UNITED STATES
SECURITIES AND EXCHANGE COMMISSIONWashington, D.C. 20549

FORM 10-K

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

For the fiscal year ended December 31, 2007

Commission File Number: 0-18832

FIRST FINANCIAL SERVICE CORPORATION(Exact name of registrant as specified in its charter)

|Kentucky                                                          |  | 61-1168311                          
|----------------------------------------------------------------- |  | ------------------------------------
|(State or other jurisdiction of
incorporation or organization)    |  | (I.R.S. Employer Identification No.)
|2323 Ring Road, Elizabethtown, Kentucky                           |  | 42701                               
|(Address of principal executive offices)                          |  | Zip Code                            
|Registrant's telephone number, including area code:(270) 765-2131
|Securities registered pursuant to Section 12(b) of the Act:      
|Common Stock, par value $1.00 per share(Title of Class)          

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.
Yes o No ý

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act.
Yes o No ý

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past
ninety days. Yes ý No o

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

|Large Accelerated Filer o |  | Accelerated Filer ý |  | Non-Accelerated Filer o (Do not check if a smaller reporting company) |  | Smaller Reporting Company o
|------------------------- |  | ------------------- |  | --------------------------------------------------------------------- |  | ---------------------------

Indicate
by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not 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-K or any amendment to this
Form 10-K. ý

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

The aggregate market value of the outstanding voting stock held by non-affiliates of the registrant based on a June 29, 2007 closing price of
$25.85 as quoted on the NASDAQ Global Market was $99,162,565. Solely for purposes of this calculation, the shares held by directors and executive officers of the registrant and by any stockholder
beneficially owning more than 5% of the registrant's outstanding common stock are deemed to be shares held by affiliates.

As
of February 29, 2008 there were issued and outstanding 4,664,235 shares of the registrant's common stock.

DOCUMENTS INCORPORATED BY REFERENCE



---





FIRST FINANCIAL SERVICE CORPORATION  2007 ANNUAL REPORT AND FORM 10-K

TABLE OF CONTENTS

|           |  | PART I.                                                                                                                                |  | PAGE
|---------- |  | -------------------------------------------------------------------------------------------------------------------------------------- |  | ----
|ITEM 1.    |  | Business                                                                                                                               |  | 2   
|ITEM 1A.   |  | Risk Factors                                                                                                                           |  | 13  
|ITEM 1B.   |  | Unresolved Staff Comments                                                                                                              |  | 16  
|ITEM 2.    |  | Properties                                                                                                                             |  | 17  
|ITEM 3.    |  | Legal Proceedings                                                                                                                      |  | 17  
|ITEM 4.    |  | Submission of Matters to a Vote of Security Holders                                                                                    |  | 17  
|PART II.  
|ITEM 5.    |  | Market Price of and Dividends on the Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities |  | 18  
|ITEM 6.    |  | Selected Financial Data                                                                                                                |  | 20  
|ITEM 7.    |  | Management's Discussion and Analysis of Financial Condition and Results of Operations                                                  |  | 21  
|ITEM 7A.   |  | Quantitative and Qualitative Disclosures about Market Risk                                                                             |  | 39  
|ITEM 8.    |  | Financial Statements and Supplementary Data                                                                                            |  | 42  
|ITEM 9.    |  | Changes in and Disagreements with Accountants on Accounting and Financial Disclosure                                                   |  | 76  
|ITEM 9A.   |  | Controls and Procedures                                                                                                                |  | 76  
|PART III. 
|ITEM 10.   |  | Directors and Executive Officers of the Registrant                                                                                     |  | 77  
|ITEM 11.   |  | Executive Compensation                                                                                                                 |  | 77  
|ITEM 12.   |  | Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters                                         |  | 77  
|ITEM 13.   |  | Certain Relationships and Related Transactions                                                                                         |  | 77  
|ITEM 14.   |  | Principal Accountant Fees and Services                                                                                                 |  | 77  
|PART IV.   |  |                                                                                                                                       
|ITEM 15.   |  | Exhibits and Financial Statement Schedules                                                                                             |  | 78  
|SIGNATURES |  | 79                                                                                                                                    

---





PRELIMINARY NOTE REGARDING  FORWARD-LOOKING STATEMENTS

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

Various
risks and uncertainties may cause actual results to differ materially from those indicated by our forward-looking statements. In addition to those risks described under
"Item 1A Risk Factors," of this report, the following factors could cause such differences: changes in general economic conditions and economic conditions in Kentucky and the markets we serve,
any of which may affect, among other things, our level of non-performing assets, charge-offs, and provision for loan loss expense; changes in interest rates that may reduce
interest margins and impact funding sources; changes in market rates and prices which may adversely impact the value of financial products including securities, loans and deposits; changes in tax
laws, rules and regulations; various monetary and fiscal policies and regulations, including those determined by the Federal Reserve Board, the Federal Deposit Insurance Corporation ("FDIC") and the
Kentucky Office of Financial Institutions ("KOFI"); competition with other local and regional commercial banks, savings banks, credit unions and other non-bank financial institutions; our
ability to grow core businesses; our ability to develop and introduce new banking-related products, services and enhancements and gain market acceptance of such products; and management's ability to
manage these and other risks.

Our
forward-looking statements speak only as of the date on which they are made, and we undertake no obligation to update any forward-looking statement to reflect events or circumstances
after the date of the statement to reflect the occurrence of unanticipated events.

PART I

ITEM 1.    Business

First Financial Service Corporation was incorporated in August 1989 under Kentucky law and became the holding company for First Federal Savings Bank of
Elizabethtown (the "Bank'), effective on June 1, 1990. Since that date, we have engaged in no significant activity other than holding the stock of the Bank and directing, planning and
coordinating its business activities. Unless the text clearly suggests otherwise, references to "us," "we," or "our" include First Financial Service Corporation and its wholly owned subsidiary, the
Bank. Accordingly, the information set forth in this report, including financial statements and related data, relates primarily to the Bank and its subsidiaries. In 2004 we amended our articles of
incorporation to change our name from First Federal Financial Corporation of Kentucky to First Financial Service Corporation.

We
are headquartered in Elizabethtown, Kentucky and were originally founded in 1923 as a state-chartered institution and became federally chartered in 1940. In 1987, we converted to a
federally chartered savings bank and converted from mutual to stock form. We are a member of the FHLB of Cincinnati and, since converting to a state charter in 2003, have been subject to regulation,
examination and supervision by the FDIC and the KOFI. Our deposits are insured by the Deposit Insurance Fund administered by the FDIC.

2

---



General Business Overview

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

Our
full complement of lending services includes:



We
also provide a broad selection of deposit instruments. These include:



We
also support our customers by providing services such as:



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

Our
results of operations depend primarily on net interest income, which is the difference between interest income from interest-earning assets and interest expense on interest-bearing
liabilities. Our results are also affected by non-interest income, such as service charges, insurance agency revenue, loan

3

---



fees,
gains and losses from the sale of mortgage loans and gains from the sale of real estate held for development. Our principal operating expenses, aside from interest expense, consist of
compensation and employee benefits, occupancy costs, data processing expense and provisions for loan losses.

Market Area Served

We conduct operations in 15 full-service banking centers and a commercial private banking center in six contiguous counties in Central Kentucky along
the Interstate 65 corridor. Our markets range from the major metropolitan area of Louisville in Jefferson County, Kentucky approximately 40 miles north of our headquarters in Elizabethtown, Kentucky
to Hart County, Kentucky, approximately 30 miles south of Elizabethtown. Our markets are supported by a diversified industry base and have a regional population of over 1 million. Louisville
and Jefferson County comprise the 16th largest city in the United States. Our core markets have experienced a growth rate of 21% in deposits for the past three years. Management
anticipates that our markets will continue to grow at a similar rate for the next few years and believes we are well positioned to benefit from this anticipated growth.

We
operate in Hardin, Nelson, Hart, Bullitt, Meade and Jefferson Counties in Kentucky. Excluding Jefferson County, we control in the aggregate over 21% of the deposit market share in
this area with the next largest competitor controlling just 7% of the market. Over the past five years, these counties have demonstrated an average growth rate in deposits of 6%. According to the most
recent census data, our core markets have experienced a population increase of 5%, a 22% increase in the median home price, and a growth in median family income of 15% over the past four census
reporting years.

We
expanded our presence into the Louisville market, primarily through our commercial lending operations. At December 31, 2007, over 24% of our total loan portfolio resides in
this market. In an effort to better serve these customers and to enhance our retail branch network in this market, we opened our third new full-service state of the art retail facility in
the second quarter of 2007 and anticipate beginning construction on a fourth new facility in the third quarter of 2008. These facilities represent our state of the art prototype branch with a
retail-focused design. This design features an internet café with access to online banking and bill payment services. Large plasma screens in the lobby provide customers with current
news and information about bank products and services as well as upcoming community events. The facilities are staffed to offer a full range of financial services to the growing retail and commercial
customer base. We also opened a new commercial private banking center in Louisville during 2007. It is the first of its type for our company designed to better serve our high net worth commercial
customers. We also plan on expanding our retail branch network in this market to ten branches over the next six years. We have a combined $54.2 million in deposits in these three facilities,
representing a 39% increase in deposits in this market during 2007. Our current deposit market share in Louisville remains under 1% of the current $14.8 billion deposit base. Based on our
service-focused operating strategy, we believe we can increase our presence in Louisville, where six large out-of-state holding companies hold the largest deposit market
shares.

All
of our market areas will likely benefit from the Fort Knox Military Base Realignment passed into law during 2006. Fort Knox is located in Hardin County, where we have a 20% market
share. With the base realignment, Fort Knox will receive several additional military units including the Light Infantry Brigade Combat Team, the Combat Service Support Units and the Human Resource
Command. These military units will bring an estimated 2,000 additional civilian positions and 2,000 additional military positions with an estimated $300 million in annual payroll to this area
beginning in late 2008 through 2010. Over $900 million in renovations to Fort Knox are planned to accommodate these units, including the construction of approximately 800,000 square feet of
office space to house the Human Resource Command. We anticipate the base realignment will result in substantial growth in the retail, housing, and service industries in our area. We plan to begin
construction on a new full service facility at the main entrance to the Fort Knox Military Base during 2008 for completion in April 2009. We have already experienced commercial loan growth as a result
of ongoing development and have

4

---



active
retail and commercial strategies prepared in anticipation of the new personnel arriving in our market area.

General and Operating Strategies

Our operating strategy is to serve the needs and cater to the economic strengths of the local communities in which we operate and strive to provide a high level
of personal and professional customer service. We offer a variety of financial services to our retail and commercial banking customers.

Our
growth strategy is focused on a combination of acquisitions and expansion in our existing markets through internal growth as well as establishing new branches.

Branch Expansion.Management continues to consider markets for branch expansion. Because of the
economic growth in our markets over the past several years, we may consider further branch expansion in our current or surrounding market areas. However, we do not rule out branch expansion in other
areas experiencing economic growth.

During
2007, we completed construction on a new full service banking center and established a commercial private banking center in Louisville. As we progress into 2008, we will open a
full service banking center in our growing Bullitt County market at Cedar Grove and begin construction on a two new full service facilities, one in our Jefferson County market and another at the main
entrance to Fort Knox in our Hardin County market. We are also considering other possible locations within our core market area as we continue to identify future branch sites. Negotiations continue on
several locations, contingent upon successful rezoning efforts. Our expectation is to complete rezoning and begin construction on at least two facilities during 2009.

Internal Growth.Management believes that its largest source of internal growth is through our
ongoing solicitation program conducted by branch managers and lending officers, followed by referrals from customers. The primary source for referrals is positive customer endorsements regarding our
customer service and response time.

Our
goal in continuing our expansion is to maintain a profitable, customer-focused financial institution. We believe that our existing structure, management, data and operational systems
are sufficient to achieve further internal growth in asset size, revenues and capital without proportionate increases in operating costs. This growth should also allow us to increase the lending
limits, thereby enabling us to increase our ability to serve the needs of existing and new customers. Our operating strategy has always been to provide high quality community banking services to our
customers and increase market share through active solicitation of new business, repeat business and referrals from customers, and continuation of selected promotional strategies.

We
believe that our banking customers seek a banking relationship with a service-oriented community banking organization. Our operational systems have been designed to facilitate
personalized service. Management believes our banking locations have an atmosphere that encourages personalized services and decision-making, plus we are of sufficient financial size to offer broad
product lines to meet customers' needs. We also believe that economic expansion in our market areas will continue to contribute to internal growth. Through our primary emphasis on customer service and
our management's banking experience, we intend to continue internal growth by attracting customers and primarily focusing on the following:



5

---





Acquisitions.Management believes that the consolidation in the banking industries, along with the
easing of restrictions on bank branching, increased regulatory burdens, and concerns about technology and marketing are likely to lead owners of community banks and agencies within the Bank's market
areas to explore the possibility of sale or combination with a broader-based financial service companies such as ourselves.

In
addition, branching opportunities have arisen from time to time as a result of divestiture of branches by large national and regional bank holding companies of certain overlapping
branches resulting from consolidations. As a result, branch locations become available for purchase from time to time.

Management's
strategy in assimilating acquisitions is to emphasize revenue growth as well as to continuously review the operations of the acquired entities and streamline operations
where feasible. Management does not believe that implementing wholesale administrative cost reductions in acquired institutions, particularly reducing customer focused personnel, is beneficial to our
long-term growth, because significant administrative changes in community banks can
have an adverse impact on customer satisfaction in the acquired institution's community. However, management believes that certain human resource and accounting functions can be consolidated
immediately upon acquisition to achieve higher productivity levels without compromising customer service. We emphasize revenue growth by offering customers a broader product line consistent with full
service banking.

Management
is very selective when evaluating a potential acquisition based upon factors such as the operating strategy, market, financial condition, and the culture of the acquisition
candidate. The last acquisition we made was in July 1998 with the acquisition of three bank branches.

Lending Activities

Commercial Real Estate & Construction Lending.The largest portion of our lending activity is
the origination of commercial loans that are primarily secured by real estate, including construction loans. We generate loans primarily in our market area. In recent years, we have put greater
emphasis on originating loans for small and medium-sized businesses from our various locations. We make commercial loans to a variety of industries. Substantially all of the commercial real estate
loans we originate have adjustable interest rates with maturities of 25 years or less or are loans with fixed interest rates and maturities of five years or less. At December 31, 2007,
we had $470.9 million outstanding in commercial real estate loans. The security for commercial real estate loans includes

6

---



retail
businesses, warehouses, churches, apartment buildings and motels. In addition, the payment experience of loans secured by income producing properties typically depends on the success of the
related real estate project and thus may be more vulnerable to adverse conditions in the real estate market or in the economy generally.

Loans
secured by multi-family residential property, consisting of properties with more than four separate dwelling units, amounted to $22.3 million of the loan portfolio at
December 31, 2007. These loans are included in the $470.9 million outstanding in commercial real estate loans discussed above. We generally do not lend above 75% of the appraised values
of multi-family residences on first mortgage loans. The mortgage loans we currently offer on multi-family dwellings are generally one or five year ARMs with maturities of 25 years or
less.

Construction
loans involve additional risks because loan funds are advanced upon the security of the project under construction, which is of uncertain value before the completion of
construction. The uncertainties inherent in estimating construction costs, delays arising from labor problems, material shortages, and other unpredictable contingencies make it relatively difficult to
evaluate accurately the
total loan funds required to complete a project and related loan-to-value ratios. The analysis of prospective construction loan projects requires significantly different
expertise from that required for permanent residential mortgage lending. At December 31, 2007, we had $21.4 million outstanding in construction loans.

Our
underwriting criteria are designed to evaluate and minimize the risks of each construction loan. Among other things, we consider evidence of the availability of permanent financing
or a takeout commitment to the borrower; the reputation of the borrower and his or her financial condition; the amount of the borrower's equity in the project; independent appraisals and cost
estimates; pre-construction sale and leasing information; and cash flow projections of the borrower.

Commercial Business Lending.The commercial business loan portfolio has grown in recent years as a
result of our focus on small business lending. We make secured and unsecured loans for commercial, corporate, business, and agricultural purposes, including issuing letters of credit and engaging in
inventory financing and commercial leasing activities. Commercial loans generally are made to small-to-medium size businesses located within our defined market area. Commercial
loans generally carry a higher yield and are made for a shorter term than real estate loans. Commercial loans, however, involve a higher degree of risk than residential real estate loans due to
potentially greater volatility in the value of the assigned collateral, the need for more technical analysis of the borrower's financial position, the potentially greater impact that changing economic
conditions may have on the borrower's ability to retire debt, and the additional expertise required for commercial lending personnel. Commercial business loans outstanding at December 31, 2007,
totaled $52.6 million.

Residential Real Estate.Residential mortgage loans are secured primarily by single-family homes. The
majority of our mortgage loan portfolio is secured by real estate in Hardin, Nelson, Hart, Meade, and Bullitt counties. Fixed rate residential real estate loans we originate have terms ranging from
ten to thirty years. Interest rates are competitively priced within the primary geographic lending market and vary according to the term for which they are fixed. At December 31, 2007, we had
$132.3 million in residential mortgage loans outstanding.

We
generally emphasize the origination of adjustable-rate mortgage loans ("ARMs") when possible. We offer six ARM products with an annual adjustment, which is tied to a
national index with a maximum adjustment of 2% annually, and a lifetime maximum adjustment cap of 6%. As of December 31, 2007, approximately 46.5% of our residential real estate loans were
adjustable rate loans with adjustment periods ranging from one to five years and balloon loans of seven years or less. The origination of these ARMs can be more difficult in a low interest rate
environment where there is a significant demand for fixed rate mortgages. We limit the maximum loan-to-value ratio on

7

---



one-to-four-family
residential first mortgages to 90% of the appraised value and generally limit the loan-to-value ratio on second mortgages
on one-to-four-family dwellings to 90%.

Consumer Lending.Consumer loans include loans on automobiles, boats, recreational vehicles and other
consumer goods, as well as loans secured by savings accounts, home improvement loans, and unsecured lines of credit. As of December 31, 2007, consumer loans outstanding were
$90.8 million. These loans involve a higher risk of default than loans secured by one-to-four-family residential loans. We believe, however, that the shorter
term and the normally higher interest rates available on various types of consumer loans help maintain a profitable spread between the average loan yield and cost of funds. Home equity lines of credit
as of December 31, 2007, totaled $33.7 million.

Our
underwriting standards reflect the greater risk in consumer lending than in residential real estate lending. Among other things, the capacity of individual borrowers to repay can
change rapidly, particularly during an economic downturn, collection costs can be relatively higher for smaller loans, and the value of collateral may be more likely to depreciate. Our Consumer
Lending Policy establishes the appropriate consumer lending authority for all loan officers based on experience, training, and past performance for approving high quality loans. Loans beyond the
authority of individual officers must be approved by additional officers, the Executive Loan Committee or the Board of Directors, based on the size of the loan. We require detailed financial
information and credit bureau reports for each consumer loan applicant to establish the applicant's credit history, the adequacy of income for debt retirement, and job stability based on the
applicant's employment records. Co-signers are required for applicants who are determined marginal or who fail to qualify individually under these standards. Adequate collateral is
required on the majority of consumer loans. The Executive Loan Committee monitors and evaluates unsecured lending activity by each loan officer.

The
indirect consumer loan portfolio is comprised of new and used automobile, motorcycle and all terrain vehicle loans originated on our behalf by a select group of auto dealers within
the service area. Indirect consumer loans are considered to have greater risk of loan losses than direct consumer loans due to, among other things: borrowers may have no existing relationship with us;
borrowers may not be residents of the lending area; less detailed financial statement information may be collected at application; collateral values can be more difficult to determine; and the
condition of vehicles securing the loan can deteriorate rapidly. To address the additional risks associated with indirect consumer lending, the Executive Loan Committee continually evaluates data
regarding the dealers enrolled in the program, including monitoring turn down and delinquency rates. All applications are approved by specific lending officers, selected based on experience in this
field, who obtain credit bureau reports on each application to assist in the decision. Aggressive collection procedures encourage more timely recovery of late payments. At December 31, 2007,
total loans under the indirect consumer loan program totaled $27.7 million.

Subsidiary Activities

First Service Corporation of Elizabethtown ("First Service"), our licensed brokerage affiliate, provides investment services to our customers and offers
tax-deferred annuities, government securities, mutual funds, and stocks and bonds. First Service employs four full-time employees. The net income of First Service was $64,787
for the year ended December 31, 2007.

First
Federal Office Park, LLC, holds commercial lots adjacent to our home office on Ring Road in Elizabethtown, that are available for sale. We recorded $227,000 in gains from a
lot sale during the year ended December 31, 2007. Currently, one of the original nine lots held for sale remains unsold.

We
provide title insurance coverage for mortgage borrowers through two subsidiaries: First Heartland Title, LLC, and First Federal Title Services, LLC. First Heartland
Title is a joint venture with a title insurance company in Hardin County and First Federal Title Services is a joint venture with a title insurance company in Louisville. We hold a 48% interest in
First Heartland Title and a 49%

8

---



interest
in First Federal Title Services. The subsidiaries generated $92,049 in income for the year ended December 31, 2007, of which our portion was $44,564.

In
2006, we dissolved First Heartland Mortgage Company of Elizabethtown, through which our secondary market lending department originated and sold qualified VA, KHC, RHC and conventional
secondary market loans. The employees of the First Heartland have been rolled back into the Bank. During 2007, our secondary market lending department originated $34.2 million in loans on
behalf of investors. We do not service these loans after the sale.

Competition

We face substantial competition both in attracting and retaining deposits and in lending. Direct competition for deposits comes from commercial banks, savings
institutions, and credit unions located in north-central Kentucky, and less directly from money market mutual funds and from sellers of corporate and government debt securities.

The
primary competitive factors in lending are interest rates, loan origination fees and the range of services offered by the various financial institutions. Competition for origination
of real estate loans normally comes from commercial banks, savings institutions, mortgage bankers, mortgage brokers, and insurance companies. Retail establishments effectively compete for loans by
offering credit cards and retail installment contracts for the purchase of goods, merchandise and services (for example, Home Depot, Lowe's, etc.). We believe that we have been able to compete
effectively in our primary market area.

