Farmers Capital Bank Corp - Quarterly Report (10-Q)

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

QUARTERLY REPORT

Pursuant to Section 13 OR 15(d) of

The Securities Exchange Act of 1934

For the quarterly period ended June 30, 2008

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, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer”, “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

Large accelerated filer ¨ Accelerated filer x

Non-accelerated filer ¨ (Do not check if a smaller reporting company) Smaller reporting company ¨

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

7,348,744 shares outstanding at August 6, 2008

TABLE OF CONTENTS

PART I – FINANCIAL INFORMATION

Item 1. Financial Statements
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	7
Notes to Unaudited Consolidated Financial Statements	8

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations	13

Item 3. Quantitative and Qualitative Disclosures About Market Risk	28

Item 4. Controls and Procedures	28

PART II - OTHER INFORMATION

Item 1. Legal Proceedings	28

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds	29

Item 4. Submission of Matters to a Vote of Security Holders	29

Item 6. Exhibits	30

SIGNATURES	31

PART I – FINANCIAL INFORMATION

Item 1. Financial Statements

Unaudited Consolidated Balance Sheets

	June 30,			December 31,
(In thousands, except share data)	2008			2007
Assets
Cash and cash equivalents:
Cash and due from banks	$	79,795		$	44,896
Interest bearing deposits in other banks		2,281			2,290
Federal funds sold and securities purchased under agreements to resell		29,631			31,954
Total cash and cash equivalents		111,707			79,140
Investment securities:
Available for sale, amortized cost of $547,016 (2008) and $542,259 (2007)		544,267			542,633
Held to maturity, fair value of $3,053 (2008) and $3,863 (2007)		3,304			3,844
Total investment securities		547,571			546,477
Loans, net of unearned income		1,305,079			1,291,985
Allowance for loan losses		(14,965	)		(14,216	)
Loans, net		1,290,114			1,277,769
Premises and equipment, net		40,808			38,663
Company-owned life insurance		34,775			34,171
Goodwill		52,408			52,408
Other intangibles, net		8,242			9,543
Other assets		36,718			30,076
Total assets	$	2,122,343		$	2,068,247
Liabilities
Deposits:
Noninterest bearing	$	223,400		$	192,432
Interest bearing		1,290,214			1,281,665
Total deposits		1,513,614			1,474,097
Federal funds purchased and other short-term borrowings		83,926			80,755
Securities sold under agreements to repurchase and other long-term borrowings		278,987			267,339
Subordinated notes payable to unconsolidated trusts		48,970			48,970
Dividends payable		2,426			2,436
Other liabilities		24,276			26,159
Total liabilities		1,952,199			1,899,756
Shareholders’ Equity
Preferred Stock, no par value; 1,000,000 shares authorized; none issued
Common stock, par value $.125 per share; 9,608,000 shares authorized; 7,348,744
and 7,384,865 shares issued and outstanding at June 30, 2008
and December 31, 2007, respectively		919			923
Capital surplus		48,046			48,176
Retained earnings		126,152			122,498
Accumulated other comprehensive loss		(4,973	)		(3,106	)
Total shareholders’ equity		170,144			168,491
Total liabilities and shareholders’ equity	$	2,122,343		$	2,068,247

See accompanying notes to unaudited consolidated financial statements.

Unaudited Consolidated Statements of Income

	Three Months Ended						Six Months Ended
	June 30,						June 30,
(In thousands, except per share data)	2008			2007			2008		2007
Interest Income
Interest and fees on loans	$	21,960		$	24,215		$	44,736	$	46,752
Interest on investment securities:
Taxable		5,964			2,897			11,831		5,521
Nontaxable		827			844			1,651		1,701
Interest on deposits in other banks		10			15			24		29
Interest of federal funds sold and securities purchased under agreements to resell		276			540			830		1,910
Total interest income		29,037			28,511			59,072		55,913
Interest Expense
Interest on deposits		9,757			11,254			20,709		22,205
Interest on federal funds purchased and other short-term borrowings		447			1,252			1,153		2,499
Interest on securities sold under agreements to repurchase and other long-term borrowings		2,818			701			5,644		1,362
Interest on subordinated notes payable to unconsolidated trusts		664			454			1,460		902
Total interest expense		13,686			13,661			28,966		26,968
Net interest income		15,351			14,850			30,106		28,945
Provision for loan losses		483			330			1,585		(166	)
Net interest income after provision for loan losses		14,868			14,520			28,521		29,111
Noninterest Income
Service charges and fees on deposits		2,486			2,624			4,864		5,117
Allotment processing fees		1,166			1,168			2,331		2,125
Other service charges, commissions, and fees		1,119			1,036			2,226		2,020
Data processing income		305			307			585		584
Trust income		533			485			1,050		973
Investment securities gains, net		214						580
Gains on sale of mortgage loans, net		101			175			226		292
Income from company-owned life insurance		312			321			613		668
Other		(45	)		(8	)		103		(4	)
Total noninterest income		6,191			6,108			12,578		11,775
Noninterest Expense
Salaries and employee benefits		7,557			7,619			15,108		15,129
Occupancy expenses, net		1,064			1,023			2,200		2,089
Equipment expenses		753			761			1,467		1,542
Data processing and communications expense		1,252			1,160			2,563		2,326
Bank franchise tax		477			525			896		1,039
Correspondent bank fees		293			186			508		345
Amortization of intangibles		650			848			1,301		1,666
Other		2,346			2,187			4,729		4,511
Total noninterest expense		14,392			14,309			28,772		28,647
Income before income taxes		6,667			6,319			12,327		12,239
Income tax expense		1,767			1,407			3,051		2,717
Net Income	$	4,900		$	4,912		$	9,276	$	9,522
Per Common Share
Net income, basic and diluted	$	.67		$	.62		$	1.26	$	1.21
Cash dividends declared		.33			.33			.66		.66
Weighted Average Shares Outstanding
Basic		7,350			7,884			7,362		7,888
Diluted		7,350			7,892			7,362		7,899

See accompanying notes to unaudited consolidated financial statements.

Unaudited Consolidated Statements of Comprehensive Income

	Three Months Ended						Six Months Ended
	June 30,						June 30,
(In thousands)	2008			2007			2008			2007
Net Income	$	4,900		$	4,912		$	9,276		$	9,522
Other comprehensive loss:
Unrealized holding loss on available for sale securities arising during the period, net of tax of $3,423, $110, $1,020, and $884, respectively		(6,357	)		(2,061	)		(1,895	)		(1,642	)

Reclassification adjustment for prior period unrealized (gain) loss recognized during current period, net of tax of $95, $4, $73, and $5, respectively		(176	)		8			(135	)		10

Change in unfunded portion of postretirement benefit obligation, net of tax of $44 , $34, $88, and $69		82			64			163			129
Other comprehensive loss		(6,451	)		(1,989	)		(1,867	)		(1,503	)
Comprehensive (Loss) Income	$	(1,551	)	$	2,923		$	7,409		$	8,019

See accompanying notes to unaudited consolidated financial statements.

Unaudited Consolidated Statements of Cash Flows

Six months ended June 30, (In thousands)	2008			2007
Cash Flows from Operating Activities
Net income	$	9,276		$	9,522
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization		3,215			3,607
Net discount accretion available for sale investment securities		(368	)		(632	)
Provision for loan losses		1,585			(166	)
Noncash compensation expense		27			30
Mortgage loans originated for sale		(11,436	)		(12,177	)
Proceeds from sale of mortgage loans		8,127			10,005
Deferred income tax expense		1,705			2,497
Gain on sale of mortgage loans, net		(226	)		(292	)
Loss on disposal of premises and equipment, net		19			104
Gain on sale of repossessed assets, net		(44	)		(90	)
Gain on sale of available for sale investment securities, net		(580	)
Decrease (increase) in accrued interest receivable		603			(478	)
Income from company-owned life insurance		(604	)		(631	)
Increase in other assets		(3,568	)		(296	)
(Decrease) increase in accrued interest payable		(944	)		579
Decrease in other liabilities		(689	)		(5,527	)
Net cash provided by operating activities		6,098			6,055
Cash Flows from Investing Activities
Proceeds from maturities and calls of investment securities:
Available for sale		140,078			209,054
Held to maturity		540			1,388
Proceeds from sale of available for sale investment securities		21,512			20,785
Purchase of available for sale investment securities		(165,399	)		(209,764	)
Loans originated for investment, net of principal collected		(16,289	)		(72,383	)
Purchase of PNC Military Allotment operations, net of cash acquired					(1,876	)
Purchase price refinements of previous acquisitions					(18	)
Additions to mortgage servicing rights, net		(31	)		(59	)
Purchase of premises and equipment		(4,013	)		(3,828	)
Proceeds from sale of repossessed assets		1,509			1,547
Proceeds from sale of equipment		19			315
Net cash used in investing activities		(22,074	)		(54,839	)
Cash Flows from Financing Activities
Net increase (decrease) in deposits		39,517			(14,449	)
Net increase in federal funds purchased and other short-term borrowings		3,171			24,863
Proceeds from long-term debt		19,000			8,000
Repayments of long-term debt		(7,352	)		(5,521	)
Dividends paid		(4,869	)		(6,078	)
Purchase of common stock		(1,049	)		(725	)
Shares issued under Employee Stock Purchase Plan		125			126
Stock options exercised					243
Net cash provided by financing activities		48,543			6,459
Net increase (decrease) in cash and cash equivalents		32,567			(42,325	)
Cash and cash equivalents at beginning of year		79,140			156,828
Cash and cash equivalents at end of period	$	111,707		$	114,503

