GENERAL

We operate 21 banking centers in seven contiguous counties in Central Kentucky along the Interstate 65 corridor and the Louisville Metropolitan area, including Southern Indiana. Our markets range from the major metropolitan area of Louisville in Jefferson County, Kentucky approximately 40 miles north of our headquarters in Elizabethtown, Kentucky to Hart County, Kentucky, approximately 30 miles south of Elizabethtown to Harrison County, Indiana approximately 60 miles northwest of our headquarters. Our markets are supported by a diversified industry base and have a regional population of over 1 million.

We serve the needs and cater to the economic strengths of the local communities in which we operate, and we strive to provide a high level of personal and professional customer service. We offer a variety of financial services to our retail and commercial banking customers. These services include personal and corporate banking services and personal investment financial counseling services.

Through our personal investment financial counseling services, we offer a wide variety of mutual funds, equity investments, and fixed and variable annuities. We invest in the wholesale capital markets to manage a portfolio of securities and use various forms of wholesale funding. The security portfolio contains a variety of instruments, including callable debentures, taxable and non-taxable debentures, fixed and adjustable rate mortgage backed securities, and collateralized mortgage obligations.

Our results of operations depend primarily on net interest income, which is the difference between interest income from interest-earning assets and interest expense on interest-bearing liabilities. Our operations are also affected by non-interest income, such as service charges, insurance agency revenue, loan fees, gains and losses from the sale of mortgage loans and gains from the sale of real estate held for development. Our principal operating expenses, aside from interest expense, consist of compensation and employee benefits, occupancy costs, data processing expense and provisions for loan losses.

This discussion and analysis covers material changes in the financial condition since December 31, 2007 and material changes in the results of operations for the three and nine month periods ending, September 30, 2008 as compared to 2007. It should be read in conjunction with "Management's Discussion and Analysis of Financial Condition and Results of Operations" included in the Annual Report on Form 10-K for the period ended December 31, 2007.

OVERVIEW

During the second quarter, we completed the acquisition of FSB Bancshares, Inc. and its wholly owned subsidiary, The Farmers State Bank, located in Southern Indiana. The Farmers State Bank had approximately $65.7 million in total assets and $55.8 million in deposits with offices in Harrison and Floyd County, Indiana. These counties are adjacent to our Kentucky counties of Meade, Hardin, Bullitt and Jefferson and are part of the Louisville MSA. The acquisition is anticipated to be accretive to our earnings during the first full year of the combined operations.

During the third quarter, we opened our twentieth full -service banking center, which expanded our current footprint in Bullitt County, Kentucky. The Cedar Grove Banking Center complements our existing branches located in Shepherdsville and Mt. Washington, Kentucky. We will continue our expansion efforts in the fourth quarter with two additional banking centers under development. The first banking center will be in Hardin County, Kentucky located at the entrance to the Fort Knox military base. The other banking center will be our fourth site in Louisville, Kentucky and located in the Middletown area.

Over the past several years we have focused on enhancing and expanding our retail and commercial banking network in our core markets as well as establishing our presence in the Louisville market. Our core markets, where we have a combined 21% market share, have become increasingly competitive as several new banks have entered those markets during the past few years. In order to protect and grow our market share, we are replacing existing branches with newer, enhanced facilities and anticipate constructing several new facilities over the next few years. In addition to the enhancement and expansion in our core markets, we have been increasing our presence in the Louisville market. Our acquisition of FSB Bancshares, Inc. has broadened our retail branch network in the Louisville market, which now extends into Southern Indiana. Approximately 73% of the deposit base in the Louisville market is controlled by six out-of-state banks. While the market is very competitive, we believe this creates an opportunity for smaller community banks with more power to make decisions locally. We

believe our investment in these initiatives along with our continued commitment to a high level of customer service will enhance our market share in our core markets and our development in the Louisville market.

