UNITED STATES SECURITIES AND EXCHANGE COMMISSION
                             Washington, D.C. 20549

                                    Form 10-K

                  Annual Report Pursuant to Section 13 or 15(d)
                     of The Securities Exchange Act of 1934

For the fiscal year ended: December 31, 1997     Commission File Number: 0-13030

                              TRANS FINANCIAL, INC.
             (Exact name of registrant as specified in its charter)

                     Kentucky                                61-1048868
     (State or other jurisdiction of        (I.R.S. Employer Identification No.)
     incorporation or organization)

500 East Main Street, Bowling Green, Kentucky                    42101
     (Address of principal executive offices)                   (Zip Code)

        Registrant's telephone number, including area code: (502)793-7717

                              Securities registered
                            pursuant to Section 12(b)
                                of the Act: None
                              Securities registered
                            pursuant to Section 12(g)
                                   of the Act:
                      Common Stock, no par value per share
                                (Title of Class)
                         Preferred Stock Purchase Rights
                                (Title of Class)


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  the  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. _


The aggregate market value of the voting stock held by non-affiliates of the
registrant on February 18, 1998: $397,830,739.

The number of shares outstanding of the issuer's class of common stock on
February 18, 1998: 11,641,651 shares.

                           Document Incorporated By Reference
Portions of the  registrant's  Proxy Statement for the Annual Meeting of
Shareholders to be held on April 20, 1998, are incorporated by reference into
Part III of this report.



<PAGE>





                                TABLE OF CONTENTS


   Item                                                                     Page
  Part I

   1.  Business...............................................................2
   2.  Properties.............................................................5
   3.  Legal Proceedings....................................................5-6
   4.  Submission of Matters to a Vote of Security Holders....................6
   4a. Executive Officers of the Registrant.................................6-7

  Part II

   5.  Market for the Registrant's Common Equity and Related
       Shareholder Matters....................................................8
   6.  Selected Financial Data................................................8
   7.  Management's Discussion and Analysis of Financial Condition and Results
       of Operations.......................................................9-31
   7a. Quantitative and Qualitative Disclosures About Market Risk............32
   8.  Financial Statements and Supplementary Data........................32-56
   9.  Changes in and Disagreements with Accountants on Accounting and
       Financial Disclosure..................................................56

  Part III

   10. Directors and Executive Officers of the Registrant....................57
   11. Executive Compensation................................................57
   12. Security Ownership of Certain Beneficial Owners and Management........57
   13. Certain Relationships and Related Transactions........................57

  Part IV

   14. Exhibits, Financial Statement Schedules and Reports on Form 8-K.......58
   Signatures.............................................................59-60
   Exhibit Index..........................................................61-62


<PAGE>


 Part I

Item 1. Business
The Company and the Banks
     Trans Financial,  Inc. ("the company") is a bank holding company registered
under the Bank Holding  Company Act of 1956. The company has two commercial bank
subsidiaries--Trans Financial Bank, National Association ("TFB-KY"),  consisting
of all of the company's banking activities in Kentucky, and Trans Financial Bank
Tennessee,  National Association ("TFB-TN"),  consisting of all of the company's
Tennessee  banking  activity.   Collectively,  these  banking  institutions  are
referred to in this  report as "the  banks." (On July 26,  1997,  the  company's
former thrift subsidiary--Trans  Financial Bank, F.S.B.--was merged into TFB-KY,
and  its  Tennessee   operations  were  sold  to  TFB-TN.   These   transactions
consolidated the company's banking operations into its current two national bank
charters.)
     In addition,  the company operates as subsidiaries of TFB-KY a full-service
securities    broker/dealer--Trans    Financial   Investment   Services,    Inc.
("TFIS")--and  a mortgage  banking  company--Trans  Financial  Mortgage  Company
("TFMC"). The company sold all of the assets of its travel agency, Trans Travel,
Inc., during the fourth quarter of 1996.
     The banks  provide a full range of corporate and retail  banking  services,
including  checking,  savings and time deposit  accounts;  secured and unsecured
loans to corporations, individuals and others; letters of credit; rental of safe
deposit boxes; financial counseling for individuals and institutions;  and trust
and brokerage services.  Interest on domestic commercial,  consumer and mortgage
loans  constitutes  the largest  contribution  to the operating  revenues of the
company and the banks.
     TFB-KY  provides  a wide  variety  of  personal  and  corporate  trust  and
trust-related  services,  including  serving as executor of estates;  as trustee
under testamentary and inter-vivos  trusts; as guardian of the estates of minors
and  incompetents;  as escrow agent under various  agreements;  and as financial
advisor to and custodian for  individuals,  corporations  and others.  Corporate
trust services  include serving as registrar,  transfer agent,  and paying agent
for  corporate  securities  and  as  corporate  trustee  under  corporate  trust
indentures.  At December  31,  1997,  approximately  $519 million in assets were
managed by the trust department of TFB-KY.
     TFMC   originates   and  purchases   mortgage  loans  for  the  purpose  of
constructing,  financing or refinancing one- to four-family dwellings. TFMC also
services  mortgage  loans for the banks and for others.  Generally,  residential
mortgage  loans  originated or purchased are then sold in the secondary  market.
When sold,  servicing may be retained by TFMC or released to the purchaser.  The
portfolio of mortgage loans serviced for others totaled $3.3 billion at December
31, 1997.
     TFIS  offers  to  customers  of the  banks  and to  others a wide  range of
investment products and services,  including  financial planning,  mutual funds,
annuities,  and individual stocks and bonds. TFB-KY introduced its own family of
proprietary  mutual  funds,  the Trans  Adviser  Funds ("the Funds") in October,
1995.  TFB-KY acted as investment  adviser to the Funds. On August 29, 1997, the
Funds were  transferred to the Countrywide  Family of Funds. As a result of this
transfer, TFB-KY no longer serves as investment adviser to the Funds.
     TFB-KY has 32 offices in Kentucky:  six located in Bowling Green;  three in
each of Pikeville and Maysville; two in each of Glasgow,  Scottsville,  Morehead
and Meta; and one in each of Auburn, Augusta, Cave City, Dawson Springs, Elkhorn
City, Flemingsburg, Franklin, Martin, Prestonsburg,  Russellville, Tompkinsville
and Virgie.  TFB-TN has 17 offices in Tennessee:  two in each of Cookeville  and
Columbia;  and one in  each  of  Clarksville,  Crossville,  Franklin,  Kingston,
Manchester,  McMinnville,  Mt.  Pleasant,  Murfreesboro,   Nashville,  Rockwood,
Shelbyville,  Tullahoma and Winchester. TFMC has a mortgage operations center in
Tullahoma, Tennessee, and loan production offices in Greensboro, North Carolina;
Little Rock, Arkansas;  and Cape Coral, Florida. Prior to December 31, 1997, the
company  entered  into a contract to sell the Mt.  Pleasant,  Tennessee  office,
subject to regulatory approval.
     On December 31, 1997, the company had total consolidated assets of $2.1
billion,  total loans of $1.5 billion,  total deposits of $1.6 billion and
shareholders'  equity of $151 million.
     The portion of Management's Discussion and Analysis of Financial Condition
and Results of Operations entitled Mergers and Acquisitions included in Item 7
is incorporated herein by reference.

Demographics
     As of December 31, 1997, the company operated 49 banking offices in 34
communities in Kentucky and Tennessee.  These communities are predominantly
non-urban markets under 100,000 in population.
Population
     Statewide, Tennessee's population is projected by the U.S. Census Bureau to
grow  approximately 2% per year through 2000, while Kentucky's  annual growth is
projected at 1%. Nearly all of the company's primary markets should  participate
in this growth, with South Central and Northeastern Kentucky experiencing growth
rates in the 0.7% to 1.5% range, and most Tennessee markets experiencing 1.0% to
4.8% growth rates. Eastern Kentucky's population growth, however, is expected to
be slower--approximately 0.2% per year.
<PAGE>
Employment and Income
     The 4.2% unemployment rate for Tennessee and the 4.4% unemployment rate for
Kentucky were slightly below the national  average of 4.7%. Per capita income in
1996 was $21,949 and $19,797,  respectively,  for Tennessee and  Kentucky--below
the national average of $24,426.  The company estimates per capita income levels
in the company's markets to be as follows (1995 data):
           South Central Kentucky                                        $18,642
           Northeastern Kentucky                                          14,610
           Eastern Kentucky                                               15,433
           Western Kentucky                                               17,098
           Eastern Tennessee                                              18,749
           Middle Tennessee                                               19,623
           South Central Tennessee                                        18,616
Industry Trends
     The local economies in the company's markets are diversified,  as discussed
below.
     In  South  Central  Kentucky,   the  largest  industries  are  durable  and
non-durable  goods  manufacturing.  Most of the recent  growth in South  Central
Kentucky has occurred in  finance/insurance/real  estate and retail trade, while
non-durable  goods  manufacturing  has been in decline in recent  years.  In the
Bowling  Green  area,  where the  company  has its  largest  presence,  services
represent the largest industry segment.
     In  Northeastern  Kentucky,  state and local  government  and durable goods
manufacturing are the largest industry groups.  Non-durable goods  manufacturing
is the fastest-growing sector in this area of the state.
     Mining--primarily  coal  mining--is  the largest  industry in the company's
Eastern  Kentucky  market,  but has been  declining over the past several years.
Services and retail trade, however, have provided strong growth.
     In the company's Western Kentucky market area, durable goods  manufacturing
and services are the primary  industries,  with durable goods providing the most
growth.  Non-durable goods  manufacturing has shown slow growth in recent years,
while mining has declined in importance in this area.
     In  the   company's   Tennessee   markets,   services  and  durable   goods
manufacturing are the largest industry segments. Wholesale trade, transportation
and  utilities,  and finance,  insurance  and real estate  represent the primary
growth  industries,  while  non-durable  goods  manufacturing  and  construction
provide the least growth to this market area.

Competition
     The  deregulation of the banking industry and the enactment in Kentucky and
other states of legislation permitting multi-bank holding companies,  as well as
interstate banking, has created a highly competitive  environment for banking in
the company's  market area. The following table displays each of the communities
where  the  company  is  currently  located  and the  respective  percentage  of
FDIC-insured  deposits the company has in each of these  communities.  The table
also shows the ranking by deposit  size of each of the  company's  locations  in
their local markets.
<PAGE>
 Share of Local Market

 Banks and savings & loans
                                                     Rank in
                                            Market     Local
                                            Share     Market
 TRANS FINANCIAL BANK, NA

 South Central Kentucky:

                       Bowling Green .......  40%       1
                       Glasgow/Cave City ...  31%       1
                       Scottsville .........  35%       2
                       Tompkinsville .......  14%       3
                       Franklin ............   *       NM
Northeastern Kentucky:

                       Maysville ...........  36%       1
                       Morehead ............  36%       1
                       Augusta .............  30%       2
Eastern Kentucky:

                       Pike County .........  19%       2
                       Floyd County ........  28%       2
Western Kentucky:

                       Dawson Springs ......   6%       6
                       Russellville/Auburn .  15%       3

TRANS FINANCIAL BANK, TN NA

Eastern  Tennessee:

                       Rockwood/Kingston ...  14%       4
Middle Tennessee:

                       Clarksville .........   4%       8
                       Cookeville ..........   6%       6
                       Murfreesboro ........   1%       9
                       Nashville ...........   *       NM
                       McMinnville .........   5%       6
                       Franklin ............   *       NM
                       Crossville ..........   4%       5
South Central Tennessee:

                       Tullahoma ...........  15%       1
                       Shelbyville .........   6%       5
                       Manchester ..........  10%       3
                       Winchester ..........  14%       5
                       Columbia/Mt. Pleasant   6%       5
                 NM = not meaningful
                 * = less than 1%

     The company  actively  competes in its markets with other  commercial banks
and financial institutions for all types of deposits, loans, trust accounts, and
other  services.  The company  also  competes  generally  with  savings and loan
associations,   credit  unions,  brokerage  firms,  insurance  companies,  other
financial institutions,  and institutions which have expanded into the financial
market.

Supervision and Regulation
     Bank holding companies and commercial banks are extensively regulated under
both federal and state law. Any change in  applicable  laws or  regulations  may
have a material  effect on the  business  and  prospects  of the company and the
banks.
     As a  registered  bank  holding  company,  the  company  is  subject to the
supervision  of and  regulation  by the  Federal  Reserve  Board  under the Bank
Holding  Company Act of 1956.  TFB-KY and TFB-TN are subject to the  supervision
of, and regular  examination  by, the Office of the Comptroller of the Currency.
The Federal Deposit Insurance  Corporation  insures the deposits of the banks to
the current maximum of $100,000 per depositor.
     In addition,  the company is subject to the  provisions of  Kentucky's  and
Tennessee's  banking laws regulating bank acquisitions and certain activities of
controlling bank shareholders.
     The  Riegle-Neal  Interstate  Banking and Branching  Efficiency Act of 1994
(the "Act")  removes  state law barriers to  interstate  bank  acquisitions  and
permits the  consolidation  of  interstate  banking  operations.  Under the Act,
adequately  capitalized and managed bank holding  companies may acquire banks in
any state,  subject to (i) Community  Reinvestment Act compliance,  (ii) federal
and state antitrust laws and deposit  concentration limits, and (iii) state laws
restricting the acquisition of a bank that has been in existence for less than a
minimum period of time (up to five years).  The Act's  interstate  consolidation
and branching  provisions  became operative on June 1, 1997,  although any state
could, prior to that time, adopt legislation to accelerate  interstate branching
or prohibit it  completely.  The Act's  interstate  consolidation  and branching
provisions permit banks to merge across state lines and, if state laws permit de
novo branching, to establish a new branch as its initial entry into a state.

Statistical Information
     Certain statistical  information is included in Management's Discussion and
Analysis of Financial  Condition and Results of Operations included in Item 7 on
pages 9 through 31 and in note 7 to the consolidated financial statements. Those
pages are incorporated herein by reference.

     Description of Statistical Information                              Page(s)

     Average Consolidated Balance Sheets and Net Interest Analysis.........12-13
     Analysis of Year-to-Year Changes in Net Interest Income..................14
     Loans Outstanding........................................................17
     Loan Maturities and Interest Rate Sensitivity............................19
     Non-performing Assets (Including Potential Problem Loans)................20
     Summary of Loan Loss Experience..........................................21
     Allocation of Allowance for Loan Losses..................................22
     Allocation of Year-end Allowance for Loan Losses
       and Percentage of Each Type of Loan to Total Loans.....................22
     Carrying Value of Securities Available for Sale..........................22
     Maturity Distribution of Securities Available for Sale...................23
     Maturity of Time Deposits of $100,000 or More............................24
     Short-Term Borrowings....................................................25

     Consolidated Statistical Information.....................................31

     Impact of Non-accrual Loans on Interest Income (note 7, paragraph 3).....42


Item 2. Properties
     The main  banking  office of  TFB-KY,  which also  serves as the  principal
office of the  company,  is  located  at 500 East Main  Street,  Bowling  Green,
Kentucky.  TFB-KY owns all of the  properties  at which it conducts its business
except the Ashley Circle and Nashville Road sales centers in Bowling Green,  the
Nashville  office (which  provides trust and investment  services),  the Auburn,
Franklin and Virgie sales centers,  and one of its Pikeville  sales centers (the
North Mayo Trail sales center). TFB-KY also leases property in Bowling Green for
its operations  center.  The facility in which its  telemarketing  Customer Care
Center operates was sold and leased back on December 31, 1996.
     TFB-TN owns all the  properties  at which it conducts  business  except the
Franklin and Nashville sales centers.
     TFMC  leases  the  property  in  Tullahoma,  Tennessee,  which  houses  its
operations  center,  with the right to  receive  the deed to the  property  upon
completion of the lease,  and also leases space in Greensboro,  North  Carolina;
Little Rock, Arkansas; and Cape Coral, Florida for loan production offices.
     Note  8  to  the  company's   consolidated  financial  statements  contains
additional information relating to amounts invested in premises and equipment.


Item 3. Legal Proceedings
     In the  ordinary  course  of  operations,  the  company  and the  banks are
defendants in various legal proceedings. In the opinion of management,  there is
no proceeding pending or, to the knowledge of management,  threatened,  in which
an  adverse   decision  could  result  in  a  material  adverse  change  in  the
consolidated financial condition or results of operations of the company.
     On August 12,  1996,  Douglas M. Lester,  the  company's  former  chairman,
president and chief executive  officer,  filed suit individually and purportedly
on behalf of the  shareholders  of the company in Warren Circuit Court,  Bowling
Green,  Kentucky,  against  the company and four of its  directors.  Mr.  Lester
claims that the company wrongfully terminated him on June 4, 1996, that the four
named directors breached their fiduciary duties to the company, and also alleges
fraud, breach of contract,  interference with contractual relations and invasion
of privacy.  Mr. Lester seeks,  among other things,  $1 million in  compensatory
damages,  the value of certain stock options, and punitive damages. The trial is
currently  scheduled for April 1, 1998.  Management believes that the litigation
will not  result in a  material  adverse  change in the  consolidated  financial
condition  or results of  operations  of the company  and intends to  vigorously
defend the action.


Item 4. Submission of Matters to a Vote of Security Holders
     No matters  were  submitted to a vote of security  holders  during the last
quarter of the period covered by this report.

Item 4a. Executive Officers of the Registrant
     The following table sets forth the name, age and position with the company
and the banks of the executive officers of the company.  Officers of the company
and the banks are elected annually.
<TABLE>
<CAPTION>

                                Served as
                              an Executive                        Position with the
     Name                    Officer Since      Age               Company and the Banks

<S>                               <C>           <C>               <C>
Vince A. Berta                    1993          39                President, Chief Executive Officer, and Director of the company;
                                                                  Director and Executive Vice President of TFB-KY; Director of TFMC
Barry D. Bray                     1984          51                Executive Vice President,  Chief Credit Officer of the company;
                                                                  Chief Credit Officer of TFB-KY;  Chief Credit Officer of TFB-TN
                                                                  President and Director of TFB-KY
Tommy W. Cole                     1996          42                Executive Vice President, Corporate Financial Services of the
                                                                  company and of TFB-KY
John K. Davis II                  1997          41                Senior Vice President and Chief Information Officer of the company
                                                                  and of TFB-KY
Gregg A. Hall                     1997          41                Senior Vice President and Auditor of the company
Roger E. Lundin                   1987          53                Senior Vice President and Director of Human Resources of the
                                                                  company
Edward R. Matthews                1995          36                Executive Vice President and Chief Financial Officer of the
                                                                  company
Michael J. Moser                  1994          51                Executive Vice President and Director of Marketing of the company
Michael L. Norris                 1995          44                President and Director of TFMC
Ronald B. Pigeon                  1995          49                Controller of  the company; Secretary/Treasurer and Director
                                                                  of TFIS
Jay B. Simmons                    1993          41                Senior Vice  President,  General  Counsel and  Secretary of the
                                                                  company;  Senior Vice  President of TFB-KY and TFB-TN;
                                                                  Director and General Counsel of TFIS; Senior Vice President
                                                                  and Director of TFMC
Thomas R. Wallingford             1996          70                Chairman of the Board and Director of the company;  Chairman and
                                                                  Director of TFB-KY;  Retired, Former Chairman
                                                                  and Chief Executive Officer of Kentucky Community Bancorp, Inc.
</TABLE>

     All of the  above-mentioned  executive  officers have been with the company
     for more than five years,  except for the  following:
     Mr. Berta joined the company in April 1993.  Prior to that, he was Vice
     President and Manager of Functional Control with PNC Bank.
     Mr. Davis joined the company in September  1995.  Prior to that,  he was
Director of  Information  Systems and  Strategic  Architecture  for  SmithKline
Beecham  Clinical Laboratories.
     Mr.  Matthews  joined the company in January  1994.  Prior to that,  he was
Chief Financial  Officer for First Union National Bank of Tennessee for eighteen
months,   and  previously  held  positions  in  commercial  lending  and  credit
administration for First Union National Bank of North Carolina.
     Mr. Moser joined the company in July 1994. Prior to that, he was Senior
Vice President and Director of Corporate Marketing for West One Bancorp in
Boise, Idaho.
     Mr. Norris joined the company in July, 1993. Prior to that, he was
responsible for all mortgage servicing activities at PNC Mortgage Servicing
Company.
     Mr. Pigeon joined the company in November 1993. Prior to that, he was
Controller for a railroad  warehousing  service company in Denver, Colorado, and
was Vice President for External Reporting with Colorado National
Bankshares, Inc.
     Mr. Simmons  joined the company in November  1993.  Prior to that, he was a
partner in a Denver law firm,  specializing in financial  institutions  law, and
was a vice president on the legal staff of Colorado National Bankshares, Inc.
     None  of the  above  officers  is  related  to  another  and  there  are no
arrangements  or  understandings  between them and any other person  pursuant to
which  any of them  was  elected  as an  officer,  other  than  arrangements  or
understandings  with directors or officers of the company acting solely in their
capacities as such.


 Part II

Item 5. Market for the Registrant's Common Equity and Related Shareholder
        Matters
     The  registrant's  common  stock is traded on the Nasdaq Stock Market under
     the symbol TRFI. As of December 31, 1997 there were 1,683  shareholders  of
     record.  Following is a summary of market prices and dividends declared for
     the registrant's common stock for the quarterly periods indicated:
                                                       Stock Price
                                                         High   Low   Dividend
First quarter, 1996 ...............................  $ 18.125 $ 14.75    $0.16
Second quarter, 1996 ................................. 18.50    15.125    0.16
Third quarter, 1996 .................................  20.50    16.875    0.16
Fourth quarter, 1996 ................................. 23.50    19.50     0.16
First quarter, 1997 .................................. 26.50    22.00     0.17
Second quarter, 1997 ................................. 28.625   22.25     0.17
Third quarter 1997 ................................... 32.375   27.25     0.17
Fourth quarter, 1997 ................................. 39.00    30.50     0.17


     Additional  information  for  this  item  is  included  in  note  11 to the
consolidated financial statements.

Item 6. Selected Financial Data
     The  information  for  this  item  is  included  in  the  section  entitled
Consolidated Statistical Information in Item 7 of this report.


<PAGE>


Item 7. Management's Discussion and Analysis of Financial Condition and Results
of Operations

Financial Overview
     Trans Financial,  Inc. ("the company") is a bank holding company registered
under the Bank Holding  Company Act of 1956. The company has two commercial bank
subsidiaries--Trans Financial Bank, National Association ("TFB-KY"),  consisting
of all of the company's banking activities in Kentucky, and Trans Financial Bank
Tennessee,  National Association ("TFB-TN"),  consisting of all of the company's
Tennessee  banking  activity.  (On July 26, 1997,  the  company's  former thrift
subsidiary--Trans  Financial  Bank,  F.S.B.--was  merged  into  TFB-KY,  and its
Tennessee  operations were sold to TFB-TN.  These transactions  consolidated the
company's  banking  operations  into its current two  national  bank  charters.)
Collectively,  these banking institutions are referred to in this report as "the
banks."
     In addition,  the company operates as subsidiaries of TFB-KY a full-service
securities  broker/dealer--Trans  Financial  Investment  Services,  Inc.--and  a
mortgage banking company--Trans Financial Mortgage Company ("TFMC").  During the
fourth quarter of 1996, the company sold all of the assets of its travel agency,
Trans Travel, Inc., and exited the travel business.
     At December 31,  1997,  the company had total  consolidated  assets of $2.1
billion,  total  loans of $1.5  billion,  total  deposits  of $1.6  billion  and
shareholders' equity of $151 million. The company's net income was $23.9 million
in 1997, up from $6.9 million in 1996.  Diluted  earnings per share increased to
$2.04 per common share in 1997, from $0.60 in 1996.
     The discussion that follows is intended to provide  additional insight into
the company's financial  condition and results of operations.  It should be read
in conjunction  with the  consolidated  financial  statements  and  accompanying
notes, which follow this discussion.

Mergers and Acquisitions
     Over the past five  years,  the company has  expanded  through  mergers and
acquisitions, which are summarized below.
<TABLE>
<CAPTION>
                                                                                                                 Asset
                                                                                                  Date            Size

       Acquisition                                                     Location                 Consummated    (millions)

Mergers (pooling-of-interests accounting):
<S>                                                                  <C>                          <C>             <C>
      Kentucky Community Bancorp, Inc. ............................  Northeastern Kentucky        February-94     $175
      Peoples Financial Services, Inc. ............................  Middle & Eastern Tennessee   April-94         123
      FGC Holding Company .........................................  Eastern  Kentucky            August-94        127
Acquisitions (purchase accounting):
      Trans Kentucky Bancorp, Inc. ................................  Eastern Kentucky             July-93          189
      Fifth Third Bank of Kentucky, Inc. branches .................  South Central Kentucky       February-95       41
      AirLanse Travel (sold November-96) ..........................  Louisville,  Kentucky        September-95       1
      Correspondents Mortgage Company, L.P. .......................  Greensboro, North Carolina   November-95        1
      Surety Mortgage, Inc. .......................................  Cape Coral, Florida          December-97        1
</TABLE>

     The  mergers  shown  in the  above  table  were  accounted  for  using  the
pooling-of-interests method of accounting and, accordingly, financial statements
for all periods  were  restated to reflect  the results of  operations  of these
companies on a combined  basis from the earliest  period  presented,  except for
dividends  per share.  The  acquisitions  were  accounted for using the purchase
method of accounting.  Accordingly,  the results of operations of those acquired
entities prior to the acquisition dates have not been included in the results of
operations.  Therefore,  ratios or analyses  for periods  before and after these
purchase acquisitions may not be comparable.
     During April 1997,  the company  sold  substantially  all of the  deposits,
premises  and  equipment,  and certain  other  assets of its Lebanon and Sparta,
Tennessee  offices.  These two offices  represented $17 million of the company's
total deposits as of March 31, 1997.
     On August 29, 1997,  the Trans Adviser family of mutual funds ("the Funds")
was  transferred  to the  Countrywide  Family  of  Funds.  TFB-KY  had  acted as
investment  adviser to the Funds,  which had total  assets of $159 million as of
June 30, 1997. However, as a result of this transfer, TFB-KY no longer serves in
that capacity.  The transfer did not have a significant  impact on the company's
financial condition or results of operations.
     AirLanse Travel was consolidated into the operations of Trans Travel,  Inc.
in September  1995. In November  1996, as a part of the company's  commitment to
refocus on core financial services,  the assets of Trans Travel, Inc. were sold,
and the company exited the travel business.
     See  note  4  to  the  consolidated  financial  statements  for  additional
information regarding business combinations.


