**UNITED STATES**

**SECURITIES ANDEXCHANGE COMMISSION**

**Washington, D.C.  20549**

**FORM 10-Q**

**(Mark One)**

| **x**                                              |   | **QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)  OF THE SECURITIES EXCHANGE ACT OF 1934.**  |
|----------------------------------------------------|--------|------------------------------------------------------------------------------------------------|
| ** **                                         |   | ** **                                                                                     |
| **For the  quarterly period ended March 31, 2007** |
| ** **                                         |   | ** **                                                                                     |
| **OR**                                             |
|                                               |   |                                                                                           |
| **o**                                              |   | **TRANSITION REPORT PURSUANT TO SECTION 13 OR  15(d) OF THE SECURITIES EXCHANGE ACT OF 1934.** |

 

**Commission File Number 0-18832**

**First FinancialService Corporation**

(ExactName 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**

(Addressof principal executive offices)

(ZipCode)

**(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 Filerx  Non-Accelerated Filer 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 April 30, 2007** |
|--------------|--------|--------------------------------------|
| Common Stock |   | 4,327,484 shares                     |

 

 

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## **FIRST FINANCIALSERVICE CORPORATION**

**TABLE OF CONTENTS**
| **PART I****–  FINANCIAL INFORMATION** |                                                                                        |
|---------------------------------------------|---------------------------------------------------------------------------------------------|
| ** **                                  |                                                                                        |
| **Item 1.**                                 | Consolidated  Financial Statements and Notes to Consolidated Financial Statements           |   |
|                                        |                                                                                        |   |
| **Item 2.**                                 | Management’s  Discussion and Analysis of Financial Condition and Results of Operations |   |
|                                        |                                                                                        |   |
| **Item 3.**                                 | Quantitative  and Qualitative Disclosures about Market Risk Controls and Procedures         |   |
| ** **                                  |                                                                                        |   |
| **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-LOOKING STATEMENTS**

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

Variousrisks and uncertainties may cause actual results to differ materially fromthose indicated by our forward-looking statements.  In addition to those risks described under “Item1A Risk Factors,” of our 2006 Annual Report on Form 10-K and of this report,the following factors could cause such differences: changes in general economicconditions and economic conditions in Kentucky and the markets we serve, any ofwhich may affect, among other things, our level of non-performing assets,charge-offs, and provision for loan loss expense; changes in interest ratesthat may reduce interest margins and impact funding sources; changes in marketrates and prices which may adversely impact the value of financial productsincluding securities, loans and deposits; changes in tax laws, rules andregulations; various monetary and fiscal policies and regulations, includingthose determined by the Federal Reserve Board, the Federal Deposit InsuranceCorporation (“FDIC”) and the Kentucky Office of Financial Institutions (“KOFI”);competition with other local and regional commercial banks, savings banks,credit unions and other non-bank financial institutions; our ability to growcore businesses; our ability to develop and introduce new banking-related products,services and enhancements and gain market acceptance of such products; andmanagement’s ability to manage these and other risks.

Our forward-lookingstatements speak only as of the date on which they are made, and we undertakeno obligation to update any forward-looking statement to reflect events orcircumstances after the date of the statement to reflect the occurrence ofunanticipated events.

3

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**Item 1.**

**FIRST FINANCIAL SERVICECORPORATION**

**Consolidated Balance Sheets**

**(Unaudited)**

 
| ** **                                                                                                                                                 | ** ** | **March 31,** | ** ** | **December 31,** | ** ** |
|------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|--------------------|------------|-----------------------|------------|
| **(Dollars in thousands, except share data)**                                                                                     | ** ** | **2007**           | ** ** | **2006**              | ** ** |
|                                                                                                                                                       | ** ** | ** **         | ** ** | ** **            | ** ** |
| **ASSETS**                                                                                                                                                 |       |               |       |                  |       |
| Cash and due  from banks                                                                                                                                   |       | $                  | 15,049     |                  | $          | 19,082 |   |
|                                                                                                                                                       |       |               |       |                  |       |
| Securities  available-for-sale                                                                                                                             |       | 27,133             |       | 28,223                |       |
| Securities  held-to-maturity, fair value of $23,683 Mar (2007) and $23,817 Dec (2006)                                                                      |       | 24,016             |       | 24,224                |       |
| Total securities                                                                                                                                           |       | 51,149             |       | 52,447                |       |
|                                                                                                                                                       |       |               |       |                  |       |
| Loans held for  sale                                                                                                                                       |       | 1,300              |       | 673                   |       |
| Loans, net of  unearned fees                                                                                                                               |       | 728,412            |       | 705,037               |       |
| Allowance for  loan losses                                                                                                                                 |       | (7,730             | )          | (7,684                | )          |
| Net loans receivable                                                                                                                                       |       | 721,982            |       | 698,026               |       |
| ** **                                                                                                                                                 |       |               |       |                  |       |
| Federal Home  Loan Bank stock                                                                                                                              |       | 7,621              |       | 7,621                 |       |
| Cash surrender  value of life insurance                                                                                                                    |       | 8,030              |       | 7,947                 |       |
| Premises and  equipment, net                                                                                                                               |       | 23,041             |       | 22,500                |       |
| Real estate  owned:                                                                                                                                        |       |               |       |                  |       |
| Acquired through foreclosure                                                                                                                               |       | 716                |       | 918                   |       |
| Held for development                                                                                                                                       |       | 91                 |       | 337                   |       |
| Other repossessed  assets                                                                                                                                  |       | 73                 |       | 82                    |       |
| Goodwill                                                                                                                                                   |       | 8,384              |       | 8,384                 |       |
| Accrued interest  receivable                                                                                                                               |       | 3,999              |       | 4,094                 |       |
| Other assets                                                                                                                                               |       | 1,941              |       | 1,388                 |       |
|                                                                                                                                                       |       |               |       |                  |       |
| **TOTAL ASSETS**                                                                                                                                           |       | $                  | 842,076    |                  | $          | 822,826 |   |
|                                                                                                                                                       |       |               |       |                  |       |
| **LIABILITIES AND STOCKHOLDERS' EQUITY**                                                                                                                   |       |               |       |                  |       |
| **LIABILITIES:**                                                                                                                                           |       |               |       |                  |       |
| Deposits:                                                                                                                                                  |       |               |       |                  |       |
| Non-interest bearing                                                                                                                                       |       | $                  | 45,242     |                  | $          | 40,349 |   |
| Interest bearing                                                                                                                                           |       | 649,941            |       | 600,688               |       |
| Total deposits                                                                                                                                             |       | 695,183            |       | 641,037               |       |
|                                                                                                                                                       |       |               |       |                  |       |
| Short-term  borrowings                                                                                                                                     |       | 32,700             |       | 68,500                |       |
| Advances from  Federal Home Loan Bank                                                                                                                      |       | 28,187             |       | 28,224                |       |
| Subordinated  debentures                                                                                                                                   |       | 10,000             |       | 10,000                |       |
| Accrued interest  payable                                                                                                                                  |       | 246                |       | 273                   |       |
| Accounts payable  and other liabilities                                                                                                                    |       | 2,498              |       | 1,321                 |       |
| Deferred income  taxes                                                                                                                                     |       | 1,370              |       | 1,373                 |       |
|                                                                                                                                                       |       |               |       |                  |       |
| **TOTAL LIABILITIES**                                                                                                                                      |       | 770,184            |       | 750,728               |       |
| Commitments and  contingent liabilities                                                                                                                    |       | —             |       | —                |       |
|                                                                                                                                                       |       |               |       |                  |       |
| **STOCKHOLDERS'  EQUITY:**                                                                                                                                 |       |               |       |                  |       |
| Serial preferred  stock, 5,000,000 shares authorized and unissued                                                                                          |       | —             |       | —                |       |
| Common stock, $1  par value per share; authorized 10,000,000 shares; issued and outstanding,  4,327,484 shares Mar (2007), and 4,384,088 shares Dec (2006) |       | 4,327              |       | 4,384                 |       |
| Additional  paid-in capital                                                                                                                                |       | 25,789             |       | 27,419                |       |
| Retained  earnings                                                                                                                                         |       | 41,697             |       | 40,210                |       |
| Accumulated  other comprehensive income                                                                                                                    |       | 79                 |       | 85                    |       |
|                                                                                                                                                       |       |               |       |                  |       |
| **TOTAL STOCKHOLDERS' EQUITY**                                                                                                                             |       | 71,892             |       | 72,098                |       |
| **TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY**                                                                                                             |       | $                  | 842,076    |                  | $          | 822,826 |   |

 

*See notesto consolidated financial statements.*

 

4

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**FIRST FINANCIAL SERVICECORPORATION**

**Consolidated Statements of Income**

** **

**(Unaudited)**

 
| ** **                                                                      | ** ** | **Three Months Ended** | ** ** |
|---------------------------------------------------------------------------------|------------|----------------------------------|------------|
| **(Dollars in thousands, except per share data)** | ** ** | **March 31,**               | ** ** |
| ** **                                                                      | ** ** | **2007**                         | ** ** | **2006** | ** ** |
| **Interest  and Dividend Income:**                                              |       |                             |       |   |   |
| Loans, including fees                                                           |       | $                                | 13,941     |   | $ | 11,716 |   |
| Taxable securities                                                              |       | 612                              |       | 714 |   |
| Tax exempt securities                                                           |       | 108                              |       | 62 |   |
| Total interest income                                                           |       | 14,661                           |       | 12,492 |   |
|                                                                            |       |                             |       |   |   |
| **Interest  Expense:**                                                          |       |                             |       |   |   |
| Deposits                                                                        |       | 5,946                            |       | 4,044 |   |
| Short-term borrowings                                                           |       | 575                              |       | 74 |   |
| Federal Home Loan Bank advances                                                 |       | 336                              |       | 931 |   |
| Subordinated debentures                                                         |       | 228                              |       | 207 |   |
| Total interest expense                                                          |       | 7,085                            |       | 5,256 |   |
|                                                                            |       |                             |       |   |   |
| Net interest  income                                                            |       | 7,576                            |       | 7,236 |   |
| Provision for  loan losses                                                      |       | 81                               |       | 89 |   |
| Net interest  income after provision for loan losses                            |       | 7,495                            |       | 7,147 |   |
|                                                                            |       |                             |       |   |   |
| **Non-interest  Income:**                                                       |       |                             |       |   |   |
| Customer service fees on deposit accounts                                       |       | 1,273                            |       | 1,232 |   |
| Gain on sale of mortgage loans                                                  |       | 126                              |       | 163 |   |
| Gain on sale of real estate held for development                                |       | 227                              |       | — |   |
| Brokerage commissions                                                           |       | 97                               |       | 82 |   |
| Other income                                                                    |       | 222                              |       | 235 |   |
| Total non-interest income                                                       |       | 1,945                            |       | 1,712 |   |
|                                                                            |       |                             |       |   |   |
| **Non-interest  Expense:**                                                      |       |                             |       |   |   |
| Employee compensation and benefits                                              |       | 3,124                            |       | 2,977 |   |
| Office occupancy expense and equipment                                          |       | 566                              |       | 552 |   |
| Marketing and advertising                                                       |       | 271                              |       | 206 |   |
| Outside services and data processing                                            |       | 666                              |       | 616 |   |
| Bank franchise tax                                                              |       | 231                              |       | 219 |   |
| Write off of issuance cost of Trust Preferred  Securities                       |       | 229                              |       | — |   |
| Other expense                                                                   |       | 928                              |       | 839 |   |
| Total non-interest expense                                                      |       | 6,015                            |       | 5,409 |   |
|                                                                            |       |                             |       |   |   |
| Income before  income taxes                                                     |       | 3,425                            |       | 3,450 |   |
| Income taxes                                                                    |       | 1,108                            |       | 1,112 |   |
| **Net  Income**                                                                 |       | $                                | 2,317      |   | $ | 2,338 |   |
|                                                                            |       |                             |       |   |   |
| Shares  applicable to basic income per share                                    |       | 4,361,304                        |       | 4,381,883 |   |
| **Basic  income per share**                                                     |       | $                                | 0.53       |   | $ | 0.53 |   |
|                                                                            |       |                             |       |   |   |
| Shares  applicable to diluted income per share                                  |       | 4,407,919                        |       | 4,417,573 |   |
| **Diluted  income per share**                                                   |       | $                                | 0.53       |   | $ | 0.53 |   |

