**UNITED STATES**

**SECURITIES AND EXCHANGE COMMISSION**

**Washington, D.C. 20549**

 

**FORM 10-Q**

 

| **(Mark One)**                                                  |
|-----------------------------------------------------------------|
|                                                            |
| **ý**                                                      |   | **QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE  SECURITIES  EXCHANGE ACT OF 1934.** |
|                                                            |
| **For the quarterly period ended March 31, 2004**               |
|                                                            |   |   |
| **OR**                                                          |
|                                                            |   |   |
| **o**                                                           |   | **TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE  SECURITIES  EXCHANGE ACT OF 1934.** |
|                                                            |   |   |
| **Commission File Number 0-18832**                              |
|                                                            |
| **First Federal Financial Corporation of Kentucky**             |
| (Exact Name of Registrant as specified in its charter)          |
|                                                            |
| **Kentucky**                                                    |   | **61-1168311** |
| (State or other jurisdiction  of incorporation or organization) |   | (IRS Employer Identification No.) |
|                                                            |
| **2323 Ring Road**                                              |
| **Elizabethtown, Kentucky  42701**                         |
| (Address of principal executive offices)                        |
| (Zip Code)                                                      |
|                                                            |
| **(270) 765-2131**                                              |
| (Registrant’s telephone number, including area code)       |
|                                                                 |  |  |  |  |

 

Indicate by check mark whether the registrant (1) has filed all reportsrequired to be filed by Section 13 or 15(d) of the Securities Exchange Act of1934 during the preceding 12 months (or for such shorter period that theregistrant was required to file such reports), and (2) has been subject to suchfiling requirements for the past 90 days.

 

Yes     **ý****     **No     o

 

Indicate by check mark whether the registrant is an accelerated filer(as defined in Rule 12b-2 of the Exchange Act).

 

Yes     **ý****     **No     o

 

Indicatethe number of shares outstanding of each of the issuer’s classes of commonstock, as of the latest practicable date.

 

| **Class**    |   | **Outstanding as of April 30, 2004** |
|--------------|--------|--------------------------------------|
|         |   |                                 |
| Common Stock |   | 3,645,438 shares                     |

 

 

----

 

## **FIRST FEDERAL FINANCIALCORPORATION OF KENTUCKY**

 

**TABLE OF CONTENTS**

 
| **PART I** – FINANCIAL INFORMATION |                                                                                                                        |
|-----------------------------------------|-----------------------------------------------------------------------------------------------------------------------------|
|                                    |                                                                                                                        |
| **Item 1.**                             | Consolidated Financial Statements and Notes to  Consolidated Financial Statements                                           |   |
|                                    |                                                                                                                        |   |
| **Item  2.**                            | Management’s  Discussion and Analysis of the Consolidated Statements of Financial Condition  and Results of Operations |   |
|                                    |                                                                                                                        |   |
| **Item  3.**                            | Quantitative  and Qualitative Disclosures about Market Risk                                                                 |   |
|                                    |                                                                                                                        |   |
| **Item 4.**                             | Controls and  Procedures                                                                                                    |   |
|                                    |                                                                                                                        |   |
| **PART II – OTHER INFORMATION**    |                                                                                                                        |
|                                    |                                                                                                                        |   |
| **Item 1.**                             | Legal Proceedings                                                                                                           |   |
|                                    |                                                                                                                        |   |
| **Item 2.**                             | Changes In Securities, Use of Proceeds and Issuer Purchases of Equity Securities                                            |   |
|                                    |                                                                                                                        |   |
| **Item 3.**                             | Defaults upon Senior Securities                                                                                             |   |
|                                    |                                                                                                                        |   |
| **Item 4.**                             | Submission of Matters to a Vote of Security Holders                                                                         |   |
|                                    |                                                                                                                        |   |
| **Item 5.**                             | Other Information                                                                                                           |   |
|                                    |                                                                                                                        |   |
| **Item 6.**                             | Exhibits and Reports on Form 8-K                                                                                            |   |
|                                    |                                                                                                                        |   |
|                                    | SIGNATURES                                                                                                                  |   |
|                                    |                                                                                                                        |   |
|                                    | CERTIFICATIONS                                                                                                              |   |

 

2

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**Item 1.**

 

**FIRST FEDERAL FINANCIAL CORPORATION OF KENTUCKY**

**Consolidated Statements of Financial Condition**

 
|                                                                                                                                                       |   | **(Unaudited)**     |    |                    |   |
|------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|---------------------|---------|-------------------------|--------|
| **(Dollars In Thousands, Except  Share Data)**                                                                                                             |   | **March 31,  2004** |    | **December  31,  2003** |   |
|                                                                                                                                                       |   |                |    |                    |   |
| **ASSETS**                                                                                                                                                 |   |                |    |                    |   |
| Cash and due from banks                                                                                                                                    |   | $                   | 26,890  |                    | $      | 28,030 |   |
| Federal funds sold                                                                                                                                         |   | 22,000              |    | 20,000                  |   |
| Cash and cash equivalents                                                                                                                                  |   | 48,890              |    | 48,030                  |   |
| Securities available-for-sale                                                                                                                              |   | 4,050               |    | 4,009                   |   |
| Securities held-to-maturity, fair value of  $24,593 Mar (2004) and $30,919 Dec (2003)                                                                      |   | 24,557              |    | 30,929                  |   |
| Total securities                                                                                                                                           |   | 28,607              |    | 34,938                  |   |
| Loans held for sale                                                                                                                                        |   | 1,363               |    | 1,021                   |   |
| Loans receivable, net of unearned fees                                                                                                                     |   | 569,939             |    | 554,700                 |   |
| Allowance for loan losses                                                                                                                                  |   | (5,733              | )       | (5,568                  | )      |
| Net loans receivable                                                                                                                                       |   | 565,569             |    | 550,153                 |   |
| Federal Home Loan Bank stock                                                                                                                               |   | 6,636               |    | 6,570                   |   |
| Cash surrender value of life insurance                                                                                                                     |   | 7,137               |    | 7,067                   |   |
| Premises and equipment, net                                                                                                                                |   | 16,557              |    | 15,466                  |   |
| Real estate owned:                                                                                                                                         |   |                |    |                    |   |
| Acquired through foreclosure                                                                                                                               |   | 224                 |    | 387                     |   |
| Held for development                                                                                                                                       |   | 446                 |    | 446                     |   |
| Other repossessed assets                                                                                                                                   |   | 39                  |    | 62                      |   |
| Goodwill                                                                                                                                                   |   | 8,384               |    | 8,384                   |   |
| Accrued interest receivable                                                                                                                                |   | 1,764               |    | 1,931                   |   |
| Other assets                                                                                                                                               |   | 3,894               |    | 2,901                   |   |
|                                                                                                                                                       |   |                |    |                    |   |
| **TOTAL ASSETS**                                                                                                                                           |   | $                   | 688,147 |                    | $      | 676,335 |   |
|                                                                                                                                                       |   |                |    |                    |   |
| **LIABILITIES AND STOCKHOLDERS’ EQUITY**                                                                                                              |   |                |    |                    |   |
| **LIABILITIES:**                                                                                                                                           |   |                |    |                    |   |
| Deposits:                                                                                                                                                  |   |                |    |                    |   |
| Non-interest bearing                                                                                                                                       |   | $                   | 32,881  |                    | $      | 28,632 |   |
| Interest bearing                                                                                                                                           |   | 507,966             |    | 500,530                 |   |
| Total deposits                                                                                                                                             |   | 540,847             |    | 529,162                 |   |
| Advances from Federal Home Loan Bank                                                                                                                       |   | 78,210              |    | 78,283                  |   |
| Subordinated debentures                                                                                                                                    |   | 10,000              |    | 10,000                  |   |
| Accrued interest payable                                                                                                                                   |   | 398                 |    | 416                     |   |
| Accounts payable and other liabilities                                                                                                                     |   | 1,593               |    | 1,027                   |   |
| Deferred income taxes                                                                                                                                      |   | 1,140               |    | 1,126                   |   |
|                                                                                                                                                       |   |                |    |                    |   |
| **TOTAL LIABILITIES**                                                                                                                                      |   | 632,188             |    | 620,014                 |   |
|                                                                                                                                                       |   |                |    |                    |   |
| **STOCKHOLDERS’ EQUITY:**                                                                                                                             |   |                |    |                    |   |
| Serial preferred stock, 5,000,000 shares  authorized and unissued                                                                                          |   | —              |    | —                  |   |
| Common stock, $1 par value per share;  authorized 10,000,000 shares; issued and outstanding, 3,645,438 shares Mar  (2004), and 3,705,438 shares Dec (2003) |   | 3,645               |    | 3,705                   |   |
| Additional paid-in capital                                                                                                                                 |   | 8,226               |    | 9,726                   |   |
| Retained earnings                                                                                                                                          |   | 43,263              |    | 42,092                  |   |
| Accumulated other comprehensive income, net  of tax                                                                                                        |   | 825                 |    | 798                     |   |
|                                                                                                                                                       |   |                |    |                    |   |
| **TOTAL STOCKHOLDERS’ EQUITY**                                                                                                                        |   | 55,959              |    | 56,321                  |   |
| **TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY**                                                                                                        |   | $                   | 688,147 |                    | $      | 676,335 |   |

 

***See notes to theunaudited consolidated financial statements.***

 

