**SECURITIES
      AND EXCHANGE COMMISSION**





**Washington,
      D.C. 20549**





**FORM
      10-KSB**





**[X]
      ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)**


**OF
      THE SECURITIES EXCHANGE ACT OF 1934**





For
      the
      fiscal year ended December 31, 2005





**OR**





**[**  **]
      TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d)**


**OF
      THE SECURITIES EXCHANGE ACT OF 1934**





For
      the
      transition period from __________ to _________





Commission
      File No: 000-49781





**First
      Security Bancorp, Inc.**


(Name
      of
      small business issuer in its charter)





Kentucky
            61-1364206(State
                of jurisdiction of
            (I.R.S.
                Employerincorporation
                or organization)
            Identification
                No.)





318
      East
      Main Street, Lexington, Kentucky 40507


(Address
      of principal executive offices)


(859)
      367-3700


(Issuer’s
      telephone number)





Securities
                registered under Section 12(b) of the Exchange Act:
            _______________________________________________________(Title
                of class)Securities
                registered under Section 12(g) of the Exchange Act:
            Common
                Stock(Title
                of class)





Check
      whether the issuer is not required to file reports pursuant to Section 13 or
      15(d) of the Exchange Act. [ ]





Check
      whether the issuer: (1) filed all reports required to be filed by Section
      13 or 15(d) of the Exchange Act during the past 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 [  ]





Check
      if
      disclosure of delinquent filers in response to Item 405 of Regulation S-B
      is not contained in this form, and no disclosure will be contained, to the
      best
      of registrant’s knowledge, in definitive proxy or information statements
      incorporated by reference in Part III of this Form 10-KSB or any amendment
      to this Form 10-KSB. [X]





State
      issuer’s revenues for its most recent fiscal year: $12,952,000.





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





Aggregate
      market value of the voting stock held by non-affiliates (for purposes of this
      calculation, “affiliates” are considered to be the directors of the issuer)
      computed by reference to the price at which the stock was sold, or the average
      bid and asked prices of such stock, as of a specified date within the past
      60 days: $30,041,000 as of March 1, 2006.





State
      the
      number of shares outstanding of each of the issuer’s classes of common equity,
      as of the latest practicable date: 1,560,540 shares of common stock as of March
      21, 2006.





DOCUMENTS
      INCORPORATED BY REFERENCE





Transitional
      Small Business Disclosure format (check one): Yes [ ] No[X]














**TABLE
      OF CONTENTS**





PART
          I
 
 ITEM
          1.  DESCRIPTION
          OF
          BUSINESS--------------------------------------------------------------------1
 
 ITEM
          2.  DESCRIPTION
          OF
          PROPERTIES----------------------------------------------------------------11
 
 ITEM
          3.  LEGAL
          PROCEEDINGS----------------------------------------------------------------------------11
 
 ITEM
          4.  SUBMISSION
          OF MATTERS TO A VOTE OF SECURITY HOLDERS-------------N/A
 
 PART
          II
 
 ITEM
          5.  MARKET
          FOR COMMON EQUITY, RELATED STOCKHOLDERS MATTERS
 AND
          SMALL
          BUSINESS ISSUER PURCHASES OF EQUITY SECURITIES-2
 
 ITEM
          6.  MANAGEMENT’S
          DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
 AND
          RESULTS OF
          OPERATION------------------------------------------------------13
 
 ITEM
          7.  FINANCIAL
          STATEMENTS--------------------------------------------------------------------32
 
 ITEM
          8.  CHANGES
          IN AND DISAGREEMENTS WITH ACCOUNTANTS ACCOUNTING
 AND
          FINANCIAL
          DISCLOSURE----------------------------------------------------N/A
 
 ITEM
          8A.  CONTROLS
          AND
          PROCEDURES-------------------------------------------------------------62
 
 ITEM
          8B.  OTHER
          INFORMATION-----------------------------------------------------------------------N/A
 
 PART
          III
 
 ITEM
          9.  DIRECTORS,
          EXECUTIVE OFFICERS, PROMOTERS AND CONTROL
 PERSONS;
          COMPLIANCE WITH SECTION 16(a) OF THE EXCHANGE ACT------------62
 
 ITEM
          10.  EXECUTIVE
          COMPENSATION----------------------------------------------------------------65
 
 ITEM
          11.  SECURITY
          OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
 MANAGEMENT
          AND RELATED STOCKHOLDER MATTERS---------------68
 
 ITEM
          12.  CERTAIN
          RELATIONSHIPS AND RELATED TRANSACTIONS---------------------69
 
 ITEM
          13.  EXHIBITS---------------------------------------------------------------------------------------------69
 
 ITEM
          14.  PRINCIPAL
          ACCOUNTANT FEES AND
          SERVICES--------------------------------------71
 
 SIGNATURES,
          POWER OF ATTORNEY, EXHIBIT
          INDEX-------------------------------------------72














**FORWARD-LOOKING
      STATEMENTS**





First
      Security Bancorp, Inc. (“First Security”) may from time to time make written or
      oral statements, including statements contained in this report, which may
      constitute forward-looking statements within the meaning of Section 21E of
      the
      Securities Exchange Act of 1934 (the “Exchange Act”). The words “may”, “expect”,
“anticipate”, “intend”, “consider”, “plan”, “believe”, “seek”, “should”,
“estimate”, and similar expressions are intended to identify such
      forward-looking statements, but other statements may constitute forward-looking
      statements. These statements should be considered subject to various risks
      and
      uncertainties. Such forward-looking statements are made based upon management’s
      belief as well as assumptions made by, and information currently available
      to,
      management pursuant to “safe harbor” provisions of the Private Securities
      Litigation Reform Act of 1995. First Security Bancorp’s actual results may
      differ materially from the results anticipated in forward-looking statements
      due
      to a variety of factors. Such factors are described below and include, without
      limitation, (i) unanticipated deterioration in the financial condition of
      borrowers resulting in significant increases in loan losses and provisions
      for
      those losses, (ii) increased competition with other financial institutions,
      (iii) the inability of our bank subsidiary, First Security Bank of
      Lexington, Inc. (“FS Bank”) to attract and retain key management personnel, (iv)
      the lack of sustained growth in the economy in the Lexington, Kentucky area,
      (v) rapid fluctuations or unanticipated changes in interest rates,
      (vi) the inability of FS Bank to satisfy regulatory requirements, (vii)
      changes in the legislative and regulatory environment [and (viii) the impact
      of
      the pending merger transaction between First Security and American Founders
      Bancorp, Inc.]. Many of such factors are beyond First Security’s ability to
      control or predict, and readers are cautioned not to put undue reliance on
      such
      forward-looking statements. First Security does not intend to update or reissue
      any forward-looking statements contained in this report as a result of new
      information or other circumstances that may become known to First Security.




*Unless
      this Form 10-KSB indicates otherwise or the context otherwise requires, the
      terms “we,” “our,” “us,” “First Security”, “First Security Bancorp” or “Company”
as used in this report refer to First Security Bancorp, Inc. and its subsidiary
      First Security Bank of Lexington, Inc., which we sometimes refer to as “FS
      Bank”. References herein to the fiscal years 2005, 2004, 2003, 2002, 2001 and
      2000 mean our fiscal years ended December 31, 2005, 2004, 2003, 2002, 2001
      and 2000, respectively.*




**PART
      I**





**ITEM
      1.**  **DESCRIPTION
      OF BUSINESS**





**Overview**





First
      Security is a Kentucky corporation that was incorporated on February 11, 2000
      to
      serve as the holding company for FS Bank, a state bank chartered under the
      laws
      of the Commonwealth of Kentucky. FS Bank commenced its banking operations on
      November 17, 1997, and operates as a community bank in an urban market
      emphasizing personalized banking relationships with individuals and businesses
      located within the Lexington metropolitan statistical area (MSA). We own 100%
      of
      the capital stock of FS Bank and other than FS Bank we have no material amounts
      of assets, liabilities or operations.





As
      a
      community banking organization, we serve the needs of a wide range of customers,
      from households to small and medium sized businesses. Our services and products
      include checking and savings accounts, certificates of deposit and loans to
      businesses and individuals, including residential mortgages. Our primary deposit
      customers are individuals, while our primary loan customers are small to medium
      sized businesses.





After
      conducting a strategic investigation, First Security entered into an Agreement
      and Plan of Merger, dated December 12, 2005, with American Founders Bank, Inc.,
      a Kentucky banking corporation headquartered in Frankfort, Kentucky, and its
      proposed holding company, American Founders Bancorp, Inc. The Merger Agreement
      provides, among other things, that subject to certain conditions, American
      Founders Bancorp, Inc. will acquire First Security in a merger transaction,
      and
      at the effective time of the merger, all of our outstanding shares will be
      converted into the right to receive $24.00 per share in cash (subject to
      possible adjustment if the merger is not completed by April 30, 2006). It is
      anticipated that, if the merger transaction is completed and First Security
      becomes a subsidiary of American Founders Bancorp, Inc., then FS Bank will
      merge
      with, and into American Founders Bank, Inc.







Page
            1 of 79





***Market
      Area:*** FS
      Bank’s
      primary service area is the Lexington MSA, which is composed of the contiguous
      counties of Fayette, Jessamine, Woodford, Clark, Bourbon and Scott in general,
      and specifically Lexington. Lexington
      is located approximately 70 miles south of Cincinnati, Ohio and 70 miles east
      of
      Louisville, Kentucky. Interstates 75 and 64 intersect in Lexington, making
      Lexington a central point for commerce. Lexington is also the center of the
      thoroughbred industry in Kentucky. A number of the country’s prominent horse
      farms are located within the Lexington MSA, as is Keeneland Racetrack, one
      of
      the premier tracks in the nation and the home to several of world prominent
      auctions of thoroughbred stock.





FS
      Bank’s
      main office is located in Lexington’s central business district in downtown
      Lexington. The downtown market consists of a variety of commercial
      establishments and entertainment venues. We believe that the downtown area
      is an
      important location for financial institutions requiring visibility within
      Lexington’s prominent commercial and private banking markets. Accordingly, we
      believe that this location is well suited for FS Bank’s business development
      efforts.





In
      January 1998, FS Bank opened a retail bank branch on Southview Drive. In May
      2000, FS Bank opened a retail bank branch office on Tates Creek Road. In
      November 2001, FS Bank opened a retail branch office in the Palomar Centre.
      These offices were established to serve retail banking customers and are located
      in areas of high growth in Fayette County.





The
      economic success of FS Bank’s primary service area depends heavily upon the
      economic viability of the metropolitan Lexington, Kentucky area. Our primary
      service area’s economic strength comes from its large employer base, which
      includes several large enterprises, such as the University of Kentucky, Toyota
      Motor Manufacturing, USA (an automotive assembly plant located in Scott County,
      approximately 18 miles from Lexington), Lexmark International, the
      Lexington-Fayette Urban County Government and the Fayette County Public School
      System. Additionally, the market has benefited from strong growth in
      manufacturing employment in the last twenty years, particularly in manufacturing
      in automotive related industries.





***Competition:*** The
      Lexington banking market is both concentrated and highly competitive. According
      to data released by the Federal Deposit Insurance Corporation (“FDIC”), there
      were 34 bank and thrift institutions with branch offices and deposits located
      in
      the Lexington MSA at June 30, 2005. These institutions include a large New
      York
      money center bank, three large regional banks and a large locally controlled
      community bank. These five institutions combined control approximately 54%
      of
      the total deposits in the market. These larger institutions have greater
      resources, higher lending limits and more banking offices. Of the remaining
      29
      financial institutions operating in this market, FS Bank ranks as the sixth
      largest in terms of total deposits according to the FDIC June 30, 2005 deposit
      data.





According
      to the FDIC June 30, 2005 deposit data, bank and thrift deposits in the
      Lexington MSA grew by $2.3 billion between June 1997 and June 2005, from
      $4.4 billion to $6.7 billion. This growth in deposits occurred primarily in
      locally controlled community banks, whose total deposits grew from $1.8 billion
      to $3.8 billion. Based on this data, at June 30, 2005, we held 2.64% of the
      total of bank and thrift deposits in the Lexington MSA, as compared to 2.68%
      at
      June 30, 2004.





Consequently,
      while large, multi-state institutions are well established in our market area,
      we believe the general trends indicate that a majority of the community banks
      in
      the Lexington MSA have been able to effectively compete with these larger,
      multi-state banks to increase their deposit market share in recent years. In
      addition, during this eight year period, a total of eight community banks have
      entered the market, thus further increasing competition.





While
      we
      compete with all financial institutions in this market, we believe that our
      primary competitors are the community banks that have offices in this market.
      We
      believe that positioning FS Bank solely as a community bank will not be enough
      to compete in today’s financial industry. In the wake of modern technology and
      the prosperity of the United States’ financial markets over the past decade,
      banking clients have generally become more sophisticated in their approach
      to
      selecting financial services providers. We believe that the most important
      criteria to FS Bank’s targeted clients when selecting a bank is their desire to
      receive exceptional customer service provided by local decision makers.
      Additionally, when presented with a choice, we believe that many of FS Bank’s
      targeted clients would prefer to deal with a locally-owned institution like
      FS
      Bank, as opposed to a large, multi-state bank, where many important decisions
      regarding a client’s financial affairs are made elsewhere.










Page
            2 of 79








***Challenges:*** We have
      had a number of challenges to our continued success over the last several years.
      These challenges are the result of a number of factors, including the changes
      in
      interest rate environment that began in 2001 and increased competition within
      our market as discussed above. These factors have contributed to a lack of
      growth First Security has experienced during past couple of years See also
      Item
      6 - “Management’s Discussion and Analysis of Financial Condition and Results of
      Operation”.




Our
      financing structure as a community bank is such that our deposits tend to
      reprice at a slower pace than do our loans, as our customers typically purchase
      certificates of deposit for periods of a year or longer. Conversely, our loan
      portfolio has historically been composed of commercial loans whose interest
      rates are based on our prime lending rate.





The
      interest rate environment underwent abrupt changes beginning in 2001, with
      12
      declines in the prime rate. The result of the rapid decline in the general
      interest rate environment has been that our cost of funds declined at a much
      slower pace than our loan portfolio in the period of 2001 through mid-2004,
      causing a compression in our net interest income. With the increases in interest
      rates that began in July 2004, and continued through out 2005, the yield on
      our
      loan portfolio has increased faster than our cost of deposits and other funding
      sources. The result is that our net interest income began a strong recovery
      during the latter half of 2004, and continued though 2005. We expect that this
      recovery will continue for the immediate future as interest rates continue
      to
      increase. See also Item 6 - “Management’s Discussion and Analysis of Financial
      Condition and Results of Operation”.





***Lending
      Services:*** FS
      Bank
      offers a full range of lending products, including commercial, real estate
      and
      consumer loans to individuals and small to medium sized businesses and
      professional entities. It competes for these loans with competitors who are
      well
      established in the Lexington MSA.





FS
      Bank’s
      loan approval policies provide for various levels of officer lending authority.
      When the amount of total loans to a single borrower exceeds that individual
      officer’s lending authority, officers with a higher lending limit, a committee
      of FS Bank’s Board of Directors or the Board of Directors will determine whether
      to approve the loan request.





FS
      Bank’s
      lending activities are subject to a variety of lending limits imposed by state
      and federal law. Differing limits apply based on the type of loan or the nature
      of the borrower, including the borrower’s relationship to FS Bank. In general,
      however, at December 31, 2005, FS Bank was able to loan any one borrower a
      maximum amount equal to approximately $4.3 million plus an additional
      $2.1 million, or a total of approximately $6.4 million, for loans that meet
      certain additional collateral guidelines. In addition to these regulatory
      limits, FS Bank imposes upon itself various internal lending limits based on
      the
      type of loan and collateral which are less than the prescribed legal lending
      limits, thus further reducing its exposure to any single borrower. The Agreement
      and Plan of Merger we entered into with American Founders also imposes
      additional restrictions on our operations while the transaction is
      pending.





The
      principal economic risk associated with each category of loans that FS Bank
      expects to make is the creditworthiness of the borrower. General economic
      factors affecting a commercial or consumer borrower’s ability to repay include
      interest, inflation and employment rates, as well as other factors affecting
      a
      borrower’s assets, clients, suppliers and employees. Many of FS Bank’s
      commercial loans are made to small-to medium-sized businesses that, during
      periods of economic weakness, may be more adversely affected than larger
      enterprises, resulting in increased levels of nonaccrual or other problem loans,
      loan charge-offs and higher provision for loan losses.





FS
      Bank’s
      commercial loans vary by purpose and by type of any underlying collateral and
      include equipment loans and working capital loans. Commercial loans may be
      unsecured or secured by accounts receivable or by other business assets. FS
      Bank
      also makes a variety of commercial real estate loans, residential real estate
      loans and real estate construction and development loans. FS Bank also makes
      a
      variety of loans to individuals for personal, family, investment and household
      purposes, including secured and unsecured installment and term loans,
      residential first mortgage loans, home equity loans and home equity lines of
      credit.



















Page
            3 of 79








***Investment
      Securities:*** In
      addition to loans, FS Bank has other investments primarily in obligations of
      the
      United States government, obligations guaranteed as to principal and interest
      by
      the United States government and other securities. No investment in any of
      those
      instruments exceeds any applicable limitation imposed by law or regulation.
      The
      Asset Liability/Investment Committee and the Board of Directors review the
      investment portfolio on an ongoing basis in order to ensure that the investments
      conform to FS Bank’s asset liability management policy as set by the Board of
      Directors.





***Asset
      and Liability Management:*** Our
      Asset
      Liability/Investment Committee (“ALCO”) is composed of members of the Board of
      Directors and executive management of FS Bank. The ALCO manages FS Bank’s
      investments and assets and liabilities and strives to provide a stable net
      interest income and margin, adequate liquidity and ultimately a suitable
      after-tax return on assets and return on equity. The ALCO conducts these
      management functions within the framework of written policies that FS Bank’s
      Board of Directors has adopted. The ALCO works to maintain a balancing position
      between rate sensitive assets and rate sensitive liabilities that is reflective
      of our expectations for changes in the general interest rate
      environment.





***Deposit
      Services:*** FS
      Bank
      seeks to establish a broad base of core deposits, including savings, checking,
      interest-bearing checking, money market and certificate of deposit accounts.
      To
      attract deposits, FS Bank has employed a marketing plan in its overall service
      area and features a broad product line and competitive rates and services.
      The
      primary sources of deposits are residents of and businesses and their employees
      located in the Lexington MSA. FS Bank generally obtains these deposits through
      general marketing efforts and personal solicitation by its officers and
      directors.





***Other
      Banking Services:*** Given
      client demand for increased convenience in accessing banking and investment
      services, FS Bank also offers other convenience-centered products and services,
      including 24 hour telephone and Internet banking, debit cards, direct deposit
      and cash management services for small-to medium-sized businesses. Additionally,
      FS Bank is associated with a nationwide network of automated teller machines
      that our clients are able to use throughout Kentucky and other regions. FS
      Bank
      does not plan to exercise trust powers, and would be required to obtain the
      approval of the Commonwealth of Kentucky and the Federal Deposit Insurance
      Corporation (“FDIC”) to do so.





FS
      Bank
      also offers its targeted commercial clients courier service through a third
      party which picks up non-cash deposits from the client’s place of business. We
      believe this targeted service also enables us to demonstrate convenience greater
      than most of the larger regional competitors.





***Employees:*** At
      March
      1, 2006, FS Bank employed 54 employees of which 42 were full time. FS Bank
      considers its relationship with all employees to be excellent.





**SUPERVISION
      AND REGULATION**





Both
      First Security and FS Bank are subject to extensive state and federal banking
      laws and regulations that impose restrictions on and provide for general
      regulatory oversight of First Security’s and FS Bank’s operations. These laws
      and regulations are generally intended to protect depositors and not
      shareholders. The following discussion describes the material elements of the
      regulatory framework which apply.





**First
      Security**





We
      are a
      bank holding company under the federal Bank Holding Company Act of 1956. As
      a
      result, we are subject to the supervision, examination, and reporting
      requirements of the Bank Holding Company Act and the regulations of the Federal
      Reserve.





***Acquisition
      of Banks:*** The
      Bank
      Holding Company Act requires every bank holding company to obtain the Federal
      Reserve’s prior approval before:




·
              Acquiring
                  direct or indirect ownership or control of any voting shares of
                  any bank
                  if, after the acquisition, the bank holding
                company
                  will directly or indirectly own or control more than 5% of the
                  bank’s
                  voting shares;
 ·
              Acquiring
                  all or substantially all of the assets of any bank; or
 ·
              Merging
                  or consolidating with any other bank holding
                  company.










Page
            4 of 79








Additionally,
      the Bank Holding Company Act provides that the Federal Reserve may not approve
      any of these transactions if it would substantially lessen competition or
      otherwise function as a restraint of trade, or result in or tend to create
      a
      monopoly, unless the anticompetitive effects of the proposed transaction are
      clearly outweighed by the public interest in meeting the convenience and needs
      of the communities to be served. The Federal Reserve is also required to
      consider the financial and managerial resources and future prospects of the
      bank
      holding companies and banks concerned, the convenience and needs of the
      communities to be served and the applicant’s record of compliance with
      anti-money laundering regulations. The Federal Reserve’s consideration of
      financial resources generally focuses on capital adequacy, which is discussed
      below.





With
      the
      required regulatory approvals, we, or any other bank holding company located
      in
      Kentucky, may purchase a bank located outside of Kentucky. Conversely, an
      adequately capitalized and adequately managed bank holding company located
      outside of Kentucky may purchase a bank located inside Kentucky. In each case,
      however, state law restrictions may be placed on the acquisition of a bank
      based
      on the existence of reciprocal state law in and based on limitations in
      specified concentrations of deposits.





***Change
      in Bank Control:*** Subject
      to various exceptions, the Bank Holding Company Act and the Federal Change
      in
      Bank Control Act, together with related regulations, require Federal Reserve
      approval prior to any person or company acquiring “control” of a bank holding
      company. Control is conclusively presumed to exist if an individual or company
      acquires 25% or more of any class of voting securities of the bank holding
      company. Control is rebuttably presumed to exist if a person or company acquires
      10% or more, but less than 25%, of any class of voting securities and either:




·
              The
                  bank holding company has registered securities under Section 12 of
                  the Securities Exchange Act of 1934;
                  or
 ·
              No
                  other person owns a greater percentage of that class of voting
                  securities
                  immediately after the
                  transaction.


owns
        a
        greater percentage of that class of voting securities immediately after the
        transaction




Our
      common stock is registered under the Securities Exchange Act of 1934. The
      regulations provide a procedure for challenge of the rebuttable control
      presumption.





***Permitted
      Activities:*** The
      Gramm-Leach-Bliley Act of 1999 amended the Bank Holding Company Act and expanded
      the activities in which bank holding companies and affiliates of banks are
      permitted to engage. The Gramm-Leach-Bliley Act eliminates many federal and
      state law barriers to affiliations among banks and securities firms, insurance
      companies, and other financial service providers. Generally, if we qualify
      and
      elect to become a financial holding company, which is described below, we may
      engage in activities that are:




·
              Financial
                  in nature;
 ·
              Incidental
                  to a financial activity; or
 ·
              Complementary
                  to a financial activity and do not pose a substantial risk to the
                  safety
                  or soundness of depository
                institutions
                  or the financial system
                  generally.




To
      qualify to become a financial holding company, any of our depository institution
      subsidiaries must be well capitalized and well managed and must have a Community
      Reinvestment Act rating of at least “satisfactory.” Additionally, we must file
      an election with the Federal Reserve to become a financial holding company
      and
      provide the Federal Reserve with 30 days written notice prior to engaging
      in a permitted financial activity.





Under
      the
      Bank Holding Company Act, a bank holding company, which has not qualified or
      elected to become a financial holding company, is generally prohibited from
      engaging in or acquiring direct or indirect control of more than 5% of the
      voting shares of any company engaged in nonbanking activities unless, prior
      to
      the enactment of the Gramm-Leach-Bliley Act, the Federal Reserve found those
      activities to be so closely related to banking as to be a proper incident to
      the
      business of banking. Activities that the Federal Reserve has found to be so
      closely related to banking as to be a proper incident to the business of banking
      include:




·
              Factoring
                  accounts receivable;
 ·
              Acquiring
                  or servicing loans;





Page
            5 of 79








·
              Leasing
                  personal property;
 ·
              Conducting
                  discount securities brokerage
                  activities;
 ·
              Performing
                  selected data processing services;
 ·
              Acting
                  as agent or broker in selling credit life insurance and other types
                  of
                  insurance in connection with credit
                transactions;
                  and
 ·
              Performing
                  selected insurance underwriting
                  activities.


Despite
      prior approval, the Federal Reserve may order a bank holding company or its
      subsidiaries to terminate any of these activities or to terminate its ownership
      or control of any subsidiary when it has reasonable cause to believe that the
      bank holding company’s continued ownership, activity or control constitutes a
      serious risk to the financial safety, soundness, or stability of any of its
      bank
      subsidiaries.





***Support
      of Subsidiary Institutions:*** Under
      Federal Reserve policy, we are expected to act as a source of financial strength
      for our subsidiary, FS Bank, and to commit resources to support FS Bank. This
      support may be required at times when, without this Federal Reserve policy,
      we
      might not be inclined to provide it. In the unlikely event of our bankruptcy,
      any commitment by us to a federal bank regulatory agency to maintain the capital
      of FS Bank would be assumed by the bankruptcy trustee and entitled to a priority
      of payment.





***FS
      Bank:*** FS
      Bank
      is a state bank chartered under the banking laws of the Commonwealth of
      Kentucky. As a result, it is subject to the supervision, examination and
      reporting requirements of both the Kentucky Office of Financial Institutions
      (“KOFI”) and the Federal Deposit Insurance Corporation (“FDIC”). KOFI and the
      FDIC regularly examine FS Bank’s operations and have the authority to approve or
      disapprove mergers, act on the establishment of branches and similar corporate
      actions. KOFI and the FDIC also have the power to prevent the continuance or
      development of unsafe or unsound banking practices or other violations of law.
      Additionally, FS Bank’s deposits are insured by the FDIC to the maximum extent
      provided by law. FS Bank also is subject to numerous state and federal statutes
      and regulations that will affect its business, activities and operations.





***Branching:*** With
      prior regulatory approval and/or notices, as applicable, Kentucky law permits
      banks based in the state to either establish new or acquire existing branch
      offices throughout Kentucky. FS Bank and any other national or state-chartered
      bank generally may branch across state lines by merging with banks in other
      states if allowed by the applicable state’s laws. Kentucky law (with limited
      exceptions) currently permits branching across state lines either through
      interstate merger or branch acquisition. Kentucky law does not currently permit
      an out-of-state bank to branch into Kentucky short of an interstate merger.





***FDIC
      Insurance:*** The
      FDIC
      has adopted a risk-based assessment system for insured depository institutions
      that takes into account the risks attributable to different categories and
      concentrations of assets and liabilities. The system assigns an institution
      to
      one of three capital categories: (1) well capitalized; (2) adequately
      capitalized; and (3) undercapitalized. These three categories are
      substantially similar to the prompt corrective action categories described
      below, with the “undercapitalized” category including institutions that are
      undercapitalized, significantly undercapitalized, and critically
      undercapitalized for prompt corrective action purposes. The FDIC also assigns
      an
      institution to one of three supervisory subgroups based on a supervisory
      evaluation that the institution’s primary federal regulator provides to the FDIC
      and information that the FDIC determines to be relevant to the institution’s
      financial condition and the risk posed to the deposit insurance funds.





The
      FDIC
      may terminate its insurance of deposits if it finds that the institution has
      engaged in unsafe and unsound practices, is in an unsafe or unsound condition
      to
      continue operations, or has violated any applicable law, regulation, rule,
      order
      or condition imposed by the FDIC.





***Capital
      Adequacy:*** Both
      First Security and FS Bank are required to comply with the capital adequacy
      standards established by the Federal Reserve in our case, and the FDIC, in
      the
      case of FS Bank. The Federal Reserve has established a risk-based and a leverage
      measure of capital adequacy for bank holding companies. FS Bank is also subject
      to risk-based and leverage capital requirements adopted by the FDIC, which
      are
      substantially similar to those adopted by the Federal Reserve for bank holding
      companies.













Page
            6 of 79








The
      risk-based capital standards are designed to make regulatory capital
      requirements more sensitive to differences in risk profiles among banks and
      bank
      holding companies, to account for off-balance-sheet exposure, and to minimize
      disincentives for holding liquid assets. Assets and off-balance-sheet items,
      such as letters of credit and unfunded loan commitments, are assigned to broad
      risk categories, each with appropriate risk weights. The resulting capital
      ratios represent capital as a percentage of total risk-weighted assets and
      off-balance-sheet items.





The
      minimum guideline for the ratio of total capital to risk-weighted assets is
      8%.
      Total capital consists of two components, Tier 1 capital and Tier 2 capital.
      Tier 1 capital generally consists of common stock, minority interests in the
      equity accounts of consolidated subsidiaries, noncumulative perpetual preferred
      stock, and a limited amount of cumulative perpetual preferred stock, less
      goodwill and other specified intangible assets. Tier 1 capital must equal at
      least 4% of risk-weighted assets. Tier 2 capital generally consists of
      subordinated debt, other preferred stock, and a limited amount of loan loss
      reserves. The total amount of Tier 2 capital is limited to 100% of Tier 1
      capital. At December 31, 2005, our ratio of total capital to risk-weighted
      assets was 13.7% and our ratio of Tier 1 capital to risk-weighted assets was
      12.9%.





In
      addition, the Federal Reserve has established minimum leverage ratio guidelines
      for bank holding companies. These guidelines have a dual structure for (i)
      bank
      holding companies that meet specified criteria, including having the highest
      regulatory rating and implementing the Federal Reserve’s risk-based capital
      measure for market risk, and (ii) all other bank holding companies, which are
      typically smaller. We are subject to the latter, under which we are required
      to
      maintain a leverage ratio of at least 4%. At December 31, 2005, our
      leverage ratio was 10.1%. The guidelines also provide that bank holding
      companies experiencing high internal growth, or making acquisitions will be
      expected to maintain strong capital positions substantially above the minimum
      supervisory levels. Furthermore, the Federal Reserve has indicated that it
      will
      consider a bank holding company’s Tier 1 capital leverage ratio, after deducting
      all intangibles, and other indicators of capital strength in evaluating
      proposals for expansion or new activities. See
      also
      the discussion of Financial Condition and Capital Resources in Item 6 -
      Management’s Discussion and Analysis of Financial Condition and Results of
      Operation. The Federal Reserve has increased the size of holding companies
      that
      can rely on the capital guidelines that apply to small bank holding companies.
      However, First Security would not be able to take advantage of these more
      lenient capital guidelines so long as its common stock is registered with the
      Securities and Exchange Commission.