<PAGE>



Income Statement Review
     Net income was $23.9  million in 1997,  compared with $6.9 million in 1996,
and $15.3 million in 1995. On a diluted  per-share  basis, net income was $2.04,
$0.60 and $1.35,  respectively.  Results for 1997 include a $1.2 million pre-tax
gain on the sale of the two Tennessee  branch  offices,  a $0.9 million  pre-tax
gain on the sale of a portion of the  mortgage  servicing  portfolio  and a $0.4
million loss on the sale of securities available for sale.
     Non-interest  expenses  for 1996  reflect  pre-tax  charges  totaling  $5.8
million related to an initiative to refocus the company's  resources on its core
financial  services,  reduce  operating  expenses and exit from  less-profitable
initiatives.  This initiative was undertaken in the second quarter of 1996, when
the Board of Directors made a change in executive management, with the expressed
purpose  of  changing  the  company's  strategic  direction.   The  company  has
accomplished the following goals of the initiative:
         -exited the venture capital and human resources consulting initiatives,
         -closed  the  Louisville,   Kentucky   office,
         -closed  mortgage  loan production offices in Chattanooga,  Jackson and
          Knoxville,  Tennessee,
         -sold the  corporate  aircraft,
         -sold all of the  assets of the  travel
          agency,
         -sold a  newly-constructed  building  intended  to  house  the
          company's  corporate  headquarters  and  consolidated  office space in
          Bowling  Green,  Kentucky,
         -realized  additional  cost  savings in the  company's retail delivery
          system of  approximately  $2.5 million on an annualized pre-tax basis
          primarily through the reduction of administrative personnel, and
         -discontinued  TFB-KY's role as investment adviser to the Trans Adviser
          family of mutual funds.
          Based on a comparison of  non-interest expenses for the fourth quarter
of 1997 to the second quarter of 1996  (excluding the $5.8 million of charges to
implement the plan), total operating expenses have been reduced by more than $6
million on an annualized pre-tax basis.
          In addition to the charges associated with the refocus initiative, the
company  increased its 1996  provision for loan losses by $8.6 million  compared
with 1995 and recorded a pre-tax charge of $2.6 million imposed by congressional
legislation   enacted  during  1996  designed  to   re-capitalize   the  Savings
Association  Insurance Fund ("SAIF").  All banks with SAIF-insured  deposits and
all  savings  and loans  were  subject  to the SAIF  assessment.  The  increased
provision for loan losses in 1996 was primarily  due to a  deterioration  in the
quality of certain commercial credits in the second quarter of that year.
          Following is a summary of the components of income and expense and the
changes in those components over the past three years.

<TABLE>

Condensed Consolidated Statements of Income
For the years ended December 31
Dollars in thousands, except per share data
<CAPTION>

                                                 Change                        Change
                                 1997      Amount     %      1996      Amount     %        1995
<S>                          <C>       <C>         <C>     <C>        <C>        <C>    <C>
Interest income ...........  $161,411  $ 13,476      9.1%  $147,935   $  13,707   10.2%  $134,228
Interest expense ..........    81,200     8,134     11.1     73,066       8,467   13.1     64,599
                            ----------   ------             --------   --------          --------
Net interest income .......    80,211     5,342      7.1     74,869       5,240    7.5     69,629
Provision for loan losses .     9,500    (4,414)   (31.7)    13,914       8,654  164.5      5,260
Net interest income after   ----------   ------             --------   --------          --------
  provision for loan losses    70,711     9,756     16.0     60,955      (3,414)  (5.3)    64,369
Non-interest income .......    34,410     4,721     15.9     29,689       5,278   21.6     24,411
Non-interest expenses .....    69,133   (11,509)   (14.3)    80,642      14,593   22.1     66,049
                            ---------    ------            --------    --------          --------
Income before income taxes     35,988    25,986    259.8     10,002     (12,729) (56.0)    22,731
Income tax expense ........    12,055     8,935    286.4      3,120      (4,296) (57.9)     7,416
                            ---------    ------            --------     --------         --------
Net income ................  $ 23,933  $ 17,051    247.8    $ 6,882    $ (8,433) (55.1)   $15,315
Basic earnings per share ..     $2.09     $1.48    243.5      $0.61       $0.75) (55.1)     $1.36
Diluted earnings per share      $2.04     $1.44    239.8%     $0.60      $(0.75) (55.4)%    $1.35
</TABLE>

          Each of these components of income and expense is discussed separately
in the sections that follow.

      Net Interest Income
          Net interest  income  totaled  $80.2  million in 1997, a 7.1% increase
over the $74.9 million recorded in 1996. In 1996 net interest income was up 7.5%
over 1995's $69.6 million.  On a  fully-taxable-equivalent  basis,  net interest
income was $81.6 million in 1997,  compared with $76.5 million in 1996 and $71.3
million in 1995. The increases in net interest income in both 1997 and 1996 were
due to a higher level of interest-earning  assets,  primarily  commercial loans.
These  increases  in  interest  income were  partially  offset by  increases  in
interest expense due to a greater reliance on wholesale funding sources, such as
brokered deposits and advances from the Federal Home Loan Bank.
          The  following  table  summarizes  the  changes in the  company's  net
interest margin (on a fully-taxable-equivalent basis) over the past three years.
Net interest  margin is net interest  income  divided by the average  balance of
interest-earning assets for the year.
<TABLE>

 Net Interest Analysis Summary (F1)
 For the years ended December 31
<CAPTION>

                                                           Basis Point          Basis Point
                                                     1997     Change     1996    Change      1995

<S>                                                   <C>     <C>        <C>     <C>        <C>
Average yield on interest-earning assets .......      8.89%     6        8.83%     (6)       8.89 %
Average rate on interest-bearing liabilities ...      5.06     17        4.89      15        4.74
                                                      ----    ---       ------  ------       ----
Net interest-rate spread .......................      3.83    (11)       3.94    (21)        4.15
Impact of non-interest-bearing sources and other
   changes in balance sheet composition ........      0.63      5        0.58      6         0.52
                                                      ----    ---      ------   ------       ----
Net interest margin ............................      4.46%    (6)       4.52%   (15)        4.67 %
<FN>

      (F1)Refer to the tables on pages 12 and 13 for  additional data regarding
the net interest analysis.
</FN>
</TABLE>

          The  table  on pages 12 and 13 show,  for the past  three  years,  the
relationship  between  interest  income  and  expense  and the levels of average
interest-earning  assets  and  average  interest-bearing  liabilities.  It  also
reflects  the  general  increase  in  interest  rates on total  interest-bearing
liabilities over the past year, and increased volumes of loans,  certificates of
deposit and borrowed funds.
          Approximately $675 million of the company's loans reprice  immediately
with changes in the prime rate,  and another $37 million of loans reprice within
three months of a change in prime.  Decreases in the prime lending  rate,  which
began in the third quarter of 1995, had a negative impact on net interest margin
during 1996 as compared to 1995.  The prime rate  increased to 8.25% in February
1996,  and remained  constant  through the remainder of 1996 and through most of
the first  quarter  of 1997.  During  this time,  the  company's  funding  costs
continued to rise, as the company placed greater  reliance on wholesale  funding
sources,  such as brokered  deposits and other borrowed funds. As a result,  the
company's net interest-rate  spread (the difference between the average yield on
interest-earning   assets  and  the  average   rate  paid  on   interest-bearing
liabilities)  decreased,  negatively  impacting  the net interest  margin.  This
negative  impact was partially  offset during 1996 by increased  interest income
due to loan growth.  As loan growth  slowed during 1997,  the net  interest-rate
spread  dropped 11 basis  points as compared to 1996.  The prime rate  increased
twenty-five  basis  points to 8.50%  near the end of the first  quarter of 1997,
which had a slight positive impact on net interest income in 1997.
          On November 30,  1995,  the company  reclassified  all  securities  to
available for sale, as permitted by the Financial  Accounting Standards Board in
a special one-time reassessment.


<PAGE>



<TABLE>


       Average Consolidated Balance Sheets and Net Interest Analysis

 For the years ended December 31
 Fully-taxable equivalent basis
 Dollars in thousands
<CAPTION>

                                                     1997                      1996                            1995
                                         Average            Average   Average           Average     Average              Average
                                         Balance   Interest  Rate     Balance  Interest   Rate      Balance   Interest   Rate
                                           (F1)      (F2)               (F1)      (F2)                (F1)      (F2)

Assets

 <S>                                <C>          <C>        <C>    <C>          <C>        <C>      <C>          <C>        <C>
 Securities held to maturity:
 U.S. Treasury, federal agencies, and
 mortgage-backed securities ..       $      --   $    --       -%    $    --    $    --       -%    $  24,257     $1,686     6.95%
 State and municipal obligations            --        --       -          --         --       -        46,674      3,622     7.76
 Other securities ...................       --        --       -          --         --      --         4,816        355     7.37
                                     ----------    ------   -----     ------    -------     ----     --------     ------    -----
 Total securities held to maturity ..       --        --       -          --         --      --        75,747      5,663     7.48
 Securities available for sale:
 U.S. Treasury, federal agencies, and
 mortgage-backed securities .......    180,872     10,293   5.69     204,549     11,450    5.60      209,756      11,847     5.65
 State and municipal obligations ....   48,999      3,517   7.18      53,844      4,023    7.47        5,442         445     8.18
 Other securities ...................   35,673      2,365   6.63      33,460      2,133    6.37       13,727         901     6.56
                                     ----------    ------   -----     ------    -------    -----     --------     ------    -----
 Total securities available for sale   265,544     16,175   6.09     291,853     17,606    6.03      228,925      13,193     5.76
                                     ----------    ------   -----     ------    -------    -----     --------     ------    -----

 Total securities ...................  265,544     16,175   6.09     291,853     17,606    6.03      304,672      18,856     6.19
 Federal funds sold ...................     16          1   6.25         898         52    5.79       13,652         804     5.89
 Interest-bearing deposits with banks .     98          9   9.18         117         14   11.97          197          17     8.63
 Mortgage loans held for sale ........  91,779      6,880   7.50      53,824      3,938    7.32       19,436       1,644     8.46
 Loans, net of unearned income (F3)  1,473,103    139,701   9.48   1,346,754    127,983    9.50    1,190,101     114,572     9.63
                                     ----------   -------   ----   ---------    -------    ----    ---------     -------    -----
Total interest-earning assets /
  interest income .................. 1,830,540    162,766   8.89%  1,693,446    149,593    8.83%  1,528,058      135,893     8.89%

Less allowance for loan losses ......  (20,668)                      (16,563)                       (13,239)
                                    ----------                   ------------                     ----------
                                     1,809,872                     1,676,883                      1,514,819
Non-interest-earning assets:
  Cash and due from banks ...........   55,524                        58,443                         63,726
  Premises and equipment ............   37,080                        39,891                         38,307
                                     ----------                   ------------                  -----------
Total assets ....................  $ 1,988,814                   $ 1,857,328                    $ 1,672,932
<FN>

    (F1)Average balances are computed based on daily balances.
    (F2)Interest income on tax-exempt securities and loans has been increased
     47% in this analysis to reflect comparable interest on fully-taxable-
     equivalent investments.
    (F3)For computational purposes,  non-accrual loans are included
     in loans.
</FN>
</TABLE>


<PAGE>
<TABLE>

       Average Consolidated Balance Sheets and Net Interest Analysis

 For the years ended December 31
 Fully-taxable equivalent basis
 Dollars in thousands
<CAPTION>


                                                      1997                           1996                       1995
                                          Average              Average   Average            Average    Average               Average
                                         Balance      Interest   Rate    Balance   Interest   Rate     Balance    Interest    Rate
 Interest                                   (F1)         (F2)              (F1)     (F2)              (F1)       (F2)
<S>                                     <C>            <C>      <C>     <C>          <C>     <C>     <C>          <C>         <C>
Liabilities and Shareholders' Equity
Interest-bearing liabilities:
  Interest-bearing deposits:

  Interest-bearing demand ............  $   39,278     1,397    3.56%  $ 108,325      3,128   2.89%  $ 231,224     6,147       2.66%
  Savings deposits ...................     100,608     2,750    2.73     113,078      3,027   2.68     131,614     3,778       2.87
  Money market accounts ..............     270,303     8,867    3.28     178,566      5,571   3.12      47,288     1,514       3.20
  Certificates of deposit ............     711,106    38,995    5.48     715,344     38,490   5.38     700,707    37,962       5.42
  Brokered certificates of deposit ...     124,236     7,805    6.28      68,042      4,786   7.03      28,562     2,278       7.98
  Individual Retirement Accounts .....      81,629     4,575    5.60      86,097      4,793   5.57      88,547     4,786       5.41
                                        ----------    ------    ----   ---------     ------   ----    --------    ------      -----
Total interest-bearing deposits .....    1,327,160    64,389    4.85   1,269,452     59,795   4.71   1,227,942    56,465       4.60

Federal funds purchased
  and repurchase agreements .........       69,455     3,668    5.28      42,010      1,949   4.64      47,219     2,013       4.26
Other short-term borrowings .........       63,863     3,607    5.65      56,136      3,117   5.55      40,652     2,983       7.34
Long-term debt ......................      143,882     9,536    6.63     125,593      8,205   6.53      46,840     3,137       6.70
                                        ----------    ------           ---------     ------           --------    ------
 Total borrowed funds ...............      277,200    16,811    6.06     223,739     13,271   5.93     134,711     8,133       6.04
                                        ----------    ------           ---------     ------           --------    ------
Total interest-bearing liabilities /
  interest expense ..................    1,604,360    81,200    5.06%  1,493,191     73,066   4.89%  1,362,653    64,598       4.74%


Non-interest-bearing liabilities:
Non-interest-bearing deposits ........     219,302                       213,332                       172,748

Other liabilities ....................      24,654                        21,405                        15,485
                                         ---------                    ----------                     ---------
                                         1,848,316                     1,727,928                     1,550,886
Shareholders' equity .................     140,498                       129,400                       122,046
                                         ---------                    ----------                     ---------

Total liabilities
and shareholders' equity .............  $1,988,814                    $1,857,328                    $1,672,932
Net interest-rate spread (F4) ........                          3.83%                         3.94%                            4.15%
sources and other changes in
balance sheet composition                                       0.63%                         0.58%                            0.52%
Net interest income /
margin on interest-earning assets (F5)            $   81,566    4.46%            $   76,527   4.52%        $      71,295       4.67%

<FN>

    (F1)Average balances are computed based on daily balances.
    (F2)Interest income on tax-exempt securities and loans has been increased 47%
    in this analysis to reflect comparable interest on  fully-taxable-equivalent
    investments.
    (F3)For computational purposes,  non-accrual loans are included
    in loans.
    (F4)Net  interest-rate spread is the difference between the average
    rate of interest earned on  interest-earning  assets and the average rate of
    interest expensed on
interest-bearing liabilities.
    (F5)Net interest margin is net interest income divided by average interest-
earning assets.
</FN>
</TABLE>


<PAGE>






      Analysis of Year-to-Year Changes in Net Interest Income
          The  following  table shows  changes in interest  income and  interest
expense  resulting from changes in volume (average  balances) and interest rates
for the years  ended  December  31, 1997 and 1996,  as compared to the  previous
year. The change in interest  income and expense due to both rate and volume has
been  allocated to changes in volume and rate in proportion to the  relationship
of the absolute dollar amounts of the change in each.

<TABLE>
<CAPTION>

                                               1997 vs. 1996                                  1996 vs. 1995
                                         -------------------------------------------------------------------------
                                                Increase (decrease)                       Increase (decrease)
Fully-taxable equivalent basis         in interest income and expense               in interest income and expense
In thousands                            due to changes in:                             due to changes in:
                                      Rate       Volume     Total                    Rate        Volume    Total
<S>                                   <C>        <C>         <C>                    <C>        <C>        <C>
Interest-earning assets:
Securities held to maturity:
U.S. Treasury, federal agencies,
and mortgage-backed securities ....   $  --      $   --      $   --                 $  --      $ (1,686)  $(1,686)
State and municipal obligations ...      --          --          --                    --        (3,622)   (3,622)
Other securities ..................      --          --          --                    --          (355)     (355)
                                       -----      ------      ------              --------       -------    ------
Total securities held to maturity .      --          --          --                    --        (5,663)   (5,663)
Securities available for sale:
U.S. Treasury, federal agencies,
and mortgage-backed securities ....       188      (1,345)     (1,157)               (105)         (292)     (397)
State and municipal obligations ...      (154)       (352)       (506)                (42)        3,620     3,578
Other securities ..................        87         145         232                 (27)        1,259     1,232
                                       ------      ------      ------             --------      -------    ------                   
Total securities available for sale       121      (1,552)     (1,431)                (174)       4,587     4,413
                                       ------      ------      ------             --------      -------    ------                   
    Total securities ..............       121      (1,552)     (1,431)                (174)      (1,076)   (1,250)
Federal funds sold ................         4         (55)        (51)                 (13)        (739)     (752)
Interest-bearing deposits
 with banks .......................        (3)         (2)         (5)                   5           (8)       (3)
Mortgage loans held for sale ......        99       2,843       2,942                 (250)       2,544     2,294
Loans, net of unearned income .....      (265)     11,983      11,718               (1,493)      14,904    13,411
                                        ------     ------      ------              --------     -------    ------                   
Total interest-earning assets .....       (44)     13,217      13,173               (1,925)      15,625    13,700
Interest-bearing liabilities:
Interest-bearing deposits:
Interest-bearing demand ...........       602      (2,333)     (1,731)                 491       (3,510)   (3,019)
Savings deposits ..................        63        (340)       (277)                (243)        (508)     (751)
Money market accounts .............       300       2,996       3,296                  (40)       4,097     4,057
Certificates of deposit ...........       734        (229)        505                 (261)         789       528
Brokered certificates of deposit ..      (560)      3,579       3,019                 (298)       2,806     2,508
Individual Retirement Accounts ....        32        (250)       (218)                 141         (134)        7
                                        ------      ------      ------             --------     -------    ------                   

Total interest-bearing deposits ...     1,171       3,423       4,594                  (210)      3,540     3,330
  Federal funds purchased
    and repurchase agreements .....       300       1,419       1,719                   169        (233)      (64)
  Other short-term borrowings .....        54         436         490                  (834)        968       134
  Long-term debt ..................       120       1,211       1,331                   (79)      5,147     5,068
                                       ------      ------      ------              --------     -------    ------                   
    Total borrowed funds ..........       474       3,066       3,540                  (744)      5,882     5,138
                                       ------      ------      ------              --------     -------    ------                   

Total interest-bearing liabilities      1,645       6,489       8,134                  (954)      9,422     8,468
                                       ------      ------      ------              --------     -------    ------                   

Increase (decrease) in
net interest income                   $(1,689)    $ 6,728     $ 5,039               $  (971)   $  6,203   $ 5,232

</TABLE>

      Provision for Loan Losses
          The provision for loan losses in 1997 was $9.5 million,  or 0.64%
of average loans, a decrease of $4.4 million from the $13.9 million,  or 1.03%
of average loans,  in 1996. In 1995, the company recorded a provision of $5.3
million, or 0.44% of average loans.
          Net loan  charge-offs  were $5.5 million in 1997,  compared with $11.6
million in 1996, and $2.0 million in 1995. In 1996 the company  charged off $7.0
million  on three  non-performing  loans  which had been  placed in  non-accrual
status during 1995. As a percentage of average loans, net charge-offs were 0.38%
in 1997,  compared  with  0.86% in 1996,  and  0.17% in 1995.  For the five year
period from 1993 through 1997, net charge-offs averaged 0.40%.
          The  provision for loan losses and the level of the allowance for loan
losses result from  management's  evaluation of the risk in the loan  portfolio.
The increased  provision in 1997 and 1996 as compared to 1995  reflects  overall
growth in the loan portfolio as well as a higher level of non-performing  loans.
Further discussion on loan quality and the allowance for loan losses is included
later in this review in the Asset Quality section.

      Non-interest Income
          Non-interest  income for 1997 increased 16% over 1996 after increasing
22% from 1995 to 1996. The increases in non-interest income were due to:

                                                         Increase (Decrease) in
                                                          Non-Interest Income
 In thousands                                       1997 vs. 1996  1996 vs. 1995
                                                    -------------  -------------
Service charges on deposit accounts ..................   $   613    $ 1,069
Net gains and losses on sale of securities ...........      (376)      (180)
Increase (decrease) in mortgage banking income due to:
      Recognition of mortgage servicing rights .......      (396)       174
      Gain on sale of mortgage loans held for sale ...     1,083      1,580
      Mortgage servicing fees ........................     1,205      2,965
      Gain on sale of mortgage servicing rights ......       889     (1,687)
Trust service fees ...................................       520        563
Brokerage income .....................................       742        473
Travel agency fees ...................................      (650)       335
Credit life insurance fees ...........................       200        252
Gain on sale of branch offices .......................     1,241       --
All other non-interest income ........................      (350)      (266)
                                                          ------     -------
      Total increase in non-interest income ..........   $ 4,721    $ 5,278

          The increases in  non-interest  income reflect the company's  focus on
its expanding mortgage banking,  securities  brokerage and trust businesses,  as
well as significant improvements in service charges on deposit accounts.  Income
from the mortgage banking  business  includes an $889 thousand pre-tax gain from
the sale of $256 million of mortgage servicing during 1997. The sale allowed the
company to take advantage of attractive  market prices,  while reducing exposure
to future  prepayment  risk.  Even  excluding  the sale,  growth in the mortgage
servicing  portfolio  resulted  in a $1.9  million  increase  in other  mortgage
banking  income for 1997 as compared with 1996. In 1995, the company sold a $168
million mortgage loan servicing  portfolio,  resulting in a $1.7 million pre-tax
gain.
          Non-interest income for 1997 also reflects a $1.2 million pre-tax gain
on the sale of two Tennessee banking offices.  The sale of these two offices was
part of the company's plan to improve efficiency of its distribution  network by
reallocating  resources  toward  markets with more growth  potential.  Partially
offsetting  these  improvements in 1997 was $356 thousand in net security losses
taken to reposition the investment  portfolio into  higher-yielding  securities.
The decrease in travel  agency fees in 1997 as compared  with 1996 is the result
of the  company's  exit from the travel  business  during the fourth  quarter of
1996.
          TFMC  purchased a $1.0 billion  mortgage loan  servicing  portfolio in
1996 and a $1.2 billion servicing portfolio in 1995,  increasing the size of the
servicing  portfolio  from $1.3  billion  at the end of 1994 to $3.3  billion at
year-end 1997, net of the sales in 1995 and 1997.  The  significant  increase in
mortgage  servicing fees in 1996 as compared with 1995 was due to this growth in
the servicing portfolio.
          Most of the increase in mortgage banking income in 1997, however,  was
due to fees associated with mortgage loans originated or purchased and then sold
in  the  secondary  market.  In  the  fourth  quarter  of  1995,  TFMC  acquired
Correspondents  Mortgage Company, L.P. of Greensboro,  North Carolina,  doubling
TFMC's wholesale mortgage lending capacity.  The Greensboro office accounted for
$2.1 million of the $4.7 million  increase in mortgage  banking income from 1995
to 1996.
          The company  accounts  for  mortgage  servicing  rights  ("MSR's")  in
accordance with Statement of Financial  Accounting Standards No. 125, Accounting
for  Transfers  and  Servicing  of  Financial  Assets  and   Extinguishments  of
Liabilities  ("SFAS  125").  SFAS 125 requires  that rights to service  mortgage
loans for others be recognized as assets, without regard to whether those assets
were acquired in purchase transactions or through loan originations. As a result
of SFAS 125, the company recognized in 1997 $1.0 million in non-interest income,
before  amortization,  compared  with $1.4  million in 1996 and $1.2  million in
1995.

      Non-interest Expenses
          Non-interest   expenses  for  1997  decreased  14%  from  1996,  after
increasing 22% from 1995 to 1996. The changes in non-interest expense over these
periods were due to:

                                                 Increase (Decrease) in
                                                  Non-Interest Expenses
 In thousands
                                                1997 vs. 1996   1996 vs. 1995
                                                -------------   --------------
1996 second quarter initiatives ..................   $(5,807)   $ 5,807
Incentive-based compensation .....................       439      1,426
All other compensation and employee benefits .....    (1,816)     4,115
Hiring and relocation ............................      (341)      (210)
Occupancy expense ................................       (71)      (105)
Furniture, equipment and communications expense ..       365      1,463
Deposit insurance:
Deposit insurance premiums .......................      (608)    (1,073)
1996 SAIF assessment, net of fourth quarter refund    (2,563)     2,563
Advertising and public relations expense .........        88       (410)
Travel and entertainment .........................      (299)        70
Professional fees ................................      (272)      (594)
Postage, printing and supplies ...................      (532)       482
Foreclosed asset expense .........................       246       (495)
Processing fees ..................................       423        931
All other non-interest expenses ..................      (761)       623
                                                      --------    ------
Total increase (decrease) in non-interest expense   $(11,509)   $14,593

          The decreased expenses in 1997 are a direct result of the cost control
efforts in  connection  with the  company's  initiative to refocus the company's
resources on core financial services,  which began in mid-1996. Costs associated
with this  initiative,  which were  recognized  in the  second  quarter of 1996,
included severance and related payroll taxes and benefits,  write-downs of fixed
assets  to be sold or  abandoned,  legal and  accounting  fees  associated  with
discontinuing  certain  activities and various other costs  associated  with the
disposition of assets.  These charges  provided for the cost of exiting  several
initiatives  which the company entered in recent years,  such as human resources
consulting  and venture  capital.  Also  included in the charges  were  expenses
associated  with  closing  the  Louisville,   Kentucky  office;   mortgage  loan
production  offices  in  Chattanooga,  Jackson  and  Knoxville,  Tennessee;  and
consolidation of operations in Bowling Green,  Kentucky.  Severance  expense was
also  recognized  related  to  changes  designed  to reduce  costs in the retail
delivery  system and in  investment  management.  The company sold its corporate
jet, with the cost of its disposition  included in second quarter expenses.  The
classification  of these  costs in the  consolidated  statement  of income is as
follows:

      In thousands
               Compensation and employee benefits                         $1,798
               Net occupancy expense                                         475
               Furniture and equipment expense                               325
               Professional fees                                             340
               Writedowns and losses on sale of fixed assets               1,698
               Other expenses                                              1,171
                                                                         -------
                   Total costs associated with the initiative             $5,807
                                                                          ======

     As a result of higher revenues and lower operating expenses, the efficiency
ratio (a measure of operating expenses per dollar of income) decreased to 61.26%
in 1997  (excluding  the  mortgage  servicing  and branch  sale  gains,  and net
securities losses)--a substantial improvement over the 71.6% efficiency ratio in
1996  (excluding  the  $5.8  million  in  costs   associated  with  the  refocus
initiative).
     Although the company is committed to maintaining  strict  expense  control,
increased expenses for furniture, equipment and communications over the past two
years reflect  another  commitment:  to invest in new  technology,  distribution
channels and product lines,  to provide  enhanced  customer  service and support
future growth. To support expanded  distribution channels and product lines, the
company has incurred  higher  external  data  processing  costs,  primarily  for
mortgage loan servicing and  electronic  delivery of financial  services.  These
costs  have   increased  $0.4  million  and  $0.9  million  in  1997  and  1996,
respectively.
     As mentioned previously,  the company recorded in the third quarter of 1996
a pre-tax charge of $2.7 million resulting from legislation  enacted during 1996
designed to re-capitalize  the SAIF (a refund of $122 thousand was received from
the SAIF in the fourth  quarter of 1996).  The $1.1 million  decrease in deposit
insurance  premiums in 1996 and the $0.6 million  decrease in 1997 were due to a
reduction from $0.23 to $0.04 per $100 of deposits  insured  through the Federal
Deposit Insurance  Corporation's Bank Insurance Fund ("BIF"),  effective June 1,
1995, and to zero effective January 1, 1996.  Insurance premiums on SAIF-insured
deposits  remained at $0.23 through 1996, but were reduced in 1997 to $0.065 per
$100 of SAIF-insured  deposits.  Approximately 69% of the company's deposits are
insured through the BIF. The remaining 31% of the company's deposits are insured
through the SAIF.
     Compensation  and  benefits  increased  $5.5  million in 1996  (excluding
the  refocus  initiative  charges) as compared  to 1995,  including a $1.4
million  increase in performance-based compensation.