 

*See notes to the unaudited consolidated financialstatements.*

5

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**FIRSTFINANCIAL SERVICE CORPORATION**

**ConsolidatedStatements of Comprehensive Income**

**(Unaudited)**
| ** **                                                     | ** ** | **Three Months Ended** | ** ** |
|----------------------------------------------------------------|------------|----------------------------------|------------|
| ** **                                                     | ** ** | **March 31,**               | ** ** |
| **(Dollars in thousands)**                           | ** ** | **2007**                         | ** ** | **2006** | ** ** |
|                                                           |       |                             |       |   |   |
| **Net  Income**                                                |       | $                                | 2,317      |   | $ | 2,338 |   |
| Other  comprehensive income (loss):                            |       |                             |       |   |   |
| Change in unrealized gain (loss) on securities                 |       | (9                               | )          | (109 | ) |
| Reclassification of realized amount                            |       | —                           |       | — |   |
| Net unrealized gain (loss) recognized in comprehensive  income |       | (9                               | )          | (109 | ) |
| Tax effect                                                     |       | 3                                |       | 37 |   |
| Total other comphrehensive income (loss)                       |       | (6                               | )          | (72 | ) |
|                                                           |       |                             |       |   |   |
| **Comprehensive Income**                                       |       | $                                | 2,311      |   | $ | 2,266 |   |

 

*See notes to the unauditedconsolidated financial statements.*

6

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**FIRSTFINANCIAL SERVICE CORPORATION**

**ConsolidatedStatements of Changes in Stockholders’ Equity**

**Three MonthsEnded March 31, 2007**

**(DollarsIn 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, 2006**                                                       |       | 4,384                 |       | $              | 4,384      |         | $          | 27,419              |       | $          | 40,210     |   | $ | 85 |   | $ | 72,098 |   |
| Net income                                                                            |       |                  |       |           |       |         |       | 2,317               |       |       |       | 2,317 |   |
| Stock issued for  stock options exercised and employee benefit plans                  |       | 4                     |       | 4              |       | 84           |       |                |       |       |       | 88 |   |
| Compensation  expense for stock options                                               |       |                  |       |           |       | 26           |       |                |       |       |       | 26 |   |
| Net change in  unrealized gains (losses) on securities available-for-sale, net of tax |       |                  |       |           |       |         |       |                |       | (6         | )          | (6 | ) |
| Cash dividends  declared ($.19 per share)                                             |       |                  |       |           |       |         |       | (830                | )          |       |       | (830 | ) |
| Stock  repurchased                                                                    |       | (61                   | )          | (61            | )          | (1,740       | )          | —              |       | —     |       | (1,801 | ) |
| **Balance, March 31, 2007**                                                           |       | 4,327                 |       | $              | 4,327      |         | $          | 25,789              |       | $          | 41,697     |   | $ | 79 |   | $ | 71,892 |   |

 

*See notes to the unaudited consolidated financialstatements.*

7

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**FIRSTFINANCIAL SERVICE CORPORATION**

**ConsolidatedStatements of Cash Flows**

**(DollarsIn Thousands)**

**(Unaudited)**

 
| ** **                                                                         | ** ** | **Three Months Ended** | ** ** |
|------------------------------------------------------------------------------------|------------|----------------------------------|------------|
| ** **                                                                         | ** ** | **March 31,**               | ** ** |
| ** **                                                                         | ** ** | **2007**                         | ** ** | **2006** | ** ** |
| **Operating  Activities:**                                                         | ** ** | ** **                       | ** ** | ** ** | ** ** |
| Net income                                                                         |       | $                                | 2,317      |   | $ | 2,338 |   |
| Adjustments to  reconcile net income to net cash provided by operating activities: |       |                             |       |   |   |
| Provision for loan losses                                                          |       | 81                               |       | 89 |   |
| Depreciation on premises and equipment                                             |       | 367                              |       | 342 |   |
| Federal Home Loan Bank stock dividends                                             |       | —                           |       | (102 | ) |
| Net amortization (accretion) available-for-sale                                    |       | 1                                |       | 3 |   |
| Net amortization (accretion) held-to-maturity                                      |       | 6                                |       | 8 |   |
| Gain on sale of real estate held for development                                   |       | (227                             | )          | — |   |
| Gain on sale of mortgage loans                                                     |       | (126                             | )          | (163 | ) |
| Origination of loans held for sale                                                 |       | (7,224                           | )          | (9,183 | ) |
| Proceeds on sale of loans held for sale                                            |       | 6,723                            |       | 9,200 |   |
| Compensation expense for stock options                                             |       | 26                               |       | 16 |   |
| Changes in:                                                                        |       |                             |       |   |   |
| Cash surrender value of life insurance                                             |       | (83                              | )          | (74 | ) |
| Interest receivable                                                                |       | 95                               |       | (157 | ) |
| Other assets                                                                       |       | (553                             | )          | 2 |   |
| Interest payable                                                                   |       | (27                              | )          | (8 | ) |
| Accounts payable and other liabilities                                             |       | 1,177                            |       | 1,123 |   |
| Net cash from  operating activities                                                |       | 2,553                            |       | 3,434 |   |
|                                                                               |       |                             |       |   |   |
| **Investing  Activities:**                                                         | ** ** | ** **                       | ** ** | ** ** | ** ** |
| Purchases of securities available-for-sale                                         |       | (395                             | )          | (1,851 | ) |
| Maturities of securities available-for-sale                                        |       | 1,475                            |       | 545 |   |
| Maturities of securities held-to-maturity                                          |       | 202                              |       | 219 |   |
| Net change in loans                                                                |       | (23,199                          | )          | (7,803 | ) |
| Net purchases of premises and equipment                                            |       | (908                             | )          | (322 | ) |
| Sales of real estate for development                                               |       | 473                              |       | — |   |
| Net cash from  investing activities                                                |       | (22,352                          | )          | (9,212 | ) |
|                                                                               |       |                             |       |   |   |
| **Financing  Activities**                                                          | ** ** | ** **                       | ** ** | ** ** | ** ** |
| Net change in deposits                                                             |       | 54,146                           |       | 39,465 |   |
| Change in short-term borrowings                                                    |       | (35,800                          | )          | (19,500 | ) |
| Repayments to Federal Home Loan Bank                                               |       | (37                              | )          | (41 | ) |
| Proceeds from issuance of subordinated debentures                                  |       | 10,000                           |       | — |   |
| Payoff of subordinated debentures                                                  |       | (10,000                          | )          | — |   |
| Issuance of common stock for options and employee  benefit plans                   |       | 88                               |       | — |   |
| Dividends paid                                                                     |       | (830                             | )          | (756 | ) |
| Common stock repurchased                                                           |       | (1,801                           | )          | — |   |
| Net cash from  financing activities                                                |       | 15,766                           |       | 19,168 |   |
|                                                                               |       |                             |       |   |   |
| **(Decrease)  Increase in cash and cash equivalents**                              |       | (4,033                           | )          | 13,390 |   |
| **Cash  and cash equivalents, beginning of period**                                |       | 19,082                           |       | 20,451 |   |
| **Cash and cash equivalents, end  of period**                                      |       | $                                | 15,049     |   | $ | 33,841 |   |

 

*See notes to the unaudited consolidated financialstatements.*

8

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**Notes To Unaudited 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 three-month periodending March 31, 2007 are not necessarily indicative of the results that mayoccur for the year ending December 31, 2007. For further information, refer to the consolidated financial statementsand footnotes thereto included in the Corporation’s annual report on Form 10-Kfor the period ended December 31, 2006.

***Stock Dividends***– We declared a 10% stock dividend on August 15, 2006 to ourshareholders of record as of August 29, 2006, payable on September 14, 2006.  The payment of this dividend is in addition tothe regular quarterly cash dividend.  Pershare amounts have been restated for the impact of the stock dividend.

***Adoption of New Accounting Standards*** – We adopted the provisions of FASBInterpretation No. 48, Accounting for Uncertainty in Income Taxes(“FIN 48”), on January 1, 2007. The adoption of FIN 48 had no affect on our financialstatements.  We have no unrecognized taxbenefits and do not anticipate any increase in unrecognized benefits during2007 relative to any tax positions taken prior to January 1, 2007.  Should the accrual of any interest orpenalties relative to unrecognized tax benefits be necessary, it is our policyto record such accruals in our income tax accounts; no such accruals exist as ofJanuary 1, 2007.  We file aconsolidated U.S. federal income tax return and the Company and its non-banksubsidiaries file an income tax return in the state of Kentucky.  These returns are subject to examination bytaxing authorities for all years after 2002.

***Reclassifications*** – Some items in the prior period financial statements werereclassified to conform to the current period presentation.

