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 September 30, 2014

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 November 10, 2014
Common Stock	5,150,356 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	4
Item 2.	Management's Discussion and Analysis of Financial Condition and Results of Operations	39
Item 3.	Quantitative and Qualitative Disclosures about Market Risk	58
Item 4.	Controls and Procedures	60
PART II – OTHER INFORMATION		60
Item 1.	Legal Proceedings	60
Item 1A.	Risk Factors	60
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	60
Item 3.	Defaults upon Senior Securities	60
Item 4.	Mine Safety Disclosures	61
Item 5.	Other Information	61
Item 6.	Exhibits	61
SIGNATURES		62

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

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

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

3

Item 1. FIRST FINANCIAL SERVICE CORPORATION

Consolidated Balance Sheets

(Unaudited)

	September 30,			December 31,
(Dollars in thousands, except per share data)	2014			2013
ASSETS:
Cash and due from banks	$	12,356		$	13,476
Interest bearing deposits		44,620			52,512
Total cash and cash equivalents		56,976			65,988
Securities available-for-sale		208,087			269,282
Loans held for sale		847			470
Loans, net of unearned fees		436,186			466,862
Allowance for loan losses		(8,218	)		(9,576	)
Net loans		427,968			457,286
Federal Home Loan Bank stock		4,080			4,430
Cash surrender value of life insurance		10,696			10,428
Premises and equipment, net		22,989			23,773
Real estate owned:
Acquired through foreclosure, net of valuation allowance of $1,144 Sept (2014) and $581 Dec (2013)		9,507			11,657
Bank lots		1,446			1,469
Other repossessed assets		30			37
Accrued interest receivable		1,664			2,224
Accrued income taxes		3			2,907
Low-income housing investments		6,770			6,965
Other assets		1,829			1,701
TOTAL ASSETS	$	752,892		$	858,617
LIABILITIES AND STOCKHOLDERS' EQUITY
LIABILITIES:
Deposits:
Non-interest bearing	$	85,654		$	78,480
Interest bearing		588,093			705,007
Total deposits		673,747			783,487
Advances from Federal Home Loan Bank		12,236			12,389
Subordinated debentures		18,000			18,000
Accrued interest payable		5,516			4,574
Accrued senior preferred dividend		4,707			3,380
Accounts payable and other liabilities		4,079			3,968
TOTAL LIABILITIES		718,285			825,798
Commitments and contingent liabilities		-			-
STOCKHOLDERS' EQUITY:
Serial preferred stock, $1 par value per share; authorized 5,000,000 shares; issued and outstanding, 20,000 shares with a liquidation preference of $24.7 million Sept (2014), and $23.4 million Dec (2013)		20,000			19,997
Common stock, $1 par value per share; authorized 35,000,000 shares; issued and outstanding, 5,150,356 shares Sept (2014), and 4,870,887shares Dec (2013)		5,150			4,871
Additional paid-in capital		37,083			36,230
Accumulated deficit		(20,606	)		(17,711	)
Accumulated other comprehensive loss		(7,020	)		(10,568	)
TOTAL STOCKHOLDERS' EQUITY		34,607			32,819
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY	$	752,892		$	858,617

See notes to the unuaudited consolidated financial statements.

4

FIRST FINANCIAL SERVICE CORPORATION

Consolidated Statements of Operations

(Unaudited)

	Three Months Ended						Nine Months Ended
(Amounts in thousands, except per share data)	September 30,						September 30,
	2014			2013			2014			2013
Interest Income:
Loans, including fees	$	5,229		$	6,308		$	16,609		$	19,729
Taxable securities		1,106			1,700			3,875			4,898
Tax exempt securities		31			53			95			185
Total interest income		6,366			8,061			20,579			24,812
Interest Expense:
Deposits		1,041			1,561			3,457			5,471
Federal Home Loan Bank advances		131			133			406			397
Subordinated debentures		195			340			787			1,022
Total interest expense		1,367			2,034			4,650			6,890
Net interest income		4,999			6,027			15,929			17,922
Credit for loan losses		(1,676	)		(500	)		(1,576	)		(1,325	)
Net interest income after credit for loan losses		6,675			6,527			17,505			19,247
Non-interest Income:
Customer service fees on deposit accounts		1,363			1,444			3,963			3,942
Gain on sale of mortgage loans		130			230			290			818
Gain on sale of investments		13			235			545			1,078
Loss on sale of investments		-			(223	)		(567	)		(839	)
Loss on sale and write downs on real estate acquired through foreclosure		(134	)		(365	)		(635	)		(1,957	)
Gain on sale on real estate acquired through foreclosure		35			1,632			65			1,839
Other income		415			593			1,448			1,805
Total non-interest income		1,822			3,546			5,109			6,686
Non-interest Expense:
Employee compensation and benefits		3,217			3,955			10,952			11,505
Office occupancy expense and equipment		670			653			2,059			2,051
Outside services and data processing		1,021			900			2,938			2,704
FDIC insurance premiums		428			460			1,348			1,654
Real estate acquired through foreclosure expense		475			452			1,251			1,270
Loan expense		35			485			600			1,092
Legal and professional service fees		484			330			1,163			720
Other expense		1,462			1,370			4,635			4,472
Total non-interest expense		7,792			8,605			24,946			25,468
Income (loss) before income taxes		705			1,468			(2,332	)		465
Income tax expense (benefit)		200			1			(767	)		2
Net Income (Loss)		505			1,467			(1,565	)		463
Less:
Dividends on preferred stock		(450	)		(250	)		(1,327	)		(750	)
Accretion on preferred stock		-			(14	)		(3	)		(41	)
Net income (loss) attributable to common shareholders	$	55		$	1,203		$	(2,895	)	$	(328	)
Shares applicable to basic income (loss) per common share		5,074,191			4,860,115			4,974,906			4,816,538
Basic income (loss) per common share	$	0.01		$	0.25		$	(0.58	)	$	(0.07	)
Shares applicable to diluted income (loss)per common share		5,176,337			4,905,542			4,974,906			4,816,538
Diluted income (loss) per common share	$	0.01		$	0.25		$	(0.58	)	$	(0.07	)
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						Nine Months Ended
(Dollars in thousands)	September 30,						September 30,
	2014			2013			2014			2013
Net Income/(Loss)	$	505		$	1,467		$	(1,565	)	$	463
Other comprehensive income (loss):
Change in unrealized gain (loss) on securities available-for-sale		(618	)		(1,438	)		4,295			(9,766	)
Reclassification of realized amount on securities available-for-sale losses (gains)		(13	)		(12	)		22			(239	)
Net unrealized gain (loss) recognized in comprehensive income		(631	)		(1,450	)		4,317			(10,005	)
Tax effect		199			-			(769	)		-
Total other comphrehensive income (loss)		(432	)		(1,450	)		3,548			(10,005	)
Comprehensive Income/(Loss)	$	73		$	17		$	1,983		$	(9,542	)

See notes to the unaudited consolidated financial statements.

6

FIRST FINANCIAL SERVICE CORPORATION

Consolidated Statements of Changes in Stockholders' Equity

Nine Months Ended September 30, 2014

(Dollars In Thousands, Except Per Share Amounts)

(Unaudited)

	Shares				Amount				Additional Paid-in			Accumulated			Accumulated Other Comprehensive Income (Loss),
	Preferred		Common		Preferred		Common		Capital			Deficit			Net of Tax			Total
Balance, January 1, 2014		20,000		4,870,887	$	19,997	$	4,871	$	36,230		$	(17,711	)	$	(10,568	)	$	32,819
Net loss		-		-		-		-		-			(1,565	)		-			(1,565	)
Stock issued for stock options  exercised and employee benefit plans		-		16,756		-		17		25			-			-			42
Issuance of restricted shares		-		262,713		-		262		(262	)		-			-			-
Stock-based compensation expense		-		-		-		-		1,090			-			-			1,090
Total other comprehensive income (loss)		-		-		-		-		-			-			3,548			3,548
Dividends on preferred stock		-		-		-		-		-			(1,327	)		-			(1,327	)
Accretion of preferred stock discount		-		-		3		-		-			(3	)		-			-
Balance, September 30, 2014		20,000		5,150,356	$	20,000	$	5,150	$	37,083		$	(20,606	)	$	(7,020	)	$	34,607

See notes to the unaudited consolidated financial statements.

7

FIRST FINANCIAL SERVICE CORPORATION

Consolidated Statements of Cash Flows

(Dollars In Thousands)

(Unaudited)

	Nine Months Ended
	September 30,
	2014			2013
Operating Activities:
Net (loss)	$	(1,565	)	$	463
Adjustments to reconcile net income/(loss) to net cash provided by operating activities:
Credit for loan losses		(1,576	)		(1,325	)
Depreciation on premises and equipment		978			1,086
Change in real estate acquired through foreclosure valuation allowance		563			221
Loss on low-income housing investments		195			46
Net amortization (accretion) available-for-sale		1,241			5,394
Loss on sale of investments available-for-sale		567			839
Gain on sale of investments available-for-sale		(545	)		(1,078	)
Gain on sale of mortgage loans		(290	)		(818	)
Loss on sale of premises and equipment		-			70
Gain on sale of real estate acquired through foreclosure		(65	)		(1,839	)
Loss on sale of real estate acquired through foreclosure		5			372
Write-downs on real estate acquired through foreclosure		630			1,585
Origination of loans held for sale		(19,139	)		(46,807	)
Proceeds on sale of loans held for sale		19,052			50,444
Stock-based compensation expense		1,090			393
Changes in:
Cash surrender value of life insurance		(268	)		(276	)
Interest receivable		560			407
Other assets		(500	)		(345	)
Interest payable		942			1,016
Accrued income tax		2,904			21
Accounts payable and other liabilities		(658	)		1,093
Net cash from operating activities		4,121			10,962
Investing Activities:
Sales of securities available-for-sale		73,701			125,351
Purchases of securities available-for-sale		(30,939	)		(108,926	)
Maturities of securities available-for-sale		21,487			32,363
Net change in loans		29,557			42,844
Redemption of Federal Home Loan Bank stock		350			375
Investment in low-income housing projects		-			(24	)
Net purchases of premises and equipment		(171	)		(537	)
Sales of premises and equipment		-			522
Proceeds from sales of real estate acquired through foreclosure		2,733			15,350
Net cash from investing activities		96,718			107,318
Financing Activities
Net change in deposits		(109,740	)		(175,742	)
Advance from Federal Home Loan Bank		-			26,000
Repayments to Federal Home Loan Bank		(153	)		(172	)
Issuance of common stock for employee benefit plans and exercise of stock options		42			48
Net cash from financing activities		(109,851	)		(149,866	)
Increase (decrease) in cash and cash equivalents		(9,012	)		(31,586	)
Cash and cash equivalents, beginning of period		65,988			63,103
Cash and cash equivalents, end of period	$	56,976		$	31,517
Supplemental disclosures
Cash Paid (Received) for:
Interest expense	$	3,271		$	5,536
Income taxes	$	(2,902	)	$	(19	)
Supplemental noncash disclosures:
Transfers from loans to real estate acquired through foreclosure and repossessed assets	$	1,800		$	2,369
Loans to facilitate sales of real estate owned and repossessed assets	$	463		$	125
Dividends accrued not paid on preferred stock	$	1,090		$	750

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 two wholly owned subsidiaries, First Service Corporation of Elizabethtown and Heritage Properties, 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 quarter and nine months ended September 30, 2014 are not necessarily indicative of the results that may occur for the year ending December 31, 2014. 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, 2013.

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 stockholders’ equity.

Recently Issued Accounting Pronouncement – In January 2014, the Financial Accounting Standards Board issued Accounting Standards Update No. 2014-01, Accounting for Investments in Qualified Affordable Housing Projects (ASU 2014-01). ASU 2014-01 permits reporting entities to make an accounting policy election to account for investments in qualified affordable housing projects using the proportional amortization method if certain conditions are met. Under the proportional amortization method, an entity amortizes the initial cost of the investment in proportion to the tax credits and other tax benefits received and recognizes the net investment performance in the income statement as a component of income tax expense. This new guidance also requires new disclosures for all investors in these projects. ASU 2014-01 is effective for interim and annual reporting periods beginning after December 15, 2014. Upon adoption, the guidance must be applied retrospectively to all periods presented. However, entities that use the effective yield method to account for investments in these projects before adoption may continue to do so for these pre-existing investments. The adoption of ASU 2014-01 is not expected to have a material impact on the consolidated financial statements.

In May 2014, the Financial Accounting Standards Board issued Accounting Standards Update No. 2014-09, Revenue From Contracts With Customers (ASU 2014-09). The core principle of the guidance is that an entity should recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods and services.ASU 2014-09 is effective for interim and annual periods beginning after December 15, 2016. Management is currently evaluating the impact of the adoption of ASU 2014-09 on the consolidated financial statements.

In August 2014, the Financial Accounting Standards Board issued Accounting Standards Update No. 2014-14, Receivables-Troubled Debt Restructurings by Creditors (Subtopic 310-40): Classification of Certain Government-Guaranteed Mortgage Loans upon Foreclosure (ASU 2014-14). The amendments in ASU 2014-14 require that a mortgage loan be derecognized and that a separate other receivable be recognized upon foreclosure if: a) the loan has a government guarantee that is not separable from the loan before foreclosure; b) at the time of foreclosure, the creditor has the intent to convey the real estate property to the guarantor and make a claim on the guarantee, and the creditor has the ability to recover under that claim; and c) at the time of foreclosure, any amount of the claim that is determined on the basis of the fair value of the real estate is fixed. The separate other receivable recognized upon foreclosure should be measured based on the amount of the loan balance (principal and interest) expected to be received from the guarantor. The amendments in ASU 2014-14 are effective for us beginning January 1, 2015 and are not expected to have a material impact on our financial statements.

9

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

2. REGULATORY MATTERS

Since January 2011, the Bank has operated under Consent Orders with the Federal Deposit Insurance Corporation (“FDIC”) and the Kentucky Department of Financial Institutions (“KDFI”). The initial 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%. It also prohibited the Bank from declaring dividends without the prior written approval of the FDIC and KDFI and has 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. When the Bank entered into a new Consent Order with the FDIC and KDFI in March 2012, it agreed that should it be unable to reach the required capital levels by June 30, 2012, 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 latest Consent Order also includes the same substantive provisions as the initial Consent Order and requires the Bank to continue to adhere to the plans implemented in response to the initial Consent Order.

At September 30, 2014, the Bank’s Tier 1 capital ratio was 9.03% and the total risk-based capital ratio was 15.93% compared to the minimum 9.00% and 12.00% capital ratios required by the Consent Order. The Bank is now in compliance with all of the requirements of its Consent Order with the FDIC and KDFI.

Copies of the Consent Orders are included as exhibits to our Form 8−K filed on January 27, 2011 and our 2011 Annual Report on Form 10-K filed March 30, 2012.

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.

The 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.

The Bank is currently designated as a "troubled institution,” which status prohibits the Bank from accepting, renewing or rolling over brokered deposits and restricts the amount of interest the Bank may pay on 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 not to pursue such a waiver and to adhere to the average rates computed by the FDIC plus the .75% rate cap. Brokered deposits were $16.1 million at September 30, 2014, decreasing by $11.2 million from $27.3 million at December 31, 2013.

On April 21, 2014, we entered into an Agreement and Plan of Share Exchange (the “Agreement”) with Community Bank Shares of Indiana, Inc. (“CBIN”), whereby CBIN will acquire all of the outstanding shares of our common stock pursuant to a statutory share exchange (the “Share Exchange”). It is anticipated that immediately following the Share Exchange, the Corporation will merge into CBIN and the Bank will merge into Your Community Bank, an Indiana chartered commercial bank and wholly owned subsidiary of CBIN (with Your Community Bank as the surviving bank).

10

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

2. REGULATORY MATTERS – (Continued)

The consummation of the Share Exchange is subject to various customary conditions, including receipt of the requisite regulatory approvals and the approval by the shareholders of the Corporation and of CBIN. The parties anticipate completing the Share Exchange shortly after year end. See “Proposed Share Exchange” in the Management’s Discussion and Analysis section of this 10-Q for additional information.

Our plans for 2014 include the following:

· Continuing to work towards the completion of the Share Exchange with CBIN.

· Continuing to comply with of our Consent Order and formal agreement.

· 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.

· Accelerating our efforts to dispose of problem assets.