3

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**FIRST FEDERAL FINANCIAL CORPORATION OF KENTUCKY**

**Consolidated Statements of Income**

**(Dollars In Thousands, Except Per Share Data)**

**(Unaudited)**

 
|                                                 |   | **Three  Months Ended  March 31,** |   |
|------------------------------------------------------|--------|------------------------------------|--------|
|                                                 |   | **2004**                           |   | **2003** |   |
| **Interest Income:**                                 |   |                               |   |   |   |
| Interest and fees on loans                           |   | $                                  | 9,107  |   | $ | 9,638 |   |
| Interest and dividends on investments and  deposits  |   | 443                                |   | 486 |   |
| Total interest income                                |   | 9,550                              |   | 10,124 |   |
|                                                 |   |                               |   |   |   |
| **Interest Expense:**                                |   |                               |   |   |   |
| Deposits                                             |   | 2,725                              |   | 3,245 |   |
| Federal Home Loan Bank advances                      |   | 928                                |   | 922 |   |
| Subordinated debentures                              |   | 124                                |   | 129 |   |
| Total interest expense                               |   | 3,777                              |   | 4,296 |   |
|                                                 |   |                               |   |   |   |
| Net interest income                                  |   | 5,773                              |   | 5,828 |   |
| Provision for loan losses                            |   | 389                                |   | 329 |   |
| Net interest income after provision for  loan losses |   | 5,384                              |   | 5,499 |   |
|                                                 |   |                               |   |   |   |
| **Non-interest Income:**                             |   |                               |   |   |   |
| Customer service fees on deposit accounts            |   | 1,135                              |   | 1,000 |   |
| Gain on sale of mortgage loans                       |   | 218                                |   | 407 |   |
| Brokerage and insurance commissions                  |   | 112                                |   | 96 |   |
| Other income                                         |   | 306                                |   | 215 |   |
| Total non-interest income                            |   | 1,771                              |   | 1,718 |   |
|                                                 |   |                               |   |   |   |
| **Non-interest Expense:**                            |   |                               |   |   |   |
| Employee compensation and benefits                   |   | 2,398                              |   | 2,236 |   |
| Office occupancy expense and equipment               |   | 408                                |   | 368 |   |
| FDIC insurance premiums                              |   | 20                                 |   | 21 |   |
| Marketing and advertising                            |   | 139                                |   | 148 |   |
| Outside services and data processing                 |   | 514                                |   | 467 |   |
| Bank franchise tax                                   |   | 212                                |   | 141 |   |
| Other expense                                        |   | 748                                |   | 663 |   |
| Total non-interest expense                           |   | 4,439                              |   | 4,044 |   |
|                                                 |   |                               |   |   |   |
| Income before income taxes                           |   | 2,716                              |   | 3,173 |   |
| Income taxes                                         |   | 878                                |   | 1,051 |   |
| **Net Income**                                       |   | $                                  | 1,838  |   | $ | 2,122 |   |
|                                                 |   |                               |   |   |   |
| Shares applicable to basic income per share          |   | 3,690,438                          |   | 3,930,497 |   |
| **Basic income per share**                           |   | $                                  | 0.50   |   | $ | 0.54 |   |
|                                                 |   |                               |   |   |   |
| Shares applicable to diluted income per  share       |   | 3,708,063                          |   | 3,959,204 |   |
| **Diluted income per share**                         |   | $                                  | 0.50   |   | $ | 0.53 |   |

 

***See notes to theunaudited consolidated financial statements.***

 

4

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**FIRST FEDERAL FINANCIAL CORPORATION OF KENTUCKY**

**Consolidated Statements of Comprehensive Income**

**(Dollars In Thousands)**

**(Unaudited)**

 
|                                                           |   | **Three  Months Ended  March 31,** |   |
|----------------------------------------------------------------|--------|------------------------------------|--------|
|                                                           |   | **2004**                           |   | **2003** |   |
|                                                           |   |                               |   |   |   |
| **Net Income**                                                 |   | $                                  | 1,838  |   | $ | 2,122 |   |
| Other comprehensive income (loss):                             |   |                               |   |   |   |
| Change in unrealized gain (loss) on  securities                |   | 41                                 |   | (6 | ) |
| Reclassification of realized amount                            |   | —                             |   | — |   |
| Net unrealized gain (loss) recognized in  comprehensive income |   | 41                                 |   | (6 | ) |
| Tax effect                                                     |   | (14                                | )      | 2 |   |
| Total other comphrehensive income (loss)                       |   | 27                                 |   | (4 | ) |
|                                                           |   |                               |   |   |   |
| **Comphrehensive Income**                                      |   | $                                  | 1,865  |   | $ | 2,118 |   |

 

***See notes to the unaudited consolidatedfinancial statements.***

 

5

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**FIRST FEDERAL FINANCIAL CORPORATION OF KENTUCKY**

**Consolidated Statements of Changes in Stockholders’Equity**

**Three Months Ended March 31, 2004**

**(Dollars In Thousands, Except Per Share Amounts)**

**(Unaudited)**

 
|                                                                                   |   | **Common  Shares** |   | **Stock  Amount** |   | **Additional  Paid-in  Capital** |   | **Retained  Earnings** |   | **Accumulated  Other  Comprehensive  Income, Net of  Tax** |   | **Total** |   |
|----------------------------------------------------------------------------------------|--------|--------------------|--------|-------------------|--------|----------------------------------|--------|------------------------|--------|------------------------------------------------------------|--------|-----------|--------|
|                                                                                   |   |               |   |              |   |                             |   |                   |   |                                                       |   |      |   |
| **Balance, December 31, 2003**                                                         |   | 3,705              |   | $                 | 3,705  |                             | $      | 9,726                  |   | $                                                          | 42,092 |      | $      | 798 |   | $ | 56,321 |   |
| Net income                                                                             |   |               |   |              |   |                             |   | 1,838                  |   |                                                       |   | 1,838     |   |
| Net change in unrealized gains (losses) on  securities available- for-sale, net of tax |   |               |   |              |   |                             |   |                   |   | 27                                                         |   | 27        |   |
| Cash dividends declared ($.18 per share)                                               |   |               |   |              |   |                             |   | (667                   | )      |                                                       |   | (667      | )      |
| Stock repurchased                                                                      |   | (60                | )      | (60               | )      | (1,500                           | )      |                   |   |                                                       |   | (1,560    | )      |
|                                                                                   |   |               |   |              |   |                             |   |                   |   |                                                       |   |      |   |
| **Balance, March 31, 2004**                                                            |   | 3,645              |   | $                 | 3,645  |                             | $      | 8,226                  |   | $                                                          | 43,263 |      | $      | 825 |   | $ | 55,959 |   |

 

***See notes to theunaudited consolidated financial statements.***

 

6

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**FIRST FEDERAL FINANCIAL CORPORATION OF KENTUCKY**

**Consolidated Statements of Cash Flows**

**(Dollars In Thousands)**

**(Unaudited)**

 
|                                                                               |   | **Three  Months Ended  March 31,** |   |
|------------------------------------------------------------------------------------|--------|------------------------------------|--------|
|                                                                               |   | **2004**                           |   | **2003** |   |
| **Operating Activities:**                                                          |   |                               |   |   |   |
| Net income                                                                         |   | $                                  | 1,838  |   | $ | 2,122 |   |
| Adjustments to reconcile net income to net  cash provided by operating activities: |   |                               |   |   |   |
| Provision for loan losses                                                          |   | 389                                |   | 329 |   |
| Depreciation on premises and equipment                                             |   | 244                                |   | 268 |   |
| Federal Home Loan Bank stock dividends                                             |   | (66                                | )      | (62 | ) |
| Net amortization (accretion)                                                       |   | 9                                  |   | (7 | ) |
| Gain on sale of mortgage loans                                                     |   | (218                               | )      | (407 | ) |
| Origination of loans held for sale                                                 |   | (11,893                            | )      | (22,774 | ) |
| Proceeds on sale of loans held for sale                                            |   | 11,769                             |   | 24,718 |   |
| Changes in:                                                                        |   |                               |   |   |   |
| Interest receivable                                                                |   | 167                                |   | 163 |   |
| Other assets                                                                       |   | (1,064                             | )      | 930 |   |
| Interest payable                                                                   |   | (18                                | )      | (31 | ) |
| Accounts payable and other liabilities                                             |   | 566                                |   | 1,471 |   |
| Net cash from operating activities                                                 |   | 1,723                              |   | 6,720 |   |
|                                                                               |   |                               |   |   |   |
| **Investing Activities:**                                                          |   |                               |   |   |   |
| Purchases of securities available-for-sale                                         |   | —                             |   | (584 | ) |
| Purchases of securities held-to-maturity                                           |   | (10,000                            | )      | (10,000 | ) |
| Maturities of securities held-to-maturity                                          |   | 16,365                             |   | 10,023 |   |
| Net change in loans                                                                |   | (15,278                            | )      | 5,445 |   |
| Net purchases of premises and equipment                                            |   | (1,335                             | )      | (968 | ) |
| Net cash from investing activities                                                 |   | (10,248                            | )      | 3,916 |   |
|                                                                               |   |                               |   |   |   |
| **Financing Activities**                                                           |   |                               |   |   |   |
| Net change in deposits                                                             |   | 11,685                             |   | 13,167 |   |
| Advances from Federal Home Loan Bank                                               |   | —                             |   | 132 |   |
| Repayments to Federal Home Loan Bank                                               |   | (73                                | )      | (75 | ) |
| Dividends paid                                                                     |   | (667                               | )      | (653 | ) |
| Common stock repurchased                                                           |   | (1,560                             | )      | (8,463 | ) |
| Net cash from financing activities                                                 |   | 9,385                              |   | 4,108 |   |
|                                                                               |   |                               |   |   |   |
| **Increase in cash and cash equivalents**                                          |   | 860                                |   | 14,744 |   |
| **Cash and cash equivalents, beginning of  year**                                  |   | 48,030                             |   | 91,776 |   |
| **Cash and cash equivalents, end of year**                                         |   | $                                  | 48,890 |   | $ | 106,520 |   |

 

***See notes to the unaudited consolidatedfinancial statements.***

 

7

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## **FIRST FEDERAL FINANCIALCORPORATION OF KENTUCKY**

**Notes To Unaudited Consolidated Financial Statements**

 

**1.****            ****BASIS OF PRESENTATION AND SUMMARY OF SIGNIFICANTACCOUNTING POLICIES**

 

***Basis of Presentation*** – The accompanyingunaudited consolidated financial statements include the accounts of FirstFederal Financial Corporation of Kentucky (the Corporation) and its whollyowned subsidiary, First Federal Savings Bank of Elizabethtown (the Bank).  As further discussed in Note 7 of theCorporation’s annual report on Form 10-K for the period ended December 31,2003, a trust that had previously been consolidated with the Bank is nowreported separately.  The Bank has threewholly owned subsidiaries, First Service Corporation of Elizabethtown, FirstHeartland Mortgage Company and First Federal Office Park, LLC.  All significant intercompany transactionsand balances have been eliminated.

 

The accompanying unauditedconsolidated financial statements have been prepared in accordance withaccounting principles generally accepted in the United States of America forinterim financial information and with the instructions to Form 10-Q and Rule10-01 of Regulation S-X.  Accordingly,they do not include all of the information and footnotes required by accountingprinciples generally accepted in the United States of America for completefinancial statements.  In the opinion ofmanagement, all adjustments (consisting of normal recurring accruals) considerednecessary for a fair presentation have been included.  Operating results for the three-month period ending March 31,2004 are not necessarily indicative of the results that may occur for the yearending December 31, 2004.  For furtherinformation, refer to the consolidated financial statements and footnotesthereto included in the Corporation’s annual report on Form 10-K for the periodended December 31, 2003.

