**UNITED STATES**

**SECURITIES AND EXCHANGE COMMISSION**

**Washington,D.C.  20549**

 

**FORM 10-Q**

 

| **(Mark One)**                                         | ** ** | ** **                                                                                     |
|--------------------------------------------------------|------------|------------------------------------------------------------------------------------------------|
|                                                   |
| **ý**                                             | ** ** | **QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)  OF THE SECURITIES EXCHANGE ACT OF 1934.**  |
|                                                   |
| **For the  quarterly period ended September 30, 2004** |
|                                                   |
| **OR**                                                 |
|                                                   |
| **o**                                                  | ** ** | **TRANSITION REPORT PURSUANT TO SECTION 13 OR  15(d) OF THE SECURITIES EXCHANGE ACT OF 1934.** |

 

**Commission File Number 0-18832**

 

**FirstFinancial Service Corporation**

(ExactName of Registrant as specified in its charter)

 

| **Kentucky**                                                     |   | **61-1168311**                     |
|------------------------------------------------------------------|--------|------------------------------------|
| (State or other  jurisdiction  of incorporation or organization) |   | (IRS Employer  Identification No.) |
|                                                             |   |                               |
| **2323 Ring  Road  Elizabethtown, Kentucky  42701**         |
| (Address of principal  executive offices)  (Zip Code)            |
|                                                             |
| **(270)  765-2131**                                              |
| (Registrant’s telephone  number, including area code)       |

 

Indicate by check markwhether the registrant (1) has filed all reports required to be filed bySection 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding12 months (or for such shorter period that the registrant was required to filesuch reports), and (2) has been subject to such filing requirements for thepast 90 days.

 

Yesý  No o

 

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

 

Yesý  Noo

 

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

 

| **Class**     | ** ** | **Outstanding as of October 31, 2004** |
|---------------|------------|----------------------------------------|
| ** **    | ** ** | ** **                             |
| Common  Stock |       | 3,645,438  shares                      |

 

 

----

 

## **FIRST FINANCIAL SERVICE CORPORATION**

 

**TABLE OFCONTENTS**

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

 

2

----

 

**Item 1.**

 

**FIRSTFINANCIAL SERVICE CORPORATION**

**Consolidated Statements of Financial****Condition**

 
| ** **                                                                                                                                                 | ** ** | **(Unaudited)**          | ** ** | ** **              | ** ** |
|------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|--------------------------|------------|-------------------------|------------|
| **(Dollars In Thousands, Except Share Data)**                                                                                                              | ** ** | **September  30,  2004** | ** ** | **December  31,  2003** | ** ** |
| **ASSETS**                                                                                                                                                 |       |                     |       |                    |       |
| Cash and due  from banks                                                                                                                                   |       | $                        | 17,226     |                    | $          | 28,030 |   |
| Federal funds  sold                                                                                                                                        |       | —                   |       | 20,000                  |       |
| Cash and cash  equivalents                                                                                                                                 |       | 17,226                   |       | 48,030                  |       |
|                                                                                                                                                       |       |                     |       |                    |       |
| Securities  available-for-sale                                                                                                                             |       | 8,674                    |       | 4,009                   |       |
| Securities  held-to-maturity, fair value of $35,113 Sep (2004) and $30,919 Dec (2003)                                                                      |       | 35,357                   |       | 30,929                  |       |
| Total securities                                                                                                                                           |       | 44,031                   |       | 34,938                  |       |
|                                                                                                                                                       |       |                     |       |                    |       |
| Loans held for  sale                                                                                                                                       |       | 1,418                    |       | 1,021                   |       |
| Loans  receivable, net of unearned fees                                                                                                                    |       | 604,070                  |       | 554,700                 |       |
| Allowance for  loan losses                                                                                                                                 |       | (6,391                   | )          | (5,568                  | )          |
| Net loans  receivable                                                                                                                                      |       | 599,097                  |       | 550,153                 |       |
|                                                                                                                                                       |       |                     |       |                    |       |
| Federal Home  Loan Bank stock                                                                                                                              |       | 6,773                    |       | 6,570                   |       |
| Cash surrender  value of life insurance                                                                                                                    |       | 7,284                    |       | 7,067                   |       |
| Premises and  equipment, net                                                                                                                               |       | 17,036                   |       | 15,466                  |       |
| Real estate  owned:                                                                                                                                        |       |                     |       |                    |       |
| Acquired through  foreclosure                                                                                                                              |       | 755                      |       | 387                     |       |
| Held for  development                                                                                                                                      |       | 389                      |       | 446                     |       |
| Other  repossessed assets                                                                                                                                  |       | 59                       |       | 62                      |       |
| Goodwill                                                                                                                                                   |       | 8,384                    |       | 8,384                   |       |
| Accrued interest  receivable                                                                                                                               |       | 2,144                    |       | 1,931                   |       |
| Other assets                                                                                                                                               |       | 1,357                    |       | 2,901                   |       |
|                                                                                                                                                       |       |                     |       |                    |       |
| **TOTAL  ASSETS**                                                                                                                                          |       | $                        | 704,535    |                    | $          | 676,335 |   |
|                                                                                                                                                       |       |                     |       |                    |       |
| **LIABILITIES AND STOCKHOLDERS’ EQUITY**                                                                                                              |       |                     |       |                    |       |
| **LIABILITIES:**                                                                                                                                           |       |                     |       |                    |       |
| Deposits:                                                                                                                                                  |       |                     |       |                    |       |
| Non-interest  bearing                                                                                                                                      |       | $                        | 36,065     |                    | $          | 28,632 |   |
| Interest bearing                                                                                                                                           |       | 498,855                  |       | 500,530                 |       |
| Total deposits                                                                                                                                             |       | 534,920                  |       | 529,162                 |       |
|                                                                                                                                                       |       |                     |       |                    |       |
| Federal funds  purchased                                                                                                                                   |       | 20,000                   |       | —                  |       |
| Advances from  Federal Home Loan Bank                                                                                                                      |       | 78,948                   |       | 78,283                  |       |
| Subordinated  debentures                                                                                                                                   |       | 10,000                   |       | 10,000                  |       |
| Accrued interest  payable                                                                                                                                  |       | 399                      |       | 416                     |       |
| Accounts payable  and other liabilities                                                                                                                    |       | 814                      |       | 1,027                   |       |
| Deferred income  taxes                                                                                                                                     |       | 1,161                    |       | 1,126                   |       |
|                                                                                                                                                       |       |                     |       |                    |       |
| **TOTAL  LIABILITIES**                                                                                                                                     |       | 646,242                  |       | 620,014                 |       |
|                                                                                                                                                       |       |                     |       |                    |       |
| **STOCKHOLDERS’  EQUITY:**                                                                                                                            |       |                     |       |                    |       |
| Serial preferred  stock, 5,000,000 shares authorized and unissued                                                                                          |       | —                   |       | —                  |       |
| Common stock, $1  par value per share; authorized 10,000,000 shares; issued and outstanding,  3,645,438 shares Sep (2004), and 3,705,438 shares Dec (2003) |       | 3,645                    |       | 3,705                   |       |
| Additional  paid-in capital                                                                                                                                |       | 8,226                    |       | 9,726                   |       |
| Retained  earnings                                                                                                                                         |       | 45,555                   |       | 42,092                  |       |
| Accumulated  other comprehensive income, net of tax                                                                                                        |       | 867                      |       | 798                     |       |
|                                                                                                                                                       |       |                     |       |                    |       |
| **TOTAL  STOCKHOLDERS’ EQUITY**                                                                                                                       |       | 58,293                   |       | 56,321                  |       |
| **TOTAL  LIABILITIES AND STOCKHOLDERS’ EQUITY**                                                                                                       |       | $                        | 704,535    |                    | $          | 676,335 |   |

 

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

 

3

----

 

**FIRSTFINANCIAL SERVICE CORPORATION**

**ConsolidatedStatements of Income**

**(DollarsIn Thousands, Except Per Share Data)**

**(Unaudited)**

 
| ** **                                           | ** ** | **Three Months Ended  September 30,** | ** ** | **Nine Months Ended  September 30,** | ** ** |
|------------------------------------------------------|------------|---------------------------------------|------------|--------------------------------------|------------|
| ** **                                           | ** ** | **2004**                              | ** ** | **2003**                             | ** ** | **2004** | ** ** | **2003** | ** ** |
| **Interest  Income:**                                |       |                                  |       |                                 |       |   |   |   |   |
| Interest and  fees on loans                          |       | $                                     | 9,374      |                                 | $          | 9,272 |   | $ | 27,502 |   | $ | 28,361 |   |
| Interest and  dividends on investments and deposits  |       | 410                                   |       | 473                                  |       | 1,273 |   | 1,480 |   |
| Total interest  income                               |       | 9,784                                 |       | 9,745                                |       | 28,775 |   | 29,841 |   |
|                                                 |       |                                  |       |                                 |       |   |   |   |   |
| **Interest  Expense:**                               |       |                                  |       |                                 |       |   |   |   |   |
| Deposits                                             |       | 2,489                                 |       | 2,924                                |       | 7,741 |   | 9,282 |   |
| Federal funds  purchased                             |       | 22                                    |       | —                               |       | 23 |   | — |   |
| Federal Home  Loan Bank advances                     |       | 943                                   |       | 942                                  |       | 2,792 |   | 2,797 |   |
| Subordinated  debentures                             |       | 136                                   |       | 122                                  |       | 385 |   | 379 |   |
| Total interest  expense                              |       | 3,590                                 |       | 3,988                                |       | 10,941 |   | 12,458 |   |
|                                                 |       |                                  |       |                                 |       |   |   |   |   |
| Net interest  income                                 |       | 6,194                                 |       | 5,757                                |       | 17,834 |   | 17,383 |   |
| Provision for  loan losses                           |       | 824                                   |       | 438                                  |       | 1,473 |   | 1,187 |   |
| Net interest  income after provision for loan losses |       | 5,370                                 |       | 5,319                                |       | 16,361 |   | 16,196 |   |
|                                                 |       |                                  |       |                                 |       |   |   |   |   |
| **Non-interest  Income:**                            |       |                                  |       |                                 |       |   |   |   |   |
| Customer service  fees on deposit accounts           |       | 1,271                                 |       | 1,142                                |       | 3,674 |   | 3,275 |   |
| Gain on sale of  mortgage loans                      |       | 221                                   |       | 473                                  |       | 683 |   | 1,311 |   |
| Brokerage and  insurance commissions                 |       | 84                                    |       | 81                                   |       | 313 |   | 278 |   |
| Gain on sale of  real estate held for development    |       | 150                                   |       | —                               |       | 526 |   | — |   |
| Gain on sale of  investments                         |       | 26                                    |       | —                               |       | 26 |   | — |   |
| Other income                                         |       | 370                                   |       | 278                                  |       | 933 |   | 710 |   |
| Total  non-interest income                           |       | 2,122                                 |       | 1,974                                |       | 6,155 |   | 5,574 |   |
|                                                 |       |                                  |       |                                 |       |   |   |   |   |
| **Non-interest  Expense:**                           |       |                                  |       |                                 |       |   |   |   |   |
| Employee  compensation and benefits                  |       | 2,611                                 |       | 2,347                                |       | 7,666 |   | 7,016 |   |
| Office occupancy  expense and equipment              |       | 460                                   |       | 396                                  |       | 1,351 |   | 1,144 |   |
| Marketing and  advertising                           |       | 187                                   |       | 150                                  |       | 539 |   | 448 |   |
| Outside services  and data processing                |       | 558                                   |       | 458                                  |       | 1,628 |   | 1,389 |   |
| Bank franchise  tax                                  |       | 201                                   |       | 141                                  |       | 620 |   | 423 |   |
| Other expense                                        |       | 953                                   |       | 913                                  |       | 2,622 |   | 2,363 |   |
| Total  non-interest expense                          |       | 4,970                                 |       | 4,405                                |       | 14,426 |   | 12,783 |   |
|                                                 |       |                                  |       |                                 |       |   |   |   |   |
| Income before  income taxes                          |       | 2,522                                 |       | 2,888                                |       | 8,090 |   | 8,987 |   |
| Income taxes                                         |       | 808                                   |       | 967                                  |       | 2,611 |   | 2,994 |   |
| **Net  Income**                                      |       | $                                     | 1,714      |                                 | $          | 1,921 |   | $ | 5,479 |   | $ | 5,993 |   |
|                                                 |       |                                  |       |                                 |       |   |   |   |   |
| Shares  applicable to basic income per share         |       | 3,645,438                             |       | 3,710,078                            |       | 3,663,438 |   | 3,799,259 |   |
| **Basic  income per share**                          |       | $                                     | 0.47       |                                 | $          | 0.52 |   | $ | 1.50 |   | $ | 1.58 |   |
|                                                 |       |                                  |       |                                 |       |   |   |   |   |
| Shares  applicable to diluted income per share       |       | 3,661,233                             |       | 3,748,669                            |       | 3,675,286 |   | 3,836,482 |   |
| **Diluted  income per share**                        |       | $                                     | 0.47       |                                 | $          | 0.51 |   | $ | 1.49 |   | $ | 1.56 |   |

