UNITED
STATES


SECURITIES
AND EXCHANGE COMMISSION


Washington,
D.C.  20549





FORM
10-Q


(Mark
One)





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





For
the quarterly period ended March 31, 2010





OR





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





Commission
File Number 0-18832





First
Financial Service Corporation


(Exact
Name of Registrant as specified in its charter)





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





2323
      Ring Road
            
            (270)
      765-2131Elizabethown,
      Kentucky 42701
            
            (Registrant's
      telephone number,(Address
      of principal executive offices)
            
            including
      area code)(Zip
      Code)





(270)
765-2131


(Registrant's
telephone number, including area code)





Indicate
by check mark whether the registrant (1) has filed all reports required to be
filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the
preceding 12 months (or for such shorter period that the registrant was required
to file such reports), and (2) has been subject to such filing requirements for
the past 90 days.Yes
x 
No  ̈





Indicate by check mark whether the
registrant has submitted electronically and posted on its corporate Web site, if
any, every Interactive Data File required to be submitted and posted pursuant to
Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12
months (or for such shorter period that the registrant was required to submit
and post such files). Yes ̈No ̈





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





Large
      Accelerated Filer  ̈
            Accelerated
      Filer x
            Non-Accelerated
      Filer  ̈
            Smaller
      Reporting Company ̈(Do
      not check if a smallerreporting
      company)





Indicate by a check mark whether the
registrant is a shell company (as defined in Rule 12b-2 of the Exchange
Act).  Yes ̈Nox





Indicate
the number of shares outstanding of each of the issuer's classes of common
stock, as of the latest practicable date.





Class
                
                Outstanding as of April 30,
      2010Common
      Stock
                
                4,717,682shares











FIRST
FINANCIAL SERVICE CORPORATION


FORM
10-Q


TABLE
OF CONTENTS




PART I – FINANCIAL
      INFORMATIONPreliminary
      Note Regarding Forward-Looking Statements
                          3Item
      1.
                          Consolidated
      Financial Statements and Notes to Consolidated Financial
      Statements
                          4Item
      2.
                          Management's
      Discussion and Analysis of Financial Condition and Results of
      Operations
                          22Item
      3.
                          Quantitative
      and Qualitative Disclosures about Market Risk
                          35Item
      4.
                          Controls
      and Procedures
                          37PART II – OTHER
      INFORMATIONItem
      1.
                          Legal
      Proceedings
                          37Item
      1A.
                          Risk
      Factors
                          37Item
      2.
                          Unregistered
      Sales of Equity Securities and Use of Proceeds
                          37Item
      3.
                          Defaults
      upon Senior Securities
                          37Item
      4.
                          Reserved
                          37Item
      5.
                          Other
      Information
                          38Item
      6.
                          Exhibits
                          38SIGNATURES
                          39




2





PRELIMINARY
NOTE REGARDING


FORWARD-LOOKING
STATEMENTS





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





Various
risks and uncertainties may cause actual results to differ materially from those
indicated by our forward-looking statements.  In addition to those risks
described under “Item 1A Risk Factors,” of this report and our Annual Report on
Form 10-K, the following factors could cause such differences: changes in
general economic conditions and economic conditions in Kentucky and the markets
we serve, any of which may affect, among other things, our level of
non-performing assets, charge-offs, and provision for loan loss expense; changes
in interest rates that may reduce interest margins and impact funding sources;
changes in market rates and prices which may adversely impact the value of
financial products including securities, loans and deposits; changes in tax
laws, rules and regulations; various monetary and fiscal policies and
regulations, including those determined by the Federal Reserve Board, the
Federal Deposit Insurance Corporation (“FDIC”) and the Kentucky Department of
Financial Institutions (“KDFI”); competition with other local and regional
commercial banks, savings banks, credit unions and other non-bank financial
institutions; our ability to grow core businesses; our ability to develop and
introduce new banking-related products, services and enhancements and gain
market acceptance of such products; and management’s ability to manage these and
other risks.





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





3





Item 1.
                FIRST
      FINANCIAL SERVICE CORPORATION


Consolidated
Balance Sheets


(Unaudited)




March 31,
                                    
                                    
                                    December 31,(Dollars in thousands, except share data)
                                    
                                    2010
                                    
                                    
                                    2009ASSETS:Cash
      and due from banks
                                    
                                    $
                                    19,811
                                    
                                    
                                    $
                                    21,253Interest
      bearing deposits
                                    
                                    
                                    119,377
                                    
                                    
                                    
                                    77,280Total cash and cash equivalents
                                    
                                    
                                    139,188
                                    
                                    
                                    
                                    98,533Securities
      available-for-sale
                                    
                                    
                                    79,512
                                    
                                    
                                    
                                    45,764Securities
      held-to-maturity, fair value of $367 Mar (2010)and $1,176 Dec (2009)
                                    
                                    
                                    362
                                    
                                    
                                    
                                    1,167Total securities
                                    
                                    
                                    79,874
                                    
                                    
                                    
                                    46,931Loans
      held for sale
                                    
                                    
                                    5,227
                                    
                                    
                                    
                                    8,183Loans,
      net of unearned fees
                                    
                                    
                                    966,392
                                    
                                    
                                    
                                    994,926Allowance
      for loan losses
                                    
                                    
                                    (18,810
                                    )
                                    
                                    
                                    (17,719
                                    )Net loans
                                    
                                    
                                    952,809
                                    
                                    
                                    
                                    985,390Federal
      Home Loan Bank stock
                                    
                                    
                                    8,515
                                    
                                    
                                    
                                    8,515Cash
      surrender value of life insurance
                                    
                                    
                                    9,096
                                    
                                    
                                    
                                    9,008Premises
      and equipment, net
                                    
                                    
                                    32,312
                                    
                                    
                                    
                                    31,965Real
      estate owned:Acquired through foreclosure
                                    
                                    
                                    10,169
                                    
                                    
                                    
                                    8,428Held for development
                                    
                                    
                                    45
                                    
                                    
                                    
                                    45Other
      repossessed assets
                                    
                                    
                                    62
                                    
                                    
                                    
                                    103Core
      deposit intangible
                                    
                                    
                                    1,236
                                    
                                    
                                    
                                    1,300Accrued
      interest receivable
                                    
                                    
                                    5,862
                                    
                                    
                                    
                                    5,658Deferred
      income taxes
                                    
                                    
                                    4,442
                                    
                                    
                                    
                                    4,515Prepaid
      FDIC premium
                                    
                                    
                                    6,408
                                    
                                    
                                    
                                    7,022Other
      assets
                                    
                                    
                                    2,807
                                    
                                    
                                    
                                    2,091TOTAL
    ASSETS
                                    
                                    $
                                    1,252,825
                                    
                                    
                                    $
                                    1,209,504LIABILITIES
      AND STOCKHOLDERS' EQUITYLIABILITIES:Deposits:Non-interest bearing
                                    
                                    $
                                    69,098
                                    
                                    
                                    $
                                    63,950Interest bearing
                                    
                                    
                                    1,023,116
                                    
                                    
                                    
                                    985,865Total deposits
                                    
                                    
                                    1,092,214
                                    
                                    
                                    
                                    1,049,815Short-term
      borrowings
                                    
                                    
                                    842
                                    
                                    
                                    
                                    1,500Advances
      from Federal Home Loan Bank
                                    
                                    
                                    52,627
                                    
                                    
                                    
                                    52,745Subordinated
      debentures
                                    
                                    
                                    18,000
                                    
                                    
                                    
                                    18,000Accrued
      interest payable
                                    
                                    
                                    314
                                    
                                    
                                    
                                    360Accounts
      payable and other liabilities
                                    
                                    
                                    2,955
                                    
                                    
                                    
                                    1,952TOTAL
      LIABILITIES
                                    
                                    
                                    1,166,952
                                    
                                    
                                    
                                    1,124,372Commitments
      and contingent liabilities
                                    
                                    
                                    -
                                    
                                    
                                    
                                    -STOCKHOLDERS' EQUITY:Serial
      preferred stock, $1 par value per share;authorized 5,000,000 shares; issued and outstanding,
      20,000shares with a liquidation preference of
      $20,000
                                    
                                    
                                    19,795
                                    
                                    
                                    
                                    19,781Common
      stock, $1 par value per share;authorized 10,000,000 shares; issued andoutstanding, 4,717,682 shares Mar (2010), and
    4,709,839shares Dec (2009)
                                    
                                    
                                    4,718
                                    
                                    
                                    
                                    4,710Additional
      paid-in capital
                                    
                                    
                                    35,071
                                    
                                    
                                    
                                    34,984Retained
      earnings
                                    
                                    
                                    27,211
                                    
                                    
                                    
                                    26,720Accumulated
      other comprehensive loss
                                    
                                    
                                    (922
                                    )
                                    
                                    
                                    (1,063
                                    )TOTAL STOCKHOLDERS' EQUITY
                                    
                                    
                                    85,873
                                    
                                    
                                    
                                    85,132TOTAL LIABILITIES AND
      STOCKHOLDERS' EQUITY
                                    
                                    $
                                    1,252,825
                                    
                                    
                                    $
                                    1,209,504





See
notes to the unaudited consolidated financial statements.





4




FIRST
FINANCIAL SERVICE CORPORATION


Consolidated
Statements of Income


(Unaudited)




Three Months Ended(Dollars in thousands, except per share data)
                    
                    March 31,2010
                    
                    
                    2009Interest and Dividend Income:Loans, including fees
                    
                    $
                    14,047
                    
                    
                    $
                    13,944Taxable securities
                    
                    
                    493
                    
                    
                    
                    308Tax exempt securities
                    
                    
                    171
                    
                    
                    
                    106Total
      interest income
                    
                    
                    14,711
                    
                    
                    
                    14,358Interest Expense:Deposits
                    
                    
                    4,869
                    
                    
                    
                    4,500Short-term borrowings
                    
                    
                    21
                    
                    
                    
                    43Federal Home Loan Bank advances
                    
                    
                    593
                    
                    
                    
                    597Subordinated debentures
                    
                    
                    327
                    
                    
                    
                    329Total
      interest expense
                    
                    
                    5,810
                    
                    
                    
                    5,469Net
      interest income
                    
                    
                    8,901
                    
                    
                    
                    8,889Provision
      for loan losses
                    
                    
                    1,752
                    
                    
                    
                    2,045Net
      interest income after provision for loan losses
                    
                    
                    7,149
                    
                    
                    
                    6,844Non-interest Income:Customer service fees on deposit accounts
                    
                    
                    1,525
                    
                    
                    
                    1,477Gain on sale of mortgage loans
                    
                    
                    299
                    
                    
                    
                    177Loss on sale of investments
                    
                    
                    (23
                    )
                    
                    
                    -Total other-than-temporary impairment losses
                    
                    
                    (172
                    )
                    
                    
                    (370
                    )Portion of loss recognized in other comprehensiveincome(before taxes)
                    
                    
                    -
                    
                    
                    
                    215Net impairment losses recognized in earnings
                    
                    
                    (172
                    )
                    
                    
                    (155
                    )Loss on sale and write downs of real estate acquiredthrough foreclosure
                    
                    
                    (26
                    )
                    
                    
                    (17
                    )Brokerage commissions
                    
                    
                    93
                    
                    
                    
                    93Other income
                    
                    
                    442
                    
                    
                    
                    428Total
      non-interest income
                    
                    
                    2,138
                    
                    
                    
                    2,003Non-interest Expense:Employee compensation and benefits
                    
                    
                    4,090
                    
                    
                    
                    4,002Office occupancy expense and equipment
                    
                    
                    804
                    
                    
                    
                    848Marketing and advertising
                    
                    
                    225
                    
                    
                    
                    265Outside services and data processing
                    
                    
                    730
                    
                    
                    
                    793Bank franchise tax
                    
                    
                    350
                    
                    
                    
                    264FDIC insurance premiums
                    
                    
                    660
                    
                    
                    
                    179Amortization of intangible assets
                    
                    
                    87
                    
                    
                    
                    130Other expense
                    
                    
                    1,328
                    
                    
                    
                    1,302Total
      non-interest expense
                    
                    
                    8,274
                    
                    
                    
                    7,783Income
      before income taxes
                    
                    
                    1,013
                    
                    
                    
                    1,064Income
      taxes
                    
                    
                    258
                    
                    
                    
                    303Net Income
                    
                    
                    755
                    
                    
                    
                    761Less:Dividends on preferred stock
                    
                    
                    (250
                    )
                    
                    
                    (267
                    )Accretion on preferred stock
                    
                    
                    (14
                    )
                    
                    
                    (11
                    )Net income available to common
      shareholders
                    
                    $
                    491
                    
                    
                    $
                    483Shares
      applicable to basic income per common share
                    
                    
                    4,715,721
                    
                    
                    
                    4,676,587Basic income per common share
                    
                    $
                    0.10
                    
                    
                    $
                    0.10Shares
      applicable to diluted income per common share
                    
                    
                    4,715,721
                    
                    
                    
                    4,676,690Diluted income per common share
                    
                    $
                    0.10
                    
                    
                    $
                    0.10Cash dividends declared per
      common share
                    
                    $
                    -
                    
                    
                    $
                    0.19




See
notes to the unaudited consolidated financial statements.





5




FIRST
FINANCIAL SERVICE CORPORATION


Consolidated
Statements of Comprehensive Income


(Unaudited)




Three Months EndedMarch 31,(Dollars in thousands)
                            
                            2010
                            
                            
                            2009Net Income
                            
                            $
                            755
                            
                            
                            $
                            761Other
      comprehensive income (loss):Change in unrealized gain (loss) on securities available-for-sale
                            
                            
                            67
                            
                            
                            
                            239Change in unrealized gain (loss) on securities available-for-sale
      forwhich a portion of other-than-temporary impairment has beenrecognized into earnings
                            
                            
                            (28
                            )
                            
                            
                            -Reclassification of realized amount on securities available-for-salelosses (gains)
                            
                            
                            146
                            
                            
                            
                            140Non-credit component of other-than-temporary impairment onheld-to-maturity securities
                            
                            
                            -
                            
                            
                            
                            (215
                            )Reclassification of unrealized loss on held-to-maturitysecurity recognized in income
                            
                            
                            29
                            
                            
                            
                            -Net unrealized gain (loss) recognized in comprehensive income
                            
                            
                            214
                            
                            
                            
                            164Tax effect
                            
                            
                            (73
                            )
                            
                            
                            (56
                            )Total other comphrehensive income (loss)
                            
                            
                            141
                            
                            
                            
                            108Comprehensive Income
                            
                            $
                            896
                            
                            
                            $
                            869




The
following is a summary of the accumulated other comprehensive income balances,
net of tax:





Balance
                        
                        
                        Current
                        
                        
                        Balanceat
                        
                        
                        Period
                        
                        
                        at12/31/2009
                        
                        
                        Change
                        
                        
                        3/31/2010Unrealized
      gains (losses) on securitiesavailable-for-sale
                        
                        $
                        (925
                        )
                        
                        $
                        122
                        
                        
                        $
                        (803
                        )Unrealized
      gains (losses) onheld-to-maturity securities for whichOTTI has been recorded, net of accretion
                        
                        
                        (138
                        )
                        
                        
                        19
                        
                        
                        
                        (119
                        )Total
                        
                        $
                        (1,063
                        )
                        
                        $
                        141
                        
                        
                        $
                        (922
                        )




See
notes to the consolidated financial statements.





6




FIRST
FINANCIAL SERVICE CORPORATION


Consolidated
Statements of Changes in Stockholders' Equity


Three
Months Ended March 31, 2010


(Dollars
In Thousands, Except Per Share Amounts)


(Unaudited)





Shares
                                                        
                                                        
                                                        Amount
                                                        
                                                        
                                                        Additional
                                                          Paid-in
                                                        
                                                        
                                                        Retained
                                                        
                                                        
                                                        Accumulated
                                                          Other
                                                          Comprehensive
                                                          (Loss), Net ofPreferred
                                                        
                                                        
                                                        Common
                                                        
                                                        
                                                        Preferred
                                                        
                                                        
                                                        Common
                                                        
                                                        
                                                        Capital
                                                        
                                                        
                                                        Earnings
                                                        
                                                        
                                                        Tax
                                                        
                                                        
                                                        TotalBalance,
      January 1, 2010
                                                        
                                                        
                                                        20,000
                                                        
                                                        
                                                        
                                                        4,710
                                                        
                                                        
                                                        $
                                                        19,781
                                                        
                                                        
                                                        $
                                                        4,710
                                                        
                                                        
                                                        $
                                                        34,984
                                                        
                                                        
                                                        $
                                                        26,720
                                                        
                                                        
                                                        $
                                                        (1,063
                                                        )
                                                        
                                                        $
                                                        85,132Net
      income
                                                        
                                                        
                                                        
                                                        
                                                        
                                                        
                                                        
                                                        
                                                        
                                                        
                                                        
                                                        
                                                        
                                                        
                                                        
                                                        
                                                        
                                                        
                                                        
                                                        
                                                        
                                                        
                                                        755
                                                        
                                                        
                                                        
                                                        
                                                        
                                                        
                                                        
                                                        755Shares
      issued under dividendreinvestment program
                                                        
                                                        
                                                        
                                                        
                                                        
                                                        
                                                        1
                                                        
                                                        
                                                        
                                                        
                                                        
                                                        
                                                        
                                                        1
                                                        
                                                        
                                                        
                                                        7
                                                        
                                                        
                                                        
                                                        
                                                        
                                                        
                                                        
                                                        
                                                        
                                                        
                                                        
                                                        8Stock
      issued for employee benefitplans
                                                        
                                                        
                                                        
                                                        
                                                        
                                                        
                                                        7
                                                        
                                                        
                                                        
                                                        
                                                        
                                                        
                                                        
                                                        7
                                                        
                                                        
                                                        
                                                        56
                                                        
                                                        
                                                        
                                                        
                                                        
                                                        
                                                        
                                                        
                                                        
                                                        
                                                        
                                                        63Stock-based
      compensation expense
                                                        
                                                        
                                                        
                                                        
                                                        
                                                        
                                                        
                                                        
                                                        
                                                        
                                                        
                                                        
                                                        
                                                        
                                                        
                                                        
                                                        
                                                        
                                                        24
                                                        
                                                        
                                                        
                                                        
                                                        
                                                        
                                                        
                                                        
                                                        
                                                        
                                                        
