loi7 J3 2010 ANNUAL REPORT 1 e n t uc Bancshares. Inc Financial Highlights Assets ($ thousands) $ 658,943 $ 675,231 $ 678,775 $ 630,939 2010 2009 2008 2007 Net income Per Share: $ 4,939 $ 4,848 $ 3,713 $ 6,586 Earnings (assuming dilution) Dividend $ $ 1.81 $ 1.77 $ 1.33 .84 $ 0.80 $ 1.12 $ $ 2.30 1.08 Annual Meeting The annual meeting of Kentucky Bancshares, Inc. will be held Wednesday, May 18, 2011 at 11:00 in the corporate headquarters. Investor Inforniation Any individual requesting a copy of the Corporation's 2010 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 Inforniation Corporate Headquarters Kentucky Bancshares, Inc. 339 Main Street Paris, Kentucky 40361 859-987-1795 www.kybank.com Transfer, Registrar and Dividend Agent Registrar and Transfer Company 10 Commerce Drive Cranford, New Jersey 07016 800-368-5948 rtco.com Acquiring Stock Kentucky Bancshares, Inc. common stock is available through your broker or Kentucky Bank's Wealth Management Department. We are listed on the Over-The-Counter Bulletin Board, symbol KTYB.OB. Dear Shareholders: We are pleased to report for the year ended December 31,2010, eamings for your company were up 1.9% when compared to December 31, 2009. On a year to date basis, we eamed $4.9 million for the year ended December 31, 2010 as compared to $4.8 million for the same period in 2009. For the fourth quarter 2010, our eamings were $1.2 million compared to $1.4 million for the same period in 2009. Additionally, I am pleased to announce that our earnings per share for the year increased from $ 1.77 per share on a fully diluted basis, to $1.81 which is a 2.26% increase. Total assets at December 31,2010 were $658.9 million compared to $675.2 million for 2009, which represented a 2.4% decrease in total assets. The main contributor to the decline in assets was represented by a 3.2% decline in loans from $425.4 million at December 31, 2009, to $411.8 million at December 31, 2010. Deposits were virtually flat from the previous year as reflected by the $537.4 million total at December 31, 2010 versus the $536.4 million figure at December 31, 2009. Economically, 2010 was for the most part a continuation of 2009. Nationally as well as locally, unemployment continues to be a lingering and significant issue. Kentucky's unemployment rate hovers above 10% and is higher than the national unemployment rate of around 9%. The primary markets that we serve are reflective of this trend, but typically experience lower unemployment percentages than does Kentucky. The housing market continues to be a drag on our national and local economies, with high levels of unsold homes as well as a significant number of foreclosures to be resolved. Even though Kentucky and our markets are not as negatively impacted as others, in relative terms it is still having an impact on real estate values. Despite these conditions, there also seems to be some slight improvement in the overall economy. Businesses are investing in equipment and other resources that will increase efficiencies. The stock market has demonstrated some recent strength, which is historically an indicator of future economic growth. One major factor that could have some impact on the future of any recovery could be the price of oil. Many economists are predicting that if gasoline goes to $4.00 a gallon, we will experience another setback to any recovery. Another factor facing the banking industry is increased regulatory burdens. The recently passed Dodd-Frank Bill will certainly add increased burdens that will impact both the revenue and expense sides of our operations. Your management has been implementing strategies to deal with these circumstances. We implemented a strategy to improve our net interest margins, and in the latter part ofthe year we saw significant improvement in that area. We expect that to continue in 2011. We have been aggressively addressing credit issues and will continue to do so in 2011. We have begun to expand