10-Q

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

(Mark One)

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

For the quarterly period ended June 30, 2013

OR

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

Commission File Number 0-18832

First Financial Service Corporation

(Exact Name of Registrant as specified in its charter)

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

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

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

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

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company.

Large Accelerated Filer ¨   Accelerated Filer ¨ Non-Accelerated Filer ¨   Smaller Reporting Company x

Indicate by a 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.

Class	Outstanding as of July 31, 2013
Common Stock	4,861,523 shares

FIRST FINANCIAL SERVICE CORPORATION

FORM 10-Q

TABLE OF CONTENTS

PART I – FINANCIAL INFORMATION
Preliminary Note Regarding Forward-Looking Statements		3
Item 1.	Consolidated Financial Statements and Notes to Consolidated Financial Statements (Unaudited)	4
Item 2.	Management's Discussion and Analysis of Financial Condition and Results of Operations	37
Item 3.	Quantitative and Qualitative Disclosures about Market Risk	56
Item 4.	Controls and Procedures	58
PART II – OTHER INFORMATION
Item 1.	Legal Proceedings	58
Item 1A.	Risk Factors	59
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	59
Item 3.	Defaults upon Senior Securities	59
Item 4.	Mine Safety Disclosures	59
Item 5.	Other Information	59
Item 6.	Exhibits	59
SIGNATURES		60

2

 PRELIMINARY NOTE REGARDING

FORWARD-LOOKING STATEMENTS

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

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

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

3

Item 1.	FIRST FINANCIAL SERVICE CORPORATION
	Consolidated Balance Sheets
	(Unaudited)

	June 30,			December 31,
(Dollars in thousands, except per share data)	2013			2012
ASSETS:
Cash and due from banks	$	11,947		$	12,598
Interest bearing deposits		15,978			50,505
Total cash and cash equivalents		27,925			63,103
Securities available-for-sale		309,132			354,131
Loans held for sale		3,595			3,887
Loans, net of unearned fees		490,586			524,835
Allowance for loan losses		(15,947	)		(17,265	)
Net loans		474,639			507,570
Federal Home Loan Bank stock		4,430			4,805
Cash surrender value of life insurance		10,244			10,060
Premises and equipment, net		26,742			27,048
Real estate owned:
Acquired through foreclosure, net of valuation allowance of $721 Jun (2013) and $500 Dec (2012)		14,169			22,286
Other repossessed assets		37			34
Accrued interest receivable		2,390			2,690
Accrued income taxes		2,907			2,928
Low-income housing investments		6,821			7,061
Other assets		1,487			1,459
TOTAL ASSETS	$	884,518		$	1,007,062
LIABILITIES AND STOCKHOLDERS' EQUITY
LIABILITIES:
Deposits:
Non-interest bearing	$	80,584		$	75,842
Interest bearing		717,793			846,778
Total deposits		798,377			922,620
Advances from Federal Home Loan Bank		22,526			12,596
Subordinated debentures		18,000			18,000
Accrued interest payable		3,798			3,121
Accrued senior preferred dividend		2,969			2,469
Accounts payable and other liabilities		4,246			3,884
TOTAL LIABILITIES		849,916			962,690
Commitments and contingent liabilities		-			-
STOCKHOLDERS' EQUITY:
Senior preferred stock, $1 par value per share; authorized 5,000,000 shares; issued and outstanding, 20,000 shares with a liquidation preference of $23.0 million Jun (2013), and $22.5 million Dec (2012)		19,970			19,943
Common stock, $1 par value per share; authorized 35,000,000 shares; issued and outstanding, 4,855,890 shares Jun (2013), and 4,775,114 shares Dec (2012)		4,856			4,775
Additional paid-in capital		35,990			35,782
Accumulated deficit		(18,929	)		(17,398	)
Accumulated other comprehensive income		(7,285	)		1,270
TOTAL STOCKHOLDERS' EQUITY		34,602			44,372
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY	$	884,518		$	1,007,062

See notes to the unuaudited consolidated financial statements.

4

FIRST FINANCIAL SERVICE CORPORATION

Consolidated Statements of Operations

(Unaudited)

	Three Months Ended						Six Months Ended
(Amounts in thousands, except per share data)	June 30,						June 30,
	2013			2012			2013			2012
Loans, including fees	$	6,603		$	8,868		$	13,421		$	18,829
Taxable securities		1,541			1,726			3,198			3,436
Tax exempt securities		67			144			132			357
Total interest income		8,211			10,738			16,751			22,622
Interest Expense:
Deposits		1,774			3,444			3,910			7,389
Federal Home Loan Bank advances		132			283			264			567
Subordinated debentures		341			341			682			682
Total interest expense		2,247			4,068			4,856			8,638
Net interest income		5,964			6,670			11,895			13,984
Provision for loan losses		212			915			(825	)		1,927
Net interest income after provision for loan losses		5,752			5,755			12,720			12,057
Non-interest Income:
Customer service fees on deposit accounts		1,307			1,399			2,498			2,782
Gain on sale of mortgage loans		161			384			588			695
Gain on sale of investments		334			598			843			1,309
Loss on sale of investments		(334	)		(303	)		(616	)		(303	)
Other than temporary impairment loss:
Total other-than-temporary impairment losses		-			-			-			(26	)
Portion of loss recognized in other comprehensive income/(loss) (before taxes)		-			-			-			-
Net impairment losses recognized in earnings		-			-			-			(26	)
Loss on sale and write downs on real estate acquired through foreclosure		(532	)		(2,016	)		(1,592	)		(3,582	)
Gain on sale of premises and equipment		-			322			-			322
Gain on sale on real estate acquired through foreclosure		150			210			207			613
Gain on sale of real estate held for development		-			-			-			175
Brokerage commissions		139			112			257			207
Other income		461			617			955			1,028
Total non-interest income		1,686			1,323			3,140			3,220
Non-interest Expense:
Employee compensation and benefits		3,757			3,822			7,550			7,675
Office occupancy expense and equipment		690			782			1,398			1,550
Marketing and advertising		74			135			174			168
Outside services and data processing		941			893			1,804			1,704
Bank franchise tax		315			402			630			744
FDIC insurance premiums		505			682			1,194			1,097
Amortization of intangible assets		-			62			-			127
Real estate acquired through foreclosure expense		524			2,336			818			2,676
Loan expense		385			656			607			1,164
Other expense		1,372			1,446			2,688			2,800
Total non-interest expense		8,563			11,216			16,863			19,705
Loss before income taxes		(1,125	)		(4,138	)		(1,003	)		(4,428	)
Income tax expense/(benefit)		1			1			1			1
Net Loss		(1,126	)		(4,139	)		(1,004	)		(4,429	)
Less:
Dividends on preferred stock		(250	)		(250	)		(500	)		(500	)
Accretion on preferred stock		(13	)		(13	)		(27	)		(27	)
Net loss attributable to common shareholders	$	(1,389	)	$	(4,402	)	$	(1,531	)	$	(4,956	)
Shares applicable to basic loss per common share		4,806,444			4,767,464			4,797,259			4,764,240
Basic loss per common share	$	(0.29	)	$	(0.92	)	$	(0.32	)	$	(1.04	)
Shares applicable to diluted loss per common share		4,806,444			4,767,464			4,797,259			4,764,240
Diluted loss per common share	$	(0.29	)	$	(0.92	)	$	(0.32	)	$	(1.04	)
Cash dividends declared per common share	$	-		$	-		$	-		$	-

See notes to the unuaudited consolidated financial statements.

5

FIRST FINANCIAL SERVICE CORPORATION

Consolidated Statements of Comprehensive Income/(Loss)

(Unaudited)

	Three Months Ended						Six Months Ended
(Dollars in thousands)	June 30,						June 30,
	2013			2012			2013			2012
Net Loss	$	(1,126	)	$	(4,139	)	$	(1,004	)	$	(4,429	)
Other comprehensive income (loss):
Change in unrealized gain (loss) on securities available-for-sale		(7,378	)		152			(8,328	)		768
Change in unrealized gain (loss) on securities available-for-sale for which a portion of other-than-temporary impairment has been recognized into earnings		-			(15	)		-			(21	)
Reclassification of realized amount on securities available-for-sale losses (gains)		-			(295	)		(227	)		(1,006	)
Reclassification of unrealized loss on held-to-maturity security recognized in income		-			-			-			26
Accretion (amortization) of non-credit component of other-than-temporary impairment on held-to-maturity securities		-			50			-			50
Net unrealized gain (loss) recognized in comprehensive income		(7,378	)		(108	)		(8,555	)		(183	)
Tax effect		-			-			-			-
Total other comphrehensive loss		(7,378	)		(108	)		(8,555	)		(183	)
Comprehensive Loss	$	(8,504	)	$	(4,247	)	$	(9,559	)	$	(4,612	)

See notes to the unaudited consolidated financial statements.

6

FIRST FINANCIAL SERVICE CORPORATION

Consolidated Statements of Changes in Stockholders' Equity

Six Months Ended June 30, 2013

(Dollars In Thousands, Except Per Share Amounts)

(Unaudited)

	Shares				Amount				Additional Paid-in			Accumulated			Accumulated Other Comprehensive Income, Net of
	Preferred		Common		Preferred		Common		Capital			Deficit			Tax			Total
Balance, January 1, 2013		20,000		4,775,114	$	19,943	$	4,775	$	35,782		$	(17,398	)	$	1,270		$	44,372
Net loss		-		-		-		-		-			(1,004	)		-			(1,004	)
Stock issued for employee benefit plans		-		14,848		-		15		14			-			-			29
Issuance of restricted shares		-		65,928		-		66		(66	)		-			-			-
Stock-based compensation expense		-		-		-		-		260			-			-			260
Total other comprehensive income (loss)		-		-		-		-		-			-			(8,555	)		(8,555	)
Dividends on preferred stock		-		-		-		-		-			(500	)		-			(500	)
Accretion of preferred stock discount		-		-		27		-		-			(27	)		-			-
Balance, June 30, 2013		20,000		4,855,890	$	19,970	$	4,856	$	35,990		$	(18,929	)	$	(7,285	)	$	34,602

See notes to the unaudited consolidated financial statements.

7

FIRST FINANCIAL SERVICE CORPORATION

Consolidated Statements of Cash Flows

(Dollars In Thousands)

(Unaudited)

	Six Months Ended
	June 30,
	2013			2012
Operating Activities:
Net loss	$	(1,004	)	$	(4,429	)
Adjustments to reconcile net income/(loss) to net cash provided by operating activities:
Provision for loan losses		(825	)		1,927
Depreciation on premises and equipment		746			771
Change in real estate acquired through foreclosure valuation allowance		221			-
Intangible asset amortization		-			127
Loss on low-income housing investments		264			183
Net amortization (accretion) available-for-sale		3,898			(904	)
Impairment loss on securities held-to-maturity		-			26
Gain on sale of investments available-for-sale		(843	)		(1,309	)
Loss on sale of investments available-for-sale		616			303
Gain on sale of mortgage loans		(588	)		(695	)
Gain on sale of premises and equipment		-			(322	)
Gain on sale of real estate acquired through foreclosure		(207	)		(613	)
Gain on sale of real estate held for development		-			(175	)
Write-downs on real estate acquired through foreclosure		1,270			3,543
Origination of loans held for sale		(34,589	)		(27,572	)
Proceeds on sale of loans held for sale		35,469			35,289
Stock-based compensation expense		260			92
Prepaid FDIC premium		-			1,055
Changes in:
Cash surrender value of life insurance		(184	)		(178	)
Interest receivable		300			702
Other assets		179			1,040
Interest payable		677			682
Accrued income tax		21			-
Accounts payable and other liabilities		362			267
Net cash from operating activities		6,043			9,810
Investing Activities:
Sales of securities available-for-sale		101,056			87,454
Purchases of securities available-for-sale		(92,922	)		(140,232	)
Maturities of securities available-for-sale		24,639			50,919
Maturities of securities held-to-maturity		-			58
Net change in loans		31,802			70,654
Sale of portfolio loans		-			10,693
Redemption of Federal Home Loan Bank stock		375			-
Investment in low-income housing projects		(24	)		(24	)
Net purchases of premises and equipment		(440	)		(86	)
Sales of premises and equipment		-			1,575
Sales of real estate acquired through foreclosure		8,577			4,356
Sales of real estate held for development		-			220
Net cash from investing activities		73,063			85,587
Financing Activities
Net change in deposits		(124,243	)		(33,492	)
Advance from Federal Home Loan Bank		10,000			-
Repayments to Federal Home Loan Bank		(70	)		(70	)
Issuance of common stock under dividend reinvestment program		-			4
Issuance of common stock for employee benefit plans		29			39
Net cash from financing activities		(114,284	)		(33,519	)
Increase (decrease) in cash and cash equivalents		(35,178	)		61,878
Cash and cash equivalents, beginning of year		63,103			92,236
Cash and cash equivalents, end of year	$	27,925		$	154,114
Supplemental noncash disclosures:
Transfers from loans to real estate acquired through foreclosure and repossessed assets	$	(2,036	)	$	15,541
Loans to facilitate sales of real estate owned and repossessed assets	$	82		$	208
Dividends accrued not paid on preferred stock	$	500		$	500
Transfers from loans to loans held for sale in probable branch divestiture	$	-		$	65,242

See notes to the unaudited consolidated financial statements.

8

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

1. BASIS OF PRESENTATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

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

The accompanying unaudited consolidated financial statements have been prepared in accordance with U.S. generally accepted accounting principles for interim financial information and with the instructions to Form 10-Q and Rule 10-01 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by U.S. generally accepted accounting principles for complete financial statements. In the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation have been included. Operating results for the three and six month periods ending June 30, 2013 are not necessarily indicative of the results that may occur for the year ending December 31, 2013. For further information, refer to the consolidated financial statements and footnotes thereto included in the Corporation’s annual report on Form 10-K for the period ended December 31, 2012.

Reclassifications – Some items in the prior year financial statements were reclassified to conform to the current presentation. Reclassifications had no effect on prior year operations or shareholder’s equity.

Adoption of New Accounting Standards – Effective February 2013, we adopted, ASU No. 2013-02, Reporting of Amounts Reclassified Out of Accumulated Other Comprehensive (ASU 2013-02).  This guidance is the culmination of the FASB’s deliberation on reporting reclassification adjustments from accumulated other comprehensive income (AOCI). The amendments in ASU 2013-02 do not change the current requirements for reporting net income or other comprehensive income.  However, the amendments require disclosure of amounts reclassified out of AOCI in its entirety, by component, on the face of the statement of operations or in the notes thereto.  Amounts that are not required to be reclassified in their entirety to net income must be cross-referenced to other disclosures that provide additional detail.  This standard was effective for public entities for annual and interim reporting periods beginning after December 15, 2012. The adoption of this update did not have a material impact on the consolidated financial statements.

In July 2013, the Financial Accounting Standards Board issued Accounting Standards Update 2013-11, Presentation of an Unrecognized Tax Benefit When a Net Operating Loss Carryforward, a Similar Tax Loss, or a Tax Credit Carryforward Exists (ASU 2013-11). Current GAAP does not include explicit guidance on the financial statement presentation of an unrecognized tax benefit when a net operating loss carryforward, a similar tax loss, or a tax credit carryforward exists. The adoption of ASU 2013-11 will require an unrecognized tax benefit, or a portion of an unrecognized tax benefit to be presented in the financial statements as a reduction to a deferred tax asset for a net operating loss carryforward, a similar tax loss, or a tax credit carryforward, unless an exception applies. The amendments in this update are effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2013. We are currently evaluating the effect that the provisions of ASU 2013-11 will have on the consolidated financial statements.

9

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

2. REGULATORY MATTERS

On January 27, 2011, the Bank entered into a Consent Order with the Federal Deposit Insurance Corporation (“FDIC”) and the Kentucky Department of Financial Institutions (“KDFI”). The 2011 Consent Order required the Bank to achieve a total capital to risk-weighted assets ratio of 12% and a Tier 1 capital to average total assets ratio of 9% by June 30, 2011. The 2011 Consent Order also forbade the Bank from declaring dividends without the prior written approval of the FDIC and KDFI and required the Bank to develop and implement plans to reduce its level of non-performing assets and concentrations of credit in commercial real estate loans, maintain adequate reserves for loan and lease losses, implement procedures to ensure compliance with applicable laws, and take certain other actions. A copy of the Consent Order is included as an exhibit to our Form 8−K filed on January 27, 2011.

In April 2011, the Corporation entered into a formal agreement with the Federal Reserve Bank of St. Louis, which requires the Corporation to obtain regulatory approval before declaring any dividends and to take steps to ensure the Bank complies with the Consent Order. We also may not redeem shares or obtain additional borrowings without prior approval.

On March 9, 2012, the Bank entered into a new Consent Order with the FDIC and KDFI. The 2012 Consent Order requires the Bank to achieve the minimum capital ratios in the 2011 Consent Order by June 30, 2012. The Bank also agreed that if it should be unable to reach the required capital levels by that date, and if directed in writing by the FDIC, then within 30 days the Bank would develop, adopt and implement a written plan to sell or merge itself into another federally insured financial institution. To date, the Bank has not received such a written direction. The 2012 Consent Order includes the substantive provisions of the 2011 Consent Order and requires the Bank to continue to adhere to the plans implemented in response to the 2011 Consent Order. A copy of the March 9, 2012 Consent Order is included as Exhibit 10.8 to our 2011 Annual Report on Form 10-K filed March 30, 2012. At June 30, 2013, the Bank’s Tier 1 capital ratio was 7.27% and the total risk-based capital ratio was 12.36% as compared to the minimum capital ratios as required by the 2011 Consent Order of 9.00% and 12.00%, respectively.

We notified the bank regulatory agencies that we have achieved and maintained the total risk-based capital ratio, but we have yet to achieve the Tier 1 capital ratio. We are continuing to explore our strategic alternatives to achieve and maintain the Tier 1 capital ratio as well as all of the other consent order issues.

The Consent Orders also resulted in the Bank being designated as a "troubled institution," which status prohibits the Bank from accepting, renewing or rolling over brokered deposits, restricts the amount of interest the Bank may pay on deposits, and increases its deposit insurance assessment.

Bank regulatory agencies can exercise discretion when an institution does not meet the terms of a regulatory order. The agencies may initiate changes in management, issue mandatory directives, impose monetary penalties or refrain from formal sanctions, depending on individual circumstances. Any material failures to comply with our regulatory orders would likely result in more stringent enforcement actions by the bank regulatory agencies, which could damage our reputation and have a material adverse effect on our business.

The 2012 Consent Order and the formal agreement will remain in effect until modified or terminated by the FDIC, KDFI and Federal Reserve Bank of St. Louis.

In response to the 2011 Consent Order, we engaged an investment banking firm with expertise in the financial services sector to assist with a review of all of our strategic alternatives as we work to achieve the higher required capital ratios. One of these alternatives was to sell branches located outside of our core market. On July 6, 2012, we sold our four banking centers in Southern Indiana, receiving a 3.65% premium on the $102.3 million of consumer and commercial deposits at closing. The buyer assumed a total of approximately $115.4 million in non-brokered deposits, which included $13.1 million of government, corporate, other financial institution and municipal deposits for which we received no premium or discount. We also sold approximately $30.4 million in performing loans at a discount of 0.80%. Other assets sold included vault cash of $367,000 and fixed assets of $887,000. The Indiana branch sale resulted in a gain of $3.1 million.

10

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

2. REGULATORY MATTERS – (Continued)

In addition to the sale of our Indiana branches, we also sold commercial real estate loans totaling $10.7 million at par during 2012.

Our plans for 2013 include the following even though there can be no assurances that our plans will be achieved:

· Continuing to identify and evaluate available strategic options to meet regulatory capital levels and all other requirements of our Consent Order.

· Continuing to serve our community banking customers and operate the Corporation and the Bank in a safe and sound manner. We have worked diligently to maintain the strength of our retail and deposit franchise.

· Continuing to reduce expenses and improve our ability to operate in a profitable manner.

· Continuing to reduce our lending concentration in commercial real estate through expected maturities and repayments.

· Enhancing our resources dedicated to special asset dispositions, both on a permanent and temporary basis, to accelerate our efforts to dispose of problem assets.

· Reducing our inventory of other real estate owned properties.

11

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

3. SECURITIES

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

			Gross		Gross
(Dollars in thousands)	Amortized		Unrealized		Unrealized
	Cost		Gains		Losses			Fair Value
Securities available-for-sale:
June 30, 2013:
Government-sponsored mortgage-backed residential	$	133,897	$	103	$	(4,654	)	$	129,346
Government-sponsored collateralized mortgage obligations		82,933		493		(489	)		82,937
Asset backed-collateralized loan obligations		24,546		11		(142	)		24,415
State and municipal		14,540		690		(8	)		15,222
Corporate bonds		57,943		189		(920	)		57,212
Total	$	313,859	$	1,486	$	(6,213	)	$	309,132
December 31, 2012:
U.S. Treasury and agencies	$	8,284	$	7	$	(13	)	$	8,278
Government-sponsored mortgage-backed residential		144,617		774		(502	)		144,889
Government-sponsored collateralized mortgage obligations		148,460		2,033		(346	)		150,147
Private asset backed		4,981		151		-			5,132
State and municipal		11,394		1,324		-			12,718
Corporate bonds		32,567		433		(33	)		32,967
Total	$	350,303	$	4,722	$	(894	)	$	354,131

The amortized cost and fair value of securities at June 30, 2013, by contractual maturity, are shown below. Securities not due at a single maturity date, primarily mortgage-backed securities, are shown separately.

	Available for Sale
	Amortized		Fair
(Dollars in thousands)	Cost		Value
Due in one year or less	$	3,068	$	3,078
Due after one year through five years		49,814		49,250
Due after five years through ten years		4,765		4,578
Due after ten years		14,836		15,528
Investment securities with no single maturity date:
Government-sponsored mortgage-backed residential		133,897		129,346
Government-sponsored collateralized mortgage obligations		82,933		82,937
Asset backed-collateralized loan obligations		24,546		24,415
	$	313,859	$	309,132

12

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

3. SECURITIES – (Continued)

The following schedule shows the proceeds from sales of available-for-sale securities and the gross realized gains and losses on those sales:

	Three Months Ended				Six Months Ended
	June 30,				June 30,
	2013		2012		2013		2012
(Dollars in thousands)
Proceeds from sales	$	25,520	$	57,733	$	101,056	$	87,454
Gross realized gains		334		598		843		1,309
Gross realized losses		334		303		616		303

Investment securities pledged to secure public deposits and Federal Home Loan Bank (FHLB) advances had an amortized cost of $145.0 million and fair value of $143.4 million at June 30, 2013 and a $130.4 million amortized cost and fair value of $132.3 million at December 31, 2012.

Securities with unrealized losses at June 30, 2013 and December 31, 2012 aggregated by major security type and length of time in a continuous unrealized loss position are as follows:

June 30, 2013	Less than 12 Months					12 Months or More				Total
	Fair		Unrealized			Fair		Unrealized		Fair		Unrealized
Description of Securities	Value		Loss			Value		Loss		Value		Loss
Government-sponsored mortgage-backed residential	$	115,458	$	(4,654	)	$	-	$	-	$	115,458	$	(4,654	)
Government-sponsored collateralized mortgage obligations		23,082		(489	)		-		-		23,082		(489	)
Asset backed-collateralized loan obligations		21,596		(142	)		-		-		21,596		(142	)
State and municipal		826		(8	)		-		-		826		(8	)
Corporate bonds		37,829		(920	)		-		-		37,829		(920	)
Total temporarily impaired	$	198,791	$	(6,213	)	$	-	$	-	$	198,791	$	(6,213	)

December 31, 2012	Less than 12 Months					12 Months or More				Total
	Fair		Unrealized			Fair		Unrealized		Fair		Unrealized
Description of Securities	Value		Loss			Value		Loss		Value		Loss
U.S. Treasury and agencies	$	3,255	$	(13	)	$	-	$	-	$	3,255	$	(13	)
Government-sponsored mortgage-backed residential		82,137		(502	)		-		-		82,137		(502	)
Government-sponsored collateralized mortgage obligations		33,275		(346	)		-		-		33,275		(346	)
Corporate bonds		5,731		(33	)		-		-		5,731		(33	)
Total temporarily impaired	$	124,398	$	(894	)	$	-	$	-	$	124,398	$	(894	)

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

Consideration is given to the length of time and the extent to which the fair value has been less than cost, the financial condition and near-term prospects of the issuer, underlying credit quality of the issuer, and our intent and ability to retain our investment in the issuer for a period of time sufficient to allow for any anticipated recovery in fair value.  In analyzing an issuer’s financial condition, we may consider whether the securities are issued by the federal government or its agencies, whether downgrades by bond rating agencies have occurred, the sector or industry trends and cycles affecting the issuer, and the results of reviews of the issuer’s financial condition.  

13

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

3. SECURITIES – (Continued)

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

The unrealized losses on our investment securities were a result of changes in interest rates for fixed-rate securities where the interest rate received is less than the current rate available for new offerings of similar securities. Because the decline in market value is attributable to changes in interest rates and not credit quality, and because we do not intend to sell and it is more likely than not that we will not be required to sell these investments until recovery of fair value, which may be maturity, we do not consider these investments to be other-than-temporarily impaired at June 30, 2013.

We recognized other-than-temporary impairment charges of $26,000 for the expected credit loss during the 2012 period. The 2012 impairment charge was related to Preferred Term Security VI which was called for early redemption in July 2012.

The table below presents a roll-forward of the credit losses recognized in earnings. During 2012, all of our trust preferred securities were either called or sold which represented the remaining balance in the OTTI roll-forward.

(Dollars in thousands)	Three Months Ended		Six Months Ended
	June 30,		June 30,
	2012		2012
Beginning balance	$	2,104	$	2,078
Increases to the amount related to the credit loss for which other-than-temporary impairment was previously recognized		-		26
Ending balance	$	2,104	$	2,104

14

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

4. LOANS

Loans are summarized as follows:

	June 30,			December 31,
(Dollars in thousands)	2013			2012
Commercial Real Estate (CRE):
Other-CRE other than Land
Development and Building Lots	$	274,863		$	287,283
Land Development		23,736			28,310
Building Lots		1,875			2,151
Residential mortgage		102,281			110,025
Consumer and home equity		54,449			57,888
Commercial		17,030			19,931
Indirect consumer		13,087			16,211
Real estate construction		3,354			3,141
		490,675			524,940
Less:
Net deferred loan origination fees		(89	)		(105	)
Allowance for loan losses		(15,947	)		(17,265	)
		(16,036	)		(17,370	)
Net Loans	$	474,639		$	507,570

The following tables present the activity in the allowance for loan losses by portfolio segment for the quarter and six months ending June 30, 2013 and 2012:

Three Months Ended
June 30, 2013				Commercial			Real Estate		Residential		Consumer &			Indirect
	Commercial			Real Estate			Construction		Mortgage		Home Equity			Consumer			Total
(Dollars in thousands)
Allowance for loan losses:
Beginning Balance	$	914		$	13,800		$	66	$	371	$	438		$	223		$	15,812
Provision for loan losses		(10	)		225			4		-		(14	)		7			212
Charge-offs		-			(61	)		-		-		(51	)		(41	)		(153	)
Recoveries		4			20			-		4		23			25			76
Total ending allowance balance	$	908		$	13,984		$	70	$	375	$	396		$	214		$	15,947

Six Months Ended
June 30, 2013				Commercial			Real Estate		Residential			Consumer &			Indirect
	Commercial			Real Estate			Construction		Mortgage			Home Equity			Consumer			Total
(Dollars in thousands)
Allowance for loan losses:
Beginning Balance	$	1,236		$	14,755		$	60	$	501		$	442		$	271		$	17,265
Provision for loan losses		(272	)		(395	)		10		(130	)		23			(61	)		(825	)
Charge-offs		(94	)		(452	)		-		-			(98	)		(57	)		(701	)
Recoveries		38			76			-		4			29			61			208
Total ending allowance balance	$	908		$	13,984		$	70	$	375		$	396		$	214		$	15,947

15

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

4. LOANS – (Continued)

Three Months Ended
June 30, 2012				Commercial			Real Estate			Residential			Consumer &			Indirect
	Commercial			Real Estate			Construction			Mortgage			Home Equity			Consumer			Total
(Dollars in thousands)
Allowance for loan losses:
Beginning Balance	$	1,723		$	13,628		$	103		$	882		$	643		$	350		$	17,329
Provision for loan losses		(255	)		1,189			(14	)		(34	)		23			6			915
Allowance associated with probable branch divestitures		(25	)		(581	)		-			(14	)		(62	)		-			(682	)
Charge-offs		-			(2,191	)		-			(31	)		(102	)		(55	)		(2,379	)
Recoveries		40			35			-			-			23			19			117
Total ending allowance balance	$	1,483		$	12,080		$	89		$	803		$	525		$	320		$	15,300

Six Months Ended
June 30, 2012				Commercial			Real Estate			Residential			Consumer &			Indirect
	Commercial			Real Estate			Construction			Mortgage			Home Equity			Consumer			Total
(Dollars in thousands)
Allowance for loan losses:
Beginning Balance	$	1,422		$	13,727		$	103		$	922		$	610		$	397		$	17,181
Provision for loan losses		222			1,687			(14	)		(52	)		98			(14	)		1,927
Allowance associated with probable branch divestitures		(25	)		(581	)		-			(6	)		(57	)		-			(669	)
Charge-offs		(187	)		(2,804	)		-			(62	)		(176	)		(99	)		(3,328	)
Recoveries		51			51			-			1			50			36			189
Total ending allowance balance	$	1,483		$	12,080		$	89		$	803		$	525		$	320		$	15,300

We did not implement any changes to our allowance related accounting policies or methodology during the current period.

The following table presents the balance in the allowance for loan losses and the recorded investment in loans by portfolio segment and based on the impairment method as of June 30, 2013 and 2012 and December 31, 2012:

June 30, 2013			Commercial		Real Estate		Residential		Consumer &		Indirect
	Commercial		Real Estate		Construction		Mortgage		Home Equity		Consumer		Total
(Dollars in thousands)
Allowance for loan losses:
Ending allowance balance attributable to loans:
Individually evaluated for impairment	$	184	$	6,851	$	-	$	31	$	81	$	-	$	7,147
Collectively evaluated for impairment		724		7,133		70		344		315		214		8,800
Total ending allowance balance	$	908	$	13,984	$	70	$	375	$	396	$	214	$	15,947
Loans:
Loans individually evaluated for impairment	$	1,213	$	35,284	$	447	$	3,418	$	664	$	-	$	41,026
Loans collectively evaluated for impairment		15,817		265,190		2,907		98,863		53,785		13,087		449,649
Total ending loans balance	$	17,030	$	300,474	$	3,354	$	102,281	$	54,449	$	13,087	$	490,675

December 31, 2012			Commercial		Real Estate		Residential		Consumer &		Indirect
	Commercial		Real Estate		Construction		Mortgage		Home Equity		Consumer		Total
(Dollars in thousands)
Allowance for loan losses:
Ending allowance balance attributable to loans:
Individually evaluated for impairment	$	252	$	7,593	$	-	$	86	$	51	$	-	$	7,982
Collectively evaluated for impairment		984		7,162		60		415		391		271		9,283
Total ending allowance balance	$	1,236	$	14,755	$	60	$	501	$	442	$	271	$	17,265
Loans:
Loans individually evaluated for impairment	$	1,071	$	43,065	$	448	$	213	$	188	$	-	$	44,985
Loans collectively evaluated for impairment		18,860		274,679		2,693		109,812		57,700		16,211		479,955
Total ending loans balance	$	19,931	$	317,744	$	3,141	$	110,025	$	57,888	$	16,211	$	524,940

16

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

4. LOANS – (Continued)

June 30, 2012				Commercial			Real Estate		Residential			Consumer &			Indirect
	Commercial			Real Estate			Construction		Mortgage			Home Equity			Consumer		Total
(Dollars in thousands)
Allowance for loan losses:
Ending allowance balance attributable to loans:
Individually evaluated for impairment	$	332		$	4,609			-	$	383		$	126		$	6	$	5,456
Collectively evaluated for impairment		1,151			7,471			89		420			399			314		9,844
Loans held for sale		-			-			-		-			-			-		-
Total ending allowance balance	$	1,483		$	12,080			89	$	803		$	525		$	320	$	15,300
Loans:
Loans individually evaluated for impairment	$	1,396		$	56,493		$	-	$	1,098		$	302		$	38	$	59,327
Loans collectively evaluated for impairment		23,469			325,322			3,950		142,175			63,895			19,462		578,273
Loans held for sale		(2,520	)		(58,767	)		-		(29,232	)		(10,806	)		-		(101,325	)
Total ending loans balance	$	22,345		$	323,048		$	3,950	$	114,041		$	53,391		$	19,500	$	536,275

The following tables present loans individually evaluated for impairment by class of loans as of June 30, 2013 and 2012 and December 31, 2012. The difference between the unpaid principal balance and recorded investment represents partial write downs/charge offs taken on individual impaired credits. The recorded investment and average recorded investment in loans exclude accrued interest receivable and loan origination fees.

							Three Months Ended						Six Months Ended
							June 30, 2013						June 30, 2013
June 30, 2013	Unpaid				Allowance for		Average		Interest		Cash Basis		Average		Interest		Cash Basis
	Principal		Recorded		Loan Losses		Recorded		Income		Interest		Recorded		Income		Interest
(Dollars in thousands)	Balance		Investment		Allocated		Investment		Recognized		Recognized		Investment		Recognized		Recognized
With no related allowance recorded:
Commercial	$	1,234	$	1,028	$	-	$	850	$	6	$	6	$	763	$	10	$	10
Commercial Real Estate:
Land Development		2,336		2,311		-		2,716		33		33		3,435		84		84
Building Lots		477		212		-		212		-		-		212		-		-
Other		10,502		9,433		-		9,336		99		99		11,575		239		239
Real Estate Construction		540		447		-		449		-		-		448		-		-
Residential Mortgage		2,941		2,941		-		1,691		6		6		3,162		53		53
Consumer and Home Equity		395		395		-		210		1		1		407		7		7
Indirect Consumer		-		-		-		-		-		-		-		-		-
With an allowance recorded:
Commercial		185		185		184		189		1		1		287		4		4
Commercial Real Estate:
Land Development		2,930		2,930		961		2,802		35		35		2,759		67		67
Building Lots		-		-		-		-		-		-		-		-		-
Other		22,609		20,398		5,890		20,350		215		215		19,984		412		412
Real Estate Construction		-		-		-		-		-		-		-		-		-
Residential Mortgage		477		477		31		399		2		2		337		6		6
Consumer and Home Equity		269		269		81		312		1		1		271		5		5
Indirect Consumer		-		-		-		-		-		-		-		-		-
Total	$	44,895	$	41,026	$	7,147	$	39,516	$	399	$	399	$	43,640	$	887	$	887

17

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

4. LOANS – (Continued)

December 31, 2012	Unpaid				Allowance for		Average		Interest		Cash Basis
	Principal		Recorded		Loan Losses		Recorded		Income		Interest
(Dollars in thousands)	Balance		Investment		Allocated		Investment		Recognized		Recognized
With no related allowance recorded:
Commercial	$	588	$	588	$	-	$	1,070	$	39	$	39
Commercial Real Estate:
Land Development		5,595		4,873		-		5,728		237		237
Building Lots		477		212		-		810		14		14
Other		21,673		16,052		-		24,961		961		961
Real Estate Construction		448		448		-		90		-		-
Residential Mortgage		-		-		-		-		-		-
Consumer and Home Equity		-		-		-		-		-		-
Indirect Consumer		-		-		-		-		-		-
With an allowance recorded:
Commercial		483		483		252		564		21		21
Commercial Real Estate:
Land Development		2,674		2,674		899		2,436		101		101
Building Lots		-		-		-		191		3		3
Other		19,254		19,254		6,694		20,075		772		772
Real Estate Construction		-		-		-		-		-		-
Residential Mortgage		213		213		86		1,191		24		24
Consumer and Home Equity		188		188		51		260		6		6
Indirect Consumer		-		-		-		54		1		1
Total	$	51,593	$	44,985	$	7,982	$	57,430	$	2,179	$	2,179

							Three Months Ended						Six Months Ended
							June 30, 2012						June 30, 2012
June 30, 2012	Unpaid				Allowance for		Average		Interest		Cash Basis		Average		Interest		Cash Basis
	Principal		Recorded		Loan Losses		Recorded		Income		Interest		Recorded		Income		Interest
(Dollars in thousands)	Balance		Investment		Allocated		Investment		Recognized		Recognized		Investment		Recognized		Recognized
With no related allowance recorded:
Commercial	$	1,111	$	991	$	-	$	944	$	8	$	8	$	1,347	$	27	$	27
Commercial Real Estate:
Land Development		11,532		5,771		-		5,176		46		46		5,825		108		108
Building Lots		1,061		1,030		-		924		6		6		1,051		8		8
Other		32,183		28,726		-		30,254		280		280		30,948		586		586
Real Estate Construction		-		-		-		-		-		-		-		-		-
Residential Mortgage		-		-		-		-		-		-		-		-		-
Consumer and Home Equity		-		-		-		-		-		-		-		-		-
Indirect Consumer		-		-		-		-		-		-		-		-		-
With an allowance recorded:
Commercial		407		405		332		477		4		4		676		13		13
Commercial Real Estate:
Land Development		786		740		190		2,303		21		21		2,519		46		46
Building Lots		-		-		-		238		2		2		318		3		3
Other		20,226		20,226		4,419		15,576		144		144		16,101		305		305
Real Estate Construction		-		-		-		-		-		-		-		-		-
Residential Mortgage		1,219		1,098		383		1,485		13		13		1,550		23		23
Consumer and Home Equity		324		302		126		332		3		3		285		3		3
Indirect Consumer		38		38		6		46		-		-		71		-		-
Total	$	68,887	$	59,327	$	5,456	$	57,755	$	527	$	527	$	60,691	$	1,122	$	1,122

18

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

4. LOANS – (Continued)

The following tables present the recorded investment in restructured, nonaccrual and loans past due over 90 days still on accrual by class of loans as of June 30, 2013 and December 31, 2012.

					Loans Past Due
June 30, 2013					Over 90 Days		Non-Accrual
	Restructured on		Restructured on		Still		Excluding
(Dollars in thousands)	Non-Accrual Status		Accrual Status		Accruing		Restructured
Commercial	$	-	$	199	$	-	$	481
Commercial Real Estate:
Land Development		-		2,733		-		302
Building Lots		-		-		-		212
Other		8,530		22,153		-		6,056
Real Estate Construction		-		-		-		447
Residential Mortgage		109		192		-		1,383
Consumer and Home Equity		-		99		-		314
Indirect Consumer		-		-		-		20
Total	$	8,639	$	25,376	$	-	$	9,215

					Loans Past Due
December 31, 2012					Over 90 Days		Non-Accrual
	Restructured on		Restructured on		Still		Excluding
(Dollars in thousands)	Non-Accrual Status		Accrual Status		Accruing		Restructured
Commercial	$	31	$	221	$	-	$	562
Commercial Real Estate:
Land Development		675		3,053		-		695
Building Lots		-		170		-		212
Other		9,047		19,080		-		8,908
Real Estate Construction		-		-		-		448
Residential Mortgage		-		303		-		827
Consumer and Home Equity		-		24		-		37
Indirect Consumer		-		-		-		13
Total	$	9,753	$	22,851	$	-	$	11,702

The following table presents the aging of the recorded investment in past due loans as of June 30, 2013 and December 31, 2012 by class of loans:

June 30, 2013	30-59		60-89		Greater than
	Days		Days		90 Days		Total		Loans Not
(Dollars in thousands)	Past Due		Past Due		Past Due		Past Due		Past Due		Total
Commercial	$	73	$	-	$	481	$	554	$	16,476	$	17,030
Commercial Real Estate:
Land Development		-		-		302		302		23,434		23,736
Building Lots		-		-		212		212		1,663		1,875
Other		179		150		14,586		14,915		259,948		274,863
Real Estate Construction		-		-		447		447		2,907		3,354
Residential Mortgage		367		615		1,492		2,474		99,807		102,281
Consumer and Home Equity		131		11		314		456		53,993		54,449
Indirect Consumer		223		28		20		271		12,816		13,087
Total	$	973	$	804	$	17,854	$	19,631	$	471,044	$	490,675

December 31, 2012	30-59		60-89		Greater than
	Days		Days		90 Days		Total		Loans Not
(Dollars in thousands)	Past Due		Past Due		Past Due		Past Due		Past Due		Total
Commercial	$	-	$	95	$	562	$	657	$	19,274	$	19,931
Commercial Real Estate:
Land Development		361		-		1,228		1,589		26,721		28,310
Building Lots		-		-		212		212		1,939		2,151
Other		1,264		1,239		13,001		15,504		271,779		287,283
Real Estate Construction		-		-		448		448		2,693		3,141
Residential Mortgage		3,588		995		827		5,410		104,615		110,025
Consumer and Home Equity		351		255		45		651		57,237		57,888
Indirect Consumer		246		130		13		389		15,822		16,211
Total	$	5,810	$	2,714	$	16,336	$	24,860	$	500,080	$	524,940

19

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

4. LOANS – (Continued)

Troubled Debt Restructurings (TDR):

We have allocated $2.7 million and $3.1 million of specific reserves to customers whose loan terms have been modified in troubled debt restructurings as of June 30, 2013 and December 31, 2012. We are not committed to lend additional funds to debtors whose loans have been modified in a troubled debt restructuring. Specific reserves are generally assessed prior to loans being modified as a TDR, as most of these loans migrate from our internal watch list and have been specifically reserved for as part of our normal reserving methodology.

During the quarter and six month periods ending June 30, 2013 and June 30, 2012, the terms of certain loans were modified as troubled debt restructurings. The modification of the terms of such loans included one or a combination of the following: a reduction of the stated interest rate of the loan; an extension of the maturity date at a stated rate of interest lower than the current market rate for new debt with similar risk; or a permanent reduction of the recorded investment in the loan.

Modifications involving a reduction of the stated interest rate of the loan were for periods ranging from six months to one year. Modifications involving an extension of the maturity date were for periods ranging from three to six months.

The following tables present loans by class modified as troubled debt restructurings that occurred during the periods ending June 30, 2013 and 2012:

	Three Months Ended						Three Months Ended
	June 30, 2013						June 30, 2012
			Pre-Modification		Post-Modification				Pre-Modification		Post-Modification
			Outstanding		Outstanding				Outstanding		Outstanding
	Number		Recorded		Recorded		Number		Recorded		Recorded
(Dollars in thousands)	of Loans		Investment		Investment		of Loans		Investment		Investment
Troubled Debt Restructurings:
Commercial		-	$	-	$	-		-	$	-	$	-
Commercial Real Estate:
Land Development		-		-		-		1		2,853		2,853
Building Lots		-		-		-		2		613		613
Other		2		1,392		1,392		3		1,088		1,088
Real Estate Construction		-		-		-		-		-		-
Residential Mortgage		-		-		-		-		-		-
Consumer and Home Equity		1		53		53		-		-		-
Indirect Consumer		-		-		-		-		-		-
Total		3	$	1,445	$	1,445		6	$	4,554	$	4,554

	Six Months Ended						Six Months Ended
	June 30, 2013						June 30, 2012
			Pre-Modification		Post-Modification				Pre-Modification		Post-Modification
			Outstanding		Outstanding				Outstanding		Outstanding
	Number		Recorded		Recorded		Number		Recorded		Recorded
(Dollars in thousands)	of Loans		Investment		Investment		of Loans		Investment		Investment
Troubled Debt Restructurings:
Commercial		-	$	-	$	-		1	$	1,094	$	1,094
Commercial Real Estate:
Land Development		-		-		-		3		4,251		4,110
Building Lots		-		-		-		2		613		613
Other		5		3,534		3,534		5		1,139		1,139
Real Estate Construction		-		-		-		-		-		-
Residential Mortgage		-		-		-		-		-		-
Consumer and Home Equity		2		76		76		-		-		-
Indirect Consumer		-		-		-		-		-		-
Total		7	$	3,610	$	3,610		11	$	7,097	$	6,956

20

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

4. LOANS – (Continued)

The troubled debt restructurings described above resulted in a reversal of provision for loan losses allocated to troubled debt restructurings of $11,000 and $164,000 for the three and six months ended June 30, 2013. The troubled debt restructurings described above increased the allowance for loan losses allocated to troubled debt restructurings by $67,000 and $256,000 for the three and six months ended June 30, 2012. Typically, these loans had allocated allowance prior to their formal modification. The troubled debt restructurings described above resulted in charge-offs of $141,000 for the three and six month periods ended June 3, 2012. There were no charge-offs recorded on the troubled debt restructurings described above for the 2013 periods.

The following tables present loans by class modified as troubled debt restructurings for which there was a payment default within twelve months following the modification during the periods ending June 30, 2013 and 2012:

	Three Months Ended				Three Months Ended
	June 30, 2013				June 30, 2012
	Number		Recorded		Number		Recorded
(Dollars in thousands)	of Loans		Investment		of Loans		Investment
Troubled Debt Restructurings:
Commercial		-	$	-		-	$	-
Commercial Real Estate:
Land Development		-		-		1		533
Building Lots		-		-		-		-
Other		-		-		1		10,068
Real Estate Construction		-		-		-		-
Residential Mortgage		-		-		-		-
Consumer and Home Equity		-		-		-		-
Indirect Consumer		-		-		-		-
Total		-	$	-		2	$	10,601

	Six Months Ended				Six Months Ended
	June 30, 2013				June 30, 2012
	Number		Recorded		Number		Recorded
(Dollars in thousands)	of Loans		Investment		of Loans		Investment
Troubled Debt Restructurings:
Commercial		-	$	-		-	$	-
Commercial Real Estate:
Land Development		-		-		2		3,386
Building Lots		-		-		-		-
Other		-		-		1		10,068
Real Estate Construction		-		-		-		-
Residential Mortgage		-		-		-		-
Consumer and Home Equity		-		-		-		-
Indirect Consumer		-		-		-		-
Total		-	$	-		3	$	13,454

For disclosure purposes, a loan is considered to be in payment default once it is 90 days contractually past due under the modified terms. The troubled debt restructurings that subsequently defaulted described above increased the allowance for loan losses by $309,000 for the three and six months ended June 30, 2012. The troubled debt restructurings described above resulted in charge-offs of $141,000 for the three and six month periods ended June 30, 2012.

