**UNITED STATES**

**SECURITIESAND 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 September 30, 2007**                                          |
| ** ** | ** ** | ** **                                                                                      |
|       |       | **OR**                                                                                          |
|       |       |                                                                                            |
| **o**      | ** ** | **TRANSITION  REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF  1934.** |
| ** ** | ** ** | ** **                                                                                      |
| ** ** | ** ** | **Commission  File Number 0-18832**                                                             |

** **

**FirstFinancial Service Corporation**

(Exact Name of Registrant as specified in itscharter)

 

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

 

**2323 RingRoad**

**Elizabethtown,Kentucky  42701**

(Address of principal executive offices)

(Zip Code)

 

**(270)765-2131**

(Registrant’s telephone number, including areacode)

 

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

 

Indicate by check markwhether the registrant is a large accelerated filer, an accelerated filer, or anon-accelerated filer.  See definition of“accelerated filer and large accelerated filer” in Rule 12b-2 of the ExchangeAct.

 

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

 

Indicateby a check mark whether the registrant is a shell company (as defined in Rule 12b-2of the Exchange Act).  Yes  **o**  No  **x**

 

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

 

| **Class**    | ** ** | **Outstanding as of October 31, 2007** |
|--------------|------------|-----------------------------------------------------------------|
| ** **   | ** ** | ** **                                                      |
| Common Stock |       | 4,664,583 shares                                                |

 

## ** **

----

 

## **FIRST FINANCIAL SERVICE CORPORATION**

## ** **

**TABLE OFCONTENTS**

 
| **PART I** – FINANCIAL INFORMATION                |                                                                                        |       |
|--------------------------------------------------------|---------------------------------------------------------------------------------------------|------------|
|                                                   |                                                                                        |       |
| Preliminary Note Regarding  Forward-Looking Statements |                                                                                        |       |
|                                                   |                                                                                        |       |   |
| **Item 1.**                                            | Consolidated Financial Statements and Notes  to Consolidated Financial Statements           |       |   |
|                                                   |                                                                                        |       |   |
| **Item 2.**                                            | Management’s Discussion and  Analysis of Financial Condition and Results of Operations |       |   |
|                                                   |                                                                                        |       |   |
| **Item 3.**                                            | Quantitative  and Qualitative Disclosures about Market Risk                                 |       |   |
|                                                   |                                                                                        |       |   |
| **Item 4.**                                            | Controls  and Procedures                                                                    |       |   |
|                                                   |                                                                                        |       |   |
| **PART II – OTHER INFORMATION**                   |                                                                                        |       |
|                                                   |                                                                                        |       |   |
| **Item 1.**                                            | Legal Proceedings                                                                           |       |   |
|                                                   |                                                                                        |       |   |
| **Item 1A.**                                           | Risk Factors                                                                                | ** ** | ** ** |
| ** **                                             | ** **                                                                                  | ** ** | ** ** |
| **Item 2.**                                            | Unregistered Sales of Equity Securities and Use of Proceeds                                 |       |   |
|                                                   |                                                                                        |       |   |
| **Item 3.**                                            | Defaults upon Senior Securities                                                             |       |   |
|                                                   |                                                                                        |       |   |
| **Item 4.**                                            | Submission of Matters to a Vote of Security Holders                                         |       |   |
|                                                   |                                                                                        |       |   |
| **Item 5.**                                            | Other Information                                                                           |       |   |
|                                                   |                                                                                        |       |   |
| **Item 6.**                                            | Exhibits                                                                                    |       |   |
|                                                   |                                                                                        |       |   |
|                                                   | SIGNATURES                                                                                  |       |   |

 

2

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**PRELIMINARY NOTE REGARDING FORWARD-LOOKING STATEMENTS**

 

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

 

Various risks anduncertainties may cause actual results to differ materially from thoseindicated by our forward-looking statements. In addition to those risks described under “Item 1A Risk Factors,” ofour 2006 Annual Report on Form 10-K and of this report, the following factorscould cause such differences: changes in general economic conditions andeconomic conditions in Kentucky and the markets we serve, any of which mayaffect, among other things, our level of non-performing assets, charge-offs,and provision for loan loss expense; changes in interest rates that may reduceinterest margins and impact funding sources; changes in market rates and priceswhich may adversely impact the value of financial products includingsecurities, loans and deposits; changes in tax laws, rules and regulations;various monetary and fiscal policies and regulations, including thosedetermined by the Federal Reserve Board, the Federal Deposit InsuranceCorporation (“FDIC”) and the Kentucky Office of Financial Institutions(“KOFI”); competition with other local and regional commercial banks, savingsbanks, credit unions and other non-bank financial institutions; our ability togrow core businesses; our ability to develop and introduce new banking-relatedproducts, services and enhancements and gain market acceptance of suchproducts; and management’s ability to manage these and other risks.

 

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

 

3

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**Item 1.**

 

**FIRSTFINANCIAL SERVICE CORPORATION**

**ConsolidatedBalance Sheets**

**(Unaudited)**

 
| ** **                                                                                                                                                 | ** ** | **September 30,** | ** ** | **December 31,** | ** ** |
|------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|------------------------|------------|-----------------------|------------|
| **(Dollars in thousands, except share data)**                                                                                     | ** ** | **2007**               | ** ** | **2006**              | ** ** |
|                                                                                                                                                       |       |                   |       |                  |       |
| **ASSETS**                                                                                                                                                 |       |                   |       |                  |       |
| Cash and due from banks                                                                                                                                    |       | $                      | 17,655     |                  | $          | 19,082 |   |
|                                                                                                                                                       |       |                   |       |                  |       |
| Securities available-for-sale                                                                                                                              |       | 22,760                 |       | 28,223                |       |
| Securities held-to-maturity, fair value of  $20,304 Sep (2007) and $23,817 Dec (2006)                                                                      |       | 20,461                 |       | 24,224                |       |
| Total securities                                                                                                                                           |       | 43,221                 |       | 52,447                |       |
| ** **                                                                                                                                                 | ** ** | ** **             | ** ** | ** **            | ** ** |
| Loans held for sale                                                                                                                                        |       | 1,407                  |       | 673                   |       |
| Loans, net of unearned fees                                                                                                                                |       | 768,216                |       | 705,037               |       |
| Allowance for loan losses                                                                                                                                  |       | (8,491                 | )          | (7,684                | )          |
| Net loans                                                                                                                                                  |       | 761,132                |       | 698,026               |       |
| ** **                                                                                                                                                 | ** ** | ** **             | ** ** | ** **            | ** ** |
| Federal Home Loan Bank stock                                                                                                                               |       | 7,621                  |       | 7,621                 |       |
| Cash surrender value of life insurance                                                                                                                     |       | 8,196                  |       | 7,947                 |       |
| Premises and equipment, net                                                                                                                                |       | 25,434                 |       | 22,500                |       |
| Real estate owned:                                                                                                                                         |       |                   |       |                  |       |
| Acquired through foreclosure                                                                                                                               |       | 1,699                  |       | 918                   |       |
| Held for development                                                                                                                                       |       | 91                     |       | 337                   |       |
| Other repossessed assets                                                                                                                                   |       | 63                     |       | 82                    |       |
| Goodwill                                                                                                                                                   |       | 8,384                  |       | 8,384                 |       |
| Accrued interest receivable                                                                                                                                |       | 4,264                  |       | 4,094                 |       |
| Other assets                                                                                                                                               |       | 1,394                  |       | 1,388                 |       |
|                                                                                                                                                       |       |                   |       |                  |       |
| **TOTAL ASSETS**                                                                                                                                           |       | $                      | 879,154    |                  | $          | 822,826 |   |
|                                                                                                                                                       |       |                   |       |                  |       |
| **LIABILITIES AND STOCKHOLDERS’ EQUITY**                                                                                                              | ** ** | ** **             | ** ** | ** **            | ** ** |
| **LIABILITIES:**                                                                                                                                           | ** ** | ** **             | ** ** | ** **            | ** ** |
| Deposits:                                                                                                                                                  |       |                   |       |                  |       |
| Non-interest bearing                                                                                                                                       |       | $                      | 50,685     |                  | $          | 40,349 |   |
| Interest bearing                                                                                                                                           |       | 645,919                |       | 600,688               |       |
| Total deposits                                                                                                                                             |       | 696,604                |       | 641,037               |       |
|                                                                                                                                                       |       |                   |       |                  |       |
| Short-term borrowings                                                                                                                                      |       | 68,200                 |       | 68,500                |       |
| Advances from Federal Home Loan Bank                                                                                                                       |       | 28,118                 |       | 28,224                |       |
| Subordinated debentures                                                                                                                                    |       | 10,000                 |       | 10,000                |       |
| Accrued interest payable                                                                                                                                   |       | 1,040                  |       | 273                   |       |
| Accounts payable and other liabilities                                                                                                                     |       | 1,576                  |       | 1,321                 |       |
| Deferred income taxes                                                                                                                                      |       | 1,307                  |       | 1,373                 |       |
|                                                                                                                                                       |       |                   |       |                  |       |
| **TOTAL LIABILITIES**                                                                                                                                      |       | 806,845                |       | 750,728               |       |
| Commitments and contingent liabilities                                                                                                                     |       | —                 |       | —                |       |
|                                                                                                                                                       |       |                   |       |                  |       |
| **STOCKHOLDERS’ EQUITY:**                                                                                                                             | ** ** | ** **             | ** ** | ** **            | ** ** |
| Serial preferred stock, 5,000,000 shares authorized  and unissued                                                                                          |       | —                 |       | —                |       |
| Common stock, $1 par value per share; authorized  10,000,000 shares; issued and outstanding, 4,664,583 shares Sep (2007), and  4,384,088 shares Dec (2006) |       | 4,665                  |       | 4,384                 |       |
| Additional paid-in capital                                                                                                                                 |       | 33,940                 |       | 27,419                |       |
| Retained earnings                                                                                                                                          |       | 33,749                 |       | 40,210                |       |
| Accumulated other comprehensive income/  (loss)                                                                                                            |       | (45                    | )          | 85                    |       |
|                                                                                                                                                       |       |                   |       |                  |       |
| **TOTAL STOCKHOLDERS’ EQUITY**                                                                                                                        |       | 72,309                 |       | 72,098                |       |
| **TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY**                                                                                                        |       | $                      | 879,154    |                  | $          | 822,826 |   |

 

*See notes to consolidated financialstatements.*

 

4

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**FIRSTFINANCIAL SERVICE CORPORATION**

**ConsolidatedStatements of Income**

**(Unaudited)**

 
| ** **                                                                      | ** ** | **Three Months Ended** | ** ** | **Nine Months Ended** | ** ** |
|---------------------------------------------------------------------------------|------------|----------------------------------|------------|---------------------------------|------------|
| ** **                                                                      | ** ** | **September 30,**           | ** ** | **September 30,**          | ** ** |
| **(Dollars in thousands, except per share data)** | ** ** | **2007**                         | ** ** | **2006**                        | ** ** | **2007** | ** ** | **2006** | ** ** |
| **Interest and Dividend Income:**                                               | ** ** | ** **                       | ** ** | ** **                      | ** ** | ** ** | ** ** | ** ** | ** ** |
| Loans, including fees                                                           |       | $                                | 14,760     |                            | $          | 13,104 |   | $ | 43,065 |   | $ | 37,106 |   |
| Taxable securities                                                              |       | 490                              |       | 640                             |       | 1,638 |   | 2,111 |   |
| Tax exempt securities                                                           |       | 102                              |       | 78                              |       | 317 |   | 208 |   |
| Total interest income                                                           |       | 15,352                           |       | 13,822                          |       | 45,020 |   | 39,425 |   |
|                                                                            |       |                             |       |                            |       |   |   |   |   |
| **Interest Expense:**                                                           | ** ** | ** **                       | ** ** | ** **                      | ** ** | ** ** | ** ** | ** ** | ** ** |
| Deposits                                                                        |       | 6,695                            |       | 4,898                           |       | 19,082 |   | 13,503 |   |
| Short-term borrowings                                                           |       | 465                              |       | 801                             |       | 1,452 |   | 889 |   |
| Federal Home Loan Bank advances                                                 |       | 345                              |       | 407                             |       | 1,022 |   | 2,280 |   |
| Subordinated debentures                                                         |       | 167                              |       | 235                             |       | 549 |   | 665 |   |
| Total interest expense                                                          |       | 7,672                            |       | 6,341                           |       | 22,105 |   | 17,337 |   |
|                                                                            |       |                             |       |                            |       |   |   |   |   |
| Net interest income                                                             |       | 7,680                            |       | 7,481                           |       | 22,915 |   | 22,088 |   |
| Provision for loan losses                                                       |       | 740                              |       | 249                             |       | 948 |   | 346 |   |
| Net interest income after provision for  loan losses                            |       | 6,940                            |       | 7,232                           |       | 21,967 |   | 21,742 |   |
|                                                                            |       |                             |       |                            |       |   |   |   |   |
| **Non-interest Income:**                                                        | ** ** | ** **                       | ** ** | ** **                      | ** ** | ** ** | ** ** | ** ** | ** ** |
| Customer service fees on deposit accounts                                       |       | 1,511                            |       | 1,481                           |       | 4,274 |   | 4,108 |   |
| Gain on sale of mortgage loans                                                  |       | 144                              |       | 204                             |       | 435 |   | 608 |   |
| Gain on sale of real estate held for  development                               |       | —                           |       | —                          |       | 227 |   | — |   |
| Brokerage commissions                                                           |       | 106                              |       | 79                              |       | 308 |   | 250 |   |
| Other income                                                                    |       | 444                              |       | 269                             |       | 945 |   | 856 |   |
| Total non-interest income                                                       |       | 2,205                            |       | 2,033                           |       | 6,189 |   | 5,822 |   |
|                                                                            |       |                             |       |                            |       |   |   |   |   |
| **Non-interest Expense:**                                                       | ** ** | ** **                       | ** ** | ** **                      | ** ** | ** ** | ** ** | ** ** | ** ** |
| Employee compensation and benefits                                              |       | 3,136                            |       | 2,968                           |       | 9,365 |   | 8,763 |   |
| Office occupancy expense and equipment                                          |       | 604                              |       | 523                             |       | 1,766 |   | 1,589 |   |
| Marketing and advertising                                                       |       | 228                              |       | 209                             |       | 677 |   | 628 |   |
| Outside services and data processing                                            |       | 638                              |       | 650                             |       | 1,974 |   | 1,907 |   |
| Bank franchise tax                                                              |       | 234                              |       | 224                             |       | 699 |   | 667 |   |
| Write off of issuance cost of Trust  Preferred Securities                       |       | —                           |       | —                          |       | 229 |   | — |   |
| Other expense                                                                   |       | 1,166                            |       | 863                             |       | 3,112 |   | 2,607 |   |
| Total non-interest expense                                                      |       | 6,006                            |       | 5,437                           |       | 17,822 |   | 16,161 |   |
|                                                                            |       |                             |       |                            |       |   |   |   |   |
| Income before income taxes                                                      |       | 3,139                            |       | 3,828                           |       | 10,334 |   | 11,403 |   |
| Income taxes                                                                    |       | 1,008                            |       | 1,257                           |       | 3,343 |   | 3,738 |   |
| **Net Income**                                                                  |       | $                                | 2,131      |                            | $          | 2,571 |   | $ | 6,991 |   | $ | 7,665 |   |
|                                                                            |       |                             |       |                            |       |   |   |   |   |
| Shares applicable to basic income per share                                     |       | 4,681,582                        |       | 4,822,492                       |       | 4,739,352 |   | 4,821,124 |   |
| **Basic income per share**                                                      |       | $                                | 0.46       |                            | $          | 0.53 |   | $ | 1.48 |   | $ | 1.59 |   |
|                                                                            |       |                             |       |                            |       |   |   |   |   |
| Shares applicable to diluted income per  share                                  |       | 4,731,496                        |       | 4,873,224                       |       | 4,792,560 |   | 4,865,430 |   |
| **Diluted income per share**                                                    |       | $                                | 0.45       |                            | $          | 0.53 |   | $ | 1.46 |   | $ | 1.57 |   |
| ** **                                                                      | ** ** | ** **                       | ** ** | ** **                      | ** ** | ** ** | ** ** | ** ** | ** ** |
| **Cash dividends declared per share**                                           |       | $                                | 0.190      |                            | $          | 0.173 |   | $ | 0.536 |   | $ | 0.487 |   |

