Forward-Looking Statements

This discussion contains forward-looking statements under the Private Securities Litigation Reform Act of 1995 that involve risks and uncertainties. These statements are not historical facts, but rather statements based on our current expectations regarding our business strategies and their intended results and our future performance. Forward-looking statements are preceded by terms such as "expects," "believes," "anticipates," "intends" and similar expressions.

Although we believe 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 and the thoroughbred horse industry, in which we and our bank operate); competition for our subsidiary'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 we have 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 our subsidiary's customers; adequacy of the allowance for losses on loans and the level of future provisions for losses on loans; and other risks detailed in our filings with the Securities and Exchange Commission, all of which are difficult to predict and many of which are beyond our control.

You are cautioned not to place undue reliance on any forward-looking statements made by us or on our behalf. We undertake 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.

Summary

The Company recorded net income of $1.6 million, or $0.60 basic earnings and diluted earnings per share for the first three months ending March 31, 2012 compared to $1.3 million or $0.46 basic earnings and diluted earnings per share for the three month period ending March 31, 2011. The first three months earnings reflect an increase of 28.2% compared to the same time period in 2011. Multiple positive trends in income contributed to this including an increase of $330 thousand in the gains on sold loans, and increase of $157 thousand in the gains on sold securities, an increase in net interest income of $290 thousand and a decrease in the loss provision of $300 thousand. These positive changes to net income during 2012 were partially offset by an increase of $778 thousand in non-interest expenses. Of this, $365 thousand was due to an increase in salaries and benefits expense, $250 thousand was due to an increase in repossession expenses and $122 thousand was related to other multiple smaller expenses.

Return on average assets was 0.96% for the three months ending March 31, 2012 and 0.76% for the three month period ending March 31, 2011. Return on average equity was 9.2% for the three month period ended March 31, 2012 and 8.2% for the same period in 2011. Gross loans increased $600 thousand from $411.9 million on December 31, 2011 to $412.5 million on March 31, 2012. The overall increase is attributed mostly to an increase of $4.7 million in 1-4 family residential loan balances and an increase of $1.2 million in commercial loan balances. The aforementioned increases were partially offset by a decrease of $2.9 million in real estate construction loan balances and a decrease of $2.2 million in non-farm & non-residential property loan balances.

Total deposits increased from $542.9 million on December 31, 2011 to $562.9 million on March 31, 2012, an increase of $20.0 million. The overall increase is partly attributed to an increase of $5.7 million in public fund deposits from December 31, 2011 to March 31, 2012. Non-interest bearing demand deposit accounts increased $7.3 million from December 31, 2011 to March 31, 2012. This increase is not all attributed to additional deposits being placed with the bank; part of the increase resulted from time deposits moving to non-interest bearing demand deposit accounts. Time deposits $100 thousand and over increased $1.6 million and other interest bearing deposit accounts increased $10.9 million.

Net Interest Income

Net interest income is the difference between interest income earned on interest-earning assets and the interest expense paid on interest-bearing liabilities.

Net interest income was $6.1 million for the three months ended March 31, 2012 compared to $5.8 million for the three months ended March 31, 2011, an increase of 4.98%. The interest spread of 3.95% for the first three months of 2012 is up from 3.85% reported for the same period in 2011, an increase of 10 basis points. Rates have remained fairly low in the past year. The slight increase in the net interest spread is largely attributed to a decrease of 39 basis points in the cost of deposit accounts. For the first three months ending March 31, 2012, the cost of total deposits was 0.49% compared to 0.88% for the same time period in 2011. Increasing non-interest bearing deposit accounts has also helped to lower the cost of deposits.

For the first three months, the yield on assets decreased from 4.96% in 2011 to 4.66% in 2012. The year to date average balance of federal funds sold decreased $10.7 million for the first three months in 2012 compared to 2011 and the year to date average of cash and due from banks increased $15.3 million in 2012 compared to 2011. The yield on loans decreased 4 basis points in the first three months of 2012 compared to 2011 from 5.76% to 5.72%. The cost of liabilities decreased from 1.11% in 2011 to 0.71% in 2012. Year to date average loans increased $1.1 million, or 0.3% from March 31, 2011 to March 31, 2012. Loan interest income has increased $44 thousand for the first three months of 2012 compared to the first three months of 2011. Year to date average deposits increased from March 31, 2011 to March 31, 2012, up $8.7 million or 1.5%. Year to date average interest bearing deposits decreased $7.3 million, or 1.7%, from March 31, 2011 to March 31, 2012. Deposit interest expense has decreased $507 thousand for the first three months of 2012 compared to the same period in 2011. Year to date average borrowings decreased $11.1 million, or 21.2% from March 31, 2011 to March 31, 2012. The decrease is mostly attributed to paying off Federal Home Loan Bank advances at maturity and not replacing them. Interest expense on borrowed funds has decreased $79 thousand for the first three months of 2012 compared to the same period in 2011.

