First Financial Service 10Q 2006 Q2 Quarterly report

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

(Mark One)

x QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934.

For the quarterly period ended June 30, 2006

o TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934.

Commission File Number 0-18832

First Financial Service Corporation

(Exact Name of Registrant as specified in its charter)

Kentucky		61-1168311
(State or other jurisdiction		(IRS Employer Identification No.)
of incorporation or organization)

2323 Ring Road
Elizabethtown, Kentucky 42701
(Address of principal executive offices)
(Zip Code)

(270) 765-2131
(Registrant’s telephone number, including area code)

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 o

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

Large Accelerated Filer o Accelerated Filer x Non-Accelerated Filer o

Indicate by a check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes o No x

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

Class		Outstanding as of July 31, 2006
Common Stock		3,986,019shares

FIRST FINANCIAL SERVICE CORPORATION

TABLE OF CONTENTS

FORWARD-LOOKING STATEMENTS

Statements contained in this report that are not statements of historical fact constitute forward-looking statements within the meaning of Section 21E of the Securities Exchange Act of 1934, as amended. In addition, First Financial Service Corporation (the “Corporation”) may make forward-looking statements in future filings with the Securities and Exchange Commission, in press releases, and in oral and written statements made by or with the approval of the Corporation. Forward-looking statements include, but are not limited to: (1) projections of revenues, income or loss, earnings or loss per share, capital structure and other financial items; (2) statements of plans and objectives of the Corporation or its management or Board of Directors; (3) statements regarding future events, actions or economic performance; and (4) statements of assumptions underlying such statements. Words such as “estimate,” “strategy,” “believes,” “anticipates,” “expects,” “intends,” “plans,” “targeted,” and similar expressions are intended to identify forward-looking statements, but are not the exclusive means of identifying such statements.

Forward-looking statements involve risks and uncertainties that may cause actual results to differ materially from those indicated by the forward-looking statements. In addition to those risks described under “Item 1A Risk Factors” of this report and our Annual Report on Form 10-K for the year ended December 31, 2005, some of the events or circumstances that could cause such differences include the following: changes in general economic conditions and economic conditions in Kentucky and the markets served by the Corporation any of which may affect, among other things, the level of non-performing assets, charge-offs, and provision for loan loss expense; changes in interest rates that may reduce interest margins and impact funding sources; changes in market rates and prices which may adversely impact the value of financial products including securities, loans and deposit; changes in tax laws, rules and regulations; various monetary and fiscal policies and regulations, including those determined by the Federal Reserve Board, the Federal Deposit Insurance Corporation and the Kentucky Office of Financial Institutions; competition with other local and regional commercial banks, savings banks, credit unions and other non-bank financial institutions; our ability to grow core businesses; our ability to develop and introduce new banking-related products, services and enhancements and gain market acceptance of such products; and management’s ability to manage these and other risks.

Item 1.

FIRST FINANCIAL SERVICE CORPORATION
Consolidated Balance Sheets
(Unaudited)

	June 30,			December 31,
	2006			2005
ASSETS	(Dollars in thousands, except share data)

Cash and due from banks	$	17,676		$	20,451

Securities available-for-sale	26,833			28,324
Securities held-to-maturity, fair value of $27,843 Jun (2006) and $32,434 Dec (2005)	28,712			33,231
Total securities	55,545			61,555

Loans held for sale	1,038			597
Loans, net of unearned fees	664,969			642,520
Allowance for loan losses	(7,408		)	(7,377		)
Net loans receivable	658,599			635,740

Federal Home Loan Bank stock	7,400			7,194
Cash surrender value of life insurance	7,784			7,637
Premises and equipment, net	20,374			19,134
Real estate owned:
Acquired through foreclosure	844			1,022
Held for development	337			337
Other repossessed assets	104			119
Goodwill	8,384			8,384
Accrued interest receivable	3,162			3,051
Other assets	1,644			1,889

TOTAL ASSETS	$	781,853		$	766,513

LIABILITIES AND STOCKHOLDERS’ EQUITY
LIABILITIES:
Deposits:
Non-interest bearing	$	43,726		$	39,145
NOW demand	72,718			76,848
Savings	88,886			99,879
Money market	58,159			66,175
Certificates of deposit	351,509			309,059
Total deposits	614,998			591,106

Federal funds purchased	7,000			19,500
Advances from Federal Home Loan Bank	78,297			78,375
Subordinated debentures	10,000			10,000
Accrued interest payable	444			389
Accounts payable and other liabilities	1,877			1,023
Deferred income taxes	1,208			1,379

TOTAL LIABILITIES	713,824			701,772
STOCKHOLDERS’ EQUITY:
Serial preferred stock, 5,000,000 shares authorized and unissued	—			—
Common stock, $1 par value per share; authorized 10,000,000 shares; issued and outstanding, 3,984,230 shares Jun (2006) and 3,983,530 shares Dec (2005)	3,984			3,984
Additional paid-in capital	16,449			16,409
Retained earnings	47,871			44,291
Accumulated other comprehensive income (loss)	(275		)	57

TOTAL STOCKHOLDERS’ EQUITY	68,029			64,741
TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY	$	781,853		$	766,513

See notes to the unaudited consolidated financial statements.

FIRST FINANCIAL SERVICE CORPORATION
Consolidated Statements of Income
(Unaudited)

	Three Months Ended June 30,				Six Months Ended June 30,
(Dollars in thousands, except per share data)	2006		2005		2006		2005

Interest Income:
Interest and fees on loans	$	12,287	$	10,272	$	24,002	$	20,226
Interest and dividends on investments and deposits	824		755		1,601		1,431
Total interest income	13,111		11,027		25,603		21,657

Interest Expense:
Deposits	4,561		3,146		8,606		6,039
Federal funds purchased	15		—		88		—
Federal Home Loan Bank advances	941		951		1,874		1,895
Subordinated debentures	223		175		429		332
Total interest expense	5,740		4,272		10,997		8,266

Net interest income	7,371		6,755		14,606		13,391
Provision for loan losses	9		41		97		316
Net interest income after provision for loan losses	7,362		6,714		14,509		13,075

Non-interest Income:
Customer service fees on deposit accounts	1,396		1,319		2,627		2,439
Gain on sale of mortgage loans	240		168		403		351
Brokerage commissions	88		78		171		157
Gain on sale of real estate held for development	—		143		—		143
Gain on sale of investments	—		—		—		381
Other income	352		268		587		527
Total non-interest income	2,076		1,976		3,788		3,998

Non-interest Expense:
Employee compensation and benefits	2,817		2,856		5,794		5,634
Office occupancy expense and equipment	514		503		1,067		998
Marketing and advertising	214		195		419		383
Outside services and data processing	641		630		1,257		1,227
Bank franchise tax	224		195		443		398
Other expense	904		897		1,743		1,781
Total non-interest expense	5,314		5,276		10,723		10,421

Income before income taxes	4,124		3,414		7,574		6,652
Income taxes	1,369		1,120		2,481		2,172
Net Income	$	2,755	$	2,294	$	5,093	$	4,480

Shares applicable to basic income per share	3,983,880		4,005,857		3,983,730		4,008,489
Basic income per share	$	0.69	$	0.57	$	1.28	$	1.12

Shares applicable to diluted income per share	4,019,962		4,024,472		4,018,035		4,028,504
Diluted income per share	$	0.69	$	0.57	$	1.27	$	1.11

See notes to the unaudited consolidated financial statements.

FIRST FINANCIAL SERVICE CORPORATION
Consolidated Statements of Comprehensive Income
(Unaudited)

	Three Months Ended						Six Months Ended
	June 30,						June 30,
(Dollars in thousands)	2006			2005			2006			2005

Net Income	$	2,755		$	2,294		$	5,093		$	4,480
Other comprehensive income (loss):
Change in unrealized gain (loss) on securities	(393		)	98			(503		)	(149		)
Reclassification of realized amount	—			—			—			(381		)
Net unrealized gain (loss) recognized in comprehensive income	(393		)	98			(503		)	(530		)
Tax effect	133			(33		)	171			180
Total other comphrehensive income (loss)	(260		)	65			(332		)	(350		)

Comprehensive Income	$	2,495		$	2,359		$	4,761		$	4,130

See notes to the unaudited consolidated financial statements.

FIRST FINANCIAL SERVICE CORPORATION

Consolidated Statements of Changes in Stockholders’ Equity
Six Months Ended June 30, 2006
(Dollars In Thousands, Except Per Share Amounts)
(Unaudited)

									Accumulated
									Other
				Additional					Comprehensive
	Common	Stock		Paid-in		Retained			Income, Net of
	Shares	Amount		Capital		Earnings			Tax			Total

Balance, December 31, 2005	3,984	$	3,984	$	16,409	$	44,291		$	57		$	64,741
Net income						5,093						5,093
Exercise of stock options				9								9
Compensation expense for stock options				31								31
Net change in unrealized gains (losses) on securities available- for-sale, net of tax									(332		)	(332		)
Cash dividends declared ($.38 per share)	—	—		—		(1,513		)	—			(1,513		)
Balance, June 30, 2006	3,984	$	3,984	$	16,449	$	47,871		$	(275	)	$	68,029

See notes to the unaudited consolidated financial statements.

