Management's Discussion and Analysis of Financial Condition and Results of Operations analyzes the major elements of our balance sheets and statements of income. This section should be read in conjunction with our Consolidated Financial Statements and accompanying Notes and other detailed information.

OVERVIEW

We operate 21 banking centers in eight 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 core markets have experienced a growth rate of 14% in deposits for the past three years. Based on the current economic slow-down, management anticipates that our markets may not continue to grow at a similar rate experienced over the last few years. However, we believe we will still be well positioned to benefit from growth in our local markets when the economy rebounds in the future.

During the second quarter of 2008, we completed the acquisition of FSB Bancshares, Inc. and its wholly owned subsidiary, The Farmers State Bank. 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 four of our Kentucky counties 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 2009 with two additional banking centers under development. One will be in Hardin County, Kentucky located at the entrance to the Fort Knox military base. The other 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 23% 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 31% over the past three years. Total deposits were $775.4 million at December 31, 2008, an increase of $86.2 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 $60.7 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 actions by the FOMC 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, 27% 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 42% growth in the total loan portfolio and 58% growth in commercial loans over the past three years. Commercial loans were $637.6 million at December 31, 2008, an increase of $92.7 million, or 17% from December 31, 2007.

Although we had substantial growth in the loan portfolio during the year, credit quality remained challenging in 2008. There was a significant migration of loans into the Special Mention and Substandard loan categories during the second half of the year resulting in higher provision for loan losses. At December 31, 2008, the allowance for loan losses was $13.6 million compared to $7.9 million at December 31, 2007. Allowance for loan loss to total loans increased to 1.50% at December 31, 2008 compared to 1.03% at December 31, 2007. The allowance for loan losses to non-performing loans fell to 81% from 89% at December 31, 2008 compared to December 31, 2007.

Despite the continued deterioration in economic conditions during the fourth quarter, the Corporation's capital position remained well-capitalized as defined by regulatory standards. Our capital position was further bolstered in the first quarter of 2009 by our participation in the U.S. Treasury Department Capital Purchase Program. Under the Capital Purchase Program, we sold $20 million of cumulative perpetual preferred shares to the U.S. Treasury in a transaction that closed on January 9, 2009.

It is our belief that the economy is in a very deep and long lasting recession. During the last quarter of 2008, the continued economic slowdown moved to sectors not previously impacted including consumer, commercial, industrial among others. Credit issues are broadening in these sectors and economic recovery is most likely several quarters away. We will continue to monitor credit quality very closely in 2009 as this recession persists. As the economy and the financial sector continue to struggle, probable losses in the loan portfolio could increase, resulting in higher provision for loan losses during 2009.

Subsequent Development

On January 9, 2009, we sold $20 million of cumulative perpetual preferred shares, with a liquidation preference of $1,000 per share (the "Senior Preferred Shares") to the U.S. Treasury under the terms of its Capital Purchase Plan. Pursuant to CPP, the U.S. Treasury will purchase up to $250 billion of senior preferred shares on standardized terms from qualifying financial institutions as part of the Troubled Asset Relief Program authorized by the Emergency Economic Stabilization Act of 2008. The Senior Preferred Shares constitute Tier 1 capital and rank senior to our common shares. The Senior Preferred Shares pay cumulative dividends at a rate of 5% per annum for the first five years and will reset to a rate of 9% per annum after five years.

Under the terms of the CPP stock purchase agreement, we also issued the U.S. Treasury a warrant to purchase an amount of our common stock equal to 15% of the aggregate amount of the Senior Preferred Shares, or $3 million. The warrant entitles the U.S. Treasury to purchase 215,983 common shares at a purchase price of $13.89 per share. The initial exercise price for the warrant and the number of shares subject to the warrant were determined by reference to the market price of our common stock calculated on a 20-day trailing average as of December 8, 2008, the date the U.S. Treasury approved our application. The warrant has a term of 10 years.

The CPP is voluntary and requires a participating institution to comply with a number of restrictions and provisions, including standards for executive compensation and corporate governance and limitations on share repurchases and the declaration and payment of dividends on common shares. The standard terms of the CPP provide that a participating financial institution may not (without the consent of the U.S. Treasury) pay regular quarterly dividends in an amount greater than the most recent quarterly dividend paid before October 14, 2008, which is $0.19 per share in our case. This dividend limitation will remain in effect for the earlier of three years or until such time that the preferred shares are redeemed.