Income Taxes
     The company had income tax expense of $12.1 million in 1997,  compared with
$3.1 million in 1996 and $7.4 million in 1995.  These  represent  effective  tax
rates of 33.5%,  31.2%  and  32.6%,  respectively.  Further  information  on the
company's  income  taxes can be found in note 12 to the  consolidated  financial
statements.


Balance Sheet Review
     Assets at year-end 1997 totaled $2.1 billion, compared with $2.0 billion at
December 31, 1996. On an average basis, total assets increased $131 million from
1996  to  1997,  after  increasing  $184  million  from  1995 to  1996.  Average
interest-earning  assets increased $137 million from 1996 to 1997, and increased
$165 million from 1995 to 1996.

Loans
     Total loans,  net of unearned  income,  averaged $1.473 billion in 1997,
 compared with $1.347 billion in 1996 and $1.190 billion in 1995. At year-end
 1997,  loans totaled $1.538 billion, compared with $1.451 billion at
 December 31, 1996, and $1.259 billion at the end of 1995.
     Over the past five years,  the company has  experienced  strong loan growth
throughout its markets, with particular strength in middle market commercial and
commercial  real  estate.  The  following  table  presents a summary of the loan
portfolio by category over that period.
<TABLE>

 Loans Outstanding
 December 31
 In thousands
<CAPTION>

                                          1997           1996           1995           1994           1993
<S>                                 <C>            <C>            <C>            <C>            <C>
Commercial ......................   $   453,487    $   466,365    $   372,822    $   318,970    $   320,952
Commercial real estate ..........       539,860        470,235        397,741        334,567        234,308
Residential real estate .........       344,008        335,433        336,769        323,541        292,021
Consumer:
   Home equity lines ............        79,716         50,461         20,928         16,064         11,262
   Other consumer ...............       122,835        130,444        132,401        153,754        150,202
                                     -----------   -----------    -----------    -----------    -----------
   Total loans ..................     1,539,906      1,452,938      1,260,661      1,146,896      1,008,745
Less unearned income ............        (2,086)        (1,939)        (2,150)        (3,063)        (3,656)
                                     -----------   -----------    -----------    -----------    -----------
   Loans,  net of unearned income   $ 1,537,820    $ 1,450,999    $ 1,258,511    $ 1,143,833    $ 1,005,089
</TABLE>

Loan Concentrations
     Much of the  increase in  commercial  and  commercial  real estate loans is
financing the operations of the company's commercial customers.  Commercial real
estate loans include financing for industrial parks,  residential  developments,
retail shopping centers, multi-family apartment complexes, industrial buildings,
fast food and mid-scale  restaurants,  hotels and motels.  The primary source of
repayment cannot be traced to any specific industry group.
     The percentage  distribution of the company's loans, by industry,  is shown
in the following table.

 Loans by Industry
 December 31, 1997
 As a percentage of total loans

Agriculture ...........................................       3.6%
Apartment buildings ...................................       2.4
Construction and land development .....................      10.1
Finance and insurance .................................       3.2
Manufacturing:
   Durable goods ......................................       6.3
   Nondurable goods ...................................       3.6
Mining ................................................       2.4
Services:
   Health .............................................       2.5
   Hotels and  motels .................................       4.3
   Other than health and hotels .......................       5.1
Wholesale trade .......................................       3.1
Retail trade:
   Restaurants ........................................       3.3
   Food stores ........................................       2.1
   Automotive .........................................       1.7
   Other ..............................................       2.2
Other commercial real estate ..........................       7.1
All other commercial loans ............................       1.6
                                                            -----
      Total commercial and commercial real estate loans      64.6
Residential real estate loans .........................      27.4
Consumer loans ........................................       8.0
                                                            -----
      Total loans, net of unearned income .............     100.0%

     Substantially  all of the  company's  loans  are to  customers  located  in
Kentucky and Tennessee, in the immediate market areas of the banks. However, the
company has  commercial  real estate  loans  totaling  $7.4 million to a Mexican
affiliate of a U.S. corporation.  The loans represent financing for an essential
part of the  operations of an established  customer  located in Kentucky and are
guaranteed by the U.S. corporation.
     As of December 31, 1997,  the  company's  40 largest  credit  relationships
consisted of loans and loan commitments  ranging from $5 million to $17 million,
one of which  was  classified  as a  non-accrual  loan  (see the  Asset  Quality
discussion below).  The aggregate amount of these credit  relationships was $420
million.  These large credit relationships have been underwritten and structured
to minimize the company's exposure to loss. However, a significant deterioration
in the financial  condition of one or more of these borrowers could result in an
increase in the company's loan charge-offs.  In addition,  the prepayment of one
or more of these credits or their refinancing at another  financial  institution
may have a negative impact on the company's future loan growth.
     The following table sets forth the maturity  distribution and interest rate
sensitivity of commercial  and  commercial  real estate loans as of December 31,
1997.  Maturities are based upon  contractual  terms. The company's policy is to
specifically  review and approve all loans renewed;  loans are not automatically
rolled over.

 Loan Maturities and Rate Sensitivity
 December 31, 1997
 In thousands                   One Year  One Through    Over          Total
                                 or Less   Five Years  Five Years       Loans
 By maturity date:
  Commercial .................   $192,995   $119,727   $140,765       $453,487
  Commercial real estate .....    116,199     92,653    331,008        539,860
                                 --------   --------    -------       --------
    Total ....................   $309,194   $212,380   $471,773       $993,347
  Fixed rate loans ...........   $ 54,802   $ 66,046   $ 68,770       $189,618
  Floating rate loans ........    254,392    146,334    403,003        803,729
                                 --------   --------    -------       --------
    Total ....................   $309,194   $212,380   $471,773       $993,347
By next repricing opportunity:
  Commercial .................   $402,970   $ 37,595   $ 12,922       $453,487
  Commercial real estate .....    436,537     47,139     56,184        539,860
                                 --------   --------    -------       --------
    Total ....................   $839,507   $ 84,734   $ 69,106       $993,347
  Fixed rate loans ...........   $ 54,802   $ 66,046   $ 68,770       $189,618
  Floating rate loans ........    784,705     18,688        336        803,729
                                 --------   --------    -------       --------
    Total ....................   $839,507   $ 84,734   $ 69,106       $993,347

Asset Quality
     Non-performing  loans, which include non-accrual loans, accruing loans past
due over 90 days and  restructured  loans,  totaled  $24.5 million at the end of
1997, and $10.6 million at December 31, 1996. The ratio of non-performing  loans
to year-end  loans was 1.59%,  compared with 0.73% at year-end 1996 and 1.38% at
December 31, 1995.
     The increase in 1997 is primarily attributable to $11.5 million of loans to
a coal mining  operation.  The terms of this loan were modified during the third
quarter  of  1997 to  defer  principal  payments  through  the end of the  year.
Accordingly,  the loan was classified as  restructured at that time. By December
31, 1997, management concluded that the cash flow from the coal mining operation
had  not  improved   sufficiently  in  order  to  service  the  debt  under  the
restructured  agreement;  therefore,  it was reclassified as a non-accrual loan.
The  company  is  closely  monitoring  its $33.5  million  exposure  to the coal
industry  consisting  of the  non-accrual  loan  mentioned  above  as well as an
additional  112  relationships,  with the next largest  single  credit  exposure
totaling $3.8 million.  This $3.8 million  credit was  subsequently  paid off in
1998; the company's  next largest coal credit totals $2.7 million.  The increase
in non-performing loans in 1995 was primarily due to placing one commercial loan
in non-accrual status during the fourth quarter of that year.
     Non-performing assets, which include non-performing loans,  foreclosed real
estate and other  foreclosed  property,  totaled $25.5 million at year-end 1997,
and the ratio of total non-performing  assets to total assets increased to 1.21%
at year-end 1997, from 0.62% at December 31, 1996, due primarily to the increase
in non-performing loans.
     The following table presents information concerning  non-performing assets,
including non-accrual and restructured loans:
<TABLE>

 Non-performing Assets
 December 31
 Dollars in thousands
<CAPTION>

                                                      1997        1996      1995        1994      1993
<S>                                                 <C>        <C>        <C>        <C>        <C>
 Non-accrual loans                                  $21,803    $ 4,717    $12,708    $ 4,375    $ 5,926
Accruing loans which are contractually
  past due 90 days or more ......................     1,991      5,863      4,617      3,514      2,377
Restructured loans ..............................       687          4         14         30      1,591
                                                    -------    -------    -------    -------    -------
  Total non-performing and restructured loans ...    24,481     10,584     17,339      7,919      9,894
Foreclosed real estate ..........................       845      1,608      4,329      4,998      5,869
Other foreclosed property .......................       217        184        677        199        113
                                                    -------    -------    -------    -------    -------
    and foreclosed property .....................   $25,543    $12,376    $22,345    $13,116    $15,876

Non-performing and restructured loans
  as a percentage of loans net of unearned income      1.59%      0.73%      1.38%      0.69%      0.98%
Non-performing and restructured loans and other
  real estate as a percentage of total assets ...      1.21%      0.62%      1.24%      0.81%      0.99%
</TABLE>

     Management  classifies  commercial  and  commercial  real  estate  loans as
non-accrual  when principal or interest is past due 90 days or more and the loan
is not adequately  collateralized and in the process of collection,  or when, in
the  opinion of  management,  principal  or interest is not likely to be paid in
accordance  with the terms of the  obligation.  Consumer  loans are  charged off
after 120 days of delinquency  unless  adequately  secured and in the process of
collection.  Non-accrual  loans are not reclassified as accruing until principal
and interest  payments are brought current and future payments appear reasonably
certain.  Loans are categorized as  restructured if the original  interest rate,
repayment  terms,  or  both  were  restructured  due to a  deterioration  in the
financial   condition  of  the  borrower.   However,   restructured  loans  that
demonstrate  performance  under the  restructured  terms and that yield a market
rate of interest may be removed from  restructured  status in the year following
the restructure.
     Six commercial credit  relationships  account for $17.3 million, or 79%, of
the  company's  non-accrual  loans  at  December  31,  1997,  and  71% of  total
non-performing and restructured loans. The largest of these credits is the $11.5
million loan to the coal mining company  mentioned above. The other five credits
consist of $1.8 million to a grocery chain, $1.3 million to a tobacco processing
company,  $1.2 million to a trucking company,  $0.8 million to a commercial real
estate developer and $0.7 million to a plastic  injection-mold  company.  Of the
$3.5 million allowance for loan losses  established in accordance with Statement
of Financial  Accounting  Standards  No. 114,  Accounting  by Creditors  for the
Impairment of a Loan, these six credits account for $3.0 million.  The remaining
non-accrual  balance consists of various  commercial and consumer loans, with no
single loan exceeding $500,000.
     The  significant  increases in 1996 and 1995 in accruing  loans past due 90
days or more were principally related to residential real estate loans. Personal
bankruptcies,  particularly Chapter 13 filings, have been rising in Kentucky and
Tennessee  over  the  past  three  years.  This  form of  bankruptcy  forestalls
foreclosure on a wage earner's residence as long as monthly payments are resumed
and a small  additional  payment  is made to the  lender  to be  applied  to the
delinquent  mortgage  payments.  Such a payment  plan may stretch out to several
years the period required to bring payments current. Although these loans may be
well secured and in the process of  collection,  most were reported as more than
90 days past due and accruing interest prior to 1997. During 1997, approximately
$700 thousand of these past-due  residential real estate loans were reclassified
to restructured from 90 days past due and accruing;  approximately $1 million of
residential  real estate loans were  reclassified  during 1997 from 90 days past
due to non-accrual.
     Foreclosed   real  estate  at  December  31,  1997,   consists  of  several
properties, with no single property exceeding $225,000.
     As of December 31,  1997,  the company had $4.1 million of loans which were
not included in the past due,  non-accrual or restructured  categories,  but for
which known information about possible credit problems caused management to have
serious  doubts as to the  ability of the  borrowers  to comply with the present
loan repayment terms. Based on management's evaluation, including current market
conditions, cash flow generated and recent appraisals, no significant losses are
anticipated  in  connection  with  these  loans.  These  loans  are  subject  to
continuing  management  attention and are considered in determining the level of
the allowance for loan losses.
     The allowance for loan losses  represents an amount which,  in management's
judgment,  will be adequate to absorb  probable  losses on existing  loans.  The
adequacy of the allowance is determined on an ongoing basis through  analysis of
the  overall  size and  quality  of the loan  portfolio,  historical  loan  loss
experience,   loan  delinquency  trends,  and  current  and  projected  economic
conditions.  Additional  allocations of the allowance are based on  specifically
identified  potential  loss  situations.   The  potential  loss  situations  are
identified by account officers' evaluations of their own portfolios,  as well as
by an independent loan review function.
     The allowance for loan losses is  established  through a provision for loan
losses  charged to expense.  At  December  31,  1997,  the  allowance  was $22.0
million,  compared with $18.1 million at December 31, 1996, and $15.8 million at
December 31,  1995.  The ratio of the  allowance  for loan losses to total loans
(excluding  mortgage  loans  held for sale) at  December  31,  1997,  was 1.43%,
compared  with 1.25% at December 31, 1996,  and 1.25% at December 31, 1995.  The
increase  from  December 31, 1995  reflects in part  management's  review of the
growth in the loan portfolio, the continuing  concentrations of credit among the
company's  largest  credit  relationships,   and  anticipated  general  economic
conditions in the company's markets.
     Following is a summary of the changes in the  allowance for loan losses for
each of the past five years.
<TABLE>

 Summary of Loan Loss Experience
 For the years ended December 31
 Dollars in thousands
<CAPTION>

                                                      1997         1996           1995          1994         1993
<S>                                              <C>           <C>           <C>           <C>           <C>
Balance at beginning of year .................   $   18,065    $   15,779    $   12,529    $   12,505    $    9,596
Provision for loan losses ....................        9,500        13,914         5,260         2,212         2,794
Balance of allowance for loan losses
  of acquired subsidiaries at acquisition date         --            --            --            --           2,433
Amounts charged off:
  Commercial and commercial real estate ......        4,208        10,012           993         1,873         2,195
  Residential real estate ....................          470           372           106            80           315
  Consumer ...................................        1,709         2,083         1,426           838           936
                                                 ----------    ----------    ----------    ----------    ----------
  Total loans charged off ....................        6,387        12,467         2,525         2,791         3,446
Recoveries of amounts previously charged off:
  Commercial and commercial real estate ......          351           390           228           232           615
  Residential real estate ....................           44            38             8            41           115
  Consumer ...................................          444           411           279           330           398
                                                  ----------    ----------    ----------    ----------    ----------
  Total recoveries ...........................          839           839           515           603         1,128
                                                  ----------    ----------    ----------    ----------    ----------
  Net charge-offs ............................        5,548        11,628         2,010         2,188         2,318
                                                  ----------    ----------    ----------    ----------    ----------
Balance at end of year .......................   $   22,017    $   18,065    $   15,779    $   12,529    $   12,505

Total loans, net of unearned income:
  Average ....................................   $1,473,103    $1,346,754    $1,190,101    $1,073,580    $  898,834
  At December 31 .............................    1,537,819     1,450,999     1,258,511     1,143,833     1,006,796
As a percentage of average loans:
  Net charge-offs ............................         0.38%         0.86%         0.17%         0.20%         0.26%
  Provision for loan losses ..................         0.64          1.03          0.44          0.21          0.31
Allowance as a percentage of year-end loans ..         1.43          1.25          1.25          1.10          1.24
Allowance as a percentage of non-performing
  and restructured loans .....................           90%          171%           91%          158%          126%
</TABLE>

     The allowance as a percentage of  non-performing  loans was 90% at December
31, 1997,  as compared to 171% at year-end  1996,  and 91% at December 31, 1995.
The fluctuations in the allowance as a percentage of  non-performing  loans from
December 31, 1994 to December  31, 1996 are in part the result of the  company's
placement of one significant  loan into  non-performing  loans at year-end 1995,
thus  reducing  the  ratio  of  the  allowance  to  non-performing  loans.  That
borrower's financial condition,  along with the financial condition of two other
significant  credits,  deteriorated in the second quarter of 1996,  resulting in
partial charge-offs totaling $7.0 million of these loans in 1996. As a result of
net loan  charge-offs  of $11.6 million and a provision for loan losses of $13.9
million   during  1996,   the  ratio  of  the   allowance  for  loan  losses  to
non-performing loans increased to 171% at December 31, 1996. The decrease in the
ratio at December  31,  1997,  is the result of the  previously-mentioned  $11.5
million coal mining loan,  which was  classified as  non-performing  at year-end
1997.
     Management  believes  that the  allowance  for loan losses at December  31,
1997,  is adequate to absorb  losses  inherent in the loan  portfolio as of that
date.  That  determination  is  based  on  the  best  information  available  to
management,  but necessarily involves uncertainties and matters of judgment and,
therefore,  cannot be  determined  with  precision and could be  susceptible  to
significant change in the future. In addition, bank regulatory authorities, as a
part  of  their  periodic   examinations  of  the  banks,  may  reach  different
conclusions  regarding  the quality of the loan  portfolio  and the level of the
allowance,  which could  result in  additional  provisions  being made in future
periods.  Further  discussion on the allowance for loan losses is included later
in this review in the Year 2000 Risks section.
     The tables below  present an allocation of the allowance for loan losses by
category of loan and a percentage  distribution of the allowance allocation.  In
making the allocation,  consideration  was given to such factors as management's
evaluation of risk in each category,  current economic conditions and charge-off
experience. An allocation of the allowance for loan losses is an estimate of the
portion of the allowance which 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 from being used to absorb losses of another loan type.

 Allocation of Allowance for Loan Losses

 December 31
 In thousands              1997       1996      1995     1994       1993
Commercial ............   $12,909   $ 9,080   $ 9,133   $ 7,529   $ 6,870
Commercial real estate      5,631     5,375     4,089     1,883     1,718
Residential real estate     1,053     1,010       640       977     1,358
Consumer ..............     2,424     2,600     1,917     2,140     2,559
                          -------   -------   -------   -------   -------
   Total ..............   $22,017   $18,065   $15,779   $12,529   $12,505

<TABLE>

 Allocation of Year-end Allowance for Loan Losses
   and Percentage of Each Type of Loan to Total Loans

<CAPTION>

 December 31                   1997               1996                1995            1994                 1993
                        Allowance   Loans  Allowance   Loans  Allowance    Loans   Allowance   Loans    Allowance   Loans
<S>                        <C>    <C>     <C>        <C>       <C>       <C>       <C>       <C>        <C>       <C>
Commercial ............     58.6%  29.5%   50.2%      32.0%     57.9%     29.5%     60.1%     27.8%      54.9%     31.7%
Commercial real estate      25.6   35.0    29.8       32.4      25.9      31.6      15.0      29.2       13.7      23.2
Residential real estate      4.8   27.4     5.6       26.6       4.1      28.4       7.8      29.6       10.9      30.2
Consumer ..............     11.0    8.1    14.4        9.0      12.1      10.5      17.1      13.4       20.5      14.9
                          ------   ----    ----       ----      ----      ----      ----      ----       ----      ----
   Total ..............    100.0% 100.0%  100.0%     100.0%    100.0%    100.0%    100.0%    100.0%     100.0%    100.0%
</TABLE>


Securities, Federal Funds Sold and Resale Agreements
     Securities,  including  those  classified as held to maturity and available
for sale,  averaged $265 million in 1997, compared with $292 million in 1996 and
$305 million in 1995. The decline in the securities  portfolio  throughout  this
period was substantially the result of maturities,  prepayments and calls. Funds
provided by the reduction in securities were utilized to fund growth in the loan
portfolio.
     The tables below present the carrying value of securities for each of the
past three years and the  maturities and yield  characteristics  of securities
as of December 31, 1997.

 Carrying Value of Securities Available for Sale
 December 31
 In thousands
                                        1997       1996        1995
U.S. Treasury and federal agencies    $139,029   $128,296   $142,199
Collateralized mortgage obligations
 and mortgage-backed securities ...     53,375     67,626     81,900
State and municipal obligations ...     47,881     51,311     55,552
Other securities ..................     37,813     37,922     18,571
                                      --------   --------   --------
Total securities available for sale   $278,098   $285,155   $298,222

<TABLE>

 Maturity Distribution of Securities Available for Sale

 December 31, 1997
 Dollars in thousands
<CAPTION>

                                                    Over        Over
                                                    One Year   Five Years   Over
                                        One Year    Through     Through      Ten      Equity       Total         Market
                                         or Less   Five Years  Ten Years   Years    Securities    Maturities      Value
<S>                                      <C>        <C>         <C>        <C>       <C>          <C>          <C>
U.S. Treasury and federal agencies ...   $100,176   $13,031     $25,633    $  --     $  --        $138,840     $139,029
Collateralized mortgage obligations
   and mortgage-backed securities:(F1)     25,634    20,208       1,422      5,906      --          53,170       53,375
State and municipal obligations ......      3,683    15,351      17,584      9,884      --          46,502       47,881
Other securities .....................      9,677     2,296         425       --      25,644        38,042       37,813
                                         --------  --------    --------    -------   -------       -------     --------
   Total securities available for sale   $139,170   $50,886     $45,064    $15,790   $25,644      $276,554     $278,098

Percent of total .....................     50.33%    18.40%      16.29%      5.71%     9.27%       100.00%
Weighted average yield(F2) ............     5.54%     5.52%       5.94%      5.63%     7.10%         5.75%
<FN>

(F1)  Collateralized  mortgage  obligations  and  mortgage-backed securities are
grouped into average lives based on December 1997  prepayment  projections.
(F2)  The weighted average yields are based on amortized cost.
</FN>
</TABLE>


Mortgage Servicing Rights
     As  mentioned  previously,  rights to  service  mortgage  loans for  others
("MSR's")  are  recognized  as assets,  whether  those  assets were  acquired in
purchase transactions or through loan originations.  MSR's totaled $46.9 million
at December  31, 1997,  compared  with $41.6  million at December 31, 1996,  and
$28.3 million at year-end 1995.
     During  1996 and 1995,  the company  purchased  servicing  portfolios  with
mortgage loan principal balances of $1.0 billion and $1.2 billion, respectively,
recognizing  MSR's of $12.5 million and $21.1  million,  respectively,  on these
purchased  portfolios.  During 1997 and 1996,  the company  recognized  MSR's of
$14.3 million and $4.9 million, respectively, related to wholesale mortgage loan
originations.
     The  carrying  value of MSR's and the related  amortization  are  evaluated
quarterly in relation to their fair values.  The company  evaluates the carrying
value of the MSR's by  estimating  the present value of the future net servicing
income, based on management's best estimate of remaining loan lives. Prepayments
of mortgage loans, which can have a considerable  impact on the value of the MSR
portfolio,  result from a variety of factors, of which the most significant is a
declining mortgage loan interest rate environment that encourages individuals to
refinance existing mortgage loans at a lower rate.
     For valuation  purposes,  serviced loans are stratified  into four interest
rate tranches (less than 7%, 7% to 7.99%, 8% to 8.99%,  and greater than 9%) and
two loan types (conventional and  Government-insured).  Management believes that
these interest rate tranches  represent  meaningful  aggregations  of loans that
would react  similarly to interest  rate  changes.  The two loan types take into
account the difference in servicing fees and prepayment rates on these two types
of loans:  Government-insured  loans typically command higher servicing fees and
historically  have lower  prepayment  rates than  conventional  mortgage  loans.
Impairment and subsequent adjustments in each stratum, if any, are recognized by
a valuation allowance and a charge against servicing income.
     As of December 31, 1997,  approximately  40% of the MSR  recognized  on the
balance sheet was related to loans which have contractual interest rates from 7%
to 7.99%,  with a weighted average rate of 7.47%.  Approximately  61% of the MSR
asset  for  this   tranche  is  related  to   conventional   loans  and  39%  to
Government-insured  loans. Loans with contractual rates from 8% to 8.99%, with a
weighted  average  rate of 8.31%,  account for  another 44% of the MSR  balance.
Approximately  46% of the MSR for this tranche is related to conventional  loans
and 54% to  Government-insured  loans.  Loans with  contractual  rates of 9% and
above  account for 11% of the MSR asset;  the  remaining  5% of the MSR asset is
related to loans with rates less than 7%.
     To mitigate its prepayment risk in a declining  interest rate  environment,
the company  purchased two interest rate "floor"  contracts that provide for the
company to receive interest on the notional amount of the contract to the extent
that the interest  rate on the ten-year  constant  maturity  U.S.  Treasury Note
("CMT") falls below the contract  rate. The first  contract,  purchased in 1996,
has a notional  amount of $75 million and a contract rate of 5.50%.  The cost of
this contract was $548,000 and its fair value at December 31, 1997 was $689,000.
The second  contract,  purchased in 1997, has a notional  amount of $100 million
and a contract  rate of 5.25%.  The cost of this  contract  was $455,000 and the
fair value at December 31, 1997 was  $790,000.  Interest  rate floors  typically
increase  in value in a  declining  long-term  interest  rate  environment,  and
decrease in value as rates rise.  The company's two floors are hedging  specific
interest rate tranches of the MSR asset.  Management  believes that the increase
in market  value of these two  floor  contracts  which  would  result  from a 50
basis-point  drop in the interest rate on ten-year CMT's would partially  offset
the impairment in the MSR likely to occur with such a decline in interest rates.
The  cost of  these  contracts,  which is  included  with  the MSR  asset on the
consolidated balance sheet, is being amortized against mortgage servicing income
on a straight-line basis over the five-year lives of the contracts.
     During  1997,  the  company  sold $4.1  million  of MSR's  associated  with
approximately  $256 million of  conventional  mortgage  loans in order to reduce
potential impairment while taking advantage of relatively high market prices for
servicing. The company recognized a pre-tax gain on sale (net of related selling
expenses) of $889,000.
     As of December 31, 1997,  mortgage  rates had fallen to the lowest level in
the past three years and many  industry  reports  indicated  that a new surge in
mortgage  refinancings  is likely.  Should  interest  rates decline more than 50
basis  points from  year-end  1997 levels,  the MSR carrying  value would likely
become  impaired  in future  periods.  To  address  this  potential  impairment,
management  has taken  additional  actions  subsequent  to December 31, 1997, to
limit the company's exposure, including additional sales of MSR's.

