BOURBON BANCSHARES INC /KY/ - 10-K Annual Report

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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K

(Mark One)
[ X ] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934 [Fee Required]
For the fiscal year ended December 31, 1997
or
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934 [No Fee Required]
For the transition period from ____________________ to
___________________

Commission File Number: 33-96358

BOURBON BANCSHARES, INC.
(Exact name of registrant as specified in its charter)

Kentucky 61-0993464
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)

P.O. Box 157, Paris, Kentucky 40362-0157
(Address of principal executive offices) (Zip Code)

Registrant's telephone number, including area code:
(606)987-1795

Securities registered pursuant to Section 12(b) of the Act:
None

Securities registered pursuant to Section 12(g) of the Act:
None

Indicate by check mark whether the registrant (1) has filed
all reports required to be filed by Section 13 or 15(d) of
the Securities Exchange Act of 1934 during the preceding 12
months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days. Yes
X No _____

Indicate by check mark if disclosure of delinquent filers
pursuant to Item 405 of Regulation S-K is not contained
herein, and will not be contained, to the best of
registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this
Form 10-K or any amendment to this Form 10-K. [ X ]

Aggregate market value of voting stock held by non-
affiliates as of March 10, 1998 was approximately $45.7
million. For purposes of this calculation, it is assumed
that directors, officers and beneficial owners of more than
5% of the registrant's outstanding voting stock are
affiliates.

The Registrant's revenues for the year ended December 31,
1997 were $23.4 million.

Number of shares of Common Stock outstanding as of March 10,
1998: 1,395,562.

PART I

Item 1. Business

General

Bourbon Bancshares, Inc. ("Company" or "Bourbon") is a
Kentucky corporation organized in 1981 and a bank and
savings and loan holding company registered under the Bank
Holding Company Act of 1956, as amended ("BHCA") and the
Home Owners Loan Act of 1933, as amended ("HOLA").

The Company conducts business through one banking
subsidiary, Kentucky Bank. Kentucky Bank is a commercial
bank and trust company organized under the laws of Kentucky.
Kentucky Bank has its main office in Paris (Bourbon County),
Kentucky, additional offices in Paris, North Middletown
(Bourbon County), Winchester (Clark County), Georgetown
(Scott County), Versailles (Woodford County), Nicholasville
(Jessamine County), Kentucky and a loan production office in
Cynthiana (Harrison County), Kentucky. The deposits of
Kentucky Bank are insured up to prescribed limits by the
Bank Insurance Fund ("BIF") of the Federal Deposit Insurance
Corporation ("FDIC"). Kentucky Bank is engaged in general
full-service commercial and consumer banking. Kentucky Bank
makes commercial, agricultural and real estate loans to its
commercial customers, with emphasis on small-to-medium-sized
industrial, service and agricultural businesses. Kentucky
Bank makes residential mortgage, installment and other loans
to its individual and other non-commercial customers.
Kentucky Bank also offers its customers the opportunity to
obtain a VISA or MasterCard credit card. Kentucky Bank
offers its customers a variety of other services, including
checking, savings, club and money market accounts,
certificates of deposits, safe deposit facilities and other
consumer-oriented financial services. Through its trust
department, Kentucky Bank provides primarily personal trust
and agency services (including management agency services)
and, to a lesser extent, corporate trust services (including
the management of corporate pension and profits sharing
plans).

Competition

The Company and its subsidiary face vigorous competition
from a number of sources, including other bank holding
companies and commercial banks, consumer finance companies,
thrift institutions, other financial institutions and
financial intermediaries. In addition to commercial banks,
savings and loan associations, savings banks and credit
unions actively compete to provide a wide variety of banking
services. Mortgage banking firms, finance companies,
insurance companies, brokerage companies, financial
affiliates of industrial companies and government agencies
provide additional competition for loans and for many other
financial services. The subsidiary also currently competes
for interest-bearing funds with a number of other financial
intermediaries, including brokerage firms and mutual funds,
which offer a diverse range of investment alternatives.

Supervision and Regulation

As a bank holding company, the Company is subject to the
regulation and supervision of the Federal Reserve Board.
The Company's subsidiary is subject to supervision and
regulation by applicable state and federal banking agencies,
including the Federal Reserve Board, the Federal Deposit
Insurance Corporation and the Kentucky Department of
Financial Institutions. The subsidiary is also subject to
various requirements and restrictions under federal and
state law, including requirements to maintain reserves
against deposits, restrictions on the types and amounts of
loans that may be granted and the interest that may be
charged thereon, and limitations on the types of investments
that may be made and the types of services that may be
offered. Various consumer laws and regulations also affect
the operations of the subsidiary. In addition to the impact
of regulation, the subsidiary is affected significantly by
the actions of the Federal Reserve Board as it attempts to
control the money supply and credit availability in order to
influence the economy.

There are a number of obligations and restrictions imposed
on bank holding companies and their depository institution
subsidiaries by federal law and regulatory policy that are
designed to reduce potential loss exposure to the depositors
of such depository institutions and to the FDIC insurance
funds in the event the depository institution becomes in
danger of default or is in default. For example, under a
policy of the Federal Reserve Board with respect to bank
holding company operations, a bank holding company is
required to serve as a source of financial strength to its
subsidiary depository institutions and commit resources to
support such institutions in circumstances where it might
not do so absent such policy. In addition, the "cross-
guarantee" provisions of federal law require insured
depository institutions under common control to reimburse
the FDIC for any loss suffered or reasonably anticipated as
a result of the default of a commonly controlled insured
depository institution or for any assistance provided by the
FDIC to a commonly controlled insured depository institution
in danger of default.

The federal banking agencies have broad powers under current
federal law to take prompt corrective action to resolve
problems of insured depository institutions. The extent of
these powers depends upon whether the institutions in
question are "well capitalized", "adequately capitalized",
"undercapitalized", "significantly undercapitalized" or
"critically undercapitalized", as such terms are defined
under uniform regulation defining such capital levels issued
by each of the federal banking agencies.

There are various legal and regulatory limits on the extent
to which the Company's subsidiary bank may pay dividends or
otherwise supply funds to the Company. In addition, federal
and state regulatory agencies also have the authority to
prevent a bank or bank holding company from paying a
dividend or engaging in any other activity that, in the
opinion of the agency, would constitute an unsafe or unsound
practice.

There have been a number of legislative and regulatory
proposals that would have an impact on the operation of bank
holding companies and their banks. It is impossible to
predict whether or in what form these proposals may be
adopted in the future and, if adopted, what their effect
will be on the Company.

Business Segments

The FASB has issued SFAS No. 131, "Disclosures about
Segments of an Enterprise and Related Information", which
requires segmenting assets, profit and loss and certain
specific revenue and expense items. The Company has
determined there are currently no reportable segments.

At December 31, 1997, the number of full time equivalent
employees of the Company was 141.

Item 2. Properties

As of December 31, 1997 the Company owned properties in
Bourbon, Clark, Harrison, Jessamine and Woodford Counties
with over 56 thousand square feet and leased offices with
over 2 thousand square feet with rental payments in 1997
totaling nearly $14 thousand. Plans for construction of a
new facility in Scott County are in progress and the new
facility is expected to open for service in the third
quarter of 1998. The new Company-owned bank will have about 3 thousand
square feet. There are no known environmental problems
affecting Company owned or leased property.

Item 3. Legal Proceedings

The Company and its subsidiary are from time to time
involved in routine legal proceedings occurring in the
ordinary course of business that, in the aggregate,
management believes will not have a material impact on
the Company's financial condition and results of operation.

Item 4. Submission of Matters to a Vote of Security Holders

Not Applicable.

PART II

Item 5. Market for Common Equity and Related Stockholder
Matters

The Company's Common Stock is not listed on any national
securities exchange nor is it quoted on the NASDAQ system.
However, it is listed on the OTC Bulletin Board under the
symbol "BBON". Trading in the Common Stock has been
infrequent, with two regional retail brokerage firms making
the market. The following table sets forth the high and low
sales prices of the Common Stock and the dividends declared
thereon, for the periods indicated below:

High Low Dividend

1997 Quarter 1 27.00 24.50 $.18
Quarter 2 30.00 26.00 $.18
Quarter 3 30.50 27.00 $.18
Quarter 4 31.00 28.00 $.18

1996 Quarter 1 27.00 24.00 $.16
Quarter 2 25.00 24.00 $.16
Quarter 3 25.00 24.75 $.16
Quarter 4 25.00 24.00 $.16

As of December 31, 1997 the Company had 1,394,562 shares of
Common Stock outstanding and approximately 429 holders of
record of its Common Stock.

During 1997, 6,080 shares of unregistered stock were issued
to employees and directors. This stock was issued through
the exercise of stock options. In accordance with Rule 701
promulgated under the Securities Act of 1933, all shares of
Common Stock were issued upon the exercise of stock options
issued prior to the Company becoming subject to the
reporting requirements of Section 13 or 15(d) of the
Securities Exchange Act of 1934. The following shares were
issued during 1997:

Aggregate
Date Issued Shares Consideration

February 26, 1997 3,600 $28,188
March 26, 1997 20 240
June 13, 1997 20 240
September 12, 1997 400 4,800
September 15, 1997 20 240
November 6, 1997 2,000 17,000
December 15, 1997 20 240

Item 6. Selected Financial Data

The following selected financial data should be read in
conjunction with the Company's Consolidated Financial
Statements and the accompanying notes presented elsewhere
herein.

At or For the Year Ended December 31
1997 1996 1995 1994 1993
(dollars in thousands, except per share amounts)
CONDENSED STATEMENT OF CONDITION:
Total Interest Income 20,962 19,425 19,658 15,657 14,233
Total Interest Expense 10,415 9,839 10,426 7,746 6,578
Net Interest Income 10,547 9,586 9,232 7,911 7,655
Provision of Losses 493 402 396 145 419
Net Interest Income After
Provision for Losses 10,054 9,184 8,836 7,766 7,236
Noninterest Income 2,390 2,284 2,053 992 1,612
Noninterest Expense 7,888 7,715 7,684 6,067 5,380
Income Before Income
Tax Expense 4,556 3,753 3,205 2,691 3,468
Income Tax Expense 1,148 866 717 488 832
Net Income 3,408 2,887 2,488 2,203 2,636

SHARE DATA:
Net Income-Earnings per Share 2.44 2.03 1.74 1.54 1.86
Net Income Earnings per Share
assuming dilution 2.40 1.52 1.82 2.00 1.71
Cash Dividends Declared 0.72 0.64 0.60 0.54 0.50
Book Value 19.16 17.44 16.16 14.00 14.17
Average Shares and Share
Equivalents Outstanding 1,422 1,443 1,474 1,454 1,451

SELECTED BALANCE SHEET DATA:
Loans, net including held
sale 182,839 157,564 153,201 145,817 114,701
Investment Securiies 81,703 92,540 92,639 99,345 92,655
Total Assets 290,655 272,453 269,431 274,497 220,321
Deposits 241,325 231,071 213,348 223,810 175,870
Long-Term Debt 10,986 11,284 20,421 23,056 18,978
Shareholders' Equity 26,716 24,633 23,167 19,955 20,044

PERFORMANCE RATIOS:
(Average Balances)
Return on Assets 1.23% 1.10% 0.94% 0.95% 0.93%
Return on Shareholders'
Equity 13.43% 12.17% 11.36% 10.61% 14.37%
Net Interest Margin 4.18% 4.02% 3.80% 3.76% 4.13%
Equity to Assets Ratio
(at period end) 9.19% 9.04% 8.60% 7.27% 9.10%

SELECTED STATISTICAL DATA:
Dividend Payout Ratio 29.49% 31.57% 32.93% 31.25% 23.45%
Number of Employees
(at period end) 141 137 125 128 94

ALLOWANCE COVERAGE RATIOS:
Allowance to Total Loans 1.25% 1.32% 1.20% 1.12% 1.19%
Allowance to Non-Accruing
Loans 1342.20% 6366.67% 4227.27% 1938.82% 443.75%
Allowance to Non-Performing
Loans 710.09% 353.11% 385.89% 447.83% 230.52%

Item 7. Management's Discussion and Analysis

The following discussion and analysis of financial condition
and results of operations should be read in conjunction with
the Consolidated Financial Statements and accompanying notes
included as Exhibit 13. When necessary, reclassifications
have been made to prior years' data throughout the following
discussion and analysis for purposes of comparability with
1997 data.

Summary

Bourbon Bancshares, Inc. net income for the year ended
December 31, 1997 was $3.4 million, or $2.44 per common
share compared to $2.9 million, or $2.03 for 1996 and $2.5
million, or $1.74 for 1995. Earnings per share assuming
dilution were $2.40, $2.00 and $1.71 for 1997, 1996 and
1995, respectively. Net income increasing over $520
thousand (over 18%) is mainly attributable to increased net
interest income and other income, offset by an increase in
the loan loss provision, while maintaining other expenses to
below modest increases. The 16% increase in 1996 net income
compared to 1995 reflects increased net interest income and
increased other income while holding the loan loss provision
and other expenses to modest increases.

Return on average equity was 13.4% in 1997 compared to 12.2%
in 1996 and 11.4% in 1995. Return on average assets was
1.23% in 1997 compared to 1.10% in 1996 and 0.94% in 1995.

Non-performing loans as of a percentage of net loans were
0.18%, 0.43% and 0.31% as of December 31, 1997, 1996 and
1995, respectively. The ratio of allowance to non-
performing loans was 710% in 1997 compared to 353% in 1996
and 385% in 1995. These ratios reflect a concerted effort
by management to increase the quality of loans over the last
several years.

On December 19, 1995, Jessamine First Federal Savings and Loan
Association (Jessamine) became a wholly owned subsidiary of the Company
through the pooling of interests. During 1996, the federal thrift
charters of Kentucky Savings Bank, FSB and Jessamine were terminated and
both entities became branches of Kentucky Bank. Financial statements
have been adjusted to reflect this change.

RESULTS OF OPERATIONS

Net Interest Income

Net interest income, the largest source of revenue, on a tax
equivalent basis increased from $9.7 million in 1995 to $9.9
million in 1996 to $10.9 million in 1997. The taxable
equivalent adjustment (which is net of the effect of the non-
deductible portion of interest expense) is based on a
Federal income tax rate of 34%. An increase in earning
assets and interest bearing liabilities were both positive
factors on 1997 net interest income. Loan growth on an
average basis for 1997 increased 10%, while being funded by
over 5% growth in interest bearing deposits. There was a
positive effect on the rate changes for assets, whereas the
rate on liabilities was relatively flat. The 10% increase
in loans from 1996 to 1997 and a 5% increase in deposits for
the same time period have resulted in the net interest
margin increasing from 4.02% in 1996 to 4.18% in 1997. Loan
volume accounted for over $1.3 million of the increase in
total interest income, while loan rates accounted for $0.3
million of the total interest income increase. On the
liability side, deposit volume accounted for $0.5 million of
the $0.6 million increase in total interest expense. In
1996, the increase was primarily attributable to higher
rates on earning assets and an improvement in net interest
margin from 3.80% to 4.02%. A reduction of investment
securities volume accounted for $0.5 million decrease in
total interest income, offset somewhat by loan volume
increase accounting for $0.2 million reduction in interest
income. On the liability side, a reduction in long-term
borrowings accounted for a reduction in total interest
expense of $0.6 million.