FIRST FINANCIAL SERVICE CORPORATION
Consolidated Statements of Cash Flows
(Dollars In Thousands)
(Unaudited)

	Six Months Ended
	June 30,
	2006			2005
Operating Activities:
Net income	$	5,093		$	4,480
Adjustments to reconcile net income to net cash provided by operating activities:
Provision for loan losses	97			316
Depreciation on premises and equipment	681			624
Federal Home Loan Bank stock dividends	(206		)	(160		)
Net amortization (accretion) available-for-sale	2			(52		)
Net amortization (accretion) held-to-maturity	17			29
Gain on sale of investments available-for-sale	—			(381		)
Gain on sale of mortgage loans	(403		)	(351		)
Gain on sale of real estate held for development	—			(143		)
Origination of loans held for sale	(20,867		)	(19,644		)
Proceeds on sale of loans held for sale	20,829			20,451
Changes in:
Cash surrender value of life insurance	(147		)	(141		)
Interest receivable	(111		)	(42		)
Other assets	245			(61		)
Interest payable	55			(35		)
Accounts payable and other liabilities	854			522
Net cash from operating activities	6,139			5,412

Investing Activities:
Sales of securities available-for-sale	—			1,431
Purchases of securities available-for-sale	(2,211		)	(27,158		)
Maturities of securities available-for-sale	3,197			5,435
Maturities of securities held-to-maturity	4,502			783
Net change in loans	(22,322		)	(3,912		)
Net purchases of premises and equipment	(1,921		)	(1,723		)
Sales of real estate held for development	—			195
Net cash from investing activities	(18,755		)	(24,949		)

Financing Activities
Net change in deposits	23,892			12,115
Change in federal funds purchased	(12,500		)	—
Repayments to Federal Home Loan Bank	(78		)	(452		)
Compensation expense for stock options	31			—
Proceeds from stock options exercised	9			57
Dividends paid	(1,513		)	(1,382		)
Common stock repurchased	—			(572		)
Net cash from financing activities	9,841			9,766

(Decrease) in cash and cash equivalents	(2,775		)	(9,771		)
Cash and cash equivalents, beginning of period	20,451			35,910
Cash and cash equivalents, end of period	$	17,676		$	26,139

See notes to the unaudited consolidated financial statements.

Notes To Unaudited Consolidated Financial Statements

1. BASIS OF PRESENTATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Basis of Presentation — The accompanying unaudited consolidated financial statements include the accounts of First Financial Service Corporation and its wholly owned subsidiary, First Federal Savings Bank. First Federal Savings Bank has two wholly owned subsidiaries, First Service Corporation of Elizabethtown and First Federal Office Park, LLC. Unless the text clearly suggests otherwise, references to “us,” “we,” or “our” include First Financial Service Corporation and its wholly-owned subsidiary. All significant intercompany transactions and balances have been eliminated.

The accompanying unaudited consolidated financial statements have been prepared in accordance with U.S. generally accepted accounting principles for interim financial information and with the instructions to Form 10-Q and Rule 10-01 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by U.S. generally accepted accounting principles for complete financial statements. In the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation have been included. Operating results for the six month period ending June 30, 2006 are not necessarily indicative of the results that may occur for the year ending December 31, 2006. For further information, refer to the consolidated financial statements and footnotes thereto included in the Corporation’s annual report on Form 10-K for the period ended December 31, 2005.

Stock Dividends — We declared a 10% stock dividend on September 20, 2005 to our shareholders of record as of October 7, 2005, payable on October 21, 2005. The payment of this dividend was in addition to the regular quarterly cash dividend. Per share amounts have been restated for the impact of the stock dividend.

Recently Issued Accounting Standards — We adopted (“SFAS No. 123R”), “Share-Based Payment” on January 1, 2006. SFAS No. 123R is a revision of FASB Statement 123, “Accounting for Stock-Based Compensation” and supersedes APB Opinion No. 25, “Accounting for Stock Issued to Employees,” and its related implementation guidance. SFAS No. 123R requires all public companies to record compensation cost for stock options provided to employees in return for employee service. The cost is measured at the fair value of the options when granted, and this cost is expensed over the employee service period, which is normally the vesting period of the options. Compensation cost is recorded for prior option grants that vest after the date of adoption. The effect on results of operations will depend on the level of future option grants and the calculation of the fair value of the options granted at such future date, as well as the vesting periods provided, and so they cannot currently be predicted. Existing options that will vest after adoption date are expected to result in compensation expense of approximately $62,000 in 2006, $56,000 in 2007, $56,000 in 2008 and $42,000 in 2009. For the six month period ended June 30, 2006, we recorded $31,000 in compensation expense related to stock options. There will be no significant effect on financial position as total equity will not change.

In March 2006, the FASB issued Statement No. 156, “Accounting for Servicing of Financial Assets, an amendment of FASB Statement No. 140”, which changes the accounting for all servicing rights recorded as the result of purchasing or originating a loan servicing right. SFAS No. 156 amends the current accounting guidance for servicing rights in that it allows companies to carry their servicing rights at fair value, where presently servicing rights are recorded at cost allocated on a fair value basis at inception and assessed for impairment based on their fair value at each reporting date, using lower of cost or market value. This pronouncement is effective beginning January 1, 2007.

In June 2006, the FASB issued Interpretation No. 48, “Accounting for Uncertainty in Income Taxes, an interpretation of FASB Statement No. 109” (FIN 48), which prescribes a recognition threshold and measure attribute for the financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return. FIN 48 also provides guidance on derecognition, classification, interest and penalties, accounting in interim periods, disclosure and transition. FIN 48 is effective beginning in 2007. We are in the process of evaluating the impact, if any, the adoption of FIN 48 will have on our financial statements.

Reclassifications — Certain amounts have been reclassified in the prior period financial statements to conform to the current period classifications.

2. SECURITIES

The amortized cost basis and fair values of securities are as follows:

			Gross		Gross
	Amortized		Unrealized		Unrealized
(Dollars in thousands)	Cost		Gains		Losses			Fair Value
Securities available-for-sale:
June 30, 2006:
U. S. Treasury and agencies	$	4,494	$	—	$	(45	)	$	4,449
Mortgage-backed	10,464		—		(408		)	10,056
Equity	1,353		534		(33		)	1,854
State and municipal	6,914		6		(470		)	6,450
Corporate	4,024		—		—			4,024

Total	$	27,249	$	540	$	(956	)	$	26,833

December 31, 2005:
U. S. Treasury and agencies	$	6,486	$	—	$	(49	)	$	6,437
Mortgage-backed	11,558		—		(256		)	11,302
Equity	1,353		638		—			1,991
State and municipal	5,803		14		(259		)	5,558
Corporate	3,036		—		—			3,036

Total	$	28,236	$	652	$	(564	)	$	28,324

			Gross		Gross
	Amortized		Unrecognized		Unrecognized
	Cost		Gains		Losses			Fair Value
Securities held-to-maturity:
June 30, 2006:
U.S. Treasury and agencies	$	22,096	$	—	$	(655	)	$	21,441
Mortgage-backed	4,616		2		(231		)	4,387
Corporate	2,000		15		—			2,015

Total	$	28,712	$	17	$	(886	)	$	27,843

December 31, 2005:
U.S. Treasury and agencies	$	26,095	$	—	$	(607	)	$	25,488
Mortgage-backed	5,136		2		(207		)	4,931
Corporate	2,000		15		—			2,015

Total	$	33,231	$	17	$	(814	)	$	32,434

3. LOANS

Loans are summarized as follows:

	June 30,			December 31,
(Dollars in thousands)	2006			2005

Commercial	$	38,022		$	36,004
Real estate commercial	369,572			353,637
Real estate construction	21,855			13,579
Residential mortgage	140,044			142,727
Consumer and home equity	63,840			66,208
Indirect consumer	32,749			31,577
Loans held for sale	1,038			597
	667,120			644,329
Less:
Net deferred loan origination fees	(1,113		)	(1,212		)
Allowance for loan losses	(7,408		)	(7,377		)
	(8,521		)	(8,589		)

Loans	$	658,599		$	635,740

The allowance for loan loss is summarized as follows:

	As of and For the						As of and For the
	Three Months Ended						Six Months Ended
	June 30,						June 30,
(Dollars in thousands)	2006			2005			2006			2005

Balance, beginning of period	$	7,420		$	6,701		$	7,377		$	6,489
Provision for loan losses	9			41			97			316
Charge-offs	(178		)	(106		)	(285		)	(246		)
Recoveries	157			78			219			155
Balance, end of period	$	7,408		$	6,714		$	7,408		$	6,714

Impaired loans are summarized as follows. There were no impaired loans for the periods presented without an allowance allocation.

	As of and For the		As of and For the
	Six Months Ended		Year Ended
	June 30,		December 31,
(Dollars in thousands)	2006		2005

End of period impaired loans	$	5,514	$	6,232
Amount of allowance for loan loss allocated	1,256		1,445

3. LOANS - - (Continued)

We report non-performing loans as impaired. Our non-performing loans by source were as follows:

	June 30,		December 31,
(Dollars in thousands)	2006		2005

Restructured	$	3,035	$	3,104
Loans past due over 90 days still on accrual	—		—
Non accrual loans	2,479		3,128
Total	$	5,514	$	6,232

4. EARNINGS PER SHARE

The reconciliation of the numerators and denominators of the basic and diluted EPS is as follows:

	Three Months Ended				Six Months Ended
(Dollars in thousands,	June 30,				June 30,
except per share data)	2006		2005		2006		2005

Net income available to common shareholders	$	2,755	$	2,294	$	5,093	$	4,480
Basic EPS:
Weighted average common shares	3,984		4,006		3,984		4,008
Diluted EPS:
Weighted average common shares	3,984		4,006		3,984		4,008
Dilutive effect of stock options	36		18		34		20
Weighted average common and incremental shares	4,020		4,024		4,018		4,028
Earnings Per Share:
Basic	$	0.69	$	0.57	$	1.28	$	1.12
Diluted	$	0.69	$	0.57	$	1.27	$	1.11

All of the outstanding stock options for the June 30, 2006 and 2005 periods were included in the computation of diluted earnings per share.