The volume rate analysis for 2012 that follows indicates that $132 thousand of the decrease in interest income is attributable to the decrease in volume, while the change in rates contributed to a decrease of $164 thousand in interest income. Even more affected by volume and rate changes was the liability side of the balance sheet. The average rate of the Company's total outstanding deposits and borrowing liabilities decreased from 1.11% in 2011 to 0.71% in 2012. Based on the volume rate analysis that follows, the lower level of interest rates contributed to a decrease of $412 thousand in interest expense, while the change in volume was responsible for a $174 thousand decrease in interest expense. As a result, the increase in the 2012 net interest income is mostly attributed to decreases in rates on deposits.

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 2012. Changes in interest income and expenses due to both rate and volume are allocated on a pro rata basis.

Changes in Interest Income and Expense



                                                                 2012 vs. 2011
                                                     Increase (Decrease) Due to  Change in
(in thousands)                                     Volume            Rate           Net Change

INTEREST INCOME
Loans                                           $         16     $          28     $          44
Investment Securities                                    (28 )            (314 )            (342 )
Other                                                   (120 )             122                 2
Total Interest Income                                   (132 )            (164 )            (296 )
INTEREST EXPENSE
Deposits
Demand                                                   156              (269 )            (113 )
Savings                                                    9               (12 )              (3 )
Negotiable Certificates of
Deposit and Other
Time Deposits                                           (108 )            (283 )            (391 )
Securities sold under agreements to
repurchase and other borrowings                          (25 )              22                (3 )
Federal Home Loan
Bank advances                                           (206 )             130               (76 )
Total Interest Expense                                  (174 )            (412 )            (586 )
Net Interest Income                             $         42     $         248     $         290

Non-Interest Income

Non-interest income increased $669 thousand for the three months ended March 31, 2012 compared to the same period in 2011 to $2.5 million. The increase was due primarily to an increase of $157 thousand in gains recognized on sold securities and an increase of $330 thousand in gains on sold loans.

The gain on the sale of mortgage loans increased from $148 thousand in the first three months of 2011 to $478 thousand during the first three months of 2012, an increase of $330 thousand. The volume of loans originated to sell during the first three months of 2012 increased $10.2 million compared to the same time period in 2011. The volume of mortgage loan originations and sales is generally inverse to rate changes. A change in the mortgage loan rate environment can have a significant impact on the related gain on sale of mortgage loans. Loan service fee income, net of mortgage servicing right amortization expense, was $87 thousand for the three months ending March 31, 2012 compared to $44 thousand for the three months ending March 31, 2011, an increase of $43 thousand. During the first three months of 2012, the carrying value of the mortgage servicing right was written up a net amount of $63 thousand, as the fair value of this asset recovered.

Non-Interest Expense

Total non-interest expenses increased $778 thousand for the three month period ended March 31, 2012 compared to the same period in 2011.

For the comparable three month periods, salaries and benefits increased $365 thousand, an increase of 13.4%. The increase is attributed largely to additional employees being hired throughout 2011 and 2012. The number of full time equivalent employees at March 31, 2012 was 199 compared to 189 one year ago. In addition, during the first three months of 2012, $300 thousand has been accrued for incentives compared to $150 thousand for the first three months of 2011, an increase of $150 thousand.

Occupancy expenses decreased $46 thousand to $709 thousand for the first three months of 2012 compared to the same time period in 2011. The decrease in year to date occupancy expense during 2012 is mostly the result of a decrease of $30 thousand in building repairs and maintenance and a decrease of $11 thousand in depreciation expense.

Legal and professional fees increased $30 thousand for the first three months ended March 31, 2012 compared to the same time period in 2011. The increase in year to date legal and professional fees is largely attributable to additional collection efforts for problem loans. Repossession expenses increased $250 thousand for the first three months ending March 31, 2012 compared to the same time period in 2011. Repossession expenses are reported net of income earned on the repossessed properties. Repossession expenses were higher during the first three months of 2012 when compared to the same time period in 2011 due to acquiring and maintaining additional foreclosed properties. In addition, the rents earned on other real estate properties, including new property added, decreased $70 thousand to $83 thousand for the three months ending March 31, 2012 compared to the same period last year. Data processing increased $98 thousand for the three months ended March 31, 2012 compared to the same time period in 2011 primarily due to outsourcing certain functions which were performed internally during the first three months of 2011. FDIC insurance expense decreased $88 thousand for the three months ending March 31, 2012 compared to the same time period in 2011. The decrease is mostly attributed to a change in the calculation the FDIC uses to assess insurance premiums.