 

***Stock Option Plans*** – Employee compensationexpense under stock option plans is reported using the intrinsic valuemethod.  No stock-based compensationcost is reflected in net income, as all options granted had an exercise priceequal to the market price of the underlying common stock at date of grant.  The following table illustrates the effecton net income and earnings per share if expense was measured using the fairvalue recognition provisions of FASB Statement No. 123, Accounting forStock-Based Compensation.

 
|                |        | **Three  Months Ended  March 31,**                 |   |
|---------------------|-------------|----------------------------------------------------|--------|
|                |        | **2004**                                           |   | **2003** |   |
|                |        | **(Dollars  In Thousands, Except Per Share Data)** |   |
| Net income:         |        |                                               |   |
| As reported         |        | $                                                  | 1,838  |   | $ | 2,122 |   |
| Pro-forma           |        | 1,807                                              |   | 2,093 |   |
| Earnings per share: |        |                                               |   |   |   |
| Basic               | As Reported |                                               | $      | 0.50 |   | $ | 0.54 |   |
|                | Pro-forma   |                                               | 0.49   |   | 0.54 |   |
| Diluted             | As Reported |                                               | $      | 0.50 |   | $ | 0.53 |   |
|                | Pro-forma   |                                               | 0.49   |   | 0.53 |   |

 

***Reclassifications*** – Certain amounts have been reclassified inthe prior period financial statements to conform to the current periodclassifications.

 

8

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**2.**             **SECURITIES**

 

Theamortized cost basis and fair values of securities are as follows:

 
| **(Dollars in thousands)**         |   | **Amortized  Cost** |   | **Gross  Unrealized  Gains**   |   | **Gross  Unrealized  Losses**   |   | **Fair Value** |   |
|------------------------------------|--------|---------------------|--------|--------------------------------|--------|---------------------------------|--------|----------------|--------|
|                               |   |                |   |                           |   |                            |   |           |   |
| **Securities available-for-sale:** |   |                |   |                           |   |                            |   |           |   |
| **March 31, 2004:**                |   |                |   |                           |   |                            |   |           |   |
| Equity                             |   | $                   | 1,801  |                           | $      | 1,178                           |   | $              | — |   | $ | 2,979 |   |
| State and municipal                |   | 999                 |   | 72                             |   | —                          |   | 1,071          |   |
|                               |   |                |   |                           |   |                            |   |           |   |
| Total                              |   | $                   | 2,800  |                           | $      | 1,250                           |   | $              | — |   | $ | 4,050 |   |
|                               |   |                |   |                           |   |                            |   |           |   |
| **December 31, 2003:**             |   |                |   |                           |   |                            |   |           |   |
| Equity                             |   | $                   | 1,801  |                           | $      | 1,138                           |   | $              | — |   | $ | 2,939 |   |
| State and municipal                |   | 999                 |   | 71                             |   | —                          |   | 1,070          |   |
|                               |   |                |   |                           |   |                            |   |           |   |
| Total                              |   | $                   | 2,800  |                           | $      | 1,209                           |   | $              | — |   | $ | 4,009 |   |
|                               |   |                |   |                           |   |                            |   |           |   |
|                               |   | **Amortized  Cost** |   | **Gross  Unrecognized  Gains** |   | **Gross  Unrecognized  Losses** |   | **Fair Value** |   |
|                               |   |                |   |                           |   |                            |   |           |   |
| **Securities held-to-maturity:**   |   |                |   |                           |   |                            |   |           |   |
| **March 31, 2004:**                |   |                |   |                           |   |                            |   |           |   |
| U.S. Treasury and agencies         |   | $                   | 13,999 |                           | $      | 60                              |   | $              | — |   | $ | 14,059 |   |
| Corporate                          |   | 2,000               |   | —                         |   | —                          |   | 2,000          |   |
| Mortgage-backed                    |   | 8,558               |   | 10                             |   | (34                             | )      | 8,534          |   |
|                               |   |                |   |                           |   |                            |   |           |   |
| Total                              |   | $                   | 24,557 |                           | $      | 70                              |   | $              | (34    | ) | $ | 24,593 |   |
|                               |   |                |   |                           |   |                            |   |           |   |
| **December 31, 2003:**             |   |                |   |                           |   |                            |   |           |   |
| U.S. Treasury and agencies         |   | $                   | 19,999 |                           | $      | 77                              |   | $              | — |   | $ | 20,076 |   |
| Corporate                          |   | 2,000               |   | —                         |   | —                          |   | 2,000          |   |
| Mortgage-backed                    |   | 8,930               |   | 9                              |   | (96                             | )      | 8,843          |   |
|                               |   |                |   |                           |   |                            |   |           |   |
| Total                              |   | $                   | 30,929 |                           | $      | 86                              |   | $              | (96    | ) | $ | 30,919 |   |

 

9

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**3.****            ****LOANS RECEIVABLE**

 

Loansreceivable are summarized as follows:

 
| **(Dollars in thousands)**         |   | **March 31,  2004** |    | **December  31,  2003** |   |
|------------------------------------|--------|---------------------|---------|-------------------------|--------|
|                               |   |                |    |                    |   |
| Commercial                         |   | $                   | 33,203  |                    | $      | 30,943 |   |
| Real estate commercial             |   | 258,652             |    | 239,406                 |   |
| Real estate construction           |   | 8,435               |    | 9,952                   |   |
| Residential mortgage               |   | 186,600             |    | 194,000                 |   |
| Consumer and home equity           |   | 55,399              |    | 53,566                  |   |
| Indirect consumer                  |   | 29,090              |    | 28,279                  |   |
|                               |   | 571,379             |    | 556,146                 |   |
| Less:                              |   |                |    |                    |   |
| Net deferred loan origination fees |   | (1,440              | )       | (1,446                  | )      |
| Allowance for loan losses          |   | (5,733              | )       | (5,568                  | )      |
|                               |   | (7,173              | )       | (7,014                  | )      |
|                               |   |                |    |                    |   |
| Loans Receivable                   |   | $                   | 564,206 |                    | $      | 549,132 |   |

 

Theallowance for losses on loans is summarized as follows:

 
|                       |   | **As of and  For the  Three Months Ended  March 31,** |   |
|----------------------------|--------|-------------------------------------------------------|--------|
| **(Dollars in thousands)** |   | **2004**                                              |   | **2003** |   |
|                       |   |                                                  |   |   |   |
| Balance, beginning of year |   | $                                                     | 5,568  |   | $ | 4,576 |   |
| Provision for loan losses  |   | 389                                                   |   | 329 |   |
| Charge-offs                |   | (271                                                  | )      | (259 | ) |
| Recoveries                 |   | 47                                                    |   | 33 |   |
| Balance, end of year       |   | $                                                     | 5,733  |   | $ | 4,679 |   |

 

Investmentin impaired loans is summarized below. There were no impaired loans for the periods presented without anallowance allocation.

 
| **(Dollars in thousands)**                  |   | **As of the  Three Months Ended  March 31,  2004** |   | **As of the  Year Ended  December 31,  2004** |   |
|---------------------------------------------|--------|----------------------------------------------------|--------|-----------------------------------------------|--------|
|                                        |   |                                               |   |                                          |   |
| End of period impaired loans                |   | $                                                  | 4,375  |                                          | $      | 5,318 |   |
| Amount of allowance for loan loss allocated |   | 854                                                |   | 911                                           |   |
|                                             |        |                                                    |        |                                               |        |  |  |

 

10

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Non-performingloans were as follows:

 
| **(Dollars in thousands)**                    |   | **March 31,  2004** |   | **December  31,  2003** |   |
|-----------------------------------------------|--------|---------------------|--------|-------------------------|--------|
|                                          |   |                |   |                    |   |
| Restructured                                  |   | $                   | 3,018  |                    | $      | 3,037 |   |
| Loans past due over 90 days still on  accrual |   | —              |   | —                  |   |
| Non accrual loans                             |   | 1,357               |   | 2,281                   |   |
|                                               |        |                     |        |                         |        |  |  |

 

**4.****            ****EARNINGS PER SHARE**

 

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

 
| **(Dollars in thousands,  except per share data)** |     | **Three  Months Ended  March 31,** |     |
|----------------------------------------------------|----------|------------------------------------|----------|
|                                               | **2004** |                               | **2003** |   |
|                                               |     |                               |     |   |   |
| Net income available to common shareholders        |     | $                                  | 1,838    |   | $ | 2,122 |   |
| Basic EPS:                                         |     |                               |     |   |   |
| Weighted average common shares                     |     | 3,690                              |     | 3,930 |   |
| Diluted EPS:                                       |     |                               |     |   |   |
| Weighted average common shares                     |     | 3,690                              |     | 3,930 |   |
| Dilutive effect of stock options                   |     | 18                                 |     | 29 |   |
| Weighted average common and incremental  shares    |     | 3,708                              |     | 3,959 |   |
| Earnings Per Share:                                |     |                               |     |   |   |
| Basic                                              |     | $                                  | 0.50     |   | $ | 0.54 |   |
| Diluted                                            |     | $                                  | 0.50     |   | $ | 0.53 |   |

 

Stock options for 10,000shares of common stock were not included in the 2004 computation of dilutedearnings per share because their impact was anti-dilutive.

 

**Item 2.**

**MANAGEMENT’S DISCUSSION AND ANALYSIS OFFINANCIAL CONDITION****AND RESULTS OF OPERATIONS**

 

##### **GENERAL**

 

The Corporation, through its subsidiary,First Federal Savings Bank conducts operations in 14 full-service bankingcenters in six contiguous counties in Kentucky along the Interstate 65corridor.  The Corporation’s marketpresence ranges from the major metropolitan market of Louisville in JeffersonCounty, Kentucky approximately 40 miles north of its headquarters inElizabethtown, Kentucky to approximately 30 miles south to Hart County,Kentucky.

 

The Bank serves the needsand caters to the economic strengths of the local communities in which itoperates and strives to provide a high level of personal and professionalcustomer service. The Bank offers a variety of financial services to its retailand commercial banking customers. These services include personal and corporatebanking services, trust and estate planning, and personal investment financialcounseling services.

