UNITED STATESSECURITIES AND EXCHANGE
COMMISSIONWashington, DC 20549

# FORM 10-Q

[X] QUARTERLY REPORT
PURSUANT TO SECTION 13 OR 15(d)OF THE SECURITIES
EXCHANGE ACT OF 1934

# For the quarterly
period ended June 30, 2006

or

[ ] Transition Report
Pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934

For the transition
period from

____________ to
____________

Commission File Number
0-14412

Farmers Capital Bank
Corporation (Exact name of registrant as
specified in its charter)

|                                                               |  |                                        
|-------------------------------------------------------------- |  | ---------------------------------------
|Kentucky                                                       |  | 61-1017851                             
|                                                              
|(State or other jurisdiction of incorporation or organization) |  | (I.R.S. Employer Identification Number)

|                                         |           
|---------------------------------------- | ----------
|P.O. Box 309, 202 West Main Street       |           
|Frankfort, Kentucky                      | 40602     
|                                        
|(Address of principal executive offices) | (Zip Code)

Registrants
telephone number, including area code: (502) 227-1668

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 whether the
registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer.
See definition of accelerated filer and large accelerated filer in Rule 12b-2
of the Exchange Act. (Check one):

Large
accelerated filer ___   Accelerated filer |X|   Non-accelerated filer ___

Indicate by check mark whether the
registrant is a shell company (as defined in Rule 12b-2 of the Act)

Yes ___   No |X|

Indicate the number of shares
outstanding of each of the issuers classes of common stock, as of the latest
practicable date.

Common stock, par value
$.125 per share7,391,417 shares
outstanding at August 4, 2006

---

TABLE OF CONTENTS

|                                                                                               | 
|---------------------------------------------------------------------------------------------- | 
|PART I - FINANCIAL INFORMATION                                                                 | 
|Item 1. Financial Statements                                                                   | 
|Unaudited Consolidated Balance Sheets                                                          | 
|Unaudited Consolidated Statements of Income                                                    | 
|Unaudited Consolidated Statements of Comprehensive Income                                      | 
|Unaudited Consolidated Statements of Cash Flows                                                | 
|Unaudited Consolidated Statements of Changes in Shareholders' Equity                           | 
|Notes to Unaudited Consolidated Financial Statements                                           | 
|Item 2.  Management's Discussion and Analysis of Financial Condition and Results of Operations | 
|Item 3.  Quantitative and Qualitative Disclosures About Market Risk                            | 
|Item 4.  Controls and Procedures                                                               | 
|                                                                                               | 
|PART II - OTHER  INFORMATION                                                                   | 
|Item 1.  Legal Proceedings                                                                     | 
|Item 2.  Unregistered Sales of Equity Securities and Use of Proceeds                           | 
|Item 4.  Submission of Matters to a Vote of Security Holders                                   | 
|Item 6.  Exhibits                                                                              | 
|SIGNATURES                                                                                     | 

---

# PART I  FINANCIAL INFORMATIONItem 1. Financial Statements

Unaudited Consolidated Balance Sheets

|                                                                          
|--------------------------------------------------------------------------
|
|Assets                                                                    
|Cash and cash equivalents:                                                
|Cash and due from banks                                                   
|Interest bearing deposits in other banks                                  
|Federal funds sold and securities purchased under agreements to resell    
|                                                                          
|Total cash and cash equivalents                                           
|                                                                          
|Investment securities:                                                    
|Available for sale, amortized cost of $273,811 (2006) and $317,759 (2005) 
|Held to maturity, fair value of $10,841 (2006) and $13,815 (2005)         
|                                                                          
|Total investment securities                                               
|                                                                          
|Loans, net of unearned income                                             
|Allowance for loan losses                                                 
|                                                                          
|Loans, net                                                                
|                                                                          
|Premises and equipment, net                                               
|Company-owned life insurance                                              
|Goodwill                                                                  
|Other intangibles, net                                                    
|Assets of discontinued operations                                         
|Other assets                                                              
|                                                                          
|Total assets                                                              
|                                                                          
|Liabilities                                                               
|Deposits:                                                                 
|Noninterest bearing                                                       
|Interest bearing                                                          
|                                                                          
|Total deposits                                                            
|                                                                          
|Federal funds purchased and securities sold under agreements to repurchase
|Other short-term borrowings                                               
|Subordinated notes payable to unconsolidated trusts                       
|Long-term debt                                                            
|Dividends payable                                                         
|Accrued purchase price-Citizens Bancorp, Inc.                             
|Liabilities of discontinued operations                                    
|Other liabilities                                                         
|                                                                          
|Total liabilities                                                         
|                                                                          
|Shareholders' Equity                                                      
|Preferred stock, no par value; 1,000,000 shares authorized; none issued   
|Common stock, par value $.125 per share                                   
|9,608,000 shares authorized;  8,869,605 and 8,856,249                     
|shares issued at June 30, 2006 and December 31, 2005, respectively        
|Capital surplus                                                           
|Retained earnings                                                         
|Treasury stock, at cost;  1,490,351 and 1,467,351 shares                  
|at June 30, 2006 and December 31, 2005, respectively                      
|Accumulated other comprehensive income                                    
|                                                                          
|Total shareholders' equity                                                
|                                                                          
|Total liabilities and shareholders' equity                                
|                                                                          
|                                                                          

See accompanying notes to unaudited
consolidated financial statements.

---

Unaudited Consolidated Statements of
Income

|                                                                                      
|--------------------------------------------------------------------------------------
|
|
|Interest Income                                                                       
|Interest and fees on loans                                                            
|Interest on investment securities:                                                    
|Taxable                                                                               
|Nontaxable                                                                            
|Interest on deposits in other banks                                                   
|Interest of federal funds sold and securities purchased under agreements to resell    
|                                                                                      
|Total interest income                                                                 
|                                                                                      
|Interest Expense                                                                      
|Interest on deposits                                                                  
|Interest on federal funds purchased and securities sold under agreements to repurchase
|Interest on subordinated notes payable to unconsolidated trusts                       
|Interest on other borrowed funds                                                      
|                                                                                      
|Total interest expense                                                                
|                                                                                      
|Net interest income                                                                   
|                                                                                      
|Provision for loan losses                                                             
|                                                                                      
|Net interest income after provision for loan losses                                   
|                                                                                      
|Noninterest Income                                                                    
|Service charges and fees on deposits                                                  
|Allotment processing fees                                                             
|Other service charges, commissions, and fees                                          
|Data processing income                                                                
|Trust income                                                                          
|Investment securities losses, net                                                     
|Gains on sale of mortgage loans, net                                                  
|Income from company-owned life insurance                                              
|Other                                                                                 
|                                                                                      
|Total noninterest income                                                              
|                                                                                      
|Noninterest Expense                                                                   
|Salaries and employee benefits                                                        
|Occupancy expenses, net                                                               
|Equipment expenses                                                                    
|Data processing and communications expense                                            
|Bank franchise tax                                                                    
|Correspondent bank fees                                                               
|Amortization of intangibles                                                           
|Other                                                                                 
|                                                                                      
|Total noninterest expense                                                             
|                                                                                      
|Income from continuing operations before income tax expense                           
|Income tax expense from continuing operations                                         
|                                                                                      
|Income from continuing operations                                                     
|                                                                                      
|Income from discontinued operations before income tax expense                         
|Income tax expense from discontinued operations                                       
|                                                                                      
|Income from discontinued operations                                                   
|                                                                                      
|Net Income                                                                            
|                                                                                      
|Net Income Per Common Share                                                           
|Income from continuing operations - basic                                             
|Income from discontinued operations - basic                                           
|                                                                                      
|Net income per common share - basic                                                   
|                                                                                      
|Income from continuing operations - diluted                                           
|Income from discontinued operations - diluted                                         
|                                                                                      
|Net income per common share - diluted                                                 
|                                                                                      
|Weighted Average Shares Outstanding                                                   
|Basic                                                                                 
|Diluted                                                                               
|                                                                                      

See accompanying notes to unaudited consolidated
financial statements.

---

Unaudited Consolidated Statements of
Comprehensive Income

|                                                                              
|------------------------------------------------------------------------------
|
|
|Net Income                                                                    
|Other comprehensive income:                                                   
|Unrealized holding (loss) gain on available for sale securities arising during
|the period, net of tax of $813, $1,187, $1,424, and $114, respectively        
|Reclassification adjustment for prior period unrealized loss recognized during
|current period, net of tax of $58, $22, $22, and $3, respectively             
|                                                                              
|Other comprehensive (loss) income                                             
|                                                                              
|Comprehensive Income                                                          
|                                                                              

See accompanying notes to unaudited
consolidated financial statements.

---

Unaudited Consolidated Statements of
Cash Flows

|                                                                                             
|---------------------------------------------------------------------------------------------
|
|Cash Flows from Operating Activities                                                         
|Net income                                                                                   
|Adjustments to reconcile net income to net cash provided by operating activities:            
|Depreciation and amortization                                                                
|Net amortization of investment security premiums and (discounts):                            
|Available for sale                                                                           
|Held to maturity                                                                             
|Provision for loan losses                                                                    
|Noncash compensation expense                                                                 
|Mortgage loans originated for sale                                                           
|Proceeds from sale of mortgage loans                                                         
|Deferred income tax expense (benefit)                                                        
|Gains on sale of mortgage loans, net                                                         
|Gain on sale of credit card portfolio                                                        
|Gains on sale of premises and equipment, net                                                 
|Loss on sale of available for sale investment securities, net                                
|Decrease (increase) in accrued interest receivable                                           
|Income from company-owned life insurance                                                     
|Decrease (increase) in other assets                                                          
|Increase in accrued interest payable                                                         
|(Decrease) increase in other liabilities                                                     
|Net cash provided by discontinued operating activities                                       
|                                                                                             
|Net cash provided by operating activities                                                    
|                                                                                             
|Cash Flows from Investing Activities                                                         
|Proceeds from maturities and calls of investment securities:                                 
|Available for sale                                                                           
|Held to maturity                                                                             
|Proceeds from sale of available for sale investment securities                               
|Purchase of available for sale investment securities                                         
|Loans originated for investment, net of principal collected                                  
|Payment of prior year accrued purchase price-Citizens Bancorp, Inc.                          
|Purchase price refinements-Citizens Bancorp, Inc.                                            
|Additions to mortgage servicing rights, net                                                  
|Purchase of premises and equipment                                                           
|Proceeds from sale of equipment                                                              
|Net cash provided by discontinued investing activities                                       
|                                                                                             
|Net cash (used in) provided by investing activities                                          
|                                                                                             
|Cash Flows from Financing Activities                                                         
|Net increase (decrease) in deposits                                                          
|Net increase in securities sold under agreements to repurchase                               
|Proceeds from long-term debt                                                                 
|Repayments of long-term debt                                                                 
|Net decrease in other short-term borrowings                                                  
|Dividends paid                                                                               
|Purchase of common stock                                                                     
|Shares issued under Employee Stock Purchase Plan                                             
|Stock options exercised                                                                      
|Net cash used in discontinued financing activites                                            
|                                                                                             
|Net cash provided by financing activities                                                    
|                                                                                             
|Net increase in cash and cash equivalents                                                    
|                                                                                             
|(Less) plus: net (increase) decrease  in cash and cash equivalents of discontinued operations
|                                                                                             
|Net (decrease) increase in cash and cash equivalents from continuing operations              
|                                                                                             
|Cash and cash equivalents from continuing activities at beginning of year                    
|                                                                                             
|Cash and cash equivalents from continuing activities at end of period                        
|                                                                                             
|Supplemental Disclosures                                                                     
|Cash paid during the period for:                                                             
|Interest                                                                                     
|Income taxes                                                                                 
|Transfers from loans to repossessed assets                                                   
|Cash dividend declared and unpaid                                                            
|                                                                                             

See accompanying notes to unaudited consolidated
financial statements.