 

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

 

4

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**FIRSTFINANCIAL SERVICE CORPORATION**

**ConsolidatedStatements of Comprehensive Income**

**(DollarsIn Thousands)**

**(Unaudited)**

 
| ** **                                                     | ** ** | **Three Months Ended  September 30,** | ** ** | **Nine Months Ended  September 30,** | ** ** |
|----------------------------------------------------------------|------------|---------------------------------------|------------|--------------------------------------|------------|
| ** **                                                     | ** ** | **2004**                              | ** ** | **2003**                             | ** ** | **2004** | ** ** | **2003** | ** ** |
|                                                           |       |                                  |       |                                 |       |   |   |   |   |
| **Net  Income**                                                |       | $                                     | 1,714      |                                 | $          | 1,921 |   | $ | 5,479 |   | $ | 5,993 |   |
| Other  comprehensive income (loss):                            |       |                                  |       |                                 |       |   |   |   |   |
| Change in  unrealized gain (loss) on securities                |       | 117                                   |       | 114                                  |       | 131 |   | 333 |   |
| Reclassification  of realized amount                           |       | (26                                   | )          | —                               |       | (26 | ) | — |   |
| Net unrealized  gain (loss) recognized in comprehensive income |       | 91                                    |       | 114                                  |       | 105 |   | 333 |   |
| Tax effect                                                     |       | (31                                   | )          | (39                                  | )          | (36 | ) | (113 | ) |
| Total other  comphrehensive income (loss)                      |       | 60                                    |       | 75                                   |       | 69 |   | 220 |   |
|                                                           |       |                                  |       |                                 |       |   |   |   |   |
| **Comphrehensive  Income**                                     |       | $                                     | 1,774      |                                 | $          | 1,996 |   | $ | 5,548 |   | $ | 6,213 |   |

 

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

 

5

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**FIRSTFINANCIAL SERVICE CORPORATION**

**ConsolidatedStatements of Changes in Stockholders’ Equity**

**NineMonths Ended September 30, 2004**

**(DollarsIn Thousands, Except Per Share Amounts)**

**(Unaudited)**

 
| ** **                                                                             |             |       |       | **Additional  Paid-in  Capital** | ** ** | **Retained  Earnings** | ** ** | **Accumulated  Other  Comprehensive  Income, Net of  Tax** | ** ** | **Total** |   |
|----------------------------------------------------------------------------------------|------------------|------------|------------|----------------------------------|------------|------------------------|------------|------------------------------------------------------------|------------|-----------|--------|
| ** **                                                                             |
| ** **                                                                             | **Common Stock** |
| ** **                                                                             | **Shares**       | ** ** | **Amount** |
| **Balance,  December 31, 2003**                                                        |             | 3,705      |       | $                                | 3,705      |                   | $          | 9,726                                                      |       | $         | 42,092 |   | $ | 798 |   | $ | 56,321 |   |
| Net income                                                                             |             |       |       |                             |       |                   |       | 5,479                                                      |       |      |   | 5,479 |   |
| Net change in  unrealized gains (losses) on securities available- for-sale, net of tax |             |       |       |                             |       |                   |       |                                                       |       | 69        |   | 69 |   |
| Cash dividends  declared                                                               |             |       |       |                             |       |                   |       |                                                       |       |      |   |   |   |
| ($.55 per share)                                                                       |             |       |       |                             |       |                   |       | (2,016                                                     | )          |      |   | (2,016 | ) |
| Stock  repurchased                                                                     |             | (60        | )          | (60                              | )          | (1,500                 | )          |                                                       |       |      |   | (1,560 | ) |
|                                                                                   |             |       |       |                             |       |                   |       |                                                       |       |      |   |   |   |
| **Balance,  September 30, 2004**                                                       |             | 3,645      |       | $                                | 3,645      |                   | $          | 8,226                                                      |       | $         | 45,555 |   | $ | 867 |   | $ | 58,293 |   |

 

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

 

6

----

 

**FIRSTFINANCIAL SERVICE CORPORATION**

**ConsolidatedStatements of Cash Flows**

**(DollarsIn Thousands)**

**(Unaudited)**

 
| ** **                                                                         | ** ** | **Nine  Months Ended  September 30,** | ** ** |
|------------------------------------------------------------------------------------|------------|---------------------------------------|------------|
| ** **                                                                         | ** ** | **2004**                              | ** ** | **2003** | ** ** |
| **Operating  Activities:**                                                         |       |                                  |       |   |   |
| Net income                                                                         |       | $                                     | 5,479      |   | $ | 5,993 |   |
| Adjustments to  reconcile net income to net cash provided by operating activities: |       |                                  |       |   |   |
| Provision for  loan losses                                                         |       | 1,473                                 |       | 1,187 |   |
| Depreciation on  premises and equipment                                            |       | 818                                   |       | 740 |   |
| Federal Home  Loan Bank stock dividends                                            |       | (203                                  | )          | (191 | ) |
| Net amortization  (accretion)                                                      |       | 54                                    |       | (204 | ) |
| Gain on sale of  investments available-for-sale                                    |       | (26                                   | )          | — |   |
| Gain on sale of  mortgage loans                                                    |       | (683                                  | )          | (1,311 | ) |
| Gain on sale of  real estate held for development                                  |       | (526                                  | )          | — |   |
| Origination of  loans held for sale                                                |       | (41,577                               | )          | (76,128 | ) |
| Proceeds on sale  of loans held for sale                                           |       | 41,863                                |       | 79,061 |   |
| Changes in:                                                                        |       |                                  |       |   |   |
| Interest  receivable                                                               |       | (213                                  | )          | 79 |   |
| Other assets                                                                       |       | 1,325                                 |       | 355 |   |
| Interest payable                                                                   |       | (17                                   | )          | (68 | ) |
| Accounts payable  and other liabilities                                            |       | 23                                    |       | 123 |   |
| Net cash from  operating activities                                                |       | 7,790                                 |       | 9,636 |   |
|                                                                               |       |                                  |       |   |   |
| **Investing  Activities:**                                                         |       |                                  |       |   |   |
| Sales of  securities available-for-sale                                            |       | 88                                    |       | — |   |
| Purchases of  securities available-for-sale                                        |       | (4,640                                | )          | (1,415 | ) |
| Purchases of  securities held-to-maturity                                          |       | (24,100                               | )          | (29,978 | ) |
| Maturities of  securities held-to-maturity                                         |       | 19,635                                |       | 25,431 |   |
| Investment in  cash surrender value of life insurance                              |       | —                                |       | (3,500 | ) |
| Net change in  loans                                                               |       | (50,384                               | )          | (4,406 | ) |
| Net purchases of  premises and equipment                                           |       | (2,253                                | )          | (3,685 | ) |
| Sales of real  estate held for development                                         |       | 213                                   |       | — |   |
| Net cash from  investing activities                                                |       | (61,441                               | )          | (17,553 | ) |
|                                                                               |       |                                  |       |   |   |
| **Financing  Activities**                                                          |       |                                  |       |   |   |
| Net change in  deposits                                                            |       | 5,758                                 |       | 4,724 |   |
| Change in  federal funds purchased                                                 |       | 20,000                                |       | — |   |
| Advances from  Federal Home Loan Bank                                              |       | 821                                   |       | 132 |   |
| Repayments to  Federal Home Loan Bank                                              |       | (156                                  | )          | (172 | ) |
| Proceeds from  stock options exercised                                             |       | —                                |       | 250 |   |
| Dividends paid                                                                     |       | (2,016                                | )          | (1,991 | ) |
| Common stock  repurchased                                                          |       | (1,560                                | )          | (9,031 | ) |
| Net cash from  financing activities                                                |       | 22,847                                |       | (6,088 | ) |
|                                                                               |       |                                  |       |   |   |
| **(Decrease)  Increase in cash and cash equivalents**                              |       | (30,804                               | )          | (14,005 | ) |
| **Cash  and cash equivalents, beginning of period**                                |       | 48,030                                |       | 91,776 |   |
| **Cash  and cash equivalents, end of period**                                      |       | $                                     | 17,226     |   | $ | 77,771 |   |

 

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

 

7

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## **FIRST FINANCIAL SERVICECORPORATION**

**Notes To Unaudited Consolidated Financial Statements**

 

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

 

***Basis of Presentation*** – The accompanying unaudited consolidated financial statements includethe accounts of First Financial Service Corporation (the Corporation) and itswholly owned subsidiary, First Federal Savings Bank of Elizabethtown (theBank).  The Corporation has amended itsarticles of incorporation to change its name from First Federal FinancialCorporation of Kentucky to First Financial Service Corporation.  The Nasdaq symbol FFKY will remain unchanged.

 

As furtherdiscussed in Note 7 of the Corporation’s annual report on Form 10-K for theperiod ended December 31, 2003, a trust that had previously been consolidatedwith the Bank is now reported separately. The Bank has three wholly owned subsidiaries, First Service Corporationof Elizabethtown, First Heartland Mortgage Company and First Federal OfficePark, LLC.  All significant intercompanytransactions and balances have been eliminated.

 

Theaccompanying unaudited consolidated financial statements have been prepared inaccordance with accounting principles generally accepted in the United Statesof America for interim financial information and with the instructions to Form10-Q and Rule 10-01 of Regulation S-X. Accordingly, they do not include all of the information and footnotesrequired by accounting principles generally accepted in the United States ofAmerica for complete financial statements. In the opinion of management, all adjustments (consisting of normalrecurring accruals) considered necessary for a fair presentation have beenincluded.  Operating results for thenine-month period ending September 30, 2004 are not necessarily indicative ofthe results that may occur for the year ending December 31, 2004.  For further information, refer to theconsolidated financial statements and footnotes thereto included in theCorporation’s annual report on Form 10-K for the period ended December 31,2003.