                                                        24Net
      change in unrealized gains (losses)on securities available-for-sale,net of tax
                                                        
                                                        
                                                        
                                                        
                                                        
                                                        
                                                        
                                                        
                                                        
                                                        
                                                        
                                                        
                                                        
                                                        
                                                        
                                                        
                                                        
                                                        
                                                        
                                                        
                                                        
                                                        
                                                        
                                                        
                                                        
                                                        
                                                        59
                                                        
                                                        
                                                        
                                                        59Change
      in unrealized gains (losses) on held-to-maturity
                                                                securities for
      which an other-than-temporary
                                                                impairment
      charge has been recorded,
                                                                net of
      tax
                                                        
                                                        
                                                        
                                                        
                                                        
                                                        
                                                        
                                                        
                                                        
                                                        
                                                        
                                                        
                                                        
                                                        
                                                        
                                                        
                                                        
                                                        
                                                        
                                                        
                                                        
                                                        
                                                        
                                                        
                                                        
                                                        
                                                        19
                                                        
                                                        
                                                        
                                                        19Change
      in unrealized gains (losses) onsecurities available-for-sale for which aportion of an other-than-temporaryimpairment charge has been recognizedinto earnings, net of reclassification and taxes
                                                        
                                                        
                                                        
                                                        
                                                        
                                                        
                                                        
                                                        
                                                        
                                                        
                                                        
                                                        
                                                        
                                                        
                                                        
                                                        
                                                        
                                                        
                                                        
                                                        
                                                        
                                                        
                                                        
                                                        
                                                        
                                                        
                                                        63
                                                        
                                                        
                                                        
                                                        63Dividends
      on preferred stock
                                                        
                                                        
                                                        
                                                        
                                                        
                                                        
                                                        
                                                        
                                                        
                                                        
                                                        
                                                        
                                                        
                                                        
                                                        
                                                        
                                                        
                                                        
                                                        
                                                        
                                                        
                                                        
                                                        (250
                                                        )
                                                        
                                                        
                                                        
                                                        
                                                        
                                                        
                                                        (250
                                                        )Accretion
      of preferred stock discount
                                                        
                                                        
                                                        -
                                                        
                                                        
                                                        
                                                        -
                                                        
                                                        
                                                        
                                                        14
                                                        
                                                        
                                                        
                                                        -
                                                        
                                                        
                                                        
                                                        -
                                                        
                                                        
                                                        
                                                        (14
                                                        )
                                                        
                                                        
                                                        -
                                                        
                                                        
                                                        
                                                        -Balance,
      March 31, 2010
                                                        
                                                        
                                                        20,000
                                                        
                                                        
                                                        
                                                        4,718
                                                        
                                                        
                                                        $
                                                        19,795
                                                        
                                                        
                                                        $
                                                        4,718
                                                        
                                                        
                                                        $
                                                        35,071
                                                        
                                                        
                                                        $
                                                        27,211
                                                        
                                                        
                                                        $
                                                        (922
                                                        )
                                                        
                                                        $
                                                        85,873





See
notes to the unaudited consolidated financial statements.





7




FIRST
FINANCIAL SERVICE CORPORATION


Consolidated
Statements of Cash Flows


(Dollars
In Thousands)


(Unaudited)




Three
      Months EndedMarch
      31,2010
                  
                  
                  2009Operating Activities:Net
      income
                  
                  $
                  755
                  
                  
                  $
                  761Adjustments
      to reconcile net income to netcash
      provided by operating activities:Provision for loan losses
                  
                  
                  1,752
                  
                  
                  
                  2,045Depreciation on premises and equipment
                  
                  
                  427
                  
                  
                  
                  413Intangible asset amortization
                  
                  
                  87
                  
                  
                  
                  130Net amortization (accretion) available-for-sale
                  
                  
                  (148
                  )
                  
                  
                  1Net amortization (accretion) held-to-maturity
                  
                  
                  -
                  
                  
                  
                  5Impairment loss on securities available-for-sale
                  
                  
                  123
                  
                  
                  
                  140Impairment loss on securities held-to-maturity
                  
                  
                  49
                  
                  
                  
                  15Loss on sale of investments available-for-sale
                  
                  
                  23
                  
                  
                  
                  -Gain on sale of mortgage loans
                  
                  
                  (299
                  )
                  
                  
                  (177
                  )Origination of loans held for sale
                  
                  
                  (24,629
                  )
                  
                  
                  (36,010
                  )Proceeds on sale of loans held for sale
                  
                  
                  27,884
                  
                  
                  
                  35,026Stock-based compensation expense
                  
                  
                  24
                  
                  
                  
                  26Prepaid FDIC premium
                  
                  
                  614
                  
                  
                  
                  -Changes in:Cash surrender value of life insurance
                  
                  
                  (88
                  )
                  
                  
                  (91
                  )Interest receivable
                  
                  
                  (204
                  )
                  
                  
                  380Other assets
                  
                  
                  (738
                  )
                  
                  
                  (1,591
                  )Interest payable
                  
                  
                  (46
                  )
                  
                  
                  (9
                  )Accounts payable and other liabilities
                  
                  
                  1,003
                  
                  
                  
                  126Net
      cash from operating activities
                  
                  
                  6,589
                  
                  
                  
                  1,190Investing Activities:Sales of securities available-for-sale
                  
                  
                  500
                  
                  
                  
                  -Purchases of securities available-for-sale
                  
                  
                  (34,614
                  )
                  
                  
                  -Maturities of securities available-for-sale
                  
                  
                  553
                  
                  
                  
                  341Maturities of securities held-to-maturity
                  
                  
                  785
                  
                  
                  
                  690Net change in loans
                  
                  
                  26,172
                  
                  
                  
                  (39,244
                  )Net purchases of premises and equipment
                  
                  
                  (774
                  )
                  
                  
                  (980
                  )Net
      cash from investing activities
                  
                  
                  (7,378
                  )
                  
                  
                  (39,193
                  )Financing ActivitiesNet change in deposits
                  
                  
                  42,399
                  
                  
                  
                  46,119Change in short-term borrowings
                  
                  
                  (658
                  )
                  
                  
                  (29,869
                  )Repayments to Federal Home Loan Bank
                  
                  
                  (118
                  )
                  
                  
                  (106
                  )Issuance of preferred stock, net
                  
                  
                  -
                  
                  
                  
                  20,000Issuance of common stock under dividend reinvestment
    program
                  
                  
                  8
                  
                  
                  
                  3Issuance of common stock for employee benefit plans
                  
                  
                  63
                  
                  
                  
                  145Dividends paid on common stock
                  
                  
                  -
                  
                  
                  
                  (890
                  )Dividends paid on preferred stock
                  
                  
                  (250
                  )
                  
                  
                  (267
                  )Net
      cash from financing activities
                  
                  
                  41,444
                  
                  
                  
                  35,135(Decrease)
      Increase in cash and cash equivalents
                  
                  
                  40,655
                  
                  
                  
                  (2,868
                  )Cash
      and cash equivalents, beginning of period
                  
                  
                  98,533
                  
                  
                  
                  20,905Cash
      and cash equivalents, end of period
                  
                  $
                  139,188
                  
                  
                  $
                  18,037




See notes to the unaudited
consolidated financial statements.





8





NOTES
TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS





1.
            BASIS
      OF PRESENTATION AND SUMMARY OF SIGNIFICANT ACCOUNTING
    POLICIES





Basis of
Presentation – The accompanying unaudited consolidated financial
statements include the accounts of First Financial Service Corporation and its
wholly owned subsidiary, First Federal Savings Bank.  First Federal Savings
Bank has three wholly owned subsidiaries, First Service Corporation of
Elizabethtown, Heritage Properties, LLC and First Federal Office Park,
LLC.  Unless the text clearly suggests otherwise, references to "us," "we,"
or "our" include First Financial Service Corporation and its direct and indirect
wholly-owned subsidiaries.  All significant intercompany transactions and
balances have been eliminated in consolidation.





The
accompanying unaudited consolidated financial statements have been prepared in
accordance with U.S. generally accepted accounting principles for interim
financial information and with the instructions to Form 10-Q and Rule 10-01 of
Regulation S-X.  Accordingly, they do not include all of the information
and footnotes required by U.S. generally accepted accounting principles for
complete financial statements.  In the opinion of management, all
adjustments (consisting of normal recurring accruals) considered necessary for a
fair presentation have been included.  Operating results for the
three-month period ending March 31, 2010 are not necessarily indicative of the
results that may occur for the year ending December 31, 2010.  For further
information, refer to the consolidated financial statements and footnotes
thereto included in the Corporation’s annual report on Form 10-K for the period
ended December 31, 2009.





Adoption of New Accounting Standards
– FASB ASC 860, Transfers and Servicingwas issued in
June 2009.  This statement amends and removes the concept of a qualifying
special-purpose entity and limits the circumstances in which a financial asset,
or portion of a financial asset, should be derecognized when the transferor has
not transferred the entire financial asset to an entity that is not consolidated
with the transferor in the financial statements being presented and/or when the
transferor has continuing involvement with the transferred financial asset. The
new standard become effective for us on January 1, 2010 and did not have a
material impact.





FASB ASC
810,Consolidations was also issued in June
2009 and amends tests for variable interest entities to determine whether a
variable interest entity must be consolidated. This standard requires an entity
to perform an analysis to determine whether an entity’s variable interest or
interests give it a controlling financial interest in a variable interest
entity. This statement requires ongoing reassessments of whether an entity is
the primary beneficiary of a variable interest entity and enhanced disclosures
that provide more transparent information about an entity’s involvement with a
variable interest entity. The new standard become effective for us on
January 1, 2010 and did not have a material impact.





Newly Issued But Not
Yet Effective Accounting Standards–The Financial Accounting
Standards Board issued new accounting guidance under Accounting Standards Update
(ASU) No. 2010-06 that requires new disclosures and clarifies existing
disclosure requirements about fair value measurement as set forth in ASC
Subtopic 820-10. The objective of the new guidance is to improve these
disclosures and increase transparency in financial reporting. Specifically, the
new guidance requires:





A
reporting entity to disclose separately the amounts of significant transfers in
and out of Level 1 andLevel 2 fair value  measurements and describe the
reasons for the transfers; and





In the
reconciliation for fair value measurements using significant unobservable
inputs, a reporting entityshould present separately information about purchases,
sales, issuances, and settlements.





In addition, the guidance clarifies the
requirements of the following existing disclosures:





For
purposes of reporting fair value measurement for each class of assets and
liabilities, a reportingentity needs to use judgment in determining the
appropriate classes of assets and  liabilities; and





A
reporting entity should provide disclosures about the valuation techniques and
inputs used to measurefair value for both recurring and nonrecurring fair value
measurements.





9




NOTES
TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS





1.
              BASIS
      OF PRESENTATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
      –
    (Continued)





ASU
2010-06 is effective for interim and annual reporting periods beginning after
December 15, 2009,except for the disclosures about purchases, sales, issuances,
and settlements in the roll forward ofactivity in Level 3 fair value
measurements.  Those disclosures are effective for fiscal years beginning
after December 15, 2010, and for interim periods within those fiscal years.
Early application is permitted.





2.
            SECURITIES





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





Gross
                                          
                                          
                                          Gross(Dollars in thousands)
                                          
                                          Amortized
                                          
                                          
                                          Unrealized
                                          
                                          
                                          UnrealizedCost
                                          
                                          
                                          Gains
                                          
                                          
                                          Losses
                                          
                                          
                                          Fair ValueSecurities available-for-sale:March 31, 2010:U.S.
      Treasury and agencies
                                          
                                          $
                                          47,492
                                          
                                          
                                          $
                                          86
                                          
                                          
                                          $
                                          (236
                                          )
                                          
                                          $
                                          47,342Government-sponsoredmortgage-backed residential
                                          
                                          
                                          14,179
                                          
                                          
                                          
                                          176
                                          
                                          
                                          
                                          (7
                                          )
                                          
                                          
                                          14,348Equity
                                          
                                          
                                          433
                                          
                                          
                                          
                                          77
                                          
                                          
                                          
                                          -
                                          
                                          
                                          
                                          510State and municipal
                                          
                                          
                                          16,751
                                          
                                          
                                          
                                          578
                                          
                                          
                                          
                                          (61
                                          )
                                          
                                          
                                          17,268Trust preferred securities
                                          
                                          
                                          1,883
                                          
                                          
                                          
                                          -
                                          
                                          
                                          
                                          (1,839
                                          )
                                          
                                          
                                          44Total
                                          
                                          $
                                          80,738
                                          
                                          
                                          $
                                          917
                                          
                                          
                                          $
                                          (2,143
                                          )
                                          
                                          $
                                          79,512December 31, 2009:U.S.
      Treasury and agencies
                                          
                                          $
                                          20,000
                                          
                                          
                                          $
                                          80
                                          
                                          
                                          $
                                          -
                                          
                                          
                                          $
                                          20,080Government-sponsoredmortgage-backed residential
                                          
                                          
                                          9,632
                                          
                                          
                                          
                                          171
                                          
                                          
                                          
                                          (51
                                          )
                                          
                                          
                                          9,752Equity
                                          
                                          
                                          933
                                          
                                          
                                          
                                          60
                                          
                                          
                                          
                                          (3
                                          )
                                          
                                          
                                          990State and municipal
                                          
                                          
                                          14,604
                                          
                                          
                                          
                                          399
                                          
                                          
                                          
                                          (110
                                          )
                                          
                                          
                                          14,893Trust preferred securities
                                          
                                          
                                          1,983
                                          
                                          
                                          
                                          -
                                          
                                          
                                          
                                          (1,934
                                          )
                                          
                                          
                                          49Total
                                          
                                          $
                                          47,152
                                          
                                          
                                          $
                                          710
                                          
                                          
                                          $
                                          (2,098
                                          )
                                          
                                          $
                                          45,764Gross
                                          
                                          
                                          GrossAmortized
                                          
                                          
                                          Unrecognized
                                          
                                          
                                          UnrecognizedCost
                                          
                                          
                                          Gains
                                          
                                          
                                          Losses
                                          
                                          
                                          Fair ValueSecurities held-to-maturity:March 31, 2010:Government-sponsoredmortgage-backed residential
                                          
                                          $
                                          97
                                          
                                          
                                          $
                                          3
                                          
                                          
                                          $
                                          -
                                          
                                          
                                          $
                                          100State and municipal
                                          
                                          
                                          245
                                          
                                          
                                          
                                          2
                                          
                                          
                                          
                                          -
                                          
                                          
                                          
                                          247Trust preferred securities
                                          
                                          
                                          20
                                          
                                          
                                          
                                          -
                                          
                                          
                                          
                                          -
                                          
                                          
                                          
                                          20Total
                                          
                                          $
                                          362
                                          
                                          
                                          $
                                          5
                                          
                                          
                                          $
                                          -
                                          
                                          
                                          $
                                          367December 31, 2009:Government-sponsoredmortgage-backed residential
                                          
                                          $
                                          902
                                          
                                          
                                          $
                                          6
                                          
                                          
                                          $
                                          -
                                          
                                          
                                          $
                                          908State and municipal
                                          
                                          
                                          245
                                          
                                          
                                          
                                          3
                                          
                                          
                                          
                                          -
                                          
                                          
                                          
                                          248Trust preferred securities
                                          
                                          
                                          20
                                          
                                          
                                          
                                          -
                                          
                                          
                                          
                                          -
                                          
                                          
                                          
                                          20Total
                                          
                                          $
                                          1,167
                                          
                                          
                                          $
                                          9
                                          
                                          
                                          $
                                          -
                                          
                                          
                                          $
                                          1,176





10





NOTES
TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS





2.
            SECURITIES
      – (Continued)





The
amortized cost and fair value of securities at March 31, 2010, by contractual
maturity, are shown below.  Securities not due at a single maturity date,
primarily mortgage-backed and equity securities, are shown
separately.




Available for Sale
                          
                          
                          Held-to-MaturityAmortized
                          
                          
                          Fair
                          
                          
                          Amortized
                          
                          
                          Fair(Dollars in thousands)
                          
                          Cost
                          
                          
                          Value
                          
                          
                          Cost
                          
                          
                          ValueDue
      in one year or less
                          
                          $
                          -
                          
                          
                          $
                          -
                          
                          
                          $
                          245
                          
                          
                          $
                          247Due
      after one year through five years
                          
                          
                          25,115
                          
                          
                          
                          25,130
                          
                          
                          
                          -
                          
                          
                          
                          -Due
      after five years through ten years
                          
                          
                          8,432
                          
                          
                          
                          8,429
                          
                          
                          
                          -
                          
                          
                          
                          -Due
      after ten years
                          
                          
                          32,579
                          
                          
                          
                          31,095
                          
                          
                          
                          20
                          
                          
                          
                          20Government-sponsored
      mortgage-backedresidential
                          
                          
                          14,179
                          
                          
                          
                          14,348
                          
                          
                          
                          97
                          
                          
                          
                          100Equity
                          
                          
                          433
                          
                          
                          
                          510
                          
                          
                          
                          -
                          
                          
                          
                          -$
                          80,738
                          
                          
                          $
                          79,512
                          
                          
                          $
                          362
                          
                          
                          $
                          367




For the
March 31, 2010 quarter, proceeds from sales of available-for-sale equity
securities were $500,000 and gross realized losses recognized in income were
$23,000.  There were not any sales of available-for-sale securities for the
March 31, 2009 period.





Investment
securities pledged to secure public deposits and FHLB advances had an amortized
cost of $27.5 million and fair value of $27.8 million at March 31, 2010 and a
$28.6 million amortized cost and fair value of $28.8 million at December 31,
2009.