---

Unaudited Consolidated Statements of
Changes in Shareholders' Equity

|                                       
|---------------------------------------
|
|
|
|
|Balance at January 1, 2006             
|Net income                             
|Other comprehensive income             
|Cash dividends declared, $.66 per share
|Purchase of common stock               
|Stock options exercised, including     
|related tax benefits                   
|Shares issued pursuant to Employee     
|Stock Purchase plan                    
|Noncash compensation expense attributed
|to stock option & Employee Stock       
|Purchase Plan grants                   
|                                       
|Balance at June 30, 2006               
|                                       
|                                       
|                                       
|Balance at January 1, 2005             
|Net income                             
|Other comprehensive income             
|Cash dividends declared, $.66 per share
|Purchase of common stock               
|Stock options exercised, including     
|related tax benefits                   
|Shares issued pursuant to Employee     
|Stock Purchase plan                    
|                                       
|Balance at June 30, 2005               
|                                       

See accompanying notes to unaudited consolidated financial statements.

---

# Notes to Unaudited
Consolidated Financial Statements

# 1. Basis of Presentation
and Nature of Operations

The consolidated financial statements
include the accounts of Farmers Capital Bank Corporation (the Company), a
financial holding company, and its bank and nonbank subsidiaries. Bank subsidiaries
include Farmers Bank & Capital Trust Co. (Farmers Bank) in Frankfort, KY
and its wholly-owned subsidiaries Leasing One Corporation (Leasing One) and
Farmers Capital Insurance Corporation (Farmers Insurance). Leasing One is a
commercial leasing company in Frankfort, KY and Farmers Insurance is an insurance agency
in Frankfort, KY; Farmers Bank and Trust Company in Georgetown, KY (Farmers
Georgetown) and its wholly-owned subsidiary Pro Mortgage Partners, LLC (Pro
Mortgage), a mortgage brokerage company established in May 2004 offering a variety
of fixed rate loan products; First Citizens Bank in Elizabethtown, KY; United Bank &
Trust Co. in Versailles, KY; Lawrenceburg National Bank in Harrodsburg, KY; Citizens Bank
of Northern Kentucky, Inc. in Newport, KY (Citizens Northern); and Kentucky
Banking Centers, Inc. in Glasgow, KY (KBC). The accounts of KBC have been
presented separately in the financial statements as discontinued operations as discussed
in Note 8.

The Company has three active nonbank
subsidiaries, FCB Services, Inc. (FCB Services), Kentucky General Holdings,
LLC (Kentucky General), and FFKT Insurance Services, Inc. (FFKT
Insurance). FCB Services is a data processing subsidiary located in Frankfort, KY,
which provides services to the Companys banks as well as unaffiliated banks.
Kentucky General holds a 50% voting interest in KHL Holdings, LLC, which is the parent
company of Kentucky Home Life Insurance Company. FFKT Insurance is a captive property and
casualty insurance company insuring primarily deductible exposures and uncovered liability
related to properties of the Company. All significant intercompany transactions and
balances are eliminated in consolidation with the exception of KBC, which is presented as
discontinued operations.

Including KBC, the Company provides
financial services through its 34 locations in 23 communities throughout Central and
Northern Kentucky to individual, business, agriculture, government, and educational
customers. Its primary deposit products are checking, savings, and term certificate
accounts. Its primary lending products are residential mortgage, commercial lending and
leasing, and installment loans. Substantially all loans and leases are secured by specific
items of collateral including business assets, consumer assets, and commercial and
residential real estate. Commercial loans and leases are expected to be repaid from cash
flow from operations of businesses. Farmers Bank has served as the general depository for
the Commonwealth of Kentucky for over 70 years and also provides investment and other
services to the Commonwealth. Other services include, but are not limited to, cash
management services, issuing letters of credit, safe deposit box rental, and providing
funds transfer services. Other financial instruments, which potentially represent
concentrations of credit risk, include deposit accounts in other financial institutions
and federal funds sold.

The preparation of financial
statements in conformity with accounting principles generally accepted in the United
States of America requires management to make estimates and assumptions that affect the
reported amounts of assets and liabilities and disclosure of contingent assets and
liabilities as of the date of the financial statements and the reported amounts of
revenues and expenses during the reporting period. Estimates used in the preparation of
the financial statements are based on various factors including the current interest rate
environment and the general strength of the local economy. Changes in the overall interest
rate environment can significantly affect the Companys net interest income and the
value of its recorded assets and liabilities. Actual results could differ from those
estimates used in the preparation of the financial statements.

The financial information presented
as of any date other than December 31 has been prepared from the books and records without
audit. The accompanying consolidated financial statements have been prepared in accordance
with the instructions to Form 10-Q and Rule 10-01 of Regulation S-X and do not include all
of the information and the footnotes required by accounting principles generally accepted
in the United States of America for complete statements. In the opinion of management, all
adjustments, consisting of normal recurring adjustments, necessary for a fair presentation
of such financial statements, have been included. The results of operations for the
interim periods are not necessarily indicative of the results to be expected for the full
year.

For further information, refer to the
consolidated financial statements and footnotes thereto included in the Companys
Annual Report on Form 10-K for the year ended December 31, 2005.

# 2. Reclassifications

Certain reclassifications have been
made to the consolidated financial statements of prior periods to conform to the current
period presentation. These reclassifications do not affect net income or total
shareholders equity as previously reported.

# 3. Recently Issued
Accounting Standards

In December 2004, the Financial
Accounting Standards Board (FASB) issued Statement of Financial Accounting
Standards (SFAS) No. 123 (revised 2004), Share-Based
Payment, that requires the cost resulting from stock options be measured at fair
value and recognized in earnings. This Statement replaces SFAS No. 123,
Accounting for Stock-Based Compensation and supersedes Accounting
Principles Board (APB) Opinion No. 25, Accounting for Stock
Issued to Employees, which permitted the recognition of compensation expense
using the intrinsic value method. The Companys Employee Stock Purchase Plan
(ESPP) is considered an option plan under SFAS No. 123(R). The Company adopted
SFAS No. 123(R) on January 1, 2006 using the modified-prospective
application. Under the modified-prospective application, compensation costs for unvested
awards will be based on the grant-date fair value as calculated for pro forma disclosures
under SFAS No. 123, as originally issued. All new awards and awards that are modified,
repurchased, or cancelled after the date of adoption will be accounted for under the
provisions of SFAS No. 123(R). As a result of adopting SFAS No. 123(R), the Companys
income before income taxes for the three months ended June 30, 2006 includes stock option
compensation cost of $42 thousand. Prior periods have not been revised. See Note 5,
Stock-Based Compensation, for additional information.

In November 2005, the FASB issued
FASB Staff Position (FSP) No. FAS 123(R)-3, Transition Election to
Accounting for the Tax Effects of Share-Based Payment Awards. This FSP provides
a simplified method to calculate the Companys hypothetical additional paid-in
capital (APIC) pool for the beginning balance of excess tax benefits and the
method of determining the subsequent impact on the pool of option awards that are
outstanding and fully or partially vested upon adoption of SFAS 123(R). This FSP allows
companies up to one year from the later of the adoption date of SFAS 123(R) or November
10, 2005 to evaluate the available transition alternatives and make a one-time election.
The Company is currently evaluating the impact of the new method provided by this
guidance.

In February 2006, the FASB issued
SFAS No. 155, Accounting for Certain Hybrid Financial Instruments, an
amendment of SFAS No. 133 and SFAS No. 140. This statement permits fair value
re-measurement for any hybrid financial instrument that contains an embedded derivative
that otherwise would require bifurcation. It establishes a requirement to evaluate
interests in securitized financial assets to identify interests that are freestanding
derivatives or that are hybrid financial instruments that contain an embedded derivative
requiring bifurcation. In addition, SFAS 155 clarifies which interest-only strips and
principal-only strips are not subject to the requirements of Statement 133. It also
clarifies that concentrations of credit risk in the form of subordination are not embedded
derivatives. SFAS 155 amends Statement 140 to eliminate the prohibition on a qualifying
special-purpose entity from holding a derivative financial instrument that pertains to a
beneficial interest other than another derivative financial instrument. This Statement is
effective for all financial instruments acquired or issued after the beginning of an
entitys first fiscal year that begins after September 15, 2006. The Company is
evaluating the impact, if any, of the adoption of this Statement on its financial results.

In March 2006, the FASB issued SFAS
No. 156, Accounting for Servicing of Financial Assets. This Statement
amends SFAS No. 140, Accounting for Transfers and Servicing of Financial Assets
and Extinguishments of Liabilities, and requires that all separately recognized
servicing assets and servicing liabilities be initially measured at fair value, if
practicable and permits the entities to elect either fair value measurement with changes
in fair value reflected in earnings or the amortization and impairment requirements of
SFAS No. 140 for subsequent measurement. The subsequent measurement of separately
recognized servicing assets and servicing liabilities at fair value eliminates the
necessity for entities that manage the risks inherent in servicing assets and servicing
liabilities with derivatives to qualify for hedge accounting treatment and eliminates the
characterization of declines in fair value as impairments or direct write-downs. This
Statement is effective as of the beginning of an entitys first fiscal year that
begins after September 15, 2006. The Company is evaluating the impact, if any, of the
adoption of this Statement on its financial results. In June 2006, the FASB issued FASB
Interpretation No. (FIN) 48 Accounting for Uncertainty in Income
Taxes  an interpretation of FASB Statement No. 109", to clarify certain
aspects of accounting for uncertain tax positions, including issues related to the
recognition and measurement of those tax positions taken or expected to be taken in a tax
return. FIN 48 also provides guidance on derecognition, classification, interest and
penalties, accounting in interim periods, disclosure, and transition. This interpretation
is effective for fiscal years beginning after December 15, 2006. The Company is in the
process of evaluating the impact of the adoption of this interpretation on the
Companys results of operations and financial condition.

# 4. Net Income Per Common
Share

Basic net income per common share is
determined by dividing net income by the weighted average total number of shares of common
stock outstanding. Diluted net income per common share is determined by dividing net
income by the total weighted average number of shares of common stock outstanding, plus
the total weighted average number of shares that would be issued upon exercise of dilutive
stock options assuming proceeds are used to repurchase shares pursuant to the treasury
stock method. Net income per common share computations were as follows at June 30, 2006
and 2005.

|                                                      
|------------------------------------------------------
|
|
|
|Net income, basic and diluted                         
|                                                      
|                                                      
|Average shares outstanding                            
|Effect of dilutive stock options                      
|                                                      
|Average diluted shares outstanding                    
|                                                      
|Net income per share, basic                           
|Net income per share, diluted                         
|                                                      
|                                                      
|Continuing Operations                                 
|                                                      
|Income from continuing operations, basic and diluted  
|                                                      
|                                                      
|Average shares outstanding                            
|Effect of dilutive stock options                      
|                                                      
|Average diluted shares outstanding                    
|                                                      
|Income per share from continuing operations, basic    
|Income per share from continuing operations, diluted  
|                                                      
|                                                      
|Discontinued Operations                               
|                                                      
|Income from discontinued operations, basic and diluted
|                                                      
|                                                      
|Average shares outstanding                            
|Effect of dilutive stock options                      
|                                                      
|Average diluted shares outstanding                    
|                                                      
|Income per share from discontinued operations, basic  
|Income per share from discontinued operations, diluted
|                                                      

# 5. Stock-Based
Compensation

During 1997, the Companys Board
of Directors and shareholders approved a nonqualified stock option plan (the
Plan) that has periodically provided for the granting of stock options to key
employees and officers of the Company. All stock options are awarded at a price equal to
the fair market value of the Companys common stock at the date the options are
granted and expire ten years from the date of the grant. Total options granted were
450,000, 54,000, and 40,049 in the years 1997, 2000, and 2004, respectively. As of March
31, 2006 the Plan allows for additional option grants of up to 5,896 shares.