 

***Stock Option Plans*** – Employeecompensation expense under stock option plans is reported using the intrinsicvalue method.  No stock-basedcompensation cost is reflected in net income, as all options granted had anexercise price equal to the market price of the underlying common stock at dateof grant.  The following tableillustrates the effect on net income and earnings per share if expense wasmeasured using the fair value recognition provisions of FASB Statement No. 123,Accounting for Stock-Based Compensation.

 
| ** **           | ** **  | **Three  Months Ended  September 30,**            | ** ** | **Nine  Months Ended  September 30,** | ** ** |
|----------------------|-------------|---------------------------------------------------|------------|---------------------------------------|------------|
| ** **           | ** **  | **2004**                                          | ** ** | **2003**                              | ** ** | **2004** | ** ** | **2003** | ** ** |
| ** **           | ** **  | **(Dollars In Thousands, Except Per Share Data)** | ** ** |
| Net income:          |        |                                              |       |                                  |       |   |   |   |   |
| As reported          |        | $                                                 | 1,714      |                                  | $          | 1,921 |   | $ | 5,479 |   | $ | 5,993 |   |
| Pro-forma            |        | 1,684                                             |       | 1,894                                 |       | 5,387 |   | 5,912 |   |
| Earnings per  share: |        |                                              |       |                                  |       |   |   |   |   |
| Basic                | As Reported |                                              | $          | 0.47                                  |       | $ | 0.52 |   | $ | 1.50 |   | $ | 1.58 |   |
|                 | Pro-forma   |                                              | 0.46       |                                  | 0.51       |   | 1.47 |   | 1.56 |   |
| Diluted              | As Reported |                                              | $          | 0.47                                  |       | $ | 0.51 |   | $ | 1.49 |   | $ | 1.56 |   |
|                 | Pro-forma   |                                              | 0.46       |                                  | 0.51       |   | 1.47 |   | 1.55 |   |

 

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

 

8

----

 

**2.**             **SECURITIES**

 

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

 
| **(Dollars in thousands)**          | ** ** | **Amortized  Cost** | ** ** | **Gross  Unrealized  Gains** | ** ** | **Gross  Unrealized  Losses** | ** ** | **Fair Value** | ** ** |
|-------------------------------------|------------|---------------------|------------|------------------------------|------------|-------------------------------|------------|----------------|------------|
| **Securities  available-for-sale:** |       |                |       |                         |       |                          |       |           |       |
| **September  30, 2004:**            |       |                |       |                         |       |                          |       |           |       |
| Equity                              |       | $                   | 2,378      |                         | $          | 1,302                         |       | $              | —     |   | $ | 3,680 |   |
| Agencies                            |       | 2,000               |       | —                       |       | (10                           | )          | 1,990          |       |
| Mortgage-backed                     |       | 1,983               |       | —                       |       | (23                           | )          | 1,960          |       |
| State and  municipal                |       | 999                 |       | 45                           |       | —                        |       | 1,044          |       |
|                                |       |                |       |                         |       |                          |       |           |       |
| Total                               |       | $                   | 7,360      |                         | $          | 1,347                         |       | $              | (33        | ) | $ | 8,674 |   |
|                                |       |                |       |                         |       |                          |       |           |       |
| **December  31, 2003:**             |       |                |       |                         |       |                          |       |           |       |
| Equity                              |       | $                   | 1,801      |                         | $          | 1,138                         |       | $              | —     |   | $ | 2,939 |   |
| State and  municipal                |       | 999                 |       | 71                           |       | —                        |       | 1,070          |       |
|                                |       |                |       |                         |       |                          |       |           |       |
| Total                               |       | $                   | 2,800      |                         | $          | 1,209                         |       | $              | —     |   | $ | 4,009 |   |
|                                     |            |                     |            |                              |            |                               |            |                |            |  |  |  |  |  |  |  |

 
| ** **                        | ** ** | **Amortized  Cost** | ** ** | **Gross  Unrecognized  Gains** | ** ** | **Gross  Unrecognized  Losses** | ** ** | **Fair Value** | ** ** |
|-----------------------------------|------------|---------------------|------------|--------------------------------|------------|---------------------------------|------------|----------------|------------|
| **Securities  held-to-maturity:** |       |                |       |                           |       |                            |       |           |       |
| **September  30, 2004:**          |       |                |       |                           |       |                            |       |           |       |
| U.S. Treasury  and agencies       |       | $                   | 26,095     |                           | $          | 10                              |       | $              | (122       | ) | $ | 25,983 |   |
| Corporate                         |       | 2,000               |       | —                         |       | —                          |       | 2,000          |       |
| Mortgage-backed                   |       | 7,262               |       | 9                              |       | (141                            | )          | 7,130          |       |
|                              |       |                |       |                           |       |                            |       |           |       |
| Total                             |       | $                   | 35,357     |                           | $          | 19                              |       | $              | (263       | ) | $ | 35,113 |   |
|                              |       |                |       |                           |       |                            |       |           |       |
| **December  31, 2003:**           |       |                |       |                           |       |                            |       |           |       |
| U.S. Treasury  and agencies       |       | $                   | 19,999     |                           | $          | 77                              |       | $              | —     |   | $ | 20,076 |   |
| Corporate                         |       | 2,000               |       | —                         |       | —                          |       | 2,000          |       |
| Mortgage-backed                   |       | 8,930               |       | 9                              |       | (96                             | )          | 8,843          |       |
|                              |       |                |       |                           |       |                            |       |           |       |
| Total                             |       | $                   | 30,929     |                           | $          | 86                              |       | $              | (96        | ) | $ | 30,919 |   |
|                                   |            |                     |            |                                |            |                                 |            |                |            |  |  |  |  |  |  |  |

 

9

----

 

**3.             LOANSRECEIVABLE**

 

Loans receivable are summarized as follows:

 
| **(Dollars in thousands)**          | ** ** | **September 30,  2004** | ** ** | **December 31,  2003** | ** ** |
|-------------------------------------|------------|-------------------------|------------|------------------------|------------|
|                                |       |                    |       |                   |       |
| Commercial                          |       | $                       | 31,215     |                   | $          | 30,943 |   |
| Real estate  commercial             |       | 307,299                 |       | 239,406                |       |
| Real estate  construction           |       | 8,684                   |       | 9,952                  |       |
| Residential  mortgage               |       | 166,936                 |       | 194,000                |       |
| Consumer and  home equity           |       | 60,272                  |       | 53,566                 |       |
| Indirect  consumer                  |       | 31,107                  |       | 28,279                 |       |
| Loans held for  sale                |       | 1,418                   |       | 1,021                  |       |
|                                |       | 606,931                 |       | 557,167                |       |
| Less:                               |       |                    |       |                   |       |
| Net deferred  loan origination fees |       | (1,443                  | )          | (1,446                 | )          |
| Allowance for  loan losses          |       | (6,391                  | )          | (5,568                 | )          |
|                                |       | (7,834                  | )          | (7,014                 | )          |
|                                |       |                    |       |                   |       |
| Loans Receivable                    |       | $                       | 599,097    |                   | $          | 550,153 |   |

 

The allowance for losses on loans is summarized asfollows:

 
| ** **                    | ** ** | **As of and For the  Three Months Ended  September 30,** | ** ** | **As of and For the  Nine Months Ended  September 30,** | ** ** |
|-------------------------------|------------|----------------------------------------------------------|------------|---------------------------------------------------------|------------|
| **(Dollars in thousands)**    | ** ** | **2004**                                                 | ** ** | **2003**                                                | ** ** | **2004** | ** ** | **2003** | ** ** |
|                          |       |                                                     |       |                                                    |       |   |   |   |   |
| Balance,  beginning of period |       | $                                                        | 5,822      |                                                    | $          | 4,935 |   | $ | 5,568 |   | $ | 4,576 |   |
| Provision for  loan losses    |       | 824                                                      |       | 438                                                     |       | 1,473 |   | 1,187 |   |
| Charge-offs                   |       | (318                                                     | )          | (188                                                    | )          | (809 | ) | (672 | ) |
| Recoveries                    |       | 63                                                       |       | 58                                                      |       | 159 |   | 152 |   |
| Balance, end of  period       |       | $                                                        | 6,391      |                                                    | $          | 5,243 |   | $ | 6,391 |   | $ | 5,243 |   |
|                               |            |                                                          |            |                                                         |            |  |  |  |  |  |  |  |  |  |

 

Investment in impaired loans is summarized below.  There were no impaired loans for the periodspresented without an allowance allocation.

 
| **(Dollars in thousands)**                   | ** ** | **As of the  Nine Months Ended  September 30,  2004** | ** ** | **As of the  Year Ended  December 31,  2003** | ** ** |
|----------------------------------------------|------------|-------------------------------------------------------|------------|-----------------------------------------------|------------|
|                                         |       |                                                  |       |                                          |       |
| End of period  impaired loans                |       | $                                                     | 4,643      |                                          | $          | 5,318 |   |
| Amount of  allowance for loan loss allocated |       | 904                                                   |       | 911                                           |       |
|                                              |            |                                                       |            |                                               |            |  |  |

 

10

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Non-performing loans were as follows:

 
| **(Dollars in thousands)**                    | ** ** | **September 30,  2004** | ** ** | **December 31,  2003** | ** ** |
|-----------------------------------------------|------------|-------------------------|------------|------------------------|------------|
|                                          |       |                    |       |                   |       |
| Restructured                                  |       | $                       | 3,056      |                   | $          | 3,037 |   |
| Loans past due  over 90 days still on accrual |       | —                  |       | —                 |       |
| Non accrual  loans                            |       | 1,587                   |       | 2,281                  |       |
|                                               |            |                         |            |                        |            |  |  |

 

**4.             EARNINGSPER SHARE**

 

Thereconciliation of the numerators and denominators of the basic and diluted EPSis as follows:

 
| **(Dollars in thousands,**                      | ** ** | **Three Months Ended  September 30,** | ** ** | **Nine Months Ended  September 30,** | ** ** |
|-------------------------------------------------|------------|---------------------------------------|------------|--------------------------------------|------------|
| **except per share data)**                      | ** ** | **2004**                              | ** ** | **2003**                             | ** ** | **2004** | ** ** | **2003** | ** ** |
|                                            |       |                                  |       |                                 |       |   |   |   |   |
| Net income  available to common shareholders    |       | $                                     | 1,714      |                                 | $          | 1,921 |   | $ | 5,479 |   | $ | 5,993 |   |
| Basic EPS:                                      |       |                                  |       |                                 |       |   |   |   |   |
| Weighted average  common shares                 |       | 3,645                                 |       | 3,710                                |       | 3,663 |   | 3,799 |   |
| Diluted EPS:                                    |       |                                  |       |                                 |       |   |   |   |   |
| Weighted average  common shares                 |       | 3,645                                 |       | 3,710                                |       | 3,663 |   | 3,799 |   |
| Dilutive effect  of stock options               |       | 16                                    |       | 39                                   |       | 12 |   | 37 |   |
| Weighted average  common and incremental shares |       | 3,661                                 |       | 3,749                                |       | 3,675 |   | 3,836 |   |
| Earnings Per  Share:                            |       |                                  |       |                                 |       |   |   |   |   |
| Basic                                           |       | $                                     | 0.47       |                                 | $          | 0.52 |   | $ | 1.50 |   | $ | 1.58 |   |
| Diluted                                         |       | $                                     | 0.47       |                                 | $          | 0.51 |   | $ | 1.49 |   | $ | 1.56 |   |
|                                                 |            |                                       |            |                                      |            |  |  |  |  |  |  |  |  |  |  |

 

Stockoptions for 10,000 shares of common stock were not included in the 2004computations of diluted earnings per share because their impact wasanti-dilutive.

