**UNITED
      STATES**


**SECURITIES
      AND EXCHANGE COMMISSION**


**Washington,
      D.C. 20549**




**FORM
      10-Q**





**QUARTERLY
      REPORT**


**Pursuant
      to Section 13 OR 15(d) of**


**The
      Securities Exchange Act of 1934**





For
      the
      quarterly period ended June 30, 2007








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








Kentucky
            
            0-14412
            
            61-1017851(State
                or other jurisdiction
            
            (Commission
            
            (IRS
                Employerof
                incorporation)
            
            File
                Number)
            
            Identification
                No.)








P.O.
                Box 309  Frankfort, KY
            
            40602(Address
                of principal executive offices)
            
            (Zip
                Code)





Registrant’s
      telephone number, including area code – (502)-227-1668








Not
                Applicable(Former
                name or former address, if changed since last report.)








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.





YesxNo ̈





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 Exchange 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 $0.125 per share


7,903,455
      shares outstanding at August 1, 2007


1





TABLE
      OF
      CONTENTS





**PART
                I – FINANCIAL INFORMATION**Item
                1. Financial StatementsUnaudited
                Consolidated Balance
                Sheets
            3Unaudited
                Consolidated Statements of
                Income
            4Unaudited
                Consolidated Statements of
                Comprehensive Income
            5Unaudited
                Consolidated Statements of Cash
                Flows
            6Unaudited
                Consolidated Statements of Changes in
                Shareholders’ Equity
            7Notes
                to Unaudited Consolidated Financial
                Statements
            8Item
                2.  Management’s Discussion and Analysis of
                Financial Condition and Results of Operations
            12Item
                3.  Quantitative and Qualitative
                Disclosures About Market Risk
            29Item
                4.  Controls and
                Procedures
            30**PART
                II - OTHER INFORMATION**Item
                1.  Legal Proceedings
            30Item
                2.  Unregistered Sales of Equity
                Securities and Use of Proceeds
            31Item
                4.  Submission of Matters to
                a Vote of Security Holders
            31Item
                6.  Exhibits
            32SIGNATURES
            33








2





**PART I – FINANCIAL INFORMATION**


**Item 1. Financial Statements**


**Unaudited Consolidated Balance Sheets**


June
                30,
            
            
            December
                31,(In thousands, except share data)
            
            2007
            
            
            2006**Assets**Cash
                and cash equivalents:Cash
                and due from banks
            
            $
            76,095
            
            
            $
            115,640Interest
                bearing deposits in other banks
            
            
            1,989
            
            
            
            1,783Federal
                funds sold and securities purchased under agreements to
                resell
            
            
            36,419
            
            
            
            39,405Total
                cash and cash equivalents
            
            
            114,503
            
            
            
            156,828Investment
                securities:Available
                for sale, amortized cost of $309,056 (2007) and $328,499
                (2006)
            
            
            304,531
            
            
            
            326,485Held
                to maturity, fair value of $6,424 (2007) and $7,849 (2006)
            
            
            6,400
            
            
            
            7,788Total
                investment securities
            
            
            310,931
            
            
            
            334,273Loans,
                net of unearned income
            
            
            1,271,105
            
            
            
            1,197,836Allowance
                for loan losses
            
            
            (11,252
            )
            
            
            (11,999
            )Loans,
                net
            
            
            1,259,853
            
            
            
            1,185,837Premises
                and equipment, net
            
            
            39,330
            
            
            
            37,775Company-owned
                life insurance
            
            
            33,560
            
            
            
            32,929Goodwill
            
            
            52,436
            
            
            
            42,822Other
                intangibles, net
            
            
            11,239
            
            
            
            9,755Other
                assets
            
            
            26,448
            
            
            
            24,147Total
                assets
            
            $
            1,848,300
            
            
            $
            1,824,366**Liabilities**Deposits:Noninterest
                bearing
            
            $
            216,548
            
            
            $
            242,938Interest
                bearing
            
            
            1,234,693
            
            
            
            1,211,882Total
                deposits
            
            
            1,451,241
            
            
            
            1,454,820Federal
                funds purchased and securities sold under agreements to
                repurchase
            
            
            101,041
            
            
            
            67,941Other
                short-term borrowings
            
            
            540
            
            
            
            8,777Subordinated
                notes payable to unconsolidated trusts
            
            
            25,774
            
            
            
            25,774Long-term
                debt
            
            
            64,697
            
            
            
            62,218Dividends
                payable
            
            
            2,602
            
            
            
            3,472Other
                liabilities
            
            
            21,478
            
            
            
            22,923Total
                liabilities
            
            
            1,667,373
            
            
            
            1,645,925**Shareholders’
                Equity**Common
                stock, par value $.125 per share9,608,000
                shares authorized; 9,403,753 and 9,388,900shares
                issued at June 30, 2007 and December 31, 2006,
                respectively
            
            
            1,175
            
            
            
            1,174Capital
                surplus
            
            
            57,078
            
            
            
            56,679Retained
                earnings
            
            
            171,701
            
            
            
            167,387Treasury
                stock, at cost;  1,517,248 and 1,493,448 sharesat
                June 30, 2007 and December 31, 2006, respectively
            
            
            (43,124
            )
            
            
            (42,399
            )Accumulated
                other comprehensive loss
            
            
            (5,903
            )
            
            
            (4,400
            )Total
                shareholders’ equity
            
            
            180,927
            
            
            
            178,441Total
                liabilities and shareholders’ equity
            
            $
            1,848,300
            
            
            $
            1,824,366


See
      accompanying notes to unaudited consolidated financial statements.




3


**Unaudited
      Consolidated Statements of
      Income**


Three
                Months Ended
            
            
            Six
                Months EndedJune
                30,
            
            
            June
                30,(In
                thousands, except per share data)
            
            2007
            
            
            2006
            
            
            2007
            
            
            2006**Interest
                Income**Interest
                and fees on loans
            
            $
            24,215
            
            
            $
            18,227
            
            
            $
            46,752
            
            
            $
            35,393Interest
                on investment securities:Taxable
            
            
            2,897
            
            
            
            2,166
            
            
            
            5,521
            
            
            
            4,551Nontaxable
            
            
            844
            
            
            
            920
            
            
            
            1,701
            
            
            
            1,863Interest
                on deposits in other banks
            
            
            15
            
            
            
            13
            
            
            
            29
            
            
            
            25Interest
                of federal funds sold and securities purchased under agreements to
                resell
            
            
            540
            
            
            
            344
            
            
            
            1,910
            
            
            
            721Total
                interest income
            
            
            28,511
            
            
            
            21,670
            
            
            
            55,913
            
            
            
            42,553**Interest
                Expense**Interest
                on deposits
            
            
            11,254
            
            
            
            7,336
            
            
            
            22,205
            
            
            
            14,086Interest
                on federal funds purchased and securities sold under agreements to
                repurchase
            
            
            1,189
            
            
            
            1,082
            
            
            
            2,302
            
            
            
            1,994Interest
                on subordinated notes payable to unconsolidated trusts
            
            
            454
            
            
            
            430
            
            
            
            902
            
            
            
            824Interest
                on other borrowed funds
            
            
            764
            
            
            
            580
            
            
            
            1,559
            
            
            
            1,091Total
                interest expense
            
            
            13,661
            
            
            
            9,428
            
            
            
            26,968
            
            
            
            17,995Net
                interest income
            
            
            14,850
            
            
            
            12,242
            
            
            
            28,945
            
            
            
            24,558Provision
                for loan losses
            
            
            330
            
            
            
            (47
            )
            
            
            (166
            )
            
            
            (81
            )Net
                interest income after provision for loan losses
            
            
            14,520
            
            
            
            12,289
            
            
            
            29,111
            
            
            
            24,639**Noninterest
                Income**Service
                charges and fees on deposits
            
            
            3,035
            
            
            
            2,227
            
            
            
            5,891
            
            
            
            4,322Allotment
                processing fees
            
            
            1,168
            
            
            
            639
            
            
            
            2,125
            
            
            
            1,336Other
                service charges, commissions, and fees
            
            
            625
            
            
            
            647
            
            
            
            1,246
            
            
            
            1,340Data
                processing income
            
            
            307
            
            
            
            459
            
            
            
            584
            
            
            
            884Trust
                income
            
            
            485
            
            
            
            466
            
            
            
            973
            
            
            
            918Investment
                securities losses, net
            
            
            
            
            
            
            (195
            )
            
            
            
            
            
            
            (195
            )Gains
                on sale of mortgage loans, net
            
            
            175
            
            
            
            189
            
            
            
            292
            
            
            
            368Income
                from company-owned life insurance
            
            
            321
            
            
            
            324
            
            
            
            668
            
            
            
            683Other
            
            
            (8
            )
            
            
            235
            
            
            
            (4
            )
            
            
            391Total
                noninterest income
            
            
            6,108
            
            
            
            4,991
            
            
            
            11,775
            
            
            
            10,047**Noninterest
                Expense**Salaries
                and employee benefits
            
            
            7,619
            
            
            
            6,579
            
            
            
            15,129
            
            
            
            13,458Occupancy
                expenses, net
            
            
            1,023
            
            
            
            835
            
            
            
            2,089
            
            
            
            1,763Equipment
                expenses
            
            
            761
            
            
            
            710
            
            
            
            1,542
            
            
            
            1,426Data
                processing and communications expense
            
            
            1,151
            
            
            
            1,309
            
            
            
            2,306
            
            
            
            2,464Bank
                franchise tax
            
            
            525
            
            
            
            444
            
            
            
            1,039
            
            
            
            882Correspondent
                bank fees
            
            
            186
            
            
            
            170
            
            
            
            345
            
            
            
            338Amortization
                of intangibles
            
            
            848
            
            
            
            447
            
            
            
            1,666
            
            
            
            893Other
            
            
            2,196
            
            
            
            1,940
            
            
            
            4,531
            
            
            
            3,717Total
                noninterest expense
            
            
            14,309
            
            
            
            12,434
            
            
            
            28,647
            
            
            
            24,941Income
                from continuing operations before income tax expense
            
            
            6,319
            
            
            
            4,846
            
            
            
            12,239
            
            
            
            9,745Income
                tax expense from continuing operations
            
            
            1,407
            
            
            
            968
            
            
            
            2,717
            
            
            
            1,878Income
                from continuing operations
            
            
            4,912
            
            
            
            3,878
            
            
            
            9,522
            
            
            
            7,867Income
                from discontinued operations before income tax expense
            
            
            
            
            
            
            598
            
            
            
            
            
            
            
            1,165Income
                tax expense from discontinued operations
            
            
            
            
            
            
            170
            
            
            
            
            
            
            
            335Income
                from discontinued operations
            
            
            
            
            
            
            428
            
            
            
            
            
            
            
            830Net
                Income
            
            $
            4,912
            
            
            $
            4,306
            
            
            $
            9,522
            
            
            $
            8,697**Net
                Income Per Common Share**Income
                from continuing operations – basic
            
            $
            .62
            
            
            $
            .52
            
            
            $
            1.21
            
            
            $
            1.07Income
                from discontinued operations – basic
            
            
            
            
            
            
            .06
            
            
            
            
            
            
            
            .11Net
                income per common share – basic
            
            
            .62
            
            
            
            .58
            
            
            
            1.21
            
            
            
            1.18Income
                from continuing operations – diluted
            
            
            .62
            
            
            
            .52
            
            
            
            1.21
            
            
            
            1.06Income
                from discontinued operations – diluted
            
            
            
            
            
            
            .06
            
            
            
            
            
            
            
            .11Net
                income per common share – diluted
            
            $
            .62
            
            
            $
            .58
            
            
            $
            1.21
            
            
            $
            1.17**Weighted
                Average Shares Outstanding**Basic
            
            
            7,884
            
            
            
            7,378
            
            
            
            7,888
            
            
            
            7,381Diluted
            
            
            7,892
            
            
            
            7,400
            
            
            
            7,899
            
            
            
            7,404


See
      accompanying notes to unaudited consolidated financial
      statements.