Average earning assets dropped $6.4 million in 1996, but
increased $12.7 million in 1997 to $260 million. Average
loans increased $15.4 million in 1997 to $171.1 million and
increased $2.6 million in 1996, from $153.1 million in 1995.

Average interest bearing liabilities increased $8.6 million
in 1997 to $217.3 million. In 1996, interest-bearing
liabilities decreased $10.6 million from $219.3 to $208.7.
Interest bearing deposits accounted for over $10 million of
this growth in 1997. During 1996, interest-bearing deposits
dropped $1.4 million. Long-term debt decreased $3.0 million
in 1997 to $11.2 million and decreased $9.4 million dollars
from $23.6 million to $14.2 million in 1996.

The accompanying analysis of changes in net interest income
in the following table shows the relationships of the volume
and rate portions of these increases in 1997 and 1996.
Changes in interest income and expenses due to both rate and
volume are allocated pro rata.

1997 vs. 1996 1996 vs. 1995

Increase (Decrease) Due to Change in Increase (Decrease) Due to Change in
Volume Rate Net Change Volume Rate Net Change

Interest Income
Loans 1,387 322 1,709 231 131 362
Investment Securities 34 (8) 26 (526) (41) (567)
Federal Funds Sold and
Securities Purchased
under Agreements to
Resell (140) 3 (137) 42 (18) 24
Deposits with Banks (38) (24) (62) (156) 104 (52)
Total Interest Income 1,242 294 1,536 (409) 176 (233)

Interest Expense
Deposits
Demand 539 79 618 (56) (13) (69)
Savings 3 (37) (34) 0 0 0
Negotiable Certificates
of Deposit and Other
Time Deposits 90 0 90 110 0 110
Short-Term Borrowings 63 0 63 4 0 4
Long-Term Borrowings (161) 0 (161) (632) 0 (632)
Total Interest Expense 535 41 576 (574) (13) (587)
Net Interest Income 708 252 960 165 189 354

Average Consolidated Balance Sheets and Net Interest Analysis
(In thousands)
1997 1996 1995
Average Average Average Average Average Average
Balance Interest Rate Balance Interest Rate Balance Interest Rate

ASSETS
Interest-Earning Assets
Securities Held to Maturity
U.S. Treasury and Federal Agency Securities 0 0 - 0 0 - 3,746 203 5.42%
State and Municipal Obligations
Other Securities 0 0 - 0 0 - 2,073 134 6.46%
Total Securities Held to Maturity 16,027 976 6.09% 16,377 1,009 6.16% 26,295 1,584 6.02%

Securities Available for Sale (1)
U.S. Treasury and Federal Agency Securities 63,057 3,919 6.22% 60,890 3,778 6.20% 61,929 3,894 6.29%
State and Municipal Obligations 3,943 198 5.02% 3,944 199 5.05% 0 0
Other Securities 2,803 200 7.14% 4,066 281 6.91% 5,563 356 6.40%
Total Securities Available for Sale 69,803 4,317 6.18% 68,900 4,258 6.18% 67,492 4,250 6.30%
Total Investment Securities 85,830 5,293 6.17% 85,277 5,267 6.18% 93,787 5,834 6.22%
Tax Equivalent Adjustment 345 0.40% 362 0.42% 431 0.46%
Tax Equivalent Total 5,638 6.57% 5,629 6.60% 6,265 6.68%
Federal Funds Sold and Agreements to Repurchase 2,979 160 5.37% 5,579 297 5.32% 4,736 273 5.76%
Interest-Bearing Deposits with Banks 500 25 5.00% 1,143 87 7.61% 2,478 139 5.61%
Loans, Net of Unearned Income (2)
Commercial 20,035 1,828 9.12% 19,192 1,749 9.11% 19,634 1,888 9.62%
Real Estate Mortgage 137,079 12,194 8.90% 123,145 10,674 8.67% 122,118 10,429 8.49%
Installment 14,014 1,461 10.43 13,398 1,351 10.08% 10,664 1,095 10.27%
Total Loans 171,128 15,483 9.05% 155,735 13,774 8.84% 153,109 13,412 8.76%
Total Interest-Earning Assets 260,437 21,306 8.18% 247,734 19,787 7.99% 254,110 20,089 7.91%
Allowance for Loan Losses (2,261) (1,988) (1,772)
Cash and Due From Banks 7,510 6,839 5,645
Premises and Equipment 5,475 4,591 4,158
Other Assets 5,565 5,617 6,023
Total Assets 276,726 262,793 268,164

LIABILITIES
Interst-Bearing Deposits
Negotiable Order of Withdrawal ("NOW") and
Money Market Investment Accounts 54,626 1,912 3.50% 43,918 1,294 2.95% 46,965 1,363 2.90%
Savings 12,786 331 2.59% 13,850 365 2.64% 13,829 365 2.64%
Certificates of Deposit and Other Deposits 133,509 7,237 5.42% 132,835 7,147 5.38% 131,243 7,037 5.36%
Total Interest-Bearing Deposits 200,921 9,480 4.72% 190,603 8,806 4.62% 192,037 8,765 4.56%
Short-Term Borrowings 5,100 265 5.20% 3,899 202 5.18% 3,702 198 5.35%
Long-Term Debt 11,247 670 5.96% 14,158 831 5.87% 23,552 1,463 6.21%
Total Interest-Bearing Liabilities 217,268 10,415 4.79% 208,660 9,839 4.72% 219,291 10,426 4.75%
Noninterest-Bearing Earning Demand Deposit 31,566 27,930 24,593
Other Liabilties 2,513 2,262 2,347
Total Liabilities 251,347 238,852 246,231
SHAREHOLDERS' EQUITY 25,379 23,941 21,933
Total Liabilities and Shareholders' Equity 276,726 262,793 268,164
Average Equity to Average Total Assets 9.17% 9.11% 8.18%
Net Interest Income 10,546 9,586 9,232
Net Interest Income (tax equivalent) 10,891 9,948 9,663
Net Interest Spread (tax equivalent) 3.39% 3.27% 3.15%
Net Interest Margin (tax equivalent) 4.18% 4.02% 3.80%

[FN]
(1) Averages computed at amortized cost.
(2) Includes loans on a nonaccrual status.
(3) Tax equivalent difference represents the tax equivalent
adjustment detailed above.

Noninterest Income and Expenses

Noninterest income was $2.4 million in 1997 compared to $2.3
million in 1996 and $2.1 million in 1995. In 1997
securities gains were $14 thousand compared to $13 thousand
losses in 1996 and $56 thousand in losses in 1995. Typically,
U. S. Treasury securities are sold before maturity when
additional interest yields can be realized. Other types of
investment securities are generally not sold. In addition,
gains on loans sold were $72 thousand, $200 thousand and $65
thousand in 1997, 1996 and 1995, respectively. The increase
in loan gains in 1996 were primarily attributable to the
Company's adoption of Statement of Financial Accounting
Standards No. 122, "Accounting for Mortgage Servicing
Rights" on January 1, 1996. Loans available to be sold to
Federal Home Loan Mortgage Corporation are generally sold as
the loans are closed. The sales of loans were $18 million,
$21 million and $21 million in 1997, 1996 and 1995,
respectively. Other noninterest income excluding security
and loans gains (losses) was $2.3 million in 1997, $2.1
million in 1996 and $2.0 million in 1995.

Noninterest expense increased a modest $173 thousand from
$7,715 thousand in 1996 to $7,888 thousand in 1996. From
1995 to 1996, noninterest expense increased $31 thousand.
The increases in salaries and benefits from $4.0 million in
1996 to $4.3 million in 1997 and the increase from 1995 to
1996 of nearly $0.2 million is mainly attributable to normal
salary increases and related benefits. Occupancy expense
also increased 8% in 1997, from $932 thousand in 1996 to
$1,002 thousand in 1997. In March 1997, the Company opened
its new branch in Versailles resulting in higher operating
cost attributable to this facility. The Company also placed more
emphasis on maintaining its existing facilities. The 1996
increase was $71 thousand. Other noninterest expense
decreased from $3.0 million in 1995 to $2.8 million in 1996,
and to $2.6 million in 1997. In September 1995, the FDIC
lowered the federal deposit insurance premium from 23 cents
to 4 cents per $100 for deposits insured by the Bank
Insurance Fund (BIF). In December 1995, the FDIC set the
1996 premium for BIF-insured deposits at zero. In September
1996, Congress declared a special, one-time assessment on
SAIF-insured deposits. The cost of this assessment was
nearly $200 thousand after income taxes. For 1997, the BIF-
insured deposit rate will be 1.3 cents per $100 and the SAIF-
insured rate will be 6.5 cents per $100. Due to the
conversion of the savings institutions to branches of
Kentucky Bank, the Company has deposits of over $53 million
that will be assessed at the SAIF rate. The resulting
decrease in FDIC assessment was $358 thousand from 1996 to
1997. Outside these savings, other noninterest expense
increased $0.2 million in 1997, which is mainly
attributable to increased inflationary costs.

The following table is a summary of noninterest income and
expense for the three-year period indicated.

Year Ended December 31 (in thousands)
1997 1996 1995
Non-interest Income
Service Charges 1,674 1,508 1,354
Loan Servicing Income 258 255 236
Trust Income 237 206 236
Investment Securities Gains (Losses) 14 (13) (56)
Gains (Losses) on Sale of Loans 72 200 65
Other 135 128 218
Total Non-interest Income 2,390 2,284 2,053

Non-interest Expense
Salaries and Employee Benefits 4,274 4,005 3,819
Occupancy 1,002 932 861
Other 2,612 2,778 3,004
Total Non-interest Expense 7,888 7,715 7,684

Income Taxes

The Company had income tax expense of $1,148 thousand in
1997 compared to $866 thousand in 1996 and $717 thousand in
1995. This represents an effective income tax rate of 25.2%
in 1997, 23.1% in 1996 and 22.4% in 1995. The difference
between the effective tax rate and the statutory federal
rate of 34% is due to tax exempt income on certain loans and
investment securities. The higher effective rate for 1997
is a result of tax free income remaining virtually unchanged
from 1996 while income before taxes increased over $800
thousand.

Balance Sheet Review

Assets at year-end 1997 totaled $291 million compared to
$272 million in 1996 and $269 million in 1995. The increase
in size from 1996 to 1997 is mainly attributable to total
loans increasing $25.5 million and investment securities
decreasing $10.8 million, while being funded by an increase
in deposits of $10.3 million and short term borrowing of
$5.3 million. Changes from 1995 to 1996 are mainly a result
of an increase in deposits of $17.7 million offset by a
decrease in short term borrowing of over $7 million.

Loans

Total loans, net of unearned income were $185 million at
December 31, 1997 compared to $160 million at the end of
1996 and $155 million in 1995. During 1997, real estate
construction loans increased $3.5 million, real estate
mortgages increased $14.2 million and agricultural loans
increased $7.0 million. Management developed regional loan
goals for each type of loan and this emphasis has resulted
in improved sales efforts by the lending personnel.
Agricultural loans and installment loans experienced an
increase of nearly $4 million each, while commercial and
real estate mortgage saw declines during 1996. Since 1994,
Bourbon has placed more emphasis on the growth as well as
the quality of the loan portfolio.

As of December 31, 1997, the real estate mortgage portfolio
comprises over 61% of total loans. Of this, nearly $87
million or 78% represent 1-4 family residential property.
Agricultural loans of nearly $38 million comprise nearly 20%
of the loan portfolio. Nearly $28 million of the
agricultural loans are secured by real estate. The
remainder of the 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 over $7 million of the
installment loan portfolio of $15 million, while the purpose
of the remainder of this portfolio is for purchasing retail
goods, home improvement or other personal reasons. Secured
interest is generally obtained on these loans after
analyzing the repayment ability of borrower. Commercial
loan's $11 million portfolio is mainly for capital outlays
and business operation. Collateral is requested depending
on the creditworthiness of the borrower. Unsecured loans
are made to individuals or companies mainly based on the
creditworthiness of the customer. Approximately 5% of the
loan portfolio is unsecured. Management is not aware of any
significant concentrations that may cause future material
risks resulting in significant problems with income and
capital.

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. Bourbon has no foreign
loans or highly leveraged transactions in its loan
portfolio.

Loans Outstanding

December 31 (in thousands)
1997 1996 1995 1994 1993
Commercial 10,644 10,216 11,167 7,502 4,451
Real Estate Construction 7,657 4,200 3,497 3,156 3,578
Real Estate Mortgage 113,467 99,293 102,077 101,361 79,290
Agricultural 37,924 30,947 27,019 23,407 24,610
Installment 15,239 14,789 11,029 11,391 7,101
Other 287 374 397 807 158
Total Loans 185,218 159,819 155,186 147,624 119,188
Less Unearned Income 57 154 125 159 124
Total Loans Net of
Unearned Income 185,161 159,665 155,061 147,465 119,064
Less loans held for sale 5,418 863 1,364 1,553 3,436
Less Allowance For Loan Losses 2,322 2,101 1,860 1,648 1,420
Net Loans 177,421 156,701 151,837 144,264 114,208

The following table sets forth the maturity distribution and
interest sensitivity of selected loan categories at December
31, 1997. Maturities are based upon contractual term. The
total loans in this report represents loans net of unearned
income, including loans held for sale but excluding the
allowance for loan losses. In addition, unearned income on
the above schedule is netted with real estate mortgage loans
on the following schedule.

