First Financial Service (FFKY) 8-K Results of Operations and Financial Condition

FOR IMMEDIATE RELEASE
November 2, 2010	For More Information Contact:
	Steven M. Zagar
	Chief Financial Officer
	First Financial Service Corporation
	(270) 765-2131

First Financial Service Corporation

Announces Quarterly Results

Elizabethtown, Kentucky, November 2, 2010 – First Financial Service Corporation (the Company, NASDAQ: FFKY) today announced net loss per common share of $(0.58) for the quarter ended September 30, 2010, compared to diluted net income per share of $0.07 for the quarter ended September 30, 2009.  Diluted net loss per common share for the nine months ended September 30, 2010, was $(0.55), compared to diluted net income per share of $0.27 for the nine months ended September 30, 2009.

“The Company’s performance this quarter was disrupted by higher provisions for loan losses and an increase in non-performing assets,” stated Chief Executive Officer, B. Keith Johnson.  “We believe the level of non-performing assets has peaked this quarter.  Non-performing assets to total assets increased to 5.84% for the quarter ended September 30, 2010, compared to 4.19% for the quarter ended June 30, 2010, due primarily to four high-end residential development projects, aggregating $27.5 million in loans, located in Jefferson and Oldham Counties, Kentucky.  These four projects coupled with three other residential development projects in that area account for $33.8 million or 46% of the bank’s nonperforming assets. The primary weakness in the residential development portfolio is concentrated in the Louisville metropolitan area.  A total of $50.7 million or 70% of our non-performing assets consist of residential housing and residential housing development loans.      In our markets surrounding the Ft. Knox military base, residential activity remains robust as a result of the increase in 3,200 civilian families relocating to Ft. Knox with the Base Realignment and Closure Act.  The Army’s Human Resource Command is being relocated to the Ft. Knox military base, resulting in a substantial economic benefit to this area.  This quarter was also impacted by a larger credit loss associated with our private pooled trust preferred securities held in our investment portfolio.  The loss was triggered by the continued deterioration of the financial service companies acting as collateral behind the pools.

Although we had a disappointing quarter in our loan portfolio, the strength of our core franchise will contribute to our ability to navigate through this economic recovery. Net operating income (excluding the increase in provisions for loan loss, FDIC insurance costs and other recessionary charges) has continued its positive growth pattern while total deposits increased $38.9 million, or 3.7% for the first nine months of 2010.  This continues the momentum from 2009 where we achieved a record growth year in the amount of $274 million, or a 35.3% increase in total deposits over 2008.  Growth in deposits, coupled with positive signs of economic growth in our home markets, which is fueled by the Ft. Knox base realignment, will provide a sound basis for our Company as the local economy recovers.  Recognizing that we are still not immune to economic concerns, the opportunity for deposits helps us strive towards our long range financial objectives.  These objectives include building additional core customer relationships, maintaining sufficient liquidity and capital levels, improving shareholder value and remediating our problem assets.”

Balance sheet changes during the first nine months of 2010 include an increase in total assets of $39.3 million to $1.25 billion.  This increase was due to building our investment portfolio to $165 million, an increase of $117.9 million since December 31, 2009.  This increase was mainly off-set by a decline in gross loans of $74.8 million and a decrease in cash and cash equivalents of $9.5 million.

Commercial loans were $642.7 million at September 30, 2010, a decrease of $62.6 million, or 8.9%, from December 31, 2009.  The decline in the Company’s commercial loan portfolio is a result of pay-offs on several large commercial relationships.  The decline is also due to moving several relationships from the loan portfolio into other real estate owned.

Total deposits were $1.09 billion at September 30, 2010, an increase of $38.9 million from December 31, 2009.    The increase was the result of deposit promotions held in February, April and May.  Competition for deposits remains very competitive in all of the markets we serve.

The percentage of non-performing loans to total loans increased to 6.53% at September 30, 2010 compared to 3.82% at December 31, 2009 and 3.94% linked-quarter.  The increase was attributed to several large commercial real estate loans reaching non-accrual status in the third quarter 2010 as well as gross loans declining during the year from pay-offs and transfers to other real estate owned.  Annualized net charge-offs as a percentage of average total loans increased to 1.24% for the nine months ended September 30, 2010, compared to 0.52% for the nine months ended September 30, 2009.  The increase was primarily caused by charging down previously recorded specific reserves on non-performing loans whose condition worsened during the third quarter of 2010.