 

Through the Bank’s trust andestate planning and our personal investment financial counseling services, weoffer a wide variety of mutual funds, equity investments, and fixed andvariable annuities.

 

The Bank participates in the wholesale capital markets through themanagement of its securities portfolio and its use of various forms ofwholesale funding. The securities portfolio contains a variety of instruments,including callable debentures, taxable and non-taxable debentures, fixed andadjustable rate mortgage backed securities, and collateralized mortgageobligations.

 

11

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The principal source of the Bank’s revenue is net interest income.  Net interest income is the differencebetween interest income on interest-earning assets, such as loans andsecurities and the interest expense on liabilities used to fund those assets,such as interest-bearing deposits and borrowings.  Net interest income is impacted by both changes in the amount andcomposition of interest-earning assets and interest-bearing liabilities as wellas market interest rates. The Bank’s other source of revenue is non-interestincome, such as service charges, insurance agency revenue, loan fees, gains andlosses from the sale of mortgage loans and gains from the sale of real estateheld for development. Its principal operating expenses, aside from interestexpense, consist of compensation and employee benefits, occupancy costs, dataprocessing expense and provisions for loan losses.

 

This discussion and analysis covers material changes in the financialcondition since December 31, 2003 and material changes in the results ofoperations for the three-month period ending, March 31, 2004 as compared to2003.  It should be read in conjunctionwith “Management Discussion and Analysis of Financial Condition and Results ofOperations” included in the Annual Report on Form 10-K for the period endedDecember 31, 2003.

 

**OVERVIEW**

 

During the quarter, the Corporation opened a new full-service facilityin the growing Metro Louisville/Jefferson County market.  The facility represents the Corporation’snew prototype branch with a retail focused design, including an internetcafé.  The facility is the Corporation’ssecond location in the Metro Louisville market and is expected to complimentits existing branch.  The Corporation’scurrent branch, which is located inside a Wal-Mart super store, will bereplaced with a second new full-service facility scheduled to open in thesecond quarter of 2004.  Managementbelieves these facilities will allow us to more effectively support our lendingrelationships, over $90 million in commercial loans, primarily commercial realestate, were closed in 2002 and 2003, as a result of the customer contacts madewithin Metro Louisville, and allow us to develop a larger presence within theMetro Louisville market in the future. While we fully anticipate these facilities to significantly enhance thevalue of our franchise in the near future, the additional expense in operatingthese new facilities will continue to place pressure on earnings for a periodof time.  We are optimistic that ourexpansion strategy for Metro Louisville will minimize this period of time andthe long-term benefits will outweigh the initial investment.

 

The Corporation’s emphasis on commercial lending continued to producepositive results for the quarter generating a $21.5 million, or 8% increase incommercial loans to $292 million at March 31, 2004, compared to $270 million atDecember 31, 2003.  This favorable trendhas resulted in an annual compound growth rate of 43% over the past threeyears.  The percentage of commercialloans in the Bank’s portfolio has increased from 49% at December 31, 2003, to52% at March 31, 2004 while residential loans declined from 35% at December 31,2003, to 33% at March 31, 2004. Management intends to continue this commercial lending emphasis andanticipates continued increases in the commercial and commercial real estateportfolios.

 

In January 2003, the Corporation implemented an effort to develop a bank-wideservice and sales culture emphasizing expanded account relationships.  To achieve this goal, the Corporationincreased the number of associates in banking centers, relationship bankers,business development officers, stockbrokers, and loan officers with experiencein commercial lending.  The results ofthis effort have contributed to the growth in the Corporation as well as aidedits transition from a federally chartered thrift to a Kentucky state-charteredcommercial bank in January 2003.  The increasein staff also contributed to a $162,000, or 7% increase in employeecompensation expense for the quarter ended March 31, 2004, compared to thequarter ended March 31, 2003. Management expects a continued increase in employee compensation expensein the 2004 calendar year as it continues its expansion into Metro Louisville.

 

12

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###### **CRITICAL ACCOUNTING POLICIES**

 

The Corporation’sapplication of accounting and reporting policies are in accordance with accountingprinciples generally accepted in the United States of America and conform togeneral practices within the banking industry. In preparing the consolidated financial statements, management isrequired to make estimates and assumptions that affect the reported amounts ofassets and liabilities as of the date of the statement of financial conditionand revenues and expenses for the period. Actual results could differ significantly depending on the accuracy ofthose estimates.

 

***Allowance for Loan Losses*****-**The applicationof the Corporation’s accounting policy relating to the allowance for loanlosses requires significant management assumptions and estimates to be made bymanagement that could result in materially different amounts to be reported ifconditions or underlying circumstances were to change. See “Allowance andProvision for Loan Losses” herein for a complete discussion of the FirstFederal Financial Corporation’s accounting methodologies related to theallowance.  Also refer to Note 1 in the“Notes to Consolidated Financial Statements” in the 2003 10-K for details-regarding all of the Corporation’s critical and significant accountingpolicies.

 

##### **RESULTSOF OPERATIONS**

 

Net income for the quarter ended March 31, 2004 was $1.8 million or$0.50 per share diluted compared to $2.1 million or $0.53 per share diluted forthe same period in 2003.  The decreasein diluted earnings per share was primarily the result of an increase innon-interest expense of $395,000.  TheBank’s book value per common share increased from $14.17 at March 31, 2003 to$15.35 at March 31, 2004.  Annualizednet income for 2004  generated a returnon average assets of 1.07% and a return on average equity of 12.99%.  These compare with a return on averageassets of 1.25% and a return on average equity of 14.56% for the 2003 periodalso annualized.

 

***Net Interest Income***-For the quarter ended March 31, 2004, net interest income declined$55,000 or 1% compared to the same period a year ago.  The average rate on interest earning assets was 5.99% for thequarter ended March 31, 2004, representing a decrease of 32 basis points from6.31% for the same three months ended 2003. The average rate paid on interest-bearing liabilities decreased 40 basispoints to 2.54% for the quarter ended March 31, 2004, compared to 2.94% for thesame period ended 2003.  The result wasan increase in the net interest spread for the quarter from 3.37% at March 31,2003 compared to 3.45% for the 2004 period.

 

The net interest margin as a percent ofaverage earning assets was 3.62% for the quarter ended March 31, 2004 comparedto 3.64% for the quarter ended March 31, 2003 and an increase of 7 basis pointsfrom 3.55% compared to the fourth quarter of 2003.  The surgein refinancing of residential mortgage loans held in the loan portfolioresulted in a net decrease of $67 million in the residential mortgage portfolioat March 31, 2004, compared to March 31, 2003. This decrease was offset with a $103 million increase in commercialloans over the same period.  Although thenet interest margin has been negatively impacted by the decrease in higheryielding fixed rate residential mortgage loans, the shift from fixed-rateresidential mortgage loans to commercial loans has reduced the Bank’s interestrate risk in the event of a rising interest rate environment and has positionedthe Bank to improve its net interest margin should rates begin to rise.

 

We expect net interest income to increase ina rising interest rate environment and decrease in a flat or decreasinginterest rate environment.  Accordingly,the Corporation is maintaining an asset sensitive balance sheet where ourinterest earning assets are expected to re-price at a faster rate than ourinterest paying liabilities.

 

13

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**AVERAGEBALANCE SHEET**

 

The following table sets forth information relating to the Bank’saverage balance sheet and reflects the average yield on assets and average costof liabilities for the periods indicated. Dividing income or expense by the average monthly balance of assets orliabilities, respectively, derives such yields and costs for the periodspresented.

 
|                                                |   | **Quarter  Ended March 31,** |    |
|-----------------------------------------------------|--------|------------------------------|---------|
|                                                |   | **2004**                     |    | **2003** |   |
| **(Dollars in thousands)**                          |   | **Average  Balance**         |    | **Interest** |   | **Average  Yield/Cost (5)** |   | **Average  Balance** |   | **Interest** |   | **Average  Yield/Cost (5)** |   |
|                                                |   |                         |    |   |   |   |   |   |   |   |   |   |   |
| **ASSETS**                                          |   |                         |    |   |   |   |   |   |   |   |   |   |   |
| Interest earning assets:                            |   |                         |    |   |   |   |   |   |   |   |   |   |   |
| Equity securities                                   |   | $                            | 2,950   |   | $ | 33 |   | 4.48 | % | $ | 1,058 |   | $ | 8 |   | 3.02 | % |
| State and political subdivision securities  (1)     |   | 1,071                        |    | 18 |   | 6.72 |   | 1,086 |   | 17 |   | 6.26 |   |
| U.S. Treasury and agencies                          |   | 17,168                       |    | 149 |   | 3.47 |   | 11,491 |   | 101 |   | 3.52 |   |
| Corporate bond                                      |   | 2,000                        |    | 15 |   | 3.00 |   | 2,000 |   | 18 |   | 3.60 |   |
| Mortgage-backed securities                          |   | 8,751                        |    | 84 |   | 3.84 |   | 579 |   | 6 |   | 4.15 |   |
| Loans receivable (2) (3) (4)                        |   | 562,049                      |    | 9,108 |   | 6.48 |   | 526,880 |   | 9,638 |   | 7.32 |   |
| FHLB stock                                          |   | 6,571                        |    | 65 |   | 3.96 |   | 6,330 |   | 62 |   | 3.92 |   |
| Interest bearing deposits                           |   | 38,145                       |    | 85 |   | 0.89 |   | 92,412 |   | 280 |   | 1.21 |   |
| **Total interest earning assets**                   |   | 638,705                      |    | 9,557 |   | 5.99 |   | 641,836 |   | 10,130 |   | 6.31 |   |
| Less:   Allowance for loan losses              |   | (5,581                       | )       |   |   |   |   | (4,636 | ) |   |   |   |   |
| Non-interest earning assets                         |   | 54,059                       |    |   |   |   |   | 39,853 |   |   |   |   |   |
| **Total assets**                                    |   | $                            | 687,183 |   |   |   |   |   | $ | 677,053 |   |   |   |   |   |
|                                                |   |                         |    |   |   |   |   |   |   |   |   |   |   |
| **LIABILITIES AND STOCKHOLDERS’ EQUITY**       |   |                         |    |   |   |   |   |   |   |   |   |   |   |
| Interest bearing liabilities:                       |   |                         |    |   |   |   |   |   |   |   |   |   |   |
| Savings accounts                                    |   | $                            | 91,137  |   | $ | 188 |   | 0.83 | % | $ | 77,558 |   | $ | 218 |   | 1.12 | % |
| NOW and money market Accounts                       |   | 121,619                      |    | 221 |   | 0.73 |   | 112,623 |   | 259 |   | 0.92 |   |
| Certificates of deposit and other time  deposits    |   | 294,471                      |    | 2,316 |   | 3.15 |   | 305,884 |   | 2,768 |   | 3.62 |   |
| FHLB Advances                                       |   | 78,243                       |    | 928 |   | 4.74 |   | 77,715 |   | 922 |   | 4.75 |   |
| Trust Preferred Securities                          |   | 10,000                       |    | 124 |   | 4.96 |   | 10,000 |   | 129 |   | 5.30 |   |
| **Total interest bearing liabilities**              |   | 595,470                      |    | 3,777 |   | 2.54 |   | 583,780 |   | 4,296 |   | 2.94 |   |
| Non-interest bearing liabilities:                   |   |                         |    |   |   |   |   |   |   |   |   |   |   |
| Non-interest bearing deposits                       |   | 31,918                       |    |   |   |   |   | 31,399 |   |   |   |   |   |
| Other liabilities                                   |   | 3,200                        |    |   |   |   |   | 3,562 |   |   |   |   |   |
| **Total liabilities**                               |   | 630,588                      |    |   |   |   |   | 618,741 |   |   |   |   |   |
|                                                |   |                         |    |   |   |   |   |   |   |   |   |   |   |
| Stockholders’ equity                           |   | 56,595                       |    |   |   |   |   | 58,312 |   |   |   |   |   |
| **Total liabilities and stockholders’ equity** |   | $                            | 687,183 |   |   |   |   |   | $ | 677,053 |   |   |   |   |   |
|                                                |   |                         |    |   |   |   |   |   |   |   |   |   |   |
| **Net interest income**                             |   |                         |    | $ | 5,780 |   |   |   |   |   | $ | 5,834 |   |   |   |
| **Net interest spread**                             |   |                         |    |   |   | 3.45 | % |   |   |   |   | 3.37 | % |
| **Net interest margin**                             |   |                         |    |   |   | 3.62 | % |   |   |   |   | 3.64 | % |