our abilities to provide electronic access to banking services to our customers and clients. Soon customers will be able to open accounts via the Intemet, and we intend to have "mobile banking" available by the third quarter o f 2 0 l l. Beyond that, we have placed major emphasis on moving market share in the communities where people have not been served, or are underserved by their current banks. We are continuing to focus on our abilities and commitment to deliver Premier Customer Service. We were pleased to be named in June 2010 as one ofthe Top 200 Community Banks in the nation, by US Banker magazine. Recently, we hired Jim Braden as the head of our Risk Management Department. He has had ten years of experience with the accounting firm Crowe-Horwath in providing banks with accounting and consulting advice. His addition adds even more depth to our Senior Management team. The financial year of 2010, as has been the case for the last several years, has been challenging to say the least. We will continue to do everything possible to meet those challenges so that we can accomplish what is in the long term best interest of our shareholders, customers, and employees. As always, we appreciate your support. fU ^^j? :[=] OR Code Kentuck}f Bank This square is a Quick Response or QR code. It is the printed equivalent of an o n h ne link. Instead of clicking on a link on the Internet, the code can be scanned by a smart p h o ne with a QR reader app. The phone reads the code and leads you to tne message. Our QR code takes you to a video of Mr. Prichard and his remarks on the progress of the bank. m> Kentucky Bank at a Glance Community Kentucky Bank serves nine communities in Kentucky with over 200 employees that are active throughout our markets. We also benefit from the guidance of our regional directors in each market. Through the involvement of both our employees and directors, we are able to identify and respond to the needs of the people we serve. In 2010 we contributed resources to hundreds of organizations, school programs, charities, and other community programs, but our support goes beyond just fmancial resources. Our employees are involved with schools as guest speakers, coaches, and volunteers at all levels. They serve as officers and directors of our local chambers of commerce, build homes with Habitat for Humanity, raise funds and organize activities for American Cancer Society - Relay for Life, assist Big Brothers Big Sisters of the Bluegrass with events, and are active in their local churches. A few of our larger contribution recipients include: Black Stallion Literacy Foundation, Bluegrass Tomorrow, Bluegrass Chapter American Red Cross, Center for Women in Racing, Commonwealth Fund for KET, Hopewell Museum, Harrison Memorial Hospital Building Fund, Junior Achievement, Kentucky Historical Society, Livestock Improvement Associations, MSU Foundation, Paris - Bourbon County YMCA, St. Claire Foundation, and United Way of the Bluegrass. We want to help build strong communities in all of our markets. Premier Customer Ser^dce The focus on providing Premier Customer Service has been an emphasis of Kentucky Bank's for some time. It is our primary goal each time we interact with a customer to provide Premier Customer Service. We have developed an employee program that recognizes those who provide service over and above expectation. Jan Worth, VP, Sr. Trust Officer, received the top award for Premier Customer Service in 2010. We appreciate the efforts and attention our employees give to our customers. Technology The business of banking is changing rapidly with new developments in technology, as is the way customers wish to have their services and information delivered to them. Remote deposit enables businesses to deposit checks electronically from their desktop scanner connected to a PC and the Internet. This allows checks received from customers to be scanned and electronically deposited anytime day or