**UNITED STATESSECURITIES AND EXCHANGE COMMISSION**

**Washington, D.C.  20549**

** **

**FORM 10-Q**

** **

**(Mark One)**

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

**For the quarterly period ended June 30, 2006**

**OR**

** **

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

**Commission File Number 0-18832**

**First Financial Service Corporation**

(Exact Name of Registrant as specified in its charter)

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

** **

**2323 Ring Road****Elizabethtown, Kentucky  42701**(Address ofprincipal executive offices)(Zip Code)

**(270) 765-2131**(Registrant’stelephone number, including area code)

Indicateby check mark whether the registrant (1) has filed all reports required to befiled by Section 13 or 15(d) of the Securities Exchange Act of 1934 during thepreceding 12 months (or for such shorter period that the registrant wasrequired to file such reports), and (2) has been subject to such filingrequirements for the past 90 days.  Yes **x**  No o

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

LargeAccelerated Filer o   Accelerated Filer **x****  **Non-AcceleratedFiler o

Indicateby a check mark whether the registrant is a shell company (as defined in Rule12b-2 of the Exchange Act).  Yes o  No **x**

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

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

 

 

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**FIRST FINANCIALSERVICE CORPORATION**

**TABLEOF CONTENTS**
| **PART I****—**FINANCIAL  INFORMATION |                                                                                        |
|--------------------------------------------|---------------------------------------------------------------------------------------------|
| ** **                                 |                                                                                        |   |
| **Item 1.**                                | Consolidated  Financial Statements and Notes to Consolidated Financial Statements           |   |
|                                       |                                                                                        |   |
| **Item 2.**                                | Management’s  Discussion and Analysis 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 1A.**                               | Risk  Factors                                                                               |   |
| ** **                                 |                                                                                        |   |
| **Item 2.**                                | Unregistered  Sales of Equity Securities and Use of Proceeds                                |   |
| ** **                                 |                                                                                        |   |
| **Item 3.**                                | Defaults upon  Senior Securities                                                            |   |
| ** **                                 |                                                                                        |   |
| **Item 4.**                                | Submission of  Matters to a Vote of Security Holders                                        |   |
| ** **                                 |                                                                                        |   |
| **Item 5.**                                | Other Information                                                                           |   |
| ** **                                 |                                                                                        |   |
| **Item  6.**                               | Exhibits                                                                                    |   |
|                                       |                                                                                        |   |
|                                       | SIGNATURES                                                                                  |   |

#  

 

2

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**FORWARD-LOOKINGSTATEMENTS**

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

Forward-looking statementsinvolve risks and uncertainties that may cause actual results to differmaterially from those indicated by the forward-looking statements.  In addition to those risks described under “Item1A Risk Factors” of this report and our Annual Report on Form 10-K for the yearended December 31, 2005, some of the events or circumstances that could causesuch differences include the following: changes in general economic conditionsand economic conditions in Kentucky and the markets served by the Corporationany of which may affect, among other things, the level of non-performingassets, charge-offs, and provision for loan loss expense; changes in interestrates that may reduce interest margins and impact funding sources; changes inmarket rates and prices which may adversely impact the value of financialproducts including securities, loans and deposit; changes in tax laws, rulesand regulations; various monetary and fiscal policies and regulations,including those determined by the Federal Reserve Board, the Federal DepositInsurance Corporation and the Kentucky Office of Financial Institutions; competitionwith other local and regional commercial banks, savings banks, credit unionsand other non-bank financial institutions; our ability to grow core businesses;our ability to develop and introduce new banking-related products, services andenhancements and gain market acceptance of such products; and management’sability to manage these and other risks.

3

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**Item 1.**

**FIRSTFINANCIAL SERVICE CORPORATIONConsolidated Balance Sheets(Unaudited)**

** **
| ** **                                                                                                                                                | ** ** | **June 30,**                                                      | ** ** | **December 31,** | ** ** |
|-----------------------------------------------------------------------------------------------------------------------------------------------------------|------------|------------------------------------------------------------------------|------------|-----------------------|------------|
| ** **                                                                                                                                                | ** ** | **2006**                                                               | ** ** | **2005**              | ** ** |
| **ASSETS**                                                                                                                                                | ** ** | **(Dollars in thousands, except share data)** | ** ** |
|                                                                                                                                                      |       |                                                                   |       |                  |       |
| Cash and due from banks                                                                                                                                   |       | $                                                                      | 17,676     |                  | $          | 20,451 |   |
|                                                                                                                                                      |       |                                                                   |       |                  |       |
| Securities  available-for-sale                                                                                                                            |       | 26,833                                                                 |       | 28,324                |       |
| Securities  held-to-maturity, fair value of $27,843 Jun (2006) and $32,434 Dec (2005)                                                                     |       | 28,712                                                                 |       | 33,231                |       |
| Total securities                                                                                                                                          |       | 55,545                                                                 |       | 61,555                |       |
|                                                                                                                                                      |       |                                                                   |       |                  |       |
| Loans held for sale                                                                                                                                       |       | 1,038                                                                  |       | 597                   |       |
| Loans, net of unearned  fees                                                                                                                              |       | 664,969                                                                |       | 642,520               |       |
| Allowance for loan  losses                                                                                                                                |       | (7,408                                                                 | )          | (7,377                | )          |
| Net loans  receivable                                                                                                                                     |       | 658,599                                                                |       | 635,740               |       |
|                                                                                                                                                      |       |                                                                   |       |                  |       |
| Federal Home Loan Bank  stock                                                                                                                             |       | 7,400                                                                  |       | 7,194                 |       |
| Cash surrender value of  life insurance                                                                                                                   |       | 7,784                                                                  |       | 7,637                 |       |
| Premises and equipment,  net                                                                                                                              |       | 20,374                                                                 |       | 19,134                |       |
| Real estate owned:                                                                                                                                        |       |                                                                   |       |                  |       |
| Acquired through  foreclosure                                                                                                                             |       | 844                                                                    |       | 1,022                 |       |
| Held for  development                                                                                                                                     |       | 337                                                                    |       | 337                   |       |
| Other repossessed  assets                                                                                                                                 |       | 104                                                                    |       | 119                   |       |
| Goodwill                                                                                                                                                  |       | 8,384                                                                  |       | 8,384                 |       |
| Accrued interest  receivable                                                                                                                              |       | 3,162                                                                  |       | 3,051                 |       |
| Other assets                                                                                                                                              |       | 1,644                                                                  |       | 1,889                 |       |
|                                                                                                                                                      |       |                                                                   |       |                  |       |
| **TOTAL  ASSETS**                                                                                                                                         |       | $                                                                      | 781,853    |                  | $          | 766,513 |   |
| ** **                                                                                                                                                |       |                                                                   |       |                  |       |
| **LIABILITIES AND STOCKHOLDERS’ EQUITY**                                                                                              | ** ** | ** **                                                             | ** ** | ** **            | ** ** |
| **LIABILITIES:**                                                                                                                                          | ** ** | ** **                                                             | ** ** | ** **            | ** ** |
| Deposits:                                                                                                                                                 |       |                                                                   |       |                  |       |
| Non-interest  bearing                                                                                                                                     |       | $                                                                      | 43,726     |                  | $          | 39,145 |   |
| NOW demand                                                                                                                                                |       | 72,718                                                                 |       | 76,848                |       |
| Savings                                                                                                                                                   |       | 88,886                                                                 |       | 99,879                |       |
| Money market                                                                                                                                              |       | 58,159                                                                 |       | 66,175                |       |
| Certificates of  deposit                                                                                                                                  |       | 351,509                                                                |       | 309,059               |       |
| Total deposits                                                                                                                                            |       | 614,998                                                                |       | 591,106               |       |
|                                                                                                                                                      |       |                                                                   |       |                  |       |
| Federal funds purchased                                                                                                                                   |       | 7,000                                                                  |       | 19,500                |       |
| Advances from Federal  Home Loan Bank                                                                                                                     |       | 78,297                                                                 |       | 78,375                |       |
| Subordinated debentures                                                                                                                                   |       | 10,000                                                                 |       | 10,000                |       |
| Accrued interest  payable                                                                                                                                 |       | 444                                                                    |       | 389                   |       |
| Accounts payable and  other liabilities                                                                                                                   |       | 1,877                                                                  |       | 1,023                 |       |
| Deferred income taxes                                                                                                                                     |       | 1,208                                                                  |       | 1,379                 |       |
|                                                                                                                                                      |       |                                                                   |       |                  |       |
| **TOTAL  LIABILITIES**                                                                                                                                    |       | 713,824                                                                |       | 701,772               |       |
| **STOCKHOLDERS’ EQUITY:**                                                                                                                       | ** ** | ** **                                                             | ** ** | ** **            | ** ** |
| Serial preferred stock,  5,000,000 shares authorized and unissued                                                                                         |       | —                                                                 |       | —                |       |
| Common stock, $1 par  value per share; authorized 10,000,000 shares; issued and outstanding,  3,984,230 shares Jun (2006) and 3,983,530 shares Dec (2005) |       | 3,984                                                                  |       | 3,984                 |       |
| Additional paid-in  capital                                                                                                                               |       | 16,449                                                                 |       | 16,409                |       |
| Retained earnings                                                                                                                                         |       | 47,871                                                                 |       | 44,291                |       |
| Accumulated other  comprehensive income (loss)                                                                                                            |       | (275                                                                   | )          | 57                    |       |
|                                                                                                                                                      |       |                                                                   |       |                  |       |
| **TOTAL  STOCKHOLDERS’ EQUITY**                                                                                                                      |       | 68,029                                                                 |       | 64,741                |       |
| **TOTAL LIABILITIES AND  STOCKHOLDERS’ EQUITY**                                                                                                      |       | $                                                                      | 781,853    |                  | $          | 766,513 |   |