Supplemental Disclosures
Cash paid during the period for:
Interest	$	29,910		$	26,389
Income taxes		4,200			5,300
Transfers from loans to repossessed assets		5,894			997
Cash dividend declared and unpaid		2,426			2,602

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
Six months ended	Common Stock						Capital			Retained			Comprehensive			Shareholders’
June 30, 2008 and 2007	Shares			Amount			Surplus			Earnings			Loss			Equity
Balance at January 1, 2008		7,385		$	923		$	48,176		$	122,498		$	(3,106	)	$	168,491
Net income											9,276						9,276
Other comprehensive loss														(1,867	)		(1,867	)
Cash dividends declared, $.66 per share											(4,859	)					(4,859	)
Purchase of common stock		(43	)		(5	)		(281	)		(763	)					(1,049	)
Shares issued pursuant to Employee Stock Purchase plan		7			1			124									125
Noncash compensation expense attributed to stock option & Employee Stock Purchase Plan grants								27									27
Balance at June 30, 2008		7,349		$	919		$	48,046		$	126,152		$	(4,973	)	$	170,144




Balance at January 1, 2007		7,895		$	988		$	53,201		$	128,652		$	(5,778	)	$	177,063
Net income											9,522						9,522
Other comprehensive loss														(1,503	)		(1,503	)
Cash dividends declared, $.66 per share											(5,208	)					(5,208	)
Purchase of common stock		(23	)		(3	)		(144	)		(578	)					(725	)
Stock options exercised, including related tax benefits		10			1			243									244
Shares issued pursuant to Employee Stock Purchase plan		5						126									126
Noncash compensation expense attributed to stock option & Employee Stock Purchase Plan grants								30									30
Balance at June 30, 2007		7,887		$	986		$	53,456		$	132,388		$	(7,281	)	$	179,549

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 and their significant nonbank subsidiaries include Farmers Bank & Capital Trust Co. (“Farmers Bank”) in Frankfort, KY and its wholly-owned subsidiaries Leasing One Corporation (“Leasing One”) and Farmers Capital Insurance Corporation. 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; First Citizens Bank in Elizabethtown, KY; United Bank & Trust Co. in Versailles, KY; The Lawrenceburg Bank and Trust Company in Harrodsburg, KY; Citizens Bank of Northern Kentucky, Inc. in Newport, KY; and Citizens Bank of Jessamine County in Nicholasville, KY. The Company has three active nonbank subsidiaries, FCB Services, Inc. (“FCB Services”), Kentucky General Holdings, LLC (“Kentucky General”), and FFKT Insurance Services, Inc. (“FFKT Insurance”). FCB Services is a data processing subsidiary located in Frankfort, KY, which provides services to the Company’s banks as well as other unaffiliated entities. Kentucky General holds a 50% voting interest in KHL Holdings, LLC, which is the parent company of Kentucky Home Life Insurance Company. FFKT Insurance is a captive property and casualty insurance company insuring primarily deductible exposures and uncovered liability related to properties of the Company. All significant intercompany transactions and balances are eliminated in consolidation.

The Company provides financial services at its 36 locations in 23 communities throughout Central and Northern Kentucky to individual, business, agriculture, government, and educational customers. Its primary deposit products are checking, savings, and term certificate accounts. Its primary lending products are residential mortgage, commercial lending and leasing, and installment loans. Substantially all loans and leases are secured by specific items of collateral including business assets, consumer assets, and commercial and residential real estate. Commercial loans and leases are expected to be repaid from cash flow from operations of businesses. Farmers Bank has served as the general depository for the Commonwealth of Kentucky for over 70 years and also provides investment and other services to the Commonwealth. Other services include, but are not limited to, cash management services, issuing letters of credit, safe deposit box rental, and providing funds transfer services. Other financial instruments, which potentially represent concentrations of credit risk, include deposit accounts in other financial institutions and federal funds sold.

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

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

For further information, refer to the consolidated financial statements and footnotes thereto included in the Company's Annual Report on Form 10-K for the year ended December 31, 2007.

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 But Not Yet Effective Accounting Standards

In December 2007, the Financial Accounting Standards Board (“FASB”) issued Statement of Financial Accounting Standards (“SFAS”) No. 141 (revised 2007), “Business Combinations” and SFAS No. 160, “Noncontrolling Interests in Consolidated Financial Statements” . In March 2008, the FASB issued SFAS No. 161, “Disclosures about Derivative Instruments and Hedging Activities” . During May 2008, the FASB issued SFAS No. 162, “ The Hierarchy of Generally Accepted Accounting Principles ” and SFAS No. 163, “ Accounting for Financial Guarantee Insurance Contracts ”.

SFAS No. 141(R) establishes principals and requirements for how an acquirer recognizes and measures in its financial statements the identifiable assets acquired, liabilities assumed, and any noncontrolling interest in an acquiree. The statement also provides guidance for recognizing and measuring goodwill or gain from a bargain purchase in a business combination and determines what information to disclose to enable users of the financial statements to evaluate the nature and financial effects of the business combination. SFAS No. 141(R) is to be applied prospectively for fiscal years beginning after December 15, 2008. The Company does not expect this statement to have a material impact on the Company’s consolidated results of operations or financial position upon adoption.

SFAS No. 160 amends Accounting Research Bulletin (“ARB”) No. 51, “Consolidated Financial Statements” to establish accounting and reporting standards for the noncontrolling interest in a subsidiary and for the deconsolidation of a subsidiary. The statement also amends certain of ARB No. 51’s consolidation procedures for consistency with the requirements of SFAS No. 141(R). This statement is effective for the fiscal years beginning after December 15, 2008 and is to be applied prospectively as of the beginning of the fiscal year in which the statement is initially adopted, except for presentation and disclosure requirements which are to be applied retrospectively for all periods presented. The Company does not expect this statement to have a material impact on the Company’s consolidated results of operations or financial position upon adoption.

SFAS No. 161 amends and expands the disclosure requirements of SFAS No. 133, “Accounting for Derivative Instruments and Hedging Activities” to provide enhanced disclosures about 1) how and why an entity uses derivative instruments; 2) how derivative instruments and related hedged items are accounted for under SFAS No. 133 and related interpretations; and 3) how derivative instruments and related hedged items affect an entity’s financial position, financial performance, and cash flows. This statement is effective for fiscal years and interim periods beginning after November 15, 2008, with early adoption encouraged. The Company does not expect this statement to have a material impact on the Company’s consolidated results of operations or financial position upon adoption.

SFAS No. 162 is intended to improve financial reporting by identifying a consistent framework, or hierarchy, for selecting accounting principles to be used in preparing financial statements that are presented in conformity with U.S. generally accepted accounting principles (GAAP) for nongovernmental entities. The hierarchy under Statement 162 is as follows:

FASB SFAS and Interpretations, FASB Statement 133 Implementation Issues, FASB Staff Positions, AICPA Accounting Research Bulletins and Accounting Principles Board Opinions that are not superseded by actions of the FASB, and Rules and interpretive releases of the SEC for SEC registrants.

FASB Technical Bulletins and, if cleared by the FASB, AICPA Industry Audit and Accounting Guides and Statements of Position.

AICPA Accounting Standards Executive Committee Practice Bulletins that have been cleared by the FASB, consensus positions of the EITF, and Appendix D EITF topics.

Implementation guides (Q&As) published by the FASB staff, AICPA Accounting Interpretations, AICPA Industry Audit and Accounting Guides and Statements of Position not cleared by the FASB, and practices that are widely recognized and prevalent either generally or in the industry.

SFAS No. 162 is effective 60 days following the Securities and Exchange Commission’s approval of the Public Company Accounting Oversight Board amendments to AU Section 411, “ The Meaning of Present Fairly in Conformity With Generally Accepted Accounting Principles”. The Company does not expect this statement to have a material impact on the Company’s consolidated results of operations or financial position upon adoption.

SFAS No. 163 clarifies how SFAS No. 60, “ Accounting and Reporting by Insurance Enterprises” , applies to financial guarantee insurance contracts issued by insurance enterprises, including the recognition and measurement of premium revenue and claim liabilities. It also requires expanded disclosures about financial guarantee insurance contracts. This statement is effective for financial statements issued for fiscal years and interim periods beginning after December 15, 2008. Early application is not permitted. The Company does not expect this statement to have a material impact on the Company’s consolidated results of operations or financial position upon adoption.