Loan Maturities and Interest Sensitivity
December 31, 1997 (in thousands)
One Year One Through Over Total
or Less Five Years Five Year Loans

Commercial 4,466 5,002 1,176 10,644
Real Estate 6,188 1,396 73 7,657
Construction
Real Estate Mortgage 9,309 45,754 58,347 113,410
Agricultural 10,071 24,165 3,687 37,923
Installment 5,065 10,070 105 15,240
Other 287 0 0 287
Total Loans 35,386 86,387 63,388 185,161
Fixed Rate Loans 18,689 77,486 17,633 113,808
Floating Rate Loans 16,697 8,901 45,755 71,353
Total 35,386 86,387 63,388 185,161

Deposits

During 1997, total deposits increased $10 million to $241
million from $231 million in 1996. The Company increased
its marketing efforts for newer interest bearing checking
accounts. In addition, management placed more emphasis on
deposits and monitored deposits generated by type on a
monthly basis. The increase was mainly a result of interest
bearing checking accounts increasing over $11 million during
1997. Public deposits accounted for $22 million, with $21
million of this being interest bearing deposits. Total
deposits increased to $231 million in 1996, up $17.7 million
or 8.3% from 1995. Over $13 million were in the form of
public deposits, mostly in interest bearing accounts. Non-
interest bearing deposits increased $5.8 million to $32.5
million in 1996.

The tables below provide information on the maturities of
time deposits of $100,000 or more at December 31, 1997 and
detail of short-term borrowing for the past three years.

Maturity of Time Deposits of $100,000 of More
December 31, 1997
(in thousands)
Maturing 3 Months or Less 6,251
Maturing over 3 Months through 6 Months 4,030
Maturing over 6 Months through 12 Months 7,507
Maturing over 12 Months 4,467

Borrowing

The Company utilizes both long and short term borrowing.
Long term borrowing is mainly from the Federal Home Loan
Bank (FHLB). As of December 31, 1997, over $10.2 million
was borrowed from FHLB, a decrease of $300 thousand from
1996. Advances are either paid monthly or at maturity.
This borrowing is mainly used to fund long term, fixed rate
mortgages and to assist in asset/liability management. Over
$7.2 million of FHLB borrowing matures in 1998. The
following table depicts relevant information concerning our
short term borrowings.

Short Term Borrowings
December 31 (in thousands)
1997 1996 1995
Federal Funds Purchased:
Balance at Year end 2,375 0 5,700
Average Balance During the Year 488 142 591
Maximum Month End Balance 2,375 1,075 5,700
Repurchase Agreements:
Balance at Year end 4,615 2,836 4,660
Average Balance During the Year 4,103 3,342 2,589
Maximum Month End Balance 4,895 4,668 6,202
Other Borrowed Funds:
Balance at Year end 1,718 574 81
Average Balance During the Year 509 475 505
Maximum Month End Balance 1,718 1,123 1,168

Asset Quality

With respect to asset quality, management considers three
categories of assets to merit constant 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.

The Company discontinues the accrual of interest on loans
that become 90 days past due as to principal or interest
unless they are adequately secured 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 rates
using period-end data, is shown below.

Nonperforming Assets
December 31 (in thousands)
1997 1996 1995 1994 1993
Non-accrual Loans 173 33 44 85 320
Accruing Loans which are
Contractually past due
90 days or more 154 562 438 283 296
Restructured Loans 0 0 0 0 0
Total Nonperforming and
Restructured Loans 327 595 482 368 616
Other Real Estate 0 79 57 306 903
Total Nonperforming and
Restructured Loans and
Other Real Estate 327 674 539 674 1,519
Loans as a Percentage
of Net Loans 0.18% 0.43% 0.31% 0.25% 0.52%
Nonperforming and Restructured
Loans and Other Real Estate
as a Percentage of Total Assets 0.12% 0.25% 0.20% 0.25% 0.56%

Nonperforming and restructured loans at December 31, 1997
were $327 thousand compared to $595 thousand at December 31,
1996 and $482 thousand at December 31, 1995. Total
nonperforming assets were $327 thousand, $674 thousand and
$539 thousand at December 31, 1997, 1996 and 1995,
respectively. Management has placed a concerted effort on
the quality of loans and the chart depicts the improved
trends in the quality of the loan portfolio. The amount of
lost interest on non-accrual loans is considered immaterial.
At December 31, 1997, 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, 1997 were $333 thousand
compared to $251 thousand in 1996 and $345 thousand in 1995.
These amounts are included in the total nonperforming and
restructured loans presented in the table above. Interest
income of $23 thousand, $55 thousand and $34 thousand was
recognized on impaired loans for cash payments received in
1997, 1996 and 1995, respectively. At December 31, 1997
nonaccrual loans amounted to $173 thousand compared to $33
thousand in 1996 and $44 thousand in 1995. See Note 5 -
Loans 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 $57
thousand, $28 thousand and $70 thousand on December 31,
1997, 1996 and 1995, respectively.

Loan Losses

The following table is a summary of the Company's loan loss
experience for each of the past five years.

Loan Losses
Year Ended December 31 (in thousands)
1997 1996 1995 1994 1993
Balance at Beginning of Year 2,101 1,860 1,648 1,420 1,234
Balance of Allowance for Loan
Losses of Acquired Brance
At Acquisition Date 252
Amounts Charged Off:
Commercial 5 55 14 123 31
Real Estate Construction 0 0 0 0 0
Real Estate Mortgage 25 4 41 53 111
Agricultural 52 12 36 3 221
Consumer 273 142 139 56 73
Total Charged-off Loans 355 213 230 235 436
Recoveries on Amounts
Previously Charged-off:
Commercial 3 12 15 22 7
Real Estate Construction 0 0 0 0 0
Real Estate Mortgage 1 8 21 1 25
Agricultural 25 1 0 0 147
Consumer 54 31 11 43 24
Total Recoveries 83 52 47 66 203
Net Charge-offs 272 161 183 169 233
Provision for Loan Losses 493 402 395 145 419
Balance at End of Year 2,322 2,101 1,860 1,648 1,420
Total Loans, Net of Unearned
Income
Average 171,128 155,735 153,109 125,643 108,043
At December 31 185,161 159,665 155,061 147,465 119,064
As a Percentage of Average Loans:
Net Charge-offs 0.16% 0.10% 0.12% 0.13% 0.22%
Provision for Loan Losses 0.29% 0.26% 0.26% 0.12% 0.39%
Allowance as a Percentage of
Year-end Net Loans 1.25% 1.32% 1.20% 1.12% 1.19%
Allowance as a Multiple of
Net Charge-offs 8.5 13.0 10.2 9.8 6.1

The provision for loan losses for 1997 was $493 thousand
compared to $402 thousand in 1996 and $396 thousand in 1995.
Net chargeoffs were $272 thousand in 1997, $161 thousand in
1996 and $183 thousand in 1995. Net chargeoffs to average
loans were 0.16%, 0.10% and 0.12% in 1997, 1996 and 1995,
respectively. The 1997 loan loss provision increased
considering our historical loan loss trends, risk analysis
of our loan portfolio and the increase in loan outstandings.
The 1996 provision was more comparable to the 1995
provision. In evaluating the allowance for loan losses,
management considers the composition of the loan portfolio,
historical loan loss experience, the overall quality of the
loans and an assessment of current economic conditions. At
December 31, 1997, the allowance for loan losses was 1.25%
of loans outstanding compared to 1.32 at year-end 1996 and
1.20% in 1995. Management believes the allowance for loan
losses at the end of 1997 is adequate to cover inherent
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 loans
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
December 31 (in thousands)
1997 1996 1995 1994 1993
Dollars Percent Dollars Percent Dollars Percent Dollars Percent Dollars Percent

Commercial 191 8.23% 168 8.00% 132 7.10% 94 5.70% 94 6.62%
Real Estate Construction 118 5.08% 77 3.66% 38 2.04% 27 1.64% 35 2.46%
Real Estate Mortgage 1,327 57.15% 1,252 59.59% 1,192 64.09% 1,105 67.05% 895 63.03%
Agricultural 393 16.93% 353 16.80% 327 17.58% 269 16.32% 270 19.01%
Consumer 293 12.62% 251 11.95% 171 9.19% 153 9.28% 126 8.87%
Total 2,322 100.00% 2,101 100.00% 1,860 100.00% 1,648 100.00% 1,420 100.00%

Loans
December 31 (in thousands)
1997 1996 1995 1994 1993
Dollars Percent Dollars Percent Dollars Percent Dollars Percent Dollars Percent
Commercial 10,644 5.75% 10,216 6.40% 11,167 7.20% 7,502 5.09% 4,451 3.74%
Real Estate Construction 7,657 4.14% 4,200 2.63% 3,497 2.26% 3,156 2.14% 3,578 3.01%
Real Estate Mortgage 113,410 61.25% 99,139 62.09% 102,077 65.83% 101,361 68.74% 79,290 66.59%
Agricultural 37,924 20.48% 30,947 19.38% 27,019 17.42% 23,407 15.87% 24,610 20.67%
Consumer 15,239 8.23% 14,789 9.26% 10,904 7.03% 11,232 7.62% 6,977 5.86%
Other 287 0.16% 374 0.23% 397 0.26% 807 0.55% 158 0.13%
Total, Net of
Unearned Income 185,161 100.00% 159,665 100.00% 155,061 100.00% 147,465 100.00% 119,064 100.00%

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, 1997
increased $2.1 million to $24.7 million. Total capital was
$26.5 million at December 31, 1997. 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.

Capital
December 31 (in thousands)
1997 1996 Change
Shareholders' Equity (1) 26,483 24,632 1,851
Less Disallowed Amount of Goodwill 1,789 2,077 (288)
Tier I Capital 24,694 22,555 1,661
Allowance for Loan Losses 2,272 1,995 277
Tier II Capital 2,272 1,995 135
Total Capital 26,966 24,550 1,796
Total Risk Weighted Assets 181,702 159,508 22,194
Ratios:
Tier I Capital to Risk-weighted 13.59% 14.14% 1.24%
Assets
Total Capital to Risk-weighted Assets 14.84% 15.39% 1.34%
Leverage 8.77% 8.66% 0.11%

(1) Excluding net unrealized gains and losses on
securities available for sale.

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, 1997, the subsidiary had ratios that
exceeded the minimum requirements established for the "well
capitalized" category.

In management's opinion, there are no 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, including those classified as held to maturity
and available for sale, decreased from $92.5 million at
December 31, 1996 to $81.7 million at December 31, 1997.
The decrease is attributable to the increased loan demand.
At December 31, 1995 securities totaled $92.6 million.
Federal funds sold totaled $75 thousand and $2.8 million at
December 31, 1996 and 1995, respectively. During December
1995, Bourbon made a one-time transfer of investment
securities from held to maturity to available for sale of
over $14 million providing added flexibility for future
interest rate and liquidity management.

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 $17.6
million of adjustable asset backed securities held on
December 31, 1997, $3.9 million are repriceable monthly and
the remaining $13.7 million is repriceable annually. In
addition, all applicable securities have passed the
appropriate stress tests. 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, 1997.

Investment Securities (Held to maturity at amortized cost,
available for sale at market value)
December 31
1997 1996 1995
(in thousands)
U.S. Treasury Securities
Available for Sale 19,072 24,571 21,139
U.S. Federal Agency Securities
Available for Sale 10,485 8,984 17,991
Held to Maturity 0 0 0
State and Municipal Obligations
Available for Sale 4,077 4,012 3,951
Held to Maturity 15,603 16,313 16,455
Asset-Backed Securities
Available for Sale 32,466 38,660 31,651
Fixed -
GNMA, FNMA, FHLMC 4,924 10,899 6,126
Passthroughs
GNMA, FNMA, FHLMC CMO's 9,970 10,482 7,506
Other Securities 0 0 0
Total 14,894 21,381 13,632
Variable -
GNMA, FNMA, FHLMC 14,306 13,907 14,485
Passthroughs
GNMA, FNMA, FHLMC CMO's 3,266 3,372 3,534
Total 17,572 17,279 18,019
Other Securities
Available for Sale 0 0 1,452
Total Securities
Available for Sale 66,100 76,227 76,184
Held to Maturity 15,603 16,313 16,455
Total 81,703 92,540 92,639

Maturity Distribution of Securities December 31, 1997 (in thousands)
Over One Year Over Five Years Asset Backed
One Year Through Through Over Ten and Equity Market
or Less Five Years Ten Years Years Securities Total Value

U.S. Treasury Securities
Available for Sale 10,019 9,053 0 0 0 19,072 19,072
U.S. Federal Agency Securities
Available for Sale 10,485 0 0 0 0 10,485 10,485
State and Municipal Obligations
Available for Sale 307 1,323 1,546 901 0 4,077 4,077
Held to Maturity 344 3,585 9,002 2,672 0 15,603 16,411
Asset-Backed Securities
Available for Sale 0 32,466 32,466 32,466
Total Securities
Available for Sale 20,811 10,376 1,546 901 32,466 66,100 66,100
Held to Maturity 344 3,585 9,002 2,672 0 15,603 16,411
Total 21,155 13,961 10,548 3,573 32,466 81,703 82,511
Percent of Total 25.89% 17.09% 12.91% 4.37% 39.74% 100.00%
Weighted Average Yield 5.90% 6.98% 8.59% 8.34% 6.68% 6.85%

Impact of Inflation and Changing Prices

The majority of Bourbon's assets and liabilities are
monetary in nature. Therefore, Bourbon 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 growing 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

The Company adopted FASB's Statement on Financial Accounting
Standards (SFAS) No. 125, "Accounting for Transfers and
Servicing of Financial Assets and Extinguishments of
Liabilities" on January 1, 1997. The effect of adopting the
new guidance was not material to the Company's consolidated
financial statements.

In June 1997, the FASB issued SFAS No. 130, "Reporting
Comprehensive Income. The new guidance is effective for
fiscal years beginning after December 15, 1997 and its
implementation will have no impact on the Company's
financial condition or results of operations.

In the last quarter of 1997, the Company adopted SFAS No.
128, "Earnings per Share", under which basic and diluted
earnings per share are computed. Prior amounts have been
restated to be comparable.

Year 2000

Management is currently reviewing the Year 2000 situation in
order to address potential problems that may occur in time
to take corrective action. The Bank's Electronic Data Processing Steering
Committee is working diligently to address Year 2000
problems that may exist with the Bank's hardware and
software, vendors, larger commercial borrowers, and the
Federal Government and other participants in the economy.
At this time, management believes that the
transition into the next century can be conducted smoothly
and with minimum additional costs.