 

**Item 2.**

 

**MANAGEMENT’S DISCUSSION ANDANALYSIS****OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS**

 

##### **GENERAL**

 

TheCorporation, through its subsidiary, First Federal Savings Bank conductsoperations in 14 full-service banking centers in six contiguous counties inKentucky along the Interstate 65 corridor. The Corporation’s market presence ranges from the major metropolitan marketof Louisville in Jefferson County, Kentucky approximately 40 miles north of itsheadquarters in Elizabethtown, Kentucky, to Hart County, Kentucky approximately30 miles south of Elizabethtown.

 

TheBank serves the needs and caters to the economic strengths of the localcommunities in which it operates, and strives to provide a high level ofpersonal and professional customer service. The Bank offers a variety offinancial services to its retail and commercial banking customers. Theseservices include personal and corporate banking services, trust and estateplanning, and personal investment financial counseling services.

 

Throughthe Bank’s trust and estate planning and personal investment financialcounseling services, it offers a wide variety of mutual funds, equityinvestments, and fixed and variable annuities.

 

Theprincipal source of the Bank’s revenue is net interest income.  Net interest income is the difference betweeninterest income on interest-earning assets, such as loans and securities andthe interest expense on liabilities used to fund those assets, such asinterest-bearing deposits and borrowings. Net interest income is impacted by both changes in the amount andcomposition of interest-earning assets and interest-bearing liabilities as wellas market interest rates. The Bank’s other source of revenue is non-interestincome, such as service charges, insurance agency revenue, loan fees, gains andlosses from the sale of mortgage loans it originates and gains from the sale

 

11

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of realestate held for development. Its principal operating expenses, aside frominterest expense, consist of compensation and employee benefits, occupancycosts, data processing expense and provisions for loan losses.

 

Thisdiscussion and analysis covers material changes in the financial conditionsince December 31, 2003 and material changes in the results of operations forthe three and nine-month periods ending, September 30, 2004 as compared to2003.  It should be read in conjunctionwith “Management Discussion and Analysis of Financial Condition and Results ofOperations” included in the Annual Report on Form 10-K for the period endedDecember 31, 2003.

 

**OVERVIEW**

 

Duringthe year, the Corporation opened two new full-service facilities in the growingMetro Louisville market and redesigned one of its existing Hardin Countyfacilities.  The Company anticipates theredesign of its Mt. Washington facility in Bullitt County to be completed inthe first quarter of next year.  Thesefacilities represent the Corporation’s state of the art prototype branch with aretail-focused design.  This designfeatures an internet café with access to online banking and bill paymentservices.  Large plasma screens decoratethe lobby providing customers with current news and information about bankproducts and services as well as upcoming community events.  The facilities are staffed to offer a fullrange of financial services to the growing retail and commercial customerbase.  Management believes thesefacilities will allow the Bank to more effectively support its lendingrelationships in Metro Louisville and to develop a larger presence within thatmarket in the future.  While managementfully anticipate these facilities to significantly enhance the value of itsfranchise in the near future, the additional expense in operating these newfacilities will continue to place pressure on earnings for a period oftime.  Management is optimistic that itsexpansion strategy for Metro Louisville will minimize this period and thelong-term benefits will outweigh the initial investment.

 

TheCorporation’s emphasis on commercial lending continued to produce positiveresults for the nine-month period generating a $69 million, or 25% increase incommercial loans to $339 million at September 30 2004, compared to $270 millionat December 31, 2003. ** **This favorable trend has resultedin an annual compound growth rate of 42% over the past three years. ** **Thepercentage of commercial loans in the Bank’s portfolio has increased from 49%at December 31, 2003, to 56% at September 30, 2004, while residential loansdeclined from 35% at December 31, 2003, to 28% at September 30, 2004.  Management intends to continue thiscommercial lending emphasis and anticipates continued increases in thecommercial and commercial real estate portfolios.

 

InJanuary 2003, the Corporation implemented an effort to develop a bank-wideservice and sales culture emphasizing expanded account relationships.  To achieve this goal, the Corporation increasedthe number of associates in banking centers, relationship bankers, businessdevelopment officers, stockbrokers, and loan officers with experience incommercial lending.  The results of thiseffort as well as its transition from a federally chartered thrift to aKentucky state-chartered commercial bank in January 2003, have contributed tothe growth in the Corporation.  Theresulting increase in staff along with the expansion into the Metro Louisvillemarket have contributed to a $650,000, or 9% increase in employee compensationexpense for the nine months ended September 30, 2004, compared to the periodended September 30, 2003.**** Management expects a continued increase inemployee compensation expense in the 2004 calendar year as it continues its expansioninto Metro Louisville.

 

12

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

 

TheCorporation’s application of accounting and reporting policies are inaccordance with accounting principles generally accepted in the United Statesof America and conform to general practices within the banking industry.  In preparing the consolidated financialstatements, management is required to make estimates and assumptions thataffect the reported amounts of assets and liabilities as of the date of thestatement of financial condition and revenues and expenses for the period.  Actual results could differ significantlydepending on the accuracy of those estimates.

 

***Allowance for Loan Losses*****-**The application of the Corporation’s accountingpolicy relating to the allowance for loan losses requires management to makesignificant assumptions and estimates that could result in materially differentamounts to be reported if conditions or underlying circumstances were tochange. See “Allowance and Provision for Loan Losses” herein for a completediscussion of the Corporation’s accounting methodologies related to theallowance.  Also refer to Note 1 in the “Notesto Consolidated Financial Statements” in the 2003 10-K for details regardingall of the Corporation’s critical and significant accounting policies.

 

##### **RESULTSOF OPERATIONS**

 

Netincome for the quarter ended September 30, 2004 was $1.7 million or $0.47 pershare diluted compared to $1.9 million or $0.51 per share diluted for the sameperiod in 2003.  Net income for thenine-month period ended September 30, 2004 was $5.5 million or $1.49 per sharediluted compared to $6.0 million or $1.56 per share diluted for the same perioda year ago.  The decrease in dilutedearnings per share for the three and nine-month periods were primarily theresult of an increase in non-interest expense of $565,000 and $1.6 million forthe 2004 respective periods compared to 2003.** **The Bank’s book value per commonshare increased from $14.80 at September 30, 2003 to $15.99 at September 30,2004.** **Annualizednet income for 2004 generated a return on average assets of 1.06% and a returnon average equity of 12.76%.  Thesecompare with a return on average assets of 1.18% and a return on average equityof 14.32% for the 2003 period also annualized.

 

Onan annualized basis, the net interest margin as a percent of average earningassets increased to 3.84% for the quarter ended September 30, 2004 and 3.73%for the nine months ended September 30, 2004 compared to 3.64% and 3.63% forthe respective three-month and nine-month periods ended September 30, 2003. ** **Netinterest margin continued to benefit from a decrease in interest expense ondeposits.** **The Bank’s cost of funds averaged 2.40% and 2.46% for therespective three-month and nine-month 2004 periods compared to an average costof funds of 2.75% and 2.85% for the same periods in 2003. ** **Theimprovement was the result of the continued re-pricing of certificate ofdeposit maturities rolling off at higher rates into current lower interestrates, as well as the continued decrease in certificate of deposit balances asa percentage of total deposits.** **Going forward, the Bank’s cost offunds is expected to increase as the general market deposit rates have becomeincreasingly competitive with the recent upward trend in interest rates.

 

Theyield on earning assets was 6.02% for the nine months ended September 30, 2004,a decrease from 6.24% for the nine months ended September 30, 2003.  The decrease in the yield on earning assetswas primarily the result of a decrease in mortgage loans as customersrefinanced their mortgage loans elsewhere, or the loans were sold to thesecondary market.** **The Bank was successful inincreasing the balance of commercial loans over that same time frame.** **Inaddition to changing the mix of assets in the loan portfolio, the shift alsoincreased the percentage of variable rate loans in the portfolio, which willincrease the yield in an increasing interest rate environment.  The Bank increased its prime lending rate 75basis points since the Federal Open Market Committee began increasingshort-term interest rates in June 2004. Management expects its net interest margin to improve with additionalincreases in the prime-lending rate.

 

Thenet result of the above factors was an increase in net interest income of$437,000 for the quarter ended and $451,000 for the nine months ended September30, 2004 compared to the same three and nine month periods a year ago.

 

13

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**AVERAGE BALANCE SHEET**

 

Thefollowing table sets forth information relating to the Bank’s average balancesheet and reflects the average yield on assets and average cost of liabilitiesfor the periods indicated.  Dividingincome or expense by the average monthly balance of assets or liabilities,respectively, derives such yields and costs for the periods presented.

 
| ** **                                           | ** ** | **Quarter Ended September 30,** | ** ** |
|------------------------------------------------------|------------|---------------------------------|------------|
| ** **                                           | ** ** | **2004**                        | ** ** | **2003** | ** ** |
| **(Dollars in thousands)**                           | ** ** | **Average  Balance**            | ** ** | **Interest** | ** ** | **Average  Yield/Cost(5)** | ** ** | **Average  Balance** | ** ** | **Interest** | ** ** | **Average  Yield/Cost(5)** | ** ** |
|                                                 |       |                            |       |   |   |   |   |   |   | ** ** |   |   |   |
| **ASSETS**                                           |       |                            |       |   |   |   |   |   |   |   |   |   |   |
| Interest earning  assets:                            |       |                            |       |   |   |   |   |   |   |   |   |   |   |
| Equity  securities                                   |       | $                               | 3,611      |   | $ | 37 |   | 4.08 | % | $ | 2,568 |   | $ | 33 |   | 5.14 | % |
| State and  political subdivision securities**(1)**   |       | 1,047                           |       | 17 |   | 6.46 |   | 1,084 |   | 17 |   | 6.27 |   |
| U.S. Treasury  and agencies                          |       | 28,267                          |       | 167 |   | 2.35 |   | 11,000 |   | 75 |   | 2.73 |   |
| Corporate bond                                       |       | 2,000                           |       | 16 |   | 3.18 |   | 2,000 |   | 15 |   | 3.00 |   |
| Mortgage-backed  securities                          |       | 9,540                           |       | 95 |   | 3.96 |   | 9,963 |   | 96 |   | 3.85 |   |
| Loans receivable**(2)(3)(4)**                        |       | 588,078                         |       | 9,374 |   | 6.34 |   | 528,183 |   | 9,272 |   | 7.02 |   |
| FHLB stock                                           |       | 6,703                           |       | 72 |   | 4.27 |   | 6,456 |   | 65 |   | 4.03 |   |
| Interest bearing  deposits                           |       | 3,428                           |       | 12 |   | 1.39 |   | 72,610 |   | 179 |   | 0.99 |   |
| **Total  interest earning assets**                   |       | 642,674                         |       | 9,790 |   | 6.06 |   | 633,864 |   | 9,752 |   | 6.15 |   |
| Less: Allowance  for loan losses                     |       | (5,837                          | )          |   |   |   |   | (5,120 | ) |   |   |   |   |
| Non-interest  earning assets                         |       | 55,934                          |       |   |   |   |   | 44,875 |   |   |   |   |   |
| **Total  assets**                                    |       | $                               | 692,771    |   |   |   |   |   | $ | 673,619 |   |   |   |   |   |
|                                                 |       |                            |       |   |   |   |   |   |   |   |   |   |   |
| **LIABILITIES  AND STOCKHOLDERS’ EQUITY**       |       |                            |       |   |   |   |   |   |   |   |   |   |   |
| Interest bearing  liabilities:                       |       |                            |       |   |   |   |   |   |   |   |   |   |   |
| Savings accounts                                     |       | $                               | 79,755     |   | $ | 167 |   | 0.83 | % | $ | 75,365 |   | $ | 176 |   | 0.93 | % |
| NOW and money  market accounts                       |       | 136,987                         |       | 300 |   | 0.87 |   | 117,049 |   | 223 |   | 0.76 |   |
| Certificates of  deposit and other time deposits     |       | 284,961                         |       | 2,022 |   | 2.82 |   | 300,154 |   | 2,525 |   | 3.36 |   |
| Federal funds  sold                                  |       | 5,607                           |       | 22 |   | 1.56 |   | — |   | — |   | — |   |
| FHLB advances                                        |       | 78,937                          |       | 943 |   | 4.75 |   | 77,668 |   | 942 |   | 4.85 |   |
| Subordinated  debentures                             |       | 10,000                          |       | 136 |   | 5.41 |   | 10,000 |   | 122 |   | 4.88 |   |
| **Total  interest bearing liabilities**              |       | 596,247                         |       | 3,590 |   | 2.40 |   | 580,236 |   | 3,988 |   | 2.75 |   |
| Non-interest  bearing liabilities:                   |       |                            |       |   |   |   |   |   |   |   |   |   |   |
| Non-interest  bearing deposits                       |       | 35,310                          |       |   |   |   |   | 35,665 |   |   |   |   |   |
| Other  liabilities                                   |       | 2,994                           |       |   |   |   |   | 3,246 |   |   |   |   |   |
| **Total  liabilities**                               |       | 634,551                         |       |   |   |   |   | 619,147 |   |   |   |   |   |
|                                                 |       |                            |       |   |   |   |   |   |   |   |   |   |   |
| Stockholders’  equity                           |       | 58,220                          |       |   |   |   |   | 54,472 |   |   |   |   |   |
| **Total  liabilities and stockholders’ equity** |       | $                               | 692,771    |   |   |   |   |   | $ | 673,619 |   |   |   |   |   |
|                                                 |       |                            |       |   |   |   |   |   |   |   |   |   |   |
| **Net  interest income**                             |       |                            |       | $ | 6,200 |   |   |   |   |   | $ | 5,764 |   |   |   |
| **Net  interest spread**                             |       |                            |       |   |   | 3.66 | % |   |   |   |   | 3.40 | % |
| **Net  interest margin**                             |       |                            |       |   |   | 3.84 | % |   |   |   |   | 3.64 | % |