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:**  | ** ** | ** **    | ** ** | ** **     | ** ** | ** **     | ** ** | ** **          | ** ** |
| **March  31, 2007:**                 | ** ** | ** **    | ** ** | ** **     | ** ** | ** **     | ** ** | ** **          | ** ** |
| U. S. Treasury and agencies          |       | $             | 2,497      |           | $          | —         |       | $                   | (7         | ) | $ | 2,490 |   |
| Mortgage-backed                      |       | 9,016         |       | 3              |       | (147           | )          | 8,872               |       |
| Equity                               |       | 1,553         |       | 552            |       | (43            | )          | 2,062               |       |
| State and municipal                  |       | 10,628        |       | 9              |       | (247           | )          | 10,390              |       |
| Corporate                            |       | 3,319         |       | —         |       | —         |       | 3,319               |       |
|                                 |       |          |       |           |       |           |       |                |       |
| Total                                |       | $             | 27,013     |           | $          | 564            |       | $                   | (444       | ) | $ | 27,133 |   |
|                                 |       |          |       |           |       |           |       |                |       |
| **December  31, 2006:**              | ** ** | ** **    | ** ** | ** **     | ** ** | ** **     | ** ** | ** **          | ** ** |
| U.S. Treasury and agencies           |       | $             | 3,497      |           | $          | —         |       | $                   | (13        | ) | $ | 3,484 |   |
| Mortgage-backed                      |       | 9,425         |       | 8              |       | (189           | )          | 9,244               |       |
| Equity                               |       | 1,553         |       | 629            |       | (36            | )          | 2,146               |       |
| State and municipal                  |       | 10,299        |       | 7              |       | (277           | )          | 10,029              |       |
| Corporate                            |       | 3,320         |       | —         |       | —         |       | 3,320               |       |
|                                 |       |          |       |           |       |           |       |                |       |
| Total                                |       | $             | 28,094     |           | $          | 644            |       | $                   | (515       | ) | $ | 28,223 |   |

 
|                                   | ** ** | ** **    | ** ** | **Gross**        | ** ** | **Gross**        | ** ** | ** **          | ** ** |
|-----------------------------------|------------|---------------|------------|------------------|------------|------------------|------------|---------------------|------------|
| ** **                        | ** ** | **Amortized** | ** ** | **Unrecognized** | ** ** | **Unrecognized** | ** ** | ** **          | ** ** |
| ** **                        | ** ** | **Cost**      | ** ** | **Gains**        | ** ** | **Losses**       | ** ** | **Fair Value** | ** ** |
| **Securities  held-to-maturity:** | ** ** | ** **    | ** ** | ** **       | ** ** | ** **       | ** ** | ** **          | ** ** |
| **March  31, 2007:**              | ** ** | ** **    | ** ** | ** **       | ** ** | ** **       | ** ** | ** **          | ** ** |
| U.S. Treasury and agencies        |       | $             | 18,097     |             | $          | 6                |       | $                   | (250       | ) | $ | 17,853 |   |
| Mortgage-backed                   |       | 3,919         |       | 2                |       | (99              | )          | 3,822               |       |
| Corporate                         |       | 2,000         |       | 8                |       | —           |       | 2,008               |       |
|                              |       |          |       |             |       |             |       |                |       |
| Total                             |       | $             | 24,016     |             | $          | 16               |       | $                   | (349       | ) | $ | 23,683 |   |
|                              |       |          |       |             |       |             |       |                |       |
| **December  31, 2006:**           | ** ** | ** **    | ** ** | ** **       | ** ** | ** **       | ** ** | ** **          | ** ** |
| U.S. Treasury and agencies        |       | $             | 18,097     |             | $          | 4                |       | $                   | (318       | ) | $ | 17,783 |   |
| Mortgage-backed                   |       | 4,127         |       | 3                |       | (111             | )          | 4,019               |       |
| Corporate                         |       | 2,000         |       | 15               |       | —           |       | 2,015               |       |
|                              |       |          |       |             |       |             |       |                |       |
| Total                             |       | $             | 24,224     |             | $          | 22               |       | $                   | (429       | ) | $ | 23,817 |   |

 

 

10

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**3.             LOANS**

Loans are summarized as follows:
|                                      | ** ** | **March 31,** | ** ** | **December 31,** | ** ** |
|--------------------------------------|------------|--------------------|------------|-----------------------|------------|
| **(Dollars in thousands)** | ** ** | **2007**           | ** ** | **2006**              | ** ** |
|                                 |       |               |       |                  |       |
| Commercial                           |       | $                  | 42,456     |                  | $          | 40,902 |   |
| Real estate  commercial              |       | 432,673            |       | 410,146               |       |
| Real estate  construction            |       | 26,777             |       | 23,953                |       |
| Residential  mortgage                |       | 134,540            |       | 137,334               |       |
| Consumer and  home equity            |       | 62,429             |       | 62,805                |       |
| Indirect  consumer                   |       | 30,412             |       | 30,857                |       |
| Loans held for  sale                 |       | 1,300              |       | 673                   |       |
|                                 |       | 730,587            |       | 706,670               |       |
| Less:                                |       |               |       |                  |       |
| Net deferred loan origination fees   |       | (875               | )          | (960                  | )          |
| Allowance for loan losses            |       | (7,730             | )          | (7,684                | )          |
|                                 |       | (8,605             | )          | (8,644                | )          |
|                                 |       |               |       |                  |       |
| Loans                                |       | $                  | 721,982    |                  | $          | 698,026 |   |

 
| The allowance for loan loss  is summarized as follows: |   |   |   |   |   |
|--------------------------------------------------------|--------|--------|--------|--------|--------|

 
|                                      | ** ** | **As of and For the** | ** ** |
|--------------------------------------|------------|-------------------------------------------|------------|
| ** **                           | ** ** | **Three Months Ended**          | ** ** |
| ** **                           | ** ** | **March 31,**                        | ** ** |
| **(Dollars in thousands)** | ** ** | **2007**                                  | ** ** | **2006** | ** ** |
|                                 |       |                                      |       |   |   |
| Balance,  beginning of period        |       | $                                         | 7,684      |   | $ | 7,377 |   |
| Provision for  loan losses           |       | 81                                        |       | 89 |   |
| Charge-offs                          |       | (106                                      | )          | (107 | ) |
| Recoveries                           |       | 71                                        |       | 61 |   |
| Balance, end of period               |       | $                                         | 7,730      |   | $ | 7,420 |   |

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

 
|                                              | ** ** | **As of and For the** | ** ** | **As of and For the** | ** ** |
|----------------------------------------------|------------|-------------------------------------------|------------|-------------------------------------------|------------|
| ** **                                   | ** ** | **Three Months Ended**          | ** ** | **Year Ended**                       | ** ** |
| ** **                                   | ** ** | **March 31,**                        | ** ** | **December 31,**                     | ** ** |
| **(Dollars in thousands)**         | ** ** | **2007**                                  | ** ** | **2006**                                  | ** ** |
|                                         |       |                                      |       |                                      |       |
| End of period  impaired loans                |       | $                                         | 5,869      |                                      | $          | 4,838 |   |
| Amount of allowance for  loan loss allocated |       | 140                                       |       | 128                                       |       |
|                                              |            |                                           |            |                                           |            |  |  |

 

11

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**3.****                                     ****LOANS - (Continued)**

We report non-performing loans as impaired.  Our non-performing loans by source were asfollows:
|                                               | ** ** | **March 31,** | ** ** | **December 31,** | ** ** |
|-----------------------------------------------|------------|--------------------|------------|-----------------------|------------|
| **(Dollars in thousands)**          | ** ** | **2007**           | ** ** | **2006**              | ** ** |
|                                          |       |               |       |                  |       |
| Restructured                                  |       | $                  | 2,437      |                  | $          | 2,470 |   |
| Loans past due  over 90 days still on accrual |       | —             |       | —                |       |
| Non accrual  loans                            |       | 3,432              |       | 2,368                 |       |
| Total                                         |       | $                  | 5,869      |                  | $          | 4,838 |   |

 

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

The reconciliation of the numerators and denominators of the basic anddiluted EPS is as follows:
|                                                | ** ** | **Three Months Ended** | ** ** |
|------------------------------------------------|------------|----------------------------------|------------|
| **(Dollars in thousands,**           | ** ** | **March 31,**               | ** ** |
| **except per share data)**      | ** ** | **2007**                         | ** ** | **2006** | ** ** |
|                                           |       |                             |       |   |   |
| Net income  available to common shareholders   |       | $                                | 2,317      |   | $ | 2,338 |   |
| Basic EPS:                                     |       |                             |       |   |   |
| Weighted average common shares                 |       | 4,361                            |       | 4,382 |   |
| Diluted EPS:                                   |       |                             |       |   |   |
| Weighted average common shares                 |       | 4,361                            |       | 4,382 |   |
| Dilutive effect of stock options               |       | 47                               |       | 36 |   |
| Weighted average common and incremental shares |       | 4,408                            |       | 4,418 |   |
| Earnings Per  Share:                           |       |                             |       |   |   |
| Basic                                          |       | $                                | 0.53       |   | $ | 0.53 |   |
| Diluted                                        |       | $                                | 0.53       |   | $ | 0.53 |   |

 

Stockoptions for 21,000 shares of common stock were not included in the March 31,2007 computation of diluted earnings per share. All outstanding stock options for the March 31, 2006 period wereincluded in diluted earnings per share.

**5.****                                     ****STOCK OPTION PLAN**

Our 2006 Stock Incentive Plan, which is shareholder approved, succeededour 1998 Stock Option and Incentive Plan. Under the 2006 Plan, we may grant either incentive or non-qualifiedstock options to****key employees anddirectors****for a total of 588,500shares of our common stock at not less than fair value at the date such optionsare granted.** **Options available for future grant under the 1998 Plantotaled 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. ** **AtMarch 31, 2007 options available for future grant under the 2006 Plan totaled562,500.** **Compensation cost related to options granted under the 1998and 2006 Plans that was charged against earnings for the periods ended March31, 2007****and 2006 was $26,003 and $16,000.

12

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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.

A summary of option activityunder the 1998 and 2006 Plans as of March 31, 2007 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    |       | 169,160     |       | $            | 20.35      |            |       |          |       |   |
| Granted during  period               |       | —      |       | —       |       |            |       |          |       |
| Exercised during  the period         |       | (3,327      | )          | 17.00        |       |            |       |          |       |
| Outstanding, end  of period          |       | 165,833     |       | $            | 20.42      |            | 6.0        |          | $          | 1,372 |   |
|                                 |       |        |       |         |       |            |       |          |       |
| Eligible for exercise  at period end |       | 104,903     |       | $            | 17.99      |            | 4.7        |          | $          | 1,123 |   |

 

There were no options granted for the periods ended March 31, 2007 and2006.  The total intrinsic value ofoptions exercised during the period ended March 31, 2007 was $47,606.  There were no options exercised, modified orsettled in cash for the period ended March 31, 2006.  There was no tax benefit recognized from theoption exercises as they are considered incentive stock options.

As of March 31, 2007 therewas $328,305 of total unrecognized compensation cost related to non-vestedshare-based compensation arrangements granted under the 1998 and 2006Plans.  That cost is expected to berecognized over a weighted-average period of 3.9 years.  Cash received from option exercise under allshare-based payment arrangements for the period ended March 31, 2007 was$56,562.  There were no options exercisedfor the period ended March 31, 2006.