*** ***

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

4

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**FIRST FINANCIAL SERVICE CORPORATIONConsolidated Statements of Income(Unaudited)**
| ** **                                                                      | ** ** | **Three Months Ended  June 30,** | ** ** | **Six Months Ended  June 30,** | ** ** |
|---------------------------------------------------------------------------------|------------|-------------------------------------------------|------------|-----------------------------------------------|------------|
| **(Dollars in thousands, except per share data)** | ** ** | **2006**                                        | ** ** | **2005**                                      | ** ** | **2006** | ** ** | **2005** | ** ** |
| ** **                                                                      | ** ** | ** **                                      | ** ** | ** **                                    | ** ** | ** ** | ** ** | ** ** | ** ** |
| **Interest  Income:**                                                           | ** ** | ** **                                      | ** ** | ** **                                    | ** ** | ** ** | ** ** | ** ** | ** ** |
| Interest and fees on loans                                                      |       | $                                               | 12,287     |                                          | $          | 10,272 |   | $ | 24,002 |   | $ | 20,226 |   |
| Interest and dividends on investments and deposits                              |       | 824                                             |       | 755                                           |       | 1,601 |   | 1,431 |   |
| Total interest income                                                           |       | 13,111                                          |       | 11,027                                        |       | 25,603 |   | 21,657 |   |
|                                                                            |       |                                            |       |                                          |       |   |   |   |   |
| **Interest  Expense:**                                                          | ** ** | ** **                                      | ** ** | ** **                                    | ** ** | ** ** | ** ** | ** ** | ** ** |
| Deposits                                                                        |       | 4,561                                           |       | 3,146                                         |       | 8,606 |   | 6,039 |   |
| Federal funds purchased                                                         |       | 15                                              |       | —                                        |       | 88 |   | — |   |
| Federal Home Loan Bank advances                                                 |       | 941                                             |       | 951                                           |       | 1,874 |   | 1,895 |   |
| Subordinated debentures                                                         |       | 223                                             |       | 175                                           |       | 429 |   | 332 |   |
| Total interest expense                                                          |       | 5,740                                           |       | 4,272                                         |       | 10,997 |   | 8,266 |   |
|                                                                            |       |                                            |       |                                          |       |   |   |   |   |
| Net interest  income                                                            |       | 7,371                                           |       | 6,755                                         |       | 14,606 |   | 13,391 |   |
| Provision for  loan losses                                                      |       | 9                                               |       | 41                                            |       | 97 |   | 316 |   |
| Net interest  income after provision for loan losses                            |       | 7,362                                           |       | 6,714                                         |       | 14,509 |   | 13,075 |   |
|                                                                            |       |                                            |       |                                          |       |   |   |   |   |
| **Non-interest  Income:**                                                       | ** ** | ** **                                      | ** ** | ** **                                    | ** ** | ** ** | ** ** | ** ** | ** ** |
| Customer service fees on deposit accounts                                       |       | 1,396                                           |       | 1,319                                         |       | 2,627 |   | 2,439 |   |
| Gain on sale of mortgage loans                                                  |       | 240                                             |       | 168                                           |       | 403 |   | 351 |   |
| Brokerage commissions                                                           |       | 88                                              |       | 78                                            |       | 171 |   | 157 |   |
| Gain on sale of real estate held for development                                |       | —                                          |       | 143                                           |       | — |   | 143 |   |
| Gain on sale of investments                                                     |       | —                                          |       | —                                        |       | — |   | 381 |   |
| Other income                                                                    |       | 352                                             |       | 268                                           |       | 587 |   | 527 |   |
| Total non-interest income                                                       |       | 2,076                                           |       | 1,976                                         |       | 3,788 |   | 3,998 |   |
|                                                                            |       |                                            |       |                                          |       |   |   |   |   |
| **Non-interest  Expense:**                                                      | ** ** | ** **                                      | ** ** | ** **                                    | ** ** | ** ** | ** ** | ** ** | ** ** |
| Employee compensation and benefits                                              |       | 2,817                                           |       | 2,856                                         |       | 5,794 |   | 5,634 |   |
| Office occupancy expense and equipment                                          |       | 514                                             |       | 503                                           |       | 1,067 |   | 998 |   |
| Marketing and advertising                                                       |       | 214                                             |       | 195                                           |       | 419 |   | 383 |   |
| Outside services and data processing                                            |       | 641                                             |       | 630                                           |       | 1,257 |   | 1,227 |   |
| Bank franchise tax                                                              |       | 224                                             |       | 195                                           |       | 443 |   | 398 |   |
| Other expense                                                                   |       | 904                                             |       | 897                                           |       | 1,743 |   | 1,781 |   |
| Total non-interest expense                                                      |       | 5,314                                           |       | 5,276                                         |       | 10,723 |   | 10,421 |   |
|                                                                            |       |                                            |       |                                          |       |   |   |   |   |
| Income before  income taxes                                                     |       | 4,124                                           |       | 3,414                                         |       | 7,574 |   | 6,652 |   |
| Income taxes                                                                    |       | 1,369                                           |       | 1,120                                         |       | 2,481 |   | 2,172 |   |
| **Net  Income**                                                                 |       | $                                               | 2,755      |                                          | $          | 2,294 |   | $ | 5,093 |   | $ | 4,480 |   |
|                                                                            |       |                                            |       |                                          |       |   |   |   |   |
| Shares  applicable to basic income per share                                    |       | 3,983,880                                       |       | 4,005,857                                     |       | 3,983,730 |   | 4,008,489 |   |
| **Basic  income per share**                                                     |       | $                                               | 0.69       |                                          | $          | 0.57 |   | $ | 1.28 |   | $ | 1.12 |   |
|                                                                            |       |                                            |       |                                          |       |   |   |   |   |
| Shares  applicable to diluted income per share                                  |       | 4,019,962                                       |       | 4,024,472                                     |       | 4,018,035 |   | 4,028,504 |   |
| **Diluted income per share**                                                    |       | $                                               | 0.69       |                                          | $          | 0.57 |   | $ | 1.27 |   | $ | 1.11 |   |

*** ***

***See notes to the unaudited consolidated financial statements.***

5

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**FIRSTFINANCIAL SERVICE CORPORATION Consolidated Statements of Comprehensive Income(Unaudited)**

** **
| ** **                                                     | ** ** | **Three Months Ended** | ** ** | **Six Months Ended** | ** ** |
|----------------------------------------------------------------|------------|----------------------------------|------------|--------------------------------|------------|
| ** **                                                     | ** ** | **June 30,**                | ** ** | **June 30,**              | ** ** |
| **(Dollars in thousands)**                           | ** ** | **2006**                         | ** ** | **2005**                       | ** ** | **2006** | ** ** | **2005** | ** ** |
| ** **                                                     | ** ** | ** **                       | ** ** | ** **                     | ** ** | ** ** | ** ** | ** ** | ** ** |
| **Net  Income**                                                |       | $                                | 2,755      |                           | $          | 2,294 |   | $ | 5,093 |   | $ | 4,480 |   |
| Other  comprehensive income (loss):                            |       |                             |       |                           |       |   |   |   |   |
| Change in unrealized gain (loss)  on securities                |       | (393                             | )          | 98                             |       | (503 | ) | (149 | ) |
| Reclassification of realized amount                            |       | —                           |       | —                         |       | — |   | (381 | ) |
| Net unrealized gain (loss) recognized in  comprehensive income |       | (393                             | )          | 98                             |       | (503 | ) | (530 | ) |
| Tax effect                                                     |       | 133                              |       | (33                            | )          | 171 |   | 180 |   |
| Total other comphrehensive income (loss)                       |       | (260                             | )          | 65                             |       | (332 | ) | (350 | ) |
|                                                           |       |                             |       |                           |       |   |   |   |   |
| **Comprehensive Income**                                       |       | $                                | 2,495      |                           | $          | 2,359 |   | $ | 4,761 |   | $ | 4,130 |   |

*** ***

***See notes to the unaudited consolidated financial statements.***

6

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**FIRST FINANCIAL SERVICECORPORATION**

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

** **
| ** **                                                                                  | ** ** | ** ** | ** ** | ** ** | ** ** | ** **     | ** ** | ** **   | ** ** | **Accumulated**              | ** ** | ** ** | ** ** |
|---------------------------------------------------------------------------------------------|------------|------------|------------|------------|------------|----------------|------------|--------------|------------|------------------------------|------------|------------|------------|
| ** **                                                                                  | ** ** | ** ** | ** ** | ** ** | ** ** | ** **     | ** ** | ** **   | ** ** | **Other**                    | ** ** | ** ** | ** ** |
| ** **                                                                                  | ** ** | ** ** | ** ** | ** ** | ** ** | **Additional** | ** ** | ** **   | ** ** | **Comprehensive**            | ** ** | ** ** | ** ** |
| ** **                                                                                  | ** ** | **Common** | ** ** | **Stock**  | ** ** | **Paid-in**    | ** ** | **Retained** | ** ** | **Income, Net of** | ** ** | ** ** | ** ** |
| ** **                                                                                  | ** ** | **Shares** | ** ** | **Amount** | ** ** | **Capital**    | ** ** | **Earnings** | ** ** | **Tax**                      | ** ** | **Total**  | ** ** |
|                                                                                        |       |       |       |       |       |           |       |         |       |                         |       |       |       |
| **Balance,  December 31, 2005**                                                             |       | 3,984      |       | $          | 3,984      |           | $          | 16,409       |       | $                            | 44,291     |       | $          | 57 |   | $ | 64,741 |   |
| Net income                                                                                  |       |       |       |       |       |           |       | 5,093        |       |                         |       | 5,093      |       |
| Exercise of  stock options                                                                  |       |       |       |       |       | 9              |       |         |       |                         |       | 9          |       |
| Compensation  expense for  stock options                                                    |       |       |       |       |       | 31             |       |         |       |                         |       | 31         |       |
| Net change in  unrealized   gains (losses) on   securities available-  for-sale, net of tax |       |       |       |       |       |           |       |         |       | (332                         | )          | (332       | )          |
| Cash dividends  declared  ($.38 per share)                                                  |       | —     |       | —     |       | —         |       | (1,513       | )          | —                       |       | (1,513     | )          |
| **Balance, June 30, 2006**                                                                  |       | 3,984      |       | $          | 3,984      |           | $          | 16,449       |       | $                            | 47,871     |       | $          | (275 | ) | $ | 68,029 |   |

*** ***

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

7

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**FIRSTFINANCIAL SERVICE CORPORATION Consolidated Statements of Cash Flows(Dollars In Thousands)(Unaudited)**

** **
| ** **                                                                          | ** ** | **Six Months Ended** | ** ** |
|-------------------------------------------------------------------------------------|------------|--------------------------------|------------|
| ** **                                                                          | ** ** | **June 30,**              | ** ** |
| ** **                                                                          | ** ** | **2006**                       | ** ** | **2005** | ** ** |
| **Operating  Activities:**                                                          | ** ** | ** **                     | ** ** | ** ** | ** ** |
| Net income                                                                          |       | $                              | 5,093      |   | $ | 4,480 |   |
| Adjustments to  reconcile net income to net  cash provided by operating activities: |       |                           |       |   |   |
| Provision for loan losses                                                           |       | 97                             |       | 316 |   |
| Depreciation on premises and equipment                                              |       | 681                            |       | 624 |   |
| Federal Home Loan Bank stock dividends                                              |       | (206                           | )          | (160 | ) |
| Net amortization (accretion) available-for-sale                                     |       | 2                              |       | (52 | ) |
| Net amortization (accretion) held-to-maturity                                       |       | 17                             |       | 29 |   |
| Gain on sale of investments available-for-sale                                      |       | —                         |       | (381 | ) |
| Gain on sale of mortgage loans                                                      |       | (403                           | )          | (351 | ) |
| Gain on sale of real estate held for development                                    |       | —                         |       | (143 | ) |
| Origination of loans held for sale                                                  |       | (20,867                        | )          | (19,644 | ) |
| Proceeds on sale of loans held for sale                                             |       | 20,829                         |       | 20,451 |   |
| Changes in:                                                                         |       |                           |       |   |   |
| Cash surrender value of life insurance                                              |       | (147                           | )          | (141 | ) |
| Interest receivable                                                                 |       | (111                           | )          | (42 | ) |
| Other assets                                                                        |       | 245                            |       | (61 | ) |
| Interest payable                                                                    |       | 55                             |       | (35 | ) |
| Accounts payable and other liabilities                                              |       | 854                            |       | 522 |   |
| Net cash from operating  activities                                                 |       | 6,139                          |       | 5,412 |   |
|                                                                                |       |                           |       |   |   |
| **Investing  Activities:**                                                          | ** ** | ** **                     | ** ** | ** ** | ** ** |
| Sales of securities available-for-sale                                              |       | —                         |       | 1,431 |   |
| Purchases of securities available-for-sale                                          |       | (2,211                         | )          | (27,158 | ) |
| Maturities of securities available-for-sale                                         |       | 3,197                          |       | 5,435 |   |
| Maturities of securities held-to-maturity                                           |       | 4,502                          |       | 783 |   |
| Net change in loans                                                                 |       | (22,322                        | )          | (3,912 | ) |
| Net purchases of premises and equipment                                             |       | (1,921                         | )          | (1,723 | ) |
| Sales of real estate held for development                                           |       | —                         |       | 195 |   |
| Net cash from  investing activities                                                 |       | (18,755                        | )          | (24,949 | ) |
|                                                                                |       |                           |       |   |   |
| **Financing  Activities**                                                           | ** ** | ** **                     | ** ** | ** ** | ** ** |
| Net change in deposits                                                              |       | 23,892                         |       | 12,115 |   |
| Change in federal funds purchased                                                   |       | (12,500                        | )          | — |   |
| Repayments to Federal Home Loan Bank                                                |       | (78                            | )          | (452 | ) |
| Compensation expense for stock options                                              |       | 31                             |       | — |   |
| Proceeds from stock options exercised                                               |       | 9                              |       | 57 |   |
| Dividends paid                                                                      |       | (1,513                         | )          | (1,382 | ) |
| Common stock repurchased                                                            |       | —                         |       | (572 | ) |
| Net cash from  financing activities                                                 |       | 9,841                          |       | 9,766 |   |
|                                                                                |       |                           |       |   |   |
| **(Decrease)  in cash and cash equivalents**                                        |       | (2,775                         | )          | (9,771 | ) |
| **Cash  and cash equivalents, beginning of period**                                 |       | 20,451                         |       | 35,910 |   |
| **Cash and cash equivalents, end  of period**                                       |       | $                              | 17,676     |   | $ | 26,139 |   |