21

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

4. LOANS – (Continued)

Credit Quality Indicators:

We categorize loans into risk categories based on relevant information about the ability of borrowers to service their debt such as: current financial information, historical payment experience, credit documentation, public information, and current economic trends, among other factors. We analyze loans individually by classifying the loans as to credit risk. This analysis includes commercial and commercial real estate loans. We also evaluate credit quality on residential mortgage, consumer and home equity and indirect consumer loans based on the aging status and payment activity of the loan. This analysis is performed on a monthly basis. We use the following definitions for risk ratings:

Criticized: Loans classified as criticized have a potential weakness that deserves management’s close attention. If left uncorrected, these potential weaknesses may result in deterioration of the repayment prospects for the loan or in our credit position at some future date.

Substandard: Loans classified as substandard are inadequately protected by the current net worth and paying capacity of the obligor or of the collateral pledged, if any. Loans so classified have a well-defined weakness or weaknesses that jeopardize the liquidation of the debt. They are characterized by the distinct possibility that the institution will sustain some loss if the deficiencies are not corrected.

Doubtful: Loans classified as doubtful have all the weaknesses inherent in those classified as substandard, with the added characteristic that the weaknesses make collection or liquidation in full, on the basis of currently existing facts, conditions, and values, highly questionable and improbable.

Loss: Loans classified as loss are considered non-collectible and their continuance as bankable assets is not warranted.

Loans not meeting the criteria above that are analyzed individually as part of the above described process are considered to be pass rated loans. Loans listed as not rated are included in groups of homogeneous loans. For our residential mortgage, consumer and home equity, and indirect consumer homogeneous loans, we also evaluate credit quality based on the aging status of the loan, which was previously presented, and by payment activity.

As of June 30, 2013and December 31, 2012, and based on the most recent analysis performed, the risk category of loans by class of loans is as follows:

June 30, 2013
(Dollars in thousands)	Not Rated		Pass		Criticized		Substandard		Doubtful		Loss		Total
Commercial	$	-	$	15,606	$	211	$	1,213	$	-	$	-	$	17,030
Commercial Real Estate:
Land Development		-		15,973		2,522		5,241		-		-		23,736
Building Lots		-		1,194		469		212		-		-		1,875
Other		-		221,281		23,710		29,872		-		-		274,863
Real Estate Construction		-		2,907		-		447		-		-		3,354
Residential Mortgage		98,016		-		848		3,417		-		-		102,281
Consumer and Home Equity		53,593		-		59		797		-		-		54,449
Indirect Consumer		12,957		-		73		57		-		-		13,087
Total	$	164,566	$	256,961	$	27,892	$	41,256	$	-	$	-	$	490,675

December 31, 2012
(Dollars in thousands)	Not Rated		Pass		Criticized		Substandard		Doubtful		Loss		Total
Commercial	$	-	$	16,736	$	2,000	$	1,195	$	-	$	-	$	19,931
Commercial Real Estate:
Land Development		-		17,744		3,059		7,507		-		-		28,310
Building Lots		-		1,447		492		212		-		-		2,151
Other		-		233,261		18,297		35,725		-		-		287,283
Real Estate Construction		-		2,693		-		448		-		-		3,141
Residential Mortgage		105,148		-		442		4,435		-		-		110,025
Consumer and Home Equity		56,593		-		569		726		-		-		57,888
Indirect Consumer		16,129		-		10		72		-		-		16,211
Total	$	177,870	$	271,881	$	24,869	$	50,320	$	-	$	-	$	524,940

22

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

4. LOANS – (Continued)

The following table presents the unpaid principal balance in residential mortgage, consumer and home equity and indirect consumer loans based on payment activity as of June 30, 2013 and December 31, 2012:

June 30, 2013	Residential		Consumer &		Indirect
(Dollars in thousands)	Mortgage		Home Equity		Consumer
Performing	$	100,789	$	54,135	$	13,067
Restructured on non-accrual		109		-		-
Non-accrual		1,383		314		20
Total	$	102,281	$	54,449	$	13,087

December 31, 2012	Residential		Consumer &		Indirect
(Dollars in thousands)	Mortgage		Home Equity		Consumer
Performing	$	109,198	$	57,851	$	16,198
Restructured on non-accrual		-		-		-
Non-accrual		827		37		13
Total	$	110,025	$	57,888	$	16,211

5. REAL ESTATE ACQUIRED THROUGH FORECLOSURE

A summary of the real estate acquired through foreclosure activity is as follows:

	June 30,			December 31,
(Dollars in thousands)	2013			2012
Beginning balance	$	22,286		$	29,083
Additions		1,951			18,100
Sales		(8,577	)		(19,250	)
Writedowns		(1,270	)		(5,147	)
Change in valuation allowance		(221	)		(500	)
Ending balance	$	14,169		$	22,286

A summary of the real estate acquired through foreclosure valuation allowance activity is as follows:

	Three Months Ended					Six Months Ended
	June 30,					June 30,
	2013			2012		2013			2012
(Dollars in thousands)
Beginning balance	$	972		$	-	$	500		$	-
Provision		532			-		1,592			-
Writedowns and loss on sale		(783	)		-		(1,371	)		-
Ending balance	$	721		$	-	$	721		$	-

Real estate acquired through foreclosure expense which consists primarily of property management expenses was $524,000 and $2.3 million for the three months ended June 30, 2013 and 2012, and $818,000 and $2.7 million for the six months ended June 30, 2013 and 2012, respectively.

23

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

6. INCOME TAXES

A full valuation allowance related to deferred tax assets is required when it is considered more likely than not that all or part of the benefit related to such assets will not be realized. In assessing the need for a full valuation allowance, we considered various factors including our four year cumulative loss position, the level of our non-performing assets, our inability to meet our forecasted levels of assets and operating results in 2013, 2012 and 2011 and our non-compliance with the capital requirements of our Consent Order. Based on this assessment, we concluded that a valuation allowance was necessary at June 30, 2013 and December 31, 2012.

7. EARNINGS (LOSS) PER SHARE

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

	Three Months Ended						Six Months Ended
(Amounts in thousands,	June 30,						June 30,
except per share data)	2013			2012			2013			2012
Basic:
Net income/(loss)	$	(1,126	)	$	(4,139	)	$	(1,004	)	$	(4,429	)
Less:
Preferred stock dividends		(250	)		(250	)		(500	)		(500	)
Accretion on preferred stock discount		(13	)		(13	)		(27	)		(27	)
Net income (loss) available to common shareholders	$	(1,389	)	$	(4,402	)	$	(1,531	)	$	(4,956	)
Weighted average common shares		4,806			4,767			4,797			4,764
Diluted:
Weighted average common shares		4,806			4,767			4,797			4,764
Dilutive effect of stock options and warrants		-			-			-			-
Weighted average common and incremental shares		4,806			4,767			4,797			4,764
Earnings (Loss) Per Common Share:
Basic	$	(0.29	)	$	(0.92	)	$	(0.32	)	$	(1.04	)
Diluted	$	(0.29	)	$	(0.92	)	$	(0.32	)	$	(1.04	)

Since the Corporation is reporting a net loss available to common shareholders for all periods presented, no stock options or warrants were evaluated for dilutive purposes.

8. STOCK BASED COMPENSATION PLAN

Our 2006 Stock Option and Incentive Compensation Plan, which is stockholder approved, authorizes us to grant restricted stock and incentive or non-qualified stock options to key employees and directors for a total of 763,935 shares of our common stock. We believe that the ability to award stock options and other forms of stock-based incentive compensation can assist us in attracting and retaining key employees. Stock-based incentive compensation is also a means to align the interests of key employees with those of our stockholders by providing awards intended to reward recipients for our long-term growth. Options to purchase shares generally vest over periods of one to five years and expire ten years after the date of grant. We issue new shares of common stock upon the exercise of stock options. If options or awards granted under the 2006 Plan expire or terminate for any reason without having been exercised in full or released from restriction, the corresponding shares shall again be available for option or award for the purposes of the Plan. At June 30, 2013, options and restricted stock available for future grant under the 2006 Plan totaled 54,240.

Stock Options – The fair value of each option award is estimated on the date of grant using the Black-Scholes option valuation model that uses various weighted-average assumptions. The risk-free interest rate is based on the U.S. Treasury yield curve in effect at the time of grant. The expected volatility is based on the fluctuation in the price of a share of stock over the period for which the option is being valued and the expected life of the options granted represents the period of time the options are expected to be outstanding.

24

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

8. STOCK BASED COMPENSATION PLAN – (Continued)

The weighted-average assumptions for options granted during the six months ended June 30, 2013 and the resulting estimated weighted average fair value per share is presented below.

	June 30,
	2013
Assumptions:
Risk-free interest rate		1.90	%
Expected dividend yield		-	%
Expected life (years)		10
Expected common stock
market price volatility		64	%
Estimated fair value per share	$	1.82

A summary of option activity under the 2006 Plan for the period ended June 30, 2013 is presented below:

						Weighted
				Weighted		Average
	Number			Average		Remaining	Aggregate
	of			Exercise		Contractual	Intrinsic
	Options			Price		Term	Value
							(Dollars In Thousands)
Outstanding, beginning of period		392,740		$	9.16
Granted during period		118,000			2.52
Forfeited during period		(9,550	)		4.51
Exercised during period		-			-
Outstanding, end of period		501,190		$	7.68	7.0	$	312
Eligible for exercise at period end		200,688		$	14.28	4.7	$	42

There were no options exercised, modified or settled in cash during the periods ended June 30, 2013 and 2012. Management expects all outstanding unvested options will vest.

Compensation cost related to options granted under the 2006 Plan that was charged against earnings for the periods ended June 30, 2013 and 2012 was $73,000 and $55,000. As of June 30, 2013 there was $427,000 of total unrecognized compensation cost related to non-vested share-based compensation arrangements granted under the 2006 Plan. That cost is expected to be recognized over a weighted-average period of 3.5 years.

Restricted Stock – On June 28, 2013, we granted 20,500 shares of restricted common stock at the current market price of $3.39. The restricted stock will vest over a five year period and will become fully vested on June 28, 2018, provided that the recipient has continued to perform substantial services for the Bank through that date. Any dividends declared on the restricted stock prior to vesting will be retained and paid only on the date of vesting. The transfer restrictions will expire upon the occurrence of a change of control event or upon the recipient’s death or disability. On the same date, we entered into an agreement with the recipient of the newly issued restricted stock to terminate 17,250 unvested shares of long-term restricted stock that had been awarded to him on February 7, 2013. Upon the sale of our Senior Preferred Shares by the U.S. Treasury on April 29, 2013 at a discount to face amount, the 17,250 shares had become subject to permanent restrictions on transfer by the holder, who elected to terminate the shares.

On September 19, 2012 our board of directors adopted the 2012 Non-Employee Director Equity Compensation Program (the “Director Program”). The Director Program enables us to compensate non-employee directors for their service with stock awards. We currently do not pay cash compensation to non-employee directors pursuant to agreements with bank regulatory agencies. The board has reserved 200,000 of the shares authorized for issuance under our shareholder approved 2006 Stock Option and Incentive Compensation Plan for stock awards under the Director Program.

25

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

8. STOCK BASED COMPENSATION PLAN – (Continued)

The Director Program provides that each non-employee director elected or continuing in office on the date of each annual meeting of the Corporation’s shareholders will automatically receive an award of restricted stock on that date having a value of $30,000, based on the closing sale price per share of the Corporation’s common stock on the award date, rounded up to the next whole number. Accordingly, on May 15, 2013, the Company’s eight non-employee directors each received an award of 9,934 restricted shares, or 79,472 shares in total, that vest at the close of business on the day immediately preceding the date of the 2014 annual meeting of the Corporation’s shareholders, provided that the recipient has continued to serve as a member of the Board as of the date of vesting. The recipient may not transfer, pledge or dispose of the restricted stock until the close of business on the day immediately preceding the first anniversary of the award date. The transfer restrictions will also expire upon the occurrence of a Change of Control, as defined in the Plan, or upon the recipient’s death or disability. If a director ceases to serve as a member of the board for any reason, that director will automatically forfeit any unvested shares subject to an award. Any dividends declared on the restricted stock prior to vesting will be retained and paid only on the date the transfer restrictions expire.

A summary of changes in our non-vested restricted shares for the six months ended June 30, 2013 is presented below:

				Weighted
				Average
	Non-vested			Grant Date
	Shares			Fair Value
Outstanding, beginning of period		32,964		$	3.64
Granted during period		122,972			3.05
Vested during period		(55,132	)		3.38
Terminated during period		(17,250	)		2.84
Forfeited during period		-			-
Outstanding, end of period		83,554		$	3.10

Compensation cost related to restricted stock granted under the 2006 Plan that was charged against earnings for the periods ended June 30, 2013 and 2012 was $187,000 and $37,000, respectively. As of June 30, 2013 there was $259,000 of total unrecognized compensation cost related to non-vested shares granted under the Plan. That cost is expected to be recognized over the remaining vesting period of 2.0 years.

26

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

9. FAIR VALUE

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

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

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

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

We used the following methods and significant assumptions to estimate the fair value.

Available-for-sale securities: For securities where quoted prices are not available, fair values are calculated on market prices of similar securities or determined by a matrix pricing, which is a mathematical technique widely used in the industry to value debt securities without relying exclusively on quoted prices for the specific securities but rather by relying on the securities’ relationship to other benchmark quoted securities (Level 2 inputs).

Impaired Loans: At the time a loan is considered impaired, it is valued at the lower of cost or fair value. Impaired loans carried at fair value generally receive specific allocations of the allowance for loan losses. For collateral dependent loans, fair value is commonly based on recent real estate appraisals. These appraisals may utilize a single valuation approach or a combination of approaches including comparable sales and the income approach. Adjustments are routinely made in the appraisal process by the independent appraisers to adjust for differences between the comparable sales and income data available. Such adjustments are usually significant and typically result in a Level 3 classification of the inputs for determining fair value. Non-real estate collateral may be valued using an appraisal, net book value per the borrower’s financial statements, or aging reports, adjusted or discounted based on management’s historical knowledge, changes in market conditions from the time of the valuation, and management’s expertise and knowledge of the client and client’s business, resulting in a Level 3 fair value classification. Once a loan is considered impaired, it is evaluated by a member of the Credit Department on at least a quarterly basis for additional impairment and adjusted accordingly.

Other Real Estate Owned: Assets acquired through or instead of loan foreclosure are initially recorded at fair value less costs to sell when acquired, establishing a new cost basis. These assets are subsequently accounted for at lower of cost or fair value less estimated costs to sell. Fair value is commonly based on recent real estate appraisals. These appraisals may utilize a single valuation approach or a combination of approaches including comparable sales and the income approach. Adjustments are routinely made in the appraisal process by the independent appraisers to adjust for differences between the comparable sales and income data available. Such adjustments are usually significant and typically result in a Level 3 classification of the inputs for determining fair value.

Appraisals for both collateral-dependent impaired loans and other real estate owned are performed by certified general appraisers (for commercial properties) or certified residential appraisers (for residential properties) whose qualifications and licenses have been reviewed and verified by us. Once received, a member of the Credit Department reviews the assumptions and approaches utilized in the appraisal as well as the overall resulting fair value in comparison with via independent data sources such as recent market data or industry-wide statistics.

27

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

9. FAIR VALUE - (Continued)

Assets and Liabilities Measured at Fair Value on a Recurring Basis

Assets measured at fair value on a recurring basis are summarized below: There were no transfers between Level 1 and Level 2 during the periods presented.

			Quoted Prices in
			Active Markets for		Significant Other		Significant
	June 30,		Identical Assets		Observable Inputs		Unobservable Inputs
(Dollars in thousands)	2013		(Level 1)		(Level 2)		(Level 3)
Assets:
Government-sponsored mortgage-backed residential	$	129,346	$	-	$	129,346	$	-
Government-sponsored collateralized mortgage obligations		82,937		-		82,937		-
Asset backed-collateralized loan obligations		24,415		-		24,415		-
State and municipal		15,222		-		15,222		-
Corporate bonds		57,212		-		57,212		-
Total	$	309,132	$	-	$	309,132	$	-

			Quoted Prices in
			Active Markets for		Significant Other		Significant
	December 31,		Identical Assets		Observable Inputs		Unobservable Inputs
(Dollars in thousands)	2012		(Level 1)		(Level 2)		(Level 3)
Assets:
U.S. Treasury and agencies	$	8,278	$	-	$	8,278	$	-
Government-sponsored mortgage-backed residential		144,889		-		144,889		-
Government-sponsored collateralized mortgage obligations		150,147		-		150,147		-
Private asset backed		5,132		-		5,132		-
State and municipal		12,718		-		12,718		-
Corporate bonds		32,967		-		32,967		-
Total	$	354,131	$	-	$	354,131	$	-

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

The table below presents a reconciliation for all assets measured at fair value on a recurring basis using significant unobservable inputs (Level 3) for the periods ended June 30, 2012. The level 3 assets consist of trust preferred securities which were called or sold in the fourth quarter of 2012. We did not have any Level 3 assets measured at fair value on a recurring basis at June 30, 2013.

	Fair Value Measurements			Fair Value Measurements
	Using Significant			Using Significant
	Unobservable Inputs			Unobservable Inputs
	(Level 3)			(Level 3)
	Three Months Ended			Six Months Ended
	June 30,			June 30,
(Dollars in thousands)	2012			2012
Beginning balance	$	268		$	264
Total gains or losses:
Impairment charges on securities		-			-
Included in other comprehensive income		(2	)		2
Purchases		-			-
Sales or calls		-			-
Settlements		-			-
Transfers in and/or out of Level 3		-			-
Ending balance	$	266		$	266

28

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

9. FAIR VALUE - (Continued)

There were no changes in unrealized gains and losses recorded in earnings for the quarter and six months ended June 30, 2013 for Level 3 assets and liabilities that are still held at June 30, 2013.

Assets and Liabilities Measured at Fair Value on a Nonrecurring Basis

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

			Quoted Prices in
			Active Markets for		Significant Other		Significant
	June 30,		Identical Assets		Observable Inputs		Unobservable Inputs
(Dollars in thousands)	2013		(Level 1)		(Level 2)		(Level 3)
Assets:
Impaired loans:
Commercial	$	1	$	-	$	-	$	1
Commercial Real Estate:
Land Development		1,969		-		-		1,969
Other		14,508		-		-		14,508
Residential Mortgage		446		-		-		446
Consumer and Home Equity		188		-		-		188
Real estate acquired through foreclosure:
Commercial Real Estate:
Land Development		980		-		-		980
Other		5,672		-		-		5,672

			Quoted Prices in
			Active Markets for		Significant Other		Significant
	December 31,		Identical Assets		Observable Inputs		Unobservable Inputs
(Dollars in thousands)	2012		(Level 1)		(Level 2)		(Level 3)
Assets:
Impaired loans:
Commercial	$	231	$	-	$	-	$	231
Commercial Real Estate:
Land Development		1,775		-		-		1,775
Other		12,560		-		-		12,560
Residential Mortgage		127		-		-		127
Consumer and Home Equity		137		-		-		137
Real estate acquired through foreclosure:
Commercial Real Estate:
Land Development		2,459		-		-		2,459
Building Lots		2,220		-		-		2,220
Other		8,350		-		-		8,350
Residential Mortgage		224		-		-		224

29

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

9. FAIR VALUE - (Continued)

Impaired loans, which are measured for impairment using the fair value of the collateral for collateral dependent loans, had a carrying amount of $24.2 million, with a valuation allowance of $7.1 million, resulting in an additional provision for loan losses of $737,000 and a reversal of provision for loan losses of $342,000 and for the quarter and six months ended June 30, 2013. Impaired loans, which are measured for impairment using the fair value of the collateral for collateral dependent loans, had a carrying amount of $22.8 million, with a valuation allowance of $5.5 million, resulting in an additional provision for loan losses of $1.4 million and $1.7 million for the three and six months ended June 30, 2012. Values for collateral dependent loans are generally based on appraisals obtained from licensed real estate appraisers and in certain circumstances consideration of offers obtained to purchase properties prior to foreclosure. Appraisals for commercial real estate generally use three methods to derive value: cost, sales or market comparison and income approach. The cost method bases value on the estimated cost to replace the current property after considering adjustments for depreciation. Values of the market comparison approach evaluate the sales price of similar properties in the same market area. The income approach considers net operating income generated by the property and an investors required return. The final value is a reconciliation of these three approaches and takes into consideration any other factors management deems relevant to arrive at a representative fair value.

Real estate owned acquired through foreclosure is recorded at fair value less estimated selling costs at the date of foreclosure. Fair value is based on the appraised market value of the property. Many of the appraisals utilize an income approach, such as the discounted cash flow method, to estimate future income and profits or cash flows.  Appraisals may also utilize a single valuation approach or a combination of approaches including a market comparison approach, where prices and other relevant information generated by market transactions involving identical or comparable properties are used to determine fair value.  The fair value may be subsequently reduced if the estimated fair value declines below the original appraised value. Fair value adjustments of $400,000 and $1.5 million were made to real estate owned during the quarter and six months ended June 30, 2013. Fair value adjustments of $1.9 million and $3.5 million were made to real estate owned during the quarter and six months ended June 30, 2012.

30

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

9. FAIR VALUE - (Continued)

The following table presents quantitative information about level 3 fair value measurements for financial instruments measured at fair value on a non-recurring basis at June 30, 2013.

	Fair		Valuation	Unobservable	Range (Weighted
(Dollars in thousands)	Value		Technique(s)	Input(s)	Average)
Impaired loans:
Commercial	$	1	Market value approach	Adjustment for receivables	0.00% (1)
				and inventory discounts
Commercial Real Estate:
Land Development		1,301	Income approach	Discount or capitalization rate	25.00% (1)
		668	Sales comparison approach	Adjustment for differences	3.39% (1)
				between comparable sales
Other		13,264	Income approach	Discount or capitalization rate	8.50%-11.00% (9.19%)
		1,244	Sales comparison approach	Adjustment for differences	10.00%-21.87% (19.69%)
				between comparable sales
Residential Mortgage		446	Sales comparison approach	Adjustment for differences	0.00%-3.87% (1.06%)
				between comparable sales
Consumer and Home Equity		188	Sales comparison approach	Adjustment for differences	0.00%-2.25% (1.82%)
				between comparable sales
Real estate acquired through foreclosure:
Commercial Real Estate:
Land Development		312	Income approach	Discount or capitalization rate	8.50%-17.50% (11.24%)
		668	Sales comparison approach	Adjustment for differences	25.00% (1)
				between comparable sales
Other		5,006	Income approach	Discount or capitalization rate	8.50%-10.50% (8.91%)
		666	Sales comparison approach	Adjustment for differences	2.75%-9.00% (4.26%)
				between comparable sales

(1) Unobservable inputs with a single discount listed include only one property.

31

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

9. FAIR VALUE - (Continued)

Fair Value of Financial Instruments

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

			June 30, 2013
(Dollars in thousands)	Carrying		Fair Value Measurements
	Value		Total		Level 1		Level 2		Level 3
Financial assets:
Cash and due from banks	$	27,925	$	27,925	$	6,069	$	21,856	$	-
Mortgage loans held for sale		3,595		3,654		-		3,654		-
Loans, net		457,527		460,246		-		-		460,246
Accrued interest receivable		2,390		2,390		-		-		2,390
FHLB stock		4,430		N/A		N/A		N/A		N/A
Financial liabilities:
Deposits		798,377		760,870		-		760,870		-
Advances from Federal Home Loan Bank		22,526		23,249		-		23,249		-
Subordinated debentures		18,000		12,222		-		-		12,222
Accrued interest payable		3,798		3,798		-		3,798		-

			December 31, 2012
(Dollars in thousands)	Carrying		Fair Value Measurements
	Value		Total		Level 1		Level 2		Level 3
Financial assets:
Cash and due from banks	$	63,103	$	63,103	$	6,468	$	56,635	$	-
Mortgage loans held for sale		3,887		3,967		-		3,967		-
Loans, net		492,740		493,998		-		-		493,998
Accrued interest receivable		2,690		2,690		-		-		2,690
FHLB stock		4,805		N/A		N/A		N/A		N/A
Financial liabilities:
Deposits		922,620		934,637		-		934,637		-
Advances from Federal Home Loan Bank		12,596		13,944		-		13,944		-
Subordinated debentures		18,000		12,695		-		-		12,695
Accrued interest payable		3,121		3,121		-		3,121		-

The methods and assumptions, not previously presented, used to estimate fair values are described below:

(a) Cash and due from banks

The carrying amount of cash on hand approximates fair value and is classified as a Level 1. The carrying amount of cash due from bank accounts is classified as a Level 2.

(b) Mortgage loans held for sale

The fair value of mortgage loans held for sale is estimated based upon the binding contracts and quotes from third party investors resulting in a Level 2 classification.

(c) Loans, net

Fair values of loans are estimated as follows: For variable rate loans that reprice frequently and with no significant change in credit risk, fair values are based on carrying values resulting in a Level 3 classification. Fair values for other loans are estimated using discounted cash flow analyses, using interest rates currently being offered for loans with similar terms to borrowers of similar credit quality resulting in a Level 3 classification. Impaired loans are valued at the lower of cost or fair value as described previously. The methods utilized to estimate the fair value of loans do not necessarily represent an exit price.

32

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

9. FAIR VALUE - (Continued)

(d) FHLB Stock

It is not practical to determine the fair value of FHLB stock due to restrictions placed on its transferability.

(e) Deposits

The carrying amounts of variable rate interest bearing deposits approximate their fair values at the reporting date resulting in a Level 2 classification. Fair values for fixed rate interest bearing deposits are estimated using a discounted cash flows calculation that applies interest rates currently being offered on certificates to a schedule of aggregated expected monthly maturities on time deposits resulting in a Level 2 classification.

(f) Advances from Federal Home Loan Bank

The fair value of the FHLB advances is obtained from the FHLB and is calculated by discounting contractual cash flow using an estimated interest rate based on the current rates available to us for debt of similar remaining maturities and collateral terms resulting in a Level 2 classification.

(g) Subordinated debentures

The fair value for subordinated debentures is calculated using discounted cash flow analyses based on the current borrowing rates for similar types of borrowing arrangements resulting in a Level 3 classification.

(h) Accrued interest receivable/payable

The carrying amounts of accrued interest approximate fair value resulting in a Level 2 or Level 3 classification based on the level of the asset or liability with which the accrual is associated.

(i) Off-balance Sheet Instruments

Fair values for off-balance sheet, credit-related financial instruments are based on fees currently charged to enter into similar agreements, taking into account the remaining terms of the agreements and the counterparties’ credit standing. The fair value of commitments is not material.

33

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

10. SUBORDINATED DEBENTURES

On October 29, 2010, we exercised our right to defer regularly scheduled interest payments on both issues of junior subordinated notes relating to outstanding trust preferred securities. Together, the junior subordinated notes had an outstanding principal amount of $18 million. We have the right to defer payments of interest for up to 20 consecutive quarterly periods without default or penalty. After such period, we must pay all deferred interest and resume quarterly interest payments or we will be in default. During the deferral period, the statutory trusts, which are wholly owned subsidiaries of First Financial Service Corporation formed to issue the trust preferred securities, will likewise suspend the declaration and payment of dividends on the trust preferred securities. The regular scheduled interest payments will continue to be accrued for payment in the future and reported as an expense for financial statement purposes. As of June 30, 2013, we have deferred a total of eleven quarterly payments and these accrued but unpaid interest payments totaled $3.7 million.

11. PREFERRED STOCK

On January 9, 2009, we issued $20 million of cumulative perpetual preferred shares, with a liquidation preference of $1,000 per share (the “Senior Preferred Shares”) to the United States Treasury under its Capital Purchase Program (“CPP”). The Senior Preferred Shares constitute Tier 1 capital and rank senior to our common shares. The Senior Preferred Shares pay cumulative dividends quarterly at a rate of 5% per year for the first five years and will reset to a rate of 9% per year on January 9, 2014. The Senior Preferred Shares may be redeemed at any time, subject to prior approval from bank regulatory agencies. We also have the ability to defer dividend payments at any time, at our option.

Under the terms of our CPP stock purchase agreement, we also issued the Treasury a warrant to purchase an amount of our common stock equal to 15% of the aggregate amount of the Senior Preferred Shares, or $3 million. The warrant entitles Treasury to purchase 215,983 common shares at a purchase price of $13.89 per share. The initial exercise price for the warrant and the number of shares subject to the warrant were determined by reference to the market price of our common stock calculated on a 20-day trailing average as of December 8, 2008, the date Treasury approved our application. The warrant has a term of 10 years and is potentially dilutive to earnings per share.

Effective with the fourth quarter of 2010, we suspended payment of regular quarterly cash dividends on our Senior Preferred Shares. The dividends will continue to be accrued for payment in the future and reported as a preferred dividend requirement that is deducted from income attributable to common shareholders for financial statement purposes. As of June 30, 2013, we have deferred a total of eleven quarterly payments and these accrued but unpaid dividends totaled $3.0 million.

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

On April 29, 2013, Treasury sold our Senior Preferred Shares to six funds who were the winning bidders in an auction.  Following the sale, the full $20 million stated value of our Senior Preferred Shares remains outstanding and our obligation to pay deferred and future dividends, currently at an annual rate of 5% and increasing to 9% in January 2014, continues until our Senior Preferred Shares are fully retired.

34

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

12. STOCKHOLDERS’ EQUITY

Regulatory Capital Requirements – The Corporation and the Bank are subject to regulatory capital requirements administered by federal banking agencies. Capital adequacy guidelines and, additionally for banks, prompt corrective action regulations involve quantitative measures of assets, liabilities, and certain off-balance-sheet items calculated under regulatory accounting practices. Capital amounts and classifications are also subject to qualitative judgments by regulators. Failure to meet capital requirements can result in regulatory action.

Prompt corrective action regulations provide five classifications: well capitalized, adequately capitalized, undercapitalized, significantly undercapitalized, and critically undercapitalized, although these terms are not used to represent overall financial condition. If adequately capitalized, regulatory approval is required to accept brokered deposits. If undercapitalized, capital distributions are limited, as is asset growth and expansion, and capital restoration plans are required.

Quantitative measures established by regulation to ensure capital adequacy require the Corporation and the Bank to maintain minimum amounts and ratios (set forth in the following table) of Total and Tier 1 capital (as defined in the regulations) to risk weighted assets (as defined) and of Tier 1 capital (as defined) to average assets (as defined).

As a result of the Consent Order the Bank entered into with the FDIC and KDFI described in greater detail in Note 2, the Bank is categorized as a "troubled institution" by bank regulators, which by definition does not permit the Bank to be considered "well-capitalized".

On March 9, 2012, the Bank entered into a new Consent Order with the FDIC and KDFI. The 2012 Consent Order requires the Bank to achieve the same minimum capital ratios mandated by the January 2011 Consent Order, which are set forth below. See Note 2 for additional information.

Our actual and required capital amounts and ratios are presented below. 

(Dollars in thousands)						For Capital
	Actual					Adequacy Purposes
As of June 30, 2013:	Amount		Ratio			Amount		Ratio
Total risk-based capital (to risk- weighted assets)
Consolidated	$	67,461		11.29	%	$	47,798		8.00	%
Bank		73,840		12.36			47,800		8.00
Tier I capital (to risk-weighted assets)
Consolidated		55,851		9.35			23,899		4.00
Bank		66,267		11.09			23,900		4.00
Tier I capital (to average assets)
Consolidated		55,851		6.14			36,408		4.00
Bank		66,267		7.27			36,460		4.00

(Dollars in thousands)						For Capital
	Actual					Adequacy Purposes
As of December 31, 2012:	Amount		Ratio			Amount		Ratio
Total risk-based capital (to risk- weighted assets)
Consolidated	$	68,791		11.36	%	$	48,438		8.00	%
Bank		73,951		12.21			48,439		8.00
Tier I capital (to risk-weighted assets)
Consolidated		57,471		9.49			24,219		4.00
Bank		66,256		10.94			24,219		4.00
Tier I capital (to average assets)
Consolidated		57,471		5.67			40,580		4.00
Bank		66,256		6.53			40,608		4.00

35

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

12. STOCKHOLDERS’ EQUITY - (Continued)

The 2012 Consent Order requires the Bank to achieve the minimum capital ratios presented below.

	Actual as of			Ratio Required
	6/30/2013			by Consent Order
Total capital to risk-weighted assets		12.36	%		12.00	%
Tier 1 capital to average total assets		7.27	%		9.00	%

13. CHANGES IN AND RECLASSIFICATIONS FROM ACCUMULATED OTHER COMPREHENSIVE INCOME

Changes in accumulated other comprehensive income by component consists of the following:

	Three Months Ended			Six Months Ended
	June 30, 2013			June 30, 2013
	Unrealized Gains			Unrealized Gains
	and Losses on			and Losses on
	Available-for-Sale			Available-for-Sale
(Dollars in thousands)	Securities (1)			Securities (1)
Beginning balance	$	93		$	1,270
Other comprehensive income (loss) before reclassification		(7,378	)		(8,328	)
Amounts reclassified from accumulated other comprehensive income		-			(227	)
Net other comprehensive income (loss)		(7,378	)		(8,555	)
Ending balance	$	(7,285	)	$	(7,285	)

(1) All amounts are net of tax.

Reclassifications out of accumulated other comprehensive income consists of the following:

Three months ended June 30, 2013
(Dollars in thousands)
	Amount
Details about	Reclassified From			Affected Line Item
Accumulated Other	Accumulated Other			in the
Comprehensive	Comprehensive			Consolidated
Income Components	Income			Statement of Operations
Unrealized gains and losses on available-for-sale securities	$	334		Gain on sale of investments
		(334	)	Loss on sale of investments
		-		Total before tax
		-		Income taxes/(benefits)
Total amount reclassified	$	-		Net income (loss)

Six months ended June 30, 2013
(Dollars in thousands)
	Amount
Details about	Reclassified From			Affected Line Item
Accumulated Other	Accumulated Other			in the
Comprehensive	Comprehensive			Consolidated
Income Components	Income			Statement of Operations
Unrealized gains and losses on available-for-sale securities	$	843		Gain on sale of investments
		(616	)	Loss on sale of investments
		227		Total before tax
		-		Income taxes/(benefits)
Total amount reclassified	$	227		Net income (loss)

36

Item 2.

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

GENERAL

We operate 17 full-service banking centers in six contiguous counties in central Kentucky along the Interstate 65 corridor and within the Louisville metropolitan area. Our markets range from Louisville in Jefferson County, Kentucky approximately 40 miles north of our headquarters in Elizabethtown, Kentucky to Hart County, Kentucky, approximately 30 miles south of Elizabethtown. Our markets are supported by a diversified industry base and have a regional population of over 1 million. We operate in Hardin, Nelson, Hart, Bullitt, Meade and Jefferson counties in Kentucky. We control in the aggregate, approximately, 22% of the deposit market share in our central Kentucky markets outside of Louisville.

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

Through our personal investment financial counseling services, we offer a wide variety of non-insured investments including mutual funds, equity investments, and fixed and variable annuities. We invest in the wholesale capital markets to manage a portfolio of securities and use various forms of wholesale funding. The security portfolio contains a variety of instruments, including callable debentures, taxable and non-taxable debentures, fixed and adjustable rate mortgage backed securities, collateralized mortgage obligations and corporate securities.

Our results of operations depend primarily on net interest income, which is the difference between interest income from interest-earning assets and interest expense on interest-bearing liabilities. Our operations are also affected by non-interest income, such as service charges, loan fees, gains and losses from the sale of mortgage loans and revenue earned from bank owned life insurance. Our principal operating expenses, aside from interest expense, consist of compensation and employee benefits, occupancy costs, data processing expense, FDIC insurance premiums, costs associated with other real estate and provisions for loan losses.

The discussion and analysis section covers material changes in the financial condition since December 31, 2012 and material changes in the results of operations for the three and six month periods ending June 30, 2013 as compared to 2012. It should be read in conjunction with "Management’s Discussion and Analysis of Financial Condition and Results of Operations" included in our Annual Report on Form 10-K for the period ended December 31, 2012.

OVERVIEW

From 2008 to 2011, economic conditions deteriorated in the markets we serve, which has had a significant adverse impact on our business. As a result, our earnings declined due to higher levels of non-performing assets and loan losses, impairment charges on goodwill and real estate we acquired through foreclosure, and a charge to establish a valuation allowance against our deferred tax asset. As economic conditions improved and collateral values stabilized in 2012 and the first half of 2013, our provision for loan losses during this period has been much lower than in 2011. However, the effects of the economic downturn continue to impact us due to elevated non-performing assets and reduced net interest income in a continuing low interest rate environment. Low interest rates, coupled with a competitive lending environment, continue to prove to be challenging.

Net loss attributable to common shareholders for the quarter ended June 30, 2013 was $1.4 million or $0.29 per diluted common share compared to a net loss attributable to common shareholders of $4.4 million or $0.92 per diluted common share for the same period in 2012. Net loss attributable to common shareholders for the six months ended June 30, 2013 was $1.5 million or $0.32 per diluted common share compared to a net loss attributable to common shareholders of $5.0 million or $1.04 per diluted common share for the same period a year ago. The main drivers to the net loss for 2013 include the following:

· declining net interest income mainly driven by a decline of $5.4 million in loan interest income as a result of a decline of $184.1 million in average loan balances combined with the continuing low interest rate environment;

· a decrease in net gains of $779,000 on the sale of securities available for sale,

· a decline of $463,000 in securities interest income mainly due to the continued low interest rate environment;

37

· offset by a decline of $3.8 million in deposit interest expense mainly as a result of a premeditated decrease of $202.1 million in average certificates of deposits and other time deposits balances combined with a decline of 42 basis points in the cost of these deposits;

· a $2.8 million decrease in provision for loans losses, including an $825,000 net reserve reversal due to the improvement in specific reserves allocated to several relationships based upon updated appraisals;

· a $2.4 million decrease in real estate acquired through foreclosure expense and loan expense, the result of lower loan workout and loan portfolio management expenses as our level of non-performing assets has decreased, and

· a $2.0 million decrease in write downs and sale losses on other real estate owned (“OREO”).

While still elevated, the level of non-performing assets is now at the lowest level since the first quarter of 2009. Compared to December 31, 2012, non-performing loans declined $3.6 million or 17%, non-performing assets declined $11.7 million or 27%, and classified and criticized assets declined $6.0 million or 8%. Compared to June 30, 2012, non-performing loans declined $20.2 million or 53%, non-performing assets declined $42.6 million or 57%, and classified and criticized assets declined $26.1 million or 27%. We sold eighteen OREO properties totaling $8.6 million during the 2013 period. The net proceeds received from the sale of most of these properties exceeded the carrying value on our books, indicating that the OREO properties were appropriately valued.

Our non-performing assets are largely comprised of residential housing development assets, building lots, an office building and strip centers, most of which are located in Jefferson and Oldham Counties. Non-performing assets were $32.1 million or 3.62% of total assets at June 30, 2013 compared to $43.8 million or 4.35% of total assets at December 31, 2012. The decrease in non-performing assets is mainly attributable to an $8.1 million decrease in real estate acquired through foreclosure and a $2.5 million decrease in non-accrual loans. Five properties totaling $16.0 million make up 50% of the total non-performing assets. The properties range in value from $1.1 million to $7.5 million and have an aggregate specific reserve for $3.6 million.

We believe that our level of real estate acquired through foreclosure has stabilized. We anticipate it will continue to decrease over the next several quarters as we continue to sell these properties, while inflow has slowed down substantially compared to 2010 and 2011. The lower values on the appraisals and reviews of properties appraised within the first half of 2013 resulted in $1.5 million in write downs on OREO compared to $3.6 million in total write downs recorded during the 2012 six month period. We believe that we have written down OREO values to levels that will facilitate their liquidation, as indicated by recent sales. We also believe we have appropriately addressed and risk-weighted real estate loans in our portfolio.

In the third quarter of 2012 we entered into a bulk sale contract to sell fourteen OREO properties totaling $16.5 million. We were able to close on $6.0 million and have since terminated the contract when the buyer was not able to meet all of the contractual terms and conditions of the contract. As a result of the termination on the bulk sale, we had to individually reevaluate the remaining properties. As a result, at June 30, 2013 we allocated an additional $721,000 of specific reserves to the remaining properties from the 2012 planned OREO bulk sale.

The allowance for loan losses to total loans was 3.25% at June 30, 2013 while net charge-offs totaled .19% of average loans for 2013 compared to .91% for 2012. We attribute the decrease in net charge-offs for 2013 to the relative stabilization of collateral values compared to 2012. Non-performing loans were $17.9 million or 3.64% of total loans at June 30, 2013 compared to $21.5 million, or 4.09% of total loans for December 31, 2012. The allowance for loan losses to non-performing loans, which excludes restructured loans on accrual status, was 89% at June 30, 2013 compared to 42% at June 30, 2012. The increase in the coverage ratio for 2013 was due to the decrease in non-accrual loans and restructured loans on non-accrual status during the period.

The net interest margin improved to 2.76% for the six months ended June 30, 2013 compared to 2.55% for the year ended December 31, 2012 and 2.53% for the six months ended June 30, 2012. The main driver to the improvement in the net interest margin for 2013 compared to 2012 is the premeditated decrease of $202.1 million in average certificates of deposits that resulted in a reduction of $3.0 in related interest expense during the period. We continue to anticipate modest improvement to the net interest margin over the next several quarters, as we continue to focus on restructuring the balance sheet to decrease our cost of funds, improve interest income, and reduce our interest rate risk exposure. However, the balance sheet restructuring may be impacted by the acceleration of loan repayments.

Non-interest income decreased $80,000 for the six months ended June 30, 2013, primarily driven by a decrease in net gains on the sale of investments, a decrease in recorded gains on the sale of OREO properties, a decrease in gains recorded on the sale of premises and equipment, and a decrease in the gain recorded on the sale of real estate held for development offset by a decline in write-downs and loss on sale of OREO properties. Non-interest expense decreased $2.8 million for the six month 2013 period compared to the same period in 2012. The decrease is primarily attributable to two factors — a decrease in the amortization of intangible assets following the 2012 sale of our four Indiana branches and reduced loan workout and loan portfolio management expenses due to a lower level of non-performing assets.

38

In its 2012 Consent Order, the Bank agreed to achieve and maintain a Tier 1 capital ratio of 9.0% and a total risk-based capital ratio of 12.0% by June 30, 2012. The Bank also agreed that if it should be unable to reach the required capital levels by that date, and if directed in writing by the FDIC, then within 30 days the Bank would develop, adopt and implement a written plan to sell or merge itself into another federally insured financial institution. To date the Bank has not received such a written direction. The 2012 Consent Order includes the substantive provisions of the 2011 Consent Order and requires the Bank to continue to adhere to the plans implemented in response to the 2011 Consent Order. A copy of the March 9, 2012 Consent Order is included as Exhibit 10.8 to our 2011 Annual Report on Form 10-K filed March 30, 2012. At June 30, 2013, the Bank’s Tier 1 capital ratio was 7.27% and the total risk-based capital ratio was 12.36% as compared to the minimum capital ratios as required by the 2011 Consent Order of 9.00% and 12.00%, respectively.

We notified the bank regulatory agencies that we have achieved and maintained the total risk-based capital ratio, but we have yet to achieve the Tier 1 capital ratio. We are continuing to explore our strategic alternatives to achieve and maintain the Tier 1 capital ratio as well as all of the other consent order issues.

The 2012 Consent Order requires us to obtain the consent of the FDIC and the KDFI in order for the Bank to pay cash dividends to the Corporation. In addition, the “troubled institution” designation resulting from the Consent Order does not allow the Bank to accept, renew or rollover brokered deposits, restricts the amount of interest the Bank may pay on deposits, and increases its deposit insurance assessment.

On April 20, 2011, the Corporation entered into a formal agreement with the Federal Reserve Bank of St. Louis, which requires the Corporation to obtain regulatory approval before declaring any dividends and to take steps to ensure the Bank complies with the Consent Order. We also may not redeem shares or obtain additional borrowings without prior approval.

Bank regulatory agencies can exercise discretion when an institution does not meet the terms of a consent order. The agencies may initiate changes in management, issue mandatory directives, impose monetary penalties or refrain from formal sanctions, depending on individual circumstances. Any action taken by bank regulatory agencies could damage our reputation and have a material adverse effect on our business.

In response to the 2011 Consent Order, we engaged an investment banking firm with expertise in the financial services sector to assist with a review of all of our strategic alternatives as we work to achieve the required regulatory capital ratios. One of these alternatives was to sell branches located outside of our core market. On July 6, 2012, we sold our four banking centers in Southern Indiana, receiving a 3.65% premium on the $102.3 million of consumer and commercial deposits at closing. The buyer assumed a total of approximately $115.4 million in non-brokered deposits, which included $13.1 million of government, corporate, other financial institution and municipal deposits for which we received no premium or discount. We also sold approximately $30.4 million in performing loans at a discount of 0.80%. Other assets sold included vault cash of $367,000 and fixed assets of $887,000. The Indiana branch sale resulted in a gain of $3.1 million.

On May 15, 2012, we entered into an agreement to sell our four banking centers in Louisville, Kentucky. The sale was subject to the buyer raising additional capital, regulatory approval and other customary closing conditions. On November 14, 2012, the buyer terminated the agreement due to its inability to raise sufficient capital to obtain regulatory approval of the sale.