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. Our Allowance for Loan Loss Review Committee, which is comprised of senior officers, 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 $13.6 million or 1.50% of total loans was our estimate of probable losses within the loan portfolio as of December 31, 2008. This estimate resulted in a provision for loan losses on the income statement of $5.9 million for the 2008 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.

Goodwill and Other Intangible Assets-Costs in excess of the estimated fair value of identified assets acquired through purchase transactions are recorded as an asset. As per Statement of Financial Accounting Standards No. 142, "Goodwill and Other Intangible Assets", an annual impairment analysis

is required to be performed to determine if the asset is impaired and needs to be written down to its fair value. This assessment is conducted annually or more frequently if conditions warrant. Per the December 31, 2008 analysis, no impairment was identified as a result of these tests. In making these impairment analyses, management must make subjective assumptions regarding the fair value of our assets and liabilities. It is possible that these judgments may change over time as market conditions or our strategies change, and these changes may cause us to record impairment changes to adjust the goodwill to its estimated fair value.

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 belowamortized 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 OPERATION

Net income for the period ended December 31, 2008 was $4.8 million or $1.02 per share diluted compared to $9.4 million or $1.96 per share diluted for the same period in 2007. 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 decreased from $15.76 at December 31, 2007 to $15.63 at December 31, 2008. Net income for 2008 generated a return on average assets of 0.51% and a return on average equity of 6.37%. These compare with a return on average assets of 1.10% and a return on average equity of 12.88% for the 2007 period.

Net income for the period ended December 31, 2007 was $9.4 million or $1.96 per share diluted compared to $10.3 million or $2.12 per share diluted for the same period in 2006. Earnings decreased for 2007 compared to 2006 due to a decrease in our net interest margin, an increase in provision for loan loss expense and a higher level of non-interest expense related to our expansion efforts. Our book value per common share increased from $14.95 at December 31, 2006 to $15.76 at December 31, 2007. Net income for 2007 generated a return on average assets of 1.10% and a return on average equity of 12.88%. These compare with a return on average assets of 1.31% and a return on average equity of 15.03% for the 2006 period.

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 $2.0 million for 2008 compared to a year ago. Average interest earning assets increased $75.7 million for 2008 compared to 2007.

Despite the increase in interest earning assets, our net interest margin realized a modest decline of eleven basis points. The yield on earning assets averaged 6.63% for 2008 compared to an average yield on earning assets of 7.63% for the same period in 2007. This decrease was offset by a decrease in our cost of funds. Net interest margin as a percent of average earning assets decreased to 3.78% for 2008 compared to 3.89% for the 2007 period.

Our cost of funds averaged 3.10% for the 2008 period compared to an average cost of funds of 4.10% for the same period 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 500 basis points since September 2007. The current Federal Funds rate is a range of 0.00% to 0.25%. Correspondingly, 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, which are priced off of the London Interbank Offering Rate (LIBOR), have not adjusted downward proportionately with the declining interest yields on loans and investments. LIBOR, which is a market driven rate, did not decline in rate as much as the prime rate. Therefore, we do not expect our deposit costs to decline as fast as our yield on loans. Sixty percent of deposits are time deposits that re-price over a longer period of time. This difference in the timing of the repricing of our assets and deposits is expected to continue to lower our net interest margin.

Comparative information regarding net interest income follows:

                                                                    2008/2007      2007/2006
(Dollars in thousands)         2008         2007         2006        Change         Change
Net interest income, tax     $  32,970    $  31,009    $  29,879           6.3 %          3.8 %
equivalent basis
Net interest spread               3.53 %       3.53 %       3.72 %           - bp        (19) bp
Net interest margin               3.78 %       3.89 %       4.04 %        (11) bp        (15) bp
Average earnings assets      $ 871,940    $ 796,275    $ 739,215           9.5 %          7.7 %
Prime rate at year end            3.25 %       7.25 %       8.25 %       (400) bp       (100) bp
Average prime rate                5.09 %       8.05 %       7.98 %       (296) bp           7 bp

Prime rate is included above to provide a general indication of the interest rate environment in which we operate. A large portion of our variable rate loans were indexed to the prime rate and re-price as the prime rate changes, unless they reach a contractual floor or ceiling.

AVERAGE BALANCE SHEETS

    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.