Our retail branch network continues to generate encouraging results. Total deposits have grown 32% over the past three years. Total deposits were $776.9 million at September 30, 2008, an increase of $87.7 million from December 31, 2007. The continued development of the retail branch network into the Louisville market also yielded positive results. We have a combined $60.9 million in deposits in our three full-service banking centers in the Louisville market. We opened two of these facilities in the second quarter of 2004 to support our growing customer base in this market. In June 2007 we opened our third new full service banking center in Louisville. Additional sites within the Louisville market are under development with our fourth location scheduled to open in the second quarter of 2009. Competition for deposits continues to be challenging in all of the markets we serve. This intense competition and future federal rate cuts could add to additional margin compression as the interest rate environment continues to be volatile.

We have developed a strong commercial real estate niche in our markets. We have an experienced team of bankers who are focused on providing service and convenience to our customers. It is quite common for our bankers to close loans at a customer's place of business or even the customer's personal residence. This high level of service has been especially well received in our Louisville market, which is dominated by regional banks. Currently, 26% of our loan portfolio resides in the Louisville market. To further develop our commercial banking relationships in Louisville, we opened a private banking office in April 2007. This office is an upscale facility complementing our full service centers in Louisville allowing us to further attract commercial deposit relationships in conjunction with our commercial lending relationships.

This emphasis on commercial lending generated 44% growth in the total loan portfolio and 76% growth in commercial loans over the past three years. Commercial loans were $608.9 million at September 30, 2008, an increase of $64.0 million, or 12% from December 31, 2007.

CRITICAL ACCOUNTING POLICIES

Our accounting and reporting policies comply with U.S. generally accepted accounting principles and conform to general practices within the banking industry. The accounting policy relating to the allowance for loan losses is critical to the understanding of our results of operations since the application of this policy requires significant management assumptions and estimates that could result in materially different amounts to be reported if conditions or underlying circumstances were to change.

Allowance for Loan Losses - We maintain an allowance sufficient to absorb probable incurred credit losses existing in the loan portfolio. The Allowance for Loan Loss Review Committee evaluates the allowance for loan losses on a quarterly basis. We estimate the allowance using past loan loss experience, known and inherent risks in the portfolio, adverse situations that may affect the borrower's ability to repay, estimated value of the underlying collateral, and current economic conditions. While we estimate the allowance for loan losses based in part on historical losses within each loan category, estimates for losses within the commercial real estate portfolio are more dependent upon credit analysis and recent payment performance. Allocations of the allowance may be made for specific loans or loan categories, but the entire allowance is available for any loan that, in management's judgment, should be charged off.

The allowance consists of specific and general components. The specific component relates to loans that are individually classified as impaired or loans otherwise classified as substandard or doubtful. The general component covers non-classified loans and is based on historical loss experience adjusted for current factors. Allowance estimates are developed with actual loss experience adjusted for current economic conditions. Allowance estimates are considered a prudent measurement of the risk in the loan portfolio and are applied to individual loans based on loan type.

Based on our calculation, an allowance of $10.5 million or 1.21% of total loans was our estimate of probable losses within the loan portfolio as of September 30, 2008. This estimate resulted in a provision for loan losses on the income statement of $2.8 million for the 2008 nine month period. If the mix and amount of future charge off percentages differ significantly from those assumptions used by management in making its determination, the allowance for loan losses and provision for loan losses on the income statement could be materially increased.

Stock-based Compensation - We adopted the provisions of Statement of Financial Accounting Standards ("SFAS") No. 123 (R) "Share-Based Payment (Revised 2004)," on January 1, 2006. Among other things, SFAS No. 123 (R) eliminates the ability to account for stock-based compensation using the intrinsic value based method of accounting and requires that such transactions be recognized as compensation expense in the income statement based on their fair values on the date of the grant. SFAS No. 123 (R) requires that management make assumptions including stock price volatility and employee turnover that are utilized to measure compensation expense. We estimate fair value of stock options granted at the date of grant using the Black-Scholes option pricing model, which requires the input of highly subjective assumptions, such as volatility, risk free interest rates and dividend pay out rates.