We
have offices in nine cities in six central Kentucky counties. In addition to the financial institutions with offices in these counties, we compete with several commercial banks and
savings institutions in surrounding counties, many of which have assets substantially greater than we have. These competitors attempt to gain market share through their financial product mix, pricing
strategies, internet banking
and banking center locations. In addition, Kentucky's interstate banking statute, which permits banks in all states to enter the Kentucky market if they have reciprocal interstate banking statutes,
has further increased competition for us. We believe that competition from both bank and non-bank entities will continue to remain strong in the near future.

The
following table shows our market share and rank in terms of deposits in each Kentucky County where we have offices. We have three offices in Jefferson County, which is Louisville,
Kentucky. The Louisville metropolitan area has a population of more than one million.

|County    |  | Number of Offices |  | FFKY Market Share % |  | FFKY Rank
|--------- |  | ----------------- |  | ------------------- |  | ---------
|Hardin    |  | 4                 |  | 20.0                |  | 1        
|Nelson    |  | 2                 |  | 8.0                 |  | 5        
|Hart      |  | 1                 |  | 21.0                |  | 2        
|Bullitt   |  | 2                 |  | 26.0                |  | 1        
|Meade     |  | 3                 |  | 54.0                |  | 1        
|Jefferson |  | 3                 |  | <1.0                |  | N/M      

Employees

As of December 31, 2007, we had 289 employees, of which 279 were full-time and 10 part-time. None of our employees are subject to a
collective bargaining agreement, and we believe that we enjoy good relations with our personnel.

9

---





Regulation

General Regulatory Matters.We are a Kentucky chartered commercial bank and are subject to
supervision and regulation, which involves regular bank examinations, by both the FDIC and the KOFI. Our deposits are insured by the FDIC. Kentucky's banking statutes contain a "super-parity"
provision that permits a well-rated Kentucky bank to engage in any banking activity in which a national bank operating in any state, a state bank, thrift or savings bank operating in any
other state, or a federally chartered thrift or federal savings association meeting the qualified thrift lender test and operating in any state could engage, provided the Kentucky bank first obtains a
legal opinion specifying the statutory or regulatory provisions that permit the activity.

In
connection with the conversion, we registered to become a bank holding company under the Bank Holding Company Act of 1956, and are subject to supervision and regulation by the Federal
Reserve Board. As a bank holding company, we are required to file with the Federal Reserve Board annual and quarterly reports and other information regarding our business operations and the business
operations of our subsidiaries. We are also subject to examination by the Federal Reserve Board and to its operational guidelines. We are subject to the Bank Holding Company Act and other federal laws
on the types of activities in which we may engage, and to other supervisory requirements, including regulatory enforcement actions for violations of laws and regulations.

Acquisitions and Change in Control.As a bank holding company, we must obtain Federal Reserve Board
approval before acquiring, directly or indirectly, ownership or control of more than 5% of the voting stock of a bank, and before engaging, or acquiring a company that is not a bank but is engaged in
certain non-banking activities. In approving these acquisitions, the Federal Reserve Board considers a number of factors, and weighs the expected benefits to the public such as greater
convenience, increased competition and gains in efficiency, against the risks of possible adverse effects such as undue concentration of resources, decreased or unfair competition, conflicts of
interest or unsound banking practices. The Federal Reserve Board also considers the financial and managerial resources of the bank holding company, its subsidiaries and any company to be acquired, and
the effect of the proposed transaction on these resources. It also evaluates compliance by the holding company's financial institution subsidiaries and the target institution with the Community
Reinvestment Act. The Community Reinvestment Act generally requires each financial institution to take affirmative action to ascertain and meet the credit needs of its entire community, including low
and moderate income neighborhoods.

Federal
law also prohibits a person or group of persons from acquiring "control" of a bank holding company without notifying the Federal Reserve Board in advance, and then only if the
Federal Reserve Board does not object to the proposed transaction. The Federal Reserve Board has established a rebuttable presumptive standard that the acquisition of 10% or more of the voting stock
of a bank holding company with a class of securities registered under the Securities Exchange Act of 1934 (the "Exchange Act") would constitute an acquisition of control of the bank holding company.
In addition, any company is required to obtain the approval of the Federal Reserve Board before acquiring 25% (5% in the case of an acquirer that is a bank holding company) or more of any class of a
bank holding company's voting securities, or otherwise obtaining control or a "controlling influence" over a bank holding company.

Other Financial Activities.The Gramm-Leach-Bliley Act of 1999 permits a bank holding company to
elect to become a financial holding company, which permits the holding company to conduct activities that are "financial in nature." To become and maintain its status as a financial holding company,
the bank holding company and all of its affiliated depository institutions must be well-capitalized, well managed, and have at least a satisfactory Community Reinvestment Act rating. We
have not filed an election to become a financial holding company.

10

---



Other Holding Company Regulations.Federal law substantially restricts transactions between financial
institutions and their affiliates. As a result, a bank is limited in extending credit to its holding company (or any non-bank subsidiary), in investing in the stock or other securities of
the bank holding company or its non-bank subsidiaries, and/or in taking such stock or securities as collateral for loans to any borrower. Moreover, transactions between a bank and a bank
holding company (or any non-bank subsidiary) must generally be on terms and under circumstances at least as favorable to the bank as those prevailing in comparable transactions with
independent third parties or, in the absence of comparable transactions, on terms and under circumstances that in good faith would be available to nonaffiliated companies.

Under
Federal Reserve Board policy, a bank holding company is expected to act as a source of financial strength to, and to commit resources to support, its bank subsidiaries. This
support may be required at times when, absent such a policy, the bank holding company may not be inclined to provide it. In addition, any capital loans by the bank holding company to its bank
subsidiaries are subordinate in right of payment to deposits and to certain other indebtedness of the bank subsidiary. In the event of a bank holding company's bankruptcy, any commitment by the bank
holding company to a federal bank regulatory agency to maintain the capital of subsidiary banks will be assumed by the bankruptcy trustee and entitled to a priority of payment.

Capital Requirements.The Federal Reserve Board and the FDIC have substantially similar
risk-based and leverage capital guidelines applicable to the banking organizations they supervise. Under the risk-based capital requirements, we are generally required to
maintain a minimum ratio of total capital to risk-weighted assets (including certain off-balance sheet activities, such as standby letters of credit) of 8%. At least half of
the total capital must be composed of common equity, retained earnings and qualifying perpetual preferred stock and certain hybrid capital instruments, less certain intangibles ("Tier 1
capital"). The remainder may consist of certain subordinated debt, certain hybrid capital instruments, qualifying preferred stock and a limited amount of the loan loss allowance ("Tier 2
capital" which, together with Tier 1 capital, composes "total capital"). To be considered well-capitalized under the risk-based capital guidelines, an institution must
maintain a total risk-weighted capital ratio of at least 10% and a Tier 1 risk-weighted ratio of 6% or greater. For further information, see
"Item 7Management's Discussion and Analysis of Financial Condition and Results of OperationsCapital."

The
Federal Deposit Insurance Corporation Act of 1991 ("FDICIA"), among other things, identifies five capital categories for insured depository institutions:
well-capitalized, adequately capitalized, undercapitalized, significantly undercapitalized and critically undercapitalized. The Corporation and the Bank are classified as
"well-capitalized." FDICIA also requires the bank regulatory agencies to implement systems for "prompt corrective action" for institutions that fail to meet minimum capital requirements
within these five categories, with progressively more severe restrictions on operations, management and capital distributions according to the category in which an institution is placed. Failure to
meet capital requirements can also cause an institution to be directed to raise additional capital. FDICIA also mandates that the agencies adopt safety and soundness standards relating generally to
operations and management, asset quality and executive compensation, and authorizes administrative action against an institution that fails to meet such standards.

In
addition, the Federal Reserve Board and the FDIC have each adopted risk-based capital standards that explicitly identify concentrations of credit risk and the risk arising
from non-traditional activities, as well as an institution's ability to manage these risks, as important factors to be taken into account by each agency in assessing an institution's
overall capital adequacy. The capital guidelines also provide that an institution's exposure to a decline in the economic value of its capital due to changes in interest rates be considered by the
agency as a factor in evaluating a banking organization's capital adequacy. In addition to the "prompt corrective action" directives, failure to meet capital guidelines can subject a banking
organization to a variety of other enforcement remedies, including additional

11

---



substantial
restrictions on its operations and activities, termination of deposit insurance by the FDIC, and under some conditions the appointment of a conservator or receiver.

Deposit Insurance.Our deposits are insured up to applicable limits per depositor through the Deposit
Insurance Fund administered by the FDIC. We are required to pay deposit insurance premiums, which are assessed semiannually and paid quarterly. The premium amount is based upon a risk classification
system established by the FDIC. Banks with higher levels of capital and a low degree of supervisory concern are assessed lower premiums than banks with lower levels of capital or a higher degree of
supervisory concern. The FDIC is also empowered to make special assessments on insured depository institutions in amounts determined by the FDIC to be necessary to give it adequate assessment income
to repay amounts borrowed from the U.S. Treasury and other sources or for any other purpose the FDIC deems necessary.

Dividends.The Corporation is a legal entity separate and distinct from the Bank. The majority of our
revenue is from dividends we receive from the Bank. The Bank is subject to laws and regulations that limit the amount of dividends it can pay. If, in the opinion of a federal regulatory agency, an
institution under its jurisdiction is engaged in or is about to engage in an unsafe or unsound practice, the agency may require, after notice and hearing, that the institution cease and desist from
such practice. The federal banking agencies have indicated that paying dividends that deplete an institution's capital base to an inadequate level would be an unsafe and unsound banking practice.
Under FDICIA, an insured institution may not pay a dividend if payment would cause it to become undercapitalized or if it already is undercapitalized. Moreover, the Federal Reserve and the FDIC have
issued policy statements providing that bank holding companies and banks should generally pay dividends only out of current operating earnings.

Under
Kentucky law, dividends by Kentucky banks may be paid only from current or retained net profits. Before any dividend may be declared for any period (other than with respect to
preferred stock), a bank must increase its capital surplus by at least 10% of the net profits of the bank for the period until the bank's capital surplus equals the amount of its stated capital
attributable to its common stock. Moreover, the KOFI Commissioner must approve the declaration of dividends if the total dividends to be declared by a bank for any calendar year would exceed the
bank's total net profits for such year combined with its retained net profits for the preceding two years, less any required transfers to surplus or a fund for the retirement of preferred stock or
debt. We are also subject to the Kentucky Business Corporation Act, which generally prohibits dividends to the extent they result in the insolvency of the corporation from a balance sheet perspective
or if becoming unable to pay debts as they come due.

Consumer Protection Laws.We are subject to a number of federal and state laws designed to protect
borrowers and promote lending to various sectors of the economy and population. These laws include the Equal Credit Opportunity Act, the Fair Credit Reporting Act, the Truth in Lending Act, the Home
Mortgage Disclosure Act, and the Real Estate Settlement Procedures Act, and state law counterparts.

Federal
law currently contains extensive customer privacy protections provisions. Under these provisions, a financial institution must provide to its customers, at the inception of the
customer relationship and annually thereafter, the institution's policies and procedures regarding the handling of customers' nonpublic personal financial information. These provisions also provide
that, except for certain limited exceptions, an institution may not provide such personal information to unaffiliated third parties unless the institution discloses to the customer that such
information may be so provided and the customer is given the opportunity to opt out of such disclosure. Federal law makes it a criminal offense, except in limited circumstances, to obtain or attempt
to obtain customer information of a financial nature by fraudulent or deceptive means.

12

---



The
Community Reinvestment Act ("CRA") requires the FDIC to assess our record in meeting the credit needs of the communities we serve, including low- and moderate-income
neighborhoods and persons. The FDIC's assessment of our record is made available to the public. The assessment also is part of the Federal Reserve Board's consideration of applications to acquire,
merge or consolidate with another banking institution or its holding company, to establish a new branch office or to relocate an office. The Federal Reserve Board will also assess the CRA record of
the subsidiary banks of a bank holding company in its consideration of any application to acquire a bank or other bank holding company, which may be the basis for denying the application.

Bank Secrecy Act.The Bank Secrecy Act of 1970 ("BSA") was enacted to deter money laundering,
establish regulatory reporting standards for currency transactions and improve detection and investigation of criminal, tax and other regulatory violations. BSA and subsequent laws and regulations
require us to take steps to prevent the use of the Bank in the flow of illegal or illicit money, including, without limitation, ensuring effective management oversight, establishing sound policies and
procedures, developing effective monitoring and reporting capabilities, ensuring adequate training and establishing a comprehensive internal audit of BSA compliance activities.

In
recent years, federal regulators have increased the attention paid to compliance with the provisions of BSA and related laws, with particular attention paid to "Know Your Customer"
practices. Banks have been encouraged by regulators to enhance their identification procedures prior to accepting new customers in order to deter criminal elements from using the banking system to
move and hide illegal and illicit activities.

USA Patriot Act.The USA PATRIOT Act of 2001 (the "Patriot Act") contains anti-money
laundering measures affecting insured depository institutions, broker-dealers and certain other financial institutions. The Patriot Act requires financial institutions to implement policies and
procedures to combat money laundering and the financing of terrorism, including standards for verifying customer identification at account opening, and rules to promote cooperation among financial
institutions, regulators and law enforcement entities in identifying parties that may be involved in terrorism or money laundering. The Patriot Act also grants the Secretary of the Treasury broad
authority to establish regulations and to impose requirements and restrictions on financial institutions' operations. In addition, the Patriot Act requires the federal bank regulatory agencies to
consider the effectiveness of a financial institution's anti-money laundering activities when reviewing bank mergers and bank holding company acquisitions.

Available Information

The periodic reports that we file with the SEC are available at the SEC's website athttp://www.sec.gov.
Additionally, all reports we file with the SEC, plus ownership reports filed by our directors and executive officers and additional shareholder information is available free of charge on our website
athttp://www.ffsbky.com. We post these reports to our website as soon as reasonably practicable after filing them with the SEC.

ITEM 1A.    Risk Factors

We, like other financial companies, are subject to a number of risks, many of which are outside of our management's control. We strive to manage risks while
optimizing returns. The principal risks that affect our business are: (a) credit risk, which is the risk that loan and lease customers or other counterparties will be unable to perform their
contractual obligations, (b) market risk, which is the risk that changes in market rates and prices will adversely affect our financial condition or results of operation, (c) liquidity
risk, which is the risk that we will have insufficient cash or access to cash to meet our operating needs, and (d) operational risk, which is the risk of loss resulting from inadequate or
failed internal processes, people, and systems, or from external events.

13

---



The
risks identified below, as well as in the other cautionary statements made throughout this report, identify factors that could materially and adversely affect our business, future
results of operations, and future cash flows.

Credit Risk

We extend credit to a variety of customers based on internally set standards and the judgment of management. We manage credit risk through a program of
underwriting standards that we follow, the review of credit decisions, and an on-going process of assessment of the quality of the credits we have already extended. If our credit standards
and our on-going process of credit assessment do not function as intended, we could incur significant credit losses.

Our
loans and deposits are focused in central Kentucky. Adverse economic conditions in that region, in particular, could harm our results from operations, cash flows, and financial
condition. Adverse economic conditions and other factors, such as legislative or business developments or natural hazards that may affect Kentucky, may reduce demand for credit or
fee-based products and could negatively affect real estate and other collateral values, interest rate levels, and the availability of credit to refinance loans at or before maturity.

Market Risk

Changes in interest rates could harm our financial condition or results of operations. Our results of operations depend substantially on net interest income, the
difference between interest earned on interest-earning assets (such as investments and loans) and interest paid on interest-bearing liabilities (such as deposits and borrowings). Interest rates are
highly sensitive to many factors, including governmental monetary policies and domestic and international economic and political conditions. Factors beyond our control, such as inflation, recession,
unemployment, and money supply may also affect interest rates. If our interest-earning assets mature or reprice more quickly than our interest-bearing liabilities in a given period, as a result of
decreasing interest rates, our net interest income may decrease. Likewise, our net interest income may decrease if interest-bearing liabilities mature or reprice more quickly than interest-earning
assets in a given period as a result of increasing interest rates.

Fixed-rate
loans increase our exposure to interest rate risk in a rising rate environment because interest-bearing liabilities would be subject to repricing before assets
become subject to repricing. Adjustable-rate loans decrease the risk associated with changes in interest rates but involve other risks, such as the inability of borrowers to make higher
payments in an increasing interest rate environment. At the same time, for secured loans, the marketability of the underlying collateral may be adversely affected by higher interest rates. In a
declining interest rate environment, there may be an increase in prepayments on loans as the borrowers refinance their loans at lower interest rates, which could reduce net interest income and harm
our results of operations.

Liquidity Risk

If we cannot borrow funds through access to the capital markets, we may not be able to meet the cash flow requirements of our depositors and borrowers, or meet
the operating cash needs of the Corporation to fund corporate expansion or other activities. Our liquidity policies and limits are established by the Board of Directors, with operating limits set by
the Asset Liability Committee ("ALCO"), based upon analyses of the ratio of loans to deposits, the percentage of assets funded with non-core or wholesale funding. The ALCO regularly
monitors the overall liquidity position of the Bank and the Corporation to ensure that various alternative strategies exist to cover unanticipated events that could affect liquidity. Liquidity is the
ability to meet cash flow needs on a timely basis at a reasonable cost. If our liquidity policies and strategies don't work as well as intended, then we may be unable to make loans and to repay
deposit liabilities as they become due or are demanded by customers. The

14

---



ALCO
follows established board approved policies and monitors guidelines to diversify our wholesale funding sources to avoid concentrations in any one-market source. Wholesale funding
sources include Federal funds purchased, securities sold under repurchase agreements, non-core brokered deposits, and medium and long-term debt, which includes Federal Home
Loan Bank ("FHLB") advances that are collateralized with mortgage-related assets.

We
maintain a portfolio of securities that can be used as a secondary source of liquidity. There are other available sources of liquidity, including the sale or securitization of loans,
the ability to acquire additional non-core brokered deposits, additional collateralized borrowings such as FHLB advances, the issuance of debt securities, and the issuance of preferred or
common securities in public or private transactions. If we were unable to access any of these funding sources when needed, we might not be able to meet the needs of our customers, which could
adversely impact our financial condition, our results of operations, cash flows, and our level of regulatory-qualifying capital. For further discussion, see the "Liquidity" section of Management's
Discussion and Analysis of Financial Condition and Results of Operations.

Operational Risk

We have significant competition in both attracting and retaining deposits and in originating loans. Competition is intense in most of the markets we serve. We
compete on price and service with other banks and financial companies such as commercial banks, savings institutions, credit unions, finance companies, insurance companies, mortgage banking companies,
and brokerage firms. Competition could intensify in the future as a result of industry consolidation, the increasing availability of products and services from non-banks, greater
technological developments in the industry, and banking reform. If our competition prices deposits or loans at rates significantly more favorable than ours, then we may have difficulty in both
attracting and retaining deposits and loans.

Management
maintains internal operational controls and we have invested in technology to help us process large volumes of transactions. However, there can be no assurance that we will be
able to continue processing at the same or higher levels of transactions. If our systems of internal controls should fail to work as expected, if our systems were to be used in an unauthorized manner,
or if employees were to subvert the system of internal controls, significant losses could occur.

We
process large volumes of transactions on a daily basis and are exposed to numerous types of operation risk, which could cause us to incur substantial losses. Operational risk
resulting from inadequate or failed internal processes, people, and systems includes the risk of fraud by employees or persons outside of our company, the execution of unauthorized transactions by
employees, errors relating to transaction processing and systems, and breaches of the internal control system and compliance requirements. This risk of loss also includes potential legal actions that
could arise as a result of the operational deficiency or as a result of noncompliance with applicable regulatory standards.

We
establish and maintain systems of internal operational controls that provide management with timely and accurate information about our level of operational risk. While not foolproof,
these systems have been designed to manage operational risk at appropriate, cost effective levels. We have also established procedures that are designed to ensure that policies relating to conduct,
ethics, and business practices are followed. From time to time, we experience loss from operational risk, including the effects of operational errors, and these losses may be substantial.

While
management continually monitors and improves our system of internal controls, data processing systems, and corporate wide processes and procedures, there can be no assurance that
we will not suffer such losses in the future. New, or changes in existing tax, accounting, are regulatory laws, regulations, rules, standards, policies, and interpretations could significantly impact
strategic initiatives, results of operations, cash flows, and financial condition.

15

---



The
financial services industry is extensively regulated. Federal and state banking regulations are designed primarily to protect deposit insurance funds and consumers, not to benefit a
financial company's shareholders. These regulations may sometimes impose significant limitations on operations. The significant federal and state banking regulations that affect us are described in
this report under the heading "Regulation." These regulations, along with currently existing tax, accounting, and monetary laws, regulations, rules, standards, policies and interpretations control the
methods by which financial institutions conduct business, implement strategic initiatives and tax compliance, and govern financial reporting and disclosures. These laws, regulations, rules, standards,
policies, and interpretations are constantly evolving and may change significantly over time. Events that may not have a direct impact on us, such as the bankruptcy of U.S. companies, can cause
legislators, regulators,
and authoritative bodies, such as the Financial Accounting Standards Board, the SEC, the Public Company Accounting Oversight Board, and other various taxing authorities to respond by adopting and or
proposing substantive revisions to laws, regulations, rules, standards, policies, and interpretations. The nature, extent, and timing of the adoption of significant new laws and regulations, or
changes in or repeal of existing laws and regulations may have a material impact on our business and results of operations. Changes in regulation may cause us to devote substantial additional
financial resources and management time to compliance, which may negatively affect our operating results.