Average earning assets increased by $181.9 million as of September 30, 2010, compared to the same period in 2009.  Despite the large increase in earning assets, the Company’s net interest margin realized decline of 55 basis points.  Net interest margin decreased to 3.14% for the quarter ended September 30, 2010, compared to 3.69% for the same period in 2009.  The decline is mostly attributed to the Bank’s increased liquidity efforts by placing assets into lowering yielding investments other than loans.  The decrease is also partially attributed to the increase in the amount of non-accrual loans.  The current Federal Funds rate remains in a range of 0.00% to 0.25%.  Correspondingly, variable rate loans that are tied to the federal prime rate have been repriced downward in relation to the prime rate.  However, interest rates paid on customer deposits have not adjusted downward proportionately with the declining interest yields on loans and investments.  Sixty percent of deposits are time deposits that reprice over a longer period of time.  The increase in the volume of earning assets and the change to the mix of earning assets had a negative impact on net interest income, which decreased $291,000 and $16,000 for the three and nine months ended September 30, 2010, compared to the respective periods ended September 30, 2009.

Provision for loan loss expense increased by $3.8 million to $6.3 million for the three months ended September 30, 2010, compared to the same period ended September 30, 2009.  For the nine months ended September 30, 2010, provision for loan loss expense increased by $4.9 million to $11.4 million compared to the nine months ended September 30, 2009.  During the nine months ended September 30, 2010, the Company continued its efforts to ensure the adequacy of the allowance by adding specific reserves to several large commercial real estate relationships based on updated appraisals received by the Bank.  As economic conditions continue to impact our loan portfolio, management’s emphasis is to aggressively review credit quality and the adequacy of the allowance for loan losses.  As a result of this provisioning, allowance for loan losses as a percent of total loans increased to 2.18% from 1.78% at December 31, 2009.

Non-interest income increased $85,000 for the three months ended September 30, 2010, compared to the three months ended September 30, 2009.  Customer service fees on deposit accounts decreased $79,000 for the third quarter 2010 compared to the same quarter in 2009.  Gain on sale of mortgage loans increased $213,000 due to continued refinancing activity at historically low rates.  The increase in non-interest income for the quarter was off-set by an increase of $69,000 for loss on the sale and write-downs of other real estate owned and an increase of $345,000 of other-than-temporary credit losses on trust preferred security investments.  Additionally, other non-interest income increased $338,000 for the third quarter compared to same quarter in 2009.  The increase in other non-interest income was mainly due gain on the sale of other real estate owned.

For the nine months ended September 30, 2010, non-interest income increased $309,000, compared to the nine months ended September 30, 2009.  Customer service fees on deposit accounts increased $63,000 for 2010 compared to the same period in 2009.  Gain on sale of mortgage loans increased $395,000.  Other income increased $251,000 year-to-date in 2010 compared to year-to-date 2009.  The increase in other income was mainly attributable to gains on sale of other real estate owned.  The increase in non-interest income was off-set by an increase in other-than-temporary impairment losses of $129,000 on trust preferred security investments and by an increase of $283,000 in write-downs on other real estate owned during 2010.

Non-interest expense increased $686,000 to $8.7 million for the three months ended September 30, 2010, compared to the same period ended September 30, 2009.  Employee compensation and benefits expense increased $134,000 and other real estate owned expense increased $178,000.  The increase in non-interest expenses was off-set by decreases in outside services and data processing of $171,000, office occupancy expense and equipment of $53,000 and amortization of core deposit intangible of $23,000.  Other non-interest expense was higher in the third quarter of 2010 by $111,000 compared to the third quarter of 2009.

Non-interest expense for the year was up $1,366,000 due to higher FDIC Insurance premiums of $588,000, higher bank franchise taxes of $704,000 and an increase in other real estate owned expense of $550,000 for 2010 compared to the same period in 2009. Other non-interest expense was also higher for the first nine months of 2010 by $177,000 compared to the first nine months of 2009.  Employee compensation and benefits expense decreased $22,000.  The increase in non-interest expenses was also off-set by decreases in outside services and data processing of $361,000, marketing and advertising of $60,000, office occupancy expense and equipment of $137,000 and amortization of core deposit intangible of $73,000.

