Farmers Capital Bank 10Q 2006 Q3 Quarterly report

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 September 30, 2006


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

Kentucky	0-14412	61-1017851
(State or other jurisdiction	(Commission	(IRS Employer
of 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.

Yes x No ¨

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of “accelerated filer and large accelerated filer” in Rule 12b-2 of the Exchange Act. (Check one):

Large accelerated filer ¨ Accelerated filer x Non-accelerated filer ¨

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

7,877,768 shares outstanding at November 6, 2006

TABLE OF CONTENTS

PART I - FINANCIAL INFORMATION	3
Item 1. Financial Statements	3
Unaudited Consolidated Balance Sheets	3
Unaudited Consolidated Statements of Income	4
Unaudited Consolidated Statements of Comprehensive Income	5
Unaudited Consolidated Statements of Cash Flows	6
Unaudited Consolidated Statements of Changes in Shareholders’ Equity	8
Notes to Unaudited Consolidated Financial Statements	9
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations	19
Item 3. Quantitative and Qualitative Disclosures About Market Risk	36
Item 4. Controls and Procedures	37
PART II - OTHER INFORMATION	37
Item 1. Legal Proceedings	37
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds	37
Item 6. Exhibits	37
SIGNATURES	38

PART I - FINANCIAL INFORMATION

Item 1. Financial Statements

Unaudited Consolidated Balance Sheets

	September 30,			December 31,
(In thousands, except share data)	2006			2005
Assets
Cash and cash equivalents:
Cash and due from banks	$	107,558		$	71,496
Interest bearing deposits in other banks		2,698			2,565
Federal funds sold and securities purchased under agreements to resell		36,715			56,957
Total cash and cash equivalents		146,971			131,018
Investment securities:
Available for sale, amortized cost of $268,112 (2006) and $317,759 (2005)		266,085			315,067
Held to maturity, fair value of $9,977 (2006) and $13,815 (2005)		9,888			13,610
Total investment securities		275,973			328,677
Loans, net of unearned income		1,055,431			962,571
Allowance for loan losses		(10,501	)		(11,069	)
Loans, net		1,044,930			951,502
Premises and equipment, net		32,870			28,832
Company-owned life insurance		31,022			30,049
Goodwill		28,226			28,437
Other intangibles, net		5,945			7,271
Assets of discontinued operations		138,922			143,569
Other assets		22,662			24,588
Total assets	$	1,727,521		$	1,673,943
Liabilities
Deposits:
Noninterest bearing	$	212,043		$	183,248
Interest bearing		1,023,786			1,008,403
Total deposits		1,235,829			1,191,651
Federal funds purchased and securities sold under agreements to repurchase		74,311			71,336
Other short-term borrowings		23,788			780
Subordinated notes payable to unconsolidated trusts		25,774			25,774
Long-term debt		50,438			49,516
Dividends payable		2,442			2,244
Accrued purchase price-Citizens Bancorp, Inc.					21,846
Liabilities of discontinued operations		140,245			144,409
Other liabilities		14,274			12,151
Total liabilities		1,567,101			1,519,707
Shareholders’ Equity
Common stock, par value $.125 per share
9,608,000 shares authorized; 8,899,158 and 8,856,249
shares issued at September 30, 2006 and December 31, 2005, respectively		1,112			1,107
Capital surplus		41,055			39,829
Retained earnings		161,929			156,796
Treasury stock, at cost; 1,490,351 and 1,467,351 shares
at September 30, 2006 and December 31, 2005, respectively		(42,294	)		(41,579	)
Accumulated other comprehensive loss		(1,382	)		(1,917	)
Total shareholders’ equity		160,420			154,236
Total liabilities and shareholders’ equity	$	1,727,521		$	1,673,943
See accompanying notes to unaudited consolidated financial statements.

Unaudited Consolidated Statements of Income

	Three Months Ended				Nine Months Ended
	September 30,				September 30,
(In thousands, except per share data)	2006		2005		2006			2005
Interest Income
Interest and fees on loans	$	19,446	$	13,195	$	54,839		$	37,872
Interest on investment securities:
Taxable		2,005		1,887		6,556			5,401
Nontaxable		896		920		2,758			2,768
Interest on deposits in other banks		14		23		39			51
Interest of federal funds sold and securities purchased under agreements to resell		474		344		1,196			1,126
Total interest income		22,835		16,369		65,388			47,218
Interest Expense
Interest on deposits		8,133		4,834		22,219			13,491
Interest on federal funds purchased and securities sold
under agreements to repurchase		1,212		640		3,206			1,814
Interest on other borrowed funds		636		531		1,727			1,553
Interest on subordinated notes payable to unconsolidated trusts		466		255		1,290			255
Total interest expense		10,447		6,260		28,442			17,113
Net interest income		12,388		10,109		36,946			30,105
Provision for loan losses		253		348		172			367
Net interest income after provision for loan losses		12,135		9,761		36,774			29,738
Noninterest Income
Service charges and fees on deposits		2,317		2,184		6,639			6,507
Allotment processing fees		621		659		1,957			1,957
Other service charges, commissions, and fees		568		503		1,958			1,675
Data processing income		439		440		1,323			1,376
Trust income		456		397		1,374			1,223
Investment securities losses, net						(195	)		(3	)
Gains on sale of mortgage loans, net		146		169		464			505
Income from company-owned life insurance		320		314		1,003			861
Other		148		186		539			1,097
Total noninterest income		5,015		4,852		15,062			15,198
Noninterest Expense
Salaries and employee benefits		6,780		5,743		20,238			16,741
Occupancy expenses, net		866		670		2,629			1,976
Equipment expenses		651		619		2,077			1,879
Data processing and communication expenses		1,309		1,053		3,773			3,079
Bank franchise tax		449		344		1,331			1,019
Correspondent bank fees		177		214		515			688
Amortization of intangibles		433		307		1,325			737
Other		2,236		1,553		5,954			5,303
Total noninterest expense		12,901		10,503		37,842			31,422
Income from continuing operations before income taxes		4,249		4,110		13,994			13,514
Income tax expense from continuing operations		966		699		2,844			2,822
Income from continuing operations		3,283		3,411		11,150			10,692
Income from discontinued operations before income tax expense		713		656		1,878			1,544
Income tax expense from discontinued operations		250		214		585			439
Income from discontinued operations		463		442		1,293			1,105
Net income	$	3,746	$	3,853	$	12,443		$	11,797
Net Income Per Common Share
Income from continuing operations - basic	$	.45	$	.51	$	1.51		$	1.58
Income from discontinued operations - basic		.06		.06		.17			.16
Net income per common share - basic		.51		.57		1.68			1.74
Income from continuing operations - diluted		.45		.50		1.51			1.57
Income from discontinued operations - diluted		.06		.06		.17			.16
Net income per common share - diluted		.51		.56		1.68			1.73
Weighted Average Shares Outstanding
Basic		7,393		6,786		7,385			6,786
Diluted		7,412		6,821		7,404			6,824
See accompanying notes to unaudited consolidated financial statements.

Unaudited Consolidated Statements of Comprehensive Income

	Three Months Ended					Nine Months Ended
	September 30,					September 30,
(In thousands)	2006		2005			2006		2005
Net Income	$	3,746	$	3,853		$	12,443	$	11,797
Other comprehensive income (loss):
Unrealized holding gain (loss) on available for sale
securities arising during the period, net of tax
of $1,691, $(867), $267, and $(981), respectively		3,140		(1,610	)		495		(1,822	)
Reclassification adjustment for prior period
unrealized loss recognized during current period,
net of tax of $22 and $3							40		5
Other comprehensive (loss) income		3,140		(1,610	)		535		(1,817	)
Comprehensive Income	$	6,886	$	2,243		$	12,978	$	9,980
See accompanying notes to unaudited consolidated financial statements.

Unaudited Consolidated Statements of Cash Flows

Nine months ended September 30, (In thousands)	2006			2005
Cash Flows from Operating Activities
Net income	$	12,443		$	11,797
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization		4,036			2,916
Net amortization of investment security premiums and (discounts):
Available for sale		(53	)		291
Held to maturity		(18	)		(32	)
Provision for loan losses		172			367
Noncash compensation expense		102
Mortgage loans originated for sale		(24,419	)		(27,359	)
Proceeds from sale of mortgage loans		22,020			25,460
Deferred income tax expense (benefit)		1,566			(419	)
Gains on sale of mortgage loans, net		(464	)		(505	)
Gain on sale of credit card portfolio					(700	)
Gain on sale of premises and equipment, net		(93	)		(5	)
Loss on sale of available for sale investment securities, net		195			3
Increase in accrued interest receivable		(1,377	)		(840	)
Income from company-owned life insurance		(973	)		(836	)
Decrease (increase) in other assets		2,303			(1,039	)
Increase in accrued interest payable		886			339
Increase in other liabilities		968			1,061
Net cash provided by discontinued operating activities		1,343			1,387
Net cash provided by operating activities		18,637			11,886
Cash Flows from Investing Activities
Proceeds from maturities and calls of investment securities:
Available for sale		76,093			111,379
Held to maturity		3,740			3,040
Proceeds from sale of available for sale investment securities		19,122			3,038
Purchase of available for sale investment securities		(45,709	)		(122,774	)
Loans originated for investment, net of principal collected		(90,737	)		(23,802	)
Payment of prior year accrued purchase price-Citizens Bancorp, Inc.		(21,846	)
Purchase price refinements-Citizens Bancorp, Inc.		211
Additions to mortgage servicing rights, net		(41	)
Purchase of premises and equipment		(7,006	)		(2,487	)
Proceeds from sale of equipment		476			121
Net cash provided by discontinued investing activities		14,225			21,977
Net cash used in investing activities		(51,472	)		(9,508	)
Cash Flows from Financing Activities
Net increase in deposits		44,178			69,541
Net increase in securities sold under agreements to repurchase		2,975			154
Proceeds from long-term debt issued to unconsolidated trusts					25,774
Proceeds from other long-term debt		11,198			2,000
Repayments of long-term debt		(10,276	)		(1,049	)
Net increase (decrease) in other short-term borrowings		23,008			(999	)
Dividends paid		(7,112	)		(6,709	)
Purchase of common stock		(715	)		(526	)
Shares issued under Employee Stock Purchase Plan		173			147
Stock options exercised		927			455
Net cash used in discontinued financing activities		(5,123	)		(17,103	)
Net cash provided by financing activities	��	59,233			71,685
Net increase in cash and cash equivalents		26,398			74,063
Less: net increase in cash and cash equivalents of discontinued operations		(10,445	)		(6,261	)
Net increase in cash and cash equivalents from continuing operations		15,953			67,802
Cash and cash equivalents from continuing activities at beginning of year		131,018			77,802
Cash and cash equivalents from continuing activities at end of period	$	146,971		$	145,604
Supplemental Disclosures
Cash paid during the period for:
Interest	$	30,484		$	19,105
Income taxes		4,050			2,000
Transfers from loans to repossessed assets		1,184			2,599
Cash dividend declared and unpaid		2,442			2,241

See accompanying notes to unaudited consolidated financial statements.