*** ***

***See notes to the unaudited consolidated financialstatements.***

8

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**Notes ToUnaudited Consolidated Financial Statements**

**1.****                                     ****BASIS OF PRESENTATION ANDSUMMARY OF SIGNIFICANT ACCOUNTING POLICIES**

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

The accompanying unaudited consolidated financial statements have beenprepared in accordance with U.S. generally accepted accounting principles 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 U.S.generally accepted accounting principles for complete financialstatements.  In the opinion ofmanagement, all adjustments (consisting of normal recurring accruals)considered necessary for a fair presentation have been included.  Operating results for the six month periodending June 30, 2006****are notnecessarily indicative of the results that may occur for the year endingDecember 31, 2006.  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, 2005.

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

**Recently Issued Accounting Standards** — We adopted (“SFAS No. 123R”), “Share-BasedPayment” on January 1, 2006.  SFAS No.123R is a revision of FASB Statement 123, “Accounting for Stock-BasedCompensation” and supersedes APB Opinion No. 25, “Accounting for Stock Issuedto Employees,” and its related implementation guidance.  SFAS No. 123R requires all public companiesto record compensation cost for stock options provided to employees in returnfor employee service. The cost is measured at the fair value of the optionswhen granted, and this cost is expensed over the employee service period, whichis normally the vesting period of the options. Compensation cost is recordedfor prior option grants that vest after the date of adoption.  The effect on results of operations willdepend on the level of future option grants and the calculation of the fairvalue of the options granted at such future date, as well as the vesting periodsprovided, and so they cannot currently be predicted. ** **Existing options thatwill vest after adoption date are expected to result in compensation expense ofapproximately $62,000 in 2006, $56,000 in 2007, $56,000 in 2008 and $42,000 in2009.  For the six month period endedJune 30, 2006, we recorded $31,000 in compensation expense related to stockoptions.  There will be no significanteffect on financial position as total equity will not change.

In March 2006, the FASB issued Statement No. 156,“Accounting for Servicing of Financial Assets, an amendment of FASB StatementNo. 140”, which changes the accounting for all servicing rights recorded as theresult of purchasing or originating a loan servicing right. SFAS No. 156 amendsthe current accounting guidance for servicing rights in that it allowscompanies to carry their servicing rights at fair value, where presentlyservicing rights are recorded at cost allocated on a fair value basis atinception and assessed for impairment based on their fair value at eachreporting date, using lower of cost or market value. This pronouncement iseffective beginning January 1, 2007.

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

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

9

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**2.**             **SECURITIES**

The amortized cost basis and fair values of securities are as follows:
| ** **                           | ** ** | ** **                            | ** ** | **Gross**                                    | ** ** | **Gross**                              | ** ** | ** **                                  | ** ** |
|--------------------------------------|------------|---------------------------------------|------------|----------------------------------------------|------------|----------------------------------------|------------|---------------------------------------------|------------|
| ** **                           | ** ** | **  Amortized  ** | ** ** | **  Unrealized   ** | ** ** | **  Unrealized  ** | ** ** | ** **                                  | ** ** |
| **(Dollars in thousands)** | ** ** | **Cost**                              | ** ** | **Gains**                                    | ** ** | **Losses**                             | ** ** | **  Fair Value  ** | ** ** |
| **Securities  available-for-sale:**  | ** ** | ** **                            | ** ** | ** **                                   | ** ** | ** **                             | ** ** | ** **                                  | ** ** |
| **June 30, 2006:**                   | ** ** | ** **                            | ** ** | ** **                                   | ** ** | ** **                             | ** ** | ** **                                  | ** ** |
| U. S. Treasury and agencies          |       | $                                     | 4,494      |                                         | $          | —                                 |       | $                                           | (45        | ) | $ | 4,449 |   |
| Mortgage-backed                      |       | 10,464                                |       | —                                       |       | (408                                   | )          | 10,056                                      |       |
| Equity                               |       | 1,353                                 |       | 534                                          |       | (33                                    | )          | 1,854                                       |       |
| State and municipal                  |       | 6,914                                 |       | 6                                            |       | (470                                   | )          | 6,450                                       |       |
| Corporate                            |       | 4,024                                 |       | —                                       |       | —                                 |       | 4,024                                       |       |
|                                 |       |                                  |       |                                         |       |                                   |       |                                        |       |
| Total                                |       | $                                     | 27,249     |                                         | $          | 540                                    |       | $                                           | (956       | ) | $ | 26,833 |   |
|                                 |       |                                  |       |                                         |       |                                   |       |                                        |       |
| **December 31, 2005:**               | ** ** | ** **                            | ** ** | ** **                                   | ** ** | ** **                             | ** ** | ** **                                  | ** ** |
| U. S. Treasury and agencies          |       | $                                     | 6,486      |                                         | $          | —                                 |       | $                                           | (49        | ) | $ | 6,437 |   |
| Mortgage-backed                      |       | 11,558                                |       | —                                       |       | (256                                   | )          | 11,302                                      |       |
| Equity                               |       | 1,353                                 |       | 638                                          |       | —                                 |       | 1,991                                       |       |
| State and municipal                  |       | 5,803                                 |       | 14                                           |       | (259                                   | )          | 5,558                                       |       |
| Corporate                            |       | 3,036                                 |       | —                                       |       | —                                 |       | 3,036                                       |       |
|                                 |       |                                  |       |                                         |       |                                   |       |                                        |       |
| Total                                |       | $                                     | 28,236     |                                         | $          | 652                                    |       | $                                           | (564       | ) | $ | 28,324 |   |

 
| ** **                        | ** ** | ** **    | ** ** | **Gross**        | ** ** | **Gross**        | ** ** | ** **          | ** ** |
|-----------------------------------|------------|---------------|------------|------------------|------------|------------------|------------|---------------------|------------|
| ** **                        | ** ** | **Amortized** | ** ** | **Unrecognized** | ** ** | **Unrecognized** | ** ** | ** **          | ** ** |
| ** **                        | ** ** | **Cost**      | ** ** | **Gains**        | ** ** | **Losses**       | ** ** | **Fair Value** | ** ** |
| **Securities  held-to-maturity:** | ** ** | ** **    | ** ** | ** **       | ** ** | ** **       | ** ** | ** **          | ** ** |
| **June 30, 2006:**                | ** ** | ** **    | ** ** | ** **       | ** ** | ** **       | ** ** | ** **          | ** ** |
| U.S. Treasury and agencies        |       | $             | 22,096     |             | $          | —           |       | $                   | (655       | ) | $ | 21,441 |   |
| Mortgage-backed                   |       | 4,616         |       | 2                |       | (231             | )          | 4,387               |       |
| Corporate                         |       | 2,000         |       | 15               |       | —           |       | 2,015               |       |
|                              |       |          |       |             |       |             |       |                |       |
| Total                             |       | $             | 28,712     |             | $          | 17               |       | $                   | (886       | ) | $ | 27,843 |   |
|                              |       |          |       |             |       |             |       |                |       |
| **December 31, 2005:**            | ** ** | ** **    | ** ** | ** **       | ** ** | ** **       | ** ** | ** **          | ** ** |
| U.S. Treasury and agencies        |       | $             | 26,095     |             | $          | —           |       | $                   | (607       | ) | $ | 25,488 |   |
| Mortgage-backed                   |       | 5,136         |       | 2                |       | (207             | )          | 4,931               |       |
| Corporate                         |       | 2,000         |       | 15               |       | —           |       | 2,015               |       |
|                              |       |          |       |             |       |             |       |                |       |
| Total                             |       | $             | 33,231     |             | $          | 17               |       | $                   | (814       | ) | $ | 32,434 |   |

 

10

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**3.             LOANS**

Loans are summarized as follows:
| ** **                           | ** ** | **June 30,** | ** ** | **December 31,** | ** ** |
|--------------------------------------|------------|-------------------|------------|-----------------------|------------|
| **(Dollars in thousands)** | ** ** | **2006**          | ** ** | **2005**              | ** ** |
|                                 |       |              |       |                  |       |
| Commercial                           |       | $                 | 38,022     |                  | $          | 36,004 |   |
| Real estate  commercial              |       | 369,572           |       | 353,637               |       |
| Real estate  construction            |       | 21,855            |       | 13,579                |       |
| Residential  mortgage                |       | 140,044           |       | 142,727               |       |
| Consumer and  home equity            |       | 63,840            |       | 66,208                |       |
| Indirect  consumer                   |       | 32,749            |       | 31,577                |       |
| Loans held for  sale                 |       | 1,038             |       | 597                   |       |
|                                 |       | 667,120           |       | 644,329               |       |
| Less:                                |       |              |       |                  |       |
| Net deferred loan origination fees   |       | (1,113            | )          | (1,212                | )          |
| Allowance for loan losses            |       | (7,408            | )          | (7,377                | )          |
|                                 |       | (8,521            | )          | (8,589                | )          |
|                                 |       |              |       |                  |       |
| Loans                                |       | $                 | 658,599    |                  | $          | 635,740 |   |

 

The allowance for loan loss is summarized as follows:
| ** **                           | ** ** | **As of and For the** | ** ** | **As of and For the** | ** ** |
|--------------------------------------|------------|-------------------------------------------|------------|-------------------------------------------|------------|
| ** **                           | ** ** | **Three Months Ended**          | ** ** | **Six Months Ended**            | ** ** |
| ** **                           | ** ** | **June 30,**                         | ** ** | **June 30,**                         | ** ** |
| **(Dollars in thousands)** | ** ** | **2006**                                  | ** ** | **2005**                                  | ** ** | **2006** | ** ** | **2005** | ** ** |
|                                 |       |                                      |       |                                      |       |   |   |   |   |
| Balance,  beginning of period        |       | $                                         | 7,420      |                                      | $          | 6,701 |   | $ | 7,377 |   | $ | 6,489 |   |
| Provision for  loan losses           |       | 9                                         |       | 41                                        |       | 97 |   | 316 |   |
| Charge-offs                          |       | (178                                      | )          | (106                                      | )          | (285 | ) | (246 | ) |
| Recoveries                           |       | 157                                       |       | 78                                        |       | 219 |   | 155 |   |
| Balance, end of period               |       | $                                         | 7,408      |                                      | $          | 6,714 |   | $ | 7,408 |   | $ | 6,714 |   |

 