· Continuing to reduce 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:
September 30, 2014:
Government-sponsored collateralized mortgage obligations	$	85,002	$	96	$	(2,135	)	$	82,963
Government-sponsored mortgage-backed residential		80,027		19		(1,783	)		78,263
Asset backed-collateralized loan obligations		14,891		30		(456	)		14,465
Corporate bonds		12,186		159		(12	)		12,333
State and municipal		8,231		414		(7	)		8,638
U.S. Government-sponsored entities and agencies		8,382		-		(53	)		8,329
Commercial mortgage backed		3,061		35		-			3,096
Total	$	211,780	$	753	$	(4,446	)	$	208,087
Securities available-for-sale:
December 31, 2013:
Government-sponsored collateralized mortgage obligations	$	104,390	$	86	$	(3,660	)	$	100,816
Government-sponsored mortgage-backed residential		78,204		4		(3,884	)		74,324
Corporate bonds		43,818		208		(328	)		43,698
Asset backed-collateralized loan obligations		35,113		-		(635	)		34,478
State and municipal		11,670		264		(11	)		11,923
Commercial mortgage backed		4,097		-		(54	)		4,043
Total	$	277,292	$	562	$	(8,572	)	$	269,282

12

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

3. SECURITIES – (Continued)

The amortized cost and fair value of securities at September 30, 2014, 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	$	855	$	856
Due after one year through five years		16,368		16,485
Due after five years through ten years		5,789		5,808
Due after ten years		5,787		6,151
Investment securities with no single maturity date:
Government-sponsored collateralized mortgage obligations		85,002		82,963
Government-sponsored mortgage-backed residential		80,027		78,263
Asset backed-collateralized loan obligations		14,891		14,465
Commercial mortgage backed		3,061		3,096
	$	211,780	$	208,087

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				Nine Months Ended
	September 30,				September 30,
	2014		2013		2014		2013
(Dollars in thousands)
Proceeds from sales	$	620	$	24,295	$	73,701	$	125,351
Gross realized gains		13		235		545		1,078
Gross realized losses		-		223		567		839

Investment securities pledged to secure public deposits and Federal Home Loan Bank (FHLB) advances had an amortized cost of $144.7 million and fair value of $141.4 million at September 30, 2014 and a $193.0 million amortized cost and fair value of $185.8 million at December 31, 2013.

13

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

3. SECURITIES – (Continued)

Securities with unrealized losses at September 30, 2014 and December 31, 2013 aggregated by major security type and length of time in a continuous unrealized loss position are as follows:

September 30, 2014	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 collateralized mortgage obligations	$	21,206	$	(189	)	$	50,828	$	(1,946	)	$	72,034	$	(2,135	)
Government-sponsored mortgage-backed residential		10,635		(89	)		64,638		(1,694	)		75,273		(1,783	)
Asset backed-collateralized loan obligations		-		-			13,571		(456	)		13,571		(456	)
Corporate bonds		2,008		(12	)		-		-			2,008		(12	)
State and municipal		306		(1	)		513		(6	)		819		(7	)
U.S. Government-sponsored entities and agencies		8,329		(53	)		-		-			8,329		(53	)
Total temporarily impaired	$	42,484	$	(344	)	$	129,550	$	(4,102	)	$	172,034	$	(4,446	)

December 31, 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 collateralized mortgage obligations	$	59,168	$	(2,119	)	$	20,560	$	(1,541	)	$	79,728	$	(3,660	)
Government-sponsored mortgage-backed residential		59,971		(2,864	)		13,215		(1,020	)		73,186		(3,884	)
Corporate bonds		17,578		(328	)		-		-			17,578		(328	)
Asset backed-collateralized loan obligations		34,478		(635	)		-		-			34,478		(635	)
State and municipal		1,865		(11	)		-		-			1,865		(11	)
Commercial mortgage backed		4,043		(54	)		-		-			4,043		(54	)
Total temporarily impaired	$	177,103	$	(6,011	)	$	33,775	$	(2,561	)	$	210,878	$	(8,572	)

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.

In conducting this assessment, the Bank evaluates a number of factors including, but not limited to:

· The length of time and the extent to which fair value has been less than the amortized cost basis;

· The Bank’s intent to hold until maturity or sell the debt security prior to maturity;

· An analysis of whether it is more likely than not that the Bank will be required to sell the debt security before its anticipated recovery;

· Adverse conditions specifically related to the security, an industry, or a geographic area;

· The historical and implied volatility of the fair value of the security;

· The payment structure of the security and the likelihood of the issuer being able to make payments;

· Failure of the issuer to make scheduled interest or principal payments;

· Any rating changes by a rating agency; and

· Recoveries or additional decline in fair value subsequent to the balance sheet date.

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.

14

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

3. SECURITIES – (Continued)

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. Mortgage backed securities held in our investment portfolio were issued by U.S. government-sponsored entities and agencies, primarily Freddie Mac (“FHLMC”) and Fannie Mae (“FNMA”), institutions that the government has affirmed its commitment to support. Because the decline in market value on our investment securities 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 September 30, 2014.

At September 30, 2014, we owned five collateralized loan obligation (“CLO”) securities subject to the Volcker Rule, with an amortized cost of $14.9 million and a net unrealized loss of $426,000. Absent changes to the Volcker Rule, we would be required to dispose of these securities before July 2017. We believe the unrealized loss reflected results not from credit risk but from interest rate changes and to the uncertainty created by the Volcker Rule. In the first quarter of 2014, we sold four of our CLOs and in the second quarter of 2014 we recorded partial sales on three of our CLOs to confirm their marketability and evaluate our assessment about their market values. We recorded a loss of $286,000 on these sales.

15

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

4. LOANS

Loans are summarized as follows:

	September 30,			December 31,
(Dollars in thousands)	2014			2013
Commercial Real Estate:
Other	$	233,296		$	257,901
Land Development		14,057			20,476
Building Lots		1,224			1,559
Residential mortgage		98,856			99,344
Consumer and home equity		51,319			54,010
Commercial		24,496			20,621
Indirect consumer		12,977			13,041
		436,225			466,952
Less:
Net deferred loan origination fees		(39	)		(90	)
Allowance for loan losses		(8,218	)		(9,576	)
		(8,257	)		(9,666	)
Net Loans	$	427,968		$	457,286

The following tables present the activity in the allowance for loan losses by portfolio segment for the three and nine months ending September 30, 2014 and 2013:

Three Months Ended
September 30, 2014				Commercial			Residential			Consumer &			Indirect
	Commercial			Real Estate			Mortgage			Home Equity			Consumer			Total
(Dollars in thousands)
Allowance for loan losses:
Beginning Balance	$	612		$	8,288		$	288		$	296		$	54		$	9,538
Provision for loan losses		(51	)		(1,569	)		(41	)		(43	)		28			(1,676	)
Charge-offs		-			(728	)		(34	)		(1	)		(25	)		(788	)
Recoveries		32			985			98			10			19			1,144
Total ending allowance balance	$	593		$	6,976		$	311		$	262		$	76		$	8,218

Nine Months Ended
September 30, 2014				Commercial			Residential			Consumer &			Indirect
	Commercial			Real Estate			Mortgage			Home Equity			Consumer			Total
(Dollars in thousands)
Allowance for loan losses:
Beginning Balance	$	540		$	8,358		$	292		$	309		$	77		$	9,576
Provision for loan losses		(13	)		(1,449	)		(41	)		(63	)		(10	)		(1,576	)
Charge-offs		-			(1,030	)		(53	)		(25	)		(69	)		(1,177	)
Recoveries		66			1,097			113			41			78			1,395
Total ending allowance balance	$	593		$	6,976		$	311		$	262		$	76		$	8,218

16

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

4. LOANS – (Continued)

Three Months Ended
September 30, 2013				Commercial			Residential			Consumer &			Indirect
	Commercial			Real Estate			Mortgage			Home Equity			Consumer			Total
(Dollars in thousands)
Allowance for loan losses:
Beginning Balance	$	908		$	14,054		$	375		$	396		$	214		$	15,947
Provision for loan losses		177			(790	)		49			67			(3	)		(500	)
Charge-offs		(48	)		(3,076	)		(73	)		(111	)		(45	)		(3,353	)
Recoveries		10			63			13			8			36			130
Total ending allowance balance	$	1,047		$	10,251		$	364		$	360		$	202		$	12,224

Nine Months Ended
September 30, 2013				Commercial			Residential			Consumer &			Indirect
	Commercial			Real Estate			Mortgage			Home Equity			Consumer			Total
(Dollars in thousands)
Allowance for loan losses:
Beginning Balance	$	1,236		$	14,815		$	501		$	442		$	271		$	17,265
Provision for loan losses		(95	)		(1,175	)		(81	)		90			(64	)		(1,325	)
Charge-offs		(142	)		(3,528	)		(73	)		(209	)		(102	)		(4,054	)
Recoveries		48			139			17			37			97			338
Total ending allowance balance	$	1,047		$	10,251		$	364		$	360		$	202		$	12,224

We did not implement any significant 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 September 30, 2014 and 2013 and December 31, 2013:

September 30, 2014			Commercial		Residential		Consumer &		Indirect
	Commercial		Real Estate		Mortgage		Home Equity		Consumer		Total
(Dollars in thousands)
Allowance for loan losses:
Ending allowance balance attributable to loans:
Individually evaluated for impairment	$	113	$	1,949	$	1	$	-	$	-	$	2,063
Collectively evaluated for impairment		480		5,027		310		262		76		6,155
Total ending allowance balance	$	593	$	6,976	$	311	$	262	$	76	$	8,218
Loans:
Loans individually evaluated for impairment	$	516	$	23,750	$	2,859	$	308	$	-	$	27,433
Loans collectively evaluated for impairment		23,980		224,827		95,997		51,011		12,977		408,792
Total ending loans balance	$	24,496	$	248,577	$	98,856	$	51,319	$	12,977	$	436,225

December 31, 2013			Commercial		Residential		Consumer &		Indirect
	Commercial		Real Estate		Mortgage		Home Equity		Consumer		Total
(Dollars in thousands)
Allowance for loan losses:
Ending allowance balance attributable to loans:
Individually evaluated for impairment	$	148	$	2,603	$	3	$	32	$	-	$	2,786
Collectively evaluated for impairment		392		5,755		289		277		77		6,790
Total ending allowance balance	$	540	$	8,358	$	292	$	309	$	77	$	9,576
Loans:
Loans individually evaluated for impairment	$	803	$	32,911	$	3,051	$	546	$	-	$	37,311
Loans collectively evaluated for impairment		19,818		247,025		96,293		53,464		13,041		429,641
Total ending loans balance	$	20,621	$	279,936	$	99,344	$	54,010	$	13,041	$	466,952

17

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

4. LOANS – (Continued)

September 30, 2013			Commercial		Residential		Consumer &		Indirect
	Commercial		Real Estate		Mortgage		Home Equity		Consumer		Total
(Dollars in thousands)
Allowance for loan losses:
Ending allowance balance attributable to loans:
Individually evaluated for impairment	$	197	$	3,550	$	68	$	51	$	-	$	3,866
Collectively evaluated for impairment		850		6,701		296		309		202		8,358
Total ending allowance balance	$	1,047	$	10,251	$	364	$	360	$	202	$	12,224
Loans:
Loans individually evaluated for impairment	$	1,353	$	40,629	$	3,015	$	620	$	-	$	45,617
Loans collectively evaluated for impairment		19,041		246,874		98,266		53,368		12,938		430,487
Total ending loans balance	$	20,394	$	287,503	$	101,281	$	53,988	$	12,938	$	476,104

The following tables’ present loans individually evaluated for impairment by class of loans as of September 30, 2014 and 2013 and December 31, 2013. 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 excludes accrued interest receivable and loan origination fees.

							Three Months Ended						Nine Months Ended
							September 30, 2014						September 30, 2014
September 30, 2014	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	$	607	$	403	$	-	$	407	$	2	$	2	$	441	$	7	$	7
Commercial Real Estate:
Land Development		1,950		1,000		-		1,163		6		6		1,438		23		23
Building Lots		-		-		-		106		-		-		159		-		-
Other		12,632		12,121		-		15,793		108		108		18,678		488		488
Residential Mortgage		3,011		2,815		-		2,642		11		11		2,817		45		45
Consumer and Home Equity		344		308		-		344		3		3		392		10		10
Indirect Consumer		-		-		-		-		-		-		-		-		-
With an allowance recorded:
Commercial		113		113		113		214		1		1		269		5		5
Commercial Real Estate:
Land Development		240		240		113		1,219		7		7		1,713		27		27
Building Lots		-		-		-		-		-		-		-		-		-
Other		10,389		10,389		1,836		8,644		59		59		7,860		205		205
Residential Mortgage		44		44		1		101		-		-		80		1		1
Consumer and Home Equity		-		-		-		11		-		-		39		1		1
Indirect Consumer		-		-		-		-		-		-		-		-		-
Total	$	29,330	$	27,433	$	2,063	$	30,644	$	197	$	197	$	33,886	$	812	$	812

18

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

4. LOANS – (Continued)

December 31, 2013	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	$	679	$	475	$	-	$	747	$	21	$	21
Commercial Real Estate:
Land Development		2,014		1,989		-		2,898		139		139
Building Lots		477		212		-		212		-		-
Other		25,441		21,864		-		17,934		754		754
Residential Mortgage		3,119		2,992		-		2,368		63		63
Consumer and Home Equity		478		478		-		330		10		10
Indirect Consumer		-		-		-		-		-		-
With an allowance recorded:
Commercial		328		328		148		314		9		9
Commercial Real Estate:
Land Development		2,206		2,206		1,581		2,538		121		121
Building Lots		-		-		-		-		-		-
Other		6,640		6,640		1,022		16,512		694		694
Residential Mortgage		59		59		3		312		8		8
Consumer and Home Equity		68		68		32		229		7		7
Indirect Consumer		-		-		-		-		-		-
Total	$	41,509	$	37,311	$	2,786	$	44,394	$	1,826	$	1,826

							Three Months Ended						Nine Months Ended
							September 30, 2013						September 30, 2013
September 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	$	1,177	$	973	$	-	$	1,001	$	9	$	9	$	815	$	18	$	18
Commercial Real Estate:
Land Development		2,220		2,195		-		2,253		27		27		3,125		114		114
Building Lots		477		212		-		212		-		-		212		-		-
Other		25,475		20,048		-		14,964		161		161		14,042		444		444
Residential Mortgage		2,525		2,525		-		2,733		21		21		2,212		45		45
Consumer and Home Equity		357		357		-		376		3		3		293		6		6
Indirect Consumer		-		-		-		-		-		-		-		-		-
With an allowance recorded:
Commercial		380		380		197		283		2		2		310		7		7
Commercial Real Estate:
Land Development		2,206		2,206		1,015		2,568		31		31		2,621		95		95
Building Lots		-		-		-		-		-		-		-		-		-
Other		15,970		15,968		2,535		18,183		195		195		18,980		599		599
Residential Mortgage		514		490		68		484		4		4		375		8		8
Consumer and Home Equity		281		263		51		266		2		2		269		6		6
Indirect Consumer		-		-		-		-		-		-		-		-		-
Total	$	51,582	$	45,617	$	3,866	$	43,323	$	455	$	455	$	43,254	$	1,342	$	1,342

19

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

4. LOANS – (Continued)

The following tables present the recorded investment in restructured, non-accrual and loans past due over 90 days still on accrual by class of loans as of September 30, 2014 and December 31, 2013.

					Restructured
					Loans Past Due		Loans Past Due
September 30, 2014					Over 90 Days		Over 90 Days		Non-Accrual
	Restructured on		Restructured on		Still		Still		Excluding
(Dollars in thousands)	Non-Accrual Status		Accrual Status		Accruing		Accruing		Restructured
Commercial	$	-	$	154	$	-	$	-	$	362
Commercial Real Estate:
Land Development		-		-		-		-		240
Building Lots		-		-		-		-		-
Other		9,139		10,691		-		2,017		2,377
Residential Mortgage		297		-		-		-		1,809
Consumer and Home Equity		-		69		-		-		81
Indirect Consumer		-		-		-		-		48
Total	$	9,436	$	10,914	$	-	$	2,017	$	4,917

					Restructured
					Loans Past Due		Loans Past Due
December 31, 2013					Over 90 Days		Over 90 Days		Non-Accrual
	Restructured on		Restructured on		Still		Still		Excluding
(Dollars in thousands)	Non-Accrual Status		Accrual Status		Accruing		Accruing		Restructured
Commercial	$	-	$	178	$	-	$	-	$	421
Commercial Real Estate:
Land Development		-		1,687		-		-		2,508
Building Lots		-		-		-		-		212
Other		986		17,025		4,780		2,226		4,237
Residential Mortgage		301		-		-		-		1,532
Consumer and Home Equity		23		73		-		-		156
Indirect Consumer		-		-		-		-		30
Total	$	1,310	$	18,963	$	4,780	$	2,226	$	9,096

20

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

4. LOANS – (Continued)

The following tables present the aging of the unpaid principal in past due loans as of September 30, 2014 and December 31, 2013 by class of loans:

September 30, 2014	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	$	523	$	-	$	362	$	885	$	23,611	$	24,496
Commercial Real Estate:
Land Development		-		-		-		-		14,057		14,057
Building Lots		-		-		-		-		1,224		1,224
Other		3,419		271		13,533		17,223		216,073		233,296
Residential Mortgage		169		861		1,699		2,729		96,127		98,856
Consumer and Home Equity		544		76		79		699		50,620		51,319
Indirect Consumer		227		77		48		352		12,645		12,997
Total	$	4,882	$	1,285	$	15,721	$	21,888	$	414,357	$	436,245

December 31, 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	$	-	$	-	$	421	$	421	$	20,200	$	20,621
Commercial Real Estate:
Land Development		-		-		2,508		2,508		17,968		20,476
Building Lots		-		-		212		212		1,347		1,559
Other		5,250		6,213		11,236		22,699		235,202		257,901
Residential Mortgage		1,446		511		1,053		3,010		96,334		99,344
Consumer and Home Equity		430		23		117		570		53,440		54,010
Indirect Consumer		211		55		22		288		12,753		13,041
Total	$	7,337	$	6,802	$	15,569	$	29,708	$	437,244	$	466,952

Troubled Debt Restructurings:

We have allocated $1.8 million and $1.1 million of specific reserves to customers whose loan terms have been modified in troubled debt restructurings as of September 30, 2014 and December 31, 2013. 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 nine month periods ending September 30, 2014, no new loans were modified as troubled debt restructurings. Prior to the 2014 period, the terms of certain loans were modified as troubled debt restructurings and 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.