 

*See notes to the unaudited consolidatedfinancial statements.*

 

5

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**FIRSTFINANCIAL SERVICE CORPORATION**

**ConsolidatedStatements of Comprehensive Income**

**(Unaudited)**

 
| ** **                                                         | ** ** | **Three Months Ended** | ** ** | **Nine Months Ended** | ** ** |
|--------------------------------------------------------------------|------------|----------------------------------|------------|---------------------------------|------------|
| ** **                                                         | ** ** | **September 30,**           | ** ** | **September 30,**          | ** ** |
| **(Dollars in thousands)**                               | ** ** | **2007**                         | ** ** | **2006**                        | ** ** | **2007** | ** ** | **2006** | ** ** |
|                                                               |       |                             |       |                            |       |   |   |   |   |
| **Net Income**                                                     |       | $                                | 2,131      |                            | $          | 2,571 |   | $ | 6,991 |   | $ | 7,665 |   |
| Other comprehensive income (loss):                                 |       |                             |       |                            |       |   |   |   |   |
| Change in unrealized gain (loss) on  securities available-for-sale |       | 364                              |       | 344                             |       | (196 | ) | (159 | ) |
| Reclassification of realized amount                                |       | —                           |       | —                          |       | — |   | — |   |
| Net unrealized gain (loss) recognized in comprehensive  income     |       | 364                              |       | 344                             |       | (196 | ) | (159 | ) |
| Tax effect                                                         |       | (124                             | )          | (117                            | )          | 66 |   | 54 |   |
| Total other comphrehensive income (loss)                           |       | 240                              |       | 227                             |       | (130 | ) | (105 | ) |
|                                                               |       |                             |       |                            |       |   |   |   |   |
| **Comprehensive Income**                                           |       | $                                | 2,371      |                            | $          | 2,798 |   | $ | 6,861 |   | $ | 7,560 |   |

 

*See notes to the unaudited consolidatedfinancial statements.*

 

6

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**FIRSTFINANCIAL SERVICE CORPORATION**

**ConsolidatedStatement of Changes in Stockholders’ Equity**

**NineMonths Ended September 30, 2007**

**(Dollars InThousands, Except Per Share Amounts)**

**(Unaudited)**

 
| ** **                                                                                             | ** ** | **Common  Shares** | ** ** | **Stock  Amount** | ** ** | **Additional  Paid-in  Capital** | ** ** | **Retained  Earnings** | ** ** | **Accumulated  Other  Comprehensive  Income/(Loss),  Net of Tax** | ** ** | **Total** | ** ** |
|--------------------------------------------------------------------------------------------------------|------------|--------------------|------------|-------------------|------------|----------------------------------|------------|------------------------|------------|-----------------------------------------------------------------------------|------------|-----------|------------|
|                                                                                                   |       |               |       |              |       |                             |       |                   |       |                                                                        |       |      |       |
| **Balance, January 1, 2007**                                                                           |       | 4,384              |       | $                 | 4,384      |                             | $          | 27,419                 |       | $                                                                           | 40,210     |      | $          | 85 |   | $ | 72,098 |   |
| Net income                                                                                             |       |               |       |              |       |                             |       | 6,991                  |       |                                                                        |       | 6,991     |       |
| Stock dividend-10%                                                                                     |       | 424                |       | 424               |       | 10,493                           |       | (10,917                | )          |                                                                        |       | —    |       |
| Stock issued for stock options exercised  and employee benefit plans                                   |       | 9                  |       | 9                 |       | 166                              |       |                   |       |                                                                        |       | 175       |       |
| Compensation expense for stock options                                                                 |       |               |       |              |       | 76                               |       |                   |       |                                                                        |       | 76        |       |
| Net change in unrealized gains (losses) on  securities available-for-sale, net of tax                  |       |               |       |              |       |                             |       |                   |       | (130                                                                        | )          | (130      | )          |
| Cash dividends declared and cash dividends  for fractional shares for stock dividend  ($.54 per share) |       |               |       |              |       |                             |       | (2,535                 | )          |                                                                        |       | (2,535    | )          |
| Stock repurchased                                                                                      |       | (152               | )          | (152              | )          | (4,214                           | )          | —                 |       | —                                                                      |       | (4,366    | )          |
| **Balance, September 30, 2007**                                                                        |       | 4,665              |       | $                 | 4,665      |                             | $          | 33,940                 |       | $                                                                           | 33,749     |      | $          | (45 | ) | $ | 72,309 |   |

 

*See notes to the unaudited consolidatedfinancial statements.*

 

7

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**FIRSTFINANCIAL SERVICE CORPORATION**

**ConsolidatedStatements of Cash Flows**

**(DollarsIn Thousands)**

**(Unaudited)**

 
| ** **                                                                         | ** ** | **Nine Months Ended** | ** ** |
|------------------------------------------------------------------------------------|------------|---------------------------------|------------|
| ** **                                                                         | ** ** | **September 30,**          | ** ** |
| ** **                                                                         | ** ** | **2007**                        | ** ** | **2006** | ** ** |
| **Operating Activities:**                                                          |       |                            |       |   |   |
| Net income                                                                         |       | $                               | 6,991      |   | $ | 7,665 |   |
| Adjustments to reconcile net income to net cash  provided by operating activities: |       |                            |       |   |   |
| Provision for loan losses                                                          |       | 948                             |       | 346 |   |
| Depreciation on premises and equipment                                             |       | 1,076                           |       | 1,034 |   |
| Federal Home Loan Bank stock dividends                                             |       | —                          |       | (314 | ) |
| Net amortization (accretion) available-for-sale                                    |       | (1                              | )          | 8 |   |
| Net amortization (accretion)  held-to-maturity                                     |       | 16                              |       | 24 |   |
| Gain on sale of real estate held for  development                                  |       | (227                            | )          | — |   |
| Gain on sale of mortgage loans                                                     |       | (435                            | )          | (608 | ) |
| Origination of loans held for sale                                                 |       | (25,778                         | )          | (31,272 | ) |
| Proceeds on sale of loans held for sale                                            |       | 25,479                          |       | 30,744 |   |
| Compensation expense for stock options                                             |       | 76                              |       | 53 |   |
| Changes in:                                                                        |       |                            |       |   |   |
| Cash surrender value of life insurance                                             |       | (249                            | )          | (221 | ) |
| Interest receivable                                                                |       | (170                            | )          | (582 | ) |
| Other assets                                                                       |       | (5                              | )          | 287 |   |
| Interest payable                                                                   |       | 767                             |       | (12 | ) |
| Accounts payable and other liabilities                                             |       | 255                             |       | 832 |   |
| Net cash from operating activities                                                 |       | 8,743                           |       | 7,984 |   |
|                                                                               |       |                            |       |   |   |
| **Investing Activities:**                                                          |       |                            |       |   |   |
| Purchases of securities available-for-sale                                         |       | (395                            | )          | (4,866 | ) |
| Maturities of securities available-for-sale                                        |       | 5,663                           |       | 5,084 |   |
| Maturities of securities held-to-maturity                                          |       | 3,747                           |       | 6,754 |   |
| Net change in loans                                                                |       | (64,083                         | )          | (43,105 | ) |
| Net purchases of premises and equipment                                            |       | (4,010                          | )          | (2,937 | ) |
| Sales of real estate for development                                               |       | 473                             |       | — |   |
| Net cash from investing activities                                                 |       | (58,605                         | )          | (39,070 | ) |
|                                                                               |       |                            |       |   |   |
| **Financing Activities**                                                           |       |                            |       |   |   |
| Net change in deposits                                                             |       | 55,567                          |       | 22,110 |   |
| Change in short-term borrowings                                                    |       | (300                            | )          | 56,500 |   |
| Repayments to Federal Home Loan Bank                                               |       | (106                            | )          | (50,114 | ) |
| Proceeds from issuance of subordinated  debentures                                 |       | 10,000                          |       | — |   |
| Payoff of subordinated debentures                                                  |       | (10,000                         | )          | — |   |
| Issuance of common stock for options and  employee benefit plans                   |       | 175                             |       | 61 |   |
| Dividends paid                                                                     |       | (2,535                          | )          | (2,352 | ) |
| Common stock repurchased                                                           |       | (4,366                          | )          | — |   |
| Net cash from financing activities                                                 |       | 48,435                          |       | 26,205 |   |
|                                                                               |       |                            |       |   |   |
| **(Decrease) Increase in cash and cash  equivalents**                              |       | (1,427                          | )          | (4,881 | ) |
| **Cash and cash equivalents, beginning of  period**                                |       | 19,082                          |       | 20,451 |   |
| **Cash and cash equivalents, end of period**                                       |       | $                               | 17,655     |   | $ | 15,570 |   |

 

*See notes to the unaudited consolidated financial statements.*

 

8

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**Notes To Unaudited Consolidated Financial Statements**

 

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

 

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

 

Theaccompanying unaudited consolidated financial statements have been prepared inaccordance with U.S. generally accepted accounting principles for interimfinancial information and with the instructions to Form 10-Q and Rule 10-01 ofRegulation S-X. Accordingly, they do not include all of the information and footnotesrequired by U.S. generally accepted accounting principles for completefinancial statements. In the opinion of management, all adjustments (consistingof normal recurring accruals) considered necessary for a fair presentation havebeen included. Operating results for the three and nine month periods endingSeptember 30, 2007 are not necessarily indicative of the results that may occurfor the year ending December 31, 2007. For further information, refer to theconsolidated financial statements and footnotes thereto included in theCorporation’s annual report on Form 10-K for the period ended December 31,2006.

 

***Stock Dividends***– We declared a 10% stock dividend on August16, 2007 to our shareholders of record as of August 29, 2007, payable onSeptember 14, 2007. The payment of this dividend was in addition to the regularquarterly cash dividend. Per share amounts have been restated for the impact ofthe stock dividend.

 

***Adoption of New Accounting Standards***– We adopted the provisions of FASBInterpretation No. 48, Accounting for Uncertainty in Income Taxes (“FIN 48”),on January 1, 2007. The adoption of FIN 48 had no affect on our financialstatements. We have no unrecognized tax benefits and do not anticipate anyincrease in unrecognized benefits during 2007 relative to any tax positionstaken prior to January 1, 2007. Should the accrual of any interest or penaltiesrelative to unrecognized tax benefits be necessary, it is our policy to recordsuch accruals in our income tax accounts; no such accruals exist as of January1, 2007, or at September 30, 2007. We file a consolidated U.S. federal incometax return and the Company and its non-bank subsidiaries file an income taxreturn in the state of Kentucky. These returns are subject to examination bytaxing authorities for all years after 2003.

 

***Reclassifications*** – Some items in the prior period financialstatements were reclassified to conform to the current period presentation.

 

***Effect ofNewly Issued But Not Yet Effective Accounting Standards*** – In September 2006, the FASB issued SFAS No. 157, “Fair ValueMeasurements” (“SFAS No. 157”), which defines fair value, establishes aframework for measuring fair value in generally accepted accounting principles(GAAP), and expands disclosures about fair value measurements. Morespecifically, this statement clarifies the definition of fair value,establishes a fair valuation hierarchy based upon observable (e.g. quotedprices, interest rates, yield curves) and unobservable market inputs, andexpands disclosure requirements to include the inputs used to develop estimatesof fair value and the effects of the estimates on income for the period. Thisstatement does not require any new fair value measurements. This pronouncementis effective for fiscal years beginning after November 15, 2007, and interimperiods within those fiscal years. We are in the process of evaluating theimpact, if any; the adoption of SFAS No. 157 will have on our financialstatements.

 

In September 2006, the FASBEmerging Issues Task Force finalized Issue No. 06-4, “Accounting for DeferredCompensation and Postretirement Benefit Aspects of Endorsement Split-DollarLife Insurance Arrangements.”  This issuerequires that a liability be recorded during the service period when asplit-dollar life insurance agreement continues after participants’ employmentor retirement. The required accrued liability will be based on either thepost-employment benefit cost for the continuing life insurance or based on thefuture death benefit depending on the contractual terms of the underlying

 

9

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agreement. This issue iseffective for fiscal years beginning after December 15, 2007. We are in theprocess of evaluating the impact, if any; the adoption of Issue 06-4 will haveon our financial statements.