Unaudited Consolidated Statements of Changes in Shareholders’ Equity

(In thousands, except per share data)															Accumulated
															Other			Total
Nine months ended	Common Stock				Capital		Retained			Treasury Stock					Comprehensive			Shareholders’
September 30, 2006 and 2005	Shares		Amount		Surplus		Earnings			Shares		Amount			Income			Equity
Balance at January 1, 2006		8,856	$	1,107	$	39,829	$	156,796			1,467	$	(41,579	)	$	(1,917	)	$	154,236
Net income								12,443											12,443
Other comprehensive income																535			535
Cash dividends declared, $.99 per share								(7,310	)										(7,310	)
Purchase of common stock											23		(715	)					(715	)
Stock options exercised, including related tax benefits		37		4		929													933
Shares issued pursuant to Employee Stock Purchase Plan		6		1		172													173
Noncash compensation expense attributed to stock option and Employee Stock Purchase Plan grants						125													125
Balance at September 30, 2006		8,899	$	1,112	$	41,055	$	161,929			1,490	$	(42,294	)	$	(1,382	)	$	160,420



Balance at January 1, 2005		8,234	$	1,029	$	20,744	$	149,985			1,450	$	(41,008	)	$	700		$	131,450
Net income								11,797											11,797
Other comprehensive income																(1,817	)		(1,817	)
Cash dividends declared, $.99 per share								(6,718	)										(6,718	)
Purchase of common stock											16		(526	)					(526	)
Stock options exercised, including related tax benefits		18		2		456													458
Shares issued pursuant to Employee Stock Purchase Plan		6		1		146													147
Balance at September 30, 2005		8,258	$	1,032	$	21,346	$	155,064			1,466	$	(41,534	)	$	(1,117	)	$	134,791
See accompanying notes to unaudited consolidated financial statements.

Notes to Unaudited Consolidated Financial Statements

1.	Basis of Presentation and Nature of Operations

The consolidated financial statements include the accounts of Farmers Capital Bank Corporation (the "Company"), a financial holding company, and its bank and nonbank subsidiaries. Bank subsidiaries include Farmers Bank & Capital Trust Co. (“Farmers Bank”) in Frankfort, KY and its wholly-owned subsidiaries Leasing One Corporation (“Leasing One”) and Farmers Capital Insurance Corporation (“Farmers Insurance”). Leasing One is a commercial leasing company in Frankfort, KY and Farmers Insurance is an insurance agency in Frankfort, KY; Farmers Bank and Trust Company in Georgetown, KY (“Farmers Georgetown”) and its wholly-owned subsidiary Pro Mortgage Partners, LLC (“Pro Mortgage”), a mortgage brokerage company established in May 2004 offering a variety of fixed rate loan products; First Citizens Bank in Elizabethtown, KY; United Bank & Trust Co. in Versailles, KY; Lawrenceburg National Bank in Harrodsburg, KY; Citizens Bank of Northern Kentucky, Inc. in Newport, KY (“Citizens Northern”); and Kentucky Banking Centers, Inc. in Glasgow, KY (“KBC”). The accounts of KBC and certain branch locations of Farmers Georgetown have been presented separately in the financial statements as discontinued operations as discussed in Note 7.

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

Including KBC, the Company provides financial services through its 38 locations in 25 communities throughout Central and Northern Kentucky to individual, business, agriculture, government, and educational customers. Its primary deposit products are checking, savings, and term certificate accounts. Its primary lending products are residential mortgage, commercial lending and leasing, and installment loans. Substantially all loans and leases are secured by specific items of collateral including business assets, consumer assets, and commercial and residential real estate. Commercial loans and leases are expected to be repaid from cash flow from operations of businesses. Farmers Bank has served as the general depository for the Commonwealth of Kentucky for over 70 years and also provides investment and other services to the Commonwealth. Other services include, but are not limited to, cash management services, issuing letters of credit, safe deposit box rental, and providing funds transfer services. Other financial instruments, which potentially represent concentrations of credit risk, include deposit accounts in other financial institutions and federal funds sold.

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

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

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

2.	Reclassifications

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

3.	Recently Issued Accounting Standards

In December 2004, the Financial Accounting Standards Board (“FASB”) issued Statement of Financial Accounting Standards (“SFAS”) No. 123 (revised 2004), “Share-Based Payment”, that requires the cost resulting from stock options be measured at fair value and recognized in earnings. This Statement replaces SFAS No. 123, “Accounting for Stock-Based Compensation” and supersedes Accounting Principles Board (“APB”) Opinion No. 25, “Accounting for Stock Issued to Employees,” which permitted the recognition of compensation expense using the intrinsic value method. The Company’s Employee Stock Purchase Plan (“ESPP”) is considered an option plan under SFAS No. 123(R). The Company adopted SFAS No. 123(R) on January 1, 2006 using the modified-prospective application. Under the modified-prospective application, compensation costs for unvested awards are based on the grant-date fair value as calculated for pro forma disclosures under SFAS No. 123, as originally issued. All new awards and awards that are modified, repurchased, or cancelled after the date of adoption are accounted for under the provisions of SFAS No. 123(R). As a result of adopting SFAS No. 123(R), the Company’s income before income taxes for the three and nine months ended September 30, 2006 includes stock option compensation cost of $42 thousand and $125 thousand, respectively. Prior periods have not been revised. See Note 5, Stock-Based Compensation, for additional information.

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

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

In October 2006, the FASB approved a staff recommendation that would change SFAS No. 133 by removing from its scope embedded derivatives that are tied to the prepayment risk of the underlying prepayable financial asset to fair value accounting through the income statement. The proposed rule is currently in a 30-day public comment period. If approved, the change will take effect after the beginning of a company’s first fiscal year after September 15, 2006

In March 2006, the FASB issued SFAS No. 156, "Accounting for Servicing of Financial Assets”. This Statement amends SFAS No. 140, "Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities", and requires that all separately recognized servicing assets and servicing liabilities be initially measured at fair value, if practicable and permits the entities to elect either fair value measurement with changes in fair value reflected in earnings or the amortization and impairment requirements of SFAS No. 140 for subsequent

measurement. The subsequent measurement of separately recognized servicing assets and servicing liabilities at fair value eliminates the necessity for entities that manage the risks inherent in servicing assets and servicing liabilities with derivatives to qualify for hedge accounting treatment and eliminates the characterization of declines in fair value as impairments or direct write-downs. This Statement is effective as of the beginning of an entity’s first fiscal year that begins after September 15, 2006. The Company is evaluating the impact, if any, of the adoption of this Statement on the Company’s result of operations and 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. This interpretation is effective for fiscal years beginning after December 15, 2006. The Company is in the process of evaluating the impact, if any, of the adoption of this interpretation on the Company’s results of operations and financial condition.

In September 2006, the United States Securities and Exchange Commission’s (“SEC”) Office of the Chief Accountant and Divisions of Corporation Finance and Investment Management released Staff Accounting Bulletin (“SAB”) 108, “Considering the Effects of Prior Year Misstatements when Quantifying Misstatements in Current Year Financial Statements”. SAB 108 was issued in order to eliminate the diversity of practice surrounding how public companies quantify financial statement misstatements. SAB 108 provides interpretive guidance on how the effects of the carryover or reversal of prior year misstatements should be considered in quantifying a current year misstatement.

SAB 108 identifies two approaches that have been widely used by public companies for quantifying the effects of financial statement misstatements: the “rollover” and “iron curtain” approaches. With the rollover approach, companies quantify the impact of misstatements based on the amount of the error originating in the current year income statement, thus ignoring the carryover effect of prior year misstatements. This approach can lead to the accumulation of misstatements on the balance sheet. The iron curtain approach focuses on the effect of correcting the period-end balance sheet, regardless of the misstatement’s year of origination. The Company currently uses the rollover method for quantifying identified financial statement misstatements.

In SAB 108 the SEC staff establishes a dual approach that requires quantification of financial statement errors based on the effects of the error on each of the Company’s financial statements and the related financial statement disclosures. The dual approach requires quantification of misstatements under both the rollover and iron curtain methods. Companies adopting the dual approach are permitted to record a one-time cumulative effect adjustment to the carrying values of assets and liabilities with an offsetting adjustment recorded to retained earnings as of the beginning of the fiscal year of adoption to correct errors existing in prior years that previously had been considered immaterial based on appropriate use of their previous approach. The Company is in the process of evaluating the impact, if any, of the adoption of this SAB on the Company’s results of operations and 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 is in the process of evaluating the impact, if any, of the adoption of this Statement on the Company’s results of operations and financial condition.

In September 2006, the FASB issued SFAS No. 158, “Employers’ Accounting for Defined Benefit Pension and Other Postretirement Plans, an amendment of FASB Statements No. 87, 88, 106, and 132(R).” SFAS No. 158 requires an employer to recognize the funded status of defined benefit postretirement plans as an asset or a liability on its balance sheet. The funded status is measured as the difference between plan assets at fair value and the benefit obligation. The Company has two unfunded postretirement benefit plans (the “Plans”) that are subject to the provisions of SFAS No. 158. For these Plans, the funded status is represented by the accumulated postretirement benefit obligation. SFAS No. 158 also requires the Company to measure the funded status of its Plans’ assets and obligations that determine its funded status as of the balance sheet date and to recognize those changes in the year in which the changes occur as a component of other comprehensive income, net of taxes. SFAS

No. 158 has no impact on how postretirement benefits are accounted for and reported in the income statement. The adoption of SFAS No. 158 is effective December 31, 2006 and is expected to result in a charge to other comprehensive income, net of tax, estimated between $3.0 million and $5.0 million.

4.	Net Income Per Common Share

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

	Three Months Ended September 30,				Nine Months Ended September 30,
(In thousands, except per share data)	2006		2005		2006		2005

Net income, basic and diluted	$	3,746	$	3,853	$	12,443	$	11,797

Average shares outstanding		7,393		6,786		7,385		6,786
Effect of dilutive stock options		19		35		19		38
Average diluted shares outstanding		7,412		6,821		7,404		6,824


Net income per share, basic	$	.51	$	.57	$	1.68	$	1.74
Net income per share, diluted		.51		.56		1.68		1.73


Continuing Operations
Income from continuing operations, basic and diluted	$	3,283	$	3,411	$	11,150	$	10,692

Average shares outstanding		7,393		6,786		7,385		6,786
Effect of dilutive stock options		19		35		19		38
Average diluted shares outstanding		7,412		6,821		7,404		6,824


Income per share from continuing operations, basic	$	.45	$	.51	$	1.51	$	1.58
Income per share from continuing operations, diluted		.45		.50		1.51		1.57


Discontinued Operations
Income from discontinued operations, basic and diluted	$	463	$	442	$	1,293	$	1,105

Average shares outstanding		7,393		6,786		7,385		6,786
Effect of dilutive stock options		19		35		19		38
Average diluted shares outstanding		7,412		6,821		7,404		6,824


Income per share from discontinued operations, basic	$	.06	$	.06	$	.17	$	.16
Income per share from discontinued operations, diluted		.06		.06		.17		.16

5. Stock-Based Compensation

During 1997, the Company’s Board of Directors and shareholders approved a nonqualified stock option plan (the "Plan") that has periodically provided for the granting of stock options to key employees and officers of the Company. All stock options are awarded at a price equal to the fair market value of the Company’s common stock at the date the options are granted and expire ten years from the date of the grant. Total options granted were 450,000, 54,000, and 40,049 in the years 1997, 2000, and 2004, respectively. As of September 30, 2006 the Plan allows for additional option grants of up to 8,544 shares.