 

----

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

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

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

**(4)**Includesloans held for sale.

**(5)**Annualized

 

14

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Thefollowing table sets forth information relating to the Bank’s average balancesheet and reflects the average yield on assets and average cost of liabilitiesfor the periods indicated.  Dividingincome or expense by the average monthly balance of assets or liabilities,respectively, derives such yields and costs for the periods presented.

 
| ** **                                           | ** ** | **Nine Months Ended September 30,** | ** ** |
|------------------------------------------------------|------------|-------------------------------------|------------|
| ** **                                           | ** ** | **2004**                            | ** ** | **2003** | ** ** |
| **(Dollars in thousands)**                           | ** ** | **Average  Balance**                | ** ** | **Interest** | ** ** | **Average  Yield/Cost(5)** | ** ** | **Average  Balance** | ** ** | **Interest** | ** ** | **Average  Yield/Cost(5)** | ** ** |
|                                                 |       |                                |       |   |   |   |   |   |   |   |   |   |   |
| **ASSETS**                                           |       |                                |       |   |   |   |   |   |   |   |   |   |   |
| Interest earning  assets:                            |       |                                |       |   |   |   |   |   |   |   |   |   |   |
| Equity  securities                                   |       | $                                   | 3,176      |   | $ | 101 |   | 4.25 | % | $ | 1,870 |   | $ | 59 |   | 4.21 | % |
| State and  political subdivision securities**(1)**   |       | 1,063                               |       | 50 |   | 6.28 |   | 1,085 |   | 51 |   | 6.27 |   |
| U.S. Treasury  and agencies                          |       | 24,119                              |       | 505 |   | 2.80 |   | 11,596 |   | 257 |   | 2.95 |   |
| Corporate bond                                       |       | 2,000                               |       | 46 |   | 3.07 |   | 2,000 |   | 49 |   | 3.27 |   |
| Mortgage-backed  securities                          |       | 9,459                               |       | 265 |   | 3.74 |   | 6,357 |   | 181 |   | 3.80 |   |
| Loans receivable**(2)(3)(4)**                        |       | 575,371                             |       | 27,502 |   | 6.38 |   | 526,908 |   | 28,362 |   | 7.18 |   |
| FHLB stock                                           |       | 6,637                               |       | 203 |   | 4.09 |   | 6,390 |   | 191 |   | 3.99 |   |
| Interest bearing  deposits                           |       | 17,550                              |       | 120 |   | 0.91 |   | 82,265 |   | 709 |   | 1.15 |   |
| **Total  interest earning assets**                   |       | 639,375                             |       | 28,792 |   | 6.02 |   | 638,471 |   | 29,859 |   | 6.24 |   |
| Less: Allowance  for loan losses                     |       | (5,714                              | )          |   |   |   |   | (4,873 | ) |   |   |   |   |
| Non-interest  earning assets                         |       | 55,292                              |       |   |   |   |   | 42,563 |   |   |   |   |   |
| **Total  assets**                                    |       | $                                   | 688,953    |   |   |   |   |   | $ | 676,161 |   |   |   |   |   |
|                                                 |       |                                |       |   |   |   |   |   |   |   |   |   |   |
| **LIABILITIES  AND STOCKHOLDERS’ EQUITY**       |       |                                |       |   |   |   |   |   |   |   |   |   |   |
| Interest bearing  liabilities:                       |       |                                |       |   |   |   |   |   |   |   |   |   |   |
| Savings accounts                                     |       | $                                   | 86,371     |   | $ | 594 |   | 0.92 | % | $ | 76,974 |   | $ | 599 |   | 1.04 | % |
| NOW and money  market accounts                       |       | 128,743                             |       | 681 |   | 0.71 |   | 114,338 |   | 735 |   | 0.86 |   |
| Certificates of  deposit and other time deposits     |       | 288,909                             |       | 6,466 |   | 2.99 |   | 303,549 |   | 7,948 |   | 3.49 |   |
| Federal funds  purchased                             |       | 2,564                               |       | 23 |   | 1.20 |   | — |   | — |   | 0.00 |   |
| FHLB advances                                        |       | 78,418                              |       | 2,792 |   | 4.76 |   | 77,695 |   | 2,797 |   | 4.80 |   |
| Subordinated  debentures                             |       | 10,000                              |       | 385 |   | 5.14 |   | 10,000 |   | 379 |   | 5.05 |   |
| **Total  interest bearing liabilities**              |       | 595,005                             |       | 10,941 |   | 2.46 |   | 582,556 |   | 12,458 |   | 2.85 |   |
| Non-interest bearing  liabilities:                   |       |                                |       |   |   |   |   |   |   |   |   |   |   |
| Non-interest  bearing deposits                       |       | 33,670                              |       |   |   |   |   | 34,188 |   |   |   |   |   |
| Other  liabilities                                   |       | 3,041                               |       |   |   |   |   | 3,619 |   |   |   |   |   |
| **Total  liabilities**                               |       | 631,716                             |       |   |   |   |   | 620,363 |   |   |   |   |   |
|                                                 |       |                                |       |   |   |   |   |   |   |   |   |   |   |
| Stockholders’  equity                           |       | 57,237                              |       |   |   |   |   | 55,798 |   |   |   |   |   |
| **Total  liabilities and stockholders’ equity** |       | $                                   | 688,953    |   |   |   |   |   | $ | 676,161 |   |   |   |   |   |
|                                                 |       |                                |       |   |   |   |   |   |   |   |   |   |   |
| **Net  interest income**                             |       |                                |       | $ | 17,851 |   |   |   |   |   | $ | 17,401 |   |   |   |
| **Net  interest spread**                             |       |                                |       |   |   | 3.56 | % |   |   |   |   | 3.39 | % |
| **Net  interest margin**                             |       |                                |       |   |   | 3.73 | % |   |   |   |   | 3.63 | % |

 

----

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

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

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

**(4)**Includesloans held for sale.

**(5)**Annualized

 

15

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**RATE/VOLUME ANALYSIS**

 

The table below sets forth certain information regarding changes ininterest income and interest expense of the Bank for the periodsindicated.  For each category ofinterest-earning assets and interest-bearing liabilities, information isprovided on changes attributable to (1) changes in rate (changes in ratemultiplied by old volume); (2) changes in volume (change in volume multipliedby old rate); and (3) changes in rate-volume (change in rate multiplied bychange in volume).  Changes inrate-volume are proportionately allocated between rate and volume variance.

 
| ** **                                       | ** ** | **Three  Months Ended  September 30,  2004 vs. 2003** | ** ** | **Nine  Months Ended  September 30,  2004 vs. 2003** | ** ** |
|--------------------------------------------------|------------|-------------------------------------------------------|------------|------------------------------------------------------|------------|
| ** **                                       | ** ** | **Increase  (decrease)  Due to change in**            | ** ** | **Increase  (decrease)  Due to change in**           | ** ** |
| **(Dollars  in thousands)**                      | ** ** | **Rate**                                              | ** ** | **Volume**                                           | ** ** | **Net  Change** | ** ** | **Rate** | ** ** | **Volume** | ** ** | **Net  Change** | ** ** |
| **Interest  income:**                            |       |                                                  |       |                                                 |       |   |   |   |   |   |   |   |   |
| Equity  securities                               |       | $                                                     | (8         | )                                                    | $          | 12 |   | $ | 4 |   | $ | 1 |   | $ | 41 |   | $ | 42 |   |
| State and  political subdivision securities      |       | 1                                                     |       | (1                                                   | )          | — |   | — |   | (1 | ) | (1 | ) |
| U.S. Treasury  and agencies                      |       | (11                                                   | )          | 103                                                  |       | 92 |   | (15 | ) | 263 |   | 248 |   |
| Corporate bond                                   |       | 1                                                     |       | —                                               |       | 1 |   | (3 | ) | — |   | (3 | ) |
| Mortgage-backed  securities                      |       | 3                                                     |       | (4                                                   | )          | (1 | ) | (3 | ) | 87 |   | 84 |   |
| Loans                                            |       | (894                                                  | )          | 996                                                  |       | 102 |   | (3,338 | ) | 2,478 |   | (860 | ) |
| FHLB stock                                       |       | 4                                                     |       | 3                                                    |       | 7 |   | 4 |   | 8 |   | 12 |   |
| Interest bearing  deposits                       |       | 52                                                    |       | (219                                                 | )          | (167 | ) | (121 | ) | (468 | ) | (589 | ) |
|                                             |       |                                                  |       |                                                 |       |   |   |   |   |   |   |   |   |
| **Total  interest earning assets**               |       | (852                                                  | )          | 890                                                  |       | 38 |   | (3,475 | ) | 2,408 |   | (1,067 | ) |
|                                             |       |                                                  |       |                                                 |       |   |   |   |   |   |   |   |   |
| **Interest  expense:**                           |       |                                                  |       |                                                 |       |   |   |   |   |   |   |   |   |
| Savings accounts                                 |       | (19                                                   | )          | 10                                                   |       | (9 | ) | (74 | ) | 69 |   | (5 | ) |
| NOW and money  market accounts                   |       | 36                                                    |       | 41                                                   |       | 77 |   | (140 | ) | 86 |   | (54 | ) |
| Certificates of  deposit and other time deposits |       | (380                                                  | )          | (123                                                 | )          | (503 | ) | (1,112 | ) | (370 | ) | (1,482 | ) |
| Federal funds  purchased                         |       | 17                                                    |       | 5                                                    |       | 22 |   | 6 |   | 17 |   | 23 |   |
| FHLB advances                                    |       | (14                                                   | )          | 15                                                   |       | 1 |   | (31 | ) | 26 |   | (5 | ) |
| Trust Preferred  Securities                      |       | 14                                                    |       | —                                               |       | 14 |   | 6 |   | — |   | 6 |   |
|                                             |       |                                                  |       |                                                 |       |   |   |   |   |   |   |   |   |
| **Total  interest bearing liabilities**          |       | (346                                                  | )          | (52                                                  | )          | (398 | ) | (1,345 | ) | (172 | ) | (1,517 | ) |
|                                             |       |                                                  |       |                                                 |       |   |   |   |   |   |   |   |   |
| **Net  change in net interest income**           |       | $                                                     | (506       | )                                                    | $          | 942 |   | $ | 436 |   | $ | (2,130 | ) | $ | 2,580 |   | $ | 450 |   |

 

***Non-Interest Income***-Non-interest income increased $148,000, or7% for the quarter ended September 30, 2004 to $2.1 million compared to $2.0million for the same quarter in 2003. Non-interest income increased $581,000 or 10% for the nine months endedSeptember 30, 2004 compared to the same period in 2003.  The increased level of non-interest incomeduring 2004 was primarily due to an increase in customer service fees ondeposit accounts, gains on sale of real estate held for development and otherincome due to the Bank’s investment in bank owned life insurance.  Offsetting these increases was a decrease inthe gain on sale of mortgage loans for the respective three and nine monthsended, resulting from a decline in refinancing activity.