Deposits
     Total  deposits  averaged  $1.5  billion  in 1997,  a $64  million,  or 4%,
increase over 1996.  Average deposits for 1996 were $1.5 billion,  a 6% increase
over 1995.  Approximately  88% of the  increase in average  deposits  was due to
brokered  certificates of deposit--$50  million issued during the fourth quarter
of 1996, $25 million in the second quarter of 1997 and $15 million in the fourth
quarter of 1997--in order to fund loan growth.
     During 1996 the company implemented a program that sweeps excess funds from
targeted  interest-bearing  demand  accounts  into money market  accounts.  This
program has significantly  reduced the Federal Reserve Bank reserve requirements
for the banks.
     Time  deposits of $100,000 or more totaled  $349.5  million at December 31,
1997,  compared with $336.1  million at December 31, 1996.  Interest  expense on
time  deposits of $100,000 or more was $19.4  million in 1997,  $16.5 million in
1996,  and $11.8 million in 1995.  The following  table shows the  maturities of
time deposits of $100,000 or more,  including brokered  certificates of deposit,
as of December 31, 1997.

 Maturity of Time Deposits of $100,000 or More
 December 31, 1997 - In thousands

 Three months or less                                                  $ 75,187
 Over three through six months                                           60,754
 Over six through twelve months                                          46,364
 Over one year through two years                                         27,413
 Over two years through five years                                       99,043
 Over five years                                                         40,709
                                                                        -------
    Total                                                              $349,470

     Brokered certificates of deposit,  which are included in the above maturity
schedule, mature as follows:

 Maturity of Brokered Certificates of Deposit
 December 31, 1997 - In thousands

 Three months or less                                                   $     -
 Over three through six months                                           19,960
 Over six through twelve months                                               -
 Over one year through two years                                         84,910
 Over two years through five years                                       39,990
 Over five years                                                              -
                                                                         -------
    Total                                                               $144,860

     Other  information  regarding  time deposits is contained in note 19 to the
consolidated financial statements.

Liquidity,  Short-term  Borrowings and Capital Resources  Information  regarding
     short-term borrowings is presented below.

 Short-term Borrowings
 Dollars in thousands
                                           1997        1996        1995
 Federal funds purchased
 and repurchase agreements:
  Balance at year end .................   $109,348   $ 71,879   $ 75,594
  Weighted average rate at year end ...     5.95 %     6.26 %     4.83 %
  Average balance during the year .....     69,455     42,010     47,219
  Weighted average rate during the year     5.28 %     4.64 %     4.26 %
  Maximum month-end balance ...........    119,588     89,640     82,607
Other short-term borrowings:
  Balance at year end .................     70,000     55,000     45,014
  Weighted average rate at year end ...     5.74 %     5.42 %     6.67 %
  Average balance during the year .....     63,863     56,136     40,652
  Weighted average rate during the year     5.65 %     5.55 %     7.34 %
  Maximum month-end balance ...........    105,000     70,005     61,831
Total short-term borrowings:
  Balance at year end .................    179,348    126,879    120,608
  Weighted average rate at year end ...     5.86 %     5.90 %     5.52 %
  Average balance during the year .....    133,318     98,146     87,871
  Weighted average rate during the year     5.46 %     5.16 %     5.69 %
  Maximum month-end balance ...........    199,588    159,645    120,608

     Substantially all federal funds purchased and repurchase  agreements mature
in one business day. Due to an unusually high demand in the market for overnight
funds on  December  31, 1997 and 1996,  the rates the  company  paid for federal
funds, excluding repurchase agreements,  on these dates were also unusually high
(6.73% and 7.12%  respectively).  The weighted  average  rates on the  company's
federal  funds  purchased  on the  preceding  business day were 5.90% and 5.61%,
respectively.  On the first  business day after  year-end  the weighted  average
rates  were  5.93%  and  5.61%,   respectively.   Other  short-term   borrowings
principally  represent  Federal Home Loan Bank ("FHLB") advances to TFB-KY (with
varying maturity dates),  which are funding residential  mortgage and commercial
loans.
     Long-term  debt  averaged  $143.9  million in 1997,  compared  with  $125.6
million in 1996 and $46.8  million in 1995.  The  increase in 1996 is due to the
issuance  by TFB-KY in the  fourth  quarter of 1995 of $20  million of  two-year
notes and $30 million of three-year  notes under a $250 million senior bank note
program;  in the second  quarter of 1996 another $25 million of  four-year  bank
notes  were  issued.  These  notes  were  issued to  support  growth in the loan
portfolio. Notes issued to date bear interest at fixed rates of 6.32%, 6.48% and
7.13%, respectively. The notes issued in 1995 have been effectively converted to
floating rate  instruments  through the use of interest rate swap  transactions.
Interest rate swaps are discussed more fully in the  Asset/Liability  Management
and  Market  Risks  section  which  follows  and in note 14 to the  consolidated
financial statements.
     TFB-KY borrowed on a long-term basis $30 million from the FHLB in the first
quarter of 1996 to fund residential  mortgage and commercial loans. In addition,
TFB-TN  borrowed $65 million on a long-term  basis in the fourth quarter of 1997
to fund residential mortgage and commercial loans.  Long-term debt also includes
financing from an unaffiliated commercial bank for the company's leveraged ESOP.
Total ESOP debt was $1.8  million at  December  31,  1997,  and $2.5  million at
December 31, 1996.
     The company  has a $3 million  unsecured  operating  line of credit with an
unaffiliated  commercial  bank that is used from time to time to supplement  the
company's  cash  requirements.  The line was not in use at December  31, 1997 or
1996. Also, under the book-entry  senior bank note program,  TFB-KY may issue up
to an additional $175 million of bank notes from time to time in maturities from
30 days to 30 years.
     See  note  9  to  the  consolidated  financial  statements  for  a  further
     description of the terms of these borrowings. 
     The company's capital ratios at December 31, 1997 and 1996  (calculated  in
accordance  with  regulatory guidelines) were as follows:


December 31                                        1997                  1996

Tier I risk-based capital ratio                     8.48%                 7.68%
   Regulatory minimum                               4.00                  4.00
   "Well-capitalized" minimum                       6.00                  6.00
Total risk-based capital ratio                     11.71                 10.87
   Regulatory minimum                               8.00                  8.00
   "Well-capitalized" minimum                      10.00                 10.00
Tier I leverage ratio                               6.81                  6.36
   Regulatory minimum                               3.00                  3.00
   "Well-capitalized" minimum                       5.00                  5.00

     Capital  ratios  of all of the  company's  subsidiaries  are in  excess  of
applicable  minimum  regulatory capital ratio requirements at December 31, 1997.
The increase in these capital  ratios in 1997 is due to the company's  increased
earnings.  Notwithstanding  the decline in net income in 1996,  primarily due to
the loss  incurred in the second  quarter of that year,  the Board of  Directors
chose to maintain the  quarterly  dividend for that year at $0.16.  As a result,
the company paid  dividends  slightly in excess of earnings for 1996.  For 1997,
the quarterly dividend was increased to $0.17 and, combined with the improvement
in net income in 1997, this resulted in the company paying 32% of its net income
to  shareholders  as dividends.  Although there can be no assurance,  management
expects the company will pay  dividends in 1998 of  approximately  30% to 40% of
net income.
     To maintain a desired level of liquidity,  the company has several  sources
of funds available.  The company  primarily relies upon net inflows of cash from
financing  activities,  supplemented  by net  inflows  of  cash  from  operating
activities,  to provide cash used in its investing activities.  As is typical of
most banking  companies,  significant  financing  activities include issuance of
common stock and long-term debt,  deposit  gathering,  and the use of short-term
borrowing facilities,  such as federal funds purchased,  repurchase  agreements,
FHLB advances and lines of credit.  The company's primary  investing  activities
include purchases of securities and loan originations, offset
by maturities, prepayments and sales of securities, and loan payments. At
December 31, 1997, the retained earnings of the banks totaled $86.3 million,
of which $23.4 million was available for the payment of dividends to the parent
company.

Asset/Liability Management and Market Risks
     Managing  interest  rate  risk is  fundamental  to the  financial  services
industry. The company's policies are designed to manage the inherently different
maturity and repricing  characteristics  of the lending and  deposit-acquisition
lines of  business  to achieve a desired  interest-sensitivity  position  and to
limit exposure to interest rate risk. The maturity and repricing characteristics
of  the   company's   lending   and  deposit   activities   create  a  naturally
asset-sensitive structure.  By using a combination of on- and  off-balance-sheet
financial  instruments,  the company  manages  interest rate  sensitivity  while
optimizing  net  interest  income  within the  constraints  of  prudent  capital
adequacy,  liquidity  needs,  the  interest  rate and economic  outlook,  market
opportunities and customer requirements.
     The company uses an earnings  simulation  model to monitor and evaluate the
impact of changing interest rates on earnings.  The simulation model used by the
company is  designed to reflect the  dynamics  of all  interest-earning  assets,
interest-bearing   liabilities  and  off-balance-sheet   financial  instruments,
combining  the  various  factors  affecting  rate  sensitivity  into a  two-year
earnings  outlook.  Among the factors the model  utilizes are 1)  rate-of-change
differentials,  such as federal funds rates versus  savings  account  rates;  2)
maturity effects, such as calls on securities;  3) rate barrier effects, such as
caps or floors on loans;  4) changes in balance sheet levels;  5)  floating-rate
financial  instruments that may be tied or related to prime,  Treasury Notes, CD
rates or other rate indices,  which do not necessarily move identically as rates
change; 6) leads and lags that occur as rates move away from current levels; and
7) the effects of prepayments on various assets, such as residential  mortgages,
mortgage-backed securities and consumer loans.
     The model is updated  bi-monthly  (or more  frequently,  if necessary)  for
multiple interest rate scenarios,  projected changes in balance sheet categories
and other  relevant  assumptions.  In  developing  multiple rate  scenarios,  an
econometric  model is  employed  to forecast  key rates,  based on the  cyclical
nature and historic volatility of those rates. A stochastic view of net interest
income is derived once  probabilities  have been assigned to those key rates. By
forecasting a most likely rate  environment,  the effects on net interest income
of  adjusting  those  rates  up or down can  reveal  the  company's  approximate
interest  rate  risk  exposure  level.   Several  rate  index  and  yield  curve
assumptions are used in the model. As an example, the company's most likely rate
environment as of December 31, 1997, assumed the 3-month Treasury rate at 5.21%,
rising to 5.25% by June 31,  1998,  then  falling  back to 5.02% in  December of
1998.
     A second  interest  rate  sensitivity  tool  utilized by the company is the
quantification of market value changes for all assets and liabilities,  given an
increase or decrease in interest  rates.  This  approach  provides a longer-term
view of interest rate risk, capturing all expected future cash flows. Assets and
liabilities with option  characteristics are measured based on numerous interest
rate path valuations using statistical rate simulation techniques.
     As of December 31, 1997,  management  believes the company's  balance sheet
was in an  asset-sensitive  position,  as the repricing  characteristics  of the
balance sheet were such that an increase in interest rates would have a positive
effect on earnings and a decrease in interest rates would have a negative effect
on earnings.
     Derivative  financial  instruments  can be a  cost-  and  capital-efficient
method   of   modifying   the   repricing   or   maturity   characteristics   of
on-balance-sheet assets and liabilities--a  necessary component of the company's
strategy  for  managing  its  overall  interest  rate  risk.   Off-balance-sheet
derivative  transactions  used for interest rate  sensitivity  management  could
include interest rate swaps, forwards,  floors, futures and options with indices
that directly  relate to the pricing of specific  assets and  liabilities of the
company.
     Off-balance-sheet  derivatives  do not  expose the  company to credit  risk
equal to the  notional  amount,  although  the company is exposed to credit risk
equal to the  aggregate  of the  positive  fair  values of the  swaps,  plus any
accrued  interest  receivable  due  from all  counterparties.  Fair  values  are
determined  by  discounting  to present  value the future cash flows which would
result from the  difference  between  current  market  rates and the actual swap
rates.
     To assist in achieving a desired  level of interest rate  sensitivity,  the
company has entered into off-balance-sheet interest rate swap transactions which
partially  neutralize  the asset  sensitive  position  which is  inherent in the
balance  sheet.  The  company  pays a  variable  interest  rate on each swap and
receives a fixed rate.  In a higher  interest-rate  environment,  the  increased
contribution   to  net  interest  income  from   on-balance-sheet   assets  will
substantially  offset any negative  impact on net interest  income from interest
rate swap transactions.  Conversely,  if interest rates decline,  the swaps will
mitigate the company's  exposure to reduced net interest  income.  Interest rate
swap  transactions  are  described  more  fully  in note 14 to the  consolidated
financial statements.
     To mitigate its prepayment risk related to MSR's, the company  purchased in
1997 and 1996 two interest rate "floor"  contracts  that provide for the company
to receive  interest on the  notional  amount of the contract to the extent that
the interest rate on the ten-year  CMT's falls below the contract rate. The cost
of these contracts is included in with the MSR asset in the consolidated balance
sheet.  Fair values can be expected to vary inversely  with market  expectations
for  intermediate-term  interest rates.  See also the Mortgage  Servicing Rights
section of this discussion regarding the use of interest rate floor contracts to
hedge  against  the  potential  impairment  of the MSR  asset  resulting  from a
significant decline in mortgage interest rates.
     The company minimizes the credit risk in all  off-balance-sheet  derivative
instruments by dealing only with high quality  counterparties (i.e., those which
have credit  ratings of investment  grade or better from one of the major rating
agencies) and each  transaction is specifically  approved for applicable  credit
exposure.  Further,  the  company's  policy is to require  all  transactions  be
governed by an International  Swap Dealers  Association  Master Agreement and be
subject to bilateral collateral arrangements.
     The company requires all off-balance-sheet  transactions be employed solely
with respect to asset/liability  management or for hedging specific transactions
or positions, rather than for speculative trading activity.  Management believes
there is minimal risk that the derivatives used for rate sensitivity  management
will have any significant unintended effect on the company's financial condition
or results of operations.
     The   following   illustrates   the  effects  of  an   immediate   100-  or
200-basis-point  shift in market  interest rates on 1) fair values of assets and
liabilities  as compared to December 31, 1997 fair  values,  and 2) net interest
income for one year as compared to the most likely rate  assumptions used in the
company's model:
<TABLE>

 Market Risk Analysis

<CAPTION>

                                                                     Increase (Decrease) in Fair Value
                                                                    Decrease in Rates        Increase in Rates

                                          Carrying       Fair        200           100         100       200
 December 31, 1997 - In thousands           Value        Value       b.p.          b.p.        b.p.      b.p.
 Market Risk-Sensitive Assets
<S>                                      <C>          <C>          <C>         <C>         <C>        <C>
Securities available for sale .........  $  278,098   $  278,098   $ 12,900    $  6,240    $ (5,863)  $(11,378)
Mortgage loans held for sale ..........     118,485      118,707        194          97         (96)      (192)
Loans, net ............................   1,515,803    1,580,122     36,453      18,690     (17,710)   (32,803)
Mortgage servicing rights and "floors"       46,870       52,747    (11,531)     (8,348)      4,023      5,586
Interest rate swaps ...................        --            246      6,582       3,316      (3,389)    (6,673)
                                         ----------   ----------   --------    --------    ---------   --------
Total market risk-sensitive assets ....  $1,959,256   $2,029,920   $ 44,598    $ 19,995    $(23,035)  $(45,460)
% change in fair value of assets ......                                2.20%        .99%     -1.13%     -2.24%
Market Risk-Sensitive Liabilities
Transaction deposit accounts ..........  $  549,355   $  548,539   $   (630)   $   (313)   $    313   $    624
Savings accounts ......................      95,571       87,621     (3,049)     (1,234)      1,204      2,464
Certificates of deposit ...............     928,912      954,309    (15,262)     (7,535)      7,237     14,457
Short-term borrowings .................     179,348      179,521       (348)       (173)        172        343
Long-term debt ........................     185,293      190,875     (6,709)     (3,307)      3,213      6,320
                                         ----------   ----------   --------    --------    ---------   --------
Total market risk-sensitive liabilities  $1,938,479   $1,960,865   $(25,998)   $(12,562)   $ 12,139   $ 24,208
% change in fair value of liabilities .                              -1.33%      -0.64%        0.62%      1.23%
</TABLE>
<TABLE>

Market Risk Analysis


<CAPTION>

                                        Most             Increase (Decrease)
                                       Likely          in Interest Income and Expense
                                       Rate        Decrease in Rates     Increase in Rates
                                       Scenario
                                                     200       100         100        200
 Dollars in thousands                                b.p.      b.p.         b.p.      b.p.
 Projected Interest Income
<S>                                    <C>       <C>        <C>         <C>         <C>
Securities available for sale .......  $ 16,017  $ (1,467)  $   (733)   $    734    $  1,468
Mortgage loans held for sale ........    10,936    (2,575)    (1,288)      1,288       2,577
Loans, net ..........................   146,298   (21,377)   (10,689)     10,687      21,367
Interest rate swaps .................     1,269     5,614      2,807      (2,806)     (5,613)
                                       ---------  --------   --------    --------    --------
Total interest income ...............  $174,520  $(19,805)  $ (9,903)   $  9,903    $ 19,799
% change in interest income .........             -11.35%     -5.67%        5.67%      11.34%
Projected Interest Expense
NOW and money market deposit accounts  $ 10,570  $ (2,397)  $ (1,135)   $    363    $    661
Savings accounts ....................     2,264      (723)      (496)        368         655
Certificates of deposit .............    52,385    (9,154)    (4,577)      4,578       9,155
Short-term borrowings ...............    12,373    (4,372)    (2,176)      2,140       4,255
Long-term debt ......................    11,902      (588)      (294)        294         588
                                       ---------  --------   --------    --------    --------
Total interest expense ..............  $ 89,494  $(17,234)  $ (8,678)   $  7,743    $ 15,314
                                       ---------  --------   --------    --------    --------
% change in interest expense ........             -19.26%     -9.70%        8.65%      17.11%

Net interest income .................  $ 85,026  $ (2,571)  $ (1,225)   $  2,160    $  4,485
% change in net interest income .....              -3.02%     -1.44%       2.54%        5.27%
</TABLE>

     It should  be noted  that  some of the  assumptions  made in the use of the
simulation  model will inevitably not materialize and  unanticipated  events and
circumstances  will occur; in addition,  the simulation model does not take into
account any future actions which could be undertaken to reduce an adverse impact
if there were a change in interest rate  expectations  or in the actual level of
interest rates.

Quarterly Results
     Following is a summary of quarterly operating results for 1997 and 1996:
<TABLE>

 Quarterly Results of Operations

 In thousands, except per share data
<CAPTION>

                                                   1997                                       1996


                                      4th Qtr.  3rd Qtr.  2nd Qtr.  1st Qtr.   4th Qtr.   3rd Qtr.   2nd Qtr.   1st Qtr.
<S>                                   <C>       <C>       <C>       <C>       <C>         <C>       <C>         <C>
Interest income ...................   $42,364   $40,884   $39,504   $38,659   $ 38,995    $37,896   $ 36,215    $34,829
Interest expense ..................    21,510    20,541    19,790    19,359     19,215     18,626     17,940     17,285
                                       ------    ------    ------    ------     ------     ------     ------     ------
Net interest income ...............    20,854    20,343    19,714    19,300     19,780     19,270     18,275     17,544
Provision for loan losses .........     2,000     2,650     2,900     1,950      2,651      1,621      8,421      1,221
                                       ------    ------    ------    ------     ------     ------     ------     ------
Net interest income after provision    18,854    17,693    16,814    17,350     17,129     17,649      9,854     16,323
Non-interest income ...............     8,286     9,030     9,175     7,919      7,756      7,394      7,304      7,235
Non-interest expenses .............    17,471    17,467    17,156    17,039     17,286     20,472     24,765     18,119
                                       ------    ------    ------    ------     ------     ------     ------     ------
Income before income taxes.........     9,669     9,256     8,833     8,230      7,599      4,571     (7,607)     5,439
Income tax expense ................     3,289     3,113     2,971     2,682      2,284      1,557     (2,424)     1,703
                                       ------    ------    ------    ------     ------     ------     ------     ------
Net income (loss) .................   $ 6,380   $ 6,143 $   5,862   $ 5,548     $5,315    $ 3,014   $ (5,183)   $ 3,736

Basic earnings (loss) per share ...   $  0.56   $  0.54   $  0.51   $  0.49   $   0.47    $  0.27   $  (0.46)   $  0.33
Diluted earnings (loss) per share .      0.54      0.52      0.50      0.48       0.46       0.26      (0.46)      0.33
</TABLE>

     Non-interest  income in the second  quarter of 1997 included a $1.2 million
pre-tax gain on the sales of two  Tennessee  offices.  For the third  quarter of
1997, non-interest income includes a $889 thousand pre-tax gain from the sale of
a portion of the  mortgage  servicing  portfolio  and a $489 pre-tax loss on the
sale of a portion of the securities portfolio.
     Significant  factors  affecting the  comparability of quarterly results for
1996 include the second  quarter  pretax  charge of $5.8 million  related to the
commitment to refocus on core financial services,  reduce operating expenses and
exit  from  less-profitable  initiatives,  and a $7.2  million  increase  in the
quarterly  loan loss  provision  in the second  quarter as compared to the first
quarter.  These second quarter charges resulted in a net loss for the first half
of 1996.  The $8.4 million loan loss provision in the second quarter of 1996 was
due to several factors:
     1) The  charge-off  of $7.0 million on three  problem  loans.  Prior to the
     second quarter of 1996, management expected two of these three borrowers to
     be sold as going  concerns  and the  loans  to be  repaid  from  the  sales
     proceeds. As a result, the company had previously allocated $4.2 million in
     the  allowance  for loan  losses for these  three  loans.  Due to the rapid
     deterioration  in the financial  condition of those borrowers in the second
     quarter of 1996 and the  resulting  loss of interest  by several  potential
     buyers,  sale prospects  became  unlikely.  As the  possibility of sales as
     going concerns grew less likely,  management  concluded that the collateral
     securing the loans would likely have to be liquidated,  resulting in larger
     than  anticipated  losses on the loans.  2) Recent  adverse loss trends for
     consumer  loans  resulting  from  unprecedented   levels  of  bankruptcies,
     particularly  personal  bankruptcies  in Kentucky and  Tennessee.  3) Three
     additional  loans  over  $1  million  (totaling  $6.6  million)  for  which
     information  became  known to the company  during the quarter  which caused
     management  to have  serious  doubts as to the ability of the  borrowers to
     comply  with the loan  repayment  terms,  but which  were not  included  in
     non-performing  loans at June 30, 1996.  4) Continued  strong growth in the
     loan portfolio,  particularly in large  commercial  relationships  (over $5
     million).
Deposit insurance expense for the third quarter of 1996 was impacted by the $2.7
million (pretax) SAIF assessment. Due to a decline in deposit insurance premiums
following the  re-capitalization of the SAIF, the company received in the fourth
quarter of 1996 a $122 thousand refund of deposit insurance premiums.

Year 2000 Risks
     The company is exposed to potential  future losses,  including  litigation,
due to  business  interruption  or  errors,  which  could  result  if any of its
computer  systems are not  modified to ensure that dates  beginning  in January,
2000 are not misinterpreted by the system as January,  1900. This eventuality is
commonly  referred  to as the Year 2000  Problem  ("Y2K").  A number of computer
systems  which are  affected  by Y2K are  utilized by the company to operate its
day-to-day  business.  Most of  these  systems  use  software  developed  by and
licensed from third party software vendors.  Some of these software applications
have  been  customized  by  the  company,   while  others  have  been  developed
internally.
     Management has established a task force to identify all instances where the
company is not currently Y2K  compliant,  and to take actions  designed to bring
those systems into  compliance  before the end of 1999. The assessment  phase of
this project has been completed, whereby the company has identified systems that
need  modification,  and the  correction  phase of the  project  has begun.  The
correction  phase is expected to be  completed  by the end of 1998,  with all of
1999 dedicated to the testing phase. Total cost to the company of the correction
and testing phases is projected to be approximately $500 thousand.
     The company is actively managing all of its third party software vendors to
obtain software corrections and warranty  commitments.  Management believes that
those software vendors which have been identified by the task force as essential
to the company's  operations are currently on schedule to meet the company's Y2K
timetable.  The  company is acting  upon the belief and  understanding  that all
federal  agencies are actively  managing the Y2K problems  which are inherent in
the global banking and payments systems.
     The company's  credit  customers are also subject to potential  losses as a
result of Y2K  exposure in their own  computer  systems as well as the  computer
systems of their  suppliers  and  customers.  The company is working  with those
customers that the company believes may be significantly affected to assess each
customer's  Y2K exposure and the extent to which the customer has  addressed the
problem.  Any exposure  which,  in the opinion of management,  is not adequately
addressed  will be taken into account in assessing the loss  potential,  if any,
associated with that credit relationship.




















