.  The Company's primary investing activities include purchasing investment securities and loan originations.  Management believes there is sufficient cash flow from operations to meet investing and liquidity needs related to reasonable borrower, depositor and creditor needs in the present economic environment.  The cash flow statements for the periods presented provide an indication of the Company's sources and uses of cash as well as an indication of the ability of the Company to maintain an adequate level of liquidity.  A number of other techniques are used to measure the liquidity position, including the ratios presented below.  These ratios are calculated based on annual averages for each year.  Liquidity Ratios                                              December 31                                          2005     2004     2003 Average Loans (including loans held  for sale)/Average Deposits             90.4%    88.3%    89.6% Average Securities sold under  agreements to repurchase and other  borrowings/Average Assets               4.9%     5.7%     1.3%  This chart shows that the loan to deposit ratio increased in 2005 and decreased in 2004.  The increase in the ratio in 2005 compared to 2004 is mainly attributable a larger increase in deposits compared to loans. The increase in the latter ratio in 2004 above is mainly a result of the leverage transaction entered into in the beginning on 2004.  Twenty million dollars of securities were purchased and were funded by repurchase agreements.
The consolidated financial statements of the Company together with the notes thereto and report of independent auditors are contained in the Company's 2005 Annual Report to Stockholders included as Exhibit 13, and are incorporated herein by reference.  No other portion of the 2005 Annual Report to Stockholders is to be deemed "filed" as part of this filing.
None
The Company's management, with participation of the Company's Chief Executive Officer and Chief Financial Officer, has evaluated the effectiveness of the Company's disclosure controls and procedures as of December 31, 2005.  Based on the evaluation, the Company's Chief Executive Officer and Chief Financial Officer concluded that the Company's disclosure controls and procedures were effective as of December 31, 2005.  There was no change in the Company's internal control over financial reporting during the fourth quarter of 2005 that has materially affected, or is reasonably likely to materially affect, such internal control over financial reporting.
None    PART III
Under the Company's Articles of Incorporation, the Board of Directors consists of three different classes, each to serve, subject to the provisions of the Articles of Incorporation and Bylaws, for a three year term and until his successor is duly elected and qualified.  The names of the directors and their terms are set forth below.  Terms expiring in 2006:  Betty J. Long, age 58, is retired President and CEO of First Federal, Cynthiana.  She has been a director of the Company since 2003.  Ted McClain, age 54, is an insurance agent with Hopewell Insurance Company.  He has been a director of Kentucky Bank since 2002 and the Company since 2003.  Buckner Woodford, age 61, is Chairman of the Board of Kentucky Bancshares, Inc. and Kentucky Bank.  He was President and Chief Executive Officer of the Company from 1991 to 2004, and President and Chief Executive Officer of the Kentucky Bank from 1984 to 2004.  He has been a director of Kentucky Bank since 1971 and the Company since inception.  Terms expiring in 2007:  William Arvin, age 65, is an attorney.  He has been a director of Kentucky Bank and the Company since 1995.  Louis Prichard, age 52, is President and Chief Executive Officer of Kentucky Bank.  He was President and Chief Operating Officer of Kentucky Bank from 2003 to 2004.  He has been a director of Kentucky Bank and the Company since 2003.  Since 1983, he was in banking in Danville and was the Chairman and Chief Executive Officer of Boyle Bancshares, Inc. and their banking subsidiary, Farmers Bank for 7 years before joining the Company in 2003.  Woodford Van Meter, age 52, is an opthalmologist.  He has been a director of Kentucky Bank and the Company since 2004.  Terms expiring in 2008:  Henry Hinkle, age 54, is President of Hinkle Construction Company.  He has been a director of Kentucky Bank and the Company since 1989.  Theodore Kuster, age 62, is a farmer and thoroughbred horse breeder.  He has been a director of Kentucky Bank since 1979 and the Company since 1985.  Robert G. Thompson, age 56, is a farmer and thoroughbred horse breeder. He has been a director of Kentucky Bank and the Company since 1991.  The Company's other executive officers are Norman J. Fryman, age 56 and Gregory J. Dawson, age 45.  Mr. Fryman is the Vice President of Sales and Service of Kentucky Bank and has been with the Company since 1977. Mr. Dawson is the Chief Financial Officer and has been with the Company since 1985.    The Company has adopted a code of ethics for its Chief Executive Officer and its Chief Financial Officer.  A copy of the code of ethics may be obtained, without charge, by contacting the CFO.  The Company has named Betty J. Long of the audit committee as its financial expert and she is independent as that term is used in Item 7(d)(3)(iv) of Schedule 14A under the Securities Exchange Act of 1934.
The following table sets forth information with respect to the compensation of the Chairman of the Board (Buckner Woodford), President and Chief Executive Officer (Louis Prichard), Vice President of Sales and Service (Norman J. Fryman) and Chief Financial Officer (Gregory J. Dawson) of the Company (the "Named Executive Officers").  No other executive officer earned total salary and bonus in excess of $100,000.  Summary Compensation Table                                            Long Term                  Annual Compensation      Compensation                                             Options       All Other       Name        Salary      Bonus         Granted     Compensation(1) Buckner Woodford   2005           $ 80,000    $10,500         1,000         $ 7,682   2004            203,000     39,585         1,000          13,653   2003            200,000     24,000         1,000          14,000  Louis Prichard   2005            175,000     30,625         4,000          12,231   2004            140,000     20,475         1,000           9,160   2003            125,000     11,700         3,000           7,605  Norman J. Fryman   2005            113,949     12,306           500           7,971   2004            105,265     17,958           500           6,871   2003             97,057      8,371           500           6,763  Gregory J. Dawson   2005             87,064     13,060           500           6,083   2004             83,000     13,554           400           5,124   2003             73,531      4,044           400           4,983   (1)  Represents the Company's matching contribution to the qualified       profit sharing plan that includes a 401(k) provision    The following table contains information regarding the grant of stock options under the Company's stock option plan to the Named Executive Officers during the year ended December 31, 2005.  In addition, in accordance with rules of the Securities and Exchange Commission, the following table sets forth the hypothetical grant date present value with respect to the referenced options, using the Black-Scholes Option Pricing Model.  Option Grants in the Last Fiscal Year                             % of Total                              Options                         Grant                    Shares  Granted to  Exercise              Date                   Granted  Employees    Price   Expiration  Present       Name          (#)     in 2005     ($/Sh)     Date     Value($)  Buckner Woodford   1,000      5.3%      $30.50    1/3/15    $ 4,820 Louis Prichard     4,000     21.4        30.50    1/3/15     19,280 Norman J. Fryman     500      2.7        30.50    1/3/15      2,410 Gregory J. Dawson    500      2.7        30.50    1/3/15      2,410  The following table sets forth certain information regarding options exercised by the Named Executive Officers during calendar year 2005 and unexercised stock options held by them as of December 31, 2005.    Aggregated Option Exercises in Calendar 2005 and Year-end Stock Option Values                    Shares                 Number of Securities       Value of Unexercised                  Acquired     Value    Underlying Unexercised          In-the-Money                 on Exercise Realized     Options at 12/31/05      Options at 12/31/05      Name          (#)         ($)    Exercisable/Unexercisable  Exercisable/Unexercisable       Buckner Woodford    n/a        n/a        5,400/2,700              $ 40,010/$  3,745 Louis Prichard      n/a        n/a        1,400/6,600                 4,860/   7,290 Norman J. Fryman    n/a        n/a        1,420/1,380                10,186/   2,004 Gregory J. Dawson  1,000     $16,100      2,700/1,150                28,194/   1,366  No SAR's exist for the Company.   Compensation of Directors  Each director of the Company is a director of Kentucky Bank, except for Betty J. Long.  Company Directors are paid $400 for each Company and Kentucky Bank board meeting attended ($400 for one paid absence per year) and non-employee Company directors are paid $100 for each Kentucky Bank committee meeting attended.  Each Company Director is paid an annual retainer of $1,500 plus the audit committee chairman is paid an additional annual retainer of $2,000.  Non-employee Directors of Kentucky Bank are also granted a 10-year option to purchase 100 shares of the Company's common stock following each year in which Kentucky Bank has a return on assets of 1 percent or greater.  The option's exercise price is the fair market value per share on the date of grant.    Pension Plan  The following table sets forth the annual benefits which an eligible employee would receive under the Company's qualified defined benefit pension plan based on remuneration that is covered under the plan and years of service with the Company and its subsidiaries.                             Years of Service  Remuneration    5       10        15        20        25        30        35   $ 25,000  $ 1,250   $ 2,500   $ 3,750   $ 5,000   $ 6,250   $ 7,500   $ 8,750    50,000    2,500     5,000     7,500    10,000    12,500    15,000    17,500    75,000    3,750     7,500    11,250    15,000    18,750    22,500    26,250   100,000    5,000    10,000    15,000    20,000    25,000    30,000    35,000   125,000    6,250    12,500    18,750    25,000    31,250    37,500    43,750   150,000    7,500    15,000    22,500    30,000    37,500    45,000    52,500   175,000    8,750    17,500    26,250    35,000    43,750    52,500    61,250   200,000   10,000    20,000    30,000    40,000    50,000    60,000    70,000   225,000   11,250    22,500    33,750    45,000    56,250    67,500    78,750   250,000   12,500    25,000    37,500    50,000    62,500    75,000    87,500  In general, a participant's remuneration covered by the Company's pension plan is his or her average annual cash compensation (W-2 earnings) for the highest 5 years.  The years of service are 34 years for Mr. Woodford, 2 years for Mr. Prichard, 21 years for Mr. Fryman and 20 years for Mr. Dawson.  The normal benefit is a life annuity based on the 1984 Unisex Pension pre-retirement mortality table and a pre- retirement interest rate of 7%.  The benefits are not subject to a deduction for Social Security or other offset amounts.
Set forth below are the number of shares of the Company's common stock beneficially owned by each director and executive officer, and all current directors and executive officers as a group as of December 31, 2005.        Name                Shares Beneficially Owned(1)                             Number          Percentage  William Arvin (2)           30,171              1.1%  Gregory J. Dawson (3)        9,733              *  Norman J. Fryman (4)         2,825              *  Henry Hinkle (5)            30,755              1.1%  Theodore Kuster (6)         18,030              *  Betty J. Long (7)            1,600              *  Ted McClain (8)              1,475              *  Louis Prichard (9)           3,510              *  Robert G. Thompson (10)      6,050              *  Woodford Van Meter (11)     31,400              1.1%  Buckner Woodford (12)      245,791              9.0%  All directors and officers (11 persons) as a group (consisting of those persons named above)(13)   381,340             13.9%  *  Less than 1%    1) Beneficial ownership as reported in the above table has been determined in accordance with Rule 13d-3 under the Exchange Act.  Unless otherwise indicated, beneficial ownership includes both sole or shared voting and sole or shared investment power. 2) Includes 11,858 shares held in a retirement account, 11,968 shares held of record by Mr. Arvin's wife, as to which Mr. Arvin disclaims beneficial ownership, 5,465 shares held jointly with his wife and 750 shares that Mr. Arvin may acquire upon exercise of outstanding stock options. 3) Includes 2,700 shares that Mr. Dawson may acquire upon exercise of outstanding stock options. 4) Includes 1,420 shares that Mr. Fryman may acquire upon exercise of outstanding stock options. 5) Includes 1,000 shares held by his wife and 640 shares held by three sons, as to which Mr. Hinkle disclaims beneficial ownership.  Includes 26,500 shares held of record by Hinkle Contracting Company, as to which Mr. Hinkle, as president, has shared voting power.  Also includes 850 shares that Mr. Hinkle may acquire upon exercise of outstanding stock options. 6) Includes 6,250 shares held of record by Mr. Kuster's wife, as to which Mr. Kuster disclaims beneficial ownership.  Also includes 5,500 shares held in a retirement account and 450 shares that Mr. Kuster may acquire upon exercise of outstanding stock options. 7) Includes 1,600 shares held in a retirement account. 8) Includes 300 shares that Mr. McClain may acquire upon exercise of outstanding stock options. 9) Includes 2,110 shares held jointly with his wife and 1,400 shares that Mr. Prichard may acquire upon exercise of outstanding stock options. 10) Includes 200 shares held of record by Mr. Thomprson's wife, as to which Mr. Thompson disclaims beneficial ownership.  Includes 650 shares that Mr. Thompson may acquire upon exercise of outstanding stock options. 11) Includes 2,200 shares held of record by Mr. Van Meter's wife, as to which Mr. Van Meter disclaims beneficial ownership.  Includes 100 shares that Mr. Van Meter may acquire upon exercise of outstanding stock options. 12) Includes 8,000 shares held by his wife, as to which Mr. Woodford disclaims beneficial ownership.  Also includes 208 shares held in a retirement account and 5,400 shares that Mr. Woodford may acquire upon exercise of outstanding stock options. 13) Includes 14,020 shares that may be acquired upon exercise of outstanding stock options.  The following table sets forth as of December 31, 2005 the only person known by the Company to own beneficially (as determined in accordance with the rules and regulations of the Commission) more than 5% of the outstanding common stock.  See note 12 in the preceding table for further information.  Name and Address       Shares Beneficially of Beneficial Owner           Owned         Percentage  Buckner Woodford             245,791            9.0% 340 Stoner Avenue Paris, Kentucky 40361    The following table sets forth as of December 31, 2005 the Company's common stock authorized for issuance under equity compensation plans. The Company's shareholders have approved all of the Company's equity compensation plans.                                                                                  Number of Securities                             Number of Securities                             remaining available for                                 To be issued         Weighted average         future issuance under                               Upon exercise of       exercise price of      equity compensation plans                             Outstanding options,    outstanding options,      (excluding securities Plan category               warrants and rights     warrants and rights      reflected in column (a)  Equity compensation plans  Approved by security holders:     Employee Gift Program                   0                $  n/a                        572 1993 Employee Stock Ownership    Incentive Plan                  24,060                 17.59                          0 1993 Non-Employee Directors   Stock Ownership Plan              6,100                 26.26                      9,300 1999 Employee Stock Option Plan    46,904                 29.16                     51,744 2005 Restricted Stock Grant Plan        0                   n/a                     50,000  Total                              77,064                $25.32                    111,616
Directors and officers of the Company and their associates were customers of and had transactions with the Company's subsidiary bank in the ordinary course of business during the year ended December 31, 2005. Similar transactions may be expected to take place with the Company's subsidiary bank in the future.  Outstanding loans and commitments made by such subsidiary bank in transactions with the Company's directors and officers and their associates were made on substantially the same terms, including interest rates and collateral, as those prevailing at the time for comparable transactions with other persons and did not involve more than a normal risk of collectibility or present other unfavorable features.  Certain directors and executive officers were loan customers of Kentucky Bank and outstanding loans were $4.7 million as of December 31, 2005 and $4.4 million as of December 31, 2004.  See Note 4 in the notes to consolidated financial statements included as Exhibit 13.  The Company purchased various types of insurance with aggregate premiums amounting to $218 thousand in 2005 from Hopewell Insurance Company. Director Ted McClain owns 33% of this company and is one of their insurance agents.