21

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

4. LOANS – (Continued)

The following table presents loans by class modified as troubled debt restructurings that occurred during the periods ending September 30, 2014 and 2013:

Three Months Ended

Three Months Ended

September 30, 2014

September 30, 2013

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

-

-

-

-

-

-

Building Lots

-

-

-

-

-

-

Other

-

-

-

-

-

-

Residential Mortgage

-

-

-

-

-

-

Consumer and Home Equity

-

-

-

-

-

-

Indirect Consumer

-

-

-

-

-

-

Total

-

$

-

$

-

-

$

-

$

-

	Nine Months Ended						Nine Months Ended
	September 30, 2014						September 30, 2013
			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		-		-		-		-		-		-
Building Lots		-		-		-		-		-		-
Other		-		-		-		5		3,512		3,512
Residential Mortgage		-		-		-		-		-		-
Consumer and Home Equity		-		-		-		2		74		74
Indirect Consumer		-		-		-		-		-		-
Total		-	$	-	$	-		7	$	3,586	$	3,586

The troubled debt restructurings described above increased the allowance for loan losses allocated to troubled debt restructurings by $0 for the three and nine months ended September 30, 2014. The troubled debt restructurings described above increased the allowance for loan losses allocated to troubled debt restructurings by $0 and $78,000 for the three and nine months ended September 30, 2013. Typically, these loans had allocated allowance prior to their formal modification. There were no charge-offs recorded on the troubled debt restructurings described above for the 2014 and 2013 periods.

22

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

4. LOANS – (Continued)

The following table presents 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 September 30, 2014 and 2013:

	Three Months Ended				Three Months Ended
	September 30, 2014				September 30, 2013
	Number		Recorded		Number		Recorded
(Dollars in thousands)	of Loans		Investment		of Loans		Investment
Troubled Debt Restructurings:
Commercial		-	$	-		-	$	-
Commercial Real Estate:
Land Development		-		-		-		-
Building Lots		-		-		-		-
Other		-		-		-		-
Residential Mortgage		-		-		-		-
Consumer and Home Equity		-		-		-		-
Indirect Consumer		-		-		-		-
Total		-	$	-		-	$	-

	Nine Months Ended				Nine Months Ended
	September 30, 2014				September 30, 2013
	Number		Recorded		Number		Recorded
(Dollars in thousands)	of Loans		Investment		of Loans		Investment
Troubled Debt Restructurings:
Commercial		-	$	-		-	$	-
Commercial Real Estate:
Land Development		-		-		-		-
Building Lots		-		-		-		-
Other		1		790		-		-
Residential Mortgage		-		-		-		-
Consumer and Home Equity		-		-		-		-
Indirect Consumer		-		-		-		-
Total		1	$	790		-	$	-

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 $0 for the three and nine months ended September 30, 2014. The troubled debt restructurings described above resulted in charge-offs of $0 for the three and nine month periods ended September 30, 2014. We did not have any troubled debt restructurings for which there was a payment default within twelve months following the modification during the September 30, 2013 three and nine month periods.

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.

23

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

4. LOANS – (Continued)

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 September 30, 2014 and December 31, 2013, and based on the most recent analysis performed, the risk category of loans by class of loans was as follows:

September 30, 2014
(Dollars in thousands)	Not Rated		Pass		Criticized		Substandard		Doubtful		Loss		Total
Commercial	$	-	$	23,522	$	461	$	513	$	-	$	-	$	24,496
Commercial Real Estate:
Land Development		-		12,065		736		1,256		-		-		14,057
Building Lots		-		832		392		-		-		-		1,224
Other		-		200,021		7,525		25,750		-		-		233,296
Residential Mortgage		94,613		-		1,384		2,859		-		-		98,856
Consumer and Home Equity		50,847		-		214		258		-		-		51,319
Indirect Consumer		12,925		-		-		52		-		-		12,977
Total	$	158,385	$	236,440	$	10,712	$	30,688	$	-	$	-	$	436,225

December 31, 2013
(Dollars in thousands)	Not Rated		Pass		Criticized		Substandard		Doubtful		Loss		Total
Commercial	$	-	$	19,289	$	470	$	862	$	-	$	-	$	20,621
Commercial Real Estate:
Land Development		-		15,484		2,484		2,508		-		-		20,476
Building Lots		-		906		441		212		-		-		1,559
Other		-		213,719		13,920		30,262		-		-		257,901
Residential Mortgage		95,351		-		942		3,051		-		-		99,344
Consumer and Home Equity		53,407		-		72		531		-		-		54,010
Indirect Consumer		12,988		-		-		53		-		-		13,041
Total	$	161,746	$	249,398	$	18,329	$	37,479	$	-	$	-	$	466,952

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 September 30, 2014 and December 31, 2013:

September 30, 2014	Residential		Consumer &		Indirect
(Dollars in thousands)	Mortgage		Home Equity		Consumer
Performing	$	96,750	$	51,190	$	12,977
Restructured on non-accrual		297		-		-
Non-accrual		1,809		129		-
Total	$	98,856	$	51,319	$	12,977

December 31, 2013	Residential		Consumer &		Indirect
(Dollars in thousands)	Mortgage		Home Equity		Consumer
Performing	$	97,511	$	53,831	$	13,011
Restructured on non-accrual		301		23		-
Non-accrual		1,532		156		30
Total	$	99,344	$	54,010	$	13,041

24

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

5. REAL ESTATE ACQUIRED THROUGH FORECLOSURE

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

	September 30,			December 31,
(Dollars in thousands)	2014			2013
Beginning balance, January 1,	$	11,657		$	22,286
Additions		1,716			8,713
Net proceeds from sale of properties		(2,673	)		(17,076	)
Writedowns		(630	)		(2,185	)
Change in valuation allowance		(563	)		(81	)
Ending balance	$	9,507		$	11,657

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

	Three Months Ended					Nine Months Ended
(Dollars in thousands)	September 30,					September 30,
	2014		2013			2014		2013
Beginning balance	$	1,039	$	721		$	581	$	500
Provision		105		365			563		1,957
Writedowns and loss on sale		-		(365	)		-		(1,736	)
Ending balance	$	1,144	$	721		$	1,144	$	721

Real estate acquired through foreclosure expense which consists primarily of property management expenses and provision expense was $475,000 and $452,000 for the three months ended September 30, 2014 and 2013, and $1.3 million for both nine month periods ended September 30, 2014 and 2013.

6. INCOME TAXES

The calculation for the income tax provision or benefit generally does not consider the tax effects of changes in other comprehensive income, or OCI, which is a component of stockholders’ equity on the balance sheet.  However, an exception is provided in certain circumstances, such as when there is a full valuation allowance against net deferred tax assets, there is a loss from continuing operations and income in other components of the financial statements.  In such a case, pre-tax income from other categories, such as changes in OCI, must be considered in determining a tax benefit to be allocated to the loss from continuing operations.  Income tax expense of $200,000 and an income tax benefit of $767,000 were recorded for the quarter and nine month period ended September 30, 2014 compared to income tax expense of $1,000 and $2,000 recorded for the quarter and nine month 2013 periods.

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 full valuation allowance, we considered various factors including our five year cumulative loss position, the level of our non-performing assets, our inability to meet our forecasted levels of assets and full year operating results in 2013, 2012 and 2011 and the degree of our compliance with the capital requirements of our Consent Order. These factors represent the most significant negative evidence that we considered in concluding that a valuation allowance was necessary at September 30, 2014 and December 31, 2013.

25

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

7. EARNINGS (LOSS) PER SHARE

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

	Three Months Ended						Nine Months Ended
(Amounts in thousands,	September 30,						September 30,
except per share data)	2014			2013			2014			2013
Basic:
Net income/(loss)	$	505		$	1,467		$	(1,565	)	$	463
Less:
Preferred stock dividends		(450	)		(250	)		(1,327	)		(750	)
Accretion on preferred stock discount		-			(14	)		(3	)		(41	)
Net income (loss) available to common shareholders	$	55		$	1,203		$	(2,895	)	$	(328	)
Weighted average common shares		5,074			4,860			4,975			4,816
Diluted:
Weighted average common shares		5,074			4,860			4,975			4,816
Dilutive effect of stock options and warrants		102			45			-			-
Weighted average common and incremental shares		5,176			4,905			4,975			4,816
Earnings (Loss) Per Common Share:
Basic	$	0.01		$	0.25		$	(0.58	)	$	(0.07	)
Diluted	$	0.01		$	0.25		$	(0.58	)	$	(0.07	)

Since the Corporation is reporting a net loss available to common shareholders for the nine month 2014 and 2013 periods, no stock options or warrants were evaluated for dilutive purposes. Stock options for 83,500 and 238,000 shares of common stock were not included in the three month September 30, 2014 and 2013 computations of diluted earnings per share because their impact was anti-dilutive. The common stock warrant for 215,983 shares was not included in the three month September 30, 2014 and 2013 computations of diluted earnings per share because its impact was also anti-dilutive.

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 September 30, 2014, options and restricted stock available for future grant under the 2006 Plan totaled 52,840.

Under the terms of our 2006 Plan, all outstanding options to purchase shares of our common stock that were not already exercisable become exercisable and the transfer restrictions on restricted stock lapse in the event of a change of control. The events constituting a change of control under the 2006 Plan include, among other things:

· shareholders approve a definitive agreement to merge us with or into another company (except if our voting securities outstanding immediately prior to the transaction continue to represent more than 50% of the combined voting power of the voting securities of the surviving entity outstanding immediately after the transaction) or to sell or otherwise transfer all or substantially all of the company’s assets or to adopt a plan of liquidation; or

· we enter into an agreement, the consummation of which would result in the occurrence of a change of control.

26

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

8. STOCK BASED COMPENSATION PLAN – (Continued)

Accordingly, all outstanding options to purchase shares of our common stock that were not already exercisable became exercisable on April 21, 2014, when we entered into the Share Exchange Agreement with Community Bank Shares of Indiana, Inc. Likewise, the transfer restrictions on the shares of our restricted stock then outstanding terminated on that date. In addition, the transfer restrictions on the shares of restricted stock issued to our non-employee directors on May 21, 2014 will terminate if and when our shareholders approve the Share Exchange Agreement at a special meeting of shareholders expected to be held before the end of 2014.

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 nine months ended September 30, 2014 and the resulting estimated weighted average fair value per share is presented below.

	September 30,
	2014
Assumptions:
Risk-free interest rate		2.86	%
Expected dividend yield		-	%
Expected life (years)		10
Expected common stock market price volatility		64	%
Estimated fair value per share	$	3.57

A summary of option activity under the 2006 Plan for the period ended September 30, 2014 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		376,300		$	3.13
Granted during period		5,000			4.90
Forfeited during period		(16,500	)		3.61
Exercised during period		(12,500	)		1.72
Outstanding, end of period		352,300		$	3.18		7.5	$	362
Eligible for exercise at period end		352,300		$	3.18		7.5	$	362

The total intrinsic value of options exercised during the nine month periods ended September 30, 2014 and 2013 was $25,000 and $364, respectively. The total cash received from options exercised during the nine month periods ended September 30, 2014 and 2013 was $22,000 and $410, respectively. There was no tax benefit recognized from the option exercises as they are considered incentive stock options.

Compensation cost related to options granted under the 2006 Plan that was charged against earnings for the nine month periods ended September 30, 2014 and 2013 was $443,000 and $113,000. As of September 30, 2014 all previously unrecognized compensation cost related to non-vested share-based compensation arrangements granted under the 2006 Plan has been recognized.

Restricted Stock – Our 2012 Non-Employee Director Equity Compensation 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 220,000 of the shares authorized for issuance under our shareholder approved 2006 Stock Option and Incentive Compensation Plan for stock awards under the Director Program.

27

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 21, 2014, the Company awarded each of its nine non-employee directors 8,310 restricted shares, or 74,790 shares in total, that vest at the close of business on the day immediately preceding the date of the 2015 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 before the date of vesting. 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 nine months ended September 30, 2014 is presented below:

				Weighted
				Average
	Non-vested			Grant Date
	Shares			Fair Value
Outstanding, beginning of period		63,497		$	3.81
Granted		138,090			4.21
Forfeited		(1,000	)		4.91
Vested		(125,797	)		4.35
Outstanding, end of period		74,790		$	3.61

Compensation cost related to restricted stock granted under the 2006 Plan that was charged against earnings for the nine month periods ended September 30, 2014 and 2013 was $659,000 and $281,000, respectively. As of September 30, 2014 there was $135,000 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 .50 years.

28

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: The fair values of some corporate bonds are determined by obtaining quoted prices on nationally recognized securities exchanges (Level 1 inputs). 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 and bank lots held for sale 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.

29

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
	September 30,		Identical Assets		Observable Inputs		Unobservable Inputs
(Dollars in thousands)	2014		(Level 1)		(Level 2)		(Level 3)
Assets:
Government-sponsored collateralized mortgage obligations	$	82,963	$	-	$	82,963	$	-
Government-sponsored mortgage-backed residential		78,263		-		78,263		-
Asset backed-collateralized loan obligations		14,465		-		14,465		-
Corporate bonds		12,333		2,782		9,551		-
State and municipal		8,638		-		8,638		-
U.S. Government-sponsored entities and agencies		8,329		-		8,329		-
Commercial mortgage backed		3,096		-		3,096		-
Total	$	208,087	$	2,782	$	205,305	$	-

			Quoted Prices in
			Active Markets for		Significant Other		Significant
	December 31,		Identical Assets		Observable Inputs		Unobservable Inputs
(Dollars in thousands)	2013		(Level 1)		(Level 2)		(Level 3)
Assets:
Government-sponsored collateralized mortgage obligations	$	100,816	$	-	$	100,816	$	-
Government-sponsored mortgage-backed residential		74,324		-		74,324		-
Corporate bonds		43,698		10,768		32,930		-
Asset backed-collateralized loan obligations		34,478		-		34,478		-
State and municipal		11,923		-		11,923		-
Commercial mortgage backed		4,043		-		4,043		-
Total	$	269,282	$	10,768	$	258,514	$	-

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

30

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

9. FAIR VALUE - (Continued)

Assets and Liabilities Measured at Fair Value on a Nonrecurring Basis

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

			Quoted Prices in
			Active Markets for		Significant Other		Significant
	September 30,		Identical Assets		Observable Inputs		Unobservable Inputs
(Dollars in thousands)	2014		(Level 1)		(Level 2)		(Level 3)
Assets:
Impaired loans:
Commercial Real Estate:
Land Development	$	127	$	-	$	-	$	127
Other		8,553		-		-		8,553
Residential Mortgage		43		-		-		43
Real estate acquired through foreclosure:
Commercial Real Estate:
Land Development		475		-		-		475
Other		1,574		-		-		1,574
Residential Mortgage		404		-		-		404
Other real estate owned:
Bank Lots		769		-		-		769

			Quoted Prices in
			Active Markets for		Significant Other		Significant
	December 31,		Identical Assets		Observable Inputs		Unobservable Inputs
(Dollars in thousands)	2013		(Level 1)		(Level 2)		(Level 3)
Assets:
Impaired loans:
Commercial Real Estate:
Land Development	$	625	$	-	$	-	$	625
Other		5,618		-		-		5,618
Residential Mortgage		56		-		-		56
Consumer and Home Equity		36		-		-		36
Real estate acquired through foreclosure:
Commercial Real Estate:
Land Development		947		-		-		947
Other		2,667		-		-		2,667
Residential Mortgage		634		-		-		634
Other real estate owned:
Bank Lots		792		-		-		792

Impaired loans, which are measured for impairment using the fair value of the collateral for collateral dependent loans, had a carrying amount of $10.8 million, with a valuation allowance of $2.1 million, resulting in a reversal of provision for loan losses of $1.2 million and $796,000 for the quarter and nine months ended September 30 2014. Impaired loans, which are measured for impairment using the fair value of the collateral for collateral dependent loans, had a carrying amount of $19.3 million, with a valuation allowance of $3.9 million, resulting in an additional provision for loan losses of $32,000 and a reversal of provision for loan losses of $310,000 for the quarter and nine months ended September 30, 2013.

31

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

9. FAIR VALUE - (Continued)

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 $236,000 and $1.2 million were made to real estate owned during the quarter and nine months ended September 30, 2014. Fair value adjustments of $300,000 and $1.8 million were made to real estate owned during the quarter and nine months ended September 30, 2013.

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 September 30, 2014.

