June 30, 2011 Letter to Shareholders

June 30, 2011

Dear Shareholder:

Municipal Market Update:

After experiencing a sharp sell off at the end of 2010, the municipal bond market staged an impressive rally during the first half of this year. The rally was supported by a number of factors including a limited supply of new tax-exempt bonds, improved market sentiment, and a growing realization by market participants that the “doom and gloom” scenario painted by a couple of high profile commentators was vastly overstated.

States and localities have continued to successfully balance their budgets through a combination of budget cuts and tax increases. Tough decisions are being made around the country by governors and state legislators to bring spending back in line with revenues. Tax revenues have bounced back nicely. Preliminary tax collection data gathered by the Nelson A. Rockefeller Institute of Government show that for forty seven early reporting states, tax collections increased by 9.1% in nominal terms during the first quarter of 2011 compared to the same quarter of 2010. State tax collections in almost every state have now risen for five consecutive quarters. In Kentucky, General Fund receipts for May 2011 grew 17.8% (the thirteenth consecutive monthly increase) compared with May of last year It appears likely the state will end its fiscal year ahead of budgeted levels. The pace of municipal bond defaults is also down in 2011. According to the Distressed Debt Newsletter, midway through this year there have been a total of only 16 defaults compared with 89 defaults for all of 2010. The current default rate is well below historical averages.

While there are these positive developments to report, it’s too early to declare that states and localities are totally out of the woods. States will be dealing with budget deficits for the next couple of years. Localities, which depend mostly on property taxes, will have to wait for the housing market to recover before their tax bases fully recover. Even though tax collections are headed in the right direction, they remain below pre-recession levels. It will take time for states and localities to shore up pensions and cut debt to comfortable levels. It will also take time for the housing market to stabilize and the economy to get back on track. Good progress has already been made, but there is plenty of work left to do.

In the meantime, we continue to stick to our fundamental strategy of purchasing higher coupon investment grade municipal bonds at the best possible prices and keeping a close eye on what we own. We are taking advantage of the steep yield curve by buying bonds with slightly longer maturities to capture additional yield. Most economists have pushed back the forecasted date for a rise in short-term interest rates to the third quarter of 2012 or even later. When interest rates do start to move up as they are sure to do, having a portfolio of higher coupon bonds will translate into lower price risk for investors.

Tax-Exemption Scrutiny:

With the debt ceiling negotiations reaching a fevered pitch and Congress looking at ways to cut the federal budget deficit, the tax-exemption for municipal bonds has once again come under scrutiny. Opponents of the tax-exemption mainly argue it is an inefficient way to subsidize state and local infrastructure projects and that the tax benefits of owning municipal bonds accrue only to the wealthy. These arguments are not new nor are they accurate; nonetheless, they have been resurrected and they seem to be gaining some traction. As this debate continues to unfold, we think our shareholders should keep a couple of key points in mind.

The most important point is somewhat counterintuitive--all of the proposals to either restrict or eliminate the tax-exemption are bullish for existing tax-exempt municipal bonds. None of the legislative proposals currently floating around in Congress would apply to municipal bonds already issued. If the tax-exemption is restricted or eliminated (which we believe is unlikely), the value of “grandfathered” municipal bonds would dramatically increase as tax-exempt bonds became increasingly scarce. Moreover, the individual tax-exempt bonds that make up our investment portfolios will continue to deliver steady tax-exempt interest payments during the life of the bond. So, if the tax-exemption is restricted or eliminated, our municipal bond funds’ stream of tax-free income will become even more valuable.

New Taxable Municipal Bond Series:

You may not be aware that we recently launched a new fund. The Taxable Municipal Bond Series invests in taxable municipal securities and seeks to provide a high level of taxable income without incurring undue risk to principal. The fund is particularly well suited for non-profit organizations, foundations, churches, and other tax-exempt entities. The fund offers an attractive yield derived from high grade taxable debt. Please call us and we will be happy to tell you a little bit more about our new fund and discuss with you whether it would be appropriate for your investment needs. We’ll also send you a Prospectus which you should read carefully before investing.

Sincerely,

Allen E. Grimes, III

Executive Vice President

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