Impairment of Investment Securities - All unrealized losses are reviewed to determine whether the losses are other-than-temporary. Investment securities are evaluated for other-than-temporary impairment on at least a quarterly basis and more frequently when economic or market conditions warrant such an evaluation to determine whether a decline in their value below amortized cost is other-than-temporary. We evaluate a number of factors including, but not limited to: valuation estimates provided by investment brokers; how much fair value has declined below amortized cost; how long the decline in fair value has existed; the financial condition of the issuer; significant rating agency changes on the issuer; and management's intent and ability to hold the security for a period of time sufficient to allow for any anticipated recovery in fair value.

The term "other-than-temporary" is not intended to indicate that the decline is permanent, but indicates that the possibility for a near-term recovery of value is not necessarily favorable, or that there is a lack of evidence to support a realizable value equal to or greater than the carrying value of the investment. Once a decline in value is determined to be other than temporary, the cost basis of the security is written down to fair value and a corresponding charge to earnings is recognized.

RESULTS OF OPERATIONS

Net income for the quarter ended September 30, 2008 was $991,000 or $0.21 per share diluted compared to $2.1 million or $0.45 per share diluted for the same period in 2007. Net income for the nine month period ended September 30, 2008 was $5.0 million or $1.06 per share diluted compared to $7.0 million or $1.46 per share diluted for the same period a year ago. Earnings decreased for 2008 compared to 2007 due to a decrease in our net interest margin, an increase in provision for loan loss expense, a higher level of non-interest expense related to our expansion efforts, a write down taken on investment securities that were other-than-temporarily impaired and a write down on real estate acquired through foreclosure. Our book value per common share increased from $15.50 at September 30, 2007 to $15.95 at September 30, 2008. Annualized net income for the first nine months of 2008 generated a return on average assets of .72% and a return on average equity of 8.80%. These compare with a return on average assets of 1.11% and a return on average equity of 12.92% for the first nine months of 2007 also annualized.

Net Interest Income - The principal source of our revenue is net interest income. Net interest income is the difference between interest income on interest-earning assets, such as loans and securities and the interest expense on liabilities used to fund those assets, such as interest-bearing deposits and borrowings. Net interest income is affected by both changes in the amount and composition of interest-earning assets and interest-bearing liabilities as well as changes in market interest rates.

The growth in our commercial loan portfolio has increased net interest income. The increase in the volume of interest earning assets increased net interest income by $744,000 and $1.3 million for the three and nine month 2008 periods compared to the same periods a year ago. Average interest earning assets increased $109.1 million for the 2008 quarter and $64.6 million for the nine months compared to 2007. Despite the increase in interest earning assets, our net interest margin declined. The yield on earning assets averaged 6.54% and 6.78% for the three and nine month 2008 periods compared to an average yield on earning assets of 7.67% and 7.66% for the same periods in 2007. This decrease was slightly offset by a decrease in our cost of funds. On an annualized basis, the net interest margin as a percent of average earning assets decreased 13 basis points to 3.72% for the quarter ended September 30, 2008 and 10 basis points to 3.81% for the nine months ended September 30, 2008 compared to 3.85% and 3.91% for the same periods in 2007.

Our cost of funds averaged 3.05% and 3.24% for the quarter and nine month periods ended September 30, 2008 compared to an average cost of funds of 4.20% and 4.11% for the same periods in 2007. Going forward, our cost of funds is expected to continue to decrease as certificates of deposit re-price and roll off into new certificates of deposit at lower interest rates.

Our net interest margin is likely to compress in future quarters as a result of the Federal Open Market Committee (FOMC) decreasing the Federal Funds rate by 225 basis points in 2008 through September 30th. In addition, the FOMC decreased the federal funds rate by an additional 50 basis points on October 8, 2008 in an emergency rate cut. Variable rate loans that are tied to the federal prime rate are immediately re-priced downward with these rate cuts. However, interest rates paid on customer deposits have not adjusted downward proportionately with the declining interest yields on loans and investments. This will in turn lower our net interest margin.