Item 7A. Asset/Liability Management, Interest Rate
Sensitivity, Market Risk and Liquidity

Asset/Liability management control is designed to ensure
safety and soundness, maintain liquidity and regulatory
capital standards, and achieve acceptable net interest
income. Management considers interest rate risk to be the
most significant market risk. The Company's exposure to
market risk is reviewed on a regular basis by the
Asset/Liability Committee. 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. Tools
used by management include the standard GAP report and an
interest rate shock simulation report. 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 to 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 with
the Board of Directors specified limits. As of December 31, 1997 the
projected percentage changes are within the Board limits and
the Company's interest rate risk appears reasonable. The
projected net interest income report summarizing the Bank's
interest rate sensitivity as of December 31, 1997 is as
follows:

PROJECTED NET INTEREST INCOME
Level
Rate Change: -300 -200 -100 Rates -100 -200 -300

Year One (1/1/98 - 12/31/98)
Interest Income 19,224,737 20,244,002 21,278,319 22,316,695 23,355,036 24,393,407 25,431,761
Interest Expense 8,497,371 9,433,118 10,368,848 11,304,627 12,240,331 13,176,071 14,111,812

Net Interest Income 10,727,366 10,810,884 10,909,471 11,012,068 11,114,705 11,217,336 11,319,949

Year Two (1/1/99 - 12/31/99)
Interest Income 17,968,779 19,885,112 21,829,511 23,781,373 25,733,216 27,685,078 29,636,973
Interest Expense 6,988,386 8,649,103 10,309,797 11,970,507 13,631,209 15,291,931 16,952,636

Net Interest Income 10,980,393 11,236,009 11,519,714 11,810,866 12,102,007 12,393,147 12,684,337

PROJECTED DOLLAR INCREASE (DECREASE) FROM "LEVEL RATES"
Level
Rate Change: -300 -200 -100 Rates -100 -200 -300

Year One (1/1/98 - 12/31/98)
Interest Income (3,091,958) (2,072,693) (1,038,376) N/A 1,038,341 2,076,712 3,115,066
Interest Expense (2,807,256) (1,871,509) (935,779) N/A 935,704 1,871,444 2,807,185

Net Interest Income (284,702) (201,184) (102,597) N/A 102,637 205,268 307,881

Year Two (1/1/99 - 12/31/99)
Interest Income (5,812,594) (3,896,261) (1,951,862) N/A 1,951,843 3,903,705 5,855,600
Interest Expense (4,982,121) (3,321,404) (1,660,710) N/A 1,660,702 3,321,424 4,982,129

Net Interest Income (830,473) (574,857) (291,152) N/A 291,141 582,281 873,471

PROJECTED PERCENTAGE INCREASE (DECREASE) FROM "LEVEL RATES"
Level
Rate Change: -300 -200 -100 Rates -100 -200 -300

Year One (1/1/98 - 12/31/98)
Interest Income -13.9 % -9.3 % -4.7 % N/A 4.7 % 9.3 % 14.0 %
Interest Expense -24.8 % -16.6 % -8.3 % N/A 8.3 % 16.6 % 24.8 %

Net Interest Income -2.6 % -1.8 % -0.9 % N/A 0.9 % 1.9 % 2.8 %

Limitation on % Change > -10.0 % > -7.0 % > -4.0 % N/A > -4.0 % > -7.0 % > -10.0 %

Year Two (1/1/99 - 12/31/99)
Interest Income -24.4 % -16.4 % -8.2 % N/A 8.2 % 16.4 % 24.6 %
Interest Expense -41.6 % -27.7 % -13.9 % N/A 13.9 % 27.7 % 41.6 %

Net Interest Income -7.0 % -4.9 % -2.5 % N/A 2.5 % 4.9 % 7.4 %

Limitation on % Change > -20.0 % > -14.0 5 > -8.0 % N/A > -8.0 % > -14.0 % > -20.0 %

Management measures the Bank'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 Bank'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 Bank's asset and
liability mix to bring interest rate risk within Board
approved limits.

In addition, the Bank uses interest rate sensitivity gap
analysis to monitor the relationship between the maturity
and repricing of its interest-earning assets and interest-
bearing liabilities, while maintaining an acceptable
interest rate spread. Interest rate sensitivity gap is
defined as the difference between the amount of interest-
earning assets maturing or repricing within a specific time
period and the amount of interest-bearing liabilities
maturing or repricing within that time period. A gap is
considered positive when the amount of interest-rate-
sensitive assets exceeds the amount of interest-sensitive-
liabilities, and is considered negative when the amount of
interest-rate-sensitive liabilities exceeds the amount of
interest-rate-sensitive assets. Generally, during a period
of rising interest rates, a negative gap would adversely
affect net interest income, while a positive gap would
result in an increase in net interest income. Conversely,
during a period of falling interest rates, a negative gap
would result in an increase in net interest income, while a
positive gap would negatively affect net interest income.
The Bank's goal is to maintain a reasonable balance between
exposure to interest rate fluctuations and earnings.

The interest rate sensitivity analysis as of December 31,
1997 shown below depicts amounts based on the earliest
period in which they can normally be expected to reprice.

Interest Rate Sensitivity Analysis
December 31, 1997 (in thousands)
Non-interest
Over Sensitive
90 Days 1 Year 5 Years 5 Years Amounts Total

Assets
Loans, Net of Unearned Income 58,635 30,009 85,235 11,143 139 185,161
Investment Securities (1) 15,648 24,725 15,946 25,384 0 81,703
Other Assets 3,381 0 0 0 0 3,381
Total Interest-earning Assets 77,664 54,734 101,181 36,527 139 270,245
Sources of Funds
Interest-bearing Deposits 115,537 66,873 25,426 8 0 207,844
Short-term Borrowings 8,708 0 0 0 0 8,708
Long-term Debt and FHLB Advances 69 7,214 2,018 1,685 0 10,986
Total Interest-bearing Liabilities 124,314 74,087 27,444 1,693 0 227,538
Interest Sensitivity Gap (46,650) (19,353) 73,737 34,834 139 42,707
Cumulative Interest Sensitivity (46,650) (66,003) 7,734 42,568 42,707 85,414
Cumulative interest Sensitivity as a
Percentage of Total Assets -16.05% -22.71% 2.66% 14.65% 14.69% 29.39%

[FN]
(1) Held to maturity at amortized cost, available for sale at market value

Liquidity risk is the possibility that Bourbon 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 meeting 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 $33.4 million at December 31, 1997.
Additionally, securities available-for-sale with maturities
greater than one year totaled $45.3 million at December 31,
1997. These securities are available to meet liquidity
needs on a continuing basis.

Bourbon 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, 1997 these balances totaled over $22 million, about 9.2%
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. FHLB advances decreased $0.3 million in
1997 to $10.2 million.

Generally, Bourbon 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
liquidity to meet all reasonable borrower, depositor and
creditor needs in the present economic environment.

The cash flow statements for the periods presented provide
an indication of Bourbon's sources and uses of cash as well
as an indication of the ability of Bourbon to maintain an
adequate level of liquidity. A discussion of cash flow
statements for 1997, 1996 and 1995 follows.

Net cash provided by operating activities was $5.3 million,
$4.8 million and $3.4 million for the years ended December
31, 1997, 1996 and 1995, respectively. The increases in
1997 and 1996 were mainly a result of the increase in net
income from $2.5 million to $2.9 million to $3.4 million in
1995, 1996 and 1997, respectively.

Net cash flow provided by (used in) investing activities was
($15.9 million), ($6.7 million), and $0.8 million and for
the years ended December 31, 1997, 1996 and 1995,
respectively. The changes in net cash from investing
activities included the result of normal maturities and
reinvestment of investment securities as well as funding
related to increases in loans. In 1997, the loan demand
resulted in a use of funds of nearly $26 million, being
offset by a decline in investment securities of $11 million.
This was funded mainly by deposits increasing $10 million
and short term borrowing increasing $5 million. In
addition, $1.3 million was used for purchases of bank
premises and equipment. During 1996 and 1997, over $1
million was expended for land, building and equipment for
the new branch location in Versailles. In 1997, $376
thousand has been spent for the new Georgetown branch to be
opened later in 1998. Increase in loans of nearly $6
million and $1.3 million for purchases of bank premises and
equipment account for the majority of the change in 1996.
In 1995 the $8 million increase in loans was offset by the
net proceeds from investment securities. During these
periods no investment securities held-to-maturity were sold.

Net cash flow provided by (used in) financing activities was
$13.7 million, $0.1 million and ($8.6 million) for the
years ended December 31, 1997, 1996 and 1995, respectively.
The net cash increases and decreases were primarily
attributable to changes in total deposits, securities sold
under agreements to repurchase and federal funds purchased,
and net changes in advances from the Federal Home Loan Bank
and other borrowings.

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
1997 1996 1995
Total Loans/Total Deposits 73.6% 71.3% 70.7%
Net Short-term Borrowings/Total Assets 1.8% 1.5% 1.4%

This chart shows that the loan to deposit ratio increased in
1997 and 1996. The changes in 1997 and 1996 are relatively
small with increases in both loan and deposits being a
factor.

Item 8. Financial Statements

The consolidated financial statements of the Company for the
years ended December 31, 1997, 1996 and 1995, together with
the notes thereto and related auditor's report are contained
in the Company's 1997 Annual Report to Shareholders included
as Exhibit 13, and are incorporated herein by reference.

Item 9. Changes In and Disagreements with Accountants on
Accounting and Financial Disclosure

Not Applicable

PART III

Item 10. Directors, Executive Officers, Promoters and
Control Persons, Compliance With Section 16(a) of the
Exchange Act

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.

Term expires in 1998:

William Arvin, age 57, is an attorney. He has been a
director of the Company since December 19, 1995.

James L. Ferrell, M.D., age 63, is a Physician. He has been
a director of the Company since 1980.

Joseph B. McClain, age 69, is President of Hopewell Co.
(insurance agency). He has been a director of the Company
since 1971.

Term expires in 1999:

Russell M. Brooks, age 46, is Financial Analyst of Kentucky
Bank. He has been a director of the Company since December
19, 1995.

Henry Hinkle, age 46, is President of Hinkle Construction
Company. He has been a director of the Company since 1979.

Theodore Kuster, age 54, is a farmer and thoroughbred horse
breeder. He has been a director of the Company since 1979.

Robert G. Thompson, age 48, is a farmer and thoroughbred
horse breeder. He has been a director of the Company since
1991.

Term expires in 2000:

William R. Stamler, age 63, is Chairman of Signal
Investments, Inc. He has been a director of the Company
since 1988.

Buckner Woodford, age 53, is President and Chief Executive
Officer of Bourbon Bancshares, Inc. and Kentucky Bank. He
has been a director of the Company since 1971.

Item 11. Executive Compensation

The following table sets forth information with respect to
the compensation of the President and Chief Executive
Officer of the Company. No other executive officer earned
total salary and bonus in excess of $100,000.

Annual Compensation
Other Options
Name Year Salary Bonus Compensation Granted
Buckner Woodford 1997 $150,000 $ 4,879 (1) 1,600
Buckner Woodford 1996 $136,500 $ 1,505 (1) 3,000
Buckner Woodford 1995 $125,000 $ 6,250 (1) 0
Buckner Woodford 1994 $120,000 $ 5,990 (1) 2,000

(1) Less than the lesser of $50,000 or 10% of annual salary
and bonuses.

The following table contains information regarding the grant
of stock options under the Company's stock option plan to
the Chief Executive Officer during the year ended December
31, 1997. 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 1997 ($/Sh) Date Value($)

Buckner Woodford 1,600 15.4% $25.00 1/6/07 $12,192

The following table sets forth certain information regarding
options exercised by the Chief Executive Officer during
calendar year 1997 and unexercised stock options held by him
as of December 31, 1997.

Aggregated Option Exercises in Calendar 1997
and Year-end Stock Option Values

Shares Number of Securities Value of Unexercised
Acquired Value Underlying Unexercised In-the-Money
on Exercise Realized Options/SARs at 12/31/97 Options/SARs at 12/31/97
Name (#) ($) Exercisable/Unexercisable Exercisable/Unexercisable

Buckner Woodford None N/A 2,872/5,068 $27,904/$31,061

Compensation of Directors

Directors are paid $300 for each board meeting attended and
$100 for each committee meeting attended.

Pension Plan Table

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 15 20 25 30 35

25,000 3,750 5,000 6,250 7,500 8,750
50,000 7,500 10,000 12,500 15,000 17,500
75,000 11,250 15,000 18,750 22,500 26,250
100,000 15,000 20,000 25,000 30,000 35,000
125,000 18,750 25,000 31,250 37,500 43,750
150,000 22,500 30,000 37,500 45,000 52,500
175,000 26,250 35,000 43,750 52,500 61,250
200,000 30,000 40,000 50,000 60,000 70,000

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 last 5 years. The years
of service for Mr. Woodford are 26 years.

Item 12. Security Ownership of Certain Beneficial Owners
and Management

Set forth below are the number of shares of the Company's
common stock beneficially owned by each director and
executive officer, and all current directors and executive
officers as a group as of December 31, 1997.

Name Shares Beneficially Owned(1)
Number Percentage

William Arvin (2) 15,616 1.1%

Russell M. Brooks (3) 12,597 *

Gregory J. Dawson (4) 6,880 *

James L. Ferrell, M.D. (5) 15,470 1.1%

Henry Hinkle (6) 10,775 *

Theodore Kuster (7) 8,885 *

Joseph B. McClain (8) 21,568 1.5%

William R. Stamler (9) 15,380 1.1%

Robert G. Thompson (10) 3,220 *

Buckner Woodford (11) 128,351 8.9%

All directors and officers
(10 persons) as a group
(consisting of those
persons named above) 238,742 16.5%

* 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 5,929 shares held in a
retirement account, 5,984 shares held of
record by Mr. Arvin's wife, as to which Mr.
Arvin disclaims beneficial ownership and
3,638 held jointly with his wife.
3) Includes 7,797 share held in a
retirement account and 4,700 shares held
jointly with his wife.
4) Includes 2,500 shares held jointly with
his wife and 4,380 shares that Mr. Dawson may
acquire upon exercise of outstanding stock
options.
5) Includes 2,500 shares held in a
retirement account and 520 shares that Mr.
Ferrell may acquire upon exercise of
outstanding stock options. Also, includes
1,500 shares held by Dr. Ferrell's wife, as
to which Dr. Ferrell disclaims beneficial
ownership.

6)
Includes 500 shares held by his wife and 320 shares held by
three sons, as to which Mr. Hinkle disclaims beneficial
ownership. Includes 8,835 shares held of record by
Hinkle Contracting Company, as to which Mr. Hinkle, as
president, has shared voting power. Also includes 520
shares that Mr. Hinkle may acquire upon exercise of
outstanding stock options.
7) Includes 3,135 share held of record by
Mr. Kuster's wife, as to which Mr. Kuster
disclaims beneficial ownership. Also
includes 2,500 shares held in a retirement
account and 520 shares that Mr. Kuster may
acquire upon exercise of outstanding stock
options.
8) Includes 520 shares that Mr. McClain may
acquire upon exercise of outstanding stock
options. Also includes 9,400 shares held of
record by Mr. McClain's wife, as to which Mr.
McClain disclaims beneficial ownership.
9) Includes 2,000 shares held by Signal
Investments Corporation, as to which Mr.
Stamler, as the chief executive officer and
majority shareholder of such corporation, has
sole voting and investment power. Also
includes 520 shares that Mr. Stamler may
acquire upon exercise of outstanding stock
options.
10) Includes 520 shares that Mr. Thompson
may acquire upon exercise of outstanding
stock options.
11) Includes 4,000 shares held by his wife
and 5,180 shares held by two sons, as to
which Mr. Woodford disclaims beneficial
ownership. Also includes 1,104 shares held
in a retirement account and 2,872 shares that
Mr. Woodford may acquire upon exercise of
outstanding stock options.