5. STOCK OPTION PLAN

At our Annual Meeting of Shareholders held on May 10, 2006, our shareholders approved the 2006 Stock Option and Incentive Compensation Plan which replaces our 1998 Stock Option and Incentive Plan. Under the 2006 Stock Option and Incentive Compensation Plan, we may grant either incentive or non-qualified stock options to key employees and directors for a total of 535,000 shares of our common stock at not less than fair value at the date such options are granted. Options available for future grant under the 1998 plan totaled 35,000 shares and were rolled into the 2006 plan. We believe that the ability to award stock options and other forms of stock-based incentive compensation can assist us in attracting and retaining key employees. Stock-based incentive compensation is also a means to align the interests of key employees with those of our shareholders by providing awards intended to reward recipients for our long-term growth. The option to purchase shares vest over periods of one to five years and expire ten years after the date of grant. We issue new shares of common stock upon the exercise of stock options. At June 30, 2006 options available for future grant under the 2006 Plan totaled 535,000. Compensation cost related to options granted under the 1998 Plan that was charged against earnings for the period ended June 30, 2006 was $31,000.

The fair value of each option award is estimated on the date of grant using the Black-Scholes option valuation model that uses various weighted-average assumptions. The risk-free interest rate is based on the U.S. Treasury yield curve in effect at the time of grant. The expected volatility is based on the fluctuation in the price of a share of stock over the period for which the option is being valued and the expected life of the options granted represents the period of time the options are expected to be outstanding.

5. STOCK OPTION PLAN - (Continued)

The following table illustrates the effect on net income and earnings per share for the quarter and six month periods ended June 30, 2005 if expense was measured using the Black-Scholes option valuation model.

	Three Months Ended			Six Months Ended
	June 30,			June 30,
(Dollars In Thousands, Except Per Share Data)	2005			2005

Net income:
As reported	$	2,294		$	4,480
Deduct: Stock-based compensation expense determined under fair value based method	(23		)	(56		)
Pro-forma	$	2,271		$	4,424

Earnings per share:
Basic As Reported	$	0.57		$	1.12
Pro-forma	0.56			1.10
Diluted As Reported	$	0.57		$	1.11
Pro-forma	0.56			1.10

A summary of option activity under the 1998 Plan as of June 30, 2006 is presented below:

					Weighted
			Weighted		Average
	Number		Average		Remaining	Aggregate
	of		Exercise		Contractual	Intrinsic
(Dollars In Thousands)	Options		Price		Term	Value

Outstanding, beginning of period	130,977		$	20.26
Granted during period	—		—
Exercised during the period	(700	)	14.05
Outstanding, end of period	130,277		$	20.30	6.0	$	1,329

Eligible for exercise at period end	86,827		$	18.72	4.8	$	1,023

There were no options granted for the periods ended June 30, 2006 and 2005. The total intrinsic value of options exercised during the periods ended June 30, 2006 and 2005 was $10,640 and $17,793 respectively.

As of June 30, 2006 there was $193,679 of total unrecognized compensation cost related to non-vested share-based compensation arrangements granted under the 1998 Plan. That cost is expected to be recognized over a weighted-average period of 3.6 years. The total fair value of shares vested during the periods ended June 30, 2006 and 2005 was $56,240 and $44,631 respectively. Cash received from option exercise under all share-based payment arrangements for the periods ended June 30, 2006 and 2005 were $9,835 and $56,562 respectively.

Item 2.

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS

GENERAL

We conduct operations in 14 full-service banking centers in six contiguous counties in Central Kentucky along the Interstate 65 corridor. Our markets range from the major metropolitan area of Louisville in Jefferson County, Kentucky approximately 40 miles north of our headquarters in Elizabethtown, Kentucky to Hart County, Kentucky, approximately 30 miles south of Elizabethtown. Our markets are supported by a diversified industry base and have a regional population of over 1 million.

We serve the needs and cater to the economic strengths of the local communities in which we operate and strive to provide a high level of personal and professional customer service. We offer a variety of financial services to our retail and commercial banking customers. These services include personal and corporate banking services and personal investment financial counseling services.

Through our personal investment financial counseling services, we offer a wide variety of mutual funds, equity investments, and fixed and variable annuities. We invest in the wholesale capital markets through the management of our security portfolio and use various forms of wholesale funding. The security portfolio contains a variety of instruments, including callable debentures, taxable and non-taxable debentures, fixed and adjustable rate mortgage backed securities, and collateralized mortgage obligations.

Our results of operations depend primarily on net interest income, which is the difference between interest income from interest-earning assets and interest expense on interest-bearing liabilities. Our operations are also affected by non-interest income, such as service charges, insurance agency revenue, loan fees, gains and losses from the sale of mortgage loans and gains from the sale of real estate held for development. Our principal operating expenses, aside from interest expense, consist of compensation and employee benefits, occupancy costs, data processing expense and provisions for loan losses.

This discussion and analysis covers material changes in the financial condition since December 31, 2005 and material changes in the results of operations for the three and six-month periods ending, June 30, 2006 as compared to 2005. It should be read in conjunction with “Management Discussion and Analysis of Financial Condition and Results of Operations” included in the Annual Report on Form 10-K for the period ended December 31, 2005.

OVERVIEW

Our emphasis over the past several years has been focused on enhancing and expanding our retail and commercial banking network in our core markets as well as establishing our presence in the Metro Louisville market. Our five county core markets, where we have a combined 22% market share, has become increasingly competitive with several new bank branches entering our markets in the past few years. In order to protect and grow our market share, we enhanced several of our new facilities and anticipate several new facilities over the next few years. In addition to the enhancement and expansion in our core markets in recent years, we have been increasing our presence in the Metro Louisville market. Approximately 75% of the deposit base in the Metro Louisville market is controlled by six out-of-state banks. While the market is very competitive, we believe this creates an opportunity for smaller community banks with more power to make decisions locally. We believe our investment in these initiatives along with our continued commitment to a high level of customer service will enhance our existing market share and our development in the Metro Louisville market.

Our retail branch network continues to generate encouraging results. Total deposits have grown at a 6% compound annual growth rate over the past four years. Total deposits were $615.0 million at June 30, 2006, which included an increase of $42 million in commercial and retail deposits for the first six months this year. The development of our retail branch network in the Metro Louisville market also yielded positive results. We have a combined $42 million in deposits in our two full-service facilities in the Metro Louisville market, increasing deposits by 39% during the first six months of 2006 following a 71% increase during 2005. We opened these new facilities in the second quarter of 2004 to support our growing customer base in this market. Twenty-one percent of our loan portfolio is comprised of loans to borrowers in the Metro Louisville market.

Our emphasis on commercial lending generated a 7% compound annual growth rate in the total loan portfolio and a 31% compound annual growth rate in commercial loans over the past four years. Commercial loans were $429.4 million at June 30, 2006, an increase of $26.2 million from December 31, 2005.

The growth in our commercial loan portfolio, coupled with the rising interest rate environment, has favorably impacted the level of interest income generated. Net interest margin increased to 4.07% for the six months ended June 30, 2006, compared to 3.88% for the same period a year ago. This has resulted in a $616,000 increase in net interest income to $7.4 million for the three months ended June 30, 2006, and a $1.2 million increase in net interest income to $14.6 million for the six months ended June 30, 2006, compared to the same three and six month periods in 2005. The increasing short-term interest rate environment positively impacted net interest margin because adjustable rate commercial loans comprise 46% of our loan portfolio. However, the net interest margin is likely to compress in future quarters as short-term interest rates peak and the cost of deposits as well as the cost of our borrowings continue to rise. The cost of deposits typically lag behind the increase in adjustable loan rates due to certificates of deposit that mature over a longer period of time than immediately adjustable loan rates.

Our asset quality remains favorable. Net charge-offs as a percent of average total loans were 0.02% for the six months ended June 30, 2006 and June 30, 2005. The allowance for loan losses as a percent of total loans, decreased to 1.11% at June 30, 2006 compared to 1.15% at December 31, 2005. The percentage of non-performing loans to total loans was 0.83% at June 30, 2006, compared to 0.97% at December 31, 2005.

Provision for loan loss expense decreased by $32,000 to $9,000 for the three months ended June 30, 2006, and by $219,000 to $97,000 for the six months ended June 30, 2006 compared to the same periods in 2005. The decrease in provision for loan loss expense for the periods was due to higher provisions during the first six months of 2005 resulting from loan downgrades during the first quarter of 2005. In addition, improvements in the Company’s security and position of certain classified loans during 2006, resulted in a reduction in the SFAS 114 allowance allocated to the loans, which decreased our provision for loan loss expense for the three and six month periods ended June 30, 2006.