This discussion contains forward-looking statements under the Private Securities
Litigation Reform Act of 1995 that involve risks and  uncertainties.  Although
the company believes  that  the  assumptions   underlying  the  forward-looking
statements contained herein are reasonable, any of the assumptions could be
inaccurate, and therefore, there can be no assurance that the forward-looking
statements included herein will prove to be accurate.  Factors that could cause
actual results to differ from the results discussed in the  forward-looking
statements  include,  but are not limited to: economic  conditions (both
generally and more specifically in the markets in which the company and its
banks operate);  competition  for the  company's customers  from other providers
of financial and mortgage services; government legislation and regulation (which
changes from time to time and over which the company has no control);  changes
in interest rates (both generally and more specifically  mortgage interest
rates);  material unforeseen changes in the liquidity,  results of operations,
or financial condition of the company's customers;  material unforeseen
complications related to addressing the Year 2000 Problem experienced
by the company, its suppliers,  customers and governmental  agencies;  and other
risks  detailed  in the  company's  filings  with the  Securities  and  Exchange
Commission, all of which are  difficult  to predict and many of which are beyond
the control of the company.   The  company   undertakes   no   obligation   to
republish   revised forward-looking  statements to reflect  events or
circumstances  after the date hereof or to reflect the occurrence of
unanticipated events.





<PAGE>

<TABLE>


 Consolidated Statistical Information (F1)(F2)
 For the years ended December 31                                                                                         
 Dollars in thousands, except per share data
<CAPTION>
                                                                                                                         5-Year
                                                                                                                         Compound
                                                     1997        1996           1995          1994          1993        Growth Rate

<S>                                           <C>            <C>           <C>           <C>           <C>                   <C>
Interest income ...........................   $   161,411    $  147,935    $  134,228    $  113,982    $  102,819            11.1%
Interest expense ..........................        81,200        73,066        64,599        47,375        44,250            11.7
                                                  -------       -------       -------       -------       --------           ----
Net interest income .......................        80,211        74,869        69,629        66,607        58,569            10.5
Provision for loan losses .................         9,500        13,914         5,260         2,212         2,794            29.4
                                                   -------       -------       -------       -------       --------          ----
  provision for loan losses ...............        70,711        60,955        64,369        64,395        55,775             9.0
Non-interest income .......................        34,410        29,689        24,411        17,170        17,032            20.1
Non-interest expenses .....................        69,133        80,642        66,049        60,070        52,830            11.6
                                                  -------       -------       -------       -------       --------           ----
  effect of change in accounting principle         35,988        10,002        22,731        21,495        19,977            12.6
Income tax expense ........................        12,055         3,120         7,416         7,075         6,223            13.5
                                                  -------       -------       -------       -------       --------           ----
  of change in accounting principle .......        23,933         6,882        15,315        14,420        13,754            12.2
Cumulative effect of change in
 accounting principle .....................          --            --            --            --             296
                                                  -------       -------       -------       -------       --------           ----
Net income ................................   $    23,933    $    6,882    $   15,315    $   14,420    $   14,050            12.2
Net income applicable to common stock .....   $    23,933    $    6,882    $   15,315    $   14,366    $   13,969            12.4

Per common share:
  Basic earnings per share ................   $      2.09    $     0.61    $     1.36    $     1.29    $     1.26            10.8
  Diluted earnings per share ..............          2.04          0.60          1.35          1.28          1.24            10.2
  Common shareholders' equity at year end .         13.14         11.55         11.49          9.96          9.96             7.8
  Cash dividends declared .................          0.68          0.64          0.60          0.56          0.51             9.1
  Year-end common stock price .............         38.88         23.00         17.88         13.00         16.50            20.7
At year end:
  Total assets ............................   $ 2,115,011    $2,003,952    $1,795,649    $1,617,835    $1,597,453             8.9
  Total loans, net of unearned income .....     1,537,819     1,450,999     1,258,511     1,143,833     1,005,089            14.5
  Total deposits ..........................     1,573,838     1,579,217     1,444,483     1,335,509     1,376,227             5.2
  Long-term debt ..........................       185,293       140,903        86,605        37,334        54,217            53.2
  Total shareholders' equity ..............       150,777       131,316       129,767       111,632       112,036             8.7
  Common shareholders' equity .............       150,777       131,316       129,767       111,632       111,026             8.9
  Allowance for loan losses ...............        22,017        18,065        15,779        12,529        12,505            18.1
Selected ratios:
  Return on average assets ................          1.20%         0.37%         0.92%            0.91%     0.96%
  Return on average shareholders' equity ..         17.03          5.32         12.55            12.89     13.24
  Return on average common shareholders'
   equity .................................         17.03          5.32         12.55            12.92     13.29
  Efficiency ratio(F3) .....................        61.26         71.59         71.67            71.92     70.96
  Average shareholders' equity to
  average total assets ....................          7.06          6.97          7.30             7.05      7.25
  Tier I leverage ratio ...................          6.81          6.36          6.92             7.07      6.46
  Tier I risk-based capital ratio .........          8.48          7.63          8.64             9.47      9.36
  Total risk-based capital ratio ..........         11.71         10.80         12.15            13.31     13.50
  Common dividend payout ratio ............         33.31        106.51         44.49            43.88     41.05
  Allowance for loan losses as a percentage
    of year-end loans .....................          1.43          1.25          1.25             1.10      1.24
  Allowance for loan losses as a percentage
    of non-performing loans ...............          89.9         170.7          91.0           158.2      126.4
  Non-performing loans as a percentage
    of year-end loans .....................          1.59          0.73          1.38             0.69      0.98
  Net charge-offs as a percentage
  of average loans ........................          0.38          0.86          0.17             0.20      0.26
  Net interest margin (non-tax equivalent)           4.38          4.42          4.56             4.57      4.32
Other data:
  Number of full-time-equivalent employees
  at year end .............................           895           881           932           836          829              5.9
  Number of common shareholders
  of record at year end (F2) ...............        1,683         1,706         1,810         1,907        1,273             10.3
  Common share trading volume .............    10,844,800     9,275,700     4,520,000     3,404,400    4,992,300             14.1
<FN>

(F1) During 1995 and 1993, the company  acquired one commercial  bank and certain
branches of another thrift  institution in transactions  accounted for using the
purchase method of accounting.  Financial information pertaining to the acquired
entities  since the  acquisition  dates has been  included  in the  consolidated
financial statements.  See note 4 to the consolidated financial statements.
(F2) In 1994, the company merged with three bank holding companies in
transactions accounted for using the pooling-of-interests method of accounting.
Accordingly, all financial data has been restated as if the entities were
combined for all periods  presented.  See  note  4  to  the  consolidated
financial  statements. Shareholders  of record for 1993 have not been  restated
to reflect  holders of shares issued in connection  with these  business
combinations.
(F3) Efficiency ratio is non-interest  expense  divided by net interest income
and  non-interest income. For this calculation,  non-interest income excludes
all gains and losses on sales of securities, mortgage servicing rights and
branches;  non-interest expense for 1996  excludes  the charges  related to the
second  quarter  refocus initiatives.
</FN>
</TABLE>


Item 7a. Quantitative and Qualitative Disclosures About Market Risk
     The  information  for  this  item  is  incorporated  by  reference  to  the
Asset/Liability  Management  and Market Risks  section of Item 7.,  Management's
Discussion and Analysis of Financial Condition and Results of Operations.


Item 8. Financial Statements and Supplementary Data
     The  following  consolidated  financial  statements of the  registrant  and
report of independent auditors are included herein:
       Report  of KPMG  Peat  Marwick  LLP,  Independent  Auditors  Consolidated
       Balance Sheets--December 31, 1997 and 1996
       Consolidated Statements of Income--Years ended December 31, 1997, 1996
       and 1995
       Consolidated  Statements of Changes in Shareholders'  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

     Additional  information  for this item is  included  in the table  entitled
Quarterly Results of Operations in Item 7 of this report.




<PAGE>
Independent Auditors' Report


     We have  audited  the  accompanying  consolidated  balance  sheets of Trans
Financial,  Inc.  and  subsidiaries  as of December  31, 1997 and 1996,  and the
related consolidated  statements of income,  changes in shareholders' equity and
cash flows for each of the years in the  three-year  period  ended  December 31,
1997. These  consolidated  financial  statements are the  responsibility  of the
company's  management.  Our  responsibility  is to  express  an opinion on these
consolidated 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
our opinion.
     In our opinion,  the consolidated  financial  statements  referred to above
present fairly, in all material respects,  the financial position of Trans
Financial,  Inc. and subsidiaries  as of  December  31,  1997  and  1996,  and
the  results  of their operations and their cash flows for each of the years in
the  three-year  period ended  December 31, 1997,  in conformity with generally
accepted  accounting principles.


                                                     /s/ KPMG Peat Marwick LLP

KPMG Peat Marwick LLP
Louisville, Kentucky
January 20, 1998
<PAGE>

<TABLE>


 Consolidated Balance Sheets
 December 31 - In thousands, except share data
<CAPTION>

                                                                                  1997           1996
 Assets
<S>                                                                           <C>            <C>
Cash and due from banks ...................................................   $    70,774    $    75,054
Interest-bearing deposits with banks ......................................            99             98
Mortgage loans held for sale ..............................................       118,485         68,814
Securities available for sale (amortized cost
of $276,554 and $285,264, respectively) ...................................       278,098        285,155
Loans, net of unearned income .............................................     1,537,820      1,450,999
Less allowance for loan losses ............................................        22,017         18,065
                                                                               ----------    -----------
   Net loans ..............................................................     1,515,803      1,432,934
Premises and equipment, net ...............................................        37,429         37,377
Mortgage servicing rights .................................................        46,870         41,598
Other assets ..............................................................        47,453         62,922
                                                                               -----------    ----------
   Total assets ...........................................................   $ 2,115,011    $ 2,003,952

Liabilities and Shareholders' Equity
Deposits:
   Non-interest bearing ...................................................   $   235,695    $   231,717
   Interest bearing .......................................................     1,338,143      1,347,500
                                                                              -----------    -----------
   Total deposits .........................................................     1,573,838      1,579,217
Federal funds purchased and repurchase agreements .........................       109,348         71,879
Other short-term borrowings ...............................................        70,000         55,000
Long-term debt ............................................................       185,293        140,903
Other liabilities .........................................................        25,755         25,637
                                                                               ----------    -----------
   Total liabilities ......................................................     1,964,234      1,872,636
Commitments and contingencies (notes 13 and 14)
Shareholders' equity:
   Preferred stock ........................................................          --             --
   Common stock, no par value. Authorized 50,000,000 shares;
      issued and outstanding 11,471,689 and 11,372,532 shares, respectively        21,510         21,324
   Additional paid-in capital .............................................        46,284         44,745
   Retained earnings ......................................................        83,947         67,790
   Net unrealized gain (loss) on securities available for sale, net of tax            882            (92)
   Employee Stock Ownership Plan shares purchased with debt ...............        (1,846)        (2,451)
                                                                               ----------     -----------
   Total shareholders' equity .............................................       150,777        131,316
                                                                               ----------     -----------
   Total liabilities and shareholders' equity .............................   $ 2,115,011    $ 2,003,952

 See accompanying notes to consolidated financial statements.
</TABLE>
<PAGE>
<TABLE>

 Consolidated Statements of Income
 Years Ended December 31
 In thousands, except per share data
<CAPTION>

                                                        1997         1996        1995
 Interest income
<S>                                                   <C>          <C>        <C>
  Loans, including fees ...........................   $ 146,284    $131,466   $115,757
  U.S. Treasury and federal agencies ..............      10,293      11,450     13,532
  State and municipal obligations .................       2,459       2,820      2,861
  Other securities ................................       2,365       2,133      1,257
  Other interest income ...........................          10          66        821
                                                        -------    --------   --------
  Total interest income ...........................     161,411     147,935    134,228
Interest expense
  Deposits ........................................      64,389      59,795     56,465
  Federal funds purchased and repurchase agreements       3,668       1,949      2,014
  Other short-term borrowings .....................       3,607       3,117      2,983
  Long-term debt ..................................       9,536       8,205      3,137
                                                        -------    --------   --------
  Total interest expense ..........................      81,200      73,066     64,599
                                                                              --------
Net interest income ...............................      80,211      74,869     69,629
  Provision for loan losses .......................       9,500      13,914      5,260
                                                        -------    --------   --------
Net interest income after provision for loan losses      70,711      60,955     64,369
Non-interest income
  Service charges on deposit accounts .............      10,154       9,541      8,472
  Mortgage banking income .........................      12,620      10,728      6,166
  Gain on sale of mortgage servicing rights .......         889        --        1,687
  Gain (loss) on sale of securities, net ..........        (356)         20        200
  Trust services ..................................       2,475       1,955      1,392
  Brokerage income ................................       2,943       2,201      1,728
  Other ...........................................       5,685       5,244      4,766
                                                        -------    --------   --------
  Total non-interest income .......................      34,410      29,689     24,411
Non-interest expenses
  Compensation and benefits .......................      34,752      37,927     30,588
  Net occupancy expense ...........................       4,660       5,206      4,836
  Furniture and equipment expense .................       6,799       7,005      6,126
  Deposit insurance ...............................         414       3,585      2,095
  Professional fees ...............................       2,558       3,170      3,424
  Postage, printing and supplies ..................       3,593       4,125      3,643
  Communications ..................................       2,762       2,516      1,607
  Processing fees .................................       2,466       2,043      1,112
  Loss on sale of fixed assets ....................        --         1,790       --
  Other ...........................................      11,129      13,275     12,618
                                                        -------    --------   --------
  Total non-interest expenses .....................      69,133      80,642     66,049
                                                        -------    --------   --------
Income before income taxes ........................      35,988      10,002     22,731
Income tax expense ................................      12,055       3,120      7,416
                                                        -------    --------   --------
Net income ........................................   $  23,933  $   6,882    $ 15,315

Basic earnings per share ..........................   $    2.09    $   0.61   $   1.36
Diluted earnings per share ........................   $    2.04    $   0.60   $   1.35

 See accompanying notes to consolidated financial statements.

</TABLE>
<PAGE>
<TABLE>

 Consolidated Statements of Changes in Shareholders' Equity


 In thousands, except share and per share data
<CAPTION>

                                                                                                   Employee
                                                                                       Net         Stock
                                                                                    Unrealized     Ownership
                                                                                    Gain (Loss)      Plan
                                         Common Stock       Additional             on Securities     Shares         Total
                                          Number               Paid-in    Retained  Available      Purchased     Shareholders'
                                         of shares   Amount   Capital     Earnings  for Sale       With Debt        Equity

<S>                                      <C>         <C>      <C>          <C>       <C>            <C>           <C>
 Balance, December 31, 1994              11,203,247  $21,006  $42,810      $59,587   $(8,073)       $(3,698)      $111,632

 Net income for the year                                                    15,315                                 15,315
 Cash dividends declared on
   common stock, $.60 per share                                             (6,750)                                (6,750)
 Common stock issued in connection
   with business combination accounted
   for as a purchase
                                             25,000       47      384                                                 431
 Stock options exercised, net of
     shares redeemed                         30,887       58      205                                                 263
 Common stock issued in connection
   with dividend reinvestment and stock
   purchase plan                             34,157       64      473                                                 537
 Decrease in net unrealized loss on
 securities available for sale, net of tax                                              7,670                       7,670
 ESOP debt reduction, net                         -        -        -           -          -             669          669
                                        --------------------------------------------------------------------------------------------

 Balance, December 31, 1995              11,293,291   21,175   43,872       68,152       (403)        (3,029)     129,767

 Net income for the year                                                     6,882                                  6,882
 Cash dividends declared on
   common stock, $.64 per share                                             (7,244)                                (7,244)
 Common stock issued in connection
     with the exercise of stock warrants     46,666       88      428                                                 516
 Stock options exercised, net of
     shares redeemed                          6,026       11       28                                                  39
 Common stock issued in connection
   with dividend reinvestment and stock
   purchase plan                             26,549       50      417                                                 467
 Decrease in net unrealized loss on
   securities available for sale, net of tax                                           311                            311
 ESOP debt reduction, net                        -         -        -            -       -               578          578
                                        --------------------------------------------------------------------------------------------

 Balance, December 31, 1996              11,372,532   21,324   44,745       67,790     (92)           (2,451)     131,316

 Net income for the year                                                    23,933                                 23,933
 Cash dividends declared on
   common stock, $.68 per share                                             (7,776)                                (7,776)
 Stock options exercised, net of
     shares redeemed                         71,413      134      961                                               1,095
 Common stock issued in connection
   with dividend reinvestment and stock
   purchase plan                             12,561       24      321                                                 345
 Common stock issued in connection
   with directors' stock compensation plan   15,183       28      257                                                 285
 Increase in net unrealized gain on
   securities available for sale, net of tax                                                974                       974
 ESOP debt reduction, net                        -          -      -             -           -           605          605
                                        --------------------------------------------------------------------------------------------

 Balance, December 31, 1997              11,471,689  $21,510  $46,284       $83,947   $     882      $(1,846)    $150,777


 See accompanying notes to consolidated financial statements.
</TABLE>
<PAGE>

<TABLE>

 Consolidated Statements of Cash Flows
 Years Ended December 31
 In thousands, except per share data
<CAPTION>

                                                                       1997         1996          1995

 Cash flows from operating activities:
<S>                                                               <C>            <C>          <C>
Net income ....................................................   $    23,933    $   6,882    $  15,315
Adjustments to reconcile net income to cash
  provided by operating activities:
    Provision for loan losses .................................         9,500       13,914        5,260
    Deferred tax expense (benefit) ............................           504       (3,215)      (2,387)
    Loss (gain) on sale of securities .........................           356          (20)        (200)
    Gain on sale of mortgage loans held for sale ..............        (4,329)      (3,642)      (1,888)
    Loss (gain) on sale of premises and equipment .............            (8)       1,790         (174)
    Gain on sale of branches ..................................        (1,241)        --           --
    Gain on sale of mortgage servicing rights .................          (889)        --         (1,687)
    Depreciation and amortization of fixed assets .............         6,172        5,959        5,473
    Amortization of intangible assets .........................         1,294        1,361        1,394
    Amortization of premium on securities and loans, net ......           788          975        1,077
    Amortization of mortgage servicing rights .................         6,439        5,271        2,720
Increase in accrued interest receivable .......................          (575)      (1,391)      (1,736)
Decrease (increase) in other assets ...........................        15,991       (5,343)     (10,759)
Increase (decrease) in accrued interest payable ...............          (582)         916        3,588
Increase (decrease) in other liabilities ......................            13        9,880       (4,993)
Sale of mortgage loans held for sale ..........................     1,032,880      614,452      150,359
Originations of mortgage loans held for sale ..................    (1,078,222)    (632,976)    (188,578)
                                                                    ---------    ---------     --------
  Net cash provided by (used in) operating activities .........        12,024       14,813      (27,216)
Cash flows from investing activities:
Net decrease (increase) in interest-bearing deposits with banks            (1)          99         --
Proceeds from sale of securities:
  Available for sale ..........................................        25,722        9,417       33,165
  Held to maturity ............................................          --           --          2,568
Proceeds from prepayment and call of securities:
  Available for sale ..........................................        26,263       37,794       22,940
  Held to maturity ............................................          --           --          4,758
Proceeds from maturities of securities:
  Available for sale ..........................................        86,760       52,601       33,726
  Held to maturity ............................................          --           --          3,140
Purchase of securities:
  Available for sale ..........................................      (131,178)     (87,233)     (70,136)
  Held to maturity ............................................          --           --         (3,000)
Net increase in loans .........................................       (94,051)    (202,802)    (117,938)
Purchase and origination of mortgage servicing rights .........       (15,773)     (18,423)     (21,994)
Net cash inflow from sale of branches .........................       (13,789)        --           --
Proceeds from sale of mortgage servicing rights ...............         4,951         --          2,180
Proceeds from sale of foreclosed assets .......................         1,401        3,337        1,705
Purchases of premises and equipment ...........................        (7,281)      (8,835)     (10,555)
Proceeds from disposal of premises and equipment ..............           366        2,924          836
Net cash and cash equivalents inflow from acquisitions ........        (1,733)        --         36,815
                                                                     ---------    ---------     --------
  Net cash used in investing activities .......................      (118,343)    (211,121)     (81,790)
Cash flows from financing activities:
Net increase in deposits ......................................        10,626      134,734       67,869
Net increase (decrease) in federal funds purchased
  and repurchase agreements ...................................        37,469       (3,715)       1,041
Net increase (decrease) in other short-term borrowings ........        15,000        9,986       (3,019)
Proceeds from issuance of long-term debt ......................        45,000       55,000       50,000
Repayment of long-term debt ...................................            (5)        (124)         (60)
Proceeds from issuance of common stock ........................         1,725        1,022          800
Dividends paid ................................................        (7,776)      (7,244)      (6,750)
                                                                     ---------    ---------     --------
  Net cash provided by financing activities ...................       102,039      189,659      109,881
Net increase (decrease) in cash and cash equivalents ..........        (4,280)      (6,649)         875
Cash and cash equivalents at beginning of year ................        75,054       81,703       80,828
                                                                     ---------    ---------     --------
Cash and cash equivalents at end of year ......................   $    70,774     $ 75,054    $  81,703

 See accompanying notes to consolidated financial statements.
</TABLE>
<PAGE>
Notes to Consolidated Financial Statements
(1) Nature of Operations
     Trans  Financial,  Inc.  ("the  company")  is a bank  holding  company
registered  under the Bank  Holding  Company  Act of 1956.  The  company has two
commercial  bank subsidiaries--Trans  Financial Bank,  National  Association
("TFB-KY"),  consisting of all of the company's banking activities in Kentucky,
and Trans Financial Bank Tennessee, National Association ("TFB-TN"),  consisting
of all of the company's Tennessee banking   activity.   (On  July  26,   1997,
the company's former thrift subsidiary--Trans Financial  Bank,  F.S.B.--was
merged  into  TFB-KY,  and its Tennessee  operations were sold to TFB-TN.  These
transactions  consolidated the company's  banking  operations  into its current
two  national  bank  charters.)  Collectively,  these two  subsidiaries  are
referred  to in this report as "the banks".  In addition,  the company operates
as subsidiaries of TFB-KY a full-service securities  broker/dealer:  Trans
Financial  Investment  Services,  Inc., and a mortgage banking company: Trans
Financial Mortgage Company ("TFMC").
     During April 1997,  the company  sold  substantially  all of the  deposits,
premises  and  equipment,  and certain  other  assets of its Lebanon and Sparta,
Tennessee offices.  These two offices  represented  approximately $17 million of
the company's total deposits as of March 31, 1997.
     On August 29, 1997,  the Trans Adviser family of mutual funds ("the Funds")
was  transferred  to the  Countrywide  Family  of  Funds.  TFB-KY  had  acted as
investment  adviser to the Funds,  which had total  assets of $159 million as of
June 30, 1997. However,  as a result of this transfer,  TFB-KY no longer acts as
investment  adviser to the Funds. The transfer did not have a significant impact
on the company's financial condition or results of operations.
     The  company's  financial  services  network  is  comprised  of  49  office
locations   serving  34  communities  in  Kentucky  and  Tennessee  by  offering
commercial and consumer  banking,  brokerage,  mortgage and trust  services.  In
addition,  the mortgage company  operates 3 mortgage loan production  offices in
Arkansas,  Florida,  and North  Carolina.  As of December 31, 1997,  the company
employed 921 employees and serviced more than 83 thousand customer households.
     The company actively  competes in its markets with other commercial  banks,
savings  and  loan  associations,  credit  unions,  brokerage  firms,  insurance
companies,  other financial  institutions and  institutions  which have expanded
into the financial market.
     Bank holding companies and commercial banks are extensively regulated under
both federal and state law. Changes in applicable laws or regulations may have a
material effect on the businesses and prospects of the company and the banks.