 

In February 2007, the FASBissued SFAS 159, “The Fair ValueOption for Financial Assets and Financial Liabilities — Including an amendmentof FASB Statement No. 115.”****Thisstatement allows companies to record certain financial assets and financialliabilities at full fair value if they so choose. The statement was issued tomitigate volatility in reported earnings caused by an accounting modelutilizing multiple measurement attributes. The adoption of the fair value optionis recorded as a cumulative-effect adjustment to the opening balance ofretained earnings, which would be January 1, 2008. Upon adoption, thedifference between the carrying amount and the fair value of the items chosenis removed from the balance sheet and included in the cumulative-effectadjustment. Subsequent changes in fair value are recorded through the incomestatement. We are in the process of evaluating the impact, if any; the adoptionof SFAS No. 159 will have on our financial statements.

 

10

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**2.**                                      **SECURITIES**

 

The amortized cost basis and fair values ofsecurities are as follows:

 
| ** **                           | ** ** | ** **    | ** ** | **Gross**      | ** ** | **Gross**      | ** ** | ** **          | ** ** |
|--------------------------------------|------------|---------------|------------|----------------|------------|----------------|------------|---------------------|------------|
| ** **                           | ** ** | **Amortized** | ** ** | **Unrealized** | ** ** | **Unrealized** | ** ** | ** **          | ** ** |
| **(Dollars in thousands)** | ** ** | **Cost**      | ** ** | **Gains**      | ** ** | **Losses**     | ** ** | **Fair Value** | ** ** |
| **Securities  available-for-sale:**  |       |          |       |           |       |           |       |                |       |
| **September  30, 2007:**             |       |          |       |           |       |           |       |                |       |
| U. S. Treasury  and agencies         |       | $             | 497        |           | $          | —         |       | $                   | (1         | ) | $ | 496 |   |
| Mortgage-backed                      |       | 7,927         |       | 4              |       | (117           | )          | 7,814               |       |
| Equity                               |       | 1,553         |       | 540            |       | (103           | )          | 1,990               |       |
| State and  municipal                 |       | 10,038        |       | 4              |       | (394           | )          | 9,648               |       |
| Corporate                            |       | 2,812         |       | —         |       | —         |       | 2,812               |       |
|                                 |       |          |       |           |       |           |       |                |       |
| Total                                |       | $             | 22,827     |           | $          | 548            |       | $                   | (615       | ) | $ | 22,760 |   |
|                                 |       |          |       |           |       |           |       |                |       |
| **December  31, 2006:**              |       |          |       |           |       |           |       |                |       |
| U.S. Treasury  and agencies          |       | $             | 3,497      |           | $          | —         |       | $                   | (13        | ) | $ | 3,484 |   |
| Mortgage-backed                      |       | 9,425         |       | 8              |       | (189           | )          | 9,244               |       |
| Equity                               |       | 1,553         |       | 629            |       | (36            | )          | 2,146               |       |
| State and  municipal                 |       | 10,299        |       | 7              |       | (277           | )          | 10,029              |       |
| Corporate                            |       | 3,320         |       | —         |       | —         |       | 3,320               |       |
|                                 |       |          |       |           |       |           |       |                |       |
| Total                                |       | $             | 28,094     |           | $          | 644            |       | $                   | (515       | ) | $ | 28,223 |   |

 
| ** **                        | ** ** | ** **    | ** ** | **Gross**        | ** ** | **Gross**        | ** ** | ** **          | ** ** |
|-----------------------------------|------------|---------------|------------|------------------|------------|------------------|------------|---------------------|------------|
| ** **                        | ** ** | **Amortized** | ** ** | **Unrecognized** | ** ** | **Unrecognized** | ** ** | ** **          | ** ** |
| ** **                        | ** ** | **Cost**      | ** ** | **Gains**        | ** ** | **Losses**       | ** ** | **Fair Value** | ** ** |
| **Securities  held-to-maturity:** |       |          |       |             |       |             |       |                |       |
| **September  30, 2007:**          |       |          |       |             |       |             |       |                |       |
| U.S. Treasury  and agencies       |       | $             | 16,098     |             | $          | 16               |       | $                   | (103       | ) | $ | 16,011 |   |
| Mortgage-backed                   |       | 3,412         |       | 2                |       | (76              | )          | 3,338               |       |
| Corporate                         |       | 951           |       | 4                |       | –           |       | 955                 |       |
|                              |       |          |       |             |       |             |       |                |       |
| Total                             |       | $             | 20,461     |             | $          | 22               |       | $                   | (179       | ) | $ | 20,304 |   |
|                              |       |          |       |             |       |             |       |                |       |
| **December  31, 2006:**           |       |          |       |             |       |             |       |                |       |
| U.S. Treasury  and agencies       |       | $             | 18,097     |             | $          | 4                |       | $                   | (318       | ) | $ | 17,783 |   |
| Mortgage-backed                   |       | 4,127         |       | 3                |       | (111             | )          | 4,019               |       |
| Corporate                         |       | 2,000         |       | 15               |       | –           |       | 2,015               |       |
|                              |       |          |       |             |       |             |       |                |       |
| Total                             |       | $             | 24,224     |             | $          | 22               |       | $                   | (429       | ) | $ | 23,817 |   |

 

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

 

Loans are summarized as follows:

 
| ** **                           | ** ** | **September 30,** | ** ** | **December 31,** | ** ** |
|--------------------------------------|------------|------------------------|------------|-----------------------|------------|
| **(Dollars in thousands)** | ** ** | **2007**               | ** ** | **2006**              | ** ** |
|                                 |       |                   |       |                  |       |
| Commercial                           |       | $                      | 51,602     |                  | $          | 40,902 |   |
| Real estate  commercial              |       | 463,572                |       | 410,146               |       |
| Real estate  construction            |       | 27,207                 |       | 23,953                |       |
| Residential  mortgage                |       | 133,368                |       | 137,334               |       |
| Consumer and  home equity            |       | 64,321                 |       | 62,805                |       |
| Indirect  consumer                   |       | 28,999                 |       | 30,857                |       |
| Loans held for  sale                 |       | 1,407                  |       | 673                   |       |
|                                 |       | 770,476                |       | 706,670               |       |
| Less:                                |       |                   |       |                  |       |
| Net deferred  loan origination fees  |       | (853                   | )          | (960                  | )          |
| Allowance for  loan losses           |       | (8,491                 | )          | (7,684                | )          |
|                                 |       | (9,344                 | )          | (8,644                | )          |
|                                 |       |                   |       |                  |       |
| Loans                                |       | $                      | 761,132    |                  | $          | 698,026 |   |

 

The allowance for loan loss is summarized asfollows:

 
| ** **                           | ** ** | **As of and For the** | ** ** | **As of and For the** | ** ** |
|--------------------------------------|------------|-------------------------------------------|------------|-------------------------------------------|------------|
| ** **                           | ** ** | **Three Months Ended**          | ** ** | **Nine Months Ended**           | ** ** |
| ** **                           | ** ** | **September 30,**                    | ** ** | **September 30,**                    | ** ** |
| **(Dollars in thousands)** | ** ** | **2007**                                  | ** ** | **2006**                                  | ** ** | **2007** | ** ** | **2006** | ** ** |
|                                 |       |                                      |       |                                      |       |   |   |   |   |
| Balance,  beginning of period        |       | $                                         | 7,822      |                                      | $          | 7,408 |   | $ | 7,684 |   | $ | 7,377 |   |
| Provision for  loan losses           |       | 740                                       |       | 249                                       |       | 948 |   | 346 |   |
| Charge-offs                          |       | (129                                      | )          | (157                                      | )          | (330 | ) | (443 | ) |
| Recoveries                           |       | 58                                        |       | 77                                        |       | 189 |   | 297 |   |
| Balance, end of  period              |       | $                                         | 8,491      |                                      | $          | 7,577 |   | $ | 8,491 |   | $ | 7,577 |   |

 

Impaired loans are summarized below. Therewere no impaired loans for the periods presented that have not been reviewed bymanagement for an allowance allocation.

 
| ** **                                   | ** ** | **As of and For the** | ** ** | **As of and For the** | ** ** |
|----------------------------------------------|------------|-------------------------------------------|------------|-------------------------------------------|------------|
| ** **                                   | ** ** | **Nine Months Ended**           | ** ** | **Year Ended**                       | ** ** |
| ** **                                   | ** ** | **September 30,**                    | ** ** | **December 31,**                     | ** ** |
| **(Dollars in thousands)**         | ** ** | **2007**                                  | ** ** | **2006**                                  | ** ** |
|                                         |       |                                      |       |                                      |       |
| End of period  impaired loans                |       | $                                         | 7,656      |                                      | $          | 4,838 |   |
| Amount of  allowance for loan loss allocated |       | 770                                       |       | 128                                       |       |
|                                              |            |                                           |            |                                           |            |  |  |

 

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We report non-performing loans as impaired. Ournon-performing loans by source were as follows:

 
| ** **                                    | ** ** | **September 30,** | ** ** | **December 31,** | ** ** |
|-----------------------------------------------|------------|------------------------|------------|-----------------------|------------|
| **(Dollars in thousands)**          | ** ** | **2007**               | ** ** | **2006**              | ** ** |
|                                          |       |                   |       |                  |       |
| Restructured                                  |       | $                      | 2,375      |                  | $          | 2,470 |   |
| Loans past due  over 90 days still on accrual |       | —                 |       | —                |       |
| Non accrual  loans                            |       | 5,281                  |       | 2,368                 |       |
| Total                                         |       | $                      | 7,656      |                  | $          | 4,838 |   |

 

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

 

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

 
| ** **                                      | ** ** | **Three Months Ended** | ** ** | **Nine Months Ended** | ** ** |
|-------------------------------------------------|------------|----------------------------------|------------|---------------------------------|------------|
| **(Dollars in thousands,**            | ** ** | **September 30,**           | ** ** | **September 30,**          | ** ** |
| **except per share data)**       | ** ** | **2007**                         | ** ** | **2006**                        | ** ** | **2007** | ** ** | **2006** | ** ** |
|                                            |       |                             |       |                            |       |   |   |   |   |
| Net income  available to common shareholders    |       | $                                | 2,131      |                            | $          | 2,571 |   | $ | 6,991 |   | $ | 7,665 |   |
| Basic EPS:                                      |       |                             |       |                            |       |   |   |   |   |
| Weighted average  common shares                 |       | 4,681                            |       | 4,822                           |       | 4,739 |   | 4,821 |   |
| Diluted EPS:                                    |       |                             |       |                            |       |   |   |   |   |
| Weighted average  common shares                 |       | 4,681                            |       | 4,822                           |       | 4,739 |   | 4,821 |   |
| Dilutive effect  of stock options               |       | 50                               |       | 51                              |       | 53 |   | 44 |   |
| Weighted average  common and incremental shares |       | 4,731                            |       | 4,873                           |       | 4,792 |   | 4,865 |   |
| Earnings Per  Share:                            |       |                             |       |                            |       |   |   |   |   |
| Basic                                           |       | $                                | 0.46       |                            | $          | 0.53 |   | $ | 1.48 |   | $ | 1.59 |   |
| Diluted                                         |       | $                                | 0.45       |                            | $          | 0.53 |   | $ | 1.46 |   | $ | 1.57 |   |

 

Stock options for 28,600 shares of common stock werenot included in the September 30, 2007 computation of diluted earnings for boththe quarter and year to date per share because they were anti-dilutive. Alloutstanding stock options for the September 30, 2006 period were included indiluted earnings per share.

 

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

 

Our2006 Stock Incentive Plan, which is shareholder approved, succeeded our 1998Stock Option and Incentive Plan. Under the 2006 Plan, we may grant eitherincentive or non-qualified stock options to****keyemployees and directors****for atotal of 647,350 shares of our common stock at not less than fair value at thedate such options are granted. Options available for future grant under the1998 Plan totaled 38,500 shares and were rolled into the 2006 Plan. We believethat the ability to award stock options and other forms of stock-basedincentive compensation can assist us in attracting and retaining key employees.Stock-based incentive compensation is also a means  to  align the  interests  of key  employees  with those  of our shareholders  by providing  awards  intended to  reward   recipients for  our  long-term growth. The option to purchase shares vest over periods of one to fiveyears and expire ten years after the date of grant. We issue new shares ofcommon stock upon the exercise of stock options. At September 30, 2007 optionsavailable for future grant under the 2006 Plan totaled 618,750. Compensationcost related to options granted under the 1998 and 2006 Plans that was chargedagainst earnings for the nine month periods ended September 30, 2007****and 2006 was $76,565 and $53,485.

 

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Thefair value of each option award is estimated on the date of grant using theBlack-Scholes option valuation model that uses various weighted-averageassumptions. The risk-free interest rate is based on the U.S. Treasury yieldcurve in effect at the time of grant. The expected volatility is based on thefluctuation in the price of a share of stock over the period for which theoption is being valued and the expected life of the options granted representsthe period of time the options are expected to be outstanding.

 

Asummary of option activity under the 1998 and 2006 Plans as of September 30,2007 is presented below:

 
| ** **                           | ** ** | ** **  | ** ** | ** **   | ** ** | **Weighted**    | ** ** | ** **                           | ** ** |
|--------------------------------------|------------|-------------|------------|--------------|------------|-----------------|------------|--------------------------------------|------------|
| ** **                           | ** ** | ** **  | ** ** | **Weighted** | ** ** | **Average**     | ** ** | ** **                           | ** ** |
| ** **                           | ** ** | **Number**  | ** ** | **Average**  | ** ** | **Remaining**   | ** ** | **Aggregate**                        | ** ** |
| ** **                           | ** ** | **of**      | ** ** | **Exercise** | ** ** | **Contractual** | ** ** | **Intrinsic**                        | ** ** |
| ** **                           | ** ** | **Options** | ** ** | **Price**    | ** ** | **Term**        | ** ** | **Value**                            | ** ** |
| ** **                           | ** ** | ** **  | ** ** | ** **   | ** ** | ** **      | ** ** | **(Dollars In Thousands)** | ** ** |
|                                 |       |        |       |         |       |            |       |                                 |       |
| Outstanding,  beginning of period    |       | 186,076     |       | $            | 18.50      |            |       |                                 |       |   |
| Granted during  period               |       | —      |       | —       |       |            |       |                                 |       |
| Exercised during  the period         |       | (5,009      | )          | 14.42        |       |            |       |                                 |       |
| Outstanding, end  of period          |       | 181,067     |       | $            | 18.61      |            | 5.5        |                                 | $          | 1,564 |   |
|                                 |       |        |       |         |       |            |       |                                 |       |
| Eligible for  exercise at period end |       | 114,044     |       | $            | 16.41      |            | 4.1        |                                 | $          | 1,237 |   |

 

Therewere no options granted for the nine months ended September 30, 2007 and 2006. Thetotal intrinsic value of options exercised during the nine months endedSeptember 30, 2007 and 2006 was $67,520 and $10,641. There was no tax benefitrecognized from the option exercises as they are considered incentive stockoptions.

 

Asof September 30, 2007 there was $262,761 of total unrecognized compensationcost related to non-vested share-based compensation arrangements granted underthe 1998 and 2006 Plans. That cost is expected to be recognized over aweighted-average period of 3.6 years. Cash received from option exercises underall share-based payment arrangements for the periods ended September 30, 2007and 2006 was $72,228 and $9,835.

 

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**Item 2.**

 

##### **MANAGEMENT’SDISCUSSION AND ANALYSIS OF FINANCIAL CONDITIONAND RESULTS OF OPERATIONS**

 

##### **GENERAL**

##### ** **

Weconduct operations in 15 full-service banking centers in six contiguouscounties in Central Kentucky along the Interstate 65 corridor. Our marketsrange from the major metropolitan area of Louisville in Jefferson County,Kentucky, approximately 40 miles north of our headquarters in Elizabethtown,Kentucky, to Hart County, Kentucky, approximately 30 miles south ofElizabethtown. Our markets are supported by a diversified industry base andhave a regional population of over 1 million.

 

We serve the needs and cater to the economic strengths of the localcommunities in which we operate and strive to provide a high level of personaland professional customer service. We offer a variety of financial services toour retail and commercial banking customers. These services include personaland corporate banking services and personal investment financial counselingservices.

 

Through****our personalinvestment financial counseling services, we offer a wide variety of mutualfunds, equity investments, and fixed and variable annuities. We invest in thewholesale capital markets to manage a portfolio of securities and use variousforms of wholesale funding. The security portfolio contains a variety ofinstruments, including callable debentures, taxable and non-taxable debentures,fixed and adjustable rate mortgage backed securities, and collateralizedmortgage obligations.

 

Our results of operations depend primarily on net interest income,which is the difference between interest income from interest-earning assetsand interest expense on interest-bearing liabilities. Our operations are alsoaffected by non-interest income, such as service charges, insurance agencyrevenue, loan fees, gains and losses from the sale of mortgage loans and gainsfrom the sale of real estate held for development. Our principal operatingexpenses, aside from interest expense, consist of compensation and employeebenefits, occupancy costs, data processing expense and provisions for loanlosses.

 

Thisdiscussion and analysis covers material changes in the financial conditionsince December 31, 2006 and material changes in the results of operations forthe three and nine month periods ending, September 30, 2007 as compared to 2006.It should be read in conjunction with “Management’s Discussion and Analysis ofFinancial Condition and Results of Operations” included in the Annual Report onForm 10-K for the period ended December 31, 2006.

 

**OVERVIEW**

 

Overthe past several years we have focused on enhancing and expanding our retailand commercial banking network in our core markets as well as establishing ourpresence in the Louisville market. Our core markets, five counties other thanLouisville/Jefferson County where we have a combined 21% market share, havebecome increasingly competitive as several new banks have entered these marketsin the past few years. In order to protect and grow our market share, wereplaced existing branches with newer, enhanced facilities and anticipateconstructing several new facilities over the next few years. In addition to theenhancement and expansion in our core markets, we have been increasing ourpresence in the Louisville market. Approximately 75% of the deposit base in theLouisville market is controlled by six out-of-state banks. While the market isvery competitive, we believe this creates an opportunity for smaller communitybanks with more power to make decisions locally. We believe our investment inthese initiatives along with our continued commitment to a high level ofcustomer service will continue to enhance our market share in our core marketsand our development in the Louisville market.

 

Ourretail branch network continues to generate encouraging results. Total depositshave grown at a 10% compound annual growth rate over the past three years. Totaldeposits were $696.6 million at September 30, 2007, an increase of $55.6million, or 9% from December 31, 2006. The continued development of the retailbranch network into the Louisville market also yielded positive results. Wehave a combined $55.0 million in deposits in our three full-service facilitiesin the Louisville market, representing a 41% increase in deposits for the firstnine months and a 213% increase from December 31, 2004. We opened two of thesefacilities in the second quarter of 2004 to support our growing customer basein this market and in June 2007 we opened our third new full service-bankingcenter in the Louisville market.

 

Wehave developed a strong commercial real estate niche in our markets. We have anexperienced team of bankers who are focused on providing service andconvenience to our customers. It is quite common for our

 

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bankersto close loans at a customer’s place of business or even the customer’spersonal residence. This high level of service has been especially wellreceived in our Louisville market, which is dominated by regional banks. Currently,borrowers representing 26% percent of our loan portfolio resides in theLouisville market. To further develop our commercial banking relationships inLouisville, we opened a private banking office in April 2007. This office is anupscale facility complementing our retail branch network in Louisville,allowing us to further attract commercial deposit relationships in conjunctionwith our commercial lending relationships.

 

Ouremphasis on commercial lending generated a 10% compound annual growth rate inthe total loan portfolio and a 20% compound annual growth rate in commercialloans over the past three years. Commercial loans were $542.4 million atSeptember 30 2007, an increase of $67.4 million, or 14% from December 31, 2006.The growth in our commercial and commercial real estate loan portfolio, coupledwith our efforts to fund these loans with lower cost customer deposits is ourprimary business model and has substantially contributed to the growth inearnings over the past several years.

 

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

###### ** **

Ouraccounting and reporting policies comply with U.S. generally acceptedaccounting principles and conform to general practices within the bankingindustry. The accounting policy relating to the allowance for loan losses iscritical to the understanding of our results of operations since theapplication of this policy requires significant management assumptions andestimates that could result in materially different amounts to be reported ifconditions or underlying circumstances were to change.

 

***Allowance for Loan Losses*****–**We maintain an allowance sufficient to absorbprobable incurred credit losses existing in the loan portfolio. The Allowancefor Loan Loss Review Committee evaluates the allowance for loan losses on aquarterly basis.  We estimate the allowance using past loan lossexperience, known and inherent risks in the portfolio, adverse situations thatmay affect the borrower’s ability to repay, estimated value of the underlyingcollateral, and current economic conditions.  While we estimate theallowance for loan losses based in part on historical losses within each loancategory, estimates for losses within the commercial real estate portfolio aremore dependent upon credit analysis and recent payment performance.Allocations of the allowancemay be made for specific loans or loan categories, but the entire allowance isavailable for any loan that, in management’s judgment, should be charged off.

 

The allowance consists ofspecific and general components. The specific component relates to loans thatare individually classified as impaired or loans otherwise classified assubstandard or doubtful. The general component covers non-classified loans andis based on historical loss experience adjusted for current factors. Allowanceestimates are developed with actual loss experience adjusted for currenteconomic conditions. Allowance estimates are considered a prudent measurementof the risk in the loan portfolio and are applied to individual loans based onloan type.

 

Basedon our calculation, an allowance of $8.5 million****or 1.11% of total loans was our estimate of probable losseswithin the loan portfolio as of****September30, 2007.** **This estimateresulted in a provision for loan losses on the income statement of****$948,000 for the 2007 nine month period.** **If the mix and amount of futurecharge off percentages differ significantly from those assumptions used bymanagement in making its determination, the allowance for loan losses and provisionfor loan losses on the income statement could be materially increased.

 

***Stock-based Compensation*****–**We adopted the provisionsof Statement of Financial Accounting Standards (“SFAS”) No. 123 (R) “Share-BasedPayment (Revised 2004),” on January 1, 2006. Among other things, SFAS No. 123(R) eliminates the ability to account for stock-based compensation using theintrinsic value based method of accounting and requires that such transactionsbe recognized as compensation expense in the income statement based on theirfair values on the date of the grant. SFAS No. 123 (R) requires that managementmake assumptions including stock price volatility and expected forfeitures thatare utilized to measure compensation expense. We estimate fair value of stockoptions granted at the date of grant using the Black-Scholes option pricingmodel, which requires the input of highly subjective assumptions, such asvolatility, risk free interest rates and dividend pay out rates.

 

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##### **RESULTSOF OPERATIONS**

##### ** **

Netincome for the quarter ended September 30, 2007 was $2.1 million or $0.45 pershare diluted compared to $2.6 million or $0.53 per share diluted for the sameperiod in 2006. Net income for the ninemonth period ended September 30, 2007 was $7.0 million or $1.46 per sharediluted compared to $7.7 million or $1.57 per share diluted for the same perioda year ago. Earnings decreased for 2007 compared to 2006 due to adecrease in our net interest margin, an increase in provision for loan lossexpense and a higher level of non-interest expense related to our expansionefforts. Our book value per common share increased from $14.53 at September 30,2006 to $15.50 at September 30, 2007. Annualized net income for the first ninemonths of 2007 generated a return on average assets of 1.11% and a return onaverage equity of 12.92%. These compare with a return on average assets of1.31% and a return on average equity of 15.11% for the first nine months of2006, also on an annualized basis.

 

***Net Interest Income*****–**The principal source of our revenue is netinterest income. Net interest income is the difference between interest incomeon interest-earning assets, such as loans and securities and the interestexpense on liabilities used to fund those assets, such as interest-bearingdeposits and borrowings. Net interest income is impacted by both changes in theamount and composition of interest-earning assets and interest-bearingliabilities as well as market interest rates.

 

Thegrowth in our commercial loan portfolio has increased the level of interestincome generated. Average interest earning assets increased $52.6 million forthe 2007 quarter and $55.4 million for the nine months compared to 2006. Theyield on earning assets averaged 7.67% and 7.66% for the three and nine month2007 periods compared to an average yield on earning assets of 7.39% and  7.21% for the same periods in 2006. Thisincrease was slightly offset by a larger increase in our cost of funds. On anannualized basis, the net interest margin as a percent of average earningassets decreased****16 basis pointsto 3.85% for the quarter ended September 30, 2007 and 14 basis points to 3.91%for the nine months ended September 30, 2007 compared to 4.01% and 4.05% forthe same periods in 2006.

 

Ourcost of funds averaged 4.20% and 4.11% for the quarter and nine month periodsended September 30, 2007 compared to an average cost of funds of 3.72% and3.47% for the same periods in 2006. Deposit costs have accelerated due to there-pricing of maturing certificates of deposit that roll off into newcertificates of deposit at higher interest rates. In addition, we were payinghigher rates on our money market products. Going forward, our cost of funds isexpected to decrease as certificates of deposit re-price and roll off into newcertificates of deposit at lower interest rates.

 

Theincrease in the volume of interest earning assets has resulted in an increasein net interest income of $199,000 and $827,000 for the quarter and nine monthperiods ended September 30, 2007 compared to the same periods a year ago. Ournet interest margin is likely to compress in future quarters as a result of therecent 50 basis point decrease by the Federal Open Market Committee (FOMC), asour loan portfolio is primarily priced off the prime rate and our deposits arepriced off of the London Interbank Offering Rate (LIBOR). The prime ratedecreased 50 basis points in conjunction with the FOMC rate decrease loweringour yield on loans. LIBOR, which is a market driven rate, did not decline inrate as much as the prime rate. Therefore, our deposit costs will not declineas fast as our yield on loans. This will in turn lower our net interest margin.

 

17

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**AVERAGE BALANCE SHEET**

 

Thefollowing tables provide information relating to our average balance sheet andreflect the average yield on assets and average cost of liabilities for theindicated periods. Yields and costs for the periods presented are derived bydividing income or expense by the average monthly balance of assets orliabilities, respectively.

 
| ** **                                                | ** ** | **Quarter Ended September 30,** | ** ** |
|-----------------------------------------------------------|------------|------------------------------------------------|------------|
| ** **                                                | ** ** | **2007**                                       | ** ** | **2006** | ** ** |
| ** **                                                | ** ** | **Average**                                    | ** ** | ** ** | ** ** | **Average** | ** ** | **Average** | ** ** | ** ** | ** ** | **Average** | ** ** |
| **(Dollars in thousands)**                      | ** ** | **Balance**                                    | ** ** | **Interest** | ** ** | **Yield/Cost (5)** | ** ** | **Balance** | ** ** | **Interest** | ** ** | **Yield/Cost (5)** | ** ** |
|                                                      |       |                                           |       |   |   |   |   |   |   |   |   |   |   |
| **ASSETS**                                                | ** ** | ** **                                     | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| Interest earning  assets:                                 |       |                                           |       |   |   |   |   |   |   |   |   |   |   |
| U.S. Treasury  and agencies                               |       | $                                              | 16,583     |   | $ | 146 |   | 3.49 | % | $ | 25,880 |   | $ | 212 |   | 3.25 | % |
| Mortgage-backed  securities                               |       | 11,514                                         |       | 125 |   | 4.31 |   | 14,315 |   | 153 |   | 4.24 |   |
| Equity  securities                                        |       | 2,036                                          |       | 19 |   | 3.70 |   | 1,867 |   | 15 |   | 3.19 |   |
| State and  political subdivision  securities **(1)** |       | 9,405                                          |       | 155 |   | 6.54 |   | 7,261 |   | 119 |   | 6.50 |   |
| Corporate bonds                                           |       | 3,820                                          |       | 65 |   | 6.75 |   | 6,377 |   | 115 |   | 7.15 |   |
| Loans**(2) (3) (4)**                                      |       | 745,028                                        |       | 14,760 |   | 7.86 |   | 677,359 |   | 13,104 |   | 7.68 |   |
| FHLB stock                                                |       | 7,621                                          |       | 126 |   | 6.56 |   | 7,401 |   | 107 |   | 5.74 |   |
| Interest bearing  deposits                                |       | 375                                            |       | 9 |   | 9.53 |   | 3,324 |   | 37 |   | 4.42 |   |
| **Total  interest earning assets**                        |       | 796,382                                        |       | 15,405 |   | 7.67 |   | 743,784 |   | 13,862 |   | 7.39 |   |
| Less: Allowance  for loan losses                          |       | (8,024                                         | )          |   |   |   |   | (7,449 | ) |   |   |   |   |
| Non-interest  earning assets                              |       | 63,557                                         |       |   |   |   |   | 56,326 |   |   |   |   |   |
| **Total  assets**                                         |       | $                                              | 851,915    |   |   |   |   |   | $ | 792,661 |   |   |   |   |   |
|                                                      |       |                                           |       |   |   |   |   |   |   |   |   |   |   |
| **LIABILITIES  AND STOCKHOLDERS’ EQUITY**            | ** ** | ** **                                     | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| Interest bearing  liabilities:                            |       |                                           |       |   |   |   |   |   |   |   |   |   |   |
| Savings accounts                                          |       | $                                              | 92,877     |   | $ | 731 |   | 3.12 | % | $ | 88,454 |   | $ | 650 |   | 2.92 | % |
| NOW and money  market accounts                            |       | 126,193                                        |       | 631 |   | 1.98 |   | 128,322 |   | 534 |   | 1.65 |   |
| Certificates of  deposit and other time deposits          |       | 432,569                                        |       | 5,333 |   | 4.89 |   | 356,313 |   | 3,714 |   | 4.14 |   |
| Short term  borrowings                                    |       | 33,639                                         |       | 465 |   | 5.48 |   | 59,722 |   | 801 |   | 5.32 |   |
| FHLB advances                                             |       | 29,929                                         |       | 345 |   | 4.57 |   | 33,113 |   | 407 |   | 4.88 |   |
| Subordinated  debentures                                  |       | 10,000                                         |       | 167 |   | 6.63 |   | 10,000 |   | 235 |   | 9.32 |   |
| **Total  interest bearing liabilities**                   |       | 725,207                                        |       | 7,672 |   | 4.20 |   | 675,924 |   | 6,341 |   | 3.72 |   |
| Non-interest  bearing liabilities:                        |       |                                           |       |   |   |   |   |   |   |   |   |   |   |
| Non-interest  bearing deposits                            |       | 48,728                                         |       |   |   |   |   | 42,091 |   |   |   |   |   |
| Other  liabilities                                        |       | 5,724                                          |       |   |   |   |   | 5,006 |   |   |   |   |   |
| **Total  liabilities**                                    |       | 779,659                                        |       |   |   |   |   | 723,021 |   |   |   |   |   |
|                                                      |       |                                           |       |   |   |   |   |   |   |   |   |   |   |
| Stockholders’  equity                                |       | 72,256                                         |       |   |   |   |   | 69,640 |   |   |   |   |   |
| **Total  liabilities and stockholders’ equity**      |       | $                                              | 851,915    |   |   |   |   |   | $ | 792,661 |   |   |   |   |   |
|                                                      |       |                                           |       |   |   |   |   |   |   |   |   |   |   |
| **Net  interest income**                                  |       |                                           |       | $ | 7,733 |   |   |   |   |   | $ | 7,521 |   |   |   |
| **Net  interest spread**                                  |       |                                           |       |   |   | 3.47 | % |   |   |   |   | 3.67 | % |
| **Net  interest margin**                                  |       |                                           |       |   |   | 3.85 | % |   |   |   |   | 4.01 | % |

 

----

**(1)**Taxableequivalent yields are calculated assuming a 34% federal income tax rate.

**(2)**Includesloan fees, immaterial in amount, in both interest income and the calculation ofyield on loans.

**(3)**Calculationsinclude non-accruing loans in the average loan amounts outstanding.

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

**(5)**Annualized

 

18

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| ** **                                           | ** ** | **Nine Months Ended September 30,** | ** ** |
|------------------------------------------------------|------------|---------------------------------------------------------|------------|
| ** **                                           | ** ** | **2007**                                                | ** ** | **2006** | ** ** |
| ** **                                           | ** ** | **Average**                                             | ** ** | ** ** | ** ** | **Average** | ** ** | **Average** | ** ** | ** ** | ** ** | **Average** | ** ** |
| **(Dollars in thousands)**                 | ** ** | **Balance**                                             | ** ** | **Interest** | ** ** | **Yield/Cost (5)** | ** ** | **Balance** | ** ** | **Interest** | ** ** | **Yield/Cost (5)** | ** ** |
|                                                 |       |                                                    |       |   |   |   |   |   |   |   |   |   |   |
| **ASSETS**                                           | ** ** | ** **                                              | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| Interest earning  assets:                            |       |                                                    |       |   |   |   |   |   |   |   |   |   |   |
| U.S. Treasury  and agencies                          |       | $                                                       | 19,252     |   | $ | 519 |   | 3.60 | % | $ | 29,334 |   | $ | 687 |   | 3.13 | % |
| Mortgage-backed  securities                          |       | 12,335                                                  |       | 398 |   | 4.31 |   | 15,211 |   | 485 |   | 4.26 |   |
| Equity  securities                                   |       | 2,081                                                   |       | 56 |   | 3.60 |   | 1,935 |   | 52 |   | 3.59 |   |
| State and  political subdivision securities **(1)**  |       | 10,035                                                  |       | 480 |   | 6.40 |   | 6,546 |   | 316 |   | 6.45 |   |
| Corporate bonds                                      |       | 4,721                                                   |       | 250 |   | 7.08 |   | 5,899 |   | 304 |   | 6.89 |   |
| Loans**(2) (3) (4)**                                 |       | 731,276                                                 |       | 43,065 |   | 7.87 |   | 658,777 |   | 37,106 |   | 7.53 |   |
| FHLB stock                                           |       | 7,621                                                   |       | 368 |   | 6.46 |   | 7,298 |   | 314 |   | 5.75 |   |
| Interest bearing  deposits                           |       | 1,043                                                   |       | 47 |   | 6.03 |   | 7,981 |   | 268 |   | 4.49 |   |
| **Total  interest earning assets**                   |       | 788,364                                                 |       | 45,183 |   | 7.66 |   | 732,981 |   | 39,532 |   | 7.21 |   |
| Less: Allowance  for loan losses                     |       | (7,828                                                  | )          |   |   |   |   | (7,401 | ) |   |   |   |   |
| Non-interest  earning assets                         |       | 61,453                                                  |       |   |   |   |   | 56,820 |   |   |   |   |   |
| **Total  assets**                                    |       | $                                                       | 841,989    |   |   |   |   |   | $ | 782,400 |   |   |   |   |   |
|                                                 |       |                                                    |       |   |   |   |   |   |   |   |   |   |   |
| **LIABILITIES  AND STOCKHOLDERS’ EQUITY**       | ** ** | ** **                                              | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| Interest bearing  liabilities:                       |       |                                                    |       |   |   |   |   |   |   |   |   |   |   |
| Savings accounts                                     |       | $                                                       | 98,894     |   | $ | 2,417 |   | 3.27 | % | $ | 93,932 |   | $ | 1,932 |   | 2.75 | % |
| NOW and money  market accounts                       |       | 121,932                                                 |       | 1,599 |   | 1.75 |   | 130,543 |   | 1,521 |   | 1.56 |   |
| Certificates of  deposit and other time deposits     |       | 422,608                                                 |       | 15,066 |   | 4.77 |   | 346,919 |   | 10,050 |   | 3.87 |   |
| Short term  borrowings                               |       | 35,303                                                  |       | 1,452 |   | 5.50 |   | 22,485 |   | 889 |   | 5.29 |   |
| FHLB advances                                        |       | 29,866                                                  |       | 1,022 |   | 4.58 |   | 63,258 |   | 2,280 |   | 4.82 |   |
| Subordinated  debentures                             |       | 10,000                                                  |       | 549 |   | 7.34 |   | 10,000 |   | 665 |   | 8.89 |   |
| **Total  interest bearing liabilities**              |       | 718,603                                                 |       | 22,105 |   | 4.11 |   | 667,137 |   | 17,337 |   | 3.47 |   |
| Non-interest bearing  liabilities:                   |       |                                                    |       |   |   |   |   |   |   |   |   |   |   |
| Non-interest  bearing deposits                       |       | 45,603                                                  |       |   |   |   |   | 42,802 |   |   |   |   |   |
| Other  liabilities                                   |       | 5,452                                                   |       |   |   |   |   | 4,648 |   |   |   |   |   |
| **Total  liabilities**                               |       | 769,658                                                 |       |   |   |   |   | 714,587 |   |   |   |   |   |
|                                                 |       |                                                    |       |   |   |   |   |   |   |   |   |   |   |
| Stockholders’  equity                           |       | 72,331                                                  |       |   |   |   |   | 67,813 |   |   |   |   |   |
| **Total  liabilities and stockholders’ equity** |       | $                                                       | 841,989    |   |   |   |   |   | $ | 782,400 |   |   |   |   |   |
|                                                 |       |                                                    |       |   |   |   |   |   |   |   |   |   |   |
| **Net  interest income**                             |       |                                                    |       | $ | 23,078 |   |   |   |   |   | $ | 22,195 |   |   |   |
| **Net  interest spread**                             |       |                                                    |       |   |   | 3.55 | % |   |   |   |   | 3.74 | % |
| **Net  interest margin**                             |       |                                                    |       |   |   | 3.91 | % |   |   |   |   | 4.05 | % |

 

----

**(1)**Taxableequivalent yields are calculated assuming a 34% federal income tax rate.

**(2)**Includesloan fees, immaterial in amount, in both interest income and the calculation ofyield on loans.

**(3)**Calculationsinclude non-accruing loans in the average loan amounts outstanding.

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

**(5)**Annualized

 

19

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**RATE/VOLUME ANALYSIS**

 

Thetable below provides information regarding changes in interest income andinterest expense for the indicated periods. For each category ofinterest-earning assets and interest-bearing liabilities, information isprovided on changes attributable to (1) changes in rate (changes in ratemultiplied by old volume); (2) changes in volume (change in volume multipliedby old rate); and (3) changes in rate-volume (change in rate multiplied bychange in volume). Changes in rate-volume are proportionately allocated betweenrate and volume variance.

 
| ** **                                       | ** ** | **Three Months Ended**    | ** ** | **Nine Months Ended**     | ** ** |
|--------------------------------------------------|------------|-------------------------------------|------------|-------------------------------------|------------|
| ** **                                       | ** ** | **September 30,**              | ** ** | **September 30,**              | ** ** |
| ** **                                       | ** ** | **2007 vs. 2006**         | ** ** | **2007 vs. 2006**         | ** ** |
| ** **                                       | ** ** | **Increase (decrease)**        | ** ** | **Increase (decrease)**        | ** ** |
| ** **                                       | ** ** | **Due to change in** | ** ** | **Due to change in** | ** ** |
| ** **                                       | ** ** | ** **                          | ** ** | ** **                          | ** ** | **Net** | ** ** | ** ** | ** ** | ** ** | ** ** | **Net** | ** ** |
| **(Dollars in thousands)**             | ** ** | **Rate**                            | ** ** | **Volume**                          | ** ** | **Change** | ** ** | **Rate** | ** ** | **Volume** | ** ** | **Change** | ** ** |
| **Interest  income:**                            | ** ** | ** **                          | ** ** | ** **                          | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| U.S. Treasury  and agencies                      |       | $                                   | 15         |                                | $          | (81 | ) | $ | (66 | ) | $ | 93 |   | $ | (261 | ) | $ | (168 | ) |
| Mortgage-backed  securities                      |       | 2                                   |       | (30                                 | )          | (28 | ) | 6 |   | (93 | ) | (87 | ) |
| Equity  securities                               |       | 2                                   |       | 2                                   |       | 4 |   | — |   | 4 |   | 4 |   |
| State and  political subdivision securities      |       | 1                                   |       | 35                                  |       | 36 |   | (3 | ) | 167 |   | 164 |   |
| Corporate bonds                                  |       | (50                                 | )          | —                              |       | (50 | ) | (54 | ) | — |   | (54 | ) |
| Loans                                            |       | 322                                 |       | 1,334                               |       | 1,656 |   | 1,744 |   | 4,215 |   | 5,959 |   |
| FHLB stock                                       |       | 16                                  |       | 3                                   |       | 19 |   | 40 |   | 14 |   | 54 |   |
| Interest bearing  deposits                       |       | 21                                  |       | (49                                 | )          | (28 | ) | 69 |   | (290 | ) | (221 | ) |
|                                             |       |                                |       |                                |       |   |   |   |   |   |   |   |   |
| **Total  interest earning assets**               |       | 329                                 |       | 1,214                               |       | 1,543 |   | 1,895 |   | 3,756 |   | 5,651 |   |
|                                             |       |                                |       |                                |       |   |   |   |   |   |   |   |   |
| **Interest  expense:**                           | ** ** | ** **                          | ** ** | ** **                          | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| Savings accounts                                 |       | 47                                  |       | 34                                  |       | 81 |   | 379 |   | 106 |   | 485 |   |
| NOW and money  market accounts                   |       | 106                                 |       | (9                                  | )          | 97 |   | 183 |   | (105 | ) | 78 |   |
| Certificates of  deposit and other time deposits |       | 746                                 |       | 873                                 |       | 1,619 |   | 2,578 |   | 2,438 |   | 5,016 |   |
| Short term  borrowings                           |       | (336                                | )          | —                              |       | (336 | ) | 563 |   | — |   | 563 |   |
| FHLB advances                                    |       | (24                                 | )          | (38                                 | )          | (62 | ) | (110 | ) | (1,148 | ) | (1,258 | ) |
| Subordinated  debentures                         |       | (68                                 | )          | —                              |       | (68 | ) | (116 | ) | — |   | (116 | ) |
|                                             |       |                                |       |                                |       |   |   |   |   |   |   |   |   |
| **Total  interest bearing liabilities**          |       | 471                                 |       | 860                                 |       | 1,331 |   | 3,477 |   | 1,291 |   | 4,768 |   |
|                                             |       |                                |       |                                |       |   |   |   |   |   |   |   |   |
| **Net  change in net interest income**           |       | $                                   | (142       | )                                   | $          | 354 |   | $ | 212 |   | $ | (1,582 | ) | $ | 2,465 |   | $ | 883 |   |

 

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

 

Thefollowing tables provide a comparison of the components of non-interest incomeand expenses for the periods ended September 30, 2007 and 2006. The tables showthe dollar and percentage change from 2006 to 2007. Below each table is adiscussion of significant changes and trends.

 
| ** **                                 | ** ** | **Three Months Ended  September 30,** | ** ** |
|--------------------------------------------|------------|------------------------------------------------------|------------|
| **(Dollars in thousands)**       | ** ** | **2007**                                             | ** ** | **2006** | ** ** | **Change** | ** ** | **%** | ** ** |
| **Non-interest  income**                   | ** ** | ** **                                           | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| Customer service  fees on deposit accounts |       | $                                                    | 1,511      |   | $ | 1,481 |   | $ | 30 |   | 2.0 | % |
| Gain on sale of  mortgage loans            |       | 144                                                  |       | 204 |   | (60 | ) | -29.4 | % |
| Brokerage  commissions                     |       | 106                                                  |       | 79 |   | 27 |   | 34.2 | % |
| Other income                               |       | 444                                                  |       | 269 |   | 175 |   | 65.1 | % |
|                                       |       | $                                                    | 2,205      |   | $ | 2,033 |   | $ | 172 |   | 8.5 | % |

 

20

----

 
| ** **                                        | ** ** | **Nine Months Ended  September 30,** | ** ** |
|---------------------------------------------------|------------|--------------------------------------|------------|
| **(Dollars in thousands)**              | ** ** | **2007**                             | ** ** | **2006** | ** ** | **Change** | ** ** | **%** | ** ** |
| **Non-interest  income**                          | ** ** | ** **                           | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| Customer service  fees on deposit accounts        |       | $                                    | 4,274      |   | $ | 4,108 |   | $ | 166 |   | 4.0 | % |
| Gain on sale of  mortgage loans                   |       | 435                                  |       | 608 |   | (173 | ) | -28.5 | % |
| Gain on sale of  real estate held for development |       | 227                                  |       | — |   | 227 |   | 100.0 | % |
| Brokerage  commissions                            |       | 308                                  |       | 250 |   | 58 |   | 23.2 | % |
| Other income                                      |       | 945                                  |       | 856 |   | 89 |   | 10.4 | % |
|                                              |       | $                                    | 6,189      |   | $ | 5,822 |   | $ | 367 |   | 6.3 | % |

 

Growthin customer service fees on deposit accounts, our largest component ofnon-interest income, is primarily due to growth in customer deposits, overdraftfee income on retail checking accounts and the sale of fee-based products for2007. We continue to increase our customer base through cross-sellingopportunities and marketing initiatives and promotions. In addition, wecontinue to emphasize growing our checking account base to better enhance ourprofitability and franchise value.

 

We originate qualified VA, KHC, RHC and conventionalsecondary market loans and sell them into the secondary market with servicingrights released. For the quarter and the first nine months of 2007, gain onsale of mortgage loans decreased due to a decrease in the volume of loansclosed.

 

Through our subsidiary, First Federal Office Park, we hold commercial lots adjacent to our home office on Ring Road in Elizabethtown, that are available for sale. During the March 2007 quarter we recorded $227,000 in gains from a lot sale. Currently, one of the original nine lots held for sale remain unsold.

 

Included in other income for the three and nine month periods ended September 30, 2007 was $104,000 from an easement settlement related to our Shepherdsville banking center.

 
| ** **                              | ** ** | **Three Months Ended  September 30,** | ** ** |
|-----------------------------------------|------------|---------------------------------------|------------|
| **(Dollars in thousands)**    | ** ** | **2007**                              | ** ** | **2006** | ** ** | **Change** | ** ** | **%** | ** ** |
| **Non-interest  expenses**              | ** ** | ** **                            | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| Employee  compensation and benefits     |       | $                                     | 3,136      |   | $ | 2,968 |   | $ | 168 |   | 5.7 | % |
| Office occupancy  expense and equipment |       | 604                                   |       | 523 |   | 81 |   | 15.5 | % |
| Marketing and  advertising              |       | 228                                   |       | 209 |   | 19 |   | 9.1 | % |
| Outside services  and data processing   |       | 638                                   |       | 650 |   | (12 | ) | -1.8 | % |
| Bank franchise  tax                     |       | 234                                   |       | 224 |   | 10 |   | 4.5 | % |
| Other expense                           |       | 1,166                                 |       | 863 |   | 303 |   | 35.1 | % |
|                                    |       | $                                     | 6,006      |   | $ | 5,437 |   | $ | 569 |   | 10.5 | % |

 
| ** **                                                | ** ** | **Nine Months Ended  September 30,** | ** ** |
|-----------------------------------------------------------|------------|-----------------------------------------------------|------------|
| **(Dollars in thousands)**                      | ** ** | **2007**                                            | ** ** | **2006** | ** ** | **Change** | ** ** | **%** | ** ** |
| **Non-interest  expenses**                                | ** ** | ** **                                          | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| Employee  compensation and benefits                       |       | $                                                   | 9,365      |   | $ | 8,763 |   | $ | 602 |   | 6.9 | % |
| Office occupancy  expense and equipment                   |       | 1,766                                               |       | 1,589 |   | 177 |   | 11.1 | % |
| Marketing and  advertising                                |       | 677                                                 |       | 628 |   | 49 |   | 7.8 | % |
| Outside services  and data processing                     |       | 1,974                                               |       | 1,907 |   | 67 |   | 3.5 | % |
| Bank franchise  tax                                       |       | 699                                                 |       | 667 |   | 32 |   | 4.8 | % |
| Write off of  issuance cost of Trust Preferred Securities |       | 229                                                 |       | — |   | 229 |   | 100.0 | % |
| Other expense                                             |       | 3,112                                               |       | 2,607 |   | 505 |   | 19.4 | % |
|                                                      |       | $                                                   | 17,822     |   | $ | 16,161 |   | $ | 1,661 |   | 10.3 | % |

 

21

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Employeecompensation and benefits is the largest component of non-interest expense. Employeecompensation increased for the quarter and nine months ended September 30, 2007.Three commercial lending associates and twenty retail associates have beenadded with our expansion efforts. These associates were hired for a commercialprivate banking center which opened in April 2007 and a new Louisville retailbranch facility which opened in June 2007. We look for a continued increase inemployee compensation and benefits expense in line with recent trends, as weprogress with our retail expansion and market efforts.

 

Officeoccupancy expense and equipment as well as marketing and advertising increaseddue to additional operating expenses related to our expansion efforts. Weanticipate the increased level of non-interest expense to continue in 2007 withcontinued retail expansion.

 

Includedin other expense for the September 2007 nine month period is $229,000 inunamortized trust preferred issuance cost from the redemption of all of our$10.0 million issuance of cumulative trust preferred securities. Thesesecurities paid distributions at a quarterly adjustable rate of LIBOR plus 360basis points (8.97% on March 26, 2007). We re-issued new cumulative trustpreferred securities at a 10 year fixed rate of 6.69%.

 

In2007 we created a new debit rewards program intended to increase debit cardactivity. Expenses related to this program were $118,000 for 2007. Also during2007, interchange expense increased $192,000 due to the switch to real-timedebit card processing, which is more expensive per item than the batchprocessing method we used during 2006. Other expense also increased for thethree and nine month periods ended September 30, 2007 due to $127,000 recordedfor back taxes paid on a repossessed real estate property.

 

Ourefficiency ratio was 61% for the nine months ended September 30, 2007 comparedto 58% for the 2006 period.

 

**ANALYSIS OF FINANCIAL CONDITION**

 

Total assets at September30, 2007 increased to $879.2 million compared to $822.8 million at December 31,2006, an increase of $56.4 million. The increase was primarily driven by anincrease in loans of $63.1 million. The growth in loans was funded withdeposits, which increased $55.6 million for the period as well as a $9.2million decrease in investment securities.

 

##### **Loans**

##### ** **

Net loans increased $63.1 million to $761.1million at September 30, 2007 compared to $698.0 million at December 31, 2006. Ourcommercial, commercial real estate and real estate construction portfoliosincreased $67.4 million to $542.4 million at September 30, 2007. For the 2007period, these loans comprised 70% of the total loan portfolio compared to 66%at September 30, 2006. Consumer, home equity and indirect consumer remainedrelatively constant for the 2007 period. Offsetting this growth was a $4.0million decrease in the residential mortgage loan portfolio to $133.4 millionat September 30, 2007, compared to $137.3 million****at December 31, 2006.

 
| ** **                           | ** ** | **September 30,** | ** ** | **December 31,** | ** ** |
|--------------------------------------|------------|------------------------|------------|-----------------------|------------|
| **(Dollars in thousands)** | ** ** | **2007**               | ** ** | **2006**              | ** ** |
|                                 |       |                   |       |                  |       |
| Commercial                           |       | $                      | 51,602     |                  | $          | 40,902 |   |
| Real estate  commercial              |       | 463,572                |       | 410,146               |       |
| Real estate  construction            |       | 27,207                 |       | 23,953                |       |
| Residential  mortgage                |       | 133,368                |       | 137,334               |       |
| Consumer and  home equity            |       | 64,321                 |       | 62,805                |       |
| Indirect  consumer                   |       | 28,999                 |       | 30,857                |       |
| Loans held for  sale                 |       | 1,407                  |       | 673                   |       |
|                                 |       | 770,476                |       | 706,670               |       |
| Less:                                |       |                   |       |                  |       |
| Net deferred  loan origination fees  |       | (853                   | )          | (960                  | )          |
| Allowance for  loan losses           |       | (8,491                 | )          | (7,684                | )          |
|                                 |       | (9,344                 | )          | (8,644                | )          |
|                                 |       |                   |       |                  |       |
| Loans                                |       | $                      | 761,132    |                  | $          | 698,026 |   |

 

22

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**Allowance and Provision for Loan Losses**

 

Our financial performance depends on the quality andquantity of the loans we originate and management’s ability to assess thedegree of risk in existing loans when it determines the allowance for loanlosses. An increase in loan charge-offs or non-performing loans or aninadequate allowance for loan losses could reduce net interest income, netincome and capital and limit the range of products and services we can offer.

 

The Allowance for Loan Loss Review Committeeevaluates the allowance for loan losses quarterly to maintain a levelsufficient to absorb incurred credit losses existing in the loan portfolio. Periodicprovisions to the allowance are made as needed. The allowance is determinedbased on the application of loss estimates to graded loans by categories. Theamount of the provision for loan losses necessary to maintain an adequateallowance is also based upon an analysis of such factors as changes in lendingpolicies and procedures; underwriting standards; collection; charge-off andrecovery history; changes in national and local economic business conditionsand developments; changes in the characteristics of the portfolio; ability anddepth of lending management and staff; changes in the trend of the volume andseverity of past due, non-accrual and classified loans; troubled debt restructuringand other loan modifications; and results of regulatory examinations.

 

Thefollowing table provides an analysis of loan loss experience for the periodsindicated.

 
| ** **                                                                | ** ** | **Three Months Ended** | ** ** | **Nine Months Ended** | ** ** |
|---------------------------------------------------------------------------|------------|----------------------------------|------------|---------------------------------|------------|
| ** **                                                                | ** ** | **September 30,**           | ** ** | **September 30,**          | ** ** |
| **(Dollars in thousands)**                                      | ** ** | **2007**                         | ** ** | **2006**                        | ** ** | **2007** | ** ** | **2006** | ** ** |
|                                                                      |       |                             |       |                            |       |   |   |   |   |
| **Balance  at beginning of period**                                       |       | $                                | 7,822      |                            | $          | 7,408 |   | $ | 7,684 |   | $ | 7,377 |   |
| Loans  charged-off:                                                       |       |                             |       |                            |       |   |   |   |   |
| Real estate  mortgage                                                     |       | 18                               |       | —                          |       | 18 |   | 3 |   |
| Consumer                                                                  |       | 111                              |       | 125                             |       | 295 |   | 322 |   |
| Commercial                                                                |       | —                           |       | 32                              |       | 17 |   | 118 |   |
| Total  charge-offs                                                        |       | 129                              |       | 157                             |       | 330 |   | 443 |   |
| Recoveries:                                                               |       |                             |       |                            |       |   |   |   |   |
| Real estate  mortgage                                                     |       | —                           |       | —                          |       | 9 |   | 7 |   |
| Consumer                                                                  |       | 55                               |       | 76                              |       | 174 |   | 203 |   |
| Commercial                                                                |       | 3                                |       | 1                               |       | 6 |   | 87 |   |
| Total recoveries                                                          |       | 58                               |       | 77                              |       | 189 |   | 297 |   |
|                                                                      |       |                             |       |                            |       |   |   |   |   |
| **Net  loans charged-off**                                                |       | 71                               |       | 80                              |       | 141 |   | 146 |   |
|                                                                      |       |                             |       |                            |       |   |   |   |   |
| Provision for  loan losses                                                |       | 740                              |       | 249                             |       | 948 |   | 346 |   |
|                                                                      |       |                             |       |                            |       |   |   |   |   |
| **Balance  at end of period**                                             |       | $                                | 8,491      |                            | $          | 7,577 |   | $ | 8,491 |   | $ | 7,577 |   |
|                                                                      |       |                             |       |                            |       |   |   |   |   |
| Allowance for  loan losses to total loans (excluding loans held for sale) |       |                             |       |                            |       | 1.11 | % | 1.10 | % |
| Annualized net  charge-offs to average loans outstanding                  |       |                             |       |                            |       | 0.02 | % | 0.03 | % |
| Allowance for  loan losses to total non-performing loans                  |       |                             |       |                            |       | 111 | % | 141 | % |

 

Theprovision for loan losses increased $491,000 to $740,000 for the quarter endedSeptember 30, 2007, and increased $602,000 to $948,000 for the nine monthsended September 30, 2007 compared to the same periods in 2006. The allowancefor loan losses increased $914,000 to $8.5 million from September 30, 2006 toSeptember 30, 2007. The increase in the allowance was related to a $63.2million increase in net loans for the year, as well as provision recorded, inconjunction with a $1.3 million increase in classified loans for the 2007period. For the three and nine months ended September 30, 2007, $387,000 inprovision was directly related to assets classified during the period. In addition, we recorded a smaller provision for 2006 due to the improvedperformance of certain credit relationships which resulted in a reduction inthe allowance allocated to those loans.

 

Federalregulations require banks to classify their own assets on a regular basis. Theregulations provide for three categories of classified loans — substandard,doubtful and loss. A bank must establish general allowances for loan losses forany assets classified as substandard or doubtful. If an asset or portionthereof is classified as

 

23

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loss,the bank must either establish specified allowances for loan losses in theamount of 100% of the portion of the asset classified loss, or charge off theamount of the loss.