4





**Unaudited
      Consolidated Statements of Comprehensive
      Income**


Three
                Months Ended
            
            
            Six
                Months EndedJune
                30,
            
            
            June
                30,(In
                thousands)
            
            2007
            
            
            2006
            
            
            2007
            
            
            2006**Net
                Income**
            
            $
            4,912
            
            
            $
            4,306
            
            
            $
            9,522
            
            
            $
            8,697Other
                comprehensive loss:Unrealized
                holding loss on available for sale securities arising during the
                period,
                net of tax of $1,110, $813, $884, and $1,424, respectively
            
            
            (2,061
            )
            
            
            (1,509
            )
            
            
            (1,642
            )
            
            
            (2,645
            )Reclassification
                adjustment for prior period unrealized loss recognized during current
                period, net of tax of $4, $58, $5, and $22, respectively
            
            
            8
            
            
            
            107
            
            
            
            10
            
            
            
            40Amortization
                of net actuarial loss, transition obligation, and prior service costs
                attributed to the Company’s postretirement benefit  plans, net
                of tax of $34 and $69
            
            
            64
            
            
            
            
            
            
            
            129Other
                comprehensive loss
            
            
            (1,989
            )
            
            
            (1,402
            )
            
            
            (1,503
            )
            
            
            (2,605
            )**Comprehensive
                Income**
            
            $
            2,923
            
            
            $
            2,904
            
            
            $
            8,019
            
            
            $
            6,092


See
      accompanying notes to unaudited consolidated financial statements.








5


**Unaudited
      Consolidated Statements of Cash
      Flows**


Six
                months ended June 30, (In thousands)
            
            2007
            
            
            2006**Cash
                Flows from Operating Activities**Net
                income
            
            $
            9,522
            
            
            $
            8,697Adjustments
                to reconcile net income to net cash provided by operating
                activities:Depreciation
                and amortization
            
            
            3,607
            
            
            
            2,630Net
                amortization of investment security premiums and
                (discounts):Available
                for sale
            
            
            (632
            )
            
            
            (13
            )Held
                to maturity
            
            
            
            
            
            
            (13
            )Provision
                for loan losses
            
            
            (166
            )
            
            
            (81
            )Noncash
                compensation expense
            
            
            30
            
            
            
            67Mortgage
                loans originated for sale
            
            
            (12,177
            )
            
            
            (16,677
            )Proceeds
                from sale of mortgage loans
            
            
            10,005
            
            
            
            15,301Deferred
                income tax expense
            
            
            2,497
            
            
            
            1,272Gain
                on sale of mortgage loans, net
            
            
            (292
            )
            
            
            (318
            )Loss
                (gain) on sale of premises and equipment, net
            
            
            104
            
            
            
            (93
            )Loss
                on sale of available for sale investment securities, net
            
            
            
            
            
            
            195(Increase)
                decrease in accrued interest receivable
            
            
            (478
            )
            
            
            273Income
                from company-owned life insurance
            
            
            (631
            )
            
            
            (653
            )Decrease
                in other assets
            
            
            164
            
            
            
            2,347Increase
                in accrued interest payable
            
            
            579
            
            
            
            457Decrease
                in other liabilities
            
            
            (5,527
            )
            
            
            (533
            )Net
                cash provided by discontinued operating activities
            
            
            
            
            
            
            1,051Net
                cash provided by operating activities
            
            
            6,605
            
            
            
            13,909**Cash
                Flows from Investing Activities**Proceeds
                from maturities and calls of investment securities:Available
                for sale
            
            
            209,054
            
            
            
            32,074Held
                to maturity
            
            
            1,388
            
            
            
            2,875Proceeds
                from sale of available for sale investment securities
            
            
            20,785
            
            
            
            19,121Purchase
                of available for sale investment securities
            
            
            (209,764
            )
            
            
            (7,428
            )Loans
                originated for investment, net of principal collected
            
            
            (71,386
            )
            
            
            (59,437
            )Payment
                of prior year accrued purchase price-Citizens Bancorp,
                Inc.
            
            
            
            
            
            
            (21,846
            )Purchase
                of PNC Military Allotment operations, net of cash acquired
            
            
            (1,876
            )Purchase
                price refinements of previous acquisitions
            
            
            (18
            )
            
            
            (58
            )Additions
                to mortgage servicing rights, net
            
            
            (59
            )
            
            
            (41
            )Purchase
                of premises and equipment
            
            
            (3,828
            )
            
            
            (4,210
            )Proceeds
                from sale of equipment
            
            
            315
            
            
            
            476Net
                cash provided by discontinued investing activities
            
            
            
            
            
            
            14,406Net
                cash used in investing activities
            
            
            (55,389
            )
            
            
            (24,068
            )**Cash
                Flows from Financing Activities**Net
                decrease in deposits
            
            
            (14,449
            )
            
            
            (8,706
            )Net
                increase in securities sold under agreements to repurchase
            
            
            33,100
            
            
            
            22,838Proceeds
                from long-term debt
            
            
            8,000
            
            
            
            11,198Repayments
                of long-term debt
            
            
            (5,521
            )
            
            
            (2,092
            )Net
                decrease in other short-term borrowings
            
            
            (8,237
            )
            
            
            (564
            )Dividends
                paid
            
            
            (6,078
            )
            
            
            (4,680
            )Purchase
                of common stock
            
            
            (725
            )
            
            
            (715
            )Shares
                issued under Employee Stock Purchase Plan
            
            
            126
            
            
            
            113Stock
                options exercised
            
            
            243
            
            
            
            225Net
                cash used in discontinued financing activities
            
            
            
            
            
            
            (2,258
            )Net
                cash provided by financing activities
            
            
            6,459
            
            
            
            15,359Net
                (decrease) increase in cash and cash equivalents
            
            
            (42,325
            )
            
            
            5,200Less:  net
                increase in cash and cash equivalents of discontinued
                operations
            
            
            
            
            
            
            (13,199
            )Net
                decrease in cash and cash equivalents from continuing
                operations
            
            
            (42,325
            )
            
            
            (7,999
            )Cash
                and cash equivalents from continuing activities at beginning of
                year
            
            
            156,828
            
            
            
            131,018Cash
                and cash equivalents from continuing activities at end of
                period
            
            $
            114,503
            
            
            $
            123,019**Supplemental
                Disclosures**Cash
                paid during the period for:Interest
            
            $
            26,389
            
            
            $
            19,456Income
                taxes
            
            
            5,300
            
            
            
            2,400Transfers
                from loans to repossessed assets
            
            
            997
            
            
            
            930Cash
                dividend declared and unpaid
            
            
            2,602
            
            
            
            2,432


See
      accompanying notes to unaudited
      consolidated financial statements.




6




**Unaudited
        Consolidated Statements of Changes in
        Shareholders’ Equity**
 
 (In
                  thousands, except per share data)
              
              
              
              
              
              
              
              
              
              
              
              AccumulatedOther
              
              
              TotalSix
                  months ended
              
              Common
                  Stock
              
              
              Capital
              
              
              Retained
              
              
              Treasury
                  Stock
              
              
              Comprehensive
              
              
              Shareholders’June
                  30, 2007 and 2006
              
              Shares
              
              
              Amount
              
              
              Surplus
              
              
              Earnings
              
              
              Shares
              
              
              Amount
              
              
              Loss
              
              
              EquityBalance
                  at January 1, 2007
              
              
              7,895
              
              
              $
              1,174
              
              
              $
              56,679
              
              
              $
              167,387
              
              
              
              1,493
              
              
              $
              (42,399
              )
              
              $
              (4,400
              )
              
              $
              178,441Net
                  income
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              9,522
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              9,522Other
                  comprehensive loss
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              (1,503
              )
              
              
              (1,503
              )Cash
                  dividends declared,
                $.66
                  per share
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              (5,208
              )
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              (5,208
              )Purchase
                  of common stock
              
              
              (23
              )
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              24
              
              
              
              (725
              )
              
              
              
              
              
              
              (725
              )Stock
                  options exercised,
                including
                  related tax benefits
              
              
              10
              
              
              
              1
              
              
              
              243
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              244Shares
                  issued pursuant to Employee Stock Purchase plan
              
              
              5
              
              
              
              
              
              
              
              126
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              126Noncash
                  compensation expense attributed to stock option & Employee Stock
                  Purchase Plan grants
              
              
              
              
              
              
              
              
              
              
              30
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              30Balance
                  at June 30, 2007
              
              
              7,887
              
              
              $
              1,175
              
              
              $
              57,078
              
              
              $
              171,701
              
              
              
              1,517
              
              
              $
              (43,124
              )
              
              $
              (5,903
              )
              
              $
              180,927Balance
                  at January 1, 2006
              
              
              8,856
              
              
              $
              1,107
              
              
              $
              39,829
              
              
              $
              156,796
              
              
              
              1,467
              
              
              $
              (41,579
              )
              
              $
              (1,917
              )
              
              $
              154,236Net
                  income
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              8,697
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              8,697Other
                  comprehensive loss
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              (2,605
              )
              
              
              (2,605
              )Cash
                  dividends declared,
                $.66
                  per share
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              (4,868
              )
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              (4,868
              )Purchase
                  of common stock
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              23
              
              
              
              (715
              )
              
              
              
              
              
              
              (715
              )Stock
                  options exercised,
                including
                  related tax benefits
              
              
              9
              
              
              
              1
              
              
              
              224
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              225Shares
                  issued pursuant to Employee Stock Purchase plan
              
              
              4
              
              
              
              1
              
              
              
              112
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              113Noncash
                  compensation expense attributed to stock option & Employee Stock
                  Purchase Plan grants
              
              
              
              
              
              
              
              
              
              
              83
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              83Balance
                  at June 30, 2006
              
              
              8,869
              
              
              $
              1,109
              
              
              $
              40,248
              
              
              $
              160,625
              
              
              
              1,490
              
              
              $
              (42,294
              )
              
              $
              (4,522
              )
              
              $
              155,166
 See
        accompanying notes to unaudited consolidated financial
        statements.
  7


**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 and their significant nonbank
      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
      offering a variety of fixed rate loan products; First Citizens Bank in
      Elizabethtown, KY; United Bank & Trust Co. in Versailles, KY; The
      Lawrenceburg Bank & Trust Company, formerly Lawrenceburg National Bank, in
      Harrodsburg, KY; Citizens Bank of Northern Kentucky, Inc. in Newport, KY
      (“Citizens Northern”); and Citizens Bank of Jessamine County, Inc., formerly
      Citizens National Bank of Jessamine County, in Nicholasville, KY (“Citizens
      Jessamine”).





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 other unaffiliated entities. 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.





The
      Company provides financial services at its 36 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
      condensed 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, 2006.


8


**2.**
            **Discontinued
                Operations**





During
      2006, the Company announced that it had entered into an agreement to sell
      Kentucky Banking Centers, Inc. (“KBC”), its former wholly-owned bank subsidiary
      in Glasgow, Kentucky, in a cash transaction valued at $20.0 million. The Company
      completed the sale on November 30, 2006 that resulted in a pretax gain of $9.4
      million.





The
      Company also announced during 2006 that it had entered into an agreement to
      sell
      the Owingsville and Sharpsburg branches of Farmers Georgetown in Bath County
      (the “Branches”). The sale was completed on December 1, 2006 and the Company
      recorded a pretax gain on the sale of the Branches of $431
      thousand.





In
      accordance with SFAS No. 144, *“Accounting for the Impairment or Disposal of
      Long-Lived Assets”*, the results of operations of KBC and Farmers
      Georgetown’s Branches are removed from the detail line items of the Company’s
      financial statements and presented separately as discontinued operations. Prior
      period results included herein have been reclassified to conform to the current
      presentation which displays the operating results prior to the sale and the
      subsequent gains on sale of KBC and the Branches as discontinued operations.
      These reclassifications had no effect on net income or shareholders’
equity.





**3.            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.





**4.          
      Recently Issued Accounting Standards**





In
      February 2006, the Financial Accounting Standards Board (“FASB”) issued
      Statement of Financial Accounting Standards (“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 No. 155 clarifies which
      interest-only strips and principal-only strips are not subject to the
      requirements of SFAS No. 133. It also clarifies that concentrations of credit
      risk in the form of subordination are not embedded derivatives. SFAS No. 155
      amends SFAS No. 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. Adoption
      of SFAS No. 155 on January 1, 2007 did not have a material impact on the
      Company’s results of operations and consolidated financial
      condition.





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. Adoption of SFAS No. 156 on January
      1, 2007 did not have a material impact on the Company’s results of operations
      and consolidated financial condition.