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

 
| ** **                                    | ** ** | **As of and For the** | ** ** | **As of and For the** | ** ** |
|-----------------------------------------------|------------|-------------------------------------------|------------|-------------------------------------------|------------|
| ** **                                    | ** ** | **Six Months Ended**            | ** ** | **Year Ended**                       | ** ** |
| ** **                                    | ** ** | **June 30,**                         | ** ** | **December 31,**                     | ** ** |
| **(Dollars in thousands)**          | ** ** | **2006**                                  | ** ** | **2005**                                  | ** ** |
|                                          |       |                                      |       |                                      |       |
| End of period  impaired loans                 |       | $                                         | 5,514      |                                      | $          | 6,232 |   |
| Amount of allowance for  loan  loss allocated |       | 1,256                                     |       | 1,445                                     |       |
|                                               |            |                                           |            |                                           |            |  |  |

 

11

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**3.             LOANS- (Continued)**

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

 
| ** **                                    | ** ** | **June 30,** | ** ** | **December 31,** | ** ** |
|-----------------------------------------------|------------|-------------------|------------|-----------------------|------------|
| **(Dollars in thousands)**          | ** ** | **2006**          | ** ** | **2005**              | ** ** |
|                                          |       |              |       |                  |       |
| Restructured                                  |       | $                 | 3,035      |                  | $          | 3,104 |   |
| Loans past due  over 90 days still on accrual |       | —            |       | —                |       |
| Non accrual  loans                            |       | 2,479             |       | 3,128                 |       |
| Total                                         |       | $                 | 5,514      |                  | $          | 6,232 |   |

 

**4.             EARNINGS PER SHARE**

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

 
| ** **                                      | ** ** | **Three Months Ended** | ** ** | **Six Months Ended** | ** ** |
|-------------------------------------------------|------------|----------------------------------|------------|--------------------------------|------------|
| **(Dollars in thousands,**            | ** ** | **June 30,**                | ** ** | **June 30,**              | ** ** |
| **except per share data)**       | ** ** | **2006**                         | ** ** | **2005**                       | ** ** | **2006** | ** ** | **2005** | ** ** |
|                                            |       |                             |       |                           |       |   |   |   |   |
| Net income  available to common shareholders    |       | $                                | 2,755      |                           | $          | 2,294 |   | $ | 5,093 |   | $ | 4,480 |   |
| Basic EPS:                                      |       |                             |       |                           |       |   |   |   |   |
| Weighted average common shares                  |       | 3,984                            |       | 4,006                          |       | 3,984 |   | 4,008 |   |
| Diluted EPS:                                    |       |                             |       |                           |       |   |   |   |   |
| Weighted average common shares                  |       | 3,984                            |       | 4,006                          |       | 3,984 |   | 4,008 |   |
| Dilutive effect of stock options                |       | 36                               |       | 18                             |       | 34 |   | 20 |   |
| Weighted average common and incremental  shares |       | 4,020                            |       | 4,024                          |       | 4,018 |   | 4,028 |   |
| Earnings Per  Share:                            |       |                             |       |                           |       |   |   |   |   |
| Basic                                           |       | $                                | 0.69       |                           | $          | 0.57 |   | $ | 1.28 |   | $ | 1.12 |   |
| Diluted                                         |       | $                                | 0.69       |                           | $          | 0.57 |   | $ | 1.27 |   | $ | 1.11 |   |

 

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

**5.             STOCKOPTION PLAN**

At our Annual Meeting of Shareholders held on May 10, 2006, ourshareholders approved the 2006 Stock Option and Incentive Compensation Planwhich replaces our 1998 Stock Option and Incentive Plan. Under the 2006 StockOption and Incentive Compensation Plan, we may grant either incentive ornon-qualified stock options to****keyemployees and directors****for atotal of 535,000 shares of our common stock at not less than fair value at thedate such options are granted.****Options available for future grant under the1998 plan totaled 35,000 shares and were rolled into the 2006 plan. Webelieve that the ability to award stock options and other forms of stock-basedincentive compensation can assist us in attracting and retaining key employees.Stock-based incentive compensation is also a means  to  align the  interests  of  key  employees with  those  of our shareholders  by providing  awards  intended to  reward   recipients for  our  long-term growth.** **The option to purchase shares vestover periods of one to five years and expire ten years after the date of grant.** **Weissue new shares of common stock upon the exercise of stock options. ** **AtJune 30, 2006 options available for future grant under the 2006 Plan totaled535,000.** **Compensation cost related to options granted under the 1998 Planthat was charged against earnings for the period ended June 30, 2006 was$31,000.

The fair value of each option award is estimated on the date of grantusing the Black-Scholes option valuation model that uses variousweighted-average assumptions.  Therisk-free interest rate is based on the U.S. Treasury yield curve in effect atthe time of grant.  The expectedvolatility is based on the fluctuation in the price of a share of stock overthe period for which the option is being valued and the expected life of theoptions granted represents the period of time the options are expected to beoutstanding.

 

12

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**5.            STOCK OPTION PLAN -(Continued)**

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

 

|                                                                                                                                                                                                                                                  | ** ** | **Three Months Ended** | ** ** | **Six Months Ended** | ** ** |
|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|----------------------------------|------------|--------------------------------|------------|
| ** **                                                                                                                                                                                                                                       | ** ** | **June 30,**                | ** ** | **June 30,**              | ** ** |
| **(Dollars In Thousands, Except Per Share Data**)                                                                                                                                                                                                | ** ** | **2005**                         | ** ** | **2005**                       | ** ** |
| ** **                                                                                                                                                                                                                                       | ** ** | ** **                       | ** ** | ** **                     | ** ** |
| Net income:                                                                                                                                                                                                                                      |       |                             |       |                           |       |
| As reported                                                                                                                                                                                                                                      |       | $                                | 2,294      |                           | $          | 4,480 |   |
| Deduct:  Stock-based compensation expense  determined under fair value based method                                                                                                                                                              |       | (23                              | )          | (56                            | )          |
| Pro-forma                                                                                                                                                                                                                                        |       | $                                | 2,271      |                           | $          | 4,424 |   |
|                                                                                                                                                                                                                                             |       |                             |       |                           |       |
| Earnings per share:                                                                                                                                                                                                                              |       |                             |       |                           |       |
| Basic                                      As  Reported |       | $                                | 0.57       |                           | $          | 1.12 |   |
| Pro-forma                                                                                                                                                                                                                                        |       | 0.56                             |       | 1.10                           |       |
| Diluted                            As  Reported                                                           |       | $                                | 0.57       |                           | $          | 1.11 |   |
| Pro-forma                                                                                                                                                                                                                                        |       | 0.56                             |       | 1.10                           |       |

 

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

 

|                                      | ** ** | ** **  | ** ** | ** **   | ** ** | **Weighted**    | ** ** | ** **    | ** ** |
|--------------------------------------|------------|-------------|------------|--------------|------------|-----------------|------------|---------------|------------|
| ** **                           | ** ** | ** **  | ** ** | **Weighted** | ** ** | **Average**     | ** ** | ** **    | ** ** |
| ** **                           | ** ** | **Number**  | ** ** | **Average**  | ** ** | **Remaining**   | ** ** | **Aggregate** | ** ** |
| ** **                           | ** ** | **of**      | ** ** | **Exercise** | ** ** | **Contractual** | ** ** | **Intrinsic** | ** ** |
| **(Dollars In Thousands)** | ** ** | **Options** | ** ** | **Price**    | ** ** | **Term**        | ** ** | **Value**     | ** ** |
| ** **                           |       |        |       |         |       |            |       |          |       |
| Outstanding, beginning  of period    |       | 130,977     |       | $            | 20.26      |            |       |          |       |   |
| Granted during period                | ** ** | **—**  | ** ** | **—**   | ** ** | ** **      | ** ** | ** **    | ** ** |
| Exercised during the  period         |       | (700        | )          | 14.05        |       |            |       |          |       |
| Outstanding, end of  period          |       | 130,277     |       | $            | 20.30      |            | 6.0        |          | $          | 1,329 |   |
|                                 |       |        |       |         |       |            |       |          |       |
| Eligible for exercise  at period end |       | 86,827      |       | $            | 18.72      |            | 4.8        |          | $          | 1,023 |   |

 

There were no options granted for the periods ended June 30, 2006 and2005.** **Thetotal intrinsic value of options exercised during the periods ended June 30,2006 and 2005****was $10,640 and $17,793respectively.

As of June 30, 2006 therewas $193,679 of total unrecognized compensation cost related to non-vestedshare-based compensation arrangements granted under the 1998 Plan.** **Thatcost is expected to be recognized over a weighted-average period of 3.6 years. ** **Thetotal fair value of shares vested during the periods ended June 30, 2006 and2005 was $56,240 and $44,631 respectively.** **Cash received from option exerciseunder all share-based payment arrangements for the periods ended June 30, 2006and 2005 were $9,835 and $56,562 respectively.

13

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**Item 2.**

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

##### **GENERAL**

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

Weserve the needs and cater to the economic strengths of the local communities inwhich we operate and strive to provide a high level of personal andprofessional customer service. We offer a variety of financial services to ourretail and commercial banking customers. These services include personal andcorporate banking services and personal investment financial counselingservices.

Through****our personal investment financialcounseling services, we offer a wide variety of mutual funds, equityinvestments, and fixed and variable annuities. We invest in the wholesale capital markets through the management of oursecurity portfolio and use various forms of wholesale funding. The securityportfolio contains a variety of instruments, including callable debentures,taxable and non-taxable debentures, fixed and adjustable rate mortgage backedsecurities, and collateralized mortgage obligations.

Our results of operationsdepend primarily on net interest income, which is the difference betweeninterest income from interest-earning assets and interest expense oninterest-bearing liabilities. Our operations are also affected by 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. Our principal operating expenses, aside from interestexpense, consist of compensation and employee benefits, occupancy costs, dataprocessing expense and provisions for loan losses.

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

**OVERVIEW**

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

Our retail branch network continues to generate encouragingresults.  Total deposits have grown at a6% compound annual growth rate over the past four years.  Total deposits were $615.0 million at June30, 2006, which included an increase of $42 million in commercial and retaildeposits for the first six months this year. The development of our retail branch network in the Metro Louisvillemarket also yielded positive results.  Wehave a combined $42 million in deposits in our two full-service facilities inthe Metro Louisville market, increasing deposits by 39% during the first sixmonths of 2006 following a 71% increase during 2005.  We opened these new facilities in the secondquarter of 2004 to support our growing customer base in this market.  Twenty-one percent of our loan portfolio iscomprised of loans to borrowers in the Metro Louisville market.

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

14

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The growth in our commercial loan portfolio, coupled with the risinginterest rate environment, has favorably impacted the level of interest incomegenerated.  Net interest margin increasedto 4.07% for the six months ended June 30, 2006, compared to 3.88% for the sameperiod a year ago.  This has resulted ina $616,000 increase in net interest income to $7.4 million for the three monthsended June 30, 2006, and a $1.2 million increase in net interest income to$14.6 million for the six months ended June 30, 2006, compared to the samethree and six month periods in 2005.  Theincreasing short-term interest rate environment positively impacted net interestmargin because adjustable rate commercial loans comprise 46% of our loanportfolio.  However, the net interestmargin is likely to compress in future quarters as short-term interest ratespeak and the cost of deposits as well as the cost of our borrowings continue torise.  The cost of deposits typically lagbehind the increase in adjustable loan rates due to certificates of depositthat mature over a longer period of time than immediately adjustable loanrates.