Income Taxes

The effective tax rate for the three months ended March 31, 2012 was 16.9% compared to 14.0% in 2011. These rates are less than the statutory rate as a result of the tax-free securities and loans and tax credits generated by certain investments held by the Company. The rates for 2012 are higher due to the higher level of income for 2012. Tax-exempt interest income decreased $21 thousand for the first three months of 2012 compared to the first three months of 2011.

As part of normal business, Kentucky Bank typically makes tax free loans to select municipalities in our market and invests in selected tax free securities, primarily in the Commonwealth of Kentucky. In making these investments, the Company considers the overall impact to managing our net interest margin, credit worthiness of the underlying issuer and the favorable impact on our tax position. For the three months ended March 31, 2012, the Company averaged $80.9 million in tax free securities and $13.9 million in tax free loans. As of March 31, 2012, the weighted average remaining maturity for the tax free securities is 97 months, while the weighted average remaining maturity for the tax free loans is 170 months.

Liquidity and Funding

Liquidity is the ability to meet current and future financial obligations. The Company's primary sources of funds consist of deposit inflows, loan repayments, maturities and sales of investment securities and FHLB borrowings.

Liquidity risk is the possibility that we may not be able to meet our cash requirements. Management of liquidity risk includes maintenance of adequate cash and sources of cash to fund operations and to meet the needs of borrowers, depositors and creditors. Excess liquidity has a negative impact on earnings as a result of the lower yields on short-term assets.

Cash and cash equivalents were $24.7 million as of March 31, 2012 compared to $17.7 million at December 31, 2011. The increase in cash and cash equivalents is mainly attributable to an increase of $7.2 in cash and due from banks resulting primarily from an increase in short term deposits. In addition to cash and cash equivalents, the securities portfolio provides an important source of liquidity. Securities available for sale totaled $190.2 million at March 31, 2012 compared to $180.4 million at December 31, 2011. The available for sale securities are available to meet liquidity needs on a continuing basis. However, we expect our customers' deposits to be adequate to meet our funding demands.

Generally, we rely upon net cash inflows from financing activities, supplemented by net cash inflows from operating activities, to provide cash used in our 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. Our primary investing activities include purchasing investment securities and loan originations.

For the first three months of 2012, deposits have increased $19.9 million, partly due to an increase of $5.7 million in public fund deposit balances. The Company's investment portfolio has increased $9.7 million and the Company's loan portfolio has increased $0.6 million. In addition, the Company has paid down FHLB advances by $1.6 million during the first three months of 2012.

The Company has a promissory note payable that matures July 30, 2012, and has principal due at maturity and interest payable quarterly at prime, and is secured by 100% of the common stock of the Bank. The loan agreement contains certain covenants and performance terms. The Bank was in compliance with its debt covenants at March 31, 2012.

Management is aware of the challenge of funding sustained loan growth. Therefore, in addition to deposits, other sources of funds, such as Federal Home Loan Bank (FHLB) advances, may be used. We rely 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. As of March 31, 2012, we have sufficient collateral to borrow an additional $59 million from the Federal Home Loan Bank. In addition, as of March, 2012, $24 million is available in overnight borrowing through various correspondent banks and the Company has access to $237 million in brokered deposits. In light of this, management believes there is sufficient liquidity to meet all reasonable borrower, depositor and creditor needs in the present economic environment.

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 March 31, 2012 and December 31, 2011, 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 Thousands)
March 31, 2012
Consolidated

Total Capital (to Risk-Weighted
Assets)                           $ 65,134     14.1 % $    36,996         8 % $       N/A       N/A
Tier I Capital (to
Risk-Weighted Assets)               59,335     12.8        18,498         4           N/A       N/A
Tier I Capital (to Average
Assets)                             59,335      9.0        26,378         4           N/A       N/A

Bank Only
Total Capital (to Risk-Weighted
Assets)                           $ 65,902     14.3 % $    37,003         8 % $    46,253        10 %
Tier I Capital (to
Risk-Weighted Assets)               60,101     13.0        18,501         4        27,752         6
Tier I Capital (to Average
Assets)                             60,101      9.1        26,369         4        32,961         5