In
      September 2006, the FASB issued SFAS No. 157, “*Fair Value
      Measurements*”. This Statement provides clarification of the definition of
      fair value, methods used to measure fair value, and additional disclosures
      about
      fair value measurements. This Standard is applicable in circumstances in which
      other Standards require or permit assets or liabilities to be measured at fair
      value. Therefore, this Standard does not require any new fair value
      measurements. This Standard is effective for financial statements issued for
      fiscal years beginning after November 15, 2007, and interim periods within
      those
      fiscal years. The Company does not expect the adoption of this Statement on
      January 1, 2008 to have a material impact on its results of operations and
      consolidated financial condition.


9





On
      February 15, 2007, the FASB issued SFAS No. 159, “*The Fair Value Option for
      Financial Assets and Financial Liabilities*”. SFAS No. 159 allows companies
      to record certain financial assets and financial liabilities at full fair value
      if they so choose. SFAS No. 159 was issued to mitigate volatility in reported
      earnings caused by an accounting model utilizing multiple measurement
      attributes.  The adoption of the fair value option is recorded as a
      cumulative-effect adjustment to the opening balance of retained earnings, which
      would be January 1 for the Company. Upon adoption, the difference between the
      carrying amount and the fair value of the items chosen is included in the
      cumulative-effect adjustment. Subsequent changes in fair value are recorded
      through the income statement. SFAS No. 159 is effective as of the beginning
      of
      the first fiscal year after November 15, 2007, which is January 1, 2008 for
      the
      Company. The Company does not expect the adoption of this Statement to have
      a
      material impact on its results of operations and consolidated financial
      condition.





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. It is the Company’s policy to charge any
      interest and penalties, if incurred, to their respective federal or state income
      tax expense accounts. The Company files U.S. federal and various state income
      tax returns. The Company is no longer subject to income tax examinations by
      taxing authorities for years before 2003. Adoption of FIN 48 on January 1,
      2007
      did not have a material impact on the Company’s results of operations and
      consolidated financial condition.





**5.           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, 2007 and 2006.





Three
                Months Ended
              June
                30,
            
            
            Six
                Months Ended
              June
                30,(In
                thousands, except per share data)
            
            2007
            
            
            2006
            
            
            2007
            
            
            2006Net
                income, basic and diluted
            
            $
            4,912
            
            
            $
            4,306
            
            
            $
            9,522
            
            
            $
            8,697Average
                shares outstanding
            
            
            7,884
            
            
            
            7,378
            
            
            
            7,888
            
            
            
            7,381Effect
                of dilutive stock options
            
            
            8
            
            
            
            22
            
            
            
            11
            
            
            
            23Average
                diluted shares outstanding
            
            
            7,892
            
            
            
            7,400
            
            
            
            7,899
            
            
            
            7,404Net
                income per share, basic
            
            $
            .62
            
            
            $
            .58
            
            
            $
            1.21
            
            
            $
            1.18Net
                income per share, diluted
            
            
            .62
            
            
            
            .58
            
            
            
            1.21
            
            
            
            1.17**Continuing
                Operations**Income
                from continuing operations, basic and diluted
            
            $
            4,912
            
            
            $
            3,878
            
            
            $
            9,522
            
            
            $
            7,867Income
                per share from continuing operations, basic
            
            $
            .62
            
            
            $
            .52
            
            
            $
            1.21
            
            
            $
            1.07Income
                per share from continuing operations, diluted
            
            
            .62
            
            
            
            .52
            
            
            
            1.21
            
            
            
            1.06**Discontinued
                Operations**Income
                from discontinued operations, basic and diluted
            
            
            
            
            
            $
            428
            
            
            
            
            
            
            $
            830Income
                per share from discontinued operations, basic
            
            
            
            
            
            $
            .06
            
            
            
            
            
            
            $
            .11Income
                per share from discontinued operations, diluted
            
            
            
            
            
            
            .06
            
            
            
            
            
            
            
            .11





10





**6.        
      Business Combination – Military Allotment Operation, PNC Bank, National
      Association**





In
      January 2007, First Citizens completed its transaction to acquire the Military
      Allotment operation of PNC Bank, National Association in a cash transaction.
      First Citizens acquired intangible assets in the form of a customer list and
      goodwill. It also recorded a core deposit intangible in connection with
      receiving approximately $10.8 million in deposits from PNC in the transaction.
      First Citizens merged the acquired Military Allotment operation into its
      existing allotment operations, which specializes in the processing of federal
      benefit payments and military allotments.





The
      total
      cost related to this acquisition, which was paid entirely in cash, was $12.7
      million. The customer list and core deposit intangible assets of $1.3 million
      and $1.9 million at acquisition are being amortized over a life of 7 years
      under
      a declining amortization schedule through year 2013. Goodwill is not subject
      to
      periodic amortization in the consolidated financial statements, but will be
      deductible for federal income tax purposes over a period of 15 years. The
      following table summarized the estimated fair value of assets acquired and
      liabilities assumed at the date of acquisition.





(In
                thousands)
            
            January
                12, 2007**Assets**Cash
            
            $
            10,870Customer
                list intangible
            
            
            1,275Core
                deposit intangible
            
            
            1,874Goodwill
            
            
            9,575Total
                Assets
            
            $
            23,594**Liabilities**Deposits
            
            $
            10,870**Net
                Assets Acquired**
            
            $
            12,724





**7.        
      Subsequent Event – Share Repurchase and Trust Preferred Securities
      Transaction**





In
      July
      2007, the Company announced a tender offer to purchase for cash up to 550
      thousand shares of its outstanding common stock at a price not greater than
      $35.00 nor less than $31.00 per share through a process commonly known as a
      modified “Dutch Auction”. Assuming the maximum number of shares of our common
      stock is tendered, the aggregate purchase price will be between $17.1 million
      and $19.3 million. The tender offer is scheduled to expire, unless extended,
      at
      12:01 a.m. (Eastern Daylight Savings Time) on August 16, 2007.




As
      part
      of the modified Dutch Auction repurchase program, the Company anticipates
      issuing up to $25.0 million of trust preferred securities to finance the cost
      of
      the share purchases. The Company intends to complete a private offering of
      trust
      preferred securities through a Delaware statutory trust sponsored by the
      Company. The trust would sell up to $25.0 million of preferred securities and
      the Company will own all of the common securities of the trust. The trust will
      use the proceeds from the sale of the preferred securities, plus capital
      contributed to establish the trust, to purchase the Company’s junior
      subordinated notes in amounts and bearing terms that mirror the amounts and
      terms of the preferred securities. Capital from the proceeds of the trust
      preferred securities, which will not be dilutive to common shareholders, is
      expected to be part of our regulatory capital base and allow us to maintain
      our
      historically strong, “well-capitalized” regulatory rating. Any excess funds
      raised in the trust preferred securities transaction that remain available
      following the tender offer will be used for general corporate
      purposes.





11





**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.  In general, forward-looking statements relate to a
      discussion of future financial results or projections, future economic
      performance, future operational plans and objectives, and statements regarding
      the underlying assumptions of such statements.  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)
      and lower interest margins; competition for the Company’s customers from other
      providers of financial services; deposit outflows or reduced demand for
      financial services and loan products; government legislation, regulation, and
      changes in monetary and fiscal policies (which changes from time to time and
      over which the Company has no control); changes in interest rates; inflation;
      material unforeseen changes in the liquidity, results of operations, or
      financial condition of the Company’s customers; changes in the level of
      non-performing assets and charge-offs; the capability of the Company to
      successfully enter into a definitive agreement for and close anticipated
      transactions; the possibility that acquired entities may not perform as well
      as
      expected; unexpected claims or litigation against the Company; technological
      or
      operational difficulties; the impact of new accounting pronouncements and
      changes in policies and practices that may be adopted by regulatory agencies;
      acts of war or terrorism; and other risks or uncertainties 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 former wholly-owned subsidiary, Kentucky Banking Centers, Inc. (“KBC”),
      based in Glasgow, Kentucky.  During the third quarter of 2006, the
      Company also committed to a plan of sale of the Bath County branches of its
      wholly-owned subsidiary Farmers Bank & Trust Company.  Both sales
      were closed during the fourth quarter of 2006. Prior period results included
      herein have been reclassified to conform to the current presentation which
      displays the operating results of KBC and Bath County 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 2007 Compared
      to Second Quarter 2006**





The
      Company reported income from continuing operations of $4.9 million for the
      three
      months ended June 30, 2007, an increase of $606 thousand or 14.1% compared
      to
      $4.3 million for the same period in 2006.  Basic and diluted net
      income per share was $.62 for the current three months, an increase of $.04
      or
      6.9% compared to $.58 in the same three-month period a year ago.





Although
      net income in dollar terms increased 14.1% in the three-month comparison, net
      income on a per share diluted basis increased by a lower amount of
      6.9%.  The increase in net income on a per share basis is lower due to
      the effect of an additional 464 thousand shares issued in connection with the
      acquisition of Citizens National Bancshares, Inc., the parent company of
      Citizens Bank of Jessamine County (“Citizens Bank”). The operating results
      related to Citizens Bank, acquired on October 1, 2006, 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 Bank in the comparable period.  Net loans and deposits
      acquired from Citizens Bank on the date of purchase were $120 million and $139
      million, respectively.





12


The
      increase in net income for the three months ended June 30, 2007 is primarily
      related to an increase in net interest income that was led by the Citizens
      Bank
      acquisition. Net interest income was $14.9 million in the current three-month
      period ended June 30, 2007. This represents an increase of $2.6 million or
      21.3%
      compared to the same period a year ago. The increase in net interest income
      is
      primarily due to higher interest on loans of $6.0 million or 32.9%, partially
      offset by $3.9 million or 53.4% higher interest expense on deposits. The
      Citizens Bank acquisition accounted for $1.4 million of the increase in net
      interest income, including $2.4 million higher interest from loans partially
      offset by $1.3 million higher interest expense on deposits.





The
      provision for loans losses was $330 thousand in the current three-month period,
      an increase of $377 thousand compared to a negative provision of $47 thousand
      in
      the same three-month period a year ago. The Company’s nonperforming loans and
      net charge-offs are up in the current quarter compared to the first quarter
      of
      2007, although still at relatively low levels. In addition, at June 30, 2007
      loans, net of unearned income, are up $48.6 million and $73.3 million compared
      to March 31, 2007 and December 31, 2006, respectively. As a percentage of net
      loans outstanding, the allowance for loan losses was .89% as of June 30, 2007
      compared to .92% and 1.0% at March 31, 2007 and December 31, 2006,
      respectively.





Noninterest
      income was $6.1 million in the current quarter, an increase of $1.1 million
      or
      22.4% in the comparable period of a year earlier. The increase in noninterest
      income was driven by the previously mentioned Citizens Bank acquisition and
      the
      acquisition of the Military Allotment operation of PNC Bank, National
      Association that occurred during January, 2007. The Citizens Bank acquisition
      accounted for an additional $407 thousand of noninterest income during the
      current three-month period; the Military Allotment acquisition accounted for
      an
      additional $968 thousand of noninterest income during the current three-month
      period. The increase in fee income from these acquisitions offset revenue
      declines experienced in other line items from previously existing
      operations.





Noninterest
      expenses increased $1.9 million or 15.1% for the current three-month period
      compared to the same period a year earlier. The increase in noninterest expenses
      is due mainly to higher personnel costs and intangible amortization. Salaries
      and employee benefits were up $1.0 million or 15.8% in the three-month
      comparison, as the average number of full time equivalent employees rose to
      588
      from 537. Amortization of intangibles increased $401 thousand or 89.7% and
      is
      attributed to the additional customer list and core deposit intangible assets
      resulting from the Citizens Bank and Military Allotment acquisitions. Combined
      other noninterest expenses had a net increase of $434 thousand or 8.0% and
      occurred across a broad range of categories.  These increases are
      generally attributed to the Company’s recent acquisitions. The effective income
      tax rate increased to 22.3% from 20.0% in the three-month
      comparison.





The
      return on average assets (“ROA”) was 1.06% for the current quarter of 2007, an
      increase of 5 basis points compared to 1.01% reported for the same period of
      2006.  The increase in ROA was led by a 15 basis point reduction in
      noninterest expenses as a percentage of average assets, partially offset by
      a
      higher provision for loan losses relative to average assets of 8 basis points.
      The return on average equity ("ROE") was 10.91% for the current quarter of
      2007,
      an increase of 85 basis points compared to 10.06% for the same period of
      2006.  The increase in ROE is attributed to a combination of the
      higher ROA and a 33 basis point increase in financial leverage to 10.3% from
      10.0%.  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 zero for the current three-month period and
      $428 thousand for the three-month period ended June 30, 2006. There were no
      discontinued operations in the current-year period presented since all
      discontinued operations were disposed of during the fourth quarter of
      2006.