Prior to January 1, 2006, the Company
accounted for its Plan under the recognition and measurement provisions of APB Opinion No.
25 and related interpretations as allowed by SFAS No. 123. Effective January 1, 2006, the
Company adopted the fair value recognition provisions of SFAS No. 123(R) applying the
modified-prospective application. Under the modified-prospective application, prior year
amounts are not restated. The following table presents the effect on net income and
earnings per share prior to adoption as if expense was measured using the fair value
recognition provisions of SFAS No. 123(R).

|                                                    
|----------------------------------------------------
|
|
|Net Income                                          
|As reported                                         
|Less:  Stock-based compensation expense determined  
|under fair value based method for all awards,       
|net of related tax effects                          
|                                                    
|Proforma                                            
|                                                    
|Net Income Per Common Share                         
|Basic, as reported                                  
|Basic, proforma                                     
|                                                    
|Diluted, as reported                                
|Diluted, proforma                                   
|                                                    
|Income From Continuing Operations                   
|As reported                                         
|Less:  Stock-based compensation expense determined  
|under fair value based method for all awards,       
|net of related tax effects                          
|                                                    
|Proforma                                            
|                                                    
|Income Per Common Share From Continuing Operations  
|Basic, as reported                                  
|Basic, proforma                                     
|                                                    
|Diluted, as reported                                
|Diluted, proforma                                   
|                                                    
|Income From Discontinued Operations                 
|As reported                                         
|Less:  Stock-based compensation expense determined  
|under fair value based method for all awards,       
|net of related tax effects                          
|                                                    
|Proforma                                            
|                                                    
|Income Per Common Share From Discontinued Operations
|Basic, as reported                                  
|Basic, proforma                                     
|                                                    
|Diluted, as reported                                
|Diluted, proforma                                   
|                                                    

On March 16, 2005 the Compensation
Committee of the Companys Board of Directors acted to approve an immediate and full
acceleration of the vesting on options granted during 2004. As a result, options to
purchase 40,049 unvested and out-of-the-money shares of the Companys
common stock became immediately exercisable as of March 16, 2005. The exercise price of
these options remains unchanged at $34.80 per share. The closing price of the
Companys shares was $34.50 on March 15, 2005. None of the accelerated options are
granted to directors or executive officers of the Company. The purpose of the accelerated
vesting was to allow the Company to reduce anticipated future compensation expense
attributed to its stock option grants pursuant to SFAS No. 123(R).

Option activity under the Plan for
the three and six-month periods ended June 30, 2006 is presented in the following table.

|                                  
|----------------------------------
|
|
|
|
|
|Outstanding at beginning of period
|Granted                           
|Forfeited                         
|Exercised                         
|                                  
|Outstanding at June 30            
|                                  
|                                  
|                                  
|Options exercisable at June 30    
|                                  

Options outstanding at June 30, 2006
were as follows.

|                            
|----------------------------
|
|
|$24.50                      
|$29.75                      
|$34.80                      
|                            
|Outstanding at June 30, 2006
|                            

The aggregate intrinsic value for
options outstanding and options exercisable at June 30, 2006 was $966,000 and $945,000,
respectively. There was $68,000 in total compensation cost related to unvested options not
recognized at June 30, 2006, with a weighted-average period of 7 months over which the
cost is expected to be recognized. There were no modifications or cash paid to settle
stock option awards during the six months ended June 30, 2006.

The following table presents further
information regarding the Companys stock option Plan for the periods indicated.

|                                                         
|---------------------------------------------------------
|
|
|
|Compensation expense recognized for stock options        
|Related tax benefit recognized                           
|Weighted average grant date fair value of options granted
|Total intrinsic value of options exercised               
|Total fair value of options vested                       
|Cash received from options exercised                     
|                                                         

The fair value of options awarded is estimated
on the date of the grant using the Black-Scholes option pricing model. The assumptions
used in the valuations are summarized in the table below. The assumptions related to the
1997 Grant are not included since all of these options were fully vested during 2004.

|                        
|------------------------
|
|
|Dividend yield          
|Expected volatility     
|Risk-free interest rate 
|Expected life (in years)
|                        
|                        
|Fair value              
|                        

# 6. Employee Stock
Purchase Plan

The Companys 2004 ESPP was
approved by its shareholders at the Companys 2004 annual meeting. The purpose of the
ESPP is to provide a means by which eligible employees may purchase, at a discount, shares
of common stock of the Company through payroll withholding. The purchase price of the
shares is equal to 85% of their fair market value on specified dates as defined in the
plan. The ESPP was effective July 1, 2004. There were 4,213 and 3,420 shares issued under
the plan during the first six months of 2006 and 2005, respectively. Compensation cost
related to the ESPP included in the proforma net income disclosure in the table in Note 5
above was $7,000 and $14,300 for the three and six-month periods ended June 30, 2005. The
Company recorded $13,000 and $26,000, respectively, in compensation expense related to its
ESPP during the three and six months ended June 30, 2006.

The fair value of ESPP shares awarded
is estimated on the grant date using the Black-Scholes option pricing model. The
assumptions used to determine compensation expense under SFAS 123(R) are summarized in the
table below. The offering period, purchase period, and vesting of options under the ESPP
occur during each calendar quarter; therefore, the amounts displayed in the table for the
six-month periods represent the average amounts for the first and second quarters for the
year indicated.

|                        
|------------------------
|
|
|
|Dividend yield          
|Expected volatility     
|Risk-free interest rate 
|Expected life (in years)
|                        
|                        
|Fair value              
|                        
|                        

7. Pending Business Combination  Citizens National Bancshares, Inc.

On April 12, 2006, the Company
announced the signing of an agreement and plan of merger with Citizens National
Bancshares, Inc. (Citizens National) whereby Citizens National will be
acquired in a cash and stock transaction valued at approximately $30.0 million.
Approximately 50% of the purchase price will be paid in cash and the remaining amount will
be in the form of newly issued shares of the Companys common stock. The Company
intends to borrow additional funds for the cash portion of the purchase price.

Citizens National is a one-bank
holding company headquartered in Nicholasville, Kentucky and the parent corporation of
Citizens National Bank of Jessamine County (Citizens Jessamine). Pending the
required approvals from the appropriate regulatory authorities and subject to the
satisfaction of the conditions set forth in the definitive agreement, this transaction is
expected to close during the third quarter of 2006. The operating results of Citizens
National are not included herein. Citizens Jessamine operates four offices located in
Jessamine County, Kentucky. As of June 30, 2006, Citizens Jessamine had total assets of
$153 million, total loans (net of unearned income) of $121 million, total deposits of $135
million, and shareholders equity of $13.7 million.

# 8. Discontinued
Operations

In June 2006, the Company announced
that it had entered into a definitive agreement to sell KBC, its wholly-owned bank
subsidiary in Glasgow, Kentucky, in a cash transaction valued at $20.0 million. The
Company anticipates it will record a pretax gain on this transaction of of approximately
$10.0 million, incur $3.5 million in federal income tax liability, and realize a net gain
of $6.5 million. This transaction is expected to close during the fourth quarter of 2006.

In accordance with SFAS No. 144,
Accounting for the Impairment or Disposal of Long-Lived Assets, the
financial position and results of operations of KBC are removed from the detail line items
of the Companys financial statements and presented separately as discontinued
operations. Following are condensed balance sheets and statements of income for the
periods indicated.

Condensed Balance Sheets

|                                          
|------------------------------------------
|
|Assets                                    
|Cash and cash equivalents                 
|Investment securities                     
|Loans, net                                
|Premises and equipment, net               
|Other assets                              
|                                          
|Total assets                              
|                                          
|Liabilities                               
|Deposits                                  
|Other borrowed funds                      
|Other liabilities                         
|                                          
|Total liabilities                         
|                                          
|Shareholders' equity                      
|                                          
|Total liabilities and shareholders' equity
|                                          

Condensed Statements of Income

|                         
|-------------------------
|
|
|
|Interest income          
|Interest expense         
|                         
|Net interest income      
|                         
|Provision for loan losses
|Noninterest income       
|Noninterest expense      
|Income tax expense       
|                         
|Net income               
|                         

---

Item 2. Management's Discussion and
Analysis of Financial Condition and Results of Operations

# FORWARD-LOOKING
STATEMENTS

This report 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 subsidiaries operate); competition for the
Companys customers from other providers of financial services; government
legislation and regulation (which changes from time to time and over which the Company has
no control); changes in interest rates; material unforeseen changes in the liquidity,
results of operations, or financial condition of the Companys customers; 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 expressly disclaims any intent or obligation to update any
forward-looking statements after the date hereof to conform such statements to actual
results or to changes in our opinions or expectations.

# DISCONTINUED OPERATIONS

In June 2006, the Company announced
that it had entered into a definitive agreement to sell its wholly-owned subsidiary,
Kentucky Banking Centers, Inc. (KBC), based in Glasgow, Kentucky. All prior
period results included herein have been reclassified to conform to the current
presentation which displays the operating results of KBC as discontinued operations. These
reclassifications had no effect on net income or shareholders equity. Unless
otherwise noted, this Managements Discussion and Analysis of Financial Condition and
Results of Operations relate only to the Companys continuing operations.

# RESULTS OF OPERATIONS

# Second Quarter 2006 vs. Second Quarter 2005

The Company reported net income of
$4.3 million, an increase of $418 thousand or 10.8% compared to $3.9 million for the same
period in 2005. Basic and diluted net income per share were $.58 for the current three
months, an increase of $.01 or 1.8% compared to $.57 in the same period a year ago.

Income from continuing operations was
$4.0 million, an increase of $357 thousand or 9.9% compared to $3.6 million for the same
period in 2005. Basic and diluted income per share from continuing operations were $.53,
for the current three months, unchanged compared to the same period a year ago.

The percentage increase in net income
in the comparable periods is not proportional to the percentage change in per share
earnings due to the effect of an additional 584,000 shares issued in connection with the
acquisition of Citizens Bancorp, Inc. (Citizens Bancorp). The operating
results related to Citizens Bancorp, acquired on December 6, 2005, generally increased
reported income and expense line items in the current three-month period compared to a
year ago since there are no operating results attributed to Citizens Bancorp in the
comparable period. Net loans and deposits acquired from Citizens Bancorp on the date of
purchase were $149.0 million and $173.0 million, respectively.

During April the Company announced an
agreement and plan of merger to acquire Citizens National Bancshares, Inc. (Citizens
National), the parent company of Citizens National Bank of Jessamine County, a
$153.0 million asset bank operating four locations in Jessamine County, Kentucky. The
operating results of Citizens National are not included herein. This transaction is
expected to close during the fourth quarter of 2006.

The increase in net income for the
three months ended June 30, 2006 is primarily related to an increase in net interest
income, which was fueled by the Citizens Bancorp acquisition. Net interest income was
$12.4 million in the current three-month period ended June 30, 2006. This represents an
increase of $2.2 million or 21.8% compared to the same period a year ago. The increase in
net interest income is primarily due to higher interest on loans of $5.6 million or 43.7%,
partially offset by $2.9 million or 61.8% higher interest expense on deposits. The
Citizens Bancorp acquisition accounted for $1.8 million of the increase in net interest
income, including $2.9 million higher interest from loans partially offset by $1.3 million
higher interest on deposits.

The provision for loans losses was
unchanged in the three-month comparison. The negative provision for loan losses of $89
thousand in the current three-month period is reflective of the trend of improved credit
quality of the Companys loan portfolio. This improvement is attributed to lower
delinquent and classified loans from year-end 2005, lower annualized net charge-offs as a
percentage of average loans outstanding, and lower historical loss ratios.

Noninterest income was $5.1 million
in the current quarter, relatively unchanged in the quarter to quarter comparison. The
Company recorded a loss of $195 thousand on the sale of available for sale investment
securities during the current quarter that negatively impacted noninterest income.
Non-deposit service charges, commissions, and fees rose $135 thousand or 23.8% due mainly
to the Citizens Bancorp acquisition. Trust department income increased $38 thousand or
8.9%. Income from company-owned life insurance and allotment processing fees was
relatively unchanged in the comparison. Other significant categories include a decline in
data processing fees of $39 thousand or 7.8% and lower gains on sale of mortgage loans of
$45 thousand or 24.5%.

Noninterest expenses increased $2.0
million or 19.2% for the current three-month period compared to the same period a year
earlier. The increase in noninterest expenses occurred across a broad range of line items
and is generally attributed to the Citizens Bancorp acquisition. The most significant
increase was salaries and employee benefits, which grew $982 thousand or 17.3% as the
average number of full time equivalent employees rose to 550 from 478 for the three-month
comparison. Combined other noninterest expenses increased $1.1 million or 21.5% and
occurred across a broad range of categories. These increases are generally attributed to
the purchase of Citizens Bancorp. The effective income tax rate declined to 20.3% from
24.3% in the three-month comparison.