The Audit Committee has pre-approved that management of the Company may consult with the primary independent auditor concerning certain additional services outside of the audit work that was specifically approved in the engagement letter for those services.  Included were services such as:  1.  Discussions related to accounting for mergers and acquisitions, 2.  Tax return preparation   3.  Discussions concerning loan review,   4.  Discussions regarding regulatory requirements,   5.  Data processing and retirement plan audits, and   6.  Profit enhancement and other consulting.  The fees for services provided by the primary independent auditor, Crowe Chizek for 2005 and for 2004 were as follows:  Audit fees - Fees for the financial statement audit, and the review of the Company's Form 10-Q's were $92,050 for 2005 and $99,250 for 2004.  Audit related fees - Aggregate fees for all assurance and related services were $14,600 for 2005 and $12,950 for 2004.  These fees were incurred for audits of benefit plans.  The 2005 and 2004 amounts were preapproved by the audit committee.  Tax fees - Fees related to tax compliance, advice and planning were $14,450 for 2005 and $14,145 for 2004.  The 2005 and 2004 amounts were preapproved by the audit committee.  All other fees - Consulting fees related to acquisitions, profitability and risk management were $14,400 for 2005 and $16,000 for 2004.  The 2005 and 2004 amounts were preapproved by the audit committee.  All services provided by the Corporation's primary independent auditor in 2005 and 2004 were approved by the Audit Committee.     Part IV
(a)  The following exhibits are incorporated by reference herein or made a part of this Form 10-K:  2.1   Agreement and Plan of Merger with Peoples Bancorp of Sandy Hook is incorporated by reference to Exhibit 2.1 of the Registrant's Current Report on Form 8-K dated February 24, 2006 (File No. 33-96358).  3.1   Articles of Incorporation of the Registrant are incorporated by reference to Exhibit 3.1 of the Registrant's Quarterly Report on Form 10-Q for the quarterly period ending March 31, 2000 (File No. 33-96358).  3.2   Bylaws of the Registrant are incorporated by reference to Exhibit 3.1 of the Registrant's Quarterly Report on Form 10-Q for the quarterly period ending June 30, 2000 (File No. 33-96358).  3.3   Articles of Amendment to Amended and Restated Articles of Incorporation of the Registrant.  10.1  Kentucky Bancshares, Inc. 1993 Employee Stock Ownership Incentive Plan is incorporated by reference to Exhibit 10.2 of the Registrant's Registration Statement on Form S-4 (File No. 33-96358).*  10.2  Kentucky Bancshares, Inc. 1993 Non-Employee Directors Stock Ownership Incentive   Plan is incorporated by reference to Exhibit 10.3 of the Registrant's Registration Statement on Form S-4 (File No. 33-96358).*  10.3  Kentucky Bancshares, Inc. 1999 Employee Stock Option Plan is incorporated by reference to Exhibit 99.1 of the Registrant's Form 10-K for the fiscal year ended December 31, 1998.*  10.4  Schedule of 2006 Compensation Arrangements for Named Executive Officers is incorporated by reference to the Registrant's Current Report on Form 8-K dated December 20, 2005 (File No. 33-96358).*  10.5  Schedule of 2006 Compensation Arrangement for Named Executive Officer.*  10.6  2005 Restricted Stock Grant Plan, including form of Award Agreement, as incorporated by reference to Exhibit 10.1 of the Registrant's Current Report on Form 8-K dated February 15, 2005 (File No. 33-96358).*  11    Computation of earnings per share - See Note 12 in the notes to consolidated financial statements included as Exhibit 13.  13    Kentucky Bancshares, Inc. 2005 Annual Report and Proxy Statement, including Financial Statements: Consolidated Balance Sheets Consolidated Statements of Income Consolidated Statements of Comprehensive Income Consolidated Statements of Changes in Stockholders' Equity Consolidated Statements of Cash Flows Notes to Consolidated Financial Statements Report of Independent Auditors  21    Subsidiaries of Registrant  23    Consent of Crowe Chizek and Company LLC  31.1  Certification of Chief Executive Officer pursuant to Rule 13a- 14(a) and Rule 15d-14(a) of the Securities Exchange Act, as amended.  31.2  Certification of Chief Financial Officer pursuant to Rule 13a- 14(a) and Rule 15d-14(a) of the Securities Exchange Act, as amended.  32.1  Certification of Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.  32.2  Certification of Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.    * Denotes a management contract or compensatory plan or arrangement of the Registrant required to be filed as an exhibit pursuant to Item 601(10) (iii) of Regulation S-K.     SIGNATURES  Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.  Kentucky Bancshares, Inc. By:  __/s/Louis Prichard  __ Louis Prichard, President and Chief Executive Officer, Director March 24, 2006  Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.  __/s/Louis Prichard   _______       March 24, 2006 Louis Prichard, President and Chief Executive Officer, Director  __/s/Gregory J. Dawson_______       March 28, 2006 Gregory J. Dawson, Chief Financial and Accounting Officer  __/s/Buckner Woodford________       March 28, 2006 Buckner Woodford, Chairman of the Board, Director  _____________________________       March 28, 2006 William Arvin, Director  __/s/Henry Hinkle_ _  __ ____       March 28, 2006 Henry Hinkle, Director  _____________________________       March 28, 2006 Theodore Kuster, Director  __/s/Betty J. Long___________       March 21, 2006 Betty J. Long, Director  __/s/Ted McClain____________        March 21, 2006 Ted McClain, Director  __/s/Robert G. Thompson______       March 21, 2006 Robert G. Thompson, Director  _____________________________       March 28, 2006 Woodford Van Meter, Director     SUPPLEMENTAL INFORMATION TO BE FURNISHED WITH REPORTS FILED PURSUANT TO SECTION 15(d) OF THE ACT BY REGISTRANTS WHICH HAVE NOT REGISTERED SECURITIES PURSUANT TO SECTION 12 OF THE ACT.  The Registrant refers to Exhibit 13 to the Form 10-K.   INDEX TO EXHIBITS      Exhibit     Number     Description of Document  2.1   Agreement and Plan of Merger with Peoples Bancorp of Sandy Hook is incorporated by reference to Exhibit 2.1 of the Registrant's Current Report on Form 8-K dated February 24, 2006 (File No. 33-96358).  3.1   Articles of Incorporation of the Registrant are incorporated by reference to Exhibit 3.1 of the Registrant's Quarterly Report on Form 10-Q for the quarterly period ending March 31, 2000 (File No. 33-96358).  3.2   Bylaws of the Registrant are incorporated by reference to Exhibit 3.1 of the Registrant's Quarterly Report on Form 10- Q for the quarterly period ending June 30, 2000 (File No. 33-96358).  3.3   Articles of Amendment to Amended and Restated Articles of Incorporation of the Registrant.  10.1  Kentucky Bancshares, Inc. 1993 Employee Stock Ownership Incentive Plan is incorporated by reference to Exhibit 10.2 of the Registrant's Registration Statement on Form S-4 (File No. 33-96358).*  10.2  Kentucky Bancshares, Inc. 1993 Non-Employee Directors Stock Ownership Incentive Plan is incorporated by reference to Exhibit 10.3 of the Registrant's Registration Statement on Form S-4 (File No. 33-96358).*  10.3  Kentucky Bancshares, Inc. 1999 Employee Stock Option Plan is incorporated by reference to Exhibit 99.1 of the Registrant's Form 10-K for the fiscal year ended December 31, 1998.*  10.4  Schedule of 2006 Compensation Arrangements for Named Executive Officers is incorporated by reference to the Registrant's Current Report on Form 8-K dated December 20, 2005 (File No. 33-96358).*  10.5  Schedule of 2006 Compensation Arrangement for Named Executive Officer.*  10.6  2005 Restricted Stock Grant Plan, including form of Award Agreement, as incorporated by reference to Exhibit 10.1 of the Registrant's Current Report on Form 8-K dated February 15, 2005 (File No. 33-96358).*  11    Computation of earnings per share - See Note 10 in the notes to consolidated financial statements included as Exhibit 13.  13    Kentucky Bancshares, Inc. 2005 Annual Report and Proxy Statement, including Financial Statements: Consolidated Balance Sheets Consolidated Statements of Income Consolidated Statements of Comprehensive Income Consolidated Statements of Changes in Stockholders' Equity Consolidated Statements of Cash Flows Notes to Consolidated Financial Statements Report of Independent Auditors  21    Subsidiaries of Registrant  23    Consent of Crowe Chizek and Company LLC  31.1  Certification of Chief Executive Officer pursuant to Rule 13a-14(a) and Rule 15d-14(a) of the Securities Exchange Act, as amended.  31.2  Certification of Chief Financial Officer pursuant to Rule 13a-14(a) and Rule 15d-14(a) of the Securities Exchange Act, as amended.  32.1  Certification of Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.  32.2  Certification of Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.   * Denotes a management contract or compensatory plan or arrangement of the Registrant required to be filed as an exhibit pursuant to Item 601(10) (iii) of Regulation S-K.  6  25  BOURBON BANCSHARES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS December 31, 2000, 1999 and 1998    44 43    EX-3 2 exhibit33artofinc.txt AMENDMENT TO ARTICLES OF INCORPORATION  Exhibit 3.3 ARTICLES OF AMENDMENT TO THE AMENDED AND RESTATED ARTICLES OF INCORPORATION OF BOURBON BANCSHARES, INC.  As contemplated by KRS 271B.10-030 and KRS 271B.10-060 the following Articles of Amendment to the Amended and Restated Articles of Incorporation of Bourbon Bancshares, Inc., a Kentucky corporation (the "Corporation"), are hereby adopted:  1. The name of the Corporation is Bourbon Bancshares, Inc..  2. The Corporation adopts the following amendment to its Amended and Restated Articles of Incorporation:  Article I of the Corporation's Amended and Restated Articles of Incorporation is amended to read, in its entirety, as follows:    "The Corporation's name shall be Kentucky Bancshares, Inc."   3. (a)  The foregoing amendment to the Corporation's Amended and Restated Articles of Incorporation was adopted at a meeting of the shareholders of the Corporation held on June 25, 2003, upon written notice of such meeting as provided in the Kentucky Business Corporation Act, at which two million one hundred four thousand nine hundred thirty-nine (2,104,939) of the two million seven hundred seventy-seven thousand two hundred seventy (2,777,270) outstanding Common Shares of the Corporation were indisputably represented.   (b)  With respect to the foregoing amendment, two million nine thousand two hundred ninety-five (2,009,295) shares indisputably represented at such meeting were cast for the amendment and seventy-eight thousand five hundred fifty-two (78,552) shares were cast against the amendment.  The number of votes cast for approval of this amendment was sufficient for approval thereof.   4. The effective time and date of the foregoing amendment shall be 9:00 a.m. on July 15, 2003.  IN WITNESS WHEREOF, I have signed this certificate on June 25, 2003.       BOURBON BANCSHARES, INC.   ___/s/Buckner Woodford_______ Buckner Woodford, President 46    EX-10 3 exhibit105compensation.txt COMPENSATION SCHEDULE  Exhibit 10.5  Schedule of 2006 Compensation Arrangement for Named Executive Officer  With respect to compensation in 2006, the salary of Gregory J. Dawson, Chief Financial Officer, will be $90,155 effective as of January 1, 2006.  The President and CEO established the salary of Mr. Dawson on December 19, 2005.  The Compensation Committee granted stock grants of 165 shares to Mr. Dawson effective January 3, 2006.  Also, on December 16, 2005, the Compensation Committee approved targets for the Registrant's management incentive program for its executive officers. Based upon the Registrant's net income performance relative to 2006 budget, Mr. Dawson may earn up to 22.5% of his annual salary in bonus compensation; based upon his performance relative to individual performance measures established by the President and CEO, Mr. Dawson may earn up to an additional 7.5% of his annual salary in bonus compensation.  47    EX-13 4 exhibit13annualrpt.txt ANNUAL REPORT  Exhibit 13  KENTUCKY BANCSHARES, INC.  ANNUAL REPORT 2005   Kentucky Bank's Vision  Kentucky Bank will be the premier community financial institution in our markets.  Kentucky Bank will create value for our shareholders by increasing our assets to $800 million while maintaining a focus on the growth of our earnings per share.  We will focus on adding new customers through the sales efforts of our staff, a strong program to increase referrals from a variety of sources and expansion into additional high-valued markets.  We will be opportunistic regarding acquisitions while maintaining our focus on earnings.  Our customers will bank with us because we will provide consistent customer service at the highest level.  We will maintain our practice of providing cutting-edge products and services for our customer.  Because of our focus on customer service, we will experience high customer loyalty and above average retention.  Our employees will be a part of a single Kentucky Bank team.  We will hire and retain key talent in our marketplaces.  We will recognize and reward success at all levels of the organization.  We will win as one team.   Communities Our slogan "Call it Home" reflects our dedication to the communities we serve. Collectively, the communities we call home have a population of over 175,000. Kentucky Bancshares' strategy has been to locate itself within the growth circle around Central Kentucky.  This strategy has provided us with very steady increases in market share.  Our vision is to "focus on adding new customers through the sales efforts of our staff, a strong program to increase referrals from a variety of sources and expansion into additional high-valued markets."  One such opportunity, taking place in 2006, is a merger that will allow us to serve Rowan and Elliott counties with their combined populations totaling over 30,000.  Products Kentucky Bank has always been progressive in developing and offering financial products to our clients.  This tradition has been an integral part of our culture.  Our vision directs us to "maintain our practice of providing cutting edge products and services for our customers."  To help Kentucky Bank remain involved in the emergent face of Central Kentucky, we have developed a Commercial Lending group.  They have been successful in providing the capital needed for many larger projects within the communities we serve.  Our Wealth Management group continues to make strides in building their investment options and client base.  We actively seek innovative solutions for our consumer clients, particularly for the low income housing market.  Service This is the third year we have conducted "mystery shops" to measure branches on their level of customer service.  