**Net Interest Income**





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


13


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 tables that follow this discussion represent
      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 7.2%, an increase of 57 basis points from 6.6% in the same period
      a
      year ago.  The cost of funds for the current three months was 3.8%, an
      increase of 60 basis points compared to 3.2% 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 current economic
      environment and competitive market forces.  Average earning assets
      were $1.6 billion for the current quarter, an increase of $279 million or 20.6%
      compared to $1.4 billion a year ago. As a percentage of total average assets,
      earning assets were relatively unchanged at 87.4%.





Interest
      income results from interest earned on earning assets, which primarily include
      loans and investment securities. Interest income is affected by the volume
      (average balance), composition of earning assets, and the related rates earned
      on those assets. Total interest income for the second quarter of 2007 was $28.5
      million, an increase of $6.8 million or 31.6% compared to the same period in
      the
      previous year. The growth in interest income was mainly attributed to higher
      interest income on loans of $6.0 million or 32.9%.  Interest income on
      loans increased as a result of higher average loan balances outstanding
      resulting from the Citizens Bank acquisition, higher internally generated loan
      growth, and a 52 basis point increase in the average rate earned on
      loans.  The Citizens Bank acquisition accounted for $2.4 million of
      the increase in interest income on loans.





Interest
      and fees on loans was $24.2 million, an increase of $6.0 million or 32.9%
      compared to a year earlier.  Average loans increased $248 million or
      24.6% to $1.3 billion in the comparison due mainly to a $122 million higher
      average balance outstanding from the acquisition of Citizens Bank and higher
      loan demand.  Interest income on loans was also boosted by a 52 basis
      point increase in the tax equivalent yield to 7.8% from 7.3% in the quarterly
      comparison. Interest on taxable securities was $2.9 million, an increase of
      $731
      thousand or 33.7% due to a 79 basis point increase in the average rate earned
      combined with a $25.8 million or 12.2% increase in average balances
      outstanding.  Interest on nontaxable securities declined 8.3% to $844
      thousand due mainly to a 58 basis point drop in the average rate and, to a
      lesser extent, a $2.7 million decline in the average balance. Interest on
      short-term investments, including time deposits in other banks, federal funds
      sold, and securities purchased under agreements to resell, increased $198
      thousand or 55.5% to $555 thousand due mainly to a 102 basis point increase
      in
      the average rate earned to 4.5% from 3.4%. An $8.2 million or 19.6% increase
      in
      the average balance outstanding also contributed to the increase in interest
      earned. The increase in the average rate earned on short-term investments is
      mainly attributed to higher federal funds sold and securities purchased under
      agreements to resell, which are temporary investments generally having interest
      rates that fluctuate more closely with overall short-term market interest rates
      and have increased in the period to period comparison.





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 $13.7 million for second quarter of 2007, an increase of $4.2
      million or 44.9% from the same period in the prior year.  Interest
      expense increased mainly as a result of higher interest expense on deposits
      of
      $3.9 million or 53.4% and was mainly driven by additional volume of $235 million
      or 23.3%. Interest expense on deposits increased as a result of higher deposit
      balances outstanding from the Citizens Bank acquisition, higher deposits
      generated internally, and higher rates paid on interest bearing deposits
      throughout the entire deposit portfolio.  The Citizens Bank
      acquisition accounted for an additional $120 million in average interest bearing
      deposits outstanding. The Company’s cost of funds was 3.8% for the second
      quarter of 2007, an increase of 60 basis points from 3.2% for the same period
      of
      the prior year.  The percentage increase in cost of funds was led by
      an 84 basis point increase in time deposits.





Interest
      expense on time deposits, the largest component of total interest expense,
      increased $3.6 million or 65.8% to $8.9 million. The increase is due to both
      a
      $201 million or 37.0% increase in volume combined with an 84
      basis


14


point
      increase in the average rate paid to 4.8% from 4.0%.  The increase in
      average time deposits outstanding in the comparable periods was fueled by an
      additional $72.3 million of time deposits related to the Citizens Bank
      acquisition along with additional time deposits generated internally in order
      to
      fund higher loan growth. The increase in the average rate paid is due to
      competitive market conditions, the need to attract additional deposits to
      support asset growth, and the relocation or opening of branch sites in existing
      or new markets.





Interest
      expense on interest bearing demand deposits was relatively unchanged at $918
      thousand for the second quarter of 2007. Interest expense on savings deposits
      increased $374 thousand or 36.9% and was due to the combination of a $38.6
      million or 18.7% increase in volume and a 30 basis point increase in the average
      rates paid to 2.3% from 2.0%.  The Citizens Bank acquisition
      contributed an additional $40.4 million in average savings deposits with an
      average rate paid of 3.8% in the current three-month
      period.  Excluding the additional savings deposits attributed to the
      Citizens Bank acquisition, average savings deposits for the Company declined
      $1.8 million or .9%.





Interest
      expense on federal funds purchased and securities sold under agreements to
      repurchase increased $107 thousand or 9.9% due to a $12.4 million or 13.8%
      increase in the average balance outstanding partially due to additional
      correspondent banking activity.  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 was $1.2 million, an increase of $208 thousand or 20.6%
      and is due mainly to an increase in interest expense related to higher FHLB
      average borrowings outstanding. Interest expense on the Company’s subordinated
      notes payable increased $24 thousand or 5.6% as the variable rate on these
      notes
      have repriced to a higher interest rate in the comparable periods.





The
      net
      interest margin (TE) increased one basis point to 3.79% during the second
      quarter of 2007 compared to 3.78% in the same quarter of 2006.  The
      higher margin is attributed to a four basis point increase in the impact of
      noninterest bearing sources of funds partially offset by a three basis point
      decrease in net interest spread between the rates earned on earning assets
      and
      the rates paid on interest bearing liabilities to 3.35% from 3.38%. The impact
      of noninterest bearing sources of funds on net interest margin typically
      increases as the cost of funds rise.





15





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**


Quarter
                Ended June 30,
            
            2007
            
            
            2006(In
                thousands)
            
            Average
              Balance
            
            
            Interest4
            
            
            Average
              Rate
            
            
            Average
              Balance
            
            
            Interest4
            
            
            Average
              Rate**Earning
                Assets**Investment
                securitiesTaxable
            
            $
            236,538
            
            
            $
            2,897
            
            
            
            4.91
            %
            
            $
            210,734
            
            
            $
            2,166
            
            
            
            4.12
            %Nontaxable1
            
            
            88,827
            
            
            
            1,205
            
            
            
            5.44
            
            
            
            91,523
            
            
            
            1,373
            
            
            
            6.02Time
                deposits with banks, federal funds sold and securities purchased
                under
                agreements to resell
            
            
            49,974
            
            
            
            555
            
            
            
            4.45
            
            
            
            41,799
            
            
            
            357
            
            
            
            3.43Loans1,2,3
            
            
            1,255,692
            
            
            
            24,429
            
            
            
            7.80
            
            
            
            1,008,004
            
            
            
            18,301
            
            
            
            7.28Total
                earning assets
            
            
            1,631,031
            
            
            $
            29,086
            
            
            
            7.15
            %
            
            
            1,352,060
            
            
            $
            22,197
            
            
            
            6.58
            %Allowance
                for loan losses
            
            
            (11,310
            )
            
            
            
            
            
            
            
            
            
            
            (10,930
            )Total
                earning assets, net of allowance for loan losses
            
            
            1,619,721
            
            
            
            
            
            
            
            
            
            
            
            1,341,130**Nonearning
                Assets**Cash
                and due from banks
            
            
            86,269
            
            
            
            
            
            
            
            
            
            
            
            85,036Premises
                and equipment, net
            
            
            39,280
            
            
            
            
            
            
            
            
            
            
            
            30,548Other
                assets
            
            
            121,383
            
            
            
            
            
            
            
            
            
            
            
            89,932Assets
                of discontinued operations
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            141,462Total
                assets
            
            $
            1,866,653
            
            
            
            
            
            
            
            
            
            
            $
            1,688,108**Interest
                Bearing Liabilities**DepositsInterest
                bearing demand
            
            $
            257,773
            
            
            $
            918
            
            
            
            1.43
            %
            
            $
            262,308
            
            
            $
            924
            
            
            
            1.41
            %Savings
            
            
            244,759
            
            
            
            1,387
            
            
            
            2.27
            
            
            
            206,199
            
            
            
            1,013
            
            
            
            1.97Time
            
            
            744,876
            
            
            
            8,949
            
            
            
            4.82
            
            
            
            543,572
            
            
            
            5,399
            
            
            
            3.98Federal
                funds purchased and securities sold under agreements to
                repurchase
            
            
            102,294
            
            
            
            1,189
            
            
            
            4.66
            
            
            
            89,874
            
            
            
            1,082
            
            
            
            4.83Other
                borrowed funds
            
            
            94,030
            
            
            
            1,218
            
            
            
            5.20
            
            
            
            80,689
            
            
            
            1,010
            
            
            
            5.02Total
                interest bearing liabilities
            
            
            1,443,732
            
            
            $
            13,661
            
            
            
            3.80
            %
            
            
            1,182,642
            
            
            $
            9,428
            
            
            
            3.20
            %**Noninterest
                Bearing Liabilities**Commonwealth
                of Kentucky deposits
            
            
            44,806
            
            
            
            
            
            
            
            
            
            
            
            46,028Other
                demand deposits
            
            
            175,332
            
            
            
            
            
            
            
            
            
            
            
            148,774Other
                liabilities
            
            
            22,157
            
            
            
            
            
            
            
            
            
            
            
            13,276Liabilities
                of discontinued operations
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            142,793Total
                liabilities
            
            
            1,686,027
            
            
            
            
            
            
            
            
            
            
            
            1,533,513Shareholders’
                equity
            
            
            180,626
            
            
            
            
            
            
            
            
            
            
            
            154,595Total
                liabilities and shareholders’equity
            
            $
            1,866,653
            
            
            
            
            
            
            
            
            
            
            $
            1,688,108Net
                interest income
            
            
            
            
            
            
            15,425
            
            
            
            
            
            
            
            
            
            
            
            12,769TE
                basis adjustment
            
            
            
            
            
            
            (575
            )
            
            
            
            
            
            
            
            
            
            
            (527
            )Net
                interest income
            
            
            
            
            
            $
            14,850
            
            
            
            
            
            
            
            
            
            
            $
            12,242Net
                interest spread
            
            
            
            
            
            
            
            
            
            
            3.35
            %
            
            
            
            
            
            
            
            
            
            
            3.38
            %Impact
                of noninterest bearing sources of funds
            
            
            
            
            
            
            
            
            
            
            .44
            
            
            
            
            
            
            
            
            
            
            
            .40Net
                interest margin
            
            
            
            
            
            
            
            
            
            
            3.79
            %
            
            
            
            
            
            
            
            
            
            
            3.78
            %





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 $790 thousand and $404 thousand in 2007 and
      2006,
      respectively.


4Excludes
      the
      interest income and interest expense of discontinued
      operations.


16





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


(In
                thousands)
            
            Variance
            
            
            Variance
                Attributed toQuarter
                Ended June 30,
            
            2007/20061,3
            
            
            Volume
            
            
            Rate**Interest
                Income**Taxable
                investment securities
            
            $
            731
            
            
            $
            285
            
            
            $
            446Nontaxable
                investment securities2
            
            
            (168
            )
            
            
            (39
            )
            
            
            (129
            )Time
                deposits with banks, federal funds sold andsecurities
                purchased under agreements to resell
            
            
            198
            
            
            
            79
            
            
            
            119Loans2
            
            
            6,128
            
            
            
            4,748
            
            
            
            1,380Total
                interest income
            
            
            6,889
            
            
            
            5,073
            
            
            
            1,816**Interest
                Expense**Interest
                bearing demand deposits
            
            
            (6
            )
            
            
            (61
            )
            
            
            55Savings
                deposits
            
            
            374
            
            
            
            206
            
            
            
            168Time
                deposits
            
            
            3,550
            
            
            
            2,261
            
            
            
            1,289Federal
                funds purchased and securities sold underagreements
                to repurchase
            
            
            107
            
            
            
            329
            
            
            
            (222
            )Other
                borrowed funds
            
            
            208
            
            
            
            171
            
            
            
            37Total
                interest expense
            
            
            4,233
            
            
            
            2,906
            
            
            
            1,327Net
                interest income
            
            $
            2,656
            
            
            $
            2,167
            
            
            $
            489Percentage
                change
            
            
            100.0
            %
            
            
            81.6
            %
            
            
            18.4
            %





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%.