December 31, 2011
Consolidated
Total Capital (to Risk-Weighted
Assets)                           $ 64,279     14.0 % $    36,718         8 %         N/A       N/A
Tier I Capital (to
Risk-Weighted Assets)               58,525     12.8        18,359         4           N/A       N/A
Tier I Capital (to Average
Assets)                             58,525      9.2        25,405         4           N/A       N/A

Bank Only
Total Capital (to Risk-Weighted
Assets)                           $ 65,229     14.2 % $    36,705         8 % $    45,882        10 %
Tier I Capital (to
Risk-Weighted Assets)               59,476     13.0        18,353         4        27,529         6
Tier I Capital (to Average
Assets)                             59,476      9.4        25,405         4        31,756         5

Non-Performing Assets

As of March 31, 2012, our non-performing assets totaled $15.8 million or 2.34% of assets compared to $15.8 million or 2.40% of assets at December 31, 2011 (See table below.) The Company experienced a decrease of $1.3 million in non-accrual loans from December 31, 2011 to March 31, 2012, primarily due to $1.4 million moving to other real estate. As of March 31, 2012, non-accrual loans include $73 thousand in loans secured by real estate construction, $406 thousand in loans secured by farmland, $3.0 million in loans secured by 1-4 family residential properties and $876 thousand in loans secured by non-farm & non-residential real estate. Real estate loans composed 98.0 % of the non-performing loans as of March 31, 2012 and 99.3% as of December 31, 2011. Forgone interest income on non-accrual loans totaled $53 thousand for the first three months of 2012 compared to forgone interest of $54 thousand for the same time period in 2011. Accruing loans that are contractually 90 days or more past due as of March 31, 2012 totaled $637 thousand compared to $398 thousand at December 31, 2011, an increase of $239 thousand. The total nonperforming loans decreased $1.1 million from December 31, 2011 to March 31, 2012, resulting in a decrease in the ratio of nonperforming loans to loans of 27 basis points to 1.56%. In addition, the amount the Company has booked as "Other Real Estate" has increased $1.1 million from December 31, 2011 to March 31, 2012. As of March 31, 2012, the amount recorded as "Other Real Estate" totaled $9.4 million compared to $8.3 million at December 31, 2011. The overall increase is largely attributed to one loan customer. One property which was recorded into other real estate during 2012 has a carrying value of $478 thousand and is classified as non-farm and non-residential. The allowance as a percentage of non-performing and restructured loans and Other Real Estate Owned increased from 37% at December 31, 2011 to 38% at March 31, 2012.

Nonperforming Assets



                                                          3/31/12         12/31/11
                                                               (in thousands)
Non-accrual Loans                                       $      4,711    $      6,017
Accruing Loans which are Contractually past due 90
days or more                                                     637             398
Troubled Debt Restructurings                                   1,101           1,104
Total Nonperforming Loans                                      6,449           7,519
Other Real Estate                                              9,397           8,296
Total Nonperforming Loans and Other Real Estate         $     15,846    $     15,815
Nonperforming Loans as a Percentage of Loans                    1.56 %          1.83 %
Nonperforming Loans and Other Real Estate as a
Percentage of Total Assets                                      2.34 %          2.40 %
Allowance as a Percentage of Period-end Loans                   1.45 %          1.42 %
Allowance as a Percentage of Non-performing and
Restructured Loans                                                93 %            78 %
Allowance as a Percentage of Non-performing Loans
and Other Real Estate                                             38 %            37 %

We maintain a "watch list" of agricultural, commercial, real estate mortgage, and real estate construction loans and review those loans on a regular basis. Generally, assets are designated as "watch list" loans to ensure more frequent monitoring. If we determine that there is serious doubt as to performance in accordance with original terms of the contract, then the loan is generally downgraded and often placed on non-accrual status. We review and evaluate nonaccrual loans, past due loans, and loans graded substandard or worse on a regular basis to determine if specific allocations are needed.

Provision for Loan Losses

The loan loss provision for the first three months was $450 thousand for 2012 and $750 thousand for 2011. Management evaluates the loan portfolio by reviewing the historical loss rate for each respective loan type and assigns risk multiples to certain categories to account for qualitative factors including current economic conditions. The average loss rates are reviewed for trends in the analysis, as well as comparisons to peer group loss rates. Management makes allocations within the allowance for loan losses for specifically classified loans regardless of loan amount, collateral or loan type. Loan categories are evaluated utilizing subjective factors in addition to the historical loss calculations to determine a loss allocation for each of those types. As this analysis, or any similar analysis, is an imprecise measure of loss, the allowance is subject to ongoing adjustments. Therefore, management . . .