Our plans for 2013 include the following even though there can be no assurances that our plans will be achieved:

· Continuing to identify and evaluate available strategic options to meet regulatory capital levels and all other requirements of our Consent Order.

· Continuing to serve our community banking customers and operate the Corporation and the Bank in a safe and sound manner. We have worked diligently to maintain the strength of our retail and deposit franchise.

· Continuing to reduce expenses and improve our ability to operate in a profitable manner.

· Continuing to reduce our lending concentration in commercial real estate through expected maturities and repayments. We have implemented loan diversification initiatives in place that we believe should improve the loan portfolio. Increased emphasis on retail lending, small business lending and Small Business Administration (“SBA”) lending are all expected to boost non-interest fee income. We have already reallocated resources that that we believe should contribute to the successful execution of all of these efforts. Our mortgage and consumer lending operations have maintained strong credit quality metrics throughout the economic downturn.

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· Enhancing our resources dedicated to special asset dispositions, both on a permanent and temporary basis, to accelerate our efforts to dispose of problem assets. Our objective is reduce the involvement of our commercial lenders in the special asset area, allowing them to shift their focus to their existing loan customer base and generate new business that supports our diversification efforts while stemming some of the loan roll-off. In 2012we hired several new commercial loan officers who bring significant experience in real estate and commercial and industrial lending.

While our concerns about economic conditions in our market continue, we are working towards our long-range objectives including building additional core customer relationships, maintaining sufficient liquidity and capital levels, improving shareholder value, remediating our problem assets and building upon the sustained success of our retail franchise.

CRITICAL ACCOUNTING POLICIES

Our accounting and reporting policies comply with U.S. generally accepted accounting principles and conform to general practices within the banking industry. The preparation of financial statements in conformity with U.S. generally accepted accounting principles requires us to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. These estimates, assumptions, and judgments are based on information available as of the date of the financial statements. Accordingly, as this information changes, the financial statements could change as our estimates, assumptions, and judgments change. Certain policies inherently rely more heavily on the use of estimates, assumptions, and judgments and as such have a greater possibility of producing results that could be materially different than originally reported. We consider our critical accounting policies to include the following:

Allowance for Loan Losses – We maintain an allowance we believe to be sufficient to absorb probable incurred credit losses existing in the loan portfolio. Our Appraisal Review Committee, which is comprised of senior officers and certain accounting associates, evaluates the allowance for loan losses on a monthly basis.  We estimate the amount of the allowance using past loan loss experience, known and inherent risks in the portfolio, adverse situations that may affect the borrower’s ability to repay, estimated value of the underlying collateral, and current economic conditions.  While we estimate the allowance for loan losses based in part on historical losses within each loan category, estimates for losses within the commercial real estate portfolio depend more on credit analysis and recent payment performance. Allocations of the allowance may be made for specific loans or loan categories, but the entire allowance is available for any loan that, in management’s judgment, should be charged off. 

The allowance consists of specific and general components. The specific component relates to loans that are individually classified as impaired. The general component covers non-impaired loans and is based on historical loss experience for certain categories adjusted for current factors. Allowance estimates are developed with actual loss experience adjusted for current economic conditions. Allowance estimates are considered a prudent measurement of the risk in the loan portfolio and are applied to individual loans based on loan type.

Based on our calculation, an allowance of $15.9 million or 3.25% of total loans was our estimate of probable incurred losses within the loan portfolio as of June 30, 2013.  As a consequence of this estimate we recorded a net reversal of provision for loan losses on the income statement of $825,000 for the 2013 period.  If the mix and amount of future charge off percentages differ significantly from those assumptions used by management in making its determination, the allowance for loan losses and provision for loan losses on the income statement could materially increase.

Impairment of Investment Securities – We review all unrealized losses on our investment securities to determine whether the losses are other-than-temporary. We evaluate our investment securities on at least a quarterly basis, and more frequently when economic or market conditions warrant, to determine whether a decline in their value below amortized cost is other-than-temporary. We evaluate a number of factors including, but not limited to: valuation estimates provided by investment brokers; how much fair value has declined below amortized cost; how long the decline in fair value has existed; the financial condition of the issuer; significant rating agency changes on the issuer; and management’s assessment that we do not intend to sell or will not be required to sell the security for a period of time sufficient to allow for any anticipated recovery in fair value.

The term “other-than-temporary” is not intended to indicate that the decline is permanent, but indicates that the possibility for a near-term recovery of value is not necessarily favorable, or that there is a lack of evidence to support a realizable value equal to or greater than the carrying value of the investment. Once a decline in value is determined to be other-than-temporary, the cost basis of the security is written down to fair value and a charge to earnings is recognized for the credit component and the non-credit component is recorded to other comprehensive income.

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Real Estate Owned – The estimation of fair value is significant to real estate owned-acquired through foreclosure. These assets are recorded at fair value less estimated selling costs at the date of foreclosure. Fair value is based on the appraised market value of the property based on sales of similar assets when available. The value may be subsequently reduced if the estimated fair value declines below the value recorded at the time of foreclosure. Appraisals are performed at least annually, if not more frequently. Typically, appraised values are discounted for the projected sale below appraised value in addition to the selling cost. With certain appraised values where management believes a solid liquidation value has been established, the appraisal has been discounted only by the selling cost. We have dedicated a team of associates and management focused on the continued resolution and work out of OREO. Appropriate policies, committees and procedures have been put in place to ensure the proper accounting treatment and risk management of this area.

Income Taxes – The provision for income taxes is based on income/(loss) as reported in the financial statements. Deferred income tax assets and liabilities are computed for differences between the financial statement and tax basis of assets and liabilities that will result in taxable or deductible amounts in the future. The deferred tax assets and liabilities are computed based on enacted tax laws and rates applicable to the periods in which the differences are expected to affect taxable income. An assessment is made as to whether it is more likely than not that deferred tax assets will be realized. A valuation allowance is established when necessary to reduce deferred tax assets to an amount more likely than not expected to be realized. Income tax expense is the tax payable or refundable for the period plus or minus the change during the period in deferred tax assets and liabilities. Tax credits are recorded as a reduction to the tax provision in the period for which the credits may be utilized.

A full valuation allowance related to deferred tax assets is required when it is considered more likely than not that all or part of the benefit related to such assets will not be realized. In assessing the need for a full valuation allowance, we considered various factors including our four year cumulative loss position, the level of our non-performing assets, our inability to meet our forecasted levels of assets and operating results in 2012 and 2011 and our non-compliance with the capital requirements of our Consent Order. Based on this assessment, we concluded that a valuation allowance was necessary at June 30, 2013 and December 31, 2012.

RESULTS OF OPERATIONS

Net loss attributable to common shareholders for the quarter ended June 30, 2013 was $1.4 million or $0.29 per diluted common share compared to a net loss attributable to common shareholders of $4.4 million or $0.92 per diluted common share for the same period in 2012. Net loss attributable to common shareholders for the six months ended June 30, 2013 was $1.5 million or $0.32 per diluted common share compared to a net loss attributable to common shareholders of $5.0 million or $1.04 per diluted common share for the same period a year ago. The main drivers to the net loss for 2013 include the following:

· declining net interest income mainly driven by a decline of $5.4 million in loan interest income as a result of a decline of $184.1 million in average loan balances combined with the continuing low interest rate environment;

· a decrease in net gains of $779,000 on the sale of securities available for sale,

· a decline of $463,000 in securities interest income mainly due to the continued low interest rate environment;

· offset by a decline of $3.8 million in deposit interest expense mainly as a result of a premeditated decrease of $202.1 million in average certificates of deposits and other time deposits balances combined with a decline of 42 basis points in the cost of these deposits;

· a $2.8 million decrease in provision for loans losses, including an $825,000 net reserve reversal due to the improvement in specific reserves allocated to several relationships based upon updated appraisals;

· a $2.4 million decrease in real estate acquired through foreclosure expense and loan expense, the result of lower loan workout and loan portfolio management expenses as our level of non-performing assets has decreased, and

· a $2.0 million decrease in write downs and sale losses on other real estate owned (“OREO”).

Net loss attributable to common shareholders was also increased by dividends accrued on preferred shares. Our book value per common share decreased from $5.99 at June 30, 2012 to $3.04 at June 30, 2013.

Net Interest Income – The largest component of our net income is our net interest income. Net interest income is the difference between interest income, principally from loans and investment securities, and interest expense, principally on customer deposits and borrowings. Changes in net interest income result from changes in volume, net interest spread and net interest margin. Volume refers to the average dollar levels of interest-earning assets and interest-bearing liabilities. Net interest spread refers to the difference between the average yield on interest-earning assets and the average cost of interest-bearing liabilities. Net interest margin refers to net interest income divided by average interest-earning assets and is influenced by the level and relative mix of interest-earning assets and interest-bearing liabilities.

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The majority of our assets are interest-earning and our liabilities are interest-bearing.  Accordingly, changes in interest rates may impact our net interest margin. The Federal Open Markets Committee (“FOMC”) uses the federal funds rate, which is the interest rate used by banks to lend to each other, to influence interest rates and the national economy. Changes in the federal funds rate have a direct correlation to changes in the prime rate, the underlying index for most of the variable-rate loans we issue.  The FOMC has held the target federal funds rate at a range of 0-25 basis points since December 2008.  As we are asset sensitive, continued low rates will negatively impact our earnings and net interest margin.

The large decline in the volume of interest earning assets and the change in the mix of interest earning assets reduced net interest income by $706,000 and $2.1 million for the three and six month 2013 periods compared to the prior year periods. Average interest earning assets decreased $270.8 million and 250.7 million for the quarter and six month 2013 periods compared to 2012 primarily driven by a decrease in average loans. The decrease in average loans was due to loans sold in connection with the branch sale during the third quarter of 2012, loan principal payments, payoffs, charge-offs and the conversion of nonperforming loans to OREO properties. In addition, due to the higher regulatory capital ratios required by our consent order, we elected not to replace much of this loan run-off in accordance with our efforts to reduce asset size. The average loan yield was 5.31% and 5.30% for the three and six month 2013 periods compared to an average loan yield of 5.37% and 5.47% for the 2012 periods. We redeployed available liquidity into more liquid but lower yielding investments.

Average interest bearing liabilities decreased $275.2 million and $255.0 million for the quarter and six month 2013 periods compared to 2012 driven by a decrease in average certificates of deposit and NOW and money market accounts. The decrease in average deposits was due to the sale of deposits included in the branch sale during the third quarter of 2012 and a decrease in deposit accounts as market conditions and regulatory restrictions continue to significantly affect our ability to attract and maintain deposits.

The tax equivalent yield on earning assets averaged 3.94% and 3.88% for the three and six month 2013 periods compared to 3.88% and 4.07% for 2012. The change in the yields on interest earning assets were partially offset by a decrease in our cost of funds, which averaged 1.16% and 1.21% for the three and six month 2013 periods compared to an average cost of funds of 1.55% and 1.63% for the same periods in 2012. Net interest margin as a percent of average earning assets increased 45 basis points to 2.87% for the quarter ended June 30, 2013 and increased 23 basis points to 2.76% for the six months ended June 30, 2013 compared to 2.42% and 2.53% for the 2012 periods. We anticipate being able to continue taking advantage of the continued low interest rate environment to reduce our cost of funds, as term deposits re-price at more favorable terms.

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AVERAGE BALANCE SHEET

The following table provides information relating to our average balance sheet and reflects the average yield on assets and average cost of liabilities for the indicated periods. Yields and costs for the periods presented are derived by dividing income or expense by the average balances of assets or liabilities, respectively.

	Quarter Ended June 30,
	2013								2012
(Dollars in thousands)	Average					Average			Average					Average
	Balance			Interest		Yield/Cost (5)			Balance			Interest		Yield/Cost (5)
ASSETS
Interest earning assets:
U.S. Government and federal agency	$	-		$	-		-	%	$	19,399		$	98		2.03	%
Mortgage-backed securities		244,501			1,031		1.69	%		309,475			1,498		1.94	%
State and political subdivision securities (1)		15,501			248		6.42	%		13,755			218		6.36	%
Trust Preferred Securities		-			-		-%			1,032			16		6.22	%
Corporate bonds		59,231			377		2.55	%		412			1		0.97	%
Loans (2) (3) (4)		499,079			6,603		5.31	%		662,340			8,868		5.37	%
FHLB stock		4,430			47		4.26	%		4,805			56		4.67	%
Interest bearing deposits		24,982			16		0.26	%		107,296			57		0.21	%
Total interest earning assets		847,724			8,322		3.94	%		1,118,514			10,812		3.88	%
Less:  Allowance for loan losses		(16,156	)							(17,759	)
Non-interest earning assets		78,642								92,289
Total assets	$	910,210							$	1,193,044
LIABILITIES AND STOCKHOLDERS' EQUITY
Interest bearing liabilities:
Savings accounts	$	91,122		$	52		0.23	%	$	98,445		$	72		0.29	%
NOW and money market accounts		265,784			153		0.23	%		305,064			390		0.51	%
Certificates of deposit and other time deposits		390,885			1,569		1.61	%		605,531			2,983		1.98	%
FHLB advances		13,762			132		3.85	%		27,678			282		4.09	%
Subordinated debentures		18,000			341		7.60	%		18,000			341		7.60	%
Total interest bearing liabilities		779,553			2,247		1.16	%		1,054,718			4,068		1.55	%
Non-interest bearing liabilities:
Non-interest bearing deposits		80,433								82,698
Other liabilities		11,060								5,069
Total liabilities		871,046								1,142,485
Stockholders' equity		39,164								50,559
Total liabilities and stockholders' equity	$	910,210							$	1,193,044
Net interest income				$	6,075							$	6,744
Net interest spread							2.78	%							2.33	%
Net interest margin							2.87	%							2.42	%

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

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

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

(4) Includes loans held for sale.

(5) Annualized

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	Six Months Ended June 30,
	2013								2012
(Dollars in thousands)	Average					Average			Average					Average
	Balance			Interest		Yield/Cost (5)			Balance			Interest		Yield/Cost (5)
ASSETS
Interest earning assets:
U.S. Government and federal agency	$	3,822		$	28		1.48	%	$	21,537		$	230		2.15	%
Mortgage-backed securities		266,443			2,241		1.70	%		294,883			2,969		2.03	%
State and political subdivision securities (1)		15,078			421		5.63	%		16,636			541		6.56	%
Trust Preferred Securities		-			-		-%			1,055			29		5.54	%
Corporate bonds		50,862			651		2.58	%		206			1		0.98	%
Loans (2) (3) (4)		510,593			13,421		5.30	%		694,733			18,829		5.47	%
FHLB stock		4,555			98		4.34	%		4,805			103		4.32	%
Interest bearing deposits		27,701			34		0.25	%		95,855			104		0.22	%
Total interest earning assets		879,054			16,894		3.88	%		1,129,710			22,806		4.07	%
Less:  Allowance for loan losses		(16,587	)							(17,868	)
Non-interest earning assets		81,181								92,995
Total assets	$	943,648							$	1,204,837
LIABILITIES AND STOCKHOLDERS' EQUITY
Interest bearing liabilities:
Savings accounts	$	88,947		$	107		0.24	%	$	96,491		$	143		0.30	%
NOW and money market accounts		272,224			355		0.26	%		304,972			838		0.55	%
Certificates of deposit and other time deposits		419,536			3,448		1.66	%		621,632			6,408		2.08	%
FHLB advances		13,168			264		4.04	%		27,761			567		4.12	%
Subordinated debentures		18,000			682		7.64	%		18,000			682		7.64	%
Total interest bearing liabilities		811,875			4,856		1.21	%		1,068,856			8,638		1.63	%
Non-interest bearing liabilities:
Non-interest bearing deposits		79,492								79,215
Other liabilities		10,727								4,858
Total liabilities		902,094								1,152,929
Stockholders' equity		41,554								51,908
Total liabilities and stockholders' equity	$	943,648							$	1,204,837
Net interest income				$	12,038							$	14,168
Net interest spread							2.67	%							2.44	%
Net interest margin							2.76	%							2.53	%

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

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

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

(4) Includes loans held for sale.

(5) Annualized

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RATE/VOLUME ANALYSIS

The table below shows changes in interest income and interest expense for the periods indicated. For each category of interest-earning assets and interest-bearing liabilities, information is provided on changes attributable to (1) changes in rate (changes in rate multiplied by old volume); (2) changes in volume (change in volume multiplied by old rate); and (3) changes in rate-volume (change in rate multiplied by change in volume). Changes in rate-volume are proportionately allocated between rate and volume variance.

	Three Months Ended									Six Months Ended
	June 30,									June 30,
	2013 vs. 2012									2013 vs. 2012
	Increase (decrease)									Increase (decrease)
	Due to change in									Due to change in
(Dollars in thousands)							Net									Net
	Rate			Volume			Change			Rate			Volume			Change
Interest income:
U.S. Treasury and agencies	$	(74	)	$	(24	)	$	(98	)	$	(56	)	$	(146	)	$	(202	)
Mortgage-backed securities		(178	)		(289	)		(467	)		(459	)		(269	)		(728	)
State and political subdivision securities		2			28			30			(72	)		(48	)		(120	)
Trust Preferred Securities		(12	)		(4	)		(16	)		(15	)		(14	)		(29	)
Corporate bonds		4			372			376			4			646			650
Loans		(104	)		(2,161	)		(2,265	)		(552	)		(4,856	)		(5,408	)
FHLB stock		(5	)		(4	)		(9	)		-			(5	)		(5	)
Interest bearing deposits		10			(51	)		(41	)		12			(82	)		(70	)
Total interest earning assets		(357	)		(2,133	)		(2,490	)		(1,138	)		(4,774	)		(5,912	)
Interest expense:
Savings accounts		(15	)		(5	)		(20	)		(26	)		(10	)		(36	)
NOW and money market accounts		(192	)		(45	)		(237	)		(401	)		(82	)		(483	)
Certificates of deposit and other time deposits		(485	)		(929	)		(1,414	)		(1,137	)		(1,823	)		(2,960	)
FHLB advances		(16	)		(134	)		(150	)		(10	)		(293	)		(303	)
Subordinated debentures		-			-			-			-			-			-
Total interest bearing liabilities		(708	)		(1,113	)		(1,821	)		(1,574	)		(2,208	)		(3,782	)
Net change in net interest income	$	351		$	(1,020	)	$	(669	)	$	436		$	(2,566	)	$	(2,130	)

Non-Interest Income and Non-Interest Expense

The following tables compare the components of non-interest income and expenses for the periods ended June 30, 2013 and 2012. The tables show the dollar and percentage change from 2012 to 2013. Below each table is a discussion of significant changes and trends.

	Three Months Ended
	June 30,
(Dollars in thousands)	2013			2012			Change			%
Non-interest income
Customer service fees on deposit accounts	$	1,307		$	1,399		$	(92	)		-6.6	%
Gain on sale of mortgage loans		161			384			(223	)		-58.1	%
Gain on sale of investments		334			598			(264	)		-44.1	%
Loss on sale and calls of investments		(334	)		(303	)		(31	)		10.2	%
Loss on sale and write downs of real estate acquired through foreclosure		(532	)		(2,016	)		1,484			-73.6	%
Gain on sale of premises and equipment		-			322			(322	)		-100.0	%
Gain on sale on real estate acquired through foreclosure		150			210			(60	)		-28.6	%
Brokerage commissions		139			112			27			24.1	%
Other income		461			617			(156	)		-25.3	%
	$	1,686		$	1,323		$	363			27.4	%

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	Six Months Ended
	June 30,
(Dollars in thousands)	2013			2012			Change			%
Non-interest income
Customer service fees on deposit accounts	$	2,498		$	2,782		$	(284	)		-10.2	%
Gain on sale of mortgage loans		588			695			(107	)		-15.4	%
Gain on sale of investments		843			1,309			(466	)		-35.6	%
Loss on sale and calls of investments		(616	)		(303	)		(313	)		103.3	%
Net impairment losses recognized in earnings		-			(26	)		26			-100.0	%
Loss on sale and write downs of real estate acquired through foreclosure		(1,592	)		(3,582	)		1,990			-55.6	%
Gain on sale of premises and equipment		-			322			(322	)		-100.0	%
Gain on sale on real estate acquired through foreclosure		207			613			(406	)		-66.2	%
Gain on sale of real estate held for development		-			175			(175	)		-100.0	%
Brokerage commissions		257			207			50			24.2	%
Other income		955			1,028			(73	)		-7.1	%
	$	3,140		$	3,220		$	(80	)		-2.5	%

Customer service fees on deposit accounts decreased during 2013 primarily due to a decline in customer deposits following the sale of deposit accounts from our four Indiana banking centers and a decrease in deposit accounts, as market conditions and regulatory restrictions continue to significantly affect our ability to attract and maintain deposits.

We originate qualified Veterans Affairs (VA), Kentucky Housing Corporation (KHC), Rural Housing Corporation (RHC) and conventional secondary market loans and sell them into the secondary market with servicing rights released. Gain on sale of mortgage loans decreased for 2013 due to a decrease in the volume of loans refinanced, originated and sold compared to 2012.

We invest in various types of liquid assets, including United States Treasury obligations, securities of various federal agencies, obligations of states and political subdivisions, corporate bonds, mutual funds, stocks and others. During 2013 we recorded a net gain on the sale of debt investment securities of $227,000 compared to a net gain on sale of debt investment securities of $1.0 million for the 2012 period.

We recognized other-than-temporary impairment charges of $26,000 for the expected credit loss during the 2012 period on one of our trust preferred securities. The 2012 impairment charge was related to Preferred Term Security VI which was called for early redemption in July 2012. Management believes this impairment was primarily attributable to the current economic environment in which the financial condition of some of the issuers deteriorated.

Non-interest income for 2013 was reduced by $1.6 million in losses on the sale and write down of real estate owned properties due to the decline in market value of properties held in this portfolio. Partially offsetting the losses and write downs were recorded gains of $207,000 on the sale of nine real estate owned properties.

During the first quarter of 2012 we recorded $175,000 in gains from the sale of the last of nine lots we held for sale in an office park adjacent to our home office.

The decrease in other income for the 2013 period was the result of decreases in income received on real estate owned properties.

	Three Months Ended
	June 30,
(Dollars in thousands)	2013		2012		Change			%
Non-interest expenses
Employee compensation and benefits	$	3,757	$	3,822	$	(65	)		-1.7	%
Office occupancy expense and equipment		690		782		(92	)		-11.8	%
Marketing and advertising		74		135		(61	)		-45.2	%
Outside services and data processing		941		893		48			5.4	%
Bank franchise tax		315		402		(87	)		-21.6	%
FDIC insurance premiums		505		682		(177	)		-26.0	%
Amortization of intangible assets		-		62		(62	)		-100.0	%
Real estate acquired through foreclosure expense		524		2,336		(1,812	)		-77.6	%
Loan expense		385		656		(271	)		-41.3	%
Other expense		1,372		1,446		(74	)		-5.1	%
	$	8,563	$	11,216	$	(2,653	)		-23.7	%

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	Six Months Ended
	June 30,
(Dollars in thousands)	2013		2012		Change			%
Non-interest expenses
Employee compensation and benefits	$	7,550	$	7,675	$	(125	)		-1.6	%
Office occupancy expense and equipment		1,398		1,550		(152	)		-9.8	%
Marketing and advertising		174		168		6			3.6	%
Outside services and data processing		1,804		1,704		100			5.9	%
Bank franchise tax		630		744		(114	)		-15.3	%
FDIC insurance premiums		1,194		1,097		97			8.8	%
Amortization of intangible assets		-		127		(127	)		-100.0	%
Real estate acquired through foreclosure expense		818		2,676		(1,858	)		-69.4	%
Loan expense		607		1,164		(557	)		-47.9	%
Other expense		2,688		2,800		(112	)		-4.0	%
	$	16,863	$	19,705	$	(2,842	)		-14.4	%

Amortization of intangible assets decreased due to the sale of our four Indiana banking centers in 2012 in which the related intangible assets were fully amortized.

Real estate acquired through foreclosure expense and loan expense decreased due to a reduction in loan workout and loan portfolio management expenses due to a lower level of non-performing assets. Real estate acquired through foreclosure expense was also higher in 2012 due to a $1.5 million termination fee paid that was related to the termination of a property investment and management agreement on a residential development held in other real estate owned. 

Income Taxes

The provision for income taxes includes federal and state income taxes and in 2013 and 2012 reflects a full valuation allowance against all of our deferred tax assets. The effective tax rate for the quarter and six month periods ended June 30, 2013 and 2012 is not meaningful due to the reduction of income tax benefit as the result of maintaining a full deferred tax valuation allowance. Historically, the fluctuations in effective tax rates reflect the effect of permanent differences in the inclusion or deductibility of certain income and expenses, respectively, for income tax purposes.

A valuation allowance related to deferred tax assets is required when it is considered more likely than not that all or part of the benefit related to such assets will not be realized. In assessing the need for a valuation allowance, we considered all positive and negative evidence including our four year cumulative loss position, the level of our non-performing assets, our inability to meet our forecasted levels of assets and operating results in 2013, 2012 and 2011 and our non-compliance with the capital requirements of our Consent Order. Based on this assessment, we concluded that a valuation allowance was necessary at June 30, 2013 and December 31, 2012. Our future effective income tax rate will fluctuate based on the mix of taxable and tax free investments we make and, to a greater extent, the impact of changes in the required amount of valuation allowance recorded against our net deferred tax assets and our overall level of taxable income.

Recording a valuation allowance does not have any impact on our liquidity, nor does it preclude us from using the tax losses, tax credits or other timing differences in the future. To the extent that we generate taxable income in a given quarter, the valuation allowance may be reduced to fully or partially offset the corresponding income tax expense. Any remaining deferred tax asset valuation allowance may be reversed through income tax expense once we can demonstrate a sustainable return to profitability and conclude that it is more likely than not the deferred tax asset will be utilized prior to expiration.

ANALYSIS OF FINANCIAL CONDITION

Total assets at June 30, 2013 decreased $122.5 million compared to total assets at December 31, 2012. The decrease was primarily attributable to a decline of $44.9 million in available-for-sale securities, a decline of $34.2 million in total loans, a $35.2 million decline in cash and cash equivalents and a decline in real estate acquired through foreclosure of $8.1 million. Total deposits decreased $124.2 million as market conditions and regulatory restrictions continue to significantly affect our ability to attract and maintain deposits.

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Loans

Total loans decreased $34.2 million to $490.7 million at June 30, 2013 compared to $524.9 million at December 31, 2012. Our commercial real estate and commercial portfolios decreased $20.2 million to $317.5 million at June30, 2013. Our residential mortgage loan, consumer and home equity and indirect consumer portfolios also decreased for the 2013 period. The decline in our commercial real estate and commercial loan portfolios is a result of pay-offs, charge-offs, and commercial real estate loans being transferred to real estate acquired through foreclosure. Charge-offs made up $701,000 or 2.0% of this decrease. The decline in the loan portfolio was also due, in part, to our ongoing efforts to resolve problem loans. In addition, we have elected not to replace much of this loan run-off in order to reduce asset size and increase capital in light of the higher regulatory capital ratios imposed by our consent order.

	June 30,			December 31,
(Dollars in thousands)	2013			2012
Commercial Real Estate (CRE):
Other-CRE other than Land
Development and Building Lots	$	274,863		$	287,283
Land Development		23,736			28,310
Building Lots		1,875			2,151
Residential mortgage		102,281			110,025
Consumer and home equity		54,449			57,888
Commercial		17,030			19,931
Indirect consumer		13,087			16,211
Real estate construction		3,354			3,141
		490,675			524,940
Less:
Net deferred loan origination fees		(89	)		(105	)
Allowance for loan losses		(15,947	)		(17,265	)
		(16,036	)		(17,370	)
Net Loans	$	474,639		$	507,570

Allowance and Provision for Loan Losses

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

The Appraisal Review Committee evaluates the allowance for loan losses monthly to maintain a level it believes to be sufficient to absorb probable incurred credit losses existing in the loan portfolio. Periodic provisions to the allowance are made as needed. The Committee determines the allowance by applying loss estimates to graded loans by categories, as described below. When appropriate, a specific reserve will be established for individual impaired loans based upon the risk classification and the estimated potential for loss. In accordance with our credit management processes, we obtain new appraisals on properties securing our non-performing commercial and commercial real estate loans and use those appraisals to determine specific reserves within the allowance for loan losses. As we receive new appraisals on properties securing non-performing loans, we recognize charge-offs and adjust specific reserves as appropriate. In addition, the Committee analyzes such factors as changes in lending policies and procedures; real estate market conditions; underwriting standards; collection; charge-off and recovery history; changes in national and local economic business conditions and developments; changes in the characteristics of the portfolio; ability and depth of lending management and staff; changes in the trend of the volume and severity of past due, non-accrual and classified loans; troubled debt restructuring and other loan modifications; and results of regulatory examinations.

Declines in collateral values, including commercial real estate, may impact our ability to collect on certain loans when borrowers are dependent on the values of the real estate as a source of cash flow. While we anticipate that challenges will continue in the foreseeable future as we manage the overall level of our credit quality, we believe that credit quality appears to be stabilizing as compared to the significant changes observed in real estate values prior to 2012. As a result of the relative stabilization in real estate values during 2012 and the first half of 2013, our provision for loan losses decreased.

As discussed in the Overview to this section, we have entered into a Consent Order with bank regulatory agencies. In addition to increasing capital ratios, we agreed to maintain adequate reserves for loan losses, develop and implement plans to reduce the level of non-performing assets and concentrations of credit in commercial real estate loans, implement revised credit risk management practices and credit administration policies and procedures, and report our progress to the regulators.

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The following table analyzes our loan loss experience for the periods indicated.

	Three Months Ended						Six Months Ended
	June 30,						June 30,
(Dollars in thousands)	2013			2012			2013			2012
Balance at beginning of period	$	15,812		$	17,329		$	17,265		$	17,181
Loans charged-off:
Residential mortgage		-			31			-			62
Consumer & home equity		92			158			155			276
Commercial & commercial real estate		61			2,190			546			2,990
Total charge-offs		153			2,379			701			3,328
Recoveries:
Residential mortgage		4			-			4			1
Consumer & home equity		48			42			90			86
Commercial & commercial real estate		24			75			114			102
Total recoveries		76			117			208			189
Net loans charged-off		77			2,262			493			3,139
Provision for loan losses		212			915			(825	)		1,927
Balance at end of period		15,947			15,982			15,947			15,969
Less: Allowance allocated to loans held for sale in probable branch divestiture		-			(682	)		-			(669	)
Balance at end of period, net	$	15,947		$	15,300		$	15,947		$	15,300
Allowance for loan losses to total loans (1) (2)		3.25	%		2.50	%		3.25	%		2.50	%
Annualized net charge-offs to average loans outstanding		0.06	%		1.37	%		0.19	%		0.91	%
Allowance for loan losses to total non-performing loans (2)		89	%		42	%		89	%		42	%

(1) Includes loans held for sale in probable branch divestiture and probable loan sale for 2012

(2) Includes allowance allocated to loans held for sale in probable branch divestiture for 2012

Provision for loan losses decreased $703,000 to $212,000 for the three months ended June 30, 2013 compared to the same period ended June 30, 2012. Provision for loan losses decreased $2.8 million for the six months ended June 30, 2013 compared to the same six month period in 2012. We recorded a reversal of provision expense for 2013 due to a lower level of charge-offs and an improvement in the specific reserves allocated to several relationships based upon updated appraisals during the period. Our provision for loan loss was higher in 2012 due to the higher level of classified loans and a higher level of charge-offs.

The allowance for loan losses before the reduction in the allowance due to allowance allocated to loans held for sale in a probable branch divestiture remained constant when compared to 2012. The allowance for loan losses as a percent of total loans was 3.25% for June 30, 2013 compared to 2.50% at June 30, 2012. The allowance for loan losses as a percent of total impaired loans was 39% for June 30, 2013 compared to 27% at June 30, 2012. Specific reserves allocated to substandard loans made up 45% of the total allowance for loan loss at June 30, 2013. Net charge-offs for the 2013 period included $417,000 in partial charge-offs compared to partial charge-offs of $1.4 million at June 30, 2012. Allowance for loan losses to total non-performing loans increased to 89% at June 30, 2013 from 42% at June 30, 2012. The increase in the coverage ratio for 2013 was due to the decrease in non-accrual loans and restructured loans on non-accrual status during the period.

Federal regulations require banks to classify their own assets on a regular basis. The regulations provide for three categories of classified loans — substandard, doubtful and loss. In addition, we also classify loans as criticized. Loans classified as criticized have a potential weakness that deserves management’s close attention.

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The following table provides information with respect to criticized and classified loans as of the dates indicated:

	June 30,		March 31,		December 31,		September 30,		June 30,
(Dollars in thousands)	2013		2013		2012		2012		2012
Criticized Loans:
Total Criticized	$	27,892	$	27,068	$	24,869	$	25,141	$	26,723
Classified Loans:
Substandard	$	41,256	$	42,043	$	50,320	$	65,542	$	68,569
Doubtful		-		-		-		-		-
Loss		-		-		-		-		-
Total Classified	$	41,256	$	42,043	$	50,320	$	65,542	$	68,569
Total Criticized and Classified	$	69,148	$	69,111	$	75,189	$	90,683	$	95,292

Total criticized and classified loans declined by $6.0 million or 8% from December 31, 2012 and by $26.1 million or 27% from June 30, 2012. Approximately $35.8 million or 87% of the total classified loans at June 30, 2013 were related to commercial real estate loans in our market area. Classified consumer loans totaled $854,000, classified mortgage loans totaled $3.4 million and classified commercial loans totaled $1.2 million. Our decision to record a reversal of a portion of the allowance for loan losses during the first quarter of 2013 resulted from the application of a consistent allowance methodology that is driven by risk ratings. For more information on collection efforts, evaluation of collateral and how loss amounts are estimated, see “Non-Performing Assets,” below.

Although we may allocate a portion of the allowance to specific loans or loan categories, the entire allowance is available for charge-offs. We develop our allowance estimates based on actual loss experience adjusted for current economic conditions. Allowance estimates represent a prudent measurement of the risk in the loan portfolio, which we apply to individual loans based on loan type. If economic conditions continue to put stress on our borrowers going forward, this may require higher provisions for loan losses in future periods. We have allocated additional resources to address credit quality and facilitate the structure and processes to diversify and strengthen our lending function. Credit quality will continue to be a primary focus during 2013 and going forward.

Non-Performing Assets

Non-performing assets consist of certain non-accruing restructured loans for which the interest rate or other terms have been renegotiated, loans on which interest is no longer accrued, real estate acquired through foreclosure and repossessed assets. We do not have any loans longer than 90 days past due still on accrual at June 30, 2013. Loans, including impaired loans, are placed on non-accrual status when they become past due 90 days or more as to principal or interest, unless they are adequately secured and in the process of collection. Loans are considered impaired when we no longer anticipate full principal or interest will be paid in accordance with the contractual loan terms. If a loan is impaired, we allocate a portion of the allowance so that the loan is reported, net, at the present value of estimated future cash flows using the loan’s existing rate, or at the fair value of collateral if repayment is expected solely from collateral.

Non-accrual loans that have been restructured remain on non-accrual status until we determine the future collection of principal and interest is reasonably assured, which will require that the borrower demonstrate a period of performance in accordance to the restructured terms of six months or more. Accruing loans that have been restructured are evaluated for non-accrual status based on a current evaluation of the borrower’s financial condition and ability and willingness to service the modified debt.

We review our loans on a regular basis and implement normal collection procedures when a borrower fails to make a required payment on a loan. If the delinquency on a mortgage loan exceeds 90 days and is not cured through normal collection procedures or an acceptable arrangement is not worked out with the borrower, we institute measures to remedy the default, including commencing a foreclosure action. We generally charge off consumer loans when management deems a loan uncollectible and any available collateral has been liquidated. We handle commercial business and real estate loan delinquencies on an individual basis. These loans are placed on non-accrual status upon becoming contractually past due 90 days or more as to principal and interest or where substantial doubt about full repayment of principal and interest is evident.

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We recognize interest income on loans on the accrual basis except for those loans in a non-accrual of income status. We discontinue accruing interest on impaired loans when management believes, after consideration of economic and business conditions and collection efforts, that the borrowers’ financial condition is such that collection of interest is doubtful, typically after the loan becomes 90 days delinquent. When we discontinue interest accrual, we reverse existing accrued interest and subsequently recognize interest income only to the extent we receive cash payments and are assured of repayment of all outstanding principal.

We require appraisals and perform evaluations on impaired assets upon initial identification.  Thereafter, we obtain appraisals or perform market value evaluations on impaired assets at least annually.  Recognizing the volatility of certain assets, we assess the transaction and market conditions to determine if updated appraisals are needed more frequently than annually. Additionally, we evaluate the collateral condition and value in the event of foreclosure.

We classify real estate acquired as a result of foreclosure or by deed in lieu of foreclosure as real estate owned until such time as it is sold. We classify new and used automobile, motorcycle and all-terrain vehicles acquired as a result of foreclosure as repossessed assets until they are sold. When such property is acquired we record it at fair value less estimated selling costs. We charge any write-down of the property at the time of acquisition to the allowance for loan losses. Subsequent gains and losses are included in non-interest income and non-interest expense.

Real estate owned acquired through foreclosure is recorded at fair value less estimated selling costs at the date of foreclosure. Fair value is based on the appraised market value of the property based on sales of similar assets. The value may be subsequently reduced if the estimated fair value declines below the original appraised value. We monitor market information and the age of appraisals on existing real estate owned properties and obtain new appraisals as circumstances warrant. Real estate acquired through foreclosure was $14.2 million, a decrease of $8.1 million from December 31, 2012 and a decrease of $22.4 million from June 30, 2012. Real estate acquired through foreclosure at June 30, 2013 includes $3.4 million in land development properties and building lots, which are located primarily in Jefferson County compared to $12.7 million in land development and building lots at June 30, 2012. We believe that our level of real estate acquired through foreclosure has stabilized. We anticipate reductions over the next several quarters as we continue to sell OREO properties, while inflow has slowed down substantially compared to 2010 and 2011. All properties held in OREO are listed for sale with various independent real estate agents.

In the third quarter of 2012 we entered into a bulk sale contract to sell fourteen OREO properties totaling $16.5 million. We were able to close on $6.0 million and have since terminated the contract when the buyer was not able to meet all of the contractual terms and conditions of the contract. As a result of the termination on the bulk sale, we had to individually reevaluate the remaining properties. As a result, we allocated an additional $721,000 of specific reserves to the last of the remaining properties.

A summary of the real estate acquired through foreclosure activity is as follows:

	June 30,			December 31,
(Dollars in thousands)	2013			2012
Beginning balance, January 1,	$	22,286		$	29,083
Additions		1,951			18,100
Sales		(8,577	)		(19,250	)
Writedowns		(1,270	)		(5,147	)
Change in valuation allowance		(221	)		(500	)
Ending balance	$	14,169		$	22,286

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The following table provides information with respect to non-performing assets as of the dates indicated.

		June 30,			March 31,			December 31,			September 30,			June 30,
(Dollars in thousands)		2013			2013			2012			2012			2012
Restructured on non-accrual status		$	8,639		$	9,099		$	9,753		$	16,151		$	21,844
Past due 90 days still on accrual			-			1,950			-			-			-
Loans on non-accrual status			9,215			9,596			11,702			15,565			16,217
Total non-performing loans			17,854			20,645			21,455			31,716			38,061
Real estate acquired through foreclosure			14,169			19,705			22,286			28,649			36,529
Other repossessed assets			37			32			34			24			30
Total non-performing assets		$	32,060		$	40,382		$	43,775		$	60,389		$	74,620
Interest income that would have been earned on non-performing loans		$	946		$	1,094		$	1,163		$	1,729		$	2,082
Interest income recognized on non-performing loans			-			16			-			-			-
Ratios:	Non-performing loans to total loans (includes loans held for sale in probable branch divestiture and probable loan sale for 2012)		3.64	%		4.08	%		4.09	%		5.53	%		5.97	%
	Non-performing assets to total loans (includes loans held for sale in probable branch divestiture and probable loan sale for 2012)		6.54	%		7.98	%		8.34	%		10.53	%		11.71	%

Non-performing loans decreased by $3.6 million to $17.9 million at June 30, 2013 compared to $21.5 million at December 31, 2012. The decrease for 2013 resulted from a $2.5 million reduction in non-accrual loans and a $1.1 million decrease in restructured non-accruing commercial and commercial real estate loans. The change in non-accrual loans was due to a decrease in non-accrual loans following the transfer of a non-accrual relationship totaling $1.0 million to restructured status and the transfer of two non-accrual relationships totaling $1.3 million to real estate acquired through foreclosure. Restructured loans on nonaccrual status will be placed back on accrual status if we determine that the future collection of principal and interest is reasonably assured, which requires that the borrower demonstrate a period of performance of at least six months in accordance to the restructured terms. A concentration in loans for residential subdivision development in Jefferson and Oldham counties contributed significantly to the increases in our non-performing loans and our non-performing assets during the past three years. At June 30, 2013, substantially all of our residential housing development assets in these counties have been classified as impaired and written down to what we believe to be at or near liquidation value. The remaining residential development credits are smaller and have strong guarantors. All non-performing loans are considered impaired.

The following table provides information with respect to restructured loans as of the dates indicated.

	June 30,		December 31,
(Dollar in thousands)	2013		2012
Restructured loans on non-accrual	$	8,639	$	9,753
Restructured loans on accrual		25,376		22,851
Total restructured loans	$	34,015	$	32,604

The increase in restructured loans on accrual for 2013 resulted from the restructuring of three commercial real estate relationships totaling $2.4 million. The terms of our restructured loans have been renegotiated to reduce the rate of interest or extend the term, thus reducing the amount of cash flow required from the borrower to service the loans. We anticipate that our level of restructured loans will remain elevated as we identify borrowers in financial difficulty and work with them to modify to more affordable terms. We have worked with customers when feasible to establish “A” and “B” note structures. The “B” note is charged-off on our books but remains an outstanding balance for the customer. These typically carry a very nominal or low rate of interest. The “A” note is a note structured on a proper basis meeting internal policy standards for a performing loan. After six months of performance, the “A” note restructured loan is eligible to be placed back on an accrual basis as a performing troubled debt restructured loan.

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Investment Securities

Interest on securities provides us our largest source of interest income after interest on loans, constituting 19.9% of the total interest income for the six months ended June 30, 2013. The securities portfolio serves as a source of liquidity and earnings, and contributes to the management of interest rate risk. We have the authority to invest in various types of liquid assets, including short-term United States Treasury obligations and securities of various federal agencies, obligations of states and political subdivisions, corporate bonds, certificates of deposit at insured savings and loans and banks, bankers' acceptances, and federal funds. We may also invest a portion of our assets in certain commercial paper and corporate debt securities. We are also authorized to invest in mutual funds and stocks whose assets conform to the investments that we are authorized to make directly. The investment portfolio decreased by $45.0 million due to the sales of U.S. Treasury and agency securities, government-sponsored mortgage-backed securities, government-sponsored collateralized mortgage obligations, private asset backed and corporate bonds which sales were offset by the purchases of higher yielding investments. Recent purchases have been high cash flow instruments with short average lives in order to decrease the volatility of the investment portfolio as well as provide cash flow and limit interest rate risk.

We evaluate investment securities with significant declines in fair value on a quarterly basis to determine whether they should be considered other-than-temporarily impaired under current accounting guidance, which generally provides that if a security is in an unrealized loss position, whether due to general market conditions or industry or issuer-specific factors, the holder of the securities must assess whether the impairment is other-than-temporary. We consider the length of time and the extent to which the fair value has been less than cost, the financial condition and near-term prospects of the issuer, and whether management has the intent to sell the debt security or whether it is more likely than not that we will be required to sell the debt security before its anticipated recovery. In analyzing an issuer’s financial condition, we may consider whether the securities are issued by the federal government or its agencies, whether downgrades by bond rating agencies have occurred, and the results of reviews of the issuer’s financial condition.

The unrealized losses on our investment securities were a result of changes in interest rates for fixed-rate securities where the interest rate received is less than the current rate available for new offerings of similar securities. Because the decline in market value is attributable to changes in interest rates and not credit quality, and because we do not intend to sell and it is more likely than not that we will not be required to sell these investments until recovery of fair value, which may be maturity, we do not consider these investments to be other-than-temporarily impaired at June 30, 2013. See Note 3 – Securities for more information.  Management will continue to evaluate these securities for impairment quarterly. 

Deposits

We rely primarily on providing excellent customer service and on our long-standing relationships with customers to attract and retain deposits. Market interest rates and rates on deposit products offered by competing financial institutions can significantly affect our ability to attract and retain deposits. We attract both short-term and long-term deposits from the general public by offering a wide range of deposit accounts and interest rates. In recent years market conditions have caused us to rely increasingly on short-term certificate accounts and other deposit alternatives that are more responsive to market interest rates. We use forecasts based on interest rate risk simulations to assist management in monitoring our use of certificates of deposit and other deposit products as funding sources and the impact of the use of those products on interest income and net interest margin in various rate environments.

Historically, we have utilized certificates of deposit placed by deposit brokers and deposits obtained through the CDARs program to support our asset growth. The CDARS system enables certificates of deposit that would exceed the current $250,000 FDIC coverage limit on deposits in a single financial institution to be redistributed to other financial institutions within the CDARS network in increments under the current coverage limit. However, as a result of our Consent Order, we can no longer accept, renew or roll over brokered deposits (including deposits obtained through the CDARs program) without prior regulatory approval.

Total deposits decreased $124.2 million since December 31, 2012. Public funds decreased $23.2 million while retail and commercial deposits decreased $101.0 million. We have public funds deposits from school boards, water districts and municipalities within our markets. These deposits are larger than individual retail depositors. However, we do not have a deposit relationship that we believe is significant enough to cause a negative impact on our liquidity position. Brokered deposits and CDARS certificates decreased $14.5 million. Brokered deposits were $43.0 million at June 30, 2013 compared to $56.9 million at December 31, 2012.