 

Thefollowing table provides information with respect to classified loans for theperiods indicated:

 
| ** **                           | ** ** | **September 30,** | ** ** |
|--------------------------------------|------------|------------------------|------------|
| **(Dollars in thousands)** | ** ** | **2007**               | ** ** | **2006** | ** ** |
| **Classified  Loans**                | ** ** | ** **             | ** ** | ** ** | ** ** |
| Substandard                          |       | $                      | 14,220     |   | $ | 12,144 |   |
| Doubtful                             |       | 65                     |       | 911 |   |
| Loss                                 |       | 68                     |       | 28 |   |
| Total Classified                     |       | $                      | 14,353     |   | $ | 13,083 |   |

 

The$2.1 million increase in substandard assets for 2007 was primarily the result****of the downgrading of loans with fiveborrowers in the amount of a $2.8 million, $1.7 million, $1.1 million, $957,000and $641,000,****respectively. Offsettingthis increase were upgrades of three classified loans having balances of $2.0million, $1.1 million and $458,000.

 

Althoughwe may allocate a portion of the allowance to specific loans or loancategories, the entire allowance is available for active charge-offs. Wedevelop our allowance estimates based on actual loss experience adjusted forcurrent economic conditions. Allowance estimates represent a prudentmeasurement of the risk in the loan portfolio, which we apply to individualloans based on loan type.

 

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

##### ** **

Non-performing assetsconsist of certain restructured loans for which interest rate or other termshave been renegotiated, loans on which interest is no longer accrued, realestate acquired through foreclosure and repossessed assets. We do not have anyloans greater than 90 days past due still on accrual. Loans, including impairedloans under SFAS 114, are placed on non-accrual status when they become pastdue 90 days or more as to principal or interest, unless they are adequatelysecured and in the process of collection. Loans are considered impaired when weno longer anticipate full principal or interest payments in accordance with thecontractual loan terms. We carry impaired loans at the present value ofexpected future cash flows discounted at the loan’s effective interest rate orat the fair value of the collateral if the loan is secured by collateral.

 

Wereview our loans on a regular basis and implement normal collection procedureswhen a borrower fails to make a required payment on a loan. If the delinquencyon a mortgage loan exceeds 90 days and is not cured through normal collectionprocedures or an acceptable arrangement is not worked out with the borrower, weinstitute measures to remedy the default, including commencing a foreclosureaction. We generally charge off consumer loans when management deems a loanuncollectible and any available collateral has been liquidated. We handlecommercial business and real estate loan delinquencies on an individual basiswith the advice of legal counsel.

 

Werecognize interest income on loans on the accrual basis except for those loansin a non-accrual of income status. We discontinue accruing interest on impairedloans when management believes, after consideration of economic and businessconditions and collection efforts that the borrowers’ financial condition issuch that collection of interest is doubtful, typically after the loan becomes90 days delinquent. When we discontinue interest accrual, we reverse existingaccrued interest and subsequently recognize interest income only to the extentwe receive cash payments.

 

We classify real estate acquired as a result of foreclosureor by deed in lieu of foreclosure as real estate owned until such time as it issold. We classify new and used automobile, motorcycle and all terrain vehiclesacquired 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 unpaidprincipal balance of the related loan or its fair market value. We charge anywrite-down of the property at the time of acquisition to the allowance for loanlosses. Subsequent gains and losses are included in non-interest income andnon-interest expense.  Real estateacquired through foreclosure increased $782,000 to $1.7 million at September30, 2007 compared to $918,000 at December 31, 2006.  The increase was the result of a commercialreal estate relationship totaling $1.5 million.

 

24

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Thefollowing table provides information with respect to non-performing assets forthe periods indicated.

 
| ** **                                                                   | ** ** | **September 30,** | ** ** | **December 31,** | ** ** |
|------------------------------------------------------------------------------|------------|------------------------|------------|-----------------------|------------|
| **(Dollar in thousands)**                                          | ** ** | **2007**               | ** ** | **2006**              | ** ** |
|                                                                         |       |                   |       |                  |       |
| Restructured                                                                 |       | $                      | 2,375      |                  | $          | 2,470 |   |
| Past due 90 days  still on accrual                                           |       | —                 |       | —                |       |
| Loans on  non-accrual status                                                 |       | 5,281                  |       | 2,368                 |       |
|                                                                         |       |                   |       |                  |       |
| Total  non-performing loans                                                  |       | 7,656                  |       | 4,838                 |       |
| Real estate  acquired through foreclosure                                    |       | 1,699                  |       | 918                   |       |
| Other  repossessed assets                                                    |       | 63                     |       | 82                    |       |
| Total  non-performing assets                                                 |       | $                      | 9,418      |                  | $          | 5,838 |   |
|                                                                         |       |                   |       |                  |       |
| Interest income  that would have been earned on non-performing loans         |       | $                      | 603        |                  | $          | 368 |   |
| Interest income  recognized on non-performing loans                          |       | 200                    |       | 227                   |       |
| Ratios:  Non-performing loans to total loans (excluding loans held for sale) |       | 1.00                   | %          | 0.69                  | %          |
| Non-performing  assets to total loans (excluding loans held for sale)        |       | 1.23                   | %          | 0.83                  | %          |

 

Non-performingloans increased $2.8 million to $7.7 million at September 30, 2007 compared to$4.8 million at December 31, 2006. The increase was related to an increase innon-accrual loans of $2.9 million. This was primarily the result of twocommercial real estate credit relationships totaling $1.1 million and $1.5million. These credit relationships arewell secured and no loss is expected.

 

Non-performing assets for the 2007 periodinclude $2.4 million in restructured commercial, residential mortgage andconsumer loans. The restructured loans primarily consist of two creditrelationships with balances of $2.0 million, and $199,000. The terms of theseloans have been renegotiated to reduce the rate of interest and extend theterm, thus reducing the amount of cash flow required from the borrower toservice the loans. The borrowers are currently meeting the terms of therestructured loans.

 

**InvestmentSecurities**

 

Intereston securities provides us our largest source of interest income after intereston loans, constituting 4.3% of the total interest income for the nine monthsended September 30, 2007. The securities portfolio serves as a source ofliquidity and earnings and contributes to the management of interest rate risk.We have the authority to invest in various types of liquid assets, includingshort-term United States Treasury obligations and securities of various federalagencies, 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 incertain commercial paper and corporate debt securities. We are also authorizedto invest in mutual funds and stocks whose assets conform to the investmentsthat we are authorized to make directly. The available-for-sale andheld-to-maturity investment portfolios decreased by $9.2 million during the2007 period as securities were called for redemption in accordance with theirterms due to increasing rates. During the year we made purchases of investmentsin state and municipal obligations. The state and municipal obligations have anaverage life of 10 years. We purchased these securities to enhance earnings.

 

We review unrealized lossesat least on a quarterly basis to determine whether the losses are other thantemporary and more frequently when economic or market concerns warrant suchevaluation. We consider the length of time and the extent to which the fairvalue has been less than cost, the financial condition and near-term prospectsof the issuer, and our intent and ability to retain the investment in theissuer for a period of time sufficient to allow for any anticipated recovery infair value. In analyzing an issuer’s financial condition, we may considerwhether the securities are issued by the federal government or its agencies,whether downgrades by bond rating agencies have occurred, and the results ofreviews of the issuer’s financial condition. The unrealized losses on ourinvestments in U.S. Treasury and agencies, mortgage-backed securities andobligations of state and political subdivisions are due to interest rateincreases. Because the decline in market value is attributable to changes ininterest rates and not credit quality, and because we have the ability andintent to hold these investments until recovery of fair value, which may bematurity, we do not consider these investments to be other than temporarilyimpaired at September 30, 2007.

 

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###### **Deposits**

###### ** **

Werely primarily on customer service and long-standing relationships with customersto attract and retain deposits. Market interest rates and rates on depositproducts offered by competing financial institutions can significantly affectour ability to attract and retain deposits. In conjunction with our initiativesto expand and enhance our retail branch network, we emphasize growing ourcustomer checking account base to better enhance profitability and franchisevalue. Total deposits increased $55.6 million year to date compared to December31, 2006. This was primarily the result of an increase in certificates ofdeposit and non-interest bearing deposits. Retail and commercial depositsincreased $45.5 million and we added $10.1 million in public funds and brokeredcertificates of deposit.

 

Thefollowing table breaks down our deposits.

 
| ** **               | ** ** | **September 30,**  | ** ** | **December 31,** | ** ** |
|--------------------------|------------|-------------------------|------------|-----------------------|------------|
| ** **               | ** ** | **2007**                | ** ** | **2006**              | ** ** |
| ** **               | ** ** | **(In Thousands)** | ** ** |
|                     |       |                    |       |                  |       |
| Non-interest  bearing    |       | $                       | 50,685     |                  | $          | 40,349 |   |
| NOW demand               |       | 74,387                  |       | 73,552                |       |
| Savings                  |       | 84,552                  |       | 84,994                |       |
| Money market             |       | 53,379                  |       | 53,917                |       |
| Certificates of  deposit |       | 433,601                 |       | 388,225               |       |
|                     |       | $                       | 696,604    |                  | $          | 641,037 |   |

 

**Short-Term Borrowings**

 

Short-term borrowings consist of federal fundspurchased and securities sold under agreements to repurchase. We had short-termborrowings of $68.2 million and $68.5 million from the FHLB of Cincinnati atSeptember 30, 2007 and December 31, 2006. These borrowings averaged a rate of5.50% and 5.31% for the respective periods.

 

**Advances from Federal Home Loan Bank**

 

Deposits are the primary source of funds for our lending and investmentactivities and for our general business purposes. We can also use advances(borrowings) from the Federal Home Loan Bank (FHLB) of Cincinnati to compensatefor reductions in deposits or deposit inflows at less than projected levels. Advancesfrom the FHLB are secured by our stock in the FHLB, certain securities, certaincommercial real estate loans and substantially all of our first residentialmortgage loans. At September 30, 2007 we had $28.1 million in advancesoutstanding from the FHLB.

 

**Subordinated Debentures**

 

We have $10.0 million in outstanding subordinateddebentures. A trust we formed completed a private placement of 10,000 shares ofcumulative trust preferred securities with a liquidation preference of $1,000per security for a total outstanding of $10.0 million. The proceeds of theoffering were loaned to us in exchange for junior subordinated deferrableinterest debentures.Inaccordance with FASB Interpretation 46, the trust is not consolidated with ourfinancial statements but rather the subordinated debentures are shown as aliability. These securities paid distributions of interest. On March 26, 2007we called the $10.0 million in subordinated debentures adjustable quarterly atLIBOR plus 360 basis points (8.97% on March 26, 2007) and we issued new 30 year cumulative trustpreferred securities at a 10 year fixed rate of 6.69% adjusting quarterlythereafter at LIBOR plus 160 basis points. Refinancing at a lower interest ratewill reduce interest expense approximately $226,000 per year based on currentrates. The subordinateddebentures are considered as Tier I capital for the Corporation under currentregulatory guidelines.

 

26

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##### **LIQUIDITY**

##### ** **

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

 

Our sources of funds include the sale of securities in the available-for-sale portion of the investment portfolio, principal pay-downs on loans and mortgage-backed securities, proceeds realized from loans held for sale, brokered deposits and other wholesale funding. We also secured federal funds borrowing lines from two of our correspondent banks of $15 million each. Our banking centers also provide access to retail deposit markets. If large certificate depositors shift to our competitors or other markets in response to interest rate changes, we have the ability to replenish those deposits through alternative funding sources. Traditionally, we have also borrowed from the FHLB to supplement our funding requirements. At September 30, 2007, we had an unused approved line of credit in the amount of $90.5 million and sufficient collateral available to borrow, approximately, an additional $60.0 million in advances from the FHLB. We believe our sources of liquidity are adequate to meet expected cash needs for the foreseeable future.

 

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

 

The primary source of funding for the Corporation has been dividends and returns of investment from the Bank. Kentucky banking laws limit the amount of dividends that may be paid to the Corporation by the Bank without prior approval of the KOFI. Under these laws, the amount of dividends that may be paid in any calendar year is limited to current year’s net income, as defined in the laws, combined with the retained net income of the preceding two years, less any dividends declared during those periods. At September 30 2007, the Bank had approximately $19.9 million of retained earnings that could be used to pay dividends without prior regulatory approval. Because of these limitations, consolidated cash flows as presented in the consolidated statements of cash flows may not represent cash immediately available to the Corporation. During the nine month period ended September 30, 2007, the Bank declared and paid dividends of $7.7 million to the Corporation.

 

##### **CAPITAL**

##### ** **

Stockholders’ equity increased $211,000 for the period ended September30, 2007 compared to December 31, 2006. The increase in capital was primarilydue to the net income earned during the period. This increase was offset by therepurchase of our own common stock and cash dividends declared during theperiod. Average stockholders’ equity to average assets ratio decreased to 8.59%for the nine month period ended September 30, 2007 compared to 8.67% for 2006.

 

Duringthe first nine months of 2007, we purchased 152,041 shares of our own commonstock for $4.4 million. The repurchase program authorizes the repurchase of398,601 shares from time-to-time if market conditions are deemed favorable. Therepurchase program will remain effective until the number of shares authorizedis repurchased or until the program expires September 19, 2008. As of September30, 2007, 246,060 shares could be repurchased under the current stockrepurchase program.

 

Each ofthe federal bank regulatory agencies has established minimum leverage capitalrequirements for banks. Banks must maintain a minimum ratio of Tier 1 capitalto adjusted average quarterly assets ranging from 3% to 5%, subject to federalbank regulatory evaluation of an organization’s overall safety and soundness. Weintend to maintain a capital position that meets or exceeds the “wellcapitalized” requirements as defined for banks by the FDIC. The following tableshows the ratios of Tier 1 capital and total capital to risk-adjusted assetsand the leverage ratios for the Corporation and the Bank as of September 30,2007.