(2) Summary of Significant Accounting Policies
     The consolidated financial statements have been prepared in accordance with
generally  accepted  accounting  principles,  which  require  management to make
estimates and  assumptions  that affect both the reported  amounts of assets and
liabilities  at the date of the  financial  statements,  and  also the  reported
amounts of revenues and expenses  during the reporting  periods.  Actual results
could differ from those estimates. Generally accepted accounting principles also
require  disclosure  of  contingent  assets and  liabilities  at the date of the
financial statements.
     A description of the more significant accounting policies follows.
     Principles of Consolidation
     The  consolidated  financial  statements  include  the  accounts  of  Trans
Financial,  Inc. (parent company) and its subsidiaries,  all of which are wholly
owned.  All  significant  inter-company  transactions  and  accounts  have  been
eliminated in  consolidation.  Certain prior year amounts have been reclassified
to conform with 1997 presentations.
     Securities
     The company accounts for securities under Statement of Financial Accounting
Standards  No.  115,  Accounting  for  Certain  Investments  in Debt and  Equity
Securities.  Accordingly, all debt securities in which the company does not have
the ability or management  does not have the positive intent to hold to maturity
are classified as securities available for sale and are carried at market value.
All equity securities are classified as available for sale. Unrealized gains and
losses on securities  available for sale are reported as a separate component of
shareholders'  equity (net of income  taxes).  Securities  classified as held to
maturity are carried at amortized cost. The company's asset/liability management
policy does not permit securities to be purchased for trading purposes.
     Amortization  of premiums  and  accretion  of  discounts  are recorded by a
method   which   approximates   a  level  yield  and  which,   in  the  case  of
mortgage-backed   securities,    considers   prepayment   risk.   The   specific
identification method is used to determine the cost of securities sold.
     Loans and Allowance for Loan Losses
     Loans are stated at the unpaid principal balance.  Interest income on loans
is recorded on the accrual basis except for those loans in a non-accrual status.
Loans, other than consumer loans (which are charged off when delinquent 120 days
unless  adequately  secured  and in the  process of  collection),  are placed in
non-accrual  status when  principal  or interest is past due 90 days or more and
the loan is not adequately  collateralized and in the process of collection,  or
when,  in the opinion of  management,  principal or interest is not likely to be
paid in accordance with the terms of the obligation.  Loans are not reclassified
as accruing until principal and interest payments are brought current and future
payments appear reasonably  certain.  Unearned income,  arising principally from
consumer  installment  loans or the deferral of certain loan fees, is recognized
as income using a method that approximates the interest method.
     The  allowance  for loan losses is  maintained  at a level that  adequately
provides for estimated losses in the loan portfolio.  The level of the allowance
is based on management's  evaluation of the loan  portfolio,  which includes the
review of individual credits,  consideration of past loan loss experience,  loan
delinquency  trends,  changes in the  composition  of the loan portfolio and the
impact of current and  projected  economic  conditions.  The  allowance for loan
losses  is  increased  by the  provision  for loan  losses  and  reduced  by net
charge-offs. The level of the allowance and the amount of the provision for loan
losses involve  uncertainties and matters of judgment and, therefore,  cannot be
determined with precision and could be susceptible to significant  change in the
future. In addition,  bank regulatory  authorities,  as a part of their periodic
examinations of the banks, may reach different conclusions regarding the quality
of the loan  portfolio  and the level of the  allowance,  which could  result in
additional provisions being made in future periods.
     The company  accounts for impaired  loans in accordance  with  Statement of
Financial  Accounting  Standards No. 114, Accounting by Creditors for Impairment
of a Loan  ("SFAS  114"),  as  amended  by  Statement  of  Financial  Accounting
Standards  No. 118,  Accounting by Creditors  for  Impairment of a  Loan--Income
Recognition ("SFAS 118"). SFAS 114, as amended,  requires that impaired loans be
measured at the present value of expected  future cash flows,  discounted at the
loan's effective interest rate, at the loan's observable market price, or at the
fair value of the  collateral  if the loan is collateral  dependent.  Generally,
impaired  loans  are  also in  non-accrual  status.  In  certain  circumstances,
however,  the company may continue to accrue  interest on an impaired loan. Cash
receipts on impaired  loans are applied to the recorded  investment in the loan,
including any accrued interest  receivable.  The company does not apply SFAS 114
and SFAS  118 to  loans  which  are  part of a large  group  of  smaller-balance
homogeneous  loans, such as residential  mortgage and consumer loans. Such loans
are collectively evaluated for impairment.
     Mortgage Loans Held for Sale
     Mortgage  loans held for sale are carried at the lower of aggregate cost or
market value, as determined by outstanding  loan  commitments  from investors or
current yield requirements, including the effects of forward delivery contracts.
Gain or loss is  recorded  at the  time  of  sale in an  amount  reflecting  the
difference  between  the  contractual  interest  rates of the loans sold and the
current market rate.
     Mortgage Servicing Portfolio
     The company accounts for mortgage  servicing rights ("MSR's") in accordance
with  Statement  of  Financial  Accounting  Standards  No. 125,  Accounting  for
Transfers and Servicing of Financial Assets and  Extinguishments  of Liabilities
("SFAS  125").  SFAS 125,  which  superseded  Statement of Financial  Accounting
Standards  No. 122,  Accounting  for Mortgage  Servicing  Rights,  requires that
rights to service  mortgage  loans for others be recognized  as assets,  without
regard to whether those assets were acquired in purchase transactions or through
loan   originations.   Mortgage  servicing  rights  ("MSR's")  are  recorded  by
allocating the total cost of acquiring mortgage loans to the MSR's and the loans
(without the MSR's), based on their relative fair values.
     The  carrying  value of MSR's and the related  amortization  are  evaluated
quarterly in relation to estimated  future net servicing  revenues.  The company
evaluates the value of the MSR's by estimating  the fair value of the future net
servicing income of the rights, stratified by interest rate and loan type, using
a discounted  valuation method based on management's  best estimate of remaining
loan lives.  Impairment and subsequent  adjustments in each stratum, if any, are
recognized by a valuation allowance and a charge against servicing income.
     Interest Rate Contracts
     The company uses interest rate  contracts  (swaps and floors) to manage its
sensitivity  to interest rate risk.  These  off-balance-sheet  transactions  are
employed to hedge the inherent  interest rate risk of specific  on-balance-sheet
assets or  liabilities,  rather than for  speculative  trading  activity.  These
instruments  are designated as hedges on the trade date and would not be entered
into unless  highly  correlated  with the  financial  instruments  being hedged.
Generally, a high correlation exists when the contract and the hedged instrument
have the same maturity and similar rate characteristics.
     Interest income and expense for each interest rate swap contract is accrued
over the term of the  agreement  as an  adjustment  to the yield of the  related
asset or  liability.  Similarly,  transaction  fees are deferred  and  amortized
through  interest income and expense over the lives of the agreements.  The fair
market value of these instruments is not included in the financial statements.
     Interest rate floor  contracts are currently  being utilized by the company
to mitigate the market risk of the mortgage  servicing  rights  portfolio due to
prepayments  associated with a decline in interest rates.  Under these contracts
the company would receive "interest" on the notional amount to the extent that a
specified  market rate for U.S.  Treasury  securities falls below the designated
"floor"  rate.  Any  "interest"  the  company  would  recognize  on these  floor
contracts  would be recorded as mortgage  banking  income  rather than  interest
income.  Interest  rate  floors  typically  increase  in  value  in a  declining
long-term  interest rate  environment,  and decrease in value as rates rise. The
company's  two floors are hedging  specific  interest  rate  tranches of the MSR
asset.  Management believes that the increase in market value of these two floor
contracts which would result from a 50 basis-point  drop in the interest rate on
ten-year  constant maturity U.S. Treasury Notes ("CMT's") would partially offset
the impairment in the MSR likely to occur with such a decline in interest rates.
The cost of these  contracts  is included in  mortgage  servicing  rights in the
consolidated balance sheet and is amortized against mortgage banking income on a
straight-line basis over the lives of the contracts.
     Premises and Equipment
     Premises and equipment are carried at cost, less  accumulated  depreciation
and  amortization.  Depreciation of premises and equipment is computed using the
straight-line  method over the estimated  useful lives of the assets.  Leasehold
improvements  are  amortized  on the  straight-line  method over the term of the
related lease or over the useful life of the improvements, whichever is shorter.
Leasing commitments are described in note 8.
     Other Assets
     Included in other assets is real estate  acquired in  settlement  of loans,
which is  carried  at the lower of cost or fair  value  less  estimated  selling
costs.  The excess of cost over fair value less  estimated  costs to sell at the
time of foreclosure is charged to the allowance for loan losses.  Provisions for
subsequent  declines in fair value are included in other  non-interest  expense.
Other costs relating to holding real estate  acquired in settlement of loans are
charged to other non-interest expense as incurred.  Costs related to real estate
in the process of development  are capitalized to the extent that total carrying
value does not exceed fair value less costs to sell.
     Income Taxes
     The company  accounts  for income  taxes in  accordance  with  Statement of
Financial  Accounting Standards No. 109, Accounting for Income Taxes. Under this
statement, a current or deferred income tax liability is recognized,  subject to
certain limitations,  for the current or deferred tax consequences of all events
that have been recognized in the financial  statements.  The deferred income tax
liability or asset is measured by the provisions of enacted tax laws.
     Stock Options
     Statement  of  Financial  Accounting  Standards  No.  123,  Accounting  for
Stock-Based Compensation ("SFAS 123") permits entities to either 1) recognize as
expense  over the  vesting  period  the  fair  value on the date of grant of all
stock-based  awards,  or 2) apply  Accounting  Principles  Board Opinion No. 25,
Accounting   for  Stock   Issued  to   Employees   ("APB   25"),   and   related
interpretations,  providing disclosures of pro forma net income and earnings per
share  for  stock   options   granted  in  1995  and  future  years  as  if  the
fair-value-based  method  defined in SFAS 123 had been applied.  The company has
elected to  continue to apply the  provisions  of APB 25 and to provide the SFAS
123 pro forma disclosures.  As such,  compensation  expense is recognized on the
date of grant only if the market price of the underlying stock on the grant date
exceeds the exercise price.
Information regarding stock options is included in note 10.
     Earnings Per Share
     During 1997, the Financial  Accounting  Standards Board issued Statement of
Financial  Accounting  Standards No. 128, Earnings per Share ("SFAS 128"), which
established new standards for the  calculation and  presentation of earnings per
share ("EPS") in financial  statements.  SFAS 128, which became effective in the
fourth  quarter of 1997 and was not  permitted to be adopted  earlier,  replaces
primary and fully-diluted EPS with basic and diluted EPS. All prior periods have
been restated to conform to the SFAS 128 presentation.
     Basic earnings per share is computed by dividing net income by the weighted
average number of shares of common stock outstanding during the period.  Diluted
earnings  per share  takes into  account  the  dilutive  effect of common  stock
equivalents,  such as stock  options.  For the  company,  basic EPS is  slightly
higher than primary EPS because common stock  equivalents  are not considered in
basic EPS; diluted EPS for the company is essentially the same as primary EPS.
     The weighted  average number of shares  outstanding used in the calculation
of earnings per share follows:

                                           1997     1996      1995
 Basic earnings per share:
   Average common shares outstanding ..   11,432   11,347   11,246
Diluted earnings per share:
   Average common shares outstanding ..   11,432   11,347   11,246
   Effect of dilutive securities:
      Options .........................      290      106       81
      Warrants ........................     --       --         29
                                          -----   ------    ------
   Average shares and share equivalents   11,722   11,453   11,356

 Anti-dilutive  securities  that may dilute  basic  earnings per share in future
periods:
    Number of stock options                  265      289      421
    Weighted average exercise price       $35.96   $20.99   $16.40

     Newly-Issued Accounting Standards
     During 1997, the Financial  Accounting  Standards Board issued Statement of
Financial  Accounting  Standards No. 130, Reporting  Comprehensive Income ("SFAS
130");  and Statement of Financial  Accounting  Standards  No. 131,  Disclosures
about Segments of an Enterprise and Related  Information  ("SFAS 131"). SFAS 130
requires companies to present in their financial statements comprehensive income
and its components.  In addition to items of income and expense reflected in the
consolidated statement of income, comprehensive income includes unrealized gains
and losses affecting  shareholders'  equity which are not included in the income
statement. SFAS 131 requires companies to report assets, profit or loss, certain
revenue  and  expense  items,  and  descriptive  information  for  each of their
operating  segments.  Operating  segments are generally  determined based on the
company's own method of regularly assessing the performance of the components of
the enterprise.
     These two accounting  standards will be adopted by the company in 1998 and,
because they affect financial reporting and disclosures  only, they will have no
effect on the company's financial condition or results of operations.


(3) Statement of Cash Flows
   For purposes of reporting cash flows, cash and cash equivalents  include cash
on hand and amounts due from banks. The following  summarizes  supplemental cash
flow data for the years ended December 31, 1997, 1996 and 1995:

In thousands .............      1997      1996      1995
Cash paid for interest ...   $81,171   $72,266   $60,366
Cash paid for income taxes    11,739     1,955    10,323

 Certain  non-cash  investing  and  financing  activities  of  the  company  and
subsidiaries are summarized below:

                                                 1997     1996     1995
For the parent company
 Issuance of stock in business combination ...    --      --        431
 Change in net unrealized gain (loss) on
    securities available for sale, net of tax      974     311    7,670
 Effect on shareholders' equity of reductions
    in Employee Stock Ownership Plan debt, net     605     578      669
For the subsidiaries
 Loans transferred to foreclosed real estate
   and other foreclosed assets ...............   1,522   1,161    1,493
 Securities transferred from held to maturity
  to available for sale under special one-time
    reassessment guidance issued by the
    Financial Accounting Standards Board .....    --      --     76,921


(4) Business Combinations
     On December 29, 1997,  in an  acquisition  accounted for using the purchase
method of accounting,  the company acquired Surety Mortgage, Inc. of Cape Coral,
Florida,  for $1.733 million in cash, net of cash acquired.  In accordance  with
the purchase  accounting  method,  the results of its  operations and cash flows
have been included in the  consolidated  financial  statements since the date of
acquisition only. Surety Mortgage was consolidated into the operations of TFMC.
     Following is a summary of the net assets acquired in this transaction:


In thousands

   Cash paid, net of cash acquired                                    $(1,733)
   Premises and equipment                                                  60
   Other assets                                                           223
     Excess of cost over net assets acquired                           $1,450


     The excess of the cost over the value of net assets  acquired  was recorded
as goodwill.
     On February 21, 1995, the company assumed $41 million of deposits, acquired
three  branch  facilities  and $360  thousand of consumer  loans  related to the
Bowling  Green  and  Scottsville,  Kentucky  branches  of  Fifth  Third  Bank of
Kentucky,   Inc.  These  assets  and  liabilities  were  consolidated  into  the
operations  of TFB-KY.  On  September  1, 1995,  the company  acquired  AirLanse
Travel,  a  Louisville,  Kentucky,  travel  agency,  for cash  and  stock of the
company.  AirLanse Travel was consolidated  into the operations of Trans Travel,
Inc.  (All of the  assets of Trans  Travel,  Inc.  were sold  during  the fourth
quarter of 1996,  and the company  exited the travel  business.) On November 15,
1995,  the  company  acquired  for cash the  assets of  Correspondents  Mortgage
Company, L.P., located in Greensboro,  North Carolina.  Correspondents  Mortgage
Company  was  consolidated  into  the  operations  of Trans  Financial  Mortgage
Company.  In addition to the deposits assumed,  the company received net cash of
$36.815  million and issued  25,000  shares of common stock in  connection  with
these 1995  acquisitions,  which were accounted for using the purchase method of
accounting.  Accordingly,  their  results  of  operations  and cash  flows  were
included in the consolidated  financial  statements  beginning with the dates of
acquisition.
     Following is a summary of the assets  acquired and  liabilities  assumed in
these transactions:


In thousands

   Cash and due from banks                                             $ 36,815
   Loans, net of unearned income                                            360
   Premises and equipment                                                   598
   Other assets                                                             154
   Deposits                                                             (41,105)
   Other liabilities                                                       (628)
   Common stock issued                                                     (431)
     Excess of cost over net assets acquired                              4,237

     The excess of the cost over the value of net assets  acquired  was recorded
as deposit base premium and goodwill. Goodwill and deposit base premium from all
the above purchase  transactions,  as well as acquisitions  consummated in prior
years,  are being amortized over periods ranging from five to twenty years using
straight-line and accelerated methods and had a combined  unamortized balance of
$9.164 million and $8.900  million at December 31, 1997 and 1996,  respectively.
The carrying value and related lives of these intangible assets are reviewed for
possible  impairment  when  events  or  changed  circumstances  may  affect  the
underlying basis of the asset.


(5) Cash and Due from Banks
     Regulatory  authorities  require the banks to maintain  reserve balances on
customer  deposits.  The  amounts of  required  reserves  totaled  approximately
$16.930 million at December 31, 1997, and $14.740 million at December 31, 1996.


(6) Securities
     The company accounts for securities under Statement of Financial Accounting
Standards  No.  115,  Accounting  for  Certain  Investments  in Debt and  Equity
Securities ("SFAS 115"). On November 30, 1995, $76.921 million of held-to-
maturity securities were reclassified to available for sale as permitted by the
Financial Accounting Standards Board in a special one-time reassessment. The
fair value of these  reclassified  securities  was  $79.049  million  on 
November  30,  1995, resulting in a net unrealized gain of $2.128 million.
     No securities were classified as held to maturity or trading  securities as
of December 31, 1997 or 1996. The following  summarizes  securities  available
for sale at December 31, 1997 and 1996.

<TABLE>

 December 31, 1997 (In thousands)
<CAPTION>

                                             Amortized     Unrealized        Market
                                               Cost      Gains     Losses     Value


<S>                                          <C>        <C>      <C>       <C>
U.S.Treasury and federal agency securities   $138,840   $ 270    $    81   $139,029
Collateralized mortgage obligation
and mortgage-backed securities ...........     53,170      387       182     53,375
State and municipal obligations ..........     46,502    1,387         8     47,881
Corporate debt securities ................     12,398       70         -     12,468
Equity securities ........................     25,644        7       306     25,345
                                             --------   ------    -------  --------
    Total securities available for sale ..   $276,554   $2,121   $   577   $278,098

December 31, 1996 (In thousands)
U.S.Treasury and federal agency securities   $129,330   $  131   $ 1,165   $128,296
Collateralized mortgage obligations
and mortgage-backed securities ...........     68,052      278       704     67,626
State and municipal obligations ..........     49,937    1,501       127     51,311
Corporate debt securities ................     14,530      108        13     14,625
Equity securities ........................     23,415      209       327     23,297
                                             --------   ------    -------  --------
    Total securities available for sale ..   $285,264   $2,227    $2,336   $285,155
</TABLE>

     Included in equity  securities at December 31, 1997,  are Federal Home Loan
Bank and Federal  Reserve Bank stock of $17.355  million and $2.698  million
respectively.  At December 31, 1996, these stock investments were $13.375
million and $1.977 million, respectively.
     The  amortized  cost and  approximate  market value of debt  securities  at
December 31, 1997, by contractual maturity, are shown below. Expected maturities
may differ from contractual  maturities  because borrowers may have the right to
call or  prepay  obligations  with or  without  call  or  prepayment  penalties.
Mortgage-backed  obligations generally have contractual  maturities in excess of
ten years, but shorter expected maturities as a result of prepayments.
<TABLE>


 In thousands
<CAPTION>

                                                                     Amortized    Market
                                                                        Cost      Value
<S>                                                                  <C>        <C>
Due in one year or less ..........................................   $113,536   $112,993
Due after one year through five years ............................     30,678     31,041
Due after five years through ten years ...........................     43,642     44,784
Due after ten years ..............................................      9,884     10,560
                                                                     --------   --------
                                                                      197,740    199,378
Collateralized mortgage obligations and mortgage-backed securities     53,170     53,375
                                                                     --------   --------
    Total debt securities ........................................   $250,910   $252,753
</TABLE>

     Securities with a carrying value of approximately $169.709 million and
$141.675 million at December 31, 1997 and 1996,  respectively,  were pledged to
secure public funds, trust funds and for other purposes.
     Gross gains of $225 thousand,  $105 thousand,  and $293 thousand, and gross
losses of $581 thousand, $85 thousand and $93 thousand were realized on sales of
securities in 1997,  1996,  and 1995,  respectively.  In 1995,  the company sold
mortgage-backed  securities  with a carrying  value of $2.568  million  from the
held-to-maturity  portfolio.  A net loss of $82 thousand was recognized on these
sales,  which is included in the gross realized gains and losses shown above for
1995.  At the  time  of  sale,  the  outstanding  principal  balances  of  these
securities were less than 15% of the outstanding  principal balances at the time
the securities were acquired.


(7) Loans
     The company extends credit in the form of commercial loans,  commercial and
residential  real estate loans and consumer loans to customers  primarily in the
immediate market areas of its subsidiaries. The composition of loans at December
31, 1997 and 1996, follows:

 In thousands                            1997           1996
Commercial .....................   $   453,487    $   466,365
Commercial real estate .........       539,860        470,235
Residential real estate ........       344,008        335,433
Consumer:
   Home equity lines ...........        79,716         50,461
   Other consumer ..............       122,835        130,444
Unearned income ................        (2,086)        (1,939)
                                     ---------    -----------
   Loans, net of unearned income   $ 1,537,820    $ 1,450,999

     Substantially  all of the  company's  loans  are to  customers  located  in
Kentucky and Tennessee, in the immediate market areas of the banks. Customers in
the  construction  and  land  development  industry  account  for  10.1%  of the
company's total loan portfolio;  no other industry group  represents 10% or more
of the company's total loans.
     The principal balance of non-accrual and restructured loans at December 31,
1997 and 1996,  was  $22.490  million  and  $4.721  million,  respectively.  The
interest  that would have been  recorded  if all those  loans were in an accrual
status in accordance  with their original terms was $2.330 million in 1997, $543
thousand in 1996, and $1.441 million in 1995. The amount of interest income that
was actually  recorded for those loans was $1.323  million in 1997, $38 thousand
in 1996, and $490 thousand in 1995.
     The  company's  recorded  investment  in  impaired  loans  (as  defined  in
Statement of Financial Accounting Standards No. 114, Accounting by Creditors for
Impairment of a Loan ("SFAS 114")) was $17.584 million at December 31, 1997, and
$4.613  million at December  31, 1996.  Of those  amounts,  $15.615  million and
$2.042  million,  respectively,  represent loans for which an allowance for loan
losses,  in  the  amounts  of  $3.526  million  and  $809  thousand,  have  been
established  under SFAS 114. For the years ended December 31, 1997 and 1996, the
recorded  investment  of  impaired  loans  averaged  $7.881  million  and $8.611
million, respectively. Interest income recognized on impaired loans totaled $834
thousand in 1997 and $127 thousand for 1996.
     An analysis of the changes in the allowance for loan losses follows:

 In thousands                                    1997        1996         1995

Balance, January 1 .........................   $ 18,065    $ 15,779    $ 12,529
  Provision for loan losses ................      9,500      13,914       5,260
  Loans charged off ........................     (6,387)    (12,467)     (2,525)
  Recoveries of loans previously charged off        839         839         515
                                                 ------      ------     --------
  Net charge-offs ..........................     (5,548)    (11,628)     (2,010)
                                                 ------      ------     --------
Balance, December 31 .......................   $ 22,017    $ 18,065    $ 15,779

     Loans to executive  officers and directors and their associates,  including
loans to affiliated  companies for which these individuals are principal owners,
amounted to $73.432 million at December 31, 1997 and $55.397 million at December
31, 1996.  During 1997, new loans of $77.788 million were made and repayments of
$58.769  million were received.  Other changes include net decreases for changes
in executive  officers and directors of $984 thousand.  These loans were made on
substantially the same terms, including interest rates and collateral,  as those
prevailing at the time for other customers.


(8) Premises and Equipment
     A summary of premises and equipment at December 31, 1997 and 1996, follows:
In thousands                                       1997      1996
Land and improvements ........................   $ 6,163   $ 6,429
Buildings and improvements ...................    32,963    31,890
Technology and communications equipment ......    23,731    19,461
Furniture and equipment ......................    19,419    19,930
                                                 -------   -------
                                                  82,276    77,710
Less accumulated depreciation and amortization    44,847    40,333
                                                 -------   -------
   Total premises and equipment ..............   $37,429   $37,377

     The company leases office space in Bowling Green, Kentucky, and Nashville,
Tennessee, under long-term lease agreements.  Rental expense for all real
property totaled $854 thousand and $1.357 million, respectively for 1997
and 1996.
     Future  minimum  lease   commitments   as  of  December  31,  1997,   under
non-cancelable leases with remaining terms exceeding one year are as follows:


  In thousands
 Year ended December 31
         1998                            $   760
         1999                                766
         2000                                772
         2001                                804
         2002                                819
   Later years                             4,520
                                         -------
Total lease commitments                   $8,441




<PAGE>



(9) Long-Term Debt and Other Short-Term Borrowings

     Long-term debt consisted of the following at December 31, 1997 and 1996:
<TABLE>
<CAPTION>


 In thousands                                                                                   1997       1996
<C>                                                                                          <C>        <C>
7.25% Subordinated Notes; due September 15, 2003; interest payable quarterly .............   $ 32,740   $ 32,746
Senior bank notes; due October 23, 1998; interest at 6.48% payable semi-annually .........     30,000     30,000
Senior bank notes; due October 17, 1997; interest at 6.32% payable semi-annually .........       --       20,000
Senior bank notes; due May 30, 2000; interest at 7.132% payable semi-annually ............     25,000     25,000
Advance from the Federal Home Loan Bank due
   March 6, 1998; interest at 5.50%, payable monthly .....................................     30,000     30,000
Advance from the Federal Home Loan Bank due
   November 30, 1999; interest at 5.99%, payable monthly .................................     25,000       --
Advance from the Federal Home Loan Bank due
   November 6, 2000; interest at 6.10%, payable monthly ..................................     40,000       --
Employee Stock Ownership Plan ("ESOP") note payable to bank, due September 30, 2000;
  interest at the prime rate; principal and interest payable quarterly ...................      1,847      2,451
Unsecured demand notes; interest at the prime rate less 150 basis points payable quarterly        706        706
                                                                                             --------   --------
   Total long-term debt ..................................................................   $185,293   $140,903
</TABLE>

     Other short-term borrowings consisted of the following at December 31, 1997
and 1996:

 In thousands                                                   1997        1996
 Advance from the Federal Home Loan Bank,
    due January 6, 1997; interest at 5.45%, payable monthly    $  --     $15,000
Advance from the Federal Home Loan Bank,
    due February 8, 1997; interest at 5.41%, payable monthly      --      40,000
Advance from the Federal Home Loan Bank,
    due January 29, 1998; interest at 5.69%, payable monthly    40,000      --
Advance from the Federal Home Loan Bank,
    due March 30, 1998; interest at 5.81%, payable monthly .    30,000      --
                                                               -------   -------
   Total other short-term borrowings .......................   $70,000   $55,000

     The prime interest rate  associated  with certain of the above  obligations
     was 8.50% at December 31, 1997, and 8.25% at December 31, 1996. Information
     concerning  securities  sold under  agreements  to  repurchase is presented
     below:

 Dollars in thousands
                                                           1997          1996
 Average balance during the year                        $23,785       $18,415
 Weighted average rate during the year                     4.35 %        3.43 %
 Maximum month-end balance                               47,808        27,810

     Advances from the Federal Home Loan Bank are collateralized by the
company's  Federal Home Loan Bank stock and certain first mortgage loans in the
approximate  amount of 150% of the debt.
     The company has guaranteed  the ESOP notes payable.  The loan agreement for
the ESOP note  payable  due  September  30,  2000,  has a number of  restrictive
covenants,  including maintaining capital levels of the company and the banks at
least  at  the  minimum  levels  required  by  applicable  regulatory  agencies;
maintaining the company's  risk-weighted  capital ratio, as defined, at not less
than 9.25%;  maintaining the company's  leverage ratio, as defined,  at not less
than 5.25%; maintaining the company's annualized return on assets at the date of
financial  reports  required by regulations  at no less than 0.50%;  maintaining
non-performing  loans, as defined, at less than 2.50% of gross loans at the date
of required  financial  reports;  and  maintaining  on a  consolidated  basis an
allowance  for loan losses of at least 0.75% of gross loans.  Prior  consent was
obtained  from the holder of the ESOP note for  reporting in 1996 an  annualized
return on assets of less than 0.50%, as required by the covenants noted above.
     The loan obligations of the ESOP are recorded on the  consolidated  balance
sheet with a  corresponding  amount  recorded  as a reduction  of the  company's
shareholders'   equity.   Both  the  loan   obligation   and  the  reduction  of
shareholders'  equity are reduced by the amount of any loan  repayments  made by
the ESOP. The company's Employee Stock Ownership Plan is described in note 13 to
the consolidated financial statements.
     Principal  payments required on long-term debt as of December 31, 1997, are
as follows:


In thousands
Year ended December 31
           1998                     $60,672
           1999                      25,671
           2000                      65,504
           2001                           -
           2002                           -
    Later years                      33,446
     The company  has a $3 million  unsecured  operating  line of credit with an
unaffiliated  bank.  This  obligation  has  substantially  the same  restrictive
covenants as the ESOP loan due  September  30, 2000.  The line was not in use at
December 31, 1997 or 1996.