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**Item 2.**

## **MANAGEMENT’S DISCUSSION AND ANALYSIS OFFINANCIAL CONDITION**

**AND RESULTSOF 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 a regionalpopulation 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, 2006 andmaterial changes in the results of operations for the three-month periodending, March 31, 2007 as compared to 2006. It should be read in conjunction with “Management’s Discussion andAnalysis of Financial Condition and Results of Operations” included in theAnnual Report on Form 10-K for the period ended December 31, 2006.

**OVERVIEW**

Over the past several years we have focused on enhancing and expandingour retail and commercial banking network in our core markets as well asestablishing our presence in the Louisville market.  Our core markets, where we have a combined21% market share, have become increasingly competitive as several new bankshave entered the five counties other than Louisville/Jefferson County in thepast few years.  In order to protect andgrow our market share, we replaced existing branches with newer, enhancedfacilities and anticipate constructing several new facilities over the next fewyears.  In addition to the enhancementand expansion in our core markets, we have been increasing our presence in theLouisville market.  Approximately 75% ofthe deposit base in the Louisville market is controlled by six out-of-statebanks.  While the market is verycompetitive, we believe this creates an opportunity for smaller community bankswith more power to make decisions locally. We believe our investment in these initiatives along with our continuedcommitment to a high level of customer service will enhance our market share inour core markets and our development in the Louisville market.

Our retail branch network continues to generate encouragingresults.  Total deposits have grown at a9% compound annual growth rate over the past three years.  Total deposits were $695.2 million at March31, 2007, an increase of $54.1 million, or 8% for the quarter.  The continued development of the retailbranch network into the Louisville market also yielded positive results.  We have a combined $49.5 million in depositsin our two full-service facilities in the Louisville market representing a 27%increase in deposits for the first quarter and a 181% increase from December31, 2004.  We opened these facilities inthe second quarter of 2004 to support our growing customer base in this marketand have started construction on a new full service-banking center in theLouisville market with plans of opening in June 2007.

We have developed a strong commercial real estate niche in ourmarkets.  We have an experienced team ofbankers who are focused on providing service and convenience to ourcustomers.  It is quite common for ourbankers to close loans at a customer’s place of business or even the customer’spersonal residence.   This high level ofservice has been especially well received in our Louisville market, which isdominated by regional

14

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banks.  Currently, twenty-threepercent of our loan portfolio resides in the Louisville market.  To further develop our commercial bankingrelationships in Louisville, we opened a private banking office in April2007.  This office is an upscale facilitycomplementing our retail branch network in Louisville allowing us to furtherattract commercial deposit relationships in conjunction with our commerciallending relationships.

This emphasis on commercial lending generated a 9% compound annualgrowth rate in the total loan portfolio and a 21% compound annual growth ratein commercial loans over the past three years. Commercial loans were $502 million at March 31, 2007, an increase of$26.9 million, or 6% for the quarter. The growth in our commercial and commercial real estate loan portfolio,coupled with our efforts to fund these loans with lower cost customer depositsis our primary business model and has substantially contributed to the growthin earnings over the past several years.

###### **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.

***Allowance forLoan Losses*****–**We maintain an allowancesufficient to absorb probable incurred credit losses existing in the loanportfolio. The Allowance for Loan Loss Review Committee evaluates the allowancefor loan losses on a quarterly basis.  We estimate the allowance usingpast loan loss experience, known and inherent risks in the portfolio, adversesituations that may affect the borrower’s ability to repay, estimated value ofthe underlying collateral, and current economic conditions.  While weestimate the allowance for loan losses based in part on historical losseswithin each loan category, estimates for losses within the commercial realestate portfolio are more dependent upon credit analysis and recent paymentperformance.Allocations ofthe allowance may be made for specific loans or loan categories, but the entireallowance is available for any loan that, in management’s judgment, should becharged 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 theallowance for loan and lease losses takes into account our strategic plan toincrease our emphasis on commercial and consumer lending. We increase theamount of the allowance allocated to commercial loans and consumer loans inresponse to the growth of the commercial and consumer loan portfolios andmanagement’s recognition of the higher risks and loan losses in these lendingareas. Allowance estimates are developed with actual loss experience adjustedfor 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 $7.7 million****or 1.06%of total loans was our estimate of probable losses within the loan portfolio asof****March 31, 2007.** **This estimate resulted in aprovision for loan losses on the income statement of****$81,000 for the quarter.** **If the mix and amount of future charge off percentages differsignificantly from those assumptions used by management in making itsdetermination, the allowance for loan losses and provision for loan losses onthe income statement could be materially increased.

***Stock-basedCompensation*****–**Weadopted the provisions of Statement of Financial Accounting Standards (“SFAS”)No. 123 (R) “Share-Based Payment (Revised 2004),” on January 1, 2006.  Among other things, SFAS No. 123 (R)eliminates the ability to account for stock-based compensation using theintrinsic value based method of accounting and requires that such transactionsbe recognized as compensation expense in the income statement based on theirfair values on the date of the grant. SFAS No. 123 (R) requires that management make assumptions includingstock price volatility and employee turnover that are utilized to measurecompensation expense.  We estimate fairvalue of stock options granted at the date of grant using the Black-Scholesoption pricing model, which requires the input of highly subjectiveassumptions, such as volatility, risk free interest rates and dividend pay outrates.

15

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##### **RESULTSOF OPERATIONS**

Net income for the quarter endedMarch 31, 2007 was $2.3 million or $0.53 per share diluted compared to $2.3million or $0.53 per share diluted for the same period in 2006. ** **Earningsremained flat for 2007 compared to 2006 due to a decrease in our net interestmargin and a higher level of non-interest expense related to our expansionefforts.  ** **Our book valueper common share increased from $15.12 at March 31, 2006 to $16.61 at March 31,2007.** **Annualizednet income for 2007 generated a return on average assets of 1.13% and a returnon average equity of 12.99%.** **These compare with a return onaverage assets of 1.23% and a return on average equity of 14.36% for the 2006period also annualized.

***Net Interest Income*****–**The principal source of our revenue is netinterest income.  Net interest income isthe difference between interest income on interest-earning assets, such asloans and 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.

The growth in our commercial loan portfolio hasincreased the level of interest income generated.  Average interest earning assets increased$60.5 million for the 2007 period compared to 2006.  The yield on earning assets averaged 7.64%for the 2007 period compared to an average yield on earning assets of 7.05% forthe same period in 2006.  This increasewas slightly offset by a larger increase in our cost of funds.  On an annualized basis, the net interestmargin as a percent of average earning assets decreased****13 basis points to 3.96% for the quarterended March 31, 2007 compared to 4.09% for the 2006 period.

Our cost of funds averaged 4.03% during the 2007quarter compared to an average cost of funds of 3.23% for the same period in2006.** **Depositcosts have accelerated due to the re-pricing of maturing certificates ofdeposit that roll off into new certificates of deposit at currently higherinterest rates. In addition, we are paying higher rates on our money marketproducts.  Going forward, our cost offunds is expected to increase as interest rates paid on deposit products havebecome increasingly competitive with the recent upward trend in interest rates.

The increase in the volume ofinterest earning assets has resulted in an increase in net interest income of$340,000 for the quarter ended March 31, 2007 compared to the same three-monthperiod a year ago. The net interest margin is likely to compress infuture quarters as short term interest rates peak and the cost of depositscontinue to rise.  The cost of depositstypically lags behind the increase in adjustable rate loans becausecertificates of deposit generally mature over longer periods than immediatelyadjustable rate loans.

16

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**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 indicated periods.  Yields and costs for the periods presentedare derived by dividing income or expense by the average monthly balance ofassets or liabilities, respectively.
| ** **                                          | ** ** | **Quarter Ended March 31,** | ** ** |
|-----------------------------------------------------|------------|--------------------------------------------|------------|
| ** **                                          | ** ** | **2007**                                   | ** ** | **2006** | ** ** |
| ** **                                          | ** ** | **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                          |       | $                                          | 21,165     |   | $ | 188 |   | 3.60 | % | $ | 32,533 |   | $ | 249 |   | 3.10 | % |
| Mortgage-backed securities                          |       | 13,097                                     |       | 139 |   | 4.30 |   | 16,079 |   | 170 |   | 4.29 |   |
| Equity securities                                   |       | 2,151                                      |       | 19 |   | 3.58 |   | 1,999 |   | 18 |   | 3.65 |   |
| State and political subdivision securities (1) |       | 10,346                                     |       | 163 |   | 6.39 |   | 5,876 |   | 94 |   | 6.49 |   |
| Corporate bonds                                     |       | 5,319                                      |       | 123 |   | 9.38 |   | 5,292 |   | 81 |   | 6.21 |   |
| Loans (2) (3) (4)                                   |       | 719,783                                    |       | 13,941 |   | 7.85 |   | 644,079 |   | 11,716 |   | 7.38 |   |
| FHLB stock                                          |       | 7,621                                      |       | 120 |   | 6.39 |   | 7,195 |   | 102 |   | 5.75 |   |
| Interest bearing deposits                           |       | 1,966                                      |       | 23 |   | 4.74 |   | 7,877 |   | 94 |   | 4.84 |   |
| **Total interest earning assets**                   |       | 781,448                                    |       | 14,716 |   | 7.64 |   | 720,930 |   | 12,524 |   | 7.05 |   |
| Less: Allowance  for loan losses                    |       | (7,763                                     | )          |   |   |   |   | (7,362 | ) |   |   |   |   |
| Non-interest  earning assets                        |       | 60,897                                     |       |   |   |   |   | 58,493 |   |   |   |   |   |
| **Total assets**                                    |       | $                                          | 834,582    |   |   |   |   |   | $ | 772,061 |   |   |   |   |   |
|                                                |       |                                       |       |   |   |   |   |   |   |   |   |   |   |
| **LIABILITIES  AND STOCKHOLDERS’ EQUITY**      | ** ** | ** **                                 | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| Interest bearing  liabilities:                      |       |                                       |       |   |   |   |   |   |   |   |   |   |   |
| Savings accounts                                    |       | $                                          | 103,242    |   | $ | 861 |   | 3.38 | % | $ | 98,670 |   | $ | 632 |   | 2.60 | % |
| NOW and money market accounts                       |       | 120,752                                    |       | 478 |   | 1.61 |   | 131,450 |   | 481 |   | 1.48 |   |
| Certificates of deposit and other time deposits     |       | 407,338                                    |       | 4,607 |   | 4.59 |   | 333,919 |   | 2,931 |   | 3.56 |   |
| Short term borrowings                               |       | 44,278                                     |       | 575 |   | 5.27 |   | 7,076 |   | 74 |   | 4.24 |   |
| FHLB advances                                       |       | 28,195                                     |       | 336 |   | 4.83 |   | 78,350 |   | 931 |   | 4.82 |   |
| Subordinated debentures                             |       | 10,000                                     |       | 228 |   | 9.25 |   | 10,000 |   | 207 |   | 8.40 |   |
| **Total interest bearing liabilities**              |       | 713,805                                    |       | 7,085 |   | 4.03 |   | 659,465 |   | 5,256 |   | 3.23 |   |
| Non-interest  bearing liabilities:                  |       |                                       |       |   |   |   |   |   |   |   |   |   |   |
| Non-interest bearing deposits                       |       | 43,198                                     |       |   |   |   |   | 42,418 |   |   |   |   |   |
| Other liabilities                                   |       | 5,235                                      |       |   |   |   |   | 4,130 |   |   |   |   |   |
| **Total liabilities**                               |       | 762,238                                    |       |   |   |   |   | 706,013 |   |   |   |   |   |
|                                                |       |                                       |       |   |   |   |   |   |   |   |   |   |   |
| Stockholders’  equity                          |       | 72,344                                     |       |   |   |   |   | 66,048 |   |   |   |   |   |
| **Total liabilities and stockholders’ equity** |       | $                                          | 834,582    |   |   |   |   |   | $ | 772,061 |   |   |   |   |   |
|                                                |       |                                       |       |   |   |   |   |   |   |   |   |   |   |
| **Net  interest income**                            |       |                                       |       | $ | 7,631 |   |   |   |   |   | $ | 7,268 |   |   |   |
| **Net  interest spread**                            |       |                                       |       |   |   | 3.61 | % |   |   |   |   | 3.82 | % |
| **Net interest margin**                             |       |                                       |       |   |   | 3.96 | % |   |   |   |   | 4.09 | % |