 

27

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| ** **                                          | ** ** | ** ** | ** ** | ** **                 | ** ** | ** **                 | ** ** | ** **     | ** ** | **To Be Considered** | ** ** |
|-----------------------------------------------------|------------|------------|------------|----------------------------|------------|----------------------------|------------|----------------|------------|--------------------------------|------------|
| ** **                                          | ** ** | ** ** | ** ** | ** **                 | ** ** | ** **                 | ** ** | ** **     | ** ** | **Well Capitalized**      | ** ** |
| ** **                                          | ** ** | ** ** | ** ** | ** **                 | ** ** | ** **                 | ** ** | ** **     | ** ** | **Under Prompt**          | ** ** |
| ** **                                          | ** ** | ** ** | ** ** | ** **                 | ** ** | **For Capital**       | ** ** | **Correction** | ** ** |
| ** **                                          | ** ** | **Actual** | ** ** | **Adequacy Purposes** | ** ** | **Action Provisions** | ** ** |
| **(Dollars in thousands)**                | ** ** | **Amount** | ** ** | **Ratio**                  | ** ** | **Amount**                 | ** ** | **Ratio**      | ** ** | **Amount**                     | ** ** | **Ratio** | ** ** |
| **As of  September 30, 2007:**                      |       |       |       |                       |       |                       |       |           |       |                           |       |   |   |
| Total risk-based  capital (to risk-weighted assets) |       |       |       |                       |       |                       |       |           |       |                           |       |   |   |
| Consolidated                                        |       | $          | 82,658     |                       | 10.8       | %                          | $          | 61,418         |       | 8.0                            | %          | N/A |   | N/A |   |
| Bank                                                |       | 79,504     |       | 10.4                       |       | 61,212                     |       | 8.0            |       | 76,516                         |       | 10 | % |
| Tier I capital  (to risk-weighted assets)           |       |       |       |                       |       |                       |       |           |       |                           |       |   |   |
| Consolidated                                        |       | 73,970     |       | 9.6                        |       | 30,709                     |       | 4.0            |       | N/A                            |       | N/A |   |
| Bank                                                |       | 70,789     |       | 9.3                        |       | 30,606                     |       | 4.0            |       | 45,909                         |       | 6 | % |
| Tier I capital  (to average assets)                 |       |       |       |                       |       |                       |       |           |       |                           |       |   |   |
| Consolidated                                        |       | 73,970     |       | 8.8                        |       | 33,741                     |       | 4.0            |       | N/A                            |       | N/A |   |
| Bank                                                |       | 70,789     |       | 8.4                        |       | 33,786                     |       | 4.0            |       | 42,233                         |       | 5 | % |
|                                                     |            |            |            |                            |            |                            |            |                |            |                                |            |  |  |  |  |

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

### ** **

###### **Item3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK**

###### ** **

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

###### ** **

To minimize the volatility of net interestincome and exposure to economic loss that may result from fluctuating interestrates, we manage our exposure to adverse changes in interest rates throughasset and liability management activities within guidelines established by ourAsset Liability Committee (“ALCO”). The ALCO, which includes senior managementrepresentatives, has the responsibility for approving and ensuring compliancewith asset/liability management polices. Interest rate risk is the exposure toadverse changes in the net interest income as a result of market fluctuationsin interest rates. The ALCO, on an ongoing basis, monitors interest rate andliquidity risk in order to implement appropriate funding and balance sheetstrategies. Management considers interest rate risk to be our most significantmarket risk.

 

We utilize an earningssimulation model to analyze net interest income sensitivity. We then evaluatepotential changes in market interest rates and their subsequent effects on netinterest income. The model projects the effect of instantaneous movements ininterest rates of both 100 and 200 basis points. We also incorporateassumptions based on the historical behavior of our deposit rates and balancesin relation to changes in interest rates into the model. These assumptions areinherently uncertain and, as a result, the model cannot precisely measurefuture net interest income or precisely predict the impact of fluctuations inmarket interest rates on net interest income. Actual results will differ fromthe model’s simulated results due to timing, magnitude and frequency ofinterest rate changes as well as changes in market conditions and theapplication and timing of various management strategies.

 

28

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Our interest sensitivityprofile was liability sensitive at September 30, 2007 and December 31, 2006. Givena sustained 100 basis point decrease in rates, our base net interest incomewould remain constant at September 30, 2007 compared to an increase of .55% atDecember 31, 2006. Given a 100 basis point increase in interest rates our basenet interest income would decrease by an estimated .36% at September 30, 2007compared to a decrease of .48% at December 31, 2006.

 

Our interest sensitivityat any point in time will be affected by a number of factors. These factorsinclude the mix of interest sensitive assets and liabilities, their relativepricing schedules, market interest rates, deposit growth, loan growth, decayrates and prepayment speed assumptions.

 

We have been restructuringour balance sheet so that our change to net interest income will be relativelyneutral whether interest rates increase or decrease in the future. Asdemonstrated by the September 30, 2007 sensitivity table, we remained in aslightly liability sensitive position as compared to December 31, 2006. Thismeans that our earning assets, which consist of loans and investmentsecurities, will change in price at a slower rate than our deposits andborrowings. Therefore, if short term interest rates increase 200 basis points,our net interest income will decrease or remain relatively neutral. Likewise,if short term interest rates decrease 200 basis points, our net interest incomewill decrease or remain relatively neutral.

 

We continually monitor theeffects rate changes will have on our level of net interest income, andmanagement works to structure the maturity and pricing of loans and deposits tomitigate large swings in net interest income. During 2007 and 2006, we madeefforts to increase the level of short-term deposits offering more attractiverates on short-term certificates of deposits. Also, during the third quarter of2006, we paid off a fixed rate FHLB advance that had converted to a variablerate advance. We replaced this borrowing initially with overnight short-termborrowings. In March 2007, we called our $10.0 million in subordinateddebentures adjustable quarterly at LIBOR plus 360 basis points (8.97% on March26, 2007) and we re-issued new 30 year cumulative trust preferred securities ata 10 year fixed rate of 6.69% adjusting quarterly thereafter at LIBOR plus 160basis points. In addition, the majority of the newly originated or renewedloans during 2007 and 2006 were fixed rates loans with the interest rate fixedfrom three to five years.

 

29

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Our sensitivity tointerest rate changes is presented below based on data as of September 30, 2007and December 31, 2006 annualized to a one year period.

 
| ** **                           | ** ** | **September 30, 2007** | ** ** |
|--------------------------------------|------------|----------------------------------|------------|
| ** **                           | ** ** | **Decrease in Rates**  | ** ** | ** ** | ** ** | **Increase in Rates** | ** ** |
| ** **                           | ** ** | **200**                          | ** ** | **100** | ** ** | ** ** | ** ** | **100** | ** ** | **200** | ** ** |
| **(Dollars in thousands)** | ** ** | **Basis Points**            | ** ** | **Basis Points** | ** ** | **Base** | ** ** | **Basis Points** | ** ** | **Basis Points** | ** ** |
| ** **                           | ** ** | ** **                       | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| **Projected  interest income**       | ** ** | ** **                       | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| Loans                                |       | $                                | 55,889     |   | $ | 57,240 |   | $ | 58,590 |   | $ | 59,802 |   | $ | 61,025 |   |
| Investments                          |       | 1,952                            |       | 1,990 |   | 2,033 |   | 2,076 |   | 2,120 |   |
| **Total  interest income**           |       | 57,841                           |       | 59,230 |   | 60,623 |   | 61,878 |   | 63,145 |   |
|                                 |       |                             |       |   |   |   |   |   |   |   |   |
| **Projected  interest expense**      | ** ** | ** **                       | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| Deposits                             |       | 20,945                           |       | 21,662 |   | 22,394 |   | 23,101 |   | 23,858 |   |
| Borrowed funds                       |       | 4,894                            |       | 5,549 |   | 6,210 |   | 6,872 |   | 7,536 |   |
| **Total  interest expense**          |       | 25,839                           |       | 27,211 |   | 28,604 |   | 29,973 |   | 31,394 |   |
|                                 |       |                             |       |   |   |   |   |   |   |   |   |
| **Net  interest income**             |       | $                                | 32,002     |   | $ | 32,019 |   | $ | 32,019 |   | $ | 31,905 |   | $ | 31,751 |   |
| Change from base                     |       | $                                | (17        | ) | $ | — |   |   |   | $ | (114 | ) | $ | (268 | ) |
| % Change from  base                  |       | (.05                             | )%         | 0 | % |   |   | (.36 | )% | (.84 | )% |

 
| ** **                           | ** ** | **December 31, 2006** | ** ** |
|--------------------------------------|------------|---------------------------------|------------|
| ** **                           | ** ** | **Decrease in Rates** | ** ** | ** ** | ** ** | **Increase in Rates** | ** ** |
| ** **                           | ** ** | **200**                         | ** ** | **100** | ** ** | ** ** | ** ** | **100** | ** ** | **200** | ** ** |
| **(Dollars in thousands)** | ** ** | **Basis Points**           | ** ** | **Basis Points** | ** ** | **Base** | ** ** | **Basis Points** | ** ** | **Basis Points** | ** ** |
| ** **                           | ** ** | ** **                      | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| **Projected  interest income**       | ** ** | ** **                      | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| Loans                                |       | $                               | 58,262     |   | $ | 59,517 |   | $ | 60,592 |   | $ | 61,623 |   | $ | 62,759 |   |
| Investments                          |       | 2,342                           |       | 2,482 |   | 2,535 |   | 2,625 |   | 2,653 |   |
| **Total  interest income**           |       | 60,604                          |       | 61,999 |   | 63,127 |   | 64,248 |   | 65,412 |   |
|                                 |       |                            |       |   |   |   |   |   |   |   |   |
| **Projected  interest expense**      | ** ** | ** **                      | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| Deposits                             |       | 20,643                          |       | 21,500 |   | 22,356 |   | 23,124 |   | 23,891 |   |
| Borrowed funds                       |       | 5,071                           |       | 5,628 |   | 6,090 |   | 6,608 |   | 7,040 |   |
| **Total  interest expense**          |       | 25,714                          |       | 27,128 |   | 28,446 |   | 29,732 |   | 30,931 |   |
|                                 |       |                            |       |   |   |   |   |   |   |   |   |
| **Net  interest income**             |       | $                               | 34,890     |   | $ | 34,871 |   | $ | 34,681 |   | $ | 34,516 |   | $ | 34,481 |   |
| Change from base                     |       | $                               | 209        |   | $ | 190 |   |   |   | $ | (165 | ) | $ | (200 | ) |
| % Change from  base                  |       | .60                             | %          | .55 | % |   |   | (.48 | )% | (.58 | )% |

 

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

###### ** **

*Evaluation of disclosure controls and procedures*

 

Ourmanagement, with the participation of our Chief Executive Officer and our ChiefFinancial Officer, evaluated the effectiveness of our disclosure controls andprocedures as of the end of the period covered by this quarterly report onForm 10-Q. Based on this evaluation, our Chief Executive Officer and ourChief Financial Officer have concluded that our disclosure controls andprocedures were effective as of the end of the period covered by this quarterlyreport on Form 10-Q to ensure that information we are required to disclosein reports that we file or submit under the Securities Exchange Act of 1934 isrecorded, processed, summarized and reported within the time periods specifiedin Securities and Exchange Commission rules and forms.

 

30

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*Limitations on the Effectiveness of Controls*

 

A control system, no matter how well designed andoperated, can provide only reasonable, not absolute, assurance that the controlsystem’s objectives will be met. Further, the design of a control system mustreflect the fact that there are resource constraints, and the benefits ofcontrols must be considered relative to their costs. Because of the inherentlimitations in all control systems, no evaluation of controls can provideabsolute assurance that all control issues and instances of fraud, if any, withour company have been detected. These inherent limitations include therealities that judgments in decision making can be faulty, that breakdowns canoccur because of simple errors or mistakes, and that controls can becircumvented by the acts of individuals or groups. Because of the inherentlimitations in a cost effective control system, misstatements due to error orfraud may occur and not be detected.

 

*Changes in internal control over financial reporting*

 

Therewas no change in our internal control over financial reporting that occurredduring the period covered by this quarterly report on Form 10-Q that hasmaterially affected, or is reasonably likely to materially affect, our internalcontrol over financial reporting.

 

31

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##### **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**                                                                                                                                                                                                                    |
|         |                                                                                                                                                                                                                                |
|         | We did not have any changes to our risk factors previously disclosed  in our Annual Report on Form 10-K for the year ended December 31, 2006.                                                                                       |
|         |                                                                                                                                                                                                                                |
| **Item 2.**  | **Unregistered Sales of Securities  and Use of Proceeds**                                                                                                                                                                           |
|         |                                                                                                                                                                                                                                |
|         | (e) Issuer Purchases of Equity Securities                                                                                                                                                                                           |

 
| ** **                  | ** ** | ** **         | ** ** | ** **         | ** ** | **Total Number of** | ** ** | **Maxium**                         | ** ** |
|-----------------------------|------------|--------------------|------------|--------------------|------------|-------------------------------|------------|------------------------------------|------------|
| ** **                  | ** ** | **Total**          | ** ** | **Average**        | ** ** | **Shares Purchased**     | ** ** | **Number of Shares**     | ** ** |
| ** **                  | ** ** | **Number**         | ** ** | **Price**          | ** ** | **as Part of**      | ** ** | **that May Yet Be** | ** ** |
| ** **                  | ** ** | **of Shares** | ** ** | **Paid**           | ** ** | **Publicly Announced**   | ** ** | **Purchased Under**           | ** ** |
| **Period**                  | ** ** | **Purchased**      | ** ** | **per Share** | ** ** | **Plans**                     | ** ** | **the Plan**                  | ** ** |
| July 1 - July 31            |       | 22,000             |       | $                  | 28.20      |                          | 22,000     |                               | 266,000    |   |
| August 1 -  August 31       |       | 16,940             |       | 28.10              |       | 16,940                        |       | 249,060                            |       |
| September 1 -  September 30 |       | 3,000              |       | 27.75              |       | 3,000                         |       | 246,060                            |       |
|                        |       |               |       |               |       |                          |       |                               |       |
| Total                       |       | 41,940             |       | $                  | 28.13      |                          | 41,940     |                               |       |   |

 
| **Item 3.** | **Defaults Upon Senior Securities**                      |
|-------------|----------------------------------------------------------|
|        |                                                     |
|        | Not Applicable                                           |
|        |                                                     |
| **Item 4.** | **Submission of Matters to a Vote  of Security Holders** |
|        |                                                     |
|        | None                                                     |
|        |                                                     |
| **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) |

 

32

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**FIRST FINANCIAL SERVICE CORPORATION**

 

## **SIGNATURES**

## ** **

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

 

 
| Date: November 9, 2007 | By:    | /s/ B. Keith Johnson                  |   |
|------------------------|--------|---------------------------------------|--------|
|                   |   | B. Keith Johnson                      |
|                   |   | President and Chief Executive Officer |

 

 
| Date:  November 9, 2007 | By:    | /s/ Gregory S. Schreacke     |   |
|------------------------------|--------|------------------------------|--------|
|                         |   | Gregory S.  Schreacke        |
|                         |   | Chief Financial Officer      |
|                         |   | Principal Accounting Officer |

 

33

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## **INDEX TO EXHIBITS**

## ** **

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

 

34

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