First Financial Service Corporation is the parent bank holding company of First Federal Savings Bank of Elizabethtown, which was chartered in 1923.  The Bank serves the needs and caters to the economic strengths of the local communities in which it operates and strives to provide a high level of personal and professional customer service.  The Bank offers a variety of financial services to its retail and commercial banking customers.  These services include personal and corporate banking services, and personal investment financial counseling services.  Today, the Bank serves eight contiguous counties encompassing Central Kentucky and the Louisville Metropolitan area, including Southern Indiana, through its 22 full-service banking centers and a commercial private banking center.

This press release contains forward-looking statements under the Private Securities Litigation Reform Act of 1995 that are subject to certain risks and uncertainties that could cause actual results to differ materially from historical income and those presently anticipated or projected.  The Company cautions readers not to place undue reliance on any such forward-looking statements, which speak only as of the date of this release.  Such risks and uncertainties include those detailed in the Company’s filings with the Securities and Exchange Commission, risks of adversely changing results of operations, risks related to the Company’s acquisition strategy, risk of loans and investments, including the effect of the change of the local economic conditions, risks associated with the adverse effects of the changes in interest rates, and competition for the Company’s customers by other providers of financial services, all of which are difficult to predict and many of which are beyond the control of the Company.

First Financial Service Corporation’s stock is traded on the Nasdaq Global Market under the symbol “FFKY.”  Market makers for the stock are:

Keefe, Bruyette & Woods, Inc.	FTN Midwest Securities
J.J.B. Hilliard, W.L. Lyons Company, Inc.	Howe Barnes Investments, Inc.
Stifel Nicolaus & Company	Knight Securities, LP

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FIRST FINANCIAL SERVICE CORPORATION

Consolidated Balance Sheets

(Unaudited)

	September 30,			December 31,
(Dollars in thousands, except share data)	2010			2009
ASSETS:
Cash and due from banks	$	12,591		$	21,253
Interest bearing deposits		76,407			77,280
Total cash and cash equivalents		88,998			98,533
Securities available-for-sale		164,750			45,764
Securities held-to-maturity, fair value of $131 Sept 2010
and $1,176 Dec 2009		128			1,167
Total securities		164,878			46,931
Loans held for sale		13,213			8,183
Loans, net of unearned fees		920,095			994,926
Allowance for loan losses		(20,091	)		(17,719	)
Net loans		913,217			985,390
Federal Home Loan Bank stock		5,015			8,515
Cash surrender value of life insurance		9,266			9,008
Premises and equipment, net		32,317			31,965
Real estate owned:
Acquired through foreclosure		12,781			8,428
Held for development		45			45
Other repossessed assets		48			103
Core deposit intangible		1,071			1,300
Accrued interest receivable		6,248			5,658
Accrued income taxes		3,754			-
Deferred income taxes		3,377			4,515
Prepaid FDIC premium		5,163			7,022
Other assets		2,651			2,091
TOTAL ASSETS	$	1,248,829		$	1,209,504
LIABILITIES AND STOCKHOLDERS' EQUITY
LIABILITIES:
Deposits:
Non-interest bearing	$	70,288		$	63,950
Interest bearing		1,018,438			985,865
Total deposits		1,088,726			1,049,815
Short-term borrowings		345			1,500
Advances from Federal Home Loan Bank		52,564			52,745
Subordinated debentures		18,000			18,000
Accrued interest payable		246			360
Accounts payable and other liabilities		3,956			1,952
TOTAL LIABILITIES		1,163,837			1,124,372
Commitments and contingent liabilities		-			-
STOCKHOLDERS' EQUITY:
Serial preferred stock, $1 par value per share;
authorized 5,000,000 shares; issued and outstanding, 20,000
shares with a liquidation preference of $20,000		19,822			19,781
Common stock, $1 par value per share;
authorized 10,000,000 shares; issued and
outstanding, 4,726,075 shares Sept 2010, and 4,709,839
shares Dec 2009		4,726			4,710
Additional paid-in capital		35,171			34,984
Retained earnings		24,128			26,720
Accumulated other comprehensive income/(loss)		1,145			(1,063	)
TOTAL STOCKHOLDERS' EQUITY		84,992			85,132
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY	$	1,248,829		$	1,209,504

FIRST FINANCIAL SERVICE CORPORATION

Consolidated Statements of Operations

(Unaudited)