Our asset quality remains favorable. Net charge-offs as a percent of average total loans were 0.02% for thesix months ended June 30, 2006 and June 30, 2005.  The allowance for loan losses as a percent oftotal loans, decreased to 1.11% at June 30, 2006 compared to 1.15% at December31, 2005.  The percentage ofnon-performing loans to total loans was 0.83% at June 30, 2006, compared to0.97% at December 31, 2005.

Provision for loan loss expense decreased by $32,000 to $9,000 for thethree months ended June 30, 2006, and by $219,000 to $97,000 for the six monthsended June 30, 2006 compared to the same periods in 2005.  The decrease in provision for loan lossexpense for the periods was due to higher provisions during the first sixmonths of 2005 resulting from loan downgrades during the first quarter of2005.  In addition, improvements in theCompany’s security and position of certain classified loans during 2006,resulted in a reduction in the SFAS 114 allowance allocated to the loans, whichdecreased our provision for loan loss expense for the three and six monthperiods ended June 30, 2006.

Non-interest income increased $100,000 to $2.1 million for the threemonths ended June 30, 2006.  Non-interestincome decreased $210,000 to $3.8 million for the six months ended June 30,2006.  During the first six months endedJune 30, 2005, we recorded a $381,000 gain on the sale of investment securitiesand a $143,000 gain on the sale of lots. No gains on the sale of investments or lots were recorded for the sixmonths ended June 30, 2006.  Customerservice fees on deposit accounts increased $77,000 and $188,000 for therespective three and six months ended June 30, 2006, compared to the sameperiods in 2005.

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

###### **CRITICALACCOUNTING POLICIES**

Our accounting and reportingpolicies comply with U.S. generally accepted accounting principles and conformto general practices within the banking industry.  The accounting policy relating to theallowance for loan losses is critical to the understanding of our results ofoperations since the application of this policy requires significant managementassumptions and estimates that could result in materially different amounts tobe reported if conditions or underlying circumstances were to change.

**Allowancefor Loan Losses —**Wemaintain an allowance sufficient to absorb probable incurred credit lossesexisting in the loan portfolio. The Allowance for Loan Loss Review Committeeevaluates the allowance for loan losses on a quarterly basis.  We estimatethe allowance using past loan loss experience, known and inherent risks in theportfolio, adverse situations that may affect the borrower’s ability to repay,estimated value of the underlying collateral, and current economicconditions.  While we estimate the allowance for loan losses based in parton historical losses within each loan category, estimates for losses within thecommercial real estate portfolio are more dependent upon credit analysis andrecent payment performance. Allocationsof the allowance may be made for specific loans or loan categories, but theentire allowance is available for any loan that, in management’s judgment,should be charged off.

Theallowance consists of specific and general components.  The specific component relates to loans thatare individually classified as impaired or loans otherwise classified assubstandard or doubtful.  The generalcomponent covers non-classified loans and is based on historical lossexperience adjusted for current factors. The methodology for allocating the allowancefor loan and lease losses takes into account our strategic plan to increase ouremphasis on commercial and consumer lending. We increase the amount of theallowance allocated to commercial loans and 

15

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

Based on our calculation, anallowance of $7.4 million****or 1.11%of total loans was our estimate of probable losses within the loan portfolio asof****June 30, 2006.** **This estimate resulted in aprovision for loan losses on the income statement of****$97,000 for the 2006 six-month period.** **If the mix and amount of futurecharge off percentages differ significantly from those assumptions used bymanagement in making its determination, the allowance for loan losses andprovision for loan losses on the income statement could be materially affected.

##### **RESULTSOF OPERATIONS**

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

***Net Interest Income*****-**The principal source of our revenue is netinterest income.  Net interest income is thedifference between interest income on interest-earning assets, such as loansand securities and the interest expense on liabilities used to fund thoseassets, such as interest-bearing deposits and borrowings. Net interest incomeis impacted by both changes in the amount and composition of interest-earningassets and interest-bearing liabilities as well as market interest rates.

On an annualized basis, the net interest margin as apercent of average earning assets increased 19 basis points to 4.05% for thequarter ended June 30, 2006 and 19 basis points to 4.07% for the six monthsended June 30, 2006 compared to 3.86% and 3.88% for the same periods in 2005. ** **Increasinginterest rates and an increase in average earning assets improved net interestmargin for the periods presented.** **Average interest earning assetsincreased $32.3 million for the quarter ended June 30, 2006 and $30.5 millionfor the six month ended June 30, 2006 when compared to the same periods in2005.****The yield on earning assetsaveraged 7.18% and 7.11% for the three and six month  periods ended June 30, 2006, compared to anaverage yield on earning assets of 6.30% and 6.27% for the same periods in2005.** **Theprime-lending rate has increased 425 basis points from the time the FederalOpen Market Committee began increasing short-term interest rates in June 2004through the end of the second quarter of 2006.** **The increase in short-terminterest rates favorably impacted the yield on earning assets for 2006.

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

We had borrowings of $85.3 million from the Federal Home Loan Bank(FHLB) of Cincinnati at June 30, 2006.** **During January 2001, we enteredinto $75.0 million in convertible fixed rate advances with a maturity of tenyears.  These advances were fixed forperiods of two to three years.** **At the end of the fixed rate termand quarterly thereafter, the FHLB has the right to convert these advances tovariable rate advances tied to the three-month LIBOR index. Upon conversion, wecan prepay the advance at no penalty. One of the advances, fixed at a rate of 4.86% for $50.0 million, wasprepaid in July 2006 without penalty. The other advance is fixed at a rate of5.05% for $25.0 million.** **If the three-month LIBOR indexcontinues to increase, there is a higher likelihood the $25.0 million advancewill be converted to a variable rate advance in September of 2006.

The net result of the abovefactors was an increase in net interest income of $616,000 for the quarterended and $1.2 million for the six months ended June 30, 2006 compared to thesame periods in 2005.  The net interestmargin is likely to compress in future quarters as short term interest ratespeak and the cost of deposits continue 

16

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to rise.  The cost of deposits typically lags behindthe increase in adjustable rate loans because certificates of deposit generallymature over longer periods than immediately adjustable rate loans.

**AVERAGEBALANCE SHEET**

The following table providesinformation relating to our average balance sheet and reflects the averageyield on assets and average cost of liabilities for the periods indicated.  Dividing income or expense by the averagemonthly balance of assets or liabilities, respectively, derives such yields andcosts for the periods presented.

 
| ** **                                           | ** ** | **Quarter Ended June 30,** | ** ** |
|------------------------------------------------------|------------|-------------------------------------------|------------|
| ** **                                           | ** ** | **2006**                                  | ** ** | **2005** | ** ** |
| ** **                                           | ** ** | **Average**                               | ** ** | ** ** | ** ** | **Average** | ** ** | **Average** | ** ** | ** ** | ** ** | **Average** | ** ** |
| **(Dollars in thousands)**                 | ** ** | **Balance**                               | ** ** | **Interest** | ** ** | **Yield/Cost (5)** | ** ** | **Balance** | ** ** | **Interest** | ** ** | **Yield/Cost (5)** | ** ** |
|                                                 |       |                                      |       |   |   |   |   |   |   |   |   |   |   |
| **ASSETS**                                           | ** ** | ** **                                | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| Interest earning  assets:                            |       |                                      |       |   |   |   |   |   |   |   |   |   |   |
| U.S. Treasury  and agencies                          |       | $                                         | 29,589     |   | $ | 227 |   | 3.08 | % | $ | 57,509 |   | $ | 391 |   | 2.73 | % |
| Mortgage-backed  securities                          |       | 15,240                                    |       | 162 |   | 4.26 |   | 8,640 |   | 84 |   | 3.90 |   |
| Equity  securities                                   |       | 1,938                                     |       | 19 |   | 3.93 |   | 1,747 |   | 18 |   | 4.13 |   |
| State and  political  subdivision securities **(1)** |       | 6,500                                     |       | 103 |   | 6.36 |   | 956 |   | 16 |   | 6.71 |   |
| Corporate bonds                                      |       | 6,028                                     |       | 108 |   | 7.19 |   | 4,031 |   | 51 |   | 5.08 |   |
| Loans receivable  **(2) (3) (4)**                    |       | 654,893                                   |       | 12,287 |   | 7.53 |   | 605,217 |   | 10,272 |   | 6.81 |   |
| FHLB stock                                           |       | 7,297                                     |       | 104 |   | 5.72 |   | 6,922 |   | 84 |   | 4.87 |   |
| Interest bearing deposits                            |       | 12,742                                    |       | 136 |   | 4.28 |   | 16,922 |   | 116 |   | 2.75 |   |
| **Total  interest earning assets**                   |       | 734,227                                   |       | 13,146 |   | 7.18 |   | 701,944 |   | 11,032 |   | 6.30 |   |
| Less: Allowance for  loan losses                     |       | (7,391                                    | )          |   |   |   |   | (6,706 | ) |   |   |   |   |
| Non-interest earning  assets                         |       | 55,642                                    |       |   |   |   |   | 57,104 |   |   |   |   |   |
| **Total  assets**                                    |       | $                                         | 782,478    |   |   |   |   |   | $ | 752,342 |   |   |   |   |   |
| ** **                                           | ** ** | ** **                                | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| **LIABILITIES AND  STOCKHOLDERS’ EQUITY**       | ** ** | ** **                                | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| Interest bearing  liabilities:                       |       |                                      |       |   |   |   |   |   |   |   |   |   |   |
| Savings accounts                                     |       | $                                         | 94,670     |   | $ | 650 |   | 2.75 | % | $ | 88,010 |   | $ | 350 |   | 1.60 | % |
| NOW and money  market  accounts                      |       | 131,858                                   |       | 506 |   | 1.54 |   | 150,649 |   | 498 |   | 1.33 |   |
| Certificates of  deposit and                         |       |                                      |       |   |   |   |   |   |   |   |   |   |   |
| other time  deposits                                 |       | 350,007                                   |       | 3,405 |   | 3.90 |   | 318,649 |   | 2,298 |   | 2.89 |   |
| Federal funds  purchased                             |       | 1,173                                     |       | 15 |   | 5.13 |   | — |   | — |   | — |   |
| FHLB advances                                        |       | 78,312                                    |       | 941 |   | 4.82 |   | 78,692 |   | 952 |   | 4.85 |   |
| Trust preferred  securities                          |       | 10,000                                    |       | 223 |   | 8.94 |   | 10,000 |   | 174 |   | 6.98 |   |
| **Total  interest bearing liabilities**              |       | 666,020                                   |       | 5,740 |   | 3.46 |   | 646,000 |   | 4,272 |   | 2.65 |   |
| Non-interest bearing  liabilities:                   |       |                                      |       |   |   |   |   |   |   |   |   |   |   |
| Non-interest  bearing deposits                       |       | 43,898                                    |       |   |   |   |   | 40,792 |   |   |   |   |   |
| Other  liabilities                                   |       | 4,809                                     |       |   |   |   |   | 3,550 |   |   |   |   |   |
| **Total  liabilities**                               |       | 714,727                                   |       |   |   |   |   | 690,342 |   |   |   |   |   |
|                                                 |       |                                      |       |   |   |   |   |   |   |   |   |   |   |
| Stockholders’ equity                            |       | 67,751                                    |       |   |   |   |   | 62,000 |   |   |   |   |   |
| **Total  liabilities and stockholders’ equity** |       | $                                         | 782,478    |   |   |   |   |   | $ | 752,342 |   |   |   |   |   |
|                                                 |       |                                      |       |   |   |   |   |   |   |   |   |   |   |
| **Net interest income**                              |       |                                      |       | $ | 7,406 |   |   |   |   |   | $ | 6,760 |   |   |   |
| **Net interest spread**                              |       |                                      |       |   |   | 3.72 | % |   |   |   |   | 3.67 | % |
| **Net interest margin**                              |       |                                      |       |   |   | 4.05 | % |   |   |   |   | 3.86 | % |