Securities
with unrealized losses at March 31, 2010 and December 31, 2009 aggregated by
major security type and length of time in a continuous unrealized loss position
are as follows:





March
      31, 2010
                                    
                                    Less
      than 12 Months
                                    
                                    
                                    12
      Months or More
                                    
                                    
                                    TotalFair
                                    
                                    
                                    Unrealized
                                    
                                    
                                    Fair
                                    
                                    
                                    Unrealized
                                    
                                    
                                    Fair
                                    
                                    
                                    UnrealizedDescription of Securities
                                    
                                    Value
                                    
                                    
                                    Loss
                                    
                                    
                                    Value
                                    
                                    
                                    Loss
                                    
                                    
                                    Value
                                    
                                    
                                    LossU.S.
      Treasury and agencies
                                    
                                    $
                                    17,256
                                    
                                    
                                    $
                                    (236
                                    )
                                    
                                    $
                                    -
                                    
                                    
                                    $
                                    -
                                    
                                    
                                    $
                                    17,256
                                    
                                    
                                    $
                                    (236
                                    )Government-sponsoredmortgage-backed residential
                                    
                                    
                                    5,050
                                    
                                    
                                    
                                    (7
                                    )
                                    
                                    
                                    -
                                    
                                    
                                    
                                    -
                                    
                                    
                                    
                                    5,050
                                    
                                    
                                    
                                    (7
                                    )State
      and municipal
                                    
                                    
                                    804
                                    
                                    
                                    
                                    (7
                                    )
                                    
                                    
                                    1,016
                                    
                                    
                                    
                                    (54
                                    )
                                    
                                    
                                    1,820
                                    
                                    
                                    
                                    (61
                                    )Trust
      preferred securities
                                    
                                    
                                    -
                                    
                                    
                                    
                                    -
                                    
                                    
                                    
                                    44
                                    
                                    
                                    
                                    (1,839
                                    )
                                    
                                    
                                    44
                                    
                                    
                                    
                                    (1,839
                                    )Total
      temporarily impaired
                                    
                                    $
                                    23,110
                                    
                                    
                                    $
                                    (250
                                    )
                                    
                                    $
                                    1,060
                                    
                                    
                                    $
                                    (1,893
                                    )
                                    
                                    $
                                    24,170
                                    
                                    
                                    $
                                    (2,143
                                    )December
      31, 2009
                                    
                                    Less
      than 12 Months
                                    
                                    
                                    12
      Months or More
                                    
                                    
                                    TotalFair
                                    
                                    
                                    Unrealized
                                    
                                    
                                    Fair
                                    
                                    
                                    Unrealized
                                    
                                    
                                    Fair
                                    
                                    
                                    UnrealizedDescription of Securities
                                    
                                    Value
                                    
                                    
                                    Loss
                                    
                                    
                                    Value
                                    
                                    
                                    Loss
                                    
                                    
                                    Value
                                    
                                    
                                    LossGovernment-sponsoredmortgage-backed residential
                                    
                                    $
                                    5,141
                                    
                                    
                                    $
                                    (51
                                    )
                                    
                                    $
                                    -
                                    
                                    
                                    $
                                    -
                                    
                                    
                                    $
                                    5,141
                                    
                                    
                                    $
                                    (51
                                    )Equity
                                    
                                    
                                    75
                                    
                                    
                                    
                                    (3
                                    )
                                    
                                    
                                    -
                                    
                                    
                                    
                                    -
                                    
                                    
                                    
                                    75
                                    
                                    
                                    
                                    (3
                                    )State
      and municipal
                                    
                                    
                                    1,161
                                    
                                    
                                    
                                    (22
                                    )
                                    
                                    
                                    2,456
                                    
                                    
                                    
                                    (88
                                    )
                                    
                                    
                                    3,617
                                    
                                    
                                    
                                    (110
                                    )Trust
      preferred securities
                                    
                                    
                                    -
                                    
                                    
                                    
                                    -
                                    
                                    
                                    
                                    49
                                    
                                    
                                    
                                    (1,934
                                    )
                                    
                                    
                                    49
                                    
                                    
                                    
                                    (1,934
                                    )Total
      temporarily impaired
                                    
                                    $
                                    6,377
                                    
                                    
                                    $
                                    (76
                                    )
                                    
                                    $
                                    2,505
                                    
                                    
                                    $
                                    (2,022
                                    )
                                    
                                    $
                                    8,882
                                    
                                    
                                    $
                                    (2,098
                                    )





11





NOTES
TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS





2.
            SECURITIES
      – (Continued)





We evaluate investment securities with
significant declines in fair value on a quarterly basis to determine whether
they should be considered other-than-temporarily impaired under current
accounting guidance, which generally provides that if a security is in an
unrealized loss position, whether due to general market conditions or industry
or issuer-specific factors, the holder of the securities must assess whether the
impairment is other-than-temporary.





Accounting guidance
requires entities to split other than temporary impairment charges between
credit losses (i.e., the loss based on the entity’s estimate of the decrease in
cash flows, including those that result from expected voluntary prepayments),
which are charged to earnings, and the remainder of the impairment charge
(non-credit component) to accumulated other comprehensive income. This
requirement pertains to both securities held to maturity and securities
available for sale.





The
unrealized losses on the state and municipal securities were caused primarily by
interest rate decreases.  The contractual terms of those investments do not
permit the issuer to settle the securities at a price less than the amortized
cost of the investment.  Because we do not have the intent to sell these
securities and it is likely that we will not be required to sell the securities
before their anticipated recovery, we do not consider these investments to be
other-than-temporarily impaired at March 31, 2010.  We also considered the
financial condition and near term prospects of the issuer and identified no
matters that would indicate less than full recovery.





As
discussed in Note 6 - Fair Value, the fair value of our portfolio of trust
preferred securities, has decreased significantly as a result of the current
credit crisis and lack of liquidity in the financial markets.  There are
limited trades in trust preferred securities and the majority of holders of such
instruments have elected not to participate in the market unless they are
required to sell as a result of liquidation, bankruptcy, or other forced or
distressed conditions.





To
determine if the five trust preferred securities were other than temporarily
impaired as of March 31, 2010, we used a discounted cash flow analysis. 
The cash flow models were used to determine if the current present value of the
cash flows expected on each security were still equivalent to the original cash
flows projected on the security when purchased.   The cash flow
analysis takes into consideration assumptions for prepayments, defaults and
deferrals for the underlying pool of banks, insurance companies and
REITs.





Management
works with independent third parties to identify its best estimate of the cash
flow estimated to be collected. If this estimate results in a present value of
expected cash flows that is less than the amortized cost basis of a security
(that is, credit loss exists), an OTTI is considered to have occurred. If there
is no credit loss, any impairment is considered temporary. The cash flow
analysis we performed included the following general assumptions:





·
            We
      assume default rates on individual entities behind the pools based on
      Fitch ratings for financial institutions and A.M. Best ratings for
      insurance companies.  These ratings are used to predict the default
      rates for the next several quarters.  Two of the trust preferred
      securities hold a limited number of real estate investment trusts (REITs)
      in their pools.  REITs are evaluated on an individual basis to
      predict future default rates.


·
            We
      assume that annual defaults for the remaining life of each security will
      be 37.5 basis points.


·
            We
      assume a recovery rate of 15% on deferrals after two
  years.


·
            We
      assume 2% prepayments through the five year par call and then 2% per annum
      for the remaining life of the
security.


·
            Our
      securities have been modeled using the above assumptions by FTN Financial
      using the forward LIBOR curve plus original spread to discount projected
      cash flows to present values.





12




NOTES
TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS





2.
            SECURITIES
      – (Continued)





Additionally,
in making our determination, we considered all available market information that
could be obtained without undue cost and effort, and considered the unique
characteristics of each trust preferred security individually by assessing the
available market information and the various risks associated with that security
including:





·
            Valuation
      estimates provided by our investment
broker;


·
            The
      amount of fair value decline;


·
            How
      long the decline in fair value has
existed;


·
            Significant
      rating agency changes on the
issuer;


·
            Level
      of interest rates and any movement in pricing for credit and other
      risks;


·
            Information
      about the performance of the underlying institutions that issued the debt
      instruments, such as net income, return on equity, capital adequacy,
      non-performing assets, Texas ratios,
etc;


·
            Our
      intent to sell the security or whether it is more likely than not that we
      will be required to sell the security before its anticipated recovery;
      and


·
            Other
      relevant observable inputs.





The
following table details the five debt securities with other-than-temporary
impairment at March 31, 2010 and the related credit losses recognized in
earnings during the three months ended March 31, 2010:




Moody's
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          %
      of CurrentCredit
                          
                          Current
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          Current
                          
                          
                          Deferrals and(Dollars
      in thousands)
                          
                          
                          
                          Ratings
                          
                          Moody's
                          
                          
                          
                          
                          
                          
                          
                          Estimated
                          
                          
                          Deferrals
                          
                          
                          DefaultsWhen
                          
                          Credit
                          
                          Par
                          
                          
                          Book
                          
                          
                          Fair
                          
                          
                          and
                          
                          
                          to Current
                          
                          
                          OTTISecurity
                          
                          Tranche
                          
                          Purchased
                          
                          Ratings
                          
                          Value
                          
                          
                          Value
                          
                          
                          Value
                          
                          
                          Defaults
                          
                          
                          Collateral
                          
                          
                          RecognizedPreferred
      Term Securities IV
                          
                          Mezzanine
                          
                          
                          A3
                          
                          Ca
                          
                          $
                          244
                          
                          
                          $
                          199
                          
                          
                          $
                          20
                          
                          
                          $
                          18,000
                          
                          
                          
                          27
                          %
                          
                          $
                          -Preferred
      Term Securities VI
                          
                          Mezzanine
                          
                          
                          A1
                          
                          Caa1
                          
                          
                          259
                          
                          
                          
                          20
                          
                          
                          
                          20
                          
                          
                          
                          33,000
                          
                          
                          
                          81
                          %
                          
                          
                          49Preferred
      Term Securities XV B1
                          
                          Mezzanine
                          
                          
                          A2
                          
                          Ca
                          
                          
                          1,004
                          
                          
                          
                          782
                          
                          
                          
                          15
                          
                          
                          
                          156,050
                          
                          
                          
                          26
                          %
                          
                          
                          45Preferred
      Term Securities XXI C2
                          
                          Mezzanine
                          
                          
                          A3
                          
                          Ca
                          
                          
                          1,018
                          
                          
                          
                          598
                          
                          
                          
                          5
                          
                          
                          
                          202,000
                          
                          
                          
                          27
                          %
                          
                          
                          -Preferred
      Term Securities XXII C1
                          
                          Mezzanine
                          
                          
                          A3
                          
                          Ca
                          
                          
                          503
                          
                          
                          
                          304
                          
                          
                          
                          4
                          
                          
                          
                          367,500
                          
                          
                          
                          27
                          %
                          
                          
                          78Total
                          
                          
                          
                          
                          
                          
                          
                          
                          $
                          3,028
                          
                          
                          $
                          1,903
                          
                          
                          $
                          64
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          $
                          172




The table
below presents a roll-forward of the credit losses recognized in earnings for
the period ended March 31, 2010:




(Dollars
      in thousands)Beginning
      balance January 1, 2010
                        
                        $
                        862Increases to the amount related to the credit loss for
    whichother-than-temporary impairment was previously
      recognized
                        
                        
                        172Ending
      balance March 31, 2010
                        
                        $
                        1,034





13




NOTES
TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS





3.
            LOANS





Loans are
summarized as follows:





March 31,
                  
                  
                  December 31,(Dollars
      in thousands)
                  
                  2010
                  
                  
                  2009Commercial
                  
                  $
                  56,438
                  
                  
                  $
                  62,940Real
      estate commercial
                  
                  
                  609,659
                  
                  
                  
                  627,788Real
      estate construction
                  
                  
                  15,206
                  
                  
                  
                  14,567Residential
      mortgage
                  
                  
                  177,183
                  
                  
                  
                  178,985Consumer
      and home equity
                  
                  
                  73,931
                  
                  
                  
                  74,844Indirect
      consumer
                  
                  
                  34,710
                  
                  
                  
                  36,628Loans
      held for sale
                  
                  
                  5,227
                  
                  
                  
                  8,183972,354
                  
                  
                  
                  1,003,935Less:Net deferred loan origination fees
                  
                  
                  (735
                  )
                  
                  
                  (826
                  )Allowance for loan losses
                  
                  
                  (18,810
                  )
                  
                  
                  (17,719
                  )(19,545
                  )
                  
                  
                  (18,545
                  )Loans
      Receivable
                  
                  $
                  952,809
                  
                  
                  $
                  985,390




The
allowance for loan loss is summarized as follows:





As of and For theThree Months EndedMarch 31,(Dollars
      in thousands)
                    
                    2010
                    
                    
                    2009Balance,
      beginning of period
                    
                    $
                    17,719
                    
                    
                    $
                    13,565Provision
      for loan losses
                    
                    
                    1,752
                    
                    
                    
                    2,045Charge-offs
                    
                    
                    (711
                    )
                    
                    
                    (593
                    )Recoveries
                    
                    
                    50
                    
                    
                    
                    55Balance,
      end of period
                    
                    $
                    18,810
                    
                    
                    $
                    15,072




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





As of and For the
                    
                    
                    As of and For theThree Months Ended
                    
                    
                    Year EndedMarch 31,
                    
                    
                    December 31,(Dollars in thousands)
                    
                    2010
                    
                    
                    2009End
      of period impaired loans
                    
                    $
                    33,128
                    
                    
                    $
                    37,998Amount
      of allowance for loanloss
      allocated
                    
                    
                    3,671
                    
                    
                    
                    4,111





14




NOTES
TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS





3.
            LOANS–
    (Continued)





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





March 31,
                  
                  
                  December 31,(Dollars in thousands)
                  
                  2010
                  
                  
                  2009Restructured
                  
                  $
                  7,038
                  
                  
                  $
                  9,812Loans
      past due over 90 days still on accrual
                  
                  
                  -
                  
                  
                  
                  -Non
      accrual loans
                  
                  
                  26,090
                  
                  
                  
                  28,186Total
                  
                  $
                  33,128
                  
                  
                  $
                  37,998




We have
allocated $441,000 of specific reserves to customers whose loan terms have been
modified in troubled debt restructurings as of March 31, 2010.  We are not
committed to lend additional funds to debtors whose loans have been modified in
a troubled debt restructuring.





4.
            EARNINGS
      PER SHARE





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





Three Months Ended(Dollars in thousands,
                            
                            March 31,except per share data)
                            
                            2009
                            
                            
                            2009Basic:Net income
                            
                            $
                            755
                            
                            
                            $
                            761Less:Preferred stock dividends
                            
                            
                            (250
                            )
                            
                            
                            (267
                            )Accretion on preferred stock discount
                            
                            
                            (14
                            )
                            
                            
                            (11
                            )Net income available to common shareholders
                            
                            $
                            491
                            
                            
                            $
                            483Weighted average common shares
                            
                            
                            4,716
                            
                            
                            
                            4,676Diluted:Weighted average common shares
                            
                            
                            4,716
                            
                            
                            
                            4,676Dilutive effect of stock options and warrants
                            
                            
                            -
                            
                            
                            
                            1Weighted average common and incremental shares
                            
                            
                            4,716
                            
                            
                            
                            4,677Earnings
      Per Common Share:Basic
                            
                            $
                            0.10
                            
                            
                            $
                            0.10Diluted
                            
                            $
                            0.10
                            
                            
                            $
                            0.10




Stock
options for 239,706 and 197,536 shares of common stock were not included in the
March 31, 2010 and 2009 computation of diluted earnings per share because their
impact was anti-dilutive.  Warrants to purchase 215,983 shares at March 31,
2010 and 2009 were not included in the computation because their impact was also
anti-dilutive.





5.
            STOCK
      OPTION PLAN





Our 2006
Stock Incentive Plan, which is shareholder approved, succeeded our 1998 Stock
Option and Incentive Plan.  Under the 2006 Plan, we may grant either
incentive or non-qualified stock options tokey employees and
directorsfor a
total of 647,350 shares of our common stock at not less than fair value at the
date such options are granted.Options available for
future grant under the 1998 Plan totaled 38,500 shares and were rolled into the
2006 Plan.We
believe that the ability to award stock options and other forms of stock-based
incentive compensation can assist us in attracting and retaining key employees.
Stock-based incentive compensation is also a means to align the interests of key
employees with those of our shareholders  by  providing 
awards  intended  to  reward   recipients 
for  our  long-term  growth.The option to purchase
shares vest over periods of one to five years and expire ten years after the
date of grant.We
issue new shares of common stock upon the exercise of stock options.  At
March 31, 2010 options available for future grant under the 2006 Plan totaled
494,750.Compensation cost
related to options granted under the 1998 and 2006 Plans that was charged
against earnings for the periods ended March 31, 2010and 2009 was $24,000 and
$26,000.




15




NOTES TO UNAUDITED CONSOLIDATED
FINANCIAL STATEMENTS





5.
            STOCK
      OPTION PLAN - (Continued)




The fair
value of each option award is estimated on the date of grant using the
Black-Scholes option valuation model that uses various weighted-average
assumptions.  The risk-free interest rate is based on the U.S. Treasury
yield curve in effect at the time of grant.  The expected volatility is
based on the fluctuation in the price of a share of stock over the period for
which the option is being valued and the expected life of the options granted
represents the period of time the options are expected to be outstanding. 
There were no stock option grants for the March 31, 2010 period.





A summary
of option activity under the 1998 and 2006 Plans as of March 31, 2010 is
presented below:




WeightedWeighted
              
              
              AverageNumber
              
              
              Average
              
              
              Remaining
              
              
              Aggregateof
              
              
              Exercise
              
              
              Contractual
              
              
              IntrinsicOptions
              
              
              Price
              
              
              Term
              
              
              Value(Dollars
      In Thousands)Outstanding,
      beginning of period
              
              
              279,706
              
              
              $
              15.12Granted
      during period
              
              
              -
              
              
              
              -Forfeited
      during period
              
              
              -
              
              
              
              -Exercised
      during period
              
              
              -
              
              
              
              -Cancelled
      during period
              
              
              (40,000
              )
              
              
              9.06Outstanding,
      end of period
              
              
              239,706
              
              
              $
              16.14
              
              
              
              7.2
              
              
              $
              -Eligible
      for exercise at period end
              
              
              104,898
              
              
              $
              20.01
              
              
              
              4.8
              
              
              $
              -




There
were no options exercised, modified or settled in cash for the periods ended
March 31, 2010 and 2009.  Management expects all outstanding unvested
options will vest.





As
      of March 31, 2010 there was $245,000 of total unrecognized compensation
      cost related to non-vested share-based compensation arrangements granted
      under the 1998 and 2006 Plans.  That cost is expected to be
      recognized over a weighted-average period of 3.3
  years.





6.
            FAIR
      VALUE





U.S. GAAP
defines fair value as the price that would be received to sell an asset or paid
to transfer a liability in an orderly transaction between market participants at
the measurement date and establishes a fair value hierarchy that prioritizes the
use of inputs used in valuation methodologies into the following three
levels:





Level 1: Quoted prices
(unadjusted) for identical assets or liabilities in active markets.  A
quoted         price in an active market provides the
most reliable evidence of fair value and shall be used to measure fair value
whenever available.