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

(In thousands, except per share data)	Three Months Ended September 30, 2005			Nine Months Ended September 30, 2005
Net Income
As reported	$	3,853		$	11,797
Less: Stock-based compensation expense determined under fair value based method for all awards, net of related tax effects		(15	)		(95	)
Proforma	$	3,838		$	11,702
Net Income Per Common Share
Basic, as reported	$	.57		$	1.74
Basic, proforma		.57			1.72

Diluted, as reported		.56			1.73
Diluted, proforma		.56			1.71

Income From Continuing Operations
As reported	$	3,411		$	10,692
Less: Stock-based compensation expense determined under fair value based method for all awards, net of related tax effects		(14	)		(93	)
Proforma	$	3,397		$	10,599
Income Per Common Share From Continuing Operations
Basic, as reported	$	.51		$	1.58
Basic, proforma		.51			1.56

Diluted, as reported		.50			1.57
Diluted, proforma		.50			1.55

Income From Discontinued Operations
As reported	$	442		$	1,105
Less: Stock-based compensation expense determined under fair value based method for all awards, net of related tax effects		(1	)		(2	)
Proforma	$	441		$	1,103
Income Per Common Share From Discontinued Operations
Basic, as reported	$	.06		$	.16
Basic, proforma		.06			.16

Diluted, as reported		.06			.16
Diluted, proforma		.06			.16

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

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

	Three Months Ended September 30, 2006					Nine Months Ended September 30, 2006
				Weighted					Weighted
				Average					Average
	Shares			Price		Shares			Price
Outstanding at beginning of period		178,304		$	27.75		189,447		$	27.67
Granted
Forfeited							(2,000	)		34.80
Exercised		(27,364	)		25.65		(36,507	)		25.36
Outstanding at September 30		150,940		$	28.13		150,940		$	28.13

Options exercisable at September 30		144,083		$	28.05		144,083		$	28.05

Options outstanding at September 30, 2006 were as follows.

	Outstanding						Exercisable
			Weighted Average
			Remaining Contractual		Weighted Average				Weighted Average
Range of Exercise Prices	Number		Life (Years)		Exercise Price		Number		Exercise Price

$ 24.50		81,319		1.00	$	24.50		81,319	$	24.50
$ 29.75		33,572		3.25		29.75		26,715		29.75
$ 34.80		36,049		8.08		34.80		36,049		34.80
Outstanding at September 30, 2006		150,940		8.19	$	28.13		144,083	$	28.05

The aggregate intrinsic value for options outstanding and options exercisable at September 30, 2006 was $900,000 and $872,000, respectively. There was $39,000 in total compensation cost related to unvested options not recognized at September 30, 2006, with a weighted-average period of four months over which the cost is expected to be recognized. There were no modifications or cash paid to settle stock option awards during the nine months ended September 30, 2006.

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

	Three months ended September 30,				Nine months ended September 30,
(In thousands)	2006		2005		2006		2005
Compensation expense recognized for stock options	$	29			$	88
Related tax benefit recognized		65	$	38		88	$	74
Weighted average grant date fair value of options granted
Total intrinsic value of options exercised		186		110		252		212
Total fair value of options vested						63		135
Cash received from options exercised		702		272		926		453

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

	Options
	2000 Grant			2004 Grant

Dividend yield		3.12	%		3.80	%
Expected volatility		29.6			10.5
Risk-free interest rate		6.71			2.78
Expected life (in years)		7			3

Fair value	$	9.25		$	1.79

6.	Employee Stock Purchase Plan

The Company’s 2004 ESPP was approved by its shareholders at the Company’s 2004 annual meeting. The purpose of the ESPP is to provide a means by which eligible employees may purchase, at a discount, shares of common stock of the Company through payroll withholding. The purchase price of the shares is equal to 85% of their fair market value on specified dates as defined in the plan. The ESPP was effective July 1, 2004. There were 6,406 and 5,245 shares issued under the plan during the first nine months of 2006 and 2005, respectively. Compensation cost related to the ESPP included in the proforma net income disclosure in the table in Note 5 above was $6,500 and $20,800 for the three and nine-month periods ended September 30, 2005. The Company recorded $13,000 and $39,000, respectively, in compensation expense related to its ESPP during the three and nine months ended September 30, 2006.

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

	ESPP
	Three Months Ended September 30, 2006			Three Months Ended September 30, 2005			Nine Months Ended September 30, 2006			Nine Months Ended September 30, 2005

Dividend yield		3.83	%		3.85	%		3.85	%		3.80	%
Expected volatility		13.6			13.1			13.8			12.6
Risk-free interest rate		5.08			3.17			4.64			2.76
Expected life (in years)		.25			.25			.25			.25

Fair value	$	5.69		$	5.31		$	5.51		$	6.00

7. Discontinued Operations

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

In August 2006, Farmers Georgetown entered into a definitive agreement to sell its Owingsville and Sharpsburg branches in Bath County (the “Branches”). The sale includes deposits of $25.5 million, loans of $11.7 million, fixed assets of $936 thousand, and other assets of $1.5 million. The Company anticipates it will record a pretax gain on this transaction of approximately $425 thousand. This transaction is expected to close during the fourth quarter of 2006.

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

Condensed Balance Sheets - KBC

(In thousands)	September 30, 2006		December 31, 2005

Assets
Cash and cash equivalents	$	12,512	$	3,348
Investment securities		24,044		36,027
Loans, net		80,301		80,646
Premises and equipment, net		4,158		4,186
Other assets		3,368		3,032
Total assets	$	124,383	$	127,239

Liabilities
Deposits	$	112,391	$	115,277
Other borrowed funds		1,547		2,368
Other liabilities		782		451
Total liabilities		114,720		118,096

Shareholders’ equity		9,663		9,143

Total liabilities and shareholders’ equity	$	124,383	$	127,239

Condensed Statements of Income - KBC

	Three Months Ended September 30,					Nine Months Ended September 30,
(In thousands)	2006		2005			2006			2005

Interest income	$	2,121	$	1,841		$	6,092		$	5,324
Interest expense		862		695			2,463			2,057
Net interest income		1,259		1,146			3,629			3,267
Provision for loan losses		45		(11	)		(39	)		65
Noninterest income		273		269			832			819
Noninterest expense		953		933			3,040			2,758
Income tax expense		189		159			443			344
Net income	$	345	$	334		$	1,017		$	919

Condensed Balance Sheets - Farmers Georgetown’s Branches

(In thousands)	September 30, 2006			December 31, 2005

Assets
Cash and cash equivalents	$	371		$	370
Loans, net		11,727			13,397
Premises and equipment, net		936			978
Other assets		1,504			1,584
Total assets	$	14,538		$	16,329

Liabilities
Deposits	$	25,525		$	26,312

Net liabilities	$	(10,987	)	$	(9,983	)

Condensed Statements of Income - Farmers Georgetown’s Branches

	Three Months Ended September 30,						Nine Months Ended September 30,
(In thousands)	2006			2005			2006			2005

Interest income	$	491		$	386		$	1,211		$	938
Interest expense		191			143			511			408
Net interest income		300			243			700			530
Provision for loan losses		(19	)		(90	)		(119	)		(248	)
Noninterest income		68			57			202			167
Noninterest expense		209			227			604			664
Income tax expense		61			55			142			96
Net income	$	117		$	108		$	275		$	185

8. Subsequent Event - Citizens National Bancshares, Inc.

On October 1, 2006 the Company announced that the required approvals from the appropriate regulatory authorities were received and that the acquisition of 100% of the outstanding common shares of Citizens National Bancshares, Inc. (“Citizens National”) had been completed. Citizens National is a one-bank holding company headquartered in Nicholasville, Kentucky and the parent corporation of Citizens National Bank of Jessamine County (“Citizens Jessamine”). The results presented in the consolidated financial statements herein do not include any results related to this acquisition since it occurred during the fourth quarter of 2006.

The aggregate purchase price of Citizens National was $30.3 million, including $15.3 million (50.4% of purchase price) in cash and $15.0 million (49.6% of purchase price) in common stock. The $32.30 per share value of the 464

thousand shares of common stock issued was determined based on the average of the daily closing prices of the Company’s common stock for the 15 consecutive days when the stock markets are open for trading ending on the fifteenth day prior to the closing of the merger. The purchase price resulted in approximately $14.6 million in goodwill and $4.5 million in a core deposit intangible asset. The core deposit asset is being amortized over a life of 9.4 years under a declining amortization schedule through the year 2014 with the remaining 10% to be amortized in year 2015. Goodwill is not subject to periodic amortization in the consolidated financial statements. As with prior acquisitions, minor adjustments to the total purchase price allocation, and thus goodwill, are likely as execution costs are finalized. The following table summarizes the estimated fair value of assets acquired and liabilities assumed at the date of acquisition.

(In thousands)	October 1, 2006

Assets
Cash and equivalents	$	16,307
Investment securities		13,391
Loans, net of unearned income and allowance for loan losses		119,659
Premises and equipment, net		3,424
Goodwill		14,596
Core deposit intangible		4,524
Other assets		4,407
Total assets	$	176,308

Liabilities
Deposits	$	139,441
Short-term borrowings		2,880
Other liabilities		3,724
Total liabilities		146,045

Net Assets Acquired	$	30,263

9. Subsequent Event - Special Dividend

On October 23, 2006 the Company’s Board of Directors declared a special one-time $0.11 per share cash dividend in addition to its regular quarterly cash dividend of $0.33 per share. Both dividends are payable on January 1, 2007 to shareholders of record at the close of business on December 1, 2006.

10. Subsequent Event - Acquisition of Military Allotment Operation

On November 2, 2006 the Company announced that First Citizens Bank (“First Citizens”) had signed a definitive agreement to acquire the Military Allotment operation of PNC Bank, National Association in a cash transaction for $13.7 million. First Citizens will acquire intangible assets in the form of a customer list and goodwill. It will also record a core deposit intangible in connection with receiving approximately $12.0 million in deposits from PNC in the transaction. First Citizens will integrate the acquired Military Allotment operation into its existing allotment operations, which specializes in the processing of federal benefit payments and military allotments. The results presented herein do not include any results related to this acquisition, which is expected to close in January 2007.