This research is sent to managers with feedback identifying areas of improvement and successes.  Our goal has been to raise the level of service to our vision of "providing consistent customer service at the highest level.  Because of our focus on customer service, we will experience high levels of customer loyalty and above average retention." We are seeing success in realizing this vision.  Technology Security is one of our highest priorities.  Identity fraud, as well as many other types of intrusions into security, are an increasing consumer concern.  Kentucky Bank's security measures are constantly tested and upgraded to face new challenges. Our dedication to technology and customer service allows us to offer the best of convenience and personal attention.  Spirit We understand that in order for the bank to be strong, our communities need to be strong.  Throughout the year we are involved in many organizations within our communities.  We offer support through the involvement of Kentucky Bank employees and financial support for hundreds of charitable and community organizations including schools, YMCAs, Chambers of Commerce, local colleges, hospitals, local sports teams, and a little bit of everything in between. There are even times that we reach out beyond our border to help others. The spirit of our employees was especially evident this year when Kentucky Bank employees donated over $10,000 personally to the Katrina emergency efforts.  We recognize that for our employees to help us succeed we need to help them succeed. We are all part of a single Kentucky Bank team. Our commitment and vision includes "hiring and retaining key talent in our marketplaces.  We will recognize and reward success at all levels of the organization.  We will win as one team."      Dear Shareholder:  For the year ended December 31, 2005, the assets of your company reached a record $572.7 million, which represents an 8.4% increase over last year's total assets of $528.5 million.  Loans increased 3.5% to $370.9 million, also a new, year-end high.  Deposits grew 11.3% for the year to a record high of $431.6 million.  Much of that growth was fueled by a significant increase in depository relationships with many public entities throughout our markets.  Earnings per share, on a diluted basis, were up 4.3% over the year ended December 31, 2004.  Net income reached $5.8 million, which represented a 1.0% increase over the prior year-end.  Net interest income was negatively impacted throughout the year by the competitive pressures on our short term deposit rates.  With an anticipated slow down of the continued increase of short term rates, and our budgeted loan growth, we should see improvement in our 2006 net interest margins.  A noteworthy event concluded in 2005, that should contribute to the financial success of your company, is the purchase of $14.9 million of tobacco settlement payments which we were able to acquire for $11.7 million.  We were able to conclude these purchases in such a manner as to have a positive impact on our bottom line in the upcoming years.  We do expect to continue the purchase of more of these payments, but not at the levels that we encountered in 2005.  An extremely significant transaction that should be completed in 2006 is the merger and acquisition of Peoples Bancorp, Inc. of Sandy Hook and Morehead with Kentucky Bancshares, Inc.  At year-end 2005, Peoples Bank had approximately $87 million in assets, with one office each in Elliott and Rowan Counties.  The consideration of this transaction is $14 million, with 40% in the form of Kentucky Bancshares stock, and 60% in the form of cash.  Our analysis indicates that this transaction should be accretive to earnings very quickly.  This acquisition is somewhat different than prior mergers in that Morehead and Rowan County are one hour east of Paris.  Our prior acquisitions and mergers have taken place in the counties that have surrounded Lexington and Fayette County.  However, the community of Morehead has had very steady growth, the Peoples Bank itself has been growing significantly in its market share, and it has been a very profitable institution throughout its history.  The management and board felt that this endeavor was an excellent opportunity for enhancing shareholder value.  As we look strategically to the future, Kentucky Bank will continue to look for opportunities to enlarge our banking circle around Bourbon and Fayette Counties.  B. Proctor Caudill, Jr. who is the Chairman and CEO of the Peoples Bank holding company, will become a significant shareholder in Kentucky Bancshares.  Additionally, he will come to work for us with somewhat reduced responsibilities, and we anticipate his being on the bank and holding company boards of directors.  We are very pleased about this affiliation as we anticipate that he will be able to make a significant contribution to the future success of your company.  We are extremely excited about this impending acquisition, and our financial analysis of this transaction leads us to believe that, as a shareholder, you will be pleased as well.  Sincerely,                                  Sincerely, /s/Louis Prichard                           /s/Buck Woodford Louis Prichard                              Buck Woodford President and Chief Executive Officer       Chairman of the Board Kentucky Bancshares, Inc.                   Kentucky Bancshares, Inc.   Financial Highlights...  Kentucky Bancshares, Inc.           2005         2004         2003  Assets ($ thousands)             $ 572,750    $  528,544    $ 500,852  Net Income ($ thousands)         $   5,820    $    5,762    $   4,233  Per Share Results...   Earnings (assuming dilution)   $    2.16    $    2.07    $    1.50   Dividend                       $     .92    $     .84    $     .76  Annual Meeting The annual meeting of Kentucky Bancshares, Inc. will be held Friday, May 12, 2006 at 11:00 in the corporate headquarters.  Investor Information Any individual requesting a copy of the Corporation's 2005 Form 10-K Report may obtain these by visiting our website at www.kybank.com or writing to Investor Relations at the Corporate Headquarters.  Shareholder Information...    Corporate Headquarters     Kentucky Bancshares, Inc.     4th and Main Streets     Paris, Kentucky 40361     859-987-1795    Transfer, Registrar and Dividend Agent     Registrar and Transfer Company     10 Commerce Drive     Cranford, New Jersey 07016     800-368-5948     rtco.com    Kentucky Bancshares, Inc. - KTYB.OB  Active Market Makers   Hilliard Lyons     West Vine Street, Suite 400     Lexington, Kentucky 40507     800-944-2663   Howe Barnes Investments, Inc.     135 South LaSalle Street, Suite 150     Chicago, Illinois, 60603-4398     800-800-4693   Morgan Keegan & Company     489 E. Main Street     Lexington, Kentucky 40507     800-937-0161                               CONSOLIDATED BALANCE SHEETS                                   December 31                                                       2005             2004 ASSETS Cash and due from banks                        $  11,456,496    $  12,248,975 Federal funds sold                                 2,708,000        3,206,000   Cash and cash equivalents                       14,164,496       15,454,975 Securities available for sale                    160,652,346      126,766,861 Mortgage loans held for sale                               -          175,471  Loans                                            370,911,882      358,281,554   Allowance for loan losses                       (4,309,403)      (4,163,315)     Net loans                                    366,602,479      354,118,239  Federal Home Loan Bank stock                       5,398,100        5,136,500 Bank premises and equipment, net                  10,701,541       11,378,012 Interest receivable                                3,719,135        3,226,479 Mortgage servicing rights                            801,501          875,633 Goodwill                                           9,110,524        9,110,524 Other intangible assets                              765,885          861,621 Other assets                                         834,288        1,439,331  Total assets                                   $ 572,750,295    $ 528,543,646  LIABILITIES AND STOCKHOLDERS' EQUITY Deposits   Non-interest bearing                         $  72,192,661    $  74,048,291   Time deposits, $100,000 and over                61,597,420       59,468,813   Other interest bearing                         297,841,297      254,437,718     Total deposits                               431,631,378      387,954,822 Repurchase agreements and other borrowings        16,837,573       25,592,844 Federal Home Loan Bank advances                   66,748,641       59,749,666 Subordinated debentures                            7,217,000        7,217,000 Interest payable                                   2,714,506        1,849,468 Other liabilities                                  1,054,954        1,153,035   Total liabilities                              526,204,052      483,516,835  Stockholders' equity   Preferred stock, 300,000 shares    authorized and unissued                                 -                -   Common stock, no par value; 10,000,000    shares authorized; 2,666,897 and    2,684,498 shares issued and    outstanding in 2005 and 2004                    6,812,805        6,818,664   Retained earnings                               40,666,332       37,884,215   Accumulated other comprehensive income (loss)     (932,894)         323,932     Total stockholders' equity                    46,546,243       45,026,811  Total liabilities and stockholders' equity     $ 572,750,295    $ 528,543,646                                       See Accompanying notes.                          CONSOLIDATED STATEMENTS OF INCOME                             Years Ended December 31                                           2005          2004          2003 Interest income   Loans, including fees              $ 23,373,434  $ 20,470,306  $ 18,574,690   Securities    Taxable                              3,388,793     3,574,235     2,049,835    Tax exempt                           1,444,090     1,518,275     1,430,589   Other                                   690,660       283,196       274,003                                        28,896,977    25,846,012    22,329,117 Interest expense   Deposits                              8,180,571     5,765,690     5,310,791   Repurchase agreements and other    borrowings                             603,812       411,492        27,460   Federal Home Loan Bank advances       2,487,062     2,395,898     2,293,297   Subordinated debentures                 494,227       494,052       169,000   Other                                         -             -        75,000                                        11,765,672     9,067,132     7,875,548  Net interest income                    17,131,305    16,778,880    14,453,569 Provision for loan losses                 508,100       840,000     1,300,000 Net interest income after provision  for loan losses                       16,623,205    15,938,880    13,153,569  Other income   Service charges                       4,511,270     4,357,658     4,065,210   Loan service fee income                 262,629       246,356       242,479   Trust department income                 458,328       299,448       301,612   Securities gains (losses), net           64,395       288,950       139,438   Gain on sale of mortgage loans          333,742       376,157       853,340   Other                                 1,118,289     1,227,614     1,105,534                                         6,748,653     6,796,183     6,707,613  Other expenses   Salaries and employee benefits        8,547,607     8,053,306     7,373,501   Occupancy expenses                    2,194,431     2,255,071     2,044,515   Amortization                            349,342       524,839       516,390   Advertising and marketing               473,848       378,410       399,483   Taxes other than payroll, property    and income                             547,509       499,251       439,084   Other                                 3,361,280     3,044,294     3,398,292                                        15,474,017    14,755,171    14,171,265  Income before income taxes              7,897,841     7,979,892     5,689,917 Provision for income taxes              2,077,741     2,217,783     1,456,540  Net income                            $ 5,820,100   $ 5,762,109   $ 4,233,377  Earnings per share:   Basic                               $      2.17   $      2.09   $      1.52   Diluted                                    2.16          2.07          1.50                                      See Accompanying notes.                    CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME                             Years Ended December 31                                            2005         2004          2003  Net income                            $ 5,820,100   $ 5,762,109   $ 4,233,377  Other comprehensive income (loss)    Unrealized gains (losses) on     securities arising during     the period                         (1,839,887)   (1,522,118)     (360,141)    Reclassification of realized amount    (64,395)     (288,950)     (139,438)      Net change in unrealized       gain (loss) on securities        (1,904,282)   (1,811,068)     (499,579)    Less:  Tax impact                     (647,456)     (615,763)     (169,857)  Comprehensive income                  $ 4,563,274   $ 4,566,804   $ 3,903,655                                                                         See Accompanying notes.                         CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY                  Years Ended December 31, 2005, 2004 and 2003                                                                                 Accumulated                                                                                   Other          Total                                           Common Stock            Retained    Comprehensive   Stockholders'                                        Shares       Amount        Earnings        Income         Equity       Balances, January 1, 2003           2,772,754   $ 6,806,887   $ 35,435,996   $ 1,848,959   $ 44,091,842  Common stock issued (including  employee gifts of 54 shares)          36,410       507,071              -             -        507,071  Common stock purchased                 (9,383)     (329,174)             -             -       (329,174)  Net change in unrealized gain (loss)  on securities available for sale,  net of tax                                 -             -              -      (329,722)      (329,722)  Net income                                  -             -      4,233,377             -      4,233,377  Dividends declared - $.76 per share         -             -     (2,116,753)            -     (2,116,753)  Balances, December 31, 2003         2,799,781     6,984,784     37,552,620     1,519,237     46,056,641  Common stock issued (including  employee gifts of 89 shares)           7,019       131,041              -             -        131,041  Common stock purchased               (122,302)     (297,161)    (3,127,295)            -     (3,424,456)  Net change in unrealized gain (loss)  on securities available for sale,  net of tax                                 -             -              -    (1,195,305)    (1,195,305)  Net income                                  -             -      5,762,109             -      5,762,109  Dividends declared - $.84 per share         -             -     (2,303,219)            -     (2,303,219)  Balances, December 31, 2004         2,684,498     6,818,664     37,884,215       323,932     45,026,811  Common stock issued (including  employee gifts of 75 shares)           3,375        47,595              -             -         47,595  Common stock purchased                (20,976)      (53,454)      (575,945)            -       (629,399)  Net change in unrealized gain (loss)  on securities available for sale,  net of tax                                 -             -              -    (1,256,826)    (1,256,826)  Net income                                  -             -      5,820,100             -      5,820,100  Dividends declared - $.92 per share         -             -     (2,462,038)            -     (2,462,038)  Balances, December 31, 2005         2,666,897   $ 6,812,805   $ 40,666,332   $  (932,894)  $ 46,546,243                                             See Accompanying notes.                               CONSOLIDATED STATEMENTS OF CASH FLOWS                             Years Ended December 31                                                  2005           2004           2003     Cash flows from operating activities   Net income                               $  5,820,100   $  5,762,109   $  4,233,377   Adjustments to reconcile net    income to net cash from    operating activities     Depreciation and amortization             1,174,954      1,419,794      1,460,429     Provision for loan losses                   508,100        840,000      1,300,000     Securities amortization      (accretion), net                           331,355        635,725        703,502     Securities (gains) losses, net              (64,395)      (288,950)      (139,438)     Originations of loans held      for sale                               (18,036,701)   (22,065,215)   (42,872,837)     Proceeds from sale of loans              18,545,914     30,024,484     36,707,617     Gain on sale of mortgage loans             (333,742)      (376,157)      (853,340)     Federal Home Loan Bank stock      dividends                                 (261,600)      (206,400)      (170,800)     Losses (gain) on sale of fixed      assets                                     (71,045)       (16,722)       161,849   Changes in:     Interest receivable                        (492,656)        23,355        360,511     Other assets                                425,569      1,135,547        451,918     Interest payable                            865,038        213,684       (306,069)     Other liabilities                           624,374        942,501     (1,390,747)       Net cash from operating activities      9,035,265     18,043,755       (354,028)  Cash flows from investing activities   Purchases of securities available    for sale                                 (53,539,693)   (70,689,970)   (65,248,350)   Proceeds from sales of securities    available for sale                         1,323,500     37,973,553      8,434,570   Proceeds from principal payments    and maturities of securities    available for sale                        16,159,467     32,581,271     39,625,276   Cash paid for bank acquisition                      -              -     (7,000,205)   Net change in loans                       (13,067,340)   (45,775,823)     1,481,580   Purchases of bank premises and equipment     (758,929)      (948,546)    (1,632,487)   Proceeds from sale of bank premises and    Equipment                                    581,881        199,722              -     Net cash from investing activities      (49,301,114)   (46,659,793)   (24,339,616)  Cash flows from financing activities   Net change in deposits                     43,676,556      3,356,226      8,662,228   Net change in repurchase agreements and    other borrowings                          (8,755,271)    18,307,586      2,008,563   Proceeds from subordinated debentures               -              -      7,000,000   Advances from Federal Home Loan Bank       15,000,000     25,000,000     12,000,000   Payments on Federal Home Loan    Bank advances                             (7,902,073)   (18,383,678)   (10,827,273)   Proceeds from issuance of common stock         47,595        131,041        188,697   Purchase of common stock                     (629,399)    (3,424,456)       (10,800)   Dividends paid                             (2,462,038)    (2,303,219)    (2,116,753)     Net cash from financing activities       38,975,370     22,683,500     16,904,662                              See Accompanying notes.                               CONSOLIDATED STATEMENTS OF CASH FLOWS                                   Years Ended December 31                                                 2005           2004           2003  Net change in cash and cash equivalents    $ (1,290,479)  $ (5,932,538)  $ (7,788,982)  Cash and cash equivalents at  beginning of year                           15,454,975     21,387,513     29,176,495  Cash and cash equivalents at end of year   $ 14,164,496   $ 15,454,975   $ 21,387,513  Supplemental disclosures of cash flow information   Cash paid during the year for:     Interest expense                       $ 10,900,634   $  8,853,448   $  8,084,469     Income taxes                              1,971,443        777,401      1,637,706  Supplemental schedules of non-cash investing  activities   Real estate acquired through foreclosure $    391,743   $  1,325,942   $    349,748                                                                      See Accompanying notes.    NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES  Basis of Presentation:  The consolidated financial statements include the accounts of Kentucky Bancshares, Inc. (formerly Bourbon Bancshares, Inc.) (the Company) and its wholly-owned subsidiary, Kentucky Bank (the Bank). Intercompany transactions and balances have been eliminated in consolidation.  Nature of Operations:  The Bank operates under a state bank charter and provides full banking services, including trust services, to customers located in Bourbon, Clark, Harrison, Jessamine, Scott, Woodford and adjoining counties in Kentucky.  As a state bank, the Bank is subject to regulation by the Kentucky Department of Financial Institutions and the Federal Deposit Insurance Corporation (FDIC). The Company, a bank holding company, is regulated by the Federal Reserve.  Estimates in the Financial Statements:  The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.  The allowance for loan losses, mortgage servicing rights and fair value of financial instruments are particularly subject to change.  Cash Flows:  For purposes of reporting cash flows, cash and cash equivalents include cash on hand, amounts due from banks, federal funds sold, and certain short-term investments with maturities of less than three months. Generally, federal funds are sold for one-day periods.  Net cash flows are reported for loan, deposit and short-term borrowing transactions.  Securities:  The Company is required to classify its securities portfolio into one of three categories:  trading securities, securities available for sale and securities held to maturity.  Fair value adjustments are made to the securities based on their classification with the exception of the held to maturity category.  The Company has no investments classified as trading securities, or securities held to maturity.  Securities available for sale are carried at fair value, with unrealized holding gains and losses reported in other comprehensive income.  Interest income includes amortization of purchase premium or discount. Premiums and discounts on securities are amortized on the level-yield method without anticipating prepayments, except for mortgage backed securities where prepayments are anticipated.  Gains and losses on sales are recorded on the settlement date and determined using the specific identification method.  Declines in the fair value of securities below their cost that are other than temporary are reflected as realized losses.  In estimating other than temporary losses, management considers: (1) the length of time and extent that fair value has been less than cost, (2) the financial condition and near term prospects of the issuer, and (3) the Company's ability and intent to hold the security for a period sufficient to allow for any anticipated recovery in fair value.       Loans Held for Sale:  Loans held for sale are valued at the lower of cost or market as determined by outstanding commitments from investors or current secondary market prices, calculated on the aggregate loan basis.  The Company also provides for any losses on uncovered commitments to lend or sell.  Loans:  Loans are stated at the amount of unpaid principal, reduced by an allowance for loan losses.  Interest income on loans is recognized on the accrual basis except for those loans on a nonaccrual status.  The accrual of interest on impaired loans is discontinued when management believes, after consideration of economic and business conditions and collection efforts, that the borrowers' financial condition is such that collection of interest is doubtful.  Interest income on mortgage and consumer loans is discontinued at the time the loan is 90 days delinquent, and interest income on commercial loans is discontinued at the time the loan is 120 days delinquent, unless the loan is well-secured and in process of collection.  Past due status is based on the contractual terms of the loan.  When interest accrual is discontinued, interest income received on such loans is accounted for on the cash-basis or cost-recovery method, until qualifying for return to accrual.  Loans are returned to accrual status when all the principal and interest amounts contractually due are brought current and future payments are reasonably assured.  Consumer and credit card loans are typically charged off no later than 120 days past due.  Loans are placed on nonaccrual or charged-off at an earlier date if collection of principal or interest is considered doubtful.  Loan origination fees and certain direct origination costs are capitalized and recognized as an adjustment of the yield on the related loan.  Allowance for Loan Losses:  The allowance for loan losses is a valuation allowance for probable incurred credit losses, increased by the provision for loan losses and decreased by charge-offs less recoveries.  Management estimates the allowance balance required using past loan loss experience, the nature and volume of the portfolio, information about specific borrower situations and estimated collateral values, economic conditions, and other factors. Allocations of the allowance may be made for specific loans, but the entire allowance is available for any loan that, in management's judgment, should be charged-off.  Loan losses are charged against the allowance when management believes the uncollectibility of a loan balance is confirmed.  A loan is impaired when full payment under the loan terms is not expected. Impairment is evaluated in total for smaller-balance loans of similar nature such as residential mortgage, consumer, and credit card loans, and on an individual loan basis for other loans.  If a loan is impaired, a portion of the allowance is allocated so that the loan is reported, net, at the present value of estimated future cash flows using the loan's existing rate or at the fair value of collateral if repayment is expected solely from the collateral.  Large groups of smaller balance homogenous loans, such as consumer and residential real estate loans are collectively evaluated for impairment, and accordingly, they are not separately identified for impairment disclosures.    Mortgage Servicing Rights:  The Bank has sold certain residential mortgage loans to the Federal Home Loan Mortgage Corporation (FHLMC) while retaining the servicing rights.  Gains and losses on sales of mortgage loans are based on the difference between the selling price and the carrying value of the related loan sold.  The Bank receives a servicing fee from the FHLMC on each loan sold.  Servicing rights represent the allocated value of retained servicing rights on loans sold and the cost of purchased rights.  Servicing assets are expensed in proportion to, and over the period of, estimated net servicing revenues. Impairment is evaluated based on the fair value of the assets, using interest rates, and prepayment characteristics.  Fair value is determined using prices for similar assets with similar characteristics, when available, or based upon discounted cash flows using market-based assumptions.  Any impairment of a grouping is reported as a valuation allowance, to the extent that fair value is less than the capitalized amount for a grouping.  Federal Home Loan Bank (FHLB) Stock:  The Bank is a member of the FHLB system.  Members are required to own a certain amount of stock based on the level of borrowings and other factors, and may invest in additional amounts.  FHLB stock is carried at cost, classified as a restricted security, and periodically evaluated for impairment based on ultimate recovery of par value.  Both cash and stock dividends are reported as income.  Bank Premises and Equipment:  Land is carried at cost.  Bank premises and equipment are stated at cost less accumulated depreciation.  Buildings and related components are depreciated using the straight-line method with useful lives ranging from 5 to 50 years.  Furniture, fixtures and equipment are depreciated using the straight-line (or accelerated) method with useful lives ranging from 3 to 10.  Real Estate Acquired Through Foreclosure:  Real estate acquired through foreclosure is carried at the lower of the recorded investment in the property or its fair value.  The value of the underlying loan is written down to the fair value of the real estate to be acquired by a charge to the allowance for loan losses, if necessary.  Any subsequent write-downs are charged to operating expenses.  Operating expenses of such properties, net of related income, and gains and losses on their disposition are included in other expenses.  Repurchase Agreements:  Substantially all repurchase agreement liabilities represent amounts advanced by various customers.  Securities are pledged to cover these liabilities, which are not covered by federal deposit insurance.     