Level 2:Significant other
observable inputs other than Level 1 prices such as quoted prices for similar
assets or liabilities; quoted prices in markets that are not active; or other
inputs that are observable or can be corroborated by observable market
data.





Level 3: Significant
unobservable inputs that reflect a reporting entity’s own assumptions about the
assumptions that market participants would use in pricing an asset or
liability.




16




NOTES
TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS





6.
            FAIR
      VALUE - (Continued)





We used
the following methods and significant assumptions to estimate the fair value of
available-for-sale-securities.





Available-for-sale
securities: The fair values of
some equity securities are determined by obtaining quoted prices on nationally
recognized securities exchanges (Level 1 inputs).  The fair values of most
debt securities are determined by a matrix pricing, which is a mathematical
technique widely used in the industry to value debt securities without relying
exclusively on quoted prices for the specific securities but rather by relying
on the securities’ relationship to other benchmark quoted securities (Level 2
inputs).  In certain cases where there is limited activity or less
transparency around inputs to the valuation, securities are classified within
(Level 3) of the valuation hierarchy.  For trust preferred securities,
discounted cash flows are calculated using spread to swap and LIBOR curves that
are updated to incorporate loss severities, volatility, credit spread and
optionality.  Rating agency and industry research reports as well as
defaults and deferrals on individual securities are reviewed and incorporated
into the calculations. For other equity securities, discounted cash flows are
calculated with available market information through processes using benchmark
yields, market spreads sourced from new issues, dealer quotes and trade prices
among other sources.





Assets and Liabilities
Measured at Fair Value on a Recurring Basis





Assets
measured at fair value on a recurring basis are summarized below:





Quoted Prices inActive Markets for
                                
                                
                                Significant Other
                                
                                
                                SignificantMarch
      31,
                                
                                
                                Identical
      Assets
                                
                                
                                Observable Inputs
                                
                                
                                Unobservable Inputs(Dollars
      in thousands)
                                
                                2010
                                
                                
                                (Level
      1)
                                
                                
                                (Level
      2)
                                
                                
                                (Level
      3)Assets:U.S. Treasury and agencies
                                
                                $
                                47,342
                                
                                
                                $
                                -
                                
                                
                                $
                                47,342
                                
                                
                                $
                                -Government-sponsoredmortgage-backed residential
                                
                                
                                14,348
                                
                                
                                
                                -
                                
                                
                                
                                14,348
                                
                                
                                
                                -Equity
                                
                                
                                510
                                
                                
                                
                                219
                                
                                
                                
                                -
                                
                                
                                
                                291State and municipal
                                
                                
                                17,268
                                
                                
                                
                                -
                                
                                
                                
                                17,268
                                
                                
                                
                                -Trust preferred securities
                                
                                
                                44
                                
                                
                                
                                -
                                
                                
                                
                                -
                                
                                
                                
                                44Total
                                
                                $
                                79,512
                                
                                
                                $
                                219
                                
                                
                                $
                                78,958
                                
                                
                                $
                                335Quoted
      Prices inActive Markets for
                                
                                
                                Significant Other
                                
                                
                                SignificantDecember 31,
                                
                                
                                Identical
      Assets
                                
                                
                                Observable Inputs
                                
                                
                                Unobservable Inputs(Dollars
      in thousands)
                                
                                2009
                                
                                
                                (Level
      1)
                                
                                
                                (Level
      2)
                                
                                
                                (Level
      3)Assets:U.S. Treasury and agencies
                                
                                $
                                20,080
                                
                                
                                $
                                -
                                
                                
                                $
                                20,080
                                
                                
                                $
                                -Government-sponsoredmortgage-backed residential
                                
                                
                                9,752
                                
                                
                                
                                -
                                
                                
                                
                                9,752
                                
                                
                                
                                -Equity
                                
                                
                                990
                                
                                
                                
                                699
                                
                                
                                
                                -
                                
                                
                                
                                291State and municipal
                                
                                
                                14,893
                                
                                
                                
                                -
                                
                                
                                
                                14,893
                                
                                
                                
                                -Trust preferred securities
                                
                                
                                49
                                
                                
                                
                                -
                                
                                
                                
                                -
                                
                                
                                
                                49Total
                                
                                $
                                45,764
                                
                                
                                $
                                699
                                
                                
                                $
                                44,725
                                
                                
                                $
                                340




Between
June 2002 and July 2006, we invested in four AFS and one HTM investment grade
tranches of trust preferred collateralized debt obligation (“CDO”)
securities.  The securities were issued and are referred to as Preferred
Term Securities Limited (“PreTSL”).  The underlying collateral for the
PreTSL is unguaranteed pooled trust preferred securities issued by banks,
insurance companies and REITs geographically dispersed across the United
States.  We hold five PreTSL securities, none of which are currently
investment grade.  Prior to September 30, 2008, we determined the fair
value of the trust preferred securities using a valuation technique based on
Level 2 inputs.  The Level 2 inputs included estimates of the market value
for each security provided through our investment broker.




17




NOTES
TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS





6. 
  FAIR VALUE - (Continued)





Since
late 2007, the markets for collateralized debt obligations and trust preferred
securities have become increasingly inactive.  The inactivity was first
evidenced in late 2007 when new issues of similar securities were discounted in
order to complete the offering.  Beginning in the second quarter of 2008,
the purchase and sale activity of these securities substantially decreased as
investors elected to hold the securities instead of selling them at
substantially depressed prices.  Our brokers have indicated that little if
any activity is occurring in this sector and that the PreTSL securities trades
that are taking place are primarily distressed sales where the seller must
liquidate as a result of insolvency, redemptions or closure of a fund holding
the security, or other distressed conditions.  As a result, the bid-ask
spreads have widened significantly and the volume of trades decreased
significantly compared to historical volumes.





During
2008, we determined that the market for the trust preferred securities that we
hold and for similar CDO securities (such as higher-rated tranches within the
same CDO security) are also not active.  That determination was made
considering that there are few observable transactions for the trust preferred
securities or similar CDO securities and the observable prices for those
transactions have varied substantially over time.  Consequently, we have
considered those observable inputs and determined that our trust preferred
securities are classified within Level 3 of the fair value
hierarchy.





We have
determined that an income approach valuation technique (using cash flows and
present value techniques) that maximizes the use of relevant observable inputs
and minimizes the use of unobservable inputs is equally or more representative
of fair value than relying on the estimation of market value technique used at
prior measurement dates, which now has few observable inputs and relies on an
inactive market with distressed sales conditions that would require significant
adjustments.





We
received valuation estimates on our trust preferred securities for March 31,
2010.  Those valuation estimates were based on proprietary pricing models
utilizing significant unobservable inputs in an inactive market with distressed
sales, Level 3 inputs, rather than actual transactions in an active
market. In
accordance with current accounting guidance, we determined that a risk-adjusted
discount rate appropriately reflects the reporting entity’s estimate of the
assumptions that market participants would use in an active market to estimate
the selling price of the asset at the measurement date.





We
conduct a thorough review of fair value hierarchy classifications on a quarterly
basis.  Reclassification of certain financial instruments may occur when
input observability changes.





The table
below presents a reconciliation and income statement classification of gains and
losses for all assets measured at fair value on a recurring basis using
significant unobservable inputs (Level 3) for the periods ended March 31, 2010
and 2009:





Fair Value MeasurementsUsing SignificantUnobservable Inputs(Level 3)Three Months EndedMarch 31,(Dollars in thousands)
                      
                      2010
                      
                      
                      2009Beginning
      balance
                      
                      $
                      340
                      
                      
                      $
                      364Total gains or losses:Impairment charges on securities
                      
                      
                      (123
                      )
                      
                      
                      (140
                      )Included in other comprehensive income
                      
                      
                      118
                      
                      
                      
                      106Transfers in and/or out of Level 3
                      
                      
                      -
                      
                      
                      
                      -Ending
      balance
                      
                      $
                      335
                      
                      
                      $
                      330





18





NOTES
TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS




6.
            FAIR
      VALUE - (Continued)





Assets and Liabilities
Measured at Fair Value on a Nonrecurring Basis





Assets
measured at fair value on a nonrecurring basis are summarized
below:





Quoted Prices inActive Markets for
                                          
                                          
                                          Significant Other
                                          
                                          
                                          SignificantMarch 31,
                                          
                                          
                                          Identical Assets
                                          
                                          
                                          Observable Inputs
                                          
                                          
                                          Unobservable Inputs(Dollars in thousands)
                                          
                                          2010
                                          
                                          
                                          (Level 1)
                                          
                                          
                                          (Level 2)
                                          
                                          
                                          (Level 3)Assets:Impaired
      loans
                                          
                                          $
                                          29,457
                                          
                                          
                                          $
                                          -
                                          
                                          
                                          $
                                          -
                                          
                                          
                                          $
                                          29,457Trust
      preferred securityheld-to-maturity
                                          
                                          
                                          20
                                          
                                          
                                          
                                          -
                                          
                                          
                                          
                                          -
                                          
                                          
                                          
                                          20Quoted
      Prices inActive
      Markets for
                                          
                                          
                                          Significant
      Other
                                          
                                          
                                          SignificantDecember 31,
                                          
                                          
                                          Identical
      Assets
                                          
                                          
                                          Observable
      Inputs
                                          
                                          
                                          Unobservable
      Inputs(Dollars
      in thousands)
                                          
                                          2009
                                          
                                          
                                          (Level 1)
                                          
                                          
                                          (Level 2)
                                          
                                          
                                          (Level 3)Assets:Impaired
      loans
                                          
                                          $
                                          33,887
                                          
                                          
                                          $
                                          -
                                          
                                          
                                          $
                                          -
                                          
                                          
                                          $
                                          33,887Real
      estate acquiredthrough foreclosure
                                          
                                          
                                          8,428
                                          
                                          
                                          
                                          -
                                          
                                          
                                          
                                          -
                                          
                                          
                                          
                                          8,428Trust
      preferred securityheld-to-maturity
                                          
                                          
                                          20
                                          
                                          
                                          
                                          -
                                          
                                          
                                          
                                          -
                                          
                                          
                                          
                                          20




Impaired
loans, which are measured for impairment using the fair value of the collateral
for collateral dependent loans, had a carrying amount of $33.1 million, with a
valuation allowance of $3.7 million, resulting in an additional provision for
loan losses of $1.3 million for the 2010 period.  Values for collateral
dependent loans are generally based on appraisals obtained from licensed real
estate appraisals and in certain circumstances consideration of offers obtained
to purchase properties prior to foreclosure.  Appraisals for commercial
real estate generally use three methods to derive value: cost, sales or market
comparison and income approach.  The cost method bases value on the
estimated cost to replace the current property after considering adjustments for
depreciation.  Values of the market comparison approach evaluate the sales
price of similar properties in the same market area.  The income approach
considers net operating income generated by the property and an investors
required return.  The final value is a reconciliation of these three
approaches and takes into consideration any other factors management deems
relevant to arrive at a representative fair value.





Real
estate owned acquired through foreclosure is recorded at fair value less
estimated selling costs atthe date of foreclosure.  Fair value is based on
the appraised market value of the propertybased on salesof similar assets. 
The fair value may be subsequently reduced if the estimated fair value declines
below the original appraised value.  We did not record any fair value
adjustments to real estate owned during the quarter ended March 31,
2010.





Trust
preferred securities which are held-to-maturity are valued using an income
approach valuation technique (using cash flows and present value techniques)
that maximizes the use of relevant observable inputs and minimizes the use of
unobservable inputs. The income approach is equally or more representative of
fair value than relying on the estimation of market value technique used at
prior measurement dates, which now has few observable inputs and relies on an
inactive market with distressed sales conditions that would require significant
adjustments.





We
received valuation estimates on our trust preferred security for March 31,
2010.  Those valuation estimates were based on proprietary pricing models
utilizing significant unobservable inputs in an inactive market with distressed
sales, Level 3 inputs, rather than actual transactions in an active
market.





19




NOTES
TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS




6.
            FAIR
      VALUE - (Continued)





Fair Value of Financial
Instruments





The
estimated fair value of financial instruments not previously presented is as
follows:




(Dollars in thousands)
                  
                  March 30, 2010
                  
                  
                  December 31, 2009Carrying
                  
                  
                  Fair
                  
                  
                  Carrying
                  
                  
                  FairValue
                  
                  
                  Value
                  
                  
                  Value
                  
                  
                  ValueFinancial assets:Cash and due from banks
                  
                  $
                  139,188
                  
                  
                  $
                  139,188
                  
                  
                  $
                  98,533
                  
                  
                  $
                  98,533Securities held-to-maturity
                  
                  
                  342
                  
                  
                  
                  347
                  
                  
                  
                  1,147
                  
                  
                  
                  1,156Loans held for sale
                  
                  
                  5,227
                  
                  
                  
                  5,284
                  
                  
                  
                  8,183
                  
                  
                  
                  8,257Loans, net
                  
                  
                  947,582
                  
                  
                  
                  943,963
                  
                  
                  
                  977,207
                  
                  
                  
                  982,584Accrued interest receivable
                  
                  
                  5,862
                  
                  
                  
                  5,862
                  
                  
                  
                  5,658
                  
                  
                  
                  5,658FHLB stock
                  
                  
                  8,515
                  
                  
                  
                  N/A
                  
                  
                  
                  8,515
                  
                  
                  
                  N/AFinancial
      liabilities:Deposits
                  
                  
                  1,092,214
                  
                  
                  
                  1,087,431
                  
                  
                  
                  1,049,815
                  
                  
                  
                  1,042,957Short-term borrowings
                  
                  
                  842
                  
                  
                  
                  842
                  
                  
                  
                  1,500
                  
                  
                  
                  1,500Advances from Federal Home Loan Bank
                  
                  
                  52,627
                  
                  
                  
                  54,769
                  
                  
                  
                  52,745
                  
                  
                  
                  55,856Subordinated debentures
                  
                  
                  18,000
                  
                  
                  
                  12,743
                  
                  
                  
                  18,000
                  
                  
                  
                  12,743Accrued interest payable
                  
                  
                  314
                  
                  
                  
                  314
                  
                  
                  
                  360
                  
                  
                  
                  360




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





Carrying
amount is the estimated fair value for cash and cash equivalents, interest
bearing deposits, accrued interest receivable and payable, demand deposits,
short-term debt and variable rate loans or deposits that re-price frequently and
fully.  Held-to-maturity securities fair values are based on market prices
or dealer quotes and if no such information is available, on the rate and term
of the security and information about the issuer.  The value of loans held
for sale is based on the underlying sale commitments.  For fixed rate loans
or deposits and for variable rate loans or deposits with infrequent re-pricing
or re-pricing limits, fair value is based on discounted cash flows using current
market rates applied to the estimated life.  Fair values of advances from
Federal Home Loan Bank and subordinated debentures are based on current rates
for similar financing.  The fair value of off-balance-sheet items is based
on the current fees or cost that would be charged to enter into or terminate
such arrangements and is not material.  It is not practicable to determine
the fair value of FHLB stock due to restrictions placed on its
transferability.





20




NOTES
TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS




7.
            PREFERRED
      STOCK




On
January 9, 2009, we issued $20 million of cumulative perpetual preferred
shares, with a liquidation preference of $1,000 per share (the “Senior Preferred
Shares”) to the United States Treasury under its Capital Purchase Program
(“CPP”). The Senior Preferred Shares constitute Tier 1 capital and rank senior
to our common shares. The Senior Preferred Shares pay cumulative dividends
quarterly at a rate of 5% per annum for the first five years and will reset to a
rate of 9% per annum after five years. The Senior Preferred Shares may be
redeemed at any time, at our option. We also have the ability to defer dividend
payments at any time, at our option.





We also
issued a warrant to purchase 215,983 common shares to the U.S. Treasury at a
purchase price of $13.89 per share. The aggregate purchase price equals 15% of
the aggregate amount of the Senior Preferred Shares purchased by the U.S.
Treasury or $3 million. The initial purchase price per share for the warrant and
the number of common shares subject to the warrant were determined by reference
to the market price of the common shares (calculated on a 20-day trailing
average) on December 8, 2008, the date the U.S. Treasury approved our TARP
application. The warrant has a term of 10 years and is potentially dilutive
to earnings per share.





Participation
in the CPP requires a participating institution to comply with a number of
restrictions and provisions, including standards for executive compensation and
corporate governance and limitations on share repurchases and the declaration
and payment of dividends on common shares. The standard terms of the CPP require
that a participating financial institution limit the payment of dividends to the
most recent quarterly amount prior to October 14, 2008, which is $0.19 per
share in our case. This dividend limitation will remain in effect until the
earlier of three years or such time that the preferred shares are
redeemed.





On
February 17, 2009, the American Recovery and Reinvestment Act of 2009 (“ARRA”)
was enacted. As required by ARRA, the U.S. Treasury has issued additional
compensation standards on companies receiving financial assistance from the U.S.
government. In addition, ARRA imposes certain new executive compensation and
corporate expenditure limits on each CPP recipient, until the recipient has
repaid the Treasury.  ARRA also permits CPP participants to redeem the
preferred shares held by the Treasury Department without penalty and without the
need to raise new capital, subject to the Treasury’s consultation with the
recipient’s appropriate regulatory agency.





8.
            REGULATORY
      MATTERS





We
currently have a regulatory agreement with the FDIC that requires us to obtain
the consent of the Regional Director of the FDIC and the Commissioner of the
KDFI to declare and pay cash dividends.  We also have a regulatory
agreement with the FDIC that requires us to maintain a Tier 1 leverage ratio of
8%.  We are currently in compliance with the Tier 1 capital
requirement.  We have also entered into an agreement with our primary
regulator.  Under this agreement, we must obtain regulatory approval
before declaring any dividends.  We may not redeem shares or obtain
additional borrowings without prior approval.





21




Item
2.