The following table sets forth as of December 31, 1997 the
persons known by the Company to own beneficially (as
determined in accordance with the rules and regulations of
the Commission) more than 5% of the outstanding common
stock.

Name and Address Shares Beneficially
of Beneficial Owner Owned Percentage

Buckner Woodford 128,351 8.9%
340 Stoner Avenue
Paris, Kentucky 40361

Item 13. Certain Relationships and Related Transactions

Directors and officers of the Company and their associates
were customers of and had transactions with the Company's
subsidiary bank in the ordinary course of business during
the year ended December 31, 1997. 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 the subsidiaries and
outstanding loans were $1.8 million as of December 31, 1997
and 1996. See Note 5 - Loans in the notes to consolidated
financial statements included as Exhibit 13.

Item 14. Exhibits and Reports on Form 8-K

(a) The following exhibits are incorporated by
reference herein or made a part of this Form 10-K:

11 Computation of earnings per share

13 Financial Statements:
Consolidated Balance Sheets - December 31, 1997
and 1996
Consolidated Statements of Income - Years Ended
December 31, 1997, 1996 and 1995
Consolidated Statements of Stockholders' Equity -
Years Ended December 31, 1997, 1996 and 1995
Consolidated Statements of Cash Flows - Years
Ended December 31, 1997, 1996 and 1995
Notes to Consolidated Financial Statements
Independent Auditor's Report

21 Subsidiaries of Registrant

23 Consent of Eskew & Gresham, P.S.C.

(b) Current Reports on Form 8-K during the quarter ended
December 31, 1997
None

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.

Bourbon Bancshares, Inc.
By: __/S/ Buckner Woodford____
Buckner Woodford, President and Chief Executive Officer,
Director
March 26, 1998

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/ Buckner Woodford_______ March 26, 1998
Buckner Woodford, President and Chief Executive Officer,
Director

/S/ Gregory J. Dawson______ March 26, 1998
Gregory J. Dawson, Chief Financial and Accounting Officer

/S/ James L. Ferrell_______ March 26, 1998
James L. Ferrell, M.D., Chairman of the Board, Director

_____________________________ March 26, 1998
William Arvin, Director

/S/ Russell M. Brooks_____ March 26, 1998
Russell M. Brooks, Director

_____________________________ March 26, 1998
Henry Hinkle, Director

_____________________________ March 26, 1998
Theodore Kuster, Director

/S/ Joseph B. McClain_____ March 26, 1998
Joseph B. McClain, Director

_____________________________ March 26, 1998
William R. Stamler, Director

__/S/ Robert G. Thompson_____ March 26, 1998
Robert G. Thompson, Director

INDEX TO EXHIBITS

Exhibit
Number Description of Document

11 Computation of earnings per share

13 Bourbon Bancshares, Inc. 1997 Annual Report

21 Subsidiaries of the Registrant

23 Consent of Eskew & Gresham, P.S.C.

Exhibit 11 Computation of earnings per share

Primary earnings per share for 1997 are calculated by
dividing the net income of $3.4 million by the sum of
the average shares outstanding of 1,396 thousand shares
and the dilutive effect of shares under option of 26
thousand shares for a total of 1,422 thousand average
shares. The average fully diluted share are 1,422
thousand shares.

Exhibit 13

BOURBON BANCSHARES, INC.

ANNUAL REPORT 1997

Our Shareholders:

Our company enjoyed growth in both size and profitability
this past year. After consolidating all operations under one
charter in 1996, we concentrated on promoting the name of
Kentucky Bank throughout central Kentucky in 1997. The
strategy of locating in rapidly growing, smaller communities
that surround Lexington is producing results.

The bank reached a new threshold in loan demand; our
portfolio of outstanding loans grew by 16% during the year.
Our deposit growth was not as strong, measuring a 4.4%
increase. In today's economy most banks are seeing their
loans outgrow deposits.

Earnings per share assuming dilution were $2.40, a 20%
increase from the prior year. The combination of strong loan
demand with good expense control helped produce these
favorable results. Dividends per share were also increased
in 1997, as they have each year since 1982.

A new branch office is being built in Georgetown. During
this decade Scott County has been the fastest growing county
in central Kentucky. Our new office should open around mid-
year. We believe this will strengthen our market position.

In recent months competition by banks moving into the high
growth communities we are located in has increased. The ever-
increasing competitive challenges put pressure on our
spreads. In spite of this, we feel we are well positioned to
take advantage of the economic growth in our markets.

In conclusion, let me thank our shareholders for their
support of Kentucky Bank. I hope to see at our annual
shareholders meeting, May 4, 1998, held at Kentucky Bank in
Paris. We expect 1998 to be another good year for our
business.

Buckner Woodford

FINANCIAL HIGHLIGHTS

BOURBON BANCSHARES, INC. 1997 1996 1995

Assets ($ millions) $ 291 $ 272 $ 269

Net Income ($ thousands) $3,408 $2,887 $2,488

Per Share Results

Earnings
(assuming dilution) $ 2.40 $ 2.00 $ 1.71

Dividends $ .72 $ .64 $ .60

Shareholder Information

CORPORATE HEADQUARTERS
Bourbon Bancshares, Inc.
4th and Main Street
Paris, Kentucky 40361
606-987-1795

ANNUAL MEETING
The annual meeting of shareholders of Bourbon Bancshares,
Inc. Will be held Monday, May 4, 1998 at 9:00 a.m. in the
corporate headquarters.

MARKET MAKERS

Morgan Keegan & Co.
489 East Main Street
Lexington, Kentucky 40507
1-800-937-0161

Hilliard Lyons
West Vine Street, Suite 400
Lexington, Kentucky 40507
1-800-944-2663

OTC Bulletin Board
Symbol: BBON

TRANSFER AGENT, REGISTRAR AND DIVIDEND DISBURSING AGENT
Kentucky Bank
Trust Department
606-987-1795, ext. 316

INVESTOR INFORMATION
Any individual requesting general information or a copy of
the Corporation's 1997 Form 10-K may obtain these by writing
Investor Relations at the Corporate Headquarters.

BOURBON BANCSHARES, INC. AND SUBSIDIARY

AUDITED CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995

BOURBON BANCSHARES, INC. AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS

December 31
ASSETS 1997 1996
Cash and cash equivalents:
Cash and due from banks $ 12,274,875 $ 9,115,503
Federal funds sold 0 75,000
Total cash and cash equivalents $ 12,274,875 $ 9,190,503
Investment securities:
Available for sale 66,100,663 76,226,956
Held to maturity (fair value of $16,410,523 and
$16,990,060 for 1997 and 1996, respectively) 15,602,778 16,313,453
Federal Home Loan Bank stock 2,905,200 2,705,600
Loans held for sale 5,418,297 862,947

Loans $179,799,013 $158,956,446
Unearned income (56,870) (154,583)
Allowance for loan losses (2,321,536) (2,101,081)
Net loans $177,420,607 $156,700,782

Bank premises and equipment, net 5,765,310 5,004,245
Interest receivable 2,855,565 2,737,900
Deferred income taxes 27,696 136,061
Intangible assets 2,103,688 2,266,454
Other assets 180,110 307,778

TOTAL ASSETS $290,654,789 $272,452,679

LIABILITIES AND STOCKHOLDERS' EQUITY
Deposits:
Non-interest bearing $ 33,481,215 $ 32,489,556
Time deposits, $100,000 and over 22,573,181 20,103,668
Other interest bearing 185,270,925 178,477,487
Total deposits $241,325,321 $231,070,711
Federal funds purchased 2,375,000 0
Securities sold under agreements to repurchase 4,614,607 2,835,954
Federal Home Loan Bank advances 10,236,291 10,534,031
Notes payable 750,000 750,000
Treasury tax and loan note 1,717,999 573,543
Interest payable 1,900,824 1,363,573
Other liabilities 1,018,629 691,388
Total liabilities $263,938,671 $247,819,200

STOCKHOLDERS' EQUITY
Preferred stock, 300,000 shares authorized and
unissued $ 0 $ 0
Common stock, no par value; 3,000,000 shares
authorized; 1,394,562 and 1,412,829 shares
issued and outstanding in 1997 and 1996,
respectively 6,332,861 6,392,329
Retained earnings 20,150,369 18,239,684
Net unrealized gains on investment securities 232,888 1,466
Total stockholders' equity $ 26,716,118 $ 24,633,479

TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $290,654,789 $272,452,679

See notes to consolidated financial statements.

BOURBON BANCSHARES, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF INCOME

Year Ended December 31

1997 1996 1995
INTEREST INCOME:
Loans, including fees $15,483,271 $13,774,234 $13,411,005
Investment securities -
U. S. Treasury obligations 1,482,218 1,328,163 1,807,052
Obligations of U.S. government agencies 2,436,756 2,449,743 2,404,994
Obligations of states and political
subdivisions 1,174,113 1,208,098 1,247,221
Other securities 221,179 280,524 375,916
Federal funds sold 159,833 297,418 272,640
Deposits in other bank 4,094 86,573 139,126
$20,961,464 $19,424,753 $19,657,954
INTEREST EXPENSE:
Deposits $ 9,480,440 $ 8,806,069 $ 8,758,056
Federal funds purchased and securities
sold under agreements to repurchase 234,521 175,745 174,616
Notes payable and other borrowed funds 699,754 857,033 1,493,373
$10,414,715 $ 9,838,847 $10,426,045

Net interest income $10,546,749 $ 9,585,906 $ 9,231,909
Provision for loan losses 492,800 401,965 395,794
Net interest income after provision for
loan losses $10,053,949 $ 9,183,941 $ 8,836,115

OTHER INCOME:
Service charges $ 1,674,348 $ 1,507,506 $ 1,353,839
Loan servicing income 257,953 255,426 236,488
Trust department income 237,254 205,740 235,412
Investment securities gains (losses), net 13,686 (12,839) (55,792)
Gains on sale of loans 72,236 200,366 64,853
Other 134,510 127,850 218,345
$ 2,389,987 $ 2,284,049 $ 2,053,145
OTHER EXPENSES:
Salaries and wages $ 3,478,238 $ 3,283,091 $ 3,084,993
Employee benefits 795,784 722,031 733,756
Occupancy expenses 1,002,137 931,434 860,526
FDIC assessment 54,281 412,483 324,673
Amortization 346,891 314,553 397,889
Taxes other than payroll, property and
income 287,718 255,055 209,865
Advertising 276,430 261,929 221,310
Other 1,646,499 1,534,013 1,850,665
$ 7,887,978 $ 7,714,589 $ 7,683,677

Income before income taxes $ 4,555,958 $ 3,753,401 $ 3,205,583

Provision for income taxes 1,147,924 866,295 717,389

NET INCOME $ 3,408,034 $ 2,887,106 $ 2,488,194

Earnings per share $ 2.44 $ 2.03 $ 1.74
Earnings per share assuming dilution $ 2.40 $ 2.00 $ 1.71

See notes to consolidated financial statements.

BOURBON BANCSHARES, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995

Net Total
Common Retained Unrealized Stockholders'
Stock Earnings Gain (Loss) Equity

Balances, January 1, 1995 $ 6,409,683 $14,950,308 $(1,404,598) $19,955,393

Issuance of 7,378 shares of common stock
(including employee gifts of 18 shares) 46,605 0 0 46,605

Exercise of stock options at Jessamine 25,481 0 0 25,481

Net change in unrealized gain 0 0 1,415,560 1,415,560

Net income 0 2,488,194 0 2,488,194

Dividends paid - Company ($.60 per share) 0 (749,540) 0 (749,540)

Dividends paid - Jessamine ($.60 per share) 0 (69,801) 0 (69,801)

Adjustment to conform pooled Company's
fiscal year end - Net income 0 54,745 0 54,745

BALANCES, DECEMBER 31, 1995 $ 6,481,769 $16,673,906 $ 10,962 $23,166,637

Issuance of 129 shares of common stock
(including employee gifts of 49 shares) 960 0 0 960

Purchase of 20,000 shares of common stock (90,400) (409,764) 0 (500,164)

Net change in unrealized gain 0 0 (9,496) (9,496)

Net income 0 2,887,106 0 2,887,106

Dividends paid - Company (.64 per share) 0 (911,564) 0 (911,564)

BALANCES, DECEMBER 31, 1996 $ 6,392,329 $18,239,684 $ 1,466 $24,633,479

Issuance of 6,130 shares of common stock
(including employee gifts of 50 shares) 50,948 0 0 50,948

Purchase of 24,397 shares of common stock (110,416) (492,196) 0 (602,612)

Net change in unrealized gain 0 0 231,422 231,422

Net income 0 3,408,034 0 3,408,034

Dividends paid - Company ($.72 per share) 0 (1,005,153) 0 (1,005,153)

BALANCES, DECEMBER 31, 1997 $ 6,332,861 $20,150,369 $ 232,888 $26,716,118

See notes to consolidated financial statements.

BOURBON BANCSHARES, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS

Year Ended December 31
1997 1996 1995

CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 3,408,034 $ 2,887,106 $ 2,488,194
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation and amortization 946,973 870,092 813,820
Investment securities amortization (accretion),
net 23,081 149,205 (83,805)
Provision for loan losses 492,800 401,965 396,694
Deferred income taxes (10,853) 168,544 (74,853)
Investment securities (gains) losses, net (13,686) 12,839 55,792
Originations of loans held for sale (18,313,521) (21,077,087) (20,868,849)
Proceeds from sale of loans 18,428,256 21,778,522 21,126,209
Capitalization of mortgage servicing rights (184,125) (215,812) 0
Gains on sale of loans (72,236) (200,366) (68,015)
Losses (gains), including write-downs, on real
estate acquired through foreclosure, net 23,345 10,934 (95,961)
Adjustment to conform pooled Company's
fiscal year end - net income 0 0 54,745
Changes in:
Interest receivable (117,665) (26,485) (43,918)
Other assets (150,938) 398 89,594
Interest payable 537,251 110,322 252,595
Other liabilities 327,241 (108,589) (691,179)
Net cash provided by operating activities $ 5,323,957 $ 4,761,588 $ 3,351,063

CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of securities available for sale $(26,873,621) $(47,176,494) $(16,489,439)
Proceeds from sales and calls of securities
Available for sale 17,343,034 13,512,387 22,545,152
Proceeds from principal payments and maturities
of securities available for sale 19,982,850 33,441,384 6,950,257
Purchases of investment securities held to
maturity (785,000) (1,375,000) (7,495,437)
Proceeds from maturities of investment securities
held to maturity 1,510,950 1,520,000 3,348,173
Net change in loans (25,886,674) (5,883,441) (8,151,059)
Purchases of bank premises and equipment (1,284,947) (1,307,597) (306,493)
Proceeds from sales of real estate acquired
through foreclosure 55,661 508,437 447,500
Net cash (used in) provided by investing
activities $(15,937,747) $ (6,760,324) $ 848,654

See notes to consolidated financial statements.