Non-interest income increased $100,000 to $2.1 million for the three months ended June 30, 2006. Non-interest income decreased $210,000 to $3.8 million for the six months ended June 30, 2006. During the first six months ended June 30, 2005, we recorded a $381,000 gain on the sale of investment securities and a $143,000 gain on the sale of lots. No gains on the sale of investments or lots were recorded for the six months ended June 30, 2006. Customer service fees on deposit accounts increased $77,000 and $188,000 for the respective three and six months ended June 30, 2006, compared to the same periods in 2005.

Non-interest expense increased $38,000, or 1% to $5.3 million for the quarter ended June 30, 2006, compared to the same quarter in 2005. For the six months ended June 30, 2006, non-interest expense increased $302,000, or 3% to $10.7 million, compared to the six months ended June 30, 2005. The primary factors contributing to this increase were the additional operating and employee compensation expenses related to the recent expansion efforts. Our efficiency ratio was 58% for the six months ended June 30, 2006, compared to 60% for the six months ended June 30, 2005.

CRITICAL ACCOUNTING POLICIES

Our accounting and reporting policies comply with U.S. generally accepted accounting principles and conform to general practices within the banking industry. The accounting policy relating to the allowance for loan losses is critical to the understanding of our results of operations since the application of this policy requires significant management assumptions and estimates that could result in materially different amounts to be reported if conditions or underlying circumstances were to change.

Allowance for Loan Losses — We maintain an allowance sufficient to absorb probable incurred credit losses existing in the loan portfolio. The Allowance for Loan Loss Review Committee evaluates the allowance for loan losses on a quarterly basis. We estimate the allowance using past loan loss experience, known and inherent risks in the portfolio, adverse situations that may affect the borrower’s ability to repay, estimated value of the underlying collateral, and current economic conditions. While we estimate the allowance for loan losses based in part on historical losses within each loan category, estimates for losses within the commercial real estate portfolio are more dependent upon credit analysis and recent payment performance. Allocations of the allowance may be made for specific loans or loan categories, but the entire allowance is available for any loan that, in management’s judgment, should be charged off.

The allowance consists of specific and general components. The specific component relates to loans that are individually classified as impaired or loans otherwise classified as substandard or doubtful. The general component covers non-classified loans and is based on historical loss experience adjusted for current factors. The methodology for allocating the allowance for loan and lease losses takes into account our strategic plan to increase our emphasis on commercial and consumer lending. We increase the amount of the allowance allocated to commercial loans and

consumer loans in response to the growth of the commercial and consumer loan portfolios and management’s recognition of the higher risks and loan losses in these lending areas. Allowance estimates are developed with actual loss experience adjusted for current economic conditions. Allowance estimates are considered a prudent measurement of the risk in the loan portfolio and are applied to individual loans based on loan type.

Based on our calculation, an allowance of $7.4 million or 1.11% of total loans was our estimate of probable losses within the loan portfolio as of June 30, 2006. This estimate resulted in a provision for loan losses on the income statement of $97,000 for the 2006 six-month period. If the mix and amount of future charge off percentages differ significantly from those assumptions used by management in making its determination, the allowance for loan losses and provision for loan losses on the income statement could be materially affected.

RESULTS OF OPERATIONS

Net income for the quarter ended June 30, 2006 was $2.8 million or $0.69 per share diluted compared to $2.3 million or $0.57 per share diluted for the same period in 2005. Net income for the six month period ended June 30, 2006 was $5.1 million or $1.27 per share diluted compared to $4.5 million or $1.11 per share diluted for the same period a year ago. The increase for the three and six month periods was primarily the result of increases in net interest income of $616,000 and $1.2 million and a decrease in provision for loan loss expense of $32,000, and $219,000 for the 2006 periods compared to the same periods in 2005. Our book value per common share increased from $15.55 at June 30, 2005 to $17.08 at June 30, 2006. Annualized net income for the first six months of 2006 generated a return on average assets of 1.32% and a return on average equity of 15.35%. These compare with a return on average assets of 1.21% and a return on average equity of 14.70% for the first six months of 2005, also on an annualized basis.

Net Interest Income-The principal source of our revenue is net interest income. Net interest income is the difference between interest income on interest-earning assets, such as loans and securities and the interest expense on liabilities used to fund those assets, such as interest-bearing deposits and borrowings. Net interest income is impacted by both changes in the amount and composition of interest-earning assets and interest-bearing liabilities as well as market interest rates.

On an annualized basis, the net interest margin as a percent of average earning assets increased 19 basis points to 4.05% for the quarter ended June 30, 2006 and 19 basis points to 4.07% for the six months ended June 30, 2006 compared to 3.86% and 3.88% for the same periods in 2005. Increasing interest rates and an increase in average earning assets improved net interest margin for the periods presented. Average interest earning assets increased $32.3 million for the quarter ended June 30, 2006 and $30.5 million for the six month ended June 30, 2006 when compared to the same periods in 2005. The yield on earning assets averaged 7.18% and 7.11% for the three and six month periods ended June 30, 2006, compared to an average yield on earning assets of 6.30% and 6.27% for the same periods in 2005. The prime-lending rate has increased 425 basis points from the time the Federal Open Market Committee began increasing short-term interest rates in June 2004 through the end of the second quarter of 2006. The increase in short-term interest rates favorably impacted the yield on earning assets for 2006.

Our cost of funds averaged 3.46% and 3.35% for the three and six month periods ended June 30, 2006, compared to an average cost of funds of 2.65% and 2.59% for the same periods in 2005. Deposit costs have accelerated due to the re-pricing of maturing certificates of deposit rolling off into certificates of deposit at currently higher interest rates as well as to our paying higher rates on our money market products. Going forward, our cost of funds is expected to increase as interest rates paid on deposit products have become increasingly competitive with the recent upward trend in interest rates.

We had borrowings of $85.3 million from the Federal Home Loan Bank (FHLB) of Cincinnati at June 30, 2006. During January 2001, we entered into $75.0 million in convertible fixed rate advances with a maturity of ten years. These advances were fixed for periods of two to three years. At the end of the fixed rate term and quarterly thereafter, the FHLB has the right to convert these advances to variable rate advances tied to the three-month LIBOR index. Upon conversion, we can prepay the advance at no penalty. One of the advances, fixed at a rate of 4.86% for $50.0 million, was prepaid in July 2006 without penalty. The other advance is fixed at a rate of 5.05% for $25.0 million. If the three-month LIBOR index continues to increase, there is a higher likelihood the $25.0 million advance will be converted to a variable rate advance in September of 2006.

The net result of the above factors was an increase in net interest income of $616,000 for the quarter ended and $1.2 million for the six months ended June 30, 2006 compared to the same periods in 2005. The net interest margin is likely to compress in future quarters as short term interest rates peak and the cost of deposits continue

to rise. The cost of deposits typically lags behind the increase in adjustable rate loans because certificates of deposit generally mature over longer periods than immediately adjustable rate loans.

AVERAGE BALANCE SHEET

The following table provides information relating to our average balance sheet and reflects the average yield on assets and average cost of liabilities for the periods indicated. Dividing income or expense by the average monthly balance of assets or liabilities, respectively, derives such yields and costs for the periods presented.

	Quarter Ended June 30,
	2006							2005
	Average					Average		Average					Average
(Dollars in thousands)	Balance			Interest		Yield/Cost (5)		Balance			Interest		Yield/Cost (5)

ASSETS
Interest earning assets:
U.S. Treasury and agencies	$	29,589		$	227	3.08	%	$	57,509		$	391	2.73	%
Mortgage-backed securities	15,240			162		4.26		8,640			84		3.90
Equity securities	1,938			19		3.93		1,747			18		4.13
State and political subdivision securities (1)	6,500			103		6.36		956			16		6.71
Corporate bonds	6,028			108		7.19		4,031			51		5.08
Loans receivable (2) (3) (4)	654,893			12,287		7.53		605,217			10,272		6.81
FHLB stock	7,297			104		5.72		6,922			84		4.87
Interest bearing deposits	12,742			136		4.28		16,922			116		2.75
Total interest earning assets	734,227			13,146		7.18		701,944			11,032		6.30
Less: Allowance for loan losses	(7,391		)					(6,706		)
Non-interest earning assets	55,642							57,104
Total assets	$	782,478						$	752,342

LIABILITIES AND STOCKHOLDERS’ EQUITY
Interest bearing liabilities:
Savings accounts	$	94,670		$	650	2.75	%	$	88,010		$	350	1.60	%
NOW and money market accounts	131,858			506		1.54		150,649			498		1.33
Certificates of deposit and
other time deposits	350,007			3,405		3.90		318,649			2,298		2.89
Federal funds purchased	1,173			15		5.13		—			—		—
FHLB advances	78,312			941		4.82		78,692			952		4.85
Trust preferred securities	10,000			223		8.94		10,000			174		6.98
Total interest bearing liabilities	666,020			5,740		3.46		646,000			4,272		2.65
Non-interest bearing liabilities:
Non-interest bearing deposits	43,898							40,792
Other liabilities	4,809							3,550
Total liabilities	714,727							690,342

Stockholders’ equity	67,751							62,000
Total liabilities and stockholders’ equity	$	782,478						$	752,342

Net interest income				$	7,406						$	6,760
Net interest spread						3.72	%						3.67	%
Net interest margin						4.05	%						3.86	%

(1) Taxable equivalent yields are calculated assuming a 34% federal income tax rate.
(2) Includes loan fees, immaterial in amount, in both interest income and the calculation of yield on loans.
(3) Calculations include non-accruing loans in the average loan amounts outstanding.
(4) Includes loans held for sale.
(5) Annualized