	Fair	Valuation	Unobservable	Range (Weighted
(Dollars in thousands)	Value	Technique(s)	Input(s)	Average)
Impaired loans:
Commercial Real Estate:
Land Development	127	Sales comparison approach	Adjustment for differences between comparable sales	3.00% (1)
Other	8,240	Income approach	Discount or capitalization rate	8.50%-9.75% (9.31%)
	313	Sales comparison approach	Adjustment for differences between comparable sales	17.00% (1)
Residential Mortgage	43	Sales comparison approach	Adjustment for differences between comparable sales	6.00% (1)
Real estate acquired through foreclosure:
Commercial Real Estate:
Land Development	461	Income approach	Discount or capitalization rate	27.00% (1)
	14	Sales comparison approach	Adjustment for differences between comparable sales	0.00% (1)
Other	968	Income approach	Discount or capitalization rate	9.40%-9.75% (9.68%)
	606	Sales comparison approach	Adjustment for differences between comparable sales	20.00%-25.00% (21.05%)
Residential Mortgage	404	Sales comparison approach	Adjustment for differences between comparable sales	0.00%-8.00% (3.86%)
Real estate owned:
Bank Lots	769	Sales comparison approach	Adjustment for differences between comparable sales	10.00% (1)

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

32

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:

			September 30, 2014
(Dollars in thousands)	Carrying		Fair Value Measurements
	Value		Total		Level 1		Level 2		Level 3
Financial assets:
Cash and due from banks	$	56,976	$	56,976	$	6,545	$	50,431	$	-
Mortgage loans held for sale		847		860		-		860		-
Loans, net		419,245		418,989		-		-		418,989
Accrued interest receivable		1,664		1,664		-		707		957
FHLB stock		4,080		N/A		N/A		N/A		N/A
Financial liabilities:
Deposits		673,747		675,867		-		675,867		-
Advances from Federal Home Loan Bank		12,236		12,709		-		12,709		-
Subordinated debentures		18,000		13,598		-		-		13,598
Accrued interest payable		5,516		5,516		-		5,516		-

			December 31, 2013
(Dollars in thousands)	Carrying		Fair Value Measurements
	Value		Total		Level 1		Level 2		Level 3
Financial assets:
Cash and due from banks	$	65,988	$	65,988	$	6,596	$	59,392	$	-
Mortgage loans held for sale		470		478		-		478		-
Loans, net		450,771		453,592		-		-		453,592
Accrued interest receivable		2,224		2,224		-		1,136		1,088
FHLB stock		4,430		N/A		N/A		N/A		N/A
Financial liabilities:
Deposits		783,487		788,230		-		788,230		-
Advances from Federal Home Loan Bank		12,389		13,315		-		13,315		-
Subordinated debentures		18,000		13,038		-		-		13,038
Accrued interest payable		4,485		4,485		-		4,485		-

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.

33

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.

34

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 September 30, 2014, we have deferred a total of sixteen quarterly payments and these accrued but unpaid interest payments totaled $5.5 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 paid cumulative dividends quarterly at a rate of 5% per year for the first five years and then reset to 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 September 30, 2014, we have deferred a total of sixteen quarterly payments and these accrued but unpaid dividends totaled $4.7 million.

The terms of the Senior Preferred Shares restrict our ability to repurchase shares and limit our payment of dividends on our common stock to the most recent quarterly amount we paid prior to October 14, 2008, which was $0.19 per share. These restrictions will remain in effect until the Senior Preferred Shares are fully retired. The restrictions imposed by the terms of the Senior Preferred Shares are in addition to the restrictions imposed by our Consent Order and formal agreement with bank regulatory agencies described in Note 2.

On April 29, 2013, Treasury sold our Senior Preferred Shares to six funds 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, at the current 9% annual rate, continues until our Senior Preferred Shares are fully retired.

35

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

12. STOCKHOLDERS’ EQUITY

(a) 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					Required by
	Actual					Adequacy Purposes					Consent Order
As of September 30, 2014:	Amount		Ratio			Amount		Ratio			Amount		Ratio
Total risk-based capital (to risk-weighted assets)
Consolidated	$	65,711		13.56	%	$	38,765		8.00	%	$	58,147		12.00	%
Bank		76,637		15.93			38,475		8.00			57,713		12.00
Tier I capital (to risk-weighted assets)
Consolidated		55,506		11.45			19,382		4.00			N/A		N/A
Bank		70,598		14.68			19,238		4.00			N/A		N/A
Tier I capital (to average assets)
Consolidated		55,506		7.08			31,345		4.00			70,527		9.00
Bank		70,598		9.03			31,289		4.00			70,400		9.00
(Dollars in thousands)						For Capital					Required by
	Actual					Adequacy Purposes					Consent Order
As of December 31, 2013:	Amount		Ratio			Amount		Ratio			Amount		Ratio
Total risk-based capital (to risk-weighted assets)
Consolidated	$	68,477		12.13	%	$	45,174		8.00	%	$	67,761		12.00	%
Bank		76,147		13.48			45,177		8.00			67,765		12.00
Tier I capital (to risk-weighted assets)
Consolidated		58,036		10.28			22,587		4.00			N/A		N/A
Bank		69,057		12.23			22,588		4.00			N/A		N/A
Tier I capital (to average assets)
Consolidated		58,036		6.68			34,737		4.00			78,158		9.00
Bank		69,057		7.96			34,706		4.00			78,088		9.00

36

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

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 September 30,
	Unrealized Gains and Losses on
	Available-for-Sale Securities (1)
	2014			2013
	(Dollars in thousands)
Beginning balance	$	(6,588	)	$	(7,285	)
Other comprehensive income (loss) before reclassification		(419	)		(1,438	)
Amounts reclassified from accumulated other comprehensive income		(13	)		(12	)
Net other comprehensive income (loss)		(432	)		(1,450	)
Ending balance	$	(7,020	)	$	(8,735	)

(1) All amounts are net of tax.

	Nine Months Ended September 30,
	Unrealized Gains and Losses on
	Available-for-Sale Securities (1)
	2014			2013
	(Dollars in thousands)
Beginning balance	$	(10,568	)	$	1,270
Other comprehensive income (loss) before reclassification		3,526			(9,766	)
Amounts reclassified from accumulated other comprehensive income		22			(239	)
Net other comprehensive income (loss)		3,548			(10,005	)
Ending balance	$	(7,020	)	$	(8,735	)

(1) All amounts are net of tax.

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

Three months ended September 30, 2014
(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	$	13	Gain on sale of investments
		-	Loss on sale of investments
		13	Total before tax
		-	Income taxes/(benefits)
Total amount reclassified	$	13	Net income (loss)

37

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

13. CHANGES IN AND RECLASSIFICATIONS FROM ACCUMULATED OTHER COMPREHENSIVE INCOME - (Continued)

Three months ended September 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	$	235		Gain on sale of investments
		(223	)	Loss on sale of investments
		12		Total before tax
		-		Income taxes/(benefits)
Total amount reclassified	$	12		Net income (loss)
Nine months ended September 30, 2014
(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	$	545		Gain on sale of investments
		(567	)	Loss on sale of investments
		(22	)	Total before tax
		-		Income taxes/(benefits)
Total amount reclassified	$	(22	)	Net income (loss)
Nine months ended September 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	$	1,078		Gain on sale of investments
		(839	)	Loss on sale of investments
		239		Total before tax
		-		Income taxes/(benefits)
Total amount reclassified	$	239		Net income (loss)

38

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 19% 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, 2013 and material changes in the results of operations for the three and nine month periods ended September 30, 2014 as compared to 2013. 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, 2013.

PROPOSED SHARE EXCHANGE

On April 21, 2014, we entered into an Agreement and Plan of Share Exchange (the “Agreement”) with Community Bank Shares of Indiana, Inc. (“CBIN”), whereby CBIN will acquire all of the outstanding shares of our common stock pursuant to a statutory share exchange (the “Share Exchange”). It is anticipated that immediately following the Share Exchange, First Financial Service Corporation will merge into CBIN, and our subsidiary bank, First Federal Savings Bank (the “Bank”) will merge into Your Community Bank, CBIN’s subsidiary bank (with Your Community Bank as the surviving bank).

Headquartered in New Albany, Indiana, CBIN had total assets of $866.0 million as of September 30, 2014. CBIN’s two wholly owned subsidiary banks, Your Community Bank and The Scott County State Bank, operate 24 banking offices in southern Indiana and central Kentucky, including the metro Louisville market. Its stock trades on the NASDAQ Global Select Market under the symbol “CBIN.”

Subject to the terms and conditions of the Agreement, when the Share Exchange takes effect (the “Effective Time”), each issued and outstanding share of FFKY common stock (other than shares for which dissenters’ rights are exercised) will be canceled and converted into the right to receive 0.153 shares of CBIN’s common stock (the “Exchange Ratio”), plus cash in lieu of any fractional share. Further, all options to purchase FFKY common stock that are outstanding and exercisable immediately prior to the Effective Time will be canceled and converted into the right to receive a cash payment as provided in the Agreement.

The Exchange Ratio may be adjusted, as provided in the Agreement, if, as of the date ten business days prior to the Effective Time, (a) our consolidated net book value is less than $13,000,000, or (b) the Bank has failed since the date of the Agreement to gain more than $3,000,000 (through payoffs, pay-downs or certain collateral enhancements) with respect to sixteen specifically identified special assets.

39

The Agreement provides certain termination rights for both the Corporation and CBIN. If the Agreement is terminated by CBIN, because the Corporation enters into an agreement for a superior business combination, then the Corporation would be obligated to pay to CBIN a termination fee of $1,500,000. If the Agreement is terminated by the Corporation, because CBIN fails to meet certain regulatory capital requirements, then CBIN would be obligated to pay the Corporation a termination fee of $500,000.

The consummation of the Share Exchange is subject to various conditions, including (i) receipt of the requisite approval of the shareholders of the Corporation and of CBIN, (ii) receipt of regulatory approvals, (iii) absence of any law or order prohibiting the closing, and (iv) effectiveness of the registration statement to be filed by CBIN with the SEC to register the shares of CBIN common stock to be issued to Corporation shareholders in the Share Exchange. In addition, each party’s obligation to consummate the Share Exchange is subject to certain other customary conditions, including the accuracy of the representations and warranties of the other party and compliance of the other party with its covenants in all material respects. The parties anticipate completing the Share Exchange shortly after year end.

OVERVIEW

Net income attributable to common shareholders for the quarter ended September 30, 2014 was $55,000 or $0.01 per diluted common share compared to net income attributable to common shareholders of $1.2 million or $0.25 per diluted common share for the same period in 2013. Net loss attributable to common shareholders for the nine months ended September 30, 2014 was $2.9 million or $0.58 per diluted common share compared to a net loss attributable to common shareholders of $328,000 or $0.07 per diluted common share for the same period a year ago.

While still elevated, the level of non-performing assets is now at levels not seen since the second quarter of 2009. Compared to December 31, 2013, non-performing loans declined $1.0 million or 6%, non-performing assets declined $3.2 million or 11%, and classified and criticized assets declined $14.4 million or 26%. We sold eighteen OREO properties totaling $2.7 million during the 2014 period. Non-performing assets were $27.4 million or 3.63% of total assets at September 30, 2014 compared to $30.6 million or 3.56% of total assets at December 31, 2013. Five commercial real estate relationships totaling $16.8 million make up 61% of the total non-performing assets. The relationships range in value from $790,000 to $6.1 million and have an aggregate specific reserve for $1.4 million.

The lower values on appraisals and reviews of OREO properties resulted in $630,000 in total write downs on OREO for the first nine months of 2014 compared to $1.6 million in total write downs recorded during 2013. We believe that we have written down OREO values to levels that will facilitate their liquidation, as indicated by recent sales.

As economic conditions improved and collateral values stabilized in 2013 and 2014, our provision for loan losses has been much lower than in previous years. The allowance for loan losses to total loans was 1.88% at September 30, 2014 compared to 2.57% at September 30, 2013, while net charge-offs to average loans totaled (0.06)% for 2014 compared to 0.99% for 2013. Non-performing loans were $16.4 million or 3.75% of total loans at September 30, 2014 compared to $17.4 million, or 3.73% of total loans for December 31, 2013. The allowance for loan losses to non-performing loans, which excludes restructured loans on accrual status, was 50% at September 30, 2014 compared to 57% at September 30, 2013.

The net interest margin remained relatively constant at 2.82% for the nine months ended September 30, 2014 compared to 2.83% for the 2013 nine month period and decreased 21 basis points to 2.75% for the quarter ended September 30, 2014 compared to 2.96% for the 2013 period. The decline in the yields on interest-earning assets more than offset a decrease in our cost of funds. Low interest rates, coupled with a competitive lending environment, continue to be challenging.

REGULATORY MATTERS

Since January 2011, the Bank has operated under Consent Orders with the FDIC and KDFI. In the most recent 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 Consent Order also prohibits the Bank from declaring dividends without the prior written approval of the FDIC and KDFI and requires 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 most recent Consent Order is included as Exhibit 10.8 to our 2011 Annual Report on Form 10-K filed March 30, 2012.

40

The Bank is now in compliance with all of the requirements of its Consent Order with the FDIC and KDFI. At September 30, 2014, the Bank’s Tier 1 capital ratio was 9.03% and the total risk-based capital ratio was 15.93%, compared to the minimum 9.00% and 12.00% capital ratios required by the Consent Order.

Our plans for 2014 include the following:

· Continuing to work towards the completion of the Share Exchange with CBIN.

· Continuing to comply with of our Consent Order and formal agreement.

· 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.

· Accelerating our efforts to dispose of problem assets.

· Continuing to reduce our inventory of other real estate owned properties.

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. Management, which is comprised of senior officers and certain accounting and credit 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 $8.2 million or 1.88% of total loans was our estimate of probable incurred losses within the loan portfolio as of September 30, 2014.  This estimate required us to record a reversal of provision for loan losses on the income statement of $1.6 million for the 2014 period. If the mix and amount of future charge off percentages differ significantly from those assumed 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.

41

At September 30, 2014, we owned five collateralized loan obligation (“CLO”) securities subject to the Volcker Rule, with an amortized cost of $14.9 million and a net unrealized loss of $426,000. Absent changes to the Volcker Rule, we would be required to dispose of these securities before July 2017. We believe the unrealized loss reflected results not from credit risk but from interest rate changes and to the uncertainty created by the Volcker Rule. In the first quarter of 2014, we sold four of our CLOs and in the second quarter of 2014 we recorded partial sales on three of our CLOs to confirm their marketability and evaluate our assessment about their market values. We recorded a loss of $286,000 on these sales.

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

Real Estate Owned – The estimation of fair value is significant to real estate owned-acquired through foreclosure. These assets are recorded at fair value less estimated selling costs at the date of foreclosure. Fair value is based on the appraised market value of the property based on sales of similar assets when available. The 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 other real estate owned (“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 five year cumulative loss position, the level of our non-performing assets, our inability to meet our forecasted levels of assets and full year 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 September 30, 2014 and December 31, 2013.

RESULTS OF OPERATIONS

Net income attributable to common shareholders for the quarter ended September 30, 2014 was $55,000 or $0.01 per diluted common share compared to net income attributable to common shareholders of $1.2 million or $0.25 per diluted common share for the same period in 2013. Net loss attributable to common shareholders for the nine months ended September 30, 2014 was $2.9 million or $0.58 per diluted common share compared to a net loss attributable to common shareholders of $328,000 or $0.07 per diluted common share for the same period a year ago. Factors contributing to the net loss for the 2014 nine month period included the following:

· declining net interest income mainly driven by a decline of $3.1 million in loan interest income as a result of a decline of $46.3 million in average loan balances combined with the continuing low interest rate environment;

· a $1.8 million decrease in gains recorded on the sale of other real estate owned (“OREO”);

· a decline of $1.1 million in securities interest income mainly due to the continued low interest rate environment and a declining securities portfolio;

· a decline of $528,000 in gains on the sale of mortgage loans due to the decline in refinance activity, and

· an increase of $443,000 in legal and professional service fees as a result of higher legal expense due to the Share Exchange.

42

These factors were partially offset by the following:

· a decline of $2.2 million in deposit interest expense mainly as a result of an intentional decrease of $108.57 million in average certificates of deposits and other time deposits balances combined with a decline of 20 basis points in the cost of these deposits;

· a $1.3 million decrease in write downs and sale losses on OREO;

· a decline of $553,000 in employee compensation and benefits driven by a decrease in the number of employees. Fully time equivalent employees decreased from 271 at September 30, 2013 to 236 at September 30, 2014. This was offset by the immediate vesting of all outstanding and unvested stock options and restricted stock awards when we entered into the Share Exchange Agreement with CBIN on April 21, 2014, which resulted in an expense of over $800,000;

· a $492,000 decrease in loan expense, and

· a $251,000 increase in the reversal of provision for loans losses.

Net loss attributable to common shareholders was also increased by the dividends accrued on preferred shares. The dividend rate on those shares increased to 9% in early 2014, compared to 5% in 2013. Our book value per common share decreased from $2.99 at September 30, 2013 to $2.84 at September 30, 2014.

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.