BOURBON BANCSHARES, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
(CONTINUED)

Year Ended December 31

1997 1996 1995

CASH FLOWS FROM FINANCING ACTIVITIES:
Net change in deposits $ 10,254,610 $ 17,722,380 $(10,461,498)
Net change in securities sold under agreements
to repurchase and federal funds purchased 4,153,653 (7,524,219) 5,413,919
Advances from Federal Home Loan Bank 0 400,000 400,000
Payments on Federal Home Loan Bank advances (297,740) (8,937,095) (1,934,479)
Net change in treasury tax and loan note 1,144,456 492,412 (157,268)
Proceeds from notes payable 450,000 330,000 0
Payments on notes payable (450,000) (930,000) (1,100,000)
Proceeds from issuance of common stock 50,948 960 72,086
Purchase of common stock (602,612) (500,164) 0
Dividends paid (1,005,153) (911,564) (819,341)
Net cash provided by (used in) financing
activities $ 13,698,162 $ 142,710 $ (8,586,581)

Net increase (decrease) in cash and cash
equivalents $ 3,084,372 $ (1,856,026) $ (4,386,864)

Cash and cash equivalents at beginning of year 9,190,503 11,046,529 15,433,393

CASH AND CASH EQUIVALENTS AT END OF YEAR $ 12,274,875 $ 9,190,503 $ 11,046,529

SUPPLEMENTAL DISCLOSURES OF CASH
FLOW INFORMATION:
Cash paid during the year for -
Interest expense $ 9,877,464 $ 9,728,525 $ 10,576,530
Income taxes $ 1,100,000 $ 787,008 $ 571,127

SUPPLEMENTAL SCHEDULES OF NON-CASH
INVESTING AND FINANCING ACTIVITIES:
Investment securities transferred from
securities held to maturity to securities
available for sale $ 0 $ 0 $ 14,303,320
Real estate acquired through foreclosure $ 0 $ 541,377 $ 102,712
Transfer of loans to loans held for sale $ 4,597,849 $ 0 $ 0

See notes to consolidated financial statements.

BOURBON BANCSHARES, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995

1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

A. Basis of Presentation - The consolidated financial
statements include the accounts of Bourbon Bancshares, Inc.
(the Company) and its wholly owned subsidiary, Kentucky Bank
(the Bank). All material intercompany transactions and
balances have been eliminated.

In December 1995, the Company acquired Jessamine First
Federal Savings and Loan Association (Jessamine) in a
business combination accounted for as a pooling of
interests. The accompanying consolidated financial
statements for 1995 are based on the assumption that the
companies were combined for the full year.

During 1996, the federal thrift charters of Kentucky
Savings Bank, FSB and Jessamine were terminated and both
entities became branches of the Bank. The dissolution of
these entities and termination of their respective charters
did not have a material effect on the consolidated financial
statements.

B. Nature of Operations - The Bank operates under a
state bank charter and provides full banking services,
including trust services. 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
also regulated by the Federal Reserve.

C. Estimates in the Financial Statements - The
preparation of financial statements in conformity with
generally accepted accounting principles 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.

D. Cash and Cash Equivalents - 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.

E. Investment Securities - The Company classifies its
investment securities portfolio into 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.

Investment securities available for sale are carried at
fair value. Adjustment from amortized cost to fair value is
recorded in stockholders' equity, net of related income tax,
under net unrealized gains on investment securities. The
adjustment is computed on the difference between fair value
and cost adjusted for amortization of premiums and accretion
of discounts which are recorded as adjustments to interest
income using the constant yield method.

1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(CONTINUED)

Investment securities for which the Bank has the
positive intent and ability to hold to maturity are stated
at cost, adjusted for amortization of premiums and accretion
of discounts which are recorded as adjustments to interest
income using the constant yield method.

Gains or losses on dispositions are based on the net
proceeds and the adjusted carrying amount of the securities
sold, using the specific identification method.

F. Loans - Loans are stated at the amount of unpaid
principal, reduced by unearned income and an allowance for
loan losses. Interest income on loans is recognized on the
accrual basis except for those loans in a nonaccrual income
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. When interest accrual is
discontinued, interest income is subsequently recognized
only to the extent cash payments are received.

The allowance for loan losses is established through a
provision for loan losses charged to expense. The allowance
is an amount that management believes will be adequate to
absorb possible losses on existing loans that may become
uncollectible, based on evaluations of the collectibility of
loans and prior loan loss experience. The evaluations take
into consideration such factors as changes in the nature and
volume of the loan portfolio, overall portfolio quality,
review of specific problem loans, and current economic
conditions that may affect the borrowers' ability to pay.
Loans are charged against the allowance for loan losses when
management believes that the collectibility of the principal
is unlikely.

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. A loan is considered to be impaired when it is
probable that all principal and interest amounts will not be
collected according to the loan contract. The entire change
in present value of expected cash flows is reported as
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.

Loans held for sale are valued at the lower of cost or
market as determined by outstanding commitments from
investors or current investor yield requirements, calculated
on the aggregate loan basis.

Loan origination fees and certain direct origination
costs are capitalized and recognized as an adjustment of the
yield on the related loan.

G. Loan Servicing - 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 normal servicing fee from the FHLMC on each
loan sold. Servicing rights are capitalized based on fair
value.

1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(CONTINUED)

H. Bank Premises and Equipment - Bank premises and
equipment are stated at cost less accumulated depreciation.
Depreciation is recorded principally by the straight-line
method over the estimated useful lives of the bank premises
and equipment.

I. 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.
Certain parcels of real estate are being leased to third
parties to offset holding period costs. Operating expenses
of such properties, net of related income, and gains and
losses on their disposition are included in other expenses.

J. Income Taxes - The Company and the Bank file a
consolidated federal income tax return. The Bank is charged
or credited an amount equal to the income tax that would
have been applicable on a separate return basis.

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. The
differences relate principally to premises and equipment,
accrued pension, premium on loans and deposits purchased,
unrealized gains (losses) on investment securities available
for sale, mortgage servicing rights, FHLB stock, and the
allowance for loan losses.

K. Intangible Assets - Intangible assets include a
premium on deposits paid in connection with the acquisition
of a branch which is being amortized on a straight-line
basis over ten years, capitalized mortgage servicing rights
which are being amortized over the life of the related loans
and organization costs which are being amortized on a
straight-line basis over five years.

L. Marketing Expense - The Company charges all
marketing expenses to operations when incurred. No amounts
have been established for any future benefits relative to
these expenditures.

M. Effect of New Accounting Standards - The Financial
Accounting Standards Board (FASB) has issued Statement of
Financial Accounting Standards (SFAS) No. 125, "Accounting
for Transfers and Servicing of Financial Assets and
Extinguishments of Liabilities", which provides accounting
and reporting guidance regarding various financial
instruments and related transactions. The Statement was
adopted by the Company, as required, on January 1, 1997. The
effect of adopting the new guidance was not material to the
Company's consolidated financial statements.

1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

In June 1997, the FASB issued SFAS No. 130, "Reporting
Comprehensive Income", which requires that all items that
are components of comprehensive income (defined as "the
change in equity (net assets) of a business enterprise
during a period from transactions and other events and
circumstances from nonowner sources. It includes all
changes in equity during a period except those resulting
from investments by owners and distributions to owners"), be
reported in a financial statement that is displayed with the
same prominence as other financial statements. Companies
will be required to (a) classify items of other
comprehensive income by its nature in a financial statement
and (b) display the accumulated balance of other
comprehensive income separately from retained earnings and
additional paid-in capital in the equity section of a
statement of financial position. The new guidance is
effective for fiscal years beginning after December 15, 1997
and requires reclassification of prior periods presented.
The requirements are disclosure-related and its
implementation will have no impact on the Company's
financial condition or results of operations.

N. Per Share Information - In the last quarter of
1997, the Company adopted SFAS No. 128, "Earnings Per
Share", under which basic and diluted earnings per share are
computed. Prior amounts have been restated to be
comparable. Basic earnings per share is based on net income
divided by the weighted average number of shares outstanding
during the period. Diluted earnings per share shows the
dilutive effect of additional common shares issuable under
stock options.

O. Reclassifications - Certain reclassifications have
been made in the 1996 and 1995 financial statements to
conform to classifications used in 1997.

2. BUSINESS COMBINATION

In December 1995, Jessamine became a wholly owned
subsidiary of the Company through the exchange of 244,439
shares of the Company's common stock for all of the
outstanding stock of Jessamine. Summarized results of
operations of the separate companies for the years ended
December 31, 1995 and September 30, 1995, the Company's and
Jessamine's respective fiscal year-ends are as follows:

Company Jessamine

Interest income $17,165,150 $2,492,804
Interest expense 9,010,818 1,415,227
Net interest income $ 8,154,332 $1,077,577
Provision for loan losses 390,504 5,290
Net interest income after
provision for loan losses $ 7,763,828 $1,072,287
Other income 2,002,929 50,216
Other expenses 6,899,450 784,227
Provision for income taxes 601,567 115,822
Net income $ 2,265,740 $ 222,454

2. BUSINESS COMBINATION (CONTINUED)

Prior to the pooling, Jessamine's fiscal year ended
September 30. Subsequent to the pooling, Jessamine changed
its year-end to December 31 to conform with that of the
Company. The 1995 statement of income includes Jessamine and
the Company's results of operations for their respective
fiscal year-ends. During the three months ended December 31,
1995, Jessamine reported net interest income of $237,587 and
net income of $54,745. In order to reflect this change in
fiscal year-end, retained earnings has been increased by
Jessamine's reported net income for the three-month period.
The 1995 statement of cash flows includes Jessamine's fiscal
year and the activity for the three months ended December
31, 1995.

3. 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 average requirement was
$4,345,000 at December 31, 1997.

4. INVESTMENT SECURITIES

During December, 1995, the Company made a one time
transfer of investment securities from held to maturity to
available for sale of $14,303,320, as allowed under the
Financial Accounting Series Special Report, "A Guide to
Implementation of Statement 115", issued in November 1995.
The investments were transferred at fair value at the date
of transfer. The unrealized gain (loss) on transfer is
included in the net change in unrealized gain (loss) in the
consolidated statements of stockholders' equity.

Amortized cost and fair value of investment securities,
by category, at December 31, 1997 are as follows:
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
Available for sale:
U.S. Treasury securities $18,983,175 $ 88,978 $ (278) $19,071,875
Obligations of U.S. government
Agencies 10,487,431 0 (1,931) 10,485,500
Obligations of states and
political Subdivisions 3,942,551 134,644 0 4,077,195
Asset-backed securities 32,334,645 303,520 (172,072) 32,466,093
Total available for sale $65,747,802 $527,142 $(174,281) $66,100,663

Held to maturity:
Obligations of states and
political Subdivisions $15,602,778 $807,926 $ (181) $16,410,523

4. INVESTMENT SECURITIES (CONTINUED)

Amortized cost and fair value of investment securities,
by category, at December 31, 1996 are as follows:
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
Available for sale:
U. S. Treasury securities $24,513,413 $ 67,277 $ (9,284) $24,571,406
Obligations of U.S.
government agencies 8,984,521 3,697 (4,407) 8,983,811
Obligations of states and
political subdivisions 3,943,463 83,161 (15,044) 4,011,580
Asset-backed securities 38,783,338 198,191 (321,370) 38,660,159
Total available for sale $76,224,735 $352,326 $(350,105) $76,226,956

Held to maturity:
Obligations of states and
political subdivisions $16,313,453 $706,050 $ (29,443) $16,990,060

The amortized cost and fair value of investment
securities at December 31, 1997, by category and 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.

Amortized
Fair

Cost Value
Available for sale:
Due in one year or less $20,783,132 $20,811,096
Due after one year through five years 10,293,720 10,376,240
Due after five years through ten years 1,462,602 1,546,367
Due after ten years 873,703 900,867
$33,413,157 $33,634,570
Asset-backed securities 32,334,645 32,466,093
Total available for sale $65,747,802 $66,100,663

Held to maturity:
Due in one year or less $ 344,190 $ 347,333
Due after one year through five years 3,809,838 3,978,232
Due after five years through ten years 9,002,344 9,531,675
Due after ten years 2,446,406 2,553,283
Total held to maturity $15,602,778 $16,410,523

4. INVESTMENT SECURITIES (CONTINUED)

Proceeds from sales and calls of investment securities
during 1997, 1996 and 1995 were $17,343,034, $13,512,387 and
$22,545,152, respectively. Gross gains of $31,347, $30,211
and $49,510 and gross losses of $17,661, $43,050 and
$105,302, respectively, were realized on those sales and
calls.

Investment securities with an approximate carrying
value of $56,631,000 and $37,378,000 at December 31, 1997
and 1996, respectively, were pledged to secure public
deposits, trust funds, securities sold under agreements to
repurchase and for other purposes as required or permitted
by law.

5. LOANS

Major classifications of loans are summarized as
follows:

1997 1996

Commercial $ 10,643,958 $ 10,216,331
Real estate construction 7,656,856 4,200,111
Real estate mortgage 108,048,265 98,429,977
Agricultural 37,924,098 30,947,231
Consumer 15,238,753 14,789,144
Other 287,083 373,652
$179,799,013 $158,956,446

Changes in the allowance for loan losses were as
follows:

1997 1996 1995

Balance, beginning of year $2,101,081 $1,860,093 $1,648,210
Charge-offs (355,123) (213,328) (231,889)
Recoveries 82,778 52,351 47,978
Provision for loan losses 492,800 401,965 395,794
Balance, end of year $2,321,536 $2,101,081 $1,860,093

Impaired loans totaled $333,000 and $251,000 at
December 31, 1997 and 1996, respectively. The average
recorded investment in impaired loans during 1997, 1996 and
1995 was $292,000, $298,000 and $428,000, respectively. The
total allowance for loan losses related to these loans was
$57,000 and $28,000 at December 31, 1997 and 1996,
respectively. Interest income on impaired loans of $23,000,
$55,000 and $34,000 was recognized for cash payments
received in 1997, 1996 and 1995, respectively.