 

----

(1) Taxable equivalent yields are calculatedassuming a 34% federal income tax rate.

(2) Includes loan fees, immaterial in amount,in both interest income and the calculation of yield on loans.

(3) Calculations include non-accruing loansin the average loan amounts outstanding.

(4) Includes loans held for sale.

(5) Annualized

 

14

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**RATE/VOLUMEANALYSIS**

 

The table below sets forth certaininformation regarding changes in interest income and interest expense of theBank for the periods indicated.  Foreach category of interest-earning assets and interest-bearing liabilities,information is provided on changes attributable to (1) changes in rate (changesin rate multiplied by old volume); (2) changes in volume (change in volumemultiplied by old rate); and (3) changes in rate-volume (change in ratemultiplied by change in volume). Changes in rate-volume are proportionately allocated between rate and volumevariance.

 
|                                             |   | **Three Months Ended  March 31,  2004 vs. 2003** |   |
|--------------------------------------------------|--------|--------------------------------------------------|--------|
|                                             |   | **Increase (decrease)  Due to change in**        |   |
| **(Dollars in thousands)**                       |   | **Rate**                                         |   | **Volume** |   | **Net  Change** |   |
|                                             |   |                                             |   |   |   |   |   |
| **Interest income:**                             |   |                                             |   |   |   |   |   |
| Equity securities                                |   | $                                                | 5      |   | $ | 20 |   | $ | 25 |   |
| State and political subdivision securities       |   | 1                                                |   | — |   | 1 |   |
| U.S. Treasury and agencies                       |   | (1                                               | )      | 49 |   | 48 |   |
| Corporate bond                                   |   | (3                                               | )      | — |   | (3 | ) |
| Mortgage-backed securities                       |   | (1                                               | )      | 79 |   | 78 |   |
| Loans                                            |   | (1,146                                           | )      | 616 |   | (530 | ) |
| FHLB stock                                       |   | 1                                                |   | 3 |   | 4 |   |
| Interest bearing deposits                        |   | (61                                              | )      | (135 | ) | (196 | ) |
|                                             |   |                                             |   |   |   |   |   |
| **Total interest earning assets**                |   | (1,205                                           | )      | 632 |   | (573 | ) |
|                                             |   |                                             |   |   |   |   |   |
| **Interest expense:**                            |   |                                             |   |   |   |   |   |
| Savings accounts                                 |   | (64                                              | )      | 34 |   | (30 | ) |
| NOW and money market accounts                    |   | (58                                              | )      | 20 |   | (38 | ) |
| Certificates of deposit and other time  deposits |   | (352                                             | )      | (100 | ) | (452 | ) |
| FHLB advances                                    |   | —                                           |   | 6 |   | 6 |   |
| Trust Preferred Securities                       |   | (5                                               | )      | — |   | (5 | ) |
|                                             |   |                                             |   |   |   |   |   |
| **Total interest bearing liabilities**           |   | (479                                             | )      | (40 | ) | (519 | ) |
|                                             |   |                                             |   |   |   |   |   |
| **Net change in net interest income**            |   | $                                                | (726   | ) | $ | 672 |   | $ | (54 | ) |

 

***Non-Interest Income***-Non-interest income increased $53,000, or 3% for the quarter endedMarch 31, 2004 to $1.8 million compared to $1.7 million for the same quarter in2003.  The increased level ofnon-interest income during 2004 was primarily due to an increase in customerservice fees on deposit accounts and other non-interest income.  Offsetting these increases was a decrease ingain on sale of mortgage loans.

 

Customer service fees on deposit accountsincreased by $135,000 or 14% during 2004 due to growth in customer deposits andoverdraft fee income on retail checking accounts. Gain on sale of mortgageloans decreased by $189,000 for the 2004 quarter, resulting from a decline inrefinancing activity.  Recent positiveeconomic data has increased long-term interest rates and corresponding long-termmortgage rates.  This is likely todecrease the volume of loans refinanced and decrease secondary market closingfee income in the coming months.  Incomefrom brokerage commissions and insurance sales increased $16,000 as a result ofan increase in demand for these products. Other non-interest income increased during the 2004 period by $91,000primarily due to income of $71,000 received from the Bank’s investment in bankowned life insurance.

 

***Non-Interest Expense -*** Non-interest expense increased by $395,000 or 10% during the quarterended March 31, 2004 compared to the same period in 2003.  The primary factors impacting non-interestexpense included additional operating and employee compensation expensesrelating to the recent retail expansion efforts.  Employee compensation and benefits, the largest component ofnon-interest expense, increased 162,000 or 7%

 

15

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for 2004. Compared to the first quarter a year ago, fourteen retail staffpositions were added for the expansions in Jefferson County, coupled with anexpanded facility in Hardin County, Kentucky. Additional increases in staff have taken place throughout the year tocontinue the transformation to a stronger retail sales culture and to provideexpanded products and services to our retail and commercial customers.

 

Also increasing for the period was officeoccupancy and equipment expense, which increased $40,000 for the quarter alongwith an increase in telephone expense of $21,000 and postage expense of$21,000.  Outside service fees increased$33,000 resulting from professional fees paid for consulting services.  Bank franchise tax expense was $71,000 or50% higher for March 2004 compared to March 2003 due to a lower accrual for2003 in the first six months of the year.

 

**ANALYSIS OF FINANCIAL CONDITION**

 

Total assets at March 31, 2004 were $688.1 million compared to $676.3million at December 31, 2003, an increase of $11.8 million.  The increase was primarily related to anincrease in net loans (including loans held for sale) of $15.4 million.  The increase in net loans was funded with anincrease of $11.7 million in total deposits. Investment securities decreased $6.3 million to $28.6 million for thequarter compared to December 31, 2003.

 

**Investment Securities**

 

Total investment securities were $28.6 million at March 31, 2004compared to $34.9 million at December 31, 2003, a decrease of  $6.3 million or 18%.  The decrease in investment securities wasattributable to securities that were called for redemption in accordance withtheir terms.

 

Thesecurities portfolio serves as a source of liquidity and earnings andcontributes to the management of interest rate risk.  The debt securities portfolio is comprised primarily ofobligations collateralized by U.S. Government agencies (mainly in the form ofU.S. Government agency securities), mortgage-backed securities and municipalobligations.  With the exception ofmunicipal obligations, the maturity structure of the debt securities portfoliois generally short-term in nature or indexed to variable rates.

 

##### **LoansReceivable**

##### ** **

Netloans (including loans held for sale) increased $15.4 million or 2.8% to $565.6million at March 31, 2004 compared to $550.2 million at December 31, 2003reflecting its continued emphasis on small to mid-size business lending.  The Bank’s commitment to internal loangrowth in the commercial and commercial real estate portfolios produced loangrowth of $21.5 million, an 8% increase in these loans to $291.8 million atMarch 31, 2004.  For the March 31, 2004period, these loans comprise 52% of the total loan portfolio compared to 49% ofthe loan portfolio at December 31, 2003, and 34% of the loan portfolio atDecember 31, 2002.

 

Offsettingthis growth was an $8.9 million, or 4.4% decrease in the real estateconstruction and residential mortgage loan portfolio to $195.0 million at March31, 2004, compared to $203.9 million at December 31, 2003.  The decrease was due to an increase incustomer refinancing activity into fixed-rate, secondary market loanproducts.  For 2004, the decline inmortgage loans is expected to slow, increasing the percentage of loans as totalassets and as commercial loan growth continues.  This net growth in loans will more quickly use the bank’s excessliquidity, providing for an increase in interest income and a higher netinterest margin.

 

16

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**Allowance and Provision for Loan Losses**

 

The Bank’s financialperformance depends on the quality of the loans it originates and management’sability to assess the degree of risk in existing loans when it determines theallowance for loan losses.  An increasein loan charge-offs or non-performing loans or an inadequate allowance for loanlosses could reduce net interest income, net income and capital and limit therange of products and services the Bank can offer.

 

The Bank’s Executive LoanCommittee evaluates the allowance for loan losses quarterly to maintain a levelsufficient to absorb probable incurred credit losses existing in the loanportfolio.  Periodic provisions to theallowance are made as needed.  Theallowance is determined based on the application of loss estimates to gradedloans by categories.  The amount of theprovision for loan losses necessary to maintain an adequate allowance is alsobased upon an analysis of such factors, as changes in lending policies andprocedures; underwriting standards; collection; charge-off and recoveryhistory; changes in national and local economic business conditions anddevelopments; changes in the characteristics of the portfolio; ability anddepth of lending management and staff; changes in the trend of the volume andseverity of past due, non-accrual and classified loans; troubled debtrestructuring and other loan modifications; and results of regulatoryexaminations.