	Six Months Ended June 30,
	2006							2005
	Average			Average		Average		Average
(Dollars in thousands)	Balance			Interest		Yield/Cost (5)		Balance			Interest		Yield/Cost (5)

ASSETS
Interest earning assets:
U.S. Treasury and agencies	$	31,061		$	476	3.09	%	$	53,566		$	715	2.69	%
Mortgage-backed securities	15,660			332		4.28		8,542			164		3.87
Equity securities	1,969			37		3.79		2,210			58		5.29
State and political subdivision securities (1)	6,188			197		6.42		973			31		6.42
Corporate bonds	5,660			189		6.73		3,048			74		4.90
Loans receivable (2) (3) (4)	649,486			24,002		7.45		603,199			20,226		6.76
FHLB stock	7,246			206		5.73		6,884			160		4.69
Interest bearing deposits	10,309			231		4.52		18,666			239		2.58
Total interest earning assets	727,579			25,670		7.11		697,088			21,667		6.27
Less: Allowance for loan losses	(7,376		)					(6,604		)
Non-interest earning assets	57,067							57,405
Total assets	$	777,270						$	747,889

LIABILITIES AND
STOCKHOLDERS’ EQUITY
Interest bearing liabilities:
Savings accounts	$	96,670		$	1,282	2.67	%	$	83,066		$	572	1.39	%
NOW and money market accounts	131,654			987		1.51		153,293			1,010		1.33
Certificates of deposit and other time deposits	342,222			6,337		3.73		317,571			4,456		2.83
Federal funds purchased	3,865			88		4.59		—			—		—
FHLB advances	78,331			1,874		4.82		78,785			1,896		4.85
Trust preferred securities	10,000			429		8.65		10,000			332		6.70
Total interest bearing liabilities	662,742			10,997		3.35		642,715			8,266		2.59
Non-interest bearing liabilities:
Non-interest bearing deposits	43,158							40,117
Other liabilities	4,470							3,584
Total liabilities	710,370							686,416

Stockholders’ equity	66,900							61,473
Total liabilities and stockholders’ equity	$	777,270						$	747,889

Net interest income				$	14,673						$	13,401
Net interest spread						3.76	%						3.68	%
Net interest margin						4.07	%						3.88	%

RATE/VOLUME ANALYSIS

The table below provides information regarding changes in interest income and interest expense for the periods indicated. For each category of interest-earning assets and interest-bearing liabilities, information is provided on changes attributable to (1) changes in rate (changes in rate multiplied by old volume); (2) changes in volume (change in volume multiplied by old rate); and (3) changes in rate-volume (change in rate multiplied by change in volume). Changes in rate-volume are proportionately allocated between rate and volume variance.

	Three Months Ended									Six Months Ended
	June 30,									June 30,
	2006 vs. 2005									2006 vs. 2005
	Increase (decrease)									Increase (decrease)
	Due to change in									Due to change in
							Net									Net
(Dollars in thousands)	Rate			Volume			Change			Rate			Volume			Change
Interest income:
U.S. Treasury and agencies	$	45		$	(209	)	$	(164	)	$	94		$	(333	)	$	(239	)
Mortgage-backed securities	8			70			78			19			149			168
Equity securities	(1		)	2			1			(15		)	(6		)	(21		)
State and political subdivision securities	(1		)	88			87			—			166			166
Corporate bonds	57			—			57			115			—			115
Loans	1,133			882			2,015			2,156			1,620			3,776
FHLB stock	15			5			20			37			9			46
Interest bearing deposits	54			(34		)	20			129			(137		)	(8		)

Total interest earning assets	1,310			804			2,114			2,535			1,468			4,003

Interest expense:
Savings accounts	272			28			300			603			107			710
NOW and money market accounts	75			(67		)	8			130			(153		)	(23		)
Certificates of deposit and other time deposits	863			244			1,107			1,514			367			1,881
Federal funds purchased	11			4			15			44			44			88
FHLB advances	(7		)	(4		)	(11		)	(11		)	(11		)	(22		)
Trust preferred securities	49			—			49			97			—			97

Total interest bearing liabilities	1,263			205			1,468			2,377			354			2,731

Net change in net interest income	$	47		$	599		$	646		$	158		$	1,114		$	1,272

Non-Interest Income and Non-Interest Expense

The following tables provide a comparison of the components of non-interest income and expenses for the quarter and six month periods ended June 30, 2006 and 2005. The tables show the dollar and percentage change from 2005 to 2006. Below the tables is a discussion of significant changes and trends.

	Three Months Ended
	June 30,
(Dollars in thousands)	2006		2005		Change			%
Non-interest income
Customer service fees on deposit accounts	$	1,396	$	1,319	$	77		5.8	%
Gain on sale of mortgage loans	240		168		72			42.9	%
Brokerage commissions	88		78		10			12.8	%
Gain on sale of real estate held for development	—		143		(143		)	-100.0	%
Other income	352		268		84			31.3	%
	$	2,076	$	1,976	$	100		5.1	%

	Six Months Ended
	June 30,
(Dollars in thousands)	2006		2005		Change			%
Non-interest income
Customer service fees on deposit accounts	$	2,627	$	2,439	$	188		7.7	%
Gain on sale of mortgage loans	403		351		52			14.8	%
Brokerage commissions	171		157		14			8.9	%
Gain on sale of real estate held for development	—		143		(143		)	-100.0	%
Gain on sale of investments	—		381		(381		)	-100.0	%
Other income	587		527		60			11.4	%
	$	3,788	$	3,998	$	(210	)	-5.3	%

Growth in customer service fees on deposit accounts, our largest component of non-interest income, is primarily due to growth in customer deposits, overdraft fee income on retail checking accounts and the sale of fee-based products for 2006. We continue to increase our customer base through cross-selling opportunities and marketing initiatives and promotions. We increased our emphasis on growing our checking account base during 2005 to better enhance our profitability and franchise value and will continue this emphasis. This initiative initially began in late 2004 with the introduction of 10 new checking account products and/or significant enhancements to existing products. We also introduced two new checking account products in 2005 geared toward customers on check systems who would not normally qualify for a standard checking account. If we can maintain the increase in checking accounts we experienced in 2005, it will positively impact our level of customer service fees on deposit accounts.

We originate qualified VA, KHC, RHC and conventional secondary market loans and sell them into the secondary market with servicing rights released. Gain on sale of mortgage loans increased $72,000 and $52,000 for the three and six months ended June 30, 2006 compared to the same periods in 2005. We expect the gain on sale of mortgage loans to remain consistent with the levels reached in 2005.

Through our subsidiary, First Federal Office Park, we hold commercial lots adjacent to our home office on Ring Road in Elizabethtown, that are available for sale. During 2005 we recorded $143,000 in gains from a lot sale. Currently, we hold two of the initial nine lots held for sale.

We invest in various types of liquid assets, including United States Treasury obligations, securities of various federal agencies, obligations of states and political subdivisions, corporate bonds, mutual funds, stocks and others. During the six month 2006 period we did not record any gains on the sale of investments compared to $381,000 in recorded gains for the 2005 period. Gains on investment securities are infrequent in nature and not a consistent source of income.

	Three Months Ended
	June 30,
(Dollars in thousands)	2006		2005		Change			%
Non-interest expenses
Employee compensation and benefits	$	2,817	$	2,856	$	(39	)	-1.4	%
Office occupancy expense and equipment	514		503		11			2.2	%
Marketing and advertising	214		195		19			9.7	%
Outside services and data processing	641		630		11			1.7	%
Bank franchise tax	224		195		29			14.9	%
Other expense	904		897		7			0.8	%
	$	5,314	$	5,276	$	38		0.7	%

	Six Months Ended
	June 30,
(Dollars in thousands)	2006		2005		Change			%
Non-interest expenses
Employee compensation and benefits	$	5,794	$	5,634	$	160		2.8	%
Office occupancy expense and equipment	1,067		998		69			6.9	%
Marketing and advertising	419		383		36			9.4	%
Outside services and data processing	1,257		1,227		30			2.4	%
Bank franchise tax	443		398		45			11.3	%
Other expense	1,743		1,781		(38		)	-2.1	%
	$	10,723	$	10,421	$	302		2.9	%

Employee compensation and benefits is the largest component of non-interest expense. Compensation expense decreased for the 2006 quarter due to a reduction in our health insurance expense, a result of decreased insurance claims and increased for the six months ended June 30, 2006 due to an increase in staff needed for our continued growth and expansion as well as annual raises. We look for a continued increase in employee compensation and benefits expense in line with recent trends, as we progress with our retail expansion and market efforts. Also included in employee compensation and benefits expense for the 2006 period is $31,000, due to a change in accounting rules in which compensation expense related to stock options is recorded.

Office occupancy expense and equipment, marketing and advertising, and outside services and data processing increased for the quarter and six months ended June 30, 2006 due to additional operating expenses related to our expansion efforts. We anticipate the increased level of non-interest expense to continue in 2006 with continued retail expansion and market share efforts. During the second quarter of 2006 we opened a new full service-banking center in Elizabethtown and began construction on a third facility in Jefferson County with the anticipation of opening in early 2007. We are also considering other possible locations within the core market area to grow our 22% market share. Our efficiency ratio was 58% for the six months ended June 30, 2006, compared to 60% for the six months ended June 30, 2005.