AVERAGE BALANCE SHEET

The following table provides information relating to our average balance sheet and reflects the average yield on assets and average cost of liabilities for the indicated periods. Yields and costs for the periods presented are derived by dividing income or expense by the average monthly balance of assets or liabilities, respectively.

                                                         Quarter Ended September 30,
                                             2008                                           2007
                           Average                        Average         Average                        Average
(Dollars in thousands)     Balance       Interest      Yield/Cost (5)     Balance       Interest      Yield/Cost (5)

ASSETS
Interest earning
assets:
U.S. Treasury and
agencies                  $    5,332    $        49              3.66 %  $   16,583    $       146              3.49 %
Mortgage-backed
securities                     8,501             91              4.26        11,514            125              4.31
Equity securities              1,775             12              2.69         2,036             19              3.70
State and political
subdivision securities
(1)                            9,416            136              5.75         9,405            155              6.54
Corporate bonds                3,110             47              6.01         3,820             65              6.75
Loans (2) (3) (4)            861,230         14,337              6.62       745,028         14,760              7.86
FHLB stock                     8,410            113              5.35         7,621            126              6.56
Interest bearing
deposits                       7,685             90              4.66           375              9              9.53
Total interest earning
assets                       905,459         14,875              6.54       796,382         15,405              7.67
Less: Allowance for
loan losses                   (9,029 )                                       (8,024 )
Non-interest earning
assets                        84,270                                         63,557
Total assets              $  980,700                                     $  851,915

LIABILITIES AND
STOCKHOLDERS' EQUITY
Interest bearing
liabilities:
Savings accounts          $  114,518    $       442              1.54 %  $   92,877    $       731              3.12 %
NOW and money market
accounts                     142,036            322              0.90       126,193            631              1.98
Certificates of
deposit and other time
deposits                     478,747          4,561              3.79       432,569          5,333              4.89
Short term borrowings         29,392            156              2.11        33,639            465              5.48
FHLB advances                 52,993            610              4.58        29,929            345              4.57
Subordinated
debentures                    18,000            315              6.96        10,000            167              6.63
Total interest bearing
liabilities                  835,686          6,406              3.05       725,207          7,672              4.20
Non-interest bearing
liabilities:
Non-interest bearing
deposits                      62,606                                         48,728
Other liabilities              6,261                                          5,724
Total liabilities            904,553                                        779,659

Stockholders' equity          76,147                                         72,256
Total liabilities and
stockholders' equity      $  980,700                                     $  851,915

Net interest income                     $     8,469                                    $     7,733
Net interest spread                                              3.49 %                                         3.47 %
Net interest margin                                              3.72 %                                         3.85 %

(2) Includes loan fees, immaterial in amount, in both interest income and the calculation of yield on loans.

(3) Calculations include non-accruing loans in the average loan amounts outstanding.

(4) Includes loans held for sale.

(5) Annualized

                                                     Nine Months Ended September 30,
                                            2008                                         2007
                           Average                      Average         Average                      Average
(Dollars in thousands)     Balance      Interest     Yield/Cost (5)     Balance      Interest     Yield/Cost (5)

ASSETS
Interest earning
assets:
U.S. Treasury and
agencies                  $   7,126    $      216              4.05 %  $  19,252    $      519              3.60 %
Mortgage-backed
securities                    9,311           297              4.26       12,335           398              4.31
Equity securities             1,683            42              3.33        2,081            56              3.60
State and political
subdivision securities
(1)                           9,478           450              6.34       10,035           480              6.40
Corporate bonds               3,092           123              5.31        4,721           250              7.08
Loans (2) (3) (4)           811,036        41,718              6.87      731,276        43,065              7.87
FHLB stock                    7,983           317              5.30        7,621           368              6.46
Interest bearing
deposits                      3,257           100              4.10        1,043            47              6.03
Total interest earning
assets                      852,966        43,263              6.78      788,364        45,183              7.66
Less: Allowance for
loan losses                  (8,537 )                                     (7,828 )
Non-interest earning
assets                       75,195                                       61,453
Total assets              $ 919,624                                    $ 841,989