 

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(1) Taxable equivalent yields arecalculated assuming a 34% federal income tax rate.

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

(3) Calculations include non-accruingloans in the average loan amounts outstanding.

(4) Includes loans held for sale.

(5)Annualized

17

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**RATE/VOLUME ANALYSIS**

The table below provides information regarding changes in interestincome and interest expense for the indicated periods.  For each category of interest-earning assetsand interest-bearing liabilities, information is provided on changes attributableto (1) changes in rate (changes in rate multiplied by old volume); (2) changesin volume (change in volume multiplied by old rate); and (3) changes inrate-volume (change in rate multiplied by change in volume).  Changes in rate-volume are proportionatelyallocated between rate and volume variance.
|                                                 | ** ** | **Three Months Ended**    | ** ** |
|-------------------------------------------------|------------|-------------------------------------|------------|
| ** **                                      | ** ** | **March 31,**                  | ** ** |
| ** **                                      | ** ** | **2007 vs. 2006**         | ** ** |
| ** **                                      | ** ** | **Increase (decrease)**        | ** ** |
| ** **                                      | ** ** | **Due to change in** | ** ** |
| ** **                                      | ** ** | ** **                          | ** ** | ** ** | ** ** | **Net** | ** ** |
| **(Dollars in thousands)**            | ** ** | **Rate**                            | ** ** | **Volume** | ** ** | **Change** | ** ** |
| **Interest  income:**                           | ** ** | ** **                          | ** ** | ** ** | ** ** | ** ** | ** ** |
| U.S. Treasury and agencies                      |       | $                                   | 36         |   | $ | (97 | ) | $ | (61 | ) |
| Mortgage-backed securities                      |       | 1                                   |       | (32 | ) | (31 | ) |
| Equity securities                               |       | —                              |       | 1 |   | 1 |   |
| State and political subdivision securities      |       | (2                                  | )          | 71 |   | 69 |   |
| Corporate bonds                                 |       | 42                                  |       | — |   | 42 |   |
| Loans                                           |       | 790                                 |       | 1,435 |   | 2,225 |   |
| FHLB stock                                      |       | 12                                  |       | 6 |   | 18 |   |
| Interest bearing deposits                       |       | (2                                  | )          | (69 | ) | (71 | ) |
|                                            |       |                                |       |   |   |   |   |
| **Total interest earning assets**               |       | 877                                 |       | 1,315 |   | 2,192 |   |
|                                            |       |                                |       |   |   |   |   |
| **Interest  expense:**                          | ** ** | ** **                          | ** ** | ** ** | ** ** | ** ** | ** ** |
| Savings accounts                                |       | 198                                 |       | 31 |   | 229 |   |
| NOW and money market accounts                   |       | 38                                  |       | (41 | ) | (3 | ) |
| Certificates of deposit and other time deposits |       | 951                                 |       | 725 |   | 1,676 |   |
| Federal funds purchased                         |       | 501                                 |       | — |   | 501 |   |
| FHLB advances                                   |       | 3                                   |       | (598 | ) | (595 | ) |
| Trust Preferred Securities                      |       | 21                                  |       | — |   | 21 |   |
|                                            |       |                                |       |   |   |   |   |
| **Total  interest bearing liabilities**         |       | 1,712                               |       | 117 |   | 1,829 |   |
|                                            |       |                                |       |   |   |   |   |
| **Net change in net interest  income**          |       | $                                   | (835       | ) | $ | 1,198 |   | $ | 363 |   |

 

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

The following tables provide a comparison of the components ofnon-interest income and expenses for the periods ended March 31, 2007 and2006.  The tables show the dollar andpercentage change from 2006 to 2007.  Beloweach table is a discussion of significant changes and trends.
| (Dollars in thousands)                 | ** ** | **2007**   | ** ** | **2006**   | ** ** | **Change** | ** ** | **%**      | ** ** |
|--------------------------------------------------|------------|------------|------------|------------|------------|------------|------------|------------|------------|
| **Non-interest  income**                         | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| Customer service fees on deposit accounts        |       | $          | 1,273      |       | $          | 1,232      |       | $          | 41         |   | 3.3 | % |
| Gain on sale of mortgage loans                   |       | 126        |       | 163        |       | (37        | )          | -22.7      | %          |
| Gain on sale of real estate held for development |       | 227        |       | —     |       | 227        |       | 100.0      | %          |
| Brokerage commissions                            |       | 97         |       | 82         |       | 15         |       | 18.3       | %          |
| Other income                                     |       | 222        |       | 235        |       | (13        | )          | -5.5       | %          |
|                                             |       | $          | 1,945      |       | $          | 1,712      |       | $          | 233        |   | 13.6 | % |

 

18

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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 2007.  We continueto increase our customer base through cross-selling opportunities and marketinginitiatives and promotions.  In addition,we continue to emphasize growing our checking account base to better enhanceour profitability and franchise value.

We originate qualified VA,KHC, RHC and conventional secondary market loans and sell them into thesecondary market with servicing rights released.  For the first quarter of 2007, gain on saleof mortgage loans decreased due to a decrease in the volume of loans closed.

Through our subsidiary, First Federal Office Park, we hold commercial lots adjacent to our home office on Ring Road in Elizabethtown, that are available for sale. During the March 2007 quarter we recorded $227,000 in gains from a lot sale.  Currently, one of the original nine lots held for sale remain unsold.
| (Dollars in thousands)                          | ** ** | **2007**   | ** ** | **2006**   | ** ** | **Change** | ** ** | **%**      | ** ** |
|-----------------------------------------------------------|------------|------------|------------|------------|------------|------------|------------|------------|------------|
| **Non-interest  expenses**                                | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| Employee compensation and benefits                        |       | $          | 3,124      |       | $          | 2,977      |       | $          | 147        |   | 4.9 | % |
| Office occupancy expense and equipment                    |       | 566        |       | 552        |       | 14         |       | 2.5        | %          |
| Marketing and advertising                                 |       | 271        |       | 206        |       | 65         |       | 31.6       | %          |
| Outside services and data processing                      |       | 666        |       | 616        |       | 50         |       | 8.1        | %          |
| Bank franchise tax                                        |       | 231        |       | 219        |       | 12         |       | 5.5        | %          |
| Write off of issuance cost of Trust Preferred  Securities |       | 229        |       | —     |       | 229        |       | 100.0      | %          |
| Other expense                                             |       | 928        |       | 839        |       | 89         |       | 10.6       | %          |
|                                                      |       | $          | 6,015      |       | $          | 5,409      |       | $          | 606        |   | 11.2 | % |

 

Employee compensation and benefits is the largestcomponent of non-interest expense. Employee compensation increased $147,000 for the quarter.  Three commercial lending associates and tenretail associates have been added with our expansion efforts. These associateswere hired for a commercial private banking center which opened in April 2007and a new Louisville retail branch facility scheduled to open in June2007.  We look for a continued increasein employee compensation and benefits expense in line with recent trends, as weprogress with our retail expansion and market efforts.

Office occupancy expense and equipment as well asmarketing and advertising increased due to additional operating expenses relatedto our expansion efforts.  We anticipatethe increased level of non-interest expense to continue in 2007 with continuedretail expansion.

Included in non-interest expense for the March 2007 quarter is $229,000in unamortized trust preferred issuance cost from the redemption of all of our$10.0 million issuance of cumulative trust preferred securities.  These securities paid distributions at aquarterly adjustable rate of LIBOR plus 360 basis points (8.97% on March 26,2007).  We re-issued new cumulative trustpreferred securities at a 10 year fixed rate of 6.69%.

Our efficiency ratio was 63% for the quarter endedMarch 31, 2007 compared to 60% for the 2006 quarter.

19

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**ANALYSIS OF FINANCIAL CONDITION**

Totalassets at March 31, 2007 increased to $842.1 million compared to $822.8 millionat December 31, 2006, an increase of $19.3 million.  The increase was primarily driven by anincrease in loans of $24.0 million.  Thegrowth in loans was funded with deposits, which increased $54.1 million for theperiod.