Stock Compensation:  Employee compensation expense under stock options is reported using the intrinsic value method.  No stock-based compensation cost is reflected in net income, as all options granted had an exercise price equal to or greater than the market price of the underlying common stock at date of grant.  The following table illustrates the effect on net income and earnings per share if expense was measured using the fair value recognition provisions of FASB Statement No. 123, Accounting for Stock-Based Compensation.                                          2005           2004           2003 Net income   As reported                        $ 5,820,100    $ 5,762,109    $ 4,233,377   Deduct:  Stock-based compensation    expense determined under fair    value based method                    (56,241)       (42,178)       (48,317)   Pro forma                            5,763,859      5,719,931      4,185,060                                           2005           2004           2003 Basic earnings per share   As reported                        $      2.17    $      2.09    $      1.52   Pro forma                                 2.15           2.07           1.50  Diluted earnings per share   As reported                        $      2.16    $      2.07    $      1.50   Pro forma                                 2.14           2.06           1.48  Weighted averages   Fair value of options granted      $      4.82    $      5.68    $      4.14   Risk free interest rate                   3.98%          3.86%          3.40%   Expected life                           8 years        8 years        8 years   Expected volatility                      15.11%         13.74%         16.90%   Expected dividend yield                   3.03%          2.47%          2.96%  Income Taxes:   Income tax expense is the total of the current year income tax due or refundable and the change in deferred tax assets and liabilities.  The Company uses the liability method for computing deferred income taxes.  Under the liability method, deferred income taxes are based on the change during the year in the deferred tax liability or asset established for the expected future tax consequences of differences in the financial reporting and tax bases of assets and liabilities.    Retirement Plans:  Pension expense is the net of service and interest cost, return on plan assets and amortization of gains and losses not immediately recognized.  Employee 401(k) and profit sharing plan expense is the amount of matching contributions.  Goodwill:   Goodwill results from prior business acquisitions and represents the excess of the purchase price over the fair value of acquired tangible assets and liabilities and identifiable intangible assets.  Goodwill is assessed at least annually for impairment and any such impairment will be recognized in the period identified.  Intangible Assets:  Intangible assets include a premium on deposits paid in connection with the acquisition of a bank and branches which is being amortized on a straight-line basis over ten or fifteen years.  Earnings Per Common Share:  Basic earnings per common share is net income divided by the weighted average number of common shares outstanding during the period.  Diluted earnings per common share include the dilutive effect of additional potential common shares issuable under stock options.  Earnings and dividends per share are restated for all stock splits and dividends through the date of issuance of the financial statements.  Comprehensive Income:  Comprehensive income consists of net income and other comprehensive income.  Other comprehensive income includes unrealized gains and losses on securities available for sale which are also recognized as a separate component of equity.  Derivatives:  The Company periodically enters into non-exchange traded mandatory forward sales contracts in conjunction with its mortgage banking operation.  These contracts, considered derivatives, typically last 60 to 90 days and are used to offset the risk of interest rate changes between the time of the commitment to make a loan to a borrower at a stated rate and when the loan is sold.  The Company did not have any mandatory forward sales contracts at December 31, 2005 and 2004.  Effect of Newly Issued But Not Yet Effective Accounting Standards:  FAS 123, Revised, requires companies to record compensation cost for stock options provided to employees in return for employment service.  The cost is measured at the fair value of the options when granted, and this cost is expensed over the employment service period, which is normally the vesting period of the options.  This will apply to awards granted or modified in fiscal years beginning in 2006.  Compensation cost will also be recorded for prior option grants that vest after the date of adoption.  The effect on results of operations will depend on the level of future option grants and the calculation of the fair value of the options granted at such future date, as well as the vesting periods provided, and so cannot currently be predicted. Existing options that will vest after adoption date are expected to result in additional compensation expense of approximately $48,000 in 2006 and $41,000 in 2007.  Operating Segments:  While the Company's chief decision makers monitor the revenue streams of the various Company products and services, operations are managed and financial performance is evaluated on a Company-wide basis. Accordingly, all of the Company's operations are considered by management to be aggregated into one reportable operating segment.   NOTE 2 - RESTRICTIONS ON CASH AND DUE FROM BANKS  Included in cash and due from banks are certain non-interest bearing deposits that are held at the Federal Reserve or maintained in vault cash in accordance with average balance requirements specified by the Federal Reserve Board of Governors.  The reserve requirement at December 31, 2005 and 2004 was $156,000 and $144,000.  NOTE 3 - SECURITIES  Year-end securities available for sale are as follows:                                          Fair        Unrealized     Unrealized                                         Value          Gains         Losses  2005   U. S. Treasury                    $   2,974,354   $         -   $   (32,397)   U. S. government agencies            67,032,587        14,427      (825,849)   States and municipals                37,462,770       756,298      (337,944)   Mortgage-backed                      52,340,502         4,150    (1,309,489)   Equity securities                       842,133       317,329             -      Total                           $ 160,652,346   $ 1,092,204   $(2,505,679)  2004   U. S. Treasury                    $   2,984,375   $         -   $   (30,033)   U. S. government agencies            39,029,910         4,220      (384,112)   States and municipals                35,160,329     1,297,405      (163,285)   Mortgage-backed                      48,620,711        79,835      (677,298)   Equity securities                       971,536       363,589             -      Total                           $ 126,766,861   $ 1,745,049   $(1,254,728)  The fair value of securities available for sale at December 31, 2005, by contractual maturity, are shown below. Expected maturities will differ from contractual maturities because borrowers may have the right to call or prepay obligations with or without call or prepayment penalties.  Securities not due at a single maturity are shown separately.                                                    Fair                                                   Value    Due in one year or less                    $  29,117,864   Due after one year through five years         41,549,332   Due after five years through ten years        19,861,663   Due after ten years                           16,940,852                                                107,469,711   Mortgage-backed                               52,340,502   Equity                                           842,133      Total                                    $ 160,652,346  Proceeds from sales of securities during 2005, 2004 and 2003 were $1,323,500, $37,973,553 and $8,434,570.  Gross gains of $89,943, $483,888 and $157,474 and gross losses of $25,548, $194,938 and $18,036, were realized on those sales, respectively.  The tax provision related to these realized gains and losses was $21,894, $98,243 and $47,409, respectively.    Securities with an approximate carrying value of $122,961,000 and $103,979,000 at December 31, 2005 and 2004, were pledged to secure public deposits, trust funds, securities sold under agreements to repurchase and for other purposes as required or permitted by law.  Securities with unrealized losses at year end 2005 and 2004 not recognized in income are as follows:   2005                                   Less than 12 Months        12 Months or More               Total                                  Fair       Unrealized    Fair        Unrealized      Fair       Unrealized Description of Securities        Value         Loss       Value          Loss         Value         Loss        U.S. Treasury                 $         -  $         -   $ 2,974,354   $   (32,397)  $  2,974,354  $   (32,397) U.S. Government securities     38,032,999     (289,833)   23,442,038      (536,016)    61,475,037     (825,849) States and municipals          11,774,597     (186,615)    4,210,864      (151,329)    15,985,461     (337,944) Mortgage-backed                17,876,194     (187,827)   32,745,358    (1,121,662)    50,621,552   (1,309,489)  Total temporarily impaired    $67,683,790  $  (664,275)  $63,372,614   $(1,841,404)  $131,056,404  $(2,505,679)  2004                                   Less than 12 Months        12 Months or More               Total                                  Fair       Unrealized    Fair        Unrealized      Fair       Unrealized Description of Securities        Value         Loss       Value          Loss         Value         Loss  U.S. Treasury                 $ 2,984,375  $   (30,033)  $         -   $         -   $  2,984,375  $   (30,033) U.S. Government securities     33,139,473     (384,112)            -             -     33,139,473     (384,112) States and municipals           4,156,727      (91,011)    2,811,479       (72,274)     6,968,206     (163,285) Mortgage-backed                36,918,846     (571,246)    4,705,311      (106,052)    41,624,157     (677,298)  Total temporarily impaired    $77,199,421  $(1,076,402)  $ 7,516,790   $  (178,326)  $ 84,716,211  $(1,254,728)   The Company evaluates securities for other than temporary impairment at least on an annual basis, and more frequently when economic or market concerns warrant such evaluation.  Consideration is given to the length of time and the extent to which the fair value has been less than cost, the financial condition and near-term prospects of the issuer, and the intent and ability of the Company to retain its investment in the issuer for a period of time sufficient to allow for any anticipated recovery in fair value.  In analyzing an issuer's financial condition, the Company may consider whether the securities are issued by the federal government or its agencies, whether downgrades by bond rating agencies have occurred, and the results of reviews of the issuer's financial condition.  At December 31, 2005, eight mortgage-backed securities have unrealized losses with aggregate depreciation of 3% from their amortized cost basis.  The decline in fair value from these and other securities is largely due to changes in interest rates.  As management has the ability to hold debt securities until maturity, or for the foreseeable future, no declines are deemed to be other than temporary.     NOTE 4 - LOANS  Loans at year-end were as follows:                                   2005              2004  Commercial                  $  27,301,633     $  19,999,038 Real estate construction       29,822,067        32,256,168 Real estate mortgage          245,138,321       238,475,554 Agricultural                   59,327,772        57,497,465 Consumer                        8,953,943         9,062,518 Other                             368,146           990,811                              $ 370,911,882     $ 358,281,554  Activity in the allowance for loan losses was as follows:                                   2005            2004            2003  Beginning balance            $  4,163,315    $  3,819,842    $  3,395,075 Allowance from acquisition              -               -         362,900 Charge-offs                      (526,735)       (687,798)     (1,397,822) Recoveries                        164,723         191,271         159,689 Provision for loan losses         508,100         840,000       1,300,000  Ending balance               $  4,309,403    $  4,163,315    $  3,819,842  Impaired loans totaled $774,000 and $1,781,000 at December 31, 2005 and 2004. The average recorded investment in impaired loans during 2005, 2004 and 2003 was $1,547,000, $1,444,000 and $1,051,000.  The total allowance for loan losses related to these loans was $240,000 and $416,000 at December 31, 2005 and 2004.  Interest income on impaired loans of $25,000, $22,000 and $14,000 was recognized for cash payments received in 2005, 2004 and 2003.  Nonperforming loans were as follows:                                         2005         2004 Loans past due over 90 days still  on accrual                          $  206,000   $  308,000 Nonaccrual loans                        774,000    1,781,000     Nonperforming loans include impaired loans and smaller balance homogeneous loans, such as residential mortgage and consumer loans, that are collectively evaluated for impairment.  Mortgage loans serviced for others are not included in the accompanying consolidated balance sheets.  The unpaid principal balances of mortgage loans serviced for others was approximately $104,575,000 and $102,024,000 at December 31, 2005 and 2004.  Custodial escrow balances maintained in connection with the foregoing loan servicing, and included in demand deposits, were approximately $509,000 and $467,000 at December 31, 2005 and 2004.  Changes in mortgage servicing rights were as follows:                           2005          2004          2003  Beginning balance    $  875,633    $  861,120    $  704,034 Additions               179,474       263,861       381,205 Amortization            (253,606)     (249,348)     (224,119)  Ending balance       $  801,501    $  875,633    $  861,120  Certain directors and executive officers of the Company and companies in which they have beneficiary ownership were loan customers of the Bank during 2005 and 2004.  Such loans were made in the ordinary course of business at the Bank's normal credit terms and interest rates.  An analysis of the activity with respect to all director and executive officer loans is as follows:                                                              2005  Balance, beginning of year                             $  4,410,000 New Loans                                                 1,051,000 Effect of changes in composition of Related parties        (381,000) Repayments                                                 (373,000)  Balance, end of year                                   $  4,707,000  NOTE 5 - PREMISES AND EQUIPMENT  Year-end premises and equipment were as follows:                                       2005             2004  Land and buildings               $ 12,560,227     $ 12,804,599 Furniture and equipment            10,200,440        9,732,639 Construction projects                   9,500                -                                    22,770,167       22,537,238 Less accumulated depreciation     (12,068,626)     (11,159,226)                                   $ 10,701,541     $ 11,378,012  Depreciation expense was $924,564, $993,907 and $960,512 in 2005, 2004, and 2003.    NOTE 6 - GOODWILL AND INTANGIBLE ASSETS  The change in balance for goodwill during the year is as follows:                                   2005                 2004    Beginning of year          $  9,110,524         $ 10,199,830   Adjustment to goodwill                -           (1,089,306)    End of year                $  9,110,524         $  9,110,524  Goodwill was reduced in 2004 primarily for unanticipated tax benefits arising after the initial calculation of goodwill from the business combination in 2003.  Goodwill will not be amortized but instead evaluated periodically for impairment.  Acquired intangible assets were as follows at year-end:                                        2005                      2004                                 Gross                    Gross                               Carrying   Accumulated    Carrying   Accumulated                                Amount    Amortization    Amount    Amortization Amortized intangible assets:   Core deposit intangibles   $3,656,403   $2,890,518   $3,656,403   $2,794,782  Aggregate amortization expense was $95,736, $275,490 and $292,271 for 2005, 2004 and 2003.  The core deposit from the 1994 Clark County branch acquisition was completely amortized in 2004.  Estimated amortization expense for each of the next five years:       2006          $  95,736      2007             95,736      2008             95,736      2009             95,736      2010             95,736    NOTE 7 - DEPOSITS  At December 31, 2005, the scheduled maturities of time deposits are as follows:       2006        $ 149,082,622      2007           38,020,991      2008            3,697,971      2009            1,188,208      2010              960,955  Certain directors and executive officers of the Company and companies in which they have beneficial ownership are deposit customers of the Bank. The amount of these deposits was approximately $1,700,000 and $3,421,000 at December 31, 2005 and 2004.  NOTE 8 - REPURCHASE AGREEMENTS  Securities sold under agreements to repurchase are secured by U.S. Government securities with a carrying amount of $23,246,420 and $27,275,000 at year-end 2005 and 2004.  Repurchase agreements generally mature within one year from the transaction date and range in maturities from 1 day to 3 years. The securities underlying the agreements are maintained in a third-party custodian's account under a written custodial agreement.  Information concerning repurchase agreements for 2005 and 2004 is summarized as follows:                                                  2005           2004  Average daily balance during the year       $ 16,014,304    $ 18,398,243 Average interest rate during the year               3.19%           1.90% Maximum month-end balance during the year   $ 18,071,544    $ 21,946,746 Weighted average interest rate at year end          3.18%           2.94%  NOTE 9 - FEDERAL HOME LOAN BANK ADVANCES  At year-end, advances from the Federal Home Loan Bank were as follows:                                                        2005           2004 Maturities February 2005 through March  2030, fixed rates from 1.52% to 3.08%        $ 19,802,691   $ 21,644,956 Maturities March 2005 through February  2026, fixed rates from 3.55% to 4.38%          30,781,074     16,846,606 Maturities June 2005 through November  2022, fixed rates from 4.82% to 7.23%          16,164,876     21,258,104  Total                                      $ 66,748,641   $ 59,749,666  Advances are paid either on a monthly basis or at maturity.  All advances require a prepayment penalty and certain advances are callable by the FHLB at various call dates throughout the term of the advance.  Advances are secured by the FHLB stock and substantially all first mortgage loans.  Scheduled principal payments due on advances during the years subsequent to December 31, 2005 are as follows:       2006              $ 13,182,609      2007                 9,203,106      2008                11,231,617      2009                15,261,901      2010                 7,293,215      Thereafter          10,576,193                         $ 66,748,641  NOTE 10 - SUBORDINATED DEBENTURES  In August 2003, the Company formed Kentucky Bancshares, Statutory Trust I ("Trust").  The Trust issued $217,000 of common securities to the Company and $7,000,000 of trust preferred securities as part of a pooled offering of such securities.  The Company issued $7,217,000 subordinated debentures to the Trust in exchange for the proceeds of the offering, which debentures represent the sole asset of the Trust.  The debentures pay interest quarterly at 7.06% for the first 5 years.  Starting September 2008, the rate converts to three-month LIBOR plus 3.00 adjusted quarterly.  The Company may redeem the subordinated debentures, in whole or in part, beginning September 2008 at a price of 100% of face value.  The subordinated debentures must be redeemed no later than 2033.  In accordance with FASB Interpretation No. 46, the Trust is not consolidated with the Company.  Accordingly, the Company does not report the securities issued by the Trust as liabilities, and instead reports as liabilities the subordinated debentures issued by the Company and held by the Trust, as these are no longer eliminated in consolidation.  NOTE 11 - INCOME TAXES  Income tax expense was as follows:                      2005            2004            2003  Current          $ 1,969,865     $ 2,063,949     $ 1,166,575 Deferred             107,876         153,834         289,965                   $ 2,077,741     $ 2,217,783     $ 1,456,540  Year-end deferred tax assets and liabilities were due to the following.  No valuation allowance for the realization of deferred tax assets is considered necessary.                                                2005            2004  Deferred tax assets   Allowance for loan losses              $ 1,355,432    $ 1,241,615   Unrealized loss on securities              480,581              -   Core deposit intangibles                    13,753         46,720   Other                                      121,049        358,420  Deferred tax liabilities   Unrealized gain on securities                    -       (166,874)   Bank premises and equipment               (429,886)      (428,414)   FHLB stock                              (1,018,338)      (929,394)   Mortgage servicing rights                 (272,510)      (297,715)   Other                                     (188,099)      (301,955)      Net deferred tax asset (liability)   $    61,982    $  (477,597)    Effective tax rates differ from federal statutory rates applied to financial statement income due to the following:                                                 2005       2004       2003  U. S. federal income tax rate                   34.0%      34.0%      34.0% Changes from the statutory rate   Tax-exempt investment income                  (7.3)      (7.0)      (9.3)   Non-deductible interest expense related to    carrying tax-exempt investments                .8         .6         .8   Other                                         (1.2)        .2         .1                                                  26.3%      27.8%      25.6%  Federal income tax laws provided the Federal Savings Bank, acquired by the Company in 2003, with additional bad debt deductions through 1987, totaling $1.3 million.  Accounting standards do not require a deferred tax liability to be recorded on this amount, which otherwise would total a $441,000 liability at December 31, 2005.  The Company's acquisition of First Federal Savings Bank did not require the recapture of the bad debt reserve.  However, if Kentucky Bank was liquidated or otherwise ceased to be a bank, or if tax laws were to change, the $441,000 would be recorded as expense.  NOTE 12 - EARNINGS PER SHARE  The factors used in the earnings per share computation follow:                                        2005           2004           2003 Basic Earnings Per Share   Net income                      $ 5,820,100    $ 5,762,109    $ 4,233,377 Weighted average common    shares outstanding               2,676,890      2,757,233      2,781,146   Basic earnings per share        $      2.17    $      2.09    $      1.52  Diluted Earnings Per Share   Net income                       $ 5,820,100    $ 4,233,377    $ 5,902,525   Weighted average common    shares outstanding               2,676,890      2,781,146      2,770,282   Add dilutive effects of    assumed exercise of    stock options                       14,965         45,640         35,836   Weighted average common and    dilutive potential common    shares outstanding               2,691,855      2,826,786      2,806,118   Diluted earnings per share      $      2.16    $      2.07    $      1.50  Stock options of 31,100 shares common stock from 2005 and 11,350 shares of common stock from 2004 were excluded from diluted earnings per share because their impact was antidilutive.  There were no shares that were antidilutive in 2003.    NOTE 13 - RETIREMENT PLANS  The Company has a defined benefit pension plan covering substantially all of its employees. The Company's funding policy is to contribute annually the maximum amount that can be deducted for federal income tax purposes.   Benefits are based on one percent of employee average earnings for the previous five years times years of credited service.  Information about the pension plan was as follows:                                            2005            2004 Change in benefit obligation:   Beginning benefit obligation        $ 5,481,513     $ 4,290,391   Service cost                            432,429         369,481   Interest cost                           346,223         286,326   Actuarial adjustment                    581,964         630,729   Benefits paid                          (104,770)        (95,414)     Ending benefit obligation           6,737,359       5,481,513  Change in plan assets, at fair value:   Beginning plan assets                 4,798,708       4,075,719   Actual return                           166,535         541,419   Employer contribution                   211,031         276,984   Benefits paid                          (104,770)        (95,414)     Ending plan assets                  5,071,504       4,798,708  Funded status                          (1,665,855)       (682,805) Unrecognized net actuarial (gain) loss  1,683,609         932,175 Unrecognized prior transition asset        (1,113)         (1,485)  Net pension prepaid benefit           $    16,641     $   247,885  Amounts recognized in the balance sheet consist of:  Prepaid benefit cost                  $    16,641     $   247,885 Accrued benefit cost                            -               -    Net amount recognized               $    16,641     $   247,885  The accumulated benefit obligation for defined benefit pension plans was $4,973,145 and $3,976,697 at year-end 2005 and 2004.  Net periodic pension cost include the following components:                                          2005           2004           2003  Service cost                         $  432,429     $  369,481     $  314,935 Interest cost                           346,223        286,326        265,034 Expected return on plan assets         (376,195)      (319,050)      (265,117) Amortization                             39,818           (372)        16,758  Net periodic cost                    $  442,275     $  336,385     $  331,610    Weighted-average assumptions used to determine net cost                                         2005        2004        2003 Discount rate on benefit obligation    5.75%       6.00%       7.00% Long-term expected rate of return  on plan assets                        8.00%       8.00%       8.00% Rate of compensation increase          4.00%       4.00%       5.00%  The assumptions described above were determined using various factors.  Based on the history of domestic investment experience, the expected long-term rate of return on assets for the income segment is assumed to be 6.0%.  The expected long-term return on assets for the growth segment is assumed to be 10.0%.  Thus, the assumed rate of return on the total portfolio is 8.0% per year.  The rate of compensation increase assumption of 4.0% is based upon historical compensation increases at the Bank.  The discount rate assumption of 5.75% is based on the expected movements of interest rates from economic forecasts, Federal Reserve monetary actions and commentary, the expected pace of economic activity, the issuance of new debt to finance significant fiscal policy deficits, and the benchmark Moody's AA rated long term corporate bond rate.  The Company's pension plan asset allocation at year-end and expected long-term rate of return by asset category are as follows:                                                         Weighted                          Percentage    Percentage        Average                            of Plan       of Plan        Expected                           Assets at     Assets at       Long-Term                           Year-End      Year-End     Rate of Return Asset Category              2005          2004            2005  Equity securities           62.3          64.9             10% Debt securities             35.9          34.6              6 Cash                         1.8           0.5              4    Total                    100.0         100.0  The asset allocation objective for 2005 and thereafter is to be 60% in equity securities and 40% in debt securities.  These percentages may vary 5-10 basis points based on market conditions of equity and bond markets.  There is no target allocation for cash balances.  The Company expects to contribute $204,000 to its pension plan in 2006.  The following benefit payments, which reflect expected future service, are expected:                               Pension Benefits       2006                      $  121,559      2007                         160,556      2008                         176,305      2009                         187,972      2010                         241,301      Years 2011-2015            1,527,087   The Company also has a qualified profit sharing plan which covers substantially all employees and includes a 401(k) provision.  Profit sharing contributions, excluding the 401(k) provision, are at the discretion of the Company's Board of Directors.  Expense recognized in connection with the plan was $320,670, $309,741 and $271,684 in 2005, 2004 and 2003.   NOTE 14 - STOCK OPTION PLAN  The Company grants certain officers and key employees stock option awards which vest and become fully exercisable at the end of five years and provides for issue of up to 220,000 options.  The Company also grants certain directors stock option awards which vest and become fully exercisable immediately and provides for issue of up to 20,000 options.  The exercise price of each option, which has a ten year life, was equal to the market price of the Company's stock on the date of grant; therefore, no compensation expense was recognized.  Summary of stock option transactions are as follows:                                         2005                 2004                 2003                                          Weighted             Weighted             Weighted                                           Option               Option               Option                                 Options    Price     Options    Price     Options    Price        Outstanding, beginning of year   60,564    $23.00     57,560    $20.23     83,114    $16.72 Granted                          19,850     30.40     12,250     33.65     14,500     25.72 Expired                             (50)    26.00     (2,316)    27.03     (3,698)    25.00 Exercised                        (3,300)    13.23     (6,930)    17.55    (36,356)    13.89 Outstanding, end of year         77,064    $25.32     60,564    $23.00     57,560    $20.23  Exercisable, end of year         42,116    $21.38     38,676    $19.41     36,824    $17.80 Weighted remaining contractual  Life                            71.1 months          67.0 months          67.9 months    Options outstanding at year-end 2005 were as follows:                                            Outstanding                    Exercisable                                             Weighted                                              Average     Weighted                 Weighted                                             Remaining     Average                  Average                                            Contractual   Exercise                 Exercise Range of Exercise Prices         Options       Life        Price      Options       Price       From $12.50 to $15.50 per share   12,020       18.4       $14.24       12,020       $14.24 From $18.00 to $20.63 per share   13,640       36.1        20.52       13,640        20.52 From $23.50 to $28.00 per share   20,304       75.1        25.37       12,126        25.30 From $30.00 to $30.50 per share   19,850      108.6        30.40        1,200        30.25 From $33.90 to $34.00 per share   11,250       96.3        33.91        3,130        33.94                                   77,064                               42,116   NOTE 15 - STOCK GRANT PLAN  On February 15, 2005, the Company's Board of Directors adopted a restricted stock grant plan.  Total shares issuable under the plan are 50,000.  There was no activity in the plan during 2005.  NOTE 16 - LIMITATION ON BANK DIVIDENDS  The Company's principal source of funds is dividends received from the Bank. Banking regulations limit the amount of dividends that may be paid by the Bank without prior approval of regulatory agencies.  Under these regulations, the amount of dividends that may be paid in any calendar year is limited to the current year's net profits, as defined, combined with the retained net profits of the preceding two years.  During 2006 the Bank could, without prior approval, declare dividends of approximately $4,928,000 plus any 2006 net profits retained to the date of the dividend declaration.    NOTE 17 - DISCLOSURES ABOUT FAIR VALUE OF FINANCIAL INSTRUMENTS  The fair values of the Company's financial instruments at December 31, 2005 and 2004 are as follows:                                        2005                      2004                                Carrying                  Carrying                                 Amount    Fair Value      Amount    Fair Value                                               (In Thousands) Financial assets   Cash and cash equivalents   $  14,164   $  14,164     $  15,455   $  15,455   Securities                    160,652     160,652       126,767     126,767   Mortgage loans held for sale        -           -           176         178   Loans, net                    366,602     362,686       354,118     350,912   FHLB stock                      5,398       5,398         5,136       5,136   Interest receivable             3,719       3,719         3,226       3,226  Financial liabilities   Deposits                    $ 431,631   $ 432,560     $ 387,955   $ 390,296   Securities sold under    agreements to repurchase    and other borrowings          16,838      16,612        25,593      25,467   FHLB advances                  66,749      64,937        59,750      59,281   Subordinated debentures         7,217       7,328         7,217       7,354   Interest payable                2,715       2,715         1,849       1,849  Carrying amount is the estimated fair value for cash and cash equivalents, short-term borrowings, Federal Home Loan Bank stock, accrued interest receivable and payable, demand deposits, short-term debt, and variable rate loans or deposits that reprice frequently and fully.  Security fair values are based on market prices or dealer quotes, and if no such information is available, on the rate and term of the security and information about the issuer.  For fixed rate loans or deposits and for variable rate loans or deposits with infrequent repricing or repricing limits, fair value is based on discounted cash flows using current market rates applied to the estimated life and credit risk.  Fair values for impaired loans are estimated using discounted cash flow analysis or underlying collateral values.  Fair value of debt is based on current rates for similar financing. The fair value of commitments to extend credit and standby letters of credit is not considered material.    NOTE 18 - OFF-BALANCE SHEET ACTIVITIES AND COMMITMENTS  Some financial instruments, such as loan commitments, credit lines, letters of credit, and overdraft protection, are issued to meet customer financing needs. These are agreements to provide credit or to support the credit of others, as long as conditions established in the contract are met, and usually have expiration dates.  Commitments may expire without being used.  Off-balance sheet risk to credit loss exists up to the face amount of these instruments, although material losses are not anticipated.  The same credit policies are used to make such commitments as are used for loans, including obtaining collateral at exercise of the commitment.  Financial instruments with off-balance sheet risk were as follows at year-end:                                   2005             2004  Unused lines of credit       $ 56,354,000     $ 54,785,000 Commitments to make loans         156,000        1,272,000 Letters of credit                 183,000          145,000  Unused lines of credit are substantially all at variable rates.  Commitments to make loans are generally made for a period of 60 days or less and are primarily fixed at current market rates ranging from 6.125% to 6.25% with maturities ranging from 15 to 30 years and are intended to be sold.  NOTE 19 - CONTINGENT LIABILITIES  The Bank is a defendant in legal actions arising from normal business activities.  Management believes these actions are without merit or that the ultimate liability, if any, resulting from them will not materially affect the Company's consolidated financial position or results of operations.    NOTE 20 - CAPITAL REQUIREMENTS  The Company and the Bank are subject to various regulatory capital requirements administered by the federal banking agencies. Failure to meet minimum capital requirements can initiate certain mandatory and possible additional discretionary actions by regulators that, if undertaken, could have a direct material effect on the Company's financial statements.  Under capital adequacy guidelines and the regulatory framework for prompt corrective action, the Company and the Bank must meet specific capital guidelines that involve quantitative measures of the Company's and the Bank's assets, liabilities, and certain off-balance sheet items as calculated under regulatory accounting practices. The Company and Bank capital amounts and classifications are also subject to qualitative judgments by regulators about components, risk weightings, and other factors.  Quantitative measures established by regulation to ensure capital adequacy require the Company and the Bank to maintain minimum amounts and ratios (set forth in the following table) of Total and Tier I capital (as defined in the regulations) to risk-weighted assets (as defined), and of Tier I capital to average assets (as defined).  Management believes, as of December 31, 2005 and 2004, that the Company and the Bank meet all capital adequacy requirements to which they are subject.  The most recent notification from the Federal Deposit Insurance Corporation categorized the Bank as well capitalized under the regulatory framework for prompt corrective action.  To be categorized as well capitalized, the Bank must maintain minimum Total risk-based, Tier I risk-based and Tier I leverage ratios as set forth in the following table.  There are no conditions or events since that notification that management believes have changed the institution's category.  The Company's and the Bank's actual amounts and ratios are presented in the table below:                                                                                        To Be Well                                                                                    Capitalized                                                                                    Under Prompt                                                                   For Capital         Corrective                                                  Actual       Adequacy Purposes   Action Provisions                                              Amount   Ratio     Amount   Ratio     Amount   Ratio                                                              (Dollars in Thoursands) 2004 Consolidated          Total Capital (to Risk-Weighted Assets)    $ 45,987  13.2%     $ 27,855    8%     $ 34,819    N/A   Tier I Capital (to Risk-Weighted Assets)    41,660  12.0       13,928    4        20,891    N/A   Tier I Capital (to Average Assets)          41,660   8.2       20,410    4        25,512    N/A  Bank Only   Total Capital (to Risk-Weighted Assets)   $ 44,512  12.8%    $ 27,791    8%     $ 34,739    10%   Tier I Capital (to Risk-Weighted Assets)    40,338  11.6       13,895    4        20,843     6   Tier I Capital (to Average Assets)          40,338   7.9       20,368    4        25,460     5  2005 Consolidated   Total Capital (to Risk-Weighted Assets)    $ 49,130  13.4%     $ 29,311    8%     $ 36,639    N/A   Tier I Capital (to Risk-Weighted Assets)    44,602  12.2       14,656    4        21,984    N/A   Tier I Capital (to Average Assets)          44,602   8.0       22,342    4        27,928    N/A  Bank Only   Total Capital (to Risk-Weighted Assets)   $ 47,346  13.0%    $ 29,251    8%     $ 36,564    10%   Tier I Capital (to Risk-Weighted Assets)    42,952  11.8       14,626    4        21,938     6   Tier I Capital (to Average Assets)          42,952   7.7       22,309    4        27,887     5      NOTE 21 - SUBSEQUENT EVENT - BUSINESS COMBINATION   On February 24, 2006, the Company announced the signing of a definitive merger agreement with Peoples Bancorp of Sandy Hook, Inc. (Peoples Bancorp).  Under the terms of the merger agreement, Peoples Bancorp will merge into the Company and Peoples Bank, a subsidiary of Peoples Bancorp, will merge into the Bank. Peoples Bancorp is a privately held bank holding company with offices in Sandy Hook and Morehead, Kentucky.  On December 31, 2005 it had assets, deposits and shareholders equity of $87 million, $68 million and $8.6 million, respectively.  As a result of this merger, the Company expects to expand its customer base to enhance deposit fee income, provide an opportunity to market additional products and services to new customers, and reduce operating costs through economies of scale.  Subject to regulatory approval, as well as approval of Peoples Bancorp stockholders, under the terms of the definitive agreement, each share of Peoples Bancorp common stock will be converted into consideration, sixty percent of which to be in the form of cash and forty percent of which to be in the form of shares of Kentucky Bancshares common stock.  Based on the current market price of Kentucky Bancshares common stock,   approximately 190,000 shares of Kentucky Bancshares common stock would be issued to Peoples Bancorp shareholders. The total purchase price will be approximately $14 million.      NOTE 22 - PARENT COMPANY FINANCIAL STATEMENTS                      Condensed Balance Sheets                           December 31                                                 2005         2004                                                 (In Thousands) ASSETS Cash on deposit with subsidiary              $  1,163     $    721 Investment in subsidiary                       51,699       50,481 Securities available for sale                     573          698 Other assets                                      345          363  Total assets                                 $ 53,780     $ 52,263   LIABILITIES AND STOCKHOLDERS' EQUITY Liabilities   Subordinated debentures                    $  7,217     $  7,217   Other liabilities                                17           19 Stockholders' equity   Preferred stock                                   -            -   Common stock                                  6,813        6,819   Retained earnings                            40,666       37,884   Accumulated other comprehensive income         (933)         324  Total liabilities and stockholders' equity   $ 53,780     $ 52,263                Condensed Statements of Income and Comprehensive Income                            Years Ended December 31                                                    2005       2004       2003                                                        (In Thousands) Income   Dividends from subsidiary                    $  3,750   $  3,650   $ 13,025   Securities gains (losses), net                     60         82          7   Interest income                                    13         24         20     Total income                                  3,823      3,756     13,052  Expenses   Interest expense                                  494        494        169   Other expenses                                    134        157        360     Total expenses                                  628        651        529  Income before income taxes and equity in  undistributed income of subsidiary               3,195      3,105     12,523  Applicable income tax (expense) benefits            178        177        175  Income before equity in undistributed  income of subsidiary                             3,373      3,282     12,698  Equity in undistributed income of subsidiary      2,447      2,480     (8,465)  Net income                                        5,820      5,762      4,233  Other comprehensive income (loss), net of tax:   Unrealized gains (losses) on securities    arising during the period                     (1,215)    (1,004)      (237)   Reclassification of realized amount               (42)      (191)       (92)    Net change in unrealized gain (loss)    on securities                                 (1,257)    (1,195)      (329)  Comprehensive income                           $  4,563   $  4,567   $  3,904                             Condensed Statements of Cash Flows                            Years Ended December 31                                                  2005        2004       2003                                                        (In Thousands) Cash flows from operating activities   Net income                                   $  5,820   $  5,762   $  4,233   Adjustments to reconcile net income to net    cash from operating activities     Equity in undistributed earnings of      Subsidiary                                  (2,447)    (2,480)     8,465     Securities (gains) losses, net                  (60)       (82)        (7)     Change in other assets                           32        659       (553)     Change in other liabilities                      (3)         -        (10)       Net cash from operating activities          3,342      3,859     12,128  Cash flows from investing activities   Purchase of securities available for sale           -          -        (82)   Proceeds from sales of securities    available for sale                               143        675         65   Acquisition of Kentucky First Bancorp, Inc.         -          -    (20,998)     Net cash from investing activities              143        675    (21,015)  Cash flows from financing activities   Proceeds from subordinated debentures               -          -      7,000   Dividends paid                                 (2,462)    (2,303)    (2,117)   Proceeds from issuance of common stock             48        131        189   Purchase of common stock                         (629)    (3,424)       (11)     Net cash from financing activities           (3,043)    (5,596)     5,061  Net change in cash                                  442     (1,062)    (3,826)  Cash at beginning of year                           721      1,783      5,609  Cash at end of year                            $  1,163   $    721   $  1,783    NOTE 23 - QUARTERLY FINANCIAL DATA (UNAUDITED)                      Interest   Net Interest   Net         Earnings Per Share                      Income      Income      Income     Basic    Fully Diluted  2005   First quarter     $ 6,720     $ 4,221     $ 1,333     $ .50      $ .49   Second quarter      7,033       4,385       1,516       .56        .56   Third quarter       7,321       4,246       1,430       .54        .54   Fourth quarter      7,823       4,279       1,541       .57        .57  2004   First quarter     $ 6,267     $ 4,071     $ 1,150     $ .41      $ .41   Second quarter      6,463       4,267       1,439       .51        .51   Third quarter       6,506       4,252       1,579       .58        .57   Fourth quarter      6,610       4,189       1,594       .59        .58     Report of Independent Registered Public Accounting Firm   Board of Directors Kentucky Bancshares, Inc. Paris, Kentucky  We have audited the accompanying consolidated balance sheets of Kentucky Bancshares, Inc. as of December 31, 2005 and 2004, and the related statements of operations, stockholders' equity, and cash flows for each of the three years in the period ended December 31, 2005.  These financial statements are the responsibility of the Company's management.  Our responsibility is to express an opinion on these financial statements based on our audits.  We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.  In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of the Company as of December 31, 2005 and 2004, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 2005, in conformity with U.S. generally accepted accounting principles.                                            /s/Crowe Chizek and Company LLC        Crowe Chizek and Company LLC  Lexington, Kentucky January 27, 2006, except for Note 21 with respect to a pending acquisition, as to which the date is February 24, 2006     Senior Management Louis Prichard, President and Chief Executive Officer Brenda Bragonier, VP, Director of Marketing/Human Resources Hugh Crombie, VP, Director of Operations Gregory J. Dawson, VP, Chief Financial Officer Norman J. Fryman, Sr. VP, Director of Sales & Service Clark Nyberg, VP, Director of Wealth Management  Bourbon Nancye Fightmaster, VP, Regional Manager Wallis Brooks, Branch Manager/Community Reinvestment Act Rhonda Brown, Sr. Consumer Lender Brandon Eason, Sr. Consumer Lender Philip Hurst, Branch Manager Susan Lemons, AVP, Branch Manager/Consumer Lender  Clark Nick Carter, VP, Regional Manager Kathy Newkirk, Sr. Consumer Lender Teresa Shimfessel, AVP, Branch Manager/Consumer Lender Brandon Sumpter, Sr. Consumer Lender  Harrison Ken Devasher, VP, Regional Manager Dreama Harris, AVP, Sr. Consumer Lender Joyce Rainey, Consumer Lender  Jessamine Rick Walling, VP, Regional Manager  Scott Pam Jessie, VP, Regional Manager Sharon Whitlock, Branch Manager/Consumer Lender  Woodford Duncan Gardiner, VP, Regional Manager Shane Foley, VP, Mortgage Lender  Accounting/Risk Management Gregory J. Dawson, VP, Chief Financial Officer Heather Barger, VP, Director of Risk Management Brenda Berry, AVP, Senior Accountant Robbie Cox, Senior Auditor Janice Hash, AVP, Sr. Accountant/Purchasing Lydia Sosby, VP, Compliance  Collections Catherine Hill, VP, Head of Collections Mary Moreland, AVP, Collections Officer  Commercial Lending Darren Henry, VP, Director of Commercial Lending R. W. Collins, VP, Agricultural Lender David Foster, VP, Agricultural Lender A. J. Gullett, VP, Commercial Lender James LeMaster, Business Development Michael Lovell, VP, Commercial Lender George R. Wilder, VP, Commercial Lender  Human Resources Brenda Bragonier, VP, Director of Marketing/Human Resources James Gray, AVP, Director of Training Judith Taylor, VP, Human Resource Manager  Operations Hugh Crombie, VP, Director of Operations Karen Anderson, Electronic Banking Melinda Biddle, Goverment Reporting Patricia Carpenter, Data Management Cynthia Criswell, Data Processing Perry Ingram, AVP, Network Manager Jane Mogge, Document Management Donald Roe, AVP, Sr. Data Processing Arnita Willoughby, Mortgage Operations Manager Carolyn Wilkins, Overdraft Management Martha Woodford, VP, Assistant Director of Operations  Wealth Management Clark Nyberg, VP, Director of Wealth Management Lisa Highley, Personal Trust Janice Worth, AVP, Personal Trust    Kentucky Bank Board of Directors William M. Arvin, Attorney Proctor Blair, Partner, Ludwig, Blair and Bush, PLLC James Ferrell, Physician Henry Hinkle, President, Hinkle Contracting Corporation Tricia Kittinger, Woodford County Circuit Clerk Theodore Kuster, Westview-Hillside Farms Betty Long, Retired President, First Federal Savings of Cynthiana George Lusby, County Judge Executive Ted McClain, Agent, Hopewell Insurance Company Eva McDaniel, Jessamine County Clerk Louis Prichard, President, CEO, Kentucky Bank John Roche, Optician Robert G. Thompson, Farmer, Thoroughbred Breeder, Snowhill Farm Woodford Van Meter, Ophthalmologist Buckner Woodford, Chairman, Kentucky Bank  Bourbon Proctor Blair, Partner, Ludwig, Blair and Bush, PLLC Allyson Eads, Co-owner, Eads Hardware Rodes Shackelford Parrish, President, Clay Ward Agency  Clark Mary Beth Hendricks, Director Clark County Child Support Services Donald Pace, Executive Director Central Kentucky Educational Co-op with UK John Roche, Optician Edwin Saunier, President, Saunier North American, Inc.  Harrison K. Bruce Florence, Director, Licking Valley College Betty Long, Retired President, First Federal Savings of Cynthiana Brad Marshall, Farmer, Owner Marshall's Tractor Supply Joel Techau, CEO, Techau Inc. Gerry Whalen, Broker Whalen and Company  Jessamine William M. Arvin, Attorney Dan Brewer, President and CEO, Blue Grass Energy Tom Buford, State Senator Jonah Mitchell, President, Jonah Mitchell Real Estate and Auction Company Eva McDaniel, Jessamine County Clerk  Scott Gus Bynum, Physician Mike Hockensmith, Owner and President, The Hockensmith Agency, Inc. R. C. Johnson, Jr., Owner, President, Johnson's Funeral Home George Lusby, County Judge Executive Everette Varney, Mayor  Woodford Loren Carl, Field Representative, Congressman Ben Chandler William Graul, Physician James Kay, Businessman, Farmer Tricia Kittinger, Woodford County Circuit Clerk      Kentucky Bancshares, Inc. Directors LOUIS PRICHARD   President and CEO, Kentucky Bank and Kentucky Bancshares, Inc. BUCKNER WOODFORD   Chairman, Kentucky Bank and Kentucky Bancshares, Inc. WILLIAM M. ARVIN   Attorney, Law Offices of William Arvin WOODFORD VAN METER   Opthalmologist THEODORE KUSTER   Farmer and Thoroughbred Breeder, Westview Hillside Farms HENRY HINKLE   President, Hinkle Contacting Corporation ROBERT G. THOMPSON   Farmer and Thoroughbred Breeder, Snowhill Farm BETTY LONG   Retired President, First Federal Savings of Cynthiana TED McCLAIN   Agent, Hopewell Insurance Company   KENTUCKY BANCSHARES, INC.  PROXY STATEMENT  Introduction   This Proxy Statement is being furnished to shareholders of Kentucky Bancshares, Inc., a Kentucky corporation (the "Company"), in connection with the solicitation of proxies by the Board of Directors of the Company (the "Board") from holders of record of the Company's outstanding Common Shares (the "Common Shares") as of the close of business on March 17, 2006 (the "Annual Meeting Record Date"), for use at the Annual Meeting of Shareholders of the Company (the "Annual Meeting") to be held on Friday, May 12, 2006, at 11:00 a.m. (Eastern Daylight Time) in the Board Room of Kentucky Bank, Fourth and Main Streets, Paris, Kentucky, and at any adjournment or postponement thereof.  This Proxy Statement is first being mailed to the Company's shareholders on or about March 27, 2006.  The principal executive offices of the Company are located at Fourth and Main Streets, Paris, Kentucky 40361. Its telephone number is (859) 987-1795.  Purposes of the Annual Meeting   At the Annual Meeting, holders of Common Shares will be asked to consider and to vote upon the following matters:  (1) To elect three Class I directors; and (2) To transact such other business as may properly come before the meeting.   The Board recommends that shareholders vote FOR the election of the Board's nominees for Class I directors.  As of the date of this Proxy Statement, the Board knows of no other business to come before the Annual Meeting.  Voting Rights and Proxy Information   Only holders of record of Common Shares as of the close of business on the Annual Meeting Record Date will be entitled to notice of and to vote at the Annual Meeting or any adjournment or postponement thereof.  As of the Annual Meeting Record Date, there were 2,671,672 Common Shares outstanding and entitled to vote at the Annual Meeting.  The presence, either in person or by properly executed proxy, of the holders of a majority of the outstanding Common Shares as of the Annual Meeting Record Date is necessary to constitute a quorum at the Annual Meeting.  Holders of Common Shares are entitled to one vote per share on any matter, other than the election of directors, that may properly come before the Annual Meeting.  In the election of directors, holders of Common Shares have cumulative voting rights whereby each holder is entitled to vote the number of Common Shares owned multiplied by three (the number of directors to be elected at the Annual Meeting), and each holder may cast the whole number of votes for one candidate or distribute such votes among two or more candidates.  The Board of Directors is soliciting discretionary authority for the individuals appointed in the proxies to cumulate votes represented by properly executed proxies and to vote for less than all the Company's nominees to the Board if deemed appropriate to ensure the election of as many of the Company's nominees to the Board as possible.  Those persons receiving the three highest number of votes in the election of directors will be elected to the Board.   All Common Shares that are represented at the Annual Meeting by properly executed proxies received before or at the Annual Meeting and not revoked will be voted at the Annual Meeting in accordance with the instructions indicated in such proxies.  If no instructions are indicated, such proxies will be voted "FOR" the election of the Board's three nominees as Class I directors of the Company (or, if deemed appropriate by the individuals appointed in the proxies, cumulatively voted for less than all of the Board's nominees).   Any proxy given pursuant to this solicitation may be revoked by the person giving it at any time before it is voted.  Proxies may be revoked by (i) filing with the Company, to the attention of Gregory J. Dawson, Secretary, at or before the Annual Meeting, a written notice of revocation bearing a later date than the proxy, (ii) duly executing a subsequent proxy relating to the same Common Shares and delivering it to the Company at or before the Annual Meeting or (iii) attending the Annual Meeting and voting in person (although attendance at the Annual Meeting will not in and of itself constitute a revocation of a proxy).  Any written notice revoking a proxy should be sent to Kentucky Bancshares, Inc., P. O. Box 157, Paris, Kentucky 40362-0157, Attention Gregory J. Dawson, Secretary.   The Company will bear the cost of the solicitation of proxies by the Board in connection with the Annual Meeting.  In addition to solicitation by mail, the Company will request banks, brokers and other custodian nominees and fiduciaries to supply proxy material to the beneficial owners of Common Shares, and will reimburse them for their expenses in so doing.  Certain directors, officers and other employees of the Company, not specially employed for this purpose, may solicit proxies without additional remuneration therefore, by personal interview, mail, telephone, facsimile or other electronic means.