night. We have experienced a new interest from customers in receiving e-statements. In an effort to maximize our presence on the Internet, we have increased our Search Engine Optimization (SEO) for financial services in our markets. In 2011 we will be adding mobile banking to our delivery options. We have also joined Facebook. Visit our website and become a fan of Kentucky Bank's Facebook page by clicking the "Like" button! While we are embracing the possibilities of new technology, we realize there is no replacement for meeting our customers face to face. More than ever before we are committed to a stronger effort to call on and visit our clients. In these challenging financial times, personal discussions are essential in gaining understanding and providing service. Wealth Management Our Wealth Management Department grew in size and scope in 2010. In our Trust Department, assets under management increased and we expanded the department, adding additional personnel. We are now helping more clients with their investment portfolios and trust relationships. Our brokerage division is now called Investment Services at Kentucky Bank, a title that better reflects our community bank roots. In conjunction with this naine change, we began a new affiliation with Investment Professionals, Inc. to serve as our broker-dealer in this area. We are pleased to be able to offer these additional investment options. Officers Senior Management Louis Prichard, President and CEO James Braden, Sr. VP, Director of Risk Management Brenda Bragonier, Sr VP, Director of Marketing Gregory J. Dawson, Sr. VP, Chief Financial Officer Norman J. Fryman, Sr VP, Director of Sales & Service Clark Nyberg, Sr. VP, Director of Wealth Management Martha Woodford, Sr VP, Director of Operations Accounting Gregory J. Dawson, Sr VP, Chief Financial Officer Brenda Berry, AVP, Sr Accountant Brandon Gilliam, AVP, Controller Janice Hash, AVP, Sr. Accountant and Purchasing Commercial Lending Darren Henry, VP, Director of Commercial Lending Benjamin Caudill, VP, Commercial Lender Ken DeVasher, VP, Commercial Lender Shane Foley, VP, Commercial Lender John Hamilton, VP, Commercial Lender Credit Administration Norman J. Fryman, Sr VP, Director of Sales and Service Catherine Hill, VP, Collections Manager Shawn King, VP, Credit Manager, Sr. Credit Analyst Hmnan Resources Judith Taylor, VP, Human Resources Manager Marketing Brenda Bragonier, Sr VP, Director of Marketing Christopher J. LeMaster AVP, Director of Training Mortgage Lending Lisa R. Highley, VP, Director of Mortgage Lending Jeremy Brown, Mortgage Originator Linda Johnson, Mortgage Originator Operations Martha Woodford, Sr VP, Director of Operations Karen Anderson, AVP, Exception Item and Data Officer Melinda Biddle, AVP, Core Business Processing Officer Dixie Fite, Quality Control Officer Brandon Sumpter Sr Software Administrator Risk Management James Braden, Sr. VP, Director of Risk Management Sherry Griffith, AVP, BSA and Security Officer Lydia Sosby, VP, Compliance Officer Wealth Management Clark Nyberg, Sr. VP, Director of Wealth Management James Gray, Investment Adwsor Jan Worth, VP, Sr. Trust Officer Bourbon Coimty Nancye Fightmaster Market President Walhs Brooks, AVP, Branch Manager CRA Officer Rhonda Brown, AVP, Small Business, Mortgage Lender Benson Fryman, AVP, Small Business, Mortgage Lender Clark Coxmty Darryl Terry, Market President Kathy Newkirk, AVP, Small Business, Mortgage Lender Teresa Shimfessel, AVP, Branch Manager, Consumer Lender East Kentucky WiUiam Hough, Market President Tom James, Branch Manager, Consumer Lender Sherry Mathis, AVP, Branch Manager Consumer Lender Harrison Coimty Pam Slone, Market President Dreama Harris, AVP, Small Business, Mortgage Lender Jessamine County Brandon Eason, Market President Scott County Mark Sulski, Market President Woodford County Duncan Gardiner Market President Brenda Bragonier, Noiniaii J. Fnman, Maltha Woodford, Clark Nyberg. Louis Prichard, lamt'-s