##### **Loans**

Net loans increased $24.0 million to $722.0million at March 31, 2007 compared to $698.0 million at December 31, 2006.  Our commercial, commercial real estate andreal estate construction portfolios increased $26.9 million to $501.9 millionat March 31, 2007.  For the 2007 period,these loans comprised 69% of the total loan portfolio compared to 63% at March31, 2006.  Offsetting this growth was a$2.8 million decrease in the residential mortgage loan portfolio to $134.5million at March 31, 2007, compared to $137.3 million****at December 31, 2006. Consumer, home equity and indirect consumer loansalso decreased for the 2007 period by $821,000 to $92.8 million at March 31,2007.  For 2007, the growth incommercial, commercial real estate and real estate construction loans has beenstrong for us.
|                                           | ** ** | **March 31,** | ** ** | **December 31,** | ** ** |
|-------------------------------------------|------------|--------------------|------------|-----------------------|------------|
| **(Dollars in thousands)**      | ** ** | **2007**           | ** ** | **2006**              | ** ** |
|                                      |       |               |       |                  |       |
| Commercial                                |       | $                  | 42,456     |                  | $          | 40,902 |   |
| Real estate  commercial                   |       | 432,673            |       | 410,146               |       |
| Real estate  construction                 |       | 26,777             |       | 23,953                |       |
| Residential  mortgage                     |       | 134,540            |       | 137,334               |       |
| Consumer and  home equity                 |       | 62,429             |       | 62,805                |       |
| Indirect  consumer                        |       | 30,412             |       | 30,857                |       |
| Loans held for  sale                      |       | 1,300              |       | 673                   |       |
|                                      |       | 730,587            |       | 706,670               |       |
| Less:                                     |       |               |       |                  |       |
|  Net deferred  loan origination fees |       | (875               | )          | (960                  | )          |
|  Allowance for  loan losses          |       | (7,730             | )          | (7,684                | )          |
|                                      |       | (8,605             | )          | (8,644                | )          |
|                                      |       |               |       |                  |       |
| Loans                                     |       | $                  | 721,982    |                  | $          | 698,026 |   |

 

**Allowance and Provision for LoanLosses**

Our financial performancedepends on the quality of the loans we originate and management’s ability toassess the degree of risk in existing loans when it determines the allowancefor loan losses.  An increase in loancharge-offs or non-performing loans or an inadequate allowance for loan lossescould reduce net interest income, net income and capital and limit the range ofproducts and services we can offer.

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

20

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The following table provides ananalysis of loan loss experience for the periods indicated.
|                                                                           | ** ** | **Three Months Ended** | ** ** |
|---------------------------------------------------------------------------|------------|----------------------------------|------------|
| ** **                                                                | ** ** | **March 31,**               | ** ** |
| **(Dollars in thousands)**                                      | ** ** | **2007**                         | ** ** | **2006** | ** ** |
|                                                                      |       |                             |       |   |   |
| **Balance  at beginning of period**                                       |       | $                                | 7,684      |   | $ | 7,377 |   |
| Loans  charged-off:                                                       |       |                             |       |   |   |
|  Real estate  mortgage                                               |       | —                           |       | 2 |   |
|  Consumer                                                            |       | 89                               |       | 105 |   |
|  Commercial                                                          |       | 17                               |       | — |   |
| Total  charge-offs                                                        |       | 106                              |       | 107 |   |
| Recoveries:                                                               |       |                             |       |   |   |
|  Real estate  mortgage                                               |       | 8                                |       | 2 |   |
|  Consumer                                                            |       | 62                               |       | 59 |   |
|  Commercial                                                          |       | 1                                |       | — |   |
| Total recoveries                                                          |       | 71                               |       | 61 |   |
|                                                                      |       |                             |       |   |   |
| **Net  loans charged-off**                                                |       | 35                               |       | 46 |   |
|                                                                      |       |                             |       |   |   |
| Provision for  loan losses                                                |       | 81                               |       | 89 |   |
|                                                                      |       |                             |       |   |   |
| **Balance  at end of period**                                             |       | $                                | 7,730      |   | $ | 7,420 |   |
|                                                                      |       |                             |       |   |   |
| Allowance for  loan losses to total loans (excluding loans held for sale) |       | 1.06                             | %          | 1.14 | % |
| Annualized net  charge-offs to average loans outstanding                  |       | 0.02                             | %          | 0.03 | % |
| Allowance for loan  losses to total non-performing loans                  |       | 132                              | %          | 104 | % |

 

The provision for loan losses decreased $8,000, to $81,000 for thequarter ended March 31, 2007, compared to the 2006 period. We recorded asmaller provision for 2007 due to the improved performance of one of our creditrelationships which resulted in a reduction in the allowance allocated to theloan.  The allowance for loan lossesincreased $310,000 to $7.7 million from March 31, 2006 to March 31, 2007. ** **Theincrease in the allowance was related to a $23.4 million increase in net loansfor 2007 compared to 2006, in conjunction with an $848,000 increase inclassified loans for the 2007 period.

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

The following table provides information with respect to classifiedloans for the periods indicated:
|                                      | ** ** | **March 31,** | ** ** |
|--------------------------------------|------------|--------------------|------------|
| **(Dollars in thousands)** | ** ** | **2007**           | ** ** | **2006** | ** ** |
| **Classified  Loans**                | ** ** | ** **         | ** ** | ** ** | ** ** |
| Substandard                          |       | $                  | 13,913     |   | $ | 12,175 |   |
| Doubtful                             |       | 25                 |       | 924 |   |
| Loss                                 |       | 36                 |       | 27 |   |
| Total Classified                     |       | $                  | 13,974     |   | $ | 13,126 |   |

 

21

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The $1.7 million increase in substandard assets for 2007 was primarilythe result****of the downgrading ofloans with three borrowers in the amount of a $1.8 million, $1.1 million and$689,000,****respectively.** **Offsettingthis increase were upgrades of two classified loans having balances of $1.2million and $1.1 million. 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.  We develop our allowanceestimates based on actual loss experience adjusted for current economicconditions.  Allowance estimatesrepresent a prudent measurement of the risk in the loan portfolio, which weapply 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 whenthey become past due 90 days or more as to principal or interest, unless theyare adequately secured and in the process of collection.  Loans are considered impaired when we nolonger anticipate full principal or interest payments in accordance with thecontractual loan terms.  We carryimpaired loans 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.

We review our loans on a regular basis and implement normal collectionprocedures when a borrower fails to make a required payment on a loan.  If the delinquency on a mortgage loan exceeds90 days and is not cured through normal collection procedures or an acceptablearrangement is not worked out with the borrower, we institute measures to remedythe default, including commencing a foreclosure action.  We generally charge off consumer loans whenmanagement deems a loan uncollectible and any available collateral has beenliquidated.  We handle commercial businessand real estate loan delinquencies on an individual basis with the advice oflegal counsel.

We recognize interest income on loans on the accrual basis except forthose loans in a non-accrual of income status. We discontinue accruing intereston impaired loans when management believes, after consideration of economic andbusiness conditions and collection efforts that the borrowers’ financialcondition is such that collection of interest is doubtful, typically after theloan becomes 90 days delinquent.  When wediscontinue interest accrual, we reverse existing accrued interest andsubsequently recognize interest income only to the extent we receive cashpayments.

We classify real estateacquired as a result of foreclosure or by deed in lieu of foreclosure as realestate owned until such time as it is sold. We classify new and usedautomobile, motorcycle and all terrain vehicles acquired as a result offoreclosure as repossessed assets until they are sold. When such property isacquired we record it at the lower of the unpaid principal balance of therelated loan or its fair market value. We charge any write-down of the property at the time of acquisition tothe allowance for loan losses. Subsequent gains and losses are included in non-interest income andnon-interest expense.

22

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The following table provides information with respect to non-performingassets for the periods indicated.
|                                                                             | ** ** | **March 31,** | ** ** | **December 31,** | ** ** |
|-----------------------------------------------------------------------------|------------|--------------------|------------|-----------------------|------------|
| **(Dollar in thousands)**                                         | ** ** | **2007**           | ** ** | **2006**              | ** ** |
|                                                                        |       |               |       |                  |       |
| Restructured                                                                |       | $                  | 2,437      |                  | $          | 2,470 |   |
| Past due 90 days  still on accrual                                          |       | —             |       | —                |       |
| Loans on  non-accrual status                                                |       | 3,432              |       | 2,368                 |       |
|                                                                        |       |               |       |                  |       |
| Total non-performing loans                                                  |       | 5,869              |       | 4,838                 |       |
| Real estate  acquired through foreclosure                                   |       | 716                |       | 918                   |       |
| Other  repossessed assets                                                   |       | 73                 |       | 82                    |       |
| Total non-performing assets                                                 |       | $                  | 6,658      |                  | $          | 5,838 |   |
|                                                                        |       |               |       |                  |       |
| Interest income  that would have been earned on non-performing loans        |       | $                  | 461        |                  | $          | 368 |   |
| Interest income  recognized on non-performing  loans                   |       | 224                |       | 227                   |       |
| Ratios:Non-performing loans to total loans  (excluding loans held for sale) |       | 0.81               | %          | 0.69                  | %          |
| Non-performing assets  to total loans  (excluding loans held for sale)      |       | 0.91               | %          | 0.83                  | %          |

 

Non-performing loans increased $1.1 million to$5.9 million at March 31, 2007 compared to $4.8 million at December 31,2006.  The increase was related to anincrease in non-accrual loans of $1.1 million. This was primarily the result of a $1.1 million commercial real estatecredit relationship.  The creditrelationship is well secured and no loss is expected.

Non-performing assets for the 2007 period include$2.4 million in restructured commercial, residential mortgage and consumerloans.** **The restructured loans primarily consist of two creditrelationships with balances of $2.1 million, and $202,000.   The terms of these loans have beenrenegotiated to reduce the rate of interest and extend the term, thus reducingthe amount of cash flow required from the borrower to service the loans. Theborrowers are currently meeting the terms of the restructured loans.

**Investment Securities**

Interest on securities provides us our largest source of interestincome after interest on loans, constituting 4.9% of the total interest incomefor the quarter ended March 31, 2007.  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 $1.3 million during the 2007 period as securities werecalled for redemption in accordance with their terms due to increasingrates.  During the period we madepurchases of investments in state and municipal obligations.  The state and municipal obligations have anaverage life of 10 years.  We purchasedthese securities to enhance earnings.

We review unrealized lossesat least on a quarterly basis to determine whether the losses are other thantemporary and more frequently when economic or market concerns warrant suchevaluation. We consider the length of time and the extent to which the fairvalue has been less than cost, the financial condition and near-term prospectsof the issuer, and our intent and ability to retain the investment in theissuer for a period of time sufficient to allow for any anticipated recovery infair value.  In analyzing an issuer’sfinancial condition, we may consider whether the securities are issued by thefederal government or its agencies, whether downgrades by bond rating agencieshave occurred, and the results of reviews of the issuer’s financialcondition.  The unrealized losses on ourinvestments in U.S. Treasury and agencies, mortgage-backed securities andobligations of state and political subdivisions are due to interest rateincreases.  Because the decline in marketvalue is attributable to changes in interest rates and not credit quality, andbecause we have the ability and intent to hold these

23

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investments until recoveryof fair value, which may be maturity, we do not consider these investments tobe other-than-temporarily impaired at March 31, 2007.

###### **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.  During the quarter ended March 31, 2007,total deposits increased by $54.1 million compared to December 31, 2006. Retailand commercial deposits increased $40.4 million, public fund deposits increased$13.9 millionand weadded $1.0 million in brokered certificates of deposit for the quarter.