5. LOANS (CONTINUED)

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 $91,423,000 and $86,138,000 at December 31,
1997 and 1996, respectively. Custodial escrow balances
maintained in connection with the foregoing loan servicing,
and included in demand deposits, were approximately $545,000
and $540,000 at December 31, 1997 and 1996, respectively.

Mortgage servicing rights of $184,125 and $215,812 were
capitalized in 1997 and 1996, respectively. Amortization of
mortgage servicing rights was $58,699 and $26,361 in 1997
and 1996, respectively.

Certain directors and executive officers of the Company
and companies in which they have beneficiary ownership were
loan customers of the Bank during 1997 and 1996. Total loans
to these persons were approximately $1,824,000 and
$1,828,000 at December 31, 1997 and 1996, respectively.
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:

1997 1996

Balance, beginning of year $ 1,828,000 $ 2,663,000
Additions, including loans now meeting
disclosure requirements 1,381,000 1,211,000
Amounts collected, including loans no
longer meeting disclosure requirements (1,385,000) (2,046,000)
Balance, end of year $ 1,824,000 $ 1,828,000

6. BANK PREMISES AND EQUIPMENT

Bank premises and equipment are summarized as follows:

1997 1996

Land and buildings $ 6,371,645 $ 5,235,823
Furniture and equipment 4,429,043 3,948,079
Construction in progress 27,082 358,920
$10,827,770 $ 9,542,822
Less accumulated depreciation (5,062,460) (4,538,577)
$ 5,765,310 $ 5,004,245

Depreciation expense was $523,882, $479,338 and
$408,244 in 1997, 1996 and 1995, respectively.

7. DEPOSITS

At December 31, 1997, the scheduled maturities of time
deposits are as follows:

1998 $ 94,485,845
1999 21,589,303
2000 2,779,409
2001 334,458
2002 and thereafter 695,460
$119,884,475

Certain directors and executive officers of the Company
and companies in which they have beneficiary ownership, are
deposit customers of the Bank. The amount of these deposits
was approximately $2,393,000 and $2,272,000 at December 31,
1997 and 1996, respectively.

8. SECURITIES SOLD UNDER AGREEMENTS TO REPURCHASE

Securities sold under agreements to repurchase
generally mature within one to four days from the
transaction date. The securities underlying the agreements
are maintained in a third-party custodian's account under a
written custodial agreement. Information concerning
securities sold under agreements to repurchase for 1997 and
1996 is summarized as follows:

1997 1996

Average daily balance during the year $4,103,000 $3,342,000
Average interest rate during the year 5.03% 5.01%
Maximum month-end balance during the year $4,895,000 $4,668,000
Carrying and fair value of U.S. Treasury
securities underlying the agreements $6,895,000 $8,815,000

9. FEDERAL HOME LOAN BANK ADVANCES

The Bank owns stock of the Federal Home Loan Bank
(FHLB) of Cincinnati, Ohio. This stock allows the Bank to
borrow advances from the FHLB which the Bank uses to fund
fixed-rate mortgages.

At December 31, 1997 and 1996, $10,236,291 and
$10,534,031, respectively, represented the balance due on
the above advances from the FHLB. All advances are paid
either on a monthly basis or at maturity, over remaining
terms of one to six years, with interest rates ranging from
5.05% to 6.80%. Advances are secured by the FHLB stock and
all single family first mortgage loans. Scheduled principal
payments due on advances during the years subsequent to
December 31, 1997 are as follows: 1998 - $7,286,309; 1999 -
$302,254; 2000 - $1,240,318; 2001 - $237,970; 2002 -
$251,637; years thereafter - $917,803.

10. NOTES PAYABLE

Notes payable are summarized as follows:
1997 1996
Promissory note, principal due at November 1,
2003, interest payable annually at 12%,
secured by real estate $750,000 $750,000

Revolving $500,000 line of credit, interest
payable quarterly at the prime rate,
maturing June 30, 1998 secured by 100% of
the common stock of the Bank 0 0
$750,000 $750,000

11. INCOME TAXES

The components of the provision for income taxes are as
follows:

1997 1996 1995

Current payable $1,158,777 $ 697,751 $ 793,478
Deferred (10,853) 168,544 (76,089)
$1,147,924 $ 866,295 $ 717,389

Interest income totaling $1,336,597, $1,371,098 and
$1,380,869 for 1997, 1996 and 1995, respectively, is exempt
from federal income taxes; accordingly, the tax provision is
less than that obtained by using the statutory federal
income tax rate.

The income tax expense (benefit) related to investment
securities gains and losses was $4,653, $(4,365) and
$(18,969) for 1997, 1996 and 1995, respectively.

The Company's deferred tax assets and liabilities at
December 31 are shown below. No valuation allowance for the
realization of deferred tax assets is considered necessary.

1997 1996
Deferred tax assets:
Allowance for loan losses $ 596,087 $449,757
Premium on deposits purchased 97,641 68,139
Accrued pension expense 0 13,886
Deferred loan fees 19,336 0
Other 28,119 18,842

11. INCOME TAXES (CONTINUED)
1997 1996
Deferred tax liabilities:
Bank premises and equipment (129,217) (117,104)
Unrealized gain on investment securities (119,972) (755)
FHLB stock (306,289) (239,785)
Mortgage servicing rights (107,058) 0
Premium on loans purchased (31,596) (47,887)
Other (19,355) (9,032)
Net deferred tax asset $ 27,696 $ 136,061

An analysis of the differences between the effective
tax rates and the statutory U.S. federal income tax rate is
as follows:
1997
1996 1995

U. S. federal income tax rate 34.00% 34.00% 34.00%
Changes from the statutory rate:
Tax-exempt investment income (9.97) (12.42) (14.43)
Non-deductible interest expense
related to carrying tax-exempt investments 1.25 1.53 1.45
Other (0.08) (0.03) 1.35
25.20% 22.37% 23.08%

12. EARNINGS PER SHARE

A reconciliation of the numerators and denominators of
the earnings per common share and earnings per common share
assuming dilution computations for 1997, 1996 and 1995 is
presented below.

Year Ended
1997 1996 1995
Earnings Per Share
Net income available to common
stockholders $3,408,034 $2,887,106 $2,488,194

Weighted average common shares
outstanding 1,396,201 1,424,704 1,430,025

Earnings per share $ 2.44 $ 2.03 $ 1.74

Earnings Per Share Assuming Dilution
Net income available to common
stockholders $3,408,034 $2,887,106 $2,488,194

12. EARNINGS PER SHARE (CONTINUED)

Year Ended

1997 1996 1995
Weighted average common shares
outstanding 1,396,201 1,424,704 1,430,025

Add dilutive effects of assumed
exercise of stock options 25,596 18,771 27,884

Weighted average common and dilutive
potential common shares outstanding 1,421,797 1,443,475 1,457,909

Earnings per share assuming dilution $ 2.40 $ 2.00 $ 1.71

Stock options for 12,400 shares of common stock were
not considered in computing earnings per share for 1996
because they were antidilutive.

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. Pension
expense was $127,182, $105,161 and $99,110 for 1997, 1996
and 1995, respectively.

The following table sets forth the plan's funded status
and amounts recognized in the accompanying consolidated
financial statements at December 31, 1997 and 1996:

1997 1996
Actuarial present value of benefit obligations:

Accumulated benefit obligations, including
vested benefits of $1,191,449 and
$1,044,494, respectively $ 1,213,751 $ 1,060,869

Projected benefit obligations for services
rendered to date $(1,833,910) $(1,623,500)
Plan assets at fair value, U.S. Treasury and
agency securities and mutual funds 1,995,586 1,718,776
Plan assets in excess of projected benefit
obligation $ 161,676 $ 95,276
Unrecognized net gain (137,428) (131,657)
Unrecognized net asset at January 1, 1989,
being recognized over 20 years (4,089) (4,461)

Prepaid (accrued) pension cost included in other
assets (liabilities) $ 20,159 $ (40,842)

13. RETIREMENT PLANS (CONTINUED)

1997 1996 1995
Net periodic pension cost for 1997 and
1996 include the following components:
Service cost $(137,229) $(118,339) $(107,311)
Interest cost (126,623) (112,826) (100,961)
Actual return on plan assets 110,322 84,108 92,349
Amortization of transition asset 372 372 372
Difference between actual and expected
Return on plan assets 25,976 41,524 16,441

Net periodic cost $(127,182) $(105,161) $ (99,110)

A discount rate of 8% is used to compute the actuarial
present value of the accumulated and projected benefit
obligations. The assumed rate of return on plan assets is
also 8%. The assumed rate of salary increases is 5%.

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 $166,647, $157,162 and $132,892 in 1997, 1996
and 1995, respectively.

Prior to the acquisition, Jessamine established
individual retirement accounts for all employees with two
years of continuous service. Contributions were $10,494 in
1995. Jessamine also contributed $57,600 in 1995 for the
purchase of an annuity to fund the retirement of a key
employee.

14. STOCK OPTION PLAN

The Company has two stock option plans, which are
accounted for in accordance with Accounting Principles Board
Opinion (APB) No. 25, "Accounting for Stock Issued to
Employees", and related interpretations. Under the plans,
the Company grants certain directors, officers and key
employees stock option awards which vest and become fully
exercisable at the end of five years. During 1997 and 1996,
the Company authorized the grant of options to purchase
11,000 and 10,350 shares of the Company's common stock. 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.

14. STOCK OPTION PLAN (CONTINUED)

Although the Company has elected to follow APB No. 25,
Statement of Financial Accounting Standards (SFAS) No. 123,
"Accounting for Stock-Based Compensation", requires pro
forma disclosures of net income and earnings per share as if
the Company had accounted for its employee stock options
under that Statement. The fair value of each option grant
was estimated on the grant date using an option-pricing
model.

Summary of stock option transactions are as follows:

1997 1996 1995
Weighted Weighted Weighted
Option Option Option
Options Price Options Price Options Price

Outstanding, beginning of year 58,550 $17.20 49,160 $15.33 55,420 $13.93
Granted during the year 11,000 25.24 10,350 26.36 1,100 25.50
Canceled during the year (650) 16.00 (880) 20.73 0 0
Exercised during the year (6,080) 8.38 (80) 12.00 (7,360) 6.33
Outstanding, end of year 62,820 $19.47 58,550 $17.20 49,160 $15.33

Weighted remaining contractual
life 69.3 months 66.4 months 69.7 months

Options outstanding
From $7.83 to $12.75 per share 17,900 24,380 24,620
From $17.25 to $22.28 per share 20,320 20,420 20,740
From $24.00 to $30.00 per share 24,600 13,750 3,800
62,820 58,550 49,160
Eligible for exercise
From $7.83 to $12.75 per share 17,900 24,380 23,140
From $17.25 to $22.28 per share 18,240 10,332 6,336
From $24.00 to $26.50 per share 7,620 1,120 420
43,760 35,832 29,896

14. STOCK OPTION PLAN (CONTINUED)

Under SFAS No. 123, compensation cost is recognized in
the amount of the estimated fair value of the options and
amortized to expense over the options' vesting periods. The
pro forma effect on net income and earnings per share of
this statement are as follows:

1997 1996 1995
Net income
As reported $3,408,034 $
2,887,106 $ 2,488,194
Pro forma $3,375,248 $
2,870,017 $ 2,488,194

Earnings per share
As reported $ 2.44 $ 2.03 $ 1.74
Pro forma $ 2.42 $ 2.01 $ 1.74

Earnings per share assuming dilution
As reported $ 2.40 $ 2.00 $ 1.71
Proforma $ 2.38 $ 1.98 $ 1.71

Weighted averages:
Fair value of options granted $ 7.24 $ 7.77 $ 7.89
Risk free interest rate 6.50% 6.50% 7.20%
Expected life 8 years 8 years 8 years
Expected volatility .2179 .1966 .1185
Expected dividend $ .72 $ .64 $ .60

In 1995, prior to the acquisition of Jessamine, certain
directors, officers and key employees of Jessamine exercised
stock options totaling $25,481 under Jessamine's Stock
Option and Incentive Plan. Effective with the acquisition,
all unexercised options were canceled and the Plan was
terminated.

15. 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 1998 the Bank could, without
prior approval, declare dividends of approximately
$2,243,000 plus any 1998 net profits retained to the date of
the dividend declaration.

16. DISCLOSURES ABOUT FAIR VALUE OF FINANCIAL INSTRUMENTS

The following methods and assumptions were used to
estimate the fair value of each class of financial
instruments for which it is practicable to estimate that
value:

Cash and Cash Equivalents - For those short-term instru
ments, the carrying amount is a reasonable estimate of
fair value.

Investment Securities - For investment securities, fair
values are based on quoted market prices or dealer
quotes.

Loans - Fair value is estimated by discounting the
future cash flows using the current rates at which
similar loans would be made to borrowers with similar
credit ratings and for the same remaining maturities.

Federal Home Loan Bank Stock - Federal Home Loan Bank
stock carrying value is equivalent to market since it
can only be purchased or sold with the FHLB at carrying
value.

Deposit Liabilities - The fair value of demand
deposits, savings accounts, and certain money market
deposits is the amount payable on demand at the
reporting date. The fair value of fixed-maturity
certificates of deposit is estimated using the rates
currently offered for deposits of similar remaining
maturities.

Federal Funds Purchased and Securities Sold Under
Agreements to Repurchase - For those short-term
instruments, the carrying amount is a reasonable
estimate of fair value.

Federal Home Loan Bank Advances - Rates currently
available to the Company for advances with similar
terms and remaining maturities are used to estimate
fair value of existing debt.

Other Borrowed Funds - The fair value of fixed-rate
borrowings is estimated by discounting the future cash
flows using a rate which approximates market for
borrowings of a similar maturity. The carrying value
of variable-rate borrowed funds is a reasonable
estimate of fair value.

Commitments to Extend Credit and Standby Letters of
Credit - Commitments to extend credit and standby
letters of credit represent agreements to lend to a
customer at the market rate when the loan is extended,
thus the commitments and letters of credit are not
considered to have a fair value.