4.	Adoption of New Accounting Standards

Effective January 1, 2008 the Company adopted SFAS No. 157, “ Fair Value Measurements ” and SFAS No. 159, “ The Fair Value Option for Financial Assets and Financial Liabilities ”. Please refer to Note 6 for additional information related to the impact of adopting these Statements.

Effective January 1, 2008, the Company adopted FASB Emerging Issues Task Force (“EITF”) 06-4, “Accounting for Deferred Compensation and Postretirement Benefit Aspects of Endorsement Split-Dollar Life Insurance Arrangements”. This EITF Issue addresses accounting for separate agreements which split life insurance policy benefits between an employer and employee. The Issue requires the employer to recognize a liability for future benefits payable to the employee under these agreements. The effects of applying this issue must be recognized through either a change in accounting principle through an adjustment to equity or through the retrospective application to all prior periods. The Company currently does not have split life insurance policies. The adoption of this EITF Issue did not have an impact on the Company’s consolidated financial position or results of operations.

5. Net Income Per Common Share

Basic net income per common share is determined by dividing net income by the weighted average total number of shares of common stock outstanding. Diluted net income per common share is determined by dividing net income by the total weighted average number of shares of common stock outstanding, plus the total weighted average number of shares that would be issued upon exercise of dilutive stock options assuming proceeds are used to repurchase shares pursuant to the treasury stock method. Net income per common share computations were as follows at June 30, 2008 and 2007.

	Three Months Ended June 30,				Six Months Ended June 30,
(In thousands, except per share data)	2008		2007		2008		2007

Net income, basic and diluted	$	4,900	$	4,912	$	9,276	$	9,522

Average shares outstanding		7,350		7,884		7,362		7,888
Effect of dilutive stock options				8				11
Average diluted shares outstanding		7,350		7,892		7,362		7,899


Net income per share, basic and diluted	$	.67	$	.62	$	1.26	$	1.21

6. Fair Value Measurements

Effective January 1, 2008 the Company adopted SFAS No. 157 and SFAS No. 159. SFAS No. 157 defines fair value, establishes a framework for measuring fair value, and expands disclosures about fair value measurements. SFAS No. 157 applies whenever other standards require or permit assets or liabilities to be measured at fair value, but does not require any new fair value measurements. The Company applied SFAS No. 157 prospectively as of the beginning of the year. SFAS No. 159 permits entities to choose to measure certain financial assets and liabilities at fair value. The Company has not elected the fair value option for any financial assets or liabilities.

In February 2008, the FASB issued Staff Position (“FSP”) 157-2, “ Effective Date of FASB Statement No. 157 ”. This FSP delays the effective date of SFAS No. 157 for all nonfinancial assets and nonfinancial liabilities, except those that are recognized or disclosed at fair value on a recurring basis (at least annually) to fiscal years beginning after November 15, 2008, and interim periods within those fiscal years.

SFAS No. 157 defines fair value as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. SFAS No. 157 also establishes a fair value hierarchy which requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value. The standard describes three levels of inputs that may be used to measure fair value:

Level 1:

Quoted prices for identical assets or liabilities in active markets that the entity has the ability to access at the measurement date.

Level 2:

Significant other observable inputs other than Level 1 prices such as quoted prices for similar assets or liabilities; quoted prices in markets that are not active; or other inputs that are observable or can be corroborated by observable market data.

Level 3:

Significant unobservable inputs that reflect a reporting entity’s own assumptions about the assumptions that market participants would use in pricing the asset or liability.

Following is a description of the valuation method used for instruments measured at fair value on a recurring basis. For this disclosure, the Company only has available for sale investment securities that meet the requirement.

Available for sale investment securities

Valued primarily by independent third party pricing services under the market valuation approach that include, but not limited to, the following inputs:

U.S. Treasury securities are priced using dealer quotes from active market makers and real-time trading systems.

Marketable equity securities are priced utilizing real-time data feeds from active market exchanges for identical securities.

Government-sponsored agency debt securities, obligations of states and political subdivisions, corporate bonds, and other similar investment securities are priced with available market information through processes using benchmark yields, matrix pricing, prepayment speeds, cash flows, live trading data, and market spreads sourced from new issues, dealer quotes, and trade prices, among others sources.

Investments in the Federal Reserve Bank, Federal Home Loan Bank, and other similar stock totaling $9.7 million at June 30, 2008 is carried at cost and not included in the table below, as they are outside the scope of SFAS No. 157.

Available for sale investment securities are the Company’s only balance sheet item that meets the disclosure requirements for instruments measured at fair value on a recurring basis. Disclosures are as follows in the table below.

			Fair Value Measurements at June 30, 2008 Using
(In thousands) Description	Fair Value June 30, 2008		Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)

Available for sale investment securities	$	534,537	$	16,072	$	518,465	$	0

The Company may be required to measure and disclose certain other assets and liabilities at fair value on a nonrecurring basis to comply with GAAP, primarily to adjust assets to fair value under the application of lower of cost or fair value accounting. Disclosures may also include financial assets and liabilities acquired in a business combination, which are initially measured at fair value and evaluated periodically for impairment.

For disclosures about assets and liabilities measured at fair value on a nonrecurring basis, the Company’s only current disclosure obligation consists of impaired loans. Loans are considered impaired when full payment under the contractual terms is not expected. In general, impaired loans are also on nonaccrual status. Impaired loans are measured at the present value of expected future cash flows discounted at the loan’s effective interest rate, at the loan’s observable market price, or at the fair value of the collateral if the loan is collateral dependent. If the value of an impaired loan is less than the unpaid balance, the difference is credited to the allowance for loan losses with a corresponding charge to provision for loan losses. Loan losses are charged against the allowance for loan losses when management believes the uncollectibility of a loan is confirmed.

Impaired loans in the amount of $32.2 million have been written down to their estimated fair value of $29.8 million at June 30, 2008. At December 31, 2007 impaired loans of $30.0 million had an estimated fair value of $28.2 million. The provision for loans losses for the six months ended June 30, 2008 includes $511 thousand related to the higher impaired loans. Impaired loans are measured at fair value based on the underlying collateral and are considered level 3 inputs.

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

FORWARD-LOOKING STATEMENTS

This report contains forward-looking statements under the Private Securities Litigation Reform Act of 1995 that involve risks and uncertainties. In general, forward-looking statements relate to a discussion of future financial results or projections, future economic performance, future operational plans and objectives, and statements regarding the underlying assumptions of such statements. Although the Company believes that the assumptions underlying the forward-looking statements contained herein are reasonable, any of the assumptions could be inaccurate, and therefore, there can be no assurance that the forward-looking statements included herein will prove to be accurate. Factors that could cause actual results to differ from the results discussed in the forward-looking statements include, but are not limited to: economic conditions (both generally and more specifically in the markets in which the Company and its subsidiaries operate) and lower interest margins; competition for the Company’s customers from other providers of financial services; deposit outflows or reduced demand for financial services and loan products; government legislation, regulation, and changes in monetary and fiscal policies (which changes from time to time and over which the Company has no control); changes in interest rates; changes in prepayment speeds of loans or investment securities; inflation; material unforeseen changes in the liquidity, results of operations, or financial condition of the Company’s customers; changes in the level of non-performing assets and charge-offs; changes in the number of common shares outstanding; the capability of the Company to successfully enter into a definitive agreement for and close anticipated transactions; the possibility that acquired entities may not perform as well as expected; unexpected claims or litigation against the Company; technological or operational difficulties; the impact of new accounting pronouncements and changes in policies and practices that may be adopted by regulatory agencies; acts of war or terrorism; and other risks or uncertainties detailed in the Company’s filings with the Securities and Exchange Commission, all of which are difficult to predict and many of which are beyond the control of the Company. The Company expressly disclaims any intent or obligation to update any forward-looking statements after the date hereof to conform such statements to actual results or to changes in the Company’s opinions or expectations.

RESULTS OF OPERATIONS

Second Quarter 2008 Compared to Second Quarter 2007

The Company reported net income per share of $.67 for the three months ended June 30, 2008, an increase of $.05 or 8.1% compared to $.62 for the same three-month period a year earlier. Highlights of the quarterly comparison are as follows.

Net income for the second quarter of 2008 was unchanged at $4.9 million compared to the same quarter a year earlier.

The $.05 or 8.1% increase in per share earnings in the comparison is the result of the Company’s purchase of 559 thousand of its outstanding shares through a tender offer during the third quarter of 2007, which significantly reduced the weighted average number of shares outstanding.

Net interest income increased $501 thousand or 3.4% mainly as a result of the Company’s leverage transaction that occurred during the fourth quarter of 2007.

The provision for loan losses increased $153 thousand or 46.4% due to higher nonperforming loans in the comparable periods.

Income tax expense was up $360 thousand or 25.6% due mainly to an increase in taxable sources of income and, to a lesser extent, lower tax credits. The effective income tax rate increased 424 basis points to 26.5%.

Return on average assets (“ROA”) and equity (“ROE”) was .92% and 11.35%, respectively in the current quarter. This represents a decrease of 14 basis points in ROA and an increase of 44 basis points in ROE compared to the same quarter a year ago.