	Three Months Ended						Nine Months Ended
(Dollars in thousands, except per share data)	September 30,						September 30,
	2010			2009			2010			2009
Interest and Dividend Income:
Loans, including fees	$	13,543		$	14,410		$	41,857		$	42,509
Taxable securities		1,117			312			2,488			925
Tax exempt securities		255			137			628			361
Total interest income		14,915			14,859			44,973			43,795
Interest Expense:
Deposits		4,883			4,513			14,642			13,359
Short-term borrowings		6			27			38			117
Federal Home Loan Bank advances		599			601			1,788			1,798
Subordinated debentures		331			331			989			989
Total interest expense		5,819			5,472			17,457			16,263
Net interest income		9,096			9,387			27,516			27,532
Provision for loan losses		6,327			2,482			11,353			6,441
Net interest income after provision for loan losses		2,769			6,905			16,163			21,091
Non-interest Income:
Customer service fees on deposit accounts		1,671			1,750			4,935			4,872
Gain on sale of mortgage loans		513			300			1,227			832
Gain/(loss) on sale of investments		7			-			(16	)		-
Net impairment losses recognized in earnings		(649	)		(304	)		(832	)		(703	)
Loss on sale and write downs of real estate acquired
through foreclosure		(374	)		(305	)		(838	)		(555	)
Brokerage commissions		109			89			309			281
Other income		703			365			1,514			1,263
Total non-interest income		1,980			1,895			6,299			5,990
Non-interest Expense:
Employee compensation and benefits		4,176			4,042			12,171			12,193
Office occupancy expense and equipment		779			832			2,351			2,488
Marketing and advertising		225			225			675			735
Outside services and data processing		622			793			2,020			2,381
Bank franchise tax		566			257			1,482			778
FDIC insurance premiums		615			414			1,969			1,381
Amortization of core deposit intangible		77			100			229			302
Real estate acquired through foreclosure expense		302			124			916			366
Other expense		1,352			1,241			3,809			3,632
Total non-interest expense		8,714			8,028			25,622			24,256
Income/(loss) before income taxes		(3,965	)		772			(3,160	)		2,825
Income taxes/(benefits)		(1,472	)		196			(1,359	)		773
Net Income/(loss)		(2,493	)		576			(1,801	)		2,052
Less:
Dividends on preferred stock		(250	)		(250	)		(750	)		(730	)
Accretion on preferred stock		(14	)		(14	)		(41	)		(39	)
Net income/(loss) available to common shareholders	$	(2,757	)	$	312		$	(2,592	)	$	1,283
Shares applicable to basic income per common share		4,724,043			4,704,289			4,719,513			4,689,917
Basic income/(loss) per common share	$	(0.58	)	$	0.07		$	(0.55	)	$	0.27
Shares applicable to diluted income per common share		4,724,043			4,734,037			4,719,513			4,703,432
Diluted income/(loss) per common share	$	(0.58	)	$	0.07		$	(0.55	)	$	0.27
Cash dividends declared per common share	$	-		$	0.05		$	-		$	0.43

FIRST FINANCIAL SERVICE CORPORATION

Unaudited Selected Ratios and Other Data

	As of and For the						As of and For the
	Three Months Ended						Nine Months Ended
	September 30,						September 30,
Selected Data	2010			2009			2010			2009
Performance Ratios
Return on average assets		(0.79	)%		0.11	%		(0.19	)%		0.16	%
Return on average equity		(11.63	)%		1.32	%		(2.79	)%		1.85	%
Average equity to average assets		6.82	%		8.49	%		6.90	%		8.65	%
Net interest margin		3.07	%		3.64	%		3.14	%		3.69	%
Efficiency ratio from continuing operations		78.67	%		71.16	%		75.77	%		72.36	%
Book value per common share							$	13.79		$	15.80
Average Balance Sheet Data
Average total assets	$	1,257,297		$	1,104,012		$	1,250,551		$	1,074,926
Average interest earning assets		1,193,590			1,030,908			1,186,402			1,004,492
Average loans		944,861			984,468			965,978			963,728
Average interest-bearing deposits		1,027,610			820,602			1,021,458			784,067
Average total deposits		1,097,281			878,778			1,089,259			841,297
Average total stockholders' equity		85,761			93,730			86,246			92,933
Asset Quality Ratios
Non-performing loans as a percent of total loans (1)								6.53	%		3.55	%
Non-performing assets as a percent of total assets								5.84	%		4.39	%
Allowance for loan losses as a percent of total loans (1)								2.18	%		1.65	%
Allowance for loan losses as a percent of
non-performing loans								33	%		46	%
Annualized net charge-offs to total loans (1)								1.24	%		0.52	%

(1) Excludes loans held for sale.