3Excludes
      the
      interest income and interest expense of discontinued operations.





**Noninterest Income**





Noninterest
      income was $6.1 million during the three months ended June 30, 2007, an increase
      of $1.1 million or 22.4% compared to the same period a year
      earlier.  Noninterest income represents 17.6% of total revenue for the
      current period, a decrease of 108 basis points from 18.7% for the same period
      in
      2006.





Service
      charges and fees on deposits were $3.0 million in the second quarter of 2007,
      an
      increase of $808 thousand or 36.3% in the quarterly comparison. The primary
      factor driving the increase in service charges and fees on deposits was a $410
      thousand increase in account fees related to the Company’s allotment line of
      business, which is up during the current quarter as a result of the acquisition
      of the Military Allotment operations of PNC Bank in the first quarter of 2007.
      Overdraft charges were also up $235 thousand in the current quarter compared
      to
      a year ago and are attributed to additional fees of $289 thousand from the
      Citizens Bank acquisition. Allotment processing fees were $1.2 million, up
      $529
      thousand or 82.8% boosted by the acquisition of the Military Allotment operation
      in the current year. Trust income was $485 thousand in the current quarter,
      an
      increase of $19 thousand or 4.1%. There was no net gain or loss on the sale
      of
      securities in the current period compared to a net loss on the sale of
      securities of $195 thousand during the same period a year ago.





The
      Company experienced declines in the following noninterest income categories
      in
      the current quarter compared to a year earlier: non-deposit service charges,
      commissions, and fees of $22 thousand or 3.4%; data processing fees of $152
      thousand or 33.1%; gains on sale of loans of $14 thousand or 7.4%; income from
      company-owned life insurance of $3 thousand or .9%; and net all other
      noninterest income of $243 thousand.





The
      decrease in data processing fees are attributed to the acquisition of Citizens
      Bank and the sale of KBC, both of which were customers of the Company’s data
      processing subsidiary. Data processing income from KBC was not eliminated in
      consolidation once classified as discontinued operations, effectively increasing
      data processing income during the second quarter of 2007 by $90 thousand. There
      was no data processing fees recognized from KBC during the second quarter of
      2007 since it was sold during 2006. Additionally, Citizens Bank was a separate
      independent company until the Company purchased it during the fourth quarter
      of
      2006. Approximately $50


17


thousand
      was included in data processing fees during the second quarter of 2006 that
      are
      not included in the current period since inter-company amounts are eliminated
      during consolidation.





**Noninterest Expense**





Total
      noninterest expenses were $14.3 million for the three months ended June 30,
      2007, an increase of $1.9 million or 15.1% compared to $12.4 million for the
      same period in 2006.  The increase in noninterest expenses occurred
      across a broad range of line items. A significant factor contributing to the
      higher expenses is the Citizens Bank acquisition during fourth quarter of 2006.
      The largest increases in noninterest expenses are attributed to higher salaries
      and employee benefits of $1.0 million or 15.8%, amortization of intangible
      assets of $401 thousand or 89.7%, and increases in other expenses attributed
      to
      the acquisition of Citizens Bank.





The
      increase in salaries and employee benefits resulted from the addition of 51
      average full time equivalent employees, of which 42 are attributed to the
      Citizens Bank acquisition, and normal salary increases for existing employees.
      Salaries and related payroll taxes increased $909 thousand or 17.3%, with
      Citizens Bank accounting for $461 thousand of the increase. Benefit expenses
      were up $151 thousand or 11.7% in the comparison, with Citizens Bank accounting
      for $88 thousand of the increase. The acquisition of the Military Allotment
      operations of PNC Bank during the first quarter of 2007 contributed $54 thousand
      to the increase in salaries and employee benefits.





Intangible
      asset amortization was $401 thousand higher in the current quarter compared
      to
      the same quarter a year ago and is due to the increase in customer list and
      core
      deposit intangible assets from the acquisitions of Citizens Bank and the
      Military Allotment operations of PNC Bank. The $188 thousand or 22.5% increase
      in net occupancy expense is attributed primarily to the Citizens Bank
      acquisition and expansion efforts, mainly in our Northern Kentucky market.
      Data
      processing expenses decreased $158 thousand or 12.1% in the quarterly comparison
      primarily as a result of the acquisition of Citizens Bank of Northern Kentucky
      (“Citizens Northern”) in late 2005. Up until the early part of the fourth
      quarter of 2006, Citizen Northern used the services of an unrelated third party
      vendor to meet its data processing needs. During the fourth quarter of 2006,
      Citizens Northern began to use the Company’s data processing subsidiary; as
      such, fees paid to the unrelated third party vendor during 2006 are recognized
      as an expense prior to the change in processing companies. Subsequent to the
      change, the fees paid to the Company’s data processing subsidiary have been
      eliminated in consolidation. All other noninterest expenses were up a net of
      $404 thousand or 12.4% across a wide range of line items is mainly attributed
      to
      the Citizens Bank acquisition.





**Income Taxes**





Income
      tax expense for the second quarter of 2007 was $1.4 million, an increase of
      $439
      thousand or 45.4% compared to the same period a year earlier.  The
      effective federal income tax rate increased 229 basis points to 22.3% from
      20.0%
      in the comparison. The change in the effective tax rate is due to the increase
      in the mix of taxable revenues compared to nontaxable revenues.





**Income
      From Discontinued Operations**





Income
      from discontinued operations was zero for the current three-month period and
      $428 thousand for the three-month period ended June 30, 2006. There were no
      discontinued operations in the current-year period presented since all
      discontinued operations were disposed of during the fourth quarter of
      2006.





**First
      Six Months of 2007 Compared to First Six Months of
      2006**





The
      Company reported income from continuing operations of $9.5 million for the
      six
      months ended June 30, 2007, an increase of $1.7 million or 21.0% compared to
      $7.9 million reported for the six months ended June 30, 2006.  Basic
      and diluted income per share from continuing operations was $1.21 for the
      current six months, an increase of $.14 or 13.1% (basic) and $.15 or 14.2%
      (diluted) compared to their respective amounts of $1.07 and $1.06 a year
      earlier.


18


Net
      income was $9.5 million for the current six-months, an increase of $825 thousand
      or 9.5% compared to $8.7 million reported for the six months ended June 30,
      2006.  Basic and diluted net income per share was $1.21 for the
      current six months, an increase of $.03 or 2.5% (basic) and $.04 or 3.4%
      (diluted) compared to $1.18 and $1.17 a year earlier.





While
      net
      income in dollar terms increased 9.5% in the six-month comparison, net income
      on
      a per share diluted basis increased by a lower amount of 3.4%.  The
      increase in net income on a per share basis is lower due to the effect of an
      additional 464 thousand shares issued in connection with the acquisition of
      Citizens Bank. The operating results related to Citizens Bank, acquired on
      October 1, 2006, 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 Bank in the comparable period a year
      ago.  Net loans and deposits acquired from Citizens Bank on the date
      of purchase were $120 million and $139 million, respectively.





The
      increase in net income for the six months ended June 30, 2007 is primarily
      related to an increase in net interest income that was led by the Citizens
      Bank
      acquisition. Net interest income was $28.9 million in the current six-month
      period ended June 30, 2007. This represents an increase of $4.4 million or
      17.9%
      compared to the same period a year ago. The increase in net interest income
      is
      primarily due to higher interest on loans of $11.4 million or 32.1%, partially
      offset by $8.1 million or 57.6% higher interest expense on deposits. The
      Citizens Bank acquisition accounted for $2.8 million of the increase in net
      interest income in the six-month period, including $4.7 million higher interest
      from loans partially offset by $2.5 million higher interest expense on
      deposits.





For
      the
      current six-month period, the Company recorded a negative loan loss provision
      of
      $166 thousand compared to a negative loan loss provision of $81 thousand a
      year
      earlier.  The Company’s nonperforming loans and net charge-offs are up
      in the current quarter compared to the first quarter of 2007, although still
      at
      relatively low levels. In addition, at June 30, 2007 loans, net of unearned
      income, are up $48.6 million and $73.3 million compared to March 31, 2007 and
      December 31, 2006, respectively. Annualized net charge-offs as a percentage
      of
      average net loans outstanding were .095% for the six months ended June 30,
      2007,
      relatively unchanged from 0.105% at year-end 2006. As a percentage of net loans
      outstanding, the allowance for loan losses was .89% as of June 30, 2007 compared
      to .92% and 1.0% at March 31, 2007 and December 31, 2006,
      respectively.





Noninterest
      income was $11.8 million in the current six-month period, an increase of $1.7
      million or 17.2% in the comparable period of a year earlier. The increase in
      noninterest income was driven by the previously mentioned Citizens Bank
      acquisition and the acquisition of the Military Allotment operation of PNC
      Bank,
      National Association that occurred during January, 2007. The Citizens Bank
      acquisition accounted for an additional $773 thousand of noninterest income
      during the current six-month period; the Military Allotment acquisition
      accounted for an additional $1.7 million of noninterest income during the
      current six-month period. The increase in fee income from these acquisitions
      offset revenue declines experienced in other line items from previously existing
      operations.





Noninterest
      expenses increased $3.7 million or 14.9% for the current six-month period
      compared to the same period a year earlier. The increase in noninterest expenses
      is due mainly to higher personnel costs and intangible amortization. Salaries
      and employee benefits were up $1.7 million or 12.4% in the six-month comparison,
      as the average number of full time equivalent employees rose to 584 from 530
      in
      the comparison. Amortization of intangibles increased $773 thousand or 86.6%
      and
      is attributed to the additional customer list and core deposit intangible assets
      resulting from the Citizens Bank and Military Allotment acquisitions. Combined
      other noninterest expenses had a net increase of $1.3 million or 11.9%
      comparison and occurred across a broad range of categories.  These
      increases are generally attributed to the Company’s recent acquisitions. The
      effective income tax rate increased to 22.2% for the current six-month period
      compared to 19.3% a year earlier.





ROA
      was
      1.04% for the current six-month period ended June 30, 2007, an increase of
      1
      basis point compared to 1.03% reported for the same period of
      2006.  ROE was 10.71% for the current six months of 2007, an increase
      of 43 basis points compared to 10.28% for the same period of
      2006.  The increase in ROE is attributed to a combination of the
      slightly higher ROA and a 32 basis point increase in financial leverage to
      10.3%
      from 10.0%.  Financial leverage represents the degree in which
      borrowed funds, as opposed to equity, are used in the funding of
      assets.


19


Income
      from discontinued operations was zero in the six-month period ended June 30,
      2007 and $830 thousand for the six months ended June 30, 2006. There were no
      discontinued operations in the current-year periods presented since all
      discontinued operations were disposed of during the fourth quarter of
      2006.





**Net
      Interest Income**





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 tables that follow
      this discussion represent 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
      7.1%, an increase of 55 basis points from 6.5% in the same period a year
      ago.  The cost of funds for the current six months was 3.8%, an
      increase of 69 basis points compared to 3.1% 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 current economic
      environment and competitive market forces.  Average earning assets
      were $1.6 billion for the current six months, an increase of $279 million or
      20.7% compared to $1.3 billion a year ago. As a percentage of total average
      assets, earning assets were 88.2% for the six-month period ended June 30, 2007,
      up 801 basis points from 80.1% a year earlier.  The higher earning
      asset ratio positively impacted ROA by 4 basis points in the six-month
      comparison.





Interest
      income results from interest earned on earning assets, which primarily include
      loans and investment securities. Interest income is affected by the volume
      (average balance), composition of earning assets, and the related rates earned
      on those assets. Total interest income for the first six months of 2007 was
      $55.9 million, an increase of $13.4 million or 31.4% compared to the same period
      in the previous year. The growth in interest income was mainly attributed to
      higher interest income on loans of $11.4 million or 32.1%.  Interest
      income on loans increased as a result of higher average loan balances
      outstanding resulting from the Citizens Bank acquisition, higher internally
      generated loan growth, and a 50 basis point increase in the average rate earned
      on loans.  The Citizens Bank acquisition accounted for $4.7 million of
      the increase in interest income on loans.