 

The methodology for allocating the allowance for loan and lease lossestakes into account the Bank’s strategic plan to increase its emphasis oncommercial and consumer lending.  TheBank increases the amount of the allowance allocated to commercial loans andconsumer loans in response to the growth of the commercial and consumer loanportfolios and management’s recognition of the higher risks and loan losses inthese lending areas.  The indirectconsumer loan program begun in 1999 is comprised of new and used automobile,motorcycle and all terrain vehicle loans originated on behalf of the Bank by aselect group of auto dealers within the Bank’s service area.   The indirect loan program involves agreater degree of risk and is evaluated quarterly and monitored by the Board ofDirectors.  In light of the greatercharge-offs from indirect consumer loans compared to direct consumer loans,proportionally more of the allowance for consumer loans is allocated forindirect loans than direct loans.  Asthe indirect loan program has evolved, dealer analysis and underwritingstandards have been refined to improve the loan loss experience of theprogram.  In addition, the Bank hashired a dealer loan specialist to expand its dealer loan program.  Estimating the allowance is a continuousprocess.  In this regard, the ExecutiveLoan Committee continues to monitor the performance of indirect consumer loansas well as the Bank’s other loan products and updates its estimates as the evidencewarrants.

 

17

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The following table sets forth an analysis ofthe Bank’s loan loss experience for the periods indicated.

 
|                                                     |   | **Three  Months Ended  March 31,** |   |
|----------------------------------------------------------|--------|------------------------------------|--------|
| **(Dollars in thousands)**                               |   | **2004**                           |   | **2003** |   |
|                                                     |   |                               |   |   |   |
| Balance at beginning of period                           |   | $                                  | 5,568  |   | $ | 4,576 |   |
| Loans charged-off:                                       |   |                               |   |   |   |
| Real estate mortgage                                     |   | 41                                 |   | 1 |   |
| Consumer                                                 |   | 230                                |   | 190 |   |
| Commercial                                               |   | —                             |   | 68 |   |
| Total charge-offs                                        |   | 271                                |   | 259 |   |
| Recoveries:                                              |   |                               |   |   |   |
| Real estate mortgage                                     |   | —                             |   | — |   |
| Consumer                                                 |   | 47                                 |   | 33 |   |
| Commercial                                               |   | —                             |   | — |   |
| Total recoveries                                         |   | 47                                 |   | 33 |   |
|                                                     |   |                               |   |   |   |
| Net loans charged-off                                    |   | 224                                |   | 226 |   |
|                                                     |   |                               |   |   |   |
| Provision for loan losses                                |   | 389                                |   | 329 |   |
|                                                     |   |                               |   |   |   |
| Balance at end of period                                 |   | $                                  | 5,733  |   | $ | 4,679 |   |
|                                                     |   |                               |   |   |   |
| Allowance for loan losses to total loans                 |   | 1.01                               | %      | 0.89 | % |
| Net charge-offs to average loans  outstanding            |   | 0.04                               | %      | 0.04 | % |
| Allowance for loan losses to total  non-performing loans |   | 131                                | %      | 94 | % |

 

Theprovision for loan losses increased $60,000, or 18% to $389,000 for the quarterended March 31, 2004, compared to the 2003 period.  The total allowance for loan losses increased $1 million to $5.7million from March 31, 2003 to March 31, 2004. Management increased the provision and allowance for loan losses due tothe continued strong growth in commercial lending and changes in the productmix within the loan portfolios.   Netloan charge-offs remained relatively constant for the comparative periods.

 

Federal regulations require insuredinstitutions to classify their own assets on a regular basis.  The regulations provide for three categoriesof classified loans – substandard, doubtful and loss.  The regulations also contain a special mention and a specificallowance category.  Special mention isdefined as loans that do not currently expose an insured institution to asufficient degree of risk to warrant classification but do possess creditdeficiencies or potential weaknesses deserving management’s close attention.Assets classified as substandard or doubtful require the institution toestablish general allowances for loan losses. If an asset or portion thereof isclassified as loss, the insured institution must either establish specifiedallowances for loan losses in the amount of 100% of the portion of the assetclassified loss, or charge off such amount. At March 31, 2004, on the basis of management’s review of the Bank’sloan portfolio, the Bank had $5.2 million of assets classified substandard,$1.2 million classified as doubtful, $2.6 million classified as special mentionand $106,000 of assets classified as loss.

 

Loans are classified according to estimated loss as follows:  Substandard-2.5% to 35%; Doubtful-5% to 50%;Loss-100%; and Special Mention-2% to 10%. The Bank additionally provides areserve estimate for probable incurred losses in non-classified loans rangingfrom .20% to 3.50%.  Although the Bankmay allocate a portion of the allowance to specific loans or loan categories,the entire allowance is available for active charge-offs.  Allowance estimates are developed by theBank in consultation with regulatory authorities, actual loss experience andare adjusted for current economic conditions. Allowance estimates are considered a prudent measurement of the risk ofthe Bank’s loan portfolio and are applied to individual loans based on loantype.

 

18

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##### **Non-PerformingAssets**

 

Non-performing assets consist of certainrestructured loans where interest rate or other terms have been renegotiated,loans on which interest is no longer accrued, real estate acquired throughforeclosure and repossessed assets.  The Bank does not have any loans greater than 90 days past due still onaccrual.  Loans, including impairedloans under SFAS 114, are placed on non-accrual status when they become pastdue 90 days or more as to principal or interest, unless they are adequatelysecured and in the process of collection. Loans are considered impaired if full principal or interest payments arenot anticipated in accordance with the contractual loan terms.  Impaired loans are carried at the presentvalue of expected future cash flows discounted at the loan’s effective interestrate or at the fair value of the collateral if the loan is collateraldependent.

 

Loans are reviewed on a regular basis andnormal collection procedures are implemented when a borrower fails to make arequired payment on a loan.  If thedelinquency on a mortgage loan exceeds 90 days and is not cured through normalcollection procedures or an acceptable arrangement is not worked out with theborrower, the Bank institutes measures to remedy the default, includingcommencing a foreclosure action. Consumer loans generally are charged off when a loan is deemeduncollectible by management and any available collateral has been disposed of.  Commercial business and real estate loandelinquencies are handled on an individual basis by management with the adviceof the Bank’s legal counsel.  The Bankanticipates that the increase in the volume of non-performing real estate loanswill continue due to the growth of the Bank’s loan portfolio.

 

Interest income on loans is recognized on theaccrual basis except for those loans in a nonaccrual of income status. Theaccrual of interest on impaired loans is discontinued when management believes,after consideration of economic and business conditions and collection effortsthat the borrowers’ financial condition is such that collection of interest isdoubtful, typically after the loan becomes 90 days delinquent.  When interest accrual is discontinued,interest income is subsequently recognized only to the extent cash payments arereceived.

 

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

 

Thefollowing table sets forth information with respect to the Bank’snon-performing assets for the periods indicated.

 
| **(Dollar in thousands)**                                            |                                 | **March 31,  2004** |   | **December  31,  2003** |   |
|----------------------------------------------------------------------|--------------------------------------|---------------------|--------|-------------------------|--------|
|                                                                 |                                 |                |   |                    |   |
| Restructured                                                         |                                 | $                   | 3,018  |                    | $      | 3,037 |   |
| Past due 90 days still on accrual                                    |                                 | —              |   | —                  |   |
| Loans on non-accrual status                                          |                                 | 1,357               |   | 2,281                   |   |
|                                                                 |                                 |                |   |                    |   |
| Total non-performing loans                                           |                                 | 4,375               |   | 5,318                   |   |
| Real estate acquired through foreclosure                             |                                 | 224                 |   | 387                     |   |
| Other repossessed assets                                             |                                 | 39                  |   | 62                      |   |
| Total non-performing assets                                          |                                 | $                   | 4,638  |                    | $      | 5,767 |   |
|                                                                 |                                 |                |   |                    |   |
| Interest income that would have been earned  on non-performing loans |                                 | $                   | 71     |                    | $      | 374 |   |
| Interest income recognized on  non-performing loans                  |                                 | 51                  |   | 227                     |   |
| Ratios:                                                         | Non-performing loans to total loans  |                | 0.77   | %                       | 0.96   | % |
|                                                                 | Non-performing assets to total loans |                | 0.81   | %                       | 1.04   | % |

 

Non-performing assetstotaled $4.6 million at March 31, 2004, a decrease of $1.1 million fromDecember 31, 2003 as a result of a decrease in non-performing loans.  Included in non-performing assets is $3.0million in restructured commercial and residential mortgage loans.  The restructured loans primarily consist oftwo credit relationships aggregating $2.9 million, including a $2.3 millioncommercial relationship and a $536,000

 

19

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residential mortgagerelationship.   The terms of these loanshave been renegotiated to reduce the rate of interest and extend the term thusreducing the amount of cash flow required from the borrower to service theloans.  The terms of the restructuredloans are currently being met.

 

###### **Deposits**

 

Total deposits increased$11.7 million, or 2.2%, to $540.8 million at March 31, 2004, from $529.2million at December 31, 2003.  Thegrowth in deposits for the quarter was the result of an increase innon-interest bearing demand accounts of $4.2 million due to an increase inretail and commercial deposit balances and an increase of $7.5 million in allcategories of interest bearing deposits due to management’s focus on increasingits account relationships.  The Bankplans to continue its deposit gathering initiatives by utilizing pricingstrategies and offering competitive products in its existing markets.