 

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

 

17

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| ** **                                           | ** ** | **Six Months Ended June 30,** | ** ** |
|------------------------------------------------------|------------|---------------------------------------------------|------------|
| ** **                                           | ** ** | **2006**                                          | ** ** | **2005** | ** ** |
| ** **                                           | ** ** | **Average**                                       | ** ** | **Average** | ** ** | **Average** | ** ** | **Average** | ** ** | ** ** | ** ** | ** ** | ** ** |
| **(Dollars in thousands)**                 | ** ** | **Balance**                                       | ** ** | **Interest** | ** ** | **Yield/Cost (5)** | ** ** | **Balance** | ** ** | **Interest** | ** ** | **Yield/Cost (5)** | ** ** |
|                                                 |       |                                              |       |   |   |   |   |   |   |   |   |   |   |
| **ASSETS**                                           | ** ** | ** **                                        | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| Interest earning  assets:                            |       |                                              |       |   |   |   |   |   |   |   |   |   |   |
| U.S. Treasury  and agencies                          |       | $                                                 | 31,061     |   | $ | 476 |   | 3.09 | % | $ | 53,566 |   | $ | 715 |   | 2.69 | % |
| Mortgage-backed  securities                          |       | 15,660                                            |       | 332 |   | 4.28 |   | 8,542 |   | 164 |   | 3.87 |   |
| Equity  securities                                   |       | 1,969                                             |       | 37 |   | 3.79 |   | 2,210 |   | 58 |   | 5.29 |   |
| State and  political subdivision securities **(1)**  |       | 6,188                                             |       | 197 |   | 6.42 |   | 973 |   | 31 |   | 6.42 |   |
| Corporate bonds                                      |       | 5,660                                             |       | 189 |   | 6.73 |   | 3,048 |   | 74 |   | 4.90 |   |
| Loans receivable  **(2) (3) (4)**                    |       | 649,486                                           |       | 24,002 |   | 7.45 |   | 603,199 |   | 20,226 |   | 6.76 |   |
| FHLB stock                                           |       | 7,246                                             |       | 206 |   | 5.73 |   | 6,884 |   | 160 |   | 4.69 |   |
| Interest bearing  deposits                           |       | 10,309                                            |       | 231 |   | 4.52 |   | 18,666 |   | 239 |   | 2.58 |   |
| **Total  interest earning assets**                   |       | 727,579                                           |       | 25,670 |   | 7.11 |   | 697,088 |   | 21,667 |   | 6.27 |   |
| Less: Allowance for  loan losses                     |       | (7,376                                            | )          |   |   |   |   | (6,604 | ) |   |   |   |   |
| Non-interest earning  assets                         |       | 57,067                                            |       |   |   |   |   | 57,405 |   |   |   |   |   |
| **Total  assets**                                    |       | $                                                 | 777,270    |   |   |   |   |   | $ | 747,889 |   |   |   |   |   |
|                                                 |       |                                              |       |   |   |   |   |   |   |   |   |   |   |
| **LIABILITIES AND**                                  | ** ** | ** **                                        | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| **STOCKHOLDERS’ EQUITY**                        | ** ** | ** **                                        | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| Interest bearing  liabilities:                       |       |                                              |       |   |   |   |   |   |   |   |   |   |   |
| Savings accounts                                     |       | $                                                 | 96,670     |   | $ | 1,282 |   | 2.67 | % | $ | 83,066 |   | $ | 572 |   | 1.39 | % |
| NOW and money  market  accounts                      |       | 131,654                                           |       | 987 |   | 1.51 |   | 153,293 |   | 1,010 |   | 1.33 |   |
| Certificates of  deposit and  other time deposits    |       | 342,222                                           |       | 6,337 |   | 3.73 |   | 317,571 |   | 4,456 |   | 2.83 |   |
| Federal funds  purchased                             |       | 3,865                                             |       | 88 |   | 4.59 |   | — |   | — |   | — |   |
| FHLB advances                                        |       | 78,331                                            |       | 1,874 |   | 4.82 |   | 78,785 |   | 1,896 |   | 4.85 |   |
| Trust preferred  securities                          |       | 10,000                                            |       | 429 |   | 8.65 |   | 10,000 |   | 332 |   | 6.70 |   |
| **Total  interest bearing liabilities**              |       | 662,742                                           |       | 10,997 |   | 3.35 |   | 642,715 |   | 8,266 |   | 2.59 |   |
| Non-interest bearing  liabilities:                   |       |                                              |       |   |   |   |   |   |   |   |   |   |   |
| Non-interest  bearing deposits                       |       | 43,158                                            |       |   |   |   |   | 40,117 |   |   |   |   |   |
| Other  liabilities                                   |       | 4,470                                             |       |   |   |   |   | 3,584 |   |   |   |   |   |
| **Total  liabilities**                               |       | 710,370                                           |       |   |   |   |   | 686,416 |   |   |   |   |   |
|                                                 |       |                                              |       |   |   |   |   |   |   |   |   |   |   |
| Stockholders’ equity                            |       | 66,900                                            |       |   |   |   |   | 61,473 |   |   |   |   |   |
| **Total  liabilities and stockholders’ equity** |       | $                                                 | 777,270    |   |   |   |   |   | $ | 747,889 |   |   |   |   |   |
|                                                 |       |                                              |       |   |   |   |   |   |   |   |   |   |   |
| **Net interest income**                              |       |                                              |       | $ | 14,673 |   |   |   |   |   | $ | 13,401 |   |   |   |
| **Net interest spread**                              |       |                                              |       |   |   | 3.76 | % |   |   |   |   | 3.68 | % |
| **Net interest margin**                              |       |                                              |       |   |   | 4.07 | % |   |   |   |   | 3.88 | % |

----

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

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**RATE/VOLUME ANALYSIS**

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

 
| ** **                                       | ** ** | **Three Months Ended**    | ** ** | **Six Months Ended**      | ** ** |
|--------------------------------------------------|------------|-------------------------------------|------------|-------------------------------------|------------|
| ** **                                       | ** ** | **June 30,**                   | ** ** | **June 30,**                   | ** ** |
| ** **                                       | ** ** | **2006 vs. 2005**         | ** ** | **2006 vs. 2005**         | ** ** |
| ** **                                       | ** ** | **Increase (decrease)**        | ** ** | **Increase (decrease)**        | ** ** |
| ** **                                       | ** ** | **Due to change in** | ** ** | **Due to change in** | ** ** |
| ** **                                       | ** ** | ** **                          | ** ** | ** **                          | ** ** | **Net** | ** ** | ** ** | ** ** | ** ** | ** ** | **Net** | ** ** |
| **(Dollars in thousands)**             | ** ** | **Rate**                            | ** ** | **Volume**                          | ** ** | **Change** | ** ** | **Rate** | ** ** | **Volume** | ** ** | **Change** | ** ** |
| **Interest income:**                             |       |                                |       |                                |       |   |   |   |   |   |   |   |   |
| U.S. Treasury  and agencies                      |       | $                                   | 45         |                                | $          | (209 | ) | $ | (164 | ) | $ | 94 |   | $ | (333 | ) | $ | (239 | ) |
| Mortgage-backed  securities                      |       | 8                                   |       | 70                                  |       | 78 |   | 19 |   | 149 |   | 168 |   |
| Equity  securities                               |       | (1                                  | )          | 2                                   |       | 1 |   | (15 | ) | (6 | ) | (21 | ) |
| State and political  subdivision  securities     |       | (1                                  | )          | 88                                  |       | 87 |   | — |   | 166 |   | 166 |   |
| Corporate bonds                                  |       | 57                                  |       | —                              |       | 57 |   | 115 |   | — |   | 115 |   |
| Loans                                            |       | 1,133                               |       | 882                                 |       | 2,015 |   | 2,156 |   | 1,620 |   | 3,776 |   |
| FHLB stock                                       |       | 15                                  |       | 5                                   |       | 20 |   | 37 |   | 9 |   | 46 |   |
| Interest bearing  deposits                       |       | 54                                  |       | (34                                 | )          | 20 |   | 129 |   | (137 | ) | (8 | ) |
|                                             |       |                                |       |                                |       |   |   |   |   |   |   |   |   |
| **Total  interest earning assets**               |       | 1,310                               |       | 804                                 |       | 2,114 |   | 2,535 |   | 1,468 |   | 4,003 |   |
|                                             |       |                                |       |                                |       |   |   |   |   |   |   |   |   |
| **Interest expense:**                            |       |                                |       |                                |       |   |   |   |   |   |   |   |   |
| Savings accounts                                 |       | 272                                 |       | 28                                  |       | 300 |   | 603 |   | 107 |   | 710 |   |
| NOW and money  market accounts                   |       | 75                                  |       | (67                                 | )          | 8 |   | 130 |   | (153 | ) | (23 | ) |
| Certificates of  deposit and other time deposits |       | 863                                 |       | 244                                 |       | 1,107 |   | 1,514 |   | 367 |   | 1,881 |   |
| Federal funds  purchased                         |       | 11                                  |       | 4                                   |       | 15 |   | 44 |   | 44 |   | 88 |   |
| FHLB advances                                    |       | (7                                  | )          | (4                                  | )          | (11 | ) | (11 | ) | (11 | ) | (22 | ) |
| Trust preferred  securities                      |       | 49                                  |       | —                              |       | 49 |   | 97 |   | — |   | 97 |   |
|                                             |       |                                |       |                                |       |   |   |   |   |   |   |   |   |
| **Total interest bearing  liabilities**          |       | 1,263                               |       | 205                                 |       | 1,468 |   | 2,377 |   | 354 |   | 2,731 |   |
|                                             |       |                                |       |                                |       |   |   |   |   |   |   |   |   |
| **Net change in net interest  income**           |       | $                                   | 47         |                                | $          | 599 |   | $ | 646 |   | $ | 158 |   | $ | 1,114 |   | $ | 1,272 |   |

 

19

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***Non-Interest Income and Non-InterestExpense***

The following tables provide a comparison of the components ofnon-interest income and expenses for the quarter and six month periods endedJune 30, 2006 and 2005.  The tables showthe dollar and percentage change from 2005 to 2006.  Below the tables is a discussion ofsignificant changes and trends.

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

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

 

Growth in customer service fees on deposit accounts, our largestcomponent of non-interest income, is primarily due to growth in customerdeposits, overdraft fee income on retail checking accounts and the sale offee-based products for 2006.** **We continue to increase ourcustomer base through cross-selling opportunities and marketing initiatives andpromotions.  We increased our emphasis ongrowing our checking account base during 2005 to better enhance ourprofitability and franchise value and will continue this emphasis.  This initiative initially began in late 2004with the introduction of 10 new checking account products and/or significantenhancements to existing products.  Wealso introduced two new checking account products in 2005 geared towardcustomers on check systems who would not normally qualify for a standardchecking account.  If we can maintain theincrease in checking accounts we experienced in 2005, it will positively impactour level of customer service fees on deposit accounts.

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

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

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

 

20

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

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

 

Employee compensation and benefits is the largest componentof non-interest expense. Compensation expense decreased for the 2006 quarterdue to a reduction in our health insurance expense, a result of decreasedinsurance claims and increased for the six months ended June 30, 2006 due to anincrease in staff needed for our continued growth and expansion as well asannual raises.  We look for a continuedincrease in employee compensation and benefits expense in line with recenttrends, as we progress with our retail expansion and market efforts.  Also included in employee compensation andbenefits expense for the 2006 period is $31,000, due to a change in accountingrules in which compensation expense related to stock options is recorded.