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 $1.0 million and $2.0 million for the three and nine month 2014 periods compared to the prior year periods. Average interest earning assets decreased $89.0 million and $96.0 million for the three and nine month 2014 periods compared to 2013 primarily driven by a decrease in average loans. The decrease in average loans was due to 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 consistent with our efforts to reduce our level of assets and risk-weighted assets. The average loan yield was 4.64% and 4.86% for the three and nine month 2014 periods compared to an average loan yield of 5.12% and 5.24% for the 2013 periods.

Average interest bearing liabilities decreased $103.7 million and $105.3 million for the quarter and nine month 2014 periods compared to 2013 driven by a decrease in average certificates of deposit. The decrease in average deposits was due an intentional decrease in certificates of deposit as we focus on restructuring the balance sheet to decrease our cost of funds and improve net interest income.

The tax equivalent yield on earning assets averaged 3.50% and 3.64% for the three and nine month 2014 periods compared to 3.95% and 3.90% for 2013. The decline in the yields on interest-earning assets more than offset a decrease in our cost of funds, which averaged 0.84% and 0.91% for the three and nine month 2014 periods compared to an average cost of funds of 1.08% and 1.16% for the same periods in 2013. Net interest margin as a percent of average earning assets decreased 21 basis points to 2.75% for the quarter ended September 30, 2014 compared to 2.96% for the 2013 period and remained relatively constant at 2.82% for the nine months ended September 30, 2014 compared to 2.83% for the 2013 nine month period.

43

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 September 30,
	2014								2013
(Dollars in thousands)
	Average					Average			Average					Average
	Balance			Interest		Yield/Cost (5)			Balance			Interest		Yield/Cost (5)
ASSETS
Interest earning assets:
U.S. Treasury and agencies	$	6,061		$	64		4.19	%	$	-		$	-		0.00	%
Mortgage-backed securities		186,059			813		1.73	%		235,530			1,173		1.98	%
State and political subdivision securities (1)		8,529			129		6.00	%		14,251			188		5.23	%
Corporate bonds		12,711			106		3.31	%		56,013			400		2.83	%
Loans (2) (3) (4)		447,432			5,229		4.64	%		488,494			6,308		5.12	%
FHLB stock		4,080			41		3.99	%		4,430			47		4.21	%
Interest bearing deposits		61,957			28		0.18	%		17,150			9		0.21	%
Total interest earning assets		726,829			6,410		3.50	%		815,868			8,125		3.95	%
Less: Allowance for loan losses		(9,390	)							(15,871	)
Non-interest earning assets		66,191								74,394
Total assets	$	783,630							$	874,391
LIABILITIES AND
STOCKHOLDERS' EQUITY
Interest bearing liabilities:
Savings accounts	$	96,437		$	26		0.11	%	$	89,356		$	40		0.18	%
NOW and money market accounts		247,269			75		0.12	%		243,533			82		0.13	%
Certificates of deposit and other time deposits		271,671			940		1.37	%		365,675			1,439		1.56	%
FHLB advances		12,264			131		4.24	%		32,750			133		1.61	%
Subordinated debentures		18,000			195		4.30	%		18,000			340		7.49	%
Total interest bearing liabilities		645,641			1,367		0.84	%		749,314			2,034		1.08	%
Non-interest bearing liabilities:
Non-interest bearing deposits		87,113								80,523
Other liabilities		14,158								11,759
Total liabilities		746,912								841,596
Stockholders' equity		36,718								32,795
Total liabilities and stockholders' equity	$	783,630							$	874,391
Net interest income				$	5,043							$	6,091
Net interest spread							2.66	%							2.87	%
Net interest margin							2.75	%							2.96	%

(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

44

	Nine Months Ended September 30,
	2014								2013
(Dollars in thousands)
	Average					Average			Average					Average
	Balance			Interest		Yield/Cost (5)			Balance			Interest		Yield/Cost (5)
ASSETS
Interest earning assets:
U.S. Treasury and agencies	$	2,043		$	65		4.25	%	$	2,548		$	28		1.47	%
Mortgage-backed securities		199,091			2,791		1.87	%		256,138			3,414		1.78	%
State and political subdivision securities (1)		9,629			417		5.79	%		14,803			609		5.50	%
Corporate bonds		25,799			583		3.02	%		52,579			1,051		2.67	%
Loans (2) (3) (4)		456,959			16,609		4.86	%		503,227			19,729		5.24	%
FHLB stock		4,152			128		4.12	%		4,513			145		4.30	%
Interest bearing deposits		64,324			128		0.27	%		24,184			43		0.24	%
Total interest earning assets		761,997			20,721		3.64	%		857,992			25,019		3.90	%
Less: Allowance for loan losses		(9,609	)							(16,348	)
Non-interest earning assets		68,489								78,918
Total assets	$	820,877							$	920,562
LIABILITIES AND STOCKHOLDERS' EQUITY
Interest bearing liabilities:
Savings accounts	$	96,386		$	88		0.12	%	$	89,083		$	147		0.22	%
NOW and money market accounts		265,867			243		0.12	%		262,660			437		0.22	%
Certificates of deposit and other time deposits		293,132			3,126		1.43	%		401,583			4,887		1.63	%
FHLB advances		12,321			406		4.41	%		19,695			397		2.70	%
Subordinated debentures		18,000			787		5.85	%		18,000			1,022		7.59	%
Total interest bearing liabilities		685,706			4,650		0.91	%		791,021			6,890		1.16	%
Non-interest bearing liabilities:
Non-interest bearing deposits		85,449								79,836
Other liabilities		13,195								11,071
Total liabilities		784,350								881,928
Stockholders' equity		36,527								38,634
Total liabilities and stockholders' equity	$	820,877							$	920,562
Net interest income				$	16,071							$	18,129
Net interest spread							2.73	%							2.74	%
Net interest margin							2.82	%							2.83	%

(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

45

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									Nine Months Ended
	September 30,									September 30,
	2014 vs. 2013									2014 vs. 2013
	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	$	48		$	16		$	64		$	44		$	(7	)	$	37
Mortgage-backed securities		(133	)		(227	)		(360	)		169			(792	)		(623	)
State and political subdivision securities		25			(84	)		(59	)		31			(223	)		(192	)
Corporate bonds		58			(352	)		(294	)		123			(591	)		(468	)
Loans		(572	)		(507	)		(1,079	)		(1,380	)		(1,740	)		(3,120	)
FHLB stock		(2	)		(4	)		(6	)		(6	)		(11	)		(17	)
Interest bearing deposits		(1	)		20			19			6			79			85
Total interest earning assets		(577	)		(1,138	)		(1,715	)		(1,013	)		(3,285	)		(4,298	)
Interest expense:
Savings accounts		(17	)		3			(14	)		(70	)		11			(59	)
NOW and money market accounts		(8	)		1			(7	)		(199	)		5			(194	)
Certificates of deposit and other time deposits		(159	)		(340	)		(499	)		(553	)		(1,208	)		(1,761	)
FHLB advances		119			(121	)		(2	)		193			(184	)		9
Subordinated debentures		(145	)		-			(145	)		(235	)		-			(235	)
Total interest bearing liabilities		(210	)		(457	)		(667	)		(864	)		(1,376	)		(2,240	)
Net change in net interest income	$	(367	)	$	(681	)	$	(1,048	)	$	(149	)	$	(1,909	)	$	(2,058	)

NON-INTEREST INCOME AND NON-INTEREST EXPENSE

The following tables compare the components of non-interest income and expenses for the periods ended September 30, 2014 and 2013. The tables show the dollar and percentage change from 2013 to 2014. Below each table is a discussion of significant changes and trends.

	Three Months Ended
	September 30,
(Dollars in thousands)	2014			2013			Change			%
Non-interest income
Customer service fees on deposit accounts	$	1,363		$	1,444		$	(81	)		-5.6	%
Gain on sale of mortgage loans		130			230			(100	)		-43.5	%
Gain on sale of investments		13			235			(222	)		-94.5	%
Loss on sale of investments		-			(223	)		223			-100.0	%
Loss on sale and write downs of real estate acquired through foreclosure		(134	)		(365	)		231			-63.3	%
Gain on sale on real estate acquired through foreclosure		35			1,632			(1,597	)		-97.9	%
Other income		415			593			(178	)		-30.0	%
	$	1,822		$	3,546		$	(1,724	)		-48.6	%

46

	Nine Months Ended
	September 30,
(Dollars in thousands)	2014			2013			Change			%
Non-interest income
Customer service fees on deposit accounts	$	3,963		$	3,942		$	21			0.5	%
Gain on sale of mortgage loans		290			818			(528	)		-64.5	%
Gain on sale of investments		545			1,078			(533	)		-49.4	%
Loss on sale of investments		(567	)		(839	)		272			-32.4	%
Loss on sale and write downs of real estate acquired through foreclosure		(635	)		(1,957	)		1,322			-67.6	%
Gain on sale on real estate acquired through foreclosure		65			1,839			(1,774	)		-96.5	%
Other income		1,448			1,805			(357	)		-19.8	%
	$	5,109		$	6,686		$	(1,577	)		-23.6	%

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 2014 due to a decrease in the volume and the yield earned on loans refinanced, originated and sold compared to 2013.

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 2014 we recorded a net loss on the sale of debt investment securities of $22,000 compared to a net gain on sale of debt investment securities of $239,000 for the 2013 period.

Losses of $635,000 recorded on the sale and write down of real estate owned properties reduced non-interest income for 2014. Gains of $65,000 on the sale of eighteen real estate owned properties partially offset the losses and write downs.

The decrease in other income for the 2014 period resulted from decreases in income received on real estate owned properties after the sale of these properties.

	Three Months Ended
	September 30,
(Dollars in thousands)	2014		2013		Change			%
Non-interest expenses
Employee compensation and benefits	$	3,217	$	3,955	$	(738	)		-18.7	%
Office occupancy expense and equipment		670		653		17			2.6	%
Outside services and data processing		1,021		900		121			13.4	%
FDIC insurance premiums		428		460		(32	)		-7.0	%
Real estate acquired through foreclosure expense		475		452		23			5.1	%
Loan expense		35		485		(450	)		-92.8	%
Legal and professional service fees		484		330		154			46.7	%
Other expense		1,462		1,370		92			6.7	%
	$	7,792	$	8,605	$	(813	)		-9.4	%
	Nine Months Ended
	September 30,
(Dollars in thousands)	2014		2013		Change			%
Non-interest expenses
Employee compensation and benefits	$	10,952	$	11,505	$	(553	)		-4.8	%
Office occupancy expense and equipment		2,059		2,051		8			0.4	%
Outside services and data processing		2,938		2,704		234			8.7	%
FDIC insurance premiums		1,348		1,654		(306	)		-18.5	%
Real estate acquired through foreclosure expense		1,251		1,270		(19	)		-1.5	%
Loan expense		600		1,092		(492	)		-45.1	%
Legal and professional service fees		1,163		720		443			61.5	%
Other expense		4,635		4,472		163			3.6	%
	$	24,946	$	25,468	$	(522	)		-2.0	%

Employee compensation and benefits decreased during 2014 due to a decrease in the number of employees. Full time equivalent employees decreased from 271 at September 30, 2013 to 236 at September 30, 2014. Offsetting this decrease was $814,000 in additional compensation expense recorded during the second quarter of 2014 related to the immediate vesting of options and stock awards when we entered into the Share Exchange Agreement with CBIN on April 21, 2014.

47

Outside services expense increased for 2014 related to costs incurred as a result of the Share Exchange Agreement.

FDIC insurance premiums are based on the FDIC’s assessment base and rate structure. The assessment base is defined as the average consolidated total assets less average Tier I Capital. As a result of the decrease in total deposits for 2014, FDIC insurance premiums have been reduced.

The decrease in loan expense for 2014 is due to a reduction in loan workout and loan portfolio management expenses.

The increase in legal and professional service fees for the 2014 period is due to higher legal expense arising from the Share Exchange Agreement.

Income Taxes

The provision for income taxes includes federal and state income taxes and in 2014 and 2013 reflects a full valuation allowance against all of our deferred tax assets. Income tax expense of $200,000 and an income tax benefit of $767,000 were recorded for the quarter and nine month period ended September 30, 2014 compared to income tax expense of $1,000 and $2,000 recorded for the quarter and nine month 2013 periods. Our nine month September 30, 2014 tax benefit is entirely due to gains in other comprehensive income that are presented in current operations in accordance with applicable accounting standards. 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 five year cumulative loss position, the level of our non-performing assets, our inability to meet our forecasted levels of assets and full year operating results in 2013, 2012 and 2011 and the degree of our compliance with the capital requirements of our Consent Order. Based on this assessment, we concluded that a valuation allowance was necessary at September 30, 2014 and December 31, 2013. 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.

48

ANALYSIS OF FINANCIAL CONDITION

Total assets at September 30, 2014 decreased $105.7 million compared to total assets at December 31, 2013. The decrease was primarily attributable to a decline of $61.2 million in available-for-sale securities, a decline of $30.7 million in total loans and a decline in cash and cash equivalents of $9.0 million. Total deposits decreased $109.7 million due to an intentional reduction in certificates of deposit as we focus on restructuring the balance sheet to decrease our cost of funds and improve net interest income.

Loans

Total loans decreased $30.7 million to $436.2 million at September 30, 2014 compared to $466.9 million at December 31, 2013. Our commercial real estate portfolio decreased $31.3 million to $248.6 million at September 30, 2014. The decline in the total loan portfolio is primarily the result of pay-offs, charge-offs, and loans being transferred to real estate acquired through foreclosure for commercial real estate loans, which together exceeded the volume of new loans originated. 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 our regulatory capital ratios in light of the higher regulatory capital requirements imposed by our Consent Order.

	September 30,			December 31,
(Dollars in thousands)	2014			2013
Commercial Real Estate:
Other	$	233,296		$	257,901
Land Development		14,057			20,476
Building Lots		1,224			1,559
Residential mortgage		98,856			99,344
Consumer and home equity		51,319			54,010
Commercial		24,496			20,621
Indirect consumer		12,977			13,041
		436,225			466,952
Less:
Net deferred loan origination fees		(39	)		(90	)
Allowance for loan losses		(8,218	)		(9,576	)
		(8,257	)		(9,666	)
Net Loans	$	427,968		$	457,286

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.

Management, which is comprised of senior officers and certain accounting and credit associates, 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 size of the allowance is determined 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. The Loan Appraisal Committee determines when appraisals must be obtained and reviews appraisals once received. The Loan Appraisal Committee also reviews all non-accrual and restructured loan relationships. As we receive new appraisals on properties securing non-performing loans, we recognize charge-offs and adjust specific reserves as appropriate. In addition, management, which is comprised of senior officers and certain accounting and credit associates, 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.

49

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 and real estate values have stabilized as compared to the period before 2012. As a result of the relative stabilization in real estate values during 2013 and 2014, our provision for loan losses decreased compared to the three prior years.

As discussed in the Regulatory Matters 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.

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

	Three Months Ended						Nine Months Ended
	September 30,						September 30,
(Dollars in thousands)	2014			2013			2014			2013
Balance at beginning of period	$	9,538		$	15,947		$	9,576		$	17,265
Loans charged-off:
Residential mortgage		34			73			53			73
Consumer & home equity		26			156			94			311
Commercial & commercial real estate		728			3,124			1,030			3,670
Total charge-offs		788			3,353			1,177			4,054
Recoveries:
Residential mortgage		98			13			113			17
Consumer & home equity		29			44			119			134
Commercial & commercial real estate		1,017			73			1,163			187
Total recoveries		1,144			130			1,395			338
Net loans charged-off		(356	)		3,223			(218	)		3,716
Provision for loan losses		(1,676	)		(500	)		(1,576	)		(1,325	)
Balance at end of period	$	8,218		$	12,224		$	8,218		$	12,224
Allowance for loan losses to total loans		1.88	%		2.57	%		1.88	%		2.57	%
Annualized net charge-offs to average loans outstanding		-0.32	%		2.62	%		-0.06	%		0.99	%
Allowance for loan losses to total non-performing loans		50	%		57	%		50	%		57	%

The reversal of provision for loan losses increased $1.2 million to $1.7 million for the three months ended September 30, 2014 compared to the same period ended September 30, 2013. The reversal of provision for loan losses increased $251,000 for the nine months ended September 30, 2014 compared to the same nine month period in 2013. We recorded a reversal of provision expense for the 2014 and 2013 nine month periods due to a decline in the size of our loan portfolio, realized net recoveries during the period, a lower level of classified loans compared to 2013, declining historical loss rates, and a reduction in the specific reserves allocated to several relationships based upon improved credit quality.

The allowance for loan losses was $8.2 million at September 30, 2014, a decrease of $4.0 million compared to 2013. The decrease was driven by net charge-offs of $669,000 taken during 2013 and 2014, and the reversal of $3.3 million in provision for loan loss expense. The allowance for loan losses as a percent of total loans was 1.88% for September 30, 2014 compared to 2.57% at September 30, 2013. Specific reserves allocated to substandard loans aggregated to $2.1 million and made up 25% of the total allowance for loan loss at September 30, 2014 compared to $3.9 million or 32% of the allowance at September 30, 2013. Net charge-offs for the 2014 period included $478,000 in partial charge-offs compared to partial charge-offs of $3.4 million for the 2013 period. Allowance for loan losses to total non-performing loans decreased to 50% at September 30, 2014 from 57% at September 30, 2013. The decrease in the coverage ratio for 2014 was driven by the decline in non-performing loans which more than offsets the decline in the allowance balance.