Interest
      and fees on loans was $46.8 million, an increase of $11.4 million or 32.1%
      compared to a year earlier.  Average loans increased $238 million or
      24.1% to $1.2 billion in the comparison due mainly to a $121 million higher
      average balance outstanding from the acquisition of Citizens Bank and higher
      loan demand.  Interest income on loans was also helped by a 50 basis
      point increase in the tax equivalent yield to 7.8% from 7.3% in the year-to-date
      comparison. Interest on taxable securities was $5.5 million, an increase of
      $970
      thousand or 21.3% due to a 74 basis point increase in the average rate earned
      to
      4.9% along with a $6.3 million or 2.8% increase in average balances
      outstanding.  Interest on nontaxable securities declined $162 thousand
      or 8.7% to $1.7 million due mainly to a 55 basis point drop in the average
      rate
      and, to a lesser extent, a $3.2 million decline in the average balance. Interest
      on short-term investments, including time deposits in other banks, federal
      funds
      sold, and securities purchased under agreements to resell, increased $1.2
      million or 160% to $1.9 million due mainly to a $37.2 million or 84.6% increase
      in the average balance outstanding. A 140 basis point increase in the average
      rate earned to 4.8% from 3.4% also contributed to the increase in interest
      earned. The increase in the average rate earned on short-term investments is
      mainly attributed to higher federal funds sold and securities purchased under
      agreements to resell, which are temporary investments generally having interest
      rates that fluctuate more closely with overall short-term market interest rates
      and have increased in the period to period comparison.


20


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 $27.0 million for current six months, an increase of $9.0 million
      or
      49.9% from the same period in the prior year.  Interest expense
      increased mainly as a result of higher interest expense on deposits of $8.1
      million or 57.6% and was mainly driven by additional volume of $230 million
      or
      22.7%. Interest expense on deposits increased as a result of higher deposit
      balances outstanding from the Citizens Bank acquisition, higher deposits
      generated internally, and higher rates paid on interest bearing deposits
      throughout the entire deposit portfolio.  The Citizens Bank
      acquisition accounted for an additional $117 million in average interest bearing
      deposits outstanding. The Company’s cost of funds was 3.8% for the first six
      months of 2007, an increase of 69 basis points from 3.1% for the same period
      of
      the prior year.  The percentage increase in cost of funds was led by a
      95 basis point increase in time deposits.





Interest
      expense on time deposits, the largest component of total interest expense,
      increased $7.2 million or 70.4% to $17.5 million. The increase is due to both
      a
      $197 million or 36.6% increase in volume combined with a 95 basis point increase
      in the average rate paid to 4.8% from 3.8%.  The increase in average
      time deposits outstanding in the comparable periods was boosted by an additional
      $69.5 million of time deposits related to the Citizens Bank acquisition along
      with additional time deposits generated internally in order to fund higher
      loan
      growth. The increase in the average rate paid is due to competitive market
      conditions, the need to attract additional deposits to support asset growth,
      and
      the relocation or opening of branch sites in existing or new
      markets.





Interest
      expense on interest bearing demand deposits in the first six months of 2007
      was
      $2.0 million, up $105 thousand or 5.7% compared to $1.8 million a year ago.
      The
      increase was driven by a 10 basis point increase in the average rate paid,
      which
      offset a decline in volume of $3.1 million or 1.2%. Interest expense on savings
      deposits was $2.8 million, an increase of $799 thousand or 40.2% from $2.0
      million a year earlier. The higher interest expense on savings deposits is
      due
      to increases in both rate and volume. The average rate jumped 37 basis points
      to
      2.3% and the average volume grew $36.1 million or 17.2% to $245 million. Average
      volume of savings deposits were up due to the Citizens Bank acquisition, which
      added $40.0 million in average savings deposits in the current six-month period
      with an average rate paid of 3.8%.  Excluding the additional savings
      deposits attributed to the Citizens Bank acquisition, average savings deposits
      for the Company declined $4.0 million or 1.9%.





Interest
      expense on federal funds purchased and securities sold under agreements to
      repurchase increased $308 thousand or 15.4% due to a $14.8 million or 17.6%
      increase in the average balance outstanding partially due to additional
      correspondent banking activity.  Interest expense on other borrowed
      funds consists primarily of FHLB borrowings and subordinated notes payable
      to
      unconsolidated trusts.  Interest expense on other borrowed funds was
      $2.5 million, an increase of $546 thousand or 28.5% and is due mainly to an
      increase in interest expense related to higher FHLB average borrowings
      outstanding. Interest expense on the Company’s subordinated notes payable
      increased $78 thousand or 9.5% as the variable rate on these notes have repriced
      to a higher interest rate in the comparable periods.





The
      net
      interest margin (TE) decreased 10 basis points to 3.73% during the first six
      months of 2007 compared to 3.83% for the same period of 2006.  The
      lower margin is attributed to a 14 basis point decrease to 3.29% from 3.43%
      in
      the net interest spread between the rates earned on earning assets and the
      rates
      paid on interest bearing liabilities partially offset by the impact of
      noninterest bearing sources of funds of four basis points. The impact of
      noninterest bearing sources of funds on net interest margin typically increases
      as the cost of funds rise.





21




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**


Six
                Months Ended June 30,
            
            2007
            
            
            2006(In
                thousands)
            
            Average
              Balance
            
            
            Interest4
            
            
            Average
              Rate
            
            
            Average
              Balance
            
            
            Interest4
            
            
            Average
              Rate**Earning
                Assets**Investment
                securitiesTaxable
            
            $
            229,371
            
            
            $
            5,521
            
            
            
            4.85
            %
            
            $
            223,083
            
            
            $
            4,551
            
            
            
            4.11
            %Nontaxable1
            
            
            89,384
            
            
            
            2,432
            
            
            
            5.49
            
            
            
            92,539
            
            
            
            2,770
            
            
            
            6.04Time
                deposits with banks, federal funds sold and securities purchased
                under
                agreements to resell
            
            
            81,189
            
            
            
            1,939
            
            
            
            4.82
            
            
            
            43,985
            
            
            
            746
            
            
            
            3.42Loans1,2,3
            
            
            1,227,574
            
            
            
            47,182
            
            
            
            7.75
            
            
            
            989,200
            
            
            
            35,544
            
            
            
            7.25Total
                earning assets
            
            
            1,627,518
            
            
            $
            57,074
            
            
            
            7.07
            %
            
            
            1,348,807
            
            
            $
            43,611
            
            
            
            6.52
            %Allowance
                for loan losses
            
            
            (11,647
            )
            
            
            
            
            
            
            
            
            
            
            (11,106
            )Total
                earning assets, net of allowance for loan losses
            
            
            1,615,871
            
            
            
            
            
            
            
            
            
            
            
            1,337,701**Nonearning
                Assets**Cash
                and due from banks
            
            
            82,149
            
            
            
            
            
            
            
            
            
            
            
            82,265Premises
                and equipment, net
            
            
            38,888
            
            
            
            
            
            
            
            
            
            
            
            29,774Other
                assets
            
            
            109,325
            
            
            
            
            
            
            
            
            
            
            
            91,326Assets
                of discontinued operations
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            141,981Total
                assets
            
            $
            1,846,233
            
            
            
            
            
            
            
            
            
            
            $
            1,683,047**Interest
                Bearing Liabilities**DepositsInterest
                bearing demand
            
            $
            262,630
            
            
            $
            1,951
            
            
            
            1.50
            %
            
            $
            265,755
            
            
            $
            1,846
            
            
            
            1.40
            %Savings
            
            
            245,485
            
            
            
            2,788
            
            
            
            2.29
            
            
            
            209,432
            
            
            
            1,989
            
            
            
            1.92Time
            
            
            735,682
            
            
            
            17,466
            
            
            
            4.79
            
            
            
            538,432
            
            
            
            10,251
            
            
            
            3.84Federal
                funds purchased and securities sold under agreements to
                repurchase
            
            
            99,203
            
            
            
            2,302
            
            
            
            4.68
            
            
            
            84,376
            
            
            
            1,994
            
            
            
            4.77Other
                borrowed funds
            
            
            95,009
            
            
            
            2,461
            
            
            
            5.22
            
            
            
            78,178
            
            
            
            1,915
            
            
            
            4.94Total
                interest bearing liabilities
            
            
            1,438,009
            
            
            $
            26,968
            
            
            
            3.78
            %
            
            
            1,176,173
            
            
            $
            17,995
            
            
            
            3.09
            %**Noninterest
                Bearing Liabilities**Commonwealth
                of Kentucky deposits
            
            
            40,671
            
            
            
            
            
            
            
            
            
            
            
            41,277Other
                demand deposits
            
            
            175,430
            
            
            
            
            
            
            
            
            
            
            
            151,762Other
                liabilities
            
            
            12,901
            
            
            
            
            
            
            
            
            
            
            
            16,124Liabilities
                of discontinued operations
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            143,338Total
                liabilities
            
            
            1,667,011
            
            
            
            
            
            
            
            
            
            
            
            1,528,674Shareholders’
                equity
            
            
            179,222
            
            
            
            
            
            
            
            
            
            
            
            154,373Total
                liabilities and shareholders’equity
            
            $
            1,846,233
            
            
            
            
            
            
            
            
            
            
            $
            1,683,047Net
                interest income
            
            
            
            
            
            
            30,106
            
            
            
            
            
            
            
            
            
            
            
            25,616TE
                basis adjustment
            
            
            
            
            
            
            (1,161
            )
            
            
            
            
            
            
            
            
            
            
            (1,058
            )Net
                interest income
            
            
            
            
            
            $
            28,945
            
            
            
            
            
            
            
            
            
            
            $
            24,558Net
                interest spread
            
            
            
            
            
            
            
            
            
            
            3.29
            %
            
            
            
            
            
            
            
            
            
            
            3.43
            %Impact
                of noninterest bearing sources of funds
            
            
            
            
            
            
            
            
            
            
            .44
            
            
            
            
            
            
            
            
            
            
            
            .40Net
                interest margin
            
            
            
            
            
            
            
            
            
            
            3.73
            %
            
            
            
            
            
            
            
            
            
            
            3.83
            %





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 $1.4 million and $1.1 million in 2007 and 2006,
      respectively.


4Excludes
      the
      interest income and interest expense of discontinued
      operations.


22





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


(In
                thousands)
            
            Variance
            
            
            Variance
                Attributed toSix
                Months Ended June 30,
            
            2007/20061,3
            
            
            Volume
            
            
            Rate**Interest
                Income**Taxable
                investment securities
            
            $
            970
            
            
            $
            131
            
            
            $
            839Nontaxable
                investment securities2
            
            
            (338
            )
            
            
            (92
            )
            
            
            (246
            )Time
                deposits with banks, federal funds sold andsecurities
                purchased under agreements to resell
            
            
            1,193
            
            
            
            804
            
            
            
            389Loans2
            
            
            11,638
            
            
            
            9,048
            
            
            
            2,590Total
                interest income
            
            
            13,463
            
            
            
            9,891
            
            
            
            3,572**Interest
                Expense**Interest
                bearing demand deposits
            
            
            105
            
            
            
            (61
            )
            
            
            166Savings
                deposits
            
            
            799
            
            
            
            377
            
            
            
            422Time
                deposits
            
            
            7,215
            
            
            
            4,307
            
            
            
            2,908Federal
                funds purchased and securities sold underagreements
                to repurchase
            
            
            308
            
            
            
            415
            
            
            
            (107
            )Other
                borrowed funds
            
            
            546
            
            
            
            432
            
            
            
            114Total
                interest expense
            
            
            8,973
            
            
            
            5,470
            
            
            
            3,503Net
                interest income
            
            $
            4,490
            
            
            $
            4,421
            
            
            $
            69Percentage
                change
            
            
            100.0
            %
            
            
            98.5
            %
            
            
            1.5
            %





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%.


3Excludes
      the
      interest income and interest expense of discontinued operations.





**Noninterest
      Income**





Noninterest
      income was $11.8 million during the six months ended June 30, 2007, an increase
      of $1.7 million or 17.2% compared to the same period a year
      earlier.  Noninterest income represents 17.4% of total revenue for the
      current period, a decrease of 171 basis points from 19.1% for the same period
      in
      2006.