(10) Shareholders' Equity
Stock Options
     The company has  incentive  stock option  plans which permit  options to be
granted for a maximum of 1,057,888 shares of common stock of the company.  Under
the terms of the plans,  options with  ten-year  terms may be granted to certain
key employees to purchase common stock at not less than fair value of the common
stock at the date of grant.
     In 1995 the company adopted a non-qualified stock option plan which permits
options  to  purchase  up to  313,000  shares of common  stock to be  granted to
certain  executive  officers of the company at 120% of fair market  value at the
date of grant.  Options  granted under the plan have  ten-year  terms and become
exercisable three years after the date of grant.
     The per-share  weighted-average fair value of stock options granted during
1997, 1996 and 1995 was $13.59, $6.65 and $4.64,  respectively,  on the date of
grant, using the Black-Scholes option-pricing model with the following
assumptions:


                                        1997              1996             1995

   Risk-free interest rate             5.85%            6.56%             5.74%
   Expected life (years)                 10                10               10
   Expected dividend yield             2.00%            3.00%             3.00%
   Stock price volatility               32%               32%              32%

     A summary of the company's  incentive stock option plans and non-qualified
stock option plan as of December 31, 1997, 1996 and 1995 and changes during the
years then ended is shown below:
<TABLE>

 Incentive Stock Options
<CAPTION>
                                                                                                       Weighted
                                                                                          Weighted      Average
                                                                                          Average     Fair Value
                                                                        Number            Exercise    of Options
                                                                        of shares         Price        Granted
<S>                                                                   <C>                 <C>          <C>
 Options outstanding December 31, 1994                                   347,657           $13.24
    Granted in 1995                                                      233,350           13.59        $ 4.75
    Exercised in 1995                                                    (29,807)          7.66
    Terminated or canceled in 1995                                       (56,273)          13.50
                                                                       ----------
 Options outstanding December 31, 1995                                   494,927           13.71
    Granted in 1996                                                      332,975           18.91          6.96
    Exercised in 1996                                                    (9,265)           9.77

    Terminated or canceled in 1996                                     (104,849)           15.39
                                                                       ----------
 Options outstanding December 31, 1996                                   713,788           15.94
    Granted in 1997                                                      194,605           33.82         14.14
    Exercised in 1997                                                    (74,772)          12.92
    Terminated or canceled in 1997                                       (43,574)          17.08
                                                                       ----------
 Options outstanding December 31, 1997                                   790,047           $20.57

</TABLE>
<TABLE>

 Non-qualified Stock Options
<CAPTION>
                                                                                                      Weighted
                                                                                          Weighted    Average
                                                                                          Average    Fair Value
                                                                         Number           Exercise   of Options
                                                                        of shares         Price       Granted
<S>                                                                   <C>                 <C>          <C>
 Options outstanding December 31, 1994                                        -
    Granted in 1995                                                      202,000          $17.67        $ 4.51
                                                                       ---------
 Options outstanding December 31, 1995                                  202,000           17.67
    Granted in 1996                                                     150,000           21.95           5.95

    Terminated or canceled in 1996                                     (136,000)          18.84
                                                                       ---------
 Options outstanding December 31, 1996                                  216,000           19.91
    Granted in 1997                                                      70,000           41.70          12.07
                                                                       ---------
 Options outstanding December 31, 1997                                  286,000           $25.24
</TABLE>

     The following table summarizes information about both stock option plans at
December 31, 1997:
<TABLE>

 Options Outstanding
 December 31, 1997
<CAPTION>
                                                                                                    Weighted
                                                                                        Weighted     Average
                                                                                       Average      Remaining
                                                                        Number         Exercise    Contractual
 Range of Exercise Prices                                              of shares         Price    Life (years)
<S>                                                                   <C>               <C>             <C>
 $8.16 to  $15.99                                                       191,845          $11.98          5.7
 $16.00 to $23.99                                                       569,597           18.36          7.7
 $24.00 to $31.99                                                        81,855           26.09          9.2
 $32.00 to $41.70                                                       232,750           36.84          9.9
                                                                       ---------

 $8.16 to $41.70                                                       1,076,047         $21.81          7.9
</TABLE>


 Options Exercisable                       Weighted
 December 31, 1997                          Average
                              Number       Exercise
 Range of Exercise Prices    of shares      Price
$8.16 to $ 15.99              104,600   $   11.10
$16.00 to $23.99               90,447       16.32
$8.16 to $23.99               195,047   $   13.52

     As of December 31, 1996 and 1995,  options for 158,611 and 130,756  shares,
respectively,  were  exercisable  at weighted  average  exercise  prices of
$12.47 and $10.76, respectively.
     In accounting for its stock option plans,  the company  applies  Accounting
Principles Board Opinion No. 25 and, accordingly,  no compensation cost has been
recognized  in the  financial  statements  for stock  options.  Had the  company
determined  compensation  cost for stock  options based on the fair value at the
grant date,  as prescribed  in Statement of Financial  Accounting  Standards No.
123,  Accounting for Stock-Based  Compensation  ("SFAS 123"),  the company's net
income and earnings  per share would have been reduced to the pro forma  amounts
indicated below:

                                 1997           1996         1995
 Net income:
   As reported ............     $23,933       $6,882      $15,315
   Pro forma ..............      22,622        6,030       14,918
Basic earnings per share:
   As reported ............      $2.09         $0.61        $1.36
   Pro forma ..............       1.98          0.53         1.33
Diluted earnings per share:
   As reported ............      $2.04         $0.60        $1.35
   Pro forma ..............       1.93          0.53         1.31

     The pro forma net income and  earnings  per share in the table above do not
reflect   options  granted  prior  to  January  1,  1995.   Therefore,   because
compensation  cost is reflected  over the  options'  vesting  periods,  the full
impact of calculating  the cost for stock options under the fair value method of
SFAS 123 is not  reflected  in the pro forma net income and  earnings  per share
amounts presented above.


Preferred Stock and Rights Plan
     The company's Articles of Incorporation authorize 5 million shares of Class
B Preferred  Stock,  of which the Board of Directors has designated 350 thousand
shares as Class B Preferred Stock,  Series 1992, to be issued in connection with
a Shareholder Rights Plan which was adopted by the Board of Directors on January
20, 1992.  These shares carry the right to cumulative  annual dividends of $6.00
per share or 133 times  dividends  per common  share  (subject  to  adjustment),
whichever  is  greater.  There  were  no  shares  of  Class  B  Preferred  Stock
outstanding during the three-year period ending December 31, 1997.
     Under  the  plan,  the  Board  declared  a  dividend  of one right for each
outstanding share of common stock. In addition, the company will issue one right
with  respect  to each share of common  stock  issued  subsequent  to that date.
Initially,  the  rights  are not  exercisable  and are not  detachable  from the
company's common stock.  Each right,  when and if it becomes  exercisable,  will
generally  entitle the registered holder to purchase from the company 1/100 of a
share of Series  1992 Class B  Preferred  Stock,  subject to  adjustment,  at an
exercise  price of $45. The rights are detached from the common stock and become
exercisable only if a person or group acquires, or obtains the right to acquire,
beneficial  ownership of 15% or more of the company's  outstanding common stock,
the Board  determines  that a beneficial  owner of at least 10% of the company's
outstanding  common  stock  has a  detrimental  effect  on  the  company  or its
shareholders,  or a tender or exchange offer is commenced for 25% or more of the
outstanding  common stock. The description and terms of the rights are set forth
in a Rights  Agreement,  dated as of January 20,  1992,  between the company and
First Union National  Bank, as Rights Agent.  The Board may redeem the rights in
whole, but not in part, at a price of $.01 per right.
     After the rights become  exercisable,  if any person becomes the beneficial
owner of more than 15% of the outstanding  common stock, or the Board determines
that a  beneficial  owner of at least 10% of the  company's  outstanding  common
stock has a  detrimental  effect on the  company or its  shareholders,  then the
rights will  entitle  each holder of a right  (except the  beneficial  owners of
common stock  described in the preceding  clauses of this sentence) to purchase,
for the exercise  price,  the number of shares of  preferred  stock which at the
time of the transaction would have a market value twice the exercise price.


(11) Dividend Restrictions
     Payment  of  dividends  by the  company's  subsidiaries  is  restricted  by
national banking laws and regulations.  Also, certain notes payable described in
note 9 include  restrictive  covenants  related  to the  maintenance  of minimum
capital  ratios  by  the  banks,  which  effectively  restrict  the  payment  of
dividends.  At December 31, 1997, the aggregate  retained  earnings of the banks
were  approximately  $86.3  million,  of which  approximately  $23.4  million is
available  as of January 1, 1998,  for the  payment of  dividends  to the parent
company under the most restrictive of the above restrictions.
     State law restricts the payment of dividends by the company.  Also, certain
notes payable described in note 9 include  restrictive  covenants related to the
maintenance of minimum capital ratios,  and regulatory  capital  requirements of
the banks and of the company  effectively  restrict the company's ability to pay
dividends to its shareholders. At December 31, 1997, the most restrictive of the
covenants limited the payment of dividends by the company to approximately $28.8
million.


(12) Income Taxes
     Total income tax expense  (benefit) for the years ended  December 31, 1997,
1996 and 1995 was allocated as follows:

 In thousands                               1997       1996      1995
Income from operations .................   $12,055   $ 3,120   $ 7,416
Shareholders' equity, for unrealized net
  gain on securities available for sale        680       157     4,188
                                          --------   -------   -------
                                           $12,735   $ 3,277   $11,604

     The components of income tax expense (benefit) were as follows:

 In thousands             1997      1996       1995
Current federal tax .   $11,026   $ 5,926    $ 9,303
Current state tax ...       525       409        500
Deferred income taxes       504    (3,215)    (2,387)
                        -------   --------   --------
                        $12,055   $ 3,120    $ 7,416

     An analysis of the differences between the effective tax rates and the
statutory U.S. federal income tax rate is as follows:
<TABLE>
<CAPTION>

                                                                                1997          1996          1995
<S>                                                                             <C>           <C>          <C>
U.S. federal income tax rate ..............................................     35.0 %        35.0 %       35.0 %
Changes from the statutory rate:
  Tax exempt investment income .............................................    (2.1)        (10.8)        (4.4)
  Change in deferred tax valuation allowance ...............................      --          (1.1)          --
  Amortization of goodwill .................................................     0.6           2.1          0.8
  State income taxes, net of federal tax benefit ...........................     1.0           2.7          1.3
  Other, net ...............................................................    (1.0)          3.3         (0.1)
                                                                                -----         -----       ------
                                                                                33.5 %        31.2 %       32.6 %
</TABLE>

     The tax effects of temporary  differences that give rise to significant
portions of the deferred tax assets and deferred tax liabilities at
December 31, 1997 and 1996, are presented below:

 In thousands                        1997      1996
 Deferred tax assets:
Allowance for loan losses ........   $7,552   $6,313
Deferred compensation ............       --      370
Deferred loan fees ...............      531      430
Investment securities ............      364      320
Other ............................       63    1,297
                                     ------   ------
      Total deferred tax asset ...    8,510    8,730
Deferred tax liabilities:
Purchase accounting adjustments ..      496      596
Depreciation .....................      270      200
FHLB stock .......................      740      417
Securities available for sale ....      671       --
                                    -------   ------
      Total deferred tax liability    2,177    1,213
                                    -------   ------
      Net deferred tax asset .....   $6,333   $7,517

     In assessing the realizability of deferred tax assets, management considers
whether it is more likely than not that some  portion or all of the deferred tax
assets will not be realized.  The ultimate realization of deferred tax assets is
dependent  upon the  generation of future  taxable  income during the periods in
which those temporary  differences become deductible.  Management  considers the
scheduled reversal of deferred tax liabilities, projected future taxable income,
and tax planning  strategies in making this assessment.  Based upon the level of
historical  taxable  income and  projections  for future taxable income over the
periods in which the deferred tax assets are deductible,  management believes it
is more  likely  than  not the  company  will  realize  the  benefits  of  these
deductible differences at December 31, 1997.
     Shareholder's  equity of TFB-KY  at  December  31,  1997,  includes  $5.101
million for which no deferred  federal income tax liability has been recognized.
This amount  represents an allocation of income to bad debt  deductions  for tax
purposes only. Reduction of amounts so allocated for purposes other than tax bad
debt losses or  adjustments  arising from carrying back net operating  losses to
prior years may create income for tax purposes  only,  which would be subject to
the then current corporate income tax rate.


(13) Employee Benefit Plans
     The company has an employee  stock  ownership plan ("ESOP") under which the
company and its subsidiaries  contribute to the ESOP an amount determined by the
Board of  Directors  at its  discretion.  Statement  of Position  ("SOP")  93-6,
Employers' Accounting for Employee Stock Ownership Plans, issued by the American
Institute of Certified  Public  Accountants,  prescribes  the accounting for the
company's ESOP for all shares acquired after December 31, 1992. The SOP requires
recognition  of  compensation  cost,  accounting  for dividends on allocated and
unallocated  shares and the  inclusion  in earnings  per share  calculations  of
shares  committed to be released  from the ESOP.  As debt is repaid,  shares are
released from  collateral and allocated to active  employees based on total debt
service for the year.
     At  December  31,  1997,  the  ESOP  held  326,295  allocated  and  151,801
unallocated shares. The company recognized expenses related to the ESOP based on
cash  contributions,  with such amounts  exceeding the amount computed under the
shares allocated  method.  The interest  incurred on the ESOP note payable,  the
amount  contributed  by the company to the ESOP,  and the amount of dividends on
ESOP  shares used for debt  service by the ESOP for 1997,  1996 and 1995 were as
follows:


In thousands                             1997              1996             1995

Interest incurred                        $178              $215             $290
Contributions                             390               621              839
Dividends used for debt service           314               355              155

     The company has a profit sharing plan qualified under Section 401(k) of the
Internal  Revenue Code.  Under the amended  profit sharing plan, the company and
its subsidiaries provide funds to match contributions made by each participating
employee  up to a  maximum  of 4% of the  employee's  salary.  Contributions  in
accordance  with the  profit  sharing  plan were  $888  thousand  in 1997,  $839
thousand in 1996 and $668 thousand in 1995.
     Former  full-time  employees  of  Kentucky  State  Bank  who  meet  certain
requirements  as to age and length of service were covered by a defined  benefit
pension plan.  Pension  expense for this plan was $-0- in 1997,  $90 thousand in
1996  and  $-0-  in  1995.  The  plan  was  terminated  during  1997  and  final
distributions totaling $550 thousand were made in 1997.
         Former full-time employees of Peoples Financial Services,  Inc. ("PFS")
who meet certain  requirements  as to age and length of service are covered by a
defined  benefit  pension plan.  PFS was a member of the Financial  Institutions
Retirement Fund,  which is a non-profit  pension trust through which the Federal
Home Loan  Bank,  savings  banks  and  similar  institutions  may  cooperate  in
providing for the retirement of their employees.  No contributions were required
in 1997, 1996 or 1995.
     The  company  has no  significant  commitments  to pay  post-retirement  or
     post-employment  benefits  other than as  described  above.  Stock  options
     granted  to key  employees  are  described  in note 10 to the  consolidated
     financial statements.


(14) Commitments and Contingent Liabilities
Off-Balance-Sheet Financial Instruments
     The company's  consolidated  financial  statements  do not reflect  various
commitments  and  contingent  liabilities  which  arise in the normal  course of
business to meet the  financing  needs of customers  or to manage the  company's
exposure to interest rate risk.  These  include  commitments  to extend  credit,
standby  letters  of  credit,  and  derivative  financial   instruments.   These
instruments involve, to varying degrees,  elements of credit risk, interest rate
risk and liquidity risk in excess of the amount  recognized in the  consolidated
balance sheets. The extent of the company's  involvement in various  commitments
is expressed by the contract amount of such instruments.
     Commitments  to extend  credit,  which  amounted  to  $387.065  million  at
December 31, 1997, and $328.026  million at December 31, 1996, are agreements to
lend to a customer,  provided  all  conditions  established  in the contract are
fulfilled.   Commitments   generally  have  fixed   expiration  dates  or  other
termination  clauses and generally  require payment of a fee. Market risk arises
on fixed rate  commitments  if interest  rates rise  subsequent  to the date the
fixed rate is determined.  Management believes that market risk related to these
commitments is not  significant.  Since many of the  commitments are expected to
expire  without  being  drawn upon,  the total  commitments  do not  necessarily
represent  future cash  requirements.  The  company  evaluates  each  customer's
creditworthiness on a case-by-case basis. The amount of collateral obtained,  if
deemed  necessary upon extension of credit,  is based upon  management's  credit
evaluation  of  the  customer.  Collateral  varies,  but  may  include  accounts
receivable,  inventory,  property, plant and equipment,  residential properties,
income-producing    commercial    properties,    marketable    securities    and
interest-bearing time deposits.
     Standby letters of credit are conditional commitments issued by the company
guaranteeing  the performance of a customer to a third party.  Those  guarantees
primarily consist of performance assurances made on behalf of customers who have
a  contractual  commitment  to  produce  or  deliver  goods  or  services.  Most
guarantees are for one year or less.  The company had standby  letters of credit
outstanding  totaling  $58.877  million and $46.724 million at December 31, 1997
and 1996,  respectively.  The risk to the company  arises from its obligation to
make  payment  in  the  event  of  the  customer's  contractual  default  and is
essentially  the  same  as  that  involved  in  extending  loan  commitments  to
customers. The amount of collateral obtained, if deemed necessary, is based upon
management's  credit  evaluation  of  the  customer.   Collateral  held  varies.
Management believes that market risk related to the standby letters of credit is
not significant.
     Commercial  letters of credit are short-term  commitments  generally used
to finance a commercial contract for the shipment of goods from seller to buyer.
At December 31, 1997 and 1996, the company had no commercial letters of credit
outstanding.
     Commitments  to  sell  mortgage  loans--The  company  enters  into  forward
delivery  contracts  to  sell  residential  mortgage  loans  or  mortgage-backed
securities to  broker/dealers at specific prices and dates in order to hedge the
interest  rate risk in its  portfolio  of  mortgage  loans held for sale and its
residential  mortgage  loan  commitments.  Credit risk  associated  with forward
contracts is limited to the  replacement  cost of those  forward  contracts in a
gain position.  At December 31, 1997 and 1996, the total of forward contracts in
a gain position was not material.  There were no counterparty  default losses on
forward  contracts  in 1997,  1996 or 1995.  Market risk with respect to forward
contracts  arises  from  changes in the value of  contractual  positions  due to
changes in interest  rates.  The company  limits its  exposure to market risk by
monitoring  the  differences   between  commitments  to  customers  and  forward
contracts  with  broker/dealers.  In the event the company has forward  delivery
contract  commitments  in  excess  of  available  mortgage  loans,  the  company
completes  the  transaction  by either  paying or receiving a fee to or from the
broker/dealer  equal to the  increase  or  decrease  in the market  value of the
forward  contract.  At  December  31,  1997 and 1996,  the  company  had forward
contracts   outstanding   totaling   $165.489   million  and  $74.522   million,
respectively.
     Derivative financial instruments are financial instruments whose values and
characteristics  are  derived  from  those of  other  financial  instruments  or
indices.  Derivatives can be a cost- and  capital-efficient  method of modifying
the  repricing  or  maturity  characteristics  of  on-balance-sheet  assets  and
liabilities--a  necessary  component of the company's  strategy for managing its
overall interest rate risk.  Off-balance-sheet  derivative transactions used for
interest  rate  sensitivity   management  could  include  interest  rate  swaps,
forwards,  floors,  futures and options with indices that directly relate to the
pricing of specific assets and liabilities of the company.  Management  believes
there is minimal risk that the derivatives used for rate sensitivity  management
will have any significant unintended effect on the company's financial condition
or results of operations.
     As of December 31, 1997 and 1996,  the  company's  balance  sheet was in an
asset-sensitive  position,  as the  repricing  characteristics  of the asset and
liability  portfolios  were such that an increase in interest rates would have a
positive  effect on  earnings  and a decrease  in  interest  rates  would have a
negative effect on earnings.  To assist in achieving a desired level of interest
rate  sensitivity the company has entered into  off-balance-sheet  interest rate
swap transactions,  which effectively  convert the bank notes (described in note
9) and certain  certificates  of deposit from fixed  interest  rates to floating
rates and certain commercial loans from floating rates to fixed rates.
The result is that the asset-sensitive position which is inherent in the balance
sheet is partially neutralized.
     Off-balance-sheet  derivative  instruments  do not  expose  the  company to
credit risk equal to the  notional  amount,  although  the company is exposed to
credit risk equal to the  aggregate  of the  positive  fair values of the swaps,
plus any accrued interest  receivable due from all  counterparties.  Fair values
are determined by discounting to present value the future cash flows which would
result from the  difference  between  current  market  rates and the actual swap
rates.  The company  minimizes the credit risk in these  instruments  by dealing
only with high quality  counterparties (i.e., those which have credit ratings of
investment  grade or better  from one of the  major  rating  agencies)  and each
transaction is specifically  approved for applicable  credit exposure.  Further,
the  company's  policy  is  to  require  all  transactions  be  governed  by  an
International  Swap  Dealers  Association  Master  Agreement  and be  subject to
bilateral collateral arrangements.
     The company pays a variable interest rate on each swap and receives a fixed
rate.  Interest  income and expense is accrued over the terms of the agreements.
Interest rate swap transactions as of December 31, 1997, are shown below:

 Dollars in thousands
                                     Receiving a  Paying a
                            Notional    Fixed     Floating     Fair    Credit
                            Amount    Rate of:    Rate of:    Value   Exposure
 Prime-based swaps, maturing in:
   March 1998 ..........   $ 30,000      8.23%      8.50%$     (19)   $   --
   June 1998 ...........     70,000      8.50       8.50       (34)       17
   October 1998 ........     30,000      8.60       8.50        (1)       --
   November 1999 .......     25,000      8.78       8.50        52        60
   December 1999 .......     25,000      8.74       8.50        29        34
   December 1999 .......     40,000      8.81       8.50       102       105
   April 2000 ..........     50,000      9.52       8.50       969     1,052
   August 2000 .........     50,000      8.87       8.50       210       211
   November 2000 .......     40,000      8.80       8.50        78        82
                            -------                         ------    ------
Total / weighted average   $360,000      8.78%      8.50%   $1,386    $1,561

     Interest rate swaps outstanding as of December 31, 1996, were as follows:

 Dollars in thousands
                                        Receiving a  Paying a
                             Notional      Fixed     Floating   Fair     Credit
                              Amount     Rate of:    Rate of:  Value    Exposure
 Prime-based swaps, maturing in:
   January 1997 ........   $ 30,000      10.40%       8.25%$     14      $143
   June 1997 ...........     50,000       8.33        8.25      (11)       --
   July 1997 ...........     50,000       8.50        8.25       23        42
   October 1997 ........     20,000       8.60        8.25       30        35
   March 1998 ..........     30,000       8.23        8.25     (112)        6
   June 1998 ...........     70,000       8.50        8.25     (133)        9
   October 1998 ........     30,000       8.60        8.25      (45)       --
   December 1999 .......     25,000       8.74        8.25     (114)        6
                           -------                            -----      ----
Total / weighted average   $305,000       8.67%       8.25%   $(348)     $241

     In a higher interest rate  environment,  the increased  contribution to net
interest  income  from  on-balance-sheet  assets will  substantially  offset any
negative impact on net interest income from these swap transactions. Conversely,
if interest rates decline,  these  off-balance-sheet  transactions will mitigate
the company's exposure to reduced net interest income.
     Prepayments of mortgage  loans can have a considerable  impact on the value
of mortgage servicing rights.  Prepayments result from a variety of factors, but
a declining  mortgage loan interest rate environment is generally  considered to
be the most  significant  of these.  Therefore,  the carrying value of the MSR's
could  become  impaired  in future  periods if  mortgage  rates  should  decline
substantially.
     To mitigate this risk, the company  purchased in 1997 and 1996 two interest
rate "floor"  contracts that provide for the company to receive  interest on the
notional  amount of the  contract  to the extent that the  interest  rate on the
ten-year CMT falls below the contract  rate.  The first  contract,  purchased in
1996,  has a notional  amount of $75 million and a contract  rate of 5.50%.  The
cost of this  contract was $548  thousand;  its fair value was $689 thousand and
$479 thousand at December 31, 1997 and 1996, respectively.  The second contract,
purchased in 1997, has a notional  amount of $100 million and a contract rate of
5.25%.  The cost of this  contract  was  $455  thousand  and the  fair  value at
December  31,  1997 was $790  thousand.  The cost of these  contracts,  which is
included  in with the MSR  asset in the  consolidated  balance  sheet,  is being
amortized on a  straight-line  basis over the five-year  lives of the contracts.
Fair values are based on quoted  market prices for like  instruments  and can be
expected  to vary  inversely  with  market  expectations  for  intermediate-term
interest rates. As with interest rate swaps,  the company  minimizes credit risk
associated  with the  counterparties'  inability  to meet the  contractual  cash
payments of these instruments by dealing only with high quality  counterparties,
each transaction is specifically  approved for applicable  credit exposure,  and
all  transactions  are governed by an  International  Swap  Dealers  Association
Master Agreement and subject to bilateral collateral arrangements.
     The company requires all off-balance-sheet  transactions be employed solely
with respect to asset/liability  management or for hedging specific transactions
or positions,
rather than for speculative trading activity.
Other Off-Balance-Sheet Risks
     Mortgage loans sold to investors are generally sold with servicing rights
retained,  with only the normal legal  representations  and warranties regarding
recourse to the company. Management believes that any liabilities which may
result from such recourse provisions are not significant.
Legal Proceedings
     On August 12,  1996,  Douglas M. Lester,  the  company's  former  chairman,
president and chief executive  officer,  filed suit individually and purportedly
on behalf of the shareholders of the company,  in Warren Circuit Court,  Bowling
Green,  Kentucky,  against  the company and four of its  directors.  Mr.  Lester
claims that the company wrongfully  terminated him on June 4, 1996, and that the
four named  directors  breached their fiduciary  duties to the company.  He also
alleges fraud, breach of contract,  interference with contractual  relations and
invasion  of privacy.  Mr.  Lester  seeks,  among  other  things,  $1 million in
compensatory  damages, the value of certain stock options, and punitive damages.
The trial is currently scheduled for April 1, 1998. Management believes that the
litigation  will not  have a  material  adverse  effect  upon  the  consolidated
financial statements of the company and intends to vigorously defend the action.
         As of December 31, 1997,  there were various  pending legal actions and
proceedings against the company which arise in the normal course of business and
in which claims for damages are  asserted.  Management,  after  discussion  with
legal  counsel,  believes  that the ultimate  result of these legal  actions and
proceedings  will not  have a  material  adverse  effect  upon the  consolidated
financial statements of the company.