MANAGEMENT’S
DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
 AND
RESULTS OF OPERATIONS
  GENERAL
 
 We
operate 22 full-service banking centers and a commercial private banking center
in eight contiguous counties in central Kentucky along the Interstate 65
corridor and within the Louisville metropolitan area, including southern
Indiana.  Our markets range from Metro Louisville in Jefferson County,
Kentucky approximately 40 miles north of our headquarters in Elizabethtown,
Kentucky to Hart County, Kentucky, approximately 30 miles south of Elizabethtown
to Harrison County, Indiana approximately 60 miles northwest of our
headquarters.  Our markets are supported by a diversified industry
base and have a regional population of over 1 million.  Louisville and
Jefferson County comprise the 16th largest
city in the United States.  We operate in Hardin, Nelson, Hart,
Bullitt, Meade and Jefferson counties in Kentucky and in Harrison and Floyd
counties in southern Indiana.  We Based on the continued economic
slow-down, management anticipates that our markets may not continue to grow at a
similar rate experienced over the last few years.  However, we believe
we will still be well positioned to benefit from growth in our local markets
when the economy rebounds in the future.
 
 We serve
the needs and cater to the economic strengths of the local communities in which
we operate, and we strive to provide a high level of personal and professional
customer service. We offer a variety of financial services to our retail and
commercial banking customers. These services include personal and corporate
banking services and personal investment financial counseling
services.
 
 Throughour personal investment
financial counseling services, we offer a wide variety of mutual funds, equity
investments, and fixed and variable annuities.  We invest in the
wholesale capital markets to manage a portfolio of securities and use various
forms of wholesale funding. The security portfolio contains a variety of
instruments, including callable debentures, taxable and non-taxable debentures,
fixed and adjustable rate mortgage backed securities, and collateralized
mortgage obligations.
 
 Our
results of operations depend primarily on net interest income, which is the
difference between interest income from interest-earning assets and interest
expense on interest-bearing liabilities. Our operations are also affected by
non-interest income, such as service charges, loan fees, gains and losses from
the sale of mortgage loans and revenue earned from bank owned life insurance.
Our principal operating expenses, aside from interest expense, consist of
compensation and employee benefits, occupancy costs, data processing expense,
FDIC insurance premiums and provisions for loan losses.
 
 This
discussion and analysis in this report covers material changes in the financial
condition since December 31, 2009 and material changes in the results of
operations for the three month period ending March 31, 2010 as compared to
2009.  It should be read in conjunction with "Management’s Discussion
and Analysis of Financial Condition and Results of Operations" included in the
Annual Report on Form 10-K for the period ended December 31, 2009.
 
 OVERVIEW
 
 Over the
past several years we have focused on enhancing and expanding our retail and
commercial banking network in our core central Kentucky markets as well as
establishing our presence in the metropolitan Louisville market.  Our
core markets, where we have a combined 22% market share, have become
increasingly competitive as several new banks have entered those markets during
the past few years.  In order to protect and grow our market share, we
have replaced existing branches with newer, enhanced facilities.  In
addition to the enhancement and expansion in our core markets, we have been
increasing our presence in the Louisville market.  Our acquisition of
FSB Bancshares, Inc. has broadened our retail branch network in the Louisville
market, which now extends into southern Indiana.  Approximately 55% of
the deposit base in the Louisville market is controlled by five out-of-state
banks.  While the market is very competitive, we believe this creates
an opportunity for smaller community banks with more power to make decisions
locally.  We believe our investment in these initiatives along with
our continued commitment to a high level of customer service will enhance our
market share in our core markets and our development in the Louisville
market.
 
 Our
retail branch network continues to generate encouraging
results.  Total deposits have grown 58% over the past three years.
Total deposits were $1.1 billion at March 31, 2010, an increase of $42.4 million
or 4% from December 31, 2009.  After our acquisition of Farmers State
Bank in 2008, our retail branch network in the Louisville market has broadened
to sixteen offices.  In May 2009, we opened the Fort Knox banking
center, our twenty-first banking center, which expanded our current footprint in
Hardin County, Kentucky.  The Fort Knox banking center complements our
existing branch located in Radcliff, Kentucky and is located just outside the
main entrance to the Fort Knox military base.   We also completed
the construction of our twenty-second banking center which opened in July 2009.
The branch is located in the Middletown area of Louisville,
Kentucky.  Competition for deposits continues to be challenging in all
of the markets we serve. We believe this intense competition combined with
continued re-pricing of variable rate loans could add to additional margin
compression.
  22
  We have
developed a strong commercial real estate niche in our markets.  We
have an experienced team of bankers who focus on providing service and
convenience to our customers.  It is quite common for our bankers to
close loans at a customer’s place of business or even the customer’s personal
residence.   This high level of service has been well received in
our Louisville market, which is dominated by regional banks.  To
further develop our commercial banking relationships in Louisville, we opened a
private banking office in 2007.  This upscale facility complements our
full service centers in Louisville by attracting commercial deposit
relationships in conjunction with our commercial lending
relationships.
 
 Despite
the continued adverse economic conditions during the first quarter of 2010, the
Corporation’s capital position remained well-capitalized as defined by
regulatory standards.  Our capital position was further bolstered in
the first quarter of 2009 by our participation in the U.S. Treasury Department
Capital Purchase Program (“CPP”).  Under the CPP, we sold $20 million
of cumulative perpetual preferred shares to the U.S. Treasury in a transaction
that closed on January 9, 2009.
 
 We believe that the current adverse
economic conditions will be long lasting.  During the last quarter of
2008, the continued economic slowdown moved to sectors not previously impacted,
including consumer, commercial, industrial among others.  Credit
issues are broadening in these sectors and economic recovery is most likely
several quarters away.  We will continue to monitor credit quality
very closely in 2010 as this adverse economic climate persists.  As
the economy and the financial sector continue to struggle, probable losses in
the loan portfolio could increase, resulting in higher provision for loan losses
during 2010.
 
 CRITICAL
ACCOUNTING POLICIES
 
 Our
accounting and reporting policies comply with U.S. generally accepted accounting
principles and conform to general practices within the banking
industry.  The accounting policy relating to the allowance for loan
losses is critical to the understanding of our results of operations since the
application of this policy requires significant management assumptions and
estimates that could result in materially different amounts to be reported if
conditions or underlying circumstances were to change.
 
 Allowance for
Loan Losses–We
maintain an allowance sufficient to absorb probable incurred credit losses
existing in the loan portfolio. Our Allowance for Loan Loss Review Committee,
which is comprised of senior officers, evaluates the allowance for loan losses
on a quarterly basis.  We estimate the allowance using past loan loss
experience, known and inherent risks in the portfolio, adverse situations that
may affect the borrower’s ability to repay, estimated value of the underlying
collateral, and current economic conditions.  While we estimate the
allowance for loan losses based in part on historical losses within each loan
category, estimates for losses within the commercial real estate portfolio
depend more on credit analysis and recent payment performance. Allocations of
the allowance may be made for specific loans or loan categories, but the entire
allowance is available for any loan that, in management’s judgment, should be
charged off.
 
 The
allowance consists of specific and general components.  The specific
component relates to loans that are individually classified as impaired or loans
otherwise classified as substandard or doubtful.  The general
component covers non-classified loans and is based on historical loss experience
adjusted for current factors. Allowance estimates are developed with actual loss
experience adjusted for current economic conditions.  Allowance
estimates are considered a prudent measurement of the risk in the loan portfolio
and are applied to individual loans based on loan type.
  Based on
our calculation, an allowance of $18.8 millionor 1.95% of total loans
was our estimate of probable losses within the loan portfolio as ofMarch 31, 2010.This estimate required
a provision for loan losses on the income statement of$1.8 million for the
2010 period.If
the mix and amount of future charge off percentages differ significantly from
those assumptions used by management in making its determination, the allowance
for loan losses and provision for loan losses on the income statement could
materially increase.
  23
  Impairment of
Investment Securities–We review all unrealized losses on our investment securities to determine
whether the losses are other-than-temporary.  We evaluate our
investment securities on at least a quarterly basis and more frequently when
economic or market conditions warrant, to determine whether a decline in their
value below amortized cost is other-than-temporary.  We evaluate a
number of factors including, but not limited to: valuation estimates provided by
investment brokers; how much fair value has declined below amortized cost; how
long the decline in fair value has existed; the financial condition of the
issuer; significant rating agency changes on the issuer; and management’s
assessment that we do not intend to sell or will not be required to sell the
security for a period of time sufficient to allow for any anticipated recovery
in fair value.
 
 The term
“other-than-temporary” is not intended to indicate that the decline is
permanent, but indicates that the possibility for a near-term recovery of value
is not necessarily favorable, or that there is a lack of evidence to support a
realizable value equal to or greater than the carrying value of the
investment.  Once a decline in value is determined to be
other-than-temporary, the cost basis of the security is written down to fair
value and a charge to earnings is recognized for the credit component and the
non-credit component is recorded to other comprehensive income.
 
 Real estate
owned–The
estimation of fair value is significant to real estate owned acquired through
foreclosure.  These assets are recorded at fair value less estimated
selling costs at the date of foreclosure.  Fair value is based on the
appraised market value of the property based on sales of similar assets when
available.  The fair value may be subsequently reduced if the
estimated fair value declines below the original appraised value.
 
 RESULTS
OF OPERATIONS
 
 Earnings
remained flat for 2010 compared to 2009.  Net income for the quarter
ended March 31, 2010 was $755,000 or $0.10 per common share diluted compared to
$761,000 or $0.10 per common share diluted for the same period in 2009. Net income available to
common shareholders was also impacted by dividends paid on preferred shares.
Our book value per
common share decreased from $15.62 at March 31, 2009 to $14.01 at March 31,
2010.Annualized
net income for 2010 represented a return on average assets of .16% and a return
on average equity of 2.31%.These compare with a
return on average assets of .30% and a return on average equity of 3.37% for the
2009 period also annualized.
 
 Net Interest
Income–The
principal source of our revenue is net interest income.  Net interest
income is the difference between interest income on interest-earning assets,
such as loans and securities and the interest expense on liabilities used to
fund those assets, such as interest-bearing deposits and borrowings. Net
interest income is affected by both changes in the amount and composition of
interest-earning assets and interest-bearing liabilities as well as changes in
market interest rates.
 
 The
increase in the volume of interest earning assets and the change in the mix of
interest earning assets had basically no impact on net interest income which
only increased $12,000 for the first three months of 2010 compared to the prior
year period.  Average interest earning assets increased $193.9 million
for 2010 compared to 2009.  Despite the increase in interest earning
assets, our net interest margin realized a sharp decline of 61 basis
points.  The decline is primarily attributed to our efforts to
increase liquidity by placing assets into lower yielding investments other than
loans.  The yield on earning assets averaged 5.14% for 2010 compared
to an average yield on earning assets of 6.01% for the same period in
2009.  This decrease was offset by a decrease in our cost of
funds.  Net interest margin as a percent of average earning assets
decreasedto 3.12%
for 2010 compared to 3.73% for the 2009 period.
  Our cost
of funds averaged 2.19% for the first three months of 2010 compared to an
average cost of funds of 2.49% for the same period in 2009. Going forward, our
cost of funds is expected to continue to decrease as certificates of deposit
re-price and roll off into new certificates of deposit at lower interest
rates.
 
 Competition
for deposits combined with continued re-pricing of variable rate loans and our
efforts to increase liquidity by placing assets into lower yielding investments
other than loans is likely to compress our net interest margin in future
quarters.
  24
  AVERAGE
BALANCE SHEET
 
 The
following table provides information relating to our average balance sheet and
reflects the average yield on assets and average cost of liabilities for the
indicated periods.  Yields and costs for the periods presented are
derived by dividing income or expense by the average balances of assets or
liabilities, respectively.
 
 Quarter Ended March 31,2010
                                                                                              
                                                                                              
                                                                                              2009Average
                                                                                              
                                                                                              
                                                                                              
                                                                                              
                                                                                              
                                                                                              Average
                                                                                              
                                                                                              
                                                                                              Average
                                                                                              
                                                                                              
                                                                                              
                                                                                              
                                                                                              
                                                                                              Average(Dollars in thousands)
                                                                                              
                                                                                              Balance
                                                                                              
                                                                                              
                                                                                              Interest
                                                                                              
                                                                                              
                                                                                              Yield/Cost (5)
                                                                                              
                                                                                              
                                                                                              Balance
                                                                                              
                                                                                              
                                                                                              Interest
                                                                                              
                                                                                              
                                                                                              Yield/Cost (5)ASSETSInterest
      earning assets:U.S.
      Treasury and agencies
                                                                                              
                                                                                              $
                                                                                              30,417
                                                                                              
                                                                                              
                                                                                              $
                                                                                              175
                                                                                              
                                                                                              
                                                                                              
                                                                                              2.33
                                                                                              %
                                                                                              
                                                                                              $
                                                                                              4,161
                                                                                              
                                                                                              
                                                                                              $
                                                                                              39
                                                                                              
                                                                                              
                                                                                              
                                                                                              3.80
                                                                                              %Mortgage-backed
      securities
                                                                                              
                                                                                              
                                                                                              14,304
                                                                                              
                                                                                              
                                                                                              
                                                                                              149
                                                                                              
                                                                                              
                                                                                              
                                                                                              4.22
                                                                                              
                                                                                              
                                                                                              
                                                                                              7,691
                                                                                              
                                                                                              
                                                                                              
                                                                                              82
                                                                                              
                                                                                              
                                                                                              
                                                                                              4.32Equity
      securities
                                                                                              
                                                                                              
                                                                                              830
                                                                                              
                                                                                              
                                                                                              
                                                                                              25
                                                                                              
                                                                                              
                                                                                              
                                                                                              12.22
                                                                                              
                                                                                              
                                                                                              
                                                                                              940
                                                                                              
                                                                                              
                                                                                              
                                                                                              33
                                                                                              
                                                                                              
                                                                                              
                                                                                              14.23State
      and political subdivision securities (1)
                                                                                              
                                                                                              
                                                                                              16,367
                                                                                              
                                                                                              
                                                                                              
                                                                                              257
                                                                                              
                                                                                              
                                                                                              
                                                                                              6.37
                                                                                              
                                                                                              
                                                                                              
                                                                                              9,093
                                                                                              
                                                                                              
                                                                                              
                                                                                              161
                                                                                              
                                                                                              
                                                                                              
                                                                                              7.18Corporate
      bonds
                                                                                              
                                                                                              
                                                                                              71
                                                                                              
                                                                                              
                                                                                              
                                                                                              26
                                                                                              
                                                                                              
                                                                                              
                                                                                              148.51
                                                                                              
                                                                                              
                                                                                              
                                                                                              333
                                                                                              
                                                                                              
                                                                                              
                                                                                              34
                                                                                              
                                                                                              
                                                                                              
                                                                                              41.45Loans
      (2) (3) (4)
                                                                                              
                                                                                              
                                                                                              988,646
                                                                                              
                                                                                              
                                                                                              
                                                                                              14,047
                                                                                              
                                                                                              
                                                                                              
                                                                                              5.76
                                                                                              
                                                                                              
                                                                                              
                                                                                              939,647
                                                                                              
                                                                                              
                                                                                              
                                                                                              13,944
                                                                                              
                                                                                              
                                                                                              
                                                                                              6.02FHLB
      stock
                                                                                              
                                                                                              
                                                                                              8,515
                                                                                              
                                                                                              
                                                                                              
                                                                                              93
                                                                                              
                                                                                              
                                                                                              
                                                                                              4.43
                                                                                              
                                                                                              
                                                                                              
                                                                                              8,515
                                                                                              
                                                                                              
                                                                                              
                                                                                              96
                                                                                              
                                                                                              
                                                                                              
                                                                                              4.57Interest
      bearing deposits
                                                                                              
                                                                                              
                                                                                              108,060
                                                                                              
                                                                                              
                                                                                              
                                                                                              26
                                                                                              
                                                                                              
                                                                                              
                                                                                              0.10
                                                                                              
                                                                                              
                                                                                              
                                                                                              2,956
                                                                                              
                                                                                              
                                                                                              
                                                                                              24
                                                                                              
                                                                                              
                                                                                              
                                                                                              3.29Total interest earning
      assets
                                                                                              
                                                                                              
                                                                                              1,167,210
                                                                                              
                                                                                              
                                                                                              
                                                                                              14,798
                                                                                              
                                                                                              
                                                                                              
                                                                                              5.14
                                                                                              
                                                                                              
                                                                                              
                                                                                              973,336
                                                                                              
                                                                                              
                                                                                              
                                                                                              14,413
                                                                                              
                                                                                              
                                                                                              
                                                                                              6.01Less:  Allowance
      for loan losses
                                                                                              
                                                                                              
                                                                                              (17,421
                                                                                              )
                                                                                              
                                                                                              
                                                                                              
                                                                                              
                                                                                              
                                                                                              
                                                                                              
                                                                                              
                                                                                              
                                                                                              
                                                                                              (13,793
                                                                                              )Non-interest
      earning assets
                                                                                              
                                                                                              
                                                                                              83,567
                                                                                              
                                                                                              
                                                                                              
                                                                                              
                                                                                              
                                                                                              
                                                                                              
                                                                                              
                                                                                              
                                                                                              
                                                                                              
                                                                                              80,188Total assets
                                                                                              
                                                                                              $
                                                                                              1,233,356
                                                                                              
                                                                                              
                                                                                              
                                                                                              
                                                                                              
                                                                                              
                                                                                              
                                                                                              
                                                                                              
                                                                                              
                                                                                              $
                                                                                              1,039,731LIABILITIES
      AND STOCKHOLDERS' EQUITYInterest
      bearing liabilities:Savings
      accounts
                                                                                              
                                                                                              $
                                                                                              126,561
                                                                                              
                                                                                              
                                                                                              $
                                                                                              239
                                                                                              
                                                                                              
                                                                                              
                                                                                              0.77
                                                                                              %
                                                                                              
                                                                                              $
                                                                                              111,149
                                                                                              
                                                                                              
                                                                                              $
                                                                                              197
                                                                                              
                                                                                              
                                                                                              
                                                                                              0.72
                                                                                              %NOW
      and money market accounts
                                                                                              
                                                                                              
                                                                                              253,426
                                                                                              
                                                                                              
                                                                                              
                                                                                              774
                                                                                              
                                                                                              
                                                                                              
                                                                                              1.24
                                                                                              
                                                                                              
                                                                                              
                                                                                              157,873
                                                                                              
                                                                                              
                                                                                              
                                                                                              249
                                                                                              
                                                                                              
                                                                                              
                                                                                              0.64Certificates
      of deposit and other time deposits
                                                                                              
                                                                                              
                                                                                              625,566
                                                                                              
                                                                                              
                                                                                              
                                                                                              3,856
                                                                                              
                                                                                              
                                                                                              
                                                                                              2.50
                                                                                              
                                                                                              
                                                                                              