ANALYSIS OF FINANCIAL CONDITION

Total assets at June 30, 2006 increased to $781.9 million compared to $766.5 million at December 31, 2005, an increase of $15.4 million. The increase was primarily driven by an increase in loans of $22.9 million. The growth in loans was principally funded with deposits, which increased $23.9 million for the period. Also affecting total assets was a $6.0 million decrease in investment securities. The proceeds from these investments in addition to cash and cash equivalents were used to pay off $12.5 million in federal funds purchased.

Loans

Net loans receivable increased $22.9 million to $658.6 million at June 30, 2006 compared to $635.7 million at December 31, 2005. Our commercial, commercial real estate and real estate construction portfolios increased $26.2 million to $429.4 million at June 30, 2006. For the 2006 period, these loans comprised 64% of the total loan portfolio compared to 59% at June 30, 2005. Offsetting this growth was a $2.7 million decrease in the residential mortgage loan portfolio to $140.0 million for the six months ended June 30, 2006. Consumer and home equity loans also decreased for the 2006 period by $2.4 million, or 3.6% to $63.8 million at June 30, 2006, compared to $66.2 million at December 31, 2005.

	June 30,			December 31,
(Dollars in thousands)	2006			2005

Commercial	$	38,022		$	36,004
Real estate commercial	369,572			353,637
Real estate construction	21,855			13,579
Residential mortgage	140,044			142,727
Consumer and home equity	63,840			66,208
Indirect consumer	32,749			31,577
Loans held for sale	1,038			597
	667,120			644,329
Less:
Net deferred loan origination fees	(1,113		)	(1,212		)
Allowance for loan losses	(7,408		)	(7,377		)
	(8,521		)	(8,589		)

Loans	$	658,599		$	635,740

Allowance and Provision for Loan Losses

Our financial performance depends on the quality of the loans we originate and management’s ability to assess the degree of risk in existing loans when it determines the allowance for loan losses. An increase in loan charge-offs or non-performing loans or an inadequate allowance for loan losses could reduce net interest income, net income and capital and limit the range of products and services we can offer.

The Allowance for Loan Loss Review Committee evaluates the allowance for loan losses quarterly to maintain a level sufficient to absorb probable incurred credit losses existing in the loan portfolio. Periodic provisions to the allowance are made as needed. The allowance is determined based on the application of loss estimates to graded loans by categories. The amount of the provision for loan losses necessary to maintain an adequate allowance is also based upon an analysis of such factors as changes in lending policies and procedures; underwriting standards; collection; charge-off and recovery history; changes in national and local economic business conditions and developments; changes in the characteristics of the portfolio; ability and depth of lending management and staff; changes in the trend of the volume and severity of past due, non-accrual and classified loans; troubled debt restructuring and other loan modifications; and regulatory examinations.

The methodology for allocating the allowance for loan and lease losses takes into account our strategic plan to increase our emphasis on commercial and consumer lending. We increase the amount of the allowance allocated to commercial loans and consumer loans in response to the growth of the commercial and consumer loan portfolios and management’s recognition of the higher risks and loan losses in these lending areas. The indirect consumer loan program is comprised of new and used automobile, motorcycle and all terrain vehicle loans originated on our behalf by a select group of auto dealers within the our service area. The indirect loan program involves a greater degree of risk and is evaluated quarterly and monitored by the Board of Directors. In light of the greater charge-offs from indirect consumer loans compared to direct consumer loans, proportionally more of the allowance for consumer loans is allocated for indirect loans than direct loans. As the indirect loan program has evolved, dealer analysis and underwriting standards have been refined to improve the loan loss experience of the program. Estimating the allowance is a continuous process. In this regard, the Allowance for Loan Loss Review Committee continues to monitor the performance of indirect consumer loans as well as our other loan products and updates estimates as the evidence warrants.

The following table shows an analysis of loan loss experience for the periods indicated.

	Three Months Ended				Six Months Ended
	June 30,				June 30
(Dollars in thousands)	2006		2005		2006			2005

Balance at beginning of period	$	7,420	$	6,701	$	7,377		$	6,489
Loans charged-off:
Real estate mortgage	1		—		3			4
Consumer	92		106		197			242
Commercial	85		—		85			—
Total charge-offs	178		106		285			246
Recoveries:
Real estate mortgage	3		—		6			1
Consumer	68		78		127			154
Commercial	86		—		86			—
Total recoveries	157		78		219			155

Net loans charged-off	21		28		66			91

Provision for loan losses	9		41		97			316

Balance at end of period	$	7,408	$	6,714	$	7,408		$	6,714

Allowance for loan losses to total loans (excluding loans held for sale)					1.11		%	1.10		%
Net charge-offs to average loans outstanding					0.02		%	0.02		%
Allowance for loan losses to total non-performing loans					134		%	138		%

The provision for loan losses decreased $32,000 to $9,000 for the quarter ended June 30, 2006, and decreased $219,000 to $97,000 for the six months ended June 30, 2006 compared to the same periods in 2005. We recorded a smaller provision for the 2006 periods due to an improvement in our security and position of three of our classified loans during the quarter, resulting in a reduction in the SFAS 114 allowance allocated to the loans. In addition, we experienced a higher provision for loan loss in the first six months of 2005, resulting from two classified loans downgraded to substandard. The combination resulted in a decrease in provision expense for the quarter and six months ended June 30, 2006 compared to the same periods in 2005. The total allowance for loan losses increased $694,000 to $7.4 million from June 30, 2005 to June 30, 2006. The increase in the allowance was related to a $22.9 million increase in net loans for 2006 compared to 2005, in conjunction with a $2.3 million increase in classified loans at June 30, 2006 compared to December 31, 2005.

Federal regulations require insured institutions to classify their own assets on a regular basis. The regulations provide for three categories of classified loans — substandard, doubtful and loss. Assets classified as substandard or doubtful require the institution to establish general allowances for loan losses. If an asset or portion thereof is classified as loss, the insured institution must either establish specified allowances for loan losses in the amount of 100% of the portion of the asset classified loss, or charge off the amount of the loss.

The following table provides information with respect to classified loans for the periods indicated.

	June 30,
(Dollars in thousands)	2006		2005
Classified Loans
Substandard	$	12,106	$	6,800
Doubtful	916		948
Loss	38		53
Total Classified	$	13,060	$	7,801

The $5.3 million increase in substandard assets for June 30, 2006 was primarily the result of four credit relationships. These credit relationships were a $1.5 million commercial real estate relationship, a $2.4 million commercial relationship, a $1.1 million commercial relationship and a $680,000 commercial real estate relationship. Offsetting this increase was a pay off of a $763,000 commercial relationship. We remain well secured and adequately collateralized with these credits.

Although we may allocate a portion of the allowance to specific loans or loan categories, the entire allowance is available for active charge-offs. Allowance estimates are developed with actual loss experience adjusted for current economic conditions. Allowance estimates are considered a prudent measurement of the risk in the loan portfolio and are applied to individual loans based on loan type.

Non-Performing Assets

Non-performing assets consist of certain restructured loans for which interest rate or other terms have been renegotiated, loans on which interest is no longer accrued, real estate acquired through foreclosure and repossessed assets. We do not have any loans greater than 90 days past due still on accrual. Loans, including impaired loans under SFAS 114, are placed on non-accrual status when they become past due 90 days or more as to principal or interest, unless they are adequately secured and in the process of collection. Loans are considered impaired if full principal or interest payments are not anticipated in accordance with the contractual loan terms. Impaired loans are carried at the present value of expected future cash flows discounted at the loan’s effective interest rate or at the fair value of the collateral if the loan is secured by collateral.

Loans are reviewed on a regular basis and normal collection procedures are implemented when a borrower fails to make a required payment on a loan. If the delinquency on a mortgage loan exceeds 90 days and is not cured through normal collection procedures or an acceptable arrangement is not worked out with the borrower, we institute measures to remedy the default, including commencing a foreclosure action. Consumer loans generally are charged off when a loan is deemed uncollectible by management and any available collateral has been disposed of. Commercial business and real estate loan delinquencies are handled on an individual basis by management with the advice of legal counsel.

Interest income on loans is recognized on the accrual basis except for those loans in a non-accrual of income status. The accrual of interest on impaired loans is discontinued when management believes, after consideration of economic and business conditions and collection efforts that the borrowers’ financial condition is such that collection of interest is doubtful, typically after the loan becomes 90 days delinquent. When interest accrual is discontinued, existing accrued interest is reversed and interest income is subsequently recognized only to the extent cash payments are received.

Real estate acquired as a result of foreclosure or by deed in lieu of foreclosure is classified as real estate owned until such time as it is sold. New and used automobile, motorcycle and all terrain vehicles acquired as a result of foreclosure are classified as repossessed assets until they are sold. When such property is acquired, it is recorded at the lower of the unpaid principal balance of the related loan or its fair market value. Any write-down of the property at the time of acquisition is charged to the allowance for loan losses. Subsequent gains and losses are included in non-interest income and non-interest expense.

The following table provides information with respect to non-performing assets for the periods indicated.