Bidden, and Gregory I. Dawson. Paris Georgettnvn Morchead Board of Directors WUliam M. Arvin Attorney Law Offices of William Miles Arvin B. Proctor Caudill, Jr. Special Projects Manager Kentucky Bank H e n ry Hinkle President Hinkle Contracting Corporation Betty J. Long Retired President First Federal Savings of Cynthiana T h e o d o re Kuster CEO Hillside F a r m / S h a w h an Place, LLC Ted McClain President Hopewell Insurance Company Louis Prichard President, CEO Kentucky Bank Kentucky Bancshares, Inc. R o b e rt G. T h o m p s on F a r m er T h o r o u g h b r ed Breeder Snowhill Farm Woodford Van Meter Professor of Ophthalmology University of Kentucky Edwin S. Saunier President Saunier North American, Inc. Buckner Woodford IV Chairman Kentucky Bank Kentucky Bancshares, Inc. REGIONAL D I R E C T O RS B O U R B ON Proctor W. Blair Partner Ludwig, Blair a nd Bush, PLLC Lonnie Conley Businessman Allyson Eads Co-owner Eads Hardware Rodes Shackelford Parrish, President T he Clay Ward Agency, LLC^ Bobby Shiflet Owner Frames on Main CLARK Mary Beth Hendricks Director Clark County Child Support Services Donald Pace Retired Executive Director Central Kentucky Educational Co-op with UK J o hn Roche J o hn G. Roche Optician, Inc. Edwin S. Saunier President Saunier North American, Inc. Kevin Welsh Alltech Maintenance/Facilities M a n a g er Winchester Site EAST KENTUCKY Representative Rocky Adkins Majority Floor Leader House of Representatives Trent Hamilton Owner Hamilton, Inc. G.R. (Sonny) J o n es VP, CFO St. Claire Regional Medical Center William H. Redwine AVP, Auxiliar)' Services M o r e h e ad State University M a d o n na Weathers VP, Student Life M o r e h e ad State University HARRISON K Bruce Florence Branch Campus Director Maysville Community a nd Technical College Licking Valley Campus a nd Kiser Center A nn Getting Plant Manager 3M Betty J. Long Retired President First Federal Savings of Cynthiana Brad Marshall Farmer, Former Owner Marshall's Tractor Supply Joel Techau CEO Techau, Inc. Gerry Whalen Appraiser, Broker Whalen a nd Company JESSAMINE William M. Arvin Attorney Law Offices of William Miles Arvin Michael R. Bishop Michael R Bishop, DMD, a nd Associates, PSC Tom Buford Kentucky State Senator J o n ah Mitchell President J o n ah Mitchell Real Estate a nd Auction Eva McDaniel Jessamine County Clerk S C O TT Dr Gus Bynum Physician Mike Hockensmith Owner a nd President T he Hockensmith Agency, Inc. George Lusby Scott County J u d ge Executive Katy Prather Realtor Keller Williams Bluegrass Realt)' Everette Varney Mayor of Georgetown W O O D F O RD J a m es Kay Businessman, Farmer Tricia N. Kittinger Circuit Clerk Woodford County Carolyn McDonald Realtor Rector Havden Realtors Office Locations BOURBON COUNTY Bourbon Banking Center 401 Main Street Paris, KY 40361 Lexington Road Office 2021 S. Main Street Paris, KY 40361 CLARK COUNTY Colby Road Office 1975 Bypass Road Winchester KY 40391 Winchester Main Office 24 W. Lexington Avenue Winchester KY 40391 ELLIOTT COUNTY Sandy Hook Office Main and Jane Streets Sandy Hook, KY 41171 HARRISON COUNTY Cynthiana US 27 Office 939 US Hwy. 27 South Cynthiana, KY 41031 859-987-1795 859-987-1795 859-744-3825 859-744-1632 606-738-5163 859-234-3363 JESSAMINE COUNTY Nicholasville Office 920 N. Main Street Nicholasville, KY 40356 Wilmore Office 108 E. Main Street Wilmore, KY 40390 ROWAN COUNTY Morehead Downtown Office 400 W. First Street Morehead, KY 40351 Flemingsburg Road Office 1500 Flemingsburg Road Morehead, KY 40351 SCOTT COUNTY Cherry Blossom Office 260 Blossom Park Drive Georgetown, KY 40324 Showalter Office 103 WShowalter Drive Georgetown, KY 40324 WOODFORD COUNTY Versailles Office 520 Marsailles Road Versailles, KY 40383 859-885-6028 859-858-3993 606-780-0535 606-784-6973 502-863-5522 502-863-9400 859-873-9400 KENTUCKY BANCSHARES, INC. P.O. BOX 157 PARIS, KY 40362-0157 WWW.KYBANK.COM 800-467-1939 Paris Image - Courtesy Bobby Shiflet, Photographer