The return on average assets
(ROA) was 1.02% for the current quarter of 2006, a decrease of 8 basis points
compared to 1.10% reported for the same period of 2005. The return on average equity
(ROE) was 10.27% for the current quarter of 2006, a decrease of 66 basis
points compared to 10.93% for the same period of 2005. The decrease in ROE is attributed
to a combination of the lower ROA partially offset by an 11 basis point increase in
financial leverage to 10.03% from 9.92%. Financial leverage represents the degree in which
borrowed funds, as opposed to equity, are used in the funding of assets.

Income from discontinued operations
was $349 thousand for the three-month period ended June 30, 2006. This represents an
increase of $61 thousand or 21.2% in the comparable period. As previously disclosed, the
Company has entered into a definitive agreement to sell its KBC subsidiary and expects to
close this transaction during the fourth quarter of 2006.

# Net Interest Income

The trend of the general interest
rate environment in the current three months compared to a year earlier has been upward
primarily as a result of short-term interest rate increases by the Board of Governors of
the Federal Reserve Board (the Fed). The Fed has increased short-term interest
rates by 225 basis points in nine equal increments of 25 basis points since June 30, 2005.
The effects of these rate increases by the Fed has generally led to higher average rates
earned and paid on interest earning assets and interest bearing liabilities with a faster
increase in the average rates earned on earning assets, particularly loans and temporary
investments, due to their repricing characteristics combined with new loan originations in
a rising rate environment.

Net interest income is the most
significant component of the Companys earnings. Net interest income is the excess of
the interest income earned on earning assets over the interest paid for funds to support
those assets. The two most common metrics used to analyze net interest income are net
interest spread and net interest margin. Net interest spread represents the difference
between the yields on earning assets and the rates paid on interest bearing liabilities.
Net interest margin represents the percentage of net interest income to average earning
assets. Net interest margin will exceed net interest spread because of the existence of
noninterest bearing sources of funds, principally demand deposits and shareholders
equity, which are also available to fund earning assets. Changes in net interest income
and margin result from the interaction between the volume and the composition of earning
assets, their related yields, and the associated cost and composition of the interest
bearing liabilities. Accordingly, portfolio size, composition, and the related yields
earned and the average rates paid can have a significant impact on net interest spread and
margin. The table on the following page represents the major components of interest
earning assets and interest bearing liabilities on a tax equivalent basis. To compare the
tax-exempt asset yields to taxable yields, amounts are adjusted to pretax equivalents
based on the marginal corporate Federal tax rate of 35%.

The Companys tax equivalent
(TE) yield on earning assets for the current three months was 6.7%, an
increase of 96 basis points from 5.7% in the same period a year ago. The cost of funds for
the current three months was 3.2%, an increase of 90 basis points compared to 2.3% in the
same period a year earlier. A goal of the Company in the current interest rate environment
is to increase earning assets and maintain the current relatively low interest rates paid
on interest bearing liabilities. The Company strives to accomplish this goal while
providing excellent service, offering competitive rates to its customers, and maintaining
its core deposit base. Maintaining the relatively low cost of funds is becoming
increasingly difficult due to the upward trend in general interest rates and competitive
market forces. Average earning assets were $1.4 billion for the current quarter, an
increase of $199 million or 17.2% compared to $1.2 billion a year ago. As a percentage of
total average assets, earning assets decreased 112 basis points to 87.5% from 88.6%. This
decrease had a negative 6 basis point effect on ROA in the comparison.

Interest income results from interest
earned on earning assets, which primarily include loans and investment securities.
Interest income is affected by volume (average balance), composition of earning assets,
and the related rates earned on those assets. Total interest income for the second quarter
of 2006 was $22.0 million, an increase of $6.1 million or 38.0% compared to the comparable
period in the previous year. The growth in interest income was mainly attributed to higher
interest income on loans of $5.6 million or 43.7%. Interest income on loans increased as a
result of higher average loan balances outstanding resulting from the Citizens Bancorp
acquisition, higher internally generated loan growth, and an 86 basis point increase in
the average rate earned on loans. The Citizens Bancorp acquisition accounted for $2.9
million of the increase in interest income on loans. The Companys tax equivalent
yield on earning assets for the current quarter was 6.7%, an increase of 96 basis points
compared to the same period a year ago.

Interest and fees on loans was $18.4
million, an increase of $5.6 million or 43.7% compared to a year earlier. Average loans
increased $215 million or 26.6% to $1.0 billion in the comparison due mainly to a $160
million higher average balance outstanding from the acquisition of Citizens Bancorp and,
to a lesser extent, higher loan demand. Interest income on loans was also boosted by an 86
basis point increase in the tax equivalent yield to 7.3% from 6.4% in the quarterly
comparison. Interest on taxable securities was $2.2 million, an increase of $353 thousand
or 19.5% due to both a 57 basis point increase in the average rate earned and a $5.9
million or 2.9% higher average balance outstanding. Interest on nontaxable securities was
relatively unchanged at $919 thousand. Interest on short-term investments, including time
deposits in other banks, federal funds sold, and securities purchased under agreements to
resell, increased $103 thousand or 25.4% due to an increase in the average rate earned of
389 basis points nearly offset by a decline in the average balances outstanding $23.5
million.

Interest expense results from
incurring interest on interest bearing liabilities, which primarily include interest
bearing deposits, federal funds purchased and securities sold under agreements to
repurchase, and other borrowed funds. Interest expense is affected by volume, composition
of interest bearing liabilities, and the related rates paid on those liabilities. Total
interest expense was $9.6 million for second quarter of 2006, an increase of $3.8 million
or 66.8% from the same period in the prior year. Interest expense increased mainly as a
result of higher interest expense on deposits of $2.9 million or 61.8%. Interest expense
on deposits increased as a result of higher deposit balances outstanding from the Citizens
Bancorp acquisition, higher deposits generated internally, and higher rates paid on
interest bearing deposits throughout the entire deposit portfolio. The Companys cost
of funds was 3.2% for the second quarter of 2006, an increase of 90 basis points from 2.3%
for the prior year. The increase in cost of funds was led by a 264 basis point increase in
federal funds purchased and securities sold under agreements to repurchase, which
generally reprice more quickly than other interest bearing sources of funds and correlates
with the increase in general short-term market interest rates.

Interest expense on time deposits,
the largest component of total interest expense, increased $2.0 million or 54.3% to $5.6
million. The increase is due to an 85 basis point increase in the average rate paid to
4.0% from 3.1% combined with a $99.4 million or 21.6% higher average balance outstanding,
which totaled $560 million in the current quarter compared to $461 million in the same
quarter a year earlier. The growth in average time deposits outstanding was fueled by an
additional $75.0 million of time deposits related to the Citizens Bancorp acquisition.
Interest expense on savings deposits and interest bearing demand deposits increased $439
thousand or 76.0% and $471 thousand or 103.3%, respectively. The increase in interest
expense on savings deposits was due to a 67 basis point increase in the average rates paid
to 2.0% from 1.3% and, to a lesser extent, an increase in the average balance outstanding
of $28.3 million or 15.8% to $208 million from $180 million. The Citizens Bancorp
acquisition contributed an additional $31.4 million in average savings deposits with
higher average rates than existing savings deposits in the comparison. Interest on
interest bearing demand deposits increased due mainly to a higher average rate paid of 57
basis points to 1.4% and, to a lesser extent, an increase in the average balance
outstanding of $45.4 million or 20.8%. Excluding the $52.6 million additional average
interest bearing demand deposits attributed to the Citizens Bancorp acquisition, average
interest bearing demand deposits for the Company declined $7.2 million or 3.3% in the
comparison. The increase in average rates paid for deposits follows the trend of
increasing general short-term market interest rates between the comparable periods.

Interest expense on federal funds
purchased and securities sold under agreements to repurchase increased $480 thousand or
79.7% due mainly to a 264 basis point increase in the average rate paid to 5.6% from 3.0%
a year ago and is attributed to the increase in general short-term market interest rates
experienced since the comparable period of last year. Interest expense on other borrowed
funds consists primarily of Federal Home Loan Bank (FHLB) borrowings and
subordinated notes payable to unconsolidated trusts. Interest expense on other borrowed
funds increased $497 thousand and is due mainly to an increase in interest expense related
to the notes payable to unconsolidated trusts of $430 thousand. The Company issued $25.0
million subordinated notes payable in connection with its trust preferred securities
offering during the third quarter of 2005.

The net interest margin (TE)
increased 11 basis points to 3.84% during the second quarter of 2006 compared to 3.73% in
the same quarter of 2005. The higher net interest margin is primarily attributed to a 6
basis point increase in the spread between rates earned on earning assets and the rates
paid on interest bearing liabilities to 3.46% in the current quarter from 3.40% in the
comparable quarter of 2005. The remaining five basis point increase in margin is
attributed to the effect of noninterest bearing sources of funds. The effect of
noninterest bearing sources of funds on net interest margin typically increases in a
rising rate environment.

---

The following tables present an
analysis of net interest income for the quarterly periods ended June 30.

# Distribution of Assets,
Liabilities and Shareholders Equity: Interest Rates and Interest Differential

|                                      
|--------------------------------------
|
|
|Earning Assets                        
|Investment securities                 
|Taxable                               
|Nontaxable1                           
|Time deposits with banks, federal     
|funds sold and securities purchased   
|under agreements to resell            
|Loans1,2,3                            
|                                      
|Total earning assets                  
|                                      
|Allowance for loan losses             
|                                      
|Total earning assets, net of          
|allowance for loan losses             
|                                      
|Nonearning Assets                     
|Cash and due from banks               
|Premises and equipment, net           
|Other assets                          
|Assets of discontinued operations     
|                                      
|Total assets                          
|                                      
|Interest Bearing Liabilities          
|Deposits                              
|Interest bearing demand               
|Savings                               
|Time                                  
|Federal funds purchased and           
|securities sold under agreements      
|to repurchase                         
|Other borrowed funds                  
|                                      
|Total interest bearing liabilities    
|                                      
|Noninterest Bearing Liabilities       
|Commonwealth of Kentucky deposits     
|Other demand deposits                 
|Other liabilities                     
|Liabilities of discontinued operations
|                                      
|Total liabilities                     
|                                      
|Shareholders' equity                  
|                                      
|Total liabilities and shareholders'   
|equity                                
|                                      
|Net interest income                   
|TE basis adjustment                   
|                                      
|Net interest income                   
|                                      
|Net interest spread                   
|Impact of noninterest bearing sources 
|of funds                              
|                                      
|Net interest margin                   
|                                      

1Income and yield stated
at a fully tax equivalent basis using the marginal corporate Federal tax rate of 35%.2Loan balances include principal balances on nonaccrual loans.3Loan fees included in interest income amounted to $411 thousand and $545
thousand in 2006 and 2005, respectively.4Exludes the interest income and
interest expense of discontinued operations.

---

# Analysis of Changes in
Net Interest Income (tax equivalent basis)

|                                                 
|-------------------------------------------------
|
|
|Interest Income                                  
|Taxable investment securities                    
|Nontaxable investment securities2                
|Time deposits with banks, federal funds sold and 
|securities purchased under agreements to resell  
|Loans2                                           
|                                                 
|Total interest income                            
|                                                 
|Interest Expense                                 
|Interest bearing demand deposits                 
|Savings deposits                                 
|Time deposits                                    
|Federal funds purchased and securities sold under
|agreements to repurchase                         
|Other borrowed funds                             
|                                                 
|Total interest expense                           
|                                                 
|Net interest income                              
|                                                 
|Percentage change                                
|                                                 

1The changes that are
not solely due to rate or volume are allocated on a percentage basis using the absolute
values of rate and volume variances as a basis for allocation. 2Income stated
at fully tax equivalent basis using the marginal corporate Federal tax rate of 35%.3Exludes the interest income and interest expense of discontinued operations.

# Noninterest Income

Noninterest income totaled $5.1
million for the second quarter of 2006, an increase of $20 thousand or .4% compared to the
same period in the prior year. Noninterest income represents 18.7% of total revenue for
the current quarter, a decrease of 532 basis points from 24.0% for the same period last
year. The decrease in noninterest income as a percentage of total revenue is due primarily
to the composition of the revenue streams from Citizens Bancorp, which is more heavily
weighted toward interest income.

Service charges and fees on deposits
declined $43 thousand or 1.8% in the quarterly comparison. This decline was driven by
lower fees from the Commonwealth of Kentucky of $131 thousand and lower dormant account
fees of $81 thousand. Significant other service charges and fees on deposits categories
that improved were DDA service charges of $20 thousand or 11.3% and overdraft charges of
$99 thousand or 8.0%. The increase in these line items, however, is attributed to the
Citizens Northern acquisition, which offset declines in fees from the Companys other
subsidiary banks. Income from company-owned life insurance and allotment processing was
relatively unchanged at $324 thousand and $639 thousand, respectively. Non-deposit related
service charges, commissions, and fees jumped to $702 thousand, an increase of $135
thousand or 23.8% driven mainly by $37 thousand and $23 thousand of additional loan
servicing fees and credit life insurance fees, respectively. The increase in the loan
servicing fees is attributed to Citizens Bancorp acquisition. Data processing fees
declined $39 thousand or 7.8% due mainly to an increasing percentage of electronic
transactions versus paper transactions, which are less costly and result in lower revenue
for the Company.

The Company sold investment
securities during the current quarter for a net loss of $195 thousand to better position
its balance sheet for asset and liability management purposes. Gains on the sale of
mortgage loans were $139 thousand, a decline of $45 thousand or 24.5% due to a $1.4
million or 15.5% decrease in mortgage loans sold in the comparison. Trust income is up $38
thousand or 8.9% mainly attributed to the Citizens Bancorp acquisition. Other noninterest
income was $237 thousand, an increase of $174 thousand compared to $63 thousand a year
earlier due to a gain recorded on the sale of a vacant office building of $125 thousand
and an increase in income related to the Companys investment in Kentucky Home Life
Insurance Company of $32 thousand.

# Noninterest Expense

Total noninterest expenses were $12.6
million for the three months ended June 30, 2006, an increase of $2.0 million or 19.2%
compared to $10.6 million for the same period in 2005. The increase in noninterest
expenses is reflected across a broad range of line items. A significant factor
contributing to the higher expenses is the Citizens Bancorp acquisition during December
2005. The largest increases in noninterest expenses is attributed to salaries and employee
benefits, which jumped $982 thousand or 17.3%, data processing and communication expenses
of $263 thousand or 24.9%, and amortization of intangibles of $228 thousand or 93.1%.

The increase in salaries and employee
benefits resulted from the addition of 65 average full time equivalent employees from the
Citizens Bancorp acquisition, normal salary increases for existing employees, and an
increase in benefits. Salaries and related payroll taxes increased $811 thousand or 18.0%,
with Citizens Bancorp accounting for $606 thousand of the increase. Benefit expenses grew
$138 thousand or 11.7%, with Citizens Bancorp contributing $179 thousand of the increase.
Noncash compensation expense related to the Companys nonqualified stock option plan
and employee stock purchase plan was $33 thousand. There was no such expense recorded in
the comparable period last year since the current period includes the initial recognition
of such costs pursuant to SFAS No. 123(R).

Occupancy expense, net of rental
income, increased $189 thousand or 28.6% and totaled $850 thousand for the three months
ended June 30, 2006. The increase was led by $111 thousand attributed to the Citizens
Bancorp acquisition along with normal operating increases. Equipment expenses were up $84
thousand or 13.1% to $726 thousand led by a $98 thousand increase attributed to Citizens
Bancorp. Data processing and communications expense rose $263 thousand or 24.9% to $1.3
million. The increase is attributed to the Citizens Bancorp acquisition, which added $255
thousand of expense for the current quarter. A significant portion of this amount is
related to data processing, which is expected to decline once Citizens Bancorps
processing system is converted to the Companys. Bank franchise taxes increased $106
thousand or 31.4% led by $75 thousand attributed to Citizens Bancorp. Correspondent bank
fees declined $96 thousand or 36.1% and is correlated to the decline in service charges
and fees on deposits related to the Commonwealth of Kentucky noted in the previous section
of this report. Amortization of intangibles grew $228 thousand to $473 thousand with an
increase of $269 thousand resulting from additional core deposit intangible amortization
of Citizens Bancorp. Other noninterest expenses were $2.0 million, an increase of $278
thousand or 16.4% driven mainly by the addition of Citizens Bancorp.

# Income Taxes

Income tax expense for the second
quarter of 2006 was $1.0 million, a decline of $145 thousand or 12.6% compared to the same
period a year earlier. The effective federal income tax rate decreased 396 basis points to
20.3% from 24.3% in the comparison. The change in the effective tax rate is due to an
increase in revenue from nontaxable sources, which outpaced the growth in revenue from
taxable sources.

# Income From Discontinued
Operations

Income from discontinued operations
was $349 thousand for the current three months ended June 30, 2006. This represents an
increase of $61 thousand or 21.2% compared to $288 thousand in the same period a year
earlier. Basic and diluted income per share from discontinued operations was $.05 for the
current quarter, an increase of $.01 or 25.0% compared to $.04 a year earlier.

# First Six Months of
2006 vs. First Six Months of 2005

The Company reported net income of
$8.7 million for the six months ended June 30, 2006, an increase of $753 thousand or 9.5%
compared to $7.9 million reported for the six months ended June 30, 2005. Basic and
diluted net income per share were $1.18 and $1.17 for the current six months, an increase
of $.01 or .9% compared to $1.17 and $1.16 a year earlier.

Income from continuing operations was
$8.0 million for the six months ended June 30, 2006, an increase of $666 thousand or 9.1%
compared to $7.4 million reported for the six months ended June 30, 2005. Basic and
diluted income per share from continuing operations were $1.09 and $1.08 for the current
six months, an increase of $.01 or .9% on a basic per share basis and unchanged on a
diluted per share basis compared to a year earlier.

The percentage increase in net income
in the comparable periods is not proportional to the percentage change in per share
earnings due to the effect of an additional 584,000 shares issued in connection with the
acquisition of Citizens Bancorp. The operating results related to Citizens Bancorp,
acquired on December 6, 2005, generally increased reported income and expense line items
in the current six-month period compared to a year ago since there are no operating
results attributed to Citizens Bancorp in the comparable period. Net loans and deposits
acquired from Citizens Bancorp on the date of purchase were $149.0 million and $173.0
million, respectively.

During April the Company announced an
agreement and plan of merger to acquire Citizens National, the parent company of Citizens
National Bank of Jessamine County, a $153.0 asset bank operating four locations in
Jessamine County, Kentucky. The operating results of Citizens National are not included
herein. This transaction is expected to close during the fourth quarter of 2006.

The increase in net income for the
six months ended June 30, 2006 is primarily related to an increase in net interest income,
which was boosted by the Citizens Bancorp acquisition. Net interest income was $25.0
million in the current six-month period ended June 30, 2006. This represents an increase
of $4.7 million or 23.1% compared to the same period a year ago. The increase in net
interest income in each period is primarily due to higher interest on loans of $10.7
million or 42.5%, partially offset by $5.5 million or 61.5% higher interest expense on
deposits. The Citizens Bancorp acquisition accounted for $3.6 million of the increase in
net interest income in the six-month period, including $5.7 million higher interest from
loans partially offset by $2.5 million higher interest on deposits.

The provision for loans losses
declined $40 thousand in the six-month comparison. The negative provision for loan losses
of $180 thousand in the current six-month period is reflective of the trend of improved
credit quality of the Companys loan portfolio. This improvement is attributed to
lower delinquent and classified loans from year-end 2005, lower annualized net charge-offs
as a percentage of average loans outstanding, and lower historical loss ratios.

Noninterest income was $10.1 million
in the current six-month period, down $275 thousand or 2.6% in the comparison. The decline
in noninterest income was due primarily to a one-time gain of $700 thousand on the sale of
the Companys credit card portfolio recorded in the first quarter of 2005. Excluding
the effect of the one-time gain on the credit card portfolio in the prior year,
noninterest income grew $425 thousand or 4.4% in the year to date comparison.

The Company recorded a loss of $195
thousand on the sale of available for sale investment securities during the current
six-month period that negatively impacted noninterest income in the comparison.
Non-deposit service charges, commissions, and fees rose $223 thousand or 18.9% in the
current six-month period due mainly to the Citizens Bancorp acquisition. Trust department
income increased $92 thousand or 11.1% in the current period. Income from company-owned
life insurance and allotment processing fees increased $136 thousand or 24.9% and $38
thousand or 2.9%, respectively, in the six-month comparison. Other significant categories
include a decline in data processing fees of $52 thousand or 5.6% and lower gains on sale
of mortgage loans of $18 thousand or 5.4%.

Noninterest expenses increased $4.0
million or 18.6% for the current six-month period compared to the same periods a year
earlier. The increase in noninterest expenses occurred across a broad range of line items
and is generally attributed to the Citizens Bancorp acquisition. The most significant
increase was salaries and employee benefits, which grew $2.4 million or 21.8% in the
six-month comparison, as the average number of full time equivalent employees rose to 543
from 476 in the comparable periods. Combined other noninterest expenses increased $1.5
million or 15.1% and occurred across a broad range of categories. These increases are
generally attributed to the purchase of Citizens Bancorp. The effective income tax rate
was 19.6% for the current six-month period compared to 22.7% a year earlier.

ROA was 1.04% for the current
six-month period, a decrease of 9 basis points compared to 1.13% reported for the same
period in 2005. ROE was 10.48% for the current six-month period, a decrease of 79 basis
points compared to 11.27% for the same period of 2005. The decrease in ROE is attributed
to a combination of the lower ROA partially offset by a 13 basis point increase in
financial leverage to 10.08% from 9.956%. Financial leverage represents the degree in
which borrowed funds, as opposed to equity, are used in the funding of assets.

Income from discontinued operations
was $672 thousand for the six-month period ended June 30, 2006. This represents an
increase of $87 thousand or 14.9% in the comparison. As previously disclosed, the Company
has entered into a definitive agreement to sell its KBC subsidiary and expects to close
this transaction during the fourth quarter of 2006.

# Net Interest Income

The trend of the general interest
rate environment in the current six months compared to a year earlier has been upward
primarily as a result of short-term interest rate increases by the Fed. The Fed has
increased short-term interest rates by 225 basis points in nine equal increments of 25
basis points since June 30, 2005. The effects of these rate increases by the Fed has
generally led to higher average rates earned and paid on interest earning assets and
interest bearing liabilities with a faster increase in the average rates earned on earning
assets, particularly loans and temporary investments, due to their repricing
characteristics combined with new loan originations in a rising rate environment.

Net interest income is the most
significant component of the Companys earnings. Net interest income is the excess of
the interest income earned on earning assets over the interest paid for funds to support
those assets. The two most common metrics used to analyze net interest income are net
interest spread and net interest margin. Net interest spread represents the difference
between the yields on earning assets and the rates paid on interest bearing liabilities.
Net interest margin represents the percentage of net interest income to average earning
assets. Net interest margin will exceed net interest spread because of the existence of
noninterest bearing sources of funds, principally demand deposits and shareholders
equity, which are also available to fund earning assets. Changes in net interest income
and margin result from the interaction between the volume and the composition of earning
assets, their related yields, and the associated cost and composition of the interest
bearing liabilities. Accordingly, portfolio size, composition, and the related yields
earned and the average rates paid can have a significant impact on net interest spread and
margin. The table on the following page represents the major components of interest
earning assets and interest bearing liabilities on a tax equivalent basis. To compare the
tax-exempt asset yields to taxable yields, amounts are adjusted to pretax equivalents
based on the marginal corporate Federal tax rate of 35%.

The Companys tax equivalent
yield on earning assets for the current six months was 6.6%, an increase of 94 basis
points from 5.6% in the same period a year ago. The cost of funds for the current six
months was 3.1%, an increase of 84 basis points compared to 2.3% in the same period a year
earlier. A goal of the Company in the current interest rate environment is to increase
earning assets while maintaining the current relatively low interest rates paid on
interest bearing liabilities. The Company strives to accomplish this goal while providing
excellent service, offering competitive rates to its customers, and maintaining its core
deposit base. Maintaining the relatively low cost of funds is becoming increasingly
difficult due to the upward trend in general interest rates and competitive market forces.
Average earning assets increased $201 million or 17.3% to $1.4 billion in the six month
comparison, helped in part by the acquisition of Citizens Bancorp during the fourth
quarter of 2005. As a percentage of total average assets, earning assets decreased 112
basis points to 87.5% from 88.6%. This decrease had a negative 6 basis point effect on ROA
in the comparison.

Interest income results from interest
earned on earning assets, which primarily include loans and investment securities.
Interest income is affected by volume (average balance), composition of earning assets,
and the related rates earned on those assets. Total interest income for the six-month
period ended June 30, 2006 was $43.3 million, an increase of $11.9 million or 37.8%
compared to the comparable period in the previous year. The growth in interest income was
mainly attributed to higher interest income on loans of $10.7 million or 42.5%. Interest
income on loans increased mainly as a result of higher average loan balances outstanding,
resulting from both the Citizens Bancorp acquisition and higher internally generated loan
growth. Interest income on loans was also boosted by an 88 basis point increase in the
average rate earned on loans. The Citizens Bancorp acquisition accounted for $5.7 million
of the increase in interest income on loans. The Companys tax equivalent yield on
earning assets for the current period was 6.6%, an increase of 94 basis points compared to
the same period a year ago.

Interest and fees on loans was $35.8
million, an increase of $10.7 million or 42.5% compared to a year earlier. Average loans
increased $200 million or 25.0% to $1.0 billion in the comparison due mainly to a $158.0
million higher average balance outstanding from the acquisition of Citizens Bancorp and,
to a lesser extent, higher loan demand. Interest income on loans was also helped by an 88
basis point increase in the tax equivalent yield to 7.2% from 6.4% in the year to date
comparison. Interest on taxable securities was $4.6 million, an increase of $1.0 million
or 29.5% due to both a 56 basis point increase in the average rate earned and a $23.5
million or 11.8% higher average balance outstanding. Interest on nontaxable securities was
relatively unchanged at $1.9 million. Interest on short-term investments, including time
deposits in other banks, federal funds sold, and securities purchased under agreements to
resell, increased $133 thousand or 14.6% due to an increase in the average rate earned of
213 basis points, which offset the effect of a $25.2 million or 36.4% decline in the
average balances outstanding.

Interest expense results from
incurring interest on interest bearing liabilities, which primarily include interest
bearing deposits, federal funds purchased and securities sold under agreements to
repurchase, and other borrowed funds. Interest expense is affected by volume, composition
of interest bearing liabilities, and the related rates paid on those liabilities. Total
interest expense was $18.3 million for six months ended June 30, 2006, an increase of $7.2
million or 64.7% from the same period in the prior year. Interest expense increased mainly
as a result of higher interest expense on deposits of $5.5 million or 61.5%. Interest
expense on deposits increased as a result of higher deposit balances outstanding from the
Citizens Bancorp acquisition, higher deposits generated internally, and higher rates paid
on interest bearing deposits throughout the entire deposit portfolio. The Companys
cost of funds was 3.1% for the current six-month period, an increase of 84 basis points
from 2.3% for the same period in the prior year. The increase in cost of funds was led by
a 205 basis point increase in federal funds purchased and securities sold under agreements
to repurchase, which generally reprice more quickly than other interest bearing sources of
funds and correlates with the increase in general short-term market interest rates.

Interest expense on time deposits,
the largest component of total interest expense, increased $3.6 million or 51.7% to $10.6
million. The increase is due to a 78 basis point increase in the average rate paid to 3.8%
from 3.1% combined with a $96.6 million or 21.1% higher average balance outstanding, which
totaled $555 million in the current period compared to $458 million in the same period a
year earlier. The growth in average time deposits outstanding was fueled by an additional
$74.0 million of time deposits related to the Citizens Bancorp acquisition. Interest
expense on savings deposits and interest bearing demand deposits increased $897 thousand
or 81.5% and $990 thousand or 114.8%, respectively. The increase in interest expense on
savings deposits was due to a 66 basis point increase in the average rates paid to 1.9%
from 1.2% and, to a lesser extent, an increase in the average balance outstanding of $32.5
million or 18.1% to $212 million from $179 million. The Citizens Bancorp acquisition
contributed an additional $31.2 million in average savings deposits with higher average
rates than existing savings deposits in the comparison. Interest on interest bearing
demand deposits increased due mainly to a higher average rate paid of 61 basis points to
1.4% and, to a lesser extent, an increase in the average balance outstanding of $48.5
million or 22.2%. Excluding the $52.7 million additional average interest bearing demand
deposits attributed to the Citizens Bancorp acquisition, average interest bearing demand
deposits for the Company declined $4.1 million or 1.5% in the comparison. The increase in
average rates paid for deposits follows the trend of increasing general short-term market
interest rates between the comparable periods.

Interest expense on federal funds
purchased and securities sold under agreements to repurchase increased $820 thousand or
69.8% due mainly to a 205 basis point increase in the average rate paid to 4.8% from 2.7%
a year ago and is attributed to the increase in general short-term market interest rates
experienced since the comparable period of last year. Interest expense on other borrowed
funds consists primarily of FHLB borrowings and subordinated notes payable to
unconsolidated trusts. Interest expense on other borrowed funds increased $893 thousand or
87.4% and is due mainly to an increase in interest expense related to the notes payable to
unconsolidated trusts of $824 thousand. The Company issued $25.0 million subordinated
notes payable in connection with its trust preferred securities offering during the third
quarter of 2005.

The net interest margin (TE)
increased 16 basis points to 3.86% during the six months ended June 30, 2006 compared to
3.70% in the same period of 2005. The higher net interest margin is primarily attributed
to a 10 basis point increase in the spread between rates earned on earning assets and the
rates paid on interest bearing liabilities to 3.48% in the current six months from 3.38%
in the comparable six months of 2005. The remaining six basis point increase in margin is
attributed to the effect of noninterest bearing sources of funds. The effect of
noninterest bearing sources of funds on net interest margin typically increases in a
rising rate environment.

---

The following tables present an
analysis of net interest income for the six months ended June 30.

# Distribution of Assets,
Liabilities and Shareholders Equity: Interest Rates and Interest Differential

|                                      
|--------------------------------------
|
|
|Earning Assets                        
|Investment securities                 
|Taxable                               
|Nontaxable1                           
|Time deposits with banks, federal     
|funds sold and securities purchased   
|under agreements to resell            
|Loans1,2,3                            
|                                      
|Total earning assets                  
|                                      
|Allowance for loan losses             
|                                      
|Total earning assets, net of          
|allowance for loan losses             
|                                      
|Nonearning Assets                     
|Cash and due from banks               
|Premises and equipment, net           
|Other assets                          
|Assets of discontinued operations     
|                                      
|Total assets                          
|                                      
|Interest Bearing Liabilities          
|Deposits                              
|Interest bearing demand               
|Savings                               
|Time                                  
|Federal funds purchased and           
|securities sold under agreements      
|to repurchase                         
|Other borrowed funds                  
|                                      
|Total interest bearing liabilities    
|                                      
|Noninterest Bearing Liabilities       
|Commonwealth of Kentucky deposits     
|Other demand deposits                 
|Other liabilities                     
|Liabilities of discontinued operations
|                                      
|Total liabilities                     
|                                      
|Shareholders' equity                  
|                                      
|Total liabilities and shareholders'   
|equity                                
|                                      
|Net interest income                   
|TE basis adjustment                   
|                                      
|Net interest income                   
|                                      
|Net interest spread                   
|Impact of noninterest bearing sources 
|of funds                              
|                                      
|Net interest margin                   
|                                      

1Income and yield stated
at a fully tax equivalent basis using the marginal corporate Federal tax rate of 35%.2Loan balances include principal balances on nonaccrual loans.3Loan fees included in interest income amounted to $1.2 million and $1.0
million in 2006 and 2005, respectively.4Excludes the interest income and
interest expense of discontinued operations.

---

# Analysis of Changes in
Net Interest Income (tax equivalent basis)

|                                                 
|-------------------------------------------------
|
|
|Interest Income                                  
|Taxable investment securities                    
|Nontaxable investment securities2                
|Time deposits with banks, federal funds sold and 
|securities purchased under agreements to resell  
|Loans2                                           
|                                                 
|Total interest income                            
|                                                 
|Interest Expense                                 
|Interest bearing demand deposits                 
|Savings deposits                                 
|Time deposits                                    
|Federal funds purchased and securities sold under
|agreements to repurchase                         
|Other borrowed funds                             
|                                                 
|Total interest expense                           
|                                                 
|Net interest income                              
|                                                 
|Percentage change                                
|                                                 

1The changes that are
not solely due to rate or volume are allocated on a percentage basis using the absolute
values of rate and volume variances as a basis for allocation. 2Income stated
at fully tax equivalent basis using the marginal corporate Federal tax rate of 35%.3Exludes the interest income and interest expense of discontinued operations.

# Noninterest Income

Noninterest income totaled $10.2
million for the six months ended June 30, 2006, a decrease of $275 thousand or 2.6%
compared to the same period in the prior year. Noninterest income represents 19.0% of
total revenue for the current six months, a decrease of 594 basis points from 25.0% for
the same period last year. The decrease in noninterest income as a percentage of total
revenue is due primarily to the composition of the revenue streams from Citizens Bancorp,
which is more heavily weighted toward interest income. Excluding the effect of the
one-time gain on the sale of the Companys credit card portfolio in the prior year,
noninterest income increased $425 thousand or 4.4% in the comparable periods.

Line items that showed net increases
primarily as a result of the Citizens Bancorp acquisition were as follows: service charges
and fees on deposits of $13 thousand or .3%; non-deposit service charges, commissions, and
fees of $223 thousand or 18.9%; and trust income of $92 thousand or 11.1%. The $13
thousand increase in service charges and fees on deposits include an additional $362
thousand related to Citizens Bancorp which offset a decline in fees of $203 thousand
attributed to the Commonwealth of Kentucky and $117 thousand lower dormant account fees.
The decline in fees from the Commonwealth of Kentucky is closely relates to the lower
correspondent bank fees discussed in the next section of this report. Allotment processing
fees grew $38 thousand or 2.9% attributed to higher transaction volumes in the six-month
comparison. Income from company-owned life insurance was up $136 thousand or 24.9% due to
higher crediting rates and additional amounts outstanding attributed to the purchase of
Citizens Bancorp.

Data processing fees were $884
thousand, a decline of $52 thousand or 5.6% mainly due to an increasing percentage of
electronic transactions versus paper transactions, which are less costly and result in
lower revenue for the Company. The Company sold investment securities during the current
period for a net loss of $195 thousand to better position its balance sheet for asset and
liability management purposes. Gains on the sale of mortgage loan were $318 thousand, a
decline of $18 thousand or 5.4% due to a $207 thousand or 1.2% decrease in mortgage loans
sold in the comparison. Other noninterest income was $397 thousand, a decrease of $515
thousand compared to $912 thousand a year earlier. The decrease in other noninterest
income is attributable to the $700 thousand one-time gain recorded in the prior year on
the sale of the Companys credit card portfolio. Excluding the one-time gain, other
noninterest income grew $185 thousand or 87.3% due mainly to gain on the sale of a vacant
office building of $125 thousand and an increase in income related to the Companys
investment in Kentucky Home Life Insurance Company of $48 thousand.

# Noninterest Expense

Total noninterest expenses were $25.3
million for the six months ended June 30, 2006, an increase of $4.0 million or 18.6%
compared to $21.4 million for the same period in 2005. The increase in noninterest
expenses is reflected across a broad range of line items. A significant factor
contributing to the higher expenses is the Citizens Bancorp acquisition during December
2005. The largest increase in noninterest expenses is attributed to salaries and employee
benefits, which increased $2.4 million or 21.8%, net occupancy expenses of $449 thousand
or 33.4%, amortization of intangibles of $455 thousand or 92.7%, and data processing and
communication expenses of $434 thousand or 21.1%.