Service
      charges and fees on deposits were $5.9 million in the first six months of 2007,
      an increase of $1.6 million or 36.3% in the comparison. The primary factor
      driving the increase in service charges and fees on deposits was an $873
      thousand increase in account fees related to the Company’s allotment line of
      business, which is up in the current six months as a result of the acquisition
      of the Military Allotment operations of PNC Bank during the first quarter of
      2007. Overdraft charges were also up $387 thousand in the six-month period
      compared to a year ago and are attributed to additional fees of $548 thousand
      from the Citizens Bank acquisition, which offset declines from our previously
      existing banks. Allotment processing fees were $2.1 million, up $789 thousand
      or
      59.1% that was positively impacted by the acquisition of the Military Allotment
      operation in the current year. Trust income was $973 thousand in the current
      period, an increase of $55 thousand or 6.0%. There was no net gain or loss
      on
      the sale of securities in the current period compared to a net loss on the
      sale
      of securities of $195 thousand during the same period a year ago.





The
      Company experienced declines in the following noninterest income categories
      in
      the current six months compared to a year earlier: non-deposit service charges,
      commissions, and fees of $94 thousand or 7.0%, data processing fees of $300
      thousand or 33.9%, gains on sale of loans of $76 thousand or 20.7%, income
      from
      company-owned life insurance of $15 thousand or 2.2%, and net all other
      noninterest income of $395 thousand.





The
      decrease in data processing fees are attributed to the acquisition of Citizens
      Bank and the sale of KBC, both of which were customers of the Company’s data
      processing subsidiary. Data processing income from KBC was not eliminated in
      consolidation once classified as discontinued operations, effectively increasing
      data processing income during the second quarter of 2007 by $186 thousand.
      There
      was no data processing fees recognized from KBC during the second quarter of
      2007 since it was sold during 2006. Additionally, Citizens Bank was a separate
      independent company until the Company purchased it during the fourth quarter
      of
      2006. Approximately $100


23


thousand
      was included in data processing fees during the second quarter of 2006 that
      are
      not included in the current period since inter-company amounts are eliminated
      during consolidation.





**Noninterest
      Expense**





Total
      noninterest expenses were $28.6 million for the six months ended June 30, 2007,
      an increase of $3.7 million or 14.9% compared to $24.9 million for the same
      period in 2006.  The increase in noninterest expenses occurred across
      a broad range of line items. The acquisition of Citizens Bank during the fourth
      quarter of 2006 is a significant factor contributing to the higher expenses.
      The
      largest increases in noninterest expenses are attributed to higher salaries
      and
      employee benefits of $1.7 million or 12.4%, amortization of intangible assets
      of
      $773 thousand or 86.6%, and increases in other expenses attributed to the
      acquisition of Citizens Bank.





The
      increase in salaries and employee benefits resulted from the addition of 54
      average full time equivalent employees, 40 of which are attributed to the
      Citizens Bank acquisition, and normal salary increases for existing employees.
      Salaries and related payroll taxes increased $1.9 million or 18.6%, with
      Citizens Bank accounting for $939 thousand of the increase. Benefit expenses
      declined $237 thousand or 8.1% in the comparison due to lower costs associated
      with the Company’s self-funded health insurance plan and higher costs in the
      prior year attributed to the acquisition of Citizens Northern. The acquisition
      of the Military Allotment operations of PNC Bank during the first six months
      of
      2007 contributed $92 thousand to the increase in salaries and employee benefits
      in the six-month comparison.





Intangible
      asset amortization was $1.7 million; $773 thousand higher in the current
      six-month period compared to the same period a year ago and is due to the
      increase in customer list and core deposit intangible assets from the
      acquisitions of Citizens Bank and the Military Allotment operations of PNC
      Bank.
      The $326 thousand or 18.5% increase in net occupancy expense is attributed
      primarily to the Citizens Bank acquisition and expansion efforts, mainly in
      our
      Northern Kentucky market. Data processing expenses decreased $158 thousand
      or
      6.4% in the comparison primarily as a result of the acquisition of Citizens
      Northern in late 2005. Up until the early part of the fourth quarter of 2006,
      Citizen Northern used the services of an unrelated third party vendor to meet
      its data processing needs. During the fourth quarter of 2006, Citizens Northern
      began to use the Company’s data processing subsidiary; as such, fees paid to the
      unrelated third party vendor during 2006 are recognized as an expense prior
      to
      the change in processing companies. Subsequent to the change, the fees paid
      to
      the Company’s data processing subsidiary have been eliminated in consolidation.
      All other noninterest expenses were up a net of $1.1 million or 17.2% across
      a
      wide range of line items is mainly attributed to the Citizens Bank
      acquisition.





**Income
      Taxes**





Income
      tax expense for the six months ended June 30, 2007 was $2.7 million, an increase
      of $839 thousand or 44.7% compared to the same period a year
      earlier.  The effective federal income tax rate was 22.2%, an increase
      of 293 basis points compared to 19.3% in the comparison. The change in the
      effective tax rate is due to the increase in the mix of taxable revenues
      compared to nontaxable revenues.





**Income
      From Discontinued Operations**





Income
      from discontinued operations was zero in the six-month period ended June 30,
      2007 and $830 thousand for the six months ended June 30, 2006. There were no
      discontinued operations in the current-year periods presented since all
      discontinued operations were disposed of during the fourth quarter of
      2006.








24


**FINANCIAL
      CONDITION**





Total
      assets were $1.8 billion at June 30, 2007, an increase of $23.9 million or
      1.3%
      from the prior year-end.  The most significant changes in the
      Company’s assets from year-end were as follows: an increase in net loans of
      $74.0 million or 6.2%; an increase of $11.1 million or 21.1% in goodwill and
      other intangible assets; a decrease of $42.3 million or 27.0% in cash and cash
      equivalents; and a decrease in investment securities of $23.3 million or
      7.0%.  The changes within the asset groups correlate to the overall
      funding position of the Company and the purchase of the Military Allotment
      operation of PNC Bank during the current six-month period.





Cash
      and
      cash equivalents were negatively impacted by $32.3 million lower end of period
      deposits outstanding from the Commonwealth of Kentucky. The increase in net
      loans outstanding is reflective of continued strong loan demand and corresponds
      to the decrease in investment securities and higher federal funds purchased
      and
      securities sold under repurchase agreements. Shareholders’ equity increased $2.5
      million or 1.4% since year-end 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 were $1.8 billion for the first six months of 2007,
      an increase of $113 million or 6.5% from year-end 2006 driven by an additional
      $128 million in connection with the Citizens Bank purchase during the fourth
      quarter of 2006.  Average earning assets, primarily loans and
      securities, were $1.6 billion for the six months ended June 30, 2007, an
      increase of $210 million or 14.8% from year-end 2006.  Average earning
      assets represent 88.2% of total average assets on June 30, 2007, a decrease
      of 2
      basis points compared to 88.4% at year-end 2006.





**Loans**





Loans,
      net of unearned income, totaled $1.3 billion at June 30, 2007, an increase
      of
      $73.3 million or 6.1% from year-end 2006 as loan demand remains
      strong.  The composition of the loan portfolio is summarized in the
      table below.





June
                30, 2007
            
            
            December
                31, 2006(Dollars
                in thousands)
            
            Amount
            
            
            %
            
            
            Amount
            
            
            %Commercial,
                financial, and agriculture
            
            $
            175,045
            
            
            
            13.8
            %
            
            $
            197,613
            
            
            
            16.5
            %Real
                estate - construction
            
            
            231,524
            
            
            
            18.2
            
            
            
            176,779
            
            
            
            14.7Real
                estate mortgage - residential
            
            
            399,290
            
            
            
            31.4
            
            
            
            381,081
            
            
            
            31.8Real
                estate mortgage farmland and other commercial enterprises
            
            
            380,113
            
            
            
            29.9
            
            
            
            351,793
            
            
            
            29.4Installment
            
            
            53,110
            
            
            
            4.2
            
            
            
            57,116
            
            
            
            4.8Lease
                financing
            
            
            32,023
            
            
            
            2.5
            
            
            
            33,454
            
            
            
            2.8Total
            
            $
            1,271,105
            
            
            
            100.0
            %
            
            $
            1,197,836
            
            
            
            100.0
            %





On
      average, loans represented 75.4% of earning assets during the current six month
      period, an increase of 126 basis points compared to 74.2% for year-end 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.





25


**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 $10.6 million at June
      30, 2007, an increase of $1.2 million or 12.6% from the prior
      year-end.  Nonperforming loans were $5.8 million at June 30, 2007, a
      $1.5 million or 34.3% increase compared to year-end 2006.  The
      increase in nonperforming loans is attributed to higher loans past due 90 days
      or more of $723 thousand and higher nonaccrual loans of $756 thousand.
      Nonperforming loans represent .5% of loans net of unearned income at June 30,
      2007, an increase of 10 basis points from .4% compared to year-end
      2006.





Other
      real estate owned was $4.7 million at June 30, 2007.  This represents
      a decrease of $288 thousand or 5.7% compared to $5.0 million at year-end
      2006.  The decline in other real estate balances is primarily
      attributed to the sale of previously foreclosed real estate of a commercial
      credit.





**Allowance
      for Loan Losses**





The
      allowance for loan losses was $11.3 million at June 30, 2007, a decrease of
      $747
      thousand or 6.2% from the prior year-end amount of $12.0 million. The provision
      for loan losses increased $377 thousand in the current three-month comparison
      and decreased $85 thousand in the six-month comparison. The Company’s
      nonperforming loans and net charge-offs are up in the current quarter compared
      to the first quarter of 2007, although still at relatively low levels. In
      addition, at June 30, 2007 loans, net of unearned income, are up $48.6 million
      and $73.3 million compared to March 31, 2007 and December 31, 2006,
      respectively. Annualized net charge-offs as a percentage of average net loans
      outstanding were .10% for the six months ended June 30, 2007, unchanged from
      year-end 2006. As a percentage of net loans outstanding, the allowance for
      loan
      losses was .89% as of June 30, 2007, down from .92% at March 31, 2007 and 1.0%
      at December 31, 2006.





The
      allowance for loan losses as a percentage of nonperforming loans totaled 194%
      and 278% at June 30, 2007 and December 31, 2006, respectively.  The
      decline at the end of the current period compared to the prior year-end is
      attributed to a $1.5 million increase in nonperforming loans combined with
      a
      $747 thousand lower allowance for loan losses.  Other risk factors,
      particularly loans past due less than 90 days, decreased significantly at June
      30, 2007 compared to the prior year-end and more than offset the rise in loans
      past due 90 days or more and the increase in nonaccrual loans. Management
      continues to emphasize collection efforts and evaluation of risks within the
      loan portfolio.





**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, 2007, temporary investments were $38.4 million, a decline of $2.8
      million compared to $41.2 million at year-end 2006. Temporary investments
      averaged $81.2 million during the first six months of 2007, an increase of
      $18.8
      million or 30.2% from year-end 2006. The increase is a result of the Company’s
      overall net funding position. 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 $311 million on June
      30, 2007, a decrease of $23.3 million or 7.0% from year-end 2006. The decrease
      in investment securities was mainly due to reinvesting the difference between
      proceeds received from sold or called investment securities and the purchase
      of
      investment securities into alternative assets such as loans or other temporary
      investments. Investment securities sold or called during the period was the
      result of normal asset and liability management practices.





Investment
      securities averaged $319 million in total for the current six months, an
      increase of $15.0 million or 4.9% compared to the year-end 2006 average balance.
      The Company had a net unrealized loss on available for sale investment
      securities of $4.5 million at June 30, 2007 compared to a net unrealized loss
      of
      $2.0 million at year-end 2006.  The $2.5 million increase during the
      six months ended June 30, 2007 is mainly attributed to a net decline
      in


26


the
      market value on available for sale investment securities. The decrease in the
      market value of available for sale investment securities is due primarily to
      the
      impact of changing economic conditions, including an increase in Treasury yields
      at June 30, 2007 compared to December 31, 2006, in particular those with
      maturities in excess of two years. As overall yields have increased, the
      portfolio has declined in value.  Market values of fixed rate
      investments are inversely related to changes in market interest rates.
      Unrealized losses on investment securities have not been included in income
      since they are considered interest rate related and identified as
      temporary.





**Company-owned
      Life Insurance**





Company-owned
      life insurance was $33.6 million at June 30, 2007, an increase of $631 thousand
      or 1.9% from $32.9 million at year-end 2006. Income from company-owned life
      insurance was $668 thousand for the current six months.  This
      represents a decrease of $15 thousand or 2.2% in comparison to the same
      six-month period in 2006.  Income declined in the comparison due to
      lower crediting rates on the underlying investments.