16. DISCLOSURES ABOUT FAIR VALUE OF FINANCIAL INSTRUMENTS
(CONTINUED)

The fair values of the Company's financial instruments
at December 31, 1997 and 1996 are as follows:

1997 1996
Carrying Carrying
Amount Fair Value Amount Fair Value

Financial assets:
Cash and cash equivalents $ 12,274,875 $ 12,275,000 $ 9,190,503 $ 9,191,000
Investment securities 81,703,441 82,511,000 92,540,409 93,217,000
Federal Home Loan Bank stock 2,905,200 2,905,000 2,705,600 2,706,000
Loans 185,160,440 185,327,000 159,664,810 159,541,000
Less: allowance for loan
losses (2,321,536) (2,322,000) (2,101,081) (2,101,000)
$ 279,722,420 $ 280,696,000 $ 262,000,241 $ 262,554,000

Financial liabilities:
Deposits $(241,325,321) $(242,188,000) $(231,070,711) $(232,069,000)
Federal funds purchased (2,375,000) (2,375,000) 0 0
Securities sold under
agreements to repurchase (4,614,607) (4,615,000) (2,835,954) (2,836,000)
Federal Home Loan Bank
advance (10,236,291) (10,157,000) (10,534,031) (10,390,000)
Other borrowed funds (2,467,999) (2,468,000) (1,323,543) (1,324,000)
$(261,019,218) $(261,803,000) $(245,764,239) $(246,619,000)

17. FINANCIAL INSTRUMENTS WITH OFF-BALANCE SHEET RISK

The Company is party to financial instruments with off-
balance sheet risk in the normal course of business to meet
the financing needs of its customers. These financial
instruments include standby letters of credit and
commitments to extend credit in the form of unused lines of
credit. The Company uses the same credit policies in making
commitments and conditional obligations as they do for on-
balance sheet instruments.

At December 31, 1997 and 1996, the Company had the
following financial instruments whose approximate contract
amounts represent credit risk:

1997 1996

Standby letters of credit $ 643,000 $ 501,000

Commitments to extend credit $28,879,000 $22,493,000

17. FINANCIAL INSTRUMENTS WITH OFF-BALANCE SHEET RISK
(CONTINUED)

Standby letters of credit represent conditional
commitments issued by the Company to guarantee the
performance of a third party. The credit risk involved in
issuing these letters of credit is essentially the same as
the risk involved in extending loans to customers.

Commitments to extend credit are agreements to lend to
a customer as long as there is no violation of any condition
established in the contract. Commitments generally have
fixed expiration dates or other termination clauses and may
require payment of a fee. The Company evaluates each
customer's creditworthiness on a case-by-case basis. Since
some of the commitments are expected to expire without being
drawn upon, the total commitment amounts do not necessarily
represent future cash requirements. Collateral held varies
but may include accounts receivable, inventory, property and
equipment, and income producing properties.

18. CONCENTRATION OF CREDIT RISK

The Company grants residential, commercial and consumer
related loans to customers primarily located in Bourbon,
Clark, Scott, Harrison, Woodford, Jessamine and adjoining
counties in Kentucky. Although they have a diverse loan
portfolio, a substantial portion of their debtors' ability
to perform is somewhat dependent on the economic conditions
of the counties in which they operate.

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.

20. REGULATORY MATTERS

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 the regulator about
components, risk weightings, and other factors.

20. REGULATORY MATTERS (CONTINUED)

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 table
below) 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, 1997 and 1996, that the Company
and the Bank meet all capital adequacy requirements to which
they are subject.

As of December 31, 1997, the most recent notification
from the Federal Deposit Insurance Corporation dated
November 30, 1997 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

Consolidated as of December 31, 1997:
Total Capital (to Risk-Weighted Assets) $26,966,000 14.84% $14,536,000 8.00% $18,170,000 10.00%
Tier I Capital (to Risk-Weighted Assets) 24,694,000 13.59 7,268,000 4.00 10,902,000 6.00
Tier I Capital (to Average Assets) 24,694,000 8.77 11,001,000 4.00 13,751,000 5.00

Bank Only as of December 31, 1997:
Total Capital (to Risk-Weighted Assets) $26,319,000 14.49% $14,535,000 8.00% $18,168,000 10.00%
Tier I Capital (to Risk-Weighted Assets) 24,047,000 13.24 7,267,000 4.00 10,901,000 6.00
Tier I Capital (to Average Assets) 24,047,000 8.74 11,000,000 4.00 13,750,000 5.00

Consolidated as of December 31, 1996:
Total Capital (to Risk-Weighted Assets) $24,759,000 15.50% $12,776,000 8.00% $15,970,000 10.00%
Tier I Capital (to Risk-Weighted Assets) 22,555,000 14.12 6,388,000 4.00 9,582,000 6.00
Tier I Capital (to Average Assets) 22,555,000 8.66 10,423,000 4.00 13,029,000 5.00

Bank Only as of December 31, 1996:
Total Capital (to Risk-Weighted Assets) $24,427,000 15.30% $12,769,000 8.00% $15,961,000 10.00%
Tier I Capital (to Risk-Weighted Assets) 22,431,000 14.05 6,384,000 4.00 9,577,000 6.00
Tier I Capital (to Average Assets) 22,431,000 8.61 10,422,000 4.00 13,028,000 5.00

21. PARENT COMPANY FINANCIAL STATEMENTS

Condensed Balance Sheets

December 31
1997 1996
(In Thousands)
ASSETS
Cash on deposit with subsidiary $ 616 $ 96
Investment in subsidiary 26,070 24,510
Income taxes receivable 10 18
Other assets 20 20

TOTAL ASSETS $26,716 $ 24,644

LIABILITIES AND STOCKHOLDERS' EQUITY
Other liabilities $ 0 $ 11

Stockholders' equity:
Preferred stock $ 0 $ 0
Common stock 6,333 6,392
Retained earnings 20,150 18,240
Net unrealized gains on investment securities 233 1
Total stockholders' equity $26,716 $24,633

TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $26,716 $24,644

21. PARENT COMPANY FINANCIAL STATEMENTS (CONTINUED)

Condensed Statements of Income

Year Ended December 31

1997 1996 1995
(In Thousands)

Income:
Dividends from subsidiary $ 2,100 $1,850 $ 1,470
Other income 0 807 359
Total income $ 2,100 $2,657 $ 1,829

Expenses:
Interest expense $ 10 $ 40 $ 118
Other expenses 21 823 573
Total expenses $ 31 $ 863 $ 691

Income before income taxes and
equity in undistributed income
of subsidiary $ 2,069 $1,794 $ 1,138

Applicable income tax benefits 11 18 112

Income before equity in undistributed
income of subsidiary $ 2,080 $1,812 $ 1,250

Equity in undistributed income of
subsidiary 1,328 1,075 1,238

NET INCOME $ 3,408 $2,887 $ 2,488

21. PARENT COMPANY FINANCIAL STATEMENTS (CONTINUED)

Condensed Statements of Cash Flows

Year Ended December 31

1997 1996 1995
(In Thousands)
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 3,408 $ 2,887 $ 2,488
Adjustments to reconcile net income to net
cash provided by operating activities:
Loss on sale of securities 0 0 23
Equity in undistributed earnings of
subsidiary (1,328) (1,075) (1,293)
Adjustment to conform pooled Company's
fiscal year end 0 0 55
Change in income taxes receivable 8 94 (93)
Change in other liabilities (11) 10 0
Net cash provided by operating activities $ 2,077 $ 1,916 $ 1,180

CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from sale of investment securities $ 0 $ 0 $ 702

CASH FLOWS FROM FINANCING ACTIVITIES:
Dividends paid $(1,005) $ (912) $ (750)
Proceeds from issuance of common stock 51 1 47
Purchase of common stock (603) (500) 0
Repayment of long-term debt 0 (930) (1,100)
Proceeds from long-term debt 0 330 0
Net cash used in financing activities $(1,557) $(2,011) $(1,803)

Net increase (decrease) in cash $ 520 $ (95) $ 79

Cash at beginning of year 96 191 112

CASH AT END OF YEAR $ 616 $ 96 $ 191

INDEPENDENT AUDITORS' REPORT

Board of Directors
Bourbon Bancshares, Inc.
Paris, Kentucky

We have audited the accompanying consolidated balance
sheets of Bourbon Bancshares, Inc. and Subsidiary as of
December 31, 1997 and 1996, and the related consolidated
statements of income, stockholders' equity and cash flows
for each of the years in the three year period ended
December 31, 1997. 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 generally
accepted auditing standards. 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 consolidated financial statements
referred to above present fairly, in all material respects,
the financial position of Bourbon Bancshares, Inc. and
Subsidiary at December 31, 1997 and 1996, and the results of
its operations and cash flows for each of the years in the
three year period ended December 31, 1997, in conformity
with generally accepted accounting principles.

Eskew & Gresham, PSC

January 28, 1998

Bourbon Bancshares, Inc.
Board of Directors

Buckner Woodford
President and Chief Executive Officer;
Kentucky Bank and Bourbon Bancshares, Inc.
Class of 2000

William R. Stamler
Signal Investments, Inc.; Chairman
Class of 2000

James L. Ferrell, M.D.
Physician
Class of 1998

Joseph B. McClain
President; Hopewell Insurance Company, Inc.
Class of 1998

William M. Arvin
Attorney
Class of 1998

Henry Hinkle
President; Hinkle Contracting Company
Class of 1999

Theodore Kuster
Farmer and Thoroughbred Breeder; West View Farm
Class of 1999

Robert G. Thompson
Farmer and Thoroughbred Breeder; Snow Hill Farm
Class of 1999

Russell Brooks
Vice President, Financial Analyst; Kentucky Bank
Class of 1999

Kentucky Bank
Board of Directors

Buckner Woodford
President and Chief Executive Officer;
Bourbon Bancshares and Kentucky Bank

Joe Allen
Executive Vice President, Kentucky Bank

William M. Arvin
Attorney, William M. Arvin and Associates

Russell Brooks
Financial Analyst; Kentucky Bank

James L. Ferrell, M.D.
Physician

Betty Jo Denton Heick
Retired Bourbon County Court Clerk

Henry Hinkle
President; Hinkle Contracting Company

Theodore Kuster
Farmer and Thoroughbred Breeder; West View Farm

Joseph B. McClain
President; Hopewell Insurance Company, Inc.

Alex Miller
President, Paris Stockyards, Inc.

C. Richard Gamble
Retired, Leggett and Platt, Marketing

William R. Stamler
Chairman, Signal Investments, Inc.

Robert G. Thompson
Director, Paris/Bourbon County YMCA

Gerald M. Whalen
President, Whalen and Co. Insurance and Real Estate

Michael S. Hockensmith
The Hockensmith Agency

REGIONAL BOARD OF DIRECTORS
CLARK

C. Richard Gamble
Retired, Leggett and Platt, Marketing

Donald Pace
Superintendent, Clark Co. Schools

Ed Saunier
North American Vanlines

Mary Beth Hendricks
Farmer

SCOTT

James B. Wooten, Jr.
Attorney and Partner; Bradley, Blanton and Wooten

R.C. Johnson, Jr.
Owner and President; Johnson's Funeral Home

Dr. Gus A. Bynum
Physician

Mike Hockensmith
Owner and President, The Hockensmith Agency, Inc.

George Lusby
County Judge Executive

WOODFORD

Dr. William J. Graul
Physician

James Kay
Businessman, Farmer

Loren Carl
Director, KY Attorney General's Office

Tricia N. Kittinger
Woodford Circuit Clerk

JESSAMINE

William M. Arvin
Attorney, William M. Arvin and Associates

J. R. Wilson, Jr.
Retired, U.S. Postmaster

Victor Comley
Retired, Kentucky Association of Highway Contractors

Bonnie Dean
Nicholasville City Clerk, Treasurer

OFFICERS
BOURBON COUNTY
PARIS
Buckner Woodford - President and CEO
James P. Shipp, Jr. - Sr. Vice President, Branch
Administration
Norman J. Fryman - Sr. Vice President, Director of Lending
Joe Allen - Executive Vice President
Greg Dawson - Vice President, Chief Financial Officer
Russell Brooks - Vice President, Financial Analyst
Hugh Crombie - Vice President, Operations
Bill Reynolds - Vice President, Trust Officer
Brenda Bragonier - Vice President, Director of Marketing and Human Resources
R.W. Collins, Jr. - Vice President, Loan Officer
Michael Lovell - Vice President, Loan Officer
George Wilder - Vice President, Loan Officer
Nicholas L. Carter - Assistant Vice President, Loan Officer
Cathy Hill - Assistant Vice President, Loan Officer
Mary Lou Boyle - Human Resources
Ted Wiseman - Assistant Vice President, Wire Transfer
Brenda Berry - Accountant
Wallis Brooks - Branch Manager
Patty Carpenter - Loan Operations Officer
Paul Clift - Automation Information Officer
Janice Hash - Accountant and Purchasing Manager
Donald Roe - Data Processing
Lydia Sosby - Auditor
Martha Woodford - Corporate and Automated Products Officer
Jan Worth - Trust Officer
Jean Patton - Compliance/CRA/Quality Control

Lexington Road Branch
Rita Bugg - Assistant Vice President, Branch Manager, Loan
Officer

North Middletown Branch
Jerry Ann McFarland - Branch Manager

Pleasant Street Branch
Philip Hurst - Assistant Branch Manager

CLARK COUNTY
WINCHESTER
Tim Duncan - Regional Vice President
Becky Taulbee - Assistant Vice President, Loan Officer
Darryl Terry - Assistant Vice President, Loan Officer
Carolyn Wilkins - Calling Officer

Colby Road Branch
Teresa Shimfessel - Branch Manager, Assistant Vice
President, Loan Officer

WOODFORD COUNTY
VERSAILLES
Duncan Gardner - Regional Vice President
A.J. Gullett - Loan Officer

SCOTT COUNTY
GEORGETOWN
Mark Walls - Regional Vice President
Jennifer Roberts - Loan Originator

JESSAMINE COUNTY
NICHOLASVILLE
Tom Buford - Regional Vice President
Earl Lewallen - Loan Officer
Jeanie Thompson - Assistant Cashier & CSR

HARRISON COUNTY
CYNTHIANA LOAN PRODUCTION OFFICE
Ken DeVasher - Manager, Assistant Vice President, Loan Officer

Exhibit 21 Subsidiaries of Registrant

Bourbon Bancshares, Inc.'s Subsidiary

Kentucky Bank

EXHIBIT 23

CONSENT OF INDEPENDENT AUDITORS

We consent to the use of our report dated January 28,
1998 on the consolidated financial statements of Bourbon
Bancshares, Inc. and Subsidiary as of December 31, 1997 and
1996 and for the three year period ended December 31, 1997
appearing in this Annual Report on Form 10-K of Bourbon
Bancshares, Inc. as Exhibit 13.

ESKEW & GRESHAM, PSC

Lexington, KY
March 10, 1998