50

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.

The following table provides information with respect to criticized and classified loans for the periods indicated:

	September 30,		June 30,		March 31,		December 31,		September 30,
(Dollars in thousands)	2014		2014		2014		2013		2013
Criticized Loans:
Total Criticized	$	10,712	$	13,799	$	18,614	$	18,329	$	22,456
Classified Loans:
Substandard	$	30,688	$	33,528	$	34,353	$	37,479	$	45,798
Doubtful		-		-		-		-		-
Loss		-		-		-		-		-
Total Classified	$	30,688	$	33,528	$	34,353	$	37,479	$	45,798
Total Criticized and Classified	$	41,400	$	47,327	$	52,967	$	55,808	$	68,254

Total criticized and classified loans declined by $14.4 million or 26% from December 31, 2013 and by $26.9 million or 39% from September 30, 2013. Contributing to the decline since December were two commercial real estate relationships totaling $4.6 million that were upgraded from criticized to pass status, the payoff and pay-down of five commercial real estate relationships totaling $4.2 million and the transfer of a commercial real estate relationship totaling $212,000 to real estate acquired through foreclosure. Approximately $27.0 million or 88% of the total classified loans at September 30, 2014 were related to commercial real estate loans in our market area. Classified consumer loans totaled $310,000, classified mortgage loans totaled $2.9 million and classified commercial loans totaled $513,000. Our decision to record a reversal of a portion of the allowance for loan losses during 2014 resulted from the application of a consistent allowance methodology that is driven by risk ratings and historical loss trends adjusted for qualitative factors. 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. 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 for the remainder of 2014 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 past due 90 days or more still on accrual, loans on which interest is no longer accrued, real estate acquired through foreclosure, and repossessed assets. Three bank lots originally acquired for expansion but now held for sale are also classified as non-performing assets. 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. Impaired loans are carried at the present value of estimated future cash flows discounted at the loan’s effective interest rate, or at the fair value of the collateral less cost to sell if the loan is collateral dependent.

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.

51

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 interest accrual is discontinued, existing accrued interest is reversed and interest income is subsequently recognized 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 $9.5 million, a decrease of $2.2 from December 31, 2013. We believe that our level of real estate acquired through foreclosure has stabilized, as the inflow of properties has slowed down substantially compared to 2013, 2012 and 2011. All properties held in OREO are listed for sale with various independent real estate agents.

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

	September 30,			December 31,
(Dollars in thousands)	2014			2013
Beginning balance, January 1,	$	11,657		$	22,286
Additions		1,716			8,713
Net proceeds from sale of properties		(2,673	)		(17,076	)
Writedowns		(630	)		(2,185	)
Change in valuation allowance		(563	)		(81	)
Ending balance	$	9,507		$	11,657

52

The following table provides information with respect to non-performing assets for the periods indicated.

	September 30,			June 30,			March 31,			December 31,			September 30,
(Dollars in thousands)	2014			2014			2014			2013			2013
Restructured on non-accrual status	$	9,436		$	5,792		$	1,170		$	1,310		$	7,927
Restructured past due 90 days still on accrual		-			-			-			4,780			4,837
Past due 90 days still on accrual		2,017			-			-			2,226			2,238
Loans on non-accrual status		4,917			7,171			7,688			9,096			6,511
Total non-performing loans		16,370			12,963			8,858			17,412			21,513
Real estate acquired through foreclosure		9,507			11,243			12,260			11,657			8,859
Real estate owned-bank lots		1,446			1,446			1,446			1,469			-
Other repossessed assets		30			5			32			37			16
Total non-performing assets	$	27,353		$	25,657		$	22,596		$	30,575		$	30,388
Interest income that would have been earned on non-performing loans	$	796		$	644		$	446		$	902		$	1,127
Interest income recognized on non-performing loans		72			-			-			246			38
Ratios: Non-performing loans to total loans		3.75	%		2.85	%		1.93	%		3.73	%		4.52	%
Non-performing assets to total loans		6.27	%		5.63	%		4.92	%		6.55	%		6.38	%

Non-performing loans declined by $1.0 million to $16.4 million at September 30, 2014 compared to December 31, 2013 and increased by $3.4 million compared to June 30, 2014. The change in non-accrual loans from December 31, 2013 was due to the transfer of a non-accrual relationship totaling $725,000 to real estate acquired through foreclosure and the pay-down and payoff of three commercial real estate relationships totaling $2.9 million. A commercial real estate relationship totaling $4.8 million was transferred from restructured 90 days past due and still on accrual to restructured on non-accrual status.

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. All non-performing loans are considered impaired.

The following table shows our restructured loans for the periods indicated.

	September 30,		December 31,
(Dollar in thousands)	2014		2013
Restructured loans on non-accrual	$	9,436	$	1,310
Restructured past due 90 days still on accrual		-		4,780
Restructured loans on accrual		10,914		18,963
Total restructured loans	$	20,350	$	25,053

Restructured loans on accrual decreased during 2014 due to the payoff and pay-down of three commercial real estate relationships totaling $2.3 million and the reclassification of two commercial real estate loans totaling $4.6 million to non-accrual status. Also impacting restructured loans on non-accrual was the reclassification of a commercial real estate relationship totaling $4.8 million from past due 90 days still on accrual status.

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.

53

Investment Securities

Interest on securities provides us our largest source of interest income after interest on loans, constituting 19.3% of the total interest income for the nine months ended September 30, 2014. 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 institutions and banks, bankers' acceptances, and federal funds. We may also invest a portion of our assets in certain commercial paper, collateralized loan obligations 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 $61.2 million primarily due to sales of corporate bonds and CLOs, 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 to 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 did not consider these investments to be other-than-temporarily impaired at September 30, 2014. See Note 3 – Securities for more information.

At September 30, 2014, we owned five collateralized loan obligation (“CLO”) securities subject to the Volcker Rule, with an amortized cost of $14.9 million and a net unrealized loss of $426,000. Absent changes to the Volcker Rule, we would be required to dispose of these securities before July 2017. We believe the unrealized loss reflected results not from credit risk but from interest rate changes and to the uncertainty created by the Volcker Rule. In the first quarter of 2014, we sold four of our CLOs and in the second quarter of 2014 we recorded partial sales on three of our CLOs to confirm their marketability and evaluate our assessment about their market values. We recorded a loss of $286,000 on these sales.

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, due to the Bank’s designation as a “troubled institution,” we can no longer accept, renew or roll over brokered deposits (including deposits obtained through the CDARs program) without prior regulatory approval.

54

Total deposits decreased $109.7 million since December 31, 2013. Public funds decreased $39.6 million while retail and commercial deposits decreased $70.1 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 were $16.1 million at September 30, 2014, decreasing by $11.2 million from $27.3 million at December 31, 2013.

The following table shows the amount of our brokered deposits by time remaining until maturity.

	(Dollars in thousands)
2014	$	2,341
2015		3,266
2016		1,190
2017		-
2018		4,609
2019		4,730
	$	16,136

We are currently a member of Qwickrate, which is a premier non-brokered market place that we use as an additional low cost funding source. Qwickrate deposits totaled $18.0 million at September 30, 2014 compared to $18.2 million at December 31, 2013. We do not anticipate a negative impact as a result of not being able to renew our current $16.1 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 Bank’s designation as a "troubled institution" 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 not to pursue such a waiver and to adhere to the average rates computed by the FDIC plus the .75% rate cap.

The following table breaks down our deposits.

	September 30,		December 31,
	2014		2013
	(In Thousands)
Non-interest bearing	$	85,654	$	78,480
NOW demand		154,035		192,514
Savings		94,387		90,176
Money market		78,280		94,367
Certificates of deposit		261,391		327,950
	$	673,747	$	783,487

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 September 30, 2014, outstanding FHLB advances totaled $12.2 million, and we had sufficient collateral available to borrow approximately $12.8 million in additional advances. 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 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.

55

The subordinated debentures are considered as Tier 1 capital or Tier 2 capital for the Corporation under current regulatory 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. 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 20 consecutive quarters.

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 banking operations in Indiana that we later sold. 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. Thereafter, we must pay all deferred interest or we will be in default. During the deferral period, the subsidiary trusts likewise suspended 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 September 30, 2014, we have deferred a total of sixteen quarterly payments and these accrued but unpaid interest payments totaled $5.5 million.

LIQUIDITY

Liquidity refers to our ability to generate adequate amounts of cash to meet financial obligations to our customers and shareholders in order to fund loans, respond to deposit outflows and to cover operating expenses. Maintaining a level of liquid funds through asset/liability management seeks to ensure that these needs are met at a reasonable cost. Liquidity is essential to compensate for fluctuations in the balance sheet and provide funds for growth and normal operating expenditures. 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. 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 September 30, 2014, we had sufficient collateral available to borrow approximately $12.8 million through 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 maturities and potential asset 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 the Bank can pay to the Corporation 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 our 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 nine months of 2014, the Bank did not declare or pay any dividends to the Corporation. Cash held by the Corporation at September 30, 2014 was $50,000 compared to cash of $147,000 at December 31, 2013.

56

CAPITAL

Stockholders’ equity increased $1.8 million for the period ended September 30, 2014, primarily due to a decrease in unrealized losses on securities available-for-sale offset by our net loss recorded during the period. Our average stockholders’ equity to average assets ratio increased to 4.45% for the nine months ended September 30, 2014 compared to 4.19% for the 2013 period.

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

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.

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 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 9%, continues until our Senior Preferred Shares are fully retired.

During the first nine months of 2014, 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.

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 September 30, 2014.

Capital Adequacy Ratios as of

September 30, 2014

	Regulatory			Ratio Required
Risk-Based Capital Ratios	Minimums			by Consent Order			The Bank			The Corporation
Tier 1 capital		4.00	%		N/A			14.68	%		11.45	%
Total risk-based capital		8.00	%		12.00	%		15.93	%		13.56	%
Tier 1 leverage ratio		4.00	%		9.00	%		9.03	%		7.08	%

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 September 30, 2014, the Bank’s Tier 1 capital ratio was 9.03% and the total risk-based capital ratio was 15.93% compared to 7.96% and 13.48% at December 31, 2013. As of September 30, 2014, our Tier 1 capital ratio is also in excess of the required minimum and the Bank is now in compliance with all of the requirements of its Consent Order with the FDIC and KDFI.

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 under Regulatory Matters, above.

57

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 members of management, 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.

Our interest sensitivity profile was asset sensitive at September 30, 2014 and December 31, 2013. Given a sustained 100 basis point increase in interest rates, our base net interest income would increase by an estimated 2.82% at September 30, 2014 compared to an increase of 3.89% at December 31, 2013.

We did not run a model simulation for declining interest rates as of September 30, 2014 and December 31, 2013, 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 September 30, 2014 and December 31, 2013 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.

58

Our sensitivity to interest rate changes is presented below based on data as of September 30, 2014 and December 31, 2013 annualized to a one year period.

			September 30, 2014 Increase in Rates
			100			200
(Dollars in thousands)	Base		Basis Points			Basis Points
Projected interest income	$	24,891	$	27,961		$	31,195
Projected interest expense		4,403		6,896			9,390
Net interest income	$	20,488	$	21,065		$	21,805
Change from base			$	577		$	1,317
% Change from base				2.82	%		6.43	%

			December 31, 2013 Increase in Rates
			100			200
(Dollars in thousands)	Base		Basis Points			Basis Points
Projected interest income	$	27,800	$	31,688		$	35,783
Projected interest expense		5,364		8,378			11,392
Net interest income	$	22,436	$	23,310		$	24,391
Change from base			$	874		$	1,955
% Change from base				3.89	%		8.71	%

59

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 September 30, 2014, 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 September 30, 2014 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

In the normal course of operations, we may become defendants in various legal proceedings. Litigation is subject to inherent uncertainties and unfavorable rulings could occur. Currently, there are no material pending legal proceedings to which we are a party, or to which any of our property is subject.

On February 11, 2013, seven plaintiffs filed a lawsuit against First Federal Savings Bank and two co-defendants in federal district court in Louisville, Kentucky. The plaintiffs’ complaint was dismissed on November 19, 2013. On November 22, 2013, the same plaintiffs filed a complaint in Kentucky state courts. Plaintiffs had 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 First Federal Savings Bank to the two companies to finance the purchase of this same property, in the principal amount of $3,125,622.74. Plaintiffs alleged that the Bank and the co-defendants violated Kentucky statutes; committed common law fraud, negligence, and negligence per se; and breached fiduciary duties. Plaintiffs sought to rescind the lending documents and recover damages, including punitive damages. First Federal Savings Bank filed a counterclaim, cross-claim and third-party complaint to enforce the guaranty contracts against all guarantors. Earlier, in February 2013, the Bank had filed its own foreclosure lawsuit in Illinois state court to enforce its lending documents against the borrower and to sell the subject real estate collateral. On January 6, 2014, the Illinois court entered judgment in First Federal Savings Bank’s favor. In July 2014, the Bank, Plaintiffs and certain third party defendants settled their respective litigation claims against one and another in both the Kentucky and Illinois lawsuits and requested those claims be dismissed. First Federal Savings Bank has not dismissed its cross-claim in the Kentucky action against a co-defendant who was the organizer of the borrowers and who is a limited guarantor of the subject loan. The Bank intends to vigorously prosecute its interests in the claims remaining in the Kentucky state court lawsuit.

Item 1A. Risk Factors

There have been no material changes from the risk factors as previously disclosed in our Annual Report on Form 10-K for the year ended December 31, 2013.

Item 2. Unregistered Sales of Securities and Use of Proceeds

We did not repurchase any shares of our common stock during the quarter ended September 30, 2014.

Item 3. Defaults Upon Senior Securities

Not Applicable

60

Item 4. Mine Safety Disclosures

Not Applicable

Item 5. Other Information

None

Item 6. Exhibits:

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 and Section 906 of the Sarbanes-Oxley Act

101 The following financial information from the Quarterly Report of First Financial Service Corporation on Form 10-Q for the nine months ended September 30, 2014, formatted in XBRL: (i) Consolidated Balance Sheets as of September 30, 2014 and December 31, 2013, (ii) Consolidated Statements of Operations for the three and nine months ended September 30, 2014 and 2013, (iii) Consolidated Statements of Comprehensive Income/(Loss) for the three and nine months ended September 30, 2014 and 2013, (iv) Consolidated Statements of Changes in Stockholders’ Equity for the nine months ended September 30, 2014, (v) Consolidated Statements of Cash Flows for the nine months ended September 30, 2014 and 2013, and (vi) Notes to the Unaudited Consolidated Financial Statements.

61

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: November 14, 2014	By:	/s/ Gregory S. Schreacke
		Gregory S. Schreacke
		President
		Principal Executive Officer
		Duly Authorized Representative
Date: November 14, 2014	By:	/s/ Frank Perez
		Frank Perez
		Chief Financial Officer
		Principal Financial Officer

62

INDEX TO EXHIBITS

Exhibit No.	Description
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 and Section 906 of the Sarbanes-Oxley Act.
101	The following financial information from the Quarterly Report of First Financial Service Corporation on Form 10-Q for the nine months ended September 30, 2014, formatted in XBRL: (i) Consolidated Balance Sheets as of September 30, 2014 and December 31, 2013, (ii) Consolidated Statements of Operations for the three and nine months ended September 30, 2014 and 2013, (iii) Consolidated Statements of Comprehensive Income/(Loss) for the three and nine months ended September 30, 2014 and 2013, (iv) Consolidated Statements of Changes in Stockholders’ Equity for the nine months ended September 30, 2014, (v) Consolidated Statements of Cash Flows for the nine months ended September 30, 2014 and 2013, and (vi) Notes to the Unaudited Consolidated Financial Statements.