***Prompt
      Corrective Action:*** The
      Federal Deposit Insurance Corporation Improvement Act of 1991 establishes a
      system of prompt corrective action to resolve the problems of undercapitalized
      financial institutions. Under this system, the federal banking regulators have
      established five capital categories (well capitalized, adequately capitalized,
      undercapitalized, significantly undercapitalized and critically
      undercapitalized) into one of which all institutions are placed. Federal banking
      regulators are required to take various mandatory supervisory actions and are
      authorized to take other discretionary actions with respect to institutions
      in
      the three undercapitalized categories. The severity of the action depends upon
      the capital category in which the institution is placed. Generally, subject
      to a
      narrow exception, the banking regulator must appoint a receiver or conservator
      for an institution that is critically undercapitalized. The federal banking
      agencies have specified by regulation the relevant capital level for each
      category.





An
      institution that is categorized as undercapitalized, significantly
      undercapitalized, or critically undercapitalized is required to submit an
      acceptable capital restoration plan to its appropriate federal banking agency.
      A
      bank holding company must guarantee that a subsidiary depository institution
      meets its capital restoration plan, subject to various limitations. The
      controlling holding company’s obligation to fund a capital restoration plan is
      limited to the lesser of 5% of an undercapitalized subsidiary’s assets or the
      amount required to meet regulatory capital requirements. An undercapitalized
      institution is also generally prohibited from increasing its average total
      assets, making acquisitions, establishing any branches or engaging in any new
      line of business, except under an accepted capital restoration plan or with
      FDIC
      approval. The regulations also establish procedures for downgrading an
      institution and a lower capital category based on supervisory factors other
      than
      capital. As of December 31, 2005, we believe FS Bank would be considered
“well capitalized” by its primary regulator.





***Payment
      of Dividends:*** We
      are a
      legal entity separate and distinct from FS Bank. The principal sources of our
      cash flow, including cash flow to repay our loan and to pay dividends to our
      shareholders, are dividends that FS Bank pays to us as its sole shareholder.
      Statutory and regulatory limitations apply to FS Bank’s payment of dividends to
      us as well as to our payment of dividends to our shareholders.






Page
          7 of
          79





In
      connection with our December 30, 2003 borrowing, we entered into a credit
      agreement that provides, among other things, an additional $1 million that
      can
      be used for capital infusion into FS Bank, which we do not expect to utilize.
      The credit agreement also prohibits the payment of dividends on our common
      shares until that debt is retired. In December 2004, we modified the credit
      agreement to reflect the $2 million principal reduction and reduced the amount
      available on the loan to $4 million through December 30, 2005 and $3 million
      thereafter to the maturity date of December 31, 2006. Since the loan has already
      been paid down to the $3 million amount, there are therefore, no further
      principal reductions required until its maturity. See also the Notes to
      Consolidated Financial Statements.





The
      payment of dividends by us and FS Bank may also be affected by other factors,
      such as the requirement to maintain adequate capital above regulatory
      guidelines. If, in the opinion of KOFI or the FDIC, FS Bank was engaged in
      or
      about to engage in an unsafe or unsound practice, they could require, after
      notice and a hearing, that FS Bank stop or refrain from engaging in the
      practice. The federal banking agencies have indicated that paying dividends
      that
      deplete a depository institution’s capital base to an inadequate level would be
      an unsafe and unsound banking practice. Under the Federal Deposit Insurance
      Corporation Improvement Act of 1991, a depository institution may not pay any
      dividend if payment would cause it to become undercapitalized or if it already
      is undercapitalized. Moreover, the federal agencies have issued policy
      statements that provide that bank holding companies and insured banks should
      generally only pay dividends out of current operating earnings. See “Prompt
      Corrective Action” above.





***Restrictions
      on Transactions with Affiliates:*** Transactions
      between First Security and FS Bank are subject to Section 23A of the
      Federal Reserve Act. Section 23A places limits on the amount of:




·
              A
                  bank’s loans or extensions of credit to
                  affiliates;
 ·
              A
                  bank’s investment in affiliates;
 ·
              Assets
                  a bank may purchase from affiliates, except for real and personal
                  property
                  exempted by the Federal Reserve;
 ·
              The
                  amount of loans or extensions of credit to third parties collateralized
                  by
                  the securities or obligations of affiliates;
                  and
 ·
              A
                  bank’s guarantee, acceptance or letter of credit issued on behalf of
                  an
                  affiliate.


The
      total
      amount of the above transactions is limited in amount, as to any one affiliate,
      to 10% of a bank’s capital and surplus and, as to all affiliates, to 20% of a
      bank’s capital and surplus. In addition to the limitation on the amount of these
      transactions, each of the above extensions of credit transactions must also
      meet
      specified collateral requirements. FS Bank must also comply with other
      provisions designed to avoid the taking of low-quality assets.





Transactions
      between FS Bank and its affiliates (including First Security) are also subject
      to Section 23B of the Federal Reserve Act which, among other things,
      prohibits an institution from engaging in the above transactions with affiliates
      unless the transactions are on terms substantially the same, or at least as
      favorable to the institution or its subsidiaries, as those prevailing at the
      time for comparable transactions with nonaffiliated companies.





The
      Sarbanes-Oxley Act of 2002 further restricts First Security from extending
      or
      making arrangements for the extension of credit to any of its directors or
      executive officers.





FS
      Bank
      is also subject to restrictions on extensions of credit to its executive
      officers, directors, principal shareholders and their related interests. These
      extensions of credit (1) must be made on substantially the same terms,
      including interest rates and collateral, as those prevailing at the time for
      comparable transactions with third parties, and (2) must not involve more
      than the normal risk of repayment or present other unfavorable features.





***Community
      Reinvestment:*** The
      Community Reinvestment Act requires that, in connection with examinations of
      financial institutions within their respective jurisdictions, the Federal
      Reserve, the Office of the Comptroller of the Currency or the FDIC shall
      evaluate the record of each financial institution in meeting the credit needs
      of
      its local community, including low and moderate-income neighborhoods. These
      facts are also considered in evaluating mergers, acquisitions, and applications
      to open a branch or facility. Failure to adequately meet these criteria could
      impose additional requirements and limitations on FS Bank. Additionally, banks
      are required to publicly disclose the terms of various Community Reinvestment
      Act-related agreements.







Page
            8 of 79








***Privacy:*** Under
      the
      Gramm-Leach-Bliley Act, financial institutions are required to disclose their
      policies for collecting and protecting confidential information. Customers
      generally may prevent financial institutions from sharing personal financial
      information with nonaffiliated third parties except for third parties that
      market the institutions’ own products and services. Additionally, financial
      institutions generally may not disclose consumer account numbers to any
      nonaffiliated third party for use in telemarketing, direct mail marketing or
      other marketing through electronic mail to consumers. FS Bank has established
      a
      privacy policy to ensure compliance with federal requirements.





***Other
      Consumer Laws and Regulations:*** Interest
      and other charges collected or contracted for by FS Bank are subject to state
      usury laws and federal laws concerning interest rates. For example, under the
      Servicemembers Civil Relief Act of 2003 (formerly the Soldiers’ and Sailors’
Civil Relief Act of 1940) a lender is generally prohibited from charging an
      annual interest rate in excess of 6% on any obligations for which the borrower
      is a person on active duty with the United States military. FS Bank’s loan
      operations are also subject to federal laws applicable to credit transactions,
      such as the:




·
              Federal
                  Truth-In-Lending Act, governing disclosures of credit terms to
                  consumer
                  borrowers;
 ·
              Home
                  Mortgage Disclosure Act of 1975, requiring financial institutions
                  to
                  provide information to enable the public
                and
                  public officials to determine whether a financial institution is
                  fulfilling its obligation to help meet the housing
                needs
                  of the community it serves;
 ·
              Equal
                  Credit Opportunity Act, prohibiting discrimination on the basis
                  of race,
                  creed or other prohibited factors in
                extending
                  credit;
 ·
              Fair
                  Credit Reporting Act of 1978, governing the use and provision of
                  information to credit reporting
                  agencies;
 ·
              Fair
                  and Accurate Credit Transactions Act of 2004, governing the use
                  of
                  provision of customer information to
                credit
                  reporting agencies, responding to complaints of inaccurate information
                  contained in a customer’s credit
                bureau
                  database, providing for procedures to deal with fraud and identity
                  theft
                  and using medical information as a basis
                in
                  a decision to grant credit;
 ·
              Fair
                  Debt Collection Practices Act, governing the manner in which consumer
                  debts may be collected by collection agencies;
                and
 ·
              Rules
                  and regulations of the various federal agencies charged with the
                  responsibility of implementing the federal
                  laws.




FS
      Bank’s
      deposit operations are subject to the:




·
              Right
                  to Financial Privacy Act, which imposes a duty to maintain confidentiality
                  of consumer financial records
                and
                  prescribes procedures for complying with administrative subpoenas
                  of
                  financial records; and
 
 ·
              Electronic
                  Funds Transfer Act and Regulation E issued by the Federal Reserve to
                  implement that act, which
                govern
                  automatic deposits to and withdrawals from deposit accounts and
                  customers’
                  rights and liabilities arising
                from
                  the use of automated teller machines and other electronic banking
                  services.




***Anti-Terrorism
      Legislation:*** On
      October 26, 2001, the President of the United States signed the Uniting and
      Strengthening America by Providing Appropriate Tools Required to Intercept
      and
      Obstruct Terrorism (USA PATRIOT) Act of 2001. Under the USA PATRIOT Act,
      financial institutions are subject to prohibitions against specified financial
      transactions and account relationships as well as enhanced due diligence and
      “know your customer” standards in their dealings with foreign financial
      institutions and foreign customers.





In
      addition, the USA PATRIOT Act authorizes the Secretary of the Treasury to adopt
      rules increasing the cooperation and information sharing between financial
      institutions, regulators, and law enforcement authorities regarding individuals,
      entities and organizations engaged in, or reasonably suspected based on credible
      evidence of engaging in, terrorist acts or money laundering activities. Any
      financial institution complying with these rules will not be deemed to have
      violated the privacy provisions of the Gramm-Leach-Bliley Act, as discussed
      above. FS Bank currently has policies and procedures in place designed to comply
      with the USA PATRIOT Act.












Page
            9 of
            79


******


***Proposed
        Legislation and Regulatory Action:*** New
        regulations and statutes are regularly proposed that contain wide-ranging
        proposals for altering the structures, regulations and competitive relationships
        of the nation’s financial institutions. As an example, the Fair and Accurate
        Credit Transactions Act of 2004 noted above contains a number of components
        for
        which there are presently no related regulations. We cannot predict whether
        or
        in what form any proposed regulation or statute will be adopted or the extent
        to
        which our business may be affected by any new regulation or statute.




***Effect
      of Governmental Monetary Policies:*** Our
      earnings are affected by domestic economic conditions and the monetary and
      fiscal policies of the United States government and its agencies. The Federal
      Reserve’s monetary policies have had, and are likely to continue to have, an
      important impact on the operating results of commercial banks through the
      Federal Reserve’s statutory power to implement national monetary policy in
      order, among other things, to curb inflation or combat a recession. The Federal
      Reserve, through its monetary and fiscal policies, affects the levels of bank
      loans, investments and deposits through its control over the issuance of United
      States government securities, its regulation of the discount rate applicable
      to
      member banks and its influence over reserve requirements to which member banks
      are subject. We cannot predict the nature or impact of future changes in
      monetary and fiscal policies.



























































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      balance of this page is intentionally left blank)






































































Page
            10 of 79





**ITEM
      2.**  **DESCRIPTION
      OF PROPERTIES**





First
      Security Bancorp’s principal offices are located at 318 East Main Street in
      Lexington, Kentucky in Fayette County. FS Bank owns this property.





In
      addition to its main office facility, FS Bank has three branch banking offices
      in Lexington, Kentucky, located at 3750 Palomar Centre Drive, 3616 Walden Drive
      and 2100 Southview Drive. FS Bank leases the land for its Palomar branch office
      from a related party and leases land for its Walden Drive branch office from an
      unrelated party. FS Bank leases the Southview Drive branch office from an
      unrelated party.





The
      Palomar Centre lease has an initial term extending until May 2021, and we have
      the option to extend the lease for an additional 20 year term. Rent under this
      lease is $72,000 annually until May 2007, with bi-annual adjustments of $2,400
      until the end of the lease.





The
      Walden Drive lease has an initial term of five years, and we have the option
      to
      extend the lease for five additional five year terms. The annual rent is
      currently $74,800 and ranges up to $109,515 in the last of the lease extension
      periods.





The
      Southview Drive lease has a term extending until 2007, at which time we have
      the
      option to extend the lease for two additional five year terms. Annual rent
      is
      currently $51,093, and is subject to increases in any lease extension period
      based upon increases in the consumer price index.





As
      to all
      leased properties, in the opinion of management, the properties are adequately
      covered by insurance.





We
      also
      invest in real estate mortgage loans as a part of our banking business, in
      the
      form of making such loans and in the form of investments made in pooled real
      estate mortgage loans issued by various government sponsored entities such
      as
      the Federal National Mortgage Association (FNMA).





**ITEM
      3.**  **LEGAL
      PROCEEDINGS**





As
      of the
      date hereof, to the best of our knowledge and belief, there are no pending
      legal
      proceedings to which First Security or FS Bank is a party or of which any of
      its
      properties are subject, other than routine litigation that is incidental to
      our
      business; nor are there proceedings known to First Security or FS Bank to be
      contemplated by any governmental authority; nor are there any material
      proceedings in which any director, officer or affiliate or any security holder
      of First Security or FS Bank is a party adverse to First Security or FS Bank.




















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      balance of this page is intentionally left blank)











































Page
            11 of 79








**PART
      II**




**ITEM
                5.**
            **MARKET
                FOR COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND SMALL BUSINESS
                ISSUER
                PURCHASES OF EQUITY
                SECURITIES**





First
      Security’s common stock has been traded on the OTC Bulletin Board under the
      symbol “FSLK”. The following table shows the high and low bid price information
      for First Security Bancorp’s common stock for each quarter in 2005 and 2004, as
      derived from data furnished by the National Association of Securities Dealers.
      These quotations reflect inter-dealer prices, without retail markup, markdown,
      or commission, and may not represent actual transactions.





Bid
                  Price Per ShareHigh
              
              Low2005First
                  quarter
              
              $
              17.35
              
              $
              16.10Second
                  quarter
              
              
              16.59
              
              
              15.80Third
                  quarter
              
              
              19.95
              
              
              15.50Fourth
                  quarter
              
              
              25.00
              
              
              18.952004First
                  quarter
              
              $
              18.00
              
              $
              15.90Second
                  quarter
              
              
              18.00
              
              
              17.00Third
                  quarter
              
              
              17.50
              
              
              17.00Fourth
                  quarter
              
              
              17.75
              
              
              16.75





Trading
      volume is
      considered very light as the stock is thinly traded, as that term is generally
      used.




As
      of March 1,
      2006, First Security had 479 owners of record of its shares.





First
      Security has not paid any cash dividends since inception, and it does not
      anticipate that it will consider paying dividends until FS Bank has achieved
      a
      level of profitability appropriate to fund such dividends and support asset
      growth and until First Security extinguishes its debt. See Item 1.
“Description of Business - Supervision and Regulation - Payment of Dividends”
and Item 6. “Management’s Discussion and Analysis of Financial Condition
      and Results of Operations” for additional information on dividend restrictions
      applicable to First Security, including the prohibition on payment of dividends
      under the loan First Security obtained on December 30, 2003. First Security
      is
      also prevented from paying dividends under the Agreement and Plan of Merger
      it
      entered into with American Founders while the merger transaction is
      pending.





Equity
      Plan Compensation Information


The
      following table provides information as of December 31, 2005 with respect to
      our
      compensation plans under which equity securities of the Company are authorized
      for issuance:





Number
                  of securities issued
              
              Number
                  of securities availableupon
                  the exercise of
              Weighted-average
                  exercise
              for
                  future issuance under equityoutstanding
                  options,
              price
                  of outstanding options,
              compensation
                  plans (excludingPlan
                  category
              warrants
                  and rights
              warrants
                  and right
              securities
                  reflected in column a)Equity
                  compensation plansapproved
                  by shareholders (1)
              135,300
              $18.03
              48,850Equity
                  compensation plans notapproved
                  by shareholders (2)
              20,000
              $14.00
              -Totals
              155,300
              $17.51
              48,850





(1)
            Reflectsshares
                of our common stock subject to options and available for issuance
                under
                the Company’s Stock Award Plan. First Security is also prevented from
                issuing any new stock under the Agreement and Plan of Merger it entered
                into with American Founders while the merger transaction is
                pending.


(2)
            Reflects
                options granted under the Executive Employment Agreement we entered
                into
                with R. Douglas Hutcherson when he joined First Security and FS Bank
                as
                our President and CEO effective December 1, 2003. At year end 2005,
                all
                options were vested and the corresponding remaining expense
                recognized.







Page
            12 of 79





**ITEM
      6.**  **MANAGEMENT’S
      DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
      OPERATION**





The
      following is a discussion of our financial condition at December 31, 2005 and
      2004, and our results of operations for the years ended December 31, 2005,
      and 2004. The purpose of this discussion is to focus on information about our
      financial condition and results of operations which is not otherwise apparent
      from the Consolidated Financial Statements. You should read the following
      discussion and analysis along with our Consolidated Financial Statements and
      the
      related notes included elsewhere herein.





**Critical
      Accounting Estimates**





The
      accounting principles we follow and our methods of applying these principles
      conform with accounting principles generally accepted in the United States
      and
      with general practices within the banking industry. In connection with the
      application of those principles, we have made judgments and estimates which,
      in
      the case of the determination of our allowance for loan losses (ALL), have
      been
      critical to the determination of our financial position and results of
      operations. These policies and the judgments, estimates and assumptions are
      described in greater detail in subsequent sections of Management’s Discussion
      and Analysis and in the consolidated statements and accompanying footnotes.





**Overview**





*General:* In 2005,
      the Company recorded net income of $881,000 compared to $684,000 and $620,000
      net income for 2004 and 2003, respectively. The increase in income was due
      to
      several factors including higher yields on our loan portfolio due to increases
      in the prime lending rate and more effective management of the funding of
      deposits and other sources of liquidity. Our net interest income of $7,148,000
      surpassed 2004 by $821,000 or 13% and 2003 by $1,217,000 or 21%. The increase
      in
      net income from 2004 to 2005 was offset by the increase in provision for loan
      losses and by the decrease in both security gains and in gains on the sale
      of
      loans.





At
      year
      end 2005, a summary of the financial condition of FS Bank and First Security
      is
      presented in the following table:





Indicator
            
            FS
                Bank
            
            First
                SecurityEquity
                Capital to Total Assets
            
            
            10.8
            %
            
            9.7
            %Total
                Risk Based Capital to Risk Weighted Assets
            
            
            13.7
            %
            
            12.4
            %Cash
                Equivalents to Total Assets
            
            
            9.2
            %
            
            9.2
            %Investments
                to Total Assets
            
            
            16.0
            %
            
            16.0
            %


As
        shown
        above, FS Bank and First Security are well capitalized.








**Selected
      Consolidated Financial Data**





The
      following table sets forth selected historical financial information for 2005,
      2004 and 2003. This information should be read in conjunction with the
      Consolidated Financial Statements and the related Notes found in Item 7 herein.
      Factors concerning the comparability of certain indicated periods are discussed
      in this section.





2005
            
            2004
            
            2003Income
                Statement Data:Interest
                income
            
            $
            12,077
            
            $
            10,738
            
            $
            11,402Interest
                expense
            
            
            4,929
            
            
            4,411
            
            
            5,471Net
                interest income
            
            
            7,148
            
            
            6,327
            
            
            5,931Provision
                for
                loan losses
            
            
            950
            
            
            297
            
            
            669Securities
                gains
            
            
            -
            
            
            318
            
            
            694Gain
                on
                sale of loans
            
            
            10
            
            
            332
            
            
            1,067Other
                noninterest income
            
            
            865
            
            
            847
            
            
            1,005Noninterest
                expense
            
            
            5,806
            
            
            6,538
            
            
            7,282Income
                tax expense
            
            
            386
            
            
            305
            
            
            126Net
                income
            
            
            881
            
            
            684
            
            
            620





Page
              13
              of 79








2005
            
            2004
            
            2003Balance
                Sheet Data:Total
                assets
            
            $
            216,487
            
            $
            217,434
            
            $
            238,258Total
                securities
            
            
            34,587
            
            
            33,748
            
            
            38,624Loans
                held for sale
            
            
            -
            
            
            -
            
            
            407Total
                loans, net of allowance
            
            
            152,192
            
            
            150,856
            
            
            158,733Allowance
                for
                loan losses
            
            
            1,457
            
            
            1,720
            
            
            2,379Total
                deposits
            
            
            177,488
            
            
            178,862
            
            
            19,640Repurchase
                agreements and other short-term borrowings
            
            
            5,483
            
            
            5,857
            
            
            8,874FHLB
                advances
            
            
            8,697
            
            
            8,246
            
            
            12,512Note
                payable
            
            
            3,000
            
            
            3,000
            
            
            5,000Shareholders'
                Equity
            
            
            20,985
            
            
            20,608
            
            
            20,112Per
                Share Data:Basic
                earnings per share
            
            $
            0.56
            
            $
            0.44
            
            $
            0.42Diluted
                earnings per share
            
            
            0.56
            
            
            0.44
            
            
            0.41Book
                value per share
            
            
            13.45
            
            
            13.22
            
            
            12.90Performance
                Ratios:Return
                on average assets
            
            
            0.42
            %
            
            0.31
            %
            
            0.27
            %Return
                on average equity
            
            
            4.16
            %
            
            3.37
            %
            
            3.22
            %Net
                interest margin (tax equivalent basis)
            
            
            3.63
            %
            
            3.05
            %
            
            2.84
            %Efficiency
                ratio
            
            
            72.00
            %
            
            84.00
            %
            
            84.00
            %Asset
                quality ratios:Nonperforming
                assets to total loans
            
            
            0.83
            %
            
            2.02
            %
            
            2.44
            %Net
                loan charge-offs to average loans
            
            
            0.80
            %
            
            0.60
            %
            
            0.46
            %Allowance
                for
                loan losses to total loans
            
            
            0.95
            %
            
            1.13
            %
            
            1.48
            %Capital
                ratios:Average
                shareholders' equity to average total assets
            
            
            10.03
            %
            
            9.16
            %
            
            8.36
            %Leverage
                ratio
            
            
            10.14
            %
            
            9.78
            %
            
            8.67
            %Tier
                I
                risk-based capital ratio
            
            
            11.62
            %
            
            11.62
            %
            
            10.85
            %Total
                risk-based ratio
            
            
            12.40
            %
            
            12.59
            %
            
            12.10
            %Other
                Key Data:End-of-period
                full-time equivalent employees
            
            
            49
            
            
            49
            
            
            62








***Results
      of Operations:*** ** The
      results of operations are dependent to a large degree on the Company’s net
      interest income. The Company also generates noninterest income primarily through
      service charges and fees. Like most financial institutions, the Company’s
      interest income and cost of funds are affected significantly by general economic
      conditions, particularly changes in market interest rates, and by government
      policies and actions of regulatory authorities.





***Net
      Interest Income:*** ** Net
      interest income represents the amount by which interest earned on various
      earning assets exceeds interest paid on deposits and other interest-bearing
      liabilities and is the most significant component of our earnings.




First
      Security’s net interest income increased from $6.3 million in 2004 to
      $7.1 million in 2005, for an increase of $.8 million, or 12.9%. This
      increase was a result of several factors, including more effective management
      of
      the funding of deposits and other sources of liquidity, coupled with increases
      in loan yields that resulted from increases in the prime rate that occurred
      during the year.





The
      following table sets forth the amount of our average balances, interest income
      or interest expense for each category of interest-earning assets and
      interest-bearing liabilities and the average interest rate for total
      interest-earning assets and total interest-bearing liabilities, net interest
      spread and net yield on average interest-earning assets for each of the years
      in
      the three-year period ended December 31, 2005 (dollars in
      thousands):









Page
            14 of 79








2005
            
            2004
            
            2003Average
                Balances
            
            Interest
            
            Yields/
              Rates
            
            Average
                Balances
            
            Interest
            
            Yields/
              Rates
            
            Average
                Balances
            
            Interest
            
            Yields/
                RatesInterest-earning
                assets:Loans
                (1, 2)
            
            $
            151,925
            
            $
            10,310
            
            
            6.79
            %
            $
            159,718
            
            $
            9,180
            
            
            5.75
            %
            $
            164,520
            
            $
            10,081
            
            
            6.13
            %Securities
                available-for-sale:Taxable
            
            
            35,097
            
            
            1,394
            
            
            3.97
            %
            
            38,355
            
            
            1,416
            
            
            3.72
            %
            
            30,320
            
            
            842
            
            
            2.78
            %Tax
                exempt (3)
            
            
            2,061
            
            
            131
            
            
            6.36
            %
            
            1,169
            
            
            61
            
            
            5.02
            %
            
            9,858
            
            
            574
            
            
            5.83
            %Federal
                funds sold and
                other
            
            
            8,665
            
            
            297
            
            
            3.43
            %
            
            9,201
            
            
            102
            
            
            1.00
            %
            
            10,974
            
            
            100
            
            
            0.91
            %Total
                interest-earning
                assets
            
            
            197,747
            
            
            12,132
            
            
            6.14
            %
            
            208,443
            
            
            10,759
            
            
            5.14
            %
            
            215,672
            
            
            11,597
            
            
            5.38
            %Non-earning
                assets
            
            
            13,212
            
            
            
            
            
            
            
            
            13,074
            
            
            
            
            
            
            
            
            14,552Total
                assets
            
            $
            210,960
            
            
            
            
            
            
            
            $
            221,517
            
            
            
            
            
            
            
            $
            230,224Interest-bearing
                liabilities:Interest-bearing
                deposits:Interest
                checking
            
            $
            15,683
            
            $
            123
            
            
            0.78
            %
            $
            19,635
            
            $
            126
            
            
            0.64
            %
            $
            18,894
            
            $
            136
            
            
            0.72
            %Savings
                and money market
            
            
            32,408
            
            
            758
            
            
            2.34
            %
            
            27,606
            
            
            393
            
            
            1.39
            %
            
            22,599
            
            
            230
            
            
            1.02
            %Certificates
                of deposit
            
            
            103,136
            
            
            3,463
            
            
            3.36
            %
            
            106,552
            
            
            3,181
            
            
            2.97
            %
            
            124,891
            
            
            4,509
            
            
            3.61
            %Total interest-bearing
              deposits
            
            
            151,228
            
            
            4,343
            
            
            2.87
            %
            
            153,793
            
            
            3,701
            
            
            2.39
            %
            
            166,384
            
            
            4,875
            
            
            2.93
            %Securities sold under agreements
              to
                repurchase
            
            
            3,545
            
            
            79
            
            
            2.23
            %
            
            7,483
            
            
            51
            
            
            0.67
            %
            
            4,625
            
            
            38
            
            
            0.82
            %Federal
                funds
                purchased
            
            
            -
            
            
            -
            
            
            -
            
            
            607
            
            
            15
            
            
            2.30
            %
            
            224
            
            
            1
            
            
            1.15
            %Federal
                Home Loan
                Bank advances
            
            
            7,019
            
            
            326
            
            
            4.64
            %
            
            10,126
            
            
            431
            
            
            4.25
            %
            
            13,552
            
            
            557
            
            
            4.11
            %Note
                Payable
            
            
            3,000
            
            
            180
            
            
            6.00
            %
            
            5,000
            
            
            213
            
            
            4.26
            %
            
            -
            
            
            -
            
            
            -Total
                interest-bearing
                liabilities:
            
            
            164,791
            
            
            4,929
            
            
            2.99
            %
            
            177,010
            
            
            4,411
            
            
            2.48
            %
            
            184,785
            
            
            5,471
            
            
            2.96
            %Noninterest-bearing
              liabilities:Demand
                deposits
            
            
            24,080
            
            
            
            
            
            
            
            
            23,162
            
            
            
            
            
            
            
            
            22,617Other
                liabilities
            
            
            931
            
            
            
            
            
            
            
            
            1,053
            
            
            
            
            
            
            
            
            3,575Total
                liabilities
            
            
            189,802
            
            
            
            
            
            
            
            
            201,225
            
            
            
            
            
            
            
            
            210,977Stockholders’
equity
            
            
            21,158
            
            
            
            
            
            
            
            
            20,293
            
            
            
            
            
            
            
            
            19,247Total
                liabilities and
                stockholders’ equity
            
            $
            210,960
            
            
            
            
            
            
            
            $
            221,517
            
            
            
            
            
            
            
            $
            230,224Net
                interest income - tax
              equivalent
            
            
            
            
            $
            7,203
            
            
            
            
            
            
            
            $
            6,348
            
            
            
            
            
            
            
            $
            6,126Adjustment for tax-equivalent
              income
            
            
            
            
            
            (55
            )
            
            
            
            
            
            
            
            (21
            )
            
            
            
            
            
            
            
            (195
            )Net
                interest income as
                reported
            
            
            
            
            $
            7,148
            
            
            
            
            
            
            
            $
            6,327
            
            
            
            
            
            
            
            $
            5,931Net
                interest spread
                (4)
            
            
            
            
            
            3.14
            %
            
            
            
            
            
            
            
            2.66
            %
            
            
            
            
            
            
            
            2.42
            %Net
                interest margin
                (5)
            
            
            
            
            
            3.63
            %
            
            
            
            
            
            
            
            3.05
            %
            
            
            
            
            
            
            
            2.84
            %




(1)  Average
      balances for nonaccrual loans are included in the above amounts.


(2)  Loan
      fees
      included in interest income were $490,000, $479,000 and $575,000 in 2005, 2004
      and 2003, respectively.


(3)  We
      computed yields based on the carrying value of tax exempt instruments on a
      fully
      tax equivalent basis.


(4)  Net
      interest spread is calculated as the mathematical difference between the yield
      on total interest-earning assets and the cost of total interest-bearing
      liabilities.


(5)  Net
      interest margin is calculated as the net interest income - tax equivalent
      divided into the total interest-earning assets.