(15) Fair Value of Financial Instruments
     The estimated  fair values of the company's  financial  instruments  are as
follows:
<TABLE>
<CAPTION>

                                                   December 31, 1997          December 31, 1996
                                                    -----------------          -----------------
                                                  Carrying       Fair        Carrying       Fair
 In thousands                                       Amount       Value        Amount       Value
 Financial assets:
<S>                                              <C>          <C>          <C>          <C>
  Cash and short-term investments ............   $   70,873   $   70,873   $   75,152   $    75,152
  Mortgage loans held for sale ...............      118,485      118,707       68,814        71,659
  Securities .................................      278,098      278,098      285,155       285,155
  Loans ......................................    1,515,803    1,580,122    1,432,934     1,518,354
  Other assets (interest rate floor contracts)          802        1,479          548           479
Financial liabilities:
  Deposits ...................................    1,573,838    1,590,469    1,579,217     1,606,223
  Federal funds purchased and repurchases ....      109,348      109,348       71,879        71,879
  Short-term borrowings ......................       70,000       70,173       55,000        55,235
  Long-term debt .............................      185,293      190,875      140,903       145,259

Interest rate swaps ..........................         --          1,386         --            (348)
</TABLE>

     The following  methods and assumptions were used to estimate the fair value
of each class of financial instruments:
Cash, Short-Term Investments, Federal Funds Purchased and Repurchases
     For these short-term  instruments,  the financial statement carrying amount
approximates fair value.
Securities
     The fair value of securities is based on quoted market prices or, if marke
prices are not available,  is estimated by discounting future cash flows using
current rates at which investments would be made in similar instruments with
similar credit ratings and equivalent remaining maturities.

Loans
     The fair value of loans is estimated by  discounting  the future cash flows
using  current  rates at which  similar  loans would be made to borrowers  with
similar  credit ratings and for equivalent remaining maturities.
Deposits
     The fair  value of demand  deposits,  savings  accounts,  and money  market
deposits is the amount  payable on demand at the reporting  date. The fair value
of fixed-maturity certificates of deposit is estimated by discounting the future
cash flows using the rates currently  offered for deposits of similar  remaining
maturities.
Long-term Debt and Other Short-term Borrowings
     Rates  currently  available to the company for debt with similar  terms and
remaining maturities are used to estimate fair value of existing debt.
Off-Balance-Sheet Financial Instruments
     The fair  value of  interest  rate  swap and floor  agreements  is based on
quoted market prices or, if market quoted prices are not available, is estimated
by discounting  future cash flows using prevailing  market rates for instruments
of a similar type. The fair values of loan commitments and letters of credit are
estimated  using the fees  currently  charged to enter into similar  agreements,
taking  into  account  the  remaining  terms of the  agreements  and the present
creditworthiness  of the  counterparties.  The  values of loan  commitments  and
letters of credit were not material at December  31, 1997 and 1996.  Limitations
on Fair Value Reporting
     The fair  value  estimates  are made at a  discrete  point in time based on
relevant market  information and  information  about the financial  instruments.
Because no active  market  exists  for a  significant  portion of the  company's
financial  instruments,  fair value  estimates are based on judgments  regarding
future   expected   loss   experience,   current   economic   conditions,   risk
characteristics  of various  financial  instruments,  and other  factors.  These
estimates  are  subjective  in nature and involve  uncertainties  and matters of
significant  judgment  and,  therefore,  cannot be  determined  with  precision.
Changes in assumptions could significantly affect the estimates.
     The fair value  estimates  are based on  financial  instruments  only.  The
company has not  attempted to estimate the value of assets and  liabilities  not
considered  to be financial  instruments,  such as premises and  equipment,  the
mortgage  banking  operation and the  intangible  value of its core deposits and
branch  system.  Accordingly,  the fair value  estimates do not represent a fair
value for the company as a whole.


(16) Second Quarter 1996 Initiatives
     Costs  recognized in the second quarter of 1996 which are  associated  with
the  initiative to refocus the company's  resources on core  financial  services
include  severance and related payroll taxes and benefits,  write-downs of fixed
assets to be sold or abandoned,  professional fees associated with discontinuing
certain  activities and various other costs  associated  with the disposition of
assets.  These charges provide for the cost of exiting several initiatives which
the company  entered in 1995 and 1996,  such as human  resources  consulting and
venture capital, which were outside the company's core financial services.  Also
included in the charges are expenses  associated  with  closing the  Louisville,
Kentucky office;  mortgage loan production  offices in Chattanooga,  Jackson and
Knoxville,   Tennessee;  and  consolidation  of  operations  in  Bowling  Green,
Kentucky.  Severance expense was also recognized  related to changes designed to
reduce costs in the retail  delivery  system and in investment  management.  The
company sold its  corporate  jet, with the cost of its  disposition  included in
second quarter expenses.  The  classification of these costs in the consolidated
statement of income is as follows:

In thousands

     Compensation and employee benefits                                  $1,798
     Net occupancy expense                                                  475
     Furniture and equipment expense                                        325
     Professional fees                                                      340
     Writedowns and losses on sale of fixed assets                        1,698
     Other expenses                                                       1,171
                                                                         ------
         Total costs associated with the second quarter initiatives      $5,807


(17) Mortgage Banking and Servicing Activities
     The portfolio of mortgage loans serviced for others totaled $3.3 billion at
December 31, 1997 and 1996.  At December 31, 1997,  the company had  capitalized
mortgage  servicing  rights of $46.870  million,  which related to approximately
$3.2  billion of the  aggregate  $3.3  billion of loans  serviced.  The mortgage
servicing  rights  associated  with the remaining $135 million of loans serviced
are not subject to  capitalization  because the loans were  originated  and sold
prior to the company's adoption of Statement of Financial  Accounting  Standards
No. 122,  Accounting for Mortgage  Servicing Rights ("SFAS 122"), which has been
superseded  by SFAS 125 (see note 2). At  December  31,  1996,  the  company had
capitalized  mortgage  servicing  rights of  $41,598,000.  During 1997 and 1996,
respectively,  MSR's totaling  $1.020 million and $1.417 million were recognized
on mortgage  loans  originated,  and $14.306  million and $17.436  million  were
recognized on servicing purchased.
     The company assesses the fair values of the capitalized  mortgage servicing
rights by stratifying  the underlying  loans by interest rate. The fair value of
the  mortgage  servicing  rights is then  determined  through  a  present  value
analysis of the  estimated  future net servicing  revenues and  expenses,  using
assumptions  based upon  market  estimates  for future  servicing  revenues  and
expenses. Significant estimates in the valuation process include loan prepayment
expectations,  delinquency  and  foreclosure  rates,  ancillary  fee  income and
earnings  on  escrow  balances.  The  fair  value  of the  capitalized  mortgage
servicing rights was $52.747 million and $48.055 million as of December 31, 1997
and 1996,  respectively.  The fair value of the  mortgage  servicing  rights not
subject to capitalization  because the underlying loans were originated and sold
prior to the adoption of SFAS 122 was $2.092 million at December 31, 1997. Based
on management's estimate of the fair value of each strata, no impairment existed
at December 31, 1997 and, consequently, no valuation allowance was necessary.
     The  cost  of  capitalized   mortgage  servicing  rights  is  amortized  in
proportion  to,  and  over  the  period  of,  estimated  net  servicing  income.
Amortization  for the years ended  December 31, 1997 and 1996 was $6.439 million
and $5.271 million, respectively.
     During 1997 and 1996,  the company sold into the  secondary  market  $1.033
billion and $614 million,  respectively,  of residential  mortgage loans.  These
sales resulted in net gains of $3.308  million and $2.225 million  respectively,
excluding the portion capitalized in the MSR asset.


(18) Regulatory Capital Requirements
     The  company  and the banks  are  subject  to  various  regulatory  capital
requirements  administered  by the  federal  banking  agencies.  Failure to meet
minimum capital requirements can initiate certain actions by regulators that, if
undertaken,  could have a material effect on the company's financial statements.
Under  capital  adequacy  guidelines  and the  regulatory  framework  for prompt
corrective  action,  the  company  and the  banks  must  meet  specific  capital
guidelines  that involve  quantitative  measures of the assets,  liabilities and
certain  off-balance-sheet  items.  Capital amounts and  classification are also
subject to  qualitative  judgments  by the  regulators  about  components,  risk
weightings and other factors.
     Quantitative  measures established by regulation to ensure capital adequacy
require the company and the banks to maintain a minimum  ratio of Tier I capital
(as defined in the regulations) to  risk-weighted  assets (as defined) of 4.00%,
total  capital  (as  defined)  to  risk-weighted  assets of 8.00%,  and a Tier I
leverage ratio (as defined) of 3.00%.  Regulatory capital ratios for the company
and the banks at December 31, 1997 and 1996, were as follows:
<TABLE>


 December 31 - Dollars in thousands
<CAPTION>

                                                              1997            1996

 Trans Financial Bank, National Association:
<S>                                                     <C>              <C>
Tier I capital ......................................   $     131,518    $     106,188
Total risk-based capital ............................         147,750          119,960
Total risk-adjusted assets ..........................       1,298,058        1,198,137
Tier I capital ratio ................................          10.13%            8.86%
Total risk-based capital ratio ......................          11.38%           10.01%
Tier I leverage ratio ...............................           8.42%            7.80%

Trans Financial Bank Tennessee, National Association:
Tier I capital ......................................          39,298           16,955
Total risk-based capital ............................          43,967           19,037
Total risk-adjusted assets ..........................         372,834          166,484
Tier I capital ratio ................................          10.54%           10.18%
Total risk-based capital ratio ......................          11.79%           11.43%
Tier I leverage ratio ...............................           7.47%            8.40%

Trans Financial Bank, F.S.B.:
Tier I capital ......................................            --             28,380
Total risk-based capital ............................            --             30,525
Total risk-adjusted assets ..........................            --            230,298
Tier I capital ratio ................................            --             12.32%
Total risk-based capital ratio ......................            --             13.25%
Tier I leverage ratio ...............................            --              7.82%

Trans Financial, Inc. (consolidated):
Tier I capital ......................................         140,264          122,012
Total risk-based capital ............................         193,699          172,823
Total risk-adjusted assets ..........................       1,654,250        1,599,870
Tier I capital ratio ................................           8.48%            7.63%
Total risk-based capital ratio ......................          11.71%           10.80%
Tier I leverage ratio ...............................           6.81%            6.36%
</TABLE>

     For deposit  insurance  premiums and other supervisory  purposes,  the bank
regulatory authorities have established four levels of capital adequacy based on
these ratios.  The highest of these is well capitalized,  with a required Tier I
risk-based  capital ratio of at least 6.00%, a total risk-based capital ratio of
at least 10.00%,  and a Tier I leverage ratio of at least 5.00%. The most recent
notifications received from the bank regulatory authorities  categorized each of
the banks as well capitalized.  As of December 31, 1997, no conditions or events
have occurred since those  notifications  which management believes would change
any of the banks' capital categories.


(19) Deposits
     Time deposits of $100 thousand or more totaled  $349.5 million at
December 31, 1997,  and $336.1  million at December 31, 1996.  Interest
expense on time deposits of $100 thousand or more was $19.4 million in 1997,
$16.5 million in 1996 and $11.8 million in 1995.
     The  following  table  shows the  maturities  of  certificates  of deposit,
including individual  retirement accounts and brokered  certificates of deposit,
as of December 31, 1997.

   In thousands
   Year ended December 31
      1998                                                            $660,963
      1999                                                             184,154
      2000                                                              68,431
      2001                                                               8,383
      2002 and later years                                               6,981
                                                                      --------
      Later years                                                     $928,912


(20) Parent Company Financial Statements
     Condensed  financial data for Trans Financial,  Inc. (parent company only)
 as of December 31, 1997 and 1996 and for the years ended December 31, 1997,
1996 and 1995 are as follows:

 Condensed Balance Sheets
 December 31 - In thousands
                                                  1997       1996
 Assets

Cash on deposit with subsidiaries ...........   $  2,716   $  3,277
Investment in subsidiaries ..................    181,843    160,195
Other investments ...........................        100        356
Other assets ................................      9,290     11,143
                                                --------   --------
   Total assets .............................   $193,949   $174,971

Liabilities and Shareholders' Equity
Long-term debt and other notes payable ......   $ 35,293   $ 35,903
Other liabilities ...........................      7,879      7,752
Shareholders' equity ........................    150,777    131,316
                                                 -------   --------
   Total liabilities and shareholders' equity   $193,949   $174,971

<TABLE>

 Condensed Statements of Income
 Years Ended December 31
 In thousands
<CAPTION>

                                                                   1997       1996     1995
 Income
<S>                                                              <C>       <C>       <C>
  Dividends from subsidiaries ................................   $ 7,000   $10,000   $10,000
  Other interest and dividends ...............................         2        87       180
  Management fees from subsidiaries and other income .........     6,060     6,846     5,317
                                                                 -------   -------    -------
  Total income ...............................................    13,062    16,933    15,497
Expenses
  Interest on long-term debt and other notes payable .........     2,430     2,441     2,462
  Other expenses .............................................     9,421    12,155     9,819
                                                                  -------   -------   -------
  Total expenses .............................................    11,851    14,596    12,281
                                                                  -------   -------   -------
Income before income tax benefit and equity
  in undistributed earnings of subsidiaries ..................     1,211     2,337     3,216
Federal income tax benefit ...................................     1,818     2,506     2,083
                                                                 -------   -------   -------
Income before equity in undistributed earnings of subsidiaries     3,029     4,843     5,299
Equity in undistributed earnings of subsidiaries .............    20,904     2,039    10,016
                                                                 -------   -------   -------
Net income ...................................................   $23,933   $ 6,882   $15,315
</TABLE>

<TABLE>

 Condensed Statements of Cash Flows
 Years Ended December 31
 In thousands
<CAPTION>

                                                        1997         1996       1995
 Cash flows from operating activities:
<S>                                                    <C>         <C>        <C>
Net income .........................................   $ 23,933    $ 6,882    $ 15,315
Adjustments to reconcile net income to cash
  provided by operating activities:
    Amortization ...................................        568        584         680
    Equity in undistributed earnings of subsidiaries    (20,904)    (2,039)    (10,016)
Gain on sale of securities available for sale ......       (210)      --          --
Decrease (increase) in other assets ................      1,865     (5,739)     (1,639)
Increase (decrease) in other liabilities ...........         (9)     5,717         771
                                                         -------    -------   --------
  Net cash provided by operating activities ........      5,243      5,405       5,111
Cash flows from investing activities:
Repayment of advances to subsidiaries ..............       --        2,710        --
Proceeds from sale of securities ...................        252       --          --
Purchase of securities available for sale ..........       --         (100)       --
                                                          -------    -------   --------
  Net cash provided by investing activities ........        252      2,610        --
Cash flows from financing activities:
Repayment of long-term debt and other notes payable          (5)      (124)        (60)
Proceeds from issuance of common stock .............      1,725      1,022         800
Dividends paid .....................................     (7,776)    (7,244)     (6,750)
                                                         -------    -------   --------
  Net cash used in financing activities ............     (6,056)    (6,346)     (6,010)
                                                         -------    -------   --------
Net increase (decrease) in cash and cash equivalents       (561)     1,669        (899)
Cash and cash equivalents at beginning of year .....      3,277      1,608       2,507
                                                          -------    -------   --------
Cash and cash equivalents at end of year ...........   $  2,716    $ 3,277    $  1,608
Supplemental information:
  Cash paid for interest ...........................   $  2,432    $ 2,438    $  1,866
  Non-cash transactions (note 3) ...................      1,579        889       8,770

</TABLE>


Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure
     None.


<PAGE>


Part III

Item 10. Directors and Executive Officers of the Registrant
     The information set out in the sections  entitled  Section 16(a) Beneficial
Ownership  Reporting  Compliance  and  Proposal I:  Election of Directors in the
registrant's Proxy Statement for the 1998 Annual Meeting of Shareholders and the
information set out in the section entitled Executive Officers of the Registrant
on pages 6 and 7 of Part I of this report are incorporated herein by reference.


Item 11. Executive Compensation
     The information set out in the section entitled Executive  Compensation and
Other Information  (except the information under the sections entitled Report of
Compensation  Committee of the Board of Directors on Executive  Compensation and
Performance  Graph) in the  registrant's  Proxy  Statement  for the 1998  Annual
Meeting of Shareholders is incorporated herein by reference.


Item 12. Security Ownership of Certain Beneficial Owners and Management
     The  information  set out in the section  entitled  Voting  Securities and
Ownership in the  registrant's  Proxy  Statement for the 1998 Annual Meeting of
Shareholders is incorporated herein by reference.


Item 13. Certain Relationships and Related Transactions
     The information  set out in the sections  entitled  Compensation  Committee
Interlocks and Insider Participation and Transactions with Management and Others
in the registrant's  Proxy Statement for the 1998 Annual Meeting of Shareholders
is incorporated herein by reference.




<PAGE>


Part IV

Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K
   (a) (1) Financial statements filed
           The list of  consolidated  financial  statements  together  with the
           report  thereon of KPMG Peat  Marwick  LLP,  as set forth in Part II
           Item 8 of this  report is incorporated herein by reference.
       (2) Financial statement schedules
           Schedules to the consolidated financial statements are omitted, as
           the required information is not applicable.
       (3) List of exhibits
           The list of exhibits  listed on the Exhibit  Index on pages 61 and 62
           of this report is  incorporated  herein by reference.  The management
           contracts and compensatory plans or arrangements required to be filed
           as  exhibits  to this Form 10-K  pursuant  to Item 14(c) are noted by
           asterisk (*) in the Exhibit Index.

   (b) Reports on Form 8-K
       No reports on Form 8-K were filed  during the last  quarter of the period
covered by this report.

   (c) Exhibits
       The exhibits  listed on the Exhibit Index on pages 61 and 62 of this Form
10-K are filed as a part of this report.

   (d) Financial statement schedules
       No financial  statement  schedules  are required to be filed as a part of
this report.


<PAGE>


                                   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.

                                                      Trans Financial, Inc.
                                                             (Registrant)


                                      By:   /s/Vince A. Berta
                                               Vince A. Berta
                                          President  and Chief Executive Officer
                                          Date:   February 27, 1998


     Pursuant to the  requirements of the Securities  Exchange Act of 1934, this
report has been signed below on February 27, 1998, by the  following  persons on
behalf of the registrant and in the capacities indicated.


   (a) Principal Executive Officer:



     /s/Vince A. Berta
     Vince A. Berta
     President, Chief Executive Officer
       and Director



   (b) Principal Financial Officer:



     /s/ Edward R. Matthews
     Edward R. Matthews
     Executive Vice President
       and Chief Financial Officer



   (c) Principal Accounting Officer:



     /s/ Ronald B. Pigeon
     Ronald B. Pigeon
     Controller

<PAGE>



   (d) Directors:



     /s/ Mary D. Cohron
     Mary D. Cohron



     /s/ Floyd H. Ellis
     Floyd H. Ellis



     /s/ David B. Garvin
     David B. Garvin



     /s/ Wayne Gaunce
     Wayne Gaunce



     /s/ C. C. Howard Gray
     C.C. Howard Gray



     /s/ Charles A. Hardcastle
     Charles A. Hardcastle


     /s/ Carroll F. Knicely
     Carroll F. Knicely



     /s/ C. Cecil Martin
     C. Cecil Martin



     /s/ James D. Scott
     James D. Scott



     /s/ William B. Van Meter
     William B. Van Meter



     /s/ Thomas R. Wallingford
     Thomas R. Wallingford


<PAGE>



                                    Exhibits

   3(a)  Restated  Articles of Incorporation of the registrant are incorporated
           by reference to Exhibit 4(a) of the  registrant's report on Form 10-Q
           for the quarter ended March 31, 1995.

   3(b)    Articles of Amendment to the Restated  Articles of  Incorporation  of
           the registrant are  incorporated  by reference to Exhibit 4(b) of the
           registrant's  report on Form  10-Q for the  quarter  ended  March 31,
           1995.

   3(c)  Restated Bylaws of the registrant are incorporated by reference to
          Exhibit 4(b)of the registrant's report on Form 10-K for the year ended
          December 31, 1993.

   4(a)  Rights Agreement dated January 20, 1992 between Manufacturers
          Hanover Trust Company and Trans Financial, Inc.*

   4(b)    Form of Indenture  (including Form of Subordinated  Note) dated as of
           September 1, 1993,  between the registrant  and First  Tennessee Bank
           National  Association  as Trustee,  relating to the issuance of 7.25%
           Subordinated  Notes due 2003, is incorporated by reference to Exhibit
           4 of Registration  Statement on Form S-2 of the registrant  (File No.
           33-67686).

   4(c)  Subordinated  Note dated as of September 16, 1993, by Trans  Financial,
          Inc. is incorporated  by reference to Exhibit 1 to  Registration
          Statement on Form S-2 of the registrant (File No. 33-67686).

   10(a) Trans Financial, Inc. 1987 Stock  Option Plan is  incorporated  by
         reference to Exhibit 4(a) of Registration  Statement on Form S-8 of the
         registrant  (File No. 33-43046).*

   10(b) Trans Financial, Inc. 1990 Stock Option Plan.*

   10(c) Trans Financial, Inc. 1992 Stock Option Plan.*

   10(d) Trans  Financial,  Inc. 1994 Stock Option Plan is  incorporated  by
         reference to the  registrant's  Proxy Statement dated March 18, 1994,
         for the April 25, 1994 Annual Meeting of Shareholders.*

   10(e) Employment Agreement between Douglas M. Lester and Trans Financial,
          Inc. is incorporated by reference to Exhibit 10(e) of the registrant's
          Report on Form 10-K for the year ended December 31, 1995.*

   10(f) Description of the registrant's Performance Incentive Plan is
          incorporated by reference to Exhibit 10(f) of the  registrant's Report
          on Form 10-K for the year ended December 31, 1996.*

   10(g) Form of Deferred Compensation Agreement between registrant and Vince A.
           Berta, Barry D. Bray, James G. Campbell,  Tommy W. Cole, Roger E.
           Lundin,  Michael L. Norris, Jay B. Simmons and certain other officers
           of the registrant is  incorporated  by reference to Exhibit  10(g) of
           the registrant's  Report on Form 10-K for the year ended
           December 31, 1992.*

   10(h) Trans Financial, Inc. Dividend Reinvestment and Stock Purchase Plan is
         incorporated by reference to Registration  Statement on Form S-3 of the
         registrant dated May 15, 1991 (File No. 33-40606).

   10(i) Loan Agreement dated as of July 6, 1993 between First Tennessee Bank
          National Association and Trans  Financial,  Inc. is incorporated by
          reference to Exhibit 10(p) to the Registration Statement on Form S-2
          of the registrant (File No. 33-67686).

   10(j)   Distribution  Agreement dated September 28, 1995 between  Registrant,
           Trans  Financial   Bank,  N.A.  and  Donaldson,   Lufkin  &  Jenrette
           Securities  Corporation is incorporated by reference to Exhibit 10(a)
           of the  registrant's  report  on  Form  10-Q  for the  quarter  ended
           September 30, 1995.

   10(k) Fiscal and Paying Agency  Agreement  dated  September 28, 1995 between
         Trans Financial Bank, N.A. and First Fidelity Bank, N.A. is
         incorporated by reference to Exhibit 10(b) of the registrant's report
         on Form 10-Q for the quarter ended September 30, 1995.

   10(l) 1995 Executive Stock Option Plan is incorporated by reference to the
         registrant's  Proxy  Statement  dated March 9, 1995, for the
         April 24, 1995,  Annual Meeting of Shareholders.*

   10(m) Investment and Financial  Advisory  Services  Agreement  between Trans
         Financial Bank,  National  Association,  and Mastrapasqua & Associates,
         Inc. is incorporated by reference to Exhibit 10(n) of the registrant's
         Report on Form 10-K for the year ended December 31, 1996.*

   10(n) Form of Retention  Agreements between Registrant and Vince A. Berta,
         James G. Campbell,  Tommy W. Cole, Ronald Szejner,  and certain other
         officers is incorporated by reference to Exhibit 10(o) of the
         registrant's Report on Form 10-K for the year ended December 31, 1996.*

   10(o) 1996 Directors Stock  Compensation Plan is incorporated by reference to
         Exhibit  10(n) of the registrant's report on Form 10-Q for the quarter
         ended March 31, 1996.*

   10(p) 1996 Consolidated Stock Option Plan is incorporated by reference to the
         registrant's  Proxy Statement dated February 28, 1997, for the
         April 28, 1997 Annual Meeting of Shareholders.*

   10(q) Summary of 1997 Trans Financial  Leadership  Incentive Plan is
         incorporated  by reference to Exhibit 10 of the  registrant's report on
         Form 10-Q for the quarter ended June 30, 1997.*

   10(r) Amendment to 1995 Executive  Stock Option Plan is incorporated by
         reference to Exhibit 10(a) of the registrant's  report on Form 10-Q for
         the quarter ended September 30, 1997.*

   10(s) Agreement dated September 30, 1997, between registrant and executive
         officer is incorporated by reference to Exhibit 10(b) of the
         registrant's  report on Form 10-Q for the quarter ended
         September 30, 1997.*

   10(t) First Amendment to Directors' Stock Compensation Plan adopted
         December 15, 1997.*

   11  Statement Regarding Computation of Per Share Earnings

   21  List of Subsidiaries of the Registrant

   23  Consent of Independent Auditors

   27  Financial Data Schedule (for SEC use only)


   * Denotes a management  contract or  compensatory  plan or arrangement of the
registrant required to be filed as an exhibit pursuant to Item 601 (10) (iii) of
Regulation S-K.