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

**ANALYSIS OF FINANCIAL CONDITION**

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

##### **Loans**

Net loans receivable increased $22.9 million to$658.6 million at June 30, 2006 compared to $635.7 million at December 31,2005.  Our commercial, commercial realestate and real estate construction portfolios increased $26.2 million to$429.4 million at June 30, 2006.  For the2006 period, these loans comprised 64% of the total loan portfolio compared to59% at June 30, 2005.  Offsetting thisgrowth was a $2.7 million decrease in the residential mortgage loan portfolioto $140.0 million for the six months ended June 30, 2006. Consumer and homeequity loans also decreased for the 2006 period by $2.4 million, or 3.6% to$63.8 million at June 30, 2006, compared to $66.2 million at December 31, 2005.

 

21

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|                                      | ** ** | **June 30,** | ** ** | **December 31,** | ** ** |
|--------------------------------------|------------|-------------------|------------|-----------------------|------------|
| **(Dollars in thousands)** | ** ** | **2006**          | ** ** | **2005**              | ** ** |
|                                 |       |              |       |                  |       |
| Commercial                           |       | $                 | 38,022     |                  | $          | 36,004 |   |
| Real estate  commercial              |       | 369,572           |       | 353,637               |       |
| Real estate  construction            |       | 21,855            |       | 13,579                |       |
| Residential  mortgage                |       | 140,044           |       | 142,727               |       |
| Consumer and  home equity            |       | 63,840            |       | 66,208                |       |
| Indirect  consumer                   |       | 32,749            |       | 31,577                |       |
| Loans held for  sale                 |       | 1,038             |       | 597                   |       |
|                                 |       | 667,120           |       | 644,329               |       |
| Less:                                |       |              |       |                  |       |
| Net deferred loan origination fees   |       | (1,113            | )          | (1,212                | )          |
| Allowance for loan losses            |       | (7,408            | )          | (7,377                | )          |
|                                 |       | (8,521            | )          | (8,589                | )          |
|                                 |       |              |       |                  |       |
| Loans                                |       | $                 | 658,599    |                  | $          | 635,740 |   |

 

**Allowance and Provision for LoanLosses**

Our financial performancedepends on the quality of the loans we originate and management’s ability to assessthe degree of risk in existing loans when it determines the allowance for loanlosses.  An increase in loan charge-offsor non-performing loans or an inadequate allowance for loan losses could reducenet interest income, net income and capital and limit the range of products andservices we can offer.

The Allowance for Loan LossReview Committee evaluates the allowance for loan losses quarterly to maintaina level sufficient to absorb probable incurred credit losses existing in theloan portfolio.  Periodic provisions tothe allowance 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 regulatory examinations.

The methodology for allocating the allowance forloan and lease losses takes into account our strategic plan to increase ouremphasis on commercial and consumer lending. We increase the amount of the allowance allocated to commercial loansand consumer loans in response to the growth of the commercial and consumerloan portfolios and management’s recognition of the higher risks and loanlosses in these lending areas.  Theindirect consumer loan program is comprised of new and used automobile,motorcycle and all terrain vehicle loans originated on our behalf by a selectgroup of auto dealers within the our service area.   The indirect loan program involves a greaterdegree 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.  As theindirect loan program has evolved, dealer analysis and underwriting standardshave been refined to improve the loan loss experience of the program.  Estimating the allowance is a continuousprocess.  In this regard, the Allowancefor Loan Loss Review Committee continues to monitor the performance of indirectconsumer loans as well as our other loan products and updates estimates as theevidence warrants.

 

22

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The following table shows ananalysis of loan loss experience for the periods indicated.
| ** **                                                                | ** ** | **Three Months Ended** | ** ** | **Six Months Ended** | ** ** |
|---------------------------------------------------------------------------|------------|----------------------------------|------------|--------------------------------|------------|
| ** **                                                                | ** ** | **June 30,**                | ** ** | **June 30**               | ** ** |
| **(Dollars in thousands)**                                      | ** ** | **2006**                         | ** ** | **2005**                       | ** ** | **2006** | ** ** | **2005** | ** ** |
|                                                                      |       |                             |       |                           |       |   |   |   |   |
| **Balance at beginning of period**                                        |       | $                                | 7,420      |                           | $          | 6,701 |   | $ | 7,377 |   | $ | 6,489 |   |
| Loans charged-off:                                                        |       |                             |       |                           |       |   |   |   |   |
| Real estate  mortgage                                                     |       | 1                                |       | —                         |       | 3 |   | 4 |   |
| Consumer                                                                  |       | 92                               |       | 106                            |       | 197 |   | 242 |   |
| Commercial                                                                |       | 85                               |       | —                         |       | 85 |   | — |   |
| Total charge-offs                                                         |       | 178                              |       | 106                            |       | 285 |   | 246 |   |
| Recoveries:                                                               |       |                             |       |                           |       |   |   |   |   |
| Real estate  mortgage                                                     |       | 3                                |       | —                         |       | 6 |   | 1 |   |
| Consumer                                                                  |       | 68                               |       | 78                             |       | 127 |   | 154 |   |
| Commercial                                                                |       | 86                               |       | —                         |       | 86 |   | — |   |
| Total recoveries                                                          |       | 157                              |       | 78                             |       | 219 |   | 155 |   |
|                                                                      |       |                             |       |                           |       |   |   |   |   |
| **Net loans charged-off**                                                 |       | 21                               |       | 28                             |       | 66 |   | 91 |   |
|                                                                      |       |                             |       |                           |       |   |   |   |   |
| Provision for loan  losses                                                |       | 9                                |       | 41                             |       | 97 |   | 316 |   |
|                                                                      |       |                             |       |                           |       |   |   |   |   |
| **Balance at end of period**                                              |       | $                                | 7,408      |                           | $          | 6,714 |   | $ | 7,408 |   | $ | 6,714 |   |
|                                                                      |       |                             |       |                           |       |   |   |   |   |
| Allowance for loan  losses to total loans (excluding loans held for sale) |       |                             |       |                           |       | 1.11 | % | 1.10 | % |
| Net charge-offs to  average loans outstanding                             |       |                             |       |                           |       | 0.02 | % | 0.02 | % |
| Allowance for loan losses to total non-performing loans                   |       |                             |       |                           |       | 134 | % | 138 | % |

 

The provision for loan losses decreased $32,000to $9,000 for the quarter ended June 30, 2006, and decreased $219,000 to$97,000 for the six months ended June 30, 2006 compared to the same periods in2005.****We recorded a smallerprovision for the 2006 periods due to****animprovement in our security and position of three of our classified loansduring the quarter, resulting in a reduction in the SFAS 114 allowanceallocated to the loans.  In addition, weexperienced a higher provision for loan loss in the first six months of 2005,resulting from two classified loans downgraded to substandard.** **Thecombination resulted in a decrease in provision expense for the quarter and sixmonths ended June 30, 2006 compared to the same periods in 2005.** **Thetotal allowance for loan losses increased $694,000 to $7.4 million from June30, 2005 to June 30, 2006.** **The increase in the allowance wasrelated to a $22.9 million increase in net loans for 2006 compared to 2005, inconjunction with a $2.3 million increase in classified loans at June 30, 2006compared to December 31, 2005.

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

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

** **

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

 

23

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

Although we may allocate a portion of the allowance to specific loansor loan categories, the entire allowance is available for activecharge-offs.  Allowance estimates aredeveloped with actual loss experience adjusted for current economicconditions.  Allowance estimates areconsidered a prudent measurement of the risk in the loan portfolio and areapplied to individual loans based on loan type.

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

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

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

Interest income on loans is recognized on the accrual basis except forthose loans in a non-accrual of income status. The accrual of interest onimpaired loans is discontinued when management believes, after consideration ofeconomic and business conditions and collection efforts that the borrowers’financial condition is such that collection of interest is doubtful, typicallyafter the loan becomes 90 days delinquent. When interest accrual is discontinued, existing accrued interest isreversed and interest income is subsequently recognized only to the extent cashpayments are received.

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

24

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The following table provides information with respect to non-performingassets for the periods indicated.
|                                                                              | ** ** | **June 30,** | ** ** | **December 31,** | ** ** |
|------------------------------------------------------------------------------|------------|-------------------|------------|-----------------------|------------|
| **(Dollar in thousands)**                                          | ** ** | **2006**          | ** ** | **2005**              | ** ** |
|                                                                         |       |              |       |                  |       |
| Restructured                                                                 |       | $                 | 3,035      |                  | $          | 3,104 |   |
| Past due 90 days  still on accrual                                           |       | —            |       | —                |       |
| Loans on  non-accrual status                                                 |       | 2,479             |       | 3,128                 |       |
|                                                                         |       |              |       |                  |       |
| Total non-performing loans                                                   |       | 5,514             |       | 6,232                 |       |
| Real estate  acquired through foreclosure                                    |       | 844               |       | 1,022                 |       |
| Other  repossessed assets                                                    |       | 104               |       | 119                   |       |
| Total non-performing assets                                                  |       | $                 | 6,462      |                  | $          | 7,373 |   |
|                                                                         |       |              |       |                  |       |
| Interest income  that would have been earned on non-performing loans         |       | $                 | 411        |                  | $          | 432 |   |
| Interest income  recognized on non-performing loans                          |       | 235               |       | 219                   |       |
|                                                                         |       |              |       |                  |       |
| Ratios: Non-performing loans to total loans (excluding  loans held for sale) |       | 0.83              | %          | 0.97                  | %          |
| Non-performing assets to total loans  (excluding loans held for sale)        |       | 0.97              | %          | 1.15                  | %          |
|                                                                         |       |              |       |                  |       |

 

Non-performing assets for the 2006 period include$3.0 million in restructured commercial, residential mortgage and consumerloans.** **The restructured loans primarily consist of three creditrelationships aggregating $2.8 million, including a $2.2 million commercialrelationship, a $207,000 commercial relationship and a $447,000 residentialmortgage relationship.   The terms ofthese loans have been renegotiated to reduce the rate of interest and extendthe term, thus reducing the amount of cash flow required from the borrower toservice the loans.  The terms of therestructured loans are currently being met.

**Investment Securities**

Interest on securities provides us our largest source of interestincome after interest on loans, constituting 6.3% of the total interest incomefor the six months ended June 30, 2006.  The securities portfolio serves as a source ofliquidity and earnings and contributes to the management of interest raterisk.  We have the authority toinvest in various types of liquid assets, including short-term United StatesTreasury obligations and securities of various federal agencies, obligations ofstates and political subdivisions, corporate bonds, certificates of deposit atinsured savings and loans and banks, bankers’ acceptances, and federalfunds.  We may also invest a portion ofour assets in certain commercial paper and corporate debt securities.  We are also authorized to invest in mutualfunds and stocks whose assets conform to the investments that we are authorizedto make directly. The available-for-sale and held-to-maturity investmentportfolios decreased by $6.0 million during the 2006 period as securities werecalled for redemption in accordance with their terms due to increasing interestrates.  Offsetting this decrease werepurchases of****investments in stateand municipal obligations and a corporate bond. The corporate bond re-prices quarterly with three-month LIBOR and was purchasedto enhance our earnings.  The state andmunicipal obligations have an average life of 10 years.  We purchased these securities to enhanceearnings and manage interest rate risk by placing longer-dated assets on thebalance sheet.