 

Customerservice fees on deposit accounts accounted for $129,000 and $399,000 of theincrease for the respective three and nine-month periods due to an increase inoverdraft fee income on retail checking accounts.  During the September 2004 quarter, the OfficePark recorded a gain of $150,000 from the sale of a lot previously held fordevelopment.  During the June 2004quarter, the Bank sold a lot in Tanyard Springs for a gain of $135,000 and theOffice Park recorded $241,000 in gains from the sale of two properties held fordevelopment.  Other non-interest incomeincreased $92,000 and $223,000 for the quarter and nine months ended September30, 2004 primarily due to income received from the Bank’s investment in bankowned life insurance.  Bank owned lifeinsurance income increased $75,000 and $217,000 for the quarter and nine monthsended 2004.  Offsetting these increaseswas a decrease in gain on sale of mortgage loans of $252,000 for the quarterand $628,000 for the nine months ended September 30, 2004 resulting from adecline in refinancing activity. Management anticipates the decline in refinancing activity to continuefor the 2004 period as compared to 2003.

 

16

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 ***Non-Interest Expense -*** Non-interest expenseincreased $565,000 or 13% during the quarter ended September 30, 2004 and $1.6million, or 13% for the nine months ended September 30, 2004 compared to thesame periods in 2003.

 

Theprimary factors impacting non-interest expense included additional operatingand employee compensation expenses relating to the recent retail expansionefforts.  Employeecompensation and benefits, the largest component of non-interest expense,increased $264,000 and $650,000 for the respective three and nine-monthperiods.  Twenty retail staffpositions have been added since the third quarter a year ago for the expansionin Metro Louisville, coupled with an expanded facility in Hardin County,Kentucky.  Additional increases in staffhave taken place throughout the year as we strengthen our retail sales cultureand provide expanded products and services to our retail and commercialcustomers.  The increase in compensationwas also attributable to an increase in the Bank’s self-funded health insuranceprogram due to an increase in the amount of health insurance claims.

 

Officeoccupancy and equipment expense, also increased $64,000 and $207,000 for therespective three and nine months ended September 30, 2004 due to the additionof the new facilities. Marketing expense increased for the same periods due toadditional postage for promotions and direct mailings for the new branchlocations. Outside services and data processing fees increased $100,000 and$239,000 for the respective three and nine months ended September 30, 2004resulting from professional fees paid for consulting services and increases indata processing and item processing fees due to additional transactionactivity.  Bank franchise tax expenseincreased $60,000 and $197,000 for the respective three and nine months endedSeptember 30, 2004 due to a higher tax expense resulting from the conversionfroma federallychartered thrift to a Kentucky state-chartered commercial bank.  The state tax expense for a Bank charter iscalculated based upon different rules resulting in an increase for 2004.

 

**ANALYSIS OF FINANCIAL CONDITION**

 

Total assets at September 30, 2004 were$704.5 million compared to $676.3 million at December 31, 2003, an increase of$28.2 million.  The increase wasprimarily related to an increase in loans receivable of $48.9 million and anincrease in investment securities of $9.1 million.  The growth in loans receivable and investmentsecurities was principally funded with cash and cash equivalents, whichdecreased by $30.8 million, federal funds purchased, which increased by $20.0million, and deposits, which increased by $5.8 million.

 

**Investment Securities**

 

Total investment securities were $44.0million at September 30, 2004 compared to $34.9 million at December 31, 2003,an increase of  $9.1million or 26%.  The increase ininvestment securities was attributable to the purchase of a mortgage-backedsecurity and U.S. Government agency securities.

 

The securities portfolio serves as a source ofliquidity and earnings and contributes to the management of interest raterisk.  The debt securities portfolio iscomprised primarily of obligations collateralized by U.S. Government agencies(mainly in the form of U.S. Government agency securities), mortgage-backedsecurities and municipal obligations. With the exception of municipal obligations, the maturity structure ofthe debt securities portfolio is generally short-term in nature or indexed tovariable rates.

 

##### **Loans Receivable**

 

Net loans receivable increased $48.9 million or9% to $599.1 million at September 30, 2004 compared to $550.2 million atDecember 31, 2003, reflecting our continued emphasis on commerciallending.  The Bank’s commitment tointernal loan growth in the commercial and commercial real estate portfoliosproduced loan growth of $68.2 million, a 25% increase in these loans to $338.5million at September 30, 2004.  For theSeptember 30, 2004 period, these loans comprise 56% of the total loan portfoliocompared to 49% of the loan portfolio at December 31, 2003, and 34% of the loanportfolio at December 31, 2002.  Also,contributing to the increase was a $9.5 million increase in consumer loans.

 

17

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Offsetting this growth was a $28.3 million, or14% decrease in the real estate construction and residential mortgage loanportfolio to $175.6 million at September 30, 2004, compared to $203.9 millionat December 31, 2003.  The decrease wasdue to an increase in customer refinancing activity into fixed-rate, secondarymarket loan products.  For 2004, thedecline in mortgage loans is expected to slow while growth in commercial loansis expected to continue.

 

**Allowance and Provision for LoanLosses**

 

TheBank’s financial performance depends on the quality of the loans it originatesand management’s ability to assess the degree of risk in existing loans when itdetermines the allowance for loan losses. An increase in loan charge-offs or non-performing loans or an inadequateallowance for loan losses could reduce net interest income, net income and capitaland limit the range of products and services the Bank can offer.

 

TheBank’s Executive Loan Committee evaluates the allowance for loan lossesquarterly to maintain a level sufficient to absorb probable incurred creditlosses existing in the loan portfolio. Periodic provisions to the allowance are made as needed.  The allowance is determined based on theapplication of loss estimates to graded loans by categories.  The amount of the provision for loan lossesnecessary to maintain an adequate allowance is also based upon an analysis ofsuch factors as changes in lending policies and procedures; underwritingstandards; collection; charge-off and recovery history; changes in national andlocal economic business conditions and developments; changes in thecharacteristics of the portfolio; ability and depth of lending management andstaff; changes in the trend of the volume and severity of past due, non-accrualand classified loans; troubled debt restructuring and other loan modifications;and results of regulatory examinations.

 

Themethodology for allocating the allowance for loan and lease losses takes intoaccount the Bank’s strategic plan to increase its emphasis on commercial andconsumer lending.  The Bank increases 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.

 

Thefollowing table sets forth an analysis of the Bank’s loan loss experience forthe periods indicated.

 
| ** **                                                                | ** ** | **Three Months Ended  September 30,** | ** ** | **Nine Months Ended  September 30,** | ** ** |
|---------------------------------------------------------------------------|------------|---------------------------------------|------------|--------------------------------------|------------|
| **(Dollars  in thousands)**                                               | ** ** | **2004**                              | ** ** | **2003**                             | ** ** | **2004** | ** ** | **2003** | ** ** |
|                                                                      |       |                                  |       |                                 |       |   |   |   |   |
| **Balance  at beginning of period**                                       |       | $                                     | 5,822      |                                 | $          | 4,935 |   | $ | 5,568 |   | $ | 4,576 |   |
| Loans  charged-off:                                                       |       |                                  |       |                                 |       |   |   |   |   |
| Real estate  mortgage                                                     |       | —                                |       | —                               |       | (41 | ) | (45 | ) |
| Consumer                                                                  |       | (154                                  | )          | (183                                 | )          | (562 | ) | (554 | ) |
| Commercial                                                                |       | (164                                  | )          | (5                                   | )          | (206 | ) | (73 | ) |
| Total  charge-offs                                                        |       | (318                                  | )          | (188                                 | )          | (809 | ) | (672 | ) |
| Recoveries:                                                               |       |                                  |       |                                 |       |   |   |   |   |
| Real estate  mortgage                                                     |       | —                                |       | —                               |       | — |   | — |   |
| Consumer                                                                  |       | 63                                    |       | 58                                   |       | 159 |   | 152 |   |
| Commercial                                                                |       | —                                |       | —                               |       | — |   | — |   |
| Total recoveries                                                          |       | 63                                    |       | 58                                   |       | 159 |   | 152 |   |
|                                                                      |       |                                  |       |                                 |       |   |   |   |   |
| **Net  loans charged-off**                                                |       | (255                                  | )          | (130                                 | )          | (650 | ) | (520 | ) |
|                                                                      |       |                                  |       |                                 |       |   |   |   |   |
| Provision for  loan losses                                                |       | 824                                   |       | 438                                  |       | 1,473 |   | 1,187 |   |
|                                                                      |       |                                  |       |                                 |       |   |   |   |   |
| **Balance  at end of period**                                             |       | $                                     | 6,391      |                                 | $          | 5,243 |   | $ | 6,391 |   | $ | 5,243 |   |
|                                                                      |       |                                  |       |                                 |       |   |   |   |   |
| Allowance for  loan losses to total loans (excluding loans held for sale) |       |                                  |       |                                 |       | 1.06 | % | 0.98 | % |
| Net charge-offs  to average loans outstanding (annualized)                |       |                                  |       |                                 |       | 0.11 | % | 0.10 | % |
| Allowance for  loan losses to total non-performing loans                  |       |                                  |       |                                 |       | 138 | % | 118 | % |

 

18

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The provision for loan losses increased $386,000 to$824,000 for the quarter ended September 30, 2004, and $286,000, or 24% to $1.5million for the nine months ended September 30, 2004 compared to the sameperiods in 2003.  The increase inprovision expense is primarily due to the increase in commercial loans duringthe respective periods in 2004 and to an increase in special mention classifiedloans.  The increase in commercial loansalso contributed to the increase in the allowance for loan losses, whichincreased $1.1 million to $6.4 million from September 30, 2003 to September 30,2004.  Net loan charge-offs increased$125,000 and $130,000 for the respective three and nine months ended September30, 2004.