63

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: November 14, 2014	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: November 14, 2014	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 AND SECTION 906 OF THE SARBANES-OXLEY ACT

In connection with the Quarterly Report of First Financial Service Corporation (the “Corporation”) on Form 10-Q for the period ended September 30, 2014 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: November 14, 2014	By:	/s/Gregory S. Schreacke
		Gregory S. Schreacke
		President
		Principal Executive Officer
Date: November 14, 2014	By:	/s/Frank Perez
		Frank Perez
		Chief Financial Officer
		Principal Financial Officer &
		Principal Accounting Officer

XML

LOANS (Details 3) (USD $) In Thousands, unless otherwise specified	3 Months Ended		9 Months Ended		12 Months Ended
	Sep. 30, 2014	Sep. 30, 2013	Sep. 30, 2014	Sep. 30, 2013	Dec. 31, 2013
Accounts, Notes, Loans and Financing Receivable [Line Items]
Impaired Financing Receivable, With Related Allowance, Unpaid Principal Balance	$ 29,330	$ 51,582	$ 29,330	$ 51,582	$ 41,509
Impaired Financing Receivable, With Related Allowance, Recorded Investment	27,433	45,617	27,433	45,617	37,311
Impaired Financing Receivable, With Related Allowance, Allowance for Loan Losses Allocated	2,063	3,866	2,063	3,866	2,786
Impaired Financing Receivable, With Related Allowance, Average Recorded Investment	30,644	43,323	33,886	43,254	44,394
Impaired Financing Receivable, With Related Allowance, Interest Income Recognized	197	455	812	1,342	1,826
Impaired Financing Receivable, With Related Allowance, Cash Basis Interest Recognized	197	455	812	1,342	1,826
Commercial Loan [Member]
Accounts, Notes, Loans and Financing Receivable [Line Items]
Impaired Financing Receivable, With No Related Allowance, Unpaid Principal Balance	607	1,177	607	1,177	679
Impaired Financing Receivable, With No Related Allowance, Recorded Investment	403	973	403	973	475
Impaired Financing Receivable, With No Related Allowance, Average Recorded Investment	407	1,001	441	815	747
Impaired Financing Receivable, With No Related Allowance, Interest Income Recognized	2	9	7	18	21
Impaired Financing Receivable, With No Related Allowance, Cash Basis Interest Recognized	2	9	7	18	21
Impaired Financing Receivable, With Related Allowance, Unpaid Principal Balance	113	380	113	380	328
Impaired Financing Receivable, With Related Allowance, Recorded Investment	113	380	113	380	328
Impaired Financing Receivable, With Related Allowance, Allowance for Loan Losses Allocated	113	197	113	197	148
Impaired Financing Receivable, With Related Allowance, Average Recorded Investment	214	283	269	310	314
Impaired Financing Receivable, With Related Allowance, Interest Income Recognized	1	2	5	7	9
Impaired Financing Receivable, With Related Allowance, Cash Basis Interest Recognized	1	2	5	7	9
Land Improvements [Member]
Accounts, Notes, Loans and Financing Receivable [Line Items]
Impaired Financing Receivable, With No Related Allowance, Unpaid Principal Balance	1,950	2,220	1,950	2,220	2,014
Impaired Financing Receivable, With No Related Allowance, Recorded Investment	1,000	2,195	1,000	2,195	1,989
Impaired Financing Receivable, With No Related Allowance, Average Recorded Investment	1,163	2,253	1,438	3,125	2,898
Impaired Financing Receivable, With No Related Allowance, Interest Income Recognized	6	27	23	114	139
Impaired Financing Receivable, With No Related Allowance, Cash Basis Interest Recognized	6	27	23	114	139
Impaired Financing Receivable, With Related Allowance, Unpaid Principal Balance	240	2,206	240	2,206	2,206
Impaired Financing Receivable, With Related Allowance, Recorded Investment	240	2,206	240	2,206	2,206
Impaired Financing Receivable, With Related Allowance, Allowance for Loan Losses Allocated	113	1,015	113	1,015	1,581
Impaired Financing Receivable, With Related Allowance, Average Recorded Investment	1,219	2,568	1,713	2,621	2,538
Impaired Financing Receivable, With Related Allowance, Interest Income Recognized	7	31	27	95	121
Impaired Financing Receivable, With Related Allowance, Cash Basis Interest Recognized	7	31	27	95	121
Buildings Lot [Member]
Accounts, Notes, Loans and Financing Receivable [Line Items]
Impaired Financing Receivable, With No Related Allowance, Unpaid Principal Balance	0	477	0	477	477
Impaired Financing Receivable, With No Related Allowance, Recorded Investment	0	212	0	212	212
Impaired Financing Receivable, With No Related Allowance, Average Recorded Investment	106	212	159	212	212
Impaired Financing Receivable, With No Related Allowance, Interest Income Recognized	0	0	0	0	0
Impaired Financing Receivable, With No Related Allowance, 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, With Related Allowance, 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, Cash Basis Interest Recognized	0	0	0	0	0
Commercial Real Estate Other Receivable [Member]
Accounts, Notes, Loans and Financing Receivable [Line Items]
Impaired Financing Receivable, With No Related Allowance, Unpaid Principal Balance	12,632	25,475	12,632	25,475	25,441
Impaired Financing Receivable, With No Related Allowance, Recorded Investment	12,121	20,048	12,121	20,048	21,864
Impaired Financing Receivable, With No Related Allowance, Average Recorded Investment	15,793	14,964	18,678	14,042	17,934
Impaired Financing Receivable, With No Related Allowance, Interest Income Recognized	108	161	488	444	754
Impaired Financing Receivable, With No Related Allowance, Cash Basis Interest Recognized	108	161	488	444	754
Impaired Financing Receivable, With Related Allowance, Unpaid Principal Balance	10,389	15,970	10,389	15,970	6,640
Impaired Financing Receivable, With Related Allowance, Recorded Investment	10,389	15,968	10,389	15,968	6,640
Impaired Financing Receivable, With Related Allowance, Allowance for Loan Losses Allocated	1,836	2,535	1,836	2,535	1,022
Impaired Financing Receivable, With Related Allowance, Average Recorded Investment	8,644	18,183	7,860	18,980	16,512
Impaired Financing Receivable, With Related Allowance, Interest Income Recognized	59	195	205	599	694
Impaired Financing Receivable, With Related Allowance, Cash Basis Interest Recognized	59	195	205	599	694
Residential Mortgage [Member]
Accounts, Notes, Loans and Financing Receivable [Line Items]
Impaired Financing Receivable, With No Related Allowance, Unpaid Principal Balance	3,011	2,525	3,011	2,525	3,119
Impaired Financing Receivable, With No Related Allowance, Recorded Investment	2,815	2,525	2,815	2,525	2,992
Impaired Financing Receivable, With No Related Allowance, Average Recorded Investment	2,642	2,733	2,817	2,212	2,368
Impaired Financing Receivable, With No Related Allowance, Interest Income Recognized	11	21	45	45	63
Impaired Financing Receivable, With No Related Allowance, Cash Basis Interest Recognized	11	21	45	45	63
Impaired Financing Receivable, With Related Allowance, Unpaid Principal Balance	44	514	44	514	59
Impaired Financing Receivable, With Related Allowance, Recorded Investment	44	490	44	490	59
Impaired Financing Receivable, With Related Allowance, Allowance for Loan Losses Allocated	1	68	1	68	3
Impaired Financing Receivable, With Related Allowance, Average Recorded Investment	101	484	80	375	312
Impaired Financing Receivable, With Related Allowance, Interest Income Recognized	0	4	1	8	8
Impaired Financing Receivable, With Related Allowance, Cash Basis Interest Recognized	0	4	1	8	8
Consumer and Home Equity [Member]
Accounts, Notes, Loans and Financing Receivable [Line Items]
Impaired Financing Receivable, With No Related Allowance, Unpaid Principal Balance	344	357	344	357	478
Impaired Financing Receivable, With No Related Allowance, Recorded Investment	308	357	308	357	478
Impaired Financing Receivable, With No Related Allowance, Average Recorded Investment	344	376	392	293	330
Impaired Financing Receivable, With No Related Allowance, Interest Income Recognized	3	3	10	6	10
Impaired Financing Receivable, With No Related Allowance, Cash Basis Interest Recognized	3	3	10	6	10
Impaired Financing Receivable, With Related Allowance, Unpaid Principal Balance	0	281	0	281	68
Impaired Financing Receivable, With Related Allowance, Recorded Investment	0	263	0	263	68
Impaired Financing Receivable, With Related Allowance, Allowance for Loan Losses Allocated	0	51	0	51	32
Impaired Financing Receivable, With Related Allowance, Average Recorded Investment	11	266	39	269	229
Impaired Financing Receivable, With Related Allowance, Interest Income Recognized	0	2	1	6	7
Impaired Financing Receivable, With Related Allowance, Cash Basis Interest Recognized	0	2	1	6	7
Indirect Consumer [Member]
Accounts, Notes, Loans and Financing Receivable [Line Items]
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, 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, With Related Allowance, 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, Cash Basis Interest Recognized	$ 0	$ 0	$ 0	$ 0	$ 0

XML

STOCK BASED COMPENSATION PLAN (Details 1) (USD $) In Thousands, except Share data, unless otherwise specified	9 Months Ended
	Sep. 30, 2014
Share-based Compensation Arrangement by Share-based Payment Award [Line Items]
Number of Options, Outstanding, beginning of period	376,300
Number of Options, Granted during period	5,000
Number of Options, Forfeited during period	(16,500)
Number of Options, Exercised during period	(12,500)
Number of Options, Outstanding, end of period	352,300
Number of Options, Eligible for exercise at period end	352,300
Weighted Average Exercise Price, Outstanding, beginning of period	$ 3.13
Weighted Average Exercise Price, Granted during period	$ 4.90
Weighted Average Exercise Price, Forfeited during period	$ 3.61
Weighted Average Exercise Price, Exercised during period	$ 1.72
Weighted Average Exercise Price, Outstanding, end of period	$ 3.18
Weighted Average Exercise Price, Eligible for exercise at period end	$ 3.18
Weighted Average Remaining Contractual Term Outstanding, end of period	7 years 6 months
Weighted Average Remaining Contractual Term Eligible for exercise at period end	7 years 6 months
Aggregate Intrinsic Value Outstanding, end of period	$ 362
Aggregate Intrinsic Value Eligible for exercise at period end	$ 362

XML

REAL ESTATE ACQUIRED THROUGH FORECLOSURE (Details 1) (USD $) In Thousands, unless otherwise specified	3 Months Ended		9 Months Ended
	Sep. 30, 2014	Sep. 30, 2013	Sep. 30, 2014	Sep. 30, 2013
Real Estate Acquired Through Foreclosure Valuation Allowance [Line Items]
Beginning balance	$ 1,039	$ 721	$ 581	$ 500
Provision	105	365	563	1,957
Writedowns and loss on sale	0	(365)	0	(1,736)
Ending balance	$ 1,144	$ 721	$ 1,144	$ 721

XML

STOCK BASED COMPENSATION PLAN (Details 2) (USD $)	9 Months Ended
	Sep. 30, 2014
Share-based Compensation Arrangement by Share-based Payment Award [Line Items]
Non-vested Shares, Outstanding, beginning of period	63,497
Non-vested Shares, Granted during period	138,090
Non-vested Shares, Forfeited during period	(1,000)
Non-vested Shares, Vested during period	(125,797)
Non-vested Shares, Outstanding, end of period	74,790
Weighted Average Grant Date Fair Value, Outstanding, beginning of period	$ 3.81
Weighted Average Grant Date Fair Value, Granted during period	$ 4.21
Weighted Average Grant Date Fair Value, Forfeited during period	$ 4.91
Weighted Average Grant Date Fair Value, Vested during period	$ 4.35
Weighted Average Grant Date Fair Value, Outstanding, end of period	$ 3.61

XML

LOANS (Details Textual) (USD $)	3 Months Ended		9 Months Ended
	Sep. 30, 2014	Sep. 30, 2013	Sep. 30, 2014	Sep. 30, 2013	Dec. 31, 2013
Accounts, Notes, Loans and Financing Receivable [Line Items]
Financing Receivable, Individually Evaluated for Impairment	$ 27,433,000	$ 45,617,000	$ 27,433,000	$ 45,617,000	$ 37,311,000
Troubled Debt Restructurings [Member]
Accounts, Notes, Loans and Financing Receivable [Line Items]
Financing Receivable, Individually Evaluated for Impairment	1,800,000		1,800,000		1,100,000
Allowance for Loan and Lease Losses, Period Increase (Decrease)	0		0
Provision For Loan Losses Expensed Reversal		0		78,000
Troubled Debt Restructurings Subsequently Default [Member]
Accounts, Notes, Loans and Financing Receivable [Line Items]
Allowance for Loan and Lease Losses, Period Increase (Decrease)	0		0
Allowance for Doubtful Accounts Receivable, Write-offs	$ 0		$ 0

XML

SECURITIES (Details 2) (USD $) In Thousands, unless otherwise specified	3 Months Ended		9 Months Ended
	Sep. 30, 2014	Sep. 30, 2013	Sep. 30, 2014	Sep. 30, 2013
Schedule of Available-for-sale Securities [Line Items]
Proceeds from sales	$ 620	$ 24,295	$ 73,701	$ 125,351
Gross realized gains	13	235	545	1,078
Gross realized losses	$ 0	$ 223	$ 567	$ 839

XML

FAIR VALUE (Details) (USD $) In Thousands, unless otherwise specified	Sep. 30, 2014	Dec. 31, 2013
Fair Value, Balance Sheet Grouping, Financial Statement Captions [Line Items]
Securities available-for-sale	$ 208,087	$ 269,282
Fair Value, Inputs, Level 1 [Member]
Fair Value, Balance Sheet Grouping, Financial Statement Captions [Line Items]
Securities available-for-sale	2,782	10,768
Fair Value, Inputs, Level 2 [Member]
Fair Value, Balance Sheet Grouping, Financial Statement Captions [Line Items]
Securities available-for-sale	205,305	258,514
Fair Value, Inputs, Level 3 [Member]
Fair Value, Balance Sheet Grouping, Financial Statement Captions [Line Items]
Securities available-for-sale	0	0
Commercial Mortgage Backed Securities [Member]
Fair Value, Balance Sheet Grouping, Financial Statement Captions [Line Items]
Securities available-for-sale	3,096	4,043
Commercial Mortgage Backed Securities [Member] | Fair Value, Inputs, Level 1 [Member]
Fair Value, Balance Sheet Grouping, Financial Statement Captions [Line Items]
Securities available-for-sale	0	0
Commercial Mortgage Backed Securities [Member] | Fair Value, Inputs, Level 2 [Member]
Fair Value, Balance Sheet Grouping, Financial Statement Captions [Line Items]
Securities available-for-sale	3,096	4,043
Commercial Mortgage Backed Securities [Member] | Fair Value, Inputs, Level 3 [Member]
Fair Value, Balance Sheet Grouping, Financial Statement Captions [Line Items]
Securities available-for-sale	0	0
Government-sponsored collateralized mortgage obligations [Member]
Fair Value, Balance Sheet Grouping, Financial Statement Captions [Line Items]
Securities available-for-sale	82,963	100,816
Government-sponsored collateralized mortgage obligations [Member] | Fair Value, Inputs, Level 1 [Member]
Fair Value, Balance Sheet Grouping, Financial Statement Captions [Line Items]
Securities available-for-sale	0	0
Government-sponsored collateralized mortgage obligations [Member] | Fair Value, Inputs, Level 2 [Member]
Fair Value, Balance Sheet Grouping, Financial Statement Captions [Line Items]
Securities available-for-sale	82,963	100,816
Government-sponsored collateralized mortgage obligations [Member] | Fair Value, Inputs, Level 3 [Member]
Fair Value, Balance Sheet Grouping, Financial Statement Captions [Line Items]
Securities available-for-sale	0	0
Government-sponsored mortgage-backed residential [Member]
Fair Value, Balance Sheet Grouping, Financial Statement Captions [Line Items]
Securities available-for-sale	78,263	74,324
Government-sponsored mortgage-backed residential [Member] | Fair Value, Inputs, Level 1 [Member]
Fair Value, Balance Sheet Grouping, Financial Statement Captions [Line Items]
Securities available-for-sale	0	0
Government-sponsored mortgage-backed residential [Member] | Fair Value, Inputs, Level 2 [Member]
Fair Value, Balance Sheet Grouping, Financial Statement Captions [Line Items]
Securities available-for-sale	78,263	74,324
Government-sponsored mortgage-backed residential [Member] | Fair Value, Inputs, Level 3 [Member]
Fair Value, Balance Sheet Grouping, Financial Statement Captions [Line Items]
Securities available-for-sale	0	0
Corporate bonds [Member]
Fair Value, Balance Sheet Grouping, Financial Statement Captions [Line Items]
Securities available-for-sale	12,333	43,698
Corporate bonds [Member] | Fair Value, Inputs, Level 1 [Member]
Fair Value, Balance Sheet Grouping, Financial Statement Captions [Line Items]
Securities available-for-sale	2,782	10,768
Corporate bonds [Member] | Fair Value, Inputs, Level 2 [Member]
Fair Value, Balance Sheet Grouping, Financial Statement Captions [Line Items]
Securities available-for-sale	9,551	32,930
Corporate bonds [Member] | Fair Value, Inputs, Level 3 [Member]
Fair Value, Balance Sheet Grouping, Financial Statement Captions [Line Items]
Securities available-for-sale	0	0
Asset backed-collateralized loan obligations [Member]
Fair Value, Balance Sheet Grouping, Financial Statement Captions [Line Items]
Securities available-for-sale	14,465	34,478
Asset backed-collateralized loan obligations [Member] | Fair Value, Inputs, Level 1 [Member]
Fair Value, Balance Sheet Grouping, Financial Statement Captions [Line Items]
Securities available-for-sale	0	0
Asset backed-collateralized loan obligations [Member] | Fair Value, Inputs, Level 2 [Member]
Fair Value, Balance Sheet Grouping, Financial Statement Captions [Line Items]
Securities available-for-sale	14,465	34,478
Asset backed-collateralized loan obligations [Member] | Fair Value, Inputs, Level 3 [Member]
Fair Value, Balance Sheet Grouping, Financial Statement Captions [Line Items]
Securities available-for-sale	0	0
State and municipal [Member]
Fair Value, Balance Sheet Grouping, Financial Statement Captions [Line Items]
Securities available-for-sale	8,638	11,923
State and municipal [Member] | Fair Value, Inputs, Level 1 [Member]
Fair Value, Balance Sheet Grouping, Financial Statement Captions [Line Items]
Securities available-for-sale	0	0
State and municipal [Member] | Fair Value, Inputs, Level 2 [Member]
Fair Value, Balance Sheet Grouping, Financial Statement Captions [Line Items]
Securities available-for-sale	8,638	11,923
State and municipal [Member] | Fair Value, Inputs, Level 3 [Member]
Fair Value, Balance Sheet Grouping, Financial Statement Captions [Line Items]
Securities available-for-sale	0	0
U.S. Treasury and Agencies [Member]
Fair Value, Balance Sheet Grouping, Financial Statement Captions [Line Items]
Securities available-for-sale	8,329
U.S. Treasury and Agencies [Member] | Fair Value, Inputs, Level 1 [Member]
Fair Value, Balance Sheet Grouping, Financial Statement Captions [Line Items]
Securities available-for-sale	0
U.S. Treasury and Agencies [Member] | Fair Value, Inputs, Level 2 [Member]
Fair Value, Balance Sheet Grouping, Financial Statement Captions [Line Items]
Securities available-for-sale	8,329
U.S. Treasury and Agencies [Member] | Fair Value, Inputs, Level 3 [Member]
Fair Value, Balance Sheet Grouping, Financial Statement Captions [Line Items]
Securities available-for-sale	$ 0