The $2.4 million increase in salaries
and employee benefits resulted from the addition of 63 average full time equivalent
employees from the Citizens Bancorp acquisition, normal salary increases for existing
employees, and an increase in benefit costs. Salaries and related payroll taxes increased
$1.5 million or 16.7%, with Citizens Bancorp accounting for $1.2 million of the increase.
Benefit expenses increased $863 thousand or 40.6%, a sharp increase that was boosted by
$313 thousand related to Citizens Bancorp. The increase in benefit expenses is mainly
attributed to higher health care costs in the current six-month period compared to the
same period a year ago. Employee health care claims have increased during the current
period compared to the same period a year earlier. Within specified contractual limits,
benefit costs move in tandem with their related claims. Noncash compensation expense
related to the Companys nonqualified stock option plan and employee stock purchase
plan was $65 thousand. There was no such expense recorded in the comparable period last
year since the current period includes the initial recognition of such costs pursuant to
SFAS No. 123(R).

Occupancy expense, net of rental
income, increased $449 thousand or 33.4% and totaled $1.8 million at June 30, 2006. The
increase was led by $218 thousand attributed to the Citizens Bancorp acquisition along
with normal operating increases. Equipment expenses were up $166 thousand or 12.9% to $1.5
million led by a $196 thousand increase attributed to Citizens Bancorp. Data processing
and communications expense grew $434 thousand or 21.1% to $2.5 million. The increase is
attributed to the Citizens Bancorp acquisition, which added $481 thousand of expense for
the current six-month period. A significant portion of this amount is related to data
processing, which is expected to decline once Citizens Bancorps processing system is
converted to the Companys. Bank franchise taxes increased $207 thousand or 30.7% led
by $144 thousand attributed to Citizens Bancorp. Correspondent bank fees declined $136
thousand or 28.7% and is correlated to the decline in service charges and fees on deposits
related to the Commonwealth of Kentucky noted in the previous section of this report.
Amortization of intangibles was up $455 thousand to $946 thousand with an increase of $538
thousand resulting from additional core deposit intangible amortization of Citizens
Bancorp. Other noninterest expenses were $3.8 million relatively unchanged from the same
six-month period a year earlier.

Income
Taxes

Income tax expense for the six months
ended June 30, 2006 was $2.0 million, a decline of $204 thousand or 9.4% compared to the
same period a year earlier. The effective federal income tax rate decreased 310 basis
points to 19.6% from 22.7% in the comparison. The change in the effective tax rate is due
to an increase in revenue from nontaxable sources, which outpaced the growth in revenue
from taxable sources.

# Income From Discontinued
Operations

Income from discontinued operations
was $672 thousand for the current six months ended June 30, 2006. This represents an
increase of $87 thousand or 14.9% compared to $585 thousand in the same period a year
earlier. Basic and diluted income per share from discontinued operations was $.09 in the
current period. Basic income per share from discontinued operations was unchanged compared
to a year earlier. Dilute income per share from discontinued operations was up $.01 or
12.5% compared to $.08 for the six-month period a year ago.

# FINANCIAL CONDITION

Total assets related to continuing
operations were $1.5 billion on June 30, 2006, unchanged from the prior year-end. The
composition of the Companys significant assets changed as follows: a $7.9 million or
6.0% decrease in cash and cash equivalents; a $50.8 million or 15.4% decrease in
securities; and an increase in net loans of $59.3 million or 6.1%. The changes within the
asset groups correlate to the overall funding position of the Company. Cash and cash
equivalents and investment securities declined primarily to fund new loan growth. A
decrease of $9.5 million in total deposits along with the payment of the prior year-end
accrued purchase price of Citizens Bancorp of $21.8 million was offset by a $22.8 million
and $8.5 million increase in federal funds purchased and securities sold under agreements
to repurchase and other borrowed funds, respectively. Shareholders equity grew $930
thousand or .6% to $155 million at June 30, 2006.

Management of the Company considers
it noteworthy to understand the relationship between the Companys principal
subsidiary, Farmers Bank & Capital Trust Co., and the Commonwealth of Kentucky.
Farmers Bank provides various services to state agencies of the Commonwealth. As the
depository for the Commonwealth, checks are drawn on Farmers Bank by these agencies, which
include paychecks and state income tax refunds. Farmers Bank also processes vouchers of
the WIC (Women, Infants and Children) program for the Cabinet for Human Resources. The
Banks investment department also provides services to the Teachers Retirement
systems. As the depository for the Commonwealth, large fluctuations in deposits are likely
to occur on a daily basis. Therefore, reviewing average balances is important to
understanding the financial condition of the Company.

On an average basis, total assets
related to continuing operations were $1.6 billion for the first six months of 2006, an
increase of $219 million or 16.4% from year-end 2005 driven mainly by the Citizens Bancorp
purchase during December 2005. Average earning assets, primarily loans and securities,
were $1.4 billion at June 30, 2006, an increase of $173 million or 14.6% from year-end
2005. Average earning assets represent 87.5% of total average assets on June 30, 2006, a
decrease of 141 basis points compared to 88.9% at year-end 2005. The decline in the ratio
of average earning assets compared to total average assets is due mainly to the additional
goodwill recorded in the acquisition of Citizens Bancorp.

# Loans

Loans, net of unearned income,
totaled $1.0 billion at June 30, 2006, an increase of $58.8 million or 6.0% from year-end
2005. The composition of the loan portfolio is summarized in the table below.

|                                  
|----------------------------------
|
|
|Commercial, financial,            
|and agriculture                   
|Real estate - construction        
|Real estate mortgage - residential
|Real estate mortgage farmland and 
|other commercial enterprises      
|Installment                       
|Lease financing                   
|                                  
|Total                             
|                                  

On average, loans represented 73.6%
of earning assets during the current six month period, an increase of 455 basis points
compared to 69.0% for year-end 2005. The increase was due mainly to the Citizens Bancorp
acquisition, which had loans representing 86.5% of its average earning assets for the
six-month period ended June 30, 2006. As loan demand fluctuates, the available funds are
reallocated between loans and temporary investments or investment securities, which
typically involve a decrease in credit risk and lower yields.

# Allowance for Loan Losses

The allowance for loan losses was
$10.7 million at June 30, 2006, a decrease of $515 thousand or 4.6% from the prior
year-end. The allowance for loan losses was 1.04% of loans net of unearned income at June
30, 2006, a decrease of six and 11 basis points compared to 1.10% and 1.15% at March 31,
2006 and December 31, 2005, respectively. The provision for loan losses was unchanged in
the current three-month comparison and declined $40 thousand or 28.6% in the six-month
comparison. The negative provision for loans losses of $89 thousand and $180 thousand in
the current three and six-month periods is attributed to continued improvement in the
credit quality of the Companys loan portfolio. This improvement includes a $551
thousand or 11.0% and $705 thousand or 13.6% net decline in nonperforming loans since
March 31, 2006 and year-end 2005, respectively; lower annualized net charge-offs as a
percentage of average loans outstanding; and lower historical loss ratios. Nonaccrual
loans are down $1.4 million or 49.5% and $1.2 million or 45.8% compared to March 31, 2006
and year-end 2005, partially offset by higher loans past due 90 days or more and still
accruing of $893 thousand or 42.4% and $543 thousand or 22.1% compared to March 31, 2006
and year-end 2005. Annualized net charge-offs as a percentage of average loans were .07%
for the six-month period ended June 30, 2006, unchanged compared to March 31, 2006 and
down 21 basis points from .28% at December 31, 2005.

The allowance for loan losses as a
percentage of nonperforming loans totaled 240.2% and 217.4% at June 30, 2006 and December
31, 2005, respectively. The increase in the current period compared to the prior year-end
is primarily attributed to the net decline in nonperforming loans of $705 thousand, which
offset the $515 thousand lower allowance for loan losses. Management continues to
emphasize collection efforts and evaluation of risks within the loan portfolio.

# Nonperforming Assets

Nonperforming assets for the Company
include nonperforming loans, other real estate owned, and other foreclosed assets.
Nonperforming loans consist of nonaccrual loans, restructured loans, and loans past due
ninety days or more on which interest is still accruing. Nonperforming assets totaled $9.7
million at June 30, 2006, a decrease of $4.3 million or 30.6% from the prior year-end.
Nonperforming loans were $4.5 million at June 30, 2006, a $705 thousand or 13.6% decline
compared to year-end 2005. The decline in nonperforming loans relates primarily to lower
nonaccrual loans of $1.2 million, partially offset by an increase in loans past due 90
days or more of $543 thousand. The decrease in nonaccrual loans was led by a decline of
$768 thousand to a single borrower, of which $475 thousand was transferred to the Company
through foreclosure. The increase in nonaccrual loans was driven up primarily by three
individual credits totaling $1.1 million. Nonperforming loans represent .4% of loans net
of unearned income at June 30, 2006, a decrease of 1 basis point from .5% compared to
year-end 2005.

Other real estate owned was $5.1
million at June 30, 2006. This represents a decrease of $3.7 million or 41.6% compared to
$8.8 million at year-end 2005. A significant portion of this decrease is attributed to the
sale of foreclosed real estate related to the Companys previous disclosures
regarding a financially troubled builder.

# Temporary Investments

Temporary investments consist of
interest bearing deposits in other banks and federal funds sold and securities purchased
under agreements to resell. The Company uses these funds in the management of liquidity
and interest rate sensitivity. At June 30, 2006, temporary investments were $52.1 million,
a decrease of $7.4 million or 12.5% compared to $59.5 million at year-end 2005. Temporary
investments averaged $44.0 million during the first six months of 2006, a decrease of
$24.2 million or 35.5% from year-end 2005. The decrease is primarily a result of the
Companys net funding position, which was driven by $21.8 million cash payment to
Citizens Northern stockholders during the current six months along with higher loan
demand. Temporary investments are reallocated as loan demand and other investment
alternatives present the opportunity.

# Investment Securities

The investment securities portfolio
is comprised primarily of U.S. Government agency securities, mortgage-backed securities,
and tax-exempt securities of states and political subdivisions. Total investment
securities were $278 million on June 30, 2006, a decrease of $50.8 million or 15.4% from
year-end 2005. The decline in investment securities was due in part to the sale of
investment securities for normal asset and liability management purposes and reinvesting a
higher percentage of the proceeds from matured or called investment securities into loans
or alternate uses other than for the purchase of additional investment securities.

Investment securities averaged $316
million in total for the current six months, an increase of $15.9 million or 5.3% compared
to the year-end 2005 balance. The increase in average investment securities was driven by
a $20.2 million net increase in U.S. Government agency securities. The Company had a net
unrealized loss on available for sale investment securities of $6.6 million at June 30,
2006 compared to a net unrealized loss of $2.7 million at year-end 2005. The $4.0 million
decrease in the current period is due primarily to the impact of changing economic
conditions, including an increase in short-term market interest rates that have generally
lowered the value of the investment portfolio at the end of the current period. As overall
market interest rates have continued to climb higher in the current period, the portfolio
has declined in value. Market values of fixed rate investments are inversely related to
changes in market interest rates.

# Company-owned Life
Insurance

Company-owned life insurance totaled
$30.7 million at June 30, 2006, an increase of $653 thousand or 2.2% from $30.0 million at
year-end 2005. Income from company-owned life insurance was $324 thousand and $683
thousand for the three and six months ended June 30, 2006, respectively. This represents a
decrease of $2 thousand or .6% and an increase of $136 thousand or 24.9% in the three and
six-month comparisons, respectively. Income was down in the quarter despite the addition
of $24 thousand attributed to Citizens Bancorp as a result of lower crediting rates on the
underlying investment in the current quarter compared to the same quarter a year earlier.
For the six-month comparison, the higher crediting rates combined with an additional $60
thousand from Citizens Bancorp to boost the income $136 thousand.

# Assets of Discontinued
Operations

Total assets of discontinued
operations were $127 million at June 30, 2006, a decrease of $587 thousand or .5% compared
to year-end 2005.

# Deposits

The Companys primary source of
funding for its lending and investment activities results from its customer deposits,
which consist of noninterest and interest bearing demand, savings, and time deposits. On
June 30, 2006 total deposits were $1.2 billion, a decrease of $9.5 million or .8% from
year-end 2005. The decline in deposits was due to a $3.6 million or 1.9% decrease in
noninterest bearing deposits coupled with a $5.9 million or .6% decrease in interest
bearing deposits. Average total deposits were $1.2 billion for the six months of 2006, an
increase of $177 million or 16.8% compared to year-end 2005. Net increases in average
deposits were consistent throughout nearly the entire deposit portfolio as follows:
noninterest bearing demand of $14.4 million or 7.8%; interest bearing demand of $51.1
million or 23.6%; savings accounts of $27.0 million or 14.6%; and time deposits of $84.4
million or 18.0%. The increase in average deposits outstanding is primarily attributed to
the Citizens Northern acquisition late in the fourth quarter of 2005.