	June 30,			December 31,
(Dollar in thousands)	2006			2005

Restructured	$	3,035		$	3,104
Past due 90 days still on accrual	—			—
Loans on non-accrual status	2,479			3,128

Total non-performing loans	5,514			6,232
Real estate acquired through foreclosure	844			1,022
Other repossessed assets	104			119
Total non-performing assets	$	6,462		$	7,373

Interest income that would have been earned on non-performing loans	$	411		$	432
Interest income recognized on non-performing loans	235			219

Ratios: Non-performing loans to total loans (excluding loans held for sale)	0.83		%	0.97		%
Non-performing assets to total loans (excluding loans held for sale)	0.97		%	1.15		%

Non-performing assets for the 2006 period include $3.0 million in restructured commercial, residential mortgage and consumer loans. The restructured loans primarily consist of three credit relationships aggregating $2.8 million, including a $2.2 million commercial relationship, a $207,000 commercial relationship and a $447,000 residential mortgage relationship. The terms of these loans have been renegotiated to reduce the rate of interest and extend the term, thus reducing the amount of cash flow required from the borrower to service the loans. The terms of the restructured loans are currently being met.

Investment Securities

Interest on securities provides us our largest source of interest income after interest on loans, constituting 6.3% of the total interest income for the six months ended June 30, 2006. The securities portfolio serves as a source of liquidity and earnings and contributes to the management of interest rate risk. We have the authority to invest in various types of liquid assets, including short-term United States Treasury obligations and securities of various federal agencies, obligations of states and political subdivisions, corporate bonds, certificates of deposit at insured savings and loans and banks, bankers’ acceptances, and federal funds. We may also invest a portion of our assets in certain commercial paper and corporate debt securities. We are also authorized to invest in mutual funds and stocks whose assets conform to the investments that we are authorized to make directly. The available-for-sale and held-to-maturity investment portfolios decreased by $6.0 million during the 2006 period as securities were called for redemption in accordance with their terms due to increasing interest rates. Offsetting this decrease were purchases of investments in state and municipal obligations and a corporate bond. The corporate bond re-prices quarterly with three-month LIBOR and was purchased to enhance our earnings. The state and municipal obligations have an average life of 10 years. We purchased these securities to enhance earnings and manage interest rate risk by placing longer-dated assets on the balance sheet.

Deposits

We rely primarily on customer service and long-standing relationships with customers to attract and retain deposits. Market interest rates and rates on deposit products offered by competing financial institutions can significantly affect our ability to attract and retain deposits. In conjunction with our initiatives to expand and enhance our retail branch network, we emphasize growing our customer checking account base to better enhance profitability and franchise value. Retail and commercial deposits increased $41.5 million from December 31, 2005. This increase was offset by a $17.6 million decrease in public fund deposits, resulting in an increase in total deposits of $23.9 million for the period. The increase in retail deposits was primarily in certificate of deposit balances due to a Valentines Day CD promotion.

The following table breaks down our deposits.

	June 30,		December 31,
	2006		2005
	(In Thousands)

Non-interest bearing	$	43,726	$	39,145
NOW demand	72,718		76,848
Savings	88,886		99,879
Money market	58,159		66,175
Certificates of deposit	351,509		309,059
	$	614,998	$	591,106

Advances from Federal Home Loan Bank

Subordinated Debentures

In March 2002, a trust we formed completed the private placement of 10,000 shares of cumulative trust preferred securities with a liquidation preference of $1,000 per security. The proceeds of the offering were loaned to us in exchange for floating rate junior subordinated deferrable interest debentures. Distributions on the Trust Preferred Securities are payable quarterly in arrears at the annual rate (adjusted quarterly) of three-month LIBOR plus 3.60%, and are included in interest expense. The Subordinated Debentures are considered as Tier I capital for the Corporation under current regulatory guidelines.

LIQUIDITY

Liquidity risk arises from the possibility that we may not be able to satisfy current or future financial commitments, or may become unduly reliant on alternative funding sources. The objective of liquidity risk management is to ensure that the cash flow requirements of depositors and borrowers, as well as our operating cash needs, are met, taking into account all on- and off-balance sheet funding demands. Liquidity risk management also includes ensuring cash flow needs are met at a reasonable cost. We maintain an investment and funds management policy, which identifies the primary sources of liquidity, establishes procedures for monitoring and measuring liquidity, and establishes minimum liquidity requirements in compliance with regulatory guidance. The liquidity position is continually monitored and reviewed by the Asset Liability Committee.

Funds are available from a number of sources, including the sale of securities in the available-for-sale portion of the investment portfolio, principal pay-downs on loans and mortgage-backed securities, proceeds realized from loans held for sale, brokered deposits and other wholesale funding. We also secured federal funds borrowing lines from two of our correspondent banks of $15 million each. Our banking centers also provide access to retail deposit markets. If large certificate depositors shift to our competitors or other markets in response to interest rate changes, we have the ability to replenish those deposits through alternative funding sources. Traditionally, we have also utilized borrowings from the FHLB to supplement our funding requirements. At June 30, 2006, we had an unused approved line of credit in the amount of $108.9 million and sufficient collateral available to borrow approximately $46.4 million in additional advan ces from the FHLB. We believe our sources of liquidity are adequate to meet expected cash needs for the foreseeable future.

At the holding company level, the Corporation uses cash to pay dividends to stockholders, repurchase common stock, make selected investments and acquisitions, and service debt. The main sources of funding for the holding company include dividends, borrowings and access to the capital markets.

The primary source of funding for the Corporation has been dividends and returns of investment from the Bank. Kentucky banking regulations limit the amount of dividends that may be paid. At June 30, 2006, the maximum amount of dividends available from the Bank is $14.3 million. Accordingly, consolidated cash flows as presented in the consolidated statements of cash flows may not represent cash immediately available to the Corporation. During the six month period ended June 30, 2006, the Bank declared and paid dividends to the Corporation of $1.9 million.

CAPITAL

Stockholders’ equity increased $3.3 million for the period ended June 30, 2006 compared to December 31, 2005. The increase in capital was primarily attributable to net income during the period. This increase was offset by cash dividends declared and a decline in accumulated other comprehensive income, a result of temporary unrealized losses recorded on securities. Average stockholders’ equity to average assets ratio increased to 8.61% for the six month period ended June 30, 2006 compared to 8.22% for 2005.

Kentucky banking laws limit the amount of dividends that may be paid to the Corporation by the Bank without prior approval of the Kentucky Office of Financial Institutions. Under these laws, the amount of dividends that may be paid in any calendar year is limited to current year’s net income, as defined in the laws, combined with the retained net income of the preceding two years, less any dividends declared during those periods. At June 30, 2006, without prior regulatory approval, we had approximately $14.3 million of retained earnings that could be utilized for payment of dividends if authorized by our board of directors.

Each of the federal bank regulatory agencies has established minimum leverage capital requirements for banking organizations. Banking organizations must maintain a minimum ratio of Tier 1 capital to adjusted average quarterly assets equal to 3% to 5% subject to federal bank regulatory evaluation of an organization’s overall safety and soundness. We intend to maintain a capital position that meets or exceeds the “well capitalized” requirements as defined for banks by the FDIC. The following table shows the ratios of Tier 1 capital and total capital to risk-adjusted assets and the leverage ratios for the Corporation and the Bank as of June 30, 2006.

									To Be Considered
									Well Capitalized
									Under Prompt
(Dollars in thousands)					For Capital				Correction
	Actual				Adequacy Purposes				Action Provisions
As of June 30, 2006:	Amount		Ratio		Amount		Ratio		Amount		Ratio
Total risk-based capital (to risk-weighted assets)
Consolidated	$	77,544	11.7	%	$	53,110	8.0	%	N/A		N/A
Bank	74,844		11.3		52,896		8.0		$	66,120	10	%
Tier I capital (to risk-weighted assets)
Consolidated	69,920		10.5		26,555		4.0		N/A		N/A
Bank	67,220		10.2		26,448		4.0		$	39,672	6	%
Tier I capital (to average assets)
Consolidated	69,920		9.0		30,964		4.0		N/A		N/A
Bank	67,220		8.7		30,875		4.0		$	38,594	5	%

									To Be Considered
									Well Capitalized
									Under Prompt
(Dollars in thousands)					For Capital				Correction
	Actual				Adequacy Purposes				Action Provisions
As of December 31, 2005:	Amount		Ratio		Amount		Ratio		Amount		Ratio
Total risk-based capital (to risk-weighted assets)
Consolidated	$	73,678	11.5	%	$	51,185	8.0	%	N/A		N/A
Bank	71,070		11.1		51,026		8.0		$	63,782	10	%
Tier I capital (to risk-weighted assets)
Consolidated	66,300		10.4		25,592		4.0		N/A		N/A
Bank	63,692		10.0		25,513		4.0		$	38,269	6	%
Tier I capital (to average assets)
Consolidated	66,300		8.8		30,011		4.0		N/A		N/A
Bank	63,692		8.5		29,926		4.0		$	37,408	5	%

Item 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

Asset/Liability Management and Market Risk

To minimize the volatility of net interest income and exposure to economic loss that may result from fluctuating interest rates, we manage our exposure to adverse changes in interest rates through asset and liability management activities within guidelines established by our Asset Liability Committee (“ALCO”). The ALCO, which includes senior management representatives, has the responsibility for approving and ensuring compliance with asset/liability management polices. Interest rate risk is the exposure to adverse changes in the net interest income as a result of market fluctuations in interest rates. The ALCO, on an ongoing basis, monitors interest rate and liquidity risk in order to implement appropriate funding and balance sheet strategies. Management considers interest rate risk to be our most significant market risk.