LIABILITIES AND
STOCKHOLDERS' EQUITY
Interest bearing
liabilities:
Savings accounts          $ 105,827    $    1,389              1.75 %  $  98,894    $    2,417              3.27 %
NOW and money market
accounts                    135,172         1,078              1.07      121,932         1,599              1.75
Certificates of
deposit and other time
deposits                    437,792        13,348              4.07      422,608        15,066              4.77
Short term borrowings        34,132           661              2.59       35,303         1,452              5.50
FHLB advances                53,026         1,808              4.55       29,866         1,022              4.58
Subordinated
debentures                   13,556           649              6.40       10,000           549              7.34
Total interest bearing
liabilities                 779,505        18,933              3.24      718,603        22,105              4.11
Non-interest bearing
liabilities:
Non-interest bearing
deposits                     58,847                                       45,603
Other liabilities             5,762                                        5,452
Total liabilities           844,114                                      769,658

Stockholders' equity         75,510                                       72,331
Total liabilities and
stockholders' equity      $ 919,624                                    $ 841,989

Net interest income                    $   24,330                                   $   23,078
Net interest spread                                            3.53 %                                       3.55 %
Net interest margin                                            3.81 %                                       3.91 %

(2) Includes loan fees, immaterial in amount, in both interest income and the calculation of yield on loans.

(3) Calculations include non-accruing loans in the average loan amounts outstanding.

(4) Includes loans held for sale.

(5) Annualized

RATE/VOLUME ANALYSIS

The table below provides information regarding changes in interest income and interest expense for the indicated periods. For each category of interest-earning assets and interest-bearing liabilities, information is provided on changes attributable to (1) changes in rate (changes in rate multiplied by old volume); (2) changes in volume (change in volume multiplied by old rate); and (3) changes in rate-volume (change in rate multiplied by change in volume). Changes in rate-volume are proportionately allocated between rate and volume variance.

                                    Three Months Ended                        Nine Months Ended
                                       September 30,                            September 30,
                                       2008 vs. 2007                            2008 vs. 2007
                                    Increase (decrease)                      Increase (decrease)
                                     Due to change in                          Due to change in
                                                          Net                                      Net
(Dollars in thousands)       Rate          Volume        Change         Rate        Volume       Change

Interest income:
U.S. Treasury and
agencies                  $         6    $     (103 )  $      (97 )  $       58    $    (361 )  $    (303 )
Mortgage-backed
securities                         (2 )         (32 )         (34 )          (4 )        (97 )       (101 )
Equity securities                  (5 )          (2 )          (7 )          (4 )        (10 )        (14 )
State and political
subdivision securities            (19 )           -           (19 )          (4 )        (26 )        (30 )
Corporate bonds                   (18 )           -           (18 )        (127 )          -         (127 )
Loans                          (2,544 )       2,121          (423 )      (5,769 )      4,422       (1,347 )
FHLB stock                        (25 )          12           (13 )         (67 )         16          (51 )
Interest bearing
deposits                           (7 )          88            81           (19 )         72           53

Total interest earning
assets                         (2,614 )       2,084          (530 )      (5,936 )      4,016       (1,920 )

Interest expense:
Savings accounts                 (432 )         143          (289 )      (1,187 )        159       (1,028 )
NOW and money market
accounts                         (380 )          71          (309 )        (680 )        159         (521 )
Certificates of
deposit and other time
deposits                       (1,300 )         528          (772 )      (2,244 )        526       (1,718 )
. . .