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In 2012 we became a member of Qwickrate, a premier non-brokered market place that we use as an additional low cost funding source. Qwickrate deposits totaled $18.2 million at June 30, 2013 and $18.3 million at December 31, 2012. We do not anticipate a negative impact as a result of not being able to renew the $52.1 million of brokered deposits due to additional funding sources such as Qwickrate, decreased loan generation, continued loan pay downs, and our highly liquid and mostly short-term investment portfolio.

We have deployed additional resources to try to reduce our cost of funds in this low rate environment. The Consent Order resulted in the Bank being categorized as a "troubled institution" by bank regulators and as a result limits the interest rate the Bank can pay on interest bearing deposits. Unless the Bank is granted a waiver because it resides in a market that the FDIC determines is a high rate market, the Bank is limited to paying deposit interest rates .75% above the average rates computed by the FDIC. The Bank has elected to adhere to the average rates computed by the FDIC plus the .75% rate cap.

The following table breaks down our deposits.

	June 30,		December 31,
	2013		2012
	(In Thousands)
Non-interest bearing	$	80,584	$	75,842
NOW demand		141,851		155,390
Savings		87,408		80,645
Money market		108,947		121,755
Certificates of deposit		379,587		488,988
	$	798,377	$	922,620

Advances from Federal Home Loan Bank

Deposits are the primary source of funds for our lending and investment activities and for our general business purposes. We can also use advances (borrowings) from the Federal Home Loan Bank (FHLB) to compensate for reductions in deposits or deposit inflows at less than projected levels. At June 30, 2013 outstanding FHLB advances totaled $22.5 million. At June 30, 2013, we had sufficient collateral available to borrow, approximately $13.3 million in additional advances from the FHLB. Advances from the FHLB are secured by our stock in the FHLB, certain securities and substantially all of our first mortgage loans on an individual basis.

Subordinated Debentures

Two trust subsidiaries of First Financial Service Corporation have together issued a total of $18 million trust preferred securities. The subsidiaries have loaned the sales proceeds from these issuances to us in exchange for junior subordinated deferrable interest debentures. We are not considered the primary beneficiary of these trusts, which are variable interest entities. Therefore the trusts are not consolidated in our financial statements. Rather, the subordinated debentures we have issued to them are shown as a liability. Our investment in the common stock of the trusts was $310,000.

The subordinated debentures are considered as Tier 1 capital or Tier 2 capital for the Corporation under current regulatory guidelines. Under such guidelines, capital received from the proceeds of the sale of trust preferred securities cannot constitute more than 25% of the total core capital of the Corporation. Consequently, the amount of subordinated debentures in excess of the 25% limitation constitutes Tier 2 capital for the Corporation. We have the option to defer interest payments on the subordinated debentures from time to time for a period not to exceed five consecutive years.

In 2008, one such trust subsidiary issued $8.0 million in trust preferred securities and loaned the sales proceeds to us, which we used to finance the purchase of our Indiana banking operations. The subordinated debentures we issued to the trust mature on June 24, 2038, can be called at par in whole or in part on or after June 24, 2018, and pay a fixed rate of 8% for thirty years.

In 2007, the other trust subsidiary issued 30 year cumulative trust preferred securities totaling $10 million at a 10 year fixed rate of 6.69% adjusting quarterly thereafter at LIBOR plus 160 basis points. These securities mature on March 22, 2037, and can be called at par in whole or in part on or after March 15, 2017.

On October 29, 2010, we exercised our right to defer regularly scheduled interest payments on both issues of junior subordinated notes relating to outstanding trust preferred securities. We have the right to defer payments of interest for up to 20 consecutive quarterly periods without default or penalty. After such period, we must pay all deferred interest and resume quarterly interest payments or we will be in default. During the deferral period, the subsidiary trusts will likewise suspend payment of dividends on their trust preferred securities. The regular scheduled interest payments will continue to be accrued for payment in the future and reported as an expense for financial statement purposes. As of June 30, 2013, we have deferred a total of eleven quarterly payments and these accrued but unpaid interest payments totaled $3.7 million.

54

LIQUIDITY

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

Our banking centers provide access to retail deposit markets. If large certificate depositors shift to our competitors or other markets in response to interest rate changes, we have the ability to replenish those deposits through alternative funding sources. In addition to maintaining a stable core deposit base, we maintain adequate liquidity primarily through the use of investment securities. Traditionally, we have also borrowed from the FHLB to supplement our funding requirements. At June 30, 2013, we had sufficient collateral available to borrow approximately $13.3 million in additional advances from the FHLB. We believe that we have adequate funding sources through unpledged investment securities, repayments of loan principal, investment securities pay downs and potential asset maturities and sales to meet our foreseeable liquidity requirements.

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

The primary source of funding for the Corporation has been dividends and returns of investment from the Bank. Kentucky banking laws limit the amount of dividends that may be paid to the Corporation by the Bank without prior approval of the KDFI. Under these laws, the amount of dividends that may be paid in any calendar year is limited to current year’s net income, as defined in the laws, combined with the retained net income of the preceding two years, less any dividends declared during those periods. Our Consent Order requires us to obtain the consent of the Regional Director of the FDIC and the Commissioner of the KDFI to declare and pay cash dividends to the Corporation.

The Corporation has also entered into a formal agreement with the Federal Reserve to obtain regulatory approval before declaring any dividends on our common or preferred stock. We will not be able to pay cash dividends on our common stock in the future until we first pay all unpaid dividends on the Senior Preferred Shares and all deferred distributions on our trust preferred securities. We may not redeem shares or obtain additional borrowings without prior approval. Because of these limitations, consolidated cash flows as presented in the consolidated statements of cash flows may not represent cash immediately available to the Corporation. During the first half of 2013, the Bank did not declare or pay any dividends to the Corporation. Cash held by the Corporation at June 30, 2013 was $264,000 compared to cash of $333,000 at December 31, 2012.

CAPITAL

Stockholders’ equity decreased $9.8 million for the period ended June 30, 2013, primarily due to an increase in unrealized losses on securities available-for-sale during the period. Our average stockholders’ equity to average assets ratio increased to 4.40% for the six months ended June 30, 2013 compared to 4.31% for the 2012 period.

On January 9, 2009, we sold $20 million of cumulative perpetual preferred shares, with a liquidation preference of $1,000 per share (the “Senior Preferred Shares”) to the U.S. Treasury (“Treasury”) under the terms of its Capital Purchase Program. The Senior Preferred Shares constitute Tier 1 capital and rank senior to our common shares. The Senior Preferred Shares pay cumulative dividends at a rate of 5% per year for the first five years and will reset to a rate of 9% per year on January 9, 2014.

Under the terms of our CPP stock purchase agreement, we also issued Treasury a warrant to purchase an amount of our common stock equal to 15% of the aggregate amount of the Senior Preferred Shares, or $3 million. The warrant entitles Treasury to purchase 215,983 common shares at a purchase price of $13.89 per share. The initial exercise price for the warrant and the number of shares subject to the warrant were determined by reference to the market price of our common stock calculated on a 20-day trailing average as of December 8, 2008, the date Treasury approved our application. The warrant has a term of 10 years and is potentially dilutive to earnings per share.

55

Effective with the fourth quarter of 2010, we suspended payment of regular quarterly cash dividends on our Senior Preferred Shares. The dividends are cumulative and will continue to be accrued for payment in the future and reported as a preferred dividend requirement that is deducted from income to common shareholders for financial statement purposes.

On April 29, 2013, Treasury sold our Senior Preferred Shares to six funds who were the winning bidders in an auction.  Following the sale, the full $20 million stated value of our Senior Preferred Shares remains outstanding and our obligation to pay deferred and future dividends, currently at an annual rate of 5% and increasing to 9% in January 2014, continues until our Senior Preferred Shares are fully retired.

During the first six months of 2013, we did not purchase any shares of our common stock. Like our agreement with the Federal Reserve, the terms of our Senior Preferred Shares do not allow us to repurchase shares of our common stock without prior written consent until the Senior Preferred Shares are fully retired.

Each of the federal bank regulatory agencies has established minimum leverage capital requirements for banks. Banks must maintain a minimum ratio of Tier 1 capital to adjusted average quarterly assets ranging from 3% to 5%, subject to federal bank regulatory evaluation of an organization’s overall safety and soundness.

In its 2012 Consent Order, the Bank agreed to achieve and maintain a Tier 1 capital ratio of 9.0% and a total risk-based capital ratio of 12.0% by June 30, 2012. At June 30, 2013, the Bank’s Tier 1 capital ratio was 7.27% and the total risk-based capital ratio was 12.36%. We notified the bank regulatory agencies that one of the two capital ratios would not be achieved and are continuing our efforts to meet and maintain the required regulatory capital levels and all of the other consent order issues for the Bank.

The terms of the 2012 Consent Order and the actions we have taken to attain the capital ratios and meet the other requirements of the Order are described in greater detail in the Overview to this section.

The following table shows the ratios of Tier 1 capital, total capital to risk-adjusted assets and the leverage ratios for the Corporation and the Bank as of June 30, 2013.

	Capital Adequacy Ratios as of
	June 30, 2013
	Regulatory			Ratio Required
Risk-Based Capital Ratios	Minimums			by Consent Order			The Bank			The Corporation
Tier 1 capital		4.00	%		N/A			11.09	%		9.35	%
Total risk-based capital		8.00	%		12.00	%		12.36	%		11.29	%
Tier 1 leverage ratio		4.00	%		9.00	%		7.27	%		6.14	%

Item 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

Asset/Liability Management and Market Risk

To minimize the volatility of net interest income and exposure to economic loss that may result from fluctuating interest rates, we manage our exposure to adverse changes in interest rates through asset and liability management activities within guidelines established by our Asset Liability Committee (“ALCO”). Comprised of senior management representatives, the ALCO has the responsibility for approving and ensuring compliance with asset/liability management policies. Interest rate risk is the exposure to adverse changes in the net interest income as a result of market fluctuations in interest rates. The ALCO, on an ongoing basis, monitors interest rate and liquidity risk in order to implement appropriate funding and balance sheet strategies. Management considers interest rate risk to be our most significant market risk.

We utilize an earnings simulation model to analyze net interest income sensitivity. We then evaluate potential changes in market interest rates and their subsequent effects on net interest income. The model projects the effect of instantaneous movements in interest rates of both 100 and 200 basis points. We also incorporate assumptions based on the historical behavior of our deposit rates and balances in relation to changes in interest rates into the model. These assumptions are inherently uncertain and, as a result, the model cannot precisely measure future net interest income or precisely predict the impact of fluctuations in market interest rates on net interest income. Actual results will differ from the model’s simulated results due to timing, magnitude and frequency of interest rate changes as well as changes in market conditions and the application and timing of various management strategies.

56

Our interest sensitivity profile was asset sensitive at June 30, 2013 and December 31, 2012. Given a sustained 100 basis point increase in interest rates, our base net interest income would increase by an estimated 2.55 % at June 30, 2013 compared to an increase of 9.21% at December 31, 2012.

We did not run a model simulation for declining interest rates as of June 30, 2013 and December 31, 2012, because the Federal Open Market Committee effectively lowered the Fed Funds Target Rate between 0.00% to 0.25% in December 2008 and therefore, no further short-term rate reductions can occur.

Our interest sensitivity at any point in time will be affected by a number of factors. These factors include the mix of interest sensitive assets and liabilities, their relative pricing schedules, market interest rates, deposit growth, loan growth, decay rates and prepayment speed assumptions.

We use various asset/liability strategies to manage the re-pricing characteristics of our assets and liabilities designed to ensure that exposure to interest rate fluctuations is limited within our guidelines of acceptable levels of risk-taking. As demonstrated by the June 30, 2013 and December 31, 2012 sensitivity tables, our balance sheet has an asset sensitive position. This means that our earning assets, which consist of loans and investment securities, will change in price at a faster rate than our deposits and borrowings. Therefore, if short term interest rates increase, our net interest income will increase. Likewise, if short term interest rates decrease, our net interest income will decrease.

Our sensitivity to interest rate changes is presented based on data as of June 30, 2013 and December 31, 2012 annualized to a one year period.

			June 30, 2013
			Increase in Rates
			100			200
(Dollars in thousands)	Base		Basis Points			Basis Points
Projected interest income	$	30,350	$	34,194		$	38,364
Projected interest expense		6,510		9,746			12,982
Net interest income	$	23,840	$	24,448		$	25,382
Change from base			$	608		$	1,542
% Change from base				2.55	%		6.49	%

			December 31, 2012
			Increase in Rates
			100			200
(Dollars in thousands)	Base		Basis Points			Basis Points
Projected interest income	$	34,262	$	38,129		$	41,653
Projected interest expense		9,458		11,044			12,631
Net interest income	$	24,804	$	27,085		$	29,022
Change from base			$	2,281		$	4,218
% Change from base				9.21	%		17.01	%

The increase in projected interest expense at June 30, 2013 is related to our $20 million Senior Preferred Shares. Our Senior Preferred Shares remain outstanding and our obligation to pay deferred and future dividends, currently at an annual rate of 5% and increasing to 9% in January 2014, continues until our Senior Preferred Shares are retired.

57

Item 4. CONTROLS AND PROCEDURES

Management is responsible for establishing and maintaining effective disclosure controls and procedures, as defined under Rules 13a-15(e) and 15d-15(e) of the Securities Exchange Act of 1934. As of June 30, 2013, an evaluation was performed under the supervision and with the participation of management, including the Principal Executive Officer and Principal Financial Officer, of the effectiveness of the design and operation of our disclosure controls and procedures. Based on that evaluation, management and the Risk Management Committee of our Board of Directors concluded that disclosure controls and procedures were effective as of the end of the period covered by this report.

Management is responsible for establishing and maintaining adequate internal controls over financial reporting that are designed to produce reliable financial statements in accordance with U.S. generally accepted accounting principles. Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

There were no other changes in our internal control over financial reporting that occurred during the quarter ended June 30, 2013 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

Part II - OTHER INFORMATION

Item 1. Legal Proceedings

On June 21, 2012, a lawsuit was filed against the Bank in Jefferson County, Kentucky circuit court. River Glen KHLB, LLC and Keith T. Eberenz vs. First Federal Savings Bank of Elizabethtown, Civil Action No. 12CI03473. The plaintiffs allege fraud, negligent misrepresentation, failure to fund various loans, breach of fiduciary duty and breach of the duty of good faith and fair dealing. Plaintiffs seek compensatory and punitive damages, pre-judgment interest, costs including reasonable attorneys’ fees, and equitable relief.  The Bank filed its answer on June 29, 2012 denying the allegations and seeking judgment for the balances due on promissory notes, enforcement of a guaranty contract and an assignment of rents, foreclosure, and the appointment of a receiver. On July 16, 2012, the court appointed an independent manager to preserve and manage the property, collect rents, pay operating expenses, property taxes, insurance premiums and utilities, and pay the monthly loan payment into an escrow fund. Discovery in this matter is ongoing. We intend to vigorously defend the allegations against the Bank and pursue its claims. Management continues to closely monitor this case, but is unable to estimate, at this time, the possible loss or range of possible loss, if any, that may result from this lawsuit.

On February 11, 2013, seven plaintiffs filed a lawsuit in federal district court in Louisville, Kentucky against the Bank and two co-defendants. William P. Miller, et al. v. First Federal Savings Bank of Elizabethtown, Inc., et. al., No. 3:13-cv-206 M (W.D. Ky.). Plaintiffs allege they invested in two companies organized by one of the co-defendants, which companies purchased commercial property in Addison, Illinois. Plaintiffs also guaranteed loans made by the Bank to the two companies in the principal amount of $3,125,622.74. Plaintiffs allege that the Bank and the co-defendants engaged in a pattern of fraudulent acts, including violations of federal mail fraud, wire fraud, financial institution fraud and conspiracy statutes, which induced plaintiffs to enter into the guaranty agreement with the Bank. Plaintiffs also allege intentional misrepresentation, negligence, and civil conspiracy against all of the co-defendants. Plaintiffs seek compensatory and punitive damages, as well as treble damages under federal racketeering statutes and court costs and legal fees. The Bank has filed its answer in this matter. In addition, two days after plaintiffs filed their complaint, the Bank filed a foreclosure action in Illinois state court related to the commercial property underlying the Kentucky proceedings. First Federal Savings Bank v. Addent, LLC, et. al., No. 2013-CH-000570 (Illinois Circuit Court, DuPage County). We intend to vigorously defend the allegations against the Bank and pursue the foreclosure action on the underlying property.

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Item 1A. Risk Factors

Investing in First Financial Service Corporation’s stock involves various risks which are particular to our company, our industry and our market area. We believe all significant risks to investors in First Financial Service Corporation have been outlined in Part I, Item 1A of our Annual Report on Form 10-K for the fiscal year ended December 31, 2012. However, other risks may prove to be important in the future, and new risks may emerge at any time. We cannot predict with certainty all potential developments which could materially affect our financial performance or condition.  Except as set forth below, there has been no material change to our risk factors as previously disclosed in the above described Annual Report on Form 10-K.

Recently adopted changes to capital requirements for bank holding companies and depository institutions may negatively impact First Financial Service Corporation’s and First Federal Savings Bank's results of operations.

Beginning January 1, 2015 the Corporation and the Bank will be subject to the new capital regulations of Basel III.  The new regulations establish higher minimum risk-based capital ratio requirements, a new common equity Tier 1 risk-based capital ratio and a new capital conservation buffer.  The new regulations also include revisions to the definition of capital and changes in the risk-weighting of certain assets.  The new regulations establish definitions of “well capitalized” including the capital conservation buffer as a 7.0%  common equity Tier 1 risk-based capital ratio, an 8.5% Tier 1 risk-based capital ratio and a 10.5% total risk-based capital ratio.  The Tier 1 leverage ratio is unchanged from current regulations. 

Item 2. Unregistered Sales of Securities and Use of Proceeds

We did not repurchase any shares of our common stock during the quarter ended June 30, 2013.

Item 3. Defaults Upon Senior Securities

Not Applicable

Item 4. Mine Safety Disclosures

Not Applicable

Item 5. Other Information

Not Applicable

Item 6. Exhibits:

10	Agreement dated June 28, 2013 between the Company and Gregory S. Schreacke terminating 17,250 shares of long-term restricted stock.
31.1	Certification of Principal Executive Officer Pursuant to Section 302 of Sarbanes-Oxley Act
31.2	Certification of Principal Financial Officer Pursuant to Section 302 of Sarbanes-Oxley Act
32	Certification of Principal Executive Officer and Principal Financial Officer Pursuant to 18 U.S.C. Section 1350 (As Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002)
101	The following financial information from the Quarterly Report of First Financial Service Corporation on Form 10-Q for the quarter ended June 30, 2013, formatted in XBRL: (i) Consolidated Balance Sheets as of June 30, 2013 and December 31, 2012, (ii) Consolidated Statements of Operations for the three and six months ended June 30, 2013 and 2012, (iii) Consolidated Statements of Comprehensive Income/(Loss) for the three and six months ended June 30, 2013 and 2012, (iv) Consolidated Statements of Changes in Stockholders’ Equity for the six months ended June 30, 2013, (v) Consolidated Statements of Cash Flows for the six months ended June 30, 2013 and 2012, and (vi) Notes to the Unaudited Consolidated Financial Statements.

59

FIRST FINANCIAL SERVICE CORPORATION

SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

Date:  August 14, 2013	By:	/s/ Gregory S. Schreacke
		Gregory S. Schreacke
		President
		Principal Executive Officer
		Duly Authorized Representative
Date:  August 14, 2013	By:	/s/ Frank Perez
		Frank Perez
		Chief Financial Officer
		Principal Financial Officer

60

INDEX TO EXHIBITS

Exhibit No.	Description
10	Agreement dated June 28, 2013 between the Company and Gregory S. Schreacke terminating 17,250 shares of long-term restricted stock.
31.1	Certification of Principal Executive Officer Pursuant to Section 302 of Sarbanes-Oxley Act
31.2	Certification of Principal Financial Officer Pursuant to Section 302 of Sarbanes-Oxley Act
32	Certification of Principal Executive Officer and Principal Financial Officer Pursuant to 18 U.S.C. Section 1350 (As Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002)
101	The following financial information from the Quarterly Report of First Financial Service Corporation on Form 10-Q for the quarter ended June 30, 2013, formatted in XBRL: (i) Consolidated Balance Sheets as of June 30, 2013 and December 31, 2012, (ii) Consolidated Statements of Operations for the three and six months ended June 30, 2013 and 2012, (iii) Consolidated Statements of Comprehensive Income/(Loss) for the three and six months ended June 30, 2013 and 2012, (iv) Consolidated Statements of Changes in Stockholders’ Equity for the six months ended June 30, 2013, (v) Consolidated Statements of Cash Flows for the six months ended June 30, 2013 and 2012, and (vi) Notes to the Unaudited Consolidated Financial Statements.

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EX-10

AGREEMENT

This is an Agreement dated as of June 28, 2013, between Gregory S. Schreacke (“Executive”) and First Financial Service Corporation (the “Company”).

Recitals

A.          On February 7, 2013, Executive was awarded 23,000 shares of “long-term restricted stock,” as defined by the U.S. Treasury’s Interim Final Rule governing executive compensation that applies to all bank holding companies in which Treasury holds preferred stock purchased under its the Capital Purchase Program.

B.           As a result of Treasury’s sale of preferred stock of the Company at a 54% discount on April 29, 2013, and due to the incremental schedule on which transfer restrictions on long-term restricted stock terminate, only 25% of Executive’s restricted stock, or 5,750 shares, will become freely transferable when the restricted stock vests on February 7, 2015, while the remaining 17,250 shares would remain subject to restrictions that prohibit their transfer indefinitely.

C.           Rather than pay withholding tax upon the vesting of restricted stock on which he may never realize a financial return through sale, Executive has proposed that 17,250 of the 23,000 unvested shares of long-term restricted stock awarded to him on February 7, 2013 be terminated.

Agreement

For good and valuable consideration, the receipt of which the parties hereto acknowledge, Executive and the Company do hereby agree that 17,250 shares of long-term restricted stock awarded to Executive on February 7, 2013 are hereby terminated.

	FIRST FINANCIAL SERVICE CORPORATION
By:	/s/ John L. Newcomb, Jr.
	John L. Newcomb, Jr.
	Chairman, Executive Compensation Committee
	Date: 6/28/2013
	/s/ Gregory S. Schreacke
	Gregory S. Schreacke
	Date: 6/28/2013

EX-31.1

EXHIBIT 31.1

CERTIFICATION OF PRINCIPAL EXECUTIVE OFFICER

PURSUANT TO SECTION 302 OF SARBANES-OXLEY ACT

I, Gregory S. Schreacke, certify that:

1) I have reviewed this quarterly report on Form 10-Q of First Financial Service Corporation;

2) Based on my knowledge, this annual report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this annual report;

3) Based on my knowledge, the financial statements, and other financial information included in this annual report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this annual report;

4) The registrant's other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:

a) designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

b) designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with U. S. generally accepted accounting principles;

c) evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

d) disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

5) The registrant's other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of registrant's board of directors:

a) all significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial data; and

b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting.

Date: August 14, 2013	By:	/s/ Gregory S. Schreacke
		Gregory S. Schreacke
		President
		Principal Executive Officer

EX-31.2

EXHIBIT 31.2

CERTIFICATION OF PRINCIPAL FINANCIAL OFFICER

PURSUANT TO SECTION 302 OF SARBANES-OXLEY ACT

I, Frank Perez, certify that:

1) I have reviewed this quarterly report on Form 10-Q of First Financial Service Corporation;

2) Based on my knowledge, this annual report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this annual report;

3) Based on my knowledge, the financial statements, and other financial information included in this annual report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this annual report;

4) The registrant's other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:

a) designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

b) designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with U. S. generally accepted accounting principles;

c) evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

d) disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

5) The registrant's other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of registrant's board of directors:

a) all significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial data; and

b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting.

Date: August 14, 2013	By:	/s/ Frank Perez
		Frank Perez
		Chief Financial Officer
		Principal Financial Officer &
		Principal Accounting Officer

EX-32

EXHIBIT 32

CERTIFICATION OF PRINCIPAL EXECUTIVE OFFICER AND PRINCIPAL FINANCIAL OFFICER PURSUANT TO 18 U.S.C. SECTION 1350

(AS ADOPTED PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002)

In connection with the Quarterly Report of First Financial Service Corporation (the “Corporation”) on Form 10-Q for the period ended June 30, 2013 as filed with the Securities and Exchange Commission on the date hereof (the “Report”), the undersigned, the Principal Executive Officer and Principal Financial Officer of the Company, certifies, pursuant to 18 U.S.C. Section 1350, that:

1. The Report fully complies with the requirements of section 13 (a) or 15(d) of the Securities Exchange Act of 1934 and;

2. The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company;

Date: August 14, 2013	By:	/s/Gregory S. Schreacke
		Gregory S. Schreacke
		President
		Principal Executive Officer
Date: August 14, 2013	By:	/s/Frank Perez
		Frank Perez
		Chief Financial Officer
		Principal Financial Officer &
		Principal Accounting Officer

XML

SUBORDINATED DEBENTURES

3 Months Ended

Jun. 30, 2012

Subordinated Borrowings [Abstract]

Subordinated Borrowings Disclosure [Text Block]

10. SUBORDINATED DEBENTURES

On October 29, 2010, we exercised our right to defer regularly scheduled interest payments on both issues of junior subordinated notes relating to outstanding trust preferred securities. Together, the junior subordinated notes had an outstanding principal amount of $18 million. We have the right to defer payments of interest for up to 20 consecutive quarterly periods without default or penalty. After such period, we must pay all deferred interest and resume quarterly interest payments or we will be in default. During the deferral period, the statutory trusts, which are wholly owned subsidiaries of First Financial Service Corporation formed to issue the trust preferred securities, will likewise suspend the declaration and payment of dividends on the trust preferred securities. The regular scheduled interest payments will continue to be accrued for payment in the future and reported as an expense for financial statement purposes. As of June 30, 2013, we have deferred a total of eleven quarterly payments and these accrued but unpaid interest payments totaled $3.7 million.

XML

STOCK BASED COMPENSATION PLAN (Details 1) (USD $) In Thousands, except Share data, unless otherwise specified	6 Months Ended
	Jun. 30, 2013
Number of Options Outstanding, beginning of period	392,740
Number of Options Granted during period	118,000
Number of Options Forfeited during period	(9,550)
Number of Options Exercised during period	0
Number of Options Outstanding, end of period	501,190
Number of Options Eligible for exercise at period end	200,688
Weighted Average Exercise Price Outstanding, beginning of period	$ 9.16
Weighted Average Exercise Price Granted during period	$ 2.52
Weighted Average Exercise Price Forfeited during period	$ 4.51
Weighted Average Exercise Price Exercised during period	$ 0
Weighted Average Exercise Price Outstanding, end of period	$ 7.68
Weighted Average Exercise Price Eligible for exercise at period end	$ 14.28
Weighted Average Remaining Contractual Term Outstanding, end of period	7 years
Weighted Average Remaining Contractual Term Eligible for exercise at period end	4 years 8 months 12 days
Aggregate Intrinsic Value Outstanding, end of period	$ 312
Aggregate Intrinsic Value Eligible for exercise at period end	$ 42

XML

Consolidated Statements of Operations (USD $) In Thousands, except Share data, unless otherwise specified	3 Months Ended		6 Months Ended
	Jun. 30, 2013	Jun. 30, 2012	Jun. 30, 2013	Jun. 30, 2012
Loans, including fees	$ 6,603	$ 8,868	$ 13,421	$ 18,829
Taxable securities	1,541	1,726	3,198	3,436
Tax exempt securities	67	144	132	357
Total interest income	8,211	10,738	16,751	22,622
Interest Expense:
Deposits	1,774	3,444	3,910	7,389
Federal Home Loan Bank advances	132	283	264	567
Subordinated debentures	341	341	682	682
Total interest expense	2,247	4,068	4,856	8,638
Net interest income	5,964	6,670	11,895	13,984
Provision for loan losses	212	915	(825)	1,927
Net interest income after provision for loan losses	5,752	5,755	12,720	12,057
Non-interest Income:
Customer service fees on deposit accounts	1,307	1,399	2,498	2,782
Gain on sale of mortgage loans	161	384	588	695
Gain on sale of investments	334	598	843	1,309
Loss on sale of investments	(334)	(303)	(616)	(303)
Other than temporary impairment loss:
Total other-than-temporary impairment losses	0	0	0	(26)
Portion of loss recognized in other comprehensive income/(loss) (before taxes)	0	0	0	0
Net impairment losses recognized in earnings	0	0	0	(26)
Loss on sale and write downs on real estate acquired through foreclosure	(532)	(2,016)	(1,592)	(3,582)
Gain on sale of premises and equipment	0	322	0	322
Gain on sale on real estate acquired through foreclosure	150	210	207	613
Gain on sale of real estate held for development	0	0	0	175
Brokerage commissions	139	112	257	207
Other income	461	617	955	1,028
Total non-interest income	1,686	1,323	3,140	3,220
Non-interest Expense:
Employee compensation and benefits	3,757	3,822	7,550	7,675
Office occupancy expense and equipment	690	782	1,398	1,550
Marketing and advertising	74	135	174	168
Outside services and data processing	941	893	1,804	1,704
Bank franchise tax	315	402	630	744
FDIC insurance premiums	505	682	1,194	1,097
Amortization of intangible assets	0	62	0	127
Real estate acquired through foreclosure expense	524	2,336	818	2,676
Loan expense	385	656	607	1,164
Other expense	1,372	1,446	2,688	2,800
Total non-interest expense	8,563	11,216	16,863	19,705
Loss before income taxes	(1,125)	(4,138)	(1,003)	(4,428)
Income tax expense/(benefit)	1	1	1	1
Net Loss	(1,126)	(4,139)	(1,004)	(4,429)
Less:
Dividends on preferred stock	(250)	(250)	(500)	(500)
Accretion on preferred stock	(13)	(13)	(27)	(27)
Net loss attributable to common shareholders	$ (1,389)	$ (4,402)	$ (1,531)	$ (4,956)
Shares applicable to basic loss per common share (in shares)	4,806,444	4,767,464	4,797,259	4,764,240
Basic loss per common share (in dollars per share)	$ (0.29)	$ (0.92)	$ (0.32)	$ (1.04)
Shares applicable to diluted loss per common share (in shares)	4,806,444	4,767,464	4,797,259	4,764,240
Diluted loss per common share (in dollars per share)	$ (0.29)	$ (0.92)	$ (0.32)	$ (1.04)
Cash dividends declared per common share (in dollars per share)	$ 0	$ 0	$ 0	$ 0

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SECURITIES

6 Months Ended

Jun. 30, 2013

Investments, Debt and Equity Securities [Abstract]

Investment [Text Block]

3. SECURITIES

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

			Gross		Gross
(Dollars in thousands)	Amortized		Unrealized		Unrealized
	Cost		Gains		Losses		Fair Value
Securities available-for-sale:
June 30, 2013:
Government-sponsored mortgage-backed residential	$	133,897	$	103	$	(4,654)	$	129,346
Government-sponsored collateralized mortgage obligations		82,933		493		(489)		82,937
Asset backed-collateralized loan obligations		24,546		11		(142)		24,415
State and municipal		14,540		690		(8)		15,222
Corporate bonds		57,943		189		(920)		57,212
Total	$	313,859	$	1,486	$	(6,213)	$	309,132
December 31, 2012:
U.S. Treasury and agencies	$	8,284	$	7	$	(13)	$	8,278
Government-sponsored mortgage-backed residential		144,617		774		(502)		144,889
Government-sponsored collateralized mortgage obligations		148,460		2,033		(346)		150,147
Private asset backed		4,981		151		-		5,132
State and municipal		11,394		1,324		-		12,718
Corporate bonds		32,567		433		(33)		32,967
Total	$	350,303	$	4,722	$	(894)	$	354,131

The amortized cost and fair value of securities at June 30, 2013, by contractual maturity, are shown below. Securities not due at a single maturity date, primarily mortgage-backed securities, are shown separately.

	Available for Sale
	Amortized		Fair
(Dollars in thousands)	Cost		Value
Due in one year or less	$	3,068	$	3,078
Due after one year through five years		49,814		49,250
Due after five years through ten years		4,765		4,578
Due after ten years		14,836		15,528
Investment securities with no single maturity date:
Government-sponsored mortgage-backed residential		133,897		129,346
Government-sponsored collateralized mortgage obligations		82,933		82,937
Asset backed-collateralized loan obligations		24,546		24,415
	$	313,859	$	309,132

The following schedule shows the proceeds from sales of available-for-sale securities and the gross realized gains and losses on those sales:

	Three Months Ended				Six Months Ended
	June 30,				June 30,
	2013		2012		2013		2012
(Dollars in thousands)
Proceeds from sales	$	25,520	$	57,733	$	101,056	$	87,454
Gross realized gains		334		598		843		1,309
Gross realized losses		334		303		616		303

Investment securities pledged to secure public deposits and Federal Home Loan Bank (FHLB) advances had an amortized cost of $145.0 million and fair value of $143.4 million at June 30, 2013 and a $130.4 million amortized cost and fair value of $132.3 million at December 31, 2012.

Securities with unrealized losses at June 30, 2013 and December 31, 2012 aggregated by major security type and length of time in a continuous unrealized loss position are as follows:

June 30, 2013	Less than 12 Months				12 Months or More				Total
	Fair		Unrealized		Fair		Unrealized		Fair		Unrealized
Description of Securities	Value		Loss		Value		Loss		Value		Loss
Government-sponsored mortgage-backed residential	$	115,458	$	(4,654)	$	-	$	-	$	115,458	$	(4,654)
Government-sponsored collateralized mortgage obligations		23,082		(489)		-		-		23,082		(489)
Asset backed-collateralized loan obligations		21,596		(142)		-		-		21,596		(142)
State and municipal		826		(8)		-		-		826		(8)
Corporate bonds		37,829		(920)		-		-		37,829		(920)
Total temporarily impaired	$	198,791	$	(6,213)	$	-	$	-	$	198,791	$	(6,213)

December 31, 2012	Less than 12 Months				12 Months or More				Total
	Fair		Unrealized		Fair		Unrealized		Fair		Unrealized
Description of Securities	Value		Loss		Value		Loss		Value		Loss
U.S. Treasury and agencies	$	3,255	$	(13)	$	-	$	-	$	3,255	$	(13)
Government-sponsored mortgage-backed residential		82,137		(502)		-		-		82,137		(502)
Government-sponsored collateralized mortgage obligations		33,275		(346)		-		-		33,275		(346)
Corporate bonds		5,731		(33)		-		-		5,731		(33)
Total temporarily impaired	$	124,398	$	(894)	$	-	$	-	$	124,398	$	(894)

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

Consideration is given to the length of time and the extent to which the fair value has been less than cost, the financial condition and near-term prospects of the issuer, underlying credit quality of the issuer, and our intent and ability to retain our investment in the issuer for a period of time sufficient to allow for any anticipated recovery in fair value.  In analyzing an issuer’s financial condition, we may consider whether the securities are issued by the federal government or its agencies, whether downgrades by bond rating agencies have occurred, the sector or industry trends and cycles affecting the issuer, and the results of reviews of the issuer’s financial condition.

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

The unrealized losses on our investment securities were a result of changes in interest rates for fixed-rate securities where the interest rate received is less than the current rate available for new offerings of similar securities. Because the decline in market value is attributable to changes in interest rates and not credit quality, and because we do not intend to sell and it is more likely than not that we will not be required to sell these investments until recovery of fair value, which may be maturity, we do not consider these investments to be other-than-temporarily impaired at June 30, 2013.

We recognized other-than-temporary impairment charges of $26,000 for the expected credit loss during the 2012 period.The 2012 impairment charge was related to Preferred Term Security VI which was called for early redemption in July 2012.

The table below presents a roll-forward of the credit losses recognized in earnings. During 2012, all of our trust preferred securities were either called or sold which represented the remaining balance in the OTTI roll-forward.

(Dollars in thousands)	Three Months Ended		Six Months Ended
	June 30,		June 30,
	2012		2012
Beginning balance	$	2,104	$	2,078
Increases to the amount related to the credit loss for which other-than-temporary impairment was previously recognized		-		26
Ending balance	$	2,104	$	2,104

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REAL ESTATE ACQUIRED THROUGH FORECLOSURE (Tables)

6 Months Ended

Jun. 30, 2013

Real Estate [Abstract]

Schedule of Real Estate Properties [Table Text Block]

A summary of the real estate acquired through foreclosure activity is as follows:

	June 30,		December 31,
(Dollars in thousands)	2013		2012
Beginning balance	$	22,286	$	29,083
Additions		1,951		18,100
Sales		(8,577)		(19,250)
Writedowns		(1,270)		(5,147)
Change in valuation allowance		(221)		(500)
Ending balance	$	14,169	$	22,286

Summary of Real Estate Acquired through Foreclosure Valuation Allowance [Table Text Block]

A summary of the real estate acquired through foreclosure valuation allowance activity is as follows:

	Three Months Ended				Six Months Ended
	June 30,				June 30,
	2013		2012		2013		2012
(Dollars in thousands)
Beginning balance	$	972	$	-	$	500	$	-
Provision		532		-		1,592		-
Writedowns and loss on sale		(783)		-		(1,371)		-
Ending balance	$	721	$	-	$	721	$	-

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CHANGES IN AND RECLASSIFICATIONS FROM ACCUMULATED OTHER COMPREHENSIVE INCOME (Details 1) (USD $) In Thousands, unless otherwise specified	3 Months Ended	6 Months Ended
	Jun. 30, 2013	Jun. 30, 2013
Unrealized gains and losses on available-for-sale securities, Gain on sales of investments	$ 334	$ 843
Unrealized gains and losses on available-for-sale securities, Loss on sale of investments	(334)	(616)
Unrealized gains and losses on available-for-sale securities, Total before tax	0	227
Unrealized gains and losses on available-for-sale securities, Income taxes/(benefits)	0	0
Total amount reclassified, Net income (loss)	$ 0	$ 227

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FAIR VALUE (Details) (USD $) In Thousands, unless otherwise specified	Jun. 30, 2013	Dec. 31, 2012
Securities available-for-sale	$ 309,132	$ 354,131
Fair Value, Inputs, Level 1 [Member]
Securities available-for-sale	0	0
Fair Value, Inputs, Level 2 [Member]
Securities available-for-sale	309,132	354,131
Fair Value, Inputs, Level 3 [Member]
Securities available-for-sale	0	0
U.S. Treasury and Agencies [Member]
Securities available-for-sale		8,278
U.S. Treasury and Agencies [Member] | Fair Value, Inputs, Level 1 [Member]
Securities available-for-sale		0
U.S. Treasury and Agencies [Member] | Fair Value, Inputs, Level 2 [Member]
Securities available-for-sale		8,278
U.S. Treasury and Agencies [Member] | Fair Value, Inputs, Level 3 [Member]
Securities available-for-sale		0
Government-sponsored mortgage-backed residential [Member]
Securities available-for-sale	129,346	144,889
Government-sponsored mortgage-backed residential [Member] | Fair Value, Inputs, Level 1 [Member]
Securities available-for-sale	0	0
Government-sponsored mortgage-backed residential [Member] | Fair Value, Inputs, Level 2 [Member]
Securities available-for-sale	129,346	144,889
Government-sponsored mortgage-backed residential [Member] | Fair Value, Inputs, Level 3 [Member]
Securities available-for-sale	0	0
Government-sponsored collateralized mortgage obligations [Member]
Securities available-for-sale	82,937	150,147
Government-sponsored collateralized mortgage obligations [Member] | Fair Value, Inputs, Level 1 [Member]
Securities available-for-sale	0	0
Government-sponsored collateralized mortgage obligations [Member] | Fair Value, Inputs, Level 2 [Member]
Securities available-for-sale	82,937	150,147
Government-sponsored collateralized mortgage obligations [Member] | Fair Value, Inputs, Level 3 [Member]
Securities available-for-sale	0	0
Asset backed-collateralized loan obligations [Member]
Securities available-for-sale	24,415	5,132
Asset backed-collateralized loan obligations [Member] | Fair Value, Inputs, Level 1 [Member]
Securities available-for-sale	0	0
Asset backed-collateralized loan obligations [Member] | Fair Value, Inputs, Level 2 [Member]
Securities available-for-sale	24,415	5,132
Asset backed-collateralized loan obligations [Member] | Fair Value, Inputs, Level 3 [Member]
Securities available-for-sale	0	0
State and municipal [Member]
Securities available-for-sale	15,222	12,718
State and municipal [Member] | Fair Value, Inputs, Level 1 [Member]
Securities available-for-sale	0	0
State and municipal [Member] | Fair Value, Inputs, Level 2 [Member]
Securities available-for-sale	15,222	12,718
State and municipal [Member] | Fair Value, Inputs, Level 3 [Member]
Securities available-for-sale	0	0
Corporate bonds [Member]
Securities available-for-sale	57,212	32,967
Corporate bonds [Member] | Fair Value, Inputs, Level 1 [Member]
Securities available-for-sale	0	0
Corporate bonds [Member] | Fair Value, Inputs, Level 2 [Member]
Securities available-for-sale	57,212	32,967
Corporate bonds [Member] | Fair Value, Inputs, Level 3 [Member]
Securities available-for-sale	$ 0	$ 0

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PREFERRED STOCK

6 Months Ended

Jun. 30, 2013

Equity [Abstract]

Preferred Stock [Text Block]

11. PREFERRED STOCK

On January 9, 2009, we issued $20 million of cumulative perpetual preferred shares, with a liquidation preference of $1,000 per share (the “Senior Preferred Shares”) to the United States Treasury under its Capital Purchase Program (“CPP”). The Senior Preferred Shares constitute Tier 1 capital and rank senior to our common shares. The Senior Preferred Shares pay cumulative dividends quarterly at a rate of 5% per year for the first five years and will reset to a rate of 9% per year on January 9, 2014. The Senior Preferred Shares may be redeemed at any time, subject to prior approval from bank regulatory agencies. We also have the ability to defer dividend payments at any time, at our option.

Under the terms of our CPP stock purchase agreement, we also issued the Treasury a warrant to purchase an amount of our common stock equal to 15% of the aggregate amount of the Senior Preferred Shares, or $3 million. The warrant entitles Treasury to purchase 215,983 common shares at a purchase price of $13.89 per share. The initial exercise price for the warrant and the number of shares subject to the warrant were determined by reference to the market price of our common stock calculated on a 20-day trailing average as of December 8, 2008, the date Treasury approved our application. The warrant has a term of 10 years and is potentially dilutive to earnings per share.

Effective with the fourth quarter of 2010, we suspended payment of regular quarterly cash dividends on our Senior Preferred Shares. The dividends will continue to be accrued for payment in the future and reported as a preferred dividend requirement that is deducted from income attributable to common shareholders for financial statement purposes. As of June 30, 2013, we have deferred a total of eleven quarterly payments and these accrued but unpaid dividends totaled $3.0 million.

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

On April 29, 2013, Treasury sold our Senior Preferred Shares to six funds who were the winning bidders in an auction.  Following the sale, the full $20 million stated value of our Senior Preferred Shares remains outstanding and our obligation to pay deferred and future dividends, currently at an annual rate of 5% and increasing to 9% in January 2014, continues until our Senior Preferred Shares are fully retired.

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REAL ESTATE ACQUIRED THROUGH FORECLOSURE (Details) (USD $) In Thousands, unless otherwise specified	6 Months Ended	12 Months Ended
	Jun. 30, 2013	Dec. 31, 2012
Beginning balance	$ 22,286	$ 29,083
Additions	1,951	18,100
Sales	(8,577)	(19,250)
Writedowns	(1,270)	(5,147)
Change in valuation allowance	(221)	(500)
Ending balance	$ 14,169	$ 22,286

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FAIR VALUE (Details 1) (Fair Value, Inputs, Level 3 [Member], USD $) In Thousands, unless otherwise specified	3 Months Ended	6 Months Ended
	Jun. 30, 2012	Jun. 30, 2012
Fair Value, Inputs, Level 3 [Member]
Beginning balance	$ 268	$ 264
Total gains or losses:
Impairment charges on securities	0	0
Included in other comprehensive income	(2)	2
Purchases	0	0
Sales or calls	0	0
Settlements	0	0
Transfers in and/or out of Level 3	0	0
Ending balance	$ 266	$ 266

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LOANS (Details 1) (USD $) In Thousands, unless otherwise specified	3 Months Ended		6 Months Ended
	Jun. 30, 2013	Jun. 30, 2012	Jun. 30, 2013	Jun. 30, 2012
Beginning Balance	$ 15,812	$ 17,329	$ 17,265	$ 17,181
Provision for loan losses	212	915	(825)	1,927
Allowance associated with probable branch divestitures		(682)		(669)
Charge-offs	(153)	(2,379)	(701)	(3,328)
Recoveries	76	117	208	189
Total ending allowance balance	15,947	15,300	15,947	15,300
Commercial Loan [Member]
Beginning Balance	914	1,723	1,236	1,422
Provision for loan losses	(10)	(255)	(272)	222
Allowance associated with probable branch divestitures		(25)		(25)
Charge-offs	0	0	(94)	(187)
Recoveries	4	40	38	51
Total ending allowance balance	908	1,483	908	1,483
Commercial Real Estate [Member]
Beginning Balance	13,800	13,628	14,755	13,727
Provision for loan losses	225	1,189	(395)	1,687
Allowance associated with probable branch divestitures		(581)		(581)
Charge-offs	(61)	(2,191)	(452)	(2,804)
Recoveries	20	35	76	51
Total ending allowance balance	13,984	12,080	13,984	12,080
Commercial Real Estate Construction Financing Receivable [Member]
Beginning Balance	66	103	60	103
Provision for loan losses	4	(14)	10	(14)
Allowance associated with probable branch divestitures		0		0
Charge-offs	0	0	0	0
Recoveries	0	0	0	0
Total ending allowance balance	70	89	70	89
Residential Mortgage [Member]
Beginning Balance	371	882	501	922
Provision for loan losses	0	(34)	(130)	(52)
Allowance associated with probable branch divestitures		(14)		(6)
Charge-offs	0	(31)	0	(62)
Recoveries	4	0	4	1
Total ending allowance balance	375	803	375	803
Consumer and Home Equity [Member]
Beginning Balance	438	643	442	610
Provision for loan losses	(14)	23	23	98
Allowance associated with probable branch divestitures		(62)		(57)
Charge-offs	(51)	(102)	(98)	(176)
Recoveries	23	23	29	50
Total ending allowance balance	396	525	396	525
Indirect Consumer [Member]
Beginning Balance	223	350	271	397
Provision for loan losses	7	6	(61)	(14)
Allowance associated with probable branch divestitures		0		0
Charge-offs	(41)	(55)	(57)	(99)
Recoveries	25	19	61	36
Total ending allowance balance	$ 214	$ 320	$ 214	$ 320

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FAIR VALUE (Tables)

6 Months Ended

Jun. 30, 2013

Fair Value Disclosures [Abstract]

Fair Value, Assets Measured on Recurring Basis [Table Text Block]

Assets measured at fair value on a recurring basis are summarized below: There were no transfers between Level 1 and Level 2 during the periods presented.