 

Federalregulations require insured institutions to classify their own assets on aregular basis.  The regulations providefor three categories of classified loans — substandard, doubtful and loss.  The regulations also contain a specialmention and a specific allowance category. Special mention is defined as loans that do not currently expose aninsured institution to a sufficient degree of risk to warrant classificationbut do possess credit deficiencies or potential weaknesses deserving management’sclose attention. Assets classified as substandard or doubtful require theinstitution to establish general allowances for loan losses. If an asset orportion thereof is classified as loss, the insured institution must eitherestablish specified allowances for loan losses in the amount of 100% of theportion of the asset classified loss, or charge off such amount.  At September 30, 2004, based on management’sreview of the Bank’s loan portfolio, the Bank had $6.3 million of assetsclassified substandard, $986,000 million classified as doubtful, $11.9 millionclassified as special mention and $102,000 of assets classified as loss.

 

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

 

##### **Non-Performing Assets**

 

Non-performingassets consist of certain restructured loans where interest rate or other termshave been renegotiated, loans on which interest is no longer accrued, realestate acquired through foreclosure and repossessed assets.   The Bank does not have any loans greaterthan 90 days past due still on accrual. Loans, including impaired loans under SFAS 114, are placed onnon-accrual status when they become past due 90 days or more as to principal orinterest, unless they are adequately secured and in the process ofcollection.  Loans are consideredimpaired if full principal or interest payments are not anticipated inaccordance with the contractual loan terms. Impaired loans are carried at the present value of expected future cashflows discounted at the loan’s effective interest rate or at the fair value ofthe collateral if the loan is collateral dependent.

 

Loansare reviewed on a regular basis and normal collection procedures areimplemented 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, the Bank institutes measuresto remedy the default, including commencing a foreclosure action.  Consumer loans generally are charged off whena loan is deemed uncollectible by management and any available collateral hasbeen disposed of.  Commercial businessand real estate loan delinquencies are handled on an individual basis bymanagement with the advice of the Bank’s legal counsel.  The Bank anticipates that the increase in thevolume of non-performing real estate loans will continue due to the growth ofthe Bank’s loan portfolio.

 

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

 

Real estate acquired by the Bank as a result of foreclosure or by deedin lieu of foreclosure is classified as real estate owned until such time as itis sold. New and used automobile, motorcycle and all terrain vehicles acquiredby the Bank as a result of foreclosure are classified as repossessed assetsuntil they are sold. When such property is acquired it is recorded at the lowerof the unpaid principal balance of the related loan or its fair marketvalue.  Any write-down of the property atthe time of acquisition is charged to the allowance for loan losses.  Subsequent gains and losses are included innon-interest income and non-interest expense.

 

19

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

 
| **(Dollar in thousands)**                                            | ** **                                                                       | **September 30,  2004** | ** ** | **December 31,  2003** | ** ** |
|----------------------------------------------------------------------|----------------------------------------------------------------------------------|-------------------------|------------|------------------------|------------|
| ** **                                                           | ** **                                                                       | ** **              | ** ** | ** **             | ** ** |
| Restructured                                                         |                                                                             | $                       | 3,056      |                   | $          | 3,037 |   |
| Past due 90 days  still on accrual                                   |                                                                             | —                  |       | —                 |       |
| Loans on  non-accrual status                                         |                                                                             | 1,587                   |       | 2,281                  |       |
|                                                                 |                                                                             |                    |       |                   |       |
| Total  non-performing loans                                          |                                                                             | 4,643                   |       | 5,318                  |       |
| Real estate  acquired through foreclosure                            |                                                                             | 755                     |       | 387                    |       |
| Other  repossessed assets                                            |                                                                             | 59                      |       | 62                     |       |
| Total  non-performing assets                                         |                                                                             | $                       | 5,457      |                   | $          | 5,767 |   |
|                                                                 |                                                                             |                    |       |                   |       |
| Interest income  that would have been earned on non-performing loans |                                                                             | $                       | 222        |                   | $          | 374 |   |
| Interest income  recognized on non-performing loans                  |                                                                             | 184                     |       | 227                    |       |
| Ratios:                                                              |   Non-performing  loans to total loans (excluding loans held for sale) |                    | 0.77       | %                      | 0.96       | % |
|                                                                 | Non-performing  assets to total loans (excluding loans held for sale)            |                    | 0.90       | %                      | 1.04       | % |

 

Non-performingassets totaled $5.5 million at September 30, 2004, a decrease of $310,000 fromDecember 31, 2003 as a result of a decrease in non-performing loans.  Included in non-performing assets is $3.1million in restructured commercial and residential mortgage loans.  The restructured loans primarily consist oftwo credit relationships aggregating $2.8 million, including a $2.3 millioncommercial relationship and a $463,000 residential mortgage relationship.   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.  The terms of the restructured loans arecurrently being met.

 

###### **Deposits**

 

Total deposits increased $5.7 million to $534.9 million at September30, 2004, from $529.2 million at December 31, 2003.  The increase in deposits for the period wasprimarily the result of an increase in non-interest bearing and interestbearing checking accounts.  The Bankplans to continue its deposit gathering initiatives by utilizing pricingstrategies and offering competitive products in its existing markets.

 

Thefollowing table summarizes the Bank’s deposits.

 
| ** **                            | ** ** | **September 30, 2004** | ** ** | **December 31, 2003** | ** ** |
|---------------------------------------|------------|------------------------|------------|-----------------------|------------|
| ** **                            | ** ** | **(In Thousands)**     | ** ** |
|                                  |       |                   |       |                  |       |
| Non-interest  bearing demand accounts |       | $                      | 36,065     |                  | $          | 28,632 |   |
| NOW demand  accounts                  |       | 74,882                 |       | 67,504                |       |
| Savings accounts                      |       | 72,755                 |       | 86,419                |       |
| Money market  deposit accounts        |       | 63,929                 |       | 51,773                |       |
| Certificates of  deposit              |       | 287,289                |       | 294,834               |       |
|                                  |       | $                      | 534,920    |                  | $          | 529,162 |   |

 

20

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##### **LIQUIDITY**

##### ** **

##### **The Bank must maintain sufficientliquidity to fund loan demand and routine deposit withdrawal activity.  Liquidity is managed by retaining sufficientliquid assets in the form of cash and cash equivalents.  Additional sources of funding and cash flowsinclude, but are not limited to, the sale of securities in theavailable-for-sale portion of the investment portfolio, principal paydowns onloans and mortgage-backed securities, proceeds realized from loans held forsale, brokered deposits, and other wholesale funding.  The Corporation’s banking centers alsoprovide access to retail deposit markets. If large certificate depositors shift to the Bank’s competitors or thestock market in response to interest rate changes, the Bank has the ability toreplenish those deposits through alternative funding sources.  Traditionally, the Bank has also utilizedborrowings from the FHLB to supplement its funding requirements.  At September 30, 2004, the Bank had an unusedapproved line of credit in the amount of $83.2 million**and sufficient collateral available to borrow, approximately, anadditional $20.8 million in advances from the FHLB.  Managementbelieves its sources of liquidity are adequate to meet expected cash needs forthe foreseeable future.

 

##### **CAPITAL**

 

Stockholders’equity increased $2.0 million for the nine-month period ended September 30,2004 compared to the 2003 period. During the 2004 nine-month period, theCorporation purchased 60,000 shares of its own common stock.  As a result, the transaction decreased totalcapital by $1.6 million, which in turn reduced consolidated regulatorycapital.  Offsetting the decrease was theincrease from net income.  TheCorporation and the Bank continued to be well capitalized after thetransaction.  The Corporation’s stockrepurchase programs have generally authorized the repurchase of up to 10% ofthe Corporation’s outstanding stock from time to time in the open market orprivate transactions during an 18-month period. Management considersrepurchasing shares when the financial and other terms of the purchase and itsimpact on earnings per share and other financial measures offer an attractivereturn to stockholders.  The Corporationadopted its most recent plan on March 18, 2003.

 

In March2002, a trust formed by of the Corporation completed the private placement of10,000 shares of cumulative trust preferred securities with a liquidationpreference of $1,000 per security.  Theproceeds of the offering were loaned to the Corporation in exchange forfloating rate junior subordinated deferrable interest debentures.  Distributions on the securities are payablequarterly at a rate per annum equal to the 3-month LIBOR plus 3.60%.  The Corporation undertook the issuance ofthese securities to enhance its regulatory capital position, as the securitiesare considered as Tier I capital under current regulatory guidelines.

 

###### **Kentuckybanking laws limit the amount of dividends that may be paid to the Corporationby the Bank without prior approval of the KDFI. Under these laws, the amount of dividends that may be paid in anycalendar year is limited to current year’s net income, as defined in the laws,combined with the net income of the preceding two years, less any dividendsdeclared during those periods.  AtSeptember 30, 2004, without prior regulatory approval, the Bank hadapproximately $16.2 million of retained earnings that could be utilized forpayment of dividends if authorized by its board of directors.**

 

Regulatoryagencies measure capital adequacy within a framework that makes capitalrequirements, in part, dependent on the individual risk profiles of financialinstitutions.  The Corporation on aconsolidated basis and the Bank continue to exceed the regulatory requirementsfor Tier I, Tier I leverage and total risk-based capital.  Management intends to maintain a capitalposition that meets or exceeds the “well capitalized” requirements as definedby the FDIC.  The Bank’s averagestockholders’ equity to average assets ratio increased to 8.31% for the ninemonths ended September 30, 2004 compared to 8.25% for the same period in 2003.

 

21

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The actual and requiredcapital amounts and ratios are presented below.

 
| ** **                                          | ** ** | **Actual** | ** ** | **For  Capital  Adequacy Purposes** | ** ** | **To Be  Considered  Well Capitalized  Under Prompt  Correction  Action Provisions** | ** ** |
|-----------------------------------------------------|------------|------------|------------|-------------------------------------|------------|--------------------------------------------------------------------------------------|------------|
| **(Dollars  in thousands)**                         | ** ** | **Amount** | ** ** | **Ratio**                           | ** ** | **Amount**                                                                           | ** ** | **Ratio** | ** ** | **Amount** | ** ** | **Ratio** | ** ** |
| **As of  September 30, 2004:**                      | ** ** | ** ** | ** ** | ** **                          | ** ** | ** **                                                                           | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| Total risk-based  capital (to risk-weighted assets) |       |       |       |                                |       |                                                                                 |       |   |   |   |   |   |   |
| Consolidated                                        |       | $          | 66,226     |                                | 11.6       | %                                                                                    | $          | 45,784 |   | 8.0 | % | $ | 57,231 |   | 10.0 | % |
| Bank                                                |       | 62,805     |       | 11.0                                |       | 45,491                                                                               |       | 8.0 |   | 56,864 |   | 10.0 |   |
| Tier I capital  (to risk-weighted assets)           |       |       |       |                                |       |                                                                                 |       |   |   |   |   |   |   |
| Consolidated                                        |       | 59,538     |       | 10.4                                |       | 22,892                                                                               |       | 4.0 |   | 34,338 |   | 6.0 |   |
| Bank                                                |       | 56,167     |       | 9.9                                 |       | 22,746                                                                               |       | 4.0 |   | 34,118 |   | 6.0 |   |
| Tier I capital  (to average assets)                 |       |       |       |                                |       |                                                                                 |       |   |   |   |   |   |   |
| Consolidated                                        |       | 59,538     |       | 8.6                                 |       | 27,667                                                                               |       | 4.0 |   | 34,584 |   | 5.0 |   |
| Bank                                                |       | 56,167     |       | 8.2                                 |       | 22,575                                                                               |       | 4.0 |   | 34,469 |   | 5.0 |   |
|                                                     |            |            |            |                                     |            |                                                                                      |            |  |  |  |  |  |  |  |  |  |

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

 

**FORWARD-LOOKING STATEMENTS**

 

Statementscontained in this report that are not statements of historical fact constituteforward-looking statements within the meaning of Section 21E of the SecuritiesExchange Act of 1934, as amended.  Inaddition, the Corporation may make forward-looking statements in future filingswith the Securities and Exchange Commission, in press releases, and in oral andwritten statements 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) statements of plansand objectives of the Corporation or its management or Board of Directors; (3)statements regarding future events, actions or economic performance; and (4)statements of assumptions underlying such statements.  Words such as “believes,” “anticipates,” “expects,”“intends,” “plans,” “targeted,” and similar expressions are intended toidentify forward-looking statements, but are not the exclusive means ofidentifying such statements.