                                                                                              491,731
                                                                                              
                                                                                              
                                                                                              
                                                                                              4,054
                                                                                              
                                                                                              
                                                                                              
                                                                                              3.34Short
      term borrowings
                                                                                              
                                                                                              
                                                                                              920
                                                                                              
                                                                                              
                                                                                              
                                                                                              21
                                                                                              
                                                                                              
                                                                                              
                                                                                              9.26
                                                                                              
                                                                                              
                                                                                              
                                                                                              59,942
                                                                                              
                                                                                              
                                                                                              
                                                                                              43
                                                                                              
                                                                                              
                                                                                              
                                                                                              0.29FHLB
      advances
                                                                                              
                                                                                              
                                                                                              52,689
                                                                                              
                                                                                              
                                                                                              
                                                                                              593
                                                                                              
                                                                                              
                                                                                              
                                                                                              4.56
                                                                                              
                                                                                              
                                                                                              
                                                                                              52,603
                                                                                              
                                                                                              
                                                                                              
                                                                                              597
                                                                                              
                                                                                              
                                                                                              
                                                                                              4.60Subordinated
      debentures
                                                                                              
                                                                                              
                                                                                              18,000
                                                                                              
                                                                                              
                                                                                              
                                                                                              327
                                                                                              
                                                                                              
                                                                                              
                                                                                              7.37
                                                                                              
                                                                                              
                                                                                              
                                                                                              18,000
                                                                                              
                                                                                              
                                                                                              
                                                                                              329
                                                                                              
                                                                                              
                                                                                              
                                                                                              7.41Total interest bearing
      liabilities
                                                                                              
                                                                                              
                                                                                              1,077,162
                                                                                              
                                                                                              
                                                                                              
                                                                                              5,810
                                                                                              
                                                                                              
                                                                                              
                                                                                              2.19
                                                                                              
                                                                                              
                                                                                              
                                                                                              891,298
                                                                                              
                                                                                              
                                                                                              
                                                                                              5,469
                                                                                              
                                                                                              
                                                                                              
                                                                                              2.49Non-interest
      bearing liabilities:Non-interest
      bearing deposits
                                                                                              
                                                                                              
                                                                                              66,078
                                                                                              
                                                                                              
                                                                                              
                                                                                              
                                                                                              
                                                                                              
                                                                                              
                                                                                              
                                                                                              
                                                                                              
                                                                                              
                                                                                              54,117Other
      liabilities
                                                                                              
                                                                                              
                                                                                              3,977
                                                                                              
                                                                                              
                                                                                              
                                                                                              
                                                                                              
                                                                                              
                                                                                              
                                                                                              
                                                                                              
                                                                                              
                                                                                              
                                                                                              2,605Total liabilities
                                                                                              
                                                                                              
                                                                                              1,147,217
                                                                                              
                                                                                              
                                                                                              
                                                                                              
                                                                                              
                                                                                              
                                                                                              
                                                                                              
                                                                                              
                                                                                              
                                                                                              
                                                                                              948,020Stockholders'
      equity
                                                                                              
                                                                                              
                                                                                              86,139
                                                                                              
                                                                                              
                                                                                              
                                                                                              
                                                                                              
                                                                                              
                                                                                              
                                                                                              
                                                                                              
                                                                                              
                                                                                              
                                                                                              91,711Total liabilities and
      stockholders'
      equity
                                                                                              
                                                                                              $
                                                                                              1,233,356
                                                                                              
                                                                                              
                                                                                              
                                                                                              
                                                                                              
                                                                                              
                                                                                              
                                                                                              
                                                                                              
                                                                                              
                                                                                              $
                                                                                              1,039,731Net interest income
                                                                                              
                                                                                              
                                                                                              
                                                                                              
                                                                                              
                                                                                              $
                                                                                              8,988
                                                                                              
                                                                                              
                                                                                              
                                                                                              
                                                                                              
                                                                                              
                                                                                              
                                                                                              
                                                                                              
                                                                                              
                                                                                              $
                                                                                              8,944Net interest spread
                                                                                              
                                                                                              
                                                                                              
                                                                                              
                                                                                              
                                                                                              
                                                                                              
                                                                                              
                                                                                              
                                                                                              
                                                                                              2.95
                                                                                              %
                                                                                              
                                                                                              
                                                                                              
                                                                                              
                                                                                              
                                                                                              
                                                                                              
                                                                                              
                                                                                              
                                                                                              
                                                                                              3.52
                                                                                              %Net interest margin
                                                                                              
                                                                                              
                                                                                              
                                                                                              
                                                                                              
                                                                                              
                                                                                              
                                                                                              
                                                                                              
                                                                                              
                                                                                              3.12
                                                                                              %
                                                                                              
                                                                                              
                                                                                              
                                                                                              
                                                                                              
                                                                                              
                                                                                              
                                                                                              
                                                                                              
                                                                                              
                                                                                              3.73
                                                                                              %
 
 (1)Taxable equivalent yields
are calculated assuming 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 loans in the average loan amounts outstanding.
 (4)Includes loans held for
sale.
 (5)Annualized
  25
  RATE/VOLUME
ANALYSIS
 
 The table
below shows changes in interest income and interest expense for the periods
indicated.  For each category of interest-earning assets and
interest-bearing liabilities, information is provided on changes attributable to
(1) changes in rate (changes in rate multiplied by old volume); (2) changes in
volume (change in volume multiplied by old rate); and (3) changes in rate-volume
(change in rate multiplied by change in volume).  Changes in
rate-volume are proportionately allocated between rate and volume
variance.
 
 Three Months EndedMarch 31,2010 vs. 2009Increase (decrease)Due to change inNet(Dollars in thousands)
                          
                          Rate
                          
                          
                          Volume
                          
                          
                          ChangeInterest income:U.S.
      Treasury and agencies
                          
                          $
                          (21
                          )
                          
                          $
                          157
                          
                          
                          $
                          136Mortgage-backed
      securities
                          
                          
                          (2
                          )
                          
                          
                          69
                          
                          
                          
                          67Equity
      securities
                          
                          
                          (4
                          )
                          
                          
                          (4
                          )
                          
                          
                          (8
                          )State
      and political subdivision securities
                          
                          
                          (20
                          )
                          
                          
                          116
                          
                          
                          
                          96Corporate
      bonds
                          
                          
                          35
                          
                          
                          
                          (43
                          )
                          
                          
                          (8
                          )Loans
                          
                          
                          (607
                          )
                          
                          
                          710
                          
                          
                          
                          103FHLB
      stock
                          
                          
                          (3
                          )
                          
                          
                          -
                          
                          
                          
                          (3
                          )Interest
      bearing deposits
                          
                          
                          (45
                          )
                          
                          
                          47
                          
                          
                          
                          2Total
      interest earning assets
                          
                          
                          (667
                          )
                          
                          
                          1,052
                          
                          
                          
                          385Interest expense:Savings
      accounts
                          
                          
                          13
                          
                          
                          
                          29
                          
                          
                          
                          42NOW
      and money market accounts
                          
                          
                          319
                          
                          
                          
                          206
                          
                          
                          
                          525Certificates
      of deposit and other time deposits
                          
                          
                          (1,157
                          )
                          
                          
                          959
                          
                          
                          
                          (198
                          )Short
      term borrowings
                          
                          
                          61
                          
                          
                          
                          (83
                          )
                          
                          
                          (22
                          )FHLB
      advances
                          
                          
                          (5
                          )
                          
                          
                          1
                          
                          
                          
                          (4
                          )Subordinated
      debentures
                          
                          
                          (2
                          )
                          
                          
                          -
                          
                          
                          
                          (2
                          )Total
      interest bearing liabilities
                          
                          
                          (771
                          )
                          
                          
                          1,112
                          
                          
                          
                          341Net
      change in net interest income
                          
                          $
                          104
                          
                          
                          $
                          (60
                          )
                          
                          $
                          44
 
 Non-Interest
Income and Non-Interest Expense
 
 The
following tables compare the components of non-interest income and expenses for
the periods ended March 31, 2010 and 2009.  The tables show the dollar
and percentage change from 2009 to 2010.  Below each table is a
discussion of significant changes and trends.
 
 Three Months EndedMarch 31,(Dollars in thousands)
                        
                        2010
                        
                        
                        2009
                        
                        
                        Change
                        
                        
                        %Non-interest
      incomeCustomer
      service fees on deposit accounts
                        
                        $
                        1,525
                        
                        
                        $
                        1,477
                        
                        
                        $
                        48
                        
                        
                        
                        3.2
                        %Gain
      on sale of mortgage loans
                        
                        
                        299
                        
                        
                        
                        177
                        
                        
                        
                        122
                        
                        
                        
                        68.9
                        %Loss
      on sale of investments
                        
                        
                        (23
                        )
                        
                        
                        -
                        
                        
                        
                        (23
                        )
                        
                        
                        100.0
                        %Net
      impairment losses recognized in earnings
                        
                        
                        (172
                        )
                        
                        
                        (155
                        )
                        
                        
                        (17
                        )
                        
                        
                        11.0
                        %Loss
      on sale and write downs of real estate acquired through
      foreclosure
                        
                        
                        (26
                        )
                        
                        
                        (17
                        )
                        
                        
                        (9
                        )
                        
                        
                        52.9
                        %Brokerage
      commissions
                        
                        
                        93
                        
                        
                        
                        93
                        
                        
                        
                        -
                        
                        
                        
                        0.0
                        %Other
      income
                        
                        
                        442
                        
                        
                        
                        428
                        
                        
                        
                        14
                        
                        
                        
                        3.3
                        %$
                        2,138
                        
                        
                        $
                        2,003
                        
                        
                        $
                        135
                        
                        
                        
                        6.7
                        %
 
 Growth in
customer service fees on deposit accounts, our largest component of non-interest
income, is primarily due to growth in customer deposits and overdraft fee income
on retail checking accounts for 2010.  We continue to increase our
customer base through cross-selling opportunities and marketing initiatives and
promotions.  In addition, we continue to emphasize growing our
checking account base to better enhance our profitability and franchise
value.
  26
  We
originate qualified VA, KHC, RHC and conventional secondary market loans and
sell them into the secondary market with servicing rights
released.  Prevailing mortgage interest rates remained at attractive
levels during the period helping to contribute to the increase in the volume of
loans closed for 2010.
 
 We invest
in various types of liquid assets, including United States Treasury obligations,
securities of various federal agencies, obligations of states and political
subdivisions, corporate bonds, mutual funds, stocks and
others.  During 2010 we recorded a loss on the sale of an equity
investment security of $23,000.
 
 We
recognized other-than-temporary impairment charges of $172,000 for the expected
credit loss during the 2010 quarter on three of our trust preferred securities
compared to $155,000 of impairment charges for 2009. Management believes this
impairment was primarily attributable to the current economic environment which
caused the financial conditions of some of the issuers to
deteriorate.
 
 Further
reducing non-interest income for the 2010 period was a $26,000 loss on the sale
of real estate owned properties.
 
 Three Months EndedMarch 31,(Dollars in thousands)
                      
                      2010
                      
                      
                      2009
                      
                      
                      Change
                      
                      
                      %Non-interest
      expensesEmployee
      compensation and benefits
                      
                      $
                      4,090
                      
                      
                      $
                      4,002
                      
                      
                      $
                      88
                      
                      
                      
                      2.2
                      %Office
      occupancy expense and equipment
                      
                      
                      804
                      
                      
                      
                      848
                      
                      
                      
                      (44
                      )
                      
                      
                      -5.2
                      %Marketing
      and advertising
                      
                      
                      225
                      
                      
                      
                      265
                      
                      
                      
                      (40
                      )
                      
                      
                      -15.1
                      %Outside
      services and data processing
                      
                      
                      730
                      
                      
                      
                      793
                      
                      
                      
                      (63
                      )
                      
                      
                      -7.9
                      %Bank
      franchise tax
                      
                      
                      350
                      
                      
                      
                      264
                      
                      
                      
                      86
                      
                      
                      
                      32.6
                      %FDIC
      insurance premiums
                      
                      
                      660
                      
                      
                      
                      179
                      
                      
                      
                      481
                      
                      
                      
                      268.7
                      %Amortization
      of core deposit intangible
                      
                      
                      87
                      
                      
                      
                      101
                      
                      
                      
                      (14
                      )
                      
                      
                      -13.9
                      %Other
      expense
                      
                      
                      1,328
                      
                      
                      
                      1,331
                      
                      
                      
                      (3
                      )
                      
                      
                      -0.2
                      %$
                      8,274
                      
                      
                      $
                      7,783
                      
                      
                      $
                      491
                      
                      
                      
                      6.3
                      %
 
 Employee
compensation and benefits is the largest component of non-interest
expense.  Increases for 2010 were due to cost of living salary
increases and higher costs of benefits.
 
 Office
occupancy expense and equipment, marketing and advertising, outside services and
data processing all decreased in 2010 compared to 2009. These expenses were
higher in 2009 due to additional operating expenses related to the opening of
two new banking centers. We opened a full-service banking center at Fort Knox
and another in the Middletown area of Jefferson County in 2009.
  During
the fourth quarter of 2009, the FDIC adopted a requirement that all banks prepay
three and a quarter years worth of FDIC assessments on December 31,
2009.  The prepayment is based on average third quarter
deposits.  The prepaid amount will be amortized over the prepayment
period.  Our prepayment was $7.5 million of which $613,000 was
reflected in our 2010 income statement.  Given the enacted increases
in assessments for insured financial institutions in 2009, we anticipate that
FDIC assessments on deposits will have a significantly greater impact upon
operating expenses for the next few years.
 
 Our
efficiency ratio was 75% for 2010 compared to 71% for the 2009
period.
 
 ANALYSIS
OF FINANCIAL CONDITION
 
 Total
assets at March 31, 2010 increased $43.3 million from December 31, 2009. The
increase was primarily driven by an increase in federal funds sold and
investment securities. Offsetting this growth was a decrease in loans. The
growth in federal funds sold and investments was funded with deposits, which
increased $42.4 million for the period.
  27
 
 Loans
 
 Net loans
decreased $32.6 million to $952.8 million at March 31, 2010 compared to $985.4
million at December 31, 2009.  Our commercial real estate and
commercial portfolios decreased $24.6 million to $666.1 million at March 31,
2010.  Our residential mortgage loan, consumer, home equity and
indirect consumer portfolios all decreased for the 2010 period.  The
decline in our commercial real estate and commercial loan portfolios is a result
of pay-offs on several large commercial relationships.  Although there
remains a high demand for loans from quality borrowers, we have elected to shift
our focus to preserve capital during the current economic
slow-down.    We believe however, we will still be well
positioned to benefit from growth in our local markets when the economy
rebounds.
 
 March 31,
                        
                        
                        December 31,(Dollars in thousands)
                        
                        2010
                        
                        
                        2009Commercial
                        
                        $
                        56,438
                        
                        
                        $
                        62,940Real
      estate commercial
                        
                        
                        609,659
                        
                        
                        
                        627,788Real
      estate construction
                        
                        
                        15,206
                        
                        
                        
                        14,567Residential
      mortgage
                        
                        
                        177,183
                        
                        
                        
                        178,985Consumer
      and home equity
                        
                        
                        73,931
                        
                        
                        
                        74,844Indirect
      consumer
                        
                        
                        34,710
                        
                        
                        
                        36,628Loans
      held for sale
                        
                        
                        5,227
                        
                        
                        
                        8,183972,354
                        
                        
                        
                        1,003,935Less:Net
      deferred loan origination fees
                        
                        
                        (735
                        )
                        
                        
                        (826
                        )Allowance
      for loan losses
                        
                        
                        (18,810
                        )
                        
                        
                        (17,719
                        )(19,545
                        )
                        
                        
                        (18,545
                        )Loans
      Receivable
                        
                        $
                        952,809
                        
                        
                        $
                        985,390
 
 Allowance
and Provision for Loan Losses
 
 Our
financial performance depends on the quality of the loans we originate and
management’s ability to assess the degree of risk in existing loans when it
determines the allowance for loan losses.  An increase in loan
charge-offs or non-performing loans or an inadequate allowance for loan losses
could reduce net interest income, net income and capital and limit the range of
products and services we can offer.
 
 The
Allowance for Loan Loss Review Committee evaluates the allowance for loan losses
quarterly to maintain a level sufficient to absorb probable incurred credit
losses existing in the loan portfolio.  Periodic provisions to the
allowance are made as needed.  The Committee determines the allowance
by applying loss estimates to graded loans by categories, as described
below.  In addition, the Committee analyzes such factors as changes in
lending policies and procedures; underwriting standards; collection; charge-off
and recovery history; changes in national and local economic business conditions
and developments; changes in the characteristics of the portfolio; ability and
depth of lending management and staff; changes in the trend of the volume and
severity of past due, non-accrual and classified loans; troubled debt
restructuring and other loan modifications; and results of regulatory
examinations.
 
 2008 was
a tumultuous year for the U.S. economy and the financial service industry.
Declining property values led to declining valuations for loan
portfolios.  The property value declines, which began in the second
half of 2007, continued throughout 2009.  The markets we serve have
generally avoided the severe property value declines experienced in other parts
of the country; nonetheless, the impact in our markets was still
significant.  During the second half of 2008, throughout 2009 and
continuing into the first quarter of 2010, we substantially increased our
provision for loan losses for our general and specific reserves as we identified
adverse developments.  2010 will continue to be a challenging time for
our financial institution as we manage the overall level of our credit
quality.  It is likely that provision for loan losses will remain
elevated in the near term.
  28
  The
following table analyzes our loan loss experience for the periods
indicated.
 