			Quoted Prices in
			Active Markets for		Significant Other		Significant
	June 30,		Identical Assets		Observable Inputs		Unobservable Inputs
(Dollars in thousands)	2013		(Level 1)		(Level 2)		(Level 3)
Assets:
Government-sponsored mortgage-backed residential	$	129,346	$	-	$	129,346	$	-
Government-sponsored collateralized mortgage obligations		82,937		-		82,937		-
Asset backed-collateralized loan obligations		24,415		-		24,415		-
State and municipal		15,222		-		15,222		-
Corporate bonds		57,212		-		57,212		-
Total	$	309,132	$	-	$	309,132	$	-

			Quoted Prices in
			Active Markets for		Significant Other		Significant
	December 31,		Identical Assets		Observable Inputs		Unobservable Inputs
(Dollars in thousands)	2012		(Level 1)		(Level 2)		(Level 3)
Assets:
U.S. Treasury and agencies	$	8,278	$	-	$	8,278	$	-
Government-sponsored mortgage-backed residential		144,889		-		144,889		-
Government-sponsored collateralized mortgage obligations		150,147		-		150,147		-
Private asset backed		5,132		-		5,132		-
State and municipal		12,718		-		12,718		-
Corporate bonds		32,967		-		32,967		-
Total	$	354,131	$	-	$	354,131	$	-

Fair Value, Assets Measured on Recurring Basis, Unobservable Input Reconciliation [Table Text Block]

The table below presents a reconciliation for all assets measured at fair value on a recurring basis using significant unobservable inputs (Level 3) for the periods ended June 30, 2012. The level 3 assets consist of trust preferred securities which were called or sold in the fourth quarter of 2012. We did not have any Level 3 assets measured at fair value on a recurring basis at June 30, 2013.

	Fair Value Measurements		Fair Value Measurements
	Using Significant		Using Significant
	Unobservable Inputs		Unobservable Inputs
	(Level 3)		(Level 3)
	Three Months Ended		Six Months Ended
	June 30,		June 30,
(Dollars in thousands)	2012		2012
Beginning balance	$	268	$	264
Total gains or losses:
Impairment charges on securities		-		-
Included in other comprehensive income		(2)		2
Purchases		-		-
Sales or calls		-		-
Settlements		-		-
Transfers in and/or out of Level 3		-		-
Ending balance	$	266	$	266

Fair Value, Assets and Liabilities Measured on Nonrecurring Basis [Table Text Block]

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

			Quoted Prices in
			Active Markets for		Significant Other		Significant
	June 30,		Identical Assets		Observable Inputs		Unobservable Inputs
(Dollars in thousands)	2013		(Level 1)		(Level 2)		(Level 3)
Assets:
Impaired loans:
Commercial	$	1	$	-	$	-	$	1
Commercial Real Estate:
Land Development		1,969		-		-		1,969
Other		14,508		-		-		14,508
Residential Mortgage		446		-		-		446
Consumer and Home Equity		188		-		-		188
Real estate acquired through foreclosure:
Commercial Real Estate:
Land Development		980		-		-		980
Other		5,672		-		-		5,672

			Quoted Prices in
			Active Markets for		Significant Other		Significant
	December 31,		Identical Assets		Observable Inputs		Unobservable Inputs
(Dollars in thousands)	2012		(Level 1)		(Level 2)		(Level 3)
Assets:
Impaired loans:
Commercial	$	231	$	-	$	-	$	231
Commercial Real Estate:
Land Development		1,775		-		-		1,775
Other		12,560		-		-		12,560
Residential Mortgage		127		-		-		127
Consumer and Home Equity		137		-		-		137
Real estate acquired through foreclosure:
Commercial Real Estate:
Land Development		2,459		-		-		2,459
Building Lots		2,220		-		-		2,220
Other		8,350		-		-		8,350
Residential Mortgage		224		-		-		224

Fair Value Inputs, Assets, Quantitative Information [Table Text Block]

The following table presents quantitative information about level 3 fair value measurements for financial instruments measured at fair value on a non-recurring basis at June 30, 2013.

	Fair		Valuation	Unobservable	Range (Weighted
(Dollars in thousands)	Value		Technique(s)	Input(s)	Average)
Impaired loans:
Commercial	$	1	Market value approach	Adjustment for receivables and inventory discounts	0.00% (1)
Commercial Real Estate:
Land Development		1,301	Income approach	Discount or capitalization rate	25.00% (1)
		668	Sales comparison approach	Adjustment for differences between comparable sales	3.39% (1)
Other		13,264	Income approach	Discount or capitalization rate	8.50%-11.00% (9.19%)
		1,244	Sales comparison approach	Adjustment for differences between comparable sales	10.00%-21.87% (19.69%)
Residential Mortgage		446	Sales comparison approach	Adjustment for differences between comparable sales	0.00%-3.87% (1.06%)
Consumer and Home Equity		188	Sales comparison approach	Adjustment for differences between comparable sales	0.00%-2.25% (1.82%)
Real estate acquired through foreclosure:
Commercial Real Estate:
Land Development		312	Income approach	Discount or capitalization rate	8.50%-17.50% (11.24%)
		668	Sales comparison approach	Adjustment for differences between comparable sales	25.00% (1)
Other		5,006	Income approach	Discount or capitalization rate	8.50%-10.50% (8.91%)
		666	Sales comparison approach	Adjustment for differences between comparable sales	2.75%-9.00% (4.26%)

(1) Unobservable inputs with a single discount listed include only one property.

Fair Value, by Balance Sheet Grouping [Table Text Block]

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

					June 30, 2013
(Dollars in thousands)	Carrying				Fair Value Measurements
	Value		Total		Level 1		Level 2		Level 3
Financial assets:
Cash and due from banks	$	27,925	$	27,925	$	6,069	$	21,856	$	-
Mortgage loans held for sale		3,595		3,654		-		3,654		-
Loans, net		457,527		460,246		-		-		460,246
Accrued interest receivable		2,390		2,390		-		-		2,390
FHLB stock		4,430		N/A		N/A		N/A		N/A
Financial liabilities:
Deposits		798,377		760,870		-		760,870		-
Advances from Federal Home Loan Bank		22,526		23,249		-		23,249		-
Subordinated debentures		18,000		12,222		-		-		12,222
Accrued interest payable		3,798		3,798		-		3,798		-

					December 31, 2012
(Dollars in thousands)	Carrying				Fair Value Measurements
	Value		Total		Level 1		Level 2		Level 3
Financial assets:
Cash and due from banks	$	63,103	$	63,103	$	6,468	$	56,635	$	-
Mortgage loans held for sale		3,887		3,967		-		3,967		-
Loans, net		492,740		493,998		-		-		493,998
Accrued interest receivable		2,690		2,690		-		-		2,690
FHLB stock		4,805		N/A		N/A		N/A		N/A
Financial liabilities:
Deposits		922,620		934,637		-		934,637		-
Advances from Federal Home Loan Bank		12,596		13,944		-		13,944		-
Subordinated debentures		18,000		12,695		-		-		12,695
Accrued interest payable		3,121		3,121		-		3,121		-

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STOCK BASED COMPENSATION PLAN (Tables)

6 Months Ended

Jun. 30, 2013

Disclosure of Compensation Related Costs, Share-based Payments [Abstract]

Share-based Compensation Arrangement by Share-based Payment Award, Options, Grants in Period, Weighted Average Grant Date Fair Value [Table Text Block]

The weighted-average assumptions for options granted during the six months ended June 30, 2013 and the resulting estimated weighted average fair value per share is presented below.

	June 30, 2013
Assumptions:
Risk-free interest rate		1.90	%
Expected dividend yield		-	%
Expected life (years)		10
Expected common stock market price volatility		64	%
Estimated fair value per share	$	1.82

Disclosure of Share-based Compensation Arrangements by Share-based Payment Award [Table Text Block]

A summary of option activity under the 2006 Plan for the period ended June 30, 2013 is presented below:

	Number of Options		Weighted Average Exercise Price		Weighted Average Remaining Contractual Term		Aggregate Intrinsic Value
							(Dollars In Thousands)
Outstanding, beginning of period		392,740	$	9.16
Granted during period		118,000		2.52
Forfeited during period		(9,550)		4.51
Exercised during period		-		-
Outstanding, end of period		501,190	$	7.68		7.0	$	312
Eligible for exercise at period end		200,688	$	14.28		4.7	$	42

Schedule of Nonvested Restricted Stock Units Activity [Table Text Block]

A summary of changes in our non-vested restricted shares for the six months ended June 30, 2013 is presented below:

	Non-vested Shares		Weighted Average Grant Date Fair Value
Outstanding, beginning of period		32,964	$	3.64
Granted during period		122,972		3.05
Vested during period		(55,132)		3.38
Terminated during period		(17,250)		2.84
Forfeited during period		-		-
Outstanding, end of period		83,554	$	3.10

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LOANS (Details 9) (USD $) In Thousands, unless otherwise specified	Jun. 30, 2013	Dec. 31, 2012
Performing	$ 490,675	$ 524,940
Restructured on Non-Accrual Status	8,639	9,753
Non-accrual	9,215	11,702
Residential Mortgage [Member]
Performing	102,281	110,025
Restructured on Non-Accrual Status	109	0
Non-accrual	1,383	827
Residential Mortgage [Member] | Performing Financing Receivable [Member]
Performing	100,789	109,198
Restructured on Non-Accrual Status	109	0
Non-accrual	1,383	827
Indirect Consumer [Member]
Performing	13,087	16,211
Restructured on Non-Accrual Status	0	0
Non-accrual	20	13
Indirect Consumer [Member] | Performing Financing Receivable [Member]
Performing	13,067	16,198
Restructured on Non-Accrual Status	0	0
Non-accrual	20	13
Consumer and Home Equity [Member]
Performing	54,449	57,888
Restructured on Non-Accrual Status	0	0
Non-accrual	314	37
Consumer and Home Equity [Member] | Performing Financing Receivable [Member]
Performing	54,135	57,851
Restructured on Non-Accrual Status	0	0
Non-accrual	$ 314	$ 37

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SECURITIES (Details 3) (USD $) In Thousands, unless otherwise specified	6 Months Ended	12 Months Ended
	Jun. 30, 2013	Dec. 31, 2012
Fair Value, Less than 12 Months	$ 198,791	$ 124,398
Unrealized Loss, Less than 12 Months	(6,213)	(894)
Fair Value, 12 Months or More	0	0
Unrealized Loss, 12 Months or More	0	0
Fair Value, Total	198,791	124,398
Unrealized Loss, Total	(6,213)	(894)
U.S. Treasury and Agencies [Member]
Fair Value, Less than 12 Months		3,255
Unrealized Loss, Less than 12 Months		(13)
Fair Value, 12 Months or More		0
Unrealized Loss, 12 Months or More		0
Fair Value, Total		3,255
Unrealized Loss, Total		(13)
Government-sponsored mortgage-backed residential [Member]
Fair Value, Less than 12 Months	115,458	82,137
Unrealized Loss, Less than 12 Months	(4,654)	(502)
Fair Value, 12 Months or More	0	0
Unrealized Loss, 12 Months or More	0	0
Fair Value, Total	115,458	82,137
Unrealized Loss, Total	(4,654)	(502)
Government-sponsored collateralized mortgage obligations [Member]
Fair Value, Less than 12 Months	23,082	33,275
Unrealized Loss, Less than 12 Months	(489)	(346)
Fair Value, 12 Months or More	0	0
Unrealized Loss, 12 Months or More	0	0
Fair Value, Total	23,082	33,275
Unrealized Loss, Total	(489)	(346)
Corporate Bonds [Member]
Fair Value, Less than 12 Months	37,829	5,731
Unrealized Loss, Less than 12 Months	(920)	(33)
Fair Value, 12 Months or More	0	0
Unrealized Loss, 12 Months or More	0	0
Fair Value, Total	37,829	5,731
Unrealized Loss, Total	(920)	(33)
Asset backed-collateralized loan obligations [Member]
Fair Value, Less than 12 Months	21,596
Unrealized Loss, Less than 12 Months	(142)
Fair Value, 12 Months or More	0
Unrealized Loss, 12 Months or More	0
Fair Value, Total	21,596
Unrealized Loss, Total	(142)
State and Municipal [Member]
Fair Value, Less than 12 Months	826
Unrealized Loss, Less than 12 Months	(8)
Fair Value, 12 Months or More	0
Unrealized Loss, 12 Months or More	0
Fair Value, Total	826
Unrealized Loss, Total	$ (8)

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LOANS (Details 3) (USD $) In Thousands, unless otherwise specified	3 Months Ended		6 Months Ended		12 Months Ended
	Jun. 30, 2013	Jun. 30, 2012	Jun. 30, 2013	Jun. 30, 2012	Dec. 31, 2012
Impaired Financing Receivable With Related Allowance Unpaid Principal Balance	$ 44,895	$ 68,887	$ 44,895	$ 68,887	$ 51,593
Impaired Financing Receivable With Related Allowance Recorded Investment	41,026	59,327	41,026	59,327	44,985
Impaired Financing Receivable, Allowance for Loan Losses Allocated	7,147	5,456	7,147	5,456	7,982
Impaired Financing Receivable, With Related Allowance, Average Recorded Investment	39,516	57,755	43,640	60,691	57,430
Impaired Financing Receivable, With Related Allowance, Interest Income Recognized	399	527	887	1,122	2,179
Impaired Financing Receivable, With Related Allowance, Interest Income, Cash Basis Recognized	399	527	887	1,122	2,179
Commercial Loan [Member]
Impaired Financing Receivable With No Related Allowance Unpaid Principal Balance	1,234	1,111	1,234	1,111	588
Impaired Financing Receivable With No Related Allowance Recorded Investment	1,028	991	1,028	991	588
Impaired Financing Receivable, With No Related Allowance, Average Recorded Investment	850	944	763	1,347	1,070
Impaired Financing Receivable, With No Related Allowance, Interest Income Recognized	6	8	10	27	39
Impaired Financing Receivable, With No Related Allowance, Interest Income, Cash Basis Interest Recognized	6	8	10	27	39
Impaired Financing Receivable With Related Allowance Unpaid Principal Balance	185	407	185	407	483
Impaired Financing Receivable With Related Allowance Recorded Investment	185	405	185	405	483
Impaired Financing Receivable, Allowance for Loan Losses Allocated	184	332	184	332	252
Impaired Financing Receivable, With Related Allowance, Average Recorded Investment	189	477	287	676	564
Impaired Financing Receivable, With Related Allowance, Interest Income Recognized	1	4	4	13	21
Impaired Financing Receivable, With Related Allowance, Interest Income, Cash Basis Recognized	1	4	4	13	21
Land Improvements [Member]
Impaired Financing Receivable With No Related Allowance Unpaid Principal Balance	2,336	11,532	2,336	11,532	5,595
Impaired Financing Receivable With No Related Allowance Recorded Investment	2,311	5,771	2,311	5,771	4,873
Impaired Financing Receivable, With No Related Allowance, Average Recorded Investment	2,716	5,176	3,435	5,825	5,728
Impaired Financing Receivable, With No Related Allowance, Interest Income Recognized	33	46	84	108	237
Impaired Financing Receivable, With No Related Allowance, Interest Income, Cash Basis Interest Recognized	33	46	84	108	237
Impaired Financing Receivable With Related Allowance Unpaid Principal Balance	2,930	786	2,930	786	2,674
Impaired Financing Receivable With Related Allowance Recorded Investment	2,930	740	2,930	740	2,674
Impaired Financing Receivable, Allowance for Loan Losses Allocated	961	190	961	190	899
Impaired Financing Receivable, With Related Allowance, Average Recorded Investment	2,802	2,303	2,759	2,519	2,436
Impaired Financing Receivable, With Related Allowance, Interest Income Recognized	35	21	67	46	101
Impaired Financing Receivable, With Related Allowance, Interest Income, Cash Basis Recognized	35	21	67	46	101
Buildings Lot [Member]
Impaired Financing Receivable With No Related Allowance Unpaid Principal Balance	477	1,061	477	1,061	477
Impaired Financing Receivable With No Related Allowance Recorded Investment	212	1,030	212	1,030	212
Impaired Financing Receivable, With No Related Allowance, Average Recorded Investment	212	924	212	1,051	810
Impaired Financing Receivable, With No Related Allowance, Interest Income Recognized	0	6	0	8	14
Impaired Financing Receivable, With No Related Allowance, Interest Income, Cash Basis Interest Recognized	0	6	0	8	14
Impaired Financing Receivable With Related Allowance Unpaid Principal Balance	0	0	0	0	0
Impaired Financing Receivable With Related Allowance Recorded Investment	0	0	0	0	0
Impaired Financing Receivable, Allowance for Loan Losses Allocated	0	0	0	0	0
Impaired Financing Receivable, With Related Allowance, Average Recorded Investment	0	238	0	318	191
Impaired Financing Receivable, With Related Allowance, Interest Income Recognized	0	2	0	3	3
Impaired Financing Receivable, With Related Allowance, Interest Income, Cash Basis Recognized	0	2	0	3	3
Commercial Real Estate Other Receivable [Member]
Impaired Financing Receivable With No Related Allowance Unpaid Principal Balance	10,502	32,183	10,502	32,183	21,673
Impaired Financing Receivable With No Related Allowance Recorded Investment	9,433	28,726	9,433	28,726	16,052
Impaired Financing Receivable, With No Related Allowance, Average Recorded Investment	9,336	30,254	11,575	30,948	24,961
Impaired Financing Receivable, With No Related Allowance, Interest Income Recognized	99	280	239	586	961
Impaired Financing Receivable, With No Related Allowance, Interest Income, Cash Basis Interest Recognized	99	280	239	586	961
Impaired Financing Receivable With Related Allowance Unpaid Principal Balance	22,609	20,226	22,609	20,226	19,254
Impaired Financing Receivable With Related Allowance Recorded Investment	20,398	20,226	20,398	20,226	19,254
Impaired Financing Receivable, Allowance for Loan Losses Allocated	5,890	4,419	5,890	4,419	6,694
Impaired Financing Receivable, With Related Allowance, Average Recorded Investment	20,350	15,576	19,984	16,101	20,075
Impaired Financing Receivable, With Related Allowance, Interest Income Recognized	215	144	412	305	772
Impaired Financing Receivable, With Related Allowance, Interest Income, Cash Basis Recognized	215	144	412	305	772
Commercial Real Estate Construction Financing Receivable [Member]
Impaired Financing Receivable With No Related Allowance Unpaid Principal Balance	540	0	540	0	448
Impaired Financing Receivable With No Related Allowance Recorded Investment	447	0	447	0	448
Impaired Financing Receivable, With No Related Allowance, Average Recorded Investment	449	0	448	0	90
Impaired Financing Receivable, With No Related Allowance, Interest Income Recognized	0	0	0	0	0
Impaired Financing Receivable, With No Related Allowance, Interest Income, Cash Basis Interest Recognized	0	0	0	0	0
Impaired Financing Receivable With Related Allowance Unpaid Principal Balance	0	0	0	0	0
Impaired Financing Receivable With Related Allowance Recorded Investment	0	0	0	0	0
Impaired Financing Receivable, Allowance for Loan Losses Allocated	0	0	0	0	0
Impaired Financing Receivable, With Related Allowance, Average Recorded Investment	0	0	0	0	0
Impaired Financing Receivable, With Related Allowance, Interest Income Recognized	0	0	0	0	0
Impaired Financing Receivable, With Related Allowance, Interest Income, Cash Basis Recognized	0	0	0	0	0
Residential Mortgage [Member]
Impaired Financing Receivable With No Related Allowance Unpaid Principal Balance	2,941	0	2,941	0	0
Impaired Financing Receivable With No Related Allowance Recorded Investment	2,941	0	2,941	0	0
Impaired Financing Receivable, With No Related Allowance, Average Recorded Investment	1,691	0	3,162	0	0
Impaired Financing Receivable, With No Related Allowance, Interest Income Recognized	6	0	53	0	0
Impaired Financing Receivable, With No Related Allowance, Interest Income, Cash Basis Interest Recognized	6	0	53	0	0
Impaired Financing Receivable With Related Allowance Unpaid Principal Balance	477	1,219	477	1,219	213
Impaired Financing Receivable With Related Allowance Recorded Investment	477	1,098	477	1,098	213
Impaired Financing Receivable, Allowance for Loan Losses Allocated	31	383	31	383	86
Impaired Financing Receivable, With Related Allowance, Average Recorded Investment	399	1,485	337	1,550	1,191
Impaired Financing Receivable, With Related Allowance, Interest Income Recognized	2	13	6	23	24
Impaired Financing Receivable, With Related Allowance, Interest Income, Cash Basis Recognized	2	13	6	23	24
Consumer and Home Equity [Member]
Impaired Financing Receivable With No Related Allowance Unpaid Principal Balance	395	0	395	0	0
Impaired Financing Receivable With No Related Allowance Recorded Investment	395	0	395	0	0
Impaired Financing Receivable, With No Related Allowance, Average Recorded Investment	210	0	407	0	0
Impaired Financing Receivable, With No Related Allowance, Interest Income Recognized	1	0	7	0	0
Impaired Financing Receivable, With No Related Allowance, Interest Income, Cash Basis Interest Recognized	1	0	7	0	0
Impaired Financing Receivable With Related Allowance Unpaid Principal Balance	269	324	269	324	188
Impaired Financing Receivable With Related Allowance Recorded Investment	269	302	269	302	188
Impaired Financing Receivable, Allowance for Loan Losses Allocated	81	126	81	126	51
Impaired Financing Receivable, With Related Allowance, Average Recorded Investment	312	332	271	285	260
Impaired Financing Receivable, With Related Allowance, Interest Income Recognized	1	3	5	3	6
Impaired Financing Receivable, With Related Allowance, Interest Income, Cash Basis Recognized	1	3	5	3	6
Indirect Consumer [Member]
Impaired Financing Receivable With No Related Allowance Unpaid Principal Balance	0	0	0	0	0
Impaired Financing Receivable With No Related Allowance Recorded Investment	0	0	0	0	0
Impaired Financing Receivable, With No Related Allowance, Average Recorded Investment	0	0	0	0	0
Impaired Financing Receivable, With No Related Allowance, Interest Income Recognized	0	0	0	0	0
Impaired Financing Receivable, With No Related Allowance, Interest Income, Cash Basis Interest Recognized	0	0	0	0	0
Impaired Financing Receivable With Related Allowance Unpaid Principal Balance	0	38	0	38	0
Impaired Financing Receivable With Related Allowance Recorded Investment	0	38	0	38	0
Impaired Financing Receivable, Allowance for Loan Losses Allocated	0	6	0	6	0
Impaired Financing Receivable, With Related Allowance, Average Recorded Investment	0	46	0	71	54
Impaired Financing Receivable, With Related Allowance, Interest Income Recognized	0	0	0	0	1
Impaired Financing Receivable, With Related Allowance, Interest Income, Cash Basis Recognized	$ 0	$ 0	$ 0	$ 0	$ 1

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REAL ESTATE ACQUIRED THROUGH FORECLOSURE (Details 1) (USD $) In Thousands, unless otherwise specified	3 Months Ended		6 Months Ended
	Jun. 30, 2013	Jun. 30, 2012	Jun. 30, 2013	Jun. 30, 2012
Beginning balance	$ 972	$ 0	$ 500	$ 0
Provision	532	0	1,592	0
Writedowns and loss on sale	(783)	0	(1,371)	0
Ending balance	$ 721	$ 0	$ 721	$ 0

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SECURITIES (Details) (USD $) In Thousands, unless otherwise specified	6 Months Ended	12 Months Ended
	Jun. 30, 2013	Dec. 31, 2012
Amortized Cost, Securities available-for-sale	$ 313,859	$ 350,303
Gross Unrealized Gains, Securities available-for-sale	1,486	4,722
Gross Unrealized Losses,Securities available-for-sale	(6,213)	(894)
Fair Value, Securities available-for-sale	309,132	354,131
U.S. Treasury and Agencies [Member]
Amortized Cost, Securities available-for-sale		8,284
Gross Unrealized Gains, Securities available-for-sale		7
Gross Unrealized Losses,Securities available-for-sale		(13)
Fair Value, Securities available-for-sale		8,278
Government-sponsored mortgage-backed Residential [Member]
Amortized Cost, Securities available-for-sale	133,897	144,617
Gross Unrealized Gains, Securities available-for-sale	103	774
Gross Unrealized Losses,Securities available-for-sale	(4,654)	(502)
Fair Value, Securities available-for-sale	129,346	144,889
Government-sponsored collateralized mortgage obligations [Member]
Amortized Cost, Securities available-for-sale	82,933	148,460
Gross Unrealized Gains, Securities available-for-sale	493	2,033
Gross Unrealized Losses,Securities available-for-sale	(489)	(346)
Fair Value, Securities available-for-sale	82,937	150,147
Asset backed-collateralized loan obligations [Member]
Amortized Cost, Securities available-for-sale	24,546	4,981
Gross Unrealized Gains, Securities available-for-sale	11	151
Gross Unrealized Losses,Securities available-for-sale	(142)	0
Fair Value, Securities available-for-sale	24,415	5,132
State and Municipal [Member]
Amortized Cost, Securities available-for-sale	14,540	11,394
Gross Unrealized Gains, Securities available-for-sale	690	1,324
Gross Unrealized Losses,Securities available-for-sale	(8)	0
Fair Value, Securities available-for-sale	15,222	12,718
Corporate Bonds [Member]
Amortized Cost, Securities available-for-sale	57,943	32,567
Gross Unrealized Gains, Securities available-for-sale	189	433
Gross Unrealized Losses,Securities available-for-sale	(920)	(33)
Fair Value, Securities available-for-sale	$ 57,212	$ 32,967

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STOCKHOLDERS' EQUITY (Details) (USD $) In Thousands, unless otherwise specified	Jun. 30, 2013	Jun. 30, 2011	Jun. 30, 2013 Consolidated [Member]	Dec. 31, 2012 Consolidated [Member]	Jun. 30, 2013 Bank [Member]	Dec. 31, 2012 Bank [Member]
Total risk-based capital (to risk- weighted assets), Actual Amount			$ 67,461	$ 68,791	$ 73,840	$ 73,951
Total risk-based capital (to risk- weighted assets), Actual Ratio	12.36%	12.00%	11.29%	11.36%	12.36%	12.21%
Total risk-based capital (to risk- weighted assets) For Capital Adequacy Purposes Amount			47,798	48,438	47,800	48,439
Total risk-based capital (to risk- weighted assets) For Capital Adequacy Purposes Ratio			8.00%	8.00%	8.00%	8.00%
Tier I capital (to risk-weighted assets) Actual Amount			55,851	57,471	66,267	66,256
Tier I capital (to risk-weighted assets) Actual Ratio		9.00%	9.35%	9.49%	11.09%	10.94%
Tier I capital (to risk-weighted assets) For Capital Adequacy Purposes Amount			23,899	24,219	23,900	24,219
Tier I capital (to risk-weighted assets) For Capital Adequacy Purposes Ratio			4.00%	4.00%	4.00%	4.00%
Tier I capital (to average assets) Actual Amount			55,851	57,471	66,267	66,256
Tier I capital (to average assets) Actual Ratio			6.14%	5.67%	7.27%	6.53%
Tier I capital (to average assets) For Capital Adequacy Purposes Amount			$ 36,408	$ 40,580	$ 36,460	$ 40,608
Tier I capital (to average assets) For Capital Adequacy Purposes Ratio			4.00%	4.00%	4.00%	4.00%

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PREFERRED STOCK (Details Textual) (USD $)	1 Months Ended	6 Months Ended			6 Months Ended	1 Months Ended
	Oct. 14, 2008	Jun. 30, 2013	Dec. 31, 2012	Jan. 09, 2009	Jun. 30, 2013 Warrant [Member]	Dec. 08, 2008 Warrant [Member] US Treasury [Member]
Preferred Stock, Liquidation Preference, Value		$ 23,000,000	$ 22,500,000	$ 20,000,000
Preferred Stock, Liquidation Preference Per Share				$ 1,000
Cumulative Dividends, Percentage				5.00%
Cumulative Dividends, Percentage After Five Years				9.00%
Share-based Compensation Arrangement by Share-based Payment Award, Equity Instruments Other than Options, Grants in Period		122,972				215,983
Share-based Compensation Arrangement by Share-based Payment Award, Equity Instruments Other than Options, Grants in Period, Weighted Average Grant Date Fair Value		$ 3.05				$ 13.89
Percentage of Aggregate Amount of Preferred Stock Value						15.00%
Preferred Stock, Value, Issued		19,970,000	19,943,000			3,000,000
Share-based Compensation Arrangement by Share-based Payment Award, Equity Instruments Other than Options, Outstanding, Weighted Average Remaining Contractual Terms					10 years
Dividends Payable		3,000,000
Preferred Stock, Dividends Per Share, Declared	$ 0.19
Preferred Stock, Value, Outstanding		$ 20,000,000
Preferred Stock, Dividend Rate, Percentage		5.00%
Preferred Stock, Dividend Rate, Percentage, Contingent upon Treasury Acceptance		9.00%

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LOANS (Details 6) (USD $) In Thousands, unless otherwise specified	3 Months Ended		6 Months Ended
	Jun. 30, 2013 Number	Jun. 30, 2012 Number	Jun. 30, 2013 Number	Jun. 30, 2012 Number
Financing Receivable, Pre-Modification Outstanding Recorded Investment	$ 1,445	$ 4,554	$ 3,610	$ 7,097
Financing Receivable, Post-Modification Outstanding Recorded Investment	1,445	4,554	3,610	6,956
Financing Receivable, Number of Loans	3	6	7	11
Commercial Loan [Member]
Financing Receivable, Pre-Modification Outstanding Recorded Investment	0	0	0	1,094
Financing Receivable, Post-Modification Outstanding Recorded Investment	0	0	0	1,094
Financing Receivable, Number of Loans				1
Land Improvements [Member]
Financing Receivable, Pre-Modification Outstanding Recorded Investment	0	2,853	0	4,251
Financing Receivable, Post-Modification Outstanding Recorded Investment	0	2,853	0	4,110
Financing Receivable, Number of Loans		1		3
Buildings Lot [Member]
Financing Receivable, Pre-Modification Outstanding Recorded Investment	0	613	0	613
Financing Receivable, Post-Modification Outstanding Recorded Investment	0	613	0	613
Financing Receivable, Number of Loans		2		2
Commercial Real Estate Other Receivable [Member]
Financing Receivable, Pre-Modification Outstanding Recorded Investment	1,392	1,088	3,534	1,139
Financing Receivable, Post-Modification Outstanding Recorded Investment	1,392	1,088	3,534	1,139
Financing Receivable, Number of Loans	2	3	5	5
Commercial Real Estate Construction Financing Receivable [Member]
Financing Receivable, Pre-Modification Outstanding Recorded Investment	0	0	0	0
Financing Receivable, Post-Modification Outstanding Recorded Investment	0	0	0	0
Residential Mortgage [Member]
Financing Receivable, Pre-Modification Outstanding Recorded Investment	0	0	0	0
Financing Receivable, Post-Modification Outstanding Recorded Investment	0	0	0	0
Consumer and Home Equity [Member]
Financing Receivable, Pre-Modification Outstanding Recorded Investment	53	0	76	0
Financing Receivable, Post-Modification Outstanding Recorded Investment	53	0	76	0
Financing Receivable, Number of Loans	1		2
Indirect Consumer [Member]
Financing Receivable, Pre-Modification Outstanding Recorded Investment	0	0	0	0
Financing Receivable, Post-Modification Outstanding Recorded Investment	$ 0	$ 0	$ 0	$ 0

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EARNINGS (LOSS) PER SHARE (Tables)

6 Months Ended

Jun. 30, 2013

Earnings Per Share [Abstract]

Schedule of Calculation of Numerator and Denominator in Earnings Per Share [Table Text Block]

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

	Three Months Ended				Six Months Ended
(Amounts in thousands,	June 30,				June 30,
except per share data)	2013		2012		2013		2012
Basic:
Net income/(loss)	$	(1,126)	$	(4,139)	$	(1,004)	$	(4,429)
Less:
Preferred stock dividends		(250)		(250)		(500)		(500)
Accretion on preferred stock discount		(13)		(13)		(27)		(27)
Net income (loss) available to common shareholders	$	(1,389)	$	(4,402)	$	(1,531)	$	(4,956)
Weighted average common shares		4,806		4,767		4,797		4,764
Diluted:
Weighted average common shares		4,806		4,767		4,797		4,764
Dilutive effect of stock options and warrants		-		-		-		-
Weighted average common and incremental shares		4,806		4,767		4,797		4,764
Earnings (Loss) Per Common Share:
Basic	$	(0.29)	$	(0.92)	$	(0.32)	$	(1.04)
Diluted	$	(0.29)	$	(0.92)	$	(0.32)	$	(1.04)

XML

Consolidated Statements of Changes in Stockholders' Equity (USD $) In Thousands, except Share data	Total	Preferred Stock [Member]	Common Stock [Member]	Additional Paid-in Capital [Member]	Retained Earnings [Member]	Accumulated Other Comprehensive Income (Loss) [Member]
Balance at Dec. 31, 2012	$ 44,372	$ 19,943	$ 4,775	$ 35,782	$ (17,398)	$ 1,270
Balance (in shares) at Dec. 31, 2012		20,000	4,775,114
Net loss	(1,004)	0	0	0	(1,004)	0
Stock issued for employee benefit plans	29	0	15	14	0	0
Stock issued for employee benefit plans (in shares)		0	14,848
Issuance of restricted shares	0	0	66	(66)	0	0
Issuance of restricted shares (in shares)		0	65,928
Stock-based compensation expense	260	0	0	260	0	0
Total other comprehensive income (loss)	(8,555)	0	0	0	0	(8,555)
Dividends on preferred stock	(500)	0	0	0	(500)	0
Accretion of preferred stock discount	0	27	0	0	(27)	0
Balance at Jun. 30, 2013	$ 34,602	$ 19,970	$ 4,856	$ 35,990	$ (18,929)	$ (7,285)
Balance (in shares) at Jun. 30, 2013		20,000	4,855,890

XML

BASIS OF PRESENTATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

6 Months Ended

Jun. 30, 2013

Accounting Policies [Abstract]

Basis of Presentation and Significant Accounting Policies [Text Block]

1. BASIS OF PRESENTATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

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

The accompanying unaudited consolidated financial statements have been prepared in accordance with U.S. generally accepted accounting principles for interim financial information and with the instructions to Form 10-Q and Rule 10-01 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by U.S. generally accepted accounting principles for complete financial statements. In the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation have been included. Operating results for the three and six month periods ending June 30, 2013 are not necessarily indicative of the results that may occur for the year ending December 31, 2013. For further information, refer to the consolidated financial statements and footnotes thereto included in the Corporation’s annual report on Form 10-K for the period ended December 31, 2012.

Reclassifications – Some items in the prior year financial statements were reclassified to conform to the current presentation. Reclassifications had no effect on prior year operations or shareholder’s equity.

Adoption of New Accounting Standards – Effective February 2013, we adopted, ASU No. 2013-02, Reporting of Amounts Reclassified Out of Accumulated Other Comprehensive (ASU 2013-02).  This guidance is the culmination of the FASB’s deliberation on reporting reclassification adjustments from accumulated other comprehensive income (AOCI). The amendments in ASU 2013-02 do not change the current requirements for reporting net income or other comprehensive income.  However, the amendments require disclosure of amounts reclassified out of AOCI in its entirety, by component, on the face of the statement of operations or in the notes thereto.  Amounts that are not required to be reclassified in their entirety to net income must be cross-referenced to other disclosures that provide additional detail.  This standard was effective for public entities for annual and interim reporting periods beginning after December 15, 2012. The adoption of this update did not have a material impact on the consolidated financial statements.

In July 2013, the Financial Accounting Standards Board issued Accounting Standards Update 2013-11, Presentation of an Unrecognized Tax Benefit When a Net Operating Loss Carryforward, a Similar Tax Loss, or a Tax Credit Carryforward Exists (ASU 2013-11). Current GAAP does not include explicit guidance on the financial statement presentation of an unrecognized tax benefit when a net operating loss carryforward, a similar tax loss, or a tax credit carryforward exists. The adoption of ASU 2013-11 will require an unrecognized tax benefit, or a portion of an unrecognized tax benefit to be presented in the financial statements as a reduction to a deferred tax asset for a net operating loss carryforward, a similar tax loss, or a tax credit carryforward, unless an exception applies. The amendments in this update are effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2013. We are currently evaluating the effect that the provisions of ASU 2013-11 will have on the consolidated financial statements.

XML

LOANS

6 Months Ended

Jun. 30, 2013

Receivables [Abstract]

Loans, Notes, Trade and Other Receivables Disclosure [Text Block]

4. LOANS

Loans are summarized as follows:

(Dollars in thousands)	June 30, 2013		December 31, 2012
Commercial Real Estate (CRE):
Other-CRE other than Land
Development and Building Lots	$	274,863	$	287,283
Land Development		23,736		28,310
Building Lots		1,875		2,151
Residential mortgage		102,281		110,025
Consumer and home equity		54,449		57,888
Commercial		17,030		19,931
Indirect consumer		13,087		16,211
Real estate construction		3,354		3,141
		490,675		524,940
Less:
Net deferred loan origination fees		(89)		(105)
Allowance for loan losses		(15,947)		(17,265)
		(16,036)		(17,370)
Net Loans	$	474,639	$	507,570

The following tables present the activity in the allowance for loan losses by portfolio segment for the quarter and six months ending June 30, 2013 and 2012:

Three Months Ended
June 30, 2013			Commercial		Real Estate		Residential		Consumer &		Indirect
	Commercial		Real Estate		Construction		Mortgage		Home Equity		Consumer		Total
(Dollars in thousands)
Allowance for loan losses:
Beginning Balance	$	914	$	13,800	$	66	$	371	$	438	$	223	$	15,812
Provision for loan losses		(10)		225		4		-		(14)		7		212
Charge-offs		-		(61)		-		-		(51)		(41)		(153)
Recoveries		4		20		-		4		23		25		76
Total ending allowance balance	$	908	$	13,984	$	70	$	375	$	396	$	214	$	15,947

Six Months Ended
June 30, 2013			Commercial		Real Estate		Residential		Consumer &		Indirect
	Commercial		Real Estate		Construction		Mortgage		Home Equity		Consumer		Total
(Dollars in thousands)
Allowance for loan losses:
Beginning Balance	$	1,236	$	14,755	$	60	$	501	$	442	$	271	$	17,265
Provision for loan losses		(272)		(395)		10		(130)		23		(61)		(825)
Charge-offs		(94)		(452)		-		-		(98)		(57)		(701)
Recoveries		38		76		-		4		29		61		208
Total ending allowance balance	$	908	$	13,984	$	70	$	375	$	396	$	214	$	15,947

Three Months Ended
June 30, 2012			Commercial		Real Estate		Residential		Consumer &		Indirect
	Commercial		Real Estate		Construction		Mortgage		Home Equity		Consumer		Total
(Dollars in thousands)
Allowance for loan losses:
Beginning Balance	$	1,723	$	13,628	$	103	$	882	$	643	$	350	$	17,329
Provision for loan losses		(255)		1,189		(14)		(34)		23		6		915
Allowance associated with probable branch divestitures		(25)		(581)		-		(14)		(62)		-		(682)
Charge-offs		-		(2,191)		-		(31)		(102)		(55)		(2,379)
Recoveries		40		35		-		-		23		19		117
Total ending allowance balance	$	1,483	$	12,080	$	89	$	803	$	525	$	320	$	15,300

Six Months Ended
June 30, 2012			Commercial		Real Estate		Residential		Consumer &		Indirect
	Commercial		Real Estate		Construction		Mortgage		Home Equity		Consumer		Total
(Dollars in thousands)
Allowance for loan losses:
Beginning Balance	$	1,422	$	13,727	$	103	$	922	$	610	$	397	$	17,181
Provision for loan losses		222		1,687		(14)		(52)		98		(14)		1,927
Allowance associated with probable branch divestitures		(25)		(581)		-		(6)		(57)		-		(669)
Charge-offs		(187)		(2,804)		-		(62)		(176)		(99)		(3,328)
Recoveries		51		51		-		1		50		36		189
Total ending allowance balance	$	1,483	$	12,080	$	89	$	803	$	525	$	320	$	15,300

We did not implement any changes to our allowance related accounting policies or methodology during the current period.

The following table presents the balance in the allowance for loan losses and the recorded investment in loans by portfolio segment and based on the impairment method as of June 30, 2013 and 2012 and December 31, 2012:

June 30, 2013			Commercial		Real Estate		Residential		Consumer &		Indirect
	Commercial		Real Estate		Construction		Mortgage		Home Equity		Consumer		Total
(Dollars in thousands)
Allowance for loan losses:
Ending allowance balance attributable to loans:
Individually evaluated for impairment	$	184	$	6,851	$	-	$	31	$	81	$	-	$	7,147
Collectively evaluated for impairment		724		7,133		70		344		315		214		8,800
Total ending allowance balance	$	908	$	13,984	$	70	$	375	$	396	$	214	$	15,947
Loans:
Loans individually evaluated for impairment	$	1,213	$	35,284	$	447	$	3,418	$	664	$	-	$	41,026
Loans collectively evaluated for impairment		15,817		265,190		2,907		98,863		53,785		13,087		449,649
Total ending loans balance	$	17,030	$	300,474	$	3,354	$	102,281	$	54,449	$	13,087	$	490,675

December 31, 2012			Commercial		Real Estate		Residential		Consumer &		Indirect
	Commercial		Real Estate		Construction		Mortgage		Home Equity		Consumer		Total
(Dollars in thousands)
Allowance for loan losses:
Ending allowance balance attributable to loans:
Individually evaluated for impairment	$	252	$	7,593	$	-	$	86	$	51	$	-	$	7,982
Collectively evaluated for impairment		984		7,162		60		415		391		271		9,283
Total ending allowance balance	$	1,236	$	14,755	$	60	$	501	$	442	$	271	$	17,265
Loans:
Loans individually evaluated for impairment	$	1,071	$	43,065	$	448	$	213	$	188	$	-	$	44,985
Loans collectively evaluated for impairment		18,860		274,679		2,693		109,812		57,700		16,211		479,955
Total ending loans balance	$	19,931	$	317,744	$	3,141	$	110,025	$	57,888	$	16,211	$	524,940

June 30, 2012			Commercial		Real Estate		Residential		Consumer &		Indirect
	Commercial		Real Estate		Construction		Mortgage		Home Equity		Consumer		Total
(Dollars in thousands)
Allowance for loan losses:
Ending allowance balance attributable to loans:
Individually evaluated for impairment	$	332	$	4,609		-	$	383	$	126	$	6	$	5,456
Collectively evaluated for impairment		1,151		7,471		89		420		399		314		9,844
Loans held for sale		-		-		-		-		-		-		-
Total ending allowance balance	$	1,483	$	12,080		89	$	803	$	525	$	320	$	15,300
Loans:
Loans individually evaluated for impairment	$	1,396	$	56,493	$	-	$	1,098	$	302	$	38	$	59,327
Loans collectively evaluated for impairment		23,469		325,322		3,950		142,175		63,895		19,462		578,273
Loans held for sale		(2,520)		(58,767)		-		(29,232)		(10,806)		-		(101,325)
Total ending loans balance	$	22,345	$	323,048	$	3,950	$	114,041	$	53,391	$	19,500	$	536,275

The following tables present loans individually evaluated for impairment by class of loans as of June 30, 2013 and 2012 and December 31, 2012. The difference between the unpaid principal balance and recorded investment represents partial write downs/charge offs taken on individual impaired credits. The recorded investment and average recorded investment in loans exclude accrued interest receivable and loan origination fees.