The following table breaks down our deposits.
|                          | ** ** | **March 31,**      | ** ** | **December 31,** | ** ** |
|--------------------------|------------|-------------------------|------------|-----------------------|------------|
| ** **               | ** ** | **2007**                | ** ** | **2006**              | ** ** |
| ** **               | ** ** | **(In Thousands)** | ** ** |
|                     |       |                    |       |                  |       |
| Non-interest  bearing    |       | $                       | 45,242     |                  | $          | 40,349 |   |
| NOW demand               |       | 74,432                  |       | 73,552                |       |
| Savings                  |       | 101,384                 |       | 84,994                |       |
| Money market             |       | 47,211                  |       | 53,917                |       |
| Certificates of  deposit |       | 426,914                 |       | 388,225               |       |
|                     |       | $                       | 695,183    |                  | $          | 641,037 |   |

 

**Short-Term Borrowings**

Short-term borrowings consist of federalfunds purchased and securities sold under agreements to repurchase.  We had short-term borrowings of $32.7 millionand $68.5 million from the FHLB of Cincinnati at March 31, 2007 and 2006.  These borrowings averaged a rate of 5.27% and4.24% for 2007 and 2006.

**Advances from Federal Home Loan Bank**

Deposits are the primary source of funds for our lending and investmentactivities and for our general business purposes.  We can also use advances (borrowings) fromthe Federal Home Loan Bank (FHLB) of Cincinnati to compensate for reductions indeposits or deposit inflows at less than projected levels.  Advances from the FHLB are secured by ourstock in the FHLB, certain securities, certain commercial real estate loans andsubstantially all of our first residential mortgage loans.  At March 31, 2007 we had $28.2 million inadvances outstanding from the FHLB.

**Subordinated Debentures**

We have $10.0 million in outstanding subordinated debentures.  A trust we formed completed a privateplacement of 10,000 shares of cumulative trust preferred securities with aliquidation preference of $1,000 per security for a total outstanding of $10.0million.  The proceeds of the offeringwere loaned to us in exchange for junior subordinated deferrable interestdebentures.In accordancewith FASB Interpretation 46, the trust is not consolidated with our financialstatements but rather the subordinated debentures are shown as aliability.  These securities paiddistributions of interest. On March 26, 2007 we called the $10.0 million insubordinated debentures adjustable quarterly at LIBOR plus 360 basis points(8.97% on March 26, 2007) and were-issued new 30 year cumulative trust preferred securities at a 10 year fixedrate of 6.69% adjusting quarterly thereafter at LIBOR plus 160 basis points.  Refinancingat a lower interest rate will reduce interest expense approximately $226,000per year based on current rates. Thesubordinated debentures are considered as Tier I capital for the Corporationunder current regulatory guidelines.

24

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##### **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 we can meet the cash flow requirements of depositors and borrowers, as well as our operating cash needs, at a reasonable cost, taking into account all on- and off-balance sheet funding demands. We maintain an investment and funds management policy, which identifies the primary sources of liquidity, establishes procedures for monitoring and measuring liquidity, and establishes minimum liquidity requirements in compliance with regulatory guidance. The Asset Liability Committee continually monitors our liquidity position.

Our sources of funds include the sale of securities in the available-for-sale portion of the investment portfolio, principal pay-downs on loans and mortgage-backed securities, proceeds realized from loans held for sale, brokered deposits and other wholesale funding.  We also secured federal funds borrowing lines from 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 borrowed from the FHLB to supplement our funding requirements. ** **At March 31, 2007, we had an unused approved line of credit in the amount of $94.6 million and sufficient collateral available to borrow, approximately, an additional $65.1 million in advances from the FHLB.**** We believe our sources of liquidity are adequate to meet expected cash needs for the foreseeable future.

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

The primary source of funding for the Corporation has been dividends and returns of investment from the Bank. Kentucky banking laws limit the amount of dividends that may be paid to the Corporation by the Bank without prior approval of the KOFI.  Under these laws, the amount of dividends that may be paid in any calendar year is limited to current year’s net income, as defined in the laws, combined with the retained net income of the preceding two years, less any dividends declared during those periods.   At March 31, 2007, the Bank had approximately $12.0 million of retained earnings that could be used to pay dividends without prior regulatory approval.  Because of these limitations, consolidated cash flows as presented in the consolidated statements of cash flows may not represent cash immediately available to the Corporation.  During the quarter ended March 31, 2007, the Bank declared and paid dividends to the Corporation of $2.9 million.

##### **CAPITAL**

Stockholders’ equity decreased $206,000 forthe quarter ended March 31, 2007 compared to December 31, 2006.** **Thedecrease in capital was primarily due to the repurchase of our own common stockand cash dividends declared during the quarter.** **This decrease wasoffset by net income earned during the period. Average stockholders’ equity to average assets ratio increased to 8.67%for the quarter ended March 31, 2007 compared to 8.55% for 2006.

During the first quarter of 2007, we purchased 61,000 shares of our owncommon stock for $1.8 million.  The repurchase program authorizes therepurchase of 398,601 shares from time-to-time if market conditions are deemedfavorable.  The repurchase program will remain effectiveuntil the number of shares authorized is repurchased or until the programexpires September 19, 2008.  As of March 31, 2007, 337,101 shares could berepurchased under the current stock repurchase program.

Each of the federal bank regulatory agencies hasestablished minimum leverage capital requirements for banks. Banks mustmaintain a minimum ratio of Tier 1 capital to adjusted average quarterly assetsranging from 3% to 5%, subject to federal bank regulatory evaluation of anorganization’s overall safety and soundness. We intend to maintain a capital position that meets or exceeds the “wellcapitalized” requirements as defined for banks by the FDIC.  The following table shows the ratios of Tier1 capital and total capital to risk-adjusted assets and the leverage ratios forthe Corporation and the Bank as of March 31, 2007.

25

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######  

|                                                    | ** ** | ** ** | ** ** | ** **                 | ** ** | ** **                 | ** ** | ** **     | ** ** | **To Be Considered** | ** ** |
|----------------------------------------------------|------------|------------|------------|----------------------------|------------|----------------------------|------------|----------------|------------|--------------------------------|------------|
| ** **                                         | ** ** | ** ** | ** ** | ** **                 | ** ** | ** **                 | ** ** | ** **     | ** ** | **Well Capitalized**      | ** ** |
| ** **                                         | ** ** | ** ** | ** ** | ** **                 | ** ** | ** **                 | ** ** | ** **     | ** ** | **Under Prompt**          | ** ** |
| ** **                                         | ** ** | ** ** | ** ** | ** **                 | ** ** | **For Capital**       | ** ** | **Correction** | ** ** |
| ** **                                         | ** ** | **Actual** | ** ** | **Adequacy Purposes** | ** ** | **Action Provisions** | ** ** |
| **(Dollars in thousands)**               | ** ** | **Amount** | ** ** | **Ratio**                  | ** ** | **Amount**                 | ** ** | **Ratio**      | ** ** | **Amount**                     | ** ** | **Ratio** | ** ** |
| **As of March 31, 2007:**      |       |       |       |                       |       |                       |       |           |       |                           |       |   |   |
| Total risk-based capital (to risk-weighted assets) |       |       |       |                       |       |                       |       |           |       |                           |       |   |   |
| Consolidated                                       |       | $          | 81,385     |                       | 11.1       | %                          | $          | 58,510         |       | 8.0                            | %          | N/A |   | N/A |   |
| Bank                                               |       | 78,442     |       | 10.8                       |       | 58,278                     |       | 8.0            |       | 72,848                         |       | 10 | % |
| Tier I capital (to risk-weighted assets)           | ** ** | ** ** | ** ** | ** **                 | ** ** | ** **                 | ** ** | ** **     | ** ** | ** **                     | ** ** | ** ** | ** ** |
| Consolidated                                       |       | 73,429     |       | 10.0                       |       | 29,255                     |       | 4.0            |       | N/A                            |       | N/A |   |
| Bank                                               |       | 70,486     |       | 9.7                        |       | 29,139                     |       | 4.0            |       | 43,709                         |       | 6 | % |
| Tier I capital  (to average assets)                | ** ** | ** ** | ** ** | ** **                 | ** ** | ** **                 | ** ** | ** **     | ** ** | ** **                     | ** ** | ** ** | ** ** |
| Consolidated                                       |       | 73,429     |       | 8.9                        |       | 33,048                     |       | 4.0            |       | N/A                            |       | N/A |   |
| Bank                                               |       | 70,486     |       | 8.6                        |       | 33,309                     |       | 4.0            |       | 41,217                         |       | 5 | % |
|                                                    |            |            |            |                            |            |                            |            |                |            |                                |            |  |  |  |  |

 
|                                                    | ** ** | ** ** | ** ** | ** **                 | ** ** | ** **                 | ** ** | ** **     | ** ** | **To Be Considered** | ** ** |
|----------------------------------------------------|------------|------------|------------|----------------------------|------------|----------------------------|------------|----------------|------------|--------------------------------|------------|
| ** **                                         | ** ** | ** ** | ** ** | ** **                 | ** ** | ** **                 | ** ** | ** **     | ** ** | **Well Capitalized**      | ** ** |
| ** **                                         | ** ** | ** ** | ** ** | ** **                 | ** ** | ** **                 | ** ** | ** **     | ** ** | **Under Prompt**          | ** ** |
| ** **                                         | ** ** | ** ** | ** ** | ** **                 | ** ** | **For Capital**       | ** ** | **Correction** | ** ** |
| ** **                                         | ** ** | **Actual** | ** ** | **Adequacy Purposes** | ** ** | **Action Provisions** | ** ** |
| **(Dollars in thousands)**               | ** ** | **Amount** | ** ** | **Ratio**                  | ** ** | **Amount**                 | ** ** | **Ratio**      | ** ** | **Amount**                     | ** ** | **Ratio** | ** ** |
| **As of December 31, 2006:**   |       |       |       |                       |       |                       |       |           |       |                           |       |   |   |
| Total risk-based capital (to risk-weighted assets) |       |       |       |                       |       |                       |       |           |       |                           |       |   |   |
| Consolidated                                       |       | $          | 81,583     |                       | 11.6       | %                          | $          | 56,504         |       | 8.0                            | %          | N/A |   | N/A |   |
| Bank                                               |       | 78,653     |       | 11.2                       |       | 56,376                     |       | 8.0            |       | 70,470                         |       | 10.0 |   |
| Tier I capital (to risk-weighted assets)           |       |       |       |                       |       |                       |       |           |       |                           |       |   |   |
| Consolidated                                       |       | 73,639     |       | 10.4                       |       | 28,252                     |       | 4.0            |       | N/A                            |       | N/A |   |
| Bank                                               |       | 70,709     |       | 10.0                       |       | 28,188                     |       | 4.0            |       | 42,282                         |       | 6.0 |   |
| Tier I capital  (to average assets)                |       |       |       |                       |       |                       |       |           |       |                           |       |   |   |
| Consolidated                                       |       | 73,639     |       | 9.2                        |       | 32,014                     |       | 4.0            |       | N/A                            |       | N/A |   |
| Bank                                               |       | 70,709     |       | 8.9                        |       | 31,962                     |       | 4.0            |       | 39,953                         |       | 5.0 |   |
|                                                    |            |            |            |                            |            |                            |            |                |            |                                |            |  |  |  |  |

 

###### **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.  We then evaluate potentialchanges in market interest rates and their subsequent effects on net interestincome.  The model projects the effect ofinstantaneous movements in interest rates of both 100 and 200 basispoints.  We also incorporate assumptionsbased on the historical behavior of our deposit rates and balances in relation tochanges in interest rates into the model. These assumptions are inherently uncertain and, as a result, the modelcannot precisely measure future net interest income or precisely predict theimpact of fluctuations in market interest rates on net interest income.  Actual results will differ from the model’ssimulated results due to timing, magnitude and frequency of interest ratechanges as well as changes in market conditions and the application and timingof various management strategies.