Net interest spread and margin for the current quarter was 3.17% and 3.43%, respectively compared to 3.35% and 3.79% a year ago. The 2007 balance sheet leverage transaction negatively impacted net interest margin by 28 basis points in the current three months.

Net Interest Income

Net interest income was $15.4 million for the second quarter of 2008, an increase of $501 thousand or 3.4% from $14.9 million in the same quarter a year earlier. The increase in net interest income is attributed to the Company’s $200 million balance sheet leverage transaction during the fourth quarter of 2007. This transaction added $836 thousand to net interest income in the current quarter compared to none in the same quarter a year ago since the transaction occurred late in the year of 2007.

With the exception of the balance sheet leverage transaction from 2007, interest related to most of the Company’s earning assets and interest paying liabilities have declined in the comparison. These declines are due almost entirely to a lower interest rate environment in the current period compared to a year earlier. The Company is generally earning and paying less interest from its earning assets and funding sources as rates have dropped. This includes repricing of variable and floating rate assets and liabilities that have reset since the prior year as well as activity related to new earning assets and funding sources that reflect the overall lower interest rate environment.

Total interest income was $29.0 million in the second quarter of 2008, an increase of $526 thousand or 1.8%. Interest on taxable investment securities grew $3.1 million or 106% primarily from the leverage transaction, which offset lower interest income of $2.5 million from other sources, mainly loans. Interest and fees on loans was $22.0 million, a decrease of $2.3 million or 9.3% from a year ago as the impact of lower rates earned offset a $42.1 million or 3.4% increase in volume. Interest on short-term investments declined $269 thousand or 48.5% due to a lower average rate earned that offset a $6.1 million or 12.2% increase in average outstanding balances.

Total interest expense was $13.7 million in the current quarter, unchanged from a year ago. Interest expense on securities sold under agreements to repurchase and other long-term borrowings jumped $2.1 million in the current quarter compared to a year ago due mainly to the leverage transaction in late 2007. Interest expense on deposit accounts and short-term borrowings declined $1.5 million or 13.3% and $805 thousand or 64.3%, respectively. The decline of interest expense on deposit accounts is attributed to lower average rates paid, which offset a $64.6 million or 5.2% increase in average balances outstanding. For short-term borrowings, the lower interest expense is attributed to a decline in the average rate paid of 247 basis points and $26.2 million lower average outstanding balances.

The net interest margin on a taxable equivalent basis decreased 36 basis points to 3.43% during the second quarter of 2008 compared to 3.79% in the same quarter of 2007. The lower net interest margin is attributed in part to an 18 basis point decrease in the spread between rates earned on earning assets and the rates paid on interest bearing liabilities to 3.17% in the current quarter from 3.35% in the comparable quarter of 2007. In addition, the impact of noninterest bearing sources of funds reduced net interest margin by an additional 15 basis points. The impact of noninterest bearing sources of funds on net interest margin typically decreases as the cost of funds decline. The Company expects continued margin compression in the near term as many earning assets, particularly loans, and funding sources reprice downward to reflect the overall lower market interest rate environment.

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

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

Quarter Ended June 30,	2008									2007
(In thousands)	Average Balance			Interest			Average Rate			Average Balance			Interest			Average Rate
Earning Assets
Investment securities
Taxable	$	431,778		$	5,964			5.54	%	$	236,538		$	2,897			4.91	%
Nontaxable 1		88,604			1,191			5.39			88,827			1,205			5.44
Time deposits with banks, federal funds sold and securities purchased under agreements to resell		56,058			286			2.05			49,974			555			4.45
Loans 1,2,3		1,297,789			22,260			6.88			1,255,692			24,429			7.80
Total earning assets		1,874,229		$	29,701			6.36	%		1,631,031		$	29,086			7.15	%
Allowance for loan losses		(14,517	)								(11,310	)
Total earning assets, net of allowance for loan losses		1,859,712									1,619,721
Nonearning Assets
Cash and due from banks		83,623									86,269
Premises and equipment, net		40,507									39,280
Other assets		151,801									121,383
Total assets	$	2,135,643								$	1,866,653
Interest Bearing Liabilities
Deposits
Interest bearing demand	$	267,294		$	502			0.75	%	$	257,773		$	918			1.43	%
Savings		267,405			876			1.31			244,759			1,387			2.27
Time		777,327			8,379			4.32			744,876			8,949			4.82
Federal funds purchased and other short-term borrowings		80,577			447			2.23			106,811			1,252			4.70
Securities sold under agreements to repurchase and other long-term borrowings		327,214			3,482			4.27			89,513			1,155			5.18
Total interest bearing liabilities		1,719,817		$	13,686			3.19	%		1,443,732		$	13,661			3.80	%
Noninterest Bearing Liabilities
Commonwealth of Kentucky deposits		42,900									44,806
Other demand deposits		176,702									175,332
Other liabilities		22,640									22,157
Total liabilities		1,962,059									1,686,027
Shareholders’ equity		173,584									180,626
Total liabilities and shareholders’
equity	$	2,135,643								$	1,866,653
Net interest income					16,015									15,425
TE basis adjustment					(664	)								(575	)
Net interest income				$	15,351								$	14,850
Net interest spread								3.17	%								3.35	%
Impact of noninterest bearing sources of funds								.26									.44
Net interest margin								3.43	%								3.79	%

1 Income and yield stated at a fully tax equivalent basis using the marginal corporate Federal tax rate of 35%.

2 Loan balances include principal balances on nonaccrual loans.

3 Loan fees included in interest income amounted to $818 thousand and $790 thousand in 2008 and 2007, respectively.

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

(In thousands)	Variance			Variance Attributed to
Quarter Ended June 30,		2008/2007	1	Volume			Rate

Interest Income
Taxable investment securities	$	3,067		$	2,654		$	413
Nontaxable investment securities 2		(14	)		(3	)		(11	)
Time deposits with banks, federal funds sold and securities purchased under agreements to resell		(269	)		392			(661	)
Loans 2		(2,169	)		4,634			(6,803	)
Total interest income		615			7,677			(7,062	)
Interest Expense
Interest bearing demand deposits		(416	)		222			(638	)
Savings deposits		(511	)		752			(1,263	)
Time deposits		(570	)		2,034			(2,604	)
Federal funds purchased and other short-term borrowings		(805	)		(256	)		(549	)
Securities sold under agreements to repurchase and other long-term borrowings		2,327			3,711			(1,384	)
Total interest expense		25			6,463			(6,438	)
Net interest income	$	590		$	1,214		$	(624	)
Percentage change		100.0	%		205.8	%		-105.8	%

1 The 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.

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

Provision and Allowance for Loan Losses

The provision for loan losses for the quarter ended June 30, 2008 was $483 thousand, an increase of $153 thousand or 46.4% compared to $330 thousand for the same quarter of 2007. Net charge-offs were $73 thousand in the current quarter compared to $361 thousand a year earlier. Lower net charge-offs in the current quarter were helped by an $828 thousand recovery of a previously charged-off credit initiated during 2001. On an annualized basis, quarterly net charge-offs were .02% of average loans outstanding at June 30, 2008. Excluding the unusually large recovery in the current quarter, the amount was .28%. This compares to .24%, .11% and .11% at March 31, 2008, year-end 2007, and June 30, 2007.

Nonperforming loans were $24.0 million at June 30, 2008, an increase of $2.9 million compared to year-end 2007, but a decline of $5.9 million or 19.8% compared to March 31, 2008. At June 30, 2007 nonperforming loans were $5.8 million. Nonperforming loans began to spike upward during the third quarter of 2007 and peaked at $29.9 million during the first quarter of 2008. The upward trend in nonperforming loans beginning during the last half of 2007 and into early 2008 was driven by overall weaknesses in the general economy, including a softer housing market and significant credit tightening throughout the financial services industry. For the Company, this resulted in the real estate development portion of its lending portfolio that has shown the most signs of stress. The Company’s improvement in nonperforming loan levels at June 30, 2008 compared to March 31, 2008 is reflective of managements efforts to minimize the impact of current negative market factors on the Company by working to resolve credit delinquencies with existing customers and taking a more measured and cautious approach to new lending in the near term.

The allowance for loan losses was $15.0 million or 1.15% of net loans at June 30, 2008. This compares to $14.6 million or 1.13% of net loans and $14.2 million or 1.10% of net loans outstanding at March 31, 2008 and year-end 2007, respectively. A year ago, the allowance was $11.3 million or .89% of net loans outstanding. As a percentage of nonperforming loans, the allowance for loan losses was 62.5%, 48.7%, 67.5%, and 194% at June 30, 2008, March 31, 2008, December 31, 2007, and June 30, 2007, respectively.

Noninterest Income

Noninterest income was relatively unchanged at $6.2 million for the second quarter of 2008 compared to the same period a year ago. Gains on the sale of investment securities of $214 thousand, higher non-deposit service charges of $83 thousand or 8.0%, and higher trust income of $48 thousand or 9.9% drove the increase in noninterest income. Significant line items that partially offset these increases were lower service charges and fees on deposits of $138 thousand or 5.3% and lower gains on sale of loans of $74 thousand or 42.3%.