 Three Months EndedMarch 31,(Dollars in thousands)
                        
                        2010
                        
                        
                        2009Balance
      at beginning of period
                        
                        $
                        17,719
                        
                        
                        $
                        13,565Loans
      charged-off:Real
      estate mortgage
                        
                        
                        543
                        
                        
                        
                        -Consumer
                        
                        
                        168
                        
                        
                        
                        316Commercial
                        
                        
                        -
                        
                        
                        
                        277Total
      charge-offs
                        
                        
                        711
                        
                        
                        
                        593Recoveries:Real
      estate mortgage
                        
                        
                        1
                        
                        
                        
                        3Consumer
                        
                        
                        43
                        
                        
                        
                        52Commercial
                        
                        
                        6
                        
                        
                        
                        -Total
      recoveries
                        
                        
                        50
                        
                        
                        
                        55Net
      loans charged-off
                        
                        
                        661
                        
                        
                        
                        538Provision
      for loan losses
                        
                        
                        1,752
                        
                        
                        
                        2,045Balance
      at end of period
                        
                        $
                        18,810
                        
                        
                        $
                        15,072Allowance
      for loan losses to total loans (excluding loans held for
    sale)
                        
                        
                        1.95
                        %
                        
                        
                        1.60
                        %Annualized
      net charge-offs to average loans outstanding
                        
                        
                        0.27
                        %
                        
                        
                        0.23
                        %Allowance
      for loan losses to total non-performing loans
                        
                        
                        57
                        %
                        
                        
                        70
                        %
 
 The
provision for loan losses decreased by $293,000 to $1.8 million in 2010 compared
to 2009.  The decrease was related to the decline in the loan
portfolio which lowered the general reserve provisioning levels. Offsetting the
lower level of general reserves, we added specific reserves to several large
commercial real estate relationships based on updated appraisals of the
underlying collateral.  The allowance for loan losses increased $3.7
million to $18.8 million from March 31, 2009 to March 31, 2010. The increase was due to
specific reserves placed on loans due to updated appraisal information, as well
as the provision recorded to reflect an increase in classified loans for the
2010 period.
 
 Federal
regulations require banks to classify their own assets on a regular
basis.  The regulations provide for three categories of classified
loans — substandard, doubtful and loss.
 
 The
following table provides information with respect to classified loans for the
periods indicated:
 
 March 31,(Dollars in thousands)
                        
                        2010
                        
                        
                        2009
                        
                        
                        2008Classified
      LoansSubstandard
                        
                        $
                        65,028
                        
                        
                        $
                        63,029
                        
                        
                        $
                        20,451Doubtful
                        
                        
                        407
                        
                        
                        
                        -
                        
                        
                        
                        63Loss
                        
                        
                        26
                        
                        
                        
                        271
                        
                        
                        
                        18Total
      Classified
                        
                        $
                        65,461
                        
                        
                        $
                        63,300
                        
                        
                        $
                        20,532
  As we
focused on credit quality during 2008, 2009 and the first quarter of 2010, there
was a significant migration of loans into the Special Mention and Substandard
loan categories.  If economic conditions continue to put stress on our
borrowers going forward, this may require higher provisions for loan losses in
future periods.  We expect that the economy will remain weak at least
for the next several quarters.  Credit quality will continue to be a
primary focus in 2010 and going forward.
  29
  The $2.0
million increase in substandard assets for 2010 was primarily the resultof downgrading loans
withfive borrowers
with balances ranging from $1.2 million to $6.1 million.Offsetting this increase
was the transfer of two classified loans totaling $5.6 million to real estate
acquired through foreclosure and the upgrades of three classified loans totaling
$8.3 million whose cash flow is adequate to service the debt. Approximately
$36.3 million of the total classified loans were related to real estate
development or real estate construction loans in our market
area.  Classified consumer loans totaled $1.1 million, classified
mortgage loans totaled $4.7 million andclassified commercial
loans totaled $23.4 million.  For more information on collection
efforts, evaluation of collateral and how loss amounts are estimated, see
“Non-Performing Assets,” below.
 
 Although
we may allocate a portion of the allowance to specific loans or loan categories,
the entire allowance is available for active charge-offs.  We develop
our allowance estimates based on actual loss experience adjusted for current
economic conditions.  Allowance estimates represent a prudent
measurement of the risk in the loan portfolio, which we apply to individual
loans based on loan type.
 
 Non-Performing
Assets
 
 Non-performing
assets consist of certain restructured loans for which interest rate or other
terms have been renegotiated, loans on which interest is no longer accrued, real
estate acquired through foreclosure and repossessed assets.   We
do not have any loans longer than 90 days past due still on
accrual.  Loans, including impaired loans, are placed on non-accrual
status when they become past due 90 days or more as to principal or interest,
unless they are adequately secured and in the process of
collection.  Loans are considered impaired when we no longer
anticipate full principal or interest payments in accordance with the
contractual loan terms.  If a loan is impaired, we allocate a portion
of the allowance so that the loan is reported, net, at the present value of
estimated future cash flows using the loan’s existing rate, or at the fair value
of collateral if repayment is expected solely from collateral.
 
 We review
our loans on a regular basis and implement normal collection procedures when a
borrower fails to make a required payment on a loan.  If the
delinquency on a mortgage loan exceeds 90 days and is not cured through normal
collection procedures or an acceptable arrangement is not worked out with the
borrower, we institute measures to remedy the default, including commencing a
foreclosure action.  We generally charge off consumer loans when
management deems a loan uncollectible and any available collateral has been
liquidated.  We handle commercial business and real estate loan
delinquencies on an individual basis with the advice of legal
counsel.
 
 We
recognize interest income on loans on the accrual basis except for those loans
in a non-accrual of income status. We discontinue accruing interest on impaired
loans when management believes, after consideration of economic and business
conditions and collection efforts that the borrowers’ financial condition is
such that collection of interest is doubtful, typically after the loan becomes
90 days delinquent.  When we discontinue interest accrual, we reverse
existing accrued interest and subsequently recognize interest income only to the
extent we receive cash payments.
 
 We
classify real estate acquired as a result of foreclosure or by deed in lieu of
foreclosure as real estate owned until such time as it is sold. We classify new
and used automobile, motorcycle and all terrain vehicles acquired as a result of
foreclosure as repossessed assets until they are sold. When such property is
acquired we record it at the lower of the unpaid principal balance of the
related loan or its fair market value.  We charge any write-down of
the property at the time of acquisition to the allowance for loan
losses.  Subsequent gains and losses are included in non-interest
income and non-interest expense.
 
 Real
estate owned acquired through foreclosure is recorded at fair value less
estimated selling costs at the date of foreclosure.  Fair value is
based on the appraised market value of the property based on sales of similar
assets.  The fair value may be subsequently reduced if the estimated
fair value declines below the original appraised value. Real estate acquired
through foreclosure increased $1.7 million to $10.2 million at March 31,
2010.  The increase was primarily the result of foreclosures involving
four commercial credit relationships totaling $1.6 million that was transferred
during the first quarter of 2010.
  30
  The
following table provides information with respect to non-performing assets for
the periods indicated.
 
 March
      31,
                            
                            
                            December
      31,(Dollar
      in thousands)
                            
                            2010
                            
                            
                            2009Restructured
                            
                            $
                            7,038
                            
                            
                            $
                            9,812Past
      due 90 days still on accrual
                            
                            
                            -
                            
                            
                            
                            -Loans
      on non-accrual status
                            
                            
                            26,090
                            
                            
                            
                            28,186Total
      non-performing loans
                            
                            
                            33,128
                            
                            
                            
                            37,998Real
      estate acquired through foreclosure
                            
                            
                            10,169
                            
                            
                            
                            8,428Other
      repossessed assets
                            
                            
                            62
                            
                            
                            
                            103Total
      non-performing assets
                            
                            $
                            43,359
                            
                            
                            $
                            46,529Interest
      income that would have been earned on non-performing loans
                            
                            $
                            1,908
                            
                            
                            $
                            2,234Interest
      income recognized on non-performing loans
                            
                            
                            274
                            
                            
                            
                            211Ratios:  Non-performing
      loans to total loans(excluding
      loans held for sale)
                            
                            
                            3.43
                            %
                            
                            
                            3.82
                            %Non-performing
      assets to total loans(excluding
      loans held for sale)
                            
                            
                            4.49
                            %
                            
                            
                            4.68
                            %
 
 Non-performing
loans decreased $4.9 million to $33.1 million at March 31, 2010 compared to
$38.0 million at December 31, 2009.  Non-accrual loans decreased due
to a $5.1 credit relationship being removed from the non-accrual category when
the loan was re-written with new guarantors.  Another non-accrual loan
having a balance of $1.1 million was transferred to real estate acquired through
foreclosure.  Offsetting this decrease was the addition of three
credit relationships totaling $4.7 million to non-accrual
status.  These credit relationships are secured by real estate and we
have provided adequate allowance based on current information.  All
non-performing loans are considered impaired.
 
 Non-performing
assets for the 2010 period include $7.0 million in restructured commercial,
mortgage and consumer loans.  Our restructured loans primarily consist
of five credit relationships with balances ranging from $129,000 to $6.1
million.  The terms of these loans have been renegotiated to reduce
the rate of interest and extend the term, thus reducing the amount of cash flow
required from the borrower to service the loans. The borrowers are currently
meeting the terms of the restructured loans.  The decrease in
restructured loans from December 31, 2009 was due to the removal of two credit
relationships totaling $3.2 million from the restructured category since the
terms of the loans are now substantially equivalent to terms on which loans with
comparable risks are being made and the borrowers have performed according to
the terms of the contract for the past 18 to 24 months.
 
 Investment
Securities
 
 Interest
on securities provides us our largest source of interest income after interest
on loans, constituting 4.5% of the total interest income for the quarter ended
March 31, 2010.  The securities portfolio serves as a source of
liquidity and earnings and contributes to the management of interest rate
risk.  We have the authority to invest in various types of liquid
assets, including short-term United States Treasury obligations and securities
of various federal agencies, obligations of states and political subdivisions,
corporate bonds, certificates of deposit at insured savings and loans and banks,
bankers' acceptances, and federal funds.  We may also invest a portion
of our assets in certain commercial paper and corporate debt
securities.  We are also authorized to invest in mutual funds and
stocks whose assets conform to the investments that we are authorized to make
directly. The available-for-sale investment portfolio increased $33.7 million
due to our purchase of government-sponsored mortgage-backed securities, U.S.
Government agency securities and state and municipal obligations. The
held-to-maturity investment portfolio decreased $805,000 as securities were
called for redemption in accordance with their terms due to decreasing
rates.
 
 We review
all unrealized losses at least on a quarterly basis to determine whether the
losses are other than temporary and more frequently when economic or market
concerns warrant. We consider the length of time and the extent to which the
fair value has been less than cost, the financial condition and near-term
prospects of the issuer, and whether management has the intent to sell the debt
security or whether it is more likely than not that we will be required to sell
the debt security before its anticipated recovery.  In analyzing an
issuer’s financial condition, we may consider whether the securities are issued
by the federal government or its agencies, whether downgrades by bond rating
agencies have occurred, and the results of reviews of the issuer’s financial
condition.
  31
  The
unrealized losses on the state and municipal securities were caused primarily by
interest rate decreases.  The contractual terms of those investments
do not permit the issuer to settle the securities at a price less than the
amortized cost of the investment.  Because we do not have the intent
to sell these securities and it is likely that we will not be required to sell
the securities before their anticipated recovery, we do not consider these
investments to be other-than-temporarily impaired at March 31,
2010.  We also considered the financial condition and near term
prospects of the issuer and identified no matters that would indicate less than
full recovery.
 
 We have
evaluated the decline in the fair value of the trust preferred securities we
hold, which are directly related to the credit and liquidity crisis being
experienced in the financial services industry over the past
year.   The trust preferred securities market is currently
inactive making the valuation of trust preferred securities very
difficult.  The trust preferred securities are valued by management
using unobservable inputs through a discounted cash flow analysis as permitted
under current accounting guidance and using the expected cash flows
appropriately discounted using present value techniques.   Refer to
Note 6 – Fair Value for more information.
 
 We
recognized other-than-temporary impairment charges of $172,000 for the expected
credit loss during the 2010 period on three of the trust preferred securities we
hold with an original cost basis of $1.8 million.  All of our trust
preferred securities are currently rated below investment grade. One of our
trust preferred securities continues to pay interest as scheduled through March
31, 2010, and is expected to continue paying interest as
scheduled.  The other four trust preferred securities are paying
either partial or full interest in kind instead of full cash
interest.    See Note 2 – Securities for more
information.  Management will continue to evaluate these securities
for impairment quarterly.
  As
discussed in Note 1, the FASB issued FASB ASC 320-10-65, Recognition and Presentation of
Other-Than-Temporary Impairments. Among other provisions, the guidance
requires entities to split other than temporarily impaired charges between
credit losses (i.e., the loss based on the entity’s estimate of the decrease in
cash flows, including those that result from expected voluntary prepayments),
which are charged to earnings, and the remainder of the impairment charge
(non-credit component) to accumulated other comprehensive income. This
requirement pertains to both securities held to maturity and securities
available for sale.
 
 Deposits
 
 We rely
primarily on providing excellent customer service and long-standing
relationships with customers to attract and retain deposits. Market interest
rates and rates on deposit products offered by competing financial institutions
can significantly affect our ability to attract and retain
deposits.  We attract both short-term and long-term deposits from the
general public by offering a wide range of deposit accounts and interest rates.
In recent years market conditions have caused us to rely increasingly on
short-term certificate accounts and other deposit alternatives that are more
responsive to market interest rates.  We use forecasts based on
interest rate risk simulations to assist management in monitoring our use of
certificates of deposit and other deposit products as funding sources and the
impact of the use of those products on interest income and net interest margin
in various rate environments.
 
 In
conjunction with our initiatives to expand and enhance our retail branch
network, we emphasize growing our customer checking account base to better
enhance profitability and franchise value.  Total deposits increased
$42.4 million year to date compared to December 31, 2009 due to a successful
deposit promotion.  Retail and commercial deposits increased $64.8
million.  Public funds, brokered deposits and Certificate of Deposit
Account Registry Service (“CDARS”) certificates decreased$22.4
million.  Brokered deposits were $127.4 million at March 31, 2010
compared to $127.8 million at December 31, 2009.
  32
  The
following table breaks down our deposits.
 
 March 31,
                        
                        
                        December 31,2010
                        
                        
                        2009(In Thousands)Non-interest
      bearing
                        
                        $
                        69,098
                        
                        
                        $
                        63,950NOW
      demand
                        
                        
                        120,760
                        
                        
                        
                        117,319Savings
                        
                        
                        118,022
                        
                        
                        
                        131,401Money
      market
                        
                        
                        140,504
                        
                        
                        
                        127,885Certificates
      of deposit
                        
                        
                        643,830
                        
                        
                        
                        609,260$
                        1,092,214
                        
                        
                        $
                        1,049,815
 
 Short-Term
Borrowings
 
 Short-term
borrowings consist of a loan agreement with a correspondent bank for 2010 and
primarily federal funds purchased from the FHLB of Cincinnati for
2009.  We had short-term borrowings of $842,000 at March 31, 2010 and
$65.0 million at March 31, 2009.  These borrowings averaged a rate of
9.26% and .29% for 2010 and 2009.
 
 Advances
from Federal Home Loan Bank
 
 Deposits
are the primary source of funds for our lending and investment activities and
for our general business purposes.  We can also use advances
(borrowings) from the Federal Home Loan Bank (FHLB) of Cincinnati to compensate
for reductions in deposits or deposit inflows at less than projected
levels.  Advances from the FHLB are secured by our stock in the FHLB,
certain securities, certain commercial real estate loans and substantially all
of our first mortgage, multi-family and open end home equity
loans.  At March 31, 2010 we had $52.6 million in advances outstanding
from the FHLB.
 
 Subordinated
Debentures
 
 In 2008,
First Federal Statutory Trust III, an unconsolidated trust subsidiary of First
Financial Service Corporation, issued $8.0 million in trust preferred
securities.  The trust loaned the proceeds of the offering to us in
exchange for junior subordinated deferrable interest debentures which we used to
finance the purchase of FSB Bancshares, Inc. The subordinated debentures, which
mature on June 24, 2038, can be called at par in whole or in part on or after
June 24, 2018. The subordinated debentures pay a fixed rate of 8% for thirty
years.  We have the option to defer interest payments on the
subordinated debt from time to time for a period not to exceed five consecutive
years.  The subordinated debentures are considered as Tier I capital
for the Corporation under current regulatory guidelines.
 
 A
different trust subsidiary issued 30 year cumulative trust preferred securities
totaling $10 million at a 10 year fixed rate of 6.69% adjusting quarterly
thereafter at LIBOR plus 160 basis points.  The subordinated
debentures, which mature March 22, 2037, can be called at par in whole or in
part on or after March 15, 2017.  We have the option to defer interest
payments on the subordinated debt from time to time for a period not to exceed
five consecutive years. The subordinated debentures are considered as Tier I
capital for the Corporation under current regulatory guidelines.
 
 Our trust
subsidiaries loaned the proceeds of their offerings of trust preferred
securities to us in exchange for junior subordinated deferrable interest
debentures. In accordance with current accounting guidance, these trusts are not
consolidated with our financial statements but rather the subordinated
debentures are shown as a liability.
 
 LIQUIDITY
 
 Liquidity
risk arises from the possibility we may not be able to satisfy current or future
financial commitments, or may become unduly reliant on alternative funding
sources. The objective of liquidity risk management is to ensure that we can
meet the cash flow requirements of depositors and borrowers, as well as our
operating cash needs, at a reasonable cost, taking into account all on- and
off-balance sheet funding demands. Our investment and funds management policy
identifies the primary sources of liquidity, establishes procedures for
monitoring and measuring liquidity, and establishes minimum liquidity
requirements in compliance with regulatory guidance. The Asset Liability
Committee continually monitors our liquidity position.
  33
  Our
sources of funds include the sale of securities in the available-for-sale
portion of the investment portfolio, the payment of principal on loans and
mortgage-backed securities, proceeds realized from loans held for sale, brokered
deposits and other wholesale funding.  We also secured federal funds
borrowing lines from three of our correspondent banks.  Two of the
lines are for $15 million each and the other one is for $5
million.  Our banking centers also provide access to retail deposit
markets.  If large certificate depositors shift to our competitors or
other markets in response to interest rate changes, we have the ability to
replenish those deposits through alternative funding
sources.  Traditionally, we have also borrowed from the FHLB to
supplement our funding requirements.  At March 31, 2010, we did not
have sufficient collateral available for additional borrowings from the
FHLB. We believe
we have the ability to raise deposits, when needed, by offering rates at or
slightly above market rates.  If the Bank would fall below
well-capitalized status, we would be subject to wholesale funding restrictions
as well as interest rate restrictions used to attract core
deposits.
 
 At the
holding company level, the Corporation uses cash to pay dividends to
stockholders, repurchase common stock, make selected investments and
acquisitions, and service debt. The main sources of funding for the Corporation
include dividends from the Bank, borrowings and access to the capital
markets.  The Corporation maintains a loan agreement with a
correspondent bank.  As of March 31, 2010, the outstanding balance of
this loan was $842,000.  The loan matures on January 31, 2011 and
principal and interest of $ 86,000 is due monthly at a rate of prime plus one
percent with a floor of 6.00%.
 