 

Forward-lookingstatements involve risks and uncertainties that may cause actual results todiffer materially from those indicated by the forward-looking statements.  Some of the events or circumstances that couldcause such differences include the following: changes in general economicconditions and economic conditions in Kentucky and the markets served by theCorporation, any of which may affect, among other things, the level ofnon-performing assets, charge-offs, and provision expense; changes in theinterest rate environment which may reduce interest margins and impact fundingsources; changes in market rates and prices which may adversely impact thevalue of financial products including securities, loans and deposit; changes intax laws, rules and regulations; various monetary and fiscal policies andregulations, including those determined by the Federal

 

22

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ReserveBoard, the Federal Deposit Insurance Corporation and the Kentucky Department ofFinancial Institutions; competition with other local and regional commercialbanks, savings banks, credit unions and other non-bank financial institutions;ability to grow core businesses; ability to develop and introduce newbanking-related products, services and enhancements and gain market acceptanceof such products; and management’s ability to manage these and other risks.

 

###### **Item3.**  QUANTITATIVE AND QUALITATIVE DISCLOSURESABOUT MARKET RISK

 

###### **Assetand Liability Management**

 

Tominimize the volatility of net interest income and exposure to economic lossthat may result from fluctuating interest rates, the Bank manages its exposureto adverse changes in interest rates through asset and liability managementactivities within guidelines established by its Asset Liability Committee (“ALCO”).  The ALCO, which includes senior managementrepresentatives, has the responsibility for approving and ensuring compliancewith asset/liability management polices of the Corporation.  Interest rate risk is the exposure 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 bethe Bank’s most significant market risk.

 

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

 

The Bank’s interest sensitivity profile was asset sensitive at bothSeptember 30, 2004 and December 31, 2003. Given a sustained 100 basis point decrease in rates, the Bank’s base netinterest income would decrease by an estimated 3.91% at September 30, 2004compared to a decrease of 4.34% at December 31, 2003.  Given a 100 basis point increase in interestrates the Bank’s base net interest income would increase by an estimated 2.74%at September 30, 2004 compared to an increase of 1.63% at December 31, 2003.

 

The interest sensitivity of the Corporationat any point in time will be affected by a number of factors.  These factors include the mix of interestsensitive assets and liabilities as well as their relative pricing schedules.  It is also influenced by market interestrates, decay rates and prepayment speed assumptions.

 

As demonstrated by the September 30, 2004 andDecember 31, 2003 sensitivity tables presented below, the Bank is continuing totransition away from a liability sensitive to an asset sensitive position ascompared to prior periods in anticipation of rising interest rates for the nextseveral months. The change in the Bank’s asset sensitivity is a result ofchanges in the loan portfolio to a greater extent than changes in theinvestment portfolio.** **While lendingpractices have shifted to shorter term, variable rate commercial and consumerloans, that impact will be evidenced in smaller degrees over time.

 

23

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The Corporation’s sensitivity to interestrate changes is presented based on data as of September 30, 2004 and December31, 2003 annualized to a one year period.

 
| ** **                      | ** ** | **September  30, 2004** | ** ** |
|---------------------------------|------------|-------------------------|------------|
| ** **                      | ** ** | **Decrease  in Rates**  | ** ** | ** ** | ** ** | **Increase  in Rates** | ** ** |
| **(Dollars  in thousands)**     | ** ** | **200  Basis Points**   | ** ** | **100  Basis Points** | ** ** | **Base** | ** ** | **100  Basis Points** | ** ** | **200  Basis Points** | ** ** |
|                            |       |                    |       |   |   |   |   |   |   |   |   |
| **Projected  interest income**  |       |                    |       |   |   |   |   |   |   |   |   |
| Loans                           |       | $                       | 35,302     |   | $ | 37,851 |   | $ | 40,235 |   | $ | 42,492 |   | $ | 44,662 |   |
| Investments                     |       | 1,320                   |       | 1,703 |   | 2,005 |   | 2,113 |   | 2,227 |   |
| **Total  interest income**      |       | 36,622                  |       | 39,554 |   | 42,240 |   | 44,605 |   | 46,889 |   |
|                            |       |                    |       |   |   |   |   |   |   |   |   |
| **Projected  interest expense** |       |                    |       |   |   |   |   |   |   |   |   |
| Deposits                        |       | 7,192                   |       | 8,380 |   | 9,708 |   | 11,037 |   | 12,365 |   |
| Borrowed funds                  |       | 4,207                   |       | 4,481 |   | 4,754 |   | 5,028 |   | 5,301 |   |
| **Total  interest expense**     |       | 11,399                  |       | 12,861 |   | 14,462 |   | 16,065 |   | 17,666 |   |
|                            |       |                    |       |   |   |   |   |   |   |   |   |
| **Net  interest income**        |       | $                       | 25,223     |   | $ | 26,693 |   | $ | 27,778 |   | $ | 28,540 |   | $ | 29,223 |   |
| Change from base                |       | $                       | (2,555     | ) | $ | (1,085 | ) |   |   | $ | 762 |   | $ | 1,445 |   |
| % Change from  base             |       | (9.20                   | )%         | (3.91 | )% |   |   | 2.74 | % | 5.20 | % |
|                                 |            |                         |            |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |

 
| ** **                      | ** ** | **December  31, 2003** | ** ** |
|---------------------------------|------------|------------------------|------------|
| ** **                      | ** ** | **Decrease  in Rates** | ** ** | ** ** | ** ** | **Increase  in Rates** | ** ** |
| **(Dollars  in thousands)**     | ** ** | **200  Basis Points**  | ** ** | **100  Basis Points** | ** ** | **Base** | ** ** | **100  Basis Points** | ** ** | **200  Basis Points** | ** ** |
|                            |       |                   |       |   |   |   |   |   |   |   |   |
| **Projected  interest income**  |       |                   |       |   |   |   |   |   |   |   |   |
| Loans                           |       | $                      | 32,629     |   | $ | 34,706 |   | $ | 36,625 |   | $ | 38,380 |   | $ | 40,033 |   |
| Investments                     |       | 1,179                  |       | 1,286 |   | 2,250 |   | 2,764 |   | 3,283 |   |
| **Total  interest income**      |       | 33,808                 |       | 35,992 |   | 38,875 |   | 41,144 |   | 43,316 |   |
|                            |       |                   |       |   |   |   |   |   |   |   |   |
| **Projected  interest expense** |       |                   |       |   |   |   |   |   |   |   |   |
| Deposits                        |       | 6,925                  |       | 8,283 |   | 10,018 |   | 11,806 |   | 13,594 |   |
| Borrowed funds                  |       | 4,051                  |       | 4,130 |   | 4,208 |   | 4,287 |   | 4,366 |   |
| **Total  interest expense**     |       | 10,976                 |       | 12,413 |   | 14,226 |   | 16,093 |   | 17,960 |   |
|                            |       |                   |       |   |   |   |   |   |   |   |   |
| **Net  interest income**        |       | $                      | 22,832     |   | $ | 23,579 |   | $ | 24,649 |   | $ | 25,051 |   | $ | 25,356 |   |
| Change from base                |       | $                      | (1,817     | ) | $ | (1,070 | ) |   |   | $ | 402 |   | $ | 707 |   |
| % Change from  base             |       | (7.37                  | )%         | (4.34 | )% |   |   | 1.63 | % | 2.87 | % |
|                                 |            |                        |            |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |

 

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

 

As of theend of the period covered by this report, the Corporation carried out anevaluation, under the supervision and with the participation of the Corporation’smanagement, including the Corporation’s Chief Executive Officer and ChiefFinancial Officer, of the effectiveness of the design and operation of theCorporation’s disclosure controls and procedures. Based on the foregoing, theCorporation’s Chief Executive Officer and Chief Financial Officer concludedthat the Corporation’s disclosure controls and procedures were effective, inall material respects, to ensure that information required to be disclosed inthe reports the Corporation files and submits under the Exchange Act isrecorded, processed, summarized and reported as and when required.

 

TheCorporation also conducted an evaluation of internal control over financialreporting to determine whether any changes occurred during the quarter coveredby this report that have materially affected, or are reasonably likely tomaterially affect, the Corporation’s internal control over financial reporting.Based on this evaluation, there has been no such change during the quartercovered by this report.

 

24

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

 
| ** ** | **Item 1.** | **Legal Proceedings**                                                                                                                                                                                                                                                                                                                                      |
|------------|-------------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|       |        |                                                                                                                                                                                                                                                                                                                                                       |
|       |        | Although the Bank is, from time to time, involved in  various legal proceedings in the normal course of business, there are no  material pending legal proceedings to which the Corporation, the Bank, or its  subsidiaries is a party, that management believes will have an adverse effect  on liquidity, financial condition, or results of operations. |
|       |        |                                                                                                                                                                                                                                                                                                                                                       |
| ** ** | **Item 2.** | **Changes in Securities****,  Use of Proceeds and Issuer Purchases of Equity Securities**                                                                                                                                                                                                                                                                  |
| ** ** | ** **  | ** **                                                                                                                                                                                                                                                                                                                                                 |
|       |        | (e)  Issuer Purchases of Equity Securities                                                                                                                                                                                                                                                                                                                 |
|       |        |                                                                                                                                                                                                                                                                                                                                                       |
|       |        | The Corporation repurchased no shares of its common stock during the quarter ended September 30, 2004.                                                                                                                                                                                                                                                     |
|       |        |                                                                                                                                                                                                                                                                                                                                                       |
| ** ** | **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) |
|       |        |                                                                                                                                                                                                                                                                                                                                                       |
| ** ** |        | **Reports on Form 8-K:**                                                                                                                                                                                                                                                                                                                                   |
|       |        |                                                                                                                                                                                                                                                                                                                                                       |
|       |        | The Corporation filed a  Form 8-K on July 26, 2004 announcing its second quarter ended June 30, 2004,  earnings. The Corporation filed another 8-K on August 23, 2004 announcing a  6% increase in its quarterly cash dividend from $.18 per share to $.19 per  share.                                                                                     |

 

25

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**FIRST FINANCIAL SERVICE CORPORATION**

 

## **SIGNATURES**

 

Pursuantto the requirements of Section 13 or 15(d) of the Securities Exchange Act of1934, the registrant has duly caused this report to be signed on its behalf bythe undersigned, thereunto duly authorized.

 

 

 
| DATE: November 9, 2004 | BY: (S) | B. Keith Johnson                      |   |
|------------------------|---------|---------------------------------------|--------|
|                   |    | B. Keith Johnson                      |
|                   |    | President and Chief Executive Officer |
|                   |    |                                  |
|                   |    |                                  |
| DATE: November 9, 2004 | BY: (S) | Gregory S. Schreacke                  |   |
|                   |    | Gregory S. Schreacke                  |
|                   |    | Chief Financial Officer               |

 

26

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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) |

 

27

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