ITEM 1B.    Unresolved Staff Comments

None

16

---



ITEM 2.    Properties

Our executive offices, principal support and operational functions are located at 2323 Ring Road in Elizabethtown, Kentucky. All of our banking centers are
located in Kentucky. The location of our 15 full-service banking centers and a commercial private banking center, whether owned or leased, and their respective approximate square footage
is described in the following table.

|Banking Centers                  |  | Owned or Leased |  | Approximate Square Footage
|-------------------------------- |  | --------------- |  | --------------------------
|ELIZABETHTOWN                    |  |                 |  |                           
|2323 Ring Road                   |  | Owned           |  | 57,295                    
|325 West Dixie Avenue            |  | Owned           |  | 5,880                     
|2101 North Dixie Avenue          |  | Owned           |  | 3,150                     
|RADCLIFF                         |  |                 |  |                           
|475 West Lincoln Trail           |  | Owned           |  | 2,728                     
|BARDSTOWN                        |  |                 |  |                           
|401 East John Rowan Blvd.        |  | Leased          |  | 4,500                     
|315 North Third Street           |  | Owned           |  | 1,271                     
|MUNFORDVILLE                     |  |                 |  |                           
|925 Main Street                  |  | Owned           |  | 2,928                     
|SHEPHERDSVILLE                   |  |                 |  |                           
|395 N. Buckman Street            |  | Owned           |  | 7,600                     
|MT. WASHINGTON                   |  |                 |  |                           
|279 Bardstown Road               |  | Owned           |  | 6,310                     
|BRANDENBURG                      |  |                 |  |                           
|416 East Broadway                |  | Leased          |  | 4,395                     
|50 Old Mill Road                 |  | Leased          |  | 575                       
|FLAHERTY                         |  |                 |  |                           
|4055 Flaherty Road               |  | Leased          |  | 1,216                     
|LOUISVILLE                       |  |                 |  |                           
|11810 Interchange Drive          |  | Owned           |  | 4,675                     
|3650 South Hurstbourne Parkway   |  | Owned           |  | 4,428                     
|12629 Taylorsville Road          |  | Leased          |  | 3,479                     
|4965 U.S. Highway 42, Suite 2100 |  | Leased          |  | 2,035                     

ITEM 3.    Legal Proceedings

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

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

There were no matters submitted for shareholder approval during the fourth quarter of 2007.

17

---





PART II

ITEM 5.    Market Price of and Dividends on the Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities



Our common stock is traded on the Nasdaq Global Market ("NASDAQ") under the symbol "FFKY". The following table shows the high and low closing prices of our Common
Stock and the dividends paid.

|               |  | Quarter Ended
|-------------- |  | -------------
|
|
|High           |  | $            
|Low            |  |              
|Cash dividends |  |              
|2006:(1)       |  | 3/31         
|High           |  | $            
|Low            |  |              
|Cash dividends |  |              

---



At December 31, 2007, the number of shareholders was approximately 1,147.



It is currently the policy of our Board of Directors to continue to pay quarterly dividends, but any future dividends are subject to the Board's discretion based
on its consideration of the our operating results, financial condition, capital, income tax considerations, regulatory restrictions and other factors.

18

---





The following table summarizes the securities authorized for issuance under our equity compensation plans as of December 31, 2007. We have no equity
compensation plans that have not been approved by our shareholders.

|Plan category                                          |  | Number of securities to be issued upon exercise of outstanding options, warrants and rights |  | Weighted-average exercise price of outstanding options, warrants and rights |       | Number of securities remaining available for future issuance under equity compensation plans (excluding securities reflected in column (1))
|------------------------------------------------------ |  | ------------------------------------------------------------------------------------------- |  | --------------------------------------------------------------------------- | ----- | -------------------------------------------------------------------------------------------------------------------------------------------
|Equity compensation plans approved by security holders |  | 193,067                                                                                     |  | $                                                                           | 18.95 |                                                                                                                                            

See
Note 12 of the Notes to Consolidated Financial Statements for additional information required by this item.



The following table summarizes information about the shares of common stock we repurchased during the fourth quarter of 2007.

|Period                 |  | Total Number of Shares Purchased |  | Average Price Paid per Share |       | Total Number of Shares Purchased as Part of Publicly Announced Plans |       | Maximum Number of Shares that May Yet Be Purchased Under the Plan
|---------------------- |  | -------------------------------- |  | ---------------------------- | ----- | -------------------------------------------------------------------- | ----- | -----------------------------------------------------------------
|October 1-October 31   |  |                                 |  |                              |      |                                                                      |      |                                                                  
|November 1-November 30 |  | 3,500                            |  | $                            | 26.00 |                                                                      | 3,500 |                                                                  
|December 1-December 31 |  |                                 |  |                              |      |                                                                      |      |                                                                  
|                       |  |                                  |  |                              |       |                                                                      |       |                                                                  
|Total                  |  | 3,500                            |  | $                            | 26.00 |                                                                      | 3,500 |                                                                  
|                       |  |                                  |  |                              |       |                                                                      |       |                                                                  

19

---



ITEM 6.    Selected Consolidated Financial and Other Data

|                               |  | At December 31,
|------------------------------ |  | ---------------
|
|
|Total assets                   |  | $              
|Net loans outstanding (1)      |  |                
|Investments                    |  |                
|Deposits                       |  |                
|Borrowings                     |  |                
|Stockholders' equity           |  |                
|Number of:                     |  |                
|Real estate loans outstanding  |  |                
|Deposit accounts               |  |                
|Offices                        |  |                
|Full time equivalent employees |  |                

|
|

|                                 |         | At December 31, |       
|-------------------------------- | ------- | --------------- | ------
|
|
|Interest income                  |         | $               | 60,545
|Interest expense                 |         |                 | 29,751
|Net interest income              |         |                 | 30,794
|Provision for loan losses        |         |                 | 1,209 
|Non-interest income              |         |                 | 8,203 
|Non-interest expense             |         |                 | 23,790
|Income tax expense               |         |                 | 4,646 
|Net income                       |         |                 | 9,352 
|Earnings per share:(2)           |         |                 |       
|                                 | Basic   |                 | $     
|                                 | Diluted |                 |       
|Book value per share (2)         |         |                 | 15.76 
|Dividends paid per share (2)     |         |                 | 0.73  
|Dividend payout ratio            |         |                 | 37    
|Return on average assets         |         |                 | 1.10  
|Average equity to average assets |         |                 | 8.54  
|Return on average equity         |         |                 | 12.88 
|Efficiency ratio                 |         |                 | 61    

---

20

---



ITEM 7.    Management's Discussion and Analysis of Financial Condition and Results of Operations

Management's Discussion and Analysis of Financial Condition and Results of Operations analyzes the major elements of our balance sheets and statements of income.
This section should be read in
conjunction with our Consolidated Financial Statements and accompanying Notes and other detailed information.

OVERVIEW

We conduct operations in 15 full-service banking centers and a commercial private banking center in six contiguous counties in Central Kentucky along
the Interstate 65 corridor. Our markets range from the major metropolitan area of Louisville in Jefferson County, Kentucky approximately 40 miles north of our headquarters in Elizabethtown, Kentucky
to Hart County, Kentucky, approximately 30 miles south of Elizabethtown. Our core markets have experienced a growth rate of 21% in deposits for the past three years. We anticipate that our markets
will continue to grow at a similar rate for the next few years and believe we are well positioned to benefit from this anticipated growth.

Over
the past several years we have focused on enhancing and expanding our retail and commercial banking network in our core markets as well as establishing our presence in the
Louisville market. Our core markets, the five counties other than Louisville/Jefferson County, where we have a combined 21% market share, have become increasingly competitive as several new banks have
entered those markets during the past few years. In order to protect and grow our market share, we replaced existing branches with newer, enhanced facilities and anticipate constructing several new
facilities over the next few years. In addition to the enhancement and expansion in our core markets, we have been increasing our presence in the Louisville market. Approximately 73% of the deposit
base in the Louisville market is controlled by six out-of-state banks. While the market is very competitive, we believe this creates an opportunity for smaller community banks
with more power to make decisions locally. We believe our investment in these initiatives along with our continued commitment to a high level of customer service will enhance our market share in our
core markets and our development in the Louisville market.

Our
retail branch network continues to generate encouraging results. Total deposits have grown at an 18% growth rate over the past three years. Total deposits were $689.2 million
at December 31, 2007, an increase of $48.2 million, or 8% for the year. The continued development of the retail branch network into the Louisville market also yielded positive results.
We have a combined $54.2 million in deposits in our three full-service facilities in the Louisville market representing a 39% increase in deposits for the year. We opened two of
these facilities in the second quarter of 2004 to support our growing customer base in this market. In June 2007 we opened our third new full service banking center in the Louisville market.

We
have developed a strong commercial real estate niche in our markets. We have an experienced team of bankers who are focused on providing service and convenience to our customers. It
is quite common for our bankers to close loans at a customer's place of business or even the customer's personal residence. This high level of service has been especially well received in the
Louisville market, which is dominated by regional banks. Currently, borrowers representing 24% of our loan portfolio resides in the Louisville market. To further develop our commercial banking
relationships in Louisville,
we opened a private banking office in April 2007. This office is an upscale facility complementing our retail branch network in Louisville, allowing us to further attract commercial deposit
relationships in conjunction with our commercial lending relationships.

This
emphasis on commercial lending generated a 27% growth rate in the total loan portfolio and a 58% growth rate in commercial loans over the past three years. Commercial loans were
$544.9 million at December 31, 2007, an increase of $69.9 million, or 15%, from December 31, 2006.

21

---



Commercial
checking balances were $36.7 million at December 31, 2007. We have experienced a 36% growth rate in commercial checking accounts over the past three years.

The
growth in our commercial and commercial real estate loan portfolio, coupled with our efforts to fund these loans with lower cost customer deposits is our primary business model and
has substantially contributed to the growth in earnings over the past several years.

CRITICAL ACCOUNTING POLICIES

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

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

The
allowance consists of specific and general components. The specific component relates to loans that are individually classified as impaired or loans otherwise classified as
substandard or doubtful. The general component covers non-classified loans and is based on historical loss experience
adjusted for current factors. Allowance estimates are developed with actual loss experience adjusted for current economic conditions. Allowance estimates are considered a prudent measurement of the
risk in the loan portfolio and are applied to individual loans based on loan type.

Based
on our calculation, an allowance of $7.9 million or 1.03% of total loans was our estimate of probable losses within the loan portfolio as of December 31, 2007. This
estimate resulted in a provision for loan losses on the income statement of $1.2 million for 2007. If the mix and amount of future charge-off percentages differ significantly from
the assumptions used by management in making its determination, the allowance for loan losses and provision for loan losses on the income statement could be materially increased.

Stock-based CompensationWe adopted the provisions of Statement of Financial Accounting Standards
("SFAS") No. 123 (R) "Share-Based Payment (Revised 2004)," on January 1, 2006. Among other things, SFAS No. 123 (R) eliminates the ability to account for stock-based
compensation using the intrinsic value based method of accounting and requires that such transactions be recognized as compensation expense in the income statement based on their fair values on the
date of the grant. SFAS No. 123 (R) requires that management make assumptions including stock price volatility and expected forfeitures that are utilized to measure compensation expense.
We estimate fair value of stock options granted at the date of grant using the Black-Scholes option pricing model, which requires the input of highly subjective assumptions, such as volatility, risk
free interest rates and dividend pay out rates.

22

---



RESULTS OF OPERATION

Net income for the period ended December 31, 2007 was $9.4 million or $1.96 per share diluted compared to $10.3 million or $2.12 per share
diluted for the same period in 2006. Earnings decreased for 2007 compared to 2006 due to a decrease in our net interest margin, an increase in provision for loan loss expense and a higher level of
non-interest expense related to our expansion efforts. Our book value per common share increased from $14.95 at December 31, 2006 to $15.76 at December 31, 2007. Net income
for 2007 generated a return on average assets of 1.10% and a return on average equity of 12.88%. These compare with a return on average assets of 1.31% and a return on average equity of 15.03% for the
2006 period.

Net
income for the period ended December 31, 2006 was $10.3 million or $2.12 per share diluted compared to $9.1 million or $1.88 per share diluted for the same
period in 2005. The increase was primarily the result of an increase in net interest income of $2.2 million and a decrease in provision for loan loss expense of $718,000. Our book value per
common share increased from $13.43 at
December 31, 2005 to $14.95 at December 31, 2006. Net income for 2006 generated a return on average assets of 1.31% and a return on average equity of 15.03%. These compare with a return
on average assets of 1.22% and a return on average equity of 14.60% for the 2005 period.

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

The
growth in our commercial loan portfolio has increased the level of interest income generated. Average interest earning assets increased $57.1 million for 2007 compared to
2006. The yield on earning assets averaged 7.63% for the 2007 period compared to an average yield on earning assets of 7.30% for the same period in 2006. This increase was offset by a larger increase
in our cost of funds. Net interest margin as a percent of average earning assets decreased 15 basis points to 3.89% for the year ended December 31, 2007 compared to 4.04% for the 2006 period.

Our
cost of funds averaged 4.10% for the 2007 period compared to an average cost of funds of 3.58% for the same period in 2006. Deposit costs have accelerated due to the
re-pricing of maturing certificates of deposit that rolled off into new certificates of deposit at higher interest rates. In addition, we were paying higher rates on our money market
products. Offsetting the increase in deposit costs was a decrease in interest expense relating to the refinancing of $10.0 in subordinated debentures. Refinancing at a lower rate reduced interest
expense by $178,000 during 2007. Going forward, our cost of funds is expected to decrease as certificates of deposit re-price and roll off into new certificates of deposit at lower
interest rates.

The
increase in the volume of interest earning assets has resulted in an increase in net interest income of $1.1 million for 2007 compared to the same period a year ago. Our net
interest margin is likely to compress in future quarters as a result of the recent 225 basis point decrease by the Federal Open Market Committee (FOMC), as our loan portfolio is primarily priced off
the prime rate and our deposits are priced off of the London Interbank Offering Rate (LIBOR). Since September 2007, the prime rate decreased 225 basis points in conjunction with the FOMC rate decrease
lowering our yield on loans. LIBOR, which is a market driven rate, did not decline in rate as much as the prime rate. Therefore, our deposit costs will not decline as fast as our yield on loans. This
will in turn lower our net interest margin.

23

---



Comparative
information regarding net interest income follows:

|(Dollars in thousands)                    |  | 2007 |         | 2006 |   | 2005    |   | 2007/2006 Change |         | 2006/2005 Change |      
|----------------------------------------- |  | ---- | ------- | ---- | - | ------- | - | ---------------- | ------- | ---------------- | -----
|Net interest income, tax equivalent basis |  | $    | 31,009  |      | $ | 29,879  |   | $                | 27,569  |                  | 3.8  
|Net interest spread                       |  |      | 3.53    | %    |   | 3.72    | % |                  | 3.71    | %                | (19) 
|Net interest margin                       |  |      | 3.89    | %    |   | 4.04    | % |                  | 3.93    | %                | (15) 
|Average earnings assets                   |  | $    | 796,275 |      | $ | 739,215 |   | $                | 700,849 |                  | 7.7  
|Prime rate at year end                    |  |      | 7.25    | %    |   | 8.25    | % |                  | 7.25    | %                | (100)
|Average prime rate                        |  |      | 8.05    | %    |   | 7.98    | % |                  | 6.19    | %                | 7    
|                                          |  |      |         |      |   |         |   |                  |         |                  |      
|bp = basis point = 1/100th of a percent   |  |      |         |      |   |         |   |                  |         |                  |      

Prime
rate is included above to provide a general indication of the interest rate environment in which we operate. A large portion of our variable rate loans were indexed to the prime
rate and re-price as the prime rate changes, unless they reach a contractual floor or ceiling.

24

---



AVERAGE BALANCE SHEETS

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

|                                                                                 |                                                 | Year Ended December 31,                    |       
|-------------------------------------------------------------------------------- | ----------------------------------------------- | ------------------------------------------ | ------
|
|
|ASSETS                                                                           |                                                 |                                            |       
|Interest earning assets:                                                         |                                                 |                                            |       
|                                                                                 | U.S. Treasury and agencies                      |                                            | $     
|                                                                                 | Mortgage-backed securities                      |                                            |       
|                                                                                 | Equity securities                               |                                            |       
|                                                                                 | State and political subdivision
securities(1)   |                                            |       
|                                                                                 | Corporate bonds                                 |                                            |       
|                                                                                 | Loans(2)(3)(4)                                  |                                            |       
|                                                                                 | FHLB stock                                      |                                            |       
|                                                                                 | Interest bearing deposits                       |                                            |       
|                                                                                 |                                                 |                                            |       
|                                                                                 |                                                 | Total interest earning assets              |       
|                                                                                 |                                                 |                                            |       
|Less: Allowance for loan losses                                                  |                                                 |                                            | (7,966
|Non-interest earning assets                                                      |                                                 |                                            | 61,912
|                                                                                 |                                                 |                                            |       
|                                                                                 |                                                 | Total assets                               |       
|                                                                                 |                                                 |                                            |       
|LIABILITIES AND STOCKHOLDERS' EQUITY                                             |                                                 |                                            |       
|Interest bearing liabilities:                                                    |                                                 |                                            |       
|                                                                                 | Savings accounts                                |                                            | $     
|                                                                                 | NOW and money market accounts                   |                                            |       
|                                                                                 | Certificates of deposit and other time deposits |                                            |       
|                                                                                 | Short-term borrowings                           |                                            |       
|                                                                                 | FHLB advances                                   |                                            |       
|                                                                                 | Subordinated debentures                         |                                            |       
|                                                                                 |                                                 |                                            |       
|                                                                                 |                                                 | Total interest bearing liabilities         |       
|                                                                                 |                                                 |                                            |       
|Non-interest bearing liabilities:                                                |                                                 |                                            |       
|                                                                                 | Non-interest bearing deposits                   |                                            |       
|                                                                                 | Other liabilities                               |                                            |       
|                                                                                 |                                                 | Total liabilities                          |       
|Stockholders' equity                                                             |                                                 |                                            | 72,624
|                                                                                 |                                                 |                                            |       
|                                                                                 |                                                 | Total liabilities and
stockholders' equity |       
|                                                                                 |                                                 |                                            |       
|Net interest income                                                              |                                                 |                                            |       
|                                                                                 |                                                 |                                            |       
|Net interest spread                                                              |                                                 |                                            |       
|                                                                                 |                                                 |                                            |       
|Net interest margin                                                              |                                                 |                                            |       
|                                                                                 |                                                 |                                            |       
|Ratio of average interest earning
assets to average interest
bearing liabilities |                                                 |                                            |       
|                                                                                 |                                                 |                                            |       

---

25

---



RATE/VOLUME ANALYSIS

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

|                                   |                                                 | Year Ended December 31,
2007 vs. 2006 |        | Year Ended December 31,
2006 vs. 2005 |  
|---------------------------------- | ----------------------------------------------- | ------------------------------------- | ------ | ------------------------------------- | -
|
|
|Interest income:                   |                                                 |                                       |        |                                       |  
|                                   | U.S. Treasury and agencies                      |                                       | $      | 98                                    |  
|                                   | Mortgage-backed securities                      |                                       |        | 8                                     |  
|                                   | Equity securities                               |                                       |        |                                      |  
|                                   | State and political subdivision securities      |                                       |        | (5                                    | )
|                                   | Corporate bonds                                 |                                       |        | (106                                  | )
|                                   | Loans                                           |                                       |        | 1,498                                 |  
|                                   | FHLB stock                                      |                                       |        | 60                                    |  
|                                   | Interest bearing deposits                       |                                       |        | 68                                    |  
|                                   |                                                 |                                       |        |                                       |  
|                                   | Total interest earning assets                   |                                       |        | 1,621                                 |  
|                                   |                                                 |                                       |        |                                       |  
|Interest expense:                  |                                                 |                                       |        |                                       |  
|                                   | Savings accounts                                |                                       |        | 336                                   |  
|                                   | NOW and money market accounts                   |                                       |        | 198                                   |  
|                                   | Certificates of deposit and other time deposits |                                       |        | 3,072                                 |  
|                                   | Short-term borrowings                           |                                       |        | 31                                    |  
|                                   | FHLB advances                                   |                                       |        | (135                                  | )
|                                   | Subordinated debentures                         |                                       |        | (178                                  | )
|                                   |                                                 |                                       |        |                                       |  
|Total interest bearing liabilities |                                                 |                                       | 3,324  |                                       |  
|                                   |                                                 |                                       |        |                                       |  
|Net change in net interest income  |                                                 | $                                     | (1,703 | )                                     | $
|                                   |                                                 |                                       |        |                                       |  

Non-Interest Income and Non-Interest Expense

The following tables provide a comparison of the components of non-interest income and expenses for the years ended December 31, 2007, 2006 and
2005. The tables show the dollar and percentage change from 2006 to 2007 and from 2005 to 2006. Below each table is a discussion of significant changes and trends.

|                                                 |  |   |       |  |   |       |  | 2007/2006 |       | 2006/2005 |  
|------------------------------------------------ |  | - | ----- |  | - | ----- |  | --------- | ----- | --------- | -
|
|
|Customer sevice fees on deposit accounts         |  | $ | 5,792 |  | $ | 5,460 |  | $         | 5,167 |           | $
|Gain on sale of mortgage loans                   |  |   | 569   |  |   | 783   |  |           | 868   |           |  
|Gain on sale of investments                      |  |   |      |  |   |      |  |           | 381   |           |  
|Gain on sale of real estate held for development |  |   | 227   |  |   |      |  |           | 143   |           |  
|Brokerage commissions                            |  |   | 424   |  |   | 346   |  |           | 313   |           |  
|Other income                                     |  |   | 1,191 |  |   | 1,150 |  |           | 1,195 |           |  
|                                                 |  |   |       |  |   |       |  |           |       |           |  
|                                                 |  | $ | 8,203 |  | $ | 7,739 |  | $         | 8,067 |           | $
|                                                 |  |   |       |  |   |       |  |           |       |           |  

26

---



Growth
in customer service fees on deposit accounts, our largest component of non-interest income, is primarily due to growth in customer deposits, overdraft fee
income on retail checking accounts and the sale of fee based products for 2007, 2006 and 2005. We continue to increase our customer base through cross-selling opportunities and marketing initiatives
and promotions. In addition, we continue to emphasize growing our checking account base to better enhance our profitability and franchise value.

We
originate qualified VA, KHC, RHC and conventional secondary market loans and sell them into the secondary market with servicing rights released. Gain on sale of mortgage loans
decreased for 2007, 2006 and 2005 due to the steady decrease in the volume of loans refinanced and originated and sold due to the stabilizing interest rate environment and higher rates than in
previous years. We expect gain on sales of mortgage loans to increase in 2008 due to the recent decrease in interest rates.

We
invest in various types of liquid assets, including United States Treasury obligations, securities of various federal agencies, obligations of states and political subdivisions,
corporate bonds, mutual funds, stocks and others. During 2007 and 2006 we did not record any gains on the sale of investments compared to $381,000 in recorded gains for the 2005 period. Gains on
investment securities are infrequent in nature and are not a consistent recurring source of income.

Through
our subsidiary, First Federal Office Park, we hold commercial lots adjacent to our home office on Ring Road in Elizabethtown, that are available for sale. During 2007 and 2005 we
recorded $227,000 and $143,000 in gains from lot sales. Currently, one of the original nine lots held for sale remains unsold.

Included
in other income for 2007 was $104,000 from an easement settlement related to our Shepherdsville banking center.

|                                       |                            |   |        |     |   |        |   | 2007/2006 |        | 2006/2005 |  
|-------------------------------------- | -------------------------- | - | ------ | --- | - | ------ | - | --------- | ------ | --------- | -
|
|
|Employee compensation and benefits     |                            | $ | 12,593 |     | $ | 11,903 |   | $         | 11,126 |           | $
|Office occupancy expense and equipment |                            |   | 2,373  |     |   | 2,106  |   |           | 2,065  |           |  
|Marketing and advertising              |                            |   | 914    |     |   | 859    |   |           | 778    |           |  
|Outside services and data processing   |                            |   | 2,632  |     |   | 2,567  |   |           | 2,393  |           |  
|Bank franchise tax                     |                            |   | 923    |     |   | 871    |   |           | 788    |           |  
|Write off of issuance cost of          |                            |   |        |     |   |        |   |           |        |           |  
|                                       | Trust Preferred Securities |   |        | 229 |   |        |  |           |        |          |  
|Other expense                          |                            |   | 4,126  |     |   | 3,646  |   |           | 3,609  |           |  
|                                       |                            |   |        |     |   |        |   |           |        |           |  
|                                       |                            | $ | 23,790 |     | $ | 21,952 |   | $         | 20,759 |           | $
|                                       |                            |   |        |     |   |        |   |           |        |           |  

Employee
compensation and benefits is the largest component of non-interest expense. Compensation expense increased for 2007 due to an increase in staff needed for our
continued growth and expansion as well as annual raises. Three commercial lending associates and twenty-one retail associates have been added with our expansion efforts. These associates
were hired for a commercial private banking center that opened in April 2007, a new Louisville retail branch facility that opened in June 2007, and other positions to support or growth. We have
increased our staff in each of the last three years as we expand the products and services we offer our retail and commercial customers and increase the number and size of our branch offices. We look
for a continued increase in employee compensation and benefits expense in line with recent years, as we progress with our retail expansion and market protection efforts.

Office
occupancy expense and equipment, marketing and advertising, and outside services and data processing increased due to additional operating expenses related to our expansion
efforts in each of the last three years. We anticipate the increased level of non-interest expense to continue in 2008 with continued retail expansion.

27

---



Included in other expense for 2007 is $229,000 in unamortized subordinated debentures issuance cost from the redemption of all of our underlying $10.0 million issuance of
cumulative trust preferred securities. These securities paid distributions at a quarterly adjustable rate of LIBOR plus 360 basis points (8.97% on March 26, 2007). We obtained new subordinated
debentures at a 10 year fixed rate of 6.69%.

In
2007 we created a new debit rewards program intended to increase debit card activity. Expenses related to this program were $151,000 for 2007. Also during 2007, interchange expense
increased $222,000 due to the switch to real-time debit card processing, which is more expensive per item than the batch processing method we used during 2006. Other expense also increased
for 2007 due to $127,000 recorded for back taxes paid on a repossessed real estate property.

Our
efficiency ratio was 61% for 2007 compared to 59% for the 2006 period.

Income Taxes

The effective tax rate increased to 33% for the year ended December 31, 2007 compared to 31% for the year ended December 31, 2006. During 2007 we
accrued $99,000 in state income tax, net of the federal benefit, in a contiguous state. Our level of interest income generated from properties financed in this state increased to a level which
required us to pay state income tax. This contributed to the increase in the effective tax rate to 33%. For the year ended December 31, 2006, we recorded a $281,000 reduction of federal income
tax as a result of a re-evaluation of our tax contingency reserves. Income tax expense was reduced by this amount, resulting in an effective tax rate of 31% for the year ended 2006. Going
forward, we anticipate an effective tax rate of approximately 32%.

ANALYSIS OF FINANCIAL CONDITION

Total assets at December 31, 2007 increased to $872.7 million compared to $822.8 million at December 31, 2006, an increase of
$49.9 million. The increase was primarily driven by an increase in loans of
$62.1 million. The growth in loans was funded with deposits, which increased $48.2 million for the period as well as $12.8 million in proceeds from investment securities.

Loans

Net loans increased $62.1 million or 9% to $760.1 million at December 31, 2007 compared to $698.0 million at December 31, 2006.
Our commercial and commercial real estate portfolios increased $72.5 million, a 16% increase in these loans to $523.5 million at December 31, 2007. These loans comprised 68% of
the total loan portfolio compared to 64% of the loan portfolio at December 31, 2006. Consumer and home equity loans remained relatively constant for 2007. Offsetting this growth was a
$5.0 million, or 4% decrease in the residential mortgage loan portfolio to $132.3 million at December 31, 2007, compared to $137.3 million at December 31, 2006. Real
estate construction and indirect consumer loans also decreased for the 2007 period. For 2008, the growth in commercial and commercial real estate loans is expected to continue in line with recent
years as we continue to emphasize commercial lending.

28

---



Loan Portfolio Composition.The following table presents a summary of the loan portfolio, net of
deferred loan fees, by type. There are no foreign loans in our portfolio and other than the categories noted; there is no concentration of loans in any industry exceeding 10% of total loans.

|                         |              | December 31, |       
|------------------------ | ------------ | ------------ | ------
|
|
|Type of Loan:            |              |              |       
|Real Estate:             |              |              |       
|                         | Residential  |              | $     
|                         | Construction |              |       
|                         | Commercial   |              |       
|Consumer and home equity |              |              | 63,090
|Indirect consumer        |              |              | 27,721
|Commercial, other        |              |              | 51,924
|Loans held for sale      |              |              | 780   
|                         |              |              |       
|                         |              | Total loans  |       
|                         |              |              |       

Loan Maturity Schedule.The following table provides information at
December 31, 2007, regarding the dollar amount of loans, net of deferred loan fees, maturing in the loan portfolio based on their contractual terms to maturity.

Due during
the year ended
December 31,
2008

Due after
1 through
5 years after
December 31,
2007

Due after
5 years after
December 31,
2007

Total
Loans(Dollars in thousands)Residential mortgage

$
17,985

$
15,823

$
98,401

$
132,209Real estate construction


18,199


3,184





21,383Real estate commercial


177,584


250,596


42,749


470,929Consumer, home equity and indirect consumer


12,294


41,490


37,027


90,811Commercial, other


19,237


30,891


1,796


51,924Loans held for sale


780








780Total

$
246,079

$
341,984

$
179,973

$
768,036


The
following table breaks down loans maturing after one year, by fixed and adjustable rates.

Fixed Rates

Floating or
Adjustable Rates

Total(Dollars in thousands)Residential mortgage

$
61,117

$
53,107

$
114,224Real estate construction


967


2,217


3,184Real estate commercial


161,214


132,131


293,345Consumer, home equity and
indirect consumer


51,145


27,372


78,517Commercial, other


21,267


11,420


32,687Total

$
295,710

$
226,247

$
521,957


29

---



Allowance and Provision for Loan Losses

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

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

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

|                                                                         |                      | Year Ended December 31, |      
|------------------------------------------------------------------------ | -------------------- | ----------------------- | -----
|
|Balance at beginning of period                                           |                      | $                       | 7,684
|                                                                         |                      |                         |      
|Loans charged-off:                                                       |                      |                         |      
|                                                                         | Real estate mortgage |                         |      
|                                                                         | Consumer             |                         |      
|                                                                         | Commercial           |                         |      
|Total charge-offs                                                        |                      |                         | 1,210
|                                                                         |                      |                         |      
|Recoveries:                                                              |                      |                         |      
|                                                                         | Real estate mortgage |                         |      
|                                                                         | Consumer             |                         |      
|                                                                         | Commercial           |                         |      
|                                                                         |                      |                         |      
|Total recoveries                                                         |                      |                         | 239  
|                                                                         |                      |                         |      
|Net loans charged-off                                                    |                      |                         | 971  
|                                                                         |                      |                         |      
|Provision for loan losses                                                |                      |                         | 1,209
|                                                                         |                      |                         |      
|Balance at end of period                                                 |                      | $                       | 7,922
|                                                                         |                      |                         |      
|Allowance for loan losses to total loans
(excluding loans held for sale) |                      |                         | 1.03 
|Net charge-offs to average
loans outstanding                             |                      |                         | 0.13 
|Allowance for loan losses to
total non-performing loans                  |                      |                         | 89   

The
provision for loan losses increased $669,000 to $1.2 million for 2007 compared to 2006 due to growth in the loan portfolio as well as specific allocation for loans classified
during the third quarter of 2007. In addition, we recorded a smaller provision for 2006 due to the improved performance of certain credit relationships which resulted in a reduction in the allowance
allocated to those loans. The

30

---



allowance
for loan losses increased $238,000 to $7.9 million from December 31, 2006 to December 31, 2007. The increase in the allowance was related to a $62.1 million
increase in net loans for the year, as well as provision recorded, in conjunction with a $3.1 million increase in classified loans for the 2007 period. Net charge-offs increased
$738,000 for the 2007 period which was primarily the result of a $751,000 charge off during the fourth quarter on a commercial loan. The loan was fully reserved for in a prior quarter.

The
provision for loan losses decreased $718,000 to $540,000 for 2006, compared to 2005. We recorded a smaller provision for 2006 due to an improvement in our security and position of
certain classified loans during the period, as noted above. In addition, our provision for loan loss was higher in 2005, resulting from two classified loans downgraded to substandard. The allowance
for loan losses increased $307,000 to $7.7 million from December 31, 2005 to December 31, 2006. The increase in the allowance in 2006 reflected a $62.5 million increase in
net loans for the year, as well as a $1.6 million increase in classified loans.

The
following table depicts management's allocation of the allowance for loan losses by loan type. Allowance and allocation is based on management's current evaluation of risk in each
category, economic conditions, past loss experience, loan volume, past due history and other factors. Since these factors and management's assumptions are subject to change, the allocation is not a
prediction of future portfolio performance.

|                     |       | December 31, |      
|-------------------- | ----- | ------------ | -----
|
|
|Residential mortgage |       | $            | 348  
|Consumer             |       |              | 1,293
|Commercial           |       |              | 6,281
|                     |       |              |      
|                     | Total |              | $    
|                     |       |              |      

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

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

December 31,(Dollars in thousands)

2007

2006Classified LoansSubstandard

$
15,442

$
11,520Doubtful


38


858Loss


52


31Total Classified

$
15,532

$
12,409


The
$3.9 million increase in substandard assets for 2007 was primarily the result of the downgrading of loans with six borrowers in the amounts of a
$2.4 million, $1.7 million, $1.3 million, $1.2 million, $862,000 and $730,000, respectively. Offsetting this increase were upgrades of three classified loans having
balances of $1.8 million, $1.3 million and $1.1 million. Approximately $7.3 million of the total classified loans were related to real estate development or real estate
construction loans in our market area. These loans were classified during 2007. Classified consumer

31

---



loans
totaled $1.1 million, classified mortgage loans totaled $3.6 million and classified commercial loans totaled $3.5 million. We remain well secured and adequately
collateralized with these credits.

Although
we may allocate a portion of the allowance to specific loans or loan categories, the entire allowance is available for any charge-offs. We develop our allowance
estimates based on actual loss experience adjusted for current economic conditions. Allowance estimates represent a prudent measurement of the risk in the loan portfolio, which we apply to individual
loans based on loan type.

Non-Performing Assets

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

We
review our loans on a regular basis and implement normal collection procedures when a borrower fails to make a required payment on a loan. If the delinquency on a mortgage loan
exceeds 90 days and is not cured through normal collection procedures or an acceptable arrangement is not worked out with the borrower, we institute measures to remedy the default, including
commencing a foreclosure action.
We generally charge off consumer loans when management deems a loan uncollectible and any available collateral has been liquidated. We handle commercial business and real estate loan delinquencies on
an individual basis with the advice of legal counsel.

We
recognize interest income on loans on the accrual basis except for those loans in a non-accrual of income status. We discontinue accruing interest on impaired loans when
management believes, after consideration of economic and business conditions and collection efforts that the borrowers' financial condition is such that collection of interest is doubtful, typically
after the loan becomes 90 days delinquent. When we discontinue interest accrual, we reverse existing accrued interest and subsequently recognize interest income only to the extent we receive
cash payments.

We
classify real estate acquired as a result of foreclosure or by deed in lieu of foreclosure as real estate owned until such time as it is sold. We classify new and used automobile,
motorcycle and all terrain vehicles acquired as a result of foreclosure as repossessed assets until they are sold. When such property is acquired we record it at the lower of the unpaid principal
balance of the related loan or its fair market value. We charge any write-down of the property at the time of acquisition to the allowance for loan losses. Subsequent gains and losses are
included in non-interest income and non-interest expense. Real estate acquired through foreclosure increased $831,000 to $1.7 million at December 31, 2007
compared to $918,000 at December 31, 2006. The increase was the result of a commercial real estate credit relationship totaling $1.5 million.

32

---



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

|                                                                    |                                                                      | December 31, |      
|------------------------------------------------------------------- | -------------------------------------------------------------------- | ------------ | -----
|
|Restructured                                                        |                                                                      | $            | 2,335
|Past due 90 days still on accrual                                   |                                                                      |              |     
|Loans on non-accrual status                                         |                                                                      |              | 6,554
|                                                                    |                                                                      |              |      
|                                                                    | Total non-performing loans                                           |              |      
|Real estate acquired through foreclosure                            |                                                                      |              | 1,749
|Other repossessed assets                                            |                                                                      |              | 52   
|                                                                    |                                                                      |              |      
|                                                                    | Total non-performing assets                                          |              | $    
|                                                                    |                                                                      |              |      
|Interest income that would have been earned on non-performing loans |                                                                      | $            | 696  
|Interest income recognized on non-performing loans                  |                                                                      |              | 188  
|Ratios:                                                             |                                                                      |              |      
|                                                                    | Non-performing loans to total loans (excluding loans held for sale)  |              |      
|                                                                    | Non-performing assets to total loans (excluding loans held for sale) |              |      

Non-performing
loans increased $4.1 million to $8.9 million at December 31, 2007 compared to $4.8 million at December 31, 2006. The
increase was related to an increase in
non-accrual loans of $4.2 million. This was primarily the result of four commercial real estate credit relationships totaling $1.5 million, $1.2 million, $648,000 and
$502,000. Of these relationships, $2.6 million was related to real estate development or real estate construction loans in our market area. These credit relationships are well secured and no
loss is expected.

Non-performing
assets for the 2007 period include $2.3 million in restructured commercial, residential mortgage and consumer loans. The restructured loans primarily
consist of two credit relationships with balances of $2.0 million and $197,000. The terms of these loans have been renegotiated to reduce the rate of interest or extend the term, thus reducing
the amount of cash flow required from the borrower to service the loans. The borrowers are currently meeting the terms of the restructured loans.

Non-performing
assets for the 2006 period include $2.5 million in restructured commercial, residential mortgage and consumer loans. The restructured loans primarily
consist of two credit relationships with balances of $2.1 million and $204,000.

Investment Securities

Interest on securities provides us our largest source of interest income after interest on loans, constituting 4.2% of the total interest income for the year
ended December 31, 2007. The securities portfolio serves as a source of liquidity and earnings and contributes to the management of interest rate risk. We have the authority to invest in
various types of liquid assets, including short-term United States Treasury obligations and securities of various federal agencies, obligations of states and political subdivisions,
corporate bonds, certificates of deposit at insured savings and loans and banks, bankers' acceptances, and federal funds. We may also invest a portion of our assets in certain commercial paper and
corporate debt securities. We are also authorized to invest in mutual funds and stocks whose assets conform to the investments that we are authorized to make directly. The
available-for-sale and held-to-maturity investment portfolios decreased by $12.8 million during the 2007 period as securities were called for
redemption in accordance with their terms due to increasing rates. During the year we

33

---



made
purchases of investments in state and municipal obligations. The state and municipal obligations have an average life of 19 years. We purchased these securities to enhance earnings and
manage interest rate risk by placing assets with longer terms on the balance sheet. See Note 2 of the Notes to Consolidated Financial Statements for further information concerning the
investment portfolio.

We
review unrealized losses at least on a quarterly basis to determine whether the losses are other than temporary and more frequently when economic or market concerns warrant such
evaluation. We consider the length of time and the extent to which the fair value has been less than cost, the financial
condition and near-term prospects of the issuer, and our intent and ability to retain the investment in the issuer for a period of time sufficient to allow for any anticipated recovery in
fair value. In analyzing an issuer's financial condition, we may consider whether the securities are issued by the federal government or its agencies, whether downgrades by bond rating agencies have
occurred, and the results of reviews of the issuer's financial condition. The unrealized losses on these temporarily impaired securities are a result of changes in interest rates for
fixed-rate securities where the interest rate received is less than the current rate available for new offerings of similar securities. Because the decline in market value is attributable
to changes in interest rates and not credit quality, and because we have the ability and intent to hold these investments until recovery of fair value, which may be maturity, we do not consider these
investments to be other-than-temporarily impaired at December 31, 2007.

The
following table provides the carrying value of our securities portfolio at the dates indicated.

|                               |                            | December 31,
|------------------------------ | -------------------------- | ------------
|
|Securities available-for-sale: |                            |             
|                               | U.S. Treasury and agencies |             
|                               | Mortgage-backed            |             
|                               | Equity                     |             
|                               | State and municipal        |             
|                               | Corporate                  |             
|                               |                            |             
|                               |                            | Total       
|                               |                            |             
|Securities held-to-maturity:   |                            |             
|                               | U.S. Treasury and agencies |             
|                               | Mortgage-backed            |             
|                               | Corporate                  |             
|                               |                            |             
|                               |                            | Total       
|                               |                            |             

The
following table provides the scheduled maturities, amortized cost, fair value and weighted average yields for our securities at December 31, 2007.

|(Dollars in thousands)         |                                        | Amortized Cost |   | Fair Value |        | Weighted Average Yield* |       
|------------------------------ | -------------------------------------- | -------------- | - | ---------- | ------ | ----------------------- | ------
|Securities available-for-sale: |                                        |                |   |            |        |                         |       
|                               | Due in one year or less                |                | $ | 100        |        | $                       | 100   
|                               | Due after one year through five years  |                |   | 2,805      |        |                         | 2,792 
|                               | Due after five years through ten years |                |   | 3,163      |        |                         | 3,153 
|                               | Due after ten years                    |                |   | 14,855     |        |                         | 14,437
|                               | Equity                                 |                |   | 1,553      |        |                         | 1,522 
|                               |                                        |                |   |            |        |                         |       
|                               |                                        | Total          |   | $          | 22,476 |                         | $     
|                               |                                        |                |   |            |        |                         |       

34

---



|
|

|(Dollars in thousands)       |                                        | Amortized Cost |   | Fair Value |        | Weighted Average Yield* |       
|---------------------------- | -------------------------------------- | -------------- | - | ---------- | ------ | ----------------------- | ------
|Securities held-to-maturity: |                                        |                |   |            |        |                         |       
|                             | Due in one year or less                |                | $ | 11,005     |        | $                       | 10,963
|                             | Due after one year through five years  |                |   | 6,077      |        |                         | 6,062 
|                             | Due after five years through ten years |                |   | 43         |        |                         | 44    
|                             | Due after ten years                    |                |   | 556        |        |                         | 555   
|                             |                                        |                |   |            |        |                         |       
|                             |                                        | Total          |   | $          | 17,681 |                         | $     
|                             |                                        |                |   |            |        |                         |       

---

Deposits

We rely primarily on customer service and long-standing relationships with customers to attract and retain deposits. Market interest rates and rates
on deposit products offered by competing financial institutions can significantly affect our ability to attract and retain deposits. We attract both short-term and long-term
deposits from the general public by offering a wide range of deposit accounts and interest rates. In recent years market conditions have caused us to rely increasingly on short-term
certificate accounts and other deposit alternatives that are more responsive to market interest rates. We use forecasts based on interest rate risk simulations to assist management in monitoring our
use of certificates of deposit and other deposit products as funding sources and the impact of the use of those products on interest income and net interest margin in various rate environments.

In
conjunction with our initiatives to expand and enhance our retail branch network, we emphasize growing our customer checking account base to better enhance profitability and franchise
value. Total deposits increased $48.2 million for 2007 compared to 2006. Retail and commercial deposits increased $37.8 million and we added $10.4 million in public funds and
brokered certificates of deposit for the year. The increase in retail deposits was primarily in certificate of deposit balances due to branch promotional campaigns.

To
evaluate our funding needs in light of deposit trends resulting from these changing conditions, management and Board committees evaluate simulated performance reports that forecast
changes in margins. We continue to offer attractive certificate rates for various terms to allow us to retain deposit customers and reduce interest rate risk during the current rate environment, while
protecting the margin.

We
offer a broad selection of deposit instruments, including non-interest bearing checking, statement and passbook savings accounts, health savings accounts, NOW accounts,
money market accounts and fixed and variable rate certificates with varying maturities. We also offer tax-deferred individual retirement accounts. The flow of deposits is influenced
significantly by general economic conditions, changes in interest rates and competition. As of December 31, 2007, approximately 39% of our deposits consisted of various savings and demand
deposit accounts from which customers can withdraw funds at any time without penalty. Management periodically adjusts interest rates paid on our deposit products, maturity terms, service fees and
withdrawal penalties.

We
also offer certificates of deposit with a variety of terms, interest rates and minimum deposit requirements. The variety of deposit accounts allows us to compete more effectively for
funds and to respond with more flexibility to the flow of funds away from depository institutions into direct investment vehicles such as government and corporate securities. However, market
conditions continue to significantly affect our ability to attract and maintain deposits and our cost of funds.

35

---



The
following table breaks down our deposits.

December 31,(Dollars in thousands)

2007

2006Non-interest bearing

$
46,978

$
40,349NOW demand


79,133


73,552Savings


91,249


84,994Money market


49,306


53,917Certificates of deposit


422,577


388,225Total

$
689,243

$
641,037


As
of December 31, 2007, certificates of deposits in amounts of $100,000 or more totaled $150.6 million, most of which were held by persons residing within our service
areas. An additional $24.3 million of certificates of deposits in amounts of $100,000 or more were obtained from deposit brokers at December 31, 2007. Brokered deposits consist of
certificates of deposit placed by deposit brokers for a fee and can be utilized to support our asset growth.

The
following table shows at December 31, 2007 the amount of our certificates of deposit of $100,000 or more by time remaining until maturity.

Maturity Period

Certificates
of DepositThree months or less

$
43,171Three through six months


21,524Six through twelve months


71,038Over twelve months


39,120Total

$
174,853


Short-term Borrowings

We have the ability to obtain short-term borrowings, consisting of federal funds purchased and securities sold under agreements to repurchase at year
end 2007 and 2006. We had short-term borrowings of $42.8 million for 2007 and $68.5 million for 2006 from the FHLB of Cincinnati. These borrowings averaged a rate of 5.26%
for 2007 and 5.31% for 2006.

Advances from Federal Home Loan Bank

Deposits are the primary source of funds for our lending and investment activities and for our general business purposes. We can also use advances (borrowings)
from the FHLB of Cincinnati to compensate for reductions in deposits or deposit inflows at less than projected levels. Advances from the FHLB are secured by our stock in the FHLB, certain securities,
certain commercial real estate loans and substantially all of our first mortgage, multi-family and open end home equity loans. At December 31, 2007 we had $53.1 million in advances
outstanding from the FHLB and the capacity to increase our borrowings an additional $42.4 million.

36

---





The FHLB of Cincinnati functions as a central reserve bank providing credit for savings banks and other member financial institutions. As a member, we are required to own capital stock
in the FHLB and are authorized to apply for advances on the security of such stock and certain of our home mortgages, other real estate loans and other assets (principally, securities which are
obligations of, or guaranteed by, the United States) provided that we meet certain creditworthiness standards. For further information, see Note 7 of the Notes to Consolidated Financial
Statements in this Annual Report.

The
following table provides information about our FHLB advances and short-term borrowings as of and for the periods ended.

|                                                              |                 | December 31, |       
|------------------------------------------------------------- | --------------- | ------------ | ------
|
|
|Average balance outstanding                                   |                 | $            | 71,514
|Maximum amount outstanding at any month-end during the period |                 |              | 96,318
|Year end balance                                              |                 |              | 95,883
|Weighted average interest rate:                               |                 |              |       
|                                                              | At end of year  |              |       
|                                                              | During the year |              |       

LIQUIDITY

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

Our
sources of funds include the sale of securities in the available-for-sale portion of the investment portfolio, principal pay-downs on loans and
mortgage-backed securities, proceeds realized from loans held for sale, brokered deposits and other wholesale funding. We also secured federal funds borrowing lines from our correspondent bank of
$15 million. Our banking centers also provide access to retail deposit markets. If large certificate depositors shift to our competitors or other markets in response to interest rate changes,
we have the ability to replenish those deposits through alternative funding sources. Traditionally, we have also borrowed from the FHLB to supplement our funding requirements. At December 31,
2007, we had an unused approved line of credit in the amount of $88.8 million and sufficient collateral available to borrow, approximately, an additional $42.4 million in advances from
the FHLB. We believe our sources of liquidity are adequate to meet expected cash needs for the foreseeable future.

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

The
primary source of funding for the Corporation has been dividends and returns of investment from the Bank. Kentucky banking laws limit the amount of dividends that may be paid to the
Corporation by the Bank without prior approval of the KOFI. Under these laws, the amount of dividends that may be paid in any calendar year is limited to current year's net income, as defined in the
laws, combined with the retained net income of the preceding two years, less any dividends declared during those periods. At December 31, 2007, the Bank had approximately $8.2 million of

37

---



retained
earnings that could be used to pay dividends without prior regulatory approval. Because of these limitations, consolidated cash flows as presented in the consolidated statements of cash flows
may not represent cash immediately available to the Corporation. During 2007, the Bank declared and paid dividends of $8.9 million to the Corporation.

CAPITAL

Stockholders' equity increased $1.4 million during 2007, primarily due to net income earned during the year. This increase was offset by the repurchase of
our own common stock and cash dividends declared during the period. Average stockholders' equity to average assets ratio decreased to 8.54% at December 31, 2007 from 8.71% at the end of 2006.

During
2007, we purchased 155,541 shares of our own common stock for $4.5 million. The repurchase program authorizes the repurchase of 398,601 shares from
time-to-time when we believe market conditions are favorable and the repurchase of shares represents a good value. The repurchase program will remain effective until the number
of shares authorized is repurchased or until the program expires September 19, 2008. As of December 31, 2007, 242,560 shares could be repurchased under the current stock repurchase
program.

Each
of the federal bank regulatory agencies has established minimum leverage capital requirements for banks. Banks must maintain a minimum ratio of Tier 1 capital to adjusted
average quarterly assets ranging from 3% to 5%, subject to federal bank regulatory evaluation of an organization's overall safety and soundness. We intend to maintain a capital position that meets or
exceeds the "well capitalized" requirements established for banks by the FDIC. The following table shows the ratios of Tier 1 capital and total capital to risk-adjusted assets and
the leverage ratios for the Corporation and the Bank as of December 31, 2007.

|                            |  | Capital Adequacy Ratios as of
December 31, 2007 |   |      |   |      |  
|--------------------------- |  | ----------------------------------------------- | - | ---- | - | ---- | -
|
|Tier 1 capital(1)           |  | 4.0                                             | % | 6.0  | % | 9.4  | %
|Total risk-based capital(2) |  | 8.0                                             | % | 10.0 | % | 10.5 | %
|Tier 1 leverage ratio(3)    |  | 4.0                                             | % | 5.0  | % | 8.3  | %

---

OFF BALANCE SHEET ARRANGEMENTS

Our off balance sheet arrangements consist of commitments to make loans, unused borrower lines of credit, and stand by letters of credit, which are disclosed in
Note 16 to the consolidated financial statements.

38

---



AGGREGATE CONTRACTUAL OBLIGATIONS

|December 31, 2007                  |                         | Total |   | Less than one year |  | Greater than one year to 3 years |         | Greater than 3 years to 5 years |   | More than 5 years
|---------------------------------- | ----------------------- | ----- | - | ------------------ |  | -------------------------------- | ------- | ------------------------------- | - | -----------------
|
|Aggregate Contractual Obligations: |                         |       |   |                    |  |                                  |         |                                 |   |                  
|                                   | Time deposits           |       | $ | 422,577            |  | $                                | 323,218 |                                 | $ | 77,174           
|                                   | FHLB borrowings         |       |   | 53,083             |  |                                  | 136     |                                 |   | 262              
|                                   | Short-term borrowings   |       |   | 42,800             |  |                                  | 42,800  |                                 |   |                 
|                                   | Subordinated debentures |       |   | 10,000             |  |                                  |        |                                 |   |                 
|                                   | Lease commitments       |       |   | 1,553              |  |                                  | 356     |                                 |   | 684              

FHLB
borrowings represent the amounts that are due to the FHLB of Cincinnati. These amounts have fixed maturity dates. Four of these borrowings, although fixed, are subject to conversion
provisions at the option of the FHLB. The FHLB has the right to convert these advances to a variable rate or we can prepay the advances at no penalty. There is a substantial penalty if we prepay the
advances before the FHLB exercises its right. We do not believe these advances will be converted in the near term.

The
subordinated debentures, which mature March 22, 2037, are redeemable before the maturity date at our option on or after March 15, 2017 at their principal amount plus
accrued interest. The subordinated debentures are also redeemable in whole or in part from time to time, upon the occurrence of specific events defined within the trust indenture. The interest rate on
the subordinated debentures is at a 10 year fixed rate of 6.69% adjusting quarterly thereafter at LIBOR plus 1.60%. We have the option to defer distributions on the subordinated debentures from
time to time for a period not to exceed 20 consecutive quarters.

Lease
commitments represent the total future minimum lease payments under non-cancelable operating leases.

IMPACT OF INFLATION & CHANGING PRICES

The financial statements and related data presented herein have been prepared in accordance with U.S. generally accepted accounting principles, which require the
measurement of financial position and operating results in historical dollars without considering changes in the relative purchasing power of money over time due to inflation.

The
primary impact of inflation on our operations is reflected in increasing operating costs. Unlike most industrial companies, virtually all of the assets and liabilities of a financial
institution are monetary in nature. As a result, changes in interest rates have a more significant impact on our performance than the effects of general levels of inflation and changes in prices.
Periods of high inflation are often accompanied by relatively higher interest rates, and periods of low inflation are accompanied by relatively lower interest rates. As market interest rates rise or
fall in relation to the rates earned on our loans and investments, the value of these assets decreases or increases respectively.

ITEM 7A.    QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

Asset/Liability Management and Market Risk

To minimize the volatility of net interest income and exposure to economic loss that may result from fluctuating interest rates, we manage our exposure to adverse
changes in interest rates through asset and liability management activities within guidelines established by our Asset Liability Committee ("ALCO"). The ALCO, which includes senior management
representatives, has the responsibility for approving and ensuring compliance with asset/liability management polices. Interest rate risk is the exposure to adverse changes in the net interest income
as a result of market fluctuations in interest

39

---



rates.
The ALCO, on an ongoing basis, monitors interest rate and liquidity risk in order to implement appropriate funding and balance sheet strategies. Management considers interest rate risk to be
our most significant market risk.

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

Our
interest sensitivity profile was asset sensitive at December 31, 2007, compared to a liability sensitive position at December 31, 2006, demonstrating that a larger
amount of our interest sensitive assets will re-price faster than will our interest sensitive liabilities. Given a sustained 100 basis point decrease in rates, our base net interest income
would decrease by an estimated 1.10% at December 31, 2007 compared to an increase of .55% at December 31, 2006. Given a 100 basis point increase in interest rates our base net interest
income would increase by an estimated 1.09% at December 31, 2007 compared to a decrease of .48% at December 31, 2006.

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

We
use various asset/liability strategies to manage the re-pricing characteristics of our assets and liabilities designed to ensure that exposure to interest rate
fluctuations is limited within our guidelines of acceptable levels of risk-taking. As demonstrated by the December 31, 2007 and December 31, 2006 sensitivity tables, our
balance sheet has an asset sensitive position. This means that our earning assets, which consist of loans and investment securities, will change in price at a faster rate than our deposits and
borrowings. Therefore, if short term interest rates increase, our net interest income will be favorably impacted. Likewise, if short term interest rates decrease, our net interest income will be
negatively impacted.

From
September 2007 through December 2007, the Federal Open Market Committee has decreased short-term interest rates 100 basis points. We believe the Federal Open Market
Committee will likely lower rates several more times before the end of June 2008. Our net interest margin and the level of net interest income would decrease with a decrease in short term interest
rates. We continually monitor the effects rate changes will have on our level of net interest income, and management works to structure the maturity and pricing of loans and deposits to mitigate large
swings in net interest income. During 2007 and 2006, we made efforts to increase the level of short-term deposits offering more attractive rates on short-term certificates of
deposits. Also, during the third quarter of 2006, we paid off a fixed rate FHLB advance that had converted to a variable rate advance. We replaced this borrowing initially with overnight
short-term borrowings. In March 2007, we called our $10.0 million in subordinated debentures adjustable quarterly at LIBOR plus 360 basis points (8.97% on March 26, 2007) and
we re-issued new 30 year cumulative trust preferred securities at a 10 year fixed rate of 6.69% adjusting quarterly thereafter at LIBOR plus 160 basis points. In addition,
the majority of the
newly originated or renewed loans during 2007 and 2006 were fixed rates loans with the interest rate fixed from three to five years.

40

---



Our
sensitivity to interest rate changes is presented based on data as of December 31, 2007 and 2006.

|                           |                | December 31, 2007 |       
|-------------------------- | -------------- | ----------------- | ------
|
|
|Projected interest income  |                |                   |       
|                           | Loans          |                   | $     
|                           | Investments    |                   |       
|                           |                |                   |       
|Total interest income      |                |                   | 56,527
|Projected interest expense |                |                   |       
|                           | Deposits       |                   |       
|                           | Borrowed funds |                   |       
|                           |                |                   |       
|Total interest expense     |                |                   | 24,476
|                           |                |                   |       
|Net interest income        |                | $                 | 32,051
|                           |                |                   |       
|Change from base           |                | $                 | (774  
|                           |                |                   |       
|% Change from base         |                |                   | (2.36 

|
|

|                           |                | December 31, 2006 |       
|-------------------------- | -------------- | ----------------- | ------
|
|
|Projected interest income  |                |                   |       
|                           | Loans          |                   | $     
|                           | Investments    |                   |       
|                           |                |                   |       
|Total interest income      |                |                   | 60,604
|Projected interest expense |                |                   |       
|                           | Deposits       |                   |       
|                           | Borrowed funds |                   |       
|                           |                |                   |       
|Total interest expense     |                |                   | 25,714
|                           |                |                   |       
|Net interest income        |                | $                 | 34,890
|                           |                |                   |       
|Change from base           |                | $                 | 209   
|                           |                |                   |       
|% Change from base         |                |                   | .60   

41

---





ITEM 8.    Financial Statements and Supplementary Data

FIRST FINANCIAL SERVICE CORPORATION    Table of Contents

|Audited Consolidated Financial Statements: |                                                                                     | 
|------------------------------------------ | ----------------------------------------------------------------------------------- | 
|                                           |     Report on Management's Assessment of Internal Control Over Financial Reporting | 
|                                           |     Report of Independent Registered Public Accounting Firm                        | 
|                                           |     Consolidated Balance Sheets                                                    | 
|                                           |     Consolidated Statements of Income                                              | 
|                                           |     Consolidated Statements of Comprehensive Income                                | 
|                                           |     Consolidated Statements of Changes in Stockholders' Equity                     | 
|                                           |     Consolidated Statements of Cash Flows                                          | 
|                                           |     Notes to Consolidated Financial Statements                                     | 

42

---





Report on Management's Assessment of Internal Control Over Financial Reporting

First Financial Service Corporation is responsible for the preparation, integrity, and fair presentation of the consolidated financial statements included in this
annual report. We, as management of First Financial Service Corporation, are responsible for establishing and maintaining effective internal control over financial reporting that is designed to
produce reliable financial statements in conformity with U. S. generally accepted accounting principles. Because of its inherent limitations, internal control over financial reporting may not prevent
or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that
the degree of compliance with the policies or procedures may deteriorate.

Management
assessed the system of internal control over financial reporting as of December 31, 2007, in relation to criteria for effective internal control over financial
reporting as described in "Internal ControlIntegrated Framework," issued by the Committee of Sponsoring Organizations of the Treadway Commission. Based on this assessment, management
concludes that, as of December 31, 2007, its system of internal control over financial reporting is effective and meets the criteria of the "Internal ControlIntegrated Framework".
Crowe Chizek and Company LLC, independent registered public accounting firm, has issued an attestation report on the Corporation's internal control over financial reporting dated
March 12, 2008.

|Date: March 17, 2008 |  | By: |  | /s/B. KEITH JOHNSONB. Keith Johnson Chief Executive Officer                                         
|-------------------- |  | --- |  | ----------------------------------------------------------------------------------------------------
|Date: March 17, 2008 |  | By: |  | /s/GREGORY SCHREACKEGregory Schreacke President
Chief Financial Officer
Principal Accounting Officer

43

---







GRAPHIC

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

Board
of Directors and Stockholders
First Financial Service Corporation
Elizabethtown, Kentucky

We
have audited the accompanying consolidated balance sheets of First Financial Service Corporation as of December 31, 2007 and 2006 and the related consolidated statements of
income, changes in shareholders' equity, and cash flows for each of the three years in the period ended December 31, 2007. We also have audited First Financial Service Corporation's internal
control over financial reporting as of December 31, 2007, based on criteria established inInternal ControlIntegrated Frameworkissued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). First Financial Service Corporation's management is responsible for these financial statements, for maintaining
effective internal control over financial reporting, and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying Management's Report on
Internal Control over Financial Reporting. Our responsibility is to express an opinion on these financial statements and an opinion on the company's internal control over financial reporting based on
our audits.

We
conducted our audits in accordance with the 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 and whether effective internal control over financial reporting was maintained in all material
respects. Our audits of the financial statements included examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles
used and significant
estimates made by management, and evaluating the overall financial statement presentation. Our audit of internal control over financial reporting included obtaining an understanding of internal
control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk.
Our audits also included performing such other procedures as we considered necessary in the circumstances. We believe that our audits provide a reasonable basis for our opinions.

A
company's internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of
financial statements for external purposes in accordance with generally accepted accounting principles. A company's internal control over financial reporting includes those policies and procedures
that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide
reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and
expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely
detection of unauthorized acquisition, use, or disposition of the company's assets that could have a material effect on the financial statements.

Because
of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future
periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

44

---



In
our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of First Financial Service Corporation as of
December 31, 2007 and 2006, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 2007, in conformity with accounting
principles generally accepted in the United States of America. Also in our opinion First Financial Service Corporation maintained, in all material respects, effective internal control over financial
reporting as of December 31, 2007, based on criteria established inInternal ControlIntegrated Frameworkissued by the COSO.

|                                    |  | LOGO
|----------------------------------- |  | ----
|Crowe Chizek and Company LLC        |  |     
|Louisville, Kentucky
March 12, 2008 |  |     

45

---





FIRST FINANCIAL SERVICE CORPORATION        Consolidated Balance Sheets

|                                                                                                                                                 |                                                                  | December 31, |                                           
|------------------------------------------------------------------------------------------------------------------------------------------------ | ---------------------------------------------------------------- | ------------ | ------------------------------------------
|
|ASSETS                                                                                                                                           |                                                                  |              |                                           
|Cash and due from banks                                                                                                                          |                                                                  | $            | 14,948                                    
|Securities available-for-sale                                                                                                                    |                                                                  |              | 22,004                                    
|Securities held-to-maturity, fair value of $17,624 (2007) and $23,817 (2006)                                                                     |                                                                  |              | 17,681                                    
|                                                                                                                                                 |                                                                  |              |                                           
|                                                                                                                                                 | Total securities                                                 |              |                                           
|                                                                                                                                                 |                                                                  |              |                                           
|Loans held for sale                                                                                                                              |                                                                  |              | 780                                       
|Loans, net of unearned fees                                                                                                                      |                                                                  |              | 767,256                                   
|Allowance for loan losses                                                                                                                        |                                                                  |              | (7,922                                    
|                                                                                                                                                 |                                                                  |              |                                           
|                                                                                                                                                 | Net loans                                                        |              |                                           
|                                                                                                                                                 |                                                                  |              |                                           
|Federal Home Loan Bank stock                                                                                                                     |                                                                  |              | 7,621                                     
|Cash surrender value of life insurance                                                                                                           |                                                                  |              | 8,290                                     
|Premises and equipment, net                                                                                                                      |                                                                  |              | 26,335                                    
|Real estate owned:
Acquired through foreclosure                                                                                                  |                                                                  |              | 1,749                                     
|                                                                                                                                                 | Held for development                                             |              |                                           
|Other repossessed assets                                                                                                                         |                                                                  |              | 52                                        
|Goodwill                                                                                                                                         |                                                                  |              | 8,384                                     
|Accrued interest receivable                                                                                                                      |                                                                  |              | 4,324                                     
|Other assets                                                                                                                                     |                                                                  |              | 1,144                                     
|                                                                                                                                                 |                                                                  |              |                                           
|                                                                                                                                                 |                                                                  |              | TOTAL ASSETS                              
|                                                                                                                                                 |                                                                  |              |                                           
|                                                                                                                                                 |                                                                  |              | LIABILITIES AND STOCKHOLDERS' EQUITY      
|LIABILITIES:                                                                                                                                     |                                                                  |              |                                           
|Deposits:                                                                                                                                        |                                                                  |              |                                           
|                                                                                                                                                 | Non-interest bearing                                             |              | $                                         
|                                                                                                                                                 | Interest bearing                                                 |              |                                           
|                                                                                                                                                 |                                                                  |              |                                           
|                                                                                                                                                 |                                                                  |              | Total deposits                            
|                                                                                                                                                 |                                                                  |              |                                           
|Short-term borrowings                                                                                                                            |                                                                  |              | 42,800                                    
|Advances from Federal Home Loan Bank                                                                                                             |                                                                  |              | 53,083                                    
|Subordinated debentures                                                                                                                          |                                                                  |              | 10,000                                    
|Accrued interest payable                                                                                                                         |                                                                  |              | 1,093                                     
|Accounts payable and other liabilities                                                                                                           |                                                                  |              | 1,789                                     
|Deferred income taxes                                                                                                                            |                                                                  |              | 1,223                                     
|                                                                                                                                                 |                                                                  |              | TOTAL LIABILITIES                         
|                                                                                                                                                 |                                                                  |              |                                           
|Commitments and contingent liabilities (See Note 16)                                                                                             |                                                                  |              |                                          
|STOCKHOLDERS' EQUITY:                                                                                                                            |                                                                  |              |                                           
|                                                                                                                                                 | Serial preferred stock, 5,000,000 shares authorized and unissued |              |                                           
|Common stock, $1 par value per share; authorized 10,000,000 shares; issued and outstanding, 4,661,083 shares (2007), and 4,384,088 shares (2006) |                                                                  |              | 4,661                                     
|Additional paid-in capital                                                                                                                       |                                                                  |              | 33,886                                    
|Retained earnings                                                                                                                                |                                                                  |              | 35,225                                    
|Accumulated other comprehensive income/(loss)                                                                                                    |                                                                  |              | (312                                      
|                                                                                                                                                 |                                                                  |              |                                           
|                                                                                                                                                 |                                                                  |              | TOTAL STOCKHOLDERS' EQUITY                
|                                                                                                                                                 |                                                                  |              |                                           
|                                                                                                                                                 |                                                                  |              | TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY
|                                                                                                                                                 |                                                                  |              |                                           

See notes to consolidated financial statements.

46

---



FIRST FINANCIAL SERVICE CORPORATION        Consolidated Statements of Income

|                                                    |                                                          | Year Ended December 31,
|--------------------------------------------------- | -------------------------------------------------------- | -----------------------
|
|Interest and Dividend Income:                       |                                                          |                        
|                                                    | Loans, including fees                                    |                        
|                                                    | Taxable securities                                       |                        
|                                                    | Tax exempt securities                                    |                        
|                                                    |                                                          |                        
|                                                    |                                                          |                        
|                                                    |                                                          |                        
|Interest Expense:                                   |                                                          |                        
|                                                    | Deposits                                                 |                        
|                                                    | Short-term borrowings                                    |                        
|                                                    | Federal Home Loan Bank advances                          |                        
|                                                    | Subordinated debentures                                  |                        
|                                                    |                                                          |                        
|                                                    |                                                          |                        
|                                                    |                                                          |                        
|Net interest income                                 |                                                          |                        
|Provision for loan losses                           |                                                          |                        
|                                                    |                                                          |                        
|Net interest income after provision for loan losses |                                                          |                        
|                                                    |                                                          |                        
|Non-interest Income:                                |                                                          |                        
|                                                    | Customer service fees on deposit accounts                |                        
|                                                    | Gain on sale of mortgage loans                           |                        
|                                                    | Gain on sale of investments                              |                        
|                                                    | Gain on sale of real estate held for development         |                        
|                                                    | Brokerage commissions                                    |                        
|                                                    | Other income                                             |                        
|                                                    |                                                          |                        
|                                                    |                                                          |                        
|                                                    |                                                          |                        
|Non-interest Expense:                               |                                                          |                        
|                                                    | Employee compensation and benefits                       |                        
|                                                    | Office occupancy expense and equipment                   |                        
|                                                    | Marketing and advertising                                |                        
|                                                    | Outside services and data processing                     |                        
|                                                    | Bank franchise tax                                       |                        
|                                                    | Write off of issuance cost of Trust Preferred Securities |                        
|                                                    | Other expense                                            |                        
|                                                    |                                                          |                        
|                                                    |                                                          |                        
|                                                    |                                                          |                        
|Income before income taxes                          |                                                          |                        
|Income taxes                                        |                                                          |                        
|                                                    |                                                          |                        
|Net Income                                          |                                                          | $                      
|                                                    |                                                          |                        
|Shares applicable to basic income per share         |                                                          |                        
|Basic income per share                              |                                                          | $                      
|                                                    |                                                          |                        
|Shares applicable to diluted income per share       |                                                          |                        
|Diluted income per share                            |                                                          | $                      
|                                                    |                                                          |                        
|Cash dividends declared per share                   |                                                          | $                      
|                                                    |                                                          |                        

See notes to consolidated financial statements.

47

---





FIRST FINANCIAL SERVICE CORPORATION        Consolidated Statements of Comprehensive Income

|                                   |                                                                   | Year Ended December 31, |      
|---------------------------------- | ----------------------------------------------------------------- | ----------------------- | -----
|
|Net Income                         |                                                                   | $                       | 9,352
|Other comprehensive income (loss): |                                                                   |                         |      
|                                   | Change in unrealized gain (loss) on securities available-for-sale |                         |      
|                                   | Reclassification of realized amount                               |                         |      
|                                   |                                                                   |                         |      
|                                   | Net unrealized gain (loss) recognized in comprehensive income     |                         |      
|                                   | Tax effect                                                        |                         |      
|                                   |                                                                   |                         |      
|                                   | Total other comphrehensive income (loss)                          |                         |      
|                                   |                                                                   |                         |      
|Comphrehensive Income              |                                                                   | $                       | 8,955
|                                   |                                                                   |                         |      

See
notes to consolidated financial statements.

48

---



FIRST FINANCIAL SERVICE CORPORATION        Consolidated Statements of Changes in Stockholders' Equity        Years Ending December 31, 2007, 2006 and 2005        (Dollars In
Thousands, Except Per Share Amounts)

|                                                                                                     |  | Common
Shares |   | Stock
Amount |       | Additional
Paid-in
Capital |   | Retained
Earnings |   | Accumulated
Other
Comprehensive
Income (Loss),
Net of Tax |         | Total |  
|---------------------------------------------------------------------------------------------------- |  | ------------- | - | ------------ | ----- | -------------------------- | - | ----------------- | - | --------------------------------------------------------- | ------- | ----- | -
|Balance, January 1, 2005                                                                             |  | 3,645         |   | $            | 3,645 |                            | $ | 8,226             |   | $                                                         | 47,174  |       | $
|Net income                                                                                           |  |               |   |              |       |                            |   |                   |   |                                                           | 9,144   |       |  
|Stock dividend-10%                                                                                   |  | 363           |   |              | 363   |                            |   | 8,834             |   |                                                           | (9,197  | )     |  
|Exercise of stock options                                                                            |  | 5             |   |              | 5     |                            |   | 80                |   |                                                           |         |       |  
|Net change in unrealized gains (losses) on securities available- for-sale, net of tax                |  |               |   |              |       |                            |   |                   |   |                                                           |         |       |  
|Cash dividends declared ($.59 per share)                                                             |  |               |   |              |       |                            |   |                   |   |                                                           | (2,830  | )     |  
|Stock repurchased                                                                                    |  | (29           | ) |              | (29   | )                          |   | (731              | ) |                                                           |        |       |  
|                                                                                                     |  |               |   |              |       |                            |   |                   |   |                                                           |         |       |  
|Balance, December 31, 2005                                                                           |  | 3,984         |   |              | 3,984 |                            |   | 16,409            |   |                                                           | 44,291  |       |  
|Net income                                                                                           |  |               |   |              |       |                            |   |                   |   |                                                           | 10,337  |       |  
|Stock dividend-10%                                                                                   |  | 398           |   |              | 398   |                            |   | 10,835            |   |                                                           | (11,233 | )     |  
|Stock issued for stock options exercised and employee benefit plans                                  |  | 3             |   |              | 3     |                            |   | 61                |   |                                                           |         |       |  
|Stock-based compensation expense                                                                     |  |               |   |              |       |                            |   | 129               |   |                                                           |         |       |  
|Net change in unrealized gains (losses) on securities available- for-sale, net of tax                |  |               |   |              |       |                            |   |                   |   |                                                           |         |       |  
|Cash dividends declared ($.66 per share)                                                             |  |               |   |              |       |                            |   |                   |   |                                                           | (3,185  | )     |  
|Stock repurchased                                                                                    |  | (1            | ) |              | (1    | )                          |   | (15               | ) |                                                           |        |       |  
|                                                                                                     |  |               |   |              |       |                            |   |                   |   |                                                           |         |       |  
|Balance, December 31, 2006                                                                           |  | 4,384         |   |              | 4,384 |                            |   | 27,419            |   |                                                           | 40,210  |       |  
|Net income                                                                                           |  |               |   |              |       |                            |   |                   |   |                                                           | 9,352   |       |  
|Stock dividend-10%                                                                                   |  | 424           |   |              | 424   |                            |   | 10,493            |   |                                                           | (10,917 | )     |  
|Stock issued for stock options exercised and employee benefit plans                                  |  | 9             |   |              | 9     |                            |   | 165               |   |                                                           |         |       |  
|Stock-based compensation expense                                                                     |  |               |   |              |       |                            |   | 110               |   |                                                           |         |       |  
|Net change in unrealized gains (losses) on securities available- for-sale, net of tax                |  |               |   |              |       |                            |   |                   |   |                                                           |         |       |  
|Cash dividends declared and cash dividends for fractional shares for stock dividend ($.73 per share) |  |               |   |              |       |                            |   |                   |   |                                                           | (3,420  | )     |  
|Stock repurchased                                                                                    |  | (156          | ) |              | (156  | )                          |   | (4,301            | ) |                                                           |        |       |  
|                                                                                                     |  |               |   |              |       |                            |   |                   |   |                                                           |         |       |  
|Balance, December 31, 2007                                                                           |  | 4,661         |   | $            | 4,661 |                            | $ | 33,886            |   | $                                                         | 35,225  |       | $
|                                                                                                     |  |               |   |              |       |                            |   |                   |   |                                                           |         |       |  

See
notes to consolidated financial statements.

49

---



FIRST FINANCIAL SERVICE CORPORATION        Consolidated Statements of Cash Flows

|                                                                                  |                                                                 | Year Ended December 31,                |        
|--------------------------------------------------------------------------------- | --------------------------------------------------------------- | -------------------------------------- | -------
|
|Operating Activities:                                                             |                                                                 |                                        |        
|Net income                                                                        |                                                                 | $                                      | 9,352  
|Adjustments to reconcile net income to net cash provided by operating activities: |                                                                 |                                        |        
|                                                                                  | Provision for loan losses                                       |                                        |        
|                                                                                  | Depreciation on premises and equipment                          |                                        |        
|                                                                                  | Federal Home Loan Bank stock dividends                          |                                        |        
|                                                                                  | Net amortization (accretion) available-for-sale                 |                                        |        
|                                                                                  | Net amortization (accretion) held-to-maturity                   |                                        |        
|                                                                                  | Gain on sale of investments available-for-sale                  |                                        |        
|                                                                                  | Gain on sale of real estate held for development                |                                        |        
|                                                                                  | Gain on sale of mortgage loans                                  |                                        |        
|                                                                                  | Origination of loans held for sale                              |                                        |        
|                                                                                  | Proceeds on sale of loans held for sale                         |                                        |        
|                                                                                  | Deferred taxes                                                  |                                        |        
|                                                                                  | Stock-based compensation expense                                |                                        |        
|                                                                                  | Changes in:                                                     |                                        |        
|                                                                                  |                                                                 | Cash surrender value of life insurance |        
|                                                                                  |                                                                 | Interest receivable                    |        
|                                                                                  |                                                                 | Other assets                           |        
|                                                                                  |                                                                 | Interest payable                       |        
|                                                                                  |                                                                 | Accounts payable and other liabilities |        
|                                                                                  |                                                                 |                                        |        
|Net cash from operating activities                                                |                                                                 |                                        | 12,793 
|                                                                                  |                                                                 |                                        |        
|Investing Activities:                                                             |                                                                 |                                        |        
|                                                                                  | Sales of securities available-for-sale                          |                                        |        
|                                                                                  | Purchases of securities available-for-sale                      |                                        |        
|                                                                                  | Maturities of securities available-for-sale                     |                                        |        
|                                                                                  | Maturities of securities held-to-maturity                       |                                        |        
|                                                                                  | Net change in loans                                             |                                        |        
|                                                                                  | Net purchases of premises and equipment                         |                                        |        
|                                                                                  | Sales of real estate held for development                       |                                        |        
|                                                                                  |                                                                 |                                        |        
|Net cash from investing activities                                                |                                                                 |                                        | (56,589
|                                                                                  |                                                                 |                                        |        
|Financing Activities                                                              |                                                                 |                                        |        
|                                                                                  | Net change in deposits                                          |                                        |        
|                                                                                  | Change in short-term borrowings                                 |                                        |        
|                                                                                  | Advances from Federal Home Loan Bank                            |                                        |        
|                                                                                  | Repayments to Federal Home Loan Bank                            |                                        |        
|                                                                                  | Proceeds from issuance of subordinated debentures               |                                        |        
|                                                                                  | Payoff of subordinated debentures                               |                                        |        
|                                                                                  | Issuance of common stock for options and employee benefit plans |                                        |        
|                                                                                  | Dividends paid                                                  |                                        |        
|                                                                                  | Common stock repurchased                                        |                                        |        
|                                                                                  |                                                                 |                                        |        
|Net cash from financing activities                                                |                                                                 |                                        | 39,662 
|                                                                                  |                                                                 |                                        |        
|(Decrease) in cash and cash equivalents                                           |                                                                 |                                        | (4,134 
|Cash and cash equivalents, beginning of year                                      |                                                                 |                                        | 19,082 
|                                                                                  |                                                                 |                                        |        
|Cash and cash equivalents, end of year                                            |                                                                 | $                                      | 14,948 
|                                                                                  |                                                                 |                                        |        

See notes to consolidated financial statements.

50

---





NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

1.    SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

The following is a description of the significant accounting policies First Financial Service Corporation follows in preparing and presenting its consolidated
financial statements:

Principles of Consolidation and BusinessThe consolidated financial statements include the accounts of First Financial Service
Corporation and its wholly owned subsidiary, First Federal Savings Bank. First Federal Savings Bank has two wholly owned subsidiaries, First Service Corporation of Elizabethtown and First Federal
Office Park, LLC. Unless the text clearly suggests otherwise, references to "us," "we," or "our" include First Financial Service Corporation and its wholly-owned subsidiary. All significant
intercompany transactions and balances have been eliminated in consolidation.

Our
business consists primarily of attracting deposits from the general public and origination of mortgage loans on commercial property, single-family residences and multi-family
housing. We also
make home improvement loans, consumer loans and commercial business loans. Our primary lending area is a region within North Central Kentucky. The economy within this region is diversified with a
variety of medical service, manufacturing, and agricultural industries, and Fort Knox, a military installation.

The
principal sources of funds for our lending and investment activities are deposits, repayment of loans, Federal Home Loan Bank advances and other borrowings. Our principal source of
income is interest on loans. In addition, other income is derived from loan origination fees, service charges, returns on investment securities, gain on sale of mortgage loans, and brokerage and
insurance commissions.

Our
subsidiary First Service Corporation is a licensed broker providing investment services and offering tax-deferred annuities, government securities and stocks and bonds to
our customers. First Federal Office Park, LLC, another subsidiary, holds commercial lots adjacent to our home office on Ring Road in Elizabethtown, which are available for sale.

Estimates and AssumptionsThe preparation of consolidated financial statements in conformity with U.S. generally accepted
accounting principles requires us to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of the amount of revenues and expenses during the
reporting period. Actual results could differ from those estimates. The allowance for loan losses and the fair value of financial instruments are particularly subject to change.

Cash FlowsFor purposes of the statement of cash flows, we consider all highly liquid debt instruments purchased with an
original maturity of three months or less to be cash equivalents. Cash and cash equivalents include cash on hand, amounts due from banks, federal funds sold and certain interest bearing deposits. Net
cash flows are reported for interest-bearing deposits, loans, short-term borrowings and deposits.

SecuritiesWe classify investments into held-to-maturity and
available-for-sale. Debt securities in which management has a positive intent and ability to hold are classified as held-to-maturity and are carried at
cost adjusted for the amortization of premiums and discounts using the interest method over the terms of the securities. Debt and equity securities, which do not fall into this category, are
classified as available-for-sale. Unrealized holding gains and losses, net of tax, on available-for-sale securities are reported as a component of
accumulated other comprehensive income.

Interest
income includes amortization of purchase premium or discount. Premiums and discounts on securities are amortized on the level-yield method without anticipating prepayments,
except for

51

---



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

1.    SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)

mortgage
backed securities where prepayments are anticipated. Gains and losses on sales are recorded on the trade date and determined using the specific identification method.

Declines
in the fair value of securities below their cost that are other than temporary are reflected as realized losses. In estimating other-than-temporary
losses, management considers: (1) the length of time and extent that fair value has been less than cost, (2) the financial condition and near term prospects of the issuer, and
(3) our ability and intent to hold the security for a period sufficient to allow for any anticipated recovery in fair value.

LoansLoans are stated at unpaid principal balances, less undistributed construction loans, and net deferred loan origination
fees. We defer loan origination fees and discounts net of certain direct origination costs. These net deferred fees are amortized using the level yield method on a loan-by-loan
basis over the lives of the underlying loans.

Interest
income on loans is accrued on the unpaid principal balance except for those loans in nonaccrual status. The accrual of interest is discontinued when a loan becomes 90 or more
days delinquent. When interest accrual is discontinued, all accrued interest not received is reversed against interest income. Interest income is subsequently recognized only to the extent cash
payments are received. Interest accruals resume when the loan becomes less than 90 days delinquent.

Allowance for Loan LossesThe allowance for loan losses is a valuation allowance for probable incurred credit losses. Loan
losses are charged against the allowance when we believe the uncollectibility of a loan balance is confirmed. Subsequent recoveries, if any, are credited to the allowance. Our periodic evaluation of
the allowance is based on our past loan loss experience, known and inherent risks in the portfolio, adverse situations that may affect the borrower's ability to repay, estimated value of any
underlying collateral, and current economic conditions. Allocations of the allowance may be made for specific loans, but the entire allowance is available for any loan that, in management's judgment,
should be charged-off.

The
allowance consists of specific and general components. The specific component relates to loans that are individually classified as impaired or loans otherwise classified as
substandard or doubtful. The general component covers non-classified loans and is based on historical loss experience adjusted for current factors.

Loans
are considered impaired when, based on current information and events, it is probable that full principal or interest payments are not anticipated in accordance with the
contractual loan terms.
Factors considered by management in determining impairment include payment status, collateral value, and the probability of collecting scheduled principal and interest payments when due. Loans that
experience insignificant payment delays and payment shortfalls generally are not classified as impaired. Impaired loans are carried at the present value of expected future cash flows discounted at the
loan's effective interest rate or at the fair value of the collateral if the loan is collateral dependent. Commercial and commercial real estate loans are individually evaluated for impairment. Large
groups of smaller balance homogeneous loans, such as consumer and residential real estate loans, are collectively evaluated for impairment and are not separately identified for impairment disclosures.
A portion of the allowance for loan losses is allocated to impaired loans if the value of such loans is less than the unpaid balance. If these allocations cause the allowance for loan losses to
require an increase, such increase is reported in the provision for loan losses.

Mortgage Banking ActivitiesMortgage loans originated and intended for sale in the secondary market are carried at the lower
of aggregate cost or market value. To deliver closed loans to the

52

---



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

1.    SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)

secondary
market and to control its interest rate risk prior to sale, we enter into "best efforts" agreements to sell loans. The aggregate market value of mortgage loans held for sale considers the
price of the sales contracts. The loans are sold with servicing released.

Loan
commitments related to the origination of mortgage loans held for sale are accounted for as derivative instruments. Our commitments are for fixed rate mortgage loans, generally
lasting 60 to 90 days and are at market rates when initiated. Considered derivatives, we had commitments to originate $6.0 million and $2.7 million in loans at December 31,
2007 and 2006, which we intend to sell after the loans are closed.

The
fair value was not material. Substantially all of the gain on sale generated from mortgage banking activities continues to be recorded when closed loans are delivered into the sales
contracts.

Federal Home Loan Bank StockThe Bank is a member of the FHLB system. Members are required to own a certain amount of stock
based on the level of borrowings and other factors, and may invest in additional amounts. Investment in stock of Federal Home Loan Bank is carried at cost, and periodically evaluated for impairment.
Both cash and stock dividends are reported as income.

Cash Surrender Value of Life InsuranceWe have purchased life insurance policies on certain key executives. Upon adoption of
EITF 06-5, owned life insurance is recorded at the amount that can be realized under the insurance contract at the balance sheet date, which is the cash surrender value adjusted for
other charges or other amounts due that are probable at settlement. Prior to adoption of EITF 06-5, we recorded owned life insurance at its cash surrender value.

In
September 2006, the FASB Emerging Issues Task Force finalized Issue No. 06-5 "Accounting for Purchases of Life Insurance-Determining the Amount That Could Be
Realized in Accordance with FASB Technical Bulletin No. 85-4 Accounting for Purchases of Life Insurance" ("Issue"). This Issue requires that a policyholder consider contractual
terms of a life insurance policy in determining the amount that could be realized under the insurance contract. It also requires that if the contract provides for a greater surrender value if all
individual policies in a group are surrendered at the same time, that the surrender value be determined based on the assumption that policies will be surrendered on and individual basis. Lastly, the
Issue requires disclosure when there are contractual restrictions on our ability to surrender a policy. The adoption of EITF 06-5 on January 1, 2007 had no impact on our
financial condition or results of operation.

Premises and EquipmentLand is carried 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 5 to 40 years. Furniture, fixtures and equipment are depreciated using
the straight-line method with useful lives ranging from 3 to 15 years.

Real Estate OwnedReal estate properties acquired through foreclosure and in settlement of loans are stated at lower of cost
or fair value less estimated selling costs at the date of foreclosure. The excess of cost over fair value less the estimated costs to sell at the time of foreclosure is charged to the allowance for
loan losses. Costs relating to development and improvement of property are capitalized, whereas costs relating to holding property are not capitalized and are charged against operations in the current
period.

Real Estate Held for DevelopmentReal estate properties held for development and sale are carried at the lower of cost,
including cost of development and improvement subsequent to acquisition,

53

---



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

1.    SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)

or
fair value less estimated selling costs. The portion of interest costs relating to the development of real estate is capitalized.

Other Repossessed AssetsConsumer assets acquired through repossession and in settlement of loans, typically automobiles, are
carried at lower of cost or fair value at the date of repossession. The excess cost over fair value at time of repossession is charged to the allowance for loan losses.

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

Stock DividendsWe declared a 10% stock dividend on August 16, 2007 to our shareholders of record as of
August 29, 2007, payable on September 14, 2007 and we declared a 10% stock dividend on August 15, 2006 to our shareholders of record as of August 29, 2006, payable on
September 14, 2006. In addition, we declared another 10% stock dividend on September 20, 2005 to our shareholders of record as of October 7, 2005, payable on October 21,
2005. The payments of these dividends were in addition to the regular quarterly cash dividends. Per share amounts have been restated for the impact of the stock dividends.

Stock
dividends for 20% or less are reported by transferring the fair value, as of the dividend date, of the stock issued from retained earnings to common stock and additional
paid-in-capital. Fractional share amounts are paid in cash with a reduction to retained earnings.

Brokerage and Insurance CommissionsBrokerage commissions are recognized as income on settlement date. Insurance commissions
on loan products (credit life, mortgage life, accidental death, and guaranteed auto protection) are recognized as income over the life of the loan.

Stock Based CompensationEffective January 1, 2006, we adopted Statement of Financial Accounting Standards ("SFAS
No. 123R"), "Share-Based Payment". Accordingly, we have recorded stock-based employee compensation cost using the fair value method starting in 2006. The cost is measured at the fair value of
the options when granted, and this cost is expensed over the employee service period, which is normally the vesting period of the options. Compensation cost is recorded for prior option grants that
vest after the date of adoption. Prior to January 1, 2006, employee compensation expense under stock options was reported using the intrinsic value method; therefore, no stock-based
compensation cost is reflected in net income for the year ended December 31, 2005, as all options granted had an exercise price equal to or greater than the market price of the underlying
common stock at date of grant.

54

---



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

1.    SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)

The
following table illustrates the effect on net income and earnings per share if expense was measured using the fair value recognition provisions of FASB Statement No. 123,
Accounting for Stock-Based Compensation, for the year ended December 31, 2005.

(Dollars in thousands except per share data)Net income:As reported

$
9,144Deduct: Stock-based compensation expense determined under fair value based method


(89
)Pro-forma

$
9,055Earnings per share:BasicAs Reported

$
1.89Pro-forma


1.86DilutedAs Reported

$
1.88Pro-forma


1.85


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 deferred tax assets to the amount expected to be realized.

We
adopted FASB Interpretation 48, "Accounting for Uncertainty in Income Taxes" ("FIN 48"), as of January 1, 2007. A tax position is recognized as a benefit only if it is
"more likely than not" that the tax position would be sustained in a tax examination, with a tax examination being presumed to occur. The amount recognized is the largest amount of tax benefit that is
greater than 50% likely of being realized on examination. For tax positions not meeting the "more likely than not" test, no tax benefit is recorded. We recognize interest and penalties related to
income tax matters in income tax expense.

Employee Stock Ownership PlanCompensation expense is based on the market price of shares as they are committed to be released
to participant accounts. Dividends on allocated ESOP
shares reduce retained earnings. Since the ESOP has not acquired shares in advance of allocation to participant accounts, the plan has no unallocated shares.

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 include the dilutive effect of additional potential common shares issuable under stock options.

Loss ContingenciesIn the normal course of business, there are various outstanding legal proceedings and claims. In the
opinion of management the disposition of such legal proceedings and claims will not materially affect our consolidated financial position, results of operations or liquidity.

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, which are also recognized as a separate component of equity, net of tax.

55

---



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

1.    SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)

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.

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Segments are parts of a company evaluated by management with separate financial information. Our internal
financial information is primarily reported and evaluated in three lines of business, banking, mortgage banking, and brokerage. These segments are dominated by banking at a magnitude for which
separate individual segment disclosures are not required.

Effect of Newly Issued But Not Yet Effective Accounting StandardsIn September 2006, the FASB issued SFAS No. 157,
"Fair Value Measurements" ("SFAS No. 157"), which defines fair value, establishes a framework for measuring fair value in generally accepted accounting principles (GAAP), and expands
disclosures about fair value measurements. More specifically, this statement clarifies the definition of fair value, establishes a fair valuation hierarchy based upon observable (e.g. quoted
prices, interest rates, yield curves) and unobservable market inputs, and expands disclosure requirements to include the inputs used to develop estimates of fair value and the effects of the estimates
on income for the period. This statement does not require any new fair value measurements. This pronouncement is effective for fiscal years beginning after November 15, 2007, and interim
periods within those fiscal years. There was no impact upon adoption.

In
September 2006, the FASB Emerging Issues Task Force finalized Issue No. 06-4, "Accounting for Deferred Compensation and Postretirement Benefit Aspects of
Endorsement Split-Dollar Life Insurance Arrangements." This issue requires that a liability be recorded during the service period when a split-dollar life insurance agreement continues after
participants' employment or retirement. The required accrued liability will be based on either the post-employment benefit cost for the continuing life insurance or based on the future
death benefit depending on the contractual terms of the underlying agreement. This issue is effective for fiscal years beginning after December 15, 2007. We do not believe that adoption of this
standard will have a material impact on our financial statements.

In
February 2007, the FASB issued SFAS 159, "The Fair Value Option for Financial Assets and Financial LiabilitiesIncluding an amendment of FASB Statement
No. 115." This statement allows companies to record certain financial assets and financial liabilities at full fair value if they so choose. The statement was issued to mitigate volatility in
reported earnings caused by an accounting model utilizing multiple measurement attributes. The adoption of the fair value option is recorded as a cumulative-effect adjustment to the opening balance of
retained earnings, which would be January 1, 2008. Upon adoption, the difference between the carrying amount and the fair value of the items chosen is removed from the balance sheet and
included in the cumulative-effect adjustment. Subsequent changes in fair value are recorded through the income statement. We did not elect the fair value option for any financial assets for financial
liabilities as of January 1, 2008.

56

---



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

2. SECURITIES

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

(Dollars in thousands)

Amortized
Cost

Gross
Unrealized
Gains

Gross
Unrealized
Losses

Fair ValueSecurities available-for-sale:December 31, 2007:U.S. Treasury and agencies

$
498

$
3

$


$
501Mortgage-backed


7,624


5


(53
)

7,576Equity


1,553


324


(355
)

1,522State and municipal


9,994


4


(400
)

9,598Corporate


2,807








2,807Total

$
22,476

$
336

$
(808
)
$
22,004December 31, 2006:U.S. Treasury and agencies

$
3,497

$


$
(13
)
$
3,484Mortgage-backed


9,425


8


(189
)

9,244Equity


1,553


629


(36
)

2,146State and municipal


10,299


7


(277
)

10,029Corporate


3,320








3,320Total

$
28,094

$
644

$
(515
)
$
28,223


Amortized
Cost

Gross
Unrecognized
Gains

Gross
Unrecognized
Losses

Fair ValueSecurities held-to-maturity:December 31, 2007:U.S. Treasury and agencies

$
14,098

$
33

$
(38
)
$
14,093Mortgage-backed


3,142


1


(51
)

3,092Corporate


441





(2
)

439Total

$
17,681

$
34

$
(91
)
$
17,624December 31, 2006:U.S. Treasury and agencies

$
18,097

$
4

$
(318
)
$
17,783Mortgage-backed


4,127


3


(111
)

4,019Corporate


2,000


15





2,015Total

$
24,224

$
22

$
(429
)
$
23,817


57

---



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

2. SECURITIES (Continued)

The amortized cost and fair value of securities at December 31, 2007, by contractual maturity, are shown below. Securities not due at a single maturity date, primarily
mortgage-backed and equity securities, are shown separately.

|                                       |  | Available for Sale |        | Held-to-Maturity
|-------------------------------------- |  | ------------------ | ------ | ----------------
|
|Due in one year or less                |  | $                  | 100    |                 
|Due after one year through five years  |  |                    | 224    |                 
|Due after five years through ten years |  |                    | 498    |                 
|Due after ten years                    |  |                    | 12,477 |                 
|Mortgage-backed                        |  |                    | 7,624  |                 
|Equity                                 |  |                    | 1,553  |                 
|                                       |  |                    |        |                 
|                                       |  | $                  | 22,476 |                 
|                                       |  |                    |        |                 

The
following schedule shows the proceeds from sales of available-for-sale securities and the gross realized gains on those sales:

Year Ended December 31,2007

2006

2005(Dollars in thousands)Proceeds from sales

$


$


$
1,431Gross realized gains

$


$


$
381


Tax
expense related to the realized gain for the year ended December 31, 2005 was $130,000.

Investment
securities pledged to secure public deposits and FHLB advances had an amortized cost of $22.0 million and fair value of $21.7million at December 31, 2007 and a
$31.9 million amortized cost and a $31.3 fair value at December 31, 2006.

58

---



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

2. SECURITIES (Continued)

Securities
with unrealized losses at year-end 2007 and 2006 aggregated by investment category and length of time that individual securities have been in a continuous
unrealized loss position are as follows:

|                            |  | Less than
12 Months |       |  |   |     |   |   |        |  |  
|--------------------------- |  | ------------------- | ----- |  | - | --- | - | - | ------ |  | -
|
|
|
|U. S. Treasury and agencies |  | $                   |      |  | $ |    |   | $ | 10,062 |  | $
|Mortgage-backed             |  |                     |      |  |   |    |   |   | 8,939  |  |  
|Equity                      |  |                     | 127   |  |   | (73 | ) |   | 345    |  |  
|State and municipal         |  |                     | 1,128 |  |   | (19 | ) |   | 7,882  |  |  
|Corporate                   |  |                     | 439   |  |   | (2  | ) |   |       |  |  
|                            |  |                     |       |  |   |     |   |   |        |  |  
|Total temporarily impaired  |  | $                   | 1,694 |  | $ | (94 | ) | $ | 27,228 |  | $
|                            |  |                     |       |  |   |     |   |   |        |  |  

|                            |  | Less than
12 Months |       |  |   |      |   |   |        |  |  
|--------------------------- |  | ------------------- | ----- |  | - | ---- | - | - | ------ |  | -
|
|
|
|U. S. Treasury and agencies |  | $                   |      |  | $ |     |   | $ | 19,263 |  | $
|Mortgage-backed             |  |                     |      |  |   |     |   |   | 12,340 |  |  
|Equity                      |  |                     | 591   |  |   | (36  | ) |   |       |  |  
|State and municipal         |  |                     | 4,139 |  |   | (117 | ) |   | 4,836  |  |  
|                            |  |                     |       |  |   |      |   |   |        |  |  
|Total temporarily impaired  |  | $                   | 4,730 |  | $ | (153 | ) | $ | 36,439 |  | $
|                            |  |                     |       |  |   |      |   |   |        |  |  

All
unrealized losses are reviewed at least on a quarterly basis to determine whether the losses are other than temporary and more frequently when economic or market concerns warrant
such evaluation. Consideration is given to the length of time and the extent to which the fair value has been less than cost, the financial condition and near-term prospects of the issuer,
and our intent and ability to retain the investment in the issuer for a period of time sufficient to allow for any anticipated recovery in fair value. In analyzing an issuer's financial condition, we
may consider whether the securities are issued by the federal government or its agencies, whether downgrades by bond rating agencies have occurred, and the results of reviews of the issuer's financial
condition.

The
unrealized losses on our temporarily impaired debt securities are a result of changes in interest rates for fixed-rate securities where the interest rate received is less
than the current rate available for new offerings of similar securities. Because the decline in market value is attributable to changes in interest rates and not credit quality, and because we have
the ability and intent to hold these investments until recovery of fair value, which may be maturity, we do not consider these investments to be other-than-temporarily impaired
at December 31, 2007 and 2006. The unrealized losses on our temporarily impaired marketable equity securities relate to the financial services and banking industry. Although the issuers have
shown declines in earnings as a result of the weakened economy, no credit issues have been identified that would cause management to believe the declines in market value are other-than-temporary
impaired at December 31, 2007 and 2006.

59

---



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

3. LOANS

Loans are summarized as follows:

December 31,(Dollars in thousands)

2007

2006Commercial

$
52,595

$
40,902Real estate commercial


470,929


410,146Real estate construction


21,383


23,953Residential mortgage


132,329


137,334Consumer and home equity


63,090


62,805Indirect consumer


27,721


30,857Loans held for sale


780


673768,827


706,670Less:Net deferred loan origination fees


(791
)

(960
)Allowance for loan losses


(7,922
)

(7,684
)(8,713
)

(8,644
)Net Loans

$
760,114

$
698,026


We
utilize eligible real estate loans to collateralize advances and letters of credit from the Federal Home Loan Bank. We had $430 million and $373 million in residential
mortgage, commercial real estate, multi-family and open end home equity loans pledged under this arrangement at December 31, 2007 and 2006.

The
allowance for loan loss is summarized as follows:

As of and For the
Years Ended December 31,(Dollars in thousands)

2007

2006

2005Balance, beginning of year

$
7,684

$
7,377

$
6,489Provision for loan losses


1,209


540


1,258Charge-offs


(1,210
)

(614
)

(666
)Recoveries


239


381


296Balance, end of year

$
7,922

$
7,684

$
7,377


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

As of and For the
Years Ended December 31,(Dollars in thousands)

2007

2006

2005Year-end impaired loans

$
8,889

$
4,838

$
6,232Amount of allowance for loan loss allocated


117


128


350Average impaired loans outstanding


6,970


5,808


5,647Interest income recognized


188


227


219Interest income received


188


227


219


60

---



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

3. LOANS (Continued)

We
report non-performing loans as impaired. Our non-performing loans at year-end were as follows:

December 31,(Dollars in thousands)

2007

2006Restructured

$
2,335

$
2,470Loans past due over 90 days still on accrual





Non accrual loans


6,554


2,368Total

$
8,889

$
4,838


4. PREMISES AND EQUIPMENT

Premises and equipment consist of the following:

December 31,(Dollars in thousands)

2007

2006Land

$
6,666

$
5,527Buildings


20,429


17,736Furniture, fixtures and equipment


9,269


8,51636,364


31,779Less accumulated depreciation


(10,029
)

(9,279
)$
26,335

$
22,500


Certain
premises are leased under various operating leases. Rental expense was $370,000, $281,000 and $274,000, for the years ended December 31, 2007, 2006 and
2005, respectively. Future minimum commitments under these leases are:

(Dollars in thousands)

Year Ended December 31,2008

$
3562009


3602010


3242011


2842012


183Thereafter


46$
1,553


5. DEPOSITS

Time Deposits of $100,000 or more were $174.9 million and $158.3 million at December 31, 2007 and 2006, respectively. At December 31,
2007, scheduled maturities of time deposits are as follows:

(Dollars in thousands)

Amount2008

$
323,2182009


67,3892010


9,7852011


19,7252012


2,089Thereafter


371$
422,577


61

---



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

6. SHORT-TERM BORROWINGS

Short-term borrowings consist of federal funds purchased. We had short-term borrowings of $42.8 million and $68.5 million
from the FHLB of Cincinnati at December 31, 2007 and 2006. These borrowings averaged a rate of 5.26% and 5.31% for 2007 and 2006.

7. ADVANCES FROM FEDERAL HOME LOAN BANK

Under the collateral requirements of the Federal Home Loan Bank (FHLB) of Cincinnati, we have the capacity to borrow an additional $42.4 million from the
FHLB at December 31, 2007. During 2007, we entered into $25.0 million in convertible fixed rate advances with fixed rates ranging from 3.99% to 4.22% and maturities of seven to ten
years. These advances are fixed for periods ranging from one to three years. At the end of the fixed rate term and quarterly thereafter, the FHLB has the right to convert these advances to variable
rate advances tied to the three-month LIBOR index. Upon conversion, we can prepay the advances at no penalty.

Advances
from the FHLB at year-end are as follows:

December 31,2007

2006(Dollars in Thousands)

Weighted-
Average
Rate

Amount

Weighted-
Average
Rate

AmountFixed rate advances:Mortgage matched advances with interest rates from 5.30% to 7.45% due through 2009

5.90
%
$
7

6.09
%
$
19Convertible fixed rate advances with interest rates from 3.99% to 5.05% due through 2017

4.55
%

50,000

5.05
%

25,000Other fixed rate advances with interest rates from 4.19% to 5.72% due through 2020

4.94
%

3,076

4.93
%

3,205Total borrowings



$
53,083



$
28,224


The
aggregate minimum annual repayments of borrowings as of December 31, 2007 are as follows:

(Dollars in thousands)2008

$
1362009


1312010


1312011


25,1312012


132Thereafter


27,422$
53,083


62

---



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

8.    SUBORDINATED DEBENTURES

We have $10.0 million in outstanding subordinated debentures. A trust we formed completed a private placement of 10,000 shares of cumulative trust
preferred securities with a liquidation preference of $1,000 per security for a total outstanding of $10.0 million. The proceeds of the offering were loaned to us in exchange for junior
subordinated deferrable interest debentures. In accordance with FASB Interpretation 46, the trust is not consolidated with our financial statements but rather the subordinated debentures are shown as
a liability. These securities pay distributions of interest. On March 26, 2007 we called the $10.0 million in subordinated debentures adjustable quarterly at LIBOR plus 360 basis points
(8.97% on March 26, 2007) and issued new 30 year cumulative trust preferred securities at a 10 year fixed rate of 6.69% adjusting quarterly thereafter at LIBOR plus 160 basis
points. The subordinated debentures, which mature March 22, 2037, can be called at par in whole or in part on or after March 15, 2017. We have the option to defer interest payments on
the subordinated debt from time to time for a period not to exceed five consecutive years. The subordinated debentures are considered as Tier I capital for the Corporation under current
regulatory guidelines.

9.    INCOME TAXES

We file a consolidated federal income tax return and income tax is apportioned among all companies based on their taxable income or loss. Provision for
income taxes is as follows:

Year Ended December 31,(Dollars in thousands)

2007

2006

2005Current

$
4,591

$
4,654

$
4,178Deferred


55


(20
)

234Total income tax expense

$
4,646

$
4,634

$
4,412


The
provision for income taxes differs from the amount computed at the statutory rates as follows:

Year Ended December 31,(Dollars in thousands)

2007

2006

2005Federal statutory rate

34.0
%
34.0
%
34.0
%Tax-exempt interest income

(1.0
)
(0.7
)
(0.3
)Increase in cash surrender value of life insurance

(0.8
)
(0.7
)
(0.7
)Dividends to ESOP

(0.3
)
(0.3
)
(0.3
)Stock option expense

0.3

0.3

Tax contingency reserve



(1.9
)
Effect of state tax expense recorded

0.7



Other

0.3

0.2

(0.2
)Effective rate

33.2
%
30.9
%
32.5
%


During
the fourth quarter of 2006 we re-evaluated our tax contingency reserves and determined that approximately $281,000 was no longer required. As a result, tax expense was
reduced by this amount, resulting in an effective tax rate of 31% for the year ended 2006.

63

---



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

9.    INCOME TAXES (Continued)

Temporary
differences between the financial statement carrying amounts and tax bases of assets and liabilities that give rise to significant portions of deferred income taxes relate to
the following:

December 31,(Dollars in thousands)

2007

2006Deferred tax assets:Allowance for loan losses

$
2,693

$
2,612Net unrealized gain on securities available-for-sale


161


Accrued liabilities and other


254


1433,108


2,755Deferred tax liabilities:Depreciation

$
1,539

$
1,527Net unrealized gain on securities available-for-sale





44Federal Home Loan Bank stock


1,449


1,449Intangibles


1,106


905Deferred gain on like-kind exchange


8


30Other


229


1734,331


4,128Net deferred tax liability

$
1,223

$
1,373


Federal
income tax laws provided savings banks with additional bad debt deductions through 1987, totaling $9.3 million for us. Accounting standards do not require a deferred tax
liability to be recorded on this amount, which would otherwise total $3.2 million at December 31, 2007 and 2006. If we were liquidated or otherwise ceased to be a bank or if tax laws
were to change, the $3.2 million would be recorded as a liability with an offset to expense.

We
adopted the provisions of FASB Interpretation No. 48, Accounting for Uncertainty in Income Taxes ("FIN 48"), on January 1, 2007. Accordingly, we recorded $99,000
which included $138,000 of state income tax expense, $12,000 of interest, and federal benefit of $51,000. During the year, we identified that we were subject to state income tax in a contiguous state
under FIN 48. This contributed to the increase in the effective tax rate of 33% at December 31, 2007. We have $150,000 of gross unrecognized tax benefits. During 2008, we anticipate
filing a voluntary disclosure agreement with the state in which lending activities have occurred but tax returns have not been filed. This would reverse the entire FIN 48 reserve recorded.
Should the accrual of any interest or penalties relative to unrecognized tax benefits be necessary, it is our policy to record such accruals in our income tax accounts; $12,000 of interest has been
accrued at December 31, 2007. We file a consolidated U.S. federal income tax return and the Company and its non-bank subsidiaries file an income tax return in the state of
Kentucky. These returns are subject to examination by taxing authorities for all years after 2003.

10.    STOCKHOLDERS' EQUITY



64

---



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

10.    STOCKHOLDERS' EQUITY (Continued)





The
actual and required capital amounts and ratios are presented below.

|                         |                                                    | Actual       |  | For Capital
Adequacy Purposes |        | To Be Considered
Well Capitalized
Under Prompt
Correction
Action Provisions
|------------------------ | -------------------------------------------------- | ------------ |  | ----------------------------- | ------ | ---------------------------------------------------------------------------
|
|As of December 31, 2007: |                                                    |              |  |                               |        |                                                                            
|                         | Total risk-based capital (to risk-weighted assets) |              |  |                               |        |                                                                            
|                         |                                                    | Consolidated |  | $                             | 83,310 |                                                                            
|                         |                                                    | Bank         |  |                               | 80,176 |                                                                            
|                         | Tier I capital (to risk-weighted assets)           |              |  |                               |        |                                                                            
|                         |                                                    | Consolidated |  |                               | 75,388 |                                                                            
|                         |                                                    | Bank         |  |                               | 72,126 |                                                                            
|                         | Tier I capital (to average assets)                 |              |  |                               |        |                                                                            
|                         |                                                    | Consolidated |  |                               | 75,388 |                                                                            
|                         |                                                    | Bank         |  |                               | 72,126 |                                                                            

65

---



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

10.    STOCKHOLDERS' EQUITY (Continued)

|
|

|                         |                                                    | Actual       |  | For Capital
Adequacy Purposes |        | To Be Considered
Well Capitalized
Under Prompt
Correction
Action Provisions
|------------------------ | -------------------------------------------------- | ------------ |  | ----------------------------- | ------ | ---------------------------------------------------------------------------
|
|As of December 31, 2006: |                                                    |              |  |                               |        |                                                                            
|                         | Total risk-based capital (to risk-weighted assets) |              |  |                               |        |                                                                            
|                         |                                                    | Consolidated |  | $                             | 81,583 |                                                                            
|                         |                                                    | Bank         |  |                               | 78,653 |                                                                            
|                         | Tier I capital (to risk-weighted assets)           |              |  |                               |        |                                                                            
|                         |                                                    | Consolidated |  |                               | 73,639 |                                                                            
|                         |                                                    | Bank         |  |                               | 70,709 |                                                                            
|                         | Tier I capital (to average assets)                 |              |  |                               |        |                                                                            
|                         |                                                    | Consolidated |  |                               | 73,639 |                                                                            
|                         |                                                    | Bank         |  |                               | 70,709 |                                                                            



66

---



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)



11.    EARNINGS PER SHARE

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

Year Ended December 31,(In thousands, except per share data)

2007

2006

2005Net income available to common shareholders

$
9,352

$
10,337

$
9,144Basic EPS:Weighted average common shares


4,722


4,821


4,838Diluted EPS:Weighted average common shares


4,722


4,821


4,838Dilutive effect of stock options


52


49


33Weighted average common and incremental shares


4,774


4,870


4,871Earnings Per Share:Basic

$
1.98

$
2.14

$
1.89Diluted

$
1.96

$
2.12

$
1.88


Stock
options for 28,600 and 28,600 shares of common stock were not included in the December 31, 2007 and 2006 computation of diluted earnings per share because
their impact was anti-dilutive. All of the outstanding stock options for the year ended December 31, 2005 were included in the computation of diluted earnings per share.

12.    EMPLOYEE BENEFIT PLANS



67

---







NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

12.    EMPLOYEE BENEFIT PLANS (Continued)



Year Ended December 31,2007

2006

2005KSOP shares (ending)


214,195


208,496


178,803Shares released


4,223


3,058


2,923Compensation expense

$
102,000

$
96,000

$
83,000






December 31,2007

2006Assumptions:Risk-free interest rate


4.11
%

4.71
%Expected dividend yield


3.17
%

2.47
%Expected life (years)


10


10Expected common stock market price volatility


24
%

25
%Estimated fair value per share

$
5.78

$
9.30


68

---



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

12.    EMPLOYEE BENEFIT PLANS (Continued)



Number
of
Options

Average
Exercise
Price

Remaining
Contractual
Term

Aggregate
Intrinsic
Value(Dollars In Thousands)Outstanding, beginning of period

186,076

$
18.50Granted during period

12,000


24.00Exercised during the period

(5,009
)

14.42Outstanding, end of period

193,067

$
18.95

5.3

$
976Eligible for exercise at period end

119,544

$
16.94

3.8

$
844




13.    CASH FLOW ACTIVITIES

The following information is presented as supplemental disclosures to the statement of cash flows.



Year Ended December 31,(Dollars in thousands)

2007

2006

2005Interest expense

$
28,931

$
24,224

$
17,886Income taxes

$
4,526

$
4,410

$
4,625


69

---



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

13.    CASH FLOW ACTIVITIES (Continued)



Year Ended December 31,(Dollars in thousands)

2007

2006

2005Loans to facilitate sales of real estate owned and repossessed assets

$
1,169

$
1,352

$
1,561Transfers from loans to real estate acquired through foreclosure and repossessed assets

$
1,970

$
1,209

$
1,981


14.    CONDENSED FINANCIAL INFORMATION (PARENT COMPANY ONLY)

The following condensed statements summarize the balance sheets, operating results and cash flows of First Financial Service Corporation (Parent Company only).

Condensed Balance Sheets

December 31,(Dollars in thousands)

2007

2006AssetsCash and interest bearing deposits

$
953

$
401Investment in Bank


80,405


79,168Securities available-for sale


1,230


1,560Land and building


776


752Other assets


217


318$
83,581

$
82,199Liabilities and Stockholders' EquitySubordinated debentures

$
10,000

$
10,000Other liabilities


121


101Stockholders' equity


73,460


72,098$
83,581

$
82,199


70

---



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

14.    CONDENSED FINANCIAL INFORMATION (PARENT COMPANY ONLY) (Continued)

Condensed Statements of Income

|                                                         |  | Year Ended December 31, |      
|-------------------------------------------------------- |  | ----------------------- | -----
|
|Dividend from Bank                                       |  | $                       | 8,900
|Interest income                                          |  |                         | 59   
|Interest expense                                         |  |                         | (717 
|Gain on sale of investments                              |  |                         |     
|Write off of issuance cost of Trust Preferred Securities |  |                         | (229 
|Other expenses                                           |  |                         | (512 
|                                                         |  |                         |      
|Income before income tax benefit                         |  |                         | 7,501
|Income tax benefit                                       |  |                         | 536  
|                                                         |  |                         |      
|Income before equity in undistributed net income of Bank |  |                         | 8,037
|Equity in undistributed net income of Bank               |  |                         | 1,315
|                                                         |  |                         |      
|Net income                                               |  | $                       | 9,352
|                                                         |  |                         |      

71

---



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

14.    CONDENSED FINANCIAL INFORMATION (PARENT COMPANY ONLY) (Continued)

Condensed Statements of Cash Flows

|                                                      |                                                                               | Year Ended December 31,                        |                                       
|----------------------------------------------------- | ----------------------------------------------------------------------------- | ---------------------------------------------- | --------------------------------------
|
|Operating Activities:                                 |                                                                               |                                                |                                       
|                                                      | Net income                                                                    |                                                | $                                     
|                                                      | Adjustments to reconcile net income to cash provided by operating activities: |                                                |                                       
|                                                      |                                                                               | Equity in undistributed net income of Bank     |                                       
|                                                      |                                                                               | Gain on sale of investments available-for-sale |                                       
|                                                      |                                                                               | Stock-based compensation expense               |                                       
|                                                      |                                                                               | Changes in:                                    |                                       
|                                                      |                                                                               |                                                | Other assets                          
|                                                      |                                                                               |                                                | Accounts payable and other liabilities
|                                                      |                                                                               |                                                |                                       
|Net cash from operating activities                    |                                                                               |                                                | 8,279                                 
|                                                      |                                                                               |                                                |                                       
|Investing Activities:                                 |                                                                               |                                                |                                       
|                                                      | Purchases of securities available-for-sale                                    |                                                |                                       
|                                                      | Sales of securities available-for-sale                                        |                                                |                                       
|                                                      | Net purchases of premises and equipment                                       |                                                |                                       
|                                                      |                                                                               |                                                |                                       
|Net cash from investing activities                    |                                                                               |                                                | (24                                   
|                                                      |                                                                               |                                                |                                       
|Financing Activities:                                 |                                                                               |                                                |                                       
|                                                      | Proceeds from issuance of subordinated debentures                             |                                                |                                       
|                                                      | Payoff of subordinated debentures                                             |                                                |                                       
|                                                      | Issuance of common stock for options and employee benefit plans               |                                                |                                       
|                                                      | Dividends paid                                                                |                                                |                                       
|                                                      | Common stock repurchases                                                      |                                                |                                       
|                                                      |                                                                               |                                                |                                       
|Net cash from financing activities                    |                                                                               |                                                | (7,703                                
|                                                      |                                                                               |                                                |                                       
|Net change in cash and interest bearing deposits      |                                                                               |                                                | 552                                   
|Cash and interest bearing deposits, beginning of year |                                                                               |                                                | 401                                   
|                                                      |                                                                               |                                                |                                       
|Cash and interest bearing deposits, end of year       |                                                                               | $                                              | 953                                   
|                                                      |                                                                               |                                                |                                       

72

---



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

15.    FAIR VALUES OF FINANCIAL INSTRUMENTS

The estimated fair value of financial instruments is as follows:

|                       |                                      | December 31, 2007 |   | December 31, 2006
|---------------------- | ------------------------------------ | ----------------- | - | -----------------
|
|Financial assets:      |                                      |                   |   |                  
|                       | Cash and due from banks              |                   | $ | 14,948           
|                       | Securities available-for-sale        |                   |   | 22,004           
|                       | Securities held-to-maturity          |                   |   | 17,681           
|                       | Loans held for sale                  |                   |   | 780              
|                       | Loans, net                           |                   |   | 759,334          
|                       | Accrued interest receivable          |                   |   | 4,324            
|Financial liabilities: |                                      |                   |   |                  
|                       | Deposits                             |                   |   | 689,243          
|                       | Short-term borrowings                |                   |   | 42,800           
|                       | Advances from Federal Home Loan Bank |                   |   | 53,083           
|                       | Subordinated debentures              |                   |   | 10,000           
|                       | Accrued interest payable             |                   |   | 1,093            

The
methods and assumptions used in estimating fair value disclosures for financial instruments are presented below:

Carrying
amount is the estimated fair value for cash and cash equivalents, interest bearing deposits, accrued interest receivable and payable, demand deposits, short-term
debt 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. The value of loans held for sale is based on the underlying sale commitments. For fixed rate loans or deposits and for variable rate loans or
deposits with infrequent reprising or reprising limits, fair value is based on discounted cash flows using current market rates applied to the estimated life and credit risk. Fair values for impaired
loans are estimated using discounted cash flow analysis or underlying collateral values. Fair values of advances from Federal Home Loan Bank and subordinated debentures are 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.

16.    FINANCIAL INSTRUMENTS WITH OFF-BALANCE-SHEET RISK

We are a party to financial instruments with off-balance-sheet risk in the normal course of business to meet the financing needs of our customers.
These financial instruments primarily include commitments to extend credit, and lines and letters of credit, and involve, to varying degrees, elements of credit and interest-rate risk in
excess of the amount recognized in the balance sheet. The contract or notional amounts of these instruments reflect the extent of our involvement in particular classes of financial instruments.

Our
exposure to credit loss in the event of nonperformance by the other party to the financial instrument for commitments to extend credit is represented by the contractual notional
amount of those instruments. Creditworthiness for all instruments is evaluated on a case-by-case basis in accordance with our credit policies. We use the same credit policies
in making commitments and conditional obligations as we do for on-balance-sheet instruments. Collateral from the customer may be

73

---



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

16.    FINANCIAL INSTRUMENTS WITH OFF-BALANCE-SHEET RISK (Continued)

required
based on management's credit evaluation of the customer and may include business assets of commercial customers as well as personal property and real estate of individual customers or
guarantors.

Commitments
to extend credit are agreements to lend to a customer as long as there is no violation of any condition established in the contract. Commitments generally have fixed
expiration dates or other termination clauses and may require payment of a fee. Since many of the commitments are expected to expire without being drawn upon, the total commitment amounts do not
necessarily represent future cash requirements.

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

|                          |  | December 31, 2007 |   | December 31, 2006
|------------------------- |  | ----------------- | - | -----------------
|
|Commitments to make loans |  | $                 |  |                  
|Unused lines of credit    |  |                   |  |                  
|Standby letters of credit |  |                   |  |                  
|                          |  |                   |   |                  
|                          |  | $                 |  |                  
|                          |  |                   |   |                  

At
December 31, 2007 and 2006, we had $94.3 million, and $59.5 million in letters of credit from the Federal Home Loan Bank issued to collateralize public deposits.
These letters of credit are secured by a blanket pledge of eligible one-to-four family residential mortgage loans. (For additional information see Note 3 on Loans and
Note 7 on Advances from the Federal Home Loan Bank.)

17.    RELATED PARTY TRANSACTIONS

Certain directors, executive officers and principal shareholders of the Company, including associates of such persons, are our loan and deposit customers. Related
party deposits at December 31, 2007 and 2006 were $3.4 million and $3.0 million. A summary of the related party loan activity, for loans aggregating $60,000 or more to any one
related party, is as follows:

Year Ended December 31,(Dollars in thousands)

2007

2006Beginning of year

$
288

$
291New loans


167


22Repayments


(143
)

(25
)End of year

$
312

$
288


74

---



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

18.    SUMMARY OF QUARTERLY FINANCIAL DATA(Unaudited)

(Dollars in thousands except per share data)

|Year Ended December 31, 2007: |         | March 31, |        | June 30, |   | September 30, |      | December 31,
|----------------------------- | ------- | --------- | ------ | -------- | - | ------------- | ---- | ------------
|Total interest income         |         | $         | 14,661 |          | $ | 15,007        |      | $           
|Total interest expense        |         |           | 7,085  |          |   | 7,348         |      |             
|Net interest income           |         |           | 7,576  |          |   | 7,659         |      |             
|Provision for loan losses     |         |           | 81     |          |   | 127           |      |             
|Non-interest income           |         |           | 1,945  |          |   | 2,039         |      |             
|Non-interest expense          |         |           | 6,015  |          |   | 5,801         |      |             
|Net income                    |         |           | 2,317  |          |   | 2,544         |      |             
|Earnings per share:           |         |           |        |          |   |               |      |             
|                              | Basic   |           |        | 0.48     |   |               | 0.54 |             
|                              | Diluted |           |        | 0.48     |   |               | 0.54 |             

|
|

|Year Ended December 31, 2006: |         | March 31, |        | June 30, |   | September 30, |      | December 31,
|----------------------------- | ------- | --------- | ------ | -------- | - | ------------- | ---- | ------------
|Total interest income         |         | $         | 12,492 |          | $ | 13,111        |      | $           
|Total interest expense        |         |           | 5,256  |          |   | 5,740         |      |             
|Net interest income           |         |           | 7,236  |          |   | 7,371         |      |             
|Provision for loan losses     |         |           | 89     |          |   | 9             |      |             
|Non-interest income           |         |           | 1,712  |          |   | 2,076         |      |             
|Non-interest expense          |         |           | 5,409  |          |   | 5,314         |      |             
|Net income                    |         |           | 2,338  |          |   | 2,755         |      |             
|Earnings per share:           |         |           |        |          |   |               |      |             
|                              | Basic   |           |        | 0.48     |   |               | 0.57 |             
|                              | Diluted |           |        | 0.48     |   |               | 0.56 |             

75

---





ITEM 9.    Changes in and Disagreements with Accountants on Accounting and Financial Disclosure

None

ITEM 9A.    Controls and Procedures

Management is responsible for establishing and maintaining effective disclosure controls and procedures, as defined under Rules 13a-15(e) and
15d-15(e) of the Securities Exchange Act of 1934. As of December 31, 2007, an evaluation was performed under the supervision and with the participation of management, including the
Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of our disclosure controls and procedures. Based on that evaluation, management concluded that
disclosure controls and procedures as of December 31, 2007 were effective in ensuring material information required to be disclosed in this Annual Report on Form 10-K was
recorded, processed, summarized, and reported on a timely basis. Additionally, there were no changes in our internal control over financial reporting that occurred during the quarter ended
December 31, 2007 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

Management's
responsibilities related to establishing and maintaining effective disclosure controls and procedures include maintaining effective internal controls over financial
reporting that are designed to produce reliable financial statements in accordance with accounting principles generally accepted in the United States. As disclosed in the Report on Management's
Assessment of Internal Control Over Financial Reporting of this Annual Report, we assessed our system of internal control over financial reporting as of December 31, 2007, in relation to
criteria for effective internal control over financial reporting as described in "Internal ControlIntegrated Framework," issued by the Committee of Sponsoring Organizations of the
Treadway Commission. Based on this assessment, we believe that, as of December 31, 2007, our system of internal control over financial reporting met those criteria and is effective.

There
have been no significant changes in our internal controls or in other factors that could significantly affect internal controls after December 31, 2007.

76

---





PART III

ITEM 10.    Directors and Executive Officers of the Registrant

The information contained under the sections captioned "Proposal IElection of Directors" and "Section 16(a) Beneficial Ownership Reporting
Compliance" in the Company's definitive proxy statement for the 2008 Annual Meeting of Shareholders (the "Proxy Statement") is incorporated herein by reference.



ITEM 11.    Executive Compensation

The information contained under the sections captioned "Executive Compensation" in the Proxy Statement is incorporated herein by reference.

ITEM 12.    Security Ownership of Certain Beneficial Owners and Management





ITEM 13.    Certain Relationships and Related Transactions

The information required by this item is incorporated herein by reference to the section captioned "Transactions with the Corporation and the Bank" in the Proxy
Statement.

ITEM 14.    Principal Accountant Fees and Services

The information required by this item is incorporated by reference to the section captioned "Independent Public Accountants" in the Proxy Statement.

77

---



PART IV

ITEM 15.    Exhibits and Financial Statement Schedules

1.    Financial Statements Filed

| | (a)(1) |  | Report of Independent Registered Public Accounting Firm -Crowe Chizek and Company LLC                           
| | ------ |  | ----------------------------------------------------------------------------------------------------------------
| | (b)    |  | Consolidated Balance Sheets at December 31, 2007 and 2006.                                                      
| | (c)    |  | Consolidated Statements of Income for the years ended December 31, 2007, 2006 and 2005.                         
| | (d)    |  | Consolidated Statements of Comprehensive Income for the years ended December 31, 2007, 2006 and 2005.           
| | (e)    |  | Consolidated Statements of Changes in Stockholders' Equity for the years ended December 31, 2007, 2006 and 2005.
| | (f)    |  | Consolidated Statements of Cash Flows for the years ended December 31, 2007, 2006 and 2005.                     
| | (g)    |  | Notes to Consolidated Financial Statements                                                                      

2.    Financial Statements Schedules



3.    Exhibits

| | 3 (a),  4 (a) |  | Articles of Incorporation*                                                                                                                                                    
| | ------------- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | 3 (b),  4 (b) |  | Amended and Restated Bylaws**                                                                                                                                                 
| | 4 (c)         |  | Rights Agreement between First Financial Service Corporation and Illinois Stock Tranfser Company dated April 15, 2003***                                                      
| | 10 (a)        |  | 2006 Stock Option and Incentive Compensation Plan****                                                                                                                         
| | 10 (b)        |  | Form of Stock Option Agreement**                                                                                                                                              
| | 21            |  | Subsidiaries of the Registrant                                                                                                                                                
| | 23 (a)        |  | Consent of Crowe Chizek and Company LLC, Independent Registered Public Accounting Firm                                                                                        
| | 31.1          |  | Certification of Chief Executive Officer Pursuant to Section 302 of Sarbanes-Oxley Act                                                                                        
| | 31.2          |  | Certification of Chief Financial Officer Pursuant to Section 302 of Sarbanes-Oxley Act                                                                                        
| | 32            |  | Certification of Chief Executive Officer and Chief Financial Officer Pursuant to 18 U.S.C. Section 1350 (As Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002)

---

78

---





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 FINANCIAL SERVICE CORPORATION
|------------- |  | -----------------------------------
|Date: 3/17/08 |  | By:                                

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.

|By:           | /s/B. KEITH JOHNSONB. Keith Johnson Principal Executive Officer
& Director |               | By: | /s/BOB BROWNBob Brown Director                      
|------------- | -------------------------------------------------------------------------- | ------------- | --- | ----------------------------------------------------
|Date: 3/17/08 |                                                                            | Date: 3/17/08
|By:           | /s/WRENO M. HALLWreno M. Hall Director                                     |               | By: | /s/DIANE E. LOGSDONDiane E. Logsdon Director        
|Date: 3/17/08 |                                                                            | Date: 3/17/08
|By:           | /s/J. ALTON RIDERJ. Alton Rider Director                                   |               | By: | /s/JOHN L. NEWCOMB, JR.John L. Newcomb, Jr. Director
|Date: 3/17/08 |                                                                            | Date: 3/17/08
|By:           | /s/WALTER D. HUDDLESTONWalter D. Huddleston Director                       |               | By: | /s/MICHAEL THOMAS, DVMMichael Thomas, DVM Director  
|Date: 3/17/08 |                                                                            | Date: 3/17/08
|By:           | /s/STEPHEN MOUSERStephen Mouser Director                                   |               | By: | /s/DONALD SCHEERDonald Scheer Director              
|Date: 3/17/08 |                                                                            | Date: 3/17/08

79

---



|By:           | /s/GAIL SCHOMPGail Schomp Director |               | By: | /s/GREGORY SCHREACKEGregory Schreacke President
Chief Financial Officer
Principal Accounting Officer
|------------- | ---------------------------------- | ------------- | --- | ----------------------------------------------------------------------------------------------------
|Date: 3/17/08 |                                    | Date: 3/17/08

80

---





INDEX TO EXHIBITS

|Exhibit No.  |  | Description                                                                                                                                                                   
|------------ |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|3 (a), 4 (a) |  | Articles of Incorporation*                                                                                                                                                    
|3 (b), 4 (b) |  | Amended and Restated Bylaws**                                                                                                                                                 
|4 (c)        |  | Rights Agreement between First Financial Service Corporation and Illinois Stock Tranfser Company dated April 15, 2003***                                                      
|10 (a)       |  | 2006 Stock Option and Incentive Compensation Plan****                                                                                                                         
|10 (b)       |  | Form of Stock Option Agreement**                                                                                                                                              
|21           |  | Subsidiaries of the Registrant                                                                                                                                                
|23 (a)       |  | Consent of Crowe Chizek and Company LLC, Independent Registered Public Accounting Firm                                                                                        
|31.1         |  | Certification of Chief Executive Officer Pursuant to Section 302 of Sarbanes-Oxley Act                                                                                        
|31.2         |  | Certification of Chief Financial Officer Pursuant to Section 302 of Sarbanes-Oxley Act                                                                                        
|32           |  | Certification of Chief Executive Officer and Chief Financial Officer Pursuant to 18 U.S.C. Section 1350 (As Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002)

---

81

---



QuickLinks