26

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Ourinterest sensitivity profile was asset sensitive at March 31, 2007, compared toa liability sensitive position at December 31, 2006.  Given a sustained 100 basis point decrease inrates, our base net interest income would increase by an estimated****.08% at March 31, 2007 compared to anincrease of .55% at December 31, 2006. ** **Given a 100 basis point increase ininterest rates our base net interest income would increase by an****estimated .19% at March 31, 2007 comparedto a decrease of .48% at December 31, 2006.

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.

Wehave been restructuring our assets in the expectation that interest rates willbe stable or decrease in the future.  Asdemonstrated by the March 31, 2007 sensitivity table, we transitioned from aliability sensitive to an asset sensitive position as compared to December 31,2006. This means that our earning assets, which consist of loans and investmentsecurities, will change in price at a faster rate than our deposits andborrowings.  Therefore, if short terminterest rates increase, our net interest income will also increase.  Likewise, if short term interest ratesdecrease, our net interest income will decrease.

Wecontinually monitor the effects rate changes will have on our level of netinterest income, and management works to structure the maturity and pricing ofloans and deposits to mitigate large swings in net interest income.** **During2007 and 2006, we made efforts to increase the level of short-term depositsoffering more attractive rates on short-term certificates of deposits.  Also, during the third quarter of 2006, wepaid off a fixed rate FHLB advance that had converted to a variable rateadvance.  We replaced this borrowing withovernight short-term borrowings.  InMarch 2007, we called our $10.0 million in subordinated debentures adjustablequarterly at LIBOR plus 360 basis points (8.97% on March 26, 2007) and were-issued new 30 year cumulative trust preferred securities at a 10 year fixedrate of 6.69% adjusting quarterly thereafter at LIBOR plus 160 basis points.  In addition, the majority of the newlyoriginated or renewed loans during 2007 and 2006 were fixed rates loans withthe interest rate fixed from three to five years.

27

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Oursensitivity to interest rate changes is presented based on data as of March 31,2007 and December 31, 2006 annualized to a one year period.
| ** **                           | ** ** | **March 31, 2007**    | ** ** |
|--------------------------------------|------------|---------------------------------|------------|
| ** **                           | ** ** | **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                                |       | $                               | 60,709     |   | $ | 62,131 |   | $ | 63,340 |   | $ | 64,523 |   | $ | 65,808 |   |
| Investments                          |       | 1,703                           |       | 1,862 |   | 1,914 |   | 1,943 |   | 1,971 |   |
| **Total  interest income**           |       | 62,412                          |       | 63,993 |   | 65,254 |   | 66,466 |   | 67,779 |   |
|                                 |       |                            |       |   |   |   |   |   |   |   |   |
| **Projected  interest expense**      | ** ** | ** **                      | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| Deposits                             |       | 23,878                          |       | 24,930 |   | 25,980 |   | 26,923 |   | 27,866 |   |
| Borrowed funds                       |       | 3,640                           |       | 3,976 |   | 4,215 |   | 4,416 |   | 4,613 |   |
| **Total  interest expense**          |       | 27,518                          |       | 28,906 |   | 30,195 |   | 31,339 |   | 32,479 |   |
|                                 |       |                            |       |   |   |   |   |   |   |   |   |
| **Net  interest income**             |       | $                               | 34,894     |   | $ | 35,087 |   | $ | 35,059 |   | $ | 35,127 |   | $ | 35,300 |   |
| Change from base                     |       | $                               | (165       | ) | $ | 28 |   |   |   | $ | 68 |   | $ | 241 |   |
| % Change from base                   |       | (.47                            | )%         | .08 | % |   |   | .19 | % | .69 | % |

 
| ** **                           | ** ** | **December 31, 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                                |       | $                               | 58,262     |   | $ | 59,517 |   | $ | 60,592 |   | $ | 61,623 |   | $ | 62,759 |   |
| Investments                          |       | 2,342                           |       | 2,482 |   | 2,535 |   | 2,625 |   | 2,653 |   |
| **Total  interest income**           |       | 60,604                          |       | 61,999 |   | 63,127 |   | 64,248 |   | 65,412 |   |
|                                 |       |                            |       |   |   |   |   |   |   |   |   |
| **Projected  interest expense**      | ** ** | ** **                      | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| Deposits                             |       | 20,643                          |       | 21,500 |   | 22,356 |   | 23,124 |   | 23,891 |   |
| Borrowed funds                       |       | 5,071                           |       | 5,628 |   | 6,090 |   | 6,608 |   | 7,040 |   |
| **Total  interest expense**          |       | 25,714                          |       | 27,128 |   | 28,446 |   | 29,732 |   | 30,931 |   |
|                                 |       |                            |       |   |   |   |   |   |   |   |   |
| **Net  interest income**             |       | $                               | 34,890     |   | $ | 34,871 |   | $ | 34,681 |   | $ | 34,516 |   | $ | 34,481 |   |
| Change from base                     |       | $                               | 209        |   | $ | 190 |   |   |   | $ | (165 | ) | $ | (200 | ) |
| % Change from base                   |       | .60                             | %          | .55 | % |   |   | (.48 | )% | (.58 | )% |

 

###### **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.

*Limitationson the Effectiveness of Controls*

Acontrol system, no matter how well designed and operated, can provide onlyreasonable, not absolute, assurance that the control system’s objectives willbe met.  Further, the design of a controlsystem must reflect the fact that there are resource constraints, and thebenefits of controls must be considered relative to their costs.

28

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Becauseof the inherent limitations in all control systems, no evaluation of controlscan provide absolute assurance that all control issues and instances of fraud,if any, with our company have been detected. These inherent limitations include the realities that judgments indecision making can be faulty, that breakdowns can occur because of simpleerrors or mistakes, and that controls can be circumvented by the acts ofindividuals or groups.  Because of theinherent limitations in a cost effective control system, misstatements due toerror or fraud may occur and not be detected.

*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.

29

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

| **Item 1.**   | **Legal Proceedings**                                                                                                                                                                                                               |
|---------------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| ** **    | ** **                                                                                                                                                                                                                          |
|          | Although, from time to time, we are involved in  various legal proceedings in the normal course of business, there are no  material pending legal proceedings to which we are a party, or to which any  of our property is subject. |
|          |                                                                                                                                                                                                                                |
| **Item  1A.** | **Risk Factors**                                                                                                                                                                                                                    |
| ** **    | ** **                                                                                                                                                                                                                          |
|          | We did not have any changes to our risk factors  previously disclosed in our Annual Report on Form 10-K for the year ended  December 31, 2006.                                                                                      |
|          |                                                                                                                                                                                                                                |
| **Item 2.**   | **Unregistered Sales of  Securities and Use of Proceeds**                                                                                                                                                                           |
| ** **    | ** **                                                                                                                                                                                                                          |
|          | (e) Issuer Purchases of Equity Securities                                                                                                                                                                                           |

 
|                         | ** ** | ** **         | ** ** | ** **         | ** ** | **Total Number of** | ** ** | **Maxium**                         | ** ** |
|-------------------------|------------|--------------------|------------|--------------------|------------|-------------------------------|------------|------------------------------------|------------|
| ** **              | ** ** | **Total**          | ** ** | **Average**        | ** ** | **Shares Purchased**     | ** ** | **Number of Shares**     | ** ** |
| ** **              | ** ** | **Number**         | ** ** | **Price**          | ** ** | **as Part of**      | ** ** | **that May Yet Be** | ** ** |
| ** **              | ** ** | **of Shares** | ** ** | **Paid**           | ** ** | **Publicly Announced**   | ** ** | **Purchased Under**           | ** ** |
| **Period**              | ** ** | **Purchased**      | ** ** | **per Share** | ** ** | **Plans**                     | ** ** | **the Plan**                  | ** ** |
| January 1-January  31   |       | 20,000             |       | $                  | 31.60      |                          | 20,000     |                               | 378,101    |   |
| February  1-February 28 |       | —             |       |               |       |                          |       | 378,101                            |       |
| March 1-March 31        |       | 41,000             |       | 28.50              |       | 41,000                        |       | 337,101                            |       |
|                    |       |               |       |               |       |                          |       |                               |       |
| Total                   |       | 61,000             |       | $                  | 29.52      |                          | 61,000     |                               |       |   |

 
| **Item 3.** | **Defaults Upon Senior Securities**                      |
|-------------|----------------------------------------------------------|
| ** **  | ** **                                               |
|        | Not Applicable                                           |
|        |                                                     |
| **Item 4.** | **Submission of Matters to a Vote  of Security Holders** |
| ** **  | ** **                                               |
|        | Not Applicable                                           |
|        |                                                     |
| **Item 5.** | **Other Information**                                    |
|        |                                                     |
|        | None                                                     |
|        |                                                     |
| **Item 6.** | **Exhibits:**                                            |
| ** **  | ** **                                               |
|        | 31.1                                                     | Certification of  Chief Executive Officer Pursuant to Section 302 of Sarbanes-Oxley Act |
|        |                                                     |   |
|        | 31.2                                                     | Certification of  Chief Financial Officer Pursuant to Section 302 of Sarbanes-Oxley Act |
|        |                                                     |   |
|        | 32                                                       | Certification of  Chief Executive Officer and Chief Financial Officer Pursuant to Section 18  U.S.C. Section 1350 (As Adopted Pursuant to Section 906 of the Sarbanes-Oxley  Act of 2002) |

** **

30

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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: May 10, 2007 | By: /s/ | B. Keith Johnson                      |   |
|--------------------|---------|---------------------------------------|--------|
|               |    | B. Keith Johnson                      |
|               |    | President and Chief Executive Officer |
|               |    |
|               |    |
| Date: May 10, 2007 | By: /s/ | Gregory S. Schreacke                  |   |
|               |    | Gregory S. Schreacke                  |   |
|               |    | Chief Financial Officer               |   |
|               |    | Principal Accounting Officer          |   |
|                    |         |                                       |        |  |

 

31

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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) |

 

32

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