# Borrowed Funds

Borrowed funds totaled $179 million
at June 30, 2006, an increase of $31.4 million or 21.3% from $147 million at year-end
2005. Total borrowed funds averaged $163 million, an increase of $17.2 million or 11.8%
from $145 million at year-end 2005. The increase in average borrowed funds since year-end
2005 was led by the $14.5 million of subordinated notes payable to unconsolidated trusts.
The average outstanding balances are higher due to the timing of the transaction, which
took place during the middle of 2005.

# Liabilities of
Discontinued Operations

Total liabilities of discontinued
operations were $117 million at June 30, 2006, a decrease of $612 thousand or .5% compared
to $118 million at year-end 2005.

# LIQUIDITY

The Parent Companys primary use
of cash consists of dividend payments to its common shareholders, purchases of its common
stock, corporate acquisitions, interest expense on borrowings, and other general operating
purposes. Liquidity of the Parent Company depends primarily on the receipt of dividends
from its subsidiary banks and cash balances maintained. As of June 30, 2006 combined
retained earnings of the subsidiary banks, excluding KBC, was $59.2 million, of which
$18.4 million was available for the payment of dividends to the Parent Company without
obtaining prior approval from bank regulatory agencies. As a practical matter, payment of
future dividends is also subject to the maintenance of other capital ratio requirements.
Management expects that in the aggregate, its subsidiary banks will continue to have the
ability to pay dividends in order to provide funds to the Parent Company during the
remainder of 2006 sufficient to meet its liquidity needs. In addition, the Parent Company
has a $15.0 million unsecured line of credit with an unrelated financial institution
available for general corporate purposes. This line of credit has not been drawn upon and
will mature on June 5, 2007. The Parent Company had cash balances of $11.2 million at June
30, 2006, a decrease of $20.9 million or 65.2% from $32.1 million at year-end 2005. The
$20.9 million decrease in cash at the Parent Company is due primarily to $21.8 million
cash paid during the current quarter for the acquisition of Citizens Bancorp.

The Companys objective as it
relates to liquidity is to ensure that the subsidiary banks have funds available to meet
deposit withdrawals and credit demands without unduly penalizing profitability. In order
to maintain a proper level of liquidity, the subsidiary banks have several sources of
funds available on a daily basis that can be used for liquidity purposes. Those sources of
funds include the subsidiary banks core deposits, consisting of both business and
nonbusiness deposits; cash flow generated by repayment of principal and interest on loans
and investment securities; FHLB borrowings; and federal funds purchased and securities
sold under agreements to repurchase. While maturities and scheduled amortization of loans
and investment securities are generally a predictable source of funds, deposit outflows
and mortgage prepayments are influenced significantly by general interest rates, economic
conditions, and competition in our local markets. As of June 30, 2006 the Company had
approximately $181 million in additional borrowing capacity under various FHLB, federal
funds, and other borrowing agreements. However, there is no guarantee that these sources
of funds will continue to be available to the Company, or that current borrowings can be
refinanced upon maturity, although the Company is not aware of any events or uncertainties
that are likely to cause a decrease in our liquidity from these sources.

The Company intends to borrow
additional funds during the fourth quarter of 2006 for the $15.0 million cash portion of
the purchase price of the recently announced Citizens National acquisition. It also
expects to receive $20.0 million in cash during the fourth quarter of 2006 from the
recently announced sale of KBC.

For the longer term, the liquidity
position is managed by balancing the maturity structure of the balance sheet. This process
allows for an orderly flow of funds over an extended period of time. The Companys
Asset and Liability Management Committee, both at the bank subsidiary level and on a
consolidated basis, meets regularly and monitors the composition of the balance sheet to
ensure comprehensive management of interest rate risk and liquidity.

Liquid assets consist of cash, cash
equivalents, and securities available for sale. At June 30, 2006, such assets totaled
$390.6 million, a decrease of $55.9 million or 12.5% from year-end 2005. The decrease in
liquid assets is attributed to the $21.8 million cash paid in connection with the Citizens
Bancorp acquisition and the overall funding position of the Company. The overall funding
position of the Company changes as loan demand, deposit levels, and other sources and uses
of funds fluctuate.

Net cash provided by continuing
operating activities was $11.7 million in the first six months of 2006, an increase of
$9.3 million compared to the same period a year earlier. Net cash used in continuing
investing activities was $36.5 million in the current period compared to a net cash inflow
of $5.0 million in the same period last year. The most significant items included in the
$41.5 million higher net cash outflows from continuing investing activities are the $21.8
million cash payment for the purchase of Citizens Bancorp and $35.9 million net outflows
related to increased loan activity, partially offset by $18.2 million of net cash provided
by investment securities transactions. Net cash provided by continuing financing
activities was $16.8 million for the six months ended June 30, 2006, a decrease of $7.4
million compared to the same period a year earlier. This decrease is related mainly to
lower net inflows in the comparable periods from the following: $33.2 million related to
deposit outflow activity partially offset by $15.4 million from higher federal funds
purchased and securities sold under agreements to repurchase and $11.2 million from
increased other borrowings.

Commitments to extend credit are
considered in addressing the Companys liquidity management. The Company does not
expect these commitments to significantly effect the liquidity position in future periods.

# CAPITAL RESOURCES

Shareholders equity was $155
million on June 30, 2006, relatively unchanged from $154 million at December 31, 2005. The
net change in shareholders equity from year-end was $930 thousand or .6%. Retained
earnings grew $3.8 million or 2.4% as a result of $8.7 million of net income partially
offset by $4.9 million or $.66 per share in cash dividends declared. The Company issued
nine thousand and four thousand shares of common stock, respectively, during the current
six-month period related to its nonqualified stock option and employee stock purchase
plans. The issuance of these shares increased shareholders equity by $338 thousand.
Shareholders equity also increased as a result of $83 thousand of noncash
compensation expense attributed to its nonqualified stock option and employee stock
purchase plans. The Company purchased 23 thousand shares of its outstanding common stock
during the current six months which reduced shareholders equity $715 thousand.

Accumulated other comprehensive
income, consisting of net unrealized holding losses on available for sale securities (net
of tax), was $4.5 million at June 30, 2006, a decrease of $2.6 million from year-end 2005.
The decrease is due primarily to the impact of changing economic conditions, including an
increase in short-term market interest rates that have generally lowered the value of the
investment portfolio at the end of the current period. As overall market rates have moved
higher in the current period, the portfolio has declined in value. Market values of fixed
rate investments are inversely related to changes in market interest rates.

Consistent with the objective of
operating a sound financial organization, the Companys goal is to maintain capital
ratios well above the regulatory minimum requirements. The Companys capital ratios
as of June 30, 2006, the regulatory minimums, and the regulatory standard for a
well-capitalized institution are as follows.

|                 
|-----------------
|
|
|Tier 1 risk based
|Total risk based 
|Leverage         
|                 

As of June 30, 2006, all of the
Companys subsidiary banks were in excess of the well-capitalized regulatory ratio
requirements as calculated under guidelines established by federal banking agencies.

# Item 3.  Quantitative
and Qualitative Disclosures About Market Risk

The Company uses a simulation model
as a tool to monitor and evaluate interest rate risk exposure. The model is designed to
measure the sensitivity of net interest income and net income to changing interest rates
over future time periods. Forecasting net interest income and its sensitivity to changes
in interest rates requires the Company to make assumptions about the volume and
characteristics of many attributes, including assumptions relating to the replacement of
maturing earning assets and liabilities. Other assumptions include, but are not limited
to, projected prepayments, projected new volume, and the predicted relationship between
changes in market interest rates and changes in customer account balances. These effects
are combined with the Companys estimate of the most likely rate environment to
produce a forecast of net interest income and net income. The forecasted results are then
adjusted for the effect of a gradual increase and decrease in market interest rates on the
Companys net interest income and net income. Because assumptions are inherently
uncertain, the model cannot precisely estimate net interest income or net income or the
effect of interest rate changes on net interest income and net income. Actual results
could differ significantly from simulated results.

At June 30, 2006, the model indicated
that if rates were to gradually increase by 150 basis points during the calendar year,
then net interest income and net income would be unchanged for the year ending December
31, 2006. The model indicated that if rates were to gradually decrease by 150 basis points
over the same period, then net interest income and net income would decrease .76% and
1.25%, respectively.

In the current interest rate
environment, it is not practical or possible to reduce certain deposit rates by the same
magnitude as rates on earning assets. The average rate paid on some of the Companys
deposits, primarily certain savings and interest bearing checking accounts, remains at or
below 1.5%. This situation magnifies the models predicted results when modeling a
decrease in interest rates, as earning assets with higher yields have more of an
opportunity to reprice at lower rates than lower-rate deposits.

# Item 4. Controls and
Procedures

The Registrants Chief Executive
Officer and Chief Financial Officer have reviewed and evaluated the effectiveness of the
Registrants disclosure controls and procedures as of the end of the period covered
by this report, and have concluded that the Registrants disclosure controls and
procedures were adequate and effective to ensure that all material information required to
be disclosed in this annual report has been made known to them in a timely fashion.

There were no significant changes in
the Registrants internal controls or in other factors that could significantly
affect these controls subsequent to the date of the Chief Executive Officer and Chief
Financial Officers evaluation, nor were there any significant deficiencies or material
weaknesses in the controls which required corrective action.

# PART II  OTHER
INFORMATION

# Item 1. Legal Proceedings

As of June 30, 2006, there were
various pending legal actions and proceedings against the Company arising from the normal
course of business and in which claims for damages are asserted. Management, after
discussion with legal counsel, believes that these actions are without merit and that the
ultimate liability resulting from these legal actions and proceedings, if any, will not
have a material effect upon the consolidated financial statements of the Company.

# Item 2. Unregistered
Sales of Equity Securities and Use of Proceeds

The following table provides
information with respect to shares of common stock repurchased by the Company during the
quarter ended June 30, 2006.

|                               
|-------------------------------
|
|April 1, 2006 to April 30, 2006
|                               
|May 1, 2006 to May 31, 2006    
|                               
|June 1, 2006 to June 30, 2006  
|                               
|Total                          
|                               

On January 27, 2003, the
Companys Board of Directors authorized the purchase of up to 300,000 shares of the
Companys outstanding common stock. No stated expiration date was established under
this plan.

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

The annual meeting of shareholders
was held May 9, 2006. The matters that were voted upon included the following: election of
four directors for three-year terms ending in 2008 or until their successors have been
elected and qualified; and an amendment to the Companys Articles of Incorporation to
authorize a class of 1,000,000 shares, no par value, of preferred stock whose rights,
preferences and limitations would be established by resolutions of the Board of Directors
of the Company if and when issued.

The outcome of the voting was as
follows:

|                                      
|--------------------------------------
|
|
|Frank W. Sower, Jr                    
|J. Barry Banker                       
|Dr. John D. Sutterlin                 
|Dr. Donald J. Mullineaux              
|                                      
|Amendment to Articles of Incorporation
|                                      

Listed below are the names of each
director whose term of office continued after the meeting.

|                     | 
|-------------------- | 
|
|
|Lloyd C. Hillard, Jr | 
|Harold G. Mays       | 
|Robert Roach, Jr     | 
|Cecil D. Bell, Jr    | 

In addition to the directors  above,
 Dr. John P.  Stewart,  Chairman  Emeritus,  E. Bruce  Dungan,  and Charles T.  Mitchell
 serve as advisory directors for the Company.

# Item 6. Exhibits

|List of Exhibits
|----------------
|3i              
|3ii             
|3iia            
|31.1            
|31.2            
|32              

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# SIGNATURES

Pursuant to the requirements 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.

|Date: Aug-7-06 | /s/ G. Anthony Busseni
|-------------- | ----------------------
|               |                       
|               |                       
|               |                       

|Date: 8-7-06 | /s/ Doug Carpenter
|------------ | ------------------
|             |                   
|             |                   
|             |                   

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