							Three Months Ended						Six Months Ended
							June 30, 2013						June 30, 2013
June 30, 2013	Unpaid				Allowance for		Average		Interest		Cash Basis		Average		Interest		Cash Basis
	Principal		Recorded		Loan Losses		Recorded		Income		Interest		Recorded		Income		Interest
(Dollars in thousands)	Balance		Investment		Allocated		Investment		Recognized		Recognized		Investment		Recognized		Recognized
With no related allowance recorded:
Commercial	$	1,234	$	1,028	$	-	$	850	$	6	$	6	$	763	$	10	$	10
Commercial Real Estate:
Land Development		2,336		2,311		-		2,716		33		33		3,435		84		84
Building Lots		477		212		-		212		-		-		212		-		-
Other		10,502		9,433		-		9,336		99		99		11,575		239		239
Real Estate Construction		540		447		-		449		-		-		448		-		-
Residential Mortgage		2,941		2,941		-		1,691		6		6		3,162		53		53
Consumer and Home Equity		395		395		-		210		1		1		407		7		7
Indirect Consumer		-		-		-		-		-		-		-		-		-
With an allowance recorded:
Commercial		185		185		184		189		1		1		287		4		4
Commercial Real Estate:
Land Development		2,930		2,930		961		2,802		35		35		2,759		67		67
Building Lots		-		-		-		-		-		-		-		-		-
Other		22,609		20,398		5,890		20,350		215		215		19,984		412		412
Real Estate Construction		-		-		-		-		-		-		-		-		-
Residential Mortgage		477		477		31		399		2		2		337		6		6
Consumer and Home Equity		269		269		81		312		1		1		271		5		5
Indirect Consumer		-		-		-		-		-		-		-		-		-
Total	$	44,895	$	41,026	$	7,147	$	39,516	$	399	$	399	$	43,640	$	887	$	887

December 31, 2012	Unpaid				Allowance for		Average		Interest		Cash Basis
	Principal		Recorded		Loan Losses		Recorded		Income		Interest
(Dollars in thousands)	Balance		Investment		Allocated		Investment		Recognized		Recognized
With no related allowance recorded:
Commercial	$	588	$	588	$	-	$	1,070	$	39	$	39
Commercial Real Estate:
Land Development		5,595		4,873		-		5,728		237		237
Building Lots		477		212		-		810		14		14
Other		21,673		16,052		-		24,961		961		961
Real Estate Construction		448		448		-		90		-		-
Residential Mortgage		-		-		-		-		-		-
Consumer and Home Equity		-		-		-		-		-		-
Indirect Consumer		-		-		-		-		-		-
With an allowance recorded:
Commercial		483		483		252		564		21		21
Commercial Real Estate:
Land Development		2,674		2,674		899		2,436		101		101
Building Lots		-		-		-		191		3		3
Other		19,254		19,254		6,694		20,075		772		772
Real Estate Construction		-		-		-		-		-		-
Residential Mortgage		213		213		86		1,191		24		24
Consumer and Home Equity		188		188		51		260		6		6
Indirect Consumer		-		-		-		54		1		1
Total	$	51,593	$	44,985	$	7,982	$	57,430	$	2,179	$	2,179

							Three Months Ended						Six Months Ended
							June 30, 2012						June 30, 2012
June 30, 2012	Unpaid				Allowance for		Average		Interest		Cash Basis		Average		Interest		Cash Basis
	Principal		Recorded		Loan Losses		Recorded		Income		Interest		Recorded		Income		Interest
(Dollars in thousands)	Balance		Investment		Allocated		Investment		Recognized		Recognized		Investment		Recognized		Recognized
With no related allowance recorded:
Commercial	$	1,111	$	991	$	-	$	944	$	8	$	8	$	1,347	$	27	$	27
Commercial Real Estate:
Land Development		11,532		5,771		-		5,176		46		46		5,825		108		108
Building Lots		1,061		1,030		-		924		6		6		1,051		8		8
Other		32,183		28,726		-		30,254		280		280		30,948		586		586
Real Estate Construction		-		-		-		-		-		-		-		-		-
Residential Mortgage		-		-		-		-		-		-		-		-		-
Consumer and Home Equity		-		-		-		-		-		-		-		-		-
Indirect Consumer		-		-		-		-		-		-		-		-		-
With an allowance recorded:
Commercial		407		405		332		477		4		4		676		13		13
Commercial Real Estate:
Land Development		786		740		190		2,303		21		21		2,519		46		46
Building Lots		-		-		-		238		2		2		318		3		3
Other		20,226		20,226		4,419		15,576		144		144		16,101		305		305
Real Estate Construction		-		-		-		-		-		-		-		-		-
Residential Mortgage		1,219		1,098		383		1,485		13		13		1,550		23		23
Consumer and Home Equity		324		302		126		332		3		3		285		3		3
Indirect Consumer		38		38		6		46		-		-		71		-		-
Total	$	68,887	$	59,327	$	5,456	$	57,755	$	527	$	527	$	60,691	$	1,122	$	1,122

The following tables present the recorded investment in restructured, nonaccrual and loans past due over 90 days still on accrual by class of loans as of June 30, 2013 and December 31, 2012.

					Loans Past Due
June 30, 2013					Over 90 Days		Non-Accrual
	Restructured on		Restructured on		Still		Excluding
(Dollars in thousands)	Non-Accrual Status		Accrual Status		Accruing		Restructured
Commercial	$	-	$	199	$	-	$	481
Commercial Real Estate:
Land Development		-		2,733		-		302
Building Lots		-		-		-		212
Other		8,530		22,153		-		6,056
Real Estate Construction		-		-		-		447
Residential Mortgage		109		192		-		1,383
Consumer and Home Equity		-		99		-		314
Indirect Consumer		-		-		-		20
Total	$	8,639	$	25,376	$	-	$	9,215

					Loans Past Due
December 31, 2012					Over 90 Days		Non-Accrual
	Restructured on		Restructured on		Still		Excluding
(Dollars in thousands)	Non-Accrual Status		Accrual Status		Accruing		Restructured
Commercial	$	31	$	221	$	-	$	562
Commercial Real Estate:
Land Development		675		3,053		-		695
Building Lots		-		170		-		212
Other		9,047		19,080		-		8,908
Real Estate Construction		-		-		-		448
Residential Mortgage		-		303		-		827
Consumer and Home Equity		-		24		-		37
Indirect Consumer		-		-		-		13
Total	$	9,753	$	22,851	$	-	$	11,702

The following table presents the aging of the recorded investment in past due loans as of June 30, 2013 and December 31, 2012 by class of loans:

June 30, 2013	30-59		60-89		Greater than
	Days		Days		90 Days		Total		Loans Not
(Dollars in thousands)	Past Due		Past Due		Past Due		Past Due		Past Due		Total
Commercial	$	73	$	-	$	481	$	554	$	16,476	$	17,030
Commercial Real Estate:
Land Development		-		-		302		302		23,434		23,736
Building Lots		-		-		212		212		1,663		1,875
Other		179		150		14,586		14,915		259,948		274,863
Real Estate Construction		-		-		447		447		2,907		3,354
Residential Mortgage		367		615		1,492		2,474		99,807		102,281
Consumer and Home Equity		131		11		314		456		53,993		54,449
Indirect Consumer		223		28		20		271		12,816		13,087
Total	$	973	$	804	$	17,854	$	19,631	$	471,044	$	490,675

December 31, 2012	30-59		60-89		Greater than
	Days		Days		90 Days		Total		Loans Not
(Dollars in thousands)	Past Due		Past Due		Past Due		Past Due		Past Due		Total
Commercial	$	-	$	95	$	562	$	657	$	19,274	$	19,931
Commercial Real Estate:
Land Development		361		-		1,228		1,589		26,721		28,310
Building Lots		-		-		212		212		1,939		2,151
Other		1,264		1,239		13,001		15,504		271,779		287,283
Real Estate Construction		-		-		448		448		2,693		3,141
Residential Mortgage		3,588		995		827		5,410		104,615		110,025
Consumer and Home Equity		351		255		45		651		57,237		57,888
Indirect Consumer		246		130		13		389		15,822		16,211
Total	$	5,810	$	2,714	$	16,336	$	24,860	$	500,080	$	524,940

Troubled Debt Restructurings (TDR):

We have allocated $2.7 million and $3.1 million of specific reserves to customers whose loan terms have been modified in troubled debt restructurings as of June 30, 2013 and December 31, 2012. We are not committed to lend additional funds to debtors whose loans have been modified in a troubled debt restructuring. Specific reserves are generally assessed prior to loans being modified as a TDR, as most of these loans migrate from our internal watch list and have been specifically reserved for as part of our normal reserving methodology.

During the quarter and six month periods ending June 30, 2013, and June 30, 2012, the terms of certain loans were modified as troubled debt restructurings. The modification of the terms of such loans included one or a combination of the following: a reduction of the stated interest rate of the loan; an extension of the maturity date at a stated rate of interest lower than the current market rate for new debt with similar risk; or a permanent reduction of the recorded investment in the loan.

Modifications involving a reduction of the stated interest rate of the loan were for periods ranging from six months to one year. Modifications involving an extension of the maturity date were for periods ranging from three to six months.

The following tables present loans by class modified as troubled debt restructurings that occurred during the periods ending June 30, 2013 and 2012:

	Three Months Ended June 30, 2013						Three Months Ended June 30, 2012
			Pre-Modification		Post-Modification				Pre-Modification		Post-Modification
			Outstanding		Outstanding				Outstanding		Outstanding
	Number		Recorded		Recorded		Number		Recorded		Recorded
(Dollars in thousands)	of Loans		Investment		Investment		of Loans		Investment		Investment
Troubled Debt Restructurings:
Commercial		-	$	-	$	-		-	$	-	$	-
Commercial Real Estate:
Land Development		-		-		-		1		2,853		2,853
Building Lots		-		-		-		2		613		613
Other		2		1,392		1,392		3		1,088		1,088
Real Estate Construction		-		-		-		-		-		-
Residential Mortgage		-		-		-		-		-		-
Consumer and Home Equity		1		53		53		-		-		-
Indirect Consumer		-		-		-		-		-		-
Total		3	$	1,445	$	1,445		6	$	4,554	$	4,554

	Six Months Ended June 30, 2013						Six Months Ended June 30, 2012
			Pre-Modification		Post-Modification				Pre-Modification		Post-Modification
			Outstanding		Outstanding				Outstanding		Outstanding
	Number		Recorded		Recorded		Number		Recorded		Recorded
(Dollars in thousands)	of Loans		Investment		Investment		of Loans		Investment		Investment
Troubled Debt Restructurings:
Commercial		-	$	-	$	-		1	$	1,094	$	1,094
Commercial Real Estate:
Land Development		-		-		-		3		4,251		4,110
Building Lots		-		-		-		2		613		613
Other		5		3,534		3,534		5		1,139		1,139
Real Estate Construction		-		-		-		-		-		-
Residential Mortgage		-		-		-		-		-		-
Consumer and Home Equity		2		76		76		-		-		-
Indirect Consumer		-		-		-		-		-		-
Total		7	$	3,610	$	3,610		11	$	7,097	$	6,956

The troubled debt restructurings described above resulted in a reversal of provision for loan losses allocated to troubled debt restructurings of $11,000 and $164,000 for the three and six months ended June 30, 2013. The troubled debt restructurings described above increased the allowance for loan losses allocated to troubled debt restructurings by $67,000 and $256,000 for the three and six months ended June 30, 2012. Typically, these loans had allocated allowance prior to their formal modification. The troubled debt restructurings described above resulted in charge-offs of $141,000 for the three and six month periods ended June 3, 2012. There were no charge-offs recorded on the troubled debt restructurings described above for the 2013 periods.

The following tables present loans by class modified as troubled debt restructurings for which there was a payment default within twelve months following the modification during the periods ending June 30, 2013 and 2012:

	Three Months Ended				Three Months Ended
	June 30, 2013				June 30, 2012
	Number		Recorded		Number		Recorded
(Dollars in thousands)	of Loans		Investment		of Loans		Investment
Troubled Debt Restructurings:
Commercial		-	$	-		-	$	-
Commercial Real Estate:
Land Development		-		-		1		533
Building Lots		-		-		-		-
Other		-		-		1		10,068
Real Estate Construction		-		-		-		-
Residential Mortgage		-		-		-		-
Consumer and Home Equity		-		-		-		-
Indirect Consumer		-		-		-		-
Total		-	$	-		2	$	10,601

	Six Months Ended				Six Months Ended
	June 30, 2013				June 30, 2012
	Number		Recorded		Number		Recorded
(Dollars in thousands)	of Loans		Investment		of Loans		Investment
Troubled Debt Restructurings:
Commercial		-	$	-		-	$	-
Commercial Real Estate:
Land Development		-		-		2		3,386
Building Lots		-		-		-		-
Other		-		-		1		10,068
Real Estate Construction		-		-		-		-
Residential Mortgage		-		-		-		-
Consumer and Home Equity		-		-		-		-
Indirect Consumer		-		-		-		-
Total		-	$	-		3	$	13,454

For disclosure purposes, a loan is considered to be in payment default once it is 90 days contractually past due under the modified terms. The troubled debt restructurings that subsequently defaulted described above increased the allowance for loan losses by $309,000 for the three and six months ended June 30, 2012. The troubled debt restructurings described above resulted in charge-offs of $141,000 for the three and six month periods ended June 30, 2012.

Credit Quality Indicators:

We categorize loans into risk categories based on relevant information about the ability of borrowers to service their debt such as: current financial information, historical payment experience, credit documentation, public information, and current economic trends, among other factors. We analyze loans individually by classifying the loans as to credit risk. This analysis includes commercial and commercial real estate loans. We also evaluate credit quality on residential mortgage, consumer and home equity and indirect consumer loans based on the aging status and payment activity of the loan. This analysis is performed on a monthly basis. We use the following definitions for risk ratings:

Criticized: Loans classified as criticized have a potential weakness that deserves management’s close attention. If left uncorrected, these potential weaknesses may result in deterioration of the repayment prospects for the loan or in our credit position at some future date.

Substandard: Loans classified as substandard are inadequately protected by the current net worth and paying capacity of the obligor or of the collateral pledged, if any. Loans so classified have a well-defined weakness or weaknesses that jeopardize the liquidation of the debt. They are characterized by the distinct possibility that the institution will sustain some loss if the deficiencies are not corrected.

Doubtful: Loans classified as doubtful have all the weaknesses inherent in those classified as substandard, with the added characteristic that the weaknesses make collection or liquidation in full, on the basis of currently existing facts, conditions, and values, highly questionable and improbable.

Loss: Loans classified as loss are considered non-collectible and their continuance as bankable assets is not warranted.

Loans not meeting the criteria above that are analyzed individually as part of the above described process are considered to be pass rated loans. Loans listed as not rated are included in groups of homogeneous loans. For our residential mortgage, consumer and home equity, and indirect consumer homogeneous loans, we also evaluate credit quality based on the aging status of the loan, which was previously presented, and by payment activity.

As of June 30, 2013and December 31, 2012, and based on the most recent analysis performed, the risk category of loans by class of loans is as follows: 

June 30, 2013
(Dollars in thousands)	Not Rated		Pass		Criticized		Substandard		Doubtful		Loss		Total
Commercial	$	-	$	15,606	$	211	$	1,213	$	-	$	-	$	17,030
Commercial Real Estate:
Land Development		-		15,973		2,522		5,241		-		-		23,736
Building Lots		-		1,194		469		212		-		-		1,875
Other		-		221,281		23,710		29,872		-		-		274,863
Real Estate     Construction		-		2,907		-		447		-		-		3,354
Residential Mortgage		98,016		-		848		3,417		-		-		102,281
Consumer and Home     Equity		53,593		-		59		797		-		-		54,449
Indirect Consumer		12,957		-		73		57		-		-		13,087
Total	$	164,566	$	256,961	$	27,892	$	41,256	$	-	$	-	$	490,675

December 31, 2012
(Dollars in thousands)	Not Rated		Pass		Criticized		Substandard		Doubtful		Loss		Total
Commercial	$	-	$	16,736	$	2,000	$	1,195	$	-	$	-	$	19,931
Commercial Real Estate:
Land Development		-		17,744		3,059		7,507		-		-		28,310
Building Lots		-		1,447		492		212		-		-		2,151
Other		-		233,261		18,297		35,725		-		-		287,283
Real Estate     Construction		-		2,693		-		448		-		-		3,141
Residential Mortgage		105,148		-		442		4,435		-		-		110,025
Consumer and Home     Equity		56,593		-		569		726		-		-		57,888
Indirect Consumer		16,129		-		10		72		-		-		16,211
Total	$	177,870	$	271,881	$	24,869	$	50,320	$	-	$	-	$	524,940

The following table presents the unpaid principal balance in residential mortgage, consumer and home equity and indirect consumer loans based on payment activity as of June 30, 2013 and December 31, 2012:

June 30, 2013	Residential		Consumer &		Indirect
(Dollars in thousands)	Mortgage		Home Equity		Consumer
Performing	$	100,789	$	54,135	$	13,067
Restructured on non-accrual		109		-		-
Non-accrual		1,383		314		20
Total	$	102,281	$	54,449	$	13,087

December 31, 2012	Residential		Consumer &		Indirect
(Dollars in thousands)	Mortgage		Home Equity		Consumer
Performing	$	109,198	$	57,851	$	16,198
Restructured on non-accrual		-		-		-
Non-accrual		827		37		13
Total	$	110,025	$	57,888	$	16,211

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REGULATORY MATTERS

6 Months Ended

Jun. 30, 2013

Regulatory Matters [Abstract]

Regulatory Capital Requirements under Banking Regulations [Text Block]

2. REGULATORY MATTERS

On January 27, 2011, the Bank entered into a Consent Order with the Federal Deposit Insurance Corporation (“FDIC”) and the Kentucky Department of Financial Institutions (“KDFI”). The 2011 Consent Order required the Bank to achieve a total capital to risk-weighted assets ratio of 12% and a Tier 1 capital to average total assets ratio of 9% by June 30, 2011. The 2011 Consent Order also forbade the Bank from declaring dividends without the prior written approval of the FDIC and KDFI and required the Bank to develop and implement plans to reduce its level of non-performing assets and concentrations of credit in commercial real estate loans, maintain adequate reserves for loan and lease losses, implement procedures to ensure compliance with applicable laws, and take certain other actions. A copy of the Consent Order is included as an exhibit to our Form 8-K filed on January 27, 2011.

In April 2011, the Corporation entered into a formal agreement with the Federal Reserve Bank of St. Louis, which requires the Corporation to obtain regulatory approval before declaring any dividends and to take steps to ensure the Bank complies with the Consent Order. We also may not redeem shares or obtain additional borrowings without prior approval.

On March 9, 2012, the Bank entered into a new Consent Order with the FDIC and KDFI. The 2012 Consent Order requires the Bank to achieve the minimum capital ratios in the 2011 Consent Order by June 30, 2012. The Bank also agreed that if it should be unable to reach the required capital levels by that date, and if directed in writing by the FDIC, then within 30 days the Bank would develop, adopt and implement a written plan to sell or merge itself into another federally insured financial institution. To date, the Bank has not received such a written direction. The 2012 Consent Order includes the substantive provisions of the 2011 Consent Order and requires the Bank to continue to adhere to the plans implemented in response to the 2011 Consent Order. A copy of the March 9, 2012 Consent Order is included as Exhibit 10.8 to our 2011 Annual Report on Form 10-K filed March 30, 2012. At June 30, 2013, the Bank’s Tier 1 capital ratio was 7.27% and the total risk-based capital ratio was 12.36% as compared to the minimum capital ratios as required by the 2011 Consent Order of 9.00% and 12.00%, respectively.

We notified the bank regulatory agencies that we have achieved and maintained the total risk-based capital ratio, but we have yet to achieve the Tier 1 capital ratio. We are continuing to explore our strategic alternatives to achieve and maintain the Tier 1 capital ratio as well as all of the other consent order issues.

The Consent Orders also resulted in the Bank being designated as a "troubled institution," which status prohibits the Bank from accepting, renewing or rolling over brokered deposits, restricts the amount of interest the Bank may pay on deposits, and increases its deposit insurance assessment.

Bank regulatory agencies can exercise discretion when an institution does not meet the terms of a regulatory order. The agencies may initiate changes in management, issue mandatory directives, impose monetary penalties or refrain from formal sanctions, depending on individual circumstances. Any material failures to comply with our regulatory orders would likely result in more stringent enforcement actions by the bank regulatory agencies, which could damage our reputation and have a material adverse effect on our business.

The 2012 Consent Order and the formal agreement will remain in effect until modified or terminated by the FDIC, KDFI and Federal Reserve Bank of St. Louis.

In response to the 2011 Consent Order, we engaged an investment banking firm with expertise in the financial services sector to assist with a review of all of our strategic alternatives as we work to achieve the higher required capital ratios. One of these alternatives was to sell branches located outside of our core market. On July 6, 2012, we sold our four banking centers in Southern Indiana, receiving a 3.65% premium on the $102.3 million of consumer and commercial deposits at closing. The buyer assumed a total of approximately $115.4 million in non-brokered deposits, which included $13.1 million of government, corporate, other financial institution and municipal deposits for which we received no premium or discount. We also sold approximately $30.4 million in performing loans at a discount of 0.80%. Other assets sold included vault cash of $367,000 and fixed assets of $887,000. The Indiana branch sale resulted in a gain of $3.1 million.

In addition to the sale of our Indiana branches, we also sold commercial real estate loans totaling $10.7 million at par during 2012.

Our plans for 2013 include the following even though there can be no assurances that our plans will be achieved:

⋅ Continuing to identify and evaluate available strategic options to meet regulatory capital levels and all other requirements of our Consent Order.

⋅ Continuing to serve our community banking customers and operate the Corporation and the Bank in a safe and sound manner. We have worked diligently to maintain the strength of our retail and deposit franchise.

⋅ Continuing to reduce expenses and improve our ability to operate in a profitable manner.

⋅ Continuing to reduce our lending concentration in commercial real estate through expected maturities and repayments.

⋅ Enhancing our resources dedicated to special asset dispositions, both on a permanent and temporary basis, to accelerate our efforts to dispose of problem assets.

⋅ Reducing our inventory of other real estate owned properties.

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LOANS (Details 4) (USD $) In Thousands, unless otherwise specified	Jun. 30, 2013	Dec. 31, 2012
Restructured on Non-Accrual Status	$ 8,639	$ 9,753
Restructured on Accrual Status	25,376	22,851
Loans Past Due Over 90 Days Still Accruing	0	0
Non-Accrual Excluding Restructured	9,215	11,702
Commercial Loan [Member]
Restructured on Non-Accrual Status	0	31
Restructured on Accrual Status	199	221
Loans Past Due Over 90 Days Still Accruing	0	0
Non-Accrual Excluding Restructured	481	562
Land Improvements [Member]
Restructured on Non-Accrual Status	0	675
Restructured on Accrual Status	2,733	3,053
Loans Past Due Over 90 Days Still Accruing	0	0
Non-Accrual Excluding Restructured	302	695
Buildings Lot [Member]
Restructured on Non-Accrual Status	0	0
Restructured on Accrual Status	0	170
Loans Past Due Over 90 Days Still Accruing	0	0
Non-Accrual Excluding Restructured	212	212
Commercial Real Estate Other Receivable [Member]
Restructured on Non-Accrual Status	8,530	9,047
Restructured on Accrual Status	22,153	19,080
Loans Past Due Over 90 Days Still Accruing	0	0
Non-Accrual Excluding Restructured	6,056	8,908
Commercial Real Estate Construction Financing Receivable [Member]
Restructured on Non-Accrual Status	0	0
Restructured on Accrual Status	0	0
Loans Past Due Over 90 Days Still Accruing	0	0
Non-Accrual Excluding Restructured	447	448
Residential Mortgage [Member]
Restructured on Non-Accrual Status	109	0
Restructured on Accrual Status	192	303
Loans Past Due Over 90 Days Still Accruing	0	0
Non-Accrual Excluding Restructured	1,383	827
Consumer and Home Equity [Member]
Restructured on Non-Accrual Status	0	0
Restructured on Accrual Status	99	24
Loans Past Due Over 90 Days Still Accruing	0	0
Non-Accrual Excluding Restructured	314	37
Indirect Consumer [Member]
Restructured on Non-Accrual Status	0	0
Restructured on Accrual Status	0	0
Loans Past Due Over 90 Days Still Accruing	0	0
Non-Accrual Excluding Restructured	$ 20	$ 13

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STOCKHOLDERS' EQUITY (Tables)

6 Months Ended

Jun. 30, 2013

Equity [Abstract]

Schedule of Compliance with Regulatory Capital Requirements under Banking Regulations [Table Text Block]

Our actual and required capital amounts and ratios are presented below.

(Dollars in thousands)							For Capital
	Actual					Adequacy Purposes
As of June 30, 2013:	Amount		Ratio			Amount		Ratio
Total risk-based capital (to risk-weighted assets)
Consolidated	$	67,461		11.29	%	$	47,798		8.00	%
Bank		73,840		12.36			47,800		8.00
Tier I capital (to risk-weighted assets)
Consolidated		55,851		9.35			23,899		4.00
Bank		66,267		11.09			23,900		4.00
Tier I capital (to average assets)
Consolidated		55,851		6.14			36,408		4.00
Bank		66,267		7.27			36,460		4.00

(Dollars in thousands)						For Capital
	Actual					Adequacy Purposes
As of December 31, 2012:	Amount		Ratio			Amount		Ratio
Total risk-based capital (to risk-weighted assets)
Consolidated	$	68,791		11.36	%	$	48,438		8.00	%
Bank		73,951		12.21			48,439		8.00
Tier I capital (to risk-weighted assets)
Consolidated		57,471		9.49			24,219		4.00
Bank		66,256		10.94			24,219		4.00
Tier I capital (to average assets)
Consolidated		57,471		5.67			40,580		4.00
Bank		66,256		6.53			40,608		4.00

Schedule of Capital Requirements Under 2012 Consent Order [Table Text Block]

The 2012 Consent Order requires the Bank to achieve the minimum capital ratios presented below.

	Actual as of 6/30/2013			Ratio Required by Consent Order
Total capital to risk-weighted assets		12.36	%		12.00	%
Tier 1 capital to average total assets		7.27	%		9.00	%

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SECURITIES (Details 1) (USD $) In Thousands, unless otherwise specified	Jun. 30, 2013	Dec. 31, 2012
Amortized Cost Due after one year or less	$ 3,068
Amortized Cost Due after one year through five years	49,814
Amortized Cost Due after five years through ten years	4,765
Amortized Cost Due after ten years	14,836
Available For Sale Securities Amortized Cost	313,859	350,303
Fair Value Due after one year or less	3,078
Fair Value Due after one year through five years	49,250
Fair Value Due after five years through ten years	4,578
Fair Value Due after ten years	15,528
Fair Value Available for Sale	309,132	354,131
Government-sponsored mortgage-backed residential [Member]
Available For Sale Securities Amortized Cost	133,897
Fair Value Available for Sale	129,346
Government-sponsored collateralized mortgage obligations [Member]
Available For Sale Securities Amortized Cost	82,933	148,460
Fair Value Available for Sale	82,937	150,147
Private Asset Backed [Member]
Available For Sale Securities Amortized Cost	24,546	4,981
Fair Value Available for Sale	$ 24,415	$ 5,132

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LOANS (Details) (USD $) In Thousands, unless otherwise specified	Jun. 30, 2013	Mar. 31, 2013	Dec. 31, 2012	Jun. 30, 2012	Mar. 31, 2012	Dec. 31, 2011
Loans and Leases Receivable, Gross, Carrying Amount	$ 490,675		$ 524,940
Less:
Net deferred loan origination fees	(89)		(105)
Allowance for loan losses	(15,947)	(15,812)	(17,265)	(15,300)	(17,329)	(17,181)
Loans and Leases Receivable Adjustments Total	(16,036)		(17,370)
Net loans	474,639		507,570
Development and Building Lots [Member]
Loans and Leases Receivable, Gross, Carrying Amount	274,863		287,283	287,283
Land Development [Member]
Loans and Leases Receivable, Gross, Carrying Amount	23,736		28,310
Building Lots [Member]
Loans and Leases Receivable, Gross, Carrying Amount	1,875		2,151
Residential mortgage [Member]
Loans and Leases Receivable, Gross, Carrying Amount	102,281		110,025
Less:
Allowance for loan losses	(375)	(371)	(501)	(803)	(882)	(922)
Consumer and home equity [Member]
Loans and Leases Receivable, Gross, Carrying Amount	54,449		57,888
Less:
Allowance for loan losses	(396)	(438)	(442)	(525)	(643)	(610)
Commercial [Member]
Loans and Leases Receivable, Gross, Carrying Amount	17,030		19,931	19,931
Less:
Allowance for loan losses	(908)	(914)	(1,236)	(1,483)	(1,723)	(1,422)
Indirect consumer [Member]
Loans and Leases Receivable, Gross, Carrying Amount	13,087		16,211
Less:
Allowance for loan losses	(214)	(223)	(271)	(320)	(350)	(397)
Real estate construction [Member]
Loans and Leases Receivable, Gross, Carrying Amount	3,354		3,141	3,141
Less:
Allowance for loan losses	$ (70)	$ (66)	$ (60)	$ (89)	$ (103)	$ (103)

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STOCK BASED COMPENSATION PLAN (Details Textual) (USD $)	1 Months Ended	6 Months Ended
	Sep. 30, 2012	Jun. 30, 2013	Jun. 30, 2012
Share-based Compensation Arrangement by Share-based Payment Award, Options, Grants in Period, Gross		118,000
Stock Issued During Period, Value, Restricted Stock Award, Net of Forfeitures		$ 0
Stock Option and Incentive Compensation Plan 2006 [Member]
Share-based Compensation Arrangement by Share-based Payment Award, Options, Grants in Period, Gross		763,935
Share-based Compensation Arrangement by Share-based Payment Award, Number of Shares Available for Grant		54,240
Allocated Share-based Compensation Expense		73,000	55,000
Employee Service Share-based Compensation, Nonvested Awards, Total Compensation Cost Not yet Recognized		427,000
Employee Service Share Based Compensation Nonvested Awards Total Compensation Cost Not Yet Recognized Period For Recognition 1		3 years 6 months
Share-based Compensation Arrangement by Share-based Payment Award, Number of Additional Shares Authorized	200,000
Restricted Stock Granted and Incentive Compensation Plan 2006 [Member]
Allocated Share-based Compensation Expense		187,000	37,000
Employee Service Share-based Compensation, Nonvested Awards, Total Compensation Cost Not yet Recognized		259,000
Employee Service Share Based Compensation Nonvested Awards Total Compensation Cost Not Yet Recognized Period For Recognition 1		2 years
Restricted Stock [Member]
Share-based Compensation Arrangement by Share-based Payment Initial Award, Received by Non Employee Directors		9,934
Share-based Compensation Arrangement by Share-based Payment Award, Options, Grants in Period, Gross		20,500
Share-based Compensation Arrangement by Share-based Payment Award, Number of Shares Available for Grant		79,472
Share-based Compensation Arrangement by Share-based Payment Award, Options, Grants in Period, Weighted Average Grant Date Fair Value		$ 3.39
Stock Issued During Period, Value, Restricted Stock Award, Net of Forfeitures		$ 30,000
Share-based Compensation Arrangement by Share-based Payment Award, Termination Of Unvested Restricted Stock		17,250

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REAL ESTATE ACQUIRED THROUGH FORECLOSURE (Details Textual) (USD $)	3 Months Ended		6 Months Ended
	Jun. 30, 2013	Jun. 30, 2012	Jun. 30, 2013	Jun. 30, 2012
Owned Property Management Costs	$ 524,000	$ 2,300,000	$ 818,000	$ 2,700,000

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LOANS (Details 8) (USD $) In Thousands, unless otherwise specified	Jun. 30, 2013	Dec. 31, 2012
Performing	$ 490,675	$ 524,940
Not Rated [Member]
Performing	164,566	177,870
Pass [Member]
Performing	256,961	271,881
Special Mention [Member]
Performing	27,892	24,869
Substandard [Member]
Performing	41,256	50,320
Doubtful [Member]
Performing	0	0
Loss [Member]
Performing	0	0
Commercial Loan [Member]
Performing	17,030	19,931
Commercial Loan [Member] | Not Rated [Member]
Performing	0	0
Commercial Loan [Member] | Pass [Member]
Performing	15,606	16,736
Commercial Loan [Member] | Special Mention [Member]
Performing	211	2,000
Commercial Loan [Member] | Substandard [Member]
Performing	1,213	1,195
Commercial Loan [Member] | Doubtful [Member]
Performing	0	0
Commercial Loan [Member] | Loss [Member]
Performing	0	0
Land Improvements [Member]
Performing	23,736	28,310
Land Improvements [Member] | Not Rated [Member]
Performing	0	0
Land Improvements [Member] | Pass [Member]
Performing	15,973	17,744
Land Improvements [Member] | Special Mention [Member]
Performing	2,522	3,059
Land Improvements [Member] | Substandard [Member]
Performing	5,241	7,507
Land Improvements [Member] | Doubtful [Member]
Performing	0	0
Land Improvements [Member] | Loss [Member]
Performing	0	0
Buildings Lot [Member]
Performing	1,875	2,151
Buildings Lot [Member] | Not Rated [Member]
Performing	0	0
Buildings Lot [Member] | Pass [Member]
Performing	1,194	1,447
Buildings Lot [Member] | Special Mention [Member]
Performing	469	492
Buildings Lot [Member] | Substandard [Member]
Performing	212	212
Buildings Lot [Member] | Doubtful [Member]
Performing	0	0
Buildings Lot [Member] | Loss [Member]
Performing	0	0
Commercial Real Estate Other Receivable [Member]
Performing	274,863	287,283
Commercial Real Estate Other Receivable [Member] | Not Rated [Member]
Performing	0	0
Commercial Real Estate Other Receivable [Member] | Pass [Member]
Performing	221,281	233,261
Commercial Real Estate Other Receivable [Member] | Special Mention [Member]
Performing	23,710	18,297
Commercial Real Estate Other Receivable [Member] | Substandard [Member]
Performing	29,872	35,725
Commercial Real Estate Other Receivable [Member] | Doubtful [Member]
Performing	0	0
Commercial Real Estate Other Receivable [Member] | Loss [Member]
Performing	0	0
Commercial Real Estate Construction Financing Receivable [Member]
Performing	3,354	3,141
Commercial Real Estate Construction Financing Receivable [Member] | Not Rated [Member]
Performing	0	0
Commercial Real Estate Construction Financing Receivable [Member] | Pass [Member]
Performing	2,907	2,693
Commercial Real Estate Construction Financing Receivable [Member] | Special Mention [Member]
Performing	0	0
Commercial Real Estate Construction Financing Receivable [Member] | Substandard [Member]
Performing	447	448
Commercial Real Estate Construction Financing Receivable [Member] | Doubtful [Member]
Performing	0	0
Commercial Real Estate Construction Financing Receivable [Member] | Loss [Member]
Performing	0	0
Residential Mortgage [Member]
Performing	102,281	110,025
Residential Mortgage [Member] | Not Rated [Member]
Performing	98,016	105,148
Residential Mortgage [Member] | Pass [Member]
Performing	0	0
Residential Mortgage [Member] | Special Mention [Member]
Performing	848	442
Residential Mortgage [Member] | Substandard [Member]
Performing	3,417	4,435
Residential Mortgage [Member] | Doubtful [Member]
Performing	0	0
Residential Mortgage [Member] | Loss [Member]
Performing	0	0
Consumer and Home Equity [Member]
Performing	54,449	57,888
Consumer and Home Equity [Member] | Not Rated [Member]
Performing	53,593	56,593
Consumer and Home Equity [Member] | Pass [Member]
Performing	0	0
Consumer and Home Equity [Member] | Special Mention [Member]
Performing	59	569
Consumer and Home Equity [Member] | Substandard [Member]
Performing	797	726
Consumer and Home Equity [Member] | Doubtful [Member]
Performing	0	0
Consumer and Home Equity [Member] | Loss [Member]
Performing	0	0
Indirect Consumer [Member]
Performing	13,087	16,211
Indirect Consumer [Member] | Not Rated [Member]
Performing	12,957	16,129
Indirect Consumer [Member] | Pass [Member]
Performing	0	0
Indirect Consumer [Member] | Special Mention [Member]
Performing	73	10
Indirect Consumer [Member] | Substandard [Member]
Performing	57	72
Indirect Consumer [Member] | Doubtful [Member]
Performing	0	0
Indirect Consumer [Member] | Loss [Member]
Performing	$ 0	$ 0

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Consolidated Balance Sheets (Parenthetical) (USD $)	Jun. 30, 2013	Dec. 31, 2012
Real Estate Owned, Valuation Allowance (in dollars)	$ 721,000	$ 500,000
Serial preferred stock, par value (in dollars per share)	$ 1	$ 1
Serial preferred stock, shares authorized	5,000,000	5,000,000
Serial preferred stock, shares issued	20,000	20,000
Serial preferred stock, shares outstanding	20,000	20,000
Serial preferred stock, liquidation preference (in dollars)	$ 23,000,000	$ 22,500,000
Common stock, par value (in dollars per share)	$ 1	$ 1
Common stock, shares authorized	35,000,000	35,000,000
Common stock, shares issued	4,855,890	4,775,114
Common stock, shares, outstanding	4,855,890	4,775,114

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EARNINGS (LOSS) PER SHARE

6 Months Ended

Jun. 30, 2013

Earnings Per Share [Abstract]

Earnings Per Share [Text Block]

7. EARNINGS (LOSS) PER SHARE

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

	Three Months Ended				Six Months Ended
(Amounts in thousands,	June 30,				June 30,
except per share data)	2013		2012		2013		2012
Basic:
Net income/(loss)	$	(1,126)	$	(4,139)	$	(1,004)	$	(4,429)
Less:
Preferred stock dividends		(250)		(250)		(500)		(500)
Accretion on preferred stock discount		(13)		(13)		(27)		(27)
Net income (loss) available to common shareholders	$	(1,389)	$	(4,402)	$	(1,531)	$	(4,956)
Weighted average common shares		4,806		4,767		4,797		4,764
Diluted:
Weighted average common shares		4,806		4,767		4,797		4,764
Dilutive effect of stock options and warrants		-		-		-		-
Weighted average common and incremental shares		4,806		4,767		4,797		4,764
Earnings (Loss) Per Common Share:
Basic	$	(0.29)	$	(0.92)	$	(0.32)	$	(1.04)
Diluted	$	(0.29)	$	(0.92)	$	(0.32)	$	(1.04)

Since the Corporation is reporting a net loss available to common shareholders for all periods presented, no stock options or warrants were evaluated for dilutive purposes.

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Consolidated Statements of Comprehensive Income/(Loss) (USD $) In Thousands, unless otherwise specified	3 Months Ended		6 Months Ended
	Jun. 30, 2013	Jun. 30, 2012	Jun. 30, 2013	Jun. 30, 2012
Net Loss	$ (1,126)	$ (4,139)	$ (1,004)	$ (4,429)
Other comprehensive income (loss):
Change in unrealized gain (loss) on securities available-for-sale	(7,378)	152	(8,328)	768
Change in unrealized gain (loss) on securities available-for-sale for which a portion of other-than-temporary impairment has been recognized into earnings	0	(15)	0	(21)
Reclassification of realized amount on securities available-for-sale losses (gains)	0	(295)	(227)	(1,006)
Reclassification of unrealized loss on held-to-maturity security recognized in income	0	0	0	26
Accretion (amortization) of non-credit component of other-than-temporary impairment on held-to-maturity securities	0	50	0	50
Net unrealized gain (loss) recognized in comprehensive income	(7,378)	(108)	(8,555)	(183)
Tax effect	0	0	0	0
Total other comphrehensive loss	(7,378)	(108)	(8,555)	(183)
Comprehensive Loss	$ (8,504)	$ (4,247)	$ (9,559)	$ (4,612)

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FAIR VALUE (Details 2) (USD $) In Thousands, unless otherwise specified	Jun. 30, 2013	Dec. 31, 2012
Impaired Loans [Member] | Commercial Loan [Member]
Assets, Fair Value Disclosure, Nonrecurring	$ 1	$ 231
Impaired Loans [Member] | Commercial Loan [Member] | Fair Value, Inputs, Level 1 [Member]
Assets, Fair Value Disclosure, Nonrecurring	0	0
Impaired Loans [Member] | Commercial Loan [Member] | Fair Value, Inputs, Level 2 [Member]
Assets, Fair Value Disclosure, Nonrecurring	0	0
Impaired Loans [Member] | Commercial Loan [Member] | Fair Value, Inputs, Level 3 [Member]
Assets, Fair Value Disclosure, Nonrecurring	1	231
Impaired Loans [Member] | Land Improvements [Member]
Assets, Fair Value Disclosure, Nonrecurring	1,969	1,775
Impaired Loans [Member] | Land Improvements [Member] | Fair Value, Inputs, Level 1 [Member]
Assets, Fair Value Disclosure, Nonrecurring	0	0
Impaired Loans [Member] | Land Improvements [Member] | Fair Value, Inputs, Level 2 [Member]
Assets, Fair Value Disclosure, Nonrecurring	0	0
Impaired Loans [Member] | Land Improvements [Member] | Fair Value, Inputs, Level 3 [Member]
Assets, Fair Value Disclosure, Nonrecurring	1,969	1,775
Impaired Loans [Member] | Commercial Real Estate Other Receivable [Member]
Assets, Fair Value Disclosure, Nonrecurring	14,508	12,560
Impaired Loans [Member] | Commercial Real Estate Other Receivable [Member] | Fair Value, Inputs, Level 1 [Member]
Assets, Fair Value Disclosure, Nonrecurring	0	0
Impaired Loans [Member] | Commercial Real Estate Other Receivable [Member] | Fair Value, Inputs, Level 2 [Member]
Assets, Fair Value Disclosure, Nonrecurring	0	0
Impaired Loans [Member] | Commercial Real Estate Other Receivable [Member] | Fair Value, Inputs, Level 3 [Member]
Assets, Fair Value Disclosure, Nonrecurring	14,508	12,560
Impaired Loans [Member] | Residential Mortgage [Member]
Assets, Fair Value Disclosure, Nonrecurring	446	127
Impaired Loans [Member] | Residential Mortgage [Member] | Fair Value, Inputs, Level 1 [Member]
Assets, Fair Value Disclosure, Nonrecurring	0	0
Impaired Loans [Member] | Residential Mortgage [Member] | Fair Value, Inputs, Level 2 [Member]
Assets, Fair Value Disclosure, Nonrecurring	0	0
Impaired Loans [Member] | Residential Mortgage [Member] | Fair Value, Inputs, Level 3 [Member]
Assets, Fair Value Disclosure, Nonrecurring	446	127
Impaired Loans [Member] | Consumer and Home Equity [Member]
Assets, Fair Value Disclosure, Nonrecurring	188	137
Impaired Loans [Member] | Consumer and Home Equity [Member] | Fair Value, Inputs, Level 1 [Member]
Assets, Fair Value Disclosure, Nonrecurring	0	0
Impaired Loans [Member] | Consumer and Home Equity [Member] | Fair Value, Inputs, Level 2 [Member]
Assets, Fair Value Disclosure, Nonrecurring	0	0
Impaired Loans [Member] | Consumer and Home Equity [Member] | Fair Value, Inputs, Level 3 [Member]
Assets, Fair Value Disclosure, Nonrecurring	188	137
Real Estate Acquired through Foreclosure [Member] | Land Improvements [Member]
Assets, Fair Value Disclosure, Nonrecurring	980	2,459
Real Estate Acquired through Foreclosure [Member] | Land Improvements [Member] | Fair Value, Inputs, Level 1 [Member]
Assets, Fair Value Disclosure, Nonrecurring	0	0
Real Estate Acquired through Foreclosure [Member] | Land Improvements [Member] | Fair Value, Inputs, Level 2 [Member]
Assets, Fair Value Disclosure, Nonrecurring	0	0
Real Estate Acquired through Foreclosure [Member] | Land Improvements [Member] | Fair Value, Inputs, Level 3 [Member]
Assets, Fair Value Disclosure, Nonrecurring	980	2,459
Real Estate Acquired through Foreclosure [Member] | Buildings Lot [Member]
Assets, Fair Value Disclosure, Nonrecurring		2,220
Real Estate Acquired through Foreclosure [Member] | Buildings Lot [Member] | Fair Value, Inputs, Level 1 [Member]
Assets, Fair Value Disclosure, Nonrecurring		0
Real Estate Acquired through Foreclosure [Member] | Buildings Lot [Member] | Fair Value, Inputs, Level 2 [Member]
Assets, Fair Value Disclosure, Nonrecurring		0
Real Estate Acquired through Foreclosure [Member] | Buildings Lot [Member] | Fair Value, Inputs, Level 3 [Member]
Assets, Fair Value Disclosure, Nonrecurring		2,220
Real Estate Acquired through Foreclosure [Member] | Commercial Real Estate Other Receivable [Member]
Assets, Fair Value Disclosure, Nonrecurring	5,672	8,350
Real Estate Acquired through Foreclosure [Member] | Commercial Real Estate Other Receivable [Member] | Fair Value, Inputs, Level 1 [Member]
Assets, Fair Value Disclosure, Nonrecurring	0	0
Real Estate Acquired through Foreclosure [Member] | Commercial Real Estate Other Receivable [Member] | Fair Value, Inputs, Level 2 [Member]
Assets, Fair Value Disclosure, Nonrecurring	0	0
Real Estate Acquired through Foreclosure [Member] | Commercial Real Estate Other Receivable [Member] | Fair Value, Inputs, Level 3 [Member]
Assets, Fair Value Disclosure, Nonrecurring	5,672	8,350
Real Estate Acquired through Foreclosure [Member] | Residential Mortgage [Member]
Assets, Fair Value Disclosure, Nonrecurring		224
Real Estate Acquired through Foreclosure [Member] | Residential Mortgage [Member] | Fair Value, Inputs, Level 1 [Member]
Assets, Fair Value Disclosure, Nonrecurring		0
Real Estate Acquired through Foreclosure [Member] | Residential Mortgage [Member] | Fair Value, Inputs, Level 2 [Member]
Assets, Fair Value Disclosure, Nonrecurring		0
Real Estate Acquired through Foreclosure [Member] | Residential Mortgage [Member] | Fair Value, Inputs, Level 3 [Member]
Assets, Fair Value Disclosure, Nonrecurring		$ 224

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Consolidated Balance Sheets (USD $) In Thousands, unless otherwise specified	Jun. 30, 2013	Dec. 31, 2012
ASSETS:
Cash and due from banks	$ 11,947	$ 12,598
Interest bearing deposits	15,978	50,505
Total cash and cash equivalents	27,925	63,103
Securities available-for-sale	309,132	354,131
Loans held for sale	3,595	3,887
Loans, net of unearned fees	490,586	524,835
Allowance for loan losses	(15,947)	(17,265)
Net loans	474,639	507,570
Federal Home Loan Bank stock	4,430	4,805
Cash surrender value of life insurance	10,244	10,060
Premises and equipment, net	26,742	27,048
Real estate owned:
Acquired through foreclosure, net of valuation allowance of $721 Jun (2013) and $500 Dec (2012)	14,169	22,286
Other repossessed assets	37	34
Accrued interest receivable	2,390	2,690
Accrued income taxes	2,907	2,928
Low-income housing investments	6,821	7,061
Other assets	1,487	1,459
TOTAL ASSETS	884,518	1,007,062
LIABILITIES AND STOCKHOLDERS' EQUITY
Non-interest bearing	80,584	75,842
Interest bearing	717,793	846,778
Total deposits	798,377	922,620
Advances from Federal Home Loan Bank	22,526	12,596
Subordinated debentures	18,000	18,000
Accrued interest payable	3,798	3,121
Accrued senior preferred dividend	2,969	2,469
Accounts payable and other liabilities	4,246	3,884
TOTAL LIABILITIES	849,916	962,690
Commitments and contingent liabilities
STOCKHOLDERS' EQUITY:
Senior preferred stock, $1 par value per share; authorized 5,000,000 shares; issued and outstanding, 20,000 shares with a liquidation preference of $23.0 million Jun (2013), and $22.5 million Dec (2012)	19,970	19,943
Common stock, $1 par value per share; authorized 35,000,000 shares; issued and outstanding, 4,855,890 shares Jun (2013), and 4,775,114 shares Dec (2012)	4,856	4,775
Additional paid-in capital	35,990	35,782
Accumulated deficit	(18,929)	(17,398)
Accumulated other comprehensive income	(7,285)	1,270
TOTAL STOCKHOLDERS' EQUITY	34,602	44,372
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY	$ 884,518	$ 1,007,062

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EARNINGS (LOSS) PER SHARE (Details) (USD $) In Thousands, except Share data, unless otherwise specified	3 Months Ended		6 Months Ended
	Jun. 30, 2013	Jun. 30, 2012	Jun. 30, 2013	Jun. 30, 2012
Basic:
Net income/(loss)	$ (1,126)	$ (4,139)	$ (1,004)	$ (4,429)
Less:
Preferred stock dividends	(250)	(250)	(500)	(500)
Accretion on preferred stock discount	(13)	(13)	(27)	(27)
Net income (loss) available to common shareholders	$ (1,389)	$ (4,402)	$ (1,531)	$ (4,956)
Weighted average common shares (in shares)	4,806,444	4,767,464	4,797,259	4,764,240
Diluted:
Weighted average common shares (in shares)	4,806,444	4,767,464	4,797,259	4,764,240
Dilutive effect of stock options and warrants (in shares)	0	0	0	0
Weighted average common and incremental shares (in shares)	4,806,000	4,767,000	4,797,000	4,764,000
Earnings (Loss) Per Common Share:
Basic (in dollars per share)	$ (0.29)	$ (0.92)	$ (0.32)	$ (1.04)
Diluted (in dollars per share)	$ (0.29)	$ (0.92)	$ (0.32)	$ (1.04)

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CHANGES IN AND RECLASSIFICATIONS FROM ACCUMULATED OTHER COMPREHENSIVE INCOME (Tables)

6 Months Ended

Jun. 30, 2013

Stockholders' Equity Note [Abstract]

Schedule of Available-for-sale Securities in Accumulated Other Comprehensive Income (Loss) [Table Text Block]

Changes in accumulated other comprehensive income by component consists of the following:

	Three Months Ended		Six Months Ended
	June 30, 2013		June 30, 2013
	Unrealized Gains		Unrealized Gains
	and Losses on		and Losses on
	Available-for-Sale		Available-for-Sale
(Dollars in thousands)	Securities (1)		Securities (1)
Beginning balance	$	93	$	1,270
Other comprehensive income (loss) before reclassification		(7,378)		(8,328)
Amounts reclassified from accumulated other comprehensive income		-		(227)
Net other comprehensive income (loss)		(7,378)		(8,555)
Ending balance	$	(7,285)	$	(7,285)

(1) All amounts are net of tax.