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

FORWARD-LOOKING STATEMENTS

This report contains forward-looking statements under the Private Securities Litigation Reform Act of 1995 that involve risks and uncertainties. Although the Company believes that the assumptions underlying the forward-looking statements contained herein are reasonable, any of the assumptions could be inaccurate, and therefore, there can be no assurance that the forward-looking statements included herein will prove to be accurate. Factors that could cause actual results to differ from the results discussed in the forward-looking statements include, but are not limited to: economic conditions (both generally and more specifically in the markets in which the Company and its subsidiaries operate); competition for the Company’s customers from other providers of financial services; government legislation and regulation (which changes from time to time and over which the Company has no control); changes in interest rates; material unforeseen changes in the liquidity, results of operations, or financial condition of the Company’s customers; the impact of new accounting pronouncements; and other risks detailed in the Company’s filings with the Securities and Exchange Commission, all of which are difficult to predict and many of which are beyond the control of the Company. The Company expressly disclaims any intent or obligation to update any forward-looking statements after the date hereof to conform such statements to actual results or to changes in our opinions or expectations.

DISCONTINUED OPERATIONS

In June 2006, the Company announced that it had entered into a definitive agreement to sell its wholly-owned subsidiary, Kentucky Banking Centers, Inc. (“KBC”), based in Glasgow, Kentucky. In addition, Farmers Georgetown entered into a definitive agreement during August 2006 to sell its Owingsville and Sharpsburg branches in Bath County (the “Branches”). All prior period results included herein have been reclassified to conform to the current presentation which displays the operating results of KBC and the Branches 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.

The majority of the Company’s operations are located in and around the larger population areas of Central and Northern Kentucky. The decision to sell KBC and the Branches allows the Company to focus its resources on geographical areas it has determined to have the highest potential, including new and existing markets.

RESULTS OF OPERATIONS

Third Quarter 2006 vs. Third Quarter 2005

The Company reported net income of $3.8 million, a decrease of $107 thousand or 2.8% compared to $3.9 million for the same period in 2005. Basic and diluted net income per share was $.51 for the current three months, $.06 lower (basic) and $.05 lower (diluted) compared to $.57 and $.56 in the same period a year ago.

Income from continuing operations was $3.3 million, a decrease of $128 thousand or 3.8% compared to $3.4 million for the same period in 2005. Basic and diluted income per share from continuing operations was $.45 for the current three months, a decrease of $.06 or 11.8% on a basic per share basis and $.05 or 10.0 % on a diluted per share basis compared to the same period a year ago.

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

An increase in net interest income, which was fueled by the Citizens Bancorp acquisition, had a significant impact on net income for the three months ended September 30, 2006. Net interest income was $12.4 million in the current three-month period ended September 30, 2006. This represents an increase of $2.3 million or 22.5% compared to the same period a year ago. The increase in net interest income is primarily due to higher interest on loans of $6.3 million or 47.4%, partially offset by $3.3 million or 68.2% higher interest expense on deposits. The Citizens Bancorp acquisition accounted for $1.8 million of the increase in net interest income in the comparison, including $3.0 million higher interest from loans partially offset by $1.4 million higher interest expense on deposits.

The provision for loan losses decreased $95 thousand or 27.3% in the three-month comparison. The decrease in the provision for loan losses is reflective of a still-improving trend in credit quality of the Company’s loan portfolio. This improvement is attributed to lower delinquent and classified loans from year-end 2005, lower annualized net charge-offs as a percentage of average loans outstanding, and lower historical loss ratios.

Noninterest income, boosted by the Citizens Bancorp acquisition, was $5.0 million in the current quarter. This represents an increase of $163 thousand or 3.4% in the quarterly comparison.

Noninterest expenses increased $2.4 million or 22.8% for the current three-month period compared to the same period a year earlier. The increase in noninterest expenses occurred across a broad range of line items and is generally attributed to the Citizens Bancorp acquisition.

Income from discontinued operations was $463 thousand for the three-month period ended September 30, 2006. This represents an increase of $21 thousand or 4.8% in the comparable periods. As previously disclosed, the Company has entered into a definitive agreement to sell its KBC subsidiary and the Bath County branches of Farmers Georgetown. Both of these transactions are expected to close during the fourth quarter of 2006.

The return on average assets (“ROA”) was .84% for the current quarter, a decrease of 20 basis points compared to 1.04% reported for the same period in 2005. The decrease in ROA is mainly attributed to a lower contribution from noninterest income and noninterest expenses, which negatively impacted ROA by 10 basis points and 21 basisi points, respectively. This was partially offset by a 10 basis point increase in net interest margin to 3.72% from 3.62%. Return on average equity (“ROE”) was 8.31% for the third quarter of 2006 compared to 10.09% in the same period of 2005. This represents a decrease of 178 basis points and is attributed to the reported decrease in net income and higher average equity outstanding.

Net Interest Income

The trend of the general interest rate environment in the current three months compared to a year earlier has been generally upward primarily as a result of short-term interest rate increases by the Board of Governors of the Federal Reserve Board (the “Fed”). The Fed has increased short-term interest rates by 150 basis points in six equal increments of 25 basis points since September 30, 2005. The effects of these rate increases by the Fed has generally led to higher average rates earned and paid on interest earning assets and interest bearing liabilities with a faster increase in the average rates earned on earning assets, particularly loans and temporary investments, due to their repricing characteristics combined with new loan originations in a rising rate environment.

Net interest income is the most significant component of the Company’s earnings. Net interest income is the excess of the interest income earned on earning assets over the interest paid for funds to support those assets. The two most common metrics used to analyze net interest income are net interest spread and net interest margin. Net interest spread represents the difference between the yields on earning assets and the rates paid on interest bearing liabilities. Net interest margin represents the percentage of net interest income to average earning assets. Net interest margin will exceed net interest spread because of the existence of noninterest bearing sources of funds, principally demand deposits and shareholders’ equity, which are also available to fund earning assets. Changes in net interest income and margin result from the interaction between the volume and the composition of earning assets, their related yields, and the associated cost and composition of the interest bearing liabilities. Accordingly, portfolio size, composition, and the related yields earned and the average rates paid can have a significant impact on net interest spread and margin. The 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 6.7%, an increase of 96 basis points from 5.8% in the same period a year ago. The cost of funds for the current three months was 3.4%, an increase of 91 basis points compared to 2.5% in the same period a year earlier. A goal of the Company in the current interest rate environment is to increase earning assets while maintaining the current relatively low interest rates paid on interest bearing liabilities. The Company strives to accomplish this goal while providing excellent service, offering competitive rates to its customers, and maintaining its core deposit base. Maintaining the relatively low cost of funds is becoming increasingly difficult due to the upward trend in general interest rates and competitive market forces. Average earning assets were $1.4 billion for the current quarter, an increase of 218 million or 18.8% compared to $1.2 billion a year ago. As a percentage of total average assets, earning assets decreased 64 basis points to 88.6% from 89.3%. The lower earning asset ratio decreased ROA by three basis points in the quarterly comparison.

Interest income results from interest earned on earning assets, which primarily include loans and investment securities. Interest income is affected by volume (average balance), composition of earning assets, and the related rates earned on those assets. Total interest income for the third quarter of 2006 was $22.8 million, an increase of $6.5 million or 39.5% compared to the comparable period in the previous year. The growth in interest income was mainly attributed to higher interest income on loans of $6.3 million or 47.4%. Interest income on loans increased as a result of higher average loan balances outstanding resulting from the Citizens Bancorp acquisition, higher internally generated loan growth, and a 93 basis point increase in the average rate earned on loans. The Citizens Bancorp acquisition accounted for $3.0 million of the increase in interest income on loans.

Interest and fees on loans was $19.4 million, an increase of $6.3 million or 47.4% compared to a year earlier. Average loans increased $236 million or 29.4% to $1.0 billion in the comparison due mainly to a $159 million higher average balance outstanding from the acquisition of Citizens Bancorp and, to a lesser extent, higher loan demand. Interest income on loans was also boosted by a 93 basis point increase in the tax equivalent yield to 7.5% from 6.5% in the quarterly comparison. Interest on taxable securities was $2.0 million, an increase of $118 thousand or 6.3% due to a 70 basis point increase in the average rate earned that offset a $23.5 million or 11.2% lower average balance outstanding. Interest on nontaxable securities declined 2.6% to $896 thousand due to a 24 basis point drop in the average rate and, to a lesser extent, a $775 thousand 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 $121 thousand or 33.0% due to an increase in both the average rate earned of 48 basis points and the average balances outstanding $6.8 million.

Interest expense results from incurring interest on interest bearing liabilities, which primarily include interest bearing deposits, federal funds purchased and securities sold under agreements to repurchase, and other borrowed funds. Interest expense is affected by volume, composition of interest bearing liabilities, and the related rates paid on those liabilities. Total interest expense was $10.4 million for third quarter of 2006, an increase of $4.2 million or 66.9% from the same period in the prior year. Interest expense increased mainly as a result of higher interest expense on deposits of $3.3 million or 68.2%. Interest expense on deposits increased as a result of higher deposit balances outstanding from the Citizens Bancorp acquisition, higher deposits generated internally, and higher rates paid on interest bearing deposits throughout the entire deposit portfolio. The Company’s cost of funds was 3.4% for the third quarter of 2006, an increase of 91 basis points from 2.5% for the prior year. The percentage increase in cost of funds was led by a 138 basis point increase in federal funds purchased and securities sold under agreements to repurchase, which generally reprice more quickly than other interest bearing sources of funds and correlates with the increase in general short-term market interest rates.

Interest expense on time deposits, the largest component of total interest expense, increased $2.4 million or 64.7% to $6.2 million. The increase is due to a 99 basis point increase in the average rate paid to 4.3% from 3.3% combined with a $121 million or 26.5% higher average balance outstanding, which was $577 million at the end of the current quarter compared to $456 million in the same quarter a year earlier. The growth in average time deposits outstanding was fueled by an additional $82.5 million of time deposits related to the Citizens Bancorp acquisition.

Interest expense on savings deposits and interest bearing demand deposits increased $375 thousand or 57.4% and $479 thousand or 119%, respectively. The increase in interest expense on savings deposits was due to a 62 basis point increase in the average rates paid to 2.1% from 1.5% and, to a lesser extent, an increase in the average balance outstanding of $18.2 million or 10.2% to $197 million from $179 million. The Citizens Bancorp acquisition contributed an additional $31.8 million in average savings deposits with higher average rates than existing savings deposits in the comparison. Interest on interest bearing demand deposits increased due mainly to a higher average rate paid of 63 basis points to 1.4% and, to a lesser extent, an increase in the average balance outstanding of $44.6 million or 22.2%. Excluding the $45.8 million additional average interest bearing demand deposits attributed to the Citizens Bancorp acquisition, average interest bearing demand deposits for the Company declined $1.2 million or .6% in the comparison. The increase in average rates paid for deposits follows the trend of increasing general short-term market interest rates between the comparable periods.

Interest expense on federal funds purchased and securities sold under agreements to repurchase increased $572 thousand or 89.4% due to a 138 basis point increase in the average rate paid to 4.7% from 3.4% a year ago coupled with a $26.0 million or 34.4% increase in the average balance outstanding. Interest expense on other borrowed funds consists primarily of Federal Home Loan Bank (“FHLB”) borrowings and subordinated notes payable to unconsolidated trusts. Interest expense on other borrowed funds increased $316 thousand or 40.2% and is due mainly to an increase in interest expense related to the notes payable to unconsolidated trusts of $211 thousand. The Company issued $25.0 million of subordinated notes payable in connection with its trust preferred securities offering during the third quarter of 2005. The variable rate on these notes have repriced higher in the comparable periods.

The net interest margin (TE) increased 10 basis points to 3.72% during the third quarter of 2006 compared to 3.62% in the same quarter of 2005. The higher net interest margin is attributed to a 5 basis point increase in the spread between rates earned on earning assets and the rates paid on interest bearing liabilities to 3.28% in the current quarter from 3.23% in the comparable quarter of 2005. The remaining 5 basis point increase in margin is attributed to the impact of noninterest bearing sources of funds. The impact of noninterest bearing sources of funds on net interest margin typically increases in a rising rate environment.

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

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

Quarter Ended September 30,	2006									2005
(In thousands)	Average Balance			Interest⁴			Average Rate			Average Balance			Interest⁴			Average Rate
Earning Assets
Investment securities
Taxable	$	186,769		$	2,005			4.26	%	$	210,249		$	1,887			3.56	%
Nontaxable¹		89,434			1,330			5.90			90,209			1,395			6.14
Time deposits with banks, federal
funds sold and securities purchased
under agreements to resell		65,403			488			2.96			58,610			367			2.48
Loans^1,2,3		1,038,458			19,547			7.47			802,827			13,232			6.54
Total earning assets		1,380,064		$	23,370			6.72	%		1,161,895		$	16,881			5.76	%
Allowance for loan losses		(10,602	)								(10,136	)
Total earning assets, net of
allowance for loan losses		1,369,462									1,151,759
Nonearning Assets
Cash and due from banks		69,615									68,028
Premises and equipment, net		31,581									22,529
Other assets		86,669									59,404
Assets of discontinued operations		141,479									144,485
Total assets	$	1,698,806								$	1,446,205
Interest Bearing Liabilities
Deposits
Interest bearing demand	$	245,623		$	883			1.43	%	$	201,062		$	404			.80	%
Savings		196,897			1,028			2.07			178,724			653			1.45
Time		576,626			6,222			4.28			455,765			3,777			3.29
Federal funds purchased and
securities sold under agreements
to repurchase		101,489			1,212			4.74			75,485			640			3.36
Other borrowed funds		83,901			1,102			5.21			70,903			786			4.40
Total interest bearing liabilities		1,204,536		$	10,447			3.44	%		981,939		$	6,260			2.53	%
Noninterest Bearing Liabilities
Commonwealth of Kentucky deposits		34,459									34,913
Other demand deposits		146,724									140,611
Other liabilities		13,461									12,183
Liabilities of discontinued operations		142,979									142,502
Total liabilities		1,542,159									1,312,148
Shareholders’ equity		156,647									134,057
Total liabilities and shareholders’
equity	$	1,698,806								$	1,446,205
Net interest income					12,923									10,621
TE basis adjustment					(535	)								(512	)
Net interest income				$	12,388								$	10,109
Net interest spread								3.28	%								3.23	%
Impact of noninterest bearing sources
of funds								.44									.39
Net interest margin								3.72	%								3.62	%

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 $338 thousand and $400 thousand in 2006 and 2005, respectively.

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

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

(In thousands)	Variance			Variance Attributed to
Quarter Ended September 30,	2006/2005^1,3			Volume			Rate

Interest Income
Taxable investment securities	$	118		$	(1,024	)	$	1,142
Nontaxable investment securities²		(65	)		(12	)		(53	)
Time deposits with banks, federal funds sold and securities purchased under agreements to resell		121			45			76
Loans²		6,315			4,254			2,061
Total interest income		6,489			3,263			3,226
Interest Expense
Interest bearing demand deposits		479			105			374
Savings deposits		375			72			303
Time deposits		2,445			1,145			1,300
Federal funds purchased and securities sold under agreements to repurchase		572			261			311
Other borrowed funds		316			158			158
Total interest expense		4,187			1,741			2,446
Net interest income	$	2,302			1,522		$	780
Percentage change		100.0	%		66.1	%		33.9	%

¹The changes that are not solely due to rate or volume are allocated on a percentage basis using the absolute values of rate and volume variances as a basis for allocation.

²Income stated at fully tax equivalent basis using the marginal corporate Federal tax rate of 35%.

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

Noninterest Income

Noninterest income was $5.0 million for the third quarter of 2006, an increase of $163 thousand or 3.4% compared to the same period in the prior year. Noninterest income represents 18.0% of total revenue for the current quarter, a decrease of 485 basis points from 22.9% for the same period last year. The decrease in noninterest income as a percentage of total revenue is due primarily to the composition of the revenue streams from Citizens Bancorp, which is more heavily weighted toward interest income.

Service charges and fees on deposits increased $133 thousand or 6.1% in the quarterly comparison. Lower fees of $38 thousand from the Commonwealth of Kentucky and lower dormant account fees of $50 thousand were offset by additional service charges of $316 thousand attributed to the Citizens Bancorp acquisition. Income from company-owned life insurance was relatively unchanged at $320 thousand. Allotment processing fees decreased $38 thousand or 5.8% due to procedural changes and volume losses related to Hurricane Katrina beginning late in the third quarter of 2005. Non-deposit related service charges, commissions, and fees were $568 thousand, an increase of $65 thousand or 12.9% driven mainly by $69 thousand and $35 thousand of additional custodial safekeeping fees and loan servicing fees, respectively. The increase in the loan servicing fees is attributed to the Citizens Bancorp acquisition.

Trust income is up $59 thousand or 14.9%, led by an increase of $25 thousand attributed to the Citizens Bancorp acquisition. Gains on the sale of mortgage loans were $146 thousand, a decline of $23 thousand or 13.6% due to a $2.5 million or 27.8% decrease in mortgage loans sold in the comparison. Other noninterest income was $148 thousand, a decline of $38 thousand or 20.4% compared to $186 thousand a year earlier due to lower check order fees of $44 thousand and lower income related to the Company’s investment in Kentucky Home Life Insurance Company of $38 thousand.

Noninterest Expense

Total noninterest expenses were $12.9 million for the three months ended September 30, 2006, an increase of $2.4 million or 22.8% compared to $10.5 million for the same period in 2005. The increase in noninterest expenses is reflected across a broad range of line items. A significant factor contributing to the higher expenses is the Citizens Bancorp acquisition during December 2005. The largest increases in noninterest expenses are attributed to salaries and employee benefits, which jumped $1.0 million or 18.1%, data processing and communication expenses of $256 thousand or 24.3%, and net occupancy expenses of $196 thousand or 29.3%.

The increase in salaries and employee benefits resulted from the addition of 82 average full time equivalent employees (70 from the Citizens Bancorp acquisition), normal salary increases for existing employees, and an increase in benefits. Salaries and related payroll taxes increased $956 thousand or 21.3%, with Citizens Bancorp accounting for $655 thousand of the increase. Benefit expenses grew $48 thousand or 3.8%. Noncash compensation expense related to the Company’s nonqualified stock option plan and employee stock purchase plan was $37 thousand. There was no such expense recorded in the comparable period last year since the current year includes the initial recognition of such costs pursuant to SFAS No. 123(R).

Occupancy expense, net of rental income, increased $196 thousand or 29.3% and totaled $866 thousand for the three months ended September 30, 2006. The increase was led by $177 thousand attributed to the Citizens Bancorp acquisition along with normal operating increases. Equipment expenses were up $32 thousand or 5.2% to $651 thousand led by a $25 thousand increase attributed to Citizens Bancorp. Data processing and communications expense rose $256 thousand or 24.3% to $1.3 million. The increase is attributed to the Citizens Bancorp acquisition, which added $239 thousand of expense for the current quarter. A significant portion of this amount is related to data processing, which is expected to decline once Citizens Bancorp’s processing system is converted to the Company’s processing system. Bank franchise taxes increased $105 thousand or 30.5% led by $70 thousand attributed to Citizens Bancorp. Correspondent bank fees declined $37 thousand or 17.3% and is correlated to the decline in service charges and fees on deposits related to the Commonwealth of Kentucky noted in the previous section of this report. An additional $269 thousand of core deposit amortization from Citizens Bancorp resulted in an overall increase in intangible amortization of $218 thousand. Other noninterest expenses were $2.2 million, an increase of $591 thousand or 35.9% driven mainly by the addition of Citizens Bancorp.

Income Taxes

Income tax expense for the third quarter of 2006 was $966 thousand, an increase of $267 thousand or 38.2% compared to the same period a year earlier. The effective federal income tax rate increased 573 basis points to 22.7% from 17.0% in the comparison. The change in the effective tax rate is due to the relatively large increase in taxable revenue expected later in this calendar year from the pending sale of discontinued operations.

Income From Discontinued Operations

Income from discontinued operations was $463 thousand for the current three months ended September 30, 2006. This represents an increase of $21 thousand or 4.8% compared to $442 thousand in the same period a year earlier. Basic and diluted income per share from discontinued operations was $.06 for the current quarter, unchanged from a year earlier.

First Nine Months of 2006 vs. First Nine Months of 2005

Net income for the nine months ended September 30, 2006 was $12.4 million, an increase of $646 thousand or 5.5% compared to $11.8 million for the same period in 2005. Basic and diluted net income per share was $1.68 for the current nine months, a decrease of $.06 or 3.4% (basic) and $.05 or 2.9% (diluted) compared to $1.74 and $1.73 a year earlier.

Income from continuing operations was $11.2 million, an increase of $458 thousand or 4.3% compared to $10.7 million for the same period in 2005. Basic and diluted income per share from continuing operations was $1.51 for the current nine months, a decrease of $.07 or 4.4% on a basic per share basis and $.06 or 3.8 % on a diluted per share basis compared to the same period a year ago.

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

An increase in net interest income, which was fueled by the Citizens Bancorp acquisition, had a significant impact on net income for the nine months ended September 30, 2006. Net interest income was $36.9 million in the current nine-month period ended September 30, 2006. This represents an increase of $6.8 million or 22.7% compared to the same period a year ago. The increase in net interest income is primarily due to higher interest on loans of $17.0 million or 44.8%, partially offset by $8.7 million or 64.7% higher interest expense on deposits. The Citizens Bancorp acquisition accounted for $5.5 million of the increase in net interest income in the comparison, including $8.7 million higher interest from loans partially offset by $3.9 million higher interest expense on deposits.

The provision for loan losses decreased $195 thousand or 53.1% in the nine-month comparison. The decrease in the provision for loan losses is reflective of a still-improving trend in credit quality of the Company’s loan portfolio. This improvement is attributed to lower delinquent and classified loans from year-end 2005, lower annualized net charge-offs as a percentage of average loans outstanding, and lower historical loss ratios.

Noninterest income, which was helped by the Citizens Bancorp acquisition, declined $136 thousand or .9% to $15.1 million for the current nine months compared to a year ago. The decline in the year-to-date period was due primarily to a one-time gain of $700 thousand on the sale of the Company’s $3.2 million credit card portfolio recorded in the first quarter of 2005. Excluding the effect of the one-time gain on the credit card portfolio in the prior year, noninterest income grew $564 thousand or 3.9% in the nine-month comparison.

Noninterest expenses increased $6.4 million or 20.4% for the current nine-month period compared to the same period a year earlier. The increase in noninterest expenses occurred across a broad range of line items and is generally attributed to the Citizens Bancorp acquisition.

Income from discontinued operations was $1.3 million for the nine-month period ended September 30, 2006. This represents an increase of $188 thousand or 17.0% in the comparable period. As previously disclosed, the Company has entered into a definitive agreement to sell its KBC subsidiary and the Bath County branches of Farmers Georgetown. Both of these transactions are expected to close during the fourth quarter of 2006.

The return on average assets (“ROA”) was .97% for the current year to date period, a decrease of 13 basis points compared to 1.10% reported for the same period in 2005. The decrease in ROA was driven by noninterest expenses, which negatively impacted ROA by 27 basis points. This was partially offset by a 12 basis point increase in net interest margin to 3.79% from 3.67%. Return on average equity (“ROE”) was 9.61% for the first nine months of 2006 compared to 10.79% in the same period of 2005. This represents a decrease of 121 basis points and is attributed mainly to the higher average equity outstanding, which increased at a faster pace than net income.

Net Interest Income

The trend of the general interest rate environment in the current nine months compared to a year earlier has been generally upward primarily as a result of short-term interest rate increases by the Board of Governors of the Federal Reserve Board (the “Fed”). The Fed has increased short-term interest rates by 150 basis points in six equal increments of 25 basis points since September 30, 2005. The effects of these rate increases by the Fed has generally led to higher average rates earned and paid on interest earning assets and interest bearing liabilities with a faster increase in the average rates earned on earning assets, particularly loans and temporary investments, due to their repricing characteristics combined with new loan originations in a rising rate environment.

The Company’s tax equivalent (“TE”) yield on earning assets for the current nine months was 6.6%, an increase of 93 basis points from 5.7% in the same period a year ago. The cost of funds for the current three months was 3.2%, an increase of 86 basis points compared to 2.3% in the same period a year earlier. A goal of the Company in the current interest rate environment is to increase earning assets while maintaining the current relatively low interest rates paid on interest bearing liabilities. The Company strives to accomplish this goal while providing excellent service, offering competitive rates to its customers, and maintaining its core deposit base. Maintaining the relatively low cost of funds is becoming increasingly difficult due to the upward trend in general interest rates and competitive market forces. Average earning assets were $1.4 billion for the current nine months, an increase of 209 million or 18.2% compared to $1.2 billion a year ago. As a percentage of total average assets, earning assets decreased 75 basis points to 88.1% from 88.9%. The lower earning asset ratio decreased ROA by four basis points in the nine-month comparison.

Interest income results from interest earned on earning assets, which primarily include loans and investment securities. Interest income is affected by volume (average balance), composition of earning assets, and the related rates earned on those assets. Total interest income for the nine-month period ended September 30, 2006 was $65.4 million, an increase of $18.2 million or 38.5% compared to the comparable period in the previous year. The growth in interest income was mainly attributed to higher interest income on loans of $17.0 million or 44.8%. Interest income on loans increased as a result of higher average loan balances outstanding resulting from the Citizens Bancorp acquisition, higher internally generated loan growth, and a 90 basis point increase in the average rate earned on loans. The Citizens Bancorp acquisition accounted for $8.7 million of the increase in interest income on loans.

Interest and fees on loans was $54.8 million, an increase of $17.0 million or 44.8% compared to a year earlier. Average loans increased $214 million or 27.1% to $1.0 billion in the comparison due mainly to a $158 million higher average balance outstanding from the acquisition of Citizens Bancorp and, to a lesser extent, higher loan demand. Interest income on loans was also boosted by a 90 basis point increase in the tax equivalent yield to 7.3% from 6.4% in the nine-month comparison. Interest on taxable securities was $6.6 million, an increase of $1.2 million or 21.4% due mainly to a 60 basis point increase in the average rate earned along with a $7.7 million or 3.8% higher average balance outstanding. Interest on nontaxable securities was unchanged at $2.8 million. Interest on short-term investments, including time deposits in other banks, federal funds sold, and securities purchased under agreements to resell, increased $58 thousand or 4.9% due to an increase in the average rate earned of 83 basis points to 3.2%, which more than offset a $14.5 million decline in the average balances outstanding to $51.1 million from $65.7 million.

Interest expense results from incurring interest on interest bearing liabilities, which primarily include interest bearing deposits, federal funds purchased and securities sold under agreements to repurchase, and other borrowed funds. Interest expense is affected by volume, composition of interest bearing liabilities, and the related rates paid on those liabilities. Total interest expense was $28.4 million for first nine months of 2006, an increase of $11.3 million or 66.2% from the same period in the prior year. Interest expense increased mainly as a result of higher interest expense on deposits of $8.7 million or 64.7%. Interest expense on deposits increased as a result of higher deposit balances outstanding from the Citizens Bancorp acquisition, higher deposits generated internally, and higher rates paid on interest bearing deposits throughout the entire deposit portfolio. The Company’s cost of funds was 3.2% for the current nine-month period, an increase of 86 basis points from 2.3% for the same period a year earlier. The percentage increase in cost of funds was led by a 184 basis point increase in federal funds purchased and securities sold under agreements to repurchase, which generally reprice more quickly than other interest bearing sources of funds and correlates with the increase in general short-term market interest rates.

Interest expense on time deposits, the largest component of total interest expense, increased $6.0 million or 57.1% to $16.5 million. The increase is nearly equally attributed to an 82 basis point increase in the average rate paid to 4.0% from 3.2% combined with a $109 million or 24.4% higher average balance outstanding, which was $554 million for the current nine-month period compared to $446 million in the same period last year. The growth in average time deposits outstanding was fueled by an additional $76.9 million of time deposits related to the Citizens Bancorp acquisition.

Interest expense on savings deposits and interest bearing demand deposits increased $1.3 million or 72.8% and $1.5 million or 117%, respectively. The increase in interest expense on savings deposits was due to a 65 basis point increase in the average rates paid to 2.0% from 1.3% and, to a lesser extent, an increase in the average balance outstanding of $27.8 million or 15.7% to $205 million from $177 million. The Citizens Bancorp acquisition contributed an additional $31.0 million in average savings deposits with higher average rates than existing savings deposits in the comparison. Interest on interest bearing demand deposits increased due mainly to a higher average rate paid of 62 basis points to 1.4% and, to a lesser extent, an increase in the average balance outstanding of $47.3 million or 22.3%. Excluding the $50.8 million additional average interest bearing demand deposits attributed to the Citizens Bancorp acquisition, average interest bearing demand deposits for the Company declined $3.6 million or 1.7% in the comparison. The increase in average rates paid for deposits follows the trend of increasing general short-term market interest rates between the comparable periods.

Interest expense on federal funds purchased and securities sold under agreements to repurchase increased $1.4 million or 76.7% due to a 184 basis point increase in the average rate paid to 4.8% from 2.9% a year ago and, to a smaller degree, a $6.9 million or 8.3% increase in the average balance outstanding. Interest expense on other borrowed funds consists primarily of FHLB borrowings and subordinated notes payable to unconsolidated trusts. Interest expense on other borrowed funds increased $1.2 million or 66.9% and is due mainly to an increase in interest expense related to the notes payable to unconsolidated trusts of $1.0 million. The Company issued $25.0 million of subordinated notes payable in connection with its trust preferred securities offering during the third quarter of 2005. The variable rate on these notes has also repriced higher in the comparable periods.

The net interest margin (TE) increased 12 basis points to 3.79% during the first nine months of 2006 compared to 3.67% in the same period of 2005. The higher net interest margin is attributed to a 7 basis point increase in the spread between rates earned on earning assets and the rates paid on interest bearing liabilities to 3.39% in the current period from 3.32% in the same period a year earlier. The remaining 5 basis point increase in margin is attributed to the impact of noninterest bearing sources of funds. The impact of noninterest bearing sources of funds on net interest margin typically increases in a rising rate environment.

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

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

Nine Months Ended September 30,	2006									2005
(In thousands)	Average Balance			Interest⁴			Average Rate			Average Balance			Interest⁴			Average Rate
Earning Assets
Investment securities
Taxable	$	210,978		$	6,556			4.15	%	$	203,290		$	5,401			3.55	%
Nontaxable¹		91,504			3,988			5.83			90,236			4,059			6.01
Time deposits with banks, federal
funds sold and securities purchased
under agreements to resell		51,113			1,235			3.23			65,651			1,177			2.40
Loans^1,2,3		1,005,865			55,202			7.34			791,370			38,111			6.44
Total earning assets		1,359,460		$	66,981			6.59	%		1,150,547		$	48,748			5.66	%
Allowance for loan losses		(10,930	)								(10,684	)
Total earning assets, net of
allowance for loan losses		1,348,530									1,139,863
Nonearning Assets
Cash and due from banks		78,047									75,257
Premises and equipment, net		30,376									22,356
Other assets		86,136									57,393
Assets of discontinued operations		141,708									149,949
Total assets	$	1,684,797								$	1,444,818
Interest Bearing Liabilities
Deposits
Interest bearing demand	$	259,045		$	2,728			1.41	%	$	211,778		$	1,259			.79	%
Savings		205,253			3,015			1.96			177,428			1,745			1.31
Time		554,419			16,476			3.97			445,666			10,487			3.15
Federal funds purchased and
securities sold under agreements
to repurchase		90,069			3,206			4.76			83,136			1,814			2.92
Other borrowed funds		80,085			3,017			5.04			58,768			1,808			4.11
Total interest bearing liabilities		1,188,871		$	28,442			3.20	%		976,776		$	17,113			2.34	%
Noninterest Bearing Liabilities
Commonwealth of Kentucky deposits		39,004									38,689
Other demand deposits		150,086									137,559
Other liabilities		8,593									11,482
Liabilities of discontinued operations		143,109									147,851
Total liabilities		1,529,663									1,312,357
Shareholders’ equity		155,134									132,461
Total liabilities and shareholders’
equity	$	1,684,797								$	1,444,818
Net interest income					38,539									31,635
TE basis adjustment					(1,593	)								(1,530	)
Net interest income				$	36,946								$	30,105
Net interest spread								3.39	%								3.32	%
Impact of noninterest bearing sources
of funds								.40									.35
Net interest margin								3.79	%								3.67	%

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 $1.5 million and $1.4 million in 2006 and 2005, respectively.

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

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

(In thousands)	Variance			Variance Attributed to
Nine Months Ended September 30,	2006/2005^1,3			Volume			Rate

Interest Income
Taxable investment securities	$	1,155		$	211		$	944
Nontaxable investment securities²		(71	)		81			(152	)
Time deposits with banks, federal funds sold and securities purchased under agreements to resell		58			(403	)		461
Loans²		17,091			11,277			5,814
Total interest income		18,233			11,166			7,067
Interest Expense
Interest bearing demand deposits		1,469			325			1,144
Savings deposits		1,270			305			965
Time deposits		5,989			2,898			3,091
Federal funds purchased and securities sold under agreements to repurchase		1,392			162			1,230
Other borrowed funds		1,209			744			465
Total interest expense		11,329			4,434			6,895
Net interest income	$	6,904		$	6,732		$	172
Percentage change		100.0	%		97.5	%		2.5	%

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 $15.1 million for the nine months ended September 30, 2006, a decrease of $136 thousand or less than 1.0% compared to the same period in the prior year. Noninterest income represents 18.7% of total revenue for the current nine months, a decrease of 563 basis points from 24.3% for the same period last year. The decrease in noninterest income as a percentage of total revenue is due primarily to the composition of the revenue streams from Citizens Bancorp, which is more heavily weighted toward interest income. Excluding the effect of the one-time gain on the sale of the Company’s $3.2 million credit card portfolio in the prior year, noninterest income increased $564 thousand or 3.9% in the comparable periods.

Income items that showed net increases primarily as a result of the Citizens Bancorp acquisition were as follows: service charges and fees on deposits of $132 thousand or 2.0%; non-deposit service charges, commissions, and fees of $283 thousand or 16.9%; and trust income of $151 thousand or 12.3%. The $132 thousand increase in service charges and fees on deposits includes an additional $678 thousand related to Citizens Bancorp which offset a decline in fees of $241 thousand attributed to the Commonwealth of Kentucky and $167 thousand lower dormant account fees. The decline in fees from the Commonwealth of Kentucky is closely relates to the lower correspondent bank fees discussed in the next section of this report. Allotment processing fees were unchanged at $2.0 million. Income from company-owned life insurance was up $142 thousand or 16.5% due to higher crediting rates and additional amounts outstanding attributed to the purchase of Citizens Bancorp.

Data processing fees were $1.3 million, a decline of $53 thousand or 3.9% mainly due to an increasing percentage of electronic transactions versus paper transactions, which are less costly and result in lower revenue for the Company. The Company sold investment securities during the current period for a net loss of $195 thousand to better position its balance sheet for asset and liability management purposes. Gains on the sale of mortgage loan were $464 thousand, a decline of $41 thousand or 8.1% due to a $3.4 million or 13.6% decrease in mortgage loans sold in the comparison. Other noninterest income was $539 thousand, a decrease of $558 thousand compared to $1.1 million a year earlier. The decrease in other noninterest income is attributable to the $700 thousand one-time gain recorded in the prior year on the sale of the Company’s credit card portfolio. Excluding the one-time gain,

other noninterest income grew $142 thousand or 35.8% due mainly to gain on the sale of a vacant office building of $125 thousand.

Noninterest Expense

Total noninterest expenses were $37.8 million for the nine months ended September 30, 2006, an increase of $6.4 million or 20.4% compared to $31.4 million for the same period in 2005. The increase in noninterest expenses is reflected across a broad range of line items. A significant factor contributing to the higher expenses is the Citizens Bancorp acquisition during December 2005. The largest increase in noninterest expenses is attributed to salaries and employee benefits, which grew $3.5 million or 20.9%, net occupancy expenses of $653 thousand or 33.0%, amortization of intangibles of $680 thousand or 105%, and data processing and communication expenses of $694 thousand or 22.5%.

The $3.5 million increase in salaries and employee benefits resulted from the addition of 72 average full time equivalent employees (66 from the Citizens Bancorp acquisition), normal salary increases for existing employees, and an increase in benefit costs. Salaries and related payroll taxes increased $2.5 million or 18.6%, with Citizens Bancorp accounting for $1.9 million of the increase. Benefit expenses increased $907 thousand or 27.2%, a sharp increase that was boosted by $468 thousand related to Citizens Bancorp. The increase in benefit expenses is mainly attributed to higher health care costs in the current nine-month period compared to the same period a year ago. Employee health care claims have increased during the current period compared to the same period a year earlier. Within specified contractual limits, benefit costs move in tandem with their related claims. Noncash compensation expense related to the Company’s nonqualified stock option plan and employee stock purchase plan was $102 thousand. There was no such expense recorded in the comparable period last year since the current period includes the initial recognition of such costs pursuant to SFAS No. 123(R).

Occupancy expense, net of rental income, increased $653 thousand or 33.0% and totaled $2.6 million at September 30, 2006. The increase was led by $395 thousand attributed to the Citizens Bancorp acquisition along with normal operating increases. Equipment expenses were up $198 thousand or 10.5% to $2.1 million led by a $221 thousand increase attributed to Citizens Bancorp. Data processing and communications expense was up $694 thousand or 22.5% to $3.8 million. The increase is primarily attributed to the Citizens Bancorp acquisition, which added $553 thousand of expense for the current nine-month period. A significant portion of this amount is related to data processing, which is expected to decline once Citizens Bancorp’s processing system is converted to the Company’s processing system. Bank franchise taxes increased $312 thousand or 30.6% led by $214 thousand attributed to Citizens Bancorp. Correspondent bank fees declined $173 thousand or 25.1% and is correlated to the decline in service charges and fees on deposits related to the Commonwealth of Kentucky noted in the previous section of this report. Amortization of intangibles was up $680 thousand to $1.3 million with an increase of $807 thousand resulting from additional core deposit intangible amortization at Citizens Bancorp. Other noninterest expenses were $6.0 million, an increase of $559 thousand or 10.4% compared to the same nine-month period a year earlier. The increase in other noninterest expenses was mainly attributed to the Citizens Bancorp acquisition.

Income Taxes

Income tax expense for the nine months ended September 30, 2006 was $2.8 million, an increase of $22 thousand or less than 1% compared to the same period a year earlier. The effective federal income tax rate decreased 56 basis points to 20.3% from 20.9% in the comparison. The effective federal income tax rate is expected to increase after the sale of the Company’s discontinued operations is complete, which is expected to occur in the fourth quarter of 2006.

Income From Discontinued Operations

Income from discontinued operations was $1.3 million for the current nine months ended September 30, 2006. This represents an increase of $188 thousand or 17.0% compared to $1.1 million in the same period a year earlier. Basic and diluted income per share from discontinued operations was $.17 in the current period, an increase of $.01 compared to $.16 a year earlier.

FINANCIAL CONDITION

Total assets related to continuing operations were $1.6 billion on September 30, 2006, up $58.2 million or 3.8% from the prior year-end. The composition of the Company’s significant assets changed as follows: a $16.0 million or 12.2% increase in cash and cash equivalents; a $52.7 million or 16.0% decrease in securities; and an increase in net loans of $93.4 million or 9.8%. The changes within the asset groups correlate to the overall funding position of the Company. Cash and cash equivalents increased primarily as a result of an additional $15 million borrowed near the end of the quarter for the payment of the cash portion of the Citizens Jessamine acquisition that was paid subsequent to the end of the quarter. The decline in investment securities and the $44.2 million increase in deposits primarily funded loan growth. Payment of the prior year-end accrued purchase price of Citizens Bancorp of $21.8 million was offset by a $23.9 million and a $3.0 million increase in other borrowed funds and federal funds purchased and securities sold under agreements to repurchase, respectively. Shareholders’ equity grew $6.2 million or 4.0% to $160 million at September 30, 2006.

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

On an average basis, total assets related to continuing operations were $1.5 billion for the first nine months of 2006, an increase of $248 million or 19.2% from year-end 2005 driven mainly by an additional $226 million from the Citizens Bancorp purchase during December 2005. Average earning assets, primarily loans and securities, were $1.4 billion at September 30, 2006, an increase of $209 million or 18.2% from year-end 2005. Average earning assets represent 88.1% of total average assets on September 30, 2006, a decrease of 8 basis points compared to 88.9% at year-end 2005.

Loans

Loans, net of unearned income, totaled $1.1 billion at September 30, 2006, an increase of $92.9 million or 9.6% from year-end 2005. The composition of the loan portfolio is summarized in the table below.

	September 30, 2006					December 31, 2005
(Dollars in thousands)	Amount		%			Amount		%

Commercial, financial,
and agriculture	$	185,290		17.5	%	$	173,797		18.1	%
Real estate - construction		130,425		12.4			88,693		9.2
Real estate mortgage - residential		340,823		32.3			331,508		34.4
Real estate mortgage farmland and
other commercial enterprises		310,929		29.5			274,411		28.5
Installment		54,345		5.1			56,169		5.8
Lease financing		33,619		3.2			37,993		4.0
Total	$	1,055,431		100.0	%	$	962,571		100.0	%

On average, loans represented 74.0% of earning assets during the current nine-month period, an increase of 536 basis points compared to 68.6% for year-end 2005. The increase was due mainly to the Citizens Bancorp acquisition, which had loans representing 83.0% of its average earning assets for the nine-month period ended September 30, 2006. As loan demand fluctuates, the available funds are reallocated between loans and temporary investments or investment securities, which typically involve a decrease in credit risk and lower yields.

Allowance for Loan Losses

The allowance for loan losses was $10.5 million at September 30, 2006, a decrease of $568 thousand or 5.1% from the prior year-end. The allowance for loan losses was .99% of loans net of unearned income at September 30, 2006, a decrease of 16 basis points compared to 1.15% at December 31, 2005. The provision for loan losses decreased $95 thousand and $195 thousand in the current three-month and nine-month comparisons, respectively. The lower provision for loans losses in the current periods is attributed to continued improvement in the credit quality of the Company’s loan portfolio. Although loans 90 days past due are up $1.6 million since year-end, other measurements of credit quality have declined. This includes lower nonaccrual loans of $863 thousand and a sharp decline in watch list loans. Additionally, annualized net charge-offs as a percentage of average loans were .10% for the nine-month period ended September 30, 2006, down 15 basis points from .25% at December 31, 2005.

The allowance for loan losses as a percentage of nonperforming loans totaled 193.3% and 235.4% at September 30, 2006 and December 31, 2005, respectively. The decrease in the current period compared to the prior year-end is attributed to the net increase in nonperforming loans of $730 thousand and $761 thousand lower allowance for loan losses. Management continues to emphasize collection efforts and evaluation of risks within the loan portfolio.