**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, 2007 total deposits
      were
      $1.5 billion, a decrease of $3.6 million or .2% from year-end
      2006.  Interest bearing deposits were up $22.8 million or 1.9% to $1.2
      billion, which was offset by a $26.4 million or 10.9% decline in noninterest
      bearing deposits to $217 million. The decrease in end of period noninterest
      bearing deposits is due to lower balances from the Commonwealth of Kentucky
      of
      $32.3 million or 47.1%. Balances related to the Commonwealth of Kentucky can
      fluctuate significantly from day to day.





Average
      total deposits were $1.5 billion during the first six months of 2007, an
      increase of $204 million or 16.2% compared to average year-end 2006 balances.
      Net increases in average deposits were consistent throughout the deposit
      portfolio as follows:  noninterest bearing demand of $20.1 million or
      10.3%, interest bearing demand of $2.2 million or .8%, savings accounts of
      $37.7
      million or 17.7%, and time deposits of $149 million or 25.3%. The increase
      in
      average deposits outstanding is primarily attributed to the Citizens Bank
      acquisition during the fourth quarter of 2006. This acquisition contributed
      an
      additional $23.0 million and $122 million in average noninterest bearing and
      interest bearing deposits, respectively, during the first six months of 2007
      compared to the year-end 2006 average balances.





**Borrowed Funds**





Borrowed
      funds totaled $192 million at June 30, 2007, an increase of $27.3 million or
      16.6% from $165 million at year-end 2006. The increase in borrowed funds is
      attributed to a $33.1 million increase in short-term federal funds purchased
      and
      securities sold under agreements to repurchase. Total borrowed funds averaged
      $194 million, an increase of $17.3 million or 9.7% from $177 million at year-end
      2006. The increase in average borrowed funds from year-end 2006 was led by
      a
      higher average of FHLB borrowings outstanding of $12.5 million or 22.6%, most
      of
      which occurred during the fourth quarter of 2006.





**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, cash balances maintained, and borrowings from nonaffiliated
      sources.  As of June 30, 2007 combined retained earnings of the
      subsidiary banks was $54.2 million, of which $15.1 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 2007 sufficient
      to
      meet its liquidity needs.  The Parent Company had cash balances of
      $6.5 million at June 30, 2007, a decrease of $4.6 million or 41.0% from $11.1
      million at year-end 2006.  Significant cash flows during the current
      six months ended June 30, 2007 for the Parent Company include the following:
      receipt of dividends from its subsidiary banks in the amount of $13.9 million;
      additional capital injection of $8.0 million into one of its bank subsidiaries
      to facilitate the acquisition of


27


the
      Military Allotment operations of PNC Bank; payment of dividends to shareholders
      of $6.1 million; and the repurchase of the Company’s stock of $725
      thousand.





The
      Company's objective as it relates to liquidity is to ensure that its 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, 2007 the Company had approximately
      $209 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 also expects to receive a net $1.3
      million in cash from its employees from the exercise of approximately 53
      thousand remaining stock options from its 1997 grant that expire during the
      third quarter of 2007, assuming that all in-the-money stock options are
      exercised.





In
      July
      2007, the Company announced a tender offer to purchase for cash up to 550
      thousand shares of its outstanding common stock through a process commonly
      known
      as a modified “Dutch Auction”. Assuming the maximum number of shares of our
      common stock is tendered, the aggregate purchase price will be between $17.1
      and
      $19.3 million. The Company anticipates receiving up to $25.0 million through
      a
      private offering of trust preferred securities to fund the purchase of the
      shares through the Dutch Auction. Any excess funds raised from the trust
      preferred securities transaction that remain available following the tender
      offer will be used for general corporate purposes.





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, 2007, such consolidated assets were $419 million, a
      decrease of $64.3 million or 13.3% from year-end 2006.  The decrease
      in liquid assets is mainly attributed to a $39.5 million lower cash balance
      with
      an upstream correspondent bank and is related to the decline in Commonwealth
      of
      Kentucky deposit balances of $32.3 million. A decline of $22.0 million of
      available for sale investment securities also negatively impacted liquid assets
      and is the result of the overall funding position of the Company, which changes
      as loan demand, deposit levels, and other sources and uses of funds
      fluctuate.





Net
      cash
      provided by continuing operating activities was $6.6 million in the first six
      months of 2007, a decrease of $6.3 million compared to $12.9 million during
      the
      same six-month period a year earlier.  Net cash used in continuing
      investing activities was $55.4 million and $38.5 million in the current and
      previous-year six-month periods ended June 30, an increase of $16.9 million
      or
      44.0%. The most significant items included in the $16.9 million higher net
      cash
      outflows from continuing investing activities in the comparison are negative
      variances of $25.2 million related to investment securities and $11.9 million
      related to increased loan activity, offset by the $21.8 million cash payment
      for
      the purchase of Citizens Northern that occurred during the first quarter of
      2006
      in which there is no comparable amount in the current period. Net cash provided
      by continuing financing activities was $6.5 million for the six months ended
      June 30, 2007, a decrease of $11.2 million compared to $17.6 million for the
      same period a year earlier.  This decrease is related mainly to lower
      net inflows in the comparable periods from the following: $5.7 million related
      to deposit outflow activity, $14.3 million from increased other borrowings,
      $1.4
      million in additional dividends, partially offset by $10.3 million from higher
      federal funds purchased and securities sold under agreements to
      repurchase.





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.


28





**CAPITAL
      RESOURCES**





Shareholders’
      equity was $181 million on June 30, 2007, an increase of $2.5 million or 1.4%
      from $178 million at December 31, 2006.  Retained earnings were up
      $4.3 million or 2.6% as a result of $9.5 million of net income partially offset
      by $5.2 million or $.66 per share in cash dividends declared. Other significant
      changes to shareholders’ equity include the purchase of 24 thousand shares of
      the Company’s outstanding common stock that reduced shareholders’ equity by $725
      thousand along with a net decrease in accumulated other comprehensive income
      that lowered equity by $1.5 million. The decrease in accumulated other
      comprehensive income is mainly attributed to a net decline in the market value
      on available for sale investment securities of $1.6 million, net of tax. The
      decrease in the market value of available for sale investment securities is
      due
      primarily to the impact of changing economic conditions, including an increase
      in Treasury yields at June 30, 2007 compared to December 31, 2006, in particular
      those with maturities in excess of two years. As overall yields have increased,
      the portfolio has declined in value.  Market values of fixed rate
      investments are inversely related to changes in market interest rates. The
      remaining $129 thousand increase in accumulated other comprehensive income
      is
      attributed to the change in the funded status of the Company’s defined benefit
      postretirement health insurance plans.





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, 2007, the
      regulatory minimums, and the regulatory standard for a well-capitalized
      institution are as follows.







Farmers
                CapitalBank Corporation
            
            
            RegulatoryMinimumTier
              1 risk based
            
            
            11.12
            %
            
            
            4.00
            %Total
              risk based
            
            
            11.96
            %
            
            
            8.00
            %Leverage
            
            
            8.22
            %
            
            
            4.00
            %





As
      of
      June 30, 2007, 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, 2007, the model indicated that if rates were to gradually increase by 150
      basis points during the remainder of the calendar year, then net interest income
      and net income would increase .69% and 1.49%, respectively for the year ending
      December 31, 2007.  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 .52% and 1.15%, 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.


29





**Item
      4.  Controls and
      Procedures**





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





During
      the six months ended June 30, 2007 the Company completed an internal review
      and
      evaluation of its processes in order to better ensure proper financial reporting
      of non-routine changes and complex changes. In connection with this review
      and
      evaluation, the Company has done the following:





·
            Revised
                our procedures related to internal control over financial reporting
                with
                respect to any complex or non-routine change (including changes in
                compensation policies) to require the Chief Financial Officer or
                other
                senior financial reporting employee to document in writing the results
                of
                their evaluation of potential accounting changes and financial reporting
                changes that would occur from such complex or non-routine
                change.





·
            Implemented
                a monitoring system for the differences between drafts and final
                documentation relating to complex or non-routine changes to evaluate
                whether the accounting and financial reporting requirements have
                changed.





·
            Increased
                communication by and among our senior management and financial reporting
                employees and other third parties relevant to the disclosure
                process.





·
            Retained
                our procedures of ensuring that our Chief Financial Officer be made
                aware
                of and involved in any complex or non-routine contemplated change
                so that
                any potential tax, accounting and financial reporting issues may
                be
                evaluated.





·
            Retained
                our procedure of encouraging our Chief Financial Officer and other
                senior
                financial reporting employees to contact outside financial experts
                and
                consultants, if deemed advisable, to discuss potential tax, accounting
                and/or financial reporting issues regarding a complex or non-routine
                contemplated change.








As
      a
      result of taking the above actions, Management of the Company has concluded
      that
      it has remediated the significant deficiency described in Item 9A of the
      Company’s Form 10-K for the year ended December 31, 2006.





There
      were no other significant changes in the Company’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, 2007, 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.


30





**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, 2007.





Total
                Number of Shares
            Maximum
                Number ofPurchased
                as Part of
            Shares
                that May Yet BeTotal
                Number of
            Average
                Price
            Publicly
                Announced
            Purchased
                Under thePeriod
            Shares
                Purchased
            Paid
                per Share
            Plans
                or Programs
            Plans
                or ProgramsApril
                1, 2007 to April 30, 2007
            
            
            
            134,515May
                1, 2007 to May 31, 2007
            5,300
            $  28.77
            5,300
            129,215June
                1, 2007 to June 30, 2007
            
            
            
            129,215Total
            5,300
            $   28.77
            5,300





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. However, the Company
      has
      temporarily suspended the purchase of shares under this program until at least
      10 business days following the expiration or termination of it’s recently
      announced tender offer (see paragraph that follows).




In
      July
      2007, the Company announced a tender offer to purchase for cash up to 550
      thousand shares of its outstanding common stock at a price not greater than
      $35.00 nor less than $31.00 per share through a process commonly known as a
      modified “Dutch Auction”. Assuming the maximum number of shares of our common
      stock is tendered, the aggregate purchase price will be between $17.1 million
      and $19.3 million.





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





The
      annual meeting of shareholders was held May 8, 2007.   The
      matters that was voted upon included the election of four directors for
      three-year terms ending in 2010 or until their successors have been
      elected and
      qualified.


The
        outcome of the voting was as follows:


**Election
                of Directors****Name**
            **For**
            **Against**
            **Withheld**
            **Abstained**Lloyd
                C. Hillard, Jr.
            5,746,749
            0
            237,922
            0Robert
                Roach, Jr.
            5,836,493
            0
            148,177
            0R.
                Terry Bennett
            5,897,859
            0
            86,812
            0Dr.
                Donald A. Saelinger
            5,898,123
            0
            86,547
            0





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




Frank
              W. Sower, Jr.
            G.
                Anthony BusseniJ.
              Barry Banker
            Shelley
                S. SweeneyDr.
              John D. Sutterlin
            Michael
              M. SullivanDr.
              Donald J. Mullineaux
            Frank
              R. Hamilton, 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.





31





**Item
      6.  Exhibits**








List
                of Exhibits3i.
            Amended
                and Restated Articles of Incorporation of Farmers Capital Bank Corporation
                (incorporated by reference to Quarterly Report on Form 10-Q for the
                quarterly period ended June 30, 2006).3ii.
            Amended
                and Restated By-Laws of Farmers Capital Bank Corporation (incorporated
                by
                reference to Annual Report of Form 10-K for the fiscal year ended
                December
                31, 1997).3iia
            Amendments
                to By-Laws of Farmers Capital Bank Corporation (incorporated by reference
                to Quarterly Report of Form 10-Q for the quarterly period ended March
                31,
                2003).31.1
            CEO
                Certification Pursuant to Section 302 of
                the Sarbanes-Oxley Act of 200231.2
            CFO
                Certification Pursuant to Section 302 of
                the Sarbanes-Oxley Act of 200232
            CEO
&
CFO
                Certifications Pursuant to
                Section 906 of the Sarbanes-Oxley Act of 2002














32











**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:
            *August
                1, 2007*
            
            */s/ G. Anthony Busseni*G.
                Anthony Busseni,President
                and CEO(Principal
                Executive Officer)Date:
            *8-2-07*
            
            */s/ Doug Carpenter*C.
                Douglas Carpenter,Senior
                Vice President, Secretary, and CFO(Principal
                Financial and Accounting
                Officer)


33