 

The following table summarizes the Bank’sdeposits.

 
|                                 |   | **March 31,  2004** |    | **December  31, 2003** |   |
|--------------------------------------|--------|---------------------|---------|------------------------|--------|
|                                 |   | **(In  Thousands)** |    |
|                                 |   |                |    |                   |   |
| Non-interest bearing demand accounts |   | $                   | 32,881  |                   | $      | 28,632 |   |
| NOW demand accounts                  |   | 69,401              |    | 67,504                 |   |
| Savings accounts                     |   | 87,768              |    | 86,419                 |   |
| Money market deposit accounts        |   | 54,692              |    | 51,773                 |   |
| Certificates of deposit              |   | 296,105             |    | 294,834                |   |
|                                 |   | $                   | 540,847 |                   | $      | 529,162 |   |

 

##### **LIQUIDITY**

 

##### **The Bankmust maintain sufficient liquidity to fund loan demand and routine depositwithdrawal activity.  Liquidity ismanaged by retaining sufficient liquid assets in the form of cash and cashequivalents.  Additional sources offunding and cash flows include, but are not limited to, the sale of securitiesin the available-for-sale portion of the investment portfolio, principalpaydowns on loans and mortgage-backed securities and proceeds realized fromloans held for sale.  The Corporation’sbanking centers also provide access to retail deposit markets.  If large certificate depositors shift to theBank’s competitors or the stock market in response to interest rate changes,the Bank has the ability to replenish those deposits through alternativefunding sources.  Traditionally, theBank has also utilized borrowings from the FHLB to supplement its fundingrequirements.  At March 31, 2004, theBank had an unused approved line of credit in the amount of $80.7 million**and sufficient collateral available to borrow, approximately, anadditional $49.4 million in advances from the FHLB.  Management believes its sources of liquidity are adequate to meetexpected cash needs for the foreseeable future.

 

##### **CAPITAL**

 

During the quarter ended March 31, 2004, theCorporation purchased 60,000 shares of its own common stock.  As a result, total capital decreased by $1.6million, which in turn reduced consolidated regulatory capital.  The Corporation and the Bank continued to bewell capitalized after the transaction. The Corporation’s stock repurchase programs have generally authorizedthe repurchase of up to 10% of the Corporation’s outstanding stock from time totime in the open market or private transactions during an 18-month period.Management considers repurchasing shares when the financial and other terms ofthe purchase and its impact on earnings per share and other financial measuresoffer an attractive return to stockholders. The Corporation adopted its most recent plan on March 18, 2003.

 

In March 2002, a trust formed by of the Corporation completed theprivate placement of 10,000 shares of cumulative trust preferred securitieswith a liquidation preference of $1,000 per security.  The proceeds of the offering were loaned to the Corporation inexchange for floating rate junior subordinated deferrable interestdebentures.  Distributions on thesecurities are payable quarterly at a rate per annum equal to the 3-month LIBORplus 3.60%.  The Corporation undertookthe issuance of these securities to enhance its regulatory capital position asthey are considered as Tier I capital under current regulatory guidelines.  The Corporation intends to utilize theproceeds for general business purposes and to support the Bank’s futureopportunities for growth.

 

20

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###### **Kentucky banking laws limit the amount of dividendsthat may be paid to the Corporation by the Bank without prior approval of theKDFI.  Under these laws, the amount ofdividends that may be paid in any calendar year is limited to current year’snet income, as defined in the laws, combined with the net income of thepreceding two years, less any dividends declared during those periods.  At March 31, 2004, the Bank hadapproximately $12.5 million of retained earnings that could be utilized forpayment of dividends if authorized by its board of directors without priorregulatory approval.**

 

Regulatory agencies measure capital adequacy within a framework thatmakes capital requirements, in part, dependent on the individual risk profilesof financial institutions.  TheCorporation on a consolidated basis and the Bank continue to exceed theregulatory requirements for Tier I, Tier I leverage and total risk-basedcapital.  Management intends to maintaina capital position that meets or exceeds the “well capitalized” requirements asdefined by the FDIC.  The Bank’s averagestockholders’ equity to average assets ratio declined to 8.23% during thequarter ended March 31, 2004 from 8.61% in the same quarter during 2003 dueprincipally to stock repurchases.  Theactual and required capital amounts and ratios are presented below:

 
|                                                 |   |       |   |                   |   | **For  Capital**       |   | **To Be  Considered  Well Capitalized  Under Prompt  Correction** |   |
|------------------------------------------------------|--------|------------|--------|------------------------|--------|------------------------|--------|-------------------------------------------------------------------|--------|
|                                                 |   | **Actual** |   | **Adequacy  Purposes** |   | **Action  Provisions** |   |
| **(Dollars in thousands)**                           |   | **Amount** |   | **Ratio**              |   | **Amount**             |   | **Ratio**                                                         |   | **Amount** |   | **Ratio** |   |
| **As of March 31, 2004:**                            |   |       |   |                   |   |                   |   |                                                              |   |   |   |   |   |
| Total risk-based capital (to risk- weighted  assets) |   |       |   |                   |   |                   |   |                                                              |   |   |   |   |   |
| Consolidated                                         |   | $          | 63,157 |                   | 11.6   | %                      | $      | 43,518                                                            |   | 8.0 | % | $ | 54,397 |   | 10.0 | % |
| Bank                                                 |   | 60,323     |   | 11.1                   |   | 43,333                 |   | 8.0                                                               |   | 54,167 |   | 10.0 |   |
| Tier I capital (to risk-weighted assets)             |   |       |   |                   |   |                   |   |                                                              |   |   |   |   |   |
| Consolidated                                         |   | 57,200     |   | 10.5                   |   | 21,759                 |   | 4.0                                                               |   | 32,638 |   | 6.0 |   |
| Bank                                                 |   | 54,366     |   | 10.0                   |   | 21,667                 |   | 4.0                                                               |   | 32,500 |   | 6.0 |   |
| Tier I capital (to average assets)                   |   |       |   |                   |   |                   |   |                                                              |   |   |   |   |   |
| Consolidated                                         |   | 57,200     |   | 8.4                    |   | 27,273                 |   | 4.0                                                               |   | 34,092 |   | 5.0 |   |
| Bank                                                 |   | 54,366     |   | 8.0                    |   | 27,227                 |   | 4.0                                                               |   | 34,034 |   | 5.0 |   |
|                                                      |        |            |        |                        |        |                        |        |                                                                   |        |  |  |  |  |  |  |  |

 
|                                                 |   |       |   |                   |   | **For  Capital**       |   | **To Be  Considered  Well Capitalized  Under Prompt  Correction** |   |
|------------------------------------------------------|--------|------------|--------|------------------------|--------|------------------------|--------|-------------------------------------------------------------------|--------|
|                                                 |   | **Actual** |   | **Adequacy  Purposes** |   | **Action  Provisions** |   |
| **(Dollars in thousands)**                           |   | **Amount** |   | **Ratio**              |   | **Amount**             |   | **Ratio**                                                         |   | **Amount** |   | **Ratio** |   |
| **As of December 31,  2003:**                        |   |       |   |                   |   |                   |   |                                                              |   |   |   |   |   |
| Total risk-based capital (to risk- weighted  assets) |   |       |   |                   |   |                   |   |                                                              |   |   |   |   |   |
| Consolidated                                         |   | $          | 63,094 |                   | 12.0   | %                      | $      | 42,073                                                            |   | 8.0 | % | $ | 52,591 |   | 10.0 | % |
| Bank                                                 |   | 60,602     |   | 11.6                   |   | 41,853                 |   | 8.0                                                               |   | 52,316 |   | 10.0 |   |
| Tier I capital (to risk-weighted assets)             |   |       |   |                   |   |                   |   |                                                              |   |   |   |   |   |
| Consolidated                                         |   | 57,305     |   | 10.9                   |   | 21,037                 |   | 4.0                                                               |   | 31,555 |   | 6.0 |   |
| Bank                                                 |   | 54,813     |   | 10.5                   |   | 20,926                 |   | 4.0                                                               |   | 31,389 |   | 6.0 |   |
| Tier I capital (to average assets)                   |   |       |   |                   |   |                   |   |                                                              |   |   |   |   |   |
| Consolidated                                         |   | 57,305     |   | 8.6                    |   | 26,718                 |   | 4.0                                                               |   | 33,398 |   | 5.0 |   |
| Bank                                                 |   | 54,813     |   | 8.2                    |   | 26,718                 |   | 4.0                                                               |   | 33,398 |   | 5.0 |   |
|                                                      |        |            |        |                        |        |                        |        |                                                                   |        |  |  |  |  |  |  |  |

 

**PRELIMINARYNOTE REGARDING FORWARD-LOOKING STATEMENTS**

 

Statements contained in this report that arenot statements of historical fact constitute forward-looking statements withinthe meaning of Section 21E of the Securities Exchange Act of 1934, asamended.  In addition, the Corporationmay make forward-looking statements in future filings with the Securities andExchange Commission, in press releases, and in oral and written statements madeby 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, capitalstructure and other financial items; (2) statements of plans and objectives

 

21

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of the Corporation or its management or Boardof Directors; (3) statements regarding future events, actions or economicperformance; and (4) statements of assumptions underlying such statements.  Words such as “believes,” “anticipates,”“expects,” “intends,” “plans,” “targeted,” and similar expressions are intendedto identify forward-looking statements, but are not the exclusive means ofidentifying such statements.

 

Forward-looking statements involve risks and uncertainties that maycause actual results to differ materially from those indicated by theforward-looking statements.  Some of theevents or circumstances that could cause such differences include thefollowing: changes in general economic conditions and economic conditions inKentucky and the markets served by the Corporation any of which may affect,among other things, the level of non-performing assets, charge-offs, andprovision expense; changes in the interest rate environment which may reduceinterest margins and impact funding sources; changes in market rates and priceswhich may adversely impact the value of financial products includingsecurities, loans and deposit; changes in tax laws, rules and regulations;various monetary and fiscal policies and regulations, including those determinedby the Federal Reserve Board, the Federal Deposit Insurance Corporation and theKentucky Department of Financial Institutions; competition with other local andregional commercial banks, savings banks, credit unions and other non-bankfinancial institutions; ability to grow core businesses; ability to develop andintroduce new banking-related products, services and enhancements and gainmarket acceptance of such products; and management’s ability to manage theseand other risks.

 

###### **Item3.  QUANTITATIVE AND QUALITATIVEDISCLOSURES ABOUT MARKET RISK**

 

###### **Asset and Liability Management**

 

To minimize the volatilityof net interest income and exposure to economic loss that may result fromfluctuating interest rates, the Bank manages its exposure to adverse changes ininterest rates through asset and liability management activities withinguidelines established by its Asset Liability Committee (“ALCO”).  The ALCO, which includes senior managementrepresentatives, has the responsibility for approving and ensuring compliancewith asset/liability management polices of the Corporation.  Interest rate risk is the exposure toadverse changes in the net interest income as a result of market fluctuationsin interest rates.  The ALCO, on anongoing basis, monitors interest rate and liquidity risk in order to implementappropriate funding and balance sheet strategies.  Management considers interest rate risk to be the Bank’s mostsignificant market risk.