Schedule of Available-for-sale Securities Reclassifications Out of Accumulated Other Comprehensive Income [Table Text Block]

Reclassifications out of accumulated other comprehensive income consists of the following:

Three months ended June 30, 2013

(Dollars in thousands)

	Amount
Details about	Reclassified From		Affected Line Item
Accumulated Other	Accumulated Other		in the
Comprehensive	Comprehensive		Consolidated
Income Components	Income		Statement of Operations
Unrealized gains and losses on available-for-sale securities	$	334	Gain on sale of investments
		(334)	Loss on sale of investments
		-	Total before tax
		-	Income taxes/(benefits)
Total amount reclassified	$	-	Net income (loss)

Six months ended June 30, 2013

(Dollars in thousands)

	Amount
Details about	Reclassified From		Affected Line Item
Accumulated Other	Accumulated Other		in the
Comprehensive	Comprehensive		Consolidated
Income Components	Income		Statement of Operations
Unrealized gains and losses on available-for-sale securities	$	843	Gain on sale of investments
		(616)	Loss on sale of investments
		227	Total before tax
		-	Income taxes/(benefits)
Total amount reclassified	$	227	Net income (loss)

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LOANS (Tables)

6 Months Ended

Jun. 30, 2013

Receivables [Abstract]

Schedule of Accounts, Notes, Loans and Financing Receivable [Table Text Block]

Loans are summarized as follows:

(Dollars in thousands)	June 30, 2013		December 31, 2012
Commercial Real Estate (CRE):
Other-CRE other than Land
Development and Building Lots	$	274,863	$	287,283
Land Development		23,736		28,310
Building Lots		1,875		2,151
Residential mortgage		102,281		110,025
Consumer and home equity		54,449		57,888
Commercial		17,030		19,931
Indirect consumer		13,087		16,211
Real estate construction		3,354		3,141
		490,675		524,940
Less:
Net deferred loan origination fees		(89)		(105)
Allowance for loan losses		(15,947)		(17,265)
		(16,036)		(17,370)
Net Loans	$	474,639	$	507,570

Allowance for Credit Losses on Financing Receivables by Portfolio Segment [Table Text Block]

The following tables present the activity in the allowance for loan losses by portfolio segment for the quarter and six months ending June 30, 2013 and 2012:

Three Months Ended
June 30, 2013			Commercial		Real Estate		Residential		Consumer &		Indirect
	Commercial		Real Estate		Construction		Mortgage		Home Equity		Consumer		Total
(Dollars in thousands)
Allowance for loan losses:
Beginning Balance	$	914	$	13,800	$	66	$	371	$	438	$	223	$	15,812
Provision for loan losses		(10)		225		4		-		(14)		7		212
Charge-offs		-		(61)		-		-		(51)		(41)		(153)
Recoveries		4		20		-		4		23		25		76
Total ending allowance balance	$	908	$	13,984	$	70	$	375	$	396	$	214	$	15,947

Six Months Ended
June 30, 2013			Commercial		Real Estate		Residential		Consumer &		Indirect
	Commercial		Real Estate		Construction		Mortgage		Home Equity		Consumer		Total
(Dollars in thousands)
Allowance for loan losses:
Beginning Balance	$	1,236	$	14,755	$	60	$	501	$	442	$	271	$	17,265
Provision for loan losses		(272)		(395)		10		(130)		23		(61)		(825)
Charge-offs		(94)		(452)		-		-		(98)		(57)		(701)
Recoveries		38		76		-		4		29		61		208
Total ending allowance balance	$	908	$	13,984	$	70	$	375	$	396	$	214	$	15,947

Three Months Ended
June 30, 2012			Commercial		Real Estate		Residential		Consumer &		Indirect
	Commercial		Real Estate		Construction		Mortgage		Home Equity		Consumer		Total
(Dollars in thousands)
Allowance for loan losses:
Beginning Balance	$	1,723	$	13,628	$	103	$	882	$	643	$	350	$	17,329
Provision for loan losses		(255)		1,189		(14)		(34)		23		6		915
Allowance associated with probable branch divestitures		(25)		(581)		-		(14)		(62)		-		(682)
Charge-offs		-		(2,191)		-		(31)		(102)		(55)		(2,379)
Recoveries		40		35		-		-		23		19		117
Total ending allowance balance	$	1,483	$	12,080	$	89	$	803	$	525	$	320	$	15,300

Six Months Ended
June 30, 2012			Commercial		Real Estate		Residential		Consumer &		Indirect
	Commercial		Real Estate		Construction		Mortgage		Home Equity		Consumer		Total
(Dollars in thousands)
Allowance for loan losses:
Beginning Balance	$	1,422	$	13,727	$	103	$	922	$	610	$	397	$	17,181
Provision for loan losses		222		1,687		(14)		(52)		98		(14)		1,927
Allowance associated with probable branch divestitures		(25)		(581)		-		(6)		(57)		-		(669)
Charge-offs		(187)		(2,804)		-		(62)		(176)		(99)		(3,328)
Recoveries		51		51		-		1		50		36		189
Total ending allowance balance	$	1,483	$	12,080	$	89	$	803	$	525	$	320	$	15,300

Allowance for Credit Losses on Financing Receivables [Table Text Block]

The following table presents the balance in the allowance for loan losses and the recorded investment in loans by portfolio segment and based on the impairment method as of June 30, 2013 and 2012 and December 31, 2012:

June 30, 2013			Commercial		Real Estate		Residential		Consumer &		Indirect
	Commercial		Real Estate		Construction		Mortgage		Home Equity		Consumer		Total
(Dollars in thousands)
Allowance for loan losses:
Ending allowance balance attributable to loans:
Individually evaluated for impairment	$	184	$	6,851	$	-	$	31	$	81	$	-	$	7,147
Collectively evaluated for impairment		724		7,133		70		344		315		214		8,800
Total ending allowance balance	$	908	$	13,984	$	70	$	375	$	396	$	214	$	15,947
Loans:
Loans individually evaluated for impairment	$	1,213	$	35,284	$	447	$	3,418	$	664	$	-	$	41,026
Loans collectively evaluated for impairment		15,817		265,190		2,907		98,863		53,785		13,087		449,649
Total ending loans balance	$	17,030	$	300,474	$	3,354	$	102,281	$	54,449	$	13,087	$	490,675

December 31, 2012			Commercial		Real Estate		Residential		Consumer &		Indirect
	Commercial		Real Estate		Construction		Mortgage		Home Equity		Consumer		Total
(Dollars in thousands)
Allowance for loan losses:
Ending allowance balance attributable to loans:
Individually evaluated for impairment	$	252	$	7,593	$	-	$	86	$	51	$	-	$	7,982
Collectively evaluated for impairment		984		7,162		60		415		391		271		9,283
Total ending allowance balance	$	1,236	$	14,755	$	60	$	501	$	442	$	271	$	17,265
Loans:
Loans individually evaluated for impairment	$	1,071	$	43,065	$	448	$	213	$	188	$	-	$	44,985
Loans collectively evaluated for impairment		18,860		274,679		2,693		109,812		57,700		16,211		479,955
Total ending loans balance	$	19,931	$	317,744	$	3,141	$	110,025	$	57,888	$	16,211	$	524,940

June 30, 2012			Commercial		Real Estate		Residential		Consumer &		Indirect
	Commercial		Real Estate		Construction		Mortgage		Home Equity		Consumer		Total
(Dollars in thousands)
Allowance for loan losses:
Ending allowance balance attributable to loans:
Individually evaluated for impairment	$	332	$	4,609		-	$	383	$	126	$	6	$	5,456
Collectively evaluated for impairment		1,151		7,471		89		420		399		314		9,844
Loans held for sale		-		-		-		-		-		-		-
Total ending allowance balance	$	1,483	$	12,080		89	$	803	$	525	$	320	$	15,300
Loans:
Loans individually evaluated for impairment	$	1,396	$	56,493	$	-	$	1,098	$	302	$	38	$	59,327
Loans collectively evaluated for impairment		23,469		325,322		3,950		142,175		63,895		19,462		578,273
Loans held for sale		(2,520)		(58,767)		-		(29,232)		(10,806)		-		(101,325)
Total ending loans balance	$	22,345	$	323,048	$	3,950	$	114,041	$	53,391	$	19,500	$	536,275

Impaired Financing Receivables [Table Text Block]

The following tables present loans individually evaluated for impairment by class of loans as of June 30, 2013 and 2012 and December 31, 2012. The difference between the unpaid principal balance and recorded investment represents partial write downs/charge offs taken on individual impaired credits. The recorded investment and average recorded investment in loans exclude accrued interest receivable and loan origination fees.

							Three Months Ended						Six Months Ended
							June 30, 2013						June 30, 2013
June 30, 2013	Unpaid				Allowance for		Average		Interest		Cash Basis		Average		Interest		Cash Basis
	Principal		Recorded		Loan Losses		Recorded		Income		Interest		Recorded		Income		Interest
(Dollars in thousands)	Balance		Investment		Allocated		Investment		Recognized		Recognized		Investment		Recognized		Recognized
With no related allowance recorded:
Commercial	$	1,234	$	1,028	$	-	$	850	$	6	$	6	$	763	$	10	$	10
Commercial Real Estate:
Land Development		2,336		2,311		-		2,716		33		33		3,435		84		84
Building Lots		477		212		-		212		-		-		212		-		-
Other		10,502		9,433		-		9,336		99		99		11,575		239		239
Real Estate Construction		540		447		-		449		-		-		448		-		-
Residential Mortgage		2,941		2,941		-		1,691		6		6		3,162		53		53
Consumer and Home Equity		395		395		-		210		1		1		407		7		7
Indirect Consumer		-		-		-		-		-		-		-		-		-
With an allowance recorded:
Commercial		185		185		184		189		1		1		287		4		4
Commercial Real Estate:
Land Development		2,930		2,930		961		2,802		35		35		2,759		67		67
Building Lots		-		-		-		-		-		-		-		-		-
Other		22,609		20,398		5,890		20,350		215		215		19,984		412		412
Real Estate Construction		-		-		-		-		-		-		-		-		-
Residential Mortgage		477		477		31		399		2		2		337		6		6
Consumer and Home Equity		269		269		81		312		1		1		271		5		5
Indirect Consumer		-		-		-		-		-		-		-		-		-
Total	$	44,895	$	41,026	$	7,147	$	39,516	$	399	$	399	$	43,640	$	887	$	887

December 31, 2012	Unpaid				Allowance for		Average		Interest		Cash Basis
	Principal		Recorded		Loan Losses		Recorded		Income		Interest
(Dollars in thousands)	Balance		Investment		Allocated		Investment		Recognized		Recognized
With no related allowance recorded:
Commercial	$	588	$	588	$	-	$	1,070	$	39	$	39
Commercial Real Estate:
Land Development		5,595		4,873		-		5,728		237		237
Building Lots		477		212		-		810		14		14
Other		21,673		16,052		-		24,961		961		961
Real Estate Construction		448		448		-		90		-		-
Residential Mortgage		-		-		-		-		-		-
Consumer and Home Equity		-		-		-		-		-		-
Indirect Consumer		-		-		-		-		-		-
With an allowance recorded:
Commercial		483		483		252		564		21		21
Commercial Real Estate:
Land Development		2,674		2,674		899		2,436		101		101
Building Lots		-		-		-		191		3		3
Other		19,254		19,254		6,694		20,075		772		772
Real Estate Construction		-		-		-		-		-		-
Residential Mortgage		213		213		86		1,191		24		24
Consumer and Home Equity		188		188		51		260		6		6
Indirect Consumer		-		-		-		54		1		1
Total	$	51,593	$	44,985	$	7,982	$	57,430	$	2,179	$	2,179

							Three Months Ended						Six Months Ended
							June 30, 2012						June 30, 2012
June 30, 2012	Unpaid				Allowance for		Average		Interest		Cash Basis		Average		Interest		Cash Basis
	Principal		Recorded		Loan Losses		Recorded		Income		Interest		Recorded		Income		Interest
(Dollars in thousands)	Balance		Investment		Allocated		Investment		Recognized		Recognized		Investment		Recognized		Recognized
With no related allowance recorded:
Commercial	$	1,111	$	991	$	-	$	944	$	8	$	8	$	1,347	$	27	$	27
Commercial Real Estate:
Land Development		11,532		5,771		-		5,176		46		46		5,825		108		108
Building Lots		1,061		1,030		-		924		6		6		1,051		8		8
Other		32,183		28,726		-		30,254		280		280		30,948		586		586
Real Estate Construction		-		-		-		-		-		-		-		-		-
Residential Mortgage		-		-		-		-		-		-		-		-		-
Consumer and Home Equity		-		-		-		-		-		-		-		-		-
Indirect Consumer		-		-		-		-		-		-		-		-		-
With an allowance recorded:
Commercial		407		405		332		477		4		4		676		13		13
Commercial Real Estate:
Land Development		786		740		190		2,303		21		21		2,519		46		46
Building Lots		-		-		-		238		2		2		318		3		3
Other		20,226		20,226		4,419		15,576		144		144		16,101		305		305
Real Estate Construction		-		-		-		-		-		-		-		-		-
Residential Mortgage		1,219		1,098		383		1,485		13		13		1,550		23		23
Consumer and Home Equity		324		302		126		332		3		3		285		3		3
Indirect Consumer		38		38		6		46		-		-		71		-		-
Total	$	68,887	$	59,327	$	5,456	$	57,755	$	527	$	527	$	60,691	$	1,122	$	1,122

Schedule of Recorded Investment in Restructured, Nonaccrual and Loans Past Due [Table Text Block]

The following tables present the recorded investment in restructured, nonaccrual and loans past due over 90 days still on accrual by class of loans as of June 30, 2013 and December 31, 2012.

					Loans Past Due
June 30, 2013					Over 90 Days		Non-Accrual
	Restructured on		Restructured on		Still		Excluding
(Dollars in thousands)	Non-Accrual Status		Accrual Status		Accruing		Restructured
Commercial	$	-	$	199	$	-	$	481
Commercial Real Estate:
Land Development		-		2,733		-		302
Building Lots		-		-		-		212
Other		8,530		22,153		-		6,056
Real Estate Construction		-		-		-		447
Residential Mortgage		109		192		-		1,383
Consumer and Home Equity		-		99		-		314
Indirect Consumer		-		-		-		20
Total	$	8,639	$	25,376	$	-	$	9,215

					Loans Past Due
December 31, 2012					Over 90 Days		Non-Accrual
	Restructured on		Restructured on		Still		Excluding
(Dollars in thousands)	Non-Accrual Status		Accrual Status		Accruing		Restructured
Commercial	$	31	$	221	$	-	$	562
Commercial Real Estate:
Land Development		675		3,053		-		695
Building Lots		-		170		-		212
Other		9,047		19,080		-		8,908
Real Estate Construction		-		-		-		448
Residential Mortgage		-		303		-		827
Consumer and Home Equity		-		24		-		37
Indirect Consumer		-		-		-		13
Total	$	9,753	$	22,851	$	-	$	11,702

Past Due Financing Receivables [Table Text Block]

The following table presents the aging of the recorded investment in past due loans as of June 30, 2013 and December 31, 2012 by class of loans:

June 30, 2013	30-59		60-89		Greater than
	Days		Days		90 Days		Total		Loans Not
(Dollars in thousands)	Past Due		Past Due		Past Due		Past Due		Past Due		Total
Commercial	$	73	$	-	$	481	$	554	$	16,476	$	17,030
Commercial Real Estate:
Land Development		-		-		302		302		23,434		23,736
Building Lots		-		-		212		212		1,663		1,875
Other		179		150		14,586		14,915		259,948		274,863
Real Estate Construction		-		-		447		447		2,907		3,354
Residential Mortgage		367		615		1,492		2,474		99,807		102,281
Consumer and Home Equity		131		11		314		456		53,993		54,449
Indirect Consumer		223		28		20		271		12,816		13,087
Total	$	973	$	804	$	17,854	$	19,631	$	471,044	$	490,675

December 31, 2012	30-59		60-89		Greater than
	Days		Days		90 Days		Total		Loans Not
(Dollars in thousands)	Past Due		Past Due		Past Due		Past Due		Past Due		Total
Commercial	$	-	$	95	$	562	$	657	$	19,274	$	19,931
Commercial Real Estate:
Land Development		361		-		1,228		1,589		26,721		28,310
Building Lots		-		-		212		212		1,939		2,151
Other		1,264		1,239		13,001		15,504		271,779		287,283
Real Estate Construction		-		-		448		448		2,693		3,141
Residential Mortgage		3,588		995		827		5,410		104,615		110,025
Consumer and Home Equity		351		255		45		651		57,237		57,888
Indirect Consumer		246		130		13		389		15,822		16,211
Total	$	5,810	$	2,714	$	16,336	$	24,860	$	500,080	$	524,940

Troubled Debt Restructurings on Financing Receivables [Table Text Block]

The following tables present loans by class modified as troubled debt restructurings that occurred during the periods ending June 30, 2013 and 2012:

	Three Months Ended June 30, 2013						Three Months Ended June 30, 2012
			Pre-Modification		Post-Modification				Pre-Modification		Post-Modification
			Outstanding		Outstanding				Outstanding		Outstanding
	Number		Recorded		Recorded		Number		Recorded		Recorded
(Dollars in thousands)	of Loans		Investment		Investment		of Loans		Investment		Investment
Troubled Debt Restructurings:
Commercial		-	$	-	$	-		-	$	-	$	-
Commercial Real Estate:
Land Development		-		-		-		1		2,853		2,853
Building Lots		-		-		-		2		613		613
Other		2		1,392		1,392		3		1,088		1,088
Real Estate Construction		-		-		-		-		-		-
Residential Mortgage		-		-		-		-		-		-
Consumer and Home Equity		1		53		53		-		-		-
Indirect Consumer		-		-		-		-		-		-
Total		3	$	1,445	$	1,445		6	$	4,554	$	4,554

	Six Months Ended June 30, 2013						Six Months Ended June 30, 2012
			Pre-Modification		Post-Modification				Pre-Modification		Post-Modification
			Outstanding		Outstanding				Outstanding		Outstanding
	Number		Recorded		Recorded		Number		Recorded		Recorded
(Dollars in thousands)	of Loans		Investment		Investment		of Loans		Investment		Investment
Troubled Debt Restructurings:
Commercial		-	$	-	$	-		1	$	1,094	$	1,094
Commercial Real Estate:
Land Development		-		-		-		3		4,251		4,110
Building Lots		-		-		-		2		613		613
Other		5		3,534		3,534		5		1,139		1,139
Real Estate Construction		-		-		-		-		-		-
Residential Mortgage		-		-		-		-		-		-
Consumer and Home Equity		2		76		76		-		-		-
Indirect Consumer		-		-		-		-		-		-
Total		7	$	3,610	$	3,610		11	$	7,097	$	6,956

Troubled Debt Restructurings on Financing Receivables Subsequently Defaulted [Table Text Block]

The following tables present loans by class modified as troubled debt restructurings for which there was a payment default within twelve months following the modification during the periods ending June 30, 2013 and 2012:

	Three Months Ended				Three Months Ended
	June 30, 2013				June 30, 2012
	Number		Recorded		Number		Recorded
(Dollars in thousands)	of Loans		Investment		of Loans		Investment
Troubled Debt Restructurings:
Commercial		-	$	-		-	$	-
Commercial Real Estate:
Land Development		-		-		1		533
Building Lots		-		-		-		-
Other		-		-		1		10,068
Real Estate Construction		-		-		-		-
Residential Mortgage		-		-		-		-
Consumer and Home Equity		-		-		-		-
Indirect Consumer		-		-		-		-
Total		-	$	-		2	$	10,601

	Six Months Ended				Six Months Ended
	June 30, 2013				June 30, 2012
	Number		Recorded		Number		Recorded
(Dollars in thousands)	of Loans		Investment		of Loans		Investment
Troubled Debt Restructurings:
Commercial		-	$	-		-	$	-
Commercial Real Estate:
Land Development		-		-		2		3,386
Building Lots		-		-		-		-
Other		-		-		1		10,068
Real Estate Construction		-		-		-		-
Residential Mortgage		-		-		-		-
Consumer and Home Equity		-		-		-		-
Indirect Consumer		-		-		-		-
Total		-	$	-		3	$	13,454

Financing Receivable Credit Quality Indicators [Table Text Block]

As of June 30, 2013and December 31, 2012, and based on the most recent analysis performed, the risk category of loans by class of loans is as follows: 

June 30, 2013
(Dollars in thousands)	Not Rated		Pass		Criticized		Substandard		Doubtful		Loss		Total
Commercial	$	-	$	15,606	$	211	$	1,213	$	-	$	-	$	17,030
Commercial Real Estate:
Land Development		-		15,973		2,522		5,241		-		-		23,736
Building Lots		-		1,194		469		212		-		-		1,875
Other		-		221,281		23,710		29,872		-		-		274,863
Real Estate     Construction		-		2,907		-		447		-		-		3,354
Residential Mortgage		98,016		-		848		3,417		-		-		102,281
Consumer and Home     Equity		53,593		-		59		797		-		-		54,449
Indirect Consumer		12,957		-		73		57		-		-		13,087
Total	$	164,566	$	256,961	$	27,892	$	41,256	$	-	$	-	$	490,675

December 31, 2012
(Dollars in thousands)	Not Rated		Pass		Criticized		Substandard		Doubtful		Loss		Total
Commercial	$	-	$	16,736	$	2,000	$	1,195	$	-	$	-	$	19,931
Commercial Real Estate:
Land Development		-		17,744		3,059		7,507		-		-		28,310
Building Lots		-		1,447		492		212		-		-		2,151
Other		-		233,261		18,297		35,725		-		-		287,283
Real Estate     Construction		-		2,693		-		448		-		-		3,141
Residential Mortgage		105,148		-		442		4,435		-		-		110,025
Consumer and Home     Equity		56,593		-		569		726		-		-		57,888
Indirect Consumer		16,129		-		10		72		-		-		16,211
Total	$	177,870	$	271,881	$	24,869	$	50,320	$	-	$	-	$	524,940

Schedule of Performing and Non Performing Loans by Class of Loans [Table Text Block]

The following table presents the unpaid principal balance in residential mortgage, consumer and home equity and indirect consumer loans based on payment activity as of June 30, 2013 and December 31, 2012:

June 30, 2013	Residential		Consumer &		Indirect
(Dollars in thousands)	Mortgage		Home Equity		Consumer
Performing	$	100,789	$	54,135	$	13,067
Restructured on non-accrual		109		-		-
Non-accrual		1,383		314		20
Total	$	102,281	$	54,449	$	13,087

December 31, 2012	Residential		Consumer &		Indirect
(Dollars in thousands)	Mortgage		Home Equity		Consumer
Performing	$	109,198	$	57,851	$	16,198
Restructured on non-accrual		-		-		-
Non-accrual		827		37		13
Total	$	110,025	$	57,888	$	16,211

XML

LOANS (Details 7) (USD $) In Thousands, unless otherwise specified	3 Months Ended		6 Months Ended
	Jun. 30, 2013	Jun. 30, 2012 Number	Jun. 30, 2013 Number	Jun. 30, 2012 Number
Troubled debt restructurings, Number of Loans		2	0	3
Troubled debt restructurings, Recorded investment	$ 0	$ 10,601	$ 0	$ 13,454
Commercial Loan [Member]
Troubled debt restructurings, Recorded investment	0	0	0	0
Land Improvements [Member]
Troubled debt restructurings, Number of Loans		1	0	2
Troubled debt restructurings, Recorded investment	0	533	0	3,386
Buildings Lot [Member]
Troubled debt restructurings, Recorded investment	0	0	0	0
Commercial Real Estate Other Receivable [Member]
Troubled debt restructurings, Number of Loans		1	0	1
Troubled debt restructurings, Recorded investment	0	10,068	0	10,068
Commercial Real Estate Construction Financing Receivable [Member]
Troubled debt restructurings, Recorded investment	0	0	0	0
Residential Mortgage [Member]
Troubled debt restructurings, Recorded investment	0	0	0	0
Consumer and Home Equity [Member]
Troubled debt restructurings, Recorded investment	0	0	0	0
Indirect Consumer [Member]
Troubled debt restructurings, Recorded investment	$ 0	$ 0	$ 0	$ 0

XML

STOCK BASED COMPENSATION PLAN (Details 2) (USD $)	6 Months Ended
	Jun. 30, 2013
Non-vested Shares, Outstanding, beginning of period	32,964
Non-vested Shares, Granted during period	122,972
Non-vested Shares, Vested during period	(55,132)
Non-vested Shares, Terminated during period	(17,250)
Non-vested Shares, Forfeited during period	0
Non-vested Shares, Outstanding, end of period	83,554
Weighted Average Grant Date Fair Value, Outstanding, beginning of period	$ 3.64
Weighted Average Grant Date Fair Value, Granted during period	$ 3.05
Weighted Average Grant Date Fair Value, Vested during period	$ 3.38
Weighted Average Grant Date Fair Value, Terminated during period	$ 2.84
Weighted Average Grant Date Fair Value, Forfeited during period	$ 0
Weighted Average Grant Date Fair Value, Outstanding, end of period	$ 3.10

XML

STOCKHOLDERS' EQUITY (Details 1)	Jun. 30, 2013	Jun. 30, 2011
Total capital to risk-weighted assets, Actual	12.36%	12.00%
Total capital to risk-weighted assets, Ratio Required by Consent Order	12.00%
Tier 1 capital to total assets, Actual	7.27%
Tier 1 capital to total assets, Ratio Required by Consent Order	9.00%

XML

LOANS (Details 2) (USD $) In Thousands, unless otherwise specified	Jun. 30, 2013	Mar. 31, 2013	Dec. 31, 2012	Jun. 30, 2012	Mar. 31, 2012	Dec. 31, 2011
Individually evaluated for impairment	$ 7,147		$ 7,982	$ 5,456
Collectively evaluated for impairment	8,800		9,283	9,844
Loans held for sale				0
Total ending allowance balance	15,947	15,812	17,265	15,300	17,329	17,181
Loans individually evaluated for impairment	41,026		44,985	59,327
Loans collectively evaluated for impairment	449,649		479,955	578,273
Loans held for sale				(101,325)
Total ending loans balance	490,675		524,940	536,275
Commercial Loan [Member]
Individually evaluated for impairment	184		252	332
Collectively evaluated for impairment	724		984	1,151
Loans held for sale				0
Total ending allowance balance	908	914	1,236	1,483	1,723	1,422
Loans individually evaluated for impairment	1,213		1,071	1,396
Loans collectively evaluated for impairment	15,817		18,860	23,469
Loans held for sale				(2,520)
Total ending loans balance	17,030		19,931	22,345
Commercial Real Estate [Member]
Individually evaluated for impairment	6,851		7,593	4,609
Collectively evaluated for impairment	7,133		7,162	7,471
Loans held for sale				0
Total ending allowance balance	13,984	13,800	14,755	12,080	13,628	13,727
Loans individually evaluated for impairment	35,284		43,065	56,493
Loans collectively evaluated for impairment	265,190		274,679	325,322
Loans held for sale				(58,767)
Total ending loans balance	300,474		317,744	323,048
Commercial Real Estate Construction Financing Receivable [Member]
Individually evaluated for impairment	0		0	0
Collectively evaluated for impairment	70		60	89
Loans held for sale				0
Total ending allowance balance	70	66	60	89	103	103
Loans individually evaluated for impairment	447		448	0
Loans collectively evaluated for impairment	2,907		2,693	3,950
Loans held for sale				0
Total ending loans balance	3,354		3,141	3,950
Residential Mortgage [Member]
Individually evaluated for impairment	31		86	383
Collectively evaluated for impairment	344		415	420
Loans held for sale				0
Total ending allowance balance	375	371	501	803	882	922
Loans individually evaluated for impairment	3,418		213	1,098
Loans collectively evaluated for impairment	98,863		109,812	142,175
Loans held for sale				(29,232)
Total ending loans balance	102,281		110,025	114,041
Consumer and Home Equity[Member]
Individually evaluated for impairment	81		51	126
Collectively evaluated for impairment	315		391	399
Loans held for sale				0
Total ending allowance balance	396		442	525
Loans individually evaluated for impairment	664		188	302
Loans collectively evaluated for impairment	53,785		57,700	63,895
Loans held for sale				(10,806)
Total ending loans balance	54,449		57,888	53,391
Indirect Consumer [Member]
Individually evaluated for impairment	0		0	6
Collectively evaluated for impairment	214		271	314
Loans held for sale				0
Total ending allowance balance	214	223	271	320	350	397
Loans individually evaluated for impairment	0		0	38
Loans collectively evaluated for impairment	13,087		16,211	19,462
Loans held for sale				0
Total ending loans balance	$ 13,087		$ 16,211	$ 19,500

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SECURITIES (Details 4) (USD $)	3 Months Ended	6 Months Ended
	Jun. 30, 2012	Jun. 30, 2012
Beginning balance	$ 2,104	$ 2,078
Increases to the amount related to the credit loss for which other-than-temporary impairment was previously recognized	0	26
Ending balance	$ 2,104	$ 2,104

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SECURITIES (Details Textual) (USD $)	12 Months Ended
	Dec. 31, 2012	Jun. 30, 2013
Federal Home Loan Bank, Advances, Disclosures, Collateral Pledged Amortized Cost	$ 130,400,000	$ 145,000,000
Federal Home Loan Bank, Advances, Disclosures, Collateral Pledged Fair Value	132,300,000	143,400,000
Other than Temporary Impairment Losses, Investments, Portion Recognized in Earnings	$ 26,000

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INCOME TAXES

6 Months Ended

Jun. 30, 2013

Income Tax Disclosure [Abstract]

Income Tax Disclosure [Text Block]

6. INCOME TAXES

A full valuation allowance related to deferred tax assets is required when it is considered more likely than not that all or part of the benefit related to such assets will not be realized. In assessing the need for a full valuation allowance, we considered various factors including our four year cumulative loss position, the level of our non-performing assets, our inability to meet our forecasted levels of assets and operating results in 2013, 2012 and 2011 and our non-compliance with the capital requirements of our Consent Order. Based on this assessment, we concluded that a valuation allowance was necessary at June 30, 2013 and December 31, 2012.

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SUBORDINATED DEBENTURES (Details Textual) (USD $) In Millions, unless otherwise specified	6 Months Ended
	Jun. 30, 2013
Junior Subordinated Notes	$ 18
Debt Instrument, Increase, Accrued Interest	$ 3.7

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REGULATORY MATTERS (Details Textual) (USD $)	1 Months Ended	6 Months Ended
	Jul. 31, 2012	Jun. 30, 2013	Jun. 30, 2012	Dec. 31, 2012	Jul. 06, 2012	Jun. 30, 2011
Capital to Risk Weighted Assets		12.36%				12.00%
Tier One Risk Based Capital to Risk Weighted Assets						9.00%
Proceeds from Sale of Property, Plant, and Equipment	$ 887,000	$ 0	$ 1,575,000
Proceeds from Sale of Other Property, Plant, and Equipment	367,000
Tier 1 Capital to Total Assets		7.27%
Interest-bearing Deposit Liabilities, Total		717,793,000		846,778,000
Non Brokered Interest Bearing Deposit Liabilities					115,400,000
Performing Financing Receivable [Member]
Proceeds from Sale of Loans Receivable	30,400,000
Percentage of Sale of Loans Receivable at Discount	0.80%
Gain (Loss) on Sale of Loans and Leases	3,100,000
Commercial Real Estate [Member]
Proceeds from Sale of Loans Receivable			10,700,000
Consumer and Commercial [Member]
Interest-bearing Deposit Liabilities, Total					102,300,000
Government Corporate Other Financial Institution and Municipal Deposits [Member]
Non Brokered Interest Bearing Deposit Liabilities					$ 13,100,000
First Savings Bank [Member]
Premium Percentage of Proceeds from Sale of Property Plant and Equipment	3.65%

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LOANS (Details 5) (USD $) In Thousands, unless otherwise specified	Jun. 30, 2013	Dec. 31, 2012	Jun. 30, 2012
Financing Receivable, Recorded Investment, 30 to 59 Days Past Due	$ 973	$ 5,810
Financing Receivable, Recorded Investment, 60 to 89 Days Past Due	804	2,714
Financing Receivable, Recorded Investment, Equal to Greater than 90 Days Past Due	17,854	16,336
Financing Receivable, Recorded Investment, Total Past Due	19,631	24,860
Financing Receivable, Recorded Investment, Loans Not Past Due	471,044	500,080
Loans and Leases Receivable, Gross, Carrying Amount	490,675	524,940
Commercial Loan [Member]
Financing Receivable, Recorded Investment, 30 to 59 Days Past Due	73	0
Financing Receivable, Recorded Investment, 60 to 89 Days Past Due	0	95
Financing Receivable, Recorded Investment, Equal to Greater than 90 Days Past Due	481	562
Financing Receivable, Recorded Investment, Total Past Due	554	657
Financing Receivable, Recorded Investment, Loans Not Past Due	16,476	19,274
Loans and Leases Receivable, Gross, Carrying Amount	17,030	19,931	19,931
Land Improvements [Member]
Financing Receivable, Recorded Investment, 30 to 59 Days Past Due	0	361
Financing Receivable, Recorded Investment, 60 to 89 Days Past Due	0	0
Financing Receivable, Recorded Investment, Equal to Greater than 90 Days Past Due	302	1,228
Financing Receivable, Recorded Investment, Total Past Due	302	1,589
Financing Receivable, Recorded Investment, Loans Not Past Due	23,434	26,721
Loans and Leases Receivable, Gross, Carrying Amount	23,736	28,310
Buildings Lot [Member]
Financing Receivable, Recorded Investment, 30 to 59 Days Past Due	0	0
Financing Receivable, Recorded Investment, 60 to 89 Days Past Due	0	0
Financing Receivable, Recorded Investment, Equal to Greater than 90 Days Past Due	212	212
Financing Receivable, Recorded Investment, Total Past Due	212	212
Financing Receivable, Recorded Investment, Loans Not Past Due	1,663	1,939
Loans and Leases Receivable, Gross, Carrying Amount	1,875	2,151
Commercial Real Estate Other Receivable [Member]
Financing Receivable, Recorded Investment, 30 to 59 Days Past Due	179	1,264
Financing Receivable, Recorded Investment, 60 to 89 Days Past Due	150	1,239
Financing Receivable, Recorded Investment, Equal to Greater than 90 Days Past Due	14,586	13,001
Financing Receivable, Recorded Investment, Total Past Due	14,915	15,504
Financing Receivable, Recorded Investment, Loans Not Past Due	259,948	271,779
Loans and Leases Receivable, Gross, Carrying Amount	274,863	287,283	287,283
Commercial Real Estate Construction Financing Receivable [Member]
Financing Receivable, Recorded Investment, 30 to 59 Days Past Due	0	0
Financing Receivable, Recorded Investment, 60 to 89 Days Past Due	0	0
Financing Receivable, Recorded Investment, Equal to Greater than 90 Days Past Due	447	448
Financing Receivable, Recorded Investment, Total Past Due	447	448
Financing Receivable, Recorded Investment, Loans Not Past Due	2,907	2,693
Loans and Leases Receivable, Gross, Carrying Amount	3,354	3,141	3,141
Residential Mortgage [Member]
Financing Receivable, Recorded Investment, 30 to 59 Days Past Due	367	3,588
Financing Receivable, Recorded Investment, 60 to 89 Days Past Due	615	995
Financing Receivable, Recorded Investment, Equal to Greater than 90 Days Past Due	1,492	827
Financing Receivable, Recorded Investment, Total Past Due	2,474	5,410
Financing Receivable, Recorded Investment, Loans Not Past Due	99,807	104,615
Loans and Leases Receivable, Gross, Carrying Amount	102,281	110,025
Consumer and Home Equity [Member]
Financing Receivable, Recorded Investment, 30 to 59 Days Past Due	131	351
Financing Receivable, Recorded Investment, 60 to 89 Days Past Due	11	255
Financing Receivable, Recorded Investment, Equal to Greater than 90 Days Past Due	314	45
Financing Receivable, Recorded Investment, Total Past Due	456	651
Financing Receivable, Recorded Investment, Loans Not Past Due	53,993	57,237
Loans and Leases Receivable, Gross, Carrying Amount	54,449	57,888
Indirect Consumer [Member]
Financing Receivable, Recorded Investment, 30 to 59 Days Past Due	223	246
Financing Receivable, Recorded Investment, 60 to 89 Days Past Due	28	130
Financing Receivable, Recorded Investment, Equal to Greater than 90 Days Past Due	20	13
Financing Receivable, Recorded Investment, Total Past Due	271	389
Financing Receivable, Recorded Investment, Loans Not Past Due	12,816	15,822
Loans and Leases Receivable, Gross, Carrying Amount	$ 13,087	$ 16,211

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FAIR VALUE

6 Months Ended

Jun. 30, 2013

Fair Value Disclosures [Abstract]

Fair Value Disclosures [Text Block]

9. FAIR VALUE

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

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

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

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

We used the following methods and significant assumptions to estimate the fair value.

Available-for-sale securities: For securities where quoted prices are not available, fair values are calculated on market prices of similar securities or determined by a matrix pricing, which is a mathematical technique widely used in the industry to value debt securities without relying exclusively on quoted prices for the specific securities but rather by relying on the securities’ relationship to other benchmark quoted securities (Level 2 inputs).

Impaired Loans:At the time a loan is considered impaired, it is valued at the lower of cost or fair value. Impaired loans carried at fair value generally receive specific allocations of the allowance for loan losses. For collateral dependent loans, fair value is commonly based on recent real estate appraisals. These appraisals may utilize a single valuation approach or a combination of approaches including comparable sales and the income approach. Adjustments are routinely made in the appraisal process by the independent appraisers to adjust for differences between the comparable sales and income data available. Such adjustments are usually significant and typically result in a Level 3 classification of the inputs for determining fair value. Non-real estate collateral may be valued using an appraisal, net book value per the borrower’s financial statements, or aging reports, adjusted or discounted based on management’s historical knowledge, changes in market conditions from the time of the valuation, and management’s expertise and knowledge of the client and client’s business, resulting in a Level 3 fair value classification. Once a loan is considered impaired, it is evaluated by a member of the Credit Department on at least a quarterly basis for additional impairment and adjusted accordingly.

Other Real Estate Owned: Assets acquired through or instead of loan foreclosure are initially recorded at fair value less costs to sell when acquired, establishing a new cost basis. These assets are subsequently accounted for at lower of cost or fair value less estimated costs to sell. Fair value is commonly based on recent real estate appraisals. These appraisals may utilize a single valuation approach or a combination of approaches including comparable sales and the income approach. Adjustments are routinely made in the appraisal process by the independent appraisers to adjust for differences between the comparable sales and income data available. Such adjustments are usually significant and typically result in a Level 3 classification of the inputs for determining fair value.

Appraisals for both collateral-dependent impaired loans and other real estate owned are performed by certified general appraisers (for commercial properties) or certified residential appraisers (for residential properties) whose qualifications and licenses have been reviewed and verified by us. Once received, a member of the Credit Department reviews the assumptions and approaches utilized in the appraisal as well as the overall resulting fair value in comparison with via independent data sources such as recent market data or industry-wide statistics.

Assets and Liabilities Measured at Fair Value on a Recurring Basis

Assets measured at fair value on a recurring basis are summarized below: There were no transfers between Level 1 and Level 2 during the periods presented.

			Quoted Prices in
			Active Markets for		Significant Other		Significant
	June 30,		Identical Assets		Observable Inputs		Unobservable Inputs
(Dollars in thousands)	2013		(Level 1)		(Level 2)		(Level 3)
Assets:
Government-sponsored mortgage-backed residential	$	129,346	$	-	$	129,346	$	-
Government-sponsored collateralized mortgage obligations		82,937		-		82,937		-
Asset backed-collateralized loan obligations		24,415		-		24,415		-
State and municipal		15,222		-		15,222		-
Corporate bonds		57,212		-		57,212		-
Total	$	309,132	$	-	$	309,132	$	-

			Quoted Prices in
			Active Markets for		Significant Other		Significant
	December 31,		Identical Assets		Observable Inputs		Unobservable Inputs
(Dollars in thousands)	2012		(Level 1)		(Level 2)		(Level 3)
Assets:
U.S. Treasury and agencies	$	8,278	$	-	$	8,278	$	-
Government-sponsored mortgage-backed residential		144,889		-		144,889		-
Government-sponsored collateralized mortgage obligations		150,147		-		150,147		-
Private asset backed		5,132		-		5,132		-
State and municipal		12,718		-		12,718		-
Corporate bonds		32,967		-		32,967		-
Total	$	354,131	$	-	$	354,131	$	-

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

The table below presents a reconciliation for all assets measured at fair value on a recurring basis using significant unobservable inputs (Level 3) for the periods ended June 30, 2012. The level 3 assets consist of trust preferred securities which were called or sold in the fourth quarter of 2012. We did not have any Level 3 assets measured at fair value on a recurring basis at June 30, 2013.

	Fair Value Measurements		Fair Value Measurements
	Using Significant		Using Significant
	Unobservable Inputs		Unobservable Inputs
	(Level 3)		(Level 3)
	Three Months Ended		Six Months Ended
	June 30,		June 30,
(Dollars in thousands)	2012		2012
Beginning balance	$	268	$	264
Total gains or losses:
Impairment charges on securities		-		-
Included in other comprehensive income		(2)		2
Purchases		-		-
Sales or calls		-		-
Settlements		-		-
Transfers in and/or out of Level 3		-		-
Ending balance	$	266	$	266

There were no changes in unrealized gains and losses recorded in earnings for the quarter and six months ended June 30, 2013 for Level 3 assets and liabilities that are still held at June 30, 2013.