Several
      factors contributed to the increase in net interest income and net interest
      margin for 2005 when compared to the same period in 2004, including the
      following:




·  Our
        loan
        yields, including fees, increased from 5.75% for 2004 to 6.79% for 2005,
        an
        increase of 104 basis points. Increases in FS Bank’s prime lending rate during
        2005, from 5.25% at December 31, 2004 to 7.25% at December 31, 2005 contributed
        to the increase in net interest income. This was primarily due to federal
        funds
        rate increases throughout the year. This also increased the overall interest
        yields as shown below, as measured as of December 31 of the year
        indicated:


2005
            
            
            2004Amount
            
            Yield
            
            
            Amount
            
            YieldFixed
                Rate
            
            $
            55,702
            
            
            6.58
            %
            
            $
            50,228
            
            
            6.64
            %Variable
                Rate
            
            
            97,947
            
            
            7.28
            %
            
            
            102,348
            
            
            5.33
            %Totals
            
            $
            153,649
            
            
            7.02
            %
            
            $
            152,576
            
            
            5.76
            %




·
              Our
                  cost of funding for interest-bearing liabilities increased by 51
                  basis
                  points from 2.48% in 2004 to 2.99% in 2005.
                This
                  increase was due to increases in borrowing rates in the local
                  market.
 
 ·
              Fees
                  charged on loans and included in the calculation of yields increased
                  to
                  $490,000 in 2005 from $479,000 in 2004.







Page
            15 of 79


·
              Our
                  interest income on investment securities increased during 2005
                  as a result
                  of increases in yields.
                During2005,
                  we did not sell any of our securities. We had $3.2 million in
                  available-for-sale securities
                mature
                  or becalled
                  and we reinvested the proceeds in US agency bonds and Kentucky
                  state
                  municipal
                bonds.
 
 ·
              During
                  2005, we borrowed $3.5 million in fixed rate advances from the
                  Federal
                  Home Loan Bank of
                Cincinnati(“FHLB”)
                  at a cost of 5.75%. This was to match fund a similarly structured
                  loan.


Several
      factors contributed to the increase in net interest income and net interest
      margin for 2004 when compared to the same period in 2003, including the
      following:


·
                Our
                    cost of funding for interest-bearing liabilities declined 48
                    basis points
                    from 2.96% in 2003 to 2.48% in 2004.
                  Several
                    factors contributed to this
                    decline:
 ·
                  There
                        were a moderate number and amount of certificates of deposit
                        that were
                        issued in 1999 and 2000
                      for
                        periodsas
                        long as five years and issued at rates as high as 7% that
                        were redeemed or
                        renewed in 2004
                      at
                        much lower interestrates.
 
 ·
                  In July 2004, FS Bank implemented an enhanced
                      money
                      market pricing structure that was designed to reduce
                    theproportion
                      of certificates of deposit to total funding sources. Since
                      money market
                      interest rates were
                    well
                      belowthe
                      average rate paid on certificates of deposit, the effect was
                      to reduce the
                      average cost of
                    deposits.
 ·
                At
                    various times in the last seven months of 2004,
                    FS Bank utilized federal funds borrowing lines at other
                    commercial
                      banks. During 2004, the borrowing rate on these lines was in
                      a range of
                      1.23% to 2.19%. Since
                    these
                      rateswere
                      well below the average rate paid on certificates of deposit,
                      the effect
                      was to reduce
                    the
                      average cost of funding
  ·
                Our
                    loan yields, including fees, declined from 6.13% for 2003 to
                    5.75% for
                    2004, a decline of 38 basis points. The primary
                  reasons
                    for this year to year decline
                    are:
  ·
                During
                    the first six months of 2004, a substantial amount of older fixed
                    rate
                    loans matured, were paid off or were
                  renegotiated
                    to lower interest rates. In addition, as discussed elsewhere
                    herein, we
                    continued in our efforts to
                  increase
                    the proportion of variable rate loans in the loan portfolio in
                    anticipation of interest rate increases,
                  even
                    though variable rate loans generally have lower yields than fixed
                    rate
                    loans, which are typically made for
                  longer
                    terms.
 
 ·
                Fees
                    charged on loans and included in the calculation of yields declined
                    from
                    $575,000 in 2003 to $479,000 in 2004.
 
 ·  Offsetting
          the above factors were the increases in FS Bank’s prime lending rate during
          2004, from 4.00% at June 30, 2004 to 5.25% at December 31, 2004. These
          increases, coupled with our efforts to increase the proportion of variable
          rate
          loans in the loan portfolio resulted in an increase in the overall interest
          yields (excluding fees) as shown below, as measured as of December 31 of
          the
          year indicated:


2004
            
            
            2003Amount
            
            Yield
            
            
            Amount
            
            YieldFixed
                Rate
            
            $
            50,228
            
            
            6.64
            %
            
            $
            69,681
            
            
            6.94
            %Variable
                Rate
            
            
            102,348
            
            
            5.33
            %
            
            
            91,431
            
            
            4.44
            %Totals
            
            $
            152,576
            
            
            5.76
            %
            
            $
            161,112
            
            
            5.52
            %




·
              Our
                  interest income on investment securities increased during 2004
                  as a result
                  of both increases in average balances
                and
                  increases in yields. During 2004, as in 2003, we sold a substantial
                  portion of our securities at gains and reinvested
                at
                  higher rates.





Page
            16 of 79




·
              During
                  2002, we borrowed $13.2 million in medium term (2 - 5 year) fixed
                  rate
                  advances from the Federal Home Loan
                Bank
                  of Cincinnati (“FHLB”) at a weighted average cost of 3.70%. These advances
                  generally have prepayment penalties.
                Not
                  all of these borrowings were match funded with loans having similarly
                  structured prepayment penalties. Thus, in some
                cases,
                  as our lending rates declined, we adjusted the interest rates downward
                  on
                  those loans that were funded with the
                advances
                  without a corresponding decrease in the cost of the FHLB
                  advances.


***Provision
      for Loan Losses:*** ** The
      provision for loan losses represents a charge to earnings necessary to establish
      an allowance for loan losses (“ALL”) that, in our management’s evaluation, is
      adequate to provide coverage for probable and incurred loss on outstanding
      loans. For 2005, First Security recorded a provision for loan losses in the
      amount of $950,000, as compared to $297,000 for 2004 and $669,000 in 2003.
      Net
      loans charged off were $1,213,000 in 2005 as compared to $956,000 in 2004 and
      $749,000 in 2003. The majority of charge offs in 2005 related to loans to a
      commercial business in which the sole owner passed away; a receivables financing
      arrangement which went into default; and a troubled franchise operator. The
      majority of charge offs in 2004 related to loans to a troubled franchise
      operator which first became problem loans and were significantly reserved for
      in
      2002.





Based
      upon management’s evaluation of the loan portfolio, we believe the allowance for
      loan losses to be adequate to absorb our estimate of probable and incurred
      losses existing in the loan portfolio at the balance sheet date.





Based
      upon our management’s assessment of the loan portfolio, we adjust our ALL to an
      amount deemed appropriate to adequately cover probable and incurred losses
      in
      the loan portfolio. While our policies and procedures used to estimate the
      ALL,
      as well as the resultant provision for loan losses charged to operations, are
      considered adequate by our management and are reviewed from time to time by
      FS
      Bank’s regulators, they are necessarily approximate and imprecise. There exist
      factors beyond our control, such as general economic conditions both locally
      and
      nationally, which may negatively impact, materially, the adequacy of our ALL
      and, thus, the resulting provision for loan losses.




***Noninterest
      Income:*** ** Noninterest income declined from $1,497,000 in 2004 to $875,000 in 2005. In
      2004, noninterest income from mortgage loan originations and sales was $338,000
      and gain on the sale of investment securities was $318,000. In 2005, we did
      not
      have any gains on the sales of investments as we did not sell any investments
      and we recorded only $10,000 from gain on the sale of secondary mortgages.
      In
      2003, noninterest income was $2,766,000 and included $1,067,000 in gains on
      the
      sale of mortgage loans and $694,000 in gains on the sale of investment
      securities.





FS
      Bank’s
      noninterest income is composed of several components, some of which vary
      significantly between quarterly and annual periods. Service charges on deposit
      accounts and other noninterest income generally reflect FS Bank’s growth, while
      fees from the origination of commercial and mortgage loans will often reflect
      market conditions and fluctuate from period to period. The opportunities for
      recognition of gains on sales of loans and gains on sales of investment
      securities may also vary widely from period to period.





The
      following is the makeup of our noninterest income for the years ended December
      31, 2005, 2004 and 2003 (dollars in thousands):




2005
            
            2004
            
            2003Noninterest
                income:Service
                charges on deposit accounts
            
            $
            691
            
            $
            624
            
            $
            711Net
                gains on sales of loans
            
            
            10
            
            
            332
            
            
            1,067Net
                gains on sales of securities
            
            
            -
            
            
            318
            
            
            694Other
                noninterest income
            
            
            174
            
            
            223
            
            
            291Total
            
            $
            875
            
            $
            1,497
            
            $
            2,766













Page
            17 of 79








The
      increase in service charges in 2005 compared to 2004 was due to higher returned
      check fee income in both the personal and non-personal categories which
      increased by $70,000. ATM Network fees were higher by $16,000. These increases
      were offset by lower deposit service fees of $18,000. The decline in service
      charge income for 2004 was primarily due to lower returned check fees for
      business accounts, which declined by $58,000, and general activity and service
      charges, which declined by $11,000. Other service charges and fees increased
      by
      $14,000.




Net
      gains
      on sales of loans includes income from origination fees and points on
      residential loans made with the expectation that they will be later sold into
      the secondary market, and from service release fees received on these loans
      from
      the purchasers. All loans are sold whereby servicing rights transfer to the
      buyer. Generally, mortgage origination fees increase in lower interest rate
      environments and decrease in rising interest rate environments. As a result,
      mortgage origination fees may fluctuate greatly in response to a changing rate
      environment. Net gains on sales of loans declined over this three year period
      as
      a result of two factors:





l
            During
                2003, a refinancing “boom” existed in the United States, evidenced by
                record numbers of borrowers refinancing their home loans in order
                to take
                advantage of the historically low long term interest rates. That
                boom
                slowed during the fourth quarter of 2003, and remained so throughout
                2004.
                This slowdown affected FS Bank in its mortgage lending and sales
                of loans
                into the secondary market, as shown in the above
                table.





l
            On
                September 10, 2004, FS Bank sold certain assets it used in its mortgage
                loan origination department efforts to First Mortgage Company, LLC,
                an
                entity formed by Brady Ratliff and Allen Haggard, who were employed
                by FS
                Bank in its mortgage loan department. That sale resulted in no gains
                on
                sales of loans being recognized in the fourth quarter of 2004, although
                FS
                Bank retained the ability to originate and sell secondary market
                residential loans and, in 2005, hired staff to perform this function.
                Only
                $10,000 was recognized in 2005 for the gain on sales of
                loans.





During
      2005 we did not sell any of our available-for-sale securities and therefore
      recorded no gain on such. However, included in noninterest income for the year
      ended December 31, 2004 there were net gains of approximately $318,000
      realized from the sale of approximately $11.1 million of available-for-sale
      securities. This compares to net gains of approximately $694,000 realized from
      the sale of approximately $11.6 million of available-for-sale securities in
      2003. The decline in net gains from sales of securities is the result of the
      rising interest rate environment, which erodes the value of longer term fixed
      rate investments, and a lesser amount of securities being sold in 2004.





***Noninterest
      Expense:*** ** Noninterest
      expense consists of salaries and employee benefits, equipment and occupancy
      expenses, and other operating expenses.





The
      following is the makeup of our noninterest expense for the years ended December
      31, 2005 and 2004 (dollars in thousands):




Change2005
            
            2004
            
            Amount
            
            PercentNoninterest
                expenseSalaries
                and employee benefits
            
            $
            2,482
            
            $
            3,024
            
            $
            (542
            )
            
            (17.9
            %)Equipment
                and occupancy
            
            
            1,043
            
            
            1,137
            
            
            (94
            )
            
            (8.3
            %)Data
                processing
            
            
            558
            
            
            547
            
            
            11
            
            
            2.0
            %Legal
                and professional fees
            
            
            438
            
            
            422
            
            
            16
            
            
            3.8
            %Advertising
            
            
            107
            
            
            209
            
            
            (102
            )
            
            (48.8
            %)Bankshares
                tax
            
            
            186
            
            
            176
            
            
            10
            
            
            5.7
            %Supplies
                and printing
            
            
            63
            
            
            69
            
            
            (6
            )
            
            (8.7
            %)Loss
                on sale of assets
            
            
            -
            
            
            100
            
            
            (100
            )
            
            N/AOther
                noninterest expense
            
            
            929
            
            
            854
            
            
            75
            
            
            8.8
            %Total
            
            $
            5,806
            
            $
            6,538
            
            $
            (732
            )
            
            (11.2
            %)





The
      changes in total noninterest expenses were due primarily to the following
      factors:










Page
            18 of 79





·
              Salaries
                  and employee benefits declined in total by $542,000. $331,000 was
                  a result
                  of the sale of certain assets used in the
                mortgage
                  loan department on September 10, 2004. The agreement for sale provided
                  that individuals employed in this
                department
                  would be automatically hired by the purchaser. As a result, the
                  salaries
                  and employee benefits for those
                individuals
                  were effectively assumed by the purchaser as of September 1, 2004.
                  The
                  remaining decline of $211,000
                is
                  primarily attributable to staff turnover. Several positions were
                  vacant
                  during 2005. However, most of these were filled
                by
                  December 2005.
  ·
              Equipment
                  and occupancy declined due to the sale of assets relating to the
                  mortgage
                  loan department of which there
                were
                  rented offices. The rent expense for 2005 only reflects our three
                  branch
                  leases.
 
 ·
              Advertising
                  expenses decreased by $102,000 due to a stronger focus on strategic
                  marketing and cost containment. The
                emphasis
                  was shifted to specific product marketing, emphasizing the bank’s
                  strategic objectives. By focusing on specific
                product
                  marketing during 2005, the bank was able to use less expensive
                  media such
                  as print and direct mail versus the
                substantial
                  expenses of broadcast media in 2004.
 
 ·
              The
                  loss on sale of assets in 2004 of $100,000 relates to the write
                  off of
                  intangibles acquired in connection with the 2002
                purchase
                  of assets used in the mortgage loan department and sold in September
                  2004.




Our
      efficiency ratio (ratio of noninterest expense to the sum of net interest income
      and noninterest income) was 72.4% in 2005 as compared to 83.5% in 2004. We
      use
      the efficiency ratio as a way to analyze the amount of expense that is incurred
      to generate a dollar of revenue.





The
      following is the makeup of our noninterest expense for the years ended December
      31, 2004 and 2003 (dollars in thousands):


Change2004
            
            2003
            
            Amount
            
            PercentNoninterest
                expenseSalaries
                and employee benefits
            
            $
            3,024
            
            $
            3,499
            
            $
            (475
            )
            
            (13.6
            %)Equipment
                and occupancy
            
            
            1,137
            
            
            1,161
            
            
            (24
            )
            
            (2.1
            %)Data
                processing
            
            
            547
            
            
            505
            
            
            42
            
            
            8.3
            %Legal
                and professional fees
            
            
            422
            
            
            657
            
            
            (235
            )
            
            (35.8
            %)Advertising
            
            
            209
            
            
            209
            
            
            -
            
            
            -Bankshares
                tax
            
            
            176
            
            
            177
            
            
            (1
            )
            
            (0.6
            %)Supplies
                and printing
            
            
            69
            
            
            125
            
            
            (56
            )
            
            (44.8
            %)Loss
                on sales of foreclosed assets
            
            
            -
            
            
            72
            
            
            (72
            )
            
            N/ALoss
                on sale of assets
            
            
            100
            
            
            -
            
            
            100
            
            
            N/AAmortization
                of intangibles
            
            
            10
            
            
            14
            
            
            (4
            )
            
            (28.6
            %)Other
                noninterest expense
            
            
            844
            
            
            863
            
            
            (19
            )
            
            (2.2
            %)Total
            
            $
            6,538
            
            $
            7,282
            
            $
            (744
            )
            
            (10.2
            %)







Total
      noninterest expenses declined in 2004 in the amount of $744,000 composed
      primarily of declines in salaries and employee benefits and legal and
      professional fees. All other expenses declined by an aggregate amount of
      $34,000. The changes in total noninterest expenses were due primarily to the
      following factors:




·
              Salaries
                  and employee benefits declined by $295,000 as a result of the sale
                  of
                  certain assets used in the
                mortgage
                  loan department on September 10, 2004. The agreement for sale provided
                  that individuals
                employed
                  in this department would be automatically hired by the purchaser.
                  As a
                  result, the salaries and
                employee
                  benefits for those individuals were effectively assumed by the
                  purchaser
                  as of September 1, 2004.
                The
                  remaining decline of $180,000 is primarily attributable to the
                  amounts
                  paid in 2003 to our former
                president
                  pursuant to his termination agreement in the approximate amount
                  of $90,000
                  and the $50,000
                sign
                  on bonus paid to our current president and chief executive officer
                  in
                  connection with his employment
                agreement.
 
 ·
              Legal
                  and professional fees declined $235,000. Of this decline, $48,000
                  is
                  attributable to First Security
                and
                  $187,000 is attributable to FS Bank. Legal and professional fees
                  in 2003
                  were substantially higher and
                related
                  to strategic planning at First Security and problem loan administration
                  at
                  FS Bank.





Page
            19 of 79




·
              The
                  loss of $100,000 relates to the write off of intangibles acquired
                  in
                  connection with the 2002 purchase of assets used in the mortgage
                  loan
                  department and sold in September 2004.
 
 ·
              The
                  2003 loss on the sale of foreclosed and repossessed assets of $72,000
                  relates to the liquidation of foreclosed assets that were acquired
                  in
                  2002.
 
 ·
              The
                  decline of $56,000 in supplies and printing expenses is primarily
                  attributable to the implementation of tighter expense controls
                  implemented
                  in 2004.




Our
      efficiency ratio (ratio of noninterest expense to the sum of net interest income
      and noninterest income) was 83.5% in 2004 as compared to 83.7% in 2003. We
      use
      the efficiency ratio as a way to analyze the amount of expense that is incurred
      to generate a dollar of revenue.




*Income
      Taxes.* The
      effective income tax expense rate for the year ended December 31, 2005 was
      approximately 30.5% compared to 30.8% and 23.5% for the years ended December
      31,
      2004 and 2003, respectively. This rate of taxation compares to the statutory
      rate of 34.0%. The slight decrease in 2005 resulted from increasing our tax
      exempt income by investing in municipal bonds. The increase in the effective
      rate from 2003 to 2004 is solely attributable to the significant reduction
      in
      tax exempt income resulting from the sales of tax exempt investment securities
      in 2003 undertaken in order to reduce our market risk on long term fixed rate
      investments.




***Quarterly
      Information:*** ** The
      following is a summary of quarterly balance sheet and results of operations
      information for 2005 (dollars in thousands, except per share data).




4thQuarter
            
            3rdQuarter
            
            2ndQuarter
            
            1stQuarterSelected
                balance sheet data at quarter end:Total
                assets
            
            $
            217,434
            
            $
            214,010
            
            $
            217,208
            
            $
            226,813Total
                loans (excluding loans held for sale)
            
            
            152,576
            
            
            157,482
            
            
            159,551
            
            
            161,556Allowance
                for
                loan losses
            
            
            (1,720
            )
            
            (1,796
            )
            
            (2,298
            )
            
            (2,384
            )Securities
                available-for-sale
            
            
            33,748
            
            
            36,265
            
            
            42,041
            
            
            39,516Total
                deposits
            
            
            178,862
            
            
            170,646
            
            
            173,483
            
            
            181,256Securities
                sold
                under agreements to repurchase
            
            
            5,483
            
            
            3,518
            
            
            3,153
            
            
            3,475Note
                Payable
            
            
            8,620
            
            
            13,566
            
            
            14,528
            
            
            16,041Advances
                from
                FHLB
            
            
            20,608
            
            
            20,338
            
            
            19,890
            
            
            20,399Total
                stockholders' equity
            
            $
            217,434
            
            $
            214,010
            
            $
            217,208
            
            $
            226,813Balance
                sheet data, quarterly averages:Total
                assets
            
            $
            212,500
            
            $
            207,323
            
            $
            211,142
            
            $
            212,874Total
                loans (excluding loans held for sale)
            
            
            150,562
            
            
            150,854
            
            
            151,194
            
            
            155,091Allowance
                for
                loan losses
            
            
            (1,477
            )
            
            (1,433
            )
            
            (1,489
            )
            
            (1,699
            )Securities
                available-for-sale
            
            
            35,592
            
            
            37,266
            
            
            37,591
            
            
            38,184Total
                deposits
            
            
            175,670
            
            
            173,153
            
            
            175,665
            
            
            176,742Securities
                sold
                under agreements to repurchase
            
            
            4,051
            
            
            3,210
            
            
            3,276
            
            
            3,641Note
                Payable
            
            
            7,575
            
            
            5,374
            
            
            7,278
            
            
            7,850Advances
                from
                FHLB
            
            
            21,311
            
            
            21,430
            
            
            21,128
            
            
            20,762Total
                stockholders' equity
            
            $
            212,500
            
            $
            207,323
            
            $
            211,142
            
            $
            212,874Income
                data:Interest
                income
            
            $
            3,238
            
            $
            3,067
            
            $
            2,961
            
            $
            2,811Interest
                expense
            
            
            1,368
            
            
            1,254
            
            
            1,192
            
            
            1,115Net
                interest income
            
            
            1,871
            
            
            1,813
            
            
            1,769
            
            
            1,696Provision
                for
                loan losses
            
            
            950
            
            
            -
            
            
            -
            
            
            -Net
                interest income after provisionfor
                loan losses
            
            
            921
            
            
            1,813
            
            
            1,769
            
            
            1,696Noninterest
                income
            
            
            226
            
            
            215
            
            
            224
            
            
            209Noninterest
                expense
            
            
            1,663
            
            
            1,481
            
            
            1,340
            
            
            1,322Income
                before income taxes
            
            
            (516
            )
            
            547
            
            
            653
            
            
            583Income
                taxes
            
            
            (190
            )
            
            174
            
            
            214
            
            
            188Net
                income
            
            
            (325
            )
            
            373
            
            
            439
            
            
            395









Page
          20 of 79




4thQuarter
            
            3rdQuarter
            
            2ndQuarter
            
            1stQuarter Per
                  share data:Earnings
                  -
                  basic
              
              
              (.21
              )
              
              .24
              
              
              .28
              
              
              .25Earnings
                  -
                  diluted
              
              
              (.21
              )
              
              .24
              
              
              .28
              
              
              .25Book
                  value at quarter end
              
              
              13.45
              
              
              13.79
              
              
              13.65
              
              
              13.28Weighted
                  average shares - basic
              
              
              1,560,540
              
              
              1,560,290
              
              
              1,560,290
              
              
              1,560,290


**Financial
      Condition**





Our
      consolidated balance sheet at December 31, 2005 reflects a modest decline
      since December 31, 2004. Total assets declined by $1.0 million from $217.4
      million at December 31, 2004 to $216.4 million at December 31, 2005.
      That decline was made up primarily of declines of $3.2 million in federal funds
      sold, offset by increases of $0.8 million in investment securities and $1.3
      million in net loans. Total deposits declined by $1.4 million during 2005.





***Loans:*** ** The
      composition of our loan portfolio at December 31, 2005, 2004, 2003, 2002
      and 2001 is summarized as follows (dollars in thousands):


2005
            
            2004
            
            2003
            
            2002
            
            2001Commercial
            
            $
            46,513
            
            $
            58,125
            
            $
            49,165
            
            $
            47,612
            
            $
            41,309Mortgage
                loans on real estate:Commercial
            
            
            43,173
            
            
            40,087
            
            
            61,669
            
            
            64,325
            
            
            62,330Residential
            
            
            9,882
            
            
            10,069
            
            
            14,882
            
            
            17,871
            
            
            19,749Construction
            
            
            36,994
            
            
            26,299
            
            
            16,990
            
            
            20,664
            
            
            15,508Home
                equity
            
            
            11,584
            
            
            11,637
            
            
            11,488
            
            
            10,180
            
            
            7,981Consumer
            
            
            4,759
            
            
            5,531
            
            
            6,035
            
            
            5,773
            
            
            4,696Credit
                card
            
            
            744
            
            
            828
            
            
            883
            
            
            1,033
            
            
            849Total
                Gross Loans
            
            $
            153,649
            
            $
            152,576
            
            $
            161,112
            
            $
            167,458
            
            $
            152,422





In
      2005,
      commercial loans decreased by $11.6 million primarily due to commercial lending
      staff vacancies. Construction loans increased by $10.7 million as a result
      of
      the booming new housing market in Lexington. From 2003 to 2004, the loan
      composition changed significantly as a result of increased emphasis in
      commercial loans and in construction loans. The decline in commercial loans
      secured by real estate is largely attributable to four large loans that were
      paid off during the year. The composition of our loan portfolio underwent only
      minor changes in 2003, with total and relative balances similar.





The
      following table classifies our fixed and variable rate loans at December 31,
      2005 according to contractual maturities of (1) one year or less,
      (2) after one year through five years, and (3) after five years. The
      table also classifies our variable rate loans pursuant to the contractual
      repricing dates of the underlying loans (dollars in thousands):




Amounts
                  at December 31, 2005
              
              PercentagesFixed
              
              Variable
              
              Total
              
              %
                  TotalsBased
                  on contractual repricing dates:Daily
                  floating rate
              
              $
              -
              
              $
              93,826
              
              $
              93,826
              
              
              61.1
              %Reprice
                  within one year
              
              
              18,787
              
              
              3,927
              
              
              22,714
              
              
              14.8
              %Reprice
                  in one year through five years
              
              
              33,779
              
              
              194
              
              
              33,973
              
              
              22.1
              %Reprice
                  after five years
              
              
              3,136
              
              
              -
              
              
              3,136
              
              
              2.0
              %Totals
              
              $
              55,702
              
              $
              97,947
              
              $
              153,649
              
              
              100%Percentage
                  of total portfolio
              
              
              36.3
              %
              
              63.7
              %
              
              100.0
              %







***Non-Performing
      Assets:*** ** The
      specific economic and credit risks associated with our loan portfolio include,
      but are not limited to, a general downturn in the economy which could affect
      employment rates in our market area, general real estate market deterioration,
      interest rate fluctuations, deteriorated or non-existent collateral, title
      defects, inaccurate appraisals, financial deterioration of borrowers and fraud.










Page
            21 of 79





We
      attempt to reduce these economic and credit risks by adherence to loan-to-value
      guidelines for collateralized loans, by investigating the creditworthiness
      of
      the borrower and by monitoring the borrower’s financial position. Also, we
      establish and periodically review our lending policies and procedures. Banking
      regulations limit our exposure by prohibiting loan relationships that exceed
      20%
      of FS Bank’s statutory capital in the case of loans that are not fully secured
      by readily marketable or other permissible types of collateral, and further
      limit the amount of loans that can be made to related parties.




FS
      Bank
      discontinues the accrual of interest income when (1) there is a significant
      deterioration in the financial condition of the borrower and full repayment
      of
      principal and interest is not expected or (2) the principal or interest is
      more than 90 days past due, unless the loan is both well-secured and in the
      process of collection. At December 31, 2005, we had $1,181,000 in loans on
      nonaccrual compared to $2,969,000 at December 31, 2004.





There
      were approximately $85,000 in other loans at December 31, 2005 which were
      90 days past due and still accruing interest, as compared to $10,000 at
      December 31, 2004. We did not have any restructured loans at December 31, 2005.
      At December 31, 2004, we had $1,844,000 in restructured loans as compared
      to $3,092,000 at December 31, 2003. The restructured loans consist of several
      loans to a troubled franchise operator which, during 2003, were reclassified
      to
      nonaccrual. In 2004, the franchise operator filed bankruptcy. In addition,
      during 2004, we charged off approximately $695,000 of the total of these loans.
      During the first quarter of 2005, we entered into an agreement with an unrelated
      party to sell without recourse these restructured non-performing loans. The
      agreement provided for a fixed sales price of $1,650,000. At March 31, 2005,
      these loans had a principal balance of $1,787,200. The sales agreement was
      closed on April 14, 2005, at which time we charged the difference between the
      loan balances and the sales price of $137,200 to our allowance for loan losses.
      These loans had a specific allocation of $400,000 in our allowance for loan
      losses, resulting in a net carrying value of $1,387,200. The remaining unused
      balance of the specific allocation in the amount of $262,800 was reclassified
      as
      a portion of our general or unallocated reserves for loan losses.





The
      following table is a summary of our nonperforming loans at December 31,
      2005, 2004, 2003, 2002 and 2001 (dollars in thousands):





2005
            
            2004
            
            2003
            
            2002
            
            2001Nonperforming
                loansNonaccrual
                loans (1)
            
            $
            1,181
            
            $
            2,969
            
            $
            3,605
            
            $
            1,867
            
            $
            470Restructured
                loans (2)
            
            
            -
            
            
            -
            
            
            -
            
            
            3,268
            
            
            -Accruing
                loans
                past due 90days
                or
                more
            
            
            85
            
            
            10
            
            
            214
            
            
            1,218
            
            
            319Total
                nonperforming loans
            
            
            1,266
            
            
            2,979
            
            
            3,819
            
            
            6,353
            
            
            789Other
                real estate owned
            
            
            -
            
            
            -
            
            
            119
            
            
            -
            
            
            -Other
                foreclosed assets heldpending
                liquidation
            
            
            99
            
            
            110
            
            
            -
            
            
            300
            
            
            -Total
                nonperforming assets
            
            $
            1,365
            
            $
            3,089
            
            $
            3,938
            
            $
            6,653
            
            $
            789Ratio
                of nonperforming loansto
                total loans
            
            
            1.0
            %
            
            2.0
            %
            
            2.4
            %
            
            3.8
            %
            
            .5
            %Ratio
                of nonperforming assets tototal
                loans
            
            
            1.0
            %
            
            2.0
            %
            
            2.4
            %
            
            4.0
            %
            
            .5
            %Ratio
                of nonperforming assetsto
                total allowance for loanlosses
                at end of period
            
            
            93.7
            %
            
            179.6
            %
            
            165.5
            %
            
            270.6
            %
            
            51.3
            %








(1)
            Interest
                income that would have been recorded in 2005 related to nonaccrual
                loans
                was $171,000 compared to $109,000 for the year ended December 31,
                2004, none of which is included in interest income or net income
                for the
                applicable periods.


(2)
            The
                restructured loans in the amount of $3,268,000 as of December 31,
                2002
                were placed in nonaccrual status in 2003 and are included in nonaccrual
                loans at December 31, 2004 and 2003. Those same loans, which aggregated
                $3,268,000 at December 31, 2002, had a balance of $1,844,000 at December
                31, 2004.





Potential
      problem assets, which are not included in nonperforming assets, amounted to
      $4,113,000 or 2.68% of total loans at December 31, 2005 compared to
      $3,199,000 or 2.10% at December 31, 2004. Potential problem assets
      represent those assets with a potential or a well-defined weakness and where
      information about possible credit problems of borrowers has caused management
      to
      have serious doubts










Page
            22 of 79





about
      the
      borrower’s ability to comply with present repayment terms. This definition is
      believed to be substantially consistent with the standards established by FS
      Bank’s primary regulator for loans classified as substandard.





***Allowance
      for Loan Losses (ALL):*** ** We
      maintain the ALL at a level that our management deems appropriate to adequately
      cover the probable and incurred loss in the loan portfolio. As of
      December 31, 2005 and 2004, the balance in our allowance for loan losses
      was $1,457,000 and $1,720,000, respectively. Our management deemed these amounts
      to be adequate. The judgments and estimates associated with our ALL
      determination are described under “Critical Accounting Estimates” above.





We
      periodically analyze our loan position with respect to our borrowers’ industries
      to determine if a concentration of credit risk exists to any one or more
      industries. We do have a significant credit exposure of loans outstanding plus
      unfunded lines of credit to borrowers in the residential construction industry
      and to owners of nonresidential buildings at December 31, 2005 and 2004.
      This exposure level is taken into consideration by management in its
      determination of the adequacy of the allowance for loan losses. Based upon
      that
      determination, we believe that we did not have any excessive exposure to any
      single industry which would warrant additional allowance allocations.





The
      following table sets forth, based on management’s best estimate, the allocation
      of the ALL to types of loans as of December 31, 2005, 2004, 2003, 2002 and
      2001 and the percentage (%) of the category of loans to total loans (dollars
      in
      thousands):







2005
              
              2004
              
              2003
              
              2002
              
              2001Amount
              
              %
              
              Amount
              
              %
              
              Amount
              
              %
              
              Amount
              
              %
              
              Amount
              
              %Commercial
              
              $
              700
              
              
              30.3
              %
              $
              1,000
              
              
              38.1
              %
              $
              1,610
              
              
              30.6
              %
              $
              1,509
              
              
              28.5
              %
              $
              639
              
              
              27.0
              %Mortgage
                  loans on real estate:Commercial
              
              
              450
              
              
              28.1
              %
              
              275
              
              
              26.3
              %
              
              379
              
              
              38.3
              %
              
              460
              
              
              38.4
              %
              
              450
              
              
              40.9
              %Residential
              
              
              160
              
              
              6.4
              %
              
              75
              
              
              6.6
              %
              
              80
              
              
              9.2
              %
              
              125
              
              
              10.7
              %
              
              138
              
              
              13.0
              %Construction
              
              
              -
              
              
              24.1
              %
              
              200
              
              
              17.2
              %
              
              105
              
              
              10.5
              %
              
              116
              
              
              12.3
              %
              
              111
              
              
              10.2
              %Home
                  Equity
              
              
              7
              
              
              7.5
              %
              
              -
              
              
              7.6
              %
              
              -
              
              
              7.2
              %
              
              -
              
              
              6.1
              %
              
              -
              
              
              5.2
              %Consumer
              
              
              110
              
              
              3.1
              %
              
              150
              
              
              3.6
              %
              
              190
              
              
              3.7
              %
              
              224
              
              
              3.4
              %
              
              175
              
              
              3.1
              %Credit
                  Card
              
              
              30
              
              
              0.5
              %
              
              20
              
              
              0.5
              %
              
              15
              
              
              0.5
              %
              
              25
              
              
              0.6
              %
              
              25
              
              
              0.6
              %Total
              
              $
              1,457
              
              
              100.0
              %
              $
              1,720
              
              
              100.0
              %
              $
              2,379
              
              
              100.0
              %
              $
              2.459
              
              
              100.0
              %
              $
              1,538
              
              
              100.0
              %




The
        following is a summary of changes in the allowance for loan losses for the
        years
        ended December 31, 2005, 2004, 2003, 2002 and 2001, and the ratio of the
        allowance for loan losses to total loans as of the end of each period (dollars
        in thousands):





2005
            
            2004
            
            2003
            
            2002
            
            2001Balance
                at beginning of period
            
            $ 1,720
            
            $ 2,379
            
            $ 2,459
            
            $ 1,538
            
            $ 1,221Charge-offs:Commercial
            
            
            1,035
            
            
            830
            
            
            727
            
            
            472
            
            
            77Real
                estate
            
            
            169
            
            
            99
            
            
            30
            
            
            -
            
            
            32Consumer
            
            
            92
            
            
            33
            
            
            101
            
            
            89
            
            
            21Total
                charge-offs
            
            
            1,296
            
            
            962
            
            
            858
            
            
            561
            
            
            130Recoveries:Commercial
            
            
            41
            
            
            5
            
            
            104
            
            
            -
            
            
            -Real
                estate
            
            
            12
            
            
            1
            
            
            3
            
            
            7
            
            
            -Consumer
            
            
            30
            
            
            -
            
            
            2
            
            
            3
            
            
            -Total
                recoveries
            
            
            83
            
            
            6
            
            
            109
            
            
            10
            
            
            -Net
                charge-offs
            
            
            1,213
            
            
            956
            
            
            749
            
            
            551
            
            
            130Provision
                for loan losses
            
            
            950
            
            
            297
            
            
            669
            
            
            1,472
            
            
            447Balance
                at end of period
            
            $
            1,457
            
            $
            1,720
            
            $
            2,379
            
            $
            2,459
            
            $
            1538Loans
                at end of period
            
            $
            153,649
            
            $
            152,576
            
            $
            161,112
            
            $
            167,456
            
            $
            152,422Average
                loans
            
            $
            151,925
            
            $
            159,718
            
            $
            164,520
            
            $
            161,514
            
            $
            129,190Ratios:Allowance
                for loan lossesto
                total loans
            
            
            .95
            %
            
            1.13
            %
            
            1.48
            %
            
            1.47
            %
            
            1.02
            %Net
                charge-offs to averageLoans
                for period
            
            
            .80
            %
            
            .60
            %
            
            .46
            %
            
            .34
            %
            
            .10
            %







Page
            23 of 79








Net
      loans
      charged off were $1,213,000 in 2005 as compared to $956,000 in 2004 and $749,000
      in 2003. The majority of charge offs in 2005 related to loans to a commercial
      business in which the sole owner passed away; a receivables financing
      arrangement which went into default; and a troubled franchise operator. The
      majority of charge offs in 2004 related to loans to a troubled franchise
      operator which first became problem loans and were significantly reserved for
      in
      2002.





***Investments:*** Our
      investment portfolio, consisting primarily of Federal agency bonds and
      mortgage-backed securities, amounted to $34.6 million and $33.7 million at
      December 31, 2005 and 2004, at fair market value. The following table
      summarizes the amortized cost and fair value of our securities at those dates,
      all of which we classify as available-for-sale (dollars in thousands):





Amortized
            
            Unrealized
            
            Unrealized
            
            FairCost
            
            Gains
            
            (Losses)
            
            Value2005Securities
                available-for-sale:U.S.
                Government and federal agencies
            
            $
            10,508
            
            $
            -
            
            $
            (267
            )
            $
            10,241State
                and municipal
            
            
            4,014
            
            
            2
            
            
            (70
            )
            
            3,946Mortgage-backed
            
            
            20,900
            
            
            -
            
            
            (500
            )
            
            20,400Total
            
            $
            35,422
            
            $
            2
            
            $
            (837
            )
            $
            34,5872004Securities
                available-for-sale:U.S.
                Government and federal agencies
            
            $
            13,517
            
            $
            2
            
            $
            (71
            )
            $
            13,448State
                and municipal
            
            
            875
            
            
            7
            
            
            -
            
            
            882Mortgage-backed
            
            
            19,353
            
            
            116
            
            
            (51
            )
            
            19,418Total
            
            $
            33.745
            
            $
            125
            
            $
            (122
            )
            $
            33,748








We
      did
      not sell any of our available-for-sale investments in 2005. During 2004, we
      sold
      $11.2 million of available-for-sale securities at a net gain of $318,000.
      Securities pledged to public deposits and repurchase agreements at year end
      2005
      and 2004 had carrying amounts of $8.6 million and $13.1 million. Securities
      pledged to the Federal Home Loan Bank at year end 2005 had a carrying value
      of
      $3.9 million.





The
      following table shows the carrying value of investment securities according
      to
      contractual maturity classifications of one year or less, after one year through
      five years, after five years through ten years, and after ten years. Actual
      maturities differ from contractual maturities of mortgage-backed securities
      because these securities may be called or repaid in whole or in part based
      on
      the payments received from the mortgages underlying the securities. Therefore,
      these securities are not included in the maturity categories noted below as
      of
      December 31, 2005 and 2004 (dollars in thousands):







2005
            
            2004Due
                in one year or less
            
            $-
            
            $  3,194Due
                after one year through five years
            
            
            10,555
            
            
            10,603Due
                after five years through ten years
            
            
            2,749
            
            
            533Due
                after ten years
            
            
            883
            
            
            -Total
                of investment securities with fixed maturity dates
            
            
            14,187
            
            
            14,330Mortgage-backed
                securities
            
            
            20,400
            
            
            19,418Total
                investment securities
            
            $
            34,587
            
            $
            33,748




We
      compute income on securities using coupon interest, adding discount accretion
      or
      subtracting premium amortization, and for certain Treasury Inflation Protection
      securities, the adjustments to the par values based on inflation adjustment
      data
      as provided by the federal government. The majority of our investments for
      2005
      and 2004 were in the form of mortgage-backed securities. These investments
      are
      typically acquired at a premium to their par value. Since these securities
      are
      repayable in monthly increments, based on the repayment of the underlying
      mortgages, they are subject to wide variations in their yield caused by the
      increased write off of the purchase premiums. During 2005, 2004 and 2003, the
      interest rate market for residential financings was at or near a thirty year
      low, causing many homeowners to refinance their home mortgages, especially
      during 2003. As a result, when receiving prepayments, we accelerated premium
      amortization. This caused a lowering of the yields on these
      investments.













Page 24 of
            79








***Deposits
      and Other Borrowing:*** ** We
      had
      approximately $177.5 million of deposits at December 31, 2005 compared
      to $178.9 million at December 31, 2004. Our deposits consist of
      noninterest and interest-bearing demand accounts, savings, money market and
      time
      deposits. Additionally, we have repurchase agreements which are essentially
      deposit equivalents collateralized by securities. These agreements amounted
      to
      $5.5 million at December 31, 2005 and $5.9 million at December 31, 2004.
      Additionally, at December 31, 2005, we had balances of $8.7 million in
      advances from the Federal Home Loan Bank of Cincinnati compared to
      $8.2 million at December 31, 2004.





Our
      deposits at December 31, 2005, 2004 and 2003 were as follows:




2005
            
            2004
            
            2003Interest-bearing
                demand
            
            $
            13,516
            
            $
            16,657
            
            $
            18,187Savings,
                money market and NOW
            
            
            32,435
            
            
            38,523
            
            
            23,204Time
                deposits
            
            
            60,461
            
            
            59,374
            
            
            73,461Time
                deposits $100,000 and over
            
            
            34,510
            
            
            41,638
            
            
            51,207Total
                interest-bearing deposits
            
            
            140,922
            
            
            156,192
            
            
            166,059Noninterest-bearing
            
            
            36,566
            
            
            22,670
            
            
            24,581Total
                deposits
            
            $
            177,488
            
            $
            178,862
            
            $
            190,640





Information
      on our repurchase agreements at December 31, 2005, 2004 and 2003 is as follows:





2005
            
            2004
            
            2003Average
                balance during the year
            
            $
            3,560
            
            $
            7,483
            
            $
            4,901Average
                interest rate during the year
            
            
            2.22
            %
            
            0.67
            %
            
            0.78
            %Maximum
                month end balance during the year
            
            $
            5,483
            
            $
            8,729
            
            $
            8,874Balance
                at year end
            
            $
            5,483
            
            $
            5,857
            
            $
            8,874








Information
      on our advances from the Federal Home Loan Bank of Cincinnati and outstanding
      balances at December 31, 2005 and 2004 is as follows:





Interest
            
            
            
            BalancesDate
                of Advance
            
            Amount
            
            Rate
            
            Maturity
            
            2005
            
            2004November
                30, 2000
            
            $
            1,050
            
            
            6.71
            %
            
            December
                1, 2015
            
            $
            985
            
            $
            1,000November
                21, 2001
            
            
            1,300
            
            
            5.61
            %
            
            December
                1, 2016
            
            
            1,225
            
            
            1,246May
                1, 2002
            
            
            5,000
            
            
            3.70
            %
            
            June
                1, 2005
            
            
            -
            
            
            872June
                19, 2002
            
            
            1,800
            
            
            4.15
            %
            
            July
                1, 2005
            
            
            -
            
            
            1,653September
                5, 2002
            
            
            600
            
            
            2.84
            %
            
            October
                1, 2006
            
            
            130
            
            
            283September
                5, 2002
            
            
            600
            
            
            3.06
            %
            
            October
                1, 2007
            
            
            231
            
            
            351December
                6, 2002
            
            
            1,800
            
            
            3.65
            %
            
            January
                1, 2008
            
            
            1,341
            
            
            1,504December
                6, 2002
            
            
            1,432
            
            
            3.82
            %
            
            January
                1, 2008
            
            
            1,285
            
            
            1,337November
                2, 2005
            
            
            3,500
            
            
            5.75
            %
            
            December
                1, 2015
            
            
            3,500
            
            
            -Totals
            
            $
            15,582
            
            
            
            
            
            
            
            $
            8,697
            
            $
            8,246







***Note
      Payable*** **:** On
      December 30, 2003, the Company entered into a credit agreement with another
      financial institution that provides for a reducing revolving line of credit
      in
      the maximum amount of $6 million, of which $5 million was drawn at inception
      and
      contributed to FS Bank to increase its capital base. The related note is secured
      by 100% of the common shares of FS Bank and has a maturity of December 31,
      2006.
      The maximum amount available under the credit agreement reduces to $5 million
      on
      December 31, 2004 and $4 million on December 31, 2005. The Company repaid $2
      million of the note in December 2004.




The
      credit agreement contains a number of covenants relating to the operation of
      the
      Bank including the maintenance of a minimum equity capital ratio, a maximum
      ratio of nonperforming assets to total loans, a minimum return on average assets
      and the maintenance of a minimum dividend payment capacity by the Bank.
      Covenants applicable to the Company include a prohibition of the payment of
      dividends on its common stock. At year end 2004 and 2005, all covenants of
      the
      credit agreement were either met or waived by the lender.







Page
            25 of 79








***Funding:*** Generally, banks classify their funding base as either core funding or non-core
      funding. Core funding consists of all deposits other than time deposits issued
      in denominations of $100,000 or greater, while all other funding is deemed
      to be
      non-core. The following table represents the balances of our deposits and other
      fundings and the percentage of each type to the total at December 31, 2005,
      2004 and 2003 (dollars in thousands):








2005
            
            2004
            
            2003Amount
            
            Percent
            
            Amount
            
            Percent
            
            Amount
            
            PercentCore
                funding:Noninterest-bearing
                demand deposits
            
            $
            36,566
            
            
            18.8
            %
            $
            22,670
            
            
            11.6
            %
            
            24,581
            
            
            11.3
            %Interest-bearing
                demand deposits
            
            
            13,516
            
            
            6.9
            %
            
            16,657
            
            
            8.5
            %
            
            18,187
            
            
            8.4
            %Savings
                and money market deposits
            
            
            32,435
            
            
            16.7
            %
            
            38,523
            
            
            19.6
            %
            
            23,204
            
            
            10.7
            %Time
                deposits less than $100,000
            
            
            60,461
            
            
            31.1
            %
            
            59,374
            
            
            30.3
            %
            
            73,461
            
            
            33.8
            %Total
                core funding
            
            
            142,978
            
            
            73.5
            %
            
            137,224
            
            
            70.0
            %
            
            139,433
            
            
            64.2
            %Non-core
                funding:Time
                deposits greater than $100,000
            
            
            34,510
            
            
            17.7
            %
            
            41,638
            
            
            21.3
            %
            
            51,207
            
            
            23.6
            %Securities
                sold under agreements torepurchase
            
            
            5,483
            
            
            2.8
            %
            
            5,857
            
            
            3.0
            %
            
            8,874
            
            
            4.1
            %Federal
                Home Loan Bank advances
            
            
            8,697
            
            
            4.5
            %
            
            8,246
            
            
            4.2
            %
            
            12,512
            
            
            5.8
            %Notes
                Payable
            
            
            3,000
            
            
            1.5
            %
            
            3,000
            
            
            1.5
            %
            
            5,000
            
            
            2.3
            %Total
                non-core funding
            
            
            51,690
            
            
            26.5
            %
            
            58,741
            
            
            30.0
            %
            
            77,593
            
            
            35.8
            %Total
                funding
            
            $
            194,668
            
            
            100.0
            %
            $
            195,965
            
            
            100.0
            %
            $
            217,026
            
            
            100.0
            %








***Capital
      Resource:*** ** At
      December 31, 2005 and 2004, our stockholders’ equity amounted to
      $21.0 million and $20.6 million, respectively. The change in stockholders’
equity was attributable to our net income for the year ended December 31,
      2005 of $881,000, the net decrease in comprehensive income of $554,000
      attributable to the decrease in fair value of our available-for-sale securities
      portfolio, an increase of $22,000 relating to stock paid compensation and an
      increase of $28,000 from exercise of stock options.









































(The
      balance of this page is intentionally left blank)













































Page
            26 of 79








Generally,
      banking laws and regulations require banks and bank holding companies to
      maintain certain minimum capital ratios in order to engage in certain activities
      or be eligible for certain types of regulatory relief. At December 31, 2005
      and 2004, our capital ratios, including FS Bank’s capital ratios, met regulatory
      minimum capital requirements. At December 31, 2005 and 2004, FS Bank was
      categorized as “well-capitalized”. To be categorized as “well-capitalized”, FS
      Bank must maintain minimum Total risk-based, Tier I risk-based, and Tier I
      leverage ratios as set forth in the following table. Additionally, First
      Security and FS Bank must maintain certain minimum capital ratios for regulatory
      purposes. The following table presents actual, minimum and “well-capitalized”
capital amounts and ratios at December 31, 2005 and 2004 (amounts in
      millions):





To
                be Adequately
            
            To
                be WellCapitalized
                Under
            
            Capitalized
                UnderPrompt
                Corrective
            
            Prompt
                CorrectiveActual
            
            Action
                Provisions
            
            Action
                ProvisionsAmount
            
            Ratio
            
            Amount
            
            Ratio
            
            Amount
            
            Ratio2005Total
                Risk Based Capital toRisk-weighted
                assets:Consolidated
            
            $
            23.0
            
            
            12.4
            %
            $
            14.8
            
            
            8.0
            %
            $
            18.5
            
            
            10.0
            %Bank
                only
            
            
            25.4
            
            
            13.7
            %
            
            14.8
            
            
            8.0
            %
            
            18.5
            
            
            10.0
            %Tier
                I (Core) Capital to Risk-weighted
                assetsConsolidated
            
            $
            21.5
            
            
            11.6
            %
            $
            7.4
            
            
            4.0
            %
            $
            11.1
            
            
            6.0
            %Bank
                only
            
            
            24.0
            
            
            12.9
            %
            
            7.4
            
            
            4.0
            %
            
            11.1
            
            
            6.0
            %Tier
                I Leverage Capital toAverage
                AssetsConsolidated
            
            $
            21.5
            
            
            10.1
            %
            
            8.5
            
            
            4.0
            %
            $
            10.6
            
            
            5.0
            %Bank
                only
            
            
            24.0
            
            
            11.3
            %
            
            8.5
            
            
            4.0
            %
            
            10.6
            
            
            5.0
            %2004Total
                Risk Based Capital toRisk-weighted
                assets:Consolidated
            
            $
            22.3
            
            
            12.6
            %
            $
            14.1
            
            
            8.0
            %
            $
            17.7
            
            
            10.0
            %Bank
                only
            
            
            24.5
            
            
            13.8
            %
            
            14.1
            
            
            8.0
            %
            
            17.7
            
            
            10.0
            %Tier
                I (Core) Capital to Risk-weighted
                assetsConsolidated
            
            $
            20.6
            
            
            11.6
            %
            $
            7.1
            
            
            4.0
            %
            $
            10.6
            
            
            6.0
            %Bank
                only
            
            
            22.8
            
            
            12.9
            %
            
            7.1
            
            
            4.0
            %
            
            10.6
            
            
            6.0
            %Tier
                I Leverage Capital toAverage
                AssetsConsolidated
            
            $
            20.6
            
            
            9.8
            %
            $
            8.4
            
            
            4.0
            %
            $
            10.5
            
            
            5.0
            %Bank
                only
            
            
            22.8
            
            
            10.8
            %
            
            8.4
            
            
            4.0
            %
            
            10.5
            
            
            5.0
            %





***Dividends:*** ** FS
      Bank
      is subject to restrictions on the payment of dividends to First Security under
      laws and regulations promulgated by the FDIC and the Commonwealth of Kentucky.
      Currently, FS Bank can pay First Security dividends of approximately $975,000
      without prior approval of the FDIC or Commonwealth of Kentucky.





First
      Security is also subject to limits on payment of dividends to our shareholders
      by the rules, regulations and policies of federal banking authorities. We have
      not paid any dividends to date, nor do we anticipate paying dividends to our
      shareholders for the foreseeable future. In order to pay such dividends, we
      will
      need to receive dividends from FS Bank or have other sources of funds. In
      addition, in accordance with the terms of the credit agreement which we entered
      into on December 30, 2003, the payment of dividends on our common stock cannot
      be made, except with the consent of the lending institution. First Security
      is
      also prevented from paying dividends under the Agreement and Plan of Merger
      it
      entered into with American Founders while the merger transaction is
      pending.








Page
            27
            of 79








**Interest
      and Liquidity Risk Management**





Our
      objective is to manage assets and liabilities to provide a satisfactory,
      consistent level of profitability within the framework of established liquidity,
      loan, investment, borrowing, and capital policies. Our Asset
      Liability/Investment Committee (“ALCO”) of FS Bank is charged with the
      responsibility of monitoring these policies, which are designed to ensure
      acceptable composition of asset/liability mix. Two critical areas of focus
      for
      ALCO are interest rate sensitivity and liquidity risk management, which are
      actively monitored.





***Interest
      Rate Sensitivity:*** ** In
      the
      normal course of business, we are exposed to market risk arising from
      fluctuations in interest rates. ALCO measures and evaluates the interest rate
      risk so that we can meet customer demands for various types of loans and
      deposits. ALCO determines the most appropriate amounts of on-balance sheet
      and
      off-balance sheet items. Measurements which we use to help us manage interest
      rate sensitivity include an earnings simulation model and gap analysis
      computations. These measurements are used in conjunction with competitive
      pricing analysis.





***Earnings
      Simulation Model:*** We
      believe that interest rate risk is best measured by our earnings simulation
      modeling. Forecasted levels of net interest income based on existing
      interest-bearing earning assets and liabilities are combined with ALCO forecasts
      of interest rates for the next 12 months and are combined with other
      factors in order to produce various earnings simulations. To limit interest
      rate
      risk, we have guidelines for our net interest-earnings at risk which seek to
      limit the variance of net interest income to less than predetermined levels
      based on the change in the interest rate market. At any point our calculations
      reflect a change greater than this level (which is referred to in our policies
      and procedures as a Level 1 Alert), we are required to take action to mitigate
      the condition by actively restructuring our balance sheet risk profile.





The
      following data is presented relating to the results of the earnings simulation
      model at December 31, 2005:





Changes
                in interest rates from current rates stated in basis
                points-200
            
            -100
            
            0
            
            100
            
            200Forecast
                net interest income
            
            
            7,673
            
            
            8,099
            
            
            8,470
            
            
            8,817
            
            
            9,157Effect
                on net interest income
            
            
            (797
            )
            
            (371
            )
            
            -
            
            
            347
            
            
            687Percentage
                change
            
            
            -9.41
            %
            
            -4.38
            %
            
            -
            
            
            4.10
            %
            
            8.11
            %Level
                1 alert
            
            
            -15.00
            %
            
            -10.00
            %
            
            -
            
            
            10.00
            %
            
            15.00
            %





The
      results of the earnings simulation indicate that FS Bank is asset sensitive,
      meaning that in a rising interest rate environment, yields on assets are likely
      to increase faster than costs of liabilities, thus producing increases in net
      interest income.





The
      above
      table is intended to present our technique for measuring interest rate risk
      on
      projected net interest income based on changes in the general interest rate
      environment at a point in time.








***Gap
      Analysis:*** An asset
      or liability is considered to be interest rate-sensitive if it will reprice
      or
      mature within the time period analyzed; for example, within three months or
      one
      year. The interest rate-sensitivity gap is the difference between the
      interest-earning assets and interest-bearing liabilities scheduled to mature
      or
      reprice within such time period. A gap is considered positive when the amount
      of
      interest rate-sensitive assets exceeds the amount of interest rate-sensitive
      liabilities. A gap is considered negative when the amount of interest
      rate-sensitive liabilities exceeds the interest rate-sensitive assets. During
      a
      period of rising interest rates, a negative gap would tend to adversely affect
      net interest income, while a positive gap would tend to result in an increase
      in
      net interest income. Conversely, during a period of falling interest rates,
      a
      negative gap would tend to result in an increase in net interest income, while
      a
      positive gap would tend to adversely affect net interest income. If our assets
      and liabilities were equally flexible and moved concurrently, the impact of
      any
      increase or decrease in interest rates on net interest income would be
      minimal.







Page
            28 of 79





At
      December 31, 2005, our twelve-month interest rate-sensitivity gap ratio of
      earning assets to interest-bearing liabilities was a positive 64.8%, as compared
      to a positive 30.9% at December 31, 2004. The increase in our positive gap
      ratio
      reflects our view that interest rates will continue to rise over the next
      12 months and this will have a positive impact on our net interest income.
      Since deposit pricing will generally lag both in degree and timing with any
      upward interest rate adjustments, our management believes we are well-positioned
      to manage our net interest margins through an upward rate
      environment.





Each
      of
      the above analyses may not, on their own, be an accurate indicator of how our
      net interest income will be affected by changes in interest rates. Income
      associated with interest-earning assets and costs associated with
      interest-bearing liabilities may not be affected uniformly by changes in
      interest rates. In addition, the magnitude and duration of changes in interest
      rates may have a significant impact on net interest income. For example,
      although certain assets and liabilities may have similar maturities or periods
      of repricing, they may react in different degrees to changes in market interest
      rates. Interest rates on certain types of assets and liabilities fluctuate
      in
      advance of changes in general market rates, while interest rates on other types
      may lag behind changes in general market rates. In addition, certain assets,
      such as adjustable rate mortgage loans, have features (generally referred to
      as
“interest rate caps and floors”), which limit changes in interest rates.
      Prepayment and early withdrawal levels also could deviate significantly from
      those assumed in calculating the maturity of certain instruments. The ability
      of
      many borrowers to service their debts also may decrease during periods of rising
      interest rates. ALCO reviews each of the above interest rate sensitivity
      analyses along with several different interest rate scenarios as part of its
      responsibility to provide a satisfactory, consistent level of profitability
      within the framework of established liquidity, loan, investment, borrowing,
      and
      capital policies.





***Liquidity
      Risk Management:*** ** The
      purpose of liquidity risk management is to ensure that there are sufficient
      cash
      flows to satisfy loan demand, deposit withdrawals, and our other needs.
      Traditional sources of liquidity for a bank include asset maturities and growth
      in core deposits. A bank may achieve its desired liquidity objectives from
      the
      management of its assets and liabilities and by internally generated funding
      through its operations. Funds invested in marketable instruments that can be
      readily sold and the continuous maturing of other earning assets are sources
      of
      liquidity from an asset perspective. The liability base provides sources of
      liquidity through attraction of increased deposits and borrowing funds from
      various other institutions.





Changes
      in interest rates also affect our liquidity position. We currently price
      deposits in response to market rates and our management intends to continue
      this
      policy. If deposits are not priced in response to market rates, a loss of
      deposits could occur which would negatively affect our liquidity position.





Scheduled
      loan payments are a relatively stable source of funds, but loan payoffs and
      deposit flows fluctuate significantly, being influenced by interest rates,
      general economic conditions and competition. Additionally, debt security
      investments are subject to prepayment and call provisions that could accelerate
      their payoff prior to stated maturity. We attempt to price our deposit products
      to meet our asset/liability objectives consistent with local market conditions.
      Our ALCO is responsible for monitoring our ongoing liquidity needs. Our
      regulators also monitor our liquidity and capital resources on a periodic basis.





In
      addition, FS Bank is a member of the Federal Home Loan Bank of Cincinnati.
      As a
      result, FS Bank receives advances from the Federal Home Loan Bank of Cincinnati,
      pursuant to the terms of various borrowing agreements, which assist it in the
      funding of its home mortgage and commercial real estate loan portfolios. FS
      Bank
      has pledged under the borrowing agreements with the Federal Home Loan Bank
      of
      Cincinnati certain qualifying residential mortgage loans pursuant to a blanket
      lien as collateral. Based upon the advance limitations based on the collateral
      amounts, at December 31, 2005, FS Bank could have borrowed additional amounts
      in
      the approximate amount of $2.2 million.





Additional
      sources of liquidity are represented by federal funds borrowing arrangements
      entered into with other banks. At December 31, 2005, we had borrowing lines
      established in the aggregate amount of $14 million. There were no balances
      on
      these lines at December 31, 2005.





In
      addition to the above, we are a participant in a network of financial
      institutions that purchase and sell certificates of deposit to each other and
      we
      also receive funds on a direct and referred basis from other financial
      institutions and limited public funds. There are no practical limits to the
      amount of certificates of deposit that can be sold or purchased using these
      delivery means.










Page
            29 of 79





At
      December 31, 2005, we had no significant commitments for capital
      expenditures.





Our
      management believes that we have adequate liquidity to meet all known
      contractual obligations and unfunded commitments, including loan commitments
      and
      reasonable borrower, depositor, and creditor requirements over the next twelve
      months.





**Off-Balance
      Sheet Arrangements** **





At
      December 31, 2005, we had outstanding commitments to fund existing loans of
      $52.1 million pursuant to credit availability terms in the loan agreements,
      $3.7
      million in loans approved and committed, but not yet closed. Standby letters
      of
      credit were $5.9 million and unused line of credit was $45.4 million.
      Because these commitments generally have fixed expiration dates and many will
      expire without being drawn upon, the total commitment level does not necessarily
      represent future cash requirements. If needed to fund these outstanding
      commitments, FS Bank has the ability to liquidate Federal funds sold or
      securities available-for-sale or, on a short-term basis, to borrow and purchase
      Federal funds from other financial institutions or to sell institutional
      certificates of deposit. At December 31, 2005, FS Bank had accommodations
      with upstream correspondent banks for unsecured short-term advances. These
      accommodations have various covenants related to their term and availability,
      and in most cases must be repaid within a month.





The
      following table presents additional information about our unfunded commitments
      as of December 31, 2005 and 2004, which by their terms have contractual
      maturity dates subsequent to December 31, 2005 (dollars in thousands):




2005
              
              2004Fixed
              
              Variable
              
              Fixed
              
              VariableCommitments
                  to make loans
              
              $
              -
              
              $
              3,674
              
              $
              -
              
              $
              344Unused
                  lines of credit
              
              
              827
              
              
              45,420
              
              
              477
              
              
              40,339Letters
                  of credit
              
              
              24
              
              
              5,864
              
              
              -
              
              
              4,038







**Impact
      of Inflation**





The
      Consolidated Financial Statements and related consolidated financial data
      presented herein have been prepared in accordance with generally accepted
      accounting principles and practices within the banking industry which require
      the measurement of financial position and operating results in terms of
      historical dollars without considering the changes in the relative purchasing
      power of money over time due to inflation. Unlike most industrial companies,
      virtually all the assets and liabilities of a financial institution are monetary
      in nature. As a result, interest rates have a more significant impact on a
      financial institution’s performance than the effects of general levels of
      inflation.





**Recent
      Accounting Pronouncements**





***Future
      New Accounting Standards:*** **** In
      December, 2004, FASB issued an amendment to SFAS 123 (SFAS 123R), which
      eliminates the ability to account for share-based compensation transactions
      using Accounting Principles Board Opinion No. 25, Accounting for Stock Issued
      to
      Employees, and generally requires that such transactions be accounted for using
      a fair value-based method. On April 14, 2005, the SEC amended the compliance
      date for SFAS 123R from the beginning of the first interim or annual period
      that
      begins after June 15, 2005 to the next fiscal year beginning after June 15,
      2005. The Company adopted SFAS 123R as of January 1, 2006. The effect on the
      Company’s results of operations depends 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 possible performance condition
      requirements, and so cannot currently be predicted for future awards.





SFAS
      123R
      applies to all awards granted after the effective date and to awards modified,
      repurchased, or cancelled after that date. The statement establishes standards
      for accounting for share-based payment transactions. Share-based payment
      transactions are those in which an entity exchanges its equity instruments
      for
      goods or services or in which an entity incurs liabilities in exchange for
      goods
      or services that are based on the fair value of the entity’s equity instruments
      or that may be settled by the issuance of these equity instruments. SFAS 123R
      covers a wide range of share-based compensation arrangements including stock
      options, restricted share plans, performance-based awards, share appreciation
      rights and employee stock purchase plans.







Page
            30 of 79








As
      of
      January 1, 2006, the Company applied SFAS 123R using the modified prospective
      method. This method requires that compensation expense be recorded for all
      unvested stock options and restricted stock awards over the requisite service
      period (generally the vesting schedule). For liability-classified awards, the
      Company measures the cost of employee services received in exchange for an
      award
      based on its current fair value. The fair value is re-measured subsequently
      at
      each reporting date through the settlement date, and changes in fair value
      are
      recognized as compensation cost. For equity-classified awards, the grant date
      fair value is recognized in earnings over the requisite service period.





The
      FASB
      has issued a proposed amendment to SFAS No. 128, Earnings Per Share, to clarify
      guidance for mandatorily convertible instruments, the treasury stock method,
      contingently issuable shares, and contracts that may be settled in cash or
      share. The primary impact on the Company of the proposed Statement is the change
      to the treasury stock method for year-to-date diluted earnings per
      share.





Currently
      SFAS No. 128 requires that the number of incremental shares included in the
      denominator be determined by computing a year-to-date weighted average of the
      number of incremental shares included in each quarterly diluted EPS computation.
      Under this proposed Statement, the number of incremental shares included in
      year-to-date diluted earnings per share would be computed using the average
      market price of common shares for the year-to-date period, independent of the
      quarterly computations. This computational change is not expected to have a
      significant impact on the Company’s diluted earnings per share.


















































(The
      balance of this page is intentionally left blank)












































































Page
            31 of 79





**ITEM
      7.**  **FINANCIAL
      STATEMENTS**





**First
      Security Bancorp, Inc. and Subsidiary**





**Consolidated
      Financial Statements**





**Table
      of Contents**





Report
      of
      Independent Registered Public Accounting Firm - 2005





Report
      of
      Independent Registered Public Accounting Firm - 2004





Consolidated
      Financial Statements:


Consolidated
      balance sheets


Consolidated
      statements of income


Consolidated
      statements of changes in shareholders’ equity


Consolidated
      statements of cash flows


Notes
      to
      consolidated financial statements













































































































Page
            32 of 79
























































**FIRST
      SECURITY BANCORP, INC.**


**Lexington,
      Kentucky**





**CONSOLIDATED
      FINANCIAL STATEMENTS**


**December
      31, 2005 and 2004**
















































































































Page 33 of
            79








FIRST
      SECURITY BANCORP, INC.


Lexington,
      Kentucky





CONSOLIDATED
      FINANCIAL STATEMENTS


December
      31, 2005 and 2004











REPORT
        OF
        INDEPENDENT REGISTERED PUBLIC ACCOUNTING
        FIRM-2005------------------------------------------- 35
 
 CONSOLIDATED
        FINANCIAL STATEMENTS:
 
 CONSOLIDATED
        BALANCE
        SHEETS--------------------------------------------------------------------------------------------------
        36
 
 CONSOLIDATED
      STATEMENTS OF
      INCOME---------------------------------------------------------------------------------------37




CONSOLIDATED
        STATEMENTS OF CHANGES IN


SHAREHOLDERS’
      EQUITY----------------------------------------------------------------------------------------------------------------38




CONSOLIDATED
      STATEMENTS OF CASH
      FLOWS-------------------------------------------------------------------------------39




NOTES
      TO CONSOLIDATED
      FINANCIAL
      STATEMENTS-----------------------------------------------------------------------40

















































































Page
            34 of 79








Report
      of
      Independent Registered Public Accounting Firm








Audit
      Committee, Board of Directors and Stockholders


First
      Security Bancorp, Inc.


Lexington,
      Kentucky








We
      have
      audited the accompanying consolidated balance sheet of First Security Bancorp,
      Inc. as of December 31, 2005, and 2004, and the related consolidated
      statements of income, changes in shareholder’s equity and cash for the years
      then ended. These financial statements are the responsibility of the Company's
      management. Our responsibility is to express an opinion on these financial
      statements based on our audit.





We
      conducted our audit in accordance with auditing standards of the Public Company
      Accounting Oversight Board (United States). Those standards require that we
      plan
      and perform the audit to obtain reasonable assurance about whether the financial
      statements are free of material misstatement. An audit includes examining,
      on a
      test basis, evidence supporting the amounts and disclosures in the financial
      statements. An audit also includes assessing the accounting principles used
      and
      significant estimates made by management, as well as evaluating the overall
      financial statement presentation. We believe that our audit provides a
      reasonable basis for our opinion.





In
      our
      opinion, the 2005 consolidated financial statements referred to above present
      fairly, in all material respects, the financial position of First Security
      Bancorp, Inc. as of December 31, 2005, and 2004 and the results of its
      operations and its cash flows for the years then ended in conformity with
      accounting principles generally accepted in the United States of
      America.








BKD,
      LLP


Indianapolis,
      Indiana


February
      24, 2006


















































































Page
            35 of 79





FIRST
      SECURITY BANCORP, INC.


CONSOLIDATED
      BALANCE SHEETS


Years
      Ended December 31


(Dollar
      amounts in thousands, except for per share data)








2005
            
            2004ASSETSCash
                and due from banks
            
            $
            4,529
            
            $
            4,446Federal
                funds sold
            
            
            15,356
            
            
            18,568Total
                cash and cash equivalent
            
            
            19,885
            
            
            23,014Securities
                available-for-sale
            
            
            34,587
            
            
            33,748Loans,
                net of allowance of $1,457 and $1,720
            
            
            152,192
            
            
            150,856Federal
                Home Loan Bank stock
            
            
            848
            
            
            806Foreclosed
                assets
            
            
            99
            
            
            110Premises
                and equipment, net
            
            
            6,894
            
            
            7,141Accrued
                interest receivable and other assets
            
            
            1,982
            
            
            1,759$
            216,487
            
            $
            217,434








LIABILITIES
                AND SHAREHOLDERS’ EQUITYLiabilitiesDepositsNoninterest-bearing
            
            $
            36,566
            
            $
            22,670Interest-bearing
            
            
            140,922
            
            
            156,192Total
                deposits
            
            
            177,488
            
            
            178,862Federal
                funds purchased and repurchase agreements
            
            
            5,483
            
            
            5,857Note
                payable
            
            
            3,000
            
            
            3,000Federal
                Home Loan Bank advances
            
            
            8,697
            
            
            8,246Accrued
                interest payable and other liabilities
            
            
            834
            
            
            861Total
                liabilities
            
            
            195,502
            
            
            196,826Shareholders’
                equityCommon
                stock, no par value: 5,000,000 sharesauthorized;
                December 31, 2005 - 1,560,540 shares issuedDecember
                31, 2004 - 1,558,690 shares issued
            
            
            8,940
            
            
            8,926Additional
                paid-in capital
            
            
            8,980
            
            
            8,944Retained
                earnings
            
            
            3,617
            
            
            2,736Accumulated
                other comprehensive income
            
            
            (552
            )
            
            2Total
                shareholders’ equity
            
            
            20,985
            
            
            20,608$
            216,487
            
            $
            217,434



































See
      notes
      to the consolidated financial statements.









Page
          36 of 79








FIRST
      SECURITY BANCORP, INC.


CONSOLIDATED
      STATEMENTS OF INCOME


Years
      Ended December 31


(Dollar
      amounts in thousands, except for per share data)











2005
            
            2004Interest
                incomeLoans,
                including fees
            
            $
            10,310
            
            $
            9,180Taxable
                securities
            
            
            1,407
            
            
            1,416Tax
                exempt securities
            
            
            75
            
            
            40Federal
                funds sold and other
            
            
            285
            
            
            10212,077
            
            
            10,738Interest
                expenseDeposits
            
            
            4,343
            
            
            3,701Federal
                funds purchased and repurchase agreements
            
            
            80
            
            
            67Federal
                Home Loan Bank advances and other debt
            
            
            506
            
            
            6434,929
            
            
            4,411Net
                interest income
            
            
            7,148
            
            
            6,327Provision
                for loan losses
            
            
            950
            
            
            297Net
                interest income after provision for loan losses
            
            
            6,198
            
            
            6,030Noninterest
                incomeService
                charges on deposit accounts
            
            
            691
            
            
            624Net
                gains on sales of loans
            
            
            10
            
            
            332Net
                gains on sales of securities
            
            
            -
            
            
            318Other
            
            
            174
            
            
            223875
            
            
            1,497Noninterest
                expenseSalaries
                and employee benefits
            
            
            2,482
            
            
            3,024Occupancy
                and equipment
            
            
            1,043
            
            
            1,137Data
                processing
            
            
            558
            
            
            547Legal
                and professional fees
            
            
            438
            
            
            422Advertising
            
            
            107
            
            
            209Bankshares
                Tax
            
            
            186
            
            
            176Supplies
                and Printing
            
            
            63
            
            
            69Loss
                on sale of assets
            
            
            -
            
            
            100Other
            
            
            929
            
            
            8545,806
            
            
            6,538Income
                before income taxes
            
            
            1,267
            
            
            989Income
                tax expense
            
            
            386
            
            
            305Net
                income
            
            $
            881
            
            $
            684Weighted
                average common shares outstanding:Basic
            
            
            1,560
            
            
            1,559Diluted
            
            
            1,568
            
            
            1,563Earnings
                per shareBasic
            
            $
            .56
            
            $
            .44Diluted
            
            
            .56
            
            
            .44








See
      notes
      to the consolidated financial statements.










Page
            37 of 79





FIRST
      SECURITY BANCORP, INC.


CONSOLIDATED
      STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY


Years
      Ended December 31


(Share
      and dollar amounts in thousands)








AccumulatedOther
            
            TotalCommon
                Stock
            
            Paid-In
            
            Retained
            
            Comprehensive
            
            Shareholders’Shares
            
            Amount
            
            Capital
            
            Earnings
            
            Income
                (Loss)
            
            EquityBalance,
                January 1, 2004
            
            
            1,559
            
            $
            8,926
            
            $
            8,926
            
            $
            2,052
            
            $
            208
            
            $
            20,112Stock
                options exercised
            
            
            -
            
            
            -
            
            
            18
            
            
            -
            
            
            -
            
            
            18Comprehensive
                income:Net
                income
            
            
            -
            
            
            -
            
            
            -
            
            
            684
            
            
            -
            
            
            684Change
                in unrealized gain(loss)
                on securities availablefor
                sale, net of reclassificationand
                tax effects
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            (206
            )
            
            (206
            )Total
                comprehensive income
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            478Balance,
                December 31, 2004
            
            
            1,559
            
            $
            8,926
            
            $
            8,944
            
            $
            2,736
            
            $
            2
            
            $
            20,608Stock
                options exercised
            
            
            2
            
            
            14
            
            
            36
            
            
            -
            
            
            -
            
            
            50Comprehensive
                income:Net
                income
            
            
            -
            
            
            -
            
            
            -
            
            
            881
            
            
            -
            
            
            881Change
                in unrealized gain(loss)
                on securities availablefor
                sale, net of reclassificationand
                tax effects
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            (554
            )
            
            (554
            )Total
                comprehensive income
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            327Balance,
                December 31, 2005
            
            
            1,561
            
            $
            8,940
            
            $
            8,980
            
            $
            3,617
            
            $
            (552
            )
            $
            20,985















































See
      notes
      to the consolidated financial statements.













Page
            38 of 79





FIRST
      SECURITY BANCORP, INC.


CONSOLIDATED
      STATEMENTS OF CASH FLOWS


Years
      Ended December 31


(Dollar
      amounts in thousands, except for per share data)








2005
            
            2004Cash
                flows from operating activitiesNet
                income
            
            $
            881
            
            $
            684Adjustments
                to reconcile net income to netcash
                from operating activitiesProvision
                for loan losses
            
            
            950
            
            
            297Depreciation
                and amortization
            
            
            411
            
            
            484Net
                amortization of securities
            
            
            187
            
            
            315Net
                realized gain on sale of securities
            
            
            -
            
            
            (318
            )Federal
                Home Loan Bank stock dividends
            
            
            (42
            )
            
            (32
            )Originations
                of loans held for sale
            
            
            -
            
            
            (18,666
            )Proceeds
                from sale of loans
            
            
            -
            
            
            19,405Net
                gain on sale of mortgage loans
            
            
            -
            
            
            (332
            )Write-off
                of intangible assets
            
            
            -
            
            
            100Net
                change in:Accrued
                interest receivable
            
            
            (87
            )
            
            100Other
                assets
            
            
            (190
            )
            
            (3
            )Accrued
                interest payable
            
            
            107
            
            
            (136
            )Other
                liabilities
            
            
            148
            
            
            (18
            )Net
                cash from operating activities
            
            
            2,365
            
            
            1,880Cash
                flows from investing activitiesActivity
                in available-for-sale securities:Maturities,
                calls and principal repayments
            
            
            8,571
            
            
            11,146Sales
            
            
            -
            
            
            11,164Purchases
            
            
            (10,433
            )
            
            (17,742
            )Net
                change in loans
            
            
            (2,356
            )
            
            7,470Proceeds
                from sale of foreclosed and repossessed assets
            
            
            135
            
            
            119Purchase
                of Federal Home Loan Bank stock
            
            
            -
            
            
            (2
            )Purchases
                of premises and equipment, net
            
            
            (164
            )
            
            (95
            )Proceeds
                of sale of premises and equipment, net
            
            
            -
            
            
            65Proceeds
                of sale of intangible assets
            
            
            -
            
            
            39Net
                cash used in / (from) investing activities
            
            
            (4,247
            )
            
            12,164Cash
                flows from financing activitiesNet
                change in deposits
            
            
            (1,374
            )
            
            (11,778
            )Net
                change in repurchase agreements and short-term borrowings
            
            
            (374
            )
            
            (3,017
            )Proceeds
                from Federal Home Loan Bank advances
            
            
            3,500
            
            
            -Repayments
                of Federal Home Loan Bank advances
            
            
            (3,049
            )
            
            (4,266
            )Repayments
                of note payable
            
            
            -
            
            
            (2,000
            )Proceeds
                from issuance of options and common stock
            
            
            50
            
            
            18Net
                cash used in financing activities
            
            
            (1,247
            )
            
            (21,043
            )Net
                change in cash and cash equivalents
            
            $
            (3,129
            )
            $
            (6,999
            )Cash
                and cash equivalents at beginning of period
            
            
            23,014
            
            
            30,013Cash
                and cash equivalents at end of period
            
            $
            19,885
            
            $
            23,014Supplemental
                cash flow information:Interest
                paid
            
            $
            4,822
            
            $
            4,547Income
                tax paid
            
            
            406
            
            
            200Supplemental
                non-cash disclosures:Transfers
                from loans to foreclosed and repossessed assets
            
            
            70
            
            
            110




See
      notes to the consolidated financial
      statements.


Page
            39 of 79





FIRST
      SECURITY BANCORP, INC.


NOTES
      TO
      CONSOLIDATED FINANCIAL STATEMENTS


December
      31, 2005 and 2004


________________________________________________________________________





**NOTE
      1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES**





Nature
      of Operations and Principles of Consolidation :
      The
      consolidated financial statements of First Security Bancorp, Inc. (“Bancorp”)
      and its wholly owned subsidiary First Security Bank of Lexington, Inc. (“Bank”)
      are together referred to as the “Company”. Intercompany transactions and
      balances are eliminated in consolidation.





The
      Company is a one-bank holding company and, other than the Bank, has no material
      business activity. The Bank commenced operations on November 17, 1997 and
      operates as a state chartered commercial bank, providing financial services
      through its offices in Lexington, Kentucky. Its primary deposit products are
      checking, savings, repurchase agreements and term certificates, and its primary
      lending products are commercial, real estate mortgage and consumer loans.
      Substantially all loans are secured by specific items of collateral including
      business assets, commercial and residential real estate and consumer assets.
      Commercial loans are expected to be repaid from cash flow from operations of
      businesses and residential mortgage and consumer loans are expected to be repaid
      from the earnings of the borrowers. Other financial instruments, which
      potentially represent concentrations of credit risk, include deposit accounts
      in
      other financial institutions and federal funds sold.





Use
      of
      Estimates :
      To
      prepare financial statements in conformity with accounting principles generally
      accepted in the United States of America, management makes estimates and
      assumptions based on available information. These estimates and assumptions
      affect the amounts reported in the financial statements and the disclosures
      provided, and actual results could differ. The allowance for loan losses and
      fair values of financial instruments are particularly subject to
      change.





Cash
      Flows :
      Cash
      and cash equivalents include cash, deposits with other financial institutions
      under 90 days, and federal funds sold. Net cash flows are reported for loan
      and
      deposit transactions.





Securities :
      All
      debt securities are classified as available-for-sale and are carried at fair
      value, with unrealized holding gains and losses reported in other comprehensive
      income. Other securities, such as Federal Home Loan Bank stock, are carried
      at
      cost.





Interest
      income includes amortization of purchase premium or discount. Gains and losses
      on sales are based on the amortized cost of the security sold. Securities are
      written down to fair value when a decline in fair value is not
      temporary.





Loans
      Held for Sale :
      Loans
      originated and intended for sale in the secondary market are carried at the
      lower of cost or market in the aggregate. Net unrealized losses, if any, are
      recorded as a valuation allowance and charged to earnings. These loans are
      assessed at least annually for impairment and any such impairment is recognized
      in the period identified.




Loans: Loans
      that management has the intent and ability to hold for the foreseeable future
      or
      until maturity or payoff are reported at the principal balance outstanding,
      net
      of unearned interest, deferred loan fees and costs, and an allowance for loan
      losses. Interest income is reported on the interest method and includes
      amortization of net of deferred loan fees and costs over the loan term. Interest
      income on mortgage and commercial loans is discontinued at the time the loan
      is
      90 days delinquent unless the loan is well-secured and in process of collection.
      Consumer and credit card loans are typically charged off no later than 180
      days
      past due. In all cases, loans are placed on nonaccrual or charged off at an
      earlier date if collection of principal or interest is considered doubtful.

























Page
            40 of 79





FIRST
      SECURITY BANCORP, INC.


NOTES
      TO
      CONSOLIDATED FINANCIAL STATEMENTS


December
      31, 2005 and 2004


______________________________________________________________________________________





**NOTE
      1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES** (Continued)





All
      interest accrued but not received for loans placed on nonaccrual is reversed
      against interest income. Interest received on such loans is accounted for on
      the
      cash basis or cost recovery method, until qualifying for return to accrual
      status. Loans are returned to accrual status when all of the principal and
      interest amounts contractually due are brought current and future payments
      are
      reasonably assured.





Allowance
      for Loan Losses :
      To
      evaluate the loan portfolio, management has established loan grading procedures.
      These procedures establish a grade for each loan upon origination which is
      periodically reassessed throughout the term of the loan. Grading categories
      include highest quality, above average, average, low average, watch,
      substandard, doubtful, and loss. Loans graded watch or worse also include loans
      severely past-due and those not accruing interest. Specific reserve allocations
      are calculated for specific individual loans having been graded watch,
      substandard, doubtful, and loss based on the specific estimated collectability
      (and by reference, estimated inherent risk of loss) of each loan. The aggregate
      of the estimated probable and incurred loss then becomes a portion of the
      allowance for loan losses to be specifically allocated to that loan. These
      calculations are referred to as specific allocations.





A
      historical loss factor is computed for each loan type in the portfolio based
      upon actual losses incurred over a predetermined time frame. The historical
      loss
      percentage for the overall portfolio is then calculated to determine an estimate
      of losses based upon FS Bank’s actual loss experience. This historical loss
      percentage is adjusted by management for various other qualitative factors
      such
      as economic conditions, past due trends, problem loan trends concentrations
      with
      the loan portfolio, changes in underwriting standards (if any) and management
      of
      the loan portfolio that impact the loan portfolio to arrive at an overall
      estimated loss percentage. This overall estimated loss percentage is applied
      to
      the remaining loan portfolio which has not been individually reviewed for
      impairment, after adjusting for various factors including cash equivalent
      collateral held by FS Bank and guaranties from the federal government (such
      as
      SBA guarantees), to arrive at the general allowance allocation. The sum of
      the
      specific allocations and the general allocation represents management’s best
      estimate of the probable incurred losses contained in the loan portfolio at
      the
      measurement date. These estimates are then compared to the actual recorded
      ALL
      balance to determine whether additional provisions should be recorded. Even
      though the ALL is composed of two components, the entire ALL is available to
      absorb any credit losses.





In
      assessing the adequacy of the ALL, we also rely on an ongoing independent loan
      review process. We undertake this process both to ascertain whether there are
      loans in the portfolio whose credit quality has weakened over time and to assist
      in our overall evaluation of the risk characteristics of the entire loan
      portfolio. Our loan review process includes the judgment of management, the
      input from our independent loan reviewer, who is not an employee of FS Bank,
      and
      reviews that may have been conducted by bank regulatory agencies as part of
      their usual examination process.





Management
      believes the allowance for loan losses at December 31, 2005 was adequate.
      Although we believe we use the best information available to make allowance
      provisions, future adjustments which could be material may be necessary if
      the
      assumptions used to determine the allowance differ from future loan portfolio
      performance.





Foreclosed
      Assets :
      Assets
      acquired through or instead of loan foreclosure are initially recorded at fair
      value when acquired, establishing a new cost basis. Any excess of a loan balance
      over the recorded fair value of the assets received is charged to the allowance
      for loan losses at the time the assets are recorded. If fair value declines
      subsequent to foreclosure, a valuation allowance is recorded through expense.
      Costs after acquisition are expensed. There were no additions to the valuation
      allowance for 2005 or 2004, as the fair value equaled the carrying
      cost.



















Page
            41 of 79








FIRST
      SECURITY BANCORP, INC.


NOTES
      TO
      CONSOLIDATED FINANCIAL STATEMENTS


December
      31, 2005 and 2004


**______________________________________________________________________________________**





**NOTE
      1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES** (Continued)





Premises
      and Equipment :
      Land is
      carried at cost. Premises and equipment are stated at cost less accumulated
      depreciation. Buildings and related components are depreciated using the
      straight-line method with useful lives ranging from 10 to 40 years. Furniture,
      fixtures and equipment are depreciated using the straight-line method with
      useful lives ranging from 3 to 7 years.





Goodwill
      and Other Intangible Assets :
      Goodwill results from business acquisitions and represents the excess of the
      purchase price over the fair value of acquired tangible assets and liabilities
      and identified intangible assets. Goodwill is assessed at least annually for
      impairment and any such impairment will be recognized in the period
      identified.





Long-term
      Assets :
      Premises and equipment, core deposit and other intangible assets, and other
      long-term assets are reviewed for impairment when events indicate that their
      carrying amount may not be recoverable from future discounted cash flows. If
      impaired, the assets are recorded at fair value.





Loan
      Commitments and Related Financial Instruments :
      Financial instruments include off-balance sheet credit instruments, such as
      commitments to make loans and commercial letters of credit, issued to meet
      customer financing needs. The face amount for these items represents the
      exposure to loss, before considering customer collateral or ability to repay.
      Such financial instruments are recorded when they are funded. Instruments,
      such
      as standby letters of credit, that are considered financial guarantees in
      accordance with FASB Interpretation No. 45 are not material.





Stock
      Compensation :
      Employee compensation expense under stock options is reported using the
      intrinsic value method. Stock-based compensation cost for options granted
      employees with an exercise price less than the market price of the underlying
      common stock at the date of the grant is reflected in net income. No stock-based
      compensation cost for options granted employees and directors with an exercise
      price equal to or greater than the market price of the underlying common stock
      at the date of grant is reflected in net income.





The
      following table illustrates the effect on net income and earnings per share
      if
      expense was measured for options granted using the fair value recognition
      provisions of FASB Statement No. 123, *Accounting
      for Stock-Based Compensation.* Amounts
      are in thousands, except for per share data.





2005
            
            2004Net
                income as reported
            
            $
            881
            
            $
            684Deduct:
                Stock-based compensation expensedetermined
                under fair value based method
            
            
            (253
            )
            
            (28
            )Pro
                forma net income
            
            $
            628
            
            $
            656Basic
                earnings per share as reported
            
            $
            .56
            
            $
            .44Pro
                forma basic earnings per share
            
            
            .40
            
            
            .42Diluted
                earnings per share as reported
            
            
            .56
            
            
            .44Pro
                forma diluted earnings per share
            
            
            .40
            
            
            42





The
      pro
      forma effects are computed using option pricing models, using the following
      weighted-average assumptions as of grant date for grants issued during the
      year.





2005
            
            2004Risk-free
                interest rate
            
            
            4.25
            %
            
            3.50
            %Expected
                option life
            
            
            5.0
                years
            
            
            5.0
                yearsExpected
                stock price volatility
            
            
            25
            %
            
            33
            %Dividend
                yield
            
            
            -
            
            
            -










Page
            42 of 79





FIRST
      SECURITY BANCORP, INC.


NOTES
      TO
      CONSOLIDATED FINANCIAL STATEMENTS


December
      31, 2005 and 2004


______________________________________________________________________________________





**NOTE
      1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES** (Continued)





Income
      Taxes :
      Income
      tax expense is the total of the current year income tax due or refundable and
      the change in deferred tax assets and liabilities. Deferred tax assets and
      liabilities are the expected future tax amounts for the temporary differences
      between carrying amounts and tax bases of assets and liabilities, computed
      using
      enacted tax rates. A valuation allowance, if needed, reduces tax assets to
      the
      amount expected to be realized.





Earnings
      Per Common Share :
      Basic
      earnings per common share is net income divided by the weighted average number
      of common shares outstanding during the period. Diluted earnings per common
      share includes the dilutive effect of additional potential common shares
      issuable under stock options. Earnings and dividends per share are restated
      for
      all stock splits and dividends through the date of issue of the financial
      statements.





Comprehensive
      Income :
      Comprehensive income consists of net income and other comprehensive income.
      Other comprehensive income includes unrealized gains and losses on securities
      available-for-sale.





Future
      New Accounting Standards :
      In
      December, 2004, FASB issued an amendment to SFAS 123 (SFAS 123R), which
      eliminates the ability to account for share-based compensation transactions
      using Accounting Principles Board Opinion No. 25, Accounting for Stock Issued
      to
      Employees, and generally requires that such transactions be accounted for using
      a fair value-based method. On April 14, 2005, the SEC amended the compliance
      date for SFAS 123R from the beginning of the first interim or annual period
      that
      begins after June 15, 2005 to the next fiscal year beginning after June 15,
      2005. The Company adopted SFAS 123R as of January 1, 2006. The effect on the
      Company’s results of operations depends 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 possible performance condition
      requirements, and so cannot currently be predicted for future awards.





SFAS
      123R
      applies to all awards granted after the effective date and to awards modified,
      repurchased, or cancelled after that date. The statement establishes standards
      for accounting for share-based payment transactions. Share-based payment
      transactions are those in which an entity exchanges its equity instruments
      for
      goods or services or in which an entity incurs liabilities in exchange for
      goods
      or services that are based on the fair value of the entity’s equity instruments
      or that may be settled by the issuance of these equity instruments. SFAS 123R
      covers a wide range of share-based compensation arrangements including stock
      options, restricted share plans, performance-based awards, share appreciation
      rights and employee stock purchase plans.





As
      of
      January 1, 2006, the Company applied SFAS 123R using the modified prospective
      method. This method requires that compensation expense be recorded for all
      unvested stock options and restricted stock awards over the requisite service
      period (generally the vesting schedule). For liability-classified awards, the
      Company measures the cost of employee services received in exchange for an
      award
      based on its current fair value. The fair value is re-measured subsequently
      at
      each reporting date through the settlement date, and changes in fair value
      are
      recognized as compensation cost. For equity-classified awards, the grant date
      fair value is recognized in earnings over the requisite service period.





The
      FASB
      has issued a proposed amendment to SFAS No. 128, Earnings Per Share, to clarify
      guidance for mandatorily convertible instruments, the treasury stock method,
      contingently issuable shares, and contracts that may be settled in cash or
      share. The primary impact on the Company of the proposed Statement is the change
      to the treasury stock method for year-to-date diluted earnings per
      share.





Currently
      SFAS No. 128 requires that the number of incremental shares included in the
      denominator be determined by computing a year-to-date weighted average of the
      number of incremental shares included in each quarterly diluted EPS computation.
      Under this proposed Statement, the number of incremental shares included in
      year-to-date diluted earnings per share would be computed using the average
      market price of common shares for the year-to-date period, independent of the
      quarterly computations. This computational change is not expected to have a
      significant impact on the Company’s diluted earnings per share.










Page
            43 of 79








FIRST
      SECURITY BANCORP, INC.


NOTES
      TO
      CONSOLIDATED FINANCIAL STATEMENTS


December
      31, 2005 and 2004


______________________________________________________________________________________





**NOTE
      1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES** (Continued)





Loss
      Contingencies :
      Loss
      contingencies, including claims and legal actions arising in the ordinary course
      of business, are recorded as liabilities when the likelihood of loss is probable
      and an amount or range of loss can be reasonably estimated. Management does
      not
      believe there now are such matters that will have a material effect on the
      financial statements.





Restrictions
      on Cash :
      Cash on
      hand or on deposit with the Federal Reserve Bank of $216,000 and $248,000 was
      required to meet regulatory reserve and clearing requirements at year end 2005
      and 2004. These balances do not earn interest.





Fair
      Value of Financial Instruments :
      Fair
      values of financial instruments are estimated using relevant market information
      and other assumptions, as more fully disclosed in a separate note. Fair value
      estimates involve uncertainties and matters of significant judgment
      regarding  interest
      rates, credit risk, prepayments and other factors, especially in the absence
      of
      broad markets for particular items. Changes in assumptions or in market
      conditions could significantly affect the estimates.





Operating
      Segments :
      While
      the chief decision-makers monitor the revenue streams of the various products
      and services, the identifiable segments are not material and operations are
      managed and financial performance is evaluated on a Company-wide basis.
      Accordingly, all of the financial service operations are considered by
      management to be aggregated in one reportable operating segment.





Reclassifications :
      Some
      items in the prior year financial statement were reclassified to conform to
      the
      current presentation.





Presentation :
      Unless
      otherwise indicated within the text, dollars are presented in thousands except
      for per share data.












































(The
      balance of this page is intentionally left blank)































Page
            44 of 79





FIRST
      SECURITY BANCORP, INC.


NOTES
      TO
      CONSOLIDATED FINANCIAL STATEMENTS


December
      31, 2005 and 2004


______________________________________________________________________________________





**NOTE
      2 - SECURITIES**





The
      fair
      value of available-for-sale securities and the related gross unrealized gains
      and losses recognized in accumulated other comprehensive income were as
      follows:





Gross
            
            GrossFair
            
            Unrealized
            
            UnrealizedValue
            
            Gains
            
            Losses2005U.S.
                Government and federal agency
            
            $
            10,241
            
            $
            -
            
            $
            (267
            )State
                and municipal
            
            
            3,946
            
            
            2
            
            
            (70
            )Mortgage-backed
            
            
            20,400
            
            
            -
            
            
            (500
            )Total
            
            $
            34,587
            
            $
            2
            
            $
            (837
            )2004U.S.
                Government and federal agency
            
            $
            13,448
            
            $
            2
            
            $
            (71
            )State
                and municipal
            
            
            882
            
            
            7
            
            
            -Mortgage-backed
            
            
            19,418
            
            
            116
            
            
            (51
            )Total
            
            $
            33,748
            
            $
            125
            
            $
            (122
            )








Securities
      with unrealized losses at year end 2005, aggregated by investment category
      and
      length of time that individual securities have been in a continuous unrealized
      loss position, are as follows:








12
                Months or Less
            
            More
                than 12 Months
            
            TotalFair
            
            Unrealized
            
            Fair
            
            Unrealized
            
            Fair
            
            UnrealizedValue
            
            Loss
            
            Value
            
            Loss
            
            Value
            
            LossDescription
                of SecuritiesU.S.
                Government andfederal
                agency
            
            $
            3,907
            
            $
            (91
            )
            $
            6,334
            
            $
            (176
            )
            
            10,241
            
            $
            (267
            )State
                and municipal
            
            
            3,289
            
            
            (70
            )
            
            -
            
            
            -
            
            
            3,289
            
            
            (70
            )Mortgage-backed
            
            
            14,770
            
            
            (304
            )
            
            5,609
            
            
            (196
            )
            
            20,379
            
            
            (500
            )Total
                temporarilyimpaired
                with statedmaturities
            
            $
            21,966
            
            $
            (465
            )
            $
            11,943
            
            $
            (372
            )
            $
            33,909
            
            $
            (837
            )

















































Page
            45 of 79





FIRST
      SECURITY BANCORP, INC.


NOTES
      TO
      CONSOLIDATED FINANCIAL STATEMENTS


December
      31, 2005 and 2004


______________________________________________________________________________________





**NOTE
      2 - SECURITIES** (Continued)





Securities
      with unrealized losses at year end 2004, aggregated by investment category
      and
      length of time that individual securities have been in a continuous unrealized
      loss position, are as follows:








12
                Months or Less
            
            More
                than 12 Months
            
            TotalFair
            
            Unrealized
            
            Fair
            
            Unrealized
            
            Fair
            
            UnrealizedValue
            
            Loss
            
            Value
            
            Loss
            
            Value
            
            LossDescription
                of SecuritiesU.S.
                Government andfederal
                agency
            
            $
            10,448
            
            $
            (71
            )
            $
            -
            
            $
            -
            
            $
            10,448
            
            $
            (71
            )State
                and
                municipal
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            -Mortgage-backed
            
            
            5,126
            
            
            (4
            )
            
            3,266
            
            
            (47
            )
            
            8,393
            
            
            (51
            )Total
                temporarilyimpaired
                with
                statedmaturities
            
            $
            15,574
            
            $
            (75
            )
            $
            3,266
            
            $
            (47
            )
            $
            18,841
            
            $
            (122
            )





Unrealized
      losses on securities have not been recognized into income because the securities
      are of high credit quality, management has the intent and ability to hold for
      the foreseeable future and the decline in fair value is largely due to changes
      in market conditions. The fair value is expected to recover as the securities
      approach their maturity date and/or market conditions improve.





Sales
      of
      available-for-sale securities were as follows:





2005
            
            2004Proceeds
            
            $
            -
            
            $
            11,164Gross
                gains
            
            
            -
            
            
            318Gross
                losses
            
            
            -
            
            
            -





Proceeds,
      as defined above, do not include proceeds from calls prior to the stated
      maturities, proceeds from redemptions at the stated maturity or proceeds
      received from normal repayments, as in the case of mortgage-backed
      securities.





The
      fair
      value of debt securities and carrying amount, if different, at year end 2005
      by
      contractual maturity were as follows. Securities not due at a single maturity
      date, but rather having periodic repayments and a final maturity date consist
      primarily of mortgage-backed securities, as shown below.





Fair
                ValuesDue
                in one year or less
            
            $                      -Due
                from one to five years
            
            
            10,555Due
                from five to ten years
            
            
            2,749Due
                after ten years
            
            
            883Total
                securities due at a single maturity date
            
            
            14,187Mortgage-backed
                securities
            
            
            20,400Total
            
            $
            34,587





Securities
      pledged to public deposits and repurchase agreements at year end 2005 and 2004
      had carrying amounts of $8.6 million and $13.1 million. Securities pledged
      to
      the Federal Home Loan Bank at year end 2005 had a carrying value of $3.9
      million.





At
      year
      end 2005 and 2004, there were no holdings of securities of any one issuer,
      other
      than the U.S. Government and its agencies, in an amount greater than 10% of
      shareholders’ equity.







Page
            46 of 79





FIRST
      SECURITY BANCORP, INC.


NOTES
      TO
      CONSOLIDATED FINANCIAL STATEMENTS


December
      31, 2005 and 2004


______________________________________________________________________________________





**NOTE
      3 - LOANS**





Loans
      at
      year end were as follows:





2005
            
            2004Commercial
            
            $
            46,513
            
            $
            58,125Mortgage
                loans on real estate:Commercial
            
            
            43,173
            
            
            40,087Residential
            
            
            9,882
            
            
            10,069Construction
            
            
            36,994
            
            
            26,299Home
                equity
            
            
            11,584
            
            
            11,637Consumer
            
            
            4,759
            
            
            5,531Credit
                card
            
            
            744
            
            
            828Subtotal
            
            
            153,649
            
            
            152,576Less
                allowance for loan losses
            
            
            (1,457
            )
            
            (1,720
            )Loans,
                net
            
            $
            152,192
            
            $
            150,856





Substantially
      all residential mortgage loans are pledged to the Federal Home Loan Bank as
      collateral for advances as additionally discussed in Note 8.





Changes
      in the allowance for loan losses were as follows:




2005
            
            2004Beginning
                balance
            
            $
            1,720
            
            $
            2,379Loans
                charged-off
            
            
            (1,296
            )
            
            (962
            )Recoveries
            
            
            83
            
            
            6Provision
                for loan losses
            
            
            950
            
            
            297Ending
                balance
            
            $
            1,457
            
            $
            1,720





Impaired
      loans were as follows:





2005
            
            2004Year
                end loans with no allocated allowancefor
                loan losses
            
            $
            501
            
            $
            974Year
                end loans with allocated allowancefor
                loan losses
            
            
            822
            
            
            3,056Total
            
            $
            1,323
            
            $
            4,030








Amount
                of the allowance for loan losses allocated
            
            $
            253
            
            $
            928Average
                of impaired loans during the year
            
            
            3,000
            
            
            5,075Interest
                income recognized during impairment
            
            
            171
            
            
            109Cash-basis
                interest income recognized
            
            
            171
            
            
            109Nonperforming
                loans were as follows:2005
            
            
            2004Loans
                past due 90 days still on accrual
            
            $
            85
            
            $
            10Nonaccrual
                loans
            
            
            1,181
            
            
            2,969





Nonperforming
      loans includes both smaller balance homogeneous loans that are collectively
      evaluated for impairment and individually classified as impaired loans.
      Nonperforming loans and impaired loans are defined differently. Some loans
      may
      be included in both categories, whereas other loans may only be included in
      one
      category.







Page
            47 of 79





FIRST
      SECURITY BANCORP, INC.


NOTES
      TO
      CONSOLIDATED FINANCIAL STATEMENTS


December
      31, 2005 and 2004


______________________________________________________________________________________





**NOTE
      4 - PREMISES AND EQUIPMENT**





Year
      end
      premises and equipment were as follows:





2005
            
            2004Land
            
            $
            1,250
            
            $
            1,250Buildings
            
            
            4,957
            
            
            4,956Leasehold
                improvements
            
            
            458
            
            
            342Furniture
                and equipment
            
            
            1,919
            
            
            2,106Total
                cost
            
            
            8,584
            
            
            8,654Accumulated
                depreciation
            
            
            (1,690
            )
            
            (1,513
            )Premises
                and equipment, net
            
            $
            6,894
            
            $
            7,141








Depreciation
      expense was $411 and $474 **** for
      2005
      and 2004.





The
      Company leases its three branch locations and, until September 10, 2004, its
      two
      loan production offices under noncancelable operating leases with various terms
      and renewal options. Rent expense under these leases for the years ended
      December 31, 2005 and 2004 was $192 and $231.





Rent
      commitments under these noncancelable operating leases were as follows, before
      considering renewal options that are generally present (in
      thousands):





2006
            
            $
            1982007
            
            
            1912008
            
            
            1492009
            
            
            1512010
            
            
            102Thereafter
            
            
            880Total
            
            $
            1,671











In
      addition, the Company leases small items of office equipment, such as
      photocopiers, using agreements from one year to three years. These are not
      considered material and are not included in the above table.








**NOTE
      5 - GOODWILL AND INTANGIBLE ASSETS**





The
      change in the balance for goodwill during the year is as follows:





2005
            
            2004Beginning
                of year
            
            $
            -
            
            $
            106Acquired
                goodwill
            
            
            -
            
            
            -Write
                off of goodwill
            
            
            -
            
            
            (106
            )Total
            
            $
            -
            
            $
            -

























Page
            48 of 79





FIRST
      SECURITY BANCORP, INC.


NOTES
      TO
      CONSOLIDATED FINANCIAL STATEMENTS


December
      31, 2005 and 2004


______________________________________________________________________________________





**NOTE
      6 - DEPOSITS**





The
      scheduled maturities of time deposits as of December 31, 2005 were as follows
      (in thousands):





2006
            
            $
            49,2442007
            
            
            38,4552008
            
            
            6,2492009
            
            
            8332010
            
            
            190Thereafter
            
            
            -Total
            
            $
            94,971








At
      year
      end 2005 and 2004, time deposits with balances in excess of $100 totaled $34,510
      and $41,638, respectively.








**NOTE
      7 - SECURITIES SOLD UNDER AGREEMENTS TO REPURCHASE**





Securities
      sold under agreements to repurchase are secured by U.S. Government and agency
      obligations and by mortgage-backed securities with a carrying amount of $8,633
      and $13,094 at year end 2005 and 2004.





Securities
      sold under agreements to repurchase are financing arrangements that mature
      within two years. At maturity, the securities underlying the agreements are
      returned to the Company. Substantially all of the securities sold under
      agreements to repurchase have a term of one day and are referred to as sweep
      repurchase agreements. **** Information
      concerning securities sold under agreements to repurchase is summarized as
      follows:





2005
            
            2004Average
                balance during the year
            
            $
            3,560
            
            $
            7,483Average
                interest rate during the year
            
            
            2.22
            %
            
            0.67
            %Maximum
                month end balance during the year
            
            $
            5,483
            
            $
            8,729Weighted
                average interest rate at year end
            
            
            3.43
            %
            
            1.57
            %


























































Page
            49 of 79





FIRST
      SECURITY BANCORP, INC.


NOTES
      TO
      CONSOLIDATED FINANCIAL STATEMENTS


December
      31, 2005 and 2004


______________________________________________________________________________________





**NOTE
      8 - FEDERAL HOME LOAN BANK ADVANCES AND NOTE PAYABLE**





At
      year
      end, advances from the Federal Home Loan Bank were as follows:





2005
            
            2004Monthly
                maturities of January 2006 through December 2016at
                fixed rates ranging from 2.84% to 6.71%
            
            $
            8,697
            
            $
            8,246








Advances
      are secured by the Federal Home Loan Bank stock and substantially all
      residential mortgage loans under a blanket lien arrangement.





Principal
      payments on advances over the next five years are as follows (in
      thousands):





2006
            
            $
            6342007
            
            
            2,5382008
            
            
            932009
            
            
            992010
            
            
            105Thereafter
            
            
            5,228Total
            
            $
            8,697











Note
      Payable :
      On
      December 30, 2003, the Company entered into a credit agreement with another
      financial institution that provides for a reducing revolving line of credit
      in
      the maximum amount of $6 million, of which $5 million was drawn at inception.
      The related note is secured by 100% of the common shares of the Bank and has
      a
      maturity of December 31, 2006. The maximum amount available under the credit
      agreement was reduced to $4 million on December 31, 2004 and was reduced to
      $3
      million on December 31, 2005. The note bears interest at a variable rate, at
      the
      option of the Company on a quarterly basis, at prime less .25% or at LIBOR
      plus
      2.40%. Interest is payable monthly and, other than payments required to reduce
      the balance to the maximum available amount, there are no scheduled principal
      repayments.




The
      credit agreement contains a number of covenants relating to the operation of
      the
      Bank including the maintenance of a minimum equity capital ratio, a maximum
      ratio of non-performing assets to total loans, a minimum return on average
      assets and the maintenance of a minimum dividend payment capacity by the Bank.
      Covenants applicable to the Company include a prohibition of the payment of
      dividends on its common stock. At year end 2005, all covenants of the credit
      agreement were either met or waived by the lender.








**NOTE
      9 - BENEFIT PLANS**





The
      Bank
      has a 401(k) benefit plan which allows employee contributions up to 92% of
      their
      compensation plus an additional sum depending on the age of the participant,
      all
      subject to an annual overall limitation that changes each year in accordance
      with regulations issued by the Internal Revenue Service. The Bank matches 100%
      of the first 4% of compensation contributed. Expense for the years ended
      December 31, 2005 and 2004 was $57 and $57.






















Page
            50 of 79





FIRST
      SECURITY BANCORP, INC.


NOTES
      TO
      CONSOLIDATED FINANCIAL STATEMENTS


December
      31, 2005 and 2004


**______________________________________________________________________________________**





**NOTE
      10 - INCOME TAXES**





Income
      tax expense was as follows:





2005
            
            2004Current
                federal
            
            $
            222
            
            $
            7Deferred
                federal
            
            
            164
            
            
            234Total
            
            $
            386
            
            $
            305








Effective
      rates differ from the federal statutory rate of 34% applied to income before
      taxes due to the following:








2005
            
            2004Federal
                statutory rate times the financial statement income
            
            $
            431
            
            $
            336Effect
                of:Tax-exempt
                income
            
            
            (23
            )
            
            (12
            )Low
                income housing tax credits
            
            
            (23
            )
            
            (24
            )Other,
                net
            
            
            1
            
            
            5Total
            
            $
            386
            
            $
            305








Year
      end
      deferred tax assets and liabilities were due to the following:





2005
            
            2004Deferred
                tax assetsAllowance
                for loan losses
            
            $
            285
            
            $
            426Net
                unrealized security losses
            
            
            285Other
            
            
            24
            
            
            47594
            
            
            473Deferred
                tax liabilitiesFHLB
                stock dividends
            
            $
            (58
            )
            $
            (44
            )Depreciation
            
            
            (178
            )
            
            (195
            )Net
                unrealized security gains
            
            
            -
            
            
            (1
            )Prepaid
                expenses
            
            
            (76
            )
            
            (60
            )Other
            
            
            (2
            )
            
            (14
            )(314
            )
            
            (314
            )Net
                deferred tax asset
            
            $
            280
            
            $
            159








































Page
            51 of 79





FIRST
      SECURITY BANCORP, INC.


NOTES
      TO
      CONSOLIDATED FINANCIAL STATEMENTS


December
      31, 2005 and 2004


**______________________________________________________________________________________**





**NOTE
      11 - RELATED PARTY TRANSACTIONS**





Loans
      to
      executive officers, directors, and their affiliates in 2005 were as follows
      (in
      thousands):





Beginning
                balance
            
            $
            11,458New
                loans
            
            
            1,664Effect
                of changes in related parties
            
            
            (1,831
            )Repayments
            
            
            (4,369
            )Ending
                balance
            
            $
            6,922





Deposits
      from executive officers, directors, and their affiliates at year end 2005 and
      2004 were approximately $6.8 million and $6.0 million,
      respectively.









The
      Bank
      leases land from a company controlled by a director upon which the Bank
      constructed a branch facility in 2001. The lease agreement provides for a twenty
      year term with a base rent that increases biannually from $70 per year at
      inception to $91 per year for the final two years of the term. The lease
      agreement also provides that the Bank will pay property taxes and other
      governmental levies or assessments on the property and a portion of the common
      area maintenance for the shopping center in which the branch facility is
      located.







The
      rent
      commitment under this noncancelable operating lease is as follows, before
      considering the renewal option that is present (in thousands):





2006
            
            $
            722007
            
            
            742008
            
            
            742009
            
            
            762010
            
            
            77Thereafter
            
            
            880Total
            
            $
            1,253










**NOTE
      12 - STOCK OPTIONS**







Stock
      Award Plan


Options
      to buy stock are granted to directors, officers and employees under the
      Company’s Stock Award Plan (“Stock Plan”), which provides for issuance of up to
      200,000 options. Pursuant to the Stock Plan, options may be issued which are
      defined as incentive stock options or as non-qualified stock options. Incentive
      stock options are intended to qualify under the provisions of Internal Revenue
      Code Section 422 (“IRC”), which include, among other things, that the option
      price be not less than the fair value of the shares as of the date of grant.
      Non-qualified stock options are those that do not meet the requirements of
      the
      provisions of the IRC, and, accordingly, may contain terms that are different
      than those in place for incentive stock options. The Stock Plan is accounted
      for
      in accordance with Accounting Principles Board Opinion (APB) No. 25, “Accounting
      for Stock Issued to Employees”, and related interpretations.






















Page
            52 of 79





FIRST
      SECURITY BANCORP, INC.


NOTES
      TO
      CONSOLIDATED FINANCIAL STATEMENTS


December
      31, 2005 and 2004


______________________________________________________________________________________





**NOTE
      12 - STOCK OPTIONS** (Continued)





A
      summary
      of the activity in the Stock Plan is as follows:





2005
            
            2004Weighted
            
            
            
            WeightedAverage
            
            
            
            AverageExercise
            
            
            
            ExerciseShares
            
            Price
            
            Shares
            
            PriceOutstanding
                at beginning of year
            
            
            119,650
            
            $
            18.23
            
            
            87,750
            
            $
            18.91Granted
            
            
            30,000
            
            
            16.40
            
            
            45,350
            
            
            17.15Exercised
            
            
            (1,850
            )
            
            15.50
            
            
            -
            
            
            -Forfeited
            
            
            (12,500
            )
            
            16.41
            
            
            (13,450
            )
            
            19.04Outstanding
                at end of year
            
            
            135,300
            
            $
            18.03
            
            
            119,650
            
            $
            18.23Options
                exercisable at year end
            
            
            135,300
            
            $
            18.03
            
            
            98,500
            
            $
            18.43Weighted
                average fair value of optionsgranted
                during year
            
            $
            5.06
            
            
            
            
            $
            6.04











Options
      outstanding under the Stock Plan at year end 2005 were as follows:





-----------------Outstanding---------------
            
            -------Exercisable-------WeightedAverage
            
            Weighted
            
            
            
            WeightedRange
                of
            
            
            
            Remaining
            
            Average
            
            
            
            AverageExercise
            
            
            
            Contractual
            
            Exercise
            
            
            
            ExercisePrices
            
            Number
            
            Life
            
            Price
            
            Number
            
            Price$13.75-$15.50
            
            
            12,000
            
            
            19
                months
            
            $
            15.50
            
            
            12,000
            
            $
            15.50$16.00-$22.00
            
            
            123,300
            
            
            24
                months
            
            
            18.28
            
            
            123,300
            
            
            18.28Outstanding
                at year end
            
            
            135,300
            
            
            23
                month**s**
            
            $
            18.03
            
            
            135,300
            
            $
            18.03





Other
      Stock Options


The
      Company has granted other options in connection with the employment of the
      Company’s Chief Executive Officer which are separate from the aforementioned
      plan and tables. These options are non-qualified and were granted with an
      exercise price below the grant date market price. The difference between the
      exercise price and the market price was recognized as compensation expense
      over
      the vesting period in accordance with Accounting Principles Board Opinion (APB)
      No. 25, “Accounting for Stock Issued to Employees.” At year end 2005, all
      options were vested and the corresponding remaining expense
      recognized.






Number
                  of options
              20,000Maturity
              December
                  1, 2013Exercise
                  price
              $14.00


















Page
          53 of 79


FIRST
      SECURITY BANCORP, INC.


NOTES
      TO
      CONSOLIDATED FINANCIAL STATEMENTS


December
      31, 2005 and 2004


______________________________________________________________________________________





**NOTE
      13 - CAPITAL REQUIREMENTS AND RESTRICTIONS ON RETAINED
      EARNINGS**





Banks
      and
      bank holding companies are subject to regulatory capital requirements
      administered by federal banking agencies. Capital adequacy guidelines and,
      additionally for banks, prompt corrective action regulations involve
      quantitative measures of assets, liabilities, and certain off-balance-sheet
      items calculated under regulatory accounting practices. Capital amounts and
      classifications are also subject to qualitative judgments by regulators. Failure
      to meet various capital requirements can initiate regulatory action. Prompt
      corrective action regulations provide five classifications: well capitalized,
      adequately capitalized, undercapitalized, significantly undercapitalized and
      critically undercapitalized, although these terms are not used to represent
      overall financial condition. If adequately capitalized, regulatory approval
      is
      required to accept brokered deposits. If undercapitalized, capital distributions
      are limited, as is asset growth and expansion, and capital restoration plans
      are
      required. At year end 2005 and 2004, the most recent regulatory notifications
      categorized the Bank as well capitalized under the regulatory framework for
      prompt corrective action. There are no conditions or events since that
      notification that management believes have changed the institution’s
      category.





Actual
      and required capital amounts (in millions) and ratios are presented below at
      year end.




To
                be Adequately
            
            To
                be WellCapitalized
                Under
            
            Capitalized
                UnderPrompt
                Corrective
            
            Prompt
                CorrectiveActual
            
            Action
                Provisions
            
            Action
                ProvisionsAmount
            
            Ratio
            
            Amount
            
            Ratio
            
            Amount
            
            Ratio2005Total
                Risk Based Capital toRisk-weighted
                assetsConsolidated
            
            $
            23.0
            
            
            12.4
            %
            $
            14.8
            
            
            8.0
            %
            $
            18.5
            
            
            10.0
            %Bank
                only
            
            
            25.4
            
            
            13.7
            %
            
            14.8
            
            
            8.0
            %
            
            18.5
            
            
            10.0
            %Tier
                I Capital to Risk-weighted
                assetsConsolidated
            
            $
            21.5
            
            
            11.6
            %
            $
            7.4
            
            
            4.0
            %
            $
            11.1
            
            
            6.0
            %Bank
                only
            
            
            24.0
            
            
            12.9
            %
            
            7.4
            
            
            4.0
            %
            
            11.1
            
            
            6.0
            %Tier
                I Leverage Capital toAverage
                assetsConsolidated
            
            $
            21.5
            
            
            10.1
            %
            $
            8.5
            
            
            4.0
            %
            $
            10.6
            
            
            5.0
            %Bank
                only
            
            
            24.0
            
            
            11.3
            %
            
            8.5
            
            
            4.0
            %
            
            10.6
            
            
            5.0
            %2004Total
                Risk Based Capital toRisk-weighted
                assetsConsolidated
            
            $
            22.3
            
            
            12.6
            %
            $
            14.1
            
            
            8.0
            %
            $
            17.7
            
            
            10.0
            %Bank
                only
            
            
            24.5
            
            
            13.8
            %
            
            14.1
            
            
            8.0
            %
            
            17.7
            
            
            10.0
            %Tier
                I Capital to Risk-weighted
                assetsConsolidated
            
            $
            20.6
            
            
            11.6
            %
            $
            7.1
            
            
            4.0
            %
            $
            10.6
            
            
            6.0
            %Bank
                only
            
            
            22.8
            
            
            12.9
            %
            
            7.1
            
            
            4.0
            %
            
            10.6
            
            
            6.0
            %Tier
                I Leverage Capital toAverage
                assetsConsolidated
            
            $
            20.6
            
            
            9.8
            %
            $
            8.4
            
            
            4.0
            %
            $
            10.5
            
            
            5.0
            %Bank
                only
            
            
            22.8
            
            
            10.8
            %
            
            8.4
            
            
            4.0
            %
            
            10.5
            
            
            5.0
            %










Page
            54 of 79








FIRST
      SECURITY BANCORP, INC.


NOTES
      TO
      CONSOLIDATED FINANCIAL STATEMENTS


December
      31, 2005 and 2004


______________________________________________________________________________________





**NOTE
      13 - CAPITAL REQUIREMENTS AND RESTRICTIONS ON RETAINED EARNINGS**


(Continued)





Banking
      regulations limit the amount of capital distributions that may be paid by the
      Bank without prior approval. Generally, capital distributions are limited to
      undistributed net income for the current year and prior two years. In addition,
      generally, capital distributions may be made only to the extent of retained
      earnings. At year end 2005, approximately $975 was available to pay dividends
      to
      the Company. This is computed by adding the current year and the two prior
      year’s net income less any dividends paid. The Company’s ability to pay
      dividends is dependent on the Bank. In addition, in 2003 the Company entered
      into a credit agreement that contains restrictions on dividends it can pay.
      (See
      Note 8)








**NOTE
      14 - LOAN COMMITMENTS AND OTHER RELATED ACTIVITIES**





The
      contractual amount of financial instruments with off-balance-sheet risk was
      as
      follows at year end:





2005
            
            2004Fixed
            
            Variable
            
            Fixed
            
            VariableCommitments
                to make loans
            
            $
            -
            
            $
            3,674
            
            $
            -
            
            $
            334Unused
                lines of credit
            
            
            827
            
            
            45,420
            
            
            477
            
            
            40,339Letters
                of credit
            
            
            24
            
            
            5,864
            
            
            -
            
            
            4,038








Commitments
      to make loans are generally made for periods of 3 months or less.





Letters
      of credit are considered financial guarantees under FASB Interpretation 45.
      These instruments are carried at fair value, which was immaterial at year end
      2005 and 2004.





Some
      financial instruments, such as loan commitments, credit lines, letters of credit
      and overdraft protection are issued to meet customer financing needs. These
      are
      agreements to provide credit or to support the credit of others, as long as
      conditions established in the contract are met, and usually have expiration
      dates. Commitments may expire without being used. Off-balance sheet risk to
      credit loss exists up to the face amount of these instruments, although material
      losses are not anticipated. The same credit policies are used to make such
      commitments as are used for loans, including obtaining collateral at exercise
      of
      the commitment.























































Page
            55 of 79








FIRST
      SECURITY BANCORP, INC.


NOTES
      TO
      CONSOLIDATED FINANCIAL STATEMENTS


December
      31, 2005 and 2004


**______________________________________________________________________________________**





**NOTE
      15 - FAIR VALUES OF FINANCIAL INSTRUMENTS**





Carrying
      amount and estimated fair values of financial instruments were as follows at
      year end:





2005
            
            2004Carrying
            
            Fair
            
            Carrying
            
            FairAmount
            
            Value
            
            Amount
            
            ValueFinancial
                assetsCash
                and cash equivalents
            
            $
            19,885
            
            $
            19,885
            
            $
            23,014
            
            $
            23,014Securities
                available-for-sale
            
            
            34,587
            
            
            34,587
            
            
            33,748
            
            
            33,748Loans
                held for sale
            
            
            -
            
            
            -
            
            
            -
            
            
            -Loans,
                net
            
            
            152,192
            
            
            152,892
            
            
            150,856
            
            
            151,078Federal
                Home Loan Bank stock
            
            
            848
            
            
            848
            
            
            806
            
            
            806Accrued
                interest receivable
            
            
            943
            
            
            943
            
            
            856
            
            
            856Financial
                liabilitiesDeposits
            
            $
            177,488
            
            $
            178,066
            
            $
            178,862
            
            $
            179,621Repurchase
                agreements andshort-term
                borrowings
            
            
            5,483
            
            
            5,483
            
            
            5,857
            
            
            5,857Note
                Payable
            
            
            3,000
            
            
            3,000
            
            
            3,000
            
            
            3,000Federal
                Home Loan Bank advances
            
            
            8,697
            
            
            8,795
            
            
            8,246
            
            
            8,428Accrued
                interest payable
            
            
            462
            
            
            462
            
            
            373
            
            
            373





The
      methods and assumptions used to estimate fair value are described as
      follows:





Carrying
      amount is the estimated fair value for cash and cash equivalents and Federal
      Home Loan Bank stock, accrued interest receivable and payable, demand deposits,
      repurchase agreements, short-term borrowings, note payable and variable rate
      loans or deposits that reprice frequently and fully. Security fair values are
      based on market prices or dealer quotes, and, if no such information is
      available, on the rate and term of the security and information about the
      issuer. For fixed rate loans or deposits and for variable rate loans or deposits
      with infrequent repricing or repricing limits, fair value is based on discounted
      cash flows using current market rates applied to the estimated life of credit
      risk. Fair values for impaired loans are estimated using discounted cash flow
      analysis or underlying collateral values. Fair value of debt is based on current
      rates for similar financing. The fair value of off-balance-sheet items is based
      on the current fees or cost that would be charged to enter into or terminate
      such arrangements and is not material.








**NOTE
      16 - ACQUISITION AND SALE OF MORTGAGE ORIGINATION COMPANY**





On
      March
      15, 2002, the
      Bank
      acquired the assets of First Mortgage Company, Inc., in Lexington, Kentucky.
      The
      operations were assumed by the Bank and were promoted under the name “First
      Security Mortgage Company”, the purpose of which was to originate mortgage loans
      for sale into the secondary market. The acquisition agreement included a
      purchase price of up to $476, $69 of which was paid at closing for fixed assets.
      The remainder of the purchase price was payable contingent upon the department’s
      earnings over the ensuing four years. In conjunction with the purchase and
      in
      addition to the fixed assets, the Bank recorded $67 in intangibles for customer
      lists and a non-compete agreement which was being amortized over five years.
      Of
      the remaining contingent purchase price, $106 was earned in 2003 and recorded
      as
      goodwill. In September 2004, the assets used in this department were sold to
      First Mortgage, LLC, an entity created by the two principal bank employees
      of
      the department. In connection with this transaction, First Mortgage, LLC assumed
      the operating leases and hired bank employees who were employed within this
      department. The Bank recorded a loss of $100 in connection with this sales
      transaction, which was the write off of the investment in goodwill and other
      intangible assets.










Page
            56 of 79











FIRST
      SECURITY BANCORP, INC.


NOTES
      TO
      CONSOLIDATED FINANCIAL STATEMENTS


December
      31, 2005 and 2004


**______________________________________________________________________________________**





**NOTE
      17 - PARENT COMPANY ONLY CONDENSED FINANCIAL STATEMENTS**





Condensed
      financial information of First Security Bancorp, Inc. follows:





CONDENSED
      BALANCE SHEETS,


December
      31





2005
            
            2004ASSETSCash
                and due from banks
            
            $
            209
            
            $
            325Investment
                in subsidiary
            
            
            23,409
            
            
            22,783Other
                assets
            
            
            443
            
            
            505Total
                assets
            
            $
            24,061
            
            $
            23,613LIABILITIES
                AND SHAREHOLDERS’ EQUITYLiabilitiesNote
                Payable
            
            $
            3,000
            
            $
            3,000Other
                liabilities
            
            
            76
            
            
            5Total
                liabilities
            
            
            3,076
            
            
            5,005Shareholders’
                EquityCommon
                stock
            
            
            8,940
            
            
            8,926Paid-in
                capital
            
            
            8,980
            
            
            8,944Retained
                earnings
            
            
            3,617
            
            
            2,736Accumulated
                other comprehensive income (loss)
            
            
            (552
            )
            
            2Total
                shareholders’ equity
            
            
            20,985
            
            
            20,608Total
                liabilities and shareholders’ equity
            
            $
            24,061
            
            $
            23,613



































































Page
            57 of 79





FIRST
      SECURITY BANCORP, INC.


NOTES
      TO
      CONSOLIDATED FINANCIAL STATEMENTS


December
      31, 2005 and 2004


**______________________________________________________________________________________**





**NOTE
      17 - PARENT COMPANY ONLY CONDENSED FINANCIAL STATEMENTS** (Continued)





CONDENSED
      STATEMENTS OF INCOME


Years
      Ended December 31





2005
            
            2004IncomeInterest
                income
            
            $
            1
            
            $
            1Other
                income
            
            
            -
            
            
            -Dividend
                from subsidiary
            
            
            16
            
            
            2,00017
            
            
            2,001ExpensesSalaries
                and employee benefits
            
            
            22
            
            
            18Professional
                fees
            
            
            188
            
            
            188Interest
                Expense
            
            
            180
            
            
            213Other
            
            
            78
            
            
            27468
            
            
            446Income
                (loss) before income tax and undistributedsubsidiary
                income
            
            
            (451
            )
            
            1,555Income
                tax benefit
            
            
            154
            
            
            151Income
                (loss) before undistributed earningsof
                subsidiary
            
            
            (297
            )
            
            1,706Equity
                in undistributed earnings of subsidiary
            
            
            1,178
            
            
            (1,022
            )Net
                income
            
            $
            881
            
            $
            684











































































Page
            58 of 79








FIRST
      SECURITY BANCORP, INC.


NOTES
      TO
      CONSOLIDATED FINANCIAL STATEMENTS


December
      31, 2005 and 2004


**______________________________________________________________________________________**





**NOTE
      17 - PARENT COMPANY ONLY CONDENSED FINANCIAL STATEMENTS** (Continued)





CONDENSED
      STATEMENTS OF CASH FLOW


Years
      ended December 31





2005
            
            2004Cash
                flows from operating activitiesNet
                income
            
            $
            881
            
            $
            684Adjustments
                to reconcile net incometo
                net cash from operating activitiesEquity
                in undistributed earnings of subsidiary
            
            
            (1,178
            )
            
            1,022Change
                in other assets
            
            
            60
            
            
            (308
            )Change
                in other liabilities
            
            
            71
            
            
            -Net
                cash from operating activities
            
            
            (166
            )
            
            1,398Cash
                flows from investing activitiesInvestment
                in subsidiary
            
            
            -
            
            
            -Cash
                flows from financing activitiesProceeds
                from borrowing
            
            
            -
            
            
            -Repayments
                on note
            
            
            -
            
            
            (2,000
            )Proceeds
                from issuance of options and common stock
            
            
            50
            
            
            18Net
                cash from financing activities
            
            
            50
            
            
            (1,982
            )Net
                change in cash and cash equivalents
            
            
            (116
            )
            
            (584
            )Cash
                and cash equivalents at beginning of period
            
            
            325
            
            
            909Cash
                and cash equivalents at end of period
            
            $
            209
            
            $
            325









































































Page
              59
              of 79





FIRST
      SECURITY BANCORP, INC.


NOTES
      TO
      CONSOLIDATED FINANCIAL STATEMENTS


December
      31, 2005 and 2004


____________________________________________________________________________________





**NOTE
      18 - EARNINGS PER SHARE**





The
      factors used in the earnings per share computation follow:


2005
            
            2004BasicNet
                income
            
            $
            881
            
            $
            684Weighted
                average common shares
            
            
            1,560
            
            
            1,559Basic
                earnings per common share
            
            $
            .56
            
            $
            .44DilutedNet
                income
            
            $
            881
            
            $
            684Weighted
                average common
                shares outstandingfor
                basic earnings per common share
            
            
            1,560
            
            
            1,559Add:
                Dilutive
                effects of assumed exercises ofStock
                warrants
            
            
            -
            
            
            -Stock
                options
            
            
            8
            
            
            5Average
                shares and
                dilutive potentialcommon
                shares
            
            
            1,568
            
            
            1,564Diluted
                earnings per common share
            
            $
            .56
            
            $
            .44








Stock
      options for 58,600 and 58,000 shares of common stock were not considered in
      computing diluted earnings per common share for 2005 and 2004, respectively,
      because they were anti-dilutive.








**NOTE
      19 - OTHER COMPREHENSIVE LOSS**





Other
      comprehensive loss components and related taxes were as follows:





2005
            
            2004Unrealized
                holding gains and losses onavailable-for-sale
                securities
            
            $
            (839
            )
            $
            7Less
                reclassification adjustments for gainsand
                losses later recognized as income
            
            
            -
            
            
            (318
            )Net
                unrealized losses
            
            
            (839
            )
            
            (311
            )Tax
                expense/(benefit)
            
            
            (285
            )
            
            105Other
                comprehensive loss
            
            $
            (554
            )
            $
            (206
            )































Page
              60
              of 79








FIRST
      SECURITY BANCORP, INC.


NOTES
      TO
      CONSOLIDATED FINANCIAL STATEMENTS


December
      31, 2005 and 2004


____________________________________________________________________________________





**NOTE
      20 - QUARTERLY FINANCIAL INFORMATION (UNAUDITED)**





Net
                Interest
            
            Noninterest
            
            Noninterest
            
            Net
            
            Earnings
                per ShareIncome
            
            Income
            
            Expense
            
            Income
            
            Basic
            
            Diluted2005First
                quarter
            
            $
            1,696
            
            $
            209
            
            $
            1,322
            
            $
            395
            
            $
            .25
            
            $
            .25Second
                quarter
            
            
            1,769
            
            
            225
            
            
            1,341
            
            
            439
            
            
            .28
            
            
            .28Third
                quarter
            
            
            1,813
            
            
            215
            
            
            1,481
            
            
            373
            
            
            .24
            
            
            .24Fourth
                quarter
            
            
            920
            
            
            226
            
            
            1,662
            
            
            (326
            )
            
            (.21
            )
            
            (.21
            )2004First
                quarter
            
            $
            1,448
            
            $
            515
            
            $
            1,649
            
            $
            201
            
            $
            .13
            
            $
            .13Second
                quarter
            
            
            1,648
            
            
            396
            
            
            1,698
            
            
            203
            
            
            .13
            
            
            .13Third
                quarter
            
            
            1,585
            
            
            361
            
            
            1,735
            
            
            (1
            )
            
            -
            
            
            -Fourth
                quarter
            
            
            1,646
            
            
            225
            
            
            1,456
            
            
            281
            
            
            .18
            
            
            .18








**NOTE
      21 - MERGER**





On
      December 11, 2005, First Security Bancorp, Inc. entered into an Agreement and
      Plan of Merger, dated December 12, 2005, with American Founders Bank, Inc.,
      American Founders Bancorp, Inc. and American Founders Acquisition, Inc. The
      Merger Agreement provides, among other things, that subject to certain
      conditions, First Security Bancorp, Inc. will be merged with and become a wholly
      owned subsidiary of American Founders Bancorp, Inc. As more fully described
      in
      the Merger Agreement, and in the Form 8-KA of the Company, dated December 12,
      2005, at the effective time of the merger, each share outstanding will be
      converted into the right to receive $24.00 per share in cash, subject to
      possible adjustment if the merger does not occur by April 30, 2006. The merger
      is subject to regulatory and shareholder approvals and other customary closing
      conditions. Subject to the satisfaction of these conditions, the transaction
      is
      expected to be completed at the end of April 2006.





























(The
      balance of this page is intentionally left blank)












































Page
            61
            of 79





**ITEM
      8A.**  **CONTROLS
      AND PROCEDURES**





**Evaluation
      of Disclosure Controls and Procedures**





First
      Security maintains disclosure controls and procedures, as defined in
      Rule 13a-15(e) promulgated under the Securities Exchange Act of 1934 (the
“Exchange Act”), that are designed to ensure that information required to be
      disclosed by it in the reports that it files or submits under the Exchange
      Act
      is recorded, processed, summarized and reported within the time periods
      specified in the SEC’s rules and forms and that such information is accumulated
      and communicated to First Security Bancorp’s management, including its Chief
      Executive Officer and Chief Financial Officer, as appropriate, to allow timely
      decisions regarding required disclosure. First Security carried out an
      evaluation, under the supervision and with the participation of its management,
      including its Chief Executive Officer and Chief Financial Officer, of the
      effectiveness of the design and operation of its disclosure controls and
      procedures as of the end of the period covered by this report. Based on the
      evaluation of these disclosure controls and procedures, the Chief Executive
      Officer and Chief Financial Officer concluded that First Security Bancorp’s
      disclosure controls and procedures were effective.





**Changes
      in Internal Controls**





There
      were no changes in First Security Bancorp’s internal control over financial
      reporting during First Security Bancorp’s fiscal quarter ended December 31,
      2005 that have materially affected, or are reasonably likely to materially
      affect, First Security Bancorp’s internal control over financial
      reporting.











**PART
      III**


**ITEM
      9.**  **DIRECTORS,
      EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS;**


****  **COMPLIANCE
      WITH SECTION 16(a) OF THE EXCHANGE ACT**





***Directors:***The
      following tables set forth information with respect to each Director of First
      Security.




**Name
                and Age**
            **Yr
                First Elected Director**
            **Positions
                with the Company**
            **Business
                Experience During the Past Five Years****CLASS
                I DIRECTORS (TERMS EXPIRE 2006)**R.
                Douglas Hutcherson (58)
            2003
            Director,
                President and Chief Executive Officer
            President
                and Chief Executive Officer of the Company since December 1, 2003;
                President and Chief Executive Officer of First Security Bank since
                December 1, 2003; Previously with Bank One, NA in Louisville, Kentucky
                [First Vice President and Credit Process Manager (2002 - 2003); Senior
                Vice President and Credit Support Manager (1999 - 2002)Erle
                Levy (72)
            2000
            Director
            Owner,
                Kentucky Lighting and Supply, Inc.Dr.
                Ira P. Mersack (65)
            2000
            Director
            Physician
                (Dermatology Associates of Kentucky, P.S.C.); Partner, Margaux Farm
                LLC;
                Partner DAK PropertiesD.
                Woodford Webb, Jr. (37)
            2000
            Director
            Attorney
                (Webb, Hoskins, Glover & Thompson, P.S.C.); President, The Webb
                Companies
















Page 62 of
            79





**CLASS II DIRECTORS (TERMS EXPIRE 2008)**


Julian
                E. Beard (68)
            2000
            Director,
              Board
                Chairman and Founder
            Director,
                Economic Development, Lexington-Fayette Urban County Government;
                Former
                Chief Financial Officer, Hopewell Farm and Bluegrass Bloodstock Agency;
                Retired President and Chief Executive Officer of the Company; Retired
                President and Chief Executive Officer of First Security Bank, Chairman
                Emeritus and FounderA.F.
                Dawahare (73)
            2000
            Director
            Chairman
                of the Board, Dawahare’s, Inc. (retail clothier)Robert
                J. Rosenstein (53)
            2000
            Director
            President,
                Shopper’s Village Liquors, Inc. (d/b/a The Liquor Barn); Commercial real
                estate developerKathy
                E. Walker (47)
            2000
            Director
            Owner,
                Elm Street Resources, Inc. (coal sales
                agency)





**CLASS III DIRECTORS (TERMS EXPIRE 2007)**


Harold
                Glenn Campbell (55)
            2000
            Director
            Former
                Financial Advisor,
              Merrill
                Lynch Pierce Fenner & Smith; President and Chief Executive Officer,
                Farmers State Bank, Booneville, Kentucky 1983 - 2000Dr.
                Kenneth L. Gerson (75)
            2000
            Director
            Physician
                (Allergy &
              Asthma
                Associates, PSC)Tommy
                R. Hall (68)
            2000
            Director
            President,
                T. Hall Properties LLCRichard
                S. Trontz (51)
            2000
            Director
            Owner,
                Hopewell Farm and Bluegrass Bloodstock Agency (bloodstock services
                and
                equine insurance)





None
      of
      the Directors is a director of any other company with a class of securities
      registered with the Securities and Exchange Commission pursuant to Section
      12 of
      the Securities Exchange Act of 1934 or subject to the requirements of Section
      15(d) of that Act, or of any company registered as an investment company under
      the Investment Company Act of 1940.




In
      addition to the directors listed in the tables above, Irving Rosenstein and
      Dr.
      Sibu P. Saha serve as advisory directors of the Company.




Since
      the
      last annual meeting of shareholders, William T. Vennes (age 64, Retired Vice
      President and General Manager of the Imaging Solutions Division, Lexmark
      International, Inc.) a Class II director resigned as director of the Company.
      The resignation occurred effective May 18, 2005.





***Executive
      Officers and Significant Employees:*** Executive officers are elected and serve at the pleasure of the Board of
      Directors. The following identifies the executive officers and significant
      employees of the Company and all positions held with the Company and First
      Security Bank. Information about their ages as of March 23, 2006 and their
      principal occupations for the last five years is also presented.





R.
      Douglas Hutcherson (58) has been with First Security Bank since December 1,
      2003
      and serves as President and Chief Executive Officer of the Company and President
      and Chief Executive Officer of FS Bank. Prior to this time he served as First
      Vice President and Credit Process Manager with Bank One, NA in Louisville,
      Kentucky (2002-2003); Senior Vice President and Credit Support Manager
      (1999-2002).





Don
      Shannon (66) has been with First Security Bank since May 2001 and currently
      serves as Executive Vice President and Senior Lending Officer. Prior to this
      time, he served as a Vice President of Bank One.





David
      Chrisman (49) has been with First Security Bank since November 2002 and
      currently serves as Senior Vice President and Chief Credit Officer. Prior to
      this time, he served as Industrial Sales Manager, Safety Kleen Environmental
      Systems.







Page 63 of
            79








Dave
      Donaldson (53) has been with First Security Bank since March 2004 and currently
      serves as Senior Vice President, Head of Marketing and Retail Banking. Prior
      to
      this time, he served as President of Win-Win Solutions, Inc.





Kristie
      L. Eubank (38) has been with First Security Bank since August 2003 and currently
      serves as Chief Financial Officer of the Company and Chief Financial Officer
      of
      FS Bank. Prior to this time she served as Financial Analyst for Lodestar Energy,
      Inc.





John
      G.
      Sullivan (56) resigned in May 2005. He served as Executive Vice President and
      Chief Financial Officer. He also served as Executive Vice President and Chief
      Financial Officer of the Company.





***Audit
      Committee Expertise:*** ** The
      Board
      of Directors of First Security has a separately designated Audit Committee.
      Our
      Audit Committee Charter contains independence requirements members of the Audit
      Committee must meet, and requires each Audit Committee member to be able to
      read
      and understand fundamental financial statements, including the Company’s balance
      sheet, income statement and cash flow statement, or to be able to do so within
      a
      reasonable period of time after his or her appointment to the Audit Committee.
      At least one member of the Audit Committee must have had past employment
      experience in finance or accounting or a professional certification in
      accounting or comparable experience or background which results in that
      individual possessing financial sophistication. Although not a requirement,
      our
      Audit Committee Charter contemplates that First Security will seek to have
      at
      least one member of the Audit Committee who is considered to be a "financial
      expert", as defined by the Securities and Exchange Commission.





The
      Board
      of Directors has determined that First Security presently does not have an
      “audit committee financial expert” serving on its Audit Committee, as that term
      is defined in Item 401 of SEC Regulation S-B. The Board of Directors believes
      that the Audit Committee members meet the independence and experience
      requirements mandated by our Audit Committee Charter, and have sufficient
      knowledge in financial and auditing matters to serve on the committee. The
      Board
      of Directors will monitor and evaluate its need for an audit committee financial
      expert throughout fiscal 2006.





***Code
      of Ethics:*** ** As
      a
      banking organization, we have in place various policies and procedures designed
      to promote honest and ethical conduct consistent with the extensive banking
      laws
      and regulations that govern our business. These policies and procedures were
      adopted for 2005, and we believe that our current code of ethics that applies
      to
      our senior financial officers (Chief Executive Officer and Chief Financial
      Officer) is in conformity with the requirements for a code of ethics as defined
      in Item 406 of SEC Regulation S-B, which the SEC adopted in 2003. A copy of
      our
      Code of Ethics is posted on our website at http://www.myfsb.net .
      It can
      be accessed from “Investor Relations.”





***Section
      16(a) Beneficial Ownership Reporting Compliance:*** Section
      16(a) of the Securities Exchange Act of 1934, as amended (“Section 16”),
      requires the Company’s Directors and certain officers and beneficial owners of
      Company common stock (collectively, the “reporting persons”) to file with the
      Securities and Exchange Commission (the “SEC”) reports of ownership and changes
      in ownership of Company common stock. The reporting persons are required to
      furnish the Company with copies of all reports filed pursuant to Section 16.





Based
      solely upon a review of such reports received by it, or written representations
      from certain reporting persons that no Form 5 reports were required for those
      persons, the Company believes that, during fiscal year 2005, none of the
      reporting persons failed to file on a timely basis any report required by
      Section 16(a).


























(The
      balance of this page is intentionally left blank)













Page 64 of
            79








**ITEM
      10.**  **EXECUTIVE
      COMPENSATION**





The
      following table summarizes compensation information for each person who served
      as the Chief Executive Officer of the Company during 2005 and the other
      executive officers of the Company in 2005 with annual compensation in excess
      of
      $100,000 (the named executive officers).





SUMMARY


Long
                TermCompensationAwardsAnnual
            
            Compensation*
            
            SharesFiscal
            
            
            
            
            
            Underlying
            
            All
                OtherName
                and Principal Position
            
            Year
            
            Salary
            
            Bonus
            
            Options
            
            Compensation**R.
                Douglas Hutcherson
            
            
            2005
            
            $
            150,000
            
            $
            18,000
            
            $
            -
            
            $
            29,194President
                and Chief Executive
            
            
            2004
            
            
            150,000
            
            
            -
            
            
            
            
            
            36,572Officer,
                First Security Bancorp
            
            
            2003
            
            
            12,500
            
            
            50,000
            
            
            20,000
            
            
            2,019and
                FS BankDonald
                R. Shannon
            
            
            2005
            
            
            107,500
            
            
            25,000
            
            
            
            
            
            10,323Executive
                Vice President
            
            
            2004
            
            
            105,000
            
            
            25,000
            
            
            3,500
            
            
            9,831FS
                Bank
            
            
            2003
            
            
            90,000
            
            
            33,500
            
            
            
            
            
            8,582David
                W. Chrisman
            
            
            2005
            
            
            87,000
            
            
            20,000
            
            
            
            
            
            5,789Senior
                Vice President
            
            
            2004
            
            
            84,216
            
            
            -
            
            
            1,500
            
            
            4,786FS
                Bank
            
            
            2003
            
            
            56,811
            
            
            6,700
            
            
            
            
            
            1,571





*Annual
      Compensation does not reflect perquisites which, in the aggregate, are less
      than
      10% of the officer’s salary and bonus.





**
      Represents the amounts contributed by First Security Bank to the named
      participants’ accounts in the First Security Bank 401(K) Profit Sharing Plan (in
      2005, Mr. Hutcherson $6,240; Mr. Shannon $5,300 and Mr. Chrisman $4,280) and the
      cost of group health, term life and long term disability insurance premiums
      paid
      by the Company for such individuals (in 2005, Mr. Hutcherson $3,873; Mr. Shannon
      $5,023 and Mr. Chrisman $1,509) and the amount paid to Mr. Hutcherson in 2005
      for automobile allowance and country club expenses ($19,081).





There
      were no stock options granted to the above named executive officers in
      2005.





The
      following table provides information concerning the value of unexercised options
      held by the named executive officers at December 31, 2005:





OPTION EXERCISES IN FY 2005 AND FY-END OPTION VALUE


Name
            
            Shares
                acquired on exercise
            
            Value
                Realized ($)
            
            Number
                of shares underlying unexercised options at December
                31,2005
            
            Value
                of unexercised in-the-money options at
              December
                31,2005 ($) (1)R.
                Douglas Hutcherson
            
            
            -
            
            
            -
            
            
            20,000
            
            $
            184,600Donald
                R. Shannon
            
            
            -
            
            
            -
            
            
            3,500
            
            
            21,280David
                W. Chrisman
            
            
            -
            
            
            -
            
            
            1,500
            
            
            9,120





(1)
      Value
      is calculated as the difference between the last sale price as furnished by
      the
      National Association of Securities Dealers (NASD) on December 31, 2005 ($23.23),
      and the option price.





***Employee
      Benefit Plans:*** First
      Security Bank offers all full-time officers and full-time employees group life
      and medical and dental insurance coverage. First Security Bank also has a
      defined contribution 401(k) retirement plan which covers employees that meet
      certain age and length of service requirements. First Security Bank currently
      contributes to the 401(k) plan through a one hundred percent (100%) match of
      employee contributions up to 4.0% of employee compensation. First Security
      Bank
      also sponsors a Section 125 Cafeteria Plan that provides the employee the
      opportunity to use pre-tax dollars to pay for approved benefits instead of
      paying for these benefits using after-tax dollars.







Page 65 of
            79








Under
      the
      Company’s Stock Award Plan, 200,000 shares of Company common stock were
      available for issuance under options which may be granted between 2000 and
      2010.
      Both incentive stock options and non-qualified stock options may be issued
      under
      the Stock Award Plan, as well as restricted stock awards and stock appreciation
      rights. The purposes of the Stock Award Plan are to enable the Company to
      attract, retain and provide incentives for outstanding employees, Directors
      and
      Advisory Directors for the Company and First Security Bank, to reward excellent
      performance by employees and to further the growth, development and financial
      success of the Company. The Company Board of Directors administers the Stock
      Award Plan. The information under the heading “Equity Plan Compensation” in Item
      5 of this report is incorporated by reference.





***Employment
      Agreements:*** The
      Company and First Security Bank have an employment agreement, dated December
      1,
      2003, with R. Douglas Hutcherson, pursuant to which he serves as President
      and
      Chief Executive Officer of the Company and First Security Bank. The employment
      agreement has an initial three year term that commenced December l, 2003, and
      is
      subject to one year extensions each December 1 starting December 1, 2004. Mr.
      Hutcherson’s base salary under the employment agreement is $150,000, annually,
      subject to increase by the Board of Directors of First Security Bank. He is
      also
      entitled to life insurance benefits and a car and country club allowance and
      to
      participate in the Company’s employee benefit or welfare plans, and his
      performance will be reviewed on an annual basis, as a result of which he may
      be
      eligible for annual salary increases, bonuses, and/or additional stock options
      as approved by the Board of Directors of the Bank at its discretion.




Mr.
      Hutcherson received a $50,000 signing bonus and the Company granted him an
      option to purchase 20,000 shares of the Company at $14.00 per share. First
      Security Bank agreed to provide Mr. Hutcherson relocation benefits (a housing
      allowance and moving expenses), and to compensate him for any loss he suffered
      if he had been unable to sell his residence in Louisville, Kentucky at its
      fair
      market value.




Mr.
      Hutcherson will be entitled to severance pay equal to his salary and certain
      continuing benefits for nine months if the Company or the Bank terminates the
      employment agreement without cause. If Mr. Hutcherson terminates the employment
      agreement at or after a Change in Control because of a material breach or
      because his duties, authority or responsibilities are materially altered, then
      he will be entitled to continue to receive his salary for the remainder of
      the
      term of the agreement, as if it had not been terminated, and will be entitled
      to
      certain continuing benefits for six months or until he obtains other employment.
      First Security Bank may condition severance payments and benefits on the receipt
      of a release. Mr. Hutcherson will be subject to a non-compete agreement during
      the period he receives severance.




Under
      the
      employment agreement, a “Change in Control” is generally defined to include a
      share exchange or merger of First Security Bank if the Company will not own
      100%
      of the surviving bank or of the Company if the Company’s shareholders will not
      own, in substantially the same proportions, at least a majority of the Company’s
      voting shares outstanding immediately following the transaction; a sale or
      other
      disposition of all or any substantial part of the assets of the Company or
      its
      subsidiary followed by a liquidation of the Company; and the approval of the
      Board of Directors or the shareholders of any of these transactions. The term
      also includes a change in the membership of the Board of Directors of the
      Company or First Security Bank that results in a majority of the board members
      not being Continuing Directors, where a Continuing Director is a director who
      was serving on the board on the date of the employment agreement or a successor
      who is recommended or elected by a majority of the Continuing
      Directors.




On
      September 16, 2005 the Company filed a Form 8-K to report that the Company’s
      board of directors approved a management retention program providing for salary
      continuation agreements for three executive officers of the Bank, Don Shannon,
      Executive Vice President and Senior Lending Officer, David Chrisman, Senior
      Vice
      President and Chief Credit Officer, and Dave Donaldson, Senior Vice President,
      Head of Marketing and Retail Banking. On October 18, 2005, the Compensation
      Committee of the Board of Directors of the Company recommended and the Boards
      of
      Directors of the Bank and the Company approved certain changes to the salary
      continuation agreements to be entered into under the program and the agreements,
      with such changes, were executed on October 19, 2005. Copies of the executed
      agreements are attached to this Form 8-K as Exhibits 10.1, 10.2 and 10.3 and
      incorporated herein by this reference. The following brief description of the
      terms of the agreements is qualified in its entirety by reference to the
      executed agreements attached as Exhibits.













Page 66 of
            79











Each
      salary continuation agreement provides that if, within one year of a change
      of
      control of the Bank or the Company, the executive’s employment with the Bank is
      terminated without Good Cause (as defined in the agreement) or by the executive
      voluntarily for Good Reason (as defined in the agreement), then the executive
      is
      entitled to a severance payment equal to 12 months of the executive’s then
      annualized salary. This severance payment is to be made in a lump sum payment
      within 30 days of the termination of the executive’s employment with the Bank.
      However, if the agreement is found to be nonqualified deferred compensation
      and
      if the executive is considered a “key employee” under Internal Revenue Code §
416(i) and the termination of his employment is not involuntary, then the Bank,
      upon the occurrence of a change of control of the Bank or the Company, will
      be
      required to establish a trust and maintain sufficient money in the trust to
      make
      the severance payment to the employee and any other key employees, and such
      severance payment, if triggered, cannot be made until six months after the
      termination of the executive’s employment. In addition, the executive will be
      entitled to any and all benefits accrued under any benefit plan maintained
      by
      the Bank and will be fully vested in every retirement plan. Further, the
      executive and his dependents will continue to participate in the health, dental
      and life insurance plans or arrangements in which they participated prior to
      the
      executive’s termination for 12 months or until the executive and his dependents
      are covered under the plans of a successor employer, whichever occurs first.
      Each executive will also be paid for any vacation accrued in the year preceding
      the year of his termination and unused at the time of the termination of his
      employment.





As
      part
      of the consideration for the Bank entering into the agreements, each agreement
      provides for a general release of claims that the executive might have against
      the Bank or the Company prior to entering into the agreement though this release
      does not become effective until the payments contemplated under the agreement
      have been made. Each salary continuation agreement terminates on the later
      of
      the second anniversary of the effective date of the agreement or the first
      anniversary of a change of control.





Under
      each salary continuation agreement, a change of control of the Bank or the
      Company would generally be deemed to occur if (i) a person or group of persons
      acquires greater than 50% of the fair market value or voting power of the Bank
      or the Company, (ii) a person or group of persons acquires greater than 35%
      or
      more of the voting power of the Bank or the Company during a twelve month
      period, (iii) a majority of the directors of the Bank or the Company are
      replaced in a change not endorsed by a majority of the directors in place prior
      to such replacement, or (iv) a person or group of persons acquires assets of
      the
      Bank or the Company during a twelve month period having a Gross Fair Market
      Value (determined as provided in the agreement) equal to 40% of the Gross Fair
      Market Value of the assets of the Bank or the Company prior to that transaction.
      If the foregoing definition of a change of control is more liberal than the
      definition set forth in any regulations proposed or finalized under Internal
      Revenue Code § 409A, then the definition set forth in any such regulations
      proposed or finalized after the date of the agreement shall control what
      constitutes a change of control under the salary continuation
      agreement.





***Compensation
      of Directors:*** On
      September 12, 2005, the Boards of Directors of the Company and the Bank approved
      establishing a compensation plan for directors of the Company and the Bank
      who
      are not employees of either the Company or the Bank. This compensation plan
      provides for the payment to each outside director of a one-time $3,500 stipend
      plus a per meeting fee for meetings held after July 1, 2005. Under the fee
      schedule, each outside director receives a $550 fee per meeting of the Board
      of
      Directors or $750 per meeting if the director was serving as Chairman of the
      Board. Outside directors serving on the Nomination, Compensation and Corporate
      Governance Committee of the Board of Directors of the Company receive a $200
      fee
      per committee meeting or $500 in the case of the Chairman of such Committee.
      Outside directors serving on the Audit Committee of the Board of Directors
      of
      the Company or of the Bank receive a $200 fee per committee meeting or $500
      in
      the case of the Chairman of such Committee. Outside directors serving on the
      Asset Liability Management/Investment Committee of the Board of Directors of
      the
      Bank receive a $200 fee per committee meeting or $500 in the case of the
      Chairman of such Committee. Outside directors serving on the Director Loan
      Committee of the Board of Directors of the Bank receive a $100 fee per committee
      meeting. A director must be present at the meeting to receive a fee if the
      director has missed two or more meetings during the prior twelve month period.
      Outside directors serving on the Board of Directors of both FS Bank and the
      Company who attend a joint, concurrent or consecutive meeting of both Boards
      would be paid for attending such meetings as if they only attended one Board
      meeting. Fees would be paid promptly as they accrue. The Board of Directors
      of
      the Company established this compensation plan in lieu of its previous practice
      of granting outside directors options each year to purchase stock of the
      Company.








Page
            67
            of 79





**ITEM
      11.**  **SECURITY
      OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT**


**AND
      RELATED STOCKHOLDER MATTERS**





The
      information under the heading “Equity Plan Compensation” in Item 5 of this
      report is incorporated by reference.





The
      following table sets forth, as of March 23, 2006, information about the number
      and percentage of shares of Company common stock beneficially owned by Company
      directors and executive officers, and by all Company directors and executive
      officers as a group, as well as information regarding the only persons known
      by
      the Company to own 5% or more of the outstanding shares of Company common stock.
      The table shows separately, and in total, the number of outstanding shares
      owned
      as of March 23, 2006 and the number of shares that can be acquired under options
      and warrants which are considered to be beneficially owned because the options
      and warrants are exercisable on or within 60 days of March 23, 2006. Except
      as
      otherwise indicated, all shares are owned directly, and the named persons
      possess sole voting and investment power with respect to all indicated
      shares.





Amount
      and Nature of Beneficial Ownership as of March 23, 2006:


Amount
                and Nature ofBeneficial
                Ownership ofCommon
                Stock as of
            
            Shares
                Acquirable
            
            TotalName
                of Beneficial Owner
            
            March
                23, 2006
            
            Within
                60 Days1
            
            BeneficialOwnership
            
            Percent
                  ofClass*Julian
                E. Beard
            
            
            14,8802
            
            
            20,500
            
            
            35,380
            
            
            2.24Harold
                Glenn Campbell
            
            
            52,0003
            
            
            5,500
            
            
            57,500
            
            
            3.67David
                A. Chrisman
            
            
            -
            
            
            1,500
            
            
            1,500
            
            
            0.10A.F.
                Dawahare
            
            
            20,0004
            
            
            5,500
            
            
            25,500
            
            
            1.63David
                Donaldson
            
            
            -
            
            
            1,500
            
            
            1,500
            
            
            0.10Dr.
                Kenneth L. Gerson
            
            
            15,680
            
            
            5,500
            
            
            21,180
            
            
            1.35Tommy
                R. Hall
            
            
            29,0355
            
            
            5,500
            
            
            34,535
            
            
            2.21R.
                Douglas Hutcherson
            
            
            1,000
            
            
            20,000
            
            
            21,000
            
            
            1.33Erle
                L. Levy
            
            
            17,6806
            
            
            5,500
            
            
            23,180
            
            
            1.48Dr.
                Ira P. Mersack
            
            
            35,4947
            
            
            5,500
            
            
            40,994
            
            
            2.62Robert
                J. Rosenstein
            
            
            23,8548
            
            
            5,500
            
            
            29,354
            
            
            1.87Donald
                Shannon
            
            
            -
            
            
            5,000
            
            
            5,000
            
            
            0.32Richard
                S. Trontz
            
            
            26,922
            
            
            5,500
            
            
            32,422
            
            
            2.07Kathy
                E. Walker
            
            
            21,250
            
            
            5,500
            
            
            26,750
            
            
            1.71D.
                Woodford Webb, Jr.
            
            
            18,930
            
            
            5,500
            
            
            24,430
            
            
            1.56All
                Directors and ExecutiveOfficers
                as a group
            
            
            276,725
            
            
            103,500
            
            
            380,225
            
            
            24.26%**5%
                Shareholders:Donald
                K. Poole9
            
            
            199,748
            
            
            3,500
            
            
            203,248
            
            
            13.00
            %1999
                Richmond RoadLexington,
                Kentucky40502


*
      Any
      shares reflected under the heading "Shares Acquirable Within 60 Days" for a
      named beneficial owner are deemed outstanding for purposes of computing the
      percentage of outstanding shares of Company common stock owned by such person
      but are not deemed outstanding for purposes of computing the percentage
      ownership of any other person.


**
      All
      shares reflected under the heading "Shares Acquirable Within 60 Days" are deemed
      outstanding for purposes of computing this percentage.


1
      Reflects shares of which the named persons may be deemed to be beneficial owners
      as a result of rights they may exercise, within sixty days of March 23, 2006,
      to
      acquire beneficial ownership of such reflected shares.


2
      Includes 14,680 shares held in an individual retirement account for the benefit
      of Mr. Beard.


3
      Shares
      are held by the Harold Glenn Campbell Trust.


4
      Shares
      are held by the S F Dawahare Limited Partnership.


5
      Includes 2,680 shares held by the Tommy R. and Linda R. Hall Dynasty
      Trust.


6
      Shares
      are jointly owned by Mr. Levy's wife, Sara Levy.


7
      Includes 15,000 shares held for the benefit of Dr. Ira Mersack by National
      City
      Bank as Custodian for both the Dermatology Associates
      of Kentucky, P.S.C. Profit Sharing Plan and Pension Plan.


8
      Includes 8,844 shares held by the Robert J. Rosenstein Revocable Trust and
      10
      shares held by Mr. Rosenstein as custodian for his son, Ross J.
      Rosenstein.


9
      Shares
      are held by Donald K Poole Revocable Trust. Options were issued to Donald K
      Poole, now deceased.







Page 68 of
            79










***Change
      of Control:*** As
      disclosed elsewhere in this Report, First Security entered into an Agreement
      and
      Plan of Merger, dated December 12, 2005, with American Founders Bank, Inc.,
      a
      Kentucky banking corporation headquartered in Frankfort, Kentucky, and its
      proposed holding company, American Founders Bancorp, Inc. The Merger Agreement
      provides, among other things, that subject to certain conditions, American
      Founders Bancorp, Inc. will acquire First Security in a merger transaction,
      and
      at the effective time of the merger, all of our outstanding shares will be
      converted into the right to receive $24.00 per share in cash (subject to
      possible adjustment if the merger is not completed by April 30, 2006). It is
      anticipated that, if the merger transaction is completed and First Security
      becomes a subsidiary of American Founders Bancorp, Inc., then FS Bank will
      merge
      with, and into American Founders Bank, Inc. The merger transaction if completed
      will result in a change of control of First Security.







**ITEM
      12.****CERTAIN
      RELATIONSHIPS AND RELATED TRANSACTIONS**





First
      Security Bank has had, and expects to have in the future, banking transactions
      in the ordinary course of business with some of its directors, officers, and
      employees and their associates. All of such transactions have been on the same
      terms, including interest rates, maturities and collateral requirements as
      those
      prevailing at the time for comparable transactions with non-affiliated persons
      and did not involve more than the normal risk of collectibility or present
      other
      unfavorable features.





First
      Security Bank entered into a twenty (20) year lease with LEX/108, LLC dated
      April 2, 2001 for the lease of land and improvements thereon in Palomar Centre
      in Lexington, Kentucky for the purpose of a First Security Bank branch office.
      First Security Bank paid monthly rental of $5,600 for the first two years of
      the
      lease term, with the monthly rental increasing $200 every two years of the
      lease
      term (except for the fifteenth and sixteenth years when the monthly rental
      increases $400 over the previous two-year period). First Security Bank may
      extend the lease term an additional twenty (20) years in which event monthly
      rental would increase four percent (4%) annually. First Security Bank is also
      obligated to pay the cost of all insurance, taxes and utilities associated
      with
      the property as well as a pro rata portion of the maintenance costs for the
      Palomar Centre. Company Director D. Woodford Webb, Jr. is a member of LEX/108,
      LLC.





**ITEM
      13.**  **EXHIBITS**


The
      following exhibits are furnished with this report (* denotes a management
      contract or compensatory plan arrangement):




2.1
              Agreement
                  and Plan of Merger dated as of December 12, 2005, among First Security
                  Bancorp, Inc., First Security Bank of Lexington, Inc., American
                  Founders
                  Bancorp, Inc., American Founders Bank, Inc. and American Founders
                  Acquisition, Inc. First Security will furnish to the Securities
                  and
                  Exchange Commission a copy of any omitted schedule or exhibit upon
                  request
                  (incorporated by reference to Exhibit 2.1 of the Form 8-K and Form
                  8-K/A
                  of First Security Bancorp, Inc. filed on December 12, 2005 [No.
                  000-49781]).3.1
              Articles
                  of Incorporation of First Security Bancorp, Inc. (incorporated
                  by
                  reference to Exhibit 3.1 of the Company's Registration Statement
                  on Form
                  SB-2 [No. 333-43444]).3.2
              Articles
                  of Amendment to Articles of Incorporation of First Security Bancorp,
                  Inc.
                  (incorporated by reference to Exhibit 3.2 of the Company's Registration
                  Statement on Form SB-2 [No. 333-43444]).3.3
              Amended
                  and Restated Bylaws of the Registrant (incorporated by reference
                  to
                  Exhibit 4.2 of the Registration Statement on Form S-8 of First
                  Security
                  Bancorp, Inc. filed on May 27, 2005 (File No.
                  333-125319)4.1
              Articles
                  of Incorporation of First Security Bancorp, Inc. (included in Exhibit
                  3.1)
                  (incorporated by reference to Exhibit 4.1 of the Company's Registration
                  Statement on Form SB-2 [No. 333-43444]).4.2
              Articles
                  of Amendment to Articles of Incorporation of First Security Bancorp,
                  Inc.
                  (included in Exhibit 3.2) (incorporated by reference to Exhibit
                  3.2 of the
                  Company's Registration Statement on Form SB-2 [No.
                  333-43444])4.3
              Amended
                  and Restated Bylaws of the Registrant (incorporated by reference
                  to
                  Exhibit 4.2 of the Registration Statement on Form S-8 of First
                  Security
                  Bancorp, Inc. filed on May 27, 2005 ( File No.
                  333-125319)10.1
              Form
                  of stock option agreement for the grant of options to non-employee
                  directors and advisory directors under the First Security Bancorp,
                  Inc.
                  Stock Award Plan (Amended and Restated as of March 18, 2003) (incorporated
                  by reference to Exhibit 10.1 of the Form 10-QSB of First Security
                  Bancorp,
                  Inc. for the quarter ended March 31, 2005 [No.
                  000-49781])







Page 69 of
            79


10.2
                Form
                    of stock option agreement for the grant of options to employees
                    under the
                    First Security Bancorp, Inc. Stock Award Plan (Amended and Restated
                    as of
                    March 18, 2003) (incorporated by reference to Exhibit 10.2 of
                    the Form
                    10-QSB of First Security Bancorp, Inc. for the quarter ended
                    March 31,
                    2005 [No. 000-49781])10.3
                Outsource
                    Contract between BSC, Inc. and First Security Bank dated November
                    14, 2005
                    (incorporated by reference to Exhibit 10.6 of the Form 8-K of
                    First
                    Security Bancorp, Inc. filed on November 11, 2005 [No.
                    000-49781])10.4
                Contract
                    between BSC, Inc. and First Security Bank dated November 14,
                    2005
                    (incorporated by reference to Exhibit 10.7 of the Form 8-K of
                    First
                    Security Bancorp, Inc. filed on November 11, 2005 [No.
                    000-49781])10.5
                Grounds
                    lease between Cherrywood Development, LLC and First Security
                    Bank of
                    Lexington, Inc. (incorporated by reference to Exhibit 10.8 of
                    the Form
                    10-KSB of First Security Bancorp, Inc. for the year December
                    31, 2004 [No.
                    000-49781])
  10.6
                Master
                    Resource Management Services Agreement between Precision Computer
                    Systems,
                    Inc. and First Security Bank of Lexington, Inc. dated May 27,
                    2005
                    (incorporated by reference to Exhibit 10.8 of the Form 8-K of
                    First
                    Security Bancorp, Inc. filed on November 11, 2005 [No.
                    000-49781])10.7
                Grounds
                    lease between LEX/108, LLC and First Security Bank of Lexington,
                    Inc.
                    (incorporated by reference to Exhibit 10.9 of the Form 10-KSB
                    of First
                    Security Bancorp, Inc. for the year December 31, 2004 [No.
                    000-49781])10.8
                Form
                    of Salary Continuation Agreement for three executive officers
                    and First
                    Security Bank of Lexington, Inc. (incorporated by reference to
                    Exhibit
                    10.1 of the Form 8-K of First Security Bancorp, Inc. filed on
                    September
                    16, 2005 [No. 000-49781])10.9
                Salary
                    Continuation Agreement, dated October 19, 2005, between Donald
                    R. Shannon
                    and First Security Bank of Lexington, Inc. (incorporated by reference
                    to
                    Exhibit 10.1 of the Form 8-K of First Security Bancorp, Inc.
                    filed on
                    October 31, 2005 [No. 000-49781])10.10
                Letter
                    Agreement dated December 11, 2005, between First Security Bancorp,
                    Inc.,
                    First Security Bank of Lexington, Inc. and R. Douglas Hutcherson
                    amending
                    Mr. Hutcherson's employment agreement dated December 1, 2003,
                    as amended
                    September 15, 2005 (incorporated by reference to Exhibit 2.1
                    of the Form
                    8-K and 8-K/Aof First Security Bancorp, Inc. filed on December
                    12, 2005
                    [No. 000-49781]).10.11
                Letter
                    Agreement dated September 15, 2005, among D. Hutcherson, First
                    Security
                    Bancorp, Inc. and First Security Bank of Lexington, Inc. (incorporated
                    by
                    reference to Exhibit 10.2 of the Form 8-K of First Security Bancorp,
                    Inc.
                    filed on September 16, 2005 [No. 000-49781])10.12
                Salary
                    Continuation Agreement, dated October 19, 2005, between David
                    W. Chrisman
                    and First Security Bank of Lexington, Inc. (incorporated by reference
                    to
                    Exhibit 10.2 of the Form 8-K of First Security Bancorp, Inc.
                    filed on
                    October 21, 2005 [No. 000-49781])10.13
                Salary
                    Continuation Agreement, dated October 19, 2005, between David
                    A. Donaldson
                    and First Security Bank of Lexington, Inc. (incorporated by reference
                    to
                    Exhibit 10.3 of the Form 8-K of First Security Bancorp, Inc.
                    filed on
                    October 21, 2005 [No. 000-49781])10.14
                Summary
                    of Director Compensation Plan (incorporated by reference to Exhibit
                    10.5
                    of the Form 8-K of First Security Bancorp, Inc. filed on November
                    11, 2005
                    [No. 000-49781])10.15
                Contract
                    for Electronic Data Processing Services between BSC, Inc. and
                    First
                    Security Bank of Lexington, Inc.(incorporated by reference to
                    Exhibit
                    10.11 of the Form 10-KSB of First Security Bancorp, Inc. for
                    the year
                    December 31, 2004 [No. 000-49781])10.16
                Outsource
                    Contract between BSC, Inc. and First Security Bank of Lexington,
                    Inc.
                    (incorporated by reference to Exhibit 10.12 of the Form 10-KSB
                    of First
                    Security Bancorp, Inc. for the year December 31, 2004 [No.
                    000-49781])10.17
                Data
                    Processing Agreement between Fifth Third Bank and First Security
                    Bank of
                    Lexington, Inc. (incorporated by reference to Exhibit 10.13 of
                    the Form
                    10-KSB of First Security Bancorp, Inc. for the year December
                    31, 2004 [No.
                    000-49781])10.18
                Business/Manager
                    License Agreement between Private Business, Inc. and First Security
                    Bank
                    of Lexington, Inc. (incorporated by reference to Exhibit 10.4
                    of the
                    Company’s Registration Statement on Form SB-2[No.
                    333-43444]).10.19
                Agreement
                    for Administration of Credit Card Program between Crittson Financial,
                    LLC
                    and First Security Bank of Lexington, Inc. (incorporated by reference
                    to
                    Exhibit 10.5 of the Company’s Registration Statement on Form SB-2[No.
                    333-43444]).10.20
                Leases
                    between THOMCO, inc. and First Security Bank of Lexington, Inc.
                    (incorporated by reference to Exhibit 10.7 of the Company’s Registration
                    statement on Form SB-2[No. 333-43444]).10.21
                First
                    Security Bank of Lexington, Inc. Stock Aware Plan (Amended and
                    Restated as
                    of March 18, 2003). (incorporated by reference to Exhibit 10.9
                    to the Form
                    10-K of First Security Bancorp, Inc. for the year ended December
                    31, 2002
                    [Commission File No. 000-79781]).10.22
                Master
                  Resource Management Services Agreement between Precision Computer
                  Systems,
                  Inc. and First Security Bank of Lexington, Inc. dated May 27, 2005
                  (incorporated by reference to Exhibit 10.8 of the Form 10-QSB of
                  First
                  Security Bancorp, Inc. for the quarter ended September 30, 2005
                  [No.
                  000-49781])11.1
                Statement
                    re: Computation of Per share earnings (included in Note 18 to
                    the
                    Company’s Consolidated Financial Statement included in this
                    report).21.1
                Subsidiaries
                    of First Security Bancorp, Inc.23.1
                Consent
                    of BKD, LLC.31.1
                Certification
                    pursuant to Rule 13a-14(a)/15d-14(a).31.2
                Certification
                    pursuant to Rule 13a-14(a)/15d-14(a).








Page 70 of 
79




**ITEM
      14.**  **PRINCIPAL
      ACCOUNTANT FEES AND SERVICES**





***Audit
      Fees:*****The
      aggregate fees billed for professional services rendered by BKD, LLP, the
      Company's principal accountant for the audit of the Company’s annual financial
      statements for the years ended December 31, 2005 and 2004 and review of
      financial statements included in the Company's Quarterly Reports on Form 10-QSB
      were $78,807 and $58,262, respectively.





***Audit-Related
      Fees:*** **** No
      audit-related fees were billed in 2005 or 2004 by BKD, LLP. The aggregate fees
      billed for professional services rendered for audit-related services by Crowe
      Chizek and Company LLC were $900 in 2004 for services relating to an FHLB
      Collateral Opinion.





***Tax
      Fees:*** ** The
      aggregate fees billed in 2005 for tax-related professional services rendered
      by
      BKD, LLP, the Company's principal accountant were $8,100. No fees were billed
      for professional services rendered by BKD, LLP for tax compliance, tax advice
      or
      tax planning in 2004. The aggregate fees billed in 2004 for tax-related
      professional services rendered by Crowe Chizek and Company LLC were $7,400.
      Fees
      for both periods related to tax return preparation, estimated payments and
      various other sundry tax matters.





***All
      Other Fees:*** **** No fees
      were billed in 2005 by BKD, LLP for other professional services other than
      the
      services covered under the captions “Audit Fees”, “Audit-Related Fees”, and “Tax
      Fees”. The aggregate fees billed in 2005 and 2004 for professional services
      rendered by BKD, LLP, other than the services covered under the captions “Audit
      Fees”, “Audit-Related Fees”, and “Tax Fees”, were $1,200. These fees related to
      the Company's BSA software.




The
      policies and procedures adopted by the Audit Committee of First Security
      regarding the use of the independent auditor for permissible non-audit services
      are contained in the Audit Committee Charter which was included with the proxy
      statement for the 2003 Annual Meeting of Shareholders. In addition to
      identifying non-audit services for which the independent auditor cannot be
      engaged contemporaneously with the audit, these pre-approval policies require
      members of Audit Committee to pre-approve all auditing services which may entail
      providing comfort letters in connection with securities underwritings and
      pre-approve all permissible non-audit services, including tax services, that
      exceed in the aggregate $10,000 in any fiscal year that are provided by the
      auditors to the Corporation or its affiliate.


















Page 71 of
            79








**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.





FIRST
      SECURITY BANCORP, INC.





By: /s/
      R.
      Douglas Hutcherson


President
      and Chief Executive Officer


Date:
      March 28, 2006





Pursuant
      to the requirements of the Securities Exchange Act of 1934, this Report has
      been
      signed below by the following persons on behalf of the Registrant and in the
      capacities and on the dates indicated.





Signature
              Title
              Date/s/
                  Julian E.
                  Beard
              Chairman
                  of the Board
              March
                  28, 2006Julian
                  E. Beard/s/
                  R. Douglas Hutcherson
              President
                  and Chief Executive Officer
              March
                  28, 2006R.
                  Douglas Hutcherson
              (Principal
                  Executive Officer)/s/
                  Kristie L.
                  Eubank
              Chief
                  Financial OfficerKristie
                  L. Eubank
              (Principal
                  Financial and Accounting Officer)
              March
                  28, 2006/s/
                  Harold Glenn Campbell
              Director
              March
                  28, 2006Harold
                  Glenn Campbell/s/
                  A. F.
                  Dawahare
              Director
              March
                  28, 2006A.
                  F. Dawahare/s/
                  Kenneth L.
                  Gerson
              Director
              March
                  28, 2006Kenneth
                  L. GersonDirector
              March
                  28, 2006Tommy
                  R. Hall/s/
                  Erle L.
                  Levy
              Director
              March
                  28, 2006Erle
                  L. Levy/s/
                  Ira P.
                  Mersack
              Director
              March
                  28, 2006Ira
                  P. Mersack/s/
                  Robert J.
                  Rosenstein
              Director
              March
                  28, 2006Robert
                  J. Rosenstein/s/
                  Richard S.
                  Trontz
              Director
              March
                  28, 2006Richard
                  S. Trontz/s/
                  Kathy E.
                  Walker
              Director
              March
                  28, 2006Kathy
                  E. Walker/s/
                  D. Woodford
                  Webb
              Director
              March
                  28, 2006D.
                  Woodford Webb













Page 72 of
            79





**EXHIBIT
      INDEX**





Exhibit
      No.   Description


2.1
              Agreement
                  and Plan of Merger dated as of December 12, 2005, among First Security
                  Bancorp, Inc., First Security Bank of Lexington, Inc., American
                  Founders
                  Bancorp, Inc., American Founders Bank, Inc. and American Founders
                  Acquisition, Inc.3.1
              Articles
                  of Incorporation of First Security Bancorp, Inc.*3.2
              Articles
                  of Amendment to Articles of Incorporation*3.3
              Bylaws
                  of First Security Bancorp, Inc.*4.1
              Articles
                  of Incorporation of First Security Bancorp, Inc. (included in Exhibit
                  3.1)*4.2
              Articles
                  of Amendment of Articles of Incorporation of First Security Bancorp,
                  Inc.
                  (included inExhibit
                  3.2)*4.3
              Amended
                  and Restated Bylaws of First Security Bancorp, Inc. (included in
                  Exhibit
                  3.3)*10.1
              Form
                  of stock option agreement for the grant of options to non-employee
                  directors and advisory directors under the First Security Bancorp,
                  Inc.
                  Stock Award Plan *10.2
              Form
                  of stock option agreement for the grant of options to employees
                  under the
                  First Security Bancorp, Inc. Stock Award Plan *10.3
              Outsource
                  Contract between BSC, Inc. and First Security Bank dated November
                  14, 2005
                  *10.4
              Contract
                  between BSC, Inc. and First Security Bank dated November 14, 2005
                  *10.5
              Grounds
                  lease between Cherrywood Development, LLC and First Security Bank
                  of
                  Lexington, Inc.*10.6
              Master
                  Resource Management Services Agreement between Precision Computer
                  Systems,
                  Inc. and First Security Bank of Lexington, Inc. dated May 27, 2005
                  *10.7
              Grounds
                  lease between LEX/108, LLC and First Security Bank of Lexington,
                  Inc*10.8
              Form
                  of Salary Continuation Agreement for three executive officers and
                  First
                  Security Bank of Lexington, Inc.*10.9
              Salary
                  Continuation Agreement, dated October 19, 2005, between Donald
                  R. Shannon
                  and First Security Bank of Lexington, Inc. *10.10
              Letter
                  agreement between dated December 11, 2005, First Security Bancorp,
                  Inc.,
                  First Security Bank of Lexington, Inc. and R. Douglas Hutcherson
                  amending
                  Mr. Hutcherson's employment agreement dated December 1, 2003, as
                  amended
                  September 15, 2005*10.11
              Letter
                  Agreement dated September 15, 2005, among D. Hutcherson, First
                  Security
                  Bancorp, Inc. and First Security Bank of Lexington,
                  Inc.*10.12
              Salary
                  Continuation Agreement, dated October 19, 2005, between David W.
                  Chrisman
                  and First Security Bank of Lexington, Inc.*10.13
              Salary
                  Continuation Agreement, dated October 19, 2005, between David A.
                  Donaldson
                  and First Security Bank of Lexington, Inc. *10.14
              Summary
                  of Director Compensation Plan *10.15
              Contract
                  for Electronic Data Processing Services between BSC, Inc. and First
                  Security Bank of Lexington, Inc.*10.16
              Outsource
                  Contract between BSC, Inc. and First Security Bank of Lexington,
                  Inc.
                  *10.17
              Data
                  Processing Agreement between Fifth Third Bank and First Security
                  Bank of
                  Lexington, Inc. *10.18
              Business/Manager
                  License Agreement between Private Business, Inc. and First Security
                  Bank
                  of Lexington, Inc. *10.19
              Agreement
                  for Administration of Credit Card Program between Crittson Financial,
                  LLC
                  and First Security Bank of Lexington, Inc. *10.20
              Leases
                  between THOMCO, inc. and First Security Bank of Lexington, Inc.
                  *10.21
              First
                  Security Bank of Lexington, Inc. Stock Aware Plan (Amended and
                  Restated as
                  of March 18, 2003).*10.22
              Master
                  Resource Management Services Agreement between Precision Computer
                  Systems,
                  Inc. and First Security Bank of Lexington, Inc. dated May 27,
                  2005*11.1
              Statement
                  re: Computation of per share earnings (included in Note 18 to the
                  Company’sConsolidated
                  Financial Statement included in this report).21.1
              Subsidiaries
                  of First Security Bancorp, Inc.23.1
              Consent
                  of BKD, LLC31.1
              Certification
                  pursuant to Rule 13a-14(a)/15d-14(a)31.2
              Certification
                  pursuant to Rule 13a-14(a)/15d-14(a)32.1
              Certification
                  pursuant to 18 USC Section 1350 - Sarbanes-Oxley Act of 200232.2
              Certification
                  pursuant to 18 USC Section 1350 - Sarbanes-Oxley Act of
                  2002




*  Incorporated
      by reference. See Item 13.








First
      Security Bancorp, Inc. will provide a copy of the exhibits to its Form 10-KSB
      upon request. To obtain a copy of any exhibit, please contact Sue Ezrine,
      Investor Relations, First Security Bancorp, Inc., 318 East Main Street,
      Lexington, Kentucky 40507.


Page
      73
      of 79