 

The Bank utilizes an earnings simulationmodel to analyze net interest income sensitivity.  Potential changes in market interest rates and their subsequenteffects on net interest income are then evaluated.  The model projects the effect of instantaneous movements ininterest rates of both 100 and 200 basis points.  Assumptions based on the historical behavior of the Bank’sdeposit rates and balances in relation to changes in interest rates are alsoincorporated into the model.  Theseassumptions are inherently uncertain and, as a result, the model cannotprecisely measure future net interest income or precisely predict the impact offluctuations in market interest rates on net interest income.  Actual results will differ from the model’ssimulated results due to timing, magnitude and frequency of interest ratechanges as well as changes in market conditions and the application and timingof various management strategies.

 

The Bank’s interestsensitivity profile was asset sensitive at both March 31, 2004 and December 31,2003.  Given a sustained 100 basis pointdecrease in rates, the Bank’s base net interest income would decrease by anestimated 3.93% at March 31, 2004 compared to a decrease of 4.34% at December31, 2003.  Given a 100 basis pointincrease in interest rates the Bank’s base net interest income would increaseby an estimated 2.14% at March 31, 2004 compared to an increase of 1.63% atDecember 31, 2003.

 

The interest sensitivity of the Corporation at any point in time willbe affected by a number of factors. These factors include the mix of interest sensitive assets andliabilities as well as their relative pricing schedules.  It is also influenced by market interestrates, decay rates and prepayment speed assumptions.

 

As demonstrated by the March 31, 2004 and December 31, 2003 sensitivitytables presented below, the Bank is continuing to transition away from aliability sensitive to an asset sensitive position as compared to priorperiods. The change in the Bank’s asset sensitivity is a result of changes inthe loan portfolio to a greater extent than changes

 

22

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in the investment portfolio.** **While lending practices haveshifted to shorter term, variable rate commercial and consumer loans, thatimpact will be evidenced in smaller degrees over time.

 

The Corporation’s sensitivity to interest rate changes is presentedbased on data as of March 31, 2004 and December 31, 2003 annualized to a oneyear period.

 
|                           |   | **March 31,  2004**    |   |
|--------------------------------|--------|------------------------|--------|
|                           |   | **Decrease  in Rates** |   |   |   | **Increase  in Rates** |   |
| **(Dollars in thousands)**     |   | **200  Basis Points**  |   | **100  Basis Points** |   | **Base** |   | **100  Basis Points** |   | **200  Basis Points** |   |
|                           |   |                   |   |   |   |   |   |   |   |   |   |
| **Projected interest income**  |   |                   |   |   |   |   |   |   |   |   |   |
| Loans                          |   | $                      | 32,656 |   | $ | 34,895 |   | $ | 36,961 |   | $ | 38,865 |   | $ | 40,672 |   |
| Investments                    |   | 1,105                  |   | 1,134 |   | 1,918 |   | 2,470 |   | 3,027 |   |
| **Total interest income**      |   | 33,761                 |   | 36,029 |   | 38,879 |   | 41,335 |   | 43,699 |   |
|                           |   |                   |   |   |   |   |   |   |   |   |   |
| **Projected interest expense** |   |                   |   |   |   |   |   |   |   |   |   |
| Deposits                       |   | 6,458                  |   | 7,885 |   | 9,737 |   | 11,650 |   | 13,563 |   |
| Borrowed funds                 |   | 3,756                  |   | 3,756 |   | 3,756 |   | 3,756 |   | 3,756 |   |
| **Total interest expense**     |   | 10,214                 |   | 11,641 |   | 13,493 |   | 15,406 |   | 17,319 |   |
|                           |   |                   |   |   |   |   |   |   |   |   |   |
| **Net interest income**        |   | $                      | 23,547 |   | $ | 24,388 |   | $ | 25,386 |   | $ | 25,929 |   | $ | 26,380 |   |
| Change from base               |   | $                      | (1,839 | ) | $ | (998 | ) |   |   | $ | 543 |   | $ | 994 |   |
| % Change from base             |   | (7.24                  | )%     | (3.93 | )% |   |   | 2.14 | % | 3.91 | % |
|                           |   |                   |   |
|                           |   |                   |   |
|                           |   | **December 31, 2003**  |   |
|                           |   | **Decrease in Rates**  |   |   |   | **Increase in Rates** |   |
| **(Dollars in thousands)**     |   | **200  Basis Points**  |   | **100  Basis Points** |   | **Base** |   | **100  Basis Points** |   | **200  Basis Points** |   |
|                           |   |                   |   |   |   |   |   |   |   |   |   |
| **Projected interest income**  |   |                   |   |   |   |   |   |   |   |   |   |
| Loans                          |   | $                      | 32,629 |   | $ | 34,706 |   | $ | 36,625 |   | $ | 38,380 |   | $ | 40,033 |   |
| Investments                    |   | 1,179                  |   | 1,286 |   | 2,250 |   | 2,764 |   | 3,283 |   |
| **Total interest income**      |   | 33,808                 |   | 35,992 |   | 38,875 |   | 41,144 |   | 43,316 |   |
|                           |   |                   |   |   |   |   |   |   |   |   |   |
| **Projected interest expense** |   |                   |   |   |   |   |   |   |   |   |   |
| Deposits                       |   | 6,925                  |   | 8,283 |   | 10,018 |   | 11,806 |   | 13,594 |   |
| Borrowed funds                 |   | 4,051                  |   | 4,130 |   | 4,208 |   | 4,287 |   | 4,366 |   |
| **Total interest expense**     |   | 10,976                 |   | 12,413 |   | 14,226 |   | 16,093 |   | 17,960 |   |
|                           |   |                   |   |   |   |   |   |   |   |   |   |
| **Net interest income**        |   | $                      | 22,832 |   | $ | 23,579 |   | $ | 24,649 |   | $ | 25,051 |   | $ | 25,356 |   |
| Change from base               |   | $                      | (1,817 | ) | $ | (1,070 | ) |   |   | $ | 402 |   | $ | 707 |   |
| % Change from base             |   | (7.37                  | )%     | (4.34 | )% |   |   | 1.63 | % | 2.87 | % |

 

###### **Item 4.  CONTROLS AND PROCEDURES**

 

As of the end of the period covered by this report, the Corporationcarried out an evaluation, under the supervision and with the participation ofthe Corporation’s management, including the Corporation’s Chief ExecutiveOfficer and Chief Financial Officer, of the effectiveness of the design andoperation of the Corporation’s disclosure controls and procedures. Based on theforegoing, the Corporation’s Chief Executive Officer and Chief FinancialOfficer concluded that the Corporation’s disclosure controls and procedureswere effective, in all material respects, to ensure that information requiredto be disclosed in the reports the Corporation files and submits under theExchange Act is recorded, processed, summarized and reported as and whenrequired.

 

The Corporation also conducted an evaluationof internal control over financial reporting to determine whether any changesoccurred during the quarter covered by this report that have materiallyaffected, or are reasonably likely to materially affect, the Corporation’sinternal control over financial reporting. Based on this evaluation, there hasbeen no such change during the quarter covered by this report.

 

23

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##### **Part II -  OTHER INFORMATION**

 

**Item 1.****           ****Legal Proceedings**

 

Although the Bank is, from time to time, involved in various legalproceedings in the normal course of business, there are no material pendinglegal proceedings to which the Corporation, the Bank, or its subsidiaries is aparty, that will have an adverse effect on our liquidity, financial condition,or results of operations.

 

**Item 2.****           ****Changes in Securities, Useof Proceeds and Issuer Purchases of Equity Securities**

 

(e)  Issuer Purchases of Equity Securities

 

The following table providesinformation as of March 31, 2004 with respect to shares of Common Stockrepurchased by the Company during the quarter then ended:

 
| **Period**        |   | **Total  number  of shares  purchased** |   | **Average  price paid per  share** |   | **Total  number of  shares purchased  as part of publicly  announced plans  or programs** |   | **Maximum  number  of shares that  may yet be purchased  under the plans or  programs** |    |
|-------------------|--------|-----------------------------------------|--------|------------------------------------|--------|-------------------------------------------------------------------------------------------|--------|-----------------------------------------------------------------------------------------|---------|
|              |   |                                    |   |                               |   |                                                                                      |   |                                                                                    |    |
| 01/01/04-01/31/04 |   | —                                  |   | —                             |   | —                                                                                    |   | 253,645                                                                                 |    |
| 02/01/04-02/29/04 |   | —                                  |   | —                             |   | —                                                                                    |   | 253,645                                                                                 |    |
| 03/01/04-03/31/04 |   | 60,000                                  |   | $                                  | 26.00  |                                                                                      | 60,000 |                                                                                    | 193,645 |   |
|              |   |                                    |   |                               |   |                                                                                      |   |                                                                                    |    |
| Total             |   | 60,000                                  |   | $                                  | 26.00  |                                                                                      | 60,000 |                                                                                    | 193,645 |   |

 

**Item 3.****           ****Defaults Upon SeniorSecurities**

 

NotApplicable

 

**Item 4.****           ****Submission of Matters to aVote of Security Holders**

 

NotApplicable

 

**Item 5.****            Other Information**

 

Beginning on July 1, 2003, the Corporation’s common stock has beenincluded in the small-cap Russell 2000 index, comprised of the U.S. companiesranked from 1,001 to 3,000 by total market capitalization.  If the Corporation does not remain in theRussell 2000 following the next annual reconsitution in May 2004, it may have ashort-term adverse impact on the trading price of the Corporation’s stock asindex fund managers adjust their portfolios.

 

**Item 6.****           ****Exhibits:**

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

 

**Reports on Form 8-K:**

 

The Corporation filed a Form 8-K on February 3, 2004announcing its annual and fourth quarter ended December 31, 2003, earnings.

 

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###### **FIRSTFEDERAL FINANCIAL CORPORATION OF KENTUCKY**

 

## **SIGNATURES**

 

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

 

 
| DATE:  May 7, 2004 | BY:  (S) | B.  Keith Johnson                      |   |
|--------------------|----------|----------------------------------------|--------|
|               |     | B.  Keith Johnson                      |
|               |     | President  and Chief Executive Officer |
|               |     |                                   |
|               |     |                                   |
| DATE:May 7, 2004   | BY:  (S) | Gregory  S. Schreacke                  |   |
|               |     | Gregory  S. Schreacke                  |
|               |     | Chief  Financial Officer               |

 

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## **INDEX TO EXHIBITS**

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

 

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