We utilize an earnings simulation model to analyze net interest income sensitivity. Potential changes in market interest rates and their subsequent effects on net interest income are then evaluated. The model projects the effect of instantaneous movements in interest rates of both 100 and 200 basis points. Assumptions based on the historical behavior of our deposit rates and balances in relation to changes in interest rates are also incorporated into the model. These assumptions are inherently uncertain and, as a result, the model cannot precisely measure future net interest income or precisely predict the impact of fluctuations in market interest rates on net interest income. Actual results will differ from the model’s simulated results due to timing, magnitude and frequency of interest rate changes as well as changes in market conditions and the application and timing of various management strategies.

Our interest sensitivity profile was less asset sensitive at June 30, 2006, than December 31, 2005. Given a sustained 100 basis point decrease in rates, our base net interest income would decrease by an estimated 1.08% at June 30, 2006 compared to a decrease of 2.03% at December 31, 2005. Given a 100 basis point increase in interest rates our base net interest income would increase by an estimated 1.16% at June 30, 2006 compared to an increase of 1.92% at December 31, 2005.

Our interest sensitivity at any point in time will be affected by a number of factors. These factors include the mix of interest sensitive assets and liabilities, their relative pricing schedules, market interest rates, deposit growth, loan growth, decay rates and prepayment speed assumptions.

As demonstrated by the June 30, 2006 and December 31, 2005 sensitivity tables, we are in an asset sensitive position. This means that our earning assets, which consist of loans and investment securities, will change in price at a faster rate than our deposits and borrowings. Therefore, as short term interest rates increase, our net interest income will also increase. Likewise, as short term interest rates decrease, our net interest income will decrease.

The Federal Open Market Committee began increasing short-term interest rates in June 2004. We believe the Federal Open Market Committee is likely to stop increasing short term interest rates during 2006 and may decrease short term interest rates in 2007. Our net interest margin and the level of net interest income would be negatively affected with a decrease in short term interest rates. We continually monitor the effects rate changes will have on our level of net interest income and management works to structure the maturity and pricing of loans and deposits to mitigate large swings in net interest income. During 2005, we made efforts to increase the level of short-term deposits with a money market promotion as well as offering more attractive rates on short-term certificates of deposit. In addition, the majority of the newly originated or renewed loans during 2005 and 2006 were fixed rates loans with the interest rate fixed from three to five years. These efforts, in addition to other initiatives to structure funding and future liquidity needs has decreased our asset sensitivity and will likely continue to do so. This will help decrease the negative impact that flat or decreasing short-term interest rates may have on the level of net interest income.

Our sensitivity to interest rate changes is presented based on data as of June 30, 2006 and December 31, 2005 annualized to a one year period.

	June 30, 2006
	Decrease in Rates								Increase in Rates
	200			100					100			200
(Dollars in thousands)	Basis Points			Basis Points			Base		Basis Points			Basis Points

Projected interest income
Loans	$	55,198		$	56,742		$	58,024	$	59,343		$	60,594
Investments	2,337			2,410			2,399		2,458			2,480
Total interest income	57,535			59,152			60,423		61,801			63,074

Projected interest expense
Deposits	17,545			18,257			18,968		19,605			20,242
Borrowed funds	5,346			5,627			5,802		6,129			6,314
Total interest expense	22,891			23,884			24,770		25,734			26,556

Net interest income	$	34,644		$	35,268		$	35,653	$	36,067		$	36,518
Change from base	$	(1,009	)	$	(385	)			$	414		$	865
% Change from base	(2.83		)%	(1.08		)%			1.16		%	2.43		%

	December 31, 2005
	Decrease in Rates								Increase in Rates
	200			100					100			200
(Dollars in thousands)	Basis Points			Basis Points			Base		Basis Points			Basis Points

Projected interest income
Loans	$	48,350		$	49,818		$	51,077	$	52,281		$	53,539
Investments	2,703			2,846			2,948		2,995			3,062
Total interest income	51,053			52,664			54,025		55,276			56,601

Projected interest expense
Deposits	12,738			13,319			13,900		14,421			14,941
Borrowed funds	4,697			4,782			4,845		4,896			4,947
Total interest expense	17,435			18,101			18,745		19,317			19,888

Net interest income	$	33,618		$	34,563		$	35,280	$	35,959		$	36,713
Change from base	$	(1,662	)	$	(717	)			$	679		$	1,433
% Change from base	(4.71		)%	(2.03		)%			1.92		%	4.06		%

Item 4. CONTROLS AND PROCEDURES

Evaluation of disclosure controls and procedures

Our management, with the participation of our Chief Executive Officer and our Chief Financial Officer, evaluated the effectiveness of our disclosure controls and procedures as of the end of the period covered by this Quarterly Report on Form 10-Q. Based on this evaluation, our Chief Executive Officer and our Chief Financial Officer have concluded that our disclosure controls and procedures were effective as of the end of the period covered by this Quarterly Report on Form 10-Q to ensure that information we are required to disclose in reports that we file or submit under the Securities Exchange Act of 1934 is recorded, processed, summarized and reported within the time periods specified in Securities and Exchange Commission rules and forms.

Changes in internal control over financial reporting

There was no change in our internal control over financial reporting that occurred during the period covered by this Quarterly Report on Form 10-Q that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

Part II - OTHER INFORMATION

Item 1. Legal Proceedings

Although, from time to time, we are involved in various legal proceedings in the normal course of business, there are no material pending legal proceedings to which we are a party, or to which any of our property is subject.

Item 1A. Risk Factors

We did not have any changes to our risk factors previously disclosed in our Annual Report on Form 10-K for the year ended December 31, 2005.

Item 2. Unregistered Sales of Securities and Use of Proceeds

(e) Issuer Purchases of Equity Securities

We did not repurchase any of our common stock during the period ended June 30, 2006.

Item 3. Defaults Upon Senior Securities

Not Applicable

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

Our 2006 Annual Meeting of Shareholders was held on May 10, 2006. At the meeting, the directors listed below were elected as directors of the Corporation for terms expiring at the annual meeting in the year set forth to each of their names. Other matters brought before the 2006 Annual Meeting include the approval of an Employee Stock Purchase Plan and the approval of the 2006 Stock Option and Incentive Compensation Plan. The voting results for the matters brought before the 2006 Annual Meeting are as follows:

1. Election of Directors.

				Broker
Name	Term Expires	Votes For	Abstentions	Non-Votes
B. Keith Johnson	2009	2,991,356	135,074	—
Diane E. Logsdon	2009	2,990,691	135,574	—
John L. Newcomb, Jr.	2009	2,998,735	135,074	—
Donald Scheer	2009	2,998,796	135,074	—

In addition, the following directors will continue in office until the annual meeting of the year set forth beside each of their names.

Name		Term Expires

Robert M. Brown		2007
Wreno M. Hall		2008
Walter D. Huddleston		2008
J. Stephen Mouser		2008
J. Alton Rider		2007
Gail L. Schomp		2007
Michael L. Thomas		2008

2. Approval of the Employee Stock Purchase Plan.

		Broker
Votes For	Abstentions	Non-Votes
2,231,222	38,901	1,061,241

3. Approval of the 2006 Stock Option and Incentive Compensation Plan.

		Broker
Votes For	Abstentions	Non-Votes
2,063,653	64,666	1,061,241

Item 5. Other Information

None

Item 6. Exhibits:

	31.1	Certification of Chief Executive Officer Pursuant to Section 302 of Sarbanes-Oxley Act
	31.2	Certification of Chief Financial Officer Pursuant to Section 302 of Sarbanes-Oxley Act
	32	Certification of Chief Executive Officer and Chief Financial Officer Pursuant to Section 18 U.S.C. Section 1350 (As Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002)

FIRST FINANCIAL SERVICE CORPORATION

SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

DATE: August 9, 2006	BY: /s/	B. Keith Johnson
		B. Keith Johnson
		President and Chief Executive Officer

DATE: August 9, 2006	BY: /s/	Gregory S. Schreacke
		Gregory S. Schreacke
		Chief Financial Officer
		Principal Accounting Officer

INDEX TO EXHIBITS

Exhibit No.		Description
31.1		Certification of Chief Executive Officer Pursuant to Section 302 of Sarbanes-Oxley Act
31.2		Certification of Chief Financial Officer Pursuant to Section 302 of Sarbanes-Oxley Act
32		Certification of Chief Executive Officer and Chief Financial Officer Pursuant to 18 U.S.C. Section 1350 (As Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002)

Positive
Negative
Uncertain
Constraining
Legalese
Litigous
Readability	8th grade Good

First Financial Service (FFKY) Inactive 10-Q2006 Q2 Quarterly report

Content analysis

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS

GENERAL

CRITICAL ACCOUNTING POLICIES

RESULTS OF OPERATIONS

Loans

Non-Performing Assets

Deposits

LIQUIDITY

CAPITAL

Item 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

Asset/Liability Management and Market Risk

Item 4. CONTROLS AND PROCEDURES

Part II - OTHER INFORMATION

SIGNATURES

INDEX TO EXHIBITS

First Financial Service (FFKY) Inactive 10-Q2006 Q2 Quarterly report

Content analysis

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITIONAND RESULTS OF OPERATIONS

GENERAL

CRITICAL ACCOUNTING POLICIES

RESULTS OF OPERATIONS

Loans

Non-Performing Assets

Deposits

LIQUIDITY

CAPITAL

Item 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

Asset/Liability Management and Market Risk

Item 4. CONTROLS AND PROCEDURES

Part II - OTHER INFORMATION

SIGNATURES

INDEX TO EXHIBITS

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS