##### Table of Contents

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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549



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FORM 10-Q



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(Mark One)

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

For the quarterly period ended June 30, 2007

or



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

For the transition period from  to

Commission File Number: 333-119800



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FIRST STATE FINANCIAL
CORPORATION

(Exact name of registrant as specified in its charter)



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|                                                               |  |                                     
|-------------------------------------------------------------- |  | ------------------------------------
|Florida                                                        |  | 65-0771145                          
|(State or other jurisdiction or incorporation or organization) |  | (I.R.S. Employer Identification No.)



|                                         |  |           
|---------------------------------------- |  | ----------
|22 S. Links Avenue, Sarasota, FL         |  | 34236     
|(Address of principal executive offices) |  | (Zip code)

941-929-9000

(Registrants telephone number, including area code)

N/A

(Former name, former address and former fiscal year, if changed since last report)



---

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

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a
non-accelerated filer. See definition of accelerated filer and large accelerated filer in Rule 12b-2 of the Exchange Act. (Check one):

Large accelerated filer ̈Accelerated filer  x    Non-accelerated filer ̈

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

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

As of August 3, 2007, the registrant had outstanding 5,919,500 shares of common stock.



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##### Table of Contents

TABLE OF CONTENTS



|                               |  |            |  |                                                                      |  |     
|------------------------------ |  | ---------- |  | -------------------------------------------------------------------- |  | ----
|                               |  |            |  |                                                                      |  | PAGE
|PART I  FINANCIAL INFORMATION |  |           
|                               |  |            | 
|                               |  | Item 1 -   |  | Condensed Consolidated Financial Statements                          |  |     
|                               |  |            | 
|                               |  |            |  | Condensed Consolidated Balance Sheets                                |  | 1   
|                               |  |            | 
|                               |  |            |  | Condensed Consolidated Statements of Income                          |  | 2   
|                               |  |            | 
|                               |  |            |  | Condensed Consolidated Statements of Changes in Stockholders Equity |  | 3   
|                               |  |            | 
|                               |  |            |  | Condensed Consolidated Statements of Cash Flow                       |  | 4   
|                               |  |            | 
|                               |  |            |  | Condensed Notes to Consolidated Financial Statements                 |  | 5   
|                               |  |            | 
|                               |  | Item 2 -   |  | Managements Discussion and Analysis                                 |  | 8   
|                               |  |            | 
|                               |  | Item 3 -   |  | Quantitative and Qualitative Disclosures About Market Risk           |  | 16  
|                               |  |            | 
|                               |  | Item 4 -   |  | Controls and Procedures                                              |  | 17  
|                               | 
|PART II  OTHER INFORMATION    |  |           
|                               |  |            | 
|                               |  | Item 1 -   |  | Legal Proceedings                                                    |  | 18  
|                               |  |            | 
|                               |  | Item 1A -  |  | Risk Factors                                                         |  | 18  
|                               |  |            | 
|                               |  | Item 2 -   |  | Unregistered Sales of Equity Securities and Use of Proceeds          |  | 18  
|                               |  |            | 
|                               |  | Item 3 -   |  | Defaults Upon Senior Securities                                      |  | 18  
|                               |  |            | 
|                               |  | Item 4 -   |  | Submission of Matters to Vote of Securities Holders                  |  | 18  
|                               |  |            | 
|                               |  | Item 5 -   |  | Other Information                                                    |  | 18  
|                               |  |            | 
|                               |  | Item 6 -   |  | Exhibits                                                             |  | 18  
|                               |  |            | 
|                               |  | Signatures |  |                                                                      |  | 19  



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##### Table of Contents

FIRST STATE FINANCIAL CORPORATION

CONDENSED CONSOLIDATED BALANCE SHEETS

June 30, 2007 (unaudited) and December 31, 2006

(Dollar amounts in thousands except per share data)



|                                                                                                                                                   |  |               |         |   |                   |   |         |  
|-------------------------------------------------------------------------------------------------------------------------------------------------- |  | ------------- | ------- | - | ----------------- | - | ------- | -
|                                                                                                                                                   |  | June 30, 2007 |         |   | December 31, 2006 |  
|ASSETS                                                                                                                                             |  |               |         |   |                   |   |         |  
|Cash and due from financial institutions                                                                                                           |  | $             | 5,467   |   |                   | $ | 6,427   |  
|Federal funds sold                                                                                                                                 |  |               | 59      |   |                   |   | 37,806  |  
|                                                                                                                                                   |  |               |         |   |                   |   |         |  
|Cash and cash equivalents                                                                                                                          |  |               | 5,526   |   |                   |   | 44,233  |  
|Interest bearing deposits in other financial institutions                                                                                          |  |               | 233     |   |                   |   | 299     |  
|Securities, available for sale                                                                                                                     |  |               | 33,966  |   |                   |   | 24,860  |  
|Loans, net of allowance of $4,608 and $4,358                                                                                                       |  |               | 397,522 |   |                   |   | 372,747 |  
|Federal Home Loan Bank stock                                                                                                                       |  |               | 1,176   |   |                   |   | 880     |  
|Premise and equipment, net                                                                                                                         |  |               | 7,680   |   |                   |   | 4,558   |  
|Accrued interest and other assets                                                                                                                  |  |               | 5,634   |   |                   |   | 5,871   |  
|                                                                                                                                                   |  |               |         |   |                   |   |         |  
|Total Assets                                                                                                                                       |  | $             | 451,737 |   |                   | $ | 453,448 |  
|                                                                                                                                                   |  |               |         |   |                   |   |         |  
|LIABILITIES and STOCKHOLDERS EQUITY                                                                                                               |  |               |         |   |                   |   |         |  
|Deposits                                                                                                                                           |  |               |         |   |                   |   |         |  
|Demand                                                                                                                                             |  | $             | 39,127  |   |                   | $ | 44,383  |  
|Interest-bearing checking                                                                                                                          |  |               | 14,166  |   |                   |   | 19,409  |  
|Money market                                                                                                                                       |  |               | 31,789  |   |                   |   | 30,508  |  
|Savings                                                                                                                                            |  |               | 23,979  |   |                   |   | 22,625  |  
|Time                                                                                                                                               |  |               | 273,646 |   |                   |   | 283,394 |  
|                                                                                                                                                   |  |               |         |   |                   |   |         |  
|Total deposits                                                                                                                                     |  |               | 382,707 |   |                   |   | 400,319 |  
|Accrued interest payable and other liabilities                                                                                                     |  |               | 1,644   |   |                   |   | 1,602   |  
|Federal Home Loan Bank advances & other borrowings                                                                                                 |  |               | _18,001 |   |                   |   | 3,001   |  
|                                                                                                                                                   |  |               |         |   |                   |   |         |  
|Total Liabilities                                                                                                                                  |  |               | 402,352 |   |                   |   | 404,922 |  
|Stockholders Equity                                                                                                                               |  |               |         |   |                   |   |         |  
|Common stock, $1 par value; 25,000,000 shares authorized; 5,875,500 shares issued at June 30, 2007 and 5,874,450 share issued at
December 31, 2006 |  |               | 5,875   |   |                   |   | 5,874   |  
|Additional paid-in capital                                                                                                                         |  |               | 32,029  |   |                   |   | 31,974  |  
|Retained earnings                                                                                                                                  |  |               | 11,996  |   |                   |   | 10,870  |  
|Accumulated other comprehensive loss                                                                                                               |  |               | (515    | ) |                   |   | (192    | )
|                                                                                                                                                   |  |               |         |   |                   |   |         |  
|Total Stockholders Equity                                                                                                                         |  |               | 49,385  |   |                   |   | 48,526  |  
|                                                                                                                                                   |  |               |         |   |                   |   |         |  
|Total Liabilities and Stockholders Equity                                                                                                         |  | $             | 451,737 |   |                   | $ | 453,448 |  
|                                                                                                                                                   |  |               |         |   |                   |   |         |  

See Notes to Consolidated Financial Statements



1



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##### Table of Contents

FIRST STATE FINANCIAL CORPORATION

CONDENSED CONSOLIDATED STATEMENTS OF INCOME

(Unaudited)

(Dollar amounts in thousands
except per share data)



|                                                     |  |                             |           |                           |   |           |  |      |           |  |   |          
|---------------------------------------------------- |  | --------------------------- | --------- | ------------------------- | - | --------- |  | ---- | --------- |  | - | ---------
|                                                     |  | Three months ended June 30, |           | Six months ended June 30,
|                                                     |  | 2007                        |           | 2006                      |   | 2007      |  | 2006
|Interest Income                                      |  |                             |           |                           |   |           |  |      |           |  |   |          
|Loans, including fees                                |  | $                           | 8,022     |                           | $ | 7,403     |  | $    | 16,072    |  | $ | 14,057   
|Taxable securities                                   |  |                             | 237       |                           |   | 183       |  |      | 421       |  |   | 346      
|Tax exempt securities                                |  |                             | 87        |                           |   | 71        |  |      | 172       |  |   | 130      
|Federal funds sold and other                         |  |                             | 135       |                           |   | 33        |  |      | 474       |  |   | 55       
|                                                     |  |                             |           |                           |   |           |  |      |           |  |   |          
|                                                     |  |                             | 8,481     |                           |   | 7,690     |  |      | 17,139    |  |   | 14,588   
|Interest expense                                     |  |                             |           |                           |   |           |  |      |           |  |   |          
|Deposits                                             |  |                             | 4,095     |                           |   | 2,935     |  |      | 8,135     |  |   | 5,458    
|Federal Home Loan Bank advances and other borrowings |  |                             | 94        |                           |   | 237       |  |      | 141       |  |   | 369      
|                                                     |  |                             |           |                           |   |           |  |      |           |  |   |          
|                                                     |  |                             | 4,189     |                           |   | 3,172     |  |      | 8,276     |  |   | 5,827    
|                                                     |  |                             |           |                           |   |           |  |      |           |  |   |          
|Net Interest Income                                  |  |                             | 4,292     |                           |   | 4,518     |  |      | 8,863     |  |   | 8,761    
|Provision for loan losses                            |  |                             | 286       |                           |   | 305       |  |      | 477       |  |   | 680      
|                                                     |  |                             |           |                           |   |           |  |      |           |  |   |          
|Net interest income after provision for loan losses  |  |                             | 4,006     |                           |   | 4,213     |  |      | 8,386     |  |   | 8,081    
|Non-interest income                                  |  |                             |           |                           |   |           |  |      |           |  |   |          
|Service charges and other fees                       |  |                             | 358       |                           |   | 317       |  |      | 670       |  |   | 613      
|Mortgage banking fees                                |  |                             | 265       |                           |   | 386       |  |      | 425       |  |   | 708      
|Other                                                |  |                             | 21        |                           |   | 32        |  |      | 45        |  |   | 70       
|                                                     |  |                             |           |                           |   |           |  |      |           |  |   |          
|                                                     |  |                             | 644       |                           |   | 735       |  |      | 1,140     |  |   | 1,391    
|Non-interest expense                                 |  |                             |           |                           |   |           |  |      |           |  |   |          
|Salaries and employee benefits                       |  |                             | 2,263     |                           |   | 1,749     |  |      | 4,104     |  |   | 3,388    
|Occupancy and equipment                              |  |                             | 412       |                           |   | 389       |  |      | 793       |  |   | 759      
|Data processing                                      |  |                             | 156       |                           |   | 143       |  |      | 312       |  |   | 281      
|Professional services                                |  |                             | 132       |                           |   | 40        |  |      | 221       |  |   | 90       
|Stationery and supplies                              |  |                             | 56        |                           |   | 50        |  |      | 97        |  |   | 91       
|Advertising and marketing                            |  |                             | 77        |                           |   | 95        |  |      | 156       |  |   | 192      
|Other                                                |  |                             | 303       |                           |   | 281       |  |      | 584       |  |   | 616      
|                                                     |  |                             |           |                           |   |           |  |      |           |  |   |          
|                                                     |  |                             | 3,399     |                           |   | 2,747     |  |      | 6,267     |  |   | 5,417    
|                                                     |  |                             |           |                           |   |           |  |      |           |  |   |          
|Income before income taxes                           |  |                             | 1,251     |                           |   | 2,201     |  |      | 3,259     |  |   | 4,055    
|Income tax expense                                   |  |                             | 454       |                           |   | 862       |  |      | 1,193     |  |   | 1,558    
|                                                     |  |                             |           |                           |   |           |  |      |           |  |   |          
|Net Income                                           |  | $                           | 797       |                           | $ | 1,339     |  | $    | 2,066     |  | $ | 2,497    
|                                                     |  |                             |           |                           |   |           |  |      |           |  |   |          
|Earnings per share                                   |  |                             |           |                           |   |           |  |      |           |  |   |          
|Basic                                                |  | $                           | 0.14      |                           | $ | 0.23      |  | $    | 0.36      |  | $ | 0.43     
|Diluted                                              |  | $                           | 0.14      |                           | $ | 0.23      |  | $    | 0.35      |  | $ | 0.42     
|Average common shares outstanding                    |  |                             |           |                           |   |           |  |      |           |  |   |          
|Basic                                                |  |                             | 5,875,500 |                           |   | 5,865,562 |  |      | 5,875,251 |  |   | 5,864,420
|Diluted                                              |  |                             | 5,909,198 |                           |   | 5,913,573 |  |      | 5,911,432 |  |   | 5,903,679
|Dividends per share                                  |  | $                           | 0.08      |                           | $ | 0.07      |  | $    | 0.16      |  | $ | 0.13     

See Notes to Condensed Consolidated Financial Statements



2



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##### Table of Contents

FIRST STATE FINANCIAL CORPORATION

CONDENSED CONSOLIDATED STATEMENTS OF CHANGES

IN STOCKHOLDERS EQUITY

(Unaudited)

(Dollar amounts in thousands except per share data)



|                                                                                                     |  |           |  |             |       |                          |   |                  |  |   |                                       |   |  |       |      |   |  |   |        |  
|---------------------------------------------------------------------------------------------------- |  | --------- |  | ----------- | ----- | ------------------------ | - | ---------------- |  | - | ------------------------------------- | - |  | ----- | ---- | - |  | - | ------ | -
|                                                                                                     |  | Shares    |  | CommonStock |       | AdditionalPaid-inCapital |   | RetainedEarnings |  |   | Accum. OtherComprehensiveIncome(Loss) |   |  | Total |     
|Balance at December 31, 2005                                                                         |  | 5,863,265 |  | $           | 5,863 |                          | $ | 31,763           |  | $ | 7,231                                 |   |  | $     | (373 | ) |  | $ | 44,484 |  
|Comprehensive income:                                                                                |  |           |  |             |       |                          |   |                  |  |   |                                       |   |  |       |      |   |  |   |        |  
|Net income                                                                                           |  |           |  |             |       |                          |   |                  |  |   | 2,497                                 |   |  |       |      |   |  |   | 2,497  |  
|Change in net unrealized gain (loss) on investment securities available for sale, net of tax effects |  |           |  |             |       |                          |   |                  |  |   |                                       |   |  |       | (314 | ) |  |   | (314   | )
|                                                                                                     |  |           |  |             |       |                          |   |                  |  |   |                                       |   |  |       |      |   |  |   |        |  
|Total Comprehensive Income                                                                           |  |           |  |             |       |                          |   |                  |  |   |                                       |   |  |       |      |   |  |   | 2,183  |  
|Stock-based Compensation                                                                             |  |           |  |             |       |                          |   | 68               |  |   |                                       |   |  |       |      |   |  |   | 68     |  
|Exercise of stock options                                                                            |  | 3,585     |  |             | 4     |                          |   | 29               |  |   |                                       |   |  |       |      |   |  |   | 33     |  
|Cash dividend, $0.13 per share                                                                       |  |           |  |             |       |                          |   |                  |  |   | (762                                  | ) |  |       |      |   |  |   | (762   | )
|                                                                                                     |  |           |  |             |       |                          |   |                  |  |   |                                       |   |  |       |      |   |  |   |        |  
|Balance at June 30, 2006                                                                             |  | 5,866,850 |  | $           | 5,867 |                          | $ | 31,860           |  | $ | 8,966                                 |   |  | $     | (687 | ) |  | $ | 46,006 |  
|                                                                                                     |  |           |  |             |       |                          |   |                  |  |   |                                       |   |  |       |      |   |  |   |        |  
|Balance at December 31, 2006                                                                         |  | 5,874,450 |  | $           | 5,874 |                          |   | 31,974           |  | $ | 10,870                                |   |  | $     | (192 | ) |  | $ | 48,526 |  
|Comprehensive income:                                                                                |  |           |  |             |       |                          |   |                  |  |   |                                       |   |  |       |      |   |  |   |        |  
|Net income                                                                                           |  |           |  |             |       |                          |   |                  |  |   | 2,066                                 |   |  |       |      |   |  |   | 2,066  |  
|Change in net unrealized gain (loss) on investment securities available for sale, net of tax effects |  |           |  |             |       |                          |   |                  |  |   |                                       |   |  |       | (323 | ) |  |   | (323   | )
|                                                                                                     |  |           |  |             |       |                          |   |                  |  |   |                                       |   |  |       |      |   |  |   |        |  
|Total Comprehensive Income                                                                           |  |           |  |             |       |                          |   |                  |  |   |                                       |   |  |       |      |   |  |   | 1,743  |  
|Stock-based compensation                                                                             |  |           |  |             |       |                          |   | 44               |  |   |                                       |   |  |       |      |   |  |   | 44     |  
|Exercise of stock options                                                                            |  | 1,050     |  |             | 1     |                          |   | 11               |  |   |                                       |   |  |       |      |   |  |   | 12     |  
|Cash dividend, $0.16 per share                                                                       |  |           |  |             |       |                          |   |                  |  |   | (940                                  | ) |  |       |      |   |  |   | (940   | )
|                                                                                                     |  |           |  |             |       |                          |   |                  |  |   |                                       |   |  |       |      |   |  |   |        |  
|Balance at June 30, 2007                                                                             |  | 5,875,500 |  | $           | 5,875 |                          | $ | 32,029           |  | $ | 11,996                                |   |  | $     | (515 | ) |  | $ | 49,385 |  
|                                                                                                     |  |           |  |             |       |                          |   |                  |  |   |                                       |   |  |       |      |   |  |   |        |  
|Balance at March 31, 2006                                                                            |  | 5,863,265 |  | $           | 5,863 |                          | $ | 31,802           |  | $ | 8,037                                 |   |  | $     | (395 | ) |  | $ | 45,307 |  
|Comprehensive income:                                                                                |  |           |  |             |       |                          |   |                  |  |   |                                       |   |  |       |      |   |  |   |        |  
|Net income                                                                                           |  |           |  |             |       |                          |   |                  |  |   | 1,339                                 |   |  |       |      |   |  |   | 1,339  |  
|Change in net unrealized gain (loss) on investment securities available for sale, net of tax effects |  |           |  |             |       |                          |   |                  |  |   |                                       |   |  |       | (292 | ) |  |   | (292   | )
|                                                                                                     |  |           |  |             |       |                          |   |                  |  |   |                                       |   |  |       |      |   |  |   |        |  
|Total Comprehensive Income                                                                           |  |           |  |             |       |                          |   |                  |  |   |                                       |   |  |       |      |   |  |   | 1,047  |  
|Stock-based compensation                                                                             |  |           |  |             |       |                          |   | 29               |  |   |                                       |   |  |       |      |   |  |   | 29     |  
|Exercise of stock options                                                                            |  | 3,585     |  |             | 4     |                          |   | 29               |  |   |                                       |   |  |       |      |   |  |   | 33     |  
|Cash dividend, $0.07 per share                                                                       |  |           |  |             |       |                          |   |                  |  |   | (410                                  | ) |  |       |      |   |  |   | (410   | )
|                                                                                                     |  |           |  |             |       |                          |   |                  |  |   |                                       |   |  |       |      |   |  |   |        |  
|Balance at June 30, 2006                                                                             |  | 5,866,850 |  | $           | 5,867 |                          | $ | 31,860           |  | $ | 8,966                                 |   |  | $     | (687 | ) |  | $ | 46,006 |  
|                                                                                                     |  |           |  |             |       |                          |   |                  |  |   |                                       |   |  |       |      |   |  |   |        |  
|Balance at March 31, 2007                                                                            |  | 5,875,500 |  | $           | 5,875 |                          | $ | 32,008           |  | $ | 11,669                                |   |  | $     | (142 | ) |  | $ | 49,410 |  
|Comprehensive income:                                                                                |  |           |  |             |       |                          |   |                  |  |   |                                       |   |  |       |      |   |  |   |        |  
|Net income                                                                                           |  |           |  |             |       |                          |   |                  |  |   | 797                                   |   |  |       |      |   |  |   | 797    |  
|Change in net unrealized gain (loss) on investment securities available for sale, net of tax effects |  |           |  |             |       |                          |   |                  |  |   |                                       |   |  |       | (373 | ) |  |   | (373   | )
|                                                                                                     |  |           |  |             |       |                          |   |                  |  |   |                                       |   |  |       |      |   |  |   |        |  
|Total Comprehensive Income                                                                           |  |           |  |             |       |                          |   |                  |  |   |                                       |   |  |       |      |   |  |   | 424    |  
|Stock-based compensation                                                                             |  |           |  |             |       |                          |   | 21               |  |   |                                       |   |  |       |      |   |  |   | 21     |  
|Exercise of stock options                                                                            |  |           |  |             |       |                          |   |                  |  |   |                                       |   |  |       |      |   |  |   |        |  
|Cash dividend, $0.08 per share                                                                       |  |           |  |             |       |                          |   |                  |  |   | (470                                  | ) |  |       |      |   |  |   | (470   | )
|                                                                                                     |  |           |  |             |       |                          |   |                  |  |   |                                       |   |  |       |      |   |  |   |        |  
|Balance at June 30, 2007                                                                             |  | 5,875,500 |  | $           | 5,875 |                          | $ | 32,029           |  | $ | 11,996                                |   |  | $     | (515 | ) |  | $ | 49,385 |  
|                                                                                                     |  |           |  |             |       |                          |   |                  |  |   |                                       |   |  |       |      |   |  |   |        |  

See Notes to Condensed Consolidated Financial Statements



3



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##### Table of Contents

FIRST STATE FINANCIAL CORPORATION

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOW

Six Months Ended June 30, 2007 and 2006

(Unaudited)

(Dollar amounts in thousands)



|                                                                          |  |      |         |   |      |   |         |  
|------------------------------------------------------------------------- |  | ---- | ------- | - | ---- | - | ------- | -
|                                                                          |  | 2007 |         |   | 2006 |  
|Cash flows from operating activities:                                     |  |      |         |   |      |   |         |  
|Net income                                                                |  | $    | 2,066   |   |      | $ | 2,497   |  
|Adjustments to reconcile net income to net cash from operating activities |  |      |         |   |      |   |         |  
|Provision for loan losses                                                 |  |      | 477     |   |      |   | 680     |  
|Depreciation                                                              |  |      | 209     |   |      |   | 209     |  
|Net amortization of securities                                            |  |      | (18     | ) |      |   | 25      |  
|Stock compensation expense                                                |  |      | 44      |   |      |   | 68      |  
|Net change in:                                                            |  |      |         |   |      |   |         |  
|Other assets                                                              |  |      | (48     | ) |      |   | (627    | )
|Accrued expenses and other liabilities                                    |  |      | 523     |   |      |   | (50     | )
|                                                                          |  |      |         |   |      |   |         |  
|Net cash from operating activities                                        |  |      | 3,253   |   |      |   | 2,802   |  
|Cash flows from investing activities:                                     |  |      |         |   |      |   |         |  
|Net change in interest bearing deposits in other financial institutions   |  |      | 66      |   |      |   | 84      |  
|Available-for-sale securities:                                            |  |      |         |   |      |   |         |  
|Maturities, prepayments and calls                                         |  |      | 1,157   |   |      |   | 1,094   |  
|Purchases                                                                 |  |      | (10,764 | ) |      |   | (5,302  | )
|Loan originations and payments, net                                       |  |      | (25,252 | ) |      |   | (33,310 | )
|Net sale of FHLB stock                                                    |  |      | (296    | ) |      |   | (152    | )
|Net change in premise and equipment                                       |  |      | (3,331  | ) |      |   | (229    | )
|                                                                          |  |      |         |   |      |   |         |  
|Net cash from investing activities                                        |  |      | (38,420 | ) |      |   | (37,815 | )
|Cash flows from financing activities:                                     |  |      |         |   |      |   |         |  
|Net change in deposits                                                    |  |      | (17,612 | ) |      |   | 39,472  |  
|Net change in short-term borrowing                                        |  |      | 5,000   |   |      |   | (11,000 | )
|Repayment of long-term borrowing                                          |  |      |        |   |      |   |        |  
|Proceeds from long-term borrowing                                         |  |      | 10,000  |   |      |   | 10,000  |  
|Proceeds from exercise of stock options                                   |  |      | 12      |   |      |   | 33      |  
|Proceeds from issuance of common stock, net of capitalized costs          |  |      |        |   |      |   |        |  
|Cash dividend paid                                                        |  |      | (940    | ) |      |   | (762    | )
|                                                                          |  |      |         |   |      |   |         |  
|Net cash from financing activities                                        |  |      | (3,540  | ) |      |   | 37,743  |  
|Net change in cash and cash equivalents                                   |  |      | (38,707 | ) |      |   | 2,730   |  
|Beginning cash and cash equivalents                                       |  |      | 44,233  |   |      |   | 6,054   |  
|                                                                          |  |      |         |   |      |   |         |  
|Ending cash and cash equivalents                                          |  | $    | 5,526   |   |      | $ | 8,784   |  
|                                                                          |  |      |         |   |      |   |         |  
|Supplemental cash flow information                                        |  |      |         |   |      |   |         |  
|Interest paid                                                             |  | $    | 8,230   |   |      | $ | 5,635   |  
|Income taxes paid                                                         |  |      | 1,569   |   |      |   | 1,865   |  

See Notes to Condensed Consolidated Financial Statements



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FIRST STATE FINANCIAL CORPORATION

CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

June 30, 2007

(Unaudited)

NOTE 1  INTERIM FINANCIAL STATEMENTS

These
unaudited financial statements were prepared in accordance with the instructions to Form 10-Q and Rule 10-01 of Regulation S-X. As such they do not include all of the information and footnotes required by generally accepted accounting principles for
complete financial statements. In the opinion of management, all adjustments (consisting only of normal recurring accruals) considered necessary to comply with Regulation S-X were included. The operating results for the six months ended
June 30, 2007 are not necessarily indicative of the results that may be expected for the full year of 2007.

NOTE 2  NEW ACCOUNTING STANDARDS

In February 2007 the Financial Accounting Standards Board issued FAS 159, The Fair Value Option for Financial Assets and Financial
Liabilities, which expands the scope of what companies may carry at fair value. Statement 159 offers an irrevocable option to carry the vast majority of financial assets and liabilities at fair value, (the fair value option, or FVO). The
adoption of the fair value option is recorded as a cumulative-effect adjustment to the opening balance of retained earnings. Upon adoption, the difference between the carrying amount and the fair value of the items chosen is removed from the balance
sheet and included in the cumulative-effect adjustment. Subsequent changes in fair value are recorded through the income statement. The new statement is effective for fiscal years beginning after November 15, 2007. The Company has decided not
to early adopt FAS 159.

On September 15, 2006, the FASB issued a statement to address fair value measurements. Statement 157, Fair Value
Measurements," which requires changes to how certain instruments are measured, both those for which fair value is elected and those where generally accepted accounting principles (GAAP) requires use of fair value. The Company has not yet determined
the effect of implementing this pronouncement, which is effective for fiscal years ending after January 1, 2008.

The Company adopted FASB
Interpretation 48, Accounting for Uncertainty in Income Taxes (FIN 48), as of January 1, 2007. A tax position is recognized as a benefit only if it is "more likely than not" that the tax position would be sustained in a tax
examination, with a tax examination being presumed to occur. The amount recognized is the largest amount of tax benefit that is greater than 50% likely of being realized on examination. For tax positions not meeting the "more likely than not" test,
no tax benefit is recorded. The adoption did not have a material impact on the Companys financial statements.

The Company and its subsidiaries are
subject to U.S. federal income tax as well as income tax of the state of Florida. The Company is no longer subject to examination by taxing authorities for years before 2002. The Company does not expect the total amount of unrecognized tax benefits
to significantly increase in the next twelve months.

The Company recognizes interest related to income tax matters as interest expense and penalties
related to income tax matters as other expense. The Company did not have any amounts accrued for interest and penalties at January 1, 2007.

NOTE 3
 STOCK-BASED COMPENSATION

First State Financial Corporations 2004 Stock Plan, which is stockholder approved, permits the grant of share
options for up to 500,000 shares of common stock. Under the terms of the plan, the option price is not less than the fair market value of the common stock on the date of grant. Stock options generally vest over five years and have a ten year
contractual term. Certain awards provide for accelerated vesting if there is a change in control (as defined in the plan).



5



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##### Table of Contents

The fair value of each option award is estimated on the date of grant using the Black-Scholes option-pricing model.
Expected term is based on a calculation provided for by the Securities and Exchange Commissions Staff Accounting Bulletin 107 which recognizes a lack of historical data and offers a simplified method of computing expected term. The
risk-free rate of the award is based on the U.S. Treasury yield curve in effect at the time of grant.

During the quarter ended June 30, 2007, the
Company granted 10,000 stock options. The fair value of the options granted in the second quarter of 2007 was $5.40 per option. This value was estimated as of the date of the grant using the following assumptions: dividend yield 1.786%, expected
volatility 25.71%, risk-free interest rate 5.08%, and an expected life of 6.5 years. During the previous quarter ended March 31, 2007 the Company granted 24,000 stock options. The Company did not grant stock options during the second quarter of
2006.

During the quarter ended June 30, 2007, 21,110 options vested and, no options were exercised. During the previous quarter ended March 31,
2007, 6,400 options vested and 1,050 options were exercised. No options vested and no options were exercised during the quarter ended June 30, 2006.

A summary of share option activity under the Plan as of June 30, 2007 is as follows:



|                                       |  |                         |  |                              |       |                                                      |      |                                        |   |      
|-------------------------------------- |  | ----------------------- |  | ---------------------------- | ----- | ---------------------------------------------------- | ---- | -------------------------------------- | - | -----
|                                       |  | StockOptionsOutstanding |  | WeightedAverageExercisePrice |       | Weighted-AverageRemainingContractual Life (in years) |      | AggregateIntrinsicValue (in thousands)
|Options outstanding, December 31, 2006 |  | 171,615                 |  | $                            | 10.92 |                                                      |      |                                        |   |      
|Granted                                |  | 34,000                  |  |                              | 17.23 |                                                      |      |                                        |   |      
|Exercised                              |  | 1,050                   |  |                              | 8.45  |                                                      |      |                                        |   |      
|Forfeited or expired                   |  | 41,125                  |  |                              | 12.99 |                                                      |      |                                        |   |      
|                                       |  |                         |  |                              |       |                                                      |      |                                        |   |      
|Options outstanding, June 30, 2007     |  | 163,440                 |  | $                            | 11.72 |                                                      | 7.65 |                                        | $ | 1,065
|                                       |  |                         |  |                              |       |                                                      |      |                                        |   |      
|Options exercisable, June 30, 2007     |  | 79,710                  |  | $                            | 9.33  |                                                      | 6.38 |                                        | $ | 710  
|                                       |  |                         |  |                              |       |                                                      |      |                                        |   |      

For the six months ended June 30, 2007, $44 thousand in compensation cost related to the Companys stock
option plan was recorded in net income, $21 thousand of which was recorded in the second quarter. As of June 30, 2007, $184 thousand in unrecognized compensation costs remained to be recognized over a weighted-average period of 2.6 years. All
stock option compensation costs recognized in the first six months of 2007 related to incentive stock options. Accordingly, there is no tax benefit to disclose.



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NOTE 4  LOANS

Major classifications of loans are as follows (in thousands):



|                              |  |              |         |   |                  |   |         |  
|----------------------------- |  | ------------ | ------- | - | ---------------- | - | ------- | -
|                              |  | June 30,2007 |         |   | December 31,2006 |  
|Commercial                    |  | $            | 78,089  |   |                  | $ | 59,506  |  
|Real estate:                  |  |              |         |   |                  |   |         |  
|Residential                   |  |              | 51,418  |   |                  |   | 58,863  |  
|Commercial                    |  |              | 213,636 |   |                  |   | 194,992 |  
|Construction                  |  |              | 46,518  |   |                  |   | 51,426  |  
|Consumer and other            |  |              | 13,844  |   |                  |   | 13,724  |  
|                              |  |              |         |   |                  |   |         |  
|                              |  |              | 403,505 |   |                  |   | 378,511 |  
|Less: deferred loan fees, net |  |              | (1,375  | ) |                  |   | (1,406  | )
|allowance for loan losses     |  |              | (4,608  | ) |                  |   | (4,358  | )
|                              |  |              |         |   |                  |   |         |  
|Total loans, net              |  | $            | 397,522 |   |                  | $ | 372,747 |  
|                              |  |              |         |   |                  |   |         |  

Transactions in the allowance for loan losses are as follows (in thousands):



|                                |  |                                  |       |   |               |   |       |  
|------------------------------- |  | -------------------------------- | ----- | - | ------------- | - | ----- | -
|                                |  | Activity for the sixmonths ended |      
|                                |  | June 30,2007                     |       |   | June 30, 2006 |  
|Balance, beginning of period    |  | $                                | 4,358 |   |               | $ | 3,397 |  
|Provision charged to operations |  |                                  | 477   |   |               |   | 680   |  
|Loans charged off               |  |                                  | (251  | ) |               |   | (263  | )
|Recoveries                      |  |                                  | 24    |   |               |   | 17    |  
|                                |  |                                  |       |   |               |   |       |  
|Balance, end of period          |  | $                                | 4,608 |   |               | $ | 3,831 |  
|                                |  |                                  |       |   |               |   |       |  

Impaired loans were as follows (in thousands):



|                                                  |  |                                           |        |                  |   |       
|------------------------------------------------- |  | ----------------------------------------- | ------ | ---------------- | - | ------
|                                                  |  | Year-to-date activity forthe period ended
|                                                  |  | June 30,2007                              |        | December 31,2006
|Loans with no allocated allowance for loan losses |  | $                                         | 197    |                  | $ | 8,295 
|Loans with allocated allowance for loan losses    |  |                                           | 12,784 |                  |   | 2,403 
|                                                  |  |                                           |        |                  |   |       
|                                                  |  | $                                         | 12,981 |                  | $ | 10,698
|                                                  |  |                                           |        |                  |   |       
|Amount of the allowance for loan losses allocated |  | $                                         | 2,305  |                  | $ | 1,348 
|                                                  |  |                                           |        |                  |   |       



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##### Table of Contents

|Item 2. | MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
|------- | -------------------------------------------------------------------------------------

The following commentary presents managements discussion and analysis of First State Financial Corporations financial condition and results of operations for the three and six months ended June 30,
2007. It should be read in conjunction with the unaudited Consolidated Financial Statement and Notes included elsewhere in this report and the audited Consolidated Financial Statements and Notes contained in the Corporations 2006 Annual Report
on Form 10-K. In addition the following discussion and analysis should be read together with Managements Discussion and Analysis of Financial Condition and Results of Operations contained in the Corporations 2006 Annual
Report on Form 10-K, which contains important additional information that is necessary to understand the Corporation and its financial condition and results of operations for the periods covered by this report.

As used in this report, the terms we, our, First State Financial, company, and corporation mean First State
Financial Corporation and its subsidiary unless the context indicates otherwise. The terms bank and First State Bank mean First State Bank. We intend for this discussion to provide information that will assist in
understanding our financial statements. We will discuss the changes in certain key items in those financial statements and the primary factors that accounted for those changes.

OVERVIEW

We are the parent of First State Bank, a community bank headquartered in Sarasota, Florida with offices in
Sarasota and Pinellas counties. The Bank is committed to growing by:



| |  |  | Providing customers with access to local executives;
| | - |  | ----------------------------------------------------



| |  |  | Pursuing commercial lending opportunities with small- to mid-sized businesses;
| | - |  | ------------------------------------------------------------------------------



| |  |  | Developing new products and services to generate additional revenue sources;
| | - |  | ----------------------------------------------------------------------------



| |  |  | Cross-selling products and services to existing customers;
| | - |  | ----------------------------------------------------------



| |  |  | Adhering to sound credit standards and maintaining the continued quality of assets; and
| | - |  | ---------------------------------------------------------------------------------------



| |  |  | Acquiring and developing new branches within our geographical area.
| | - |  | -------------------------------------------------------------------

Some of the key developments and achievements during the second quarter of 2007 include:



| |  |  | A $21.9 million or 5.7% increase in net loan production (new loans less repayments);
| | - |  | ------------------------------------------------------------------------------------



| |  |  | The purchase of $9.8 million in securities to increase the duration of interest earning assets;
| | - |  | -----------------------------------------------------------------------------------------------



| |  |  | The second quarter annualized net interest margin on a fully tax equivalent basis was 4.14%;
| | - |  | --------------------------------------------------------------------------------------------



| |  |  | John E. Jed Wilkinson was appointed as President, Chief Executive Officer and a Director of the Company and of First State Bank. Mr. Wilkinson has
been with the Company since November 2002, serving most recently as Executive Vice-President and Chief Operating Officer of First State Bank. Prior to joining the Company, Mr. Wilkinson served as Executive Vice-President and Chief Operating
Officer of South Trust Bank from 1987 to 2002 as part of his 16-year tenure with them; and
| | - |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Plans to open four new branches over the next 15 months: Branch openings in Largo and Clearwater are scheduled for
August and December 2007 and new branches are planned for Venice and Sarasota in the 2ndand 3rdquarters of 2008, respectively.
| | - |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

We continue to face a
variety of challenges and opportunities inherent within the banking industry which are characterized by the uncertainty in the timing of interest rate changes, credit quality and intense competition. With the reorganization of management, the
Company has positioned itself to better serve its customers in the Pinellas and Sarasota markets. As part of our strategic plan the management team and employees will continue to build upon our past successes by building customer relationships,
monitoring credit quality, our margin and expanding our presence within our geographical market.



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FORWARD-LOOKING STATEMENTS

This Managements Discussion and Analysis of Financial Condition and Results of Operations may contain forward-looking statements that may be identified by the use of words like believe, expect,
anticipate, and project. Forward-looking statements reflect our good-faith evaluation of information currently available. However, such statements are dependent on and can be influenced by, a number of external variables over
which we have little or no control. These variables include:



| |  |  | the effect of future economic conditions;
| | - |  | -----------------------------------------



| |  |  | governmental monetary and fiscal policies;
| | - |  | ------------------------------------------



| |  |  | legislative and regulatory changes;
| | - |  | -----------------------------------



| |  |  | the risks of changes in interest rates on the level and composition of deposits, loan demand, and the values of loan collateral;
| | - |  | --------------------------------------------------------------------------------------------------------------------------------



| |  |  | interest rate risks; and
| | - |  | ------------------------



| |  |  | the effects of competition from other commercial banks, thrifts, consumer financial companies, and other financial institutions operating in our market area and
elsewhere.
| | - |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------

Forward-looking statements are not, and should not be relied upon as a guaranty of future performance or results. As a
result, actual outcomes and results may differ materially from those expressed in forward-looking statements. We undertake no obligation to update or revise forward-looking statements.

RESULTS OF OPERATIONS

The table below presents, for the periods indicated, amounts included in our Condensed
Consolidated Statements of Income. The percentage change is calculated using actual amounts rounded to the nearest thousand and rounded to the nearest whole percentage.



|                                    |  |                             |       |      |                           |        |  |   |       |   |  |      |        |      |   |        |  |   |        |  |   |       |   |  |     |  
|----------------------------------- |  | --------------------------- | ----- | ---- | ------------------------- | ------ |  | - | ----- | - |  | ---- | ------ | ---- | - | ------ |  | - | ------ |  | - | ----- | - |  | --- | -
|                                    |  | Three months ended June 30, |       |      | Six months ended June 30, |       
|                                    |  |                             |       |      |                           | change |  |   |       |   |  |      | change |     
|(Dollars in thousands)              |  | 2007                        |       | 2006 |                           | $      |  |   | %     |   |  | 2007 |        | 2006 |   | $      |  |   | %      | 
|Interest income                     |  | $                           | 8,481 |      | $                         | 7,690  |  | $ | 791   |   |  | 10   | %      |      | $ | 17,139 |  | $ | 14,588 |  | $ | 2,551 |   |  | 17  | %
|Interest expense                    |  |                             | 4,189 |      |                           | 3,172  |  |   | 1,017 |   |  | 32   | %      |      |   | 8,276  |  |   | 5,827  |  |   | 2,449 |   |  | 42  | %
|                                    |  |                             |       |      |                           |        |  |   |       |   |  |      |        |      |   |        |  |   |        |  |   |       |   |  |     |  
|Net interest income                 |  |                             | 4,292 |      |                           | 4,518  |  |   | (226  | ) |  | -5   | %      |      |   | 8,863  |  |   | 8,761  |  |   | 102   |   |  | 1   | %
|Provision for loan losses           |  |                             | 286   |      |                           | 305    |  |   | (19   | ) |  | -6   | %      |      |   | 477    |  |   | 680    |  |   | (203  | ) |  | -30 | %
|                                    |  |                             |       |      |                           |        |  |   |       |   |  |      |        |      |   |        |  |   |        |  |   |       |   |  |     |  
|Net interest income after provision |  |                             | 4,006 |      |                           | 4,213  |  |   | (207  | ) |  | -5   | %      |      |   | 8,386  |  |   | 8,081  |  |   | 305   |   |  | 4   | %
|Non-interest income                 |  |                             | 644   |      |                           | 735    |  |   | (91   | ) |  | -12  | %      |      |   | 1,140  |  |   | 1,391  |  |   | (251  | ) |  | -18 | %
|Non-interest expense                |  |                             | 3,399 |      |                           | 2,747  |  |   | 652   |   |  | 24   | %      |      |   | 6,267  |  |   | 5,417  |  |   | 850   |   |  | 16  | %
|                                    |  |                             |       |      |                           |        |  |   |       |   |  |      |        |      |   |        |  |   |        |  |   |       |   |  |     |  
|Income before income taxes          |  |                             | 1,251 |      |                           | 2,201  |  |   | (950  | ) |  | -43  | %      |      |   | 3,259  |  |   | 4,055  |  |   | (796  | ) |  | -20 | %
|Income tax expense                  |  |                             | 454   |      |                           | 862    |  |   | (408  | ) |  | -47  | %      |      |   | 1,193  |  |   | 1,558  |  |   | (365  | ) |  | -23 | %
|                                    |  |                             |       |      |                           |        |  |   |       |   |  |      |        |      |   |        |  |   |        |  |   |       |   |  |     |  
|Net income                          |  | $                           | 797   |      | $                         | 1,339  |  | $ | (542  | ) |  | -40  | %      |      | $ | 2,066  |  | $ | 2,497  |  | $ | (431  | ) |  | -17 | %
|                                    |  |                             |       |      |                           |        |  |   |       |   |  |      |        |      |   |        |  |   |        |  |   |       |   |  |     |  



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The following average balance sheet presents certain information related to our average yields on assets and average cost
of liabilities. Such yields have been derived by dividing income or expenses by the average balance of the corresponding assets or liabilities and the calculated year to date rate is then annualized.



|                                         |  |                                   |         |                |      |              |  |      |                 |  |                |         |              |   |        |  |      |  
|---------------------------------------- |  | --------------------------------- | ------- | -------------- | ---- | ------------ |  | ---- | --------------- |  | -------------- | ------- | ------------ | - | ------ |  | ---- | -
|                                         |  | For the six months ended June 30, |        
|                                         |  | 2007                              |         |                | 2006 |             
|(Dollars in thousands)                   |  | AverageBalances                   |         | Income/Expense |      | Yields/Rates |  |      | AverageBalances |  | Income/Expense |         | Yields/Rates |  
|Assets:                                  |  |                                   |         |                |      |              |  |      |                 |  |                |         |              |   |        |  |      |  
|Earning assets:                          |  |                                   |         |                |      |              |  |      |                 |  |                |         |              |   |        |  |      |  
|Loans (1)                                |  | $                                 | 377,377 |                | $    | 16,072       |  | 8.59 | %               |  | $              | 352,672 |              | $ | 14,057 |  | 8.04 | %
|Investment securities, taxable           |  |                                   | 17,706  |                |      | 421          |  | 4.79 | %               |  |                | 16,160  |              |   | 346    |  | 4.32 | %
|Investment securities, non-taxable (2)   |  |                                   | 8,523   |                |      | 235          |  | 5.55 | %               |  |                | 6,180   |              |   | 178    |  | 5.80 | %
|Other                                    |  |                                   | 18,479  |                |      | 474          |  | 5.17 | %               |  |                | 2,445   |              |   | 55     |  | 4.55 | %
|                                         |  |                                   |         |                |      |              |  |      |                 |  |                |         |              |   |        |  |      |  
|Total interest earning assets            |  |                                   | 422,085 |                |      | 17,202       |  | 8.22 | %               |  |                | 377,457 |              |   | 14,636 |  | 7.82 | %
|Non-interest earning assets              |  |                                   | 18,344  |                |      |              |  |      |                 |  |                | 16,446  |              |   |        |  |      |  
|                                         |  |                                   |         |                |      |              |  |      |                 |  |                |         |              |   |        |  |      |  
|Total assets                             |  | $                                 | 440,429 |                |      |              |  |      |                 |  | $              | 393,903 |              |   |        |  |      |  
|                                         |  |                                   |         |                |      |              |  |      |                 |  |                |         |              |   |        |  |      |  
|Liabilities:                             |  |                                   |         |                |      |              |  |      |                 |  |                |         |              |   |        |  |      |  
|Interest bearing liabilities:            |  |                                   |         |                |      |              |  |      |                 |  |                |         |              |   |        |  |      |  
|NOW accounts                             |  | $                                 | 16,081  |                | $    | 114          |  | 1.43 | %               |  | $              | 16,666  |              | $ | 79     |  | 0.95 | %
|Money market                             |  |                                   | 31,320  |                |      | 576          |  | 3.71 | %               |  |                | 36,504  |              |   | 557    |  | 3.08 | %
|Savings                                  |  |                                   | 22,837  |                |      | 407          |  | 3.60 | %               |  |                | 22,853  |              |   | 289    |  | 2.55 | %
|Time deposits                            |  |                                   | 275,749 |                |      | 7,038        |  | 5.15 | %               |  |                | 214,742 |              |   | 4,532  |  | 4.26 | %
|Borrowings                               |  |                                   | 4,769   |                |      | 141          |  | 5.95 | %               |  |                | 14,160  |              |   | 370    |  | 5.27 | %
|                                         |  |                                   |         |                |      |              |  |      |                 |  |                |         |              |   |        |  |      |  
|Total interest bearing liabilities       |  |                                   | 350,756 |                |      | 8,276        |  | 4.76 | %               |  |                | 304,925 |              |   | 5,827  |  | 3.85 | %
|Demand deposits                          |  |                                   | 36,906  |                |      |              |  |      |                 |  |                | 41,119  |              |   |        |  |      |  
|Other non-interest bearing liabilities   |  |                                   | 2,554   |                |      |              |  |      |                 |  |                | 1,910   |              |   |        |  |      |  
|                                         |  |                                   |         |                |      |              |  |      |                 |  |                |         |              |   |        |  |      |  
|Total non-interest bearing liabilities   |  |                                   | 39,460  |                |      |              |  |      |                 |  |                | 43,029  |              |   |        |  |      |  
|                                         |  |                                   |         |                |      |              |  |      |                 |  |                |         |              |   |        |  |      |  
|Stockholders equity                     |  |                                   | 50,213  |                |      |              |  |      |                 |  |                | 45,949  |              |   |        |  |      |  
|                                         |  |                                   |         |                |      |              |  |      |                 |  |                |         |              |   |        |  |      |  
|Total liabilities & stockholders equity |  | $                                 | 440,429 |                |      |              |  |      |                 |  | $              | 393,903 |              |   |        |  |      |  
|                                         |  |                                   |         |                |      |              |  |      |                 |  |                |         |              |   |        |  |      |  
|Net Interest Income                      |  |                                   |         |                | $    | 8,926        |  |      |                 |  |                |         |              | $ | 8,809  |  |      |  
|                                         |  |                                   |         |                |      |              |  |      |                 |  |                |         |              |   |        |  |      |  
|Net Interest Margin (3)                  |  |                                   |         |                |      |              |  | 4.26 | %               |  |                |         |              |   |        |  | 4.71 | %

---

|(1) | Average loans include nonperforming loans
|--- | -----------------------------------------

|(2) | On a fully tax-equivalent basis using a 34% rate for Federal income tax purposes, reduced by the non-deductible portion of interest expense.
|--- | --------------------------------------------------------------------------------------------------------------------------------------------

|(3) | Net interest margin is net interest income divided by average total interest earning assets
|--- | -------------------------------------------------------------------------------------------



10



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##### Table of Contents

The table below details the components of the changes in net interest income for the six months ended June 30, 2007
and June 30, 2006. For each major category of interest earning assets and interest bearing liabilities, information is provided with respect to changes due to average volumes, changes due to rates, and with the changes in both volumes and rates
allocated to these two categories based on the proportionate absolute changes in each category.



|                                         |  |                                                        |       |   |             |   |       |                        |  |   |       |  
|---------------------------------------- |  | ------------------------------------------------------ | ----- | - | ----------- | - | ----- | ---------------------- |  | - | ----- | -
|                                         |  | For the six months ended June 30, 2007Compared to 2006 |      
|                                         |  | Increase (decrease) due tochange in                    |       |   |             |  
|(Dollars in thousands)                   |  | AverageVolume                                          |       |   | AverageRate |   |       | Net Increase(Decrease) | 
|Increase (decrease) in interest income:  |  |                                                        |       |   |             |   |       |                        |  |   |       |  
|Loans                                    |  | $                                                      | 1,019 |   |             | $ | 996   |                        |  | $ | 2,015 |  
|Investment securities, taxable           |  |                                                        | 35    |   |             |   | 40    |                        |  |   | 75    |  
|Investment securities, non-taxable (1)   |  |                                                        | 64    |   |             |   | (7    | )                      |  |   | 57    |  
|Other                                    |  |                                                        | 410   |   |             |   | 9     |                        |  |   | 419   |  
|                                         |  |                                                        |       |   |             |   |       |                        |  |   |       |  
|Total interest income                    |  |                                                        | 1,528 |   |             |   | 1,038 |                        |  |   | 2,566 |  
|                                         |  |                                                        |       |   |             |   |       |                        |  |   |       |  
|Increase (decrease) in interest expense: |  |                                                        |       |   |             |   |       |                        |  |   |       |  
|NOW accounts                             |  |                                                        | (3    | ) |             |   | 38    |                        |  |   | 35    |  
|Money market                             |  |                                                        | (86   | ) |             |   | 105   |                        |  |   | 19    |  
|Savings                                  |  |                                                        |      |   |             |   | 117   |                        |  |   | 117   |  
|Time deposits                            |  |                                                        | 1,443 |   |             |   | 1,063 |                        |  |   | 2,506 |  
|Borrowings                               |  |                                                        | (272  | ) |             |   | 44    |                        |  |   | (228  | )
|                                         |  |                                                        |       |   |             |   |       |                        |  |   |       |  
|Total interest expense                   |  |                                                        | 1,082 |   |             |   | 1,367 |                        |  |   | 2,449 |  
|                                         |  |                                                        |       |   |             |   |       |                        |  |   |       |  
|Total change in net interest income      |  | $                                                      | 446   |   |             | $ | (329  | )                      |  | $ | 117   |  
|                                         |  |                                                        |       |   |             |   |       |                        |  |   |       |  

---

|(1) | On a fully tax-equivalent basis using a 34% rate for Federal income tax purposes, reduced by the non-deductible portion of interest expense.
|--- | --------------------------------------------------------------------------------------------------------------------------------------------

FOR THE SIX MONTHS ENDED JUNE 30, 2007:

NET INTEREST INCOME

Net interest income is the most significant component of our earnings. Net interest income is comprised of interest income, and loan-related fees, less
interest expense. Net interest income is affected by numerous factors, including the level, pricing, mix and maturity of earning assets and interest-bearing liabilities, as well as interest rate fluctuations. For purposes of this discussion, net
interest income has been adjusted to a fully tax-equivalent basis which restates tax-exempt income to an amount that would yield the same after-tax income had the income been subject to income taxes.

Net interest income on a fully tax-equivalent basis for the first six months of 2007, was $8.9 million compared to $8.8 million for the comparable period of 2006. The
increase in net interest income for the first six months of 2007 was driven by volume growth in the loan portfolio and partially offset with an overall increase in interest rates. Average earning assets grew 11.8% for the first six months of 2007
over the first six months of 2006, from $377.5 million to $422.1 million, with the yield on average earning assets increasing 40 basis points. Average interest bearing liabilities (deposits and borrowings) grew 15.0% for the first six months of 2007
over the first six months of 2006, from $304.9 million to $350.8 million, with the annualized cost increasing 91 basis points.

NON-INTEREST INCOME

Non-interest income for the first six months of 2007 was $1.1 million compared to $1.4 million for the same period of 2006. The decrease from 2006 to 2007
was primarily due to a reduction in mortgage banking fees. Mortgage banking fees decreased $284 thousand, from $708 thousand in the first six months of 2006 to $425 thousand in the first six months of 2007. The decrease in mortgage banking fees was
offset slightly with an increase in service charges and other fees. Service charges and other fees were $670 thousand in the first six months of 2007, an increase of $57 thousand, from $613 thousand for the same period of 2006.



11



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##### Table of Contents

NON-INTEREST EXPENSE

For the first six months of 2007, non-interest expense was $6.3 million, an increase of $850 thousand over the first six months of 2006. Salaries and employee benefits combined with professional fees represented the largest increase in
non-interest expense. Salaries and employee benefits increased $716 thousand in the first six months of the year versus the first six months of 2006. 85% of that increase was for salaries and 15% was for benefits. The increase is a result of the
departure of the Companys former CEO, annual salary and bonus increases and to further position the Bank for continued growth, new staff and several officer positions were added over the past year. As of June 30, 2007 there were 112.5
full-time equivalent employees compared to 97 at June 30, 2006. In January 2006, SFAS 123R was adopted and we began to recognize stock-based compensation costs, of which $44 thousand was expensed in the first six months of 2007. Professional
fees have increased as the Company sought possible expansion opportunities. New office space was completed to centralize certain operations and departments of the Bank, resulting in increased occupancy costs.

INCOME TAXES

For the six months ended June 30, 2007 and 2006,
the Company recorded income tax expense of $1.2 million and $1.6 million, respectively. Accordingly, our effective tax rates were 36.6% and 38.4% for 2007 and 2006, respectively. The determination of effective rates reflects items which are not
taxed for income tax purposes, primarily tax-exempt interest income.

FOR THE THREE MONTHS ENDED JUNE 30, 2007:

NET INTEREST INCOME

Net interest income decreased 5% to $4.3 million
for the second quarter of 2007 from $4.5 million for the second quarter of 2006. The decrease in net interest income from the prior year quarterly results is primarily attributed to an overall increase in interest rates, which was partially offset
by volume growth in the loan portfolio. Average earning assets for the second quarter grew 7.7% while average interest-bearing deposits grew 10.5% when compared to the second quarter averages of 2006. Annualized yields on average earning assets grew
19 basis points while annualized costs on average interest-bearing liabilities (deposits and borrowings) grew 79 basis points.

NON-INTEREST INCOME

Non-interest income for the second quarter of 2007 was $644 thousand compared to $735 thousand for the second quarter of 2006. The major contributor to the
decrease in non-interest income for the quarter was due to a reduction in mortgage banking fees. For the second quarter of 2007, mortgage banking fees were $265 thousand representing 41% of non-interest income and decreased 31% over the second
quarter of 2006. This decrease is due to the decrease in the volume of transactions closed, as the result of changes in the marketplace, as the activity in the residential real estate market has reduced from that in the second quarter of 2006.

To produce additional non-interest income and to further meet the needs of our customers the Bank has partnered with Infinex Investments, Inc. a
broker-dealer that provides financial products and services to First State Bank customers. The partnership was put into place during the second quarter of 2007. Infinex Investments, Inc. is endorsed by the Florida Bankers Association.

NON-INTEREST EXPENSE

Non-interest expense for the second quarter of
2007 increased by approximately $652 thousand to $3.4 million, compared with $2.7 million for the second quarter of 2006, an increase of 24%. Approximately one-third of this increase was attributable to non-recurring expenses related to the
departure of the Companys former CEO and professional fees related to possible expansion opportunities. As discussed in the above discussion of our activity year-to-date, salaries and employee benefits have been affected by the expansion of



12



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##### Table of Contents

our staff. In January 2006, SFAS 123R was adopted and we began to recognize stock-based compensation costs, of which $21 thousand was expensed in the quarter
ended June 30, 2007. The remaining change in non-interest expense from the quarter ended June 30, 2007 over the same quarter in 2006 is due to the general growth of the Bank.

INCOME TAXES

For the three months ended June 30, 2007 and 2006, the Company recorded income tax expense of $454
thousand and $862 thousand, respectively. Accordingly, our effective tax rates were 36.3% and 39.2% for 2007 and 2006 respectively. The determination of effective rates reflects items which are not taxed for income tax purposes, primarily tax-exempt
interest income.

FINANCIAL CONDITION ANALYSIS



|                                                         |  |          |         |   |              |   |         |        |  |   |         |   |  |      |  
|-------------------------------------------------------- |  | -------- | ------- | - | ------------ | - | ------- | ------ |  | - | ------- | - |  | ---- | -
|                                                         |  | June 30, |         |   | December 31, |   |         | change | 
|(Dollars in thousands)                                   |  | 2007     |         |   | 2006         |   |         | $      |  |   | %       |  
|Cash                                                     |  |          | 5,526   |   |              | $ | 44,233  |        |  | $ | (38,707 | ) |  | -88  | %
|Interest bearing deposit in other financial institutions |  |          | 233     |   |              |   | 299     |        |  |   | (66     | ) |  | -22  | %
|Investments                                              |  |          | 33,966  |   |              |   | 24,860  |        |  |   | 9,106   |   |  | 37   | %
|Loans  gross                                            |  |          | 403,505 |   |              |   | 378,511 |        |  |   | 24,994  |   |  | 7    | %
|net deferred fees                                        |  |          | (1,375  | ) |              |   | (1,406  | )      |  |   | 31      |   |  | 2    | %
|Allowance for loan loss reserve                          |  |          | (4,608  | ) |              |   | (4,358  | )      |  |   | (250    | ) |  | -6   | %
|Other                                                    |  |          | 14,490  |   |              |   | 11,309  |        |  |   | 3,181   |   |  | 28   | %
|                                                         |  |          |         |   |              |   |         |        |  |   |         |   |  |      |  
|Total Assets                                             |  | $        | 451,737 |   |              | $ | 453,448 |        |  | $ | (1,711  | ) |  | -0.4 | %
|                                                         |  |          |         |   |              |   |         |        |  |   |         |   |  |      |  
|Non-interest bearing deposits                            |  | $        | 39,127  |   |              | $ | 44,383  |        |  | $ | (5,256  | ) |  | -12  | %
|Interest bearing deposits                                |  |          | 343,580 |   |              |   | 355,936 |        |  |   | (12,356 | ) |  | 3    | %
|Borrowings                                               |  |          | 18,001  |   |              |   | 3,001   |        |  |   | 15,000  |   |  | 500  | %
|Other                                                    |  |          | 1,644   |   |              |   | 1,602   |        |  |   | 42      |   |  | 3    | %
|Stockholders equity                                     |  |          | 49,385  |   |              |   | 48,526  |        |  |   | 859     |   |  | 2    | %
|                                                         |  |          |         |   |              |   |         |        |  |   |         |   |  |      |  
|Total Liabilities and Stockholders equity               |  | $        | 451,737 |   |              | $ | 453,448 |        |  | $ | (1,711  | ) |  | -0.4 | %
|                                                         |  |          |         |   |              |   |         |        |  |   |         |   |  |      |  

The balance sheet shows our changes in loans and deposits and our commitment to funding a productive mix of
assets.



| |  |  | Gross loans grew $25.0 million (from $378.5 million at December 31, 2006 to $403.5 million at June 30, 2007);
| | - |  | -------------------------------------------------------------------------------------------------------------



| |  |  | Deposits decreased $17.7 million with decreases in demand, checking and time deposits, attributed to a competitive market. The decrease was offset slightly with
increases in savings and money markets due to increased interest rates (from $400.3 million to $382.7 million);
| | - |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Other assets grew $3.2 million, which includes the purchase of land in Venice for a future branch;
| | - |  | --------------------------------------------------------------------------------------------------



| |  |  | Our securities portfolio grew with the purchase of $9.8 million in new investments for the second quarter (net growth for the first six months of 2007 was $9.1
million  from $24.9 million to $34.0 million);
| | - |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Borrowings increased $15 million (from $3.0 million to $18.0 million), $10 million was used to purchase long-term securities as part of a repurchase agreement and
the remaining $5 million was used to fund the increase in loans;
| | - |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | The above activity was funded with our decrease in cash and increase in borrowings.
| | - |  | -----------------------------------------------------------------------------------



13



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##### Table of Contents

LOAN PORTFOLIO and ADEQUACY of the ALLOWANCE FOR LOAN LOSSES

We believe the allowance for loan losses accounting policy is important to the portrayal and understanding of our financial condition and results of operations. As such,
selection and application of this accounting policy involves judgments, estimates, and uncertainties that are susceptible to change. In the event that different assumptions or conditions were to prevail, and depending upon the severity of such
changes, the possibility of materially different financial conditions or results of operations is possible.

We manage the risk characteristics of the
entire loan portfolio in an effort to maintain an adequate allowance for loan losses and identify problem loans so that the risks in the portfolio can be identified on a timely basis. Loans subject to individual review are analyzed and segregated by
risk according to our internal risk rating scale. We also consider:



| |  |  | the risk characteristics of the loan portfolio;
| | - |  | -----------------------------------------------



| |  |  | changes in nonperforming and past-due loans;
| | - |  | --------------------------------------------



| |  |  | historical loss experience;
| | - |  | ---------------------------



| |  |  | concentrations of loans to specific borrowers and industries;
| | - |  | -------------------------------------------------------------



| |  |  | general and regional economic conditions; and
| | - |  | ---------------------------------------------



| |  |  | other factors existing at the determination date.
| | - |  | -------------------------------------------------

Although credit policies are designed to minimize risk, we recognize that loan losses will occur and that the amount of these losses will fluctuate depending on the risk characteristics of the loan portfolio.

As of June 30, 2007, the allowance for loan losses was $4.6 million, up $250 thousand (or 5.7%) from December 31, 2006. This increase consists of an additional
provision of $477 thousand, of which $286 thousand was recorded in the second quarter of 2007, recoveries of $24 thousand and charge-offs of $251 thousand. The increased provision since the end of last year was primarily due to loan growth as well
as the downgrading of a few commercial loans.

The ratio of the allowance for loan loss to total loans outstanding was 1.14% as of June 30, 2007, down
one basis point from December 31, 2006. Management reviews all individual commercial loans of a certain grade for impairment, and takes into account delinquency and charge-off trends and external economic factors such as market conditions and
rising interest rates, as well as those factors mentioned above. Based on managements review of commercial and construction loans, impaired assets increased $2.3 million during the first six months of 2007. The increase was due to the
downgrading of several commercial loans; however the increase was offset with the removal of two customer relationships from the impaired asset listing. The two customer relationships, which include ten commercial loans, were removed from the
impaired asset listing and from nonperforming assets, as a result of the borrowers commitment and consistency in making payments. Management continues to monitor and review all impaired loans and believes that the collateral position, along
with a specific allocation of the allowance, sufficiently protects the Bank from further loss; however these loans classified as impaired are characterized by the distinct possibility that the Bank will sustain some loss if the deficiencies are not
corrected.

NONPERFORMING ASSETS

It is our policy to
discontinue the accrual of interest income and classify a loan as nonaccrual when principal and interest is past due 90 days or more unless we determine the principal and interest on the loan is well collateralized and in the process of collection.
In all cases, loans are placed on nonaccrual or charged-off at an earlier date if collection of principal and interest is considered doubtful. Loans are not returned to accrual status until principal and interest payments are brought current and
future payments appear reasonably certain. Interest accrued and unpaid at the time a loan is placed on nonaccrual status is charged against interest income.



14



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##### Table of Contents

As of June 30, 2007, total loans on nonaccrual status were $782 thousand, representing 0.19% of total loans. There
was $889 thousand of loans on nonaccrual status at December 31, 2006. This represented 0.23% of total loans on that date. In addition to loans classified as nonaccrual, the Bank carefully monitors other credits that are current in terms of
principal and interest payments but that it believes may deteriorate in quality if economic conditions change.

Some of the Banks nonaccrual loans
are considered to be impaired. A loan is considered impaired when its determined that it is probable that all the contractual principal and interest due under the loan may not be collectible. Nonaccrual commercial real estate loans are
reviewed individually for impairment, the impairment, if any is based upon the difference between the carrying value of the investment and the fair value of the collateral less costs to sell or the present value of estimated future cash flows.

ASSET / LIABILITY MANAGEMENT AND INTEREST RATE RISKS

Changes in interest rates can substantially impact our long-term profitability and current income. An important part of our efforts to maintain long-term profitability is the management of interest rate risk. The goal is to maximize net
interest income within acceptable levels of interest rate risk and liquidity. Interest rate exposure is managed by monitoring the relationship between interest-earning assets and interest-bearing liabilities, focusing on the size, maturity or
repricing date, rate of return and degree of risk. The Banks Asset / Liability Management Committee oversees the interest rate risk management and reviews the Banks asset / liability structure on a monthly basis.

The Bank uses interest rate sensitivity analysis (GAP analysis) to monitor the amount and timing of balances exposed to changes in interest rates. The GAP
analysis is not relied upon solely to determine future reactions to interest rate changes because it is presented at one point in time and could change significantly from day-to-day.

Interest rates have stabilized in the short term and the impact of such on adjustable rate loans and mortgages has been factored into the allowance for loan loss reserve. To mitigate our future risk associated with
the repricing of loans, management adheres to a conservative underwriting approach to minimize this future risk. Furthermore, management has avoided the use of certain loan products typically associated with speculative real estate financing, such
as negative amortization residential real estate loans and sub-prime lending. Management has focused its lending efforts on more fixed rate loans.

In
response to the changing operating environment, management continues to monitor the margin through controls and effective balance sheet and risk management practices. During the second quarter of 2007 the Bank entered into a $10 million debt
repurchase agreement, whereby higher yielding long-term securities were purchased to increase the duration of earning assets and shorten the duration of liabilities. The Bank is currently in an asset-sensitive position, therefore the debt repurchase
agreement and managements focus on fixed rate loans is intended to lessen the impact of a downward movement in interest rates.

LIQUIDITY AND
CAPITAL RESOURCES

LIQUIDITY

The goal of liquidity
management is to ensure the availability of an adequate level of funds to meet the loan demand and deposit withdrawal needs of our customers. The Bank monitors and manages its liquidity position so that funds will be available at a reasonable cost
to meet financial commitments, to finance business expansion, and to take advantage of unforeseen opportunities. We manage the levels, types, and maturities of earning assets in relation to the sources available to fund current and future needs.



15



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##### Table of Contents

In addition to maintaining a stable core deposit base, the Bank seeks to maintain adequate liquidity primarily through
the use of investment securities and unused borrowing capacity. The Bank has invested in Federal Home Loan Bank stock for the purposes of establishing credit lines with the Federal Home Loan Bank. The credit availability to the Bank is equal to 15
percent of the Banks total assets as reported on the most recent quarterly financial information submitted to its regulators. The credit availability approximated $67.8 million at June 30, 2007, under which $8 million was outstanding.
Borrowings against this line of credit are collateralized by investment securities and the Banks residential and commercial real estate loan portfolio.

CAPITAL RESOURCES

We and the Bank are subject to various regulatory capital requirements which involve quantitative measures of our assets,
liabilities, and certain off-balance sheet items. These capital requirements and classifications are ultimately subject to qualitative judgments by the regulators about components, risk weightings, and other factors.

Overall we and the Bank continue to maintain a well-capitalized capital position, which is intended to supports current needs and provide a sound foundation to support
future expansion. The Corporations and Banks regulatory capital ratios are consistently above the well-capitalized standards. Our capital ratios as of June 30, 2007 and December 31, 2006 are presented below.



|                                  |  |         |   |  |             |   |  |               |        |       |                   |   |        |   |        |  |       |  
|--------------------------------- |  | ------- | - |  | ----------- | - |  | ------------- | ------ | ----- | ----------------- | - | ------ | - | ------ |  | ----- | -
|                                  |  |         |   |  | Well-       |   |  | June 30, 2007 |        |       | December 31, 2006 |  
|(Dollars in thousands)            |  | Minimum |   |  | capitalized |   |  | Amount        |        | Ratio |                   |   | Amount |   | Ratio  | 
|First State Financial Corporation |  |         |   |  |             |   |  |               |        |       |                   |   |        |   |        |  |       |  
|Tier 1 capital                    |  | 4.0     | % |  | 6.0         | % |  | $             | 49,900 |       | 12.02             | % |        | $ | 48,718 |  | 12.17 | %
|Total capital                     |  | 8.0     | % |  | 10.0        | % |  |               | 54,509 |       | 13.13             | % |        |   | 53,076 |  | 13.26 | %
|Tier 1 leverage                   |  | 4.0     | % |  | 5.0         | % |  |               | 49,900 |       | 11.35             | % |        |   | 48,718 |  | 10.89 | %
|                                  |  |         |   |  |             |  
|First State Bank                  |  |         |   |  |             |   |  |               |        |       |                   |   |        |   |        |  |       |  
|Tier 1 capital                    |  | 4.0     | % |  | 6.0         | % |  |               | 49,787 |       | 12.00             | % |        |   | 48,670 |  | 12.16 | %
|Total capital                     |  | 8.0     | % |  | 10.0        | % |  |               | 54,395 |       | 13.11             | % |        |   | 53,028 |  | 13.25 | %
|Tier 1 leverage                   |  | 4.0     | % |  | 5.0         | % |  |               | 49,787 |       | 11.38             | % |        |   | 48,670 |  | 10.96 | %



|Item 3. | QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
|------- | ----------------------------------------------------------

Market
risk is the risk that a financial institutions earnings and capital, or its ability to meet its business objectives, will be adversely affected by movements in market rates or prices such as interest rates, foreign exchange rates, equity
rates, equity prices, credit spreads and/or commodity prices. The Company has assessed its market risk as predominately interest rate risk.

Interest rate
sensitivity as of June 30, 2007 was analyzed using a simulation analysis of the Companys sensitivity to changes in net interest income under varying assumptions for changes in market interest rates. Specifically, the model derives
expected interest income and interest expense resulting from gradual and parallel shifts in the yield curve. Rate changes are matched with known re-pricing intervals. The Bank uses standardized assumptions run against Bank data by an outsourced
provider of Asset/Liability reporting. The analysis indicates that, while a decreasing rate environment would cause our margin to compress, the decrease in net interest income is not as dramatic as the increase we would receive in a rising rate
environment. This is primarily due to the Banks ability to manage its liabilities. Competition for deposits in the Banks market areas is intense. By managing maturities and rates as well as looking to other sources of funding, such as
advances from the Federal Home Loan Bank, we attempt to control the compression on our interest rate margin in such a way as to cushion the effect of a declining rate environment.



16



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##### Table of Contents

The Companys simulation analysis has its limitations, as the assumptions are inherently uncertain and subject to
fluctuation and revision in a dynamic environment and as a result the model cannot perfectly forecast net interest income, nor exactly predict the impact of higher or lower interest rates on net interest income. Actual results will differ from
simulated results due to timing, magnitude, and frequency of balance sheet components and interest rate changes, market conditions and management strategies, among other factors.



|Item 4. | CONTROLS AND PROCEDURES
|------- | -----------------------

Disclosure Controls and Procedures

Management is responsible for establishing and maintaining effective disclosure controls and procedures, as defined under Rule 13a-15 of the Securities
Exchange Act of 1934, that are designed to cause the material information required to be disclosed by the Bank in the reports it files or submits under the Securities Exchange Act of 1934 to be recorded, processed, summarized and reported within the
time periods specified by the Securities and Exchange Commissions rules and forms. In designing and evaluating the disclosure controls and procedures, management recognized that a control design, no matter how well operated, can provide only
reasonable, not absolute, assurance that the objectives of the control design are met. Due to inherent limitations in all control designs, no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if
any, within a company have been detected.

Under the supervision and with the participation of management, including the Chief Executive Officer and Chief
Financial Officer our controls and procedures in place as of the end of the period covered by this report were evaluated. They concluded that our disclosure controls and procedures were adequate. No significant deficiencies or material weaknesses in
the design or operation of internal controls which could adversely affect our ability to record, process, summarize, and report financial data have been identified. We made no significant changes in our internal disclosure controls and procedures or
in other factors that could significantly affect these controls subsequent to the date of evaluation by management, including the Chief Executive Officer and Chief Financial Officer.

Changes in Internal Control over Financial Reporting

As of the end of the period covered by this report, we
performed an evaluation under the supervision and with the participation of management, including the Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of its internal control over financial
reporting pursuant to Rule 13a-15 of the Securities Exchange Act of 1934. Based upon that evaluation enhancements were made to the financial reporting process, however no changes were made that were considered material or reasonably likely to
materially affect, the Banks internal control over financial reporting.



17



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##### Table of Contents

PART II



|Item 1. | LEGAL PROCEEDINGS
|------- | -----------------

None



|Item 1A. | RISK FACTORS
|-------- | ------------

In addition to other information set
forth in this report, you should carefully consider the factors discussed in Part I, Item 1A. Risk Factors in our Annual Report on Form 10-K for the year ended December 31, 2006, which could materially affect our business, financial
condition or future results. The risks described in our Annual Report on Form 10-K are not the only risks facing the Company. Additional risks and uncertainties not currently know to us or that we currently deem to be immaterial also may adversely
affect our business, financial condition and/or operating results.



|Item 2. | UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
|------- | -----------------------------------------------------------

None



|Item 3. | DEFAULTS UPON SENIOR SECURITIES
|------- | -------------------------------

None



|Item 4. | SUBMISSION OF MATTERS TO VOTE OF SECURITY HOLDERS
|------- | -------------------------------------------------

On April 9, 2007, the Company held an annual meeting of the stockholders of the Common Stock to vote to elect seven persons to the Companys Board of Directors. The following table sets forth the votes for and votes withheld with
respect to the election of the directors:



|                  |  |                |  |               
|----------------- |  | -------------- |  | --------------
|Director Nominee: |  | Votes Cast For |  | Votes Withheld
|Robert Beymer     |  | 4,441,819      |  | 17,300        
|Corey Coughlin    |  | 4,453,802      |  | 5,317         
|Daniel Harrington |  | 4,433,819      |  | 25,300        
|Marshall Reynolds |  | 4,384,858      |  | 74,261        
|Neal Scaggs       |  | 4,425,302      |  | 33,817        
|Robert Shell, Jr. |  | 4,453,819      |  | 5,300         
|Thomas Wright     |  | 4,453,369      |  | 5,750         



|Item 5. | OTHER INFORMATION
|------- | -----------------

As announced on April 13,
2007, effective April 9, 2007, Corey J. Coughlin resigned as a Director and as President and Chief Executive Officer of the Registrant and of First State Bank to pursue other business opportunities. The Registrant appointed John E.
Jed Wilkinson as President and Chief Executive Officer and Director of the Registrant and of First State Bank. As severance compensation the Registrant paid Mr. Coughlin $215 thousand during the second quarter of 2007.



|Item 6. | EXHIBITS
|------- | --------

Exhibit 31.1  Chief Executive
Officers certification required under Section 302 of Sarbanes-Oxley Act of 2002

Exhibit 31.2  Chief Financial
Officers certification required under Section 302 of Sarbanes-Oxley Act of 2002

Exhibit 32Chief Executive Officer and
Chief Financial Officers certification required under Section 906 of Sarbanes-Oxley Act of 2002



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##### Table of Contents

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report
to be signed on its behalf by the undersigned thereunto duly authorized.

Date: August 3, 2007



FIRST STATE FINANCIAL CORPORATION/s/ John E. Jed WilkinsonPresident and Chief Executive Officer/s/ Dennis GrinsteinerSenior Vice President and Chief Financial Officer




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