 The
primary source of funding for the Corporation has been dividends and returns of
investment from the Bank. Kentucky banking laws limit the amount of dividends
that may be paid to the Corporation by the Bank without prior approval of the
KDFI.  Under these laws, the amount of dividends that may be paid in
any calendar year is limited to current year’s net income, as defined in the
laws, combined with the retained net income of the preceding two years, less any
dividends declared during those periods.We currently have a
regulatory agreement with the FDIC that requires us to obtain the consent of the
Regional Director of the FDIC and the Commissioner of the KDFI to declare and
pay cash dividends.  We have also entered into an agreement with our
primary regulator to obtain regulatory approval before declaring any
dividends.  We may not redeem shares or obtain additional borrowings
without prior approval.  Because of these limitations, consolidated
cash flows as presented in the consolidated statements of cash flows may not
represent cash immediately available to the Corporation.  During 2010,
the Bank did not declare or pay any dividends to the Corporation.
 
 CAPITAL
 
 Stockholders’
equity increased $741,000 for the period ended March 31, 2010 compared to
December 31, 2009 primarily due to net income earned during the
quarter.  Our average stockholders’ equity to average assets ratio
decreased to 6.98% for the quarter ended March 31, 2010 compared to 8.82% for
2009.
 
 On
January 9, 2009, we sold $20 million of cumulative perpetual preferred shares,
with a liquidation preference of $1,000 per share (the “Senior Preferred
Shares”) to the U.S. Treasury under the terms of its Capital Purchase
Program.  The Senior Preferred Shares constitute Tier 1 capital and
rank senior to our common shares.  The Senior Preferred Shares pay
cumulative dividends at a rate of 5% per year for the first five years and will
reset to a rate of 9% per year after five years. The Senior Preferred Shares may
be redeemed at any time, at our option.
 
 Under the
terms of our CPP stock purchase agreement, we also issued the U.S. Treasury a
warrant to purchase an amount of our common stock equal to 15% of the aggregate
amount of the Senior Preferred Shares, or $3 million.  The warrant
entitles the U.S. Treasury to purchase 215,983 common shares at a purchase price
of $13.89 per share.  The initial exercise price for the warrant and
the number of shares subject to the warrant were determined by reference to the
market price of our common stock calculated on a 20-day trailing average as of
December 8, 2008, the date the U.S. Treasury approved our
application.  The warrant has a term of 10 years and is
potentially dilutive to earnings per share.
 
 During
the first quarter of 2010, we did not purchase any shares of our own common
stock.The terms of
our Senior Preferred Shares do not allow us to repurchase shares of our common
stock without the consent of the U.S. Treasury until the Senior Preferred Shares
are redeemed.
 
 Each of
the federal bank regulatory agencies has established minimum leverage capital
requirements for banks. Banks must maintain a minimum ratio of Tier 1 capital to
adjusted average quarterly assets ranging from 3% to 5%, subject to federal bank
regulatory evaluation of an organization’s overall safety and
soundness.  We intend to maintain a capital position that meets or
exceeds the “well capitalized” requirements established for banks by the
FDIC.  We currently have a regulatory agreement with the FDIC that
requires us to maintain a Tier 1 leverage ratio of 8%.  We are
currently in compliance with the Tier 1 capital requirement.
  34
  The
following table shows the ratios of Tier 1 capital and total capital to
risk-adjusted assets and the leverage ratios for the Corporation and the Bank as
of March 31, 2010.
 
 To Be ConsideredWell CapitalizedUnder PromptFor Capital
                          
                          
                          CorrectionActual
                          
                          
                          Adequacy Purposes
                          
                          
                          Action Provisions(Dollars
      in thousands)
                          
                          Amount
                          
                          
                          Ratio
                          
                          
                          Amount
                          
                          
                          Ratio
                          
                          
                          Amount
                          
                          
                          RatioAs of March 31, 2010:Total
      risk-based capital (to risk-weighted assets)Consolidated
                          
                          $
                          116,175
                          
                          
                          
                          11.59
                          %
                          
                          $
                          80,210
                          
                          
                          
                          8.00
                          %
                          
                          
                          N/A
                          
                          
                          
                          N/ABank
                          
                          
                          115,427
                          
                          
                          
                          11.52
                          
                          
                          
                          80,158
                          
                          
                          
                          8.00
                          
                          
                          
                          100,197
                          
                          
                          
                          10.00Tier
      I capital (to risk-weighted assets)Consolidated
                          
                          
                          103,559
                          
                          
                          
                          10.33
                          
                          
                          
                          40,105
                          
                          
                          
                          4.00
                          
                          
                          
                          N/A
                          
                          
                          
                          N/ABank
                          
                          
                          102,809
                          
                          
                          
                          10.26
                          
                          
                          
                          40,079
                          
                          
                          
                          4.00
                          
                          
                          
                          60,118
                          
                          
                          
                          6.00Tier
      I capital (to average assets)Consolidated
                          
                          
                          103,559
                          
                          
                          
                          8.40
                          
                          
                          
                          49,285
                          
                          
                          
                          4.00
                          
                          
                          
                          N/A
                          
                          
                          
                          N/ABank
                          
                          
                          102,809
                          
                          
                          
                          8.34
                          
                          
                          
                          49,302
                          
                          
                          
                          4.00
                          
                          
                          
                          61,627
                          
                          
                          
                          5.00
 
 To Be ConsideredWell CapitalizedUnder PromptFor Capital
                          
                          
                          CorrectionActual
                          
                          
                          Adequacy Purposes
                          
                          
                          Action Provisions(Dollars
      in thousands)
                          
                          Amount
                          
                          
                          Ratio
                          
                          
                          Amount
                          
                          
                          Ratio
                          
                          
                          Amount
                          
                          
                          RatioAs
      of December 31, 2009:Total
      risk-based capital (to risk-weighted assets)Consolidated
                          
                          $
                          115,702
                          
                          
                          
                          11.35
                          %
                          
                          $
                          81,550
                          
                          
                          
                          8.00
                          %
                          
                          
                          N/A
                          
                          
                          
                          N/ABank
                          
                          
                          114,514
                          
                          
                          
                          11.25
                          
                          
                          
                          81,467
                          
                          
                          
                          8.00
                          
                          
                          
                          101,834
                          
                          
                          
                          10.00Tier
      I capital (to risk-weighted assets)Consolidated
                          
                          
                          102,894
                          
                          
                          
                          10.09
                          
                          
                          
                          40,775
                          
                          
                          
                          4.00
                          
                          
                          
                          N/A
                          
                          
                          
                          N/ABank
                          
                          
                          101,719
                          
                          
                          
                          9.99
                          
                          
                          
                          40,734
                          
                          
                          
                          4.00
                          
                          
                          
                          61,100
                          
                          
                          
                          6.00Tier
      I capital (to average assets)Consolidated
                          
                          
                          102,894
                          
                          
                          
                          8.66
                          
                          
                          
                          47,533
                          
                          
                          
                          4.00
                          
                          
                          
                          N/A
                          
                          
                          
                          N/ABank
                          
                          
                          101,719
                          
                          
                          
                          8.90
                          
                          
                          
                          45,732
                          
                          
                          
                          4.00
                          
                          
                          
                          57,165
                          
                          
                          
                          5.00
 
 Item
3.  QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET
RISK
 
 Asset/Liability
Management and Market Risk
 
 To
minimize the volatility of net interest income and exposure to economic loss
that may result from fluctuating interest rates, we manage our exposure to
adverse changes in interest rates through asset and liability management
activities within guidelines established by our Asset Liability Committee
(“ALCO”).  The ALCO, comprised of senior management representatives,
has the responsibility for approving and ensuring compliance with
asset/liability management policies.  Interest rate risk is the
exposure to adverse changes in the net interest income as a result of market
fluctuations in interest rates.  The ALCO, on an ongoing basis,
monitors interest rate and liquidity risk in order to implement appropriate
funding and balance sheet strategies.  Management considers interest
rate risk to be our most significant market risk.
 
 We
utilize an earnings simulation model to analyze net interest income
sensitivity.  We then evaluate potential changes in market interest
rates and their subsequent effects on net interest income.  The model
projects the effect of instantaneous movements in interest rates of both 100 and
200 basis points.  We also incorporate assumptions based on the
historical behavior of our deposit rates and balances in relation to changes in
interest rates into the model.  These assumptions are inherently
uncertain and, as a result, the model cannot precisely measure future net
interest income or precisely predict the impact of fluctuations in market
interest rates on net interest income.  Actual results will differ
from the model’s simulated results due to timing, magnitude and frequency of
interest rate changes as well as changes in market conditions and the
application and timing of various management strategies.
  35
 
 Our
interest sensitivity profile was asset sensitive at March 31, 2010 and December
31, 2009.  Given a sustained 100 basis point decrease in rates, our
base net interest income would decrease by an estimated.60% at March 31, 2010
compared to a decrease of 2.84% at December 31, 2009. Given a 100 basis point
increase in interest rates our base net interest income would increase by
anestimated 7.10%
at March 31, 2010 compared to an increase of 2.70% at December 31,
2009.
 
 We use
various asset/liability strategies to manage the re-pricing characteristics of
our assets and liabilities designed to ensure that exposure to interest rate
fluctuations is limited within our guidelines of acceptable levels of
risk-taking.  As demonstrated by the March 31, 2010 and December 31,
2009 sensitivity tables, our balance sheet has an asset sensitive position. This
means that our earning assets, which consist of loans and investment securities,
will change in price at a faster rate than our deposits and
borrowings.  Therefore, if short term interest rates increase, our net
interest income will increase.  Likewise, if short term interest rates
decrease, our net interest income will decrease.
 
 Our
sensitivity to interest rate changes is presented based on data as of March 31,
2010 and December 31, 2009 annualized to a one year period.
 
 March 31, 2010Decrease in Rates
                                        
                                        
                                        
                                        
                                        
                                        Increase in Rates200
                                        
                                        
                                        
                                        100
                                        
                                        
                                        
                                        
                                        
                                        
                                        100
                                        
                                        
                                        
                                        200(Dollars in thousands)
                                        
                                        Basis Points
                                        
                                        
                                        Basis Points
                                        
                                        
                                        Base
                                        
                                        
                                        Basis Points
                                        
                                        
                                        Basis PointsProjected
      interest incomeLoans
                                        
                                        $
                                        55,052
                                        
                                        
                                        $
                                        56,456
                                        
                                        
                                        $
                                        57,879
                                        
                                        
                                        $
                                        59,353
                                        
                                        
                                        $
                                        60,891Investments
                                        
                                        
                                        3,382
                                        
                                        
                                        
                                        3,449
                                        
                                        
                                        
                                        3,496
                                        
                                        
                                        
                                        4,142
                                        
                                        
                                        
                                        4,780Total
      interest income
                                        
                                        
                                        58,434
                                        
                                        
                                        
                                        59,905
                                        
                                        
                                        
                                        61,375
                                        
                                        
                                        
                                        63,495
                                        
                                        
                                        
                                        65,671Projected
      interest expenseDeposits
                                        
                                        
                                        18,931
                                        
                                        
                                        
                                        18,310
                                        
                                        
                                        
                                        19,550
                                        
                                        
                                        
                                        18,961
                                        
                                        
                                        
                                        23,765Borrowed
      funds
                                        
                                        
                                        3,667
                                        
                                        
                                        
                                        3,667
                                        
                                        
                                        
                                        3,667
                                        
                                        
                                        
                                        3,667
                                        
                                        
                                        
                                        3,667Total
      interest expense
                                        
                                        
                                        22,598
                                        
                                        
                                        
                                        21,977
                                        
                                        
                                        
                                        23,217
                                        
                                        
                                        
                                        22,628
                                        
                                        
                                        
                                        27,432Net interest income
                                        
                                        $
                                        35,836
                                        
                                        
                                        $
                                        37,928
                                        
                                        
                                        $
                                        38,158
                                        
                                        
                                        $
                                        40,867
                                        
                                        
                                        $
                                        38,239Change
      from base
                                        
                                        $
                                        (2,322
                                        )
                                        
                                        $
                                        (230
                                        )
                                        
                                        
                                        
                                        
                                        
                                        $
                                        2,709
                                        
                                        
                                        $
                                        81%
      Change from base
                                        
                                        
                                        (6.09
                                        )%
                                        
                                        
                                        (0.60
                                        )%
                                        
                                        
                                        
                                        
                                        
                                        
                                        7.10
                                        %
                                        
                                        
                                        0.21
                                        %
 
 December 31, 2009Decrease in Rates
                            
                            
                            
                            
                            
                            Increase in Rates200
                            
                            
                            
                            100
                            
                            
                            
                            
                            
                            
                            100
                            
                            
                            
                            200(Dollars in thousands)
                            
                            Basis Points
                            
                            
                            Basis Points
                            
                            
                            Base
                            
                            
                            Basis Points
                            
                            
                            Basis PointsProjected
      interest incomeLoans
                            
                            $
                            55,484
                            
                            
                            $
                            56,942
                            
                            
                            $
                            58,564
                            
                            
                            $
                            60,162
                            
                            
                            $
                            61,850Investments
                            
                            
                            2,271
                            
                            
                            
                            2,116
                            
                            
                            
                            2,150
                            
                            
                            
                            2,552
                            
                            
                            
                            2,953Total
      interest income
                            
                            
                            57,755
                            
                            
                            
                            59,058
                            
                            
                            
                            60,714
                            
                            
                            
                            62,714
                            
                            
                            
                            64,803Projected
      interest expenseDeposits
                            
                            
                            15,938
                            
                            
                            
                            16,077
                            
                            
                            
                            16,587
                            
                            
                            
                            16,920
                            
                            
                            
                            18,043Borrowed
      funds
                            
                            
                            3,753
                            
                            
                            
                            3,753
                            
                            
                            
                            3,752
                            
                            
                            
                            4,329
                            
                            
                            
                            4,905Total
      interest expense
                            
                            
                            19,691
                            
                            
                            
                            19,830
                            
                            
                            
                            20,339
                            
                            
                            
                            21,249
                            
                            
                            
                            22,948Net interest income
                            
                            $
                            38,064
                            
                            
                            $
                            39,228
                            
                            
                            $
                            40,375
                            
                            
                            $
                            41,465
                            
                            
                            $
                            41,855Change
      from base
                            
                            $
                            (2,311
                            )
                            
                            $
                            (1,147
                            )
                            
                            
                            
                            
                            
                            $
                            1,090
                            
                            
                            $
                            1,480%
      Change from base
                            
                            
                            (5.72
                            )%
                            
                            
                            (2.84
                            )%
                            
                            
                            
                            
                            
                            
                            2.70
                            %
                            
                            
                            3.67
                            %
  36
  Item
4.  CONTROLS AND PROCEDURES
 
 Management
is responsible for establishing and maintaining effective disclosure controls
and procedures, as defined under Rules 13a-15(e) and 15d-15(e) of the Securities
Exchange Act of 1934. As of March 31, 2010, an evaluation was performed under
the supervision and with the participation of management, including the Chief
Executive Officer and Chief Financial Officer, of the effectiveness of the
design and operation of our disclosure controls and procedures. Based on that
evaluation, management concluded that disclosure controls and procedures as of
March 31, 2010 were effective in ensuring material information required to be
disclosed in this Annual Report on Form 10-Q was recorded, processed,
summarized, and reported in a timely manner as specified in SEC rules and
forms.
 
 There
were no significant changes in our internal controls or in other factors that
could significantly affect these controls after the date of the Chief Executive
Officer and Chief Financial Officers evaluation, nor were there any significant
deficiencies or material weaknesses in the controls which required corrective
action.
 
 
 Part
II - OTHER INFORMATION
 
 Item
1.                Legal
Proceedings
 
 Although,
from time to time, we are involved in various legal proceedings in the normal
course of business, there are no material pending legal proceedings to which we
are a party, or to which any of our property is subject.
 
 Item
1A.             Risk
Factors
 
 Information
regarding risks that could materially affect our business, financial condition
or future results appear in our Annual Report on Form 10-K for the year ended
December 31, 2009 under Item 1A – Risk Factors.  In addition, you
should carefully consider the following supplemental risk
factor.
 
 The risks
identified in our risk factors are not the only risks we
face.  Additional risks and uncertainties not currently known to us or
that we have deemed to be immaterial also may materially adversely affect our
business, financial condition, and/or operating results.
 
 Future
sales of stock could dilute our equity, which may adversely affect the market
price of our common stock.
 
 From time
to time, we evaluate raising capital through the sale of
securities.  We are not restricted from issuing additional common
stock, including securities that are convertible into or exchangeable for, or
that represent the right to receive, common stock.  The issuance of
additional shares of common stock or the issuance of convertible securities
would dilute the ownership interest of our existing common shareholders. The
market price of our common stock could decline as a result of such an offering
as well as other sales of a large block of shares of our common stock or similar
securities in the market after an offering, or the perception that such sales
could occur.
 
 Item
2.                Unregistered
Sales of Securities and Use of Proceeds
 
 We did
not repurchase any shares of our common stock during the quarter ended March 31,
2010.
 
 Item
3.                Defaults
Upon Senior Securities
 
 Not
Applicable
 
 Item
4.                Reserved
  37
 
 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)
  38
 
 FIRST
FINANCIAL SERVICE CORPORATION
 
 SIGNATURES
 
 Pursuant
to the requirements of Section 13 or 15(d) of the Securities Exchange Act of
1934, the registrant has duly caused this report to be signed on its behalf by
the undersigned, thereunto duly authorized.
 
 Date:  May
      10, 2010
                    By:
                    /s/
      B. Keith JohnsonB.
      Keith JohnsonChief
      Executive OfficerDate:  May
      10, 2010
                    By:
                    /s/
      Steven M. ZagarSteven
      M. ZagarChief
      Financial Officer &Principal
      Accounting
Officer
  39
  INDEX
TO EXHIBITS
 
 Exhibit No.
              
              Description31.1
              
              Certification
      of Chief Executive Officer Pursuant to Section 302 of Sarbanes-Oxley
      Act31.2
              
              Certification
      of Chief Financial Officer Pursuant to Section 302 of Sarbanes-Oxley
      Act32
              
              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)
  40