###### **Deposits**

We rely primarily on customer service and long-standing relationshipswith customers to attract and retain deposits. Market interest rates and rateson deposit products offered by competing financial institutions cansignificantly affect our ability to attract and retain deposits.  In conjunction with our initiatives to expandand enhance our retail branch network, we emphasize growing our customerchecking account base to better enhance profitability and franchise value.** **Retailand commercial deposits increased $41.5 million from December 31, 2005.  This increase was offset by a $17.6 milliondecrease in public fund deposits, resulting in an increase in total deposits of$23.9 million for the period.  Theincrease in retail deposits was primarily in certificate of deposit balancesdue to a Valentines Day CD promotion.

25

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The following table breaks down our deposits.
|                          | ** ** | **June 30,**       | ** ** | **December 31,** | ** ** |
|--------------------------|------------|-------------------------|------------|-----------------------|------------|
| ** **               | ** ** | **2006**                | ** ** | **2005**              | ** ** |
| ** **               | ** ** | **(In Thousands)** | ** ** |
|                     |       |                    |       |                  |       |
| Non-interest  bearing    |       | $                       | 43,726     |                  | $          | 39,145 |   |
| NOW demand               |       | 72,718                  |       | 76,848                |       |
| Savings                  |       | 88,886                  |       | 99,879                |       |
| Money market             |       | 58,159                  |       | 66,175                |       |
| Certificates of  deposit |       | 351,509                 |       | 309,059               |       |
|                     |       | $                       | 614,998    |                  | $          | 591,106 |   |

** **

**Advances from Federal Home Loan Bank**

We had borrowings of $85.3 million from the Federal Home Loan Bank(FHLB) of Cincinnati at June 30, 2006.** **During January 2001, we enteredinto $75.0 million in convertible fixed rate advances with a maturity of tenyears.  These advances were fixed forperiods of two to three years.** **At the end of the fixed rate termand quarterly thereafter, the FHLB has the right to convert these advances tovariable rate advances tied to the three-month LIBOR index. Upon conversion, wecan prepay the advance at no penalty. One of the advances, fixed at a rate of 4.86% for $50.0 million, wasprepaid in July 2006 without penalty. The other advance is fixed at a rate of5.05% for $25.0 million.** **If the three-month LIBOR indexcontinues to increase, there is a higher likelihood the $25.0 million advancewill be converted to a variable rate advance in September of 2006.

**Subordinated Debentures**

In March 2002, a trust we formed completed the private placement of10,000 shares of cumulative trust preferred securities with a liquidationpreference of $1,000 per security.  Theproceeds of the offering were loaned to us in exchange for floating rate juniorsubordinated deferrable interest debentures. Distributions on the Trust Preferred Securities are payable quarterly inarrears at the annual rate (adjusted quarterly) of three-month LIBOR plus3.60%, and are included in interest expense. The Subordinated Debentures are considered as Tier I capital for theCorporation under current regulatory guidelines.

##### **LIQUIDITY**

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

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

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

26

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

##### **CAPITAL**

Stockholders’ equity increased $3.3 millionfor the period ended June 30, 2006 compared to December 31, 2005.** **Theincrease in capital was primarily attributable to net income during the period.** **Thisincrease was offset by cash dividends declared and a decline in accumulatedother comprehensive income, a result of temporary unrealized losses recorded onsecurities.** **Average stockholders’ equity to average assets ratioincreased to 8.61% for the six month period ended June 30, 2006 compared to8.22% for 2005.

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

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

27

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

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

 

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

###### **Asset/LiabilityManagement and Market Risk**

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

Weutilize an earnings simulation model to analyze net interest incomesensitivity.  Potential changes in marketinterest rates and their subsequent effects on net interest income are thenevaluated.  The model projects the effectof instantaneous movements in interest rates of both 100 and 200 basispoints.  Assumptions based on thehistorical behavior of our deposit rates and balances in relation to changes ininterest rates are also incorporated into the model.  These assumptions are inherently uncertainand, as a result, the model cannot precisely measure future net interest incomeor precisely predict the impact of fluctuations in market interest rates on netinterest income.  Actual results willdiffer from the model’s simulated results due to timing, magnitude andfrequency of interest rate changes as well as changes in market conditions andthe application and timing of various management strategies.

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

Ourinterest sensitivity at any point in time will be affected by a number offactors.  These factors include the mixof interest sensitive assets and liabilities, their relative pricing schedules,market interest rates, deposit growth, loan growth, decay rates and prepaymentspeed assumptions.

Asdemonstrated by the June 30, 2006 and December 31, 2005 sensitivity tables, weare in an asset sensitive position. This means that our earning assets, whichconsist of loans and investment securities, will change in price at a fasterrate than our deposits and borrowings. Therefore, as short term interest rates increase, our net interestincome will also increase.  Likewise, asshort term interest rates decrease, our net interest income will decrease.

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

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

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|                                      | ** ** | **June 30, 2006**     | ** ** |
|--------------------------------------|------------|---------------------------------|------------|
| ** **                           | ** ** | **Decrease in Rates** | ** ** | ** ** | ** ** | **Increase in Rates** | ** ** |
| ** **                           | ** ** | **200**                         | ** ** | **100** | ** ** | ** ** | ** ** | **100** | ** ** | **200** | ** ** |
| **(Dollars in thousands)** | ** ** | **Basis Points**           | ** ** | **Basis Points** | ** ** | **Base** | ** ** | **Basis Points** | ** ** | **Basis Points** | ** ** |
|                                 |       |                            |       |   |   |   |   |   |   |   |   |
| **Projected  interest income**       |       |                            |       |   |   |   |   |   |   |   |   |
| Loans                                |       | $                               | 55,198     |   | $ | 56,742 |   | $ | 58,024 |   | $ | 59,343 |   | $ | 60,594 |   |
| Investments                          |       | 2,337                           |       | 2,410 |   | 2,399 |   | 2,458 |   | 2,480 |   |
| **Total  interest income**           |       | 57,535                          |       | 59,152 |   | 60,423 |   | 61,801 |   | 63,074 |   |
|                                 |       |                            |       |   |   |   |   |   |   |   |   |
| **Projected  interest expense**      |       |                            |       |   |   |   |   |   |   |   |   |
| Deposits                             |       | 17,545                          |       | 18,257 |   | 18,968 |   | 19,605 |   | 20,242 |   |
| Borrowed funds                       |       | 5,346                           |       | 5,627 |   | 5,802 |   | 6,129 |   | 6,314 |   |
| **Total  interest expense**          |       | 22,891                          |       | 23,884 |   | 24,770 |   | 25,734 |   | 26,556 |   |
|                                 |       |                            |       |   |   |   |   |   |   |   |   |
| **Net  interest income**             |       | $                               | 34,644     |   | $ | 35,268 |   | $ | 35,653 |   | $ | 36,067 |   | $ | 36,518 |   |
| Change from base                     |       | $                               | (1,009     | ) | $ | (385 | ) |   |   | $ | 414 |   | $ | 865 |   |
| % Change from base                   |       | (2.83                           | )%         | (1.08 | )% |   |   | 1.16 | % | 2.43 | % |

 
| ** **                           | ** ** | **December 31, 2005** | ** ** |
|--------------------------------------|------------|---------------------------------|------------|
| ** **                           | ** ** | **Decrease in Rates** | ** ** | ** ** | ** ** | **Increase in Rates** | ** ** |
| ** **                           | ** ** | **200**                         | ** ** | **100** | ** ** | ** ** | ** ** | **100** | ** ** | **200** | ** ** |
| **(Dollars in thousands)** | ** ** | **Basis Points**           | ** ** | **Basis Points** | ** ** | **Base** | ** ** | **Basis Points** | ** ** | **Basis Points** | ** ** |
|                                 |       |                            |       |   |   |   |   |   |   |   |   |
| **Projected  interest income**       |       |                            |       |   |   |   |   |   |   |   |   |
| Loans                                |       | $                               | 48,350     |   | $ | 49,818 |   | $ | 51,077 |   | $ | 52,281 |   | $ | 53,539 |   |
| Investments                          |       | 2,703                           |       | 2,846 |   | 2,948 |   | 2,995 |   | 3,062 |   |
| **Total  interest income**           |       | 51,053                          |       | 52,664 |   | 54,025 |   | 55,276 |   | 56,601 |   |
|                                 |       |                            |       |   |   |   |   |   |   |   |   |
| **Projected  interest expense**      |       |                            |       |   |   |   |   |   |   |   |   |
| Deposits                             |       | 12,738                          |       | 13,319 |   | 13,900 |   | 14,421 |   | 14,941 |   |
| Borrowed funds                       |       | 4,697                           |       | 4,782 |   | 4,845 |   | 4,896 |   | 4,947 |   |
| **Total  interest expense**          |       | 17,435                          |       | 18,101 |   | 18,745 |   | 19,317 |   | 19,888 |   |
|                                 |       |                            |       |   |   |   |   |   |   |   |   |
| **Net  interest income**             |       | $                               | 33,618     |   | $ | 34,563 |   | $ | 35,280 |   | $ | 35,959 |   | $ | 36,713 |   |
| Change from base                     |       | $                               | (1,662     | ) | $ | (717 | ) |   |   | $ | 679 |   | $ | 1,433 |   |
| % Change from base                   |       | (4.71                           | )%         | (2.03 | )% |   |   | 1.92 | % | 4.06 | % |

 

###### **Item4.  CONTROLS AND PROCEDURES**

*Evaluation of disclosure controlsand procedures*

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

*Changes ininternal control over financial reporting*

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

30

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##### **PartII -  OTHER INFORMATION**

**Item 1.**                             LegalProceedings

Although, from time to time, we are involved invarious legal proceedings in the normal course of business, there are nomaterial pending legal proceedings to which we are a party, or to which any ofour property is subject.

**Item 1A.**                    RiskFactors

We didnot have any changes to our risk factors previously disclosed in our AnnualReport on Form 10-K for the year ended December 31, 2005.

**Item 2.**                             UnregisteredSales of Securities and Use of Proceeds

(e)  Issuer Purchases of Equity Securities

We didnot repurchase any of our common stock during the period ended June 30, 2006.

**Item 3.**                             DefaultsUpon Senior Securities

NotApplicable

**Item 4.**                             Submissionof Matters to a Vote of Security Holders

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

1.** **Electionof Directors.

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

 

Inaddition, the following directors will continue in office until the annualmeeting of the year set forth beside each of their names.

| Name                  | ** ** | **Term Expires** |
|-----------------------|------------|------------------|
|                  |       |             |
| Robert M. Brown       |       | 2007             |
| Wreno M. Hall         |       | 2008             |
| Walter D.  Huddleston |       | 2008             |
| J. Stephen  Mouser    |       | 2008             |
| J. Alton Rider        |       | 2007             |
| Gail L. Schomp        |       | 2007             |
| Michael L.  Thomas    |       | 2008             |

 

31

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2.  Approvalof the Employee Stock Purchase Plan.

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

3.  Approval of the 2006 Stock Option andIncentive Compensation Plan.

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

 

**Item 5.**                                OtherInformation

None

**Item6.**                                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) |

** **

32

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**FIRST FINANCIAL SERVICE CORPORATION**

## **SIGNATURES**

Pursuant to the requirements ofSection 13 or 15(d) of the Securities Exchange Act of 1934, the registrant hasduly caused this report to be signed on its behalf by the undersigned,thereunto duly authorized.
| DATE: August 9, 2006 | BY: /s/ | B. Keith Johnson                      |   |
|----------------------|---------|---------------------------------------|--------|
|                 |    | B. Keith Johnson                      |   |
|                 |    | President and Chief Executive Officer |   |

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

 

33

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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) |   |   |

 

34

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