Securities gains for the current quarter include the reversal of $85 thousand of accrued litigation related to Visa during the fourth quarter of 2007; remaining securities gains of $129 thousand is attributed to normal asset and liability management. As a result of its membership in the Visa USA network, the Company received 12,508 shares of Class B common stock from the Visa IPO completed in March, of which 4,836 shares were redeemed for a gain of $207 thousand. The Company continues to own 7,672 shares of Class B common stock that are convertible into Class A shares. The Class B shares owned include significant ownership and transfer restrictions, including a provision whereby conversion or redemption of the shares may be prohibited until up to three years or longer after the IPO. As of June 30, 2008 the conversion rate from Class B shares into Class A shares was .71429. If the Company’s Class B shares could be converted into Class A shares at June 30, 2008, they would have a market value of $446 thousand. The Company will not recognize a gain, if any, on the Visa Class B stock it currently holds until the shares are redeemed at a time in the future that is currently not known.

The increase in non-deposit service charges of $83 thousand was made up mainly of $79 thousand and $25 thousand higher debit card interchange and ATM fees, respectively, which offset slight declines from other components of this line item. The increase in trust income of $48 thousand was due primarily to increased volume.

Lower service charges and fees on deposits of $138 thousand were driven by lower dormant account fees of $309 thousand at one of the Company’s subsidiary banks that offset higher overdraft charges of $190 thousand. The decrease in dormant account fees is related to a change in the subsidiary banks’ dormant account policy during 2007, which for some accounts lengthened the period of transaction inactivity required to consider it dormant. The policy changed the dormant period of certain deposit accounts to 12 months from six months. This resulted in a decrease in the number of dormant accounts and the related fee income. The decrease in gains on sale of loans is attributed to lower loan sales volume in the current quarter compared to the comparable quarter a year ago.

Noninterest Expense

Total noninterest expenses were nearly unchanged at $14.4 million for the second quarter of 2008 compared to the second quarter a year earlier. Salaries and employee benefits, the largest component of noninterest expenses, was $7.6 million, a decrease of $62 thousand or .8% as the average number of full time equivalent employees declined to 576 from 588. Salary and related payroll taxes declined $69 thousand, which was the primary driver of the lower current expense amount in the current period.

Intangible amortization expense decreased $198 thousand or 23.3% in the quarterly comparison which helped to offset relatively minor increases in other expense line items. Amortization of intangible assets, which relate to customer lists and core deposits from prior acquisitions, is decreasing as a result of actuarially determined schedules that allocate a higher amount of amortization in the earlier periods following an acquisition.

Correspondent bank fees increased $107 thousand or 57.5% due mainly to a change in billing method of an upstream correspondent bank during the current quarter. The billing method included switching from the requirement to maintain a certain minimum balance with the correspondent to a set fee-based structured arrangement. The increase of $92 thousand or 7.9% in data processing and communication expenses is attributed primarily to higher transaction volumes. The $159 thousand or 7.3% increase in other expenses was driven mainly by higher expenses associated with other real estate owned.

Income Taxes

Income tax expense for the second quarter of 2008 was $1.8 million, an increase of $360 thousand compared to the same period a year earlier. The effective federal income tax rate increased 424 basis points to 26.5% from 22.3%

in the comparison. The Company’s effective tax rate increased mainly due to an increase in taxable sources of income and, to a lesser extent, lower tax credits.

First Six Months of 2008 Compared to First Six Months of 2007

Net income for the first six months of 2008 was $9.3 million or $1.26 per share compared to $9.5 million or $1.21 per share for the same six-month period of 2007. Highlights of the six-month comparison are as follows.

The $.05 or 4.1% increase in per share earnings for the current six-month period compared to the same period for 2007 is due mainly to the impact of the Company’s tender offer late in 2007. Net income declined $246 thousand or 2.6%, but was more than offset by the 559 thousand decrease in the number of shares outstanding from the tender offer.

Net interest income increased $1.2 million, driven by the Company’s leverage transaction that occurred during the fourth quarter of 2007.

The provision for loan losses jumped $1.8 million as overall economic conditions continue to stress certain portions of the Company’s lending portfolio, particularly real estate development and related industries.

Noninterest income increased $803 thousand or 6.8% driven by securities gains of $580 thousand.

Noninterest expenses were relatively unchanged at $28.8 million.

Income tax expense increased $334 thousand or 12.3% due mainly to an increase in taxable sources of income and, to a lesser extent, lower tax credits. The effective income tax rate increased 255 basis points to 24.8%.

ROA and ROE was .87% and 10.82%, respectively in the current six months. This represents a decrease of 17 basis points in ROA and an increase of 11 basis points in ROE compared to the same period a year ago.

Net interest spread and margin for the current six months was 3.08% and 3.36%, respectively compared to 3.29% and 3.73% a year ago. The 2007 balance sheet leverage transaction negatively impacted net interest margin by 23 basis points in the current six months.

Net Interest Income

Net interest income was $30.1 million for the first six months of 2008, an increase of $1.2 million or 4.0% from $28.9 million for the same period during 2007. The increase in net interest income is driven mainly by the Company’s $200 million balance sheet leverage transaction during the fourth quarter of 2007. This transaction added $1.7 million to net interest income in the current six months compared to zero in the same six-month period a year ago since the transaction occurred late in the year of 2007.

Interest related to many of the Company’s earning assets and interest paying liabilities have declined in the comparison. These declines are due almost entirely to a lower interest rate environment in the current period compared to a year earlier. The Company is generally earning and paying less interest from its earning assets and funding sources as rates have dropped. This includes repricing of variable and floating rate assets and liabilities that have reset since the prior year as well as activity related to new earning assets and funding sources that reflect the overall lower interest rate environment.

Total interest income was $59.1 million for the current six months, an increase of $3.2 million or 5.6%. Interest on taxable investment securities jumped $6.3 million or 114% primarily from the leverage transaction, which offset lower interest income of $3.2 million from other sources, mainly loans. Interest and fees on loans was $44.7 million, a decrease of $2.0 million or 4.3% from a year ago as the impact of a 72 basis point decline in the average rate earned offset a $69.3 million or 5.6% increase in average outstanding balances. Interest on short-term investments declined $1.1 million or 56.0% due to a 217 basis point lower average rate earned combined with $16.4 million or 20.2% lower average outstanding balances.

Total interest expense was $29.0 million in the current period, an increase of $2.0 million or 7.4% from a year ago. Interest expense on securities sold under agreements to repurchase and other long-term borrowings climbed $4.3 million in the current six months compared to a year ago due mainly to the leverage transaction in late 2007. Interest expense on deposit accounts and short-term borrowings declined $1.5 million or 6.7% and $1.3 million or 53.9%, respectively. The lower interest expense on deposit accounts is attributed to a decrease in average rates paid, mainly on savings and interest bearing demand accounts. Interest on time deposits was up $161 thousand or .9% as

a $44.6 million or 6.1% higher average balance outstanding outweighed a 25 basis point decrease in the average rate paid.

The net interest margin on a taxable equivalent basis decreased 37 basis points to 3.36% during the first six months of 2008 compared to 3.73% in the same period of 2007. The lower net interest margin is attributed in part to a 21 basis point decrease in the spread between rates earned on earning assets and the rates paid on interest bearing liabilities to 3.08% in the current period from 3.29% in the comparable six months of 2007. In addition, the impact of noninterest bearing sources of funds reduced net interest margin by an additional 16 basis points. The impact of noninterest bearing sources of funds on net interest margin typically decreases as the cost of funds decline. The Company expects continued margin compression in the near term as many earning assets, particularly loans, and funding sources reprice downward to reflect the overall lower market interest rate environment.

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

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

Six Months Ended June 30,	2008									2007
(In thousands)	Average Balance			Interest			Average Rate			Average Balance			Interest			Average Rate
Earning Assets
Investment securities
Taxable	$	429,459		$	11,831			5.54	%	$	229,371		$	5,521			4.85	%
Nontaxable 1		88,876			2,372			5.37			89,384			2,432			5.49
Time deposits with banks, federal funds sold and securities purchased under agreements to resell		64,763			854			2.65			81,189			1,939			4.82
Loans 1,2,3		1,296,851			45,321			7.03			1,227,574			47,182			7.75
Total earning assets		1,879,949		$	60,378			6.46	%		1,627,518		$	57,074			7.07	%
Allowance for loan losses		(14,321	)								(11,647	)
Total earning assets, net of allowance for loan losses		1,865,628									1,615,871
Nonearning Assets
Cash and due from banks		81,901									82,149
Premises and equipment, net		39,881									38,888
Other assets		148,738									109,325
Total assets	$	2,136,148								$	1,846,233
Interest Bearing Liabilities
Deposits
Interest bearing demand	$	267,364		$	1,174			0.88	%	$	262,630		$	1,951			1.50	%
Savings		263,340			1,908			1.46			245,485			2,788			2.29
Time		780,273			17,627			4.54			735,682			17,466			4.79
Federal funds purchased and other short-term borrowings		85,225			1,153			2.72			106,245			2,499			4.74
Securities sold under agreements to repurchase and other long-term borrowings		326,175			7,104			4.38			87,967			2,264			5.19
Total interest bearing liabilities		1,722,377		$	28,966			3.38	%		1,438,009		$	26,968			3.78	%
Noninterest Bearing Liabilities
Commonwealth of Kentucky deposits		39,645									40,671
Other demand deposits		175,463									175,430
Other liabilities		26,254									12,901
Total liabilities		1,963,739									1,667,011
Shareholders’ equity		172,409									179,222
Total liabilities and shareholders’
equity	$	2,136,148								$	1,846,233
Net interest income					31,412									30,106
TE basis adjustment					(1,306	)								(1,161	)
Net interest income				$	30,106								$	28,945
Net interest spread								3.08	%								3.29	%
Impact of noninterest bearing sources of funds								.28									.44
Net interest margin								3.36	%								3.73	%

1 Income and yield stated at a fully tax equivalent basis using the marginal corporate Federal tax rate of 35%.

2 Loan balances include principal balances on nonaccrual loans.

3 Loan fees included in interest income amounted to $1.3 million and $1.4 million in 2008 and 2007, respectively.

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

(In thousands)	Variance			Variance Attributed to
Six Months Ended June 30,		2008/2007	1	Volume			Rate

Interest Income
Taxable investment securities	$	6,310		$	5,425		$	885
Nontaxable investment securities 2		(60	)		(12	)		(48	)
Time deposits with banks, federal funds sold and securities purchased under agreements to resell		(1,085	)		(336	)		(749	)
Loans 2		(1,861	)		5,977			(7,838	)
Total interest income		3,304			11,054			(7,750	)
Interest Expense
Interest bearing demand deposits		(777	)		104			(881	)
Savings deposits		(880	)		534			(1,414	)
Time deposits		161			2,063			(1,902	)
Federal funds purchased and other short-term borrowings		(1,346	)		(427	)		(919	)
Securities sold under agreements to repurchase and other long-term borrowings		4,840			5,924			(1,084	)
Total interest expense		1,998			8,198			(6,200	)
Net interest income	$	1,306		$	2,856		$	(1,550	)
Percentage change		100.0	%		218.7	%		-118.7	%

1 The 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.

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

Provision and Allowance for Loan Losses

The provision for loan losses for the six months ended June 30, 2008 was $1.6 million, an increase of $1.8 million compared to a $166 thousand negative provision for the same period of 2007. Net charge-offs were $836 thousand in the current six-month period compared to $581 thousand a year earlier. Net charge-offs in the current period were helped by an $828 thousand recovery of a previously charged-off credit initiated during 2001. On an annualized basis, year-to-date net charge-offs were .13% of average loans outstanding at June 30, 2008. Excluding the unusually large recovery in the current period, the amount was .26%. This compares to .24%, .11% and .10% at March 31, 2008, year-end 2007, and June 30, 2007.

Nonperforming loans were $24.0 million at June 30, 2008, an increase of $2.9 million compared to year-end 2007. At June 30, 2007 nonperforming loans were $5.8 million. Nonperforming loans began to spike upward during the third quarter of 2007 and peaked at $29.9 million during the first quarter of 2008. The upward trend in nonperforming loans beginning during the last half of 2007 and into early 2008 was driven by overall weaknesses in the general economy, including a softer housing market and significant credit tightening throughout the financial services industry. For the Company, this resulted in the real estate development portion of its lending portfolio that has shown the most signs of stress. The $18.2 million increase in nonperforming loan levels at June 30, 2008 compared to June 30, 2007 is attributed to the factors identified above. Most of the increase in nonaccrual loans in the six month comparison is attributed to higher nonaccrual loans of $17.3 million that is concentrated into a relatively few number of larger-balance credits. Although nonperforming loans have increased significantly compared to a year ago, the Company experienced a decline of $5.9 million or 19.8% from the first quarter of 2008.

The allowance for loan losses was $15.0 million or 1.15% of net loans at June 30, 2008. This compares to $14.2 million or 1.10% of net loans outstanding at year-end 2007. A year ago, the allowance was $11.3 million or .89% of net loans outstanding. As a percentage of nonperforming loans, the allowance for loan losses was 62.5%, 67.5%, and 194% at June 30, 2008, December 31, 2007, and June 30, 2007, respectively.

Noninterest Income

Noninterest income for the six months ended June 30, 2008 was $12.6 million, an increase of $803 thousand or 6.8% compared to a year ago. Gains on the sale of investment securities of $580 thousand, higher allotment processing fees of $206 thousand or 9.7%, and higher non-deposit service charges of $206 thousand or 10.2% drove the increase in noninterest income. Significant line items that partially offset these increases were lower service charges and fees on deposits of $253 thousand or 4.9% and lower gains on sale of loans of $66 thousand or 22.6%.

Securities gains include $207 thousand attributed to the mandatory redemption of part of the Visa, Inc. common stock received during the first quarter of 2008 and $85 thousand attributed to the reversal of previously accrued litigation representing the Company’s share of the litigation reserve escrow account established by Visa related to its IPO. Remaining securities gains of $288 thousand are attributed to normal asset and liability management.

As a result of its membership in the Visa USA network, the Company received 12,508 shares of Class B common stock from the Visa IPO completed in March, of which 4,836 shares were redeemed. The Company continues to own 7,672 shares of Class B common stock that are convertible into Class A shares. The Class B shares owned include significant ownership and transfer restrictions, including a provision whereby conversion or redemption of the shares may be prohibited until up to three years or longer after the IPO. As of June 30, 2008 if the Company’s Class B shares could be converted into Class A shares, they would have a market value of $446 thousand. The Company will not recognize a gain, if any, on the Visa Class B stock it currently holds until the shares are redeemed at a time in the future that is currently not known.

Allotment processing fees were up $206 thousand or 9.7% due mainly to the timing of the acquisition of the Military Allotment operations of PNC Bank during the first quarter a year ago. The $206 thousand increase in other service charges, commissions, and fees was due to higher volume related interchange fees of $147 thousand and safekeeping fees of $64 thousand. Trust income increased $77 thousand or 7.9% and is also due primarily to increased volume. Lower service charges and fees on deposits of $253 thousand were driven by a decrease in dormant account fees of $642 thousand, which offset higher overdraft charges of $436 thousand. The decrease in dormant account fees is related to a change in the dormant account policy of one of the Company’s subsidiary banks during 2007. The change in policy lengthened the period of transaction inactivity of some deposit accounts required to consider them dormant. The policy changed the dormant period of certain deposit accounts to 12 months from six months. This resulted in a decrease in the number of dormant accounts and the related fee income. The $66 thousand decrease in gains on sale of loans is attributed to lower loan sales volume in the current six-month period compared to the same period a year ago.

Noninterest Expense

Total noninterest expenses were nearly unchanged at $28.8 million for the six months ended June 30, 2008 compared to the same six months of 2007. Salaries and employee benefits, the largest component of noninterest expenses, was unchanged at $15.1 million as the average number of full time equivalent employees dipped to 575 from 584. Salary and related payroll taxes grew $83 thousand, but was offset by lower benefit costs of $100 thousand.

Intangible amortization and bank franchise tax expense decreased $365 thousand or 21.9% and $143 thousand or 13.8%, respectively, in the comparison which nearly offset increases in other expense line items. Amortization of intangible assets, which relate to customer lists and core deposits from prior acquisitions, is decreasing as a result of actuarially determined schedules that allocate a higher amount of amortization in the earlier periods following an acquisition. The decrease in bank franchise taxes is the result of lower accruals and the filing of amended tax returns related to prior years.

Data processing and communications expense was up $237 thousand or 10.2% in the current period primarily due to higher transaction volumes. Correspondent bank fees increased $163 thousand or 47.2% due mainly to a change in billing method of an upstream correspondent bank in the current period. The billing method included switching from the requirement to maintain a certain minimum balance with the correspondent to a set fee-based structured arrangement. The $218 thousand or 4.8% increase in other expenses was driven mainly by higher expenses associated with other real estate owned.

Income Taxes

Income tax expense for the first six months of 2008 was $3.1 million, an increase of $334 thousand or 12.3% compared to $2.7 million for the same period a year earlier. The effective federal income tax rate increased 255 basis points to 24.8% from 22.2% in the comparison. The Company’s effective tax rate increased mainly due to an increase in taxable sources of income and, to a lesser extent, lower tax credits.

FINANCIAL CONDITION

Total assets were $2.1 billion at June 30, 2008, an increase of $54.1 million or 2.6% from the prior year-end. The most significant changes in the Company’s assets from year-end were a $32.6 million or 41.2% increase in cash and cash equivalents and an increase in net loans of $12.3 million or 1.0%.

Total liabilities increased $52.4 million or 2.8% at June 30, 2008 compared to December 31, 2007. Higher deposit balances account for $39.5 million of the increase in liabilities; borrowed funds, primarily long-term, increased $14.8 million. Shareholders’ equity was up $1.7 million or 1.0% to $170 million at the end of the period.

The increase in current end of period cash and cash equivalents compared to year-end 2007 was driven by an additional $34.4 million in deposits from the Commonwealth of Kentucky (“Commonwealth”). The Company has used the growth from other sources of funds primarily to invest in loans and investment securities. The modest increase in the loan portfolio from year-end 2007 is representative of a more cautious and measured lending strategy. This is a result of continuing signs of general economic weaknesses and tighter loan underwriting standards.

Management of the Company considers it noteworthy to understand the relationship between the Company’s principal subsidiary, Farmers Bank & Capital Trust Co. (“Farmers Bank”), and the Commonwealth. 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 provides services to the Teacher’s Retirement systems. As the depository for the Commonwealth, significant fluctuations in deposits are likely to occur on a daily basis. Therefore, reviewing average balances is important to understanding the financial condition of the Company.

On an average basis, total assets were $2.1 billion for the first six months of 2008, an increase of $250 million or 13.3% from year-end 2007. The increase in average assets is attributed mainly to higher earning asset balances. Average investment securities were up $176 million, boosted by the $200 million balance sheet leverage transaction that occurred during the fourth quarter of 2007. Average loans were up $46.4 million or 3.7% compared to their average year-end balance. Deposits averaged $1.5 billion for the six months ended June 30, 2008, an increase of $59.4 million or 4.1% from year-end. Average deposits from the Commonwealth were up $2.5 million or 6.8% in the comparison. Average earning assets were 88.0% of total average assets at June 30, 2008 compared to 88.1% at year-end 2007.

Temporary Investments

Temporary investments consist of interest bearing deposits in other banks and federal funds sold and securities purchased under agreements to resell. The Company uses these funds in the management of liquidity and interest rate sensitivity. At June 30, 2008, temporary investments were $31.9 million, a decrease of $2.3 million compared to $34.2 million at year-end 2007. Temporary investments averaged $64.8 million during the first six months of 2008, a decrease of $5.3 million or 7.6% from year-end 2007. The decrease is a result of the Company’s overall net funding position. Temporary investments are reallocated as loan demand and other investment alternatives present the opportunity.

Investment Securities

The investment securities portfolio is comprised primarily of U.S. government-sponsored agency securities, mortgage-backed securities, and tax-exempt securities of states and political subdivisions. During the first half of 2008, the Company purchased $15.5 million principal amount of fixed rate preferred stocks of U.S. government-

sponsored agencies. These investments, which make up approximately 2.8% of the total investment portfolio, had an unrealized loss of $706 thousand at June 30, 2008. Subsequent to June 30, the market value of these investments declined sharply before trending back in a higher direction. No impairment charge has been taken on these investments. Due to the U.S. government recently announcing plans to support government-sponsored agencies, the Company does not believe it is necessary to take an impairment charge at this time. The Company continues to monitor these investments with a high degree of scrutiny and will take appropriate actions, including impairment write-downs, in future quarters as necessary.

The Company also holds $16.0 million principal amount of trust preferred capital securities of global and national financial services firms, including $6 million of fixed rate coupon, $6.5 million of floating rate coupon, and $3.5 million currently fixed that converts to floating in 2013. In addition, the Company holds $1.5 million and $1.0 million of fixed and floating rate, respectively, of debentures issued by global and national financial services firms. The Company does not have direct exposure to the subprime mortgage market. The Company does not originate subprime mortgages nor has it invested in bonds that are secured by such mortgages.

Total investment securities were $548 million on June 30, 2008, up $1.1 million compared to year-end 2007. Net amortized cost amounts increased $4.2 million or .7%, partially offset by a decrease in market values of $3.1 million related to investments carried in the available for sale portfolio. Compared to the end of the first quarter of 2008, total investment securities declined $12.1 million due mainly to a $10.1 million drop in market values related to the available for sale investment portfolio. Market values of the Company’s fixed rate investments spiked significantly higher in the first quarter mainly as a result of a lower overall interest rate environment. The lower market values in the current quarter were influenced heavily by an increase in overall rates along the yield curve, with nearly half of the decline related to the GNMA bonds purchased in the Company’s $200 million balance sheet leverage transaction in late 2007. The $5.0 million unrealized gain related to these bonds that occurred during the first quarter of 2008 declined back near to their amortized cost amounts in the current quarter. Unrealized losses in the available for sale portfolio occurring in the current quarter relate to a wide range of holdings and the amount related to the GNMA bonds in the leverage transaction is noteworthy mainly because of the large amount of bonds purchased in the transaction.

Unrealized losses within the Company’s investment securities portfolio have not been included in income since they are identified as temporary. The securities’ fair values are expected to recover as they approach their maturity dates and the Company has the intent and ability to hold to recovery. All investments in the Company’s portfolio are currently performing.

Total investment securities averaged $518 million for the first six months of 2008, an increase of $176 million or 51.6% from year-end 2007. The increase in average investment securities is mainly due to the GNMA mortgage-backed bonds that were purchased in the balance sheet leverage transaction during the fourth quarter of 2007.

Loans

Loans, net of unearned income, totaled $1.3 billion at June 30, 2008, relatively unchanged from year-end 2007. The Company is taking a more measured and cautious approach to loan growth in the near term as a result of continued weaknesses in the general economy, including a softer housing market and significant credit tightening throughout the financial services industry.

The composition of the loan portfolio is summarized in the table below.

	June 30, 2008					December 31, 2007
(Dollars in thousands)	Amount		%			Amount		%

Commercial, financial, and agriculture	$	148,390		11.4	%	$	154,015		11.9	%
Real estate - construction		246,021		18.9			254,788		19.7
Real estate mortgage - residential		428,564		32.8			405,992		31.5
Real estate mortgage - farmland and other commercial enterprises		406,891		31.2			394,900		30.6
Installment		48,517		3.7			52,028		4.0
Lease financing		26,696		2.0			30,262		2.3
Total	$	1,305,079		100.0	%	$	1,291,985		100.0	%

On average, loans represented 69.0% of earning assets during the current six-month period, a decrease of 624 basis points compared to 75.2% for year-end 2007. Average loans represent a lower percentage of earning assets mainly as a result of the $200 million balance sheet leverage transaction late in 2007, which was the primary driver of increased investment securities and earning assets. 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.

The Company does not have direct exposure to the subprime mortgage market. The Company does not originate subprime mortgages nor has it invested in bonds that are secured by such mortgages.

Nonperforming Loans

Nonperforming loans consist of nonaccrual loans and loans past due ninety days or more on which interest is still accruing. Nonperforming loans dipped in the current quarter compared to the linked-quarter, but are still higher than at year-end 2007. Overall economic conditions continue to stress certain portions of the Company’s lending portfolio, particularly real estate development. Nonperforming loans were as follows at June 30, 2008, March 31, 2008, and December 31, 2007.

(In thousands)	June 30, 2008		March 31, 2008		Change			%			June 30, 2008		December 31, 2007		Change		%
Nonaccrual	$	19,479	$	24,041	$	(4,562	)		(19.0	)%	$	19,479	$	18,073	$	1,406		7.8	%
Past due 90 days or more and still accruing		4,482		5,851		(1,369	)		(23.4	)%		4,482		2,977		1,505		50.6
Total nonperforming loans	$	23,961	$	29,892	$	(5,931	)		(19.8	)%	$	23,961	$	21,050	$	2,911		13.8	%

The $19.5 million balance of nonaccrual loans outstanding at June 30, 2008 is comprised mainly of 7 credits totaling $15.2 million, substantially all of which is secured by real estate.

The decrease in linked-quarter nonaccrual loans of $4.6 million or 19.0% is attributed mainly to two credits of $6.3 million at March 31, 2008 that were removed from nonaccrual status. One credit totaling $4.1 million was transferred to the Company through foreclosure during the second quarter simultaneous with a $250 thousand charge-off. The other credit of $2.0 million was paid off during the current quarter. The $1.4 million decrease in loans past due 90 days or more and still accruing interest is primarily attributed to a single credit of $1.8 million that is now current.

The $1.4 million increase in nonaccrual loans at June 30, 2008 compared to the prior year-end is primarily limited to two credits totaling $1.2 million that were classified as past due 90 days and still accruing at year-end. Loans past due 90 days or more increased $1.5 million since year-end 2007 and scattered across multiple lower-balance credits. The Company continues to work diligently to reduce and minimize the impact of holding nonperforming loans.

Other Real Estate

Other real estate owned (“OREO”) includes real estate properties acquired by the Company through foreclosure. At June 30, 2008 OREO was $11.2 million, up $3.8 million or 51.1% and $5.2 million or 85.5% from the first quarter of 2008 and year-end 2007, respectively. The increase in linked-quarter and year-to-date OREO is mainly driven by a $4.1 million real estate development property acquired that previously secured outstanding loans to one individual credit. This property, which was included in nonaccrual loans at March 31, 2008 and December 31, 2007, was acquired by the Company during the second quarter of 2008.

Deposits

A summary of the Company’s deposits are as follows for the periods indicated.

	End of Period							Average
(In thousands)	June 30, 2008		December 31, 2007		Difference			June 30, 2008		December 31, 2007		Difference
Noninterest Bearing
Commonwealth	$	49,804	$	15,367	$	34,437		$	39,645	$	37,119	$	2,526
Other		173,596		177,065		(3,469	)		175,463		177,304		(1,841	)
Total	$	223,400	$	192,432	$	30,968		$	215,108	$	214,423	$	685

Interest Bearing
Demand	$	250,887	$	261,642	$	(10,755	)	$	267,364	$	258,992	$	8,372
Savings		268,252		250,002		18,250			263,340		244,299		19,041
Time		771,075		770,021		1,054			780,273		748,939		31,334
Total	$	1,290,214	$	1,281,665	$	8,549		$	1,310,977	$	1,252,230	$	58,747

Total Deposits	$	1,513,614	$	1,474,097	$	39,517		$	1,526,085	$	1,466,653	$	59,432

Deposit balances of the Commonwealth can fluctuate significantly from day to day. The Company believes average balances are important when analyzing its deposit balances. Both end of period and average savings account deposit balances were fueled by promotional efforts beginning in the fourth quarter of 2007. Average time deposits increased mainly as a result of higher shorter-term certificates of deposit balances and increased individual retirement account balances.

Borrowed Funds

Total borrowed funds were $412 million at June 30, 2008, an increase of $14.8 million or 3.7% from $397 million at year-end 2007. Long-term borrowings increased $11.6 million resulting from additional FHLB borrowings of $19.0 million during the current period partially offset by repayments of $7.4 million. Short-term borrowings increased $3.2 million or 3.9% due mainly to higher federal funds purchases and securities sold under agreements to repurchase balances. These sources of short-term funding fluctuate as the overall net funding position of the Company changes.

LIQUIDITY

The Parent Company’s primary use of cash consists of dividend payments to its common shareholders, purchases of its common stock, corporate acquisitions, interest expense on borrowings, and other general operating purposes. Liquidity of the Parent Company depends primarily on the receipt of dividends from its subsidiary banks, cash balances maintained, and borrowings from nonaffiliated sources. As of June 30, 2008 combined retained earnings of the subsidiary banks was $50.1 million, of which $7.9 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 to meet its near-term liquidity needs. In addition, the Parent Company has a $15.0 million unsecured line of credit with an unrelated financial institution available for general corporate purposes. This line of credit matures in June 2009 and bears interest at the three-month LIBOR rate plus 140 basis points.

The Parent Company had cash balances of $12.6 million at June 30, 2008, a decrease of $2.4 million or 15.9% from $15.0 million at year-end 2007. Significant cash flows during the current six-month period for the Parent Company include the following: management fees received from subsidiaries of $1.4 million; dividends received from subsidiaries of $6.3 million; payment of dividends to shareholders of $4.9 million; the purchase of $1.0 million of common shares in two unaffiliated banks; interest payment on borrowed funds of $1.5 million; and the repurchase of the Company’s stock in the amount of $1.0 million.

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 business and nonbusiness deposits, cash flow generated by repayment of principal and interest on loans and investment securities, FHLB and other 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 the Company’s local markets. As of June 30, 2008 the Company had approximately $195 million in additional borrowing capacity under various FHLB, federal funds, and other borrowing agreements. However, there is no guarantee that these sources of funds will continue to be available to the Company, or that current borrowings can be refinanced upon maturity, although the Company is not aware of any events or uncertainties that are likely to cause a decrease in the Company’s liquidity from these sources.

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

Liquid assets consist of cash, cash equivalents, and securities available for sale. At June 30, 2008, consolidated liquid assets were $656 million, an increase of $34.2 million or 5.5% from year-end 2007. The increase in liquid assets is mainly attributed to $32.6 million higher cash and equivalents. The increase in cash and equivalents is due mainly to higher deposit activity of the Commonwealth and 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 operating activities was $6.1 million in the first six months of 2008, unchanged compared to the same period a year earlier. Net cash used in investing activities was $22.1 million in the current six months of 2008 compared to $54.8 million a year earlier. The change in cash flows is mainly due to lower net outflows related to loan activity in the current six months of $61.0 million compared to a year ago, partially offset by lower net inflows related to investment securities transactions of $24.7 million. Net cash provided by financing activities was $48.5 million in the current six months, up $42.1 million. The higher cash provided by financing activities in the current period is due mainly to a $54.0 million increase in net deposit activity partially offset by $12.5 million lower net borrowings.

Commitments to extend credit are considered in addressing the Company’s liquidity management. The Company does not expect these commitments to significantly effect the liquidity position in future periods. The Company has not entered into any contracts for financial derivative instruments such as futures, swaps, options, or similar instruments.

CAPITAL RESOURCES

Shareholders’ equity was $170 million on June 30, 2008, an increase of $1.7 million or 1.0% from $168 million at December 31, 2007. The increase in shareholders’ equity is due mainly to an increase in retained earnings of $3.7 million or 3.0%, partially offset by $1.9 million lower accumulated other comprehensive income.

The increase in retained earnings is due to net income of $9.3 million, partially offset by $4.9 million or $.66 per share cash dividends declared and the purchase of 43 thousand shares of the Company’s outstanding shares.

Compared to year-end 2007, accumulated other comprehensive income decreased mainly due to lower market values of available for sale investment securities of $2.0 million, net of tax. Market value declines related equity investments and trust preferred capital securities purchased during the first half of 2008 is the primary driver of the decrease in accumulated other comprehensive income.

Consistent with the objective of operating a sound financial organization, the Company’s goal is to maintain capital ratios well above the regulatory minimum requirements. The Company's capital ratios as of June 30, 2008 and the regulatory minimums are as follows.

	Farmers Capital			Regulatory
	Bank Corporation			Minimum
Tier 1 risk based		11.58	%		4.00	%
Total risk based		12.66	%		8.00	%
Leverage		7.78	%		4.00	%

As of June 30, 2008, 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. The Company is not aware of any recommendations by its regulatory authorities which, if implemented, would have a material effect on its capital resources, liquidity, or operations.

Item 3. Quantitative and Qualitative Disclosures About Market Risk

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

At June 30, 2008, the model indicated that if rates were to gradually increase by 150 basis points during the remainder of the calendar year, then net interest income and net income would increase .82% and 2.1%, respectively for the year ending December 31, 2008 when compared to the forecasted results for the most likely rate environment. The model indicated that if rates were to gradually decrease by 150 basis points over the same period, then net interest income and net income would decrease 1.0% and 2.5%, respectively.

Item 4. Controls and Procedures

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

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

PART II - OTHER INFORMATION

Item 1. Legal Proceedings

As of June 30, 2008, there were various pending legal actions and proceedings against the Company arising from the normal course of business and in which claims for damages are asserted. Management, after discussion with legal counsel, believes that these actions are without merit and that the ultimate liability resulting from these legal actions and proceedings, if any, will not have a material effect upon the consolidated financial statements of the Company.

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

The following table provides information with respect to shares of common stock repurchased by the Company during the quarter ended June 30, 2008.


Period	Total Number of Shares Purchased		Average Price Paid per Share		Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs		Maximum Number of Shares that May Yet Be Purchased Under the Plans or Programs
April 1, 2008 to April 30, 2008								89,971
May 1, 2008 to May 31, 2008								89,971
June 1, 2008 to June 30, 2008		5,000	$	19.90		5,000		84,971
Total		5,000	$	19.90		5,000

At various times, the Company’s Board of Directors has authorized the purchase shares of the Company’s outstanding common stock. No stated expiration dates have been established under any of the previous authorizations.

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

The annual meeting of shareholders was held May 13, 2008. The matters that was voted upon included the election of four directors for three-year terms ending in 2011 or until their successors have been elected and qualified.

The outcome of the voting was as follows:

Election of Directors
Name	For		Against		Withheld		Abstained
G. Anthony Busseni		5,391,670		0		342,122		0
Shelley S. Sweeney		5,684,012		0		49,780		0
Ben F. Brown		5,394,847		0		338,946		0
Marvin E. Strong, Jr.		5,546,737		0		187,055		0

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

Frank W. Sower, Jr.

Lloyd C. Hillard, Jr.

J. Barry Banker	Robert Roach, Jr.
Dr. John D. Sutterlin	R. Terry Bennett

Dr. Donald J. Mullineaux

Dr. Donald A. Saelinger

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

Item 6. Exhibits

List of Exhibits

3i.	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:	August 7, 2008	/s/ G. Anthony Busseni
		G. Anthony Busseni,
		President and CEO
		(Principal Executive Officer)

Date:	8-7-08	/s/ Doug Carpenter
		C. Douglas Carpenter,
		Senior Vice President, Secretary, and CFO
		(Principal Financial and Accounting Officer)