Assets and Liabilities Measured at Fair Value on a Nonrecurring Basis

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

			Quoted Prices in
			Active Markets for		Significant Other		Significant
	June 30,		Identical Assets		Observable Inputs		Unobservable Inputs
(Dollars in thousands)	2013		(Level 1)		(Level 2)		(Level 3)
Assets:
Impaired loans:
Commercial	$	1	$	-	$	-	$	1
Commercial Real Estate:
Land Development		1,969		-		-		1,969
Other		14,508		-		-		14,508
Residential Mortgage		446		-		-		446
Consumer and Home Equity		188		-		-		188
Real estate acquired through foreclosure:
Commercial Real Estate:
Land Development		980		-		-		980
Other		5,672		-		-		5,672

			Quoted Prices in
			Active Markets for		Significant Other		Significant
	December 31,		Identical Assets		Observable Inputs		Unobservable Inputs
(Dollars in thousands)	2012		(Level 1)		(Level 2)		(Level 3)
Assets:
Impaired loans:
Commercial	$	231	$	-	$	-	$	231
Commercial Real Estate:
Land Development		1,775		-		-		1,775
Other		12,560		-		-		12,560
Residential Mortgage		127		-		-		127
Consumer and Home Equity		137		-		-		137
Real estate acquired through foreclosure:
Commercial Real Estate:
Land Development		2,459		-		-		2,459
Building Lots		2,220		-		-		2,220
Other		8,350		-		-		8,350
Residential Mortgage		224		-		-		224

Impaired loans, which are measured for impairment using the fair value of the collateral for collateral dependent loans, had a carrying amount of $24.2 million, with a valuation allowance of $7.1 million, resulting in an additional provision for loan losses of $737,000 and a reversal of provision for loan losses of $342,000 and for the quarter and six months ended June 30, 2013. Impaired loans, which are measured for impairment using the fair value of the collateral for collateral dependent loans, had a carrying amount of $22.8 million, with a valuation allowance of $5.5 million, resulting in an additional provision for loan losses of $1.4 million and $1.7 million for the three and six months ended June 30, 2012. Values for collateral dependent loans are generally based on appraisals obtained from licensed real estate appraisers and in certain circumstances consideration of offers obtained to purchase properties prior to foreclosure. Appraisals for commercial real estate generally use three methods to derive value: cost, sales or market comparison and income approach. The cost method bases value on the estimated cost to replace the current property after considering adjustments for depreciation. Values of the market comparison approach evaluate the sales price of similar properties in the same market area. The income approach considers net operating income generated by the property and an investors required return. The final value is a reconciliation of these three approaches and takes into consideration any other factors management deems relevant to arrive at a representative fair value.

Real estate owned acquired through foreclosure is recorded at fair value less estimated selling costs at the date of foreclosure. Fair value is based on the appraised market value of the property. Many of the appraisals utilize an income approach, such as the discounted cash flow method, to estimate future income and profits or cash flows.  Appraisals may also utilize a single valuation approach or a combination of approaches including a market comparison approach, where prices and other relevant information generated by market transactions involving identical or comparable properties are used to determine fair value.  The fair value may be subsequently reduced if the estimated fair value declines below the original appraised value. Fair value adjustments of $400,000 and $1.5 million were made to real estate owned during the quarter and six months ended June 30, 2013. Fair value adjustments of $1.9 million and $3.5 million were made to real estate owned during the quarter and six months ended June 30, 2012.

The following table presents quantitative information about level 3 fair value measurements for financial instruments measured at fair value on a non-recurring basis at June 30, 2013.

	Fair		Valuation	Unobservable	Range (Weighted
(Dollars in thousands)	Value		Technique(s)	Input(s)	Average)
Impaired loans:
Commercial	$	1	Market value approach	Adjustment for receivables and inventory discounts	0.00% (1)
Commercial Real Estate:
Land Development		1,301	Income approach	Discount or capitalization rate	25.00% (1)
		668	Sales comparison approach	Adjustment for differences between comparable sales	3.39% (1)
Other		13,264	Income approach	Discount or capitalization rate	8.50%-11.00% (9.19%)
		1,244	Sales comparison approach	Adjustment for differences between comparable sales	10.00%-21.87% (19.69%)
Residential Mortgage		446	Sales comparison approach	Adjustment for differences between comparable sales	0.00%-3.87% (1.06%)
Consumer and Home Equity		188	Sales comparison approach	Adjustment for differences between comparable sales	0.00%-2.25% (1.82%)
Real estate acquired through foreclosure:
Commercial Real Estate:
Land Development		312	Income approach	Discount or capitalization rate	8.50%-17.50% (11.24%)
		668	Sales comparison approach	Adjustment for differences between comparable sales	25.00% (1)
Other		5,006	Income approach	Discount or capitalization rate	8.50%-10.50% (8.91%)
		666	Sales comparison approach	Adjustment for differences between comparable sales	2.75%-9.00% (4.26%)

(1) Unobservable inputs with a single discount listed include only one property.

Fair Value of Financial Instruments

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

					June 30, 2013
(Dollars in thousands)	Carrying				Fair Value Measurements
	Value		Total		Level 1		Level 2		Level 3
Financial assets:
Cash and due from banks	$	27,925	$	27,925	$	6,069	$	21,856	$	-
Mortgage loans held for sale		3,595		3,654		-		3,654		-
Loans, net		457,527		460,246		-		-		460,246
Accrued interest receivable		2,390		2,390		-		-		2,390
FHLB stock		4,430		N/A		N/A		N/A		N/A
Financial liabilities:
Deposits		798,377		760,870		-		760,870		-
Advances from Federal Home Loan Bank		22,526		23,249		-		23,249		-
Subordinated debentures		18,000		12,222		-		-		12,222
Accrued interest payable		3,798		3,798		-		3,798		-

					December 31, 2012
(Dollars in thousands)	Carrying				Fair Value Measurements
	Value		Total		Level 1		Level 2		Level 3
Financial assets:
Cash and due from banks	$	63,103	$	63,103	$	6,468	$	56,635	$	-
Mortgage loans held for sale		3,887		3,967		-		3,967		-
Loans, net		492,740		493,998		-		-		493,998
Accrued interest receivable		2,690		2,690		-		-		2,690
FHLB stock		4,805		N/A		N/A		N/A		N/A
Financial liabilities:
Deposits		922,620		934,637		-		934,637		-
Advances from Federal Home Loan Bank		12,596		13,944		-		13,944		-
Subordinated debentures		18,000		12,695		-		-		12,695
Accrued interest payable		3,121		3,121		-		3,121		-

The methods and assumptions, not previously presented, used to estimate fair values are described below:

(a) Cash and due from banks

The carrying amount of cash on hand approximates fair value and is classified as a Level 1. The carrying amount of cash due from bank accounts is classified as a Level 2.

(b) Mortgage loans held for sale

The fair value of mortgage loans held for sale is estimated based upon the binding contracts and quotes from third party investors resulting in a Level 2 classification.

(c) Loans, net

Fair values of loans are estimated as follows: For variable rate loans that reprice frequently and with no significant change in credit risk, fair values are based on carrying values resulting in a Level 3 classification. Fair values for other loans are estimated using discounted cash flow analyses, using interest rates currently being offered for loans with similar terms to borrowers of similar credit quality resulting in a Level 3 classification. Impaired loans are valued at the lower of cost or fair value as described previously. The methods utilized to estimate the fair value of loans do not necessarily represent an exit price.

(d) FHLB Stock

It is not practical to determine the fair value of FHLB stock due to restrictions placed on its transferability.

(e) Deposits

The carrying amounts of variable rate interest bearing deposits approximate their fair values at the reporting date resulting in a Level 2 classification. Fair values for fixed rate interest bearing deposits are estimated using a discounted cash flows calculation that applies interest rates currently being offered on certificates to a schedule of aggregated expected monthly maturities on time deposits resulting in a Level 2 classification.

(f) Advances from Federal Home Loan Bank

The fair value of the FHLB advances is obtained from the FHLB and is calculated by discounting contractual cash flow using an estimated interest rate based on the current rates available to us for debt of similar remaining maturities and collateral terms resulting in a Level 2 classification.

(g) Subordinated debentures

The fair value for subordinated debentures is calculated using discounted cash flow analyses based on the current borrowing rates for similar types of borrowing arrangements resulting in a Level 3 classification.

(h) Accrued interest receivable/payable

The carrying amounts of accrued interest approximate fair value resulting in a Level 2 or Level 3 classification based on the level of the asset or liability with which the accrual is associated.

(i) Off-balance Sheet Instruments

Fair values for off-balance sheet, credit-related financial instruments are based on fees currently charged to enter into similar agreements, taking into account the remaining terms of the agreements and the counterparties’ credit standing. The fair value of commitments is not material.

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REAL ESTATE ACQUIRED THROUGH FORECLOSURE

6 Months Ended

Jun. 30, 2013

Real Estate [Abstract]

Real Estate Disclosure [Text Block]

5. REAL ESTATE ACQUIRED THROUGH FORECLOSURE

A summary of the real estate acquired through foreclosure activity is as follows:

	June 30,		December 31,
(Dollars in thousands)	2013		2012
Beginning balance	$	22,286	$	29,083
Additions		1,951		18,100
Sales		(8,577)		(19,250)
Writedowns		(1,270)		(5,147)
Change in valuation allowance		(221)		(500)
Ending balance	$	14,169	$	22,286

A summary of the real estate acquired through foreclosure valuation allowance activity is as follows:

	Three Months Ended				Six Months Ended
	June 30,				June 30,
	2013		2012		2013		2012
(Dollars in thousands)
Beginning balance	$	972	$	-	$	500	$	-
Provision		532		-		1,592		-
Writedowns and loss on sale		(783)		-		(1,371)		-
Ending balance	$	721	$	-	$	721	$	-

Real estate acquired through foreclosure expense which consists primarily of property management expenses was $524,000 and $2.3 million for the three months ended June 30, 2013 and 2012, and $818,000 and $2.7 million for the six months ended June 30, 2013 and 2012, respectively.

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Consolidated Statements of Cash Flows (USD $) In Thousands, unless otherwise specified	6 Months Ended
	Jun. 30, 2013	Jun. 30, 2012
Operating Activities:
Net loss	$ (1,004)	$ (4,429)
Adjustments to reconcile net income/(loss) to net cash provided by operating activities:
Provision for loan losses	(825)	1,927
Depreciation on premises and equipment	746	771
Change in real estate acquired through foreclosure valuation allowance	221	0
Intangible asset amortization	0	127
Loss on low-income housing investments	264	183
Net amortization (accretion) available-for-sale	3,898	(904)
Impairment loss on securities held-to-maturity	0	26
Gain on sale of investments available-for-sale	(843)	(1,309)
Loss on sale of investments available-for-sale	616	303
Gain on sale of mortgage loans	(588)	(695)
Gain on sale of premises and equipment	0	(322)
Gain on sale of real estate acquired through foreclosure	(207)	(613)
Gain on sale of real estate held for development	0	(175)
Write-downs on real estate acquired through foreclosure	1,270	3,543
Origination of loans held for sale	(34,589)	(27,572)
Proceeds on sale of loans held for sale	35,469	35,289
Stock-based compensation expense	260	92
Prepaid FDIC premium	0	1,055
Changes in:
Cash surrender value of life insurance	(184)	(178)
Interest receivable	300	702
Other assets	179	1,040
Interest payable	677	682
Accrued income tax	21	0
Accounts payable and other liabilities	362	267
Net cash from operating activities	6,043	9,810
Investing Activities:
Sales of securities available-for-sale	101,056	87,454
Purchases of securities available-for-sale	(92,922)	(140,232)
Maturities of securities available-for-sale	24,639	50,919
Maturities of securities held-to-maturity	0	58
Net change in loans	31,802	70,654
Sale of portfolio loans	0	10,693
Redemption of Federal Home Loan Bank stock	375	0
Investment in low-income housing projects	(24)	(24)
Net purchases of premises and equipment	(440)	(86)
Sales of premises and equipment	0	1,575
Sales of real estate acquired through foreclosure	8,577	4,356
Sales of real estate held for development	0	220
Net cash from investing activities	73,063	85,587
Financing Activities
Net change in deposits	(124,243)	(33,492)
Advance from Federal Home Loan Bank	10,000	0
Repayments to Federal Home Loan Bank	(70)	(70)
Issuance of common stock under dividend reinvestment program	0	4
Issuance of common stock for employee benefit plans	29	39
Net cash from financing activities	(114,284)	(33,519)
Increase (decrease) in cash and cash equivalents	(35,178)	61,878
Cash and cash equivalents, beginning of year	63,103	92,236
Cash and cash equivalents, end of year	27,925	154,114
Supplemental noncash disclosures:
Transfers from loans to real estate acquired through foreclosure and repossessed assets	(2,036)	15,541
Loans to facilitate sales of real estate owned and repossessed assets	82	208
Dividends accrued not paid on preferred stock	500	500
Transfers from loans to loans held for sale in probable branch divestiture	$ 0	$ 65,242

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STOCK BASED COMPENSATION PLAN (Details) (USD $)	6 Months Ended
	Jun. 30, 2013
Assumptions:
Risk-free interest rate	1.90%
Expected dividend yield	0.00%
Expected life (years)	10 years
Expected common stock market price volatility	64.00%
Estimated fair value per share (in dollars pe share)	$ 1.82

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LOANS (Details Textual) (USD $)	3 Months Ended		6 Months Ended
	Jun. 30, 2013	Jun. 30, 2012	Jun. 30, 2013	Jun. 30, 2012	Dec. 31, 2012
Financing Receivable, Individually Evaluated for Impairment	$ 41,026,000	$ 59,327,000	$ 41,026,000	$ 59,327,000	$ 44,985,000
Provision for Loan and Lease Losses	212,000	915,000	(825,000)	1,927,000
Troubled Debt Restructurings [Member]
Financing Receivable, Individually Evaluated for Impairment	2,700,000		2,700,000		3,100,000
Allowance for Loan and Lease Losses, Period Increase (Decrease)		67,000		256,000
Provision for Loan and Lease Losses	11,000		164,000
Troubled Debt Restructurings Subsequently Default [Member]
Allowance for Doubtful Accounts Receivable, Write-offs		$ 141,000	$ 309,000	$ 141,000

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SECURITIES (Details 2) (USD $) In Thousands, unless otherwise specified	3 Months Ended		6 Months Ended
	Jun. 30, 2013	Jun. 30, 2012	Jun. 30, 2013	Jun. 30, 2012
Proceeds from sales	$ 25,520	$ 57,733	$ 101,056	$ 87,454
Gross realized gains	334	598	843	1,309
Gross realized losses	$ 334	$ 303	$ 616	$ 303

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CHANGES IN AND RECLASSIFICATIONS FROM ACCUMULATED OTHER COMPREHENSIVE INCOME (Details) (USD $) In Thousands, unless otherwise specified	3 Months Ended		6 Months Ended
	Jun. 30, 2013		Jun. 30, 2013
Unrealized Gains and Losses on Available-for-Sale Securities, Beginning balance	$ 93	[1]	$ 1,270	[1]
Other comprehensive income (loss) before reclassification	(7,378)	[1]	(8,328)	[1]
Amounts reclassified from accumulated other comprehensive income	0		(227)
Net other comprehensive income (loss)	(7,378)	[1]	(8,555)	[1]
Unrealized Gains and Losses on Available-for-Sale Securities, Ending balance	$ (7,285)	[1]	$ (7,285)	[1]

[1] All amounts are net of tax.

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FAIR VALUE (Details 3) (USD $) In Thousands, unless otherwise specified			6 Months Ended					6 Months Ended			6 Months Ended					6 Months Ended				6 Months Ended						6 Months Ended				6 Months Ended						6 Months Ended				6 Months Ended					6 Months Ended				6 Months Ended
	Jun. 30, 2013 Impaired Loans [Member] Commercial Loan [Member]	Dec. 31, 2012 Impaired Loans [Member] Commercial Loan [Member]	Jun. 30, 2013 Impaired Loans [Member] Commercial Loan [Member] Market Value Approach [Member] Weighted Average [Member]		Jun. 30, 2013 Impaired Loans [Member] Land Improvements [Member]	Dec. 31, 2012 Impaired Loans [Member] Land Improvements [Member]	Jun. 30, 2013 Impaired Loans [Member] Land Improvements [Member] Income Approach Valuation Technique [Member]	Jun. 30, 2013 Impaired Loans [Member] Land Improvements [Member] Income Approach Valuation Technique [Member] Weighted Average [Member]		Jun. 30, 2013 Impaired Loans [Member] Land Improvements [Member] Sales Comparison Approach [Member]	Jun. 30, 2013 Impaired Loans [Member] Land Improvements [Member] Sales Comparison Approach [Member] Weighted Average [Member]		Jun. 30, 2013 Impaired Loans [Member] Commercial Real Estate Other Receivable [Member]	Dec. 31, 2012 Impaired Loans [Member] Commercial Real Estate Other Receivable [Member]	Jun. 30, 2013 Impaired Loans [Member] Commercial Real Estate Other Receivable [Member] Income Approach Valuation Technique [Member]	Jun. 30, 2013 Impaired Loans [Member] Commercial Real Estate Other Receivable [Member] Income Approach Valuation Technique [Member] Maximum [Member]	Jun. 30, 2013 Impaired Loans [Member] Commercial Real Estate Other Receivable [Member] Income Approach Valuation Technique [Member] Minimum [Member]	Jun. 30, 2013 Impaired Loans [Member] Commercial Real Estate Other Receivable [Member] Income Approach Valuation Technique [Member] Weighted Average [Member]	Jun. 30, 2013 Impaired Loans [Member] Commercial Real Estate Other Receivable [Member] Sales Comparison Approach [Member]	Jun. 30, 2013 Impaired Loans [Member] Commercial Real Estate Other Receivable [Member] Sales Comparison Approach [Member] Maximum [Member]	Jun. 30, 2013 Impaired Loans [Member] Commercial Real Estate Other Receivable [Member] Sales Comparison Approach [Member] Minimum [Member]	Jun. 30, 2013 Impaired Loans [Member] Commercial Real Estate Other Receivable [Member] Sales Comparison Approach [Member] Weighted Average [Member]	Jun. 30, 2013 Impaired Loans [Member] Residential Mortgage [Member]	Dec. 31, 2012 Impaired Loans [Member] Residential Mortgage [Member]	Jun. 30, 2013 Impaired Loans [Member] Residential Mortgage [Member] Sales Comparison Approach [Member]	Jun. 30, 2013 Impaired Loans [Member] Residential Mortgage [Member] Sales Comparison Approach [Member] Maximum [Member]	Jun. 30, 2013 Impaired Loans [Member] Residential Mortgage [Member] Sales Comparison Approach [Member] Minimum [Member]	Jun. 30, 2013 Impaired Loans [Member] Residential Mortgage [Member] Sales Comparison Approach [Member] Weighted Average [Member]	Jun. 30, 2013 Impaired Loans [Member] Consumer and Home Equity[Member] Sales Comparison Approach [Member]	Jun. 30, 2013 Impaired Loans [Member] Consumer and Home Equity[Member] Sales Comparison Approach [Member] Maximum [Member]	Jun. 30, 2013 Impaired Loans [Member] Consumer and Home Equity[Member] Sales Comparison Approach [Member] Minimum [Member]	Jun. 30, 2013 Impaired Loans [Member] Consumer and Home Equity[Member] Sales Comparison Approach [Member] Weighted Average [Member]	Jun. 30, 2013 Real Estate Acquired Through Foreclosure [Member] Land Improvements [Member]	Dec. 31, 2012 Real Estate Acquired Through Foreclosure [Member] Land Improvements [Member]	Jun. 30, 2013 Real Estate Acquired Through Foreclosure [Member] Land Improvements [Member] Income Approach Valuation Technique [Member]	Jun. 30, 2013 Real Estate Acquired Through Foreclosure [Member] Land Improvements [Member] Income Approach Valuation Technique [Member] Maximum [Member]	Jun. 30, 2013 Real Estate Acquired Through Foreclosure [Member] Land Improvements [Member] Income Approach Valuation Technique [Member] Minimum [Member]	Jun. 30, 2013 Real Estate Acquired Through Foreclosure [Member] Land Improvements [Member] Income Approach Valuation Technique [Member] Weighted Average [Member]	Jun. 30, 2013 Real Estate Acquired Through Foreclosure [Member] Land Improvements [Member] Sales Comparison Approach [Member]	Jun. 30, 2013 Real Estate Acquired Through Foreclosure [Member] Land Improvements [Member] Sales Comparison Approach [Member] Weighted Average [Member]		Jun. 30, 2013 Real Estate Acquired Through Foreclosure [Member] Commercial Real Estate Other Receivable [Member]	Dec. 31, 2012 Real Estate Acquired Through Foreclosure [Member] Commercial Real Estate Other Receivable [Member]	Jun. 30, 2013 Real Estate Acquired Through Foreclosure [Member] Commercial Real Estate Other Receivable [Member] Income Approach Valuation Technique [Member]	Jun. 30, 2013 Real Estate Acquired Through Foreclosure [Member] Commercial Real Estate Other Receivable [Member] Income Approach Valuation Technique [Member] Maximum [Member]	Jun. 30, 2013 Real Estate Acquired Through Foreclosure [Member] Commercial Real Estate Other Receivable [Member] Income Approach Valuation Technique [Member] Minimum [Member]	Jun. 30, 2013 Real Estate Acquired Through Foreclosure [Member] Commercial Real Estate Other Receivable [Member] Income Approach Valuation Technique [Member] Weighted Average [Member]	Jun. 30, 2013 Real Estate Acquired Through Foreclosure [Member] Commercial Real Estate Other Receivable [Member] Sales Comparison Approach [Member]	Jun. 30, 2013 Real Estate Acquired Through Foreclosure [Member] Commercial Real Estate Other Receivable [Member] Sales Comparison Approach [Member] Maximum [Member]	Jun. 30, 2013 Real Estate Acquired Through Foreclosure [Member] Commercial Real Estate Other Receivable [Member] Sales Comparison Approach [Member] Minimum [Member]	Jun. 30, 2013 Real Estate Acquired Through Foreclosure [Member] Commercial Real Estate Other Receivable [Member] Sales Comparison Approach [Member] Weighted Average [Member]	Dec. 31, 2012 Real Estate Acquired Through Foreclosure [Member] Residential Mortgage [Member]	Dec. 31, 2012 Real Estate Acquired Through Foreclosure [Member] Buildings Lot [Member]
Assets, Fair Value Disclosure, Nonrecurring	$ 1	$ 231			$ 1,969	$ 1,775	$ 1,301			$ 668			$ 14,508	$ 12,560	$ 13,264				$ 1,244				$ 446	$ 127	$ 446				$ 188				$ 980	$ 2,459	$ 312				$ 668			$ 5,672	$ 8,350	$ 5,006				$ 666				$ 224	$ 2,220
Adjustment for receivables and inventory discounts			0.00%	[1]
Discount or capitalization rate								25.00%	[1]							11.00%	8.50%	9.19%																		17.50%	8.50%	11.24%							10.50%	8.50%	8.91%
Adjustment for differences between comparable sales											3.39%	[1]								21.87%	10.00%	19.69%				3.87%	0.00%	1.06%		2.25%	0.00%	1.82%								25.00%	[1]								9.00%	2.75%	4.26%

[1] Unobservable inputs with a single discount listed include only one property.

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STOCKHOLDERS' EQUITY

6 Months Ended

Jun. 30, 2013

Equity [Abstract]

Stockholders' Equity Note Disclosure [Text Block]

12. STOCKHOLDERS’ EQUITY

Regulatory Capital Requirements – The Corporation and the Bank are subject to regulatory capital requirements administered by federal banking agencies. Capital adequacy guidelines and, additionally for banks, prompt corrective action regulations involve quantitative measures of assets, liabilities, and certain off-balance-sheet items calculated under regulatory accounting practices. Capital amounts and classifications are also subject to qualitative judgments by regulators. Failure to meet capital requirements can result in regulatory action.

Prompt corrective action regulations provide five classifications: well capitalized, adequately capitalized, undercapitalized, significantly undercapitalized, and critically undercapitalized, although these terms are not used to represent overall financial condition. If adequately capitalized, regulatory approval is required to accept brokered deposits. If undercapitalized, capital distributions are limited, as is asset growth and expansion, and capital restoration plans are required.

Quantitative measures established by regulation to ensure capital adequacy require the Corporation and the Bank to maintain minimum amounts and ratios (set forth in the following table) of Total and Tier 1 capital (as defined in the regulations) to risk weighted assets (as defined) and of Tier 1 capital (as defined) to average assets (as defined).

As a result of the Consent Order the Bank entered into with the FDIC and KDFI described in greater detail in Note 2, the Bank is categorized as a "troubled institution" by bank regulators, which by definition does not permit the Bank to be considered "well-capitalized".

On March 9, 2012, the Bank entered into a new Consent Order with the FDIC and KDFI. The 2012 Consent Order requires the Bank to achieve the same minimum capital ratios mandated by the January 2011 Consent Order, which are set forth below. See Note 2 for additional information.

Our actual and required capital amounts and ratios are presented below.

(Dollars in thousands)							For Capital
	Actual					Adequacy Purposes
As of June 30, 2013:	Amount		Ratio			Amount		Ratio
Total risk-based capital (to risk-weighted assets)
Consolidated	$	67,461		11.29	%	$	47,798		8.00	%
Bank		73,840		12.36			47,800		8.00
Tier I capital (to risk-weighted assets)
Consolidated		55,851		9.35			23,899		4.00
Bank		66,267		11.09			23,900		4.00
Tier I capital (to average assets)
Consolidated		55,851		6.14			36,408		4.00
Bank		66,267		7.27			36,460		4.00

(Dollars in thousands)						For Capital
	Actual					Adequacy Purposes
As of December 31, 2012:	Amount		Ratio			Amount		Ratio
Total risk-based capital (to risk-weighted assets)
Consolidated	$	68,791		11.36	%	$	48,438		8.00	%
Bank		73,951		12.21			48,439		8.00
Tier I capital (to risk-weighted assets)
Consolidated		57,471		9.49			24,219		4.00
Bank		66,256		10.94			24,219		4.00
Tier I capital (to average assets)
Consolidated		57,471		5.67			40,580		4.00
Bank		66,256		6.53			40,608		4.00

The 2012 Consent Order requires the Bank to achieve the minimum capital ratios presented below.

	Actual as of 6/30/2013			Ratio Required by Consent Order
Total capital to risk-weighted assets		12.36	%		12.00	%
Tier 1 capital to average total assets		7.27	%		9.00	%

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STOCK BASED COMPENSATION PLAN

6 Months Ended

Jun. 30, 2013

Disclosure of Compensation Related Costs, Share-based Payments [Abstract]

Disclosure of Compensation Related Costs, Share-based Payments [Text Block]

8. STOCK BASED COMPENSATION PLAN

Our 2006 Stock Option and Incentive Compensation Plan, which is stockholder approved, authorizes us to grant restricted stock and incentive or non-qualified stock options to key employees and directors for a total of 763,935 shares of our common stock. We believe that the ability to award stock options and other forms of stock-based incentive compensation can assist us in attracting and retaining key employees. Stock-based incentive compensation is also a means to align the interests of key employees with those of our stockholders by providing awards intended to reward recipients for our long-term growth. Options to purchase shares generally vest over periods of one to five years and expire ten years after the date of grant. We issue new shares of common stock upon the exercise of stock options. If options or awards granted under the 2006 Plan expire or terminate for any reason without having been exercised in full or released from restriction, the corresponding shares shall again be available for option or award for the purposes of the Plan. At June 30, 2013, options and restricted stock available for future grant under the 2006 Plan totaled 54,240.

Stock Options – The fair value of each option award is estimated on the date of grant using the Black-Scholes option valuation model that uses various weighted-average assumptions. The risk-free interest rate is based on the U.S. Treasury yield curve in effect at the time of grant. The expected volatility is based on the fluctuation in the price of a share of stock over the period for which the option is being valued and the expected life of the options granted represents the period of time the options are expected to be outstanding.

The weighted-average assumptions for options granted during the six months ended June 30, 2013 and the resulting estimated weighted average fair value per share is presented below.

	June 30, 2013
Assumptions:
Risk-free interest rate		1.90	%
Expected dividend yield		-	%
Expected life (years)		10
Expected common stock market price volatility		64	%
Estimated fair value per share	$	1.82

A summary of option activity under the 2006 Plan for the period ended June 30, 2013 is presented below:

	Number of Options		Weighted Average Exercise Price		Weighted Average Remaining Contractual Term		Aggregate Intrinsic Value
							(Dollars In Thousands)
Outstanding, beginning of period		392,740	$	9.16
Granted during period		118,000		2.52
Forfeited during period		(9,550)		4.51
Exercised during period		-		-
Outstanding, end of period		501,190	$	7.68		7.0	$	312
Eligible for exercise at period end		200,688	$	14.28		4.7	$	42

There were no options exercised, modified or settled in cash during the periods ended June 30, 2013 and 2012. Management expects all outstanding unvested options will vest.

Compensation cost related to options granted under the 2006 Plan that was charged against earnings for the periods ended June 30, 2013 and 2012 was $73,000 and $55,000. As of June 30, 2013 there was $427,000 of total unrecognized compensation cost related to non-vested share-based compensation arrangements granted under the 2006 Plan. That cost is expected to be recognized over a weighted-average period of 3.5 years.

Restricted Stock – On June 28, 2013, we granted 20,500 shares of restricted common stock at the current market price of $3.39. The restricted stock will vest over a five year period and will become fully vested on June 28, 2018, provided that the recipient has continued to perform substantial services for the Bank through that date. Any dividends declared on the restricted stock prior to vesting will be retained and paid only on the date of vesting. The transfer restrictions will expire upon the occurrence of a change of control event or upon the recipient’s death or disability. On the same date, we entered into an agreement with the recipient of the newly issued restricted stock to terminate 17,250 unvested shares of long-term restricted stock that had been awarded to him on February 7, 2013. Upon the sale of our Senior Preferred Shares by the U.S. Treasury on April 29, 2013 at a discount to face amount, the 17,250 shares had become subject to permanent restrictions on transfer by the holder, who elected to terminate the shares.

On September 19, 2012 our board of directors adopted the 2012 Non-Employee Director Equity Compensation Program (the “Director Program”). The Director Program enables us to compensate non-employee directors for their service with stock awards. We currently do not pay cash compensation to non-employee directors pursuant to agreements with bank regulatory agencies. The board has reserved 200,000 of the shares authorized for issuance under our shareholder approved 2006 Stock Option and Incentive Compensation Plan for stock awards under the Director Program.

The Director Program provides that each non-employee director elected or continuing in office on the date of each annual meeting of the Corporation’s shareholders will automatically receive an award of restricted stock on that date having a value of $30,000, based on the closing sale price per share of the Corporation’s common stock on the award date, rounded up to the next whole number. Accordingly, on May 15, 2013, the Company’s eight non-employee directors each received an award of 9,934 restricted shares, or 79,472 shares in total, that vest at the close of business on the day immediately preceding the date of the 2014 annual meeting of the Corporation’s shareholders, provided that the recipient has continued to serve as a member of the Board as of the date of vesting. The recipient may not transfer, pledge or dispose of the restricted stock until the close of business on the day immediately preceding the first anniversary of the award date. The transfer restrictions will also expire upon the occurrence of a Change of Control, as defined in the Plan, or upon the recipient’s death or disability. If a director ceases to serve as a member of the board for any reason, that director will automatically forfeit any unvested shares subject to an award. Any dividends declared on the restricted stock prior to vesting will be retained and paid only on the date the transfer restrictions expire.

A summary of changes in our non-vested restricted shares for the six months ended June 30, 2013 is presented below:

	Non-vested Shares		Weighted Average Grant Date Fair Value
Outstanding, beginning of period		32,964	$	3.64
Granted during period		122,972		3.05
Vested during period		(55,132)		3.38
Terminated during period		(17,250)		2.84
Forfeited during period		-		-
Outstanding, end of period		83,554	$	3.10

Compensation cost related to restricted stock granted under the 2006 Plan that was charged against earnings for the periods ended June 30, 2013 and 2012 was $187,000 and $37,000, respectively. As of June 30, 2013 there was $259,000 of total unrecognized compensation cost related to non-vested shares granted under the Plan. That cost is expected to be recognized over the remaining vesting period of 2.0 years.

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SECURITIES (Tables)

6 Months Ended

Jun. 30, 2013

Investments, Debt and Equity Securities [Abstract]

Marketable Securities [Table Text Block]

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

			Gross		Gross
(Dollars in thousands)	Amortized		Unrealized		Unrealized
	Cost		Gains		Losses		Fair Value
Securities available-for-sale:
June 30, 2013:
Government-sponsored mortgage-backed residential	$	133,897	$	103	$	(4,654)	$	129,346
Government-sponsored collateralized mortgage obligations		82,933		493		(489)		82,937
Asset backed-collateralized loan obligations		24,546		11		(142)		24,415
State and municipal		14,540		690		(8)		15,222
Corporate bonds		57,943		189		(920)		57,212
Total	$	313,859	$	1,486	$	(6,213)	$	309,132
December 31, 2012:
U.S. Treasury and agencies	$	8,284	$	7	$	(13)	$	8,278
Government-sponsored mortgage-backed residential		144,617		774		(502)		144,889
Government-sponsored collateralized mortgage obligations		148,460		2,033		(346)		150,147
Private asset backed		4,981		151		-		5,132
State and municipal		11,394		1,324		-		12,718
Corporate bonds		32,567		433		(33)		32,967
Total	$	350,303	$	4,722	$	(894)	$	354,131

Investments Classified by Contractual Maturity Date [Table Text Block]

The amortized cost and fair value of securities at June 30, 2013, by contractual maturity, are shown below. Securities not due at a single maturity date, primarily mortgage-backed securities, are shown separately.

	Available for Sale
	Amortized		Fair
(Dollars in thousands)	Cost		Value
Due in one year or less	$	3,068	$	3,078
Due after one year through five years		49,814		49,250
Due after five years through ten years		4,765		4,578
Due after ten years		14,836		15,528
Investment securities with no single maturity date:
Government-sponsored mortgage-backed residential		133,897		129,346
Government-sponsored collateralized mortgage obligations		82,933		82,937
Asset backed-collateralized loan obligations		24,546		24,415
	$	313,859	$	309,132

Schedule of Realized Gain (Loss) [Table Text Block]

The following schedule shows the proceeds from sales of available-for-sale securities and the gross realized gains and losses on those sales:

	Three Months Ended				Six Months Ended
	June 30,				June 30,
	2013		2012		2013		2012
(Dollars in thousands)
Proceeds from sales	$	25,520	$	57,733	$	101,056	$	87,454
Gross realized gains		334		598		843		1,309
Gross realized losses		334		303		616		303

Available-for-sale Securities, Continuous Unrealized Loss Position, Fair Value [Table Text Block]

Securities with unrealized losses at June 30, 2013 and December 31, 2012 aggregated by major security type and length of time in a continuous unrealized loss position are as follows:

June 30, 2013	Less than 12 Months				12 Months or More				Total
	Fair		Unrealized		Fair		Unrealized		Fair		Unrealized
Description of Securities	Value		Loss		Value		Loss		Value		Loss
Government-sponsored mortgage-backed residential	$	115,458	$	(4,654)	$	-	$	-	$	115,458	$	(4,654)
Government-sponsored collateralized mortgage obligations		23,082		(489)		-		-		23,082		(489)
Asset backed-collateralized loan obligations		21,596		(142)		-		-		21,596		(142)
State and municipal		826		(8)		-		-		826		(8)
Corporate bonds		37,829		(920)		-		-		37,829		(920)
Total temporarily impaired	$	198,791	$	(6,213)	$	-	$	-	$	198,791	$	(6,213)

December 31, 2012	Less than 12 Months				12 Months or More				Total
	Fair		Unrealized		Fair		Unrealized		Fair		Unrealized
Description of Securities	Value		Loss		Value		Loss		Value		Loss
U.S. Treasury and agencies	$	3,255	$	(13)	$	-	$	-	$	3,255	$	(13)
Government-sponsored mortgage-backed residential		82,137		(502)		-		-		82,137		(502)
Government-sponsored collateralized mortgage obligations		33,275		(346)		-		-		33,275		(346)
Corporate bonds		5,731		(33)		-		-		5,731		(33)
Total temporarily impaired	$	124,398	$	(894)	$	-	$	-	$	124,398	$	(894)

Schedule of Roll-forward of Credit Losses Recognized in Earnings [Table Text Block]

The table below presents a roll-forward of the credit losses recognized in earnings. During 2012, all of our trust preferred securities were either called or sold which represented the remaining balance in the OTTI roll-forward.

(Dollars in thousands)	Three Months Ended		Six Months Ended
	June 30,		June 30,
	2012		2012
Beginning balance	$	2,104	$	2,078
Increases to the amount related to the credit loss for which other-than-temporary impairment was previously recognized		-		26
Ending balance	$	2,104	$	2,104

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CHANGES IN AND RECLASSIFICATIONS FROM ACCUMULATED OTHER COMPREHENSIVE INCOME

6 Months Ended

Jun. 30, 2013

Stockholders' Equity Note [Abstract]

Comprehensive Income (Loss) Note [Text Block]

13. CHANGES IN AND RECLASSIFICATIONS FROM ACCUMULATED OTHER COMPREHENSIVE INCOME

Changes in accumulated other comprehensive income by component consists of the following:

	Three Months Ended		Six Months Ended
	June 30, 2013		June 30, 2013
	Unrealized Gains		Unrealized Gains
	and Losses on		and Losses on
	Available-for-Sale		Available-for-Sale
(Dollars in thousands)	Securities (1)		Securities (1)
Beginning balance	$	93	$	1,270
Other comprehensive income (loss) before reclassification		(7,378)		(8,328)
Amounts reclassified from accumulated other comprehensive income		-		(227)
Net other comprehensive income (loss)		(7,378)		(8,555)
Ending balance	$	(7,285)	$	(7,285)

(1) All amounts are net of tax.

Reclassifications out of accumulated other comprehensive income consists of the following:

Three months ended June 30, 2013

(Dollars in thousands)

	Amount
Details about	Reclassified From		Affected Line Item
Accumulated Other	Accumulated Other		in the
Comprehensive	Comprehensive		Consolidated
Income Components	Income		Statement of Operations
Unrealized gains and losses on available-for-sale securities	$	334	Gain on sale of investments
		(334)	Loss on sale of investments
		-	Total before tax
		-	Income taxes/(benefits)
Total amount reclassified	$	-	Net income (loss)

Six months ended June 30, 2013

(Dollars in thousands)

	Amount
Details about	Reclassified From		Affected Line Item
Accumulated Other	Accumulated Other		in the
Comprehensive	Comprehensive		Consolidated
Income Components	Income		Statement of Operations
Unrealized gains and losses on available-for-sale securities	$	843	Gain on sale of investments
		(616)	Loss on sale of investments
		227	Total before tax
		-	Income taxes/(benefits)
Total amount reclassified	$	227	Net income (loss)

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Document And Entity Information	6 Months Ended
	Jun. 30, 2013	Jul. 31, 2013
Document Information [Line Items]
Entity Registrant Name	FIRST FINANCIAL SERVICE CORP
Entity Central Index Key	0000854395
Current Fiscal Year End Date	--12-31
Entity Filer Category	Smaller Reporting Company
Trading Symbol	FFKY
Entity Common Stock, Shares Outstanding		4,861,523
Document Type	10-Q
Amendment Flag	false
Document Period End Date	Jun. 30, 2013
Document Fiscal Period Focus	Q2
Document Fiscal Year Focus	2013

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BASIS OF PRESENTATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Policies)

6 Months Ended

Jun. 30, 2013

Accounting Policies [Abstract]

Basis of Accounting, Policy [Policy Text Block]

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

The accompanying unaudited consolidated financial statements have been prepared in accordance with U.S. generally accepted accounting principles for interim financial information and with the instructions to Form 10-Q and Rule 10-01 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by U.S. generally accepted accounting principles for complete financial statements. In the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation have been included. Operating results for the three and six month periods ending June 30, 2013 are not necessarily indicative of the results that may occur for the year ending December 31, 2013. For further information, refer to the consolidated financial statements and footnotes thereto included in the Corporation’s annual report on Form 10-K for the period ended December 31, 2012.

Reclassification, Policy [Policy Text Block]

Reclassifications – Some items in the prior year financial statements were reclassified to conform to the current presentation. Reclassifications had no effect on prior year operations or shareholder’s equity.

New Accounting Pronouncements, Policy [Policy Text Block]

Adoption of New Accounting Standards – Effective February 2013, we adopted, ASU No. 2013-02, Reporting of Amounts Reclassified Out of Accumulated Other Comprehensive (ASU 2013-02).  This guidance is the culmination of the FASB’s deliberation on reporting reclassification adjustments from accumulated other comprehensive income (AOCI). The amendments in ASU 2013-02 do not change the current requirements for reporting net income or other comprehensive income.  However, the amendments require disclosure of amounts reclassified out of AOCI in its entirety, by component, on the face of the statement of operations or in the notes thereto.  Amounts that are not required to be reclassified in their entirety to net income must be cross-referenced to other disclosures that provide additional detail.  This standard was effective for public entities for annual and interim reporting periods beginning after December 15, 2012. The adoption of this update did not have a material impact on the consolidated financial statements.

In July 2013, the Financial Accounting Standards Board issued Accounting Standards Update 2013-11, Presentation of an Unrecognized Tax Benefit When a Net Operating Loss Carryforward, a Similar Tax Loss, or a Tax Credit Carryforward Exists (ASU 2013-11). Current GAAP does not include explicit guidance on the financial statement presentation of an unrecognized tax benefit when a net operating loss carryforward, a similar tax loss, or a tax credit carryforward exists. The adoption of ASU 2013-11 will require an unrecognized tax benefit, or a portion of an unrecognized tax benefit to be presented in the financial statements as a reduction to a deferred tax asset for a net operating loss carryforward, a similar tax loss, or a tax credit carryforward, unless an exception applies. The amendments in this update are effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2013. We are currently evaluating the effect that the provisions of ASU 2013-11 will have on the consolidated financial statements.

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FAIR VALUE (Details Textual) (USD $)	3 Months Ended		6 Months Ended
	Jun. 30, 2013	Jun. 30, 2012	Jun. 30, 2013	Jun. 30, 2012
Loans Pledged as Collateral	$ 24,200,000	$ 22,800,000	$ 24,200,000	$ 22,800,000
Valuation Allowances and Reserves, Adjustments	7,100,000	5,500,000	7,100,000	5,500,000
Net Interest Income (Loss) after Provision for Loan Losses	5,752,000	5,755,000	12,720,000	12,057,000
Allowance for Loan and Lease Losses, Period Increase (Decrease)	737,000	1,400,000	737,000	1,700,000
Other Real Estate Valuation Adjustments	400,000	1,900,000	1,500,000	3,500,000
Impaired Loans [Member]
Net Interest Income (Loss) after Provision for Loan Losses	$ 342,000		$ 342,000

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FAIR VALUE (Details 4) (USD $) In Thousands, unless otherwise specified	Jun. 30, 2013	Dec. 31, 2012	Jun. 30, 2012	Dec. 31, 2011
Financial assets:
Cash and due from banks Carrying Value	$ 27,925	$ 63,103	$ 154,114	$ 92,236
Mortgage loans held for sale Carrying Value	3,595	3,887
Loans, net Carrying Value	457,527	492,740
Accrued interest receivable Carrying Value	2,390	2,690
FHLB stock Carrying Value	4,430	4,805
Cash and due from banks Fair Value	27,925	63,103
Mortgage loans held for sale Fair Value	3,654	3,967
Loans, net Fair Value	460,246	493,998
Accrued interest receivable Fair Value	2,390	2,690
Financial liabilities:
Deposits Carrying Value	798,377	922,620
Advances from Federal Home Loan Bank Carrying Value	22,526	12,596
Subordinated debentures Carrying Value	18,000	18,000
Accrued interest payable Carrying Value	3,798	3,121
Deposits Fair Value	760,870	934,637
Advances from Federal Home Loan Bank Fair Value	23,249	13,944
Subordinated debentures Fair Value	12,222	12,695
Accrued interest payable Fair Value	3,798	3,121
Fair Value, Inputs, Level 1 [Member]
Financial assets:
Cash and due from banks Carrying Value	6,069	6,468
Mortgage loans held for sale Carrying Value	0	0
Loans, net Carrying Value	0	0
Accrued interest receivable Carrying Value	0	0
Financial liabilities:
Deposits Carrying Value	0	0
Advances from Federal Home Loan Bank Carrying Value	0	0
Subordinated debentures Carrying Value	0	0
Accrued interest payable Carrying Value	0
Accrued interest payable Fair Value		0
Fair Value, Inputs, Level 2 [Member]
Financial assets:
Cash and due from banks Carrying Value	21,856	56,635
Mortgage loans held for sale Carrying Value	3,654	3,967
Loans, net Carrying Value	0	0
Accrued interest receivable Carrying Value	0	0
Financial liabilities:
Deposits Carrying Value	760,870	934,637
Advances from Federal Home Loan Bank Carrying Value	23,249	13,944
Subordinated debentures Carrying Value	0	0
Accrued interest payable Carrying Value	3,798
Accrued interest payable Fair Value		3,121
Fair Value, Inputs, Level 3 [Member]
Financial assets:
Cash and due from banks Carrying Value	0	0
Mortgage loans held for sale Carrying Value	0	0
Loans, net Carrying Value	460,246	493,998
Accrued interest receivable Carrying Value	2,390	2,690
Financial liabilities:
Deposits Carrying Value	0	0
Advances from Federal Home Loan Bank Carrying Value	0	0
Subordinated debentures Carrying Value	12,222	12,695
Accrued interest payable Carrying Value	0
Accrued interest payable Fair Value		$ 0