Nonperforming Assets

Nonperforming assets for the Company include nonperforming loans, other real estate owned, and other foreclosed assets. Nonperforming loans consist of nonaccrual loans, restructured loans, and loans past due ninety days or more on which interest is still accruing. Nonperforming assets totaled $9.0 million at September 30, 2006, a decrease of $4.5 million or 33.6% from the prior year-end. Nonperforming loans were $5.4 million at September 30, 2006, a $730 thousand or 15.5% increase compared to year-end 2005. The increase in nonperforming loans relates primarily to higher loan’s past due 90 days or more of $1.6 million, partially offset by lower nonaccrual loans of $863 thousand or 37.2%. The decrease in nonaccrual loans was led by a decline of $768 thousand to a single borrower, of which $475 thousand was transferred to the Company through foreclosure and subsequently liquidated. The increase in loans 90 days or more past due was driven up primarily by five individual credits totaling $1.9 million. Nonperforming loans represent .5% of loans net of unearned income at September 30, 2006, unchanged compared to year-end 2005.

Other real estate owned was $3.4 million at September 30, 2006. This represents a decrease of $5.4 million or 60.9% compared to $8.8 million at year-end 2005. A significant portion of this decrease is attributed to the sale of foreclosed real estate related to the Company’s previous disclosures regarding a financially troubled builder.

Temporary Investments

Temporary investments consist of interest bearing deposits in other banks and federal funds sold and securities purchased under agreements to resell. The Company uses these funds in the management of liquidity and interest rate sensitivity. At September 30, 2006, temporary investments were $39.4 million, a decrease of $20.1 million or 33.8% compared to $59.5 million at year-end 2005. Temporary investments averaged $51.1 million during the first nine months of 2006, a decrease of $17.1 million or 25.1% from year-end 2005. The decrease is primarily a result of the Company’s net funding position, which was driven by $21.8 million cash payment to Citizens Northern stockholders during the current nine months along with higher loan demand. Temporary investments are reallocated as loan demand and other investment alternatives present the opportunity.

Investment Securities

The investment securities portfolio is comprised primarily of U.S. Government agency securities, mortgage-backed securities, and tax-exempt securities of states and political subdivisions. Total investment securities were $275 million on September 30, 2006, a decrease of $52.7 million or 16.0% from year-end 2005. The decline in investment securities was due in part to the sale of investment securities for normal asset and liability management purposes and reinvesting a higher percentage of the proceeds from matured or called investment securities into loans or alternate uses other than for the purchase of additional investment securities.

Investment securities averaged $302 million in total for the current nine months, an increase of $2.8 million or less than 1% compared to the year-end 2005 balance. The Company had a net unrealized loss on available for sale

investment securities of $2.0 million at September 30, 2006 compared to a net unrealized loss of $6.6 million and $2.7 million at June 30, 2006 and year-end 2005, respectively. The $4.6 million increase during the three months ended September 30, 2006 is reflective of a sharp jump in market bond prices near the end of the reporting period, particularly on bonds within the two to ten year maturity ranges. In addition, the investment portfolio has declined as a result of reinvesting proceeds from matured or called bonds into alternative uses, primarily loans. This has shortened up the maturity dates of the remaining portfolio, which generally has brought bond values closer to their par value.

Company-owned Life Insurance

Company-owned life insurance was $31.0 million at September 30, 2006, an increase of $973 thousand or 3.2% from $30.0 million at year-end 2005. Income from company-owned life insurance was $320 thousand and $1.0 million for the three and nine months ended September 30, 2006, respectively. This represents an increase of $6 thousand or 1.9% and $142 thousand or 16.5% in the three and nine-month comparisons, respectively. Income edged up during the quarter due to the addition of $33 thousand attributed to Citizens Bancorp. For the nine-month comparison, higher crediting rates combined with an additional $93 thousand from Citizens Bancorp boosted the income $142 thousand.

Assets of Discontinued Operations

Total assets of discontinued operations were $139 million at September 30, 2006, a decrease of $4.6 million or 3.2% compared to year-end 2005.

Deposits

The Company’s primary source of funding for its lending and investment activities results from its customer deposits, which consist of noninterest and interest bearing demand, savings, and time deposits. On September 30, 2006 total deposits were $1.2 billion, an increase of $44.2 million or 3.7% from year-end 2005. The bulk of the increase was related to noninterest bearing deposits, which increased $28.8 million or 15.7% to $212 million from $183 million. Interest bearing deposits grew $15.4 million or 1.5% to $1.0 billion. Average total deposits were $1.2 billion for the first nine months of 2006, an increase of $178 million or 17.3% compared to year-end 2005. Net increases in average deposits were consistent throughout nearly the entire deposit portfolio as follows: noninterest bearing demand of $9.9 million or 5.5%; interest bearing demand of $44.5 million or 20.7%; savings accounts of $22.9 million or 12.6%; and time deposits of $101 million or 22.3%. The increase in average deposits outstanding is primarily attributed to the Citizens Bancorp acquisition late in the fourth quarter of 2005. This acquisition contributed $17.2 million and $158 million in average noninterest bearing and interest bearing deposits, respectively, during the first nine months of 2006.

Borrowed Funds

Borrowed funds totaled $174 million at September 30, 2006, an increase of $26.9 million or 18.3% from $147 million at year-end 2005. Included in the increase is $15.0 million of short-term borrowing used in connection with the purchase of Citizens National. Total borrowed funds averaged $170 million, an increase of $24.8 million or 17.1% from $145 million at year-end 2005. The increase in average borrowed funds since year-end 2005 was led by a $14.5 million higher average of subordinated notes payable to unconsolidated trusts outstanding that is due to the timing of the transaction, which took place during the middle of 2005. Average federal funds purchased and securities sold under agreements to repurchase were also up by $8.8 million or 10.8% to $90.1 million.

Liabilities of Discontinued Operations

Total liabilities of discontinued operations were $140 million at September 30, 2006, a decrease of $4.2 million or 2.9% compared to $144 million at year-end 2005.

LIQUIDITY

The Parent Company’s primary use of cash consists of dividend payments to its common shareholders, purchases of its common stock, corporate acquisitions, interest expense on borrowings, and other general operating purposes. Liquidity of the Parent Company depends primarily on the receipt of dividends from its subsidiary banks and cash balances maintained. As of September 30, 2006 combined retained earnings of the subsidiary banks, excluding KBC, was $63.1 million, of which $22.3 million was available for the payment of dividends to the Parent Company without obtaining prior approval from bank regulatory agencies. As a practical matter, payment of future dividends is also subject to the maintenance of other capital ratio requirements. Management expects that in the aggregate, its subsidiary banks will continue to have the ability to pay dividends in order to provide funds to the Parent Company during the remainder of 2006 sufficient to meet its liquidity needs. The Parent Company had cash balances of $24.3 million at September 30, 2006, a decrease of $7.8 million or 25.0% from $32.1 million at year-end 2005. Included in the Parent Company’s cash balances at September 30, 2006 is $15.0 million drawn from its line of credit with an unaffiliated financial institution for payment of the cash portion of the purchase of Citizens National. This was paid out subsequent to September 30, 2006. Excluding the $15.0 million cash paid during October 2006 for the Citizens National purchase, the $22.8 million decrease in cash at the Parent Company is due primarily to the $21.8 million cash paid during 2006 for the acquisition of Citizens Bancorp.

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 September 30, 2006 the Company had approximately $163 million in additional borrowing capacity under various FHLB and federal funds 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 expects to receive $20.0 million in cash during the fourth quarter of 2006 from the previously announced sale of KBC. It also intends to use part of the cash proceeds from the sale of KBC to repay the $15.0 million in short-term borrowings drawn upon in connection with the Citizens National acquisition that closed effective October 1, 2006.

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 September 30, 2006, such consolidated assets were $413 million, a decrease of $33.0 million or 7.4% from year-end 2005. The decrease in liquid assets is attributed to 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 $17.3 million in the first nine months of 2006, an increase of $6.8 million compared to the same period a year earlier. Net cash used in continuing investing activities was $65.7 million and $31.5 million in the current and previous-year nine month periods ended September 30, an increase of $34.2 million. The most significant items included in the $34.2 million higher net cash outflows from continuing investing activities are the $21.8 million cash payment for the purchase of Citizens Bancorp and $66.9 million net outflows related to increased loan activity, partially offset by $58.6 million of net cash provided by investment securities transactions. Net cash provided by continuing financing activities was $64.4 million for the nine months ended September 30, 2006, a decrease of $24.4 million compared to the same period a year earlier. This decrease is related mainly to lower net inflows in the comparable periods of $25.4 million related to deposit activity.

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

CAPITAL RESOURCES

Shareholders’ equity was $160 million on September 30, 2006, an increase of $6.2 million or 4.0% from $154 million at December 31, 2005. Retained earnings were up $5.1 million or 3.3% as a result of $12.4 million of net income partially offset by $7.3 million or $.99 per share in cash dividends declared. The Company issued 37 thousand and six thousand shares of common stock, respectively, during the current nine-month period related to its nonqualified stock option and employee stock purchase plans. The issuance of these shares increased shareholders’ equity by $1.1 million. Shareholders’ equity also increased as a result of $125 thousand of noncash compensation expense attributed to its nonqualified stock option and employee stock purchase plans. The Company purchased 23 thousand shares of its outstanding common stock during the current nine months which reduced shareholders’ equity $715 thousand.

Accumulated other comprehensive loss, consisting of net unrealized holding losses on available for sale securities (net of tax), was $1.4 million at September 30, 2006, a decrease of $3.1 million and $535 thousand from June 30, 2006 and year-end 2005. The change is directly related to the fluctuation in market values of the Company’s available for sale securities as discusses previously in this report.

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 September 30, 2006 and the regulatory minimums are as follows.

	Farmers Capital			Regulatory
	Bank Corporation			Minimum
Tier 1 risk based		12.46	%		4.00	%
Total risk based		13.31	%		8.00	%
Leverage		9.17	%		4.00	%

As of September 30, 2006, all of the Company’s subsidiary banks were in excess of the well-capitalized regulatory ratio requirements as calculated under guidelines established by federal banking agencies. Citizens Jessamine, acquired subsequent to September 30, 2006, is also considered well-capitalized under the federal banking guidelines.

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 September 30, 2006, the model indicated that if rates were to gradually increase by 75 basis points during the remainder of the calendar year, then net interest income and net income would increase .08% and .11%, respectively for the year ending December 31, 2006. The model indicated that if rates were to gradually decrease by 75 basis points over the same period, then net interest income and net income would increase .03% and .13%, respectively.

Item 4. Controls and Procedures

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

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

PART II - OTHER INFORMATION

Item 1. Legal Proceedings

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

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

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; with no stated expiration date established under this plan. There were no shares of common stock repurchased by the Company during the quarter ended September 30, 2006. The maximum number of shares that may yet be purchased under the Company’s repurchase plan is 156,112.

Item 6. Exhibits

	List of Exhibits

	3i.	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 2002

	31.2	CFO Certification Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002

	32	CEO & CFO Certifications Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

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:	November 7, 2006	/s/ G. Anthony Busseni
		G. Anthony Busseni,
		President and CEO
		(Principal Executive Officer)

Date:	11-7-06	/s/ Doug Carpenter
		C. Douglas Carpenter,
		Senior Vice President, Secretary, and CFO
		(Principal Financial and Accounting Officer)

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Farmers Capital Bank (FFKT) Inactive 10-Q2006 Q3 Quarterly report

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