                                                                        Year Ended December 31,
                                           2008                                   2007                                   2006
                            Average                  Average       Average                  Average       Average                  Average
(Dollars in thousands)      Balance    Interest     Yield/Cost     Balance    Interest     Yield/Cost     Balance    Interest     Yield/Cost
ASSETS
Interest earning assets:
   U.S. Treasury and
   agencies                $   6,469    $    257           3.97 % $  18,147    $    651           3.59 % $  27,823    $    891           3.20 %
   Mortgage-backed
   securities                  9,006         390           4.33 %    11,993         517           4.31 %    14,832         631           4.25 %
   Equity securities           1,543          67           4.34 %     2,036          75           3.68 %     1,974          73           3.70 %
   State and political
   subdivision
   securities(1)               9,426         600           6.37 %     9,935         633           6.37 %     7,134         459           6.43 %
   Corporate bonds             2,533         159           6.28 %     4,358         307           7.04 %     6,047         413           6.83 %
   Loans(2)(3)(4)            830,748      55,739           6.71 %   741,274      58,019           7.83 %   667,793      50,803           7.61 %
   FHLB stock                  8,116         423           5.21 %     7,621         503           6.60 %     7,351         427           5.81 %
   Interest bearing
   deposits                    4,099         134           3.27 %       911          55           6.04 %     6,261         290           4.63 %

         Total interest
         earning assets      871,940      57,769           6.63 %   796,275      60,760           7.63 %   739,215      53,987           7.30 %

Less: Allowance for loan
losses                        (9,114 )                               (7,966 )                               (7,456 )
Non-interest earning
assets                        76,343                                 61,912                                 57,227

         Total assets      $ 939,169                              $ 850,221                              $ 788,986

LIABILITIES AND
STOCKHOLDERS' EQUITY
Interest bearing
liabilities:
   Savings accounts        $ 106,901    $  1,666           1.56 % $  96,221    $  3,017           3.14 % $  91,418    $  2,542           2.78 %
   NOW and money market
   accounts                  136,796       1,307           0.96 %   123,408       2,166           1.76 %   129,063       2,061           1.60 %
   Certificates of
   deposit and other
   time deposits             444,718      17,539           3.94 %   424,603      20,336           4.79 %   352,364      14,085           4.00 %
   Short-term borrowings      44,454         896           2.02 %    36,782       1,935           5.26 %    35,826       1,904           5.31 %
   FHLB advances              53,009       2,413           4.55 %    34,732       1,580           4.55 %    54,503       2,621           4.81 %
   Subordinated
   debentures                 14,667         978           6.67 %    10,000         717           7.17 %    10,000         895           8.95 %

         Total interest
         bearing
         liabilities         800,545      24,799           3.10 %   725,746      29,751           4.10 %   673,174      24,108           3.58 %

Non-interest bearing
liabilities:
   Non-interest bearing
   deposits                   57,962                                 46,343                                 42,289
   Other liabilities           5,349                                  5,508                                  4,768

         Total
         liabilities         863,856                                777,597                                720,231
Stockholders' equity          75,313                                 72,624                                 68,755

         Total
         liabilities and
         stockholders'
         equity            $ 939,169                              $ 850,221                              $ 788,986

Net interest income                     $ 32,970                               $ 31,009                               $ 29,879

Net interest spread                                        3.53 %                                 3.53 %                                 3.72 %

Net interest margin                                        3.78 %                                 3.89 %                                 4.04 %

Ratio of average
interest earning assets
to average interest
bearing liabilities                                      108.92 %                               109.72 %                               109.81 %

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

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

º (4)
º Includes loans held for sale.

RATE/VOLUME ANALYSIS

The table below provides information regarding changes in interest income and interest expense for the periods indicated. 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.

                               Year Ended December 31,              Year Ended December 31,
                                    2008 vs. 2007                        2007 vs. 2006
                                 Increase (decrease)                  Increase (decrease)
                                   Due to change in                     Due to change in
(Dollars in thousands)      Rate      Volume     Net Change      Rate      Volume     Net Change
Interest income:
  U.S. Treasury and
  agencies                 $     64   $  (458 )  $      (394 )  $     98   $  (338 )  $      (240 )
  Mortgage-backed
  securities                      2      (129 )         (127 )         8      (122 )         (114 )
  Equity securities              12       (20 )           (8 )         -         2              2
  State and political
  subdivision
  securities                     (1 )     (32 )          (33 )        (5 )     179            174
  Corporate bonds              (148 )       -           (148 )      (106 )       -           (106 )
. . .