XML

EARNINGS (LOSS) PER SHARE (Tables)

9 Months Ended

Sep. 30, 2014

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				Nine Months Ended
(Amounts in thousands,	September 30,				September 30,
except per share data)	2014		2013		2014		2013
Basic:
Net income/(loss)	$	505	$	1,467	$	(1,565)	$	463
Less:
Preferred stock dividends		(450)		(250)		(1,327)		(750)
Accretion on preferred stock discount		-		(14)		(3)		(41)
Net income (loss) available to common shareholders	$	55	$	1,203	$	(2,895)	$	(328)
Weighted average common shares		5,074		4,860		4,975		4,816
Diluted:
Weighted average common shares		5,074		4,860		4,975		4,816
Dilutive effect of stock options and warrants		102		45		-		-
Weighted average common and incremental shares		5,176		4,905		4,975		4,816
Earnings (Loss) Per Common Share:
Basic	$	0.01	$	0.25	$	(0.58)	$	(0.07)
Diluted	$	0.01	$	0.25	$	(0.58)	$	(0.07)

XML

INCOME TAXES (Details Textual) (USD $)	3 Months Ended		9 Months Ended
	Sep. 30, 2014	Sep. 30, 2013	Sep. 30, 2014	Sep. 30, 2013
INCOME TAXES [Line Items]
Income Tax Expense Benefit Continuing Operation	$ 200,000	$ 1,000	$ 767,000	$ 2,000

XML

LOANS (Details 6) (USD $) In Thousands, unless otherwise specified	3 Months Ended		9 Months Ended
	Sep. 30, 2014 Number	Sep. 30, 2013 Number	Sep. 30, 2014 Number	Sep. 30, 2013 Number
Accounts, Notes, Loans and Financing Receivable [Line Items]
Financing Receivable, Number of Loans	0	0	0	7
Financing Receivable, Pre-Modification Outstanding Recorded Investment	$ 0	$ 0	$ 0	$ 3,586
Financing Receivable, Post-Modification Outstanding Recorded Investment	0	0	0	3,586
Commercial Loan [Member]
Accounts, Notes, Loans and Financing Receivable [Line Items]
Financing Receivable, Number of Loans	0	0	0	0
Financing Receivable, Pre-Modification Outstanding Recorded Investment	0	0	0	0
Financing Receivable, Post-Modification Outstanding Recorded Investment	0	0	0	0
Land Improvements [Member]
Accounts, Notes, Loans and Financing Receivable [Line Items]
Financing Receivable, Number of Loans	0	0	0	0
Financing Receivable, Pre-Modification Outstanding Recorded Investment	0	0	0	0
Financing Receivable, Post-Modification Outstanding Recorded Investment	0	0	0	0
Buildings Lot [Member]
Accounts, Notes, Loans and Financing Receivable [Line Items]
Financing Receivable, Number of Loans	0	0	0	0
Financing Receivable, Pre-Modification Outstanding Recorded Investment	0	0	0	0
Financing Receivable, Post-Modification Outstanding Recorded Investment	0	0	0	0
Commercial Real Estate Other Receivable [Member]
Accounts, Notes, Loans and Financing Receivable [Line Items]
Financing Receivable, Number of Loans	0	0	0	5
Financing Receivable, Pre-Modification Outstanding Recorded Investment	0	0	0	3,512
Financing Receivable, Post-Modification Outstanding Recorded Investment	0	0	0	3,512
Residential Mortgage [Member]
Accounts, Notes, Loans and Financing Receivable [Line Items]
Financing Receivable, Number of Loans	0	0	0	0
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]
Accounts, Notes, Loans and Financing Receivable [Line Items]
Financing Receivable, Number of Loans	0	0	0	2
Financing Receivable, Pre-Modification Outstanding Recorded Investment	0	0	0	74
Financing Receivable, Post-Modification Outstanding Recorded Investment	0	0	0	74
Indirect Consumer [Member]
Accounts, Notes, Loans and Financing Receivable [Line Items]
Financing Receivable, Number of Loans	0	0	0	0
Financing Receivable, Pre-Modification Outstanding Recorded Investment	0	0	0	0
Financing Receivable, Post-Modification Outstanding Recorded Investment	$ 0	$ 0	$ 0	$ 0

XML

LOANS (Details 1) (USD $) In Thousands, unless otherwise specified	3 Months Ended		9 Months Ended
	Sep. 30, 2014	Sep. 30, 2013	Sep. 30, 2014	Sep. 30, 2013
Accounts, Notes, Loans and Financing Receivable [Line Items]
Beginning Balance	$ 9,538	$ 15,947	$ 9,576	$ 17,265
Provision for loan losses	(1,676)	(500)	(1,576)	(1,325)
Charge-offs	(788)	(3,353)	(1,177)	(4,054)
Recoveries	1,144	130	1,395	338
Total ending allowance balance	8,218	12,224	8,218	12,224
Commercial Loan [Member]
Accounts, Notes, Loans and Financing Receivable [Line Items]
Beginning Balance	612	908	540	1,236
Provision for loan losses	(51)	177	(13)	(95)
Charge-offs	0	(48)	0	(142)
Recoveries	32	10	66	48
Total ending allowance balance	593	1,047	593	1,047
Commercial Real Estate [Member]
Accounts, Notes, Loans and Financing Receivable [Line Items]
Beginning Balance	8,288	14,054	8,358	14,815
Provision for loan losses	(1,569)	(790)	(1,449)	(1,175)
Charge-offs	(728)	(3,076)	(1,030)	(3,528)
Recoveries	985	63	1,097	139
Total ending allowance balance	6,976	10,251	6,976	10,251
Residential Mortgage [Member]
Accounts, Notes, Loans and Financing Receivable [Line Items]
Beginning Balance	288	375	292	501
Provision for loan losses	(41)	49	(41)	(81)
Charge-offs	(34)	(73)	(53)	(73)
Recoveries	98	13	113	17
Total ending allowance balance	311	364	311	364
Consumer and Home Equity [Member]
Accounts, Notes, Loans and Financing Receivable [Line Items]
Beginning Balance	296	396	309	442
Provision for loan losses	(43)	67	(63)	90
Charge-offs	(1)	(111)	(25)	(209)
Recoveries	10	8	41	37
Total ending allowance balance	262	360	262	360
Indirect Consumer [Member]
Accounts, Notes, Loans and Financing Receivable [Line Items]
Beginning Balance	54	214	77	271
Provision for loan losses	28	(3)	(10)	(64)
Charge-offs	(25)	(45)	(69)	(102)
Recoveries	19	36	78	97
Total ending allowance balance	$ 76	$ 202	$ 76	$ 202

XML

EARNINGS (LOSS) PER SHARE (Details Textual)	9 Months Ended		3 Months Ended
	Sep. 30, 2014	Sep. 30, 2013	Sep. 30, 2014 Warrant [Member]	Sep. 30, 2013 Warrant [Member]
Share-based Compensation Arrangement by Share-based Payment Award [Line Items]
Antidilutive Securities Excluded from Computation of Earnings Per Share, Amount	83,500	238,000
Share-based Compensation Arrangement by Share-based Payment Award, Equity Instruments Other than Options, Grants in Period	138,090		215,983	215,983

XML

FAIR VALUE (Details Textual) (USD $)	3 Months Ended		9 Months Ended
	Sep. 30, 2014	Sep. 30, 2013	Sep. 30, 2014	Sep. 30, 2013
Fair Value, Balance Sheet Grouping, Financial Statement Captions [Line Items]
Loans Pledged as Collateral	$ 10,800,000	$ 19,300,000	$ 10,800,000	$ 19,300,000
Valuation Allowances and Reserves, Adjustments			2,100,000	3,900,000
Allowance for Loan and Lease Losses, Period Increase (Decrease)	1,200,000	32,000	796,000
Other Real Estate Valuation Adjustments	236,000	300,000	1,200,000	1,800,000
Impaired Loans [Member]
Fair Value, Balance Sheet Grouping, Financial Statement Captions [Line Items]
Provision For Loan Losses Expensed Reversal				$ 310,000

XML

REAL ESTATE ACQUIRED THROUGH FORECLOSURE (Details) (USD $) In Thousands, unless otherwise specified	9 Months Ended	12 Months Ended
	Sep. 30, 2014	Dec. 31, 2013
Real Estate Properties [Line Items]
Beginning balance, January 1,	$ 11,657	$ 22,286
Additions	1,716	8,713
Net proceeds from sale of properties	(2,673)	(17,076)
Writedowns	(630)	(2,185)
Change in valuation allowance	(563)	(81)
Ending balance	$ 9,507	$ 11,657

XML

REGULATORY MATTERS

9 Months Ended

Sep. 30, 2014

Regulatory Matters [Abstract]

Regulatory Capital Requirements under Banking Regulations [Text Block]

2. REGULATORY MATTERS

Since January 2011, the Bank has operated under Consent Orders with the Federal Deposit Insurance Corporation (“FDIC”) and the Kentucky Department of Financial Institutions (“KDFI”). The initial 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%. It also prohibited the Bank from declaring dividends without the prior written approval of the FDIC and KDFI and has 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. When the Bank entered into a new Consent Order with the FDIC and KDFI in March 2012, it agreed that should it be unable to reach the required capital levels by June 30, 2012, 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 latest Consent Order also includes the same substantive provisions as the initial Consent Order and requires the Bank to continue to adhere to the plans implemented in response to the initial Consent Order.

At September 30, 2014, the Bank’s Tier 1 capital ratio was 9.03% and the total risk-based capital ratio was 15.93% compared to the minimum 9.00% and 12.00% capital ratios required by the Consent Order. The Bank is now in compliance with all of the requirements of its Consent Order with the FDIC and KDFI.

Copies of the Consent Orders are included as exhibits to our Form 8-K filed on January 27, 2011 and our 2011 Annual Report on Form 10-K filed March 30, 2012.

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.

The 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.

The Bank is currently designated as a "troubled institution,” which status prohibits the Bank from accepting, renewing or rolling over brokered deposits and restricts the amount of interest the Bank may pay on 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 not to pursue such a waiver and to adhere to the average rates computed by the FDIC plus the .75% rate cap. Brokered deposits were $16.1 million at September 30, 2014, decreasing by $11.2 million from $27.3 million at December 31, 2013.

On April 21, 2014, we entered into an Agreement and Plan of Share Exchange (the “Agreement”) with Community Bank Shares of Indiana, Inc. (“CBIN”), whereby CBIN will acquire all of the outstanding shares of our common stock pursuant to a statutory share exchange (the “Share Exchange”). It is anticipated that immediately following the Share Exchange, the Corporation will merge into CBIN and the Bank will merge into Your Community Bank, an Indiana chartered commercial bank and wholly owned subsidiary of CBIN (with Your Community Bank as the surviving bank).

The consummation of the Share Exchange is subject to various customary conditions, including receipt of the requisite regulatory approvals and the approval by the shareholders of the Corporation and of CBIN. The parties anticipate completing the Share Exchange shortly after year end. See “Proposed Share Exchange” in the Management’s Discussion and Analysis section of this 10-Q for additional information.

Our plans for 2014 include the following:

· Continuing to work towards the completion of the Share Exchange with CBIN.

· Continuing to comply with of our Consent Order and formal agreement.

· 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.

· Accelerating our efforts to dispose of problem assets.

· Continuing to reduce our inventory of other real estate owned properties.

XML

SUBORDINATED DEBENTURES (Details Textual) (Subordinated Debt [Member], USD $) In Millions, unless otherwise specified	9 Months Ended
	Sep. 30, 2014
Subordinated Debt [Member]
Subordinated Borrowing [Line Items]
Proceeds from Issuance of Trust Preferred Securities	$ 18
Debt Instrument, Increase, Accrued Interest	$ 5.5

XML

LOANS (Details 7) (USD $) In Thousands, unless otherwise specified	3 Months Ended		9 Months Ended
	Sep. 30, 2014 Number	Sep. 30, 2013 Number	Sep. 30, 2014 Number	Sep. 30, 2013 Number
Accounts, Notes, Loans and Financing Receivable [Line Items]
Troubled debt restructurings, Number of Loans	0	0	1	0
Troubled debt restructurings, Recorded Investment	$ 0	$ 0	$ 790	$ 0
Commercial Loan [Member]
Accounts, Notes, Loans and Financing Receivable [Line Items]
Troubled debt restructurings, Number of Loans	0	0	0	0
Troubled debt restructurings, Recorded Investment	0	0	0	0
Land Improvements [Member]
Accounts, Notes, Loans and Financing Receivable [Line Items]
Troubled debt restructurings, Number of Loans	0	0	0	0
Troubled debt restructurings, Recorded Investment	0	0	0	0
Buildings Lot [Member]
Accounts, Notes, Loans and Financing Receivable [Line Items]
Troubled debt restructurings, Number of Loans	0	0	0	0
Troubled debt restructurings, Recorded Investment	0	0	0	0
Commercial Real Estate Other Receivable [Member]
Accounts, Notes, Loans and Financing Receivable [Line Items]
Troubled debt restructurings, Number of Loans	0	0	1	0
Troubled debt restructurings, Recorded Investment	0	0	790	0
Residential Mortgage [Member]
Accounts, Notes, Loans and Financing Receivable [Line Items]
Troubled debt restructurings, Number of Loans	0	0	0	0
Troubled debt restructurings, Recorded Investment	0	0	0	0
Consumer and Home Equity [Member]
Accounts, Notes, Loans and Financing Receivable [Line Items]
Troubled debt restructurings, Number of Loans	0	0	0	0
Troubled debt restructurings, Recorded Investment	0	0	0	0
Indirect Consumer [Member]
Accounts, Notes, Loans and Financing Receivable [Line Items]
Troubled debt restructurings, Number of Loans	0	0	0	0
Troubled debt restructurings, Recorded Investment	$ 0	$ 0	$ 0	$ 0

XML

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

9 Months Ended

Sep. 30, 2014

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 September 30,
	Unrealized Gains and Losses on
	Available-for-Sale Securities (1)
	2014		2013
	(Dollars in thousands)
Beginning balance	$	(6,588)	$	(7,285)
Other comprehensive income (loss) before reclassification		(419)		(1,438)
Amounts reclassified from accumulated other comprehensive income		(13)		(12)
Net other comprehensive income (loss)		(432)		(1,450)
Ending balance	$	(7,020)	$	(8,735)

(1) All amounts are net of tax.

	Nine Months Ended September 30,
	Unrealized Gains and Losses on
	Available-for-Sale Securities (1)
	2014		2013
	(Dollars in thousands)
Beginning balance	$	(10,568)	$	1,270
Other comprehensive income (loss) before reclassification		3,526		(9,766)
Amounts reclassified from accumulated other comprehensive income		22		(239)
Net other comprehensive income (loss)		3,548		(10,005)
Ending balance	$	(7,020)	$	(8,735)

(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 September 30, 2014

(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	$	13	Gain on sale of investments
		-	Loss on sale of investments
		13	Total before tax
		-	Income taxes/(benefits)
Total amount reclassified	$	13	Net income (loss)

Three months ended September 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	$	235	Gain on sale of investments
		(223)	Loss on sale of investments
		12	Total before tax
		-	Income taxes/(benefits)
Total amount reclassified	$	12	Net income (loss)

Nine months ended September 30, 2014

(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	$	545	Gain on sale of investments
		(567)	Loss on sale of investments
		(22)	Total before tax
		-	Income taxes/(benefits)
Total amount reclassified	$	(22)	Net income (loss)

Nine months ended September 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	$	1,078	Gain on sale of investments
		(839)	Loss on sale of investments
		239	Total before tax
		-	Income taxes/(benefits)
Total amount reclassified	$	239	Net income (loss)

XML

STOCKHOLDERS' EQUITY (Tables)

9 Months Ended

Sep. 30, 2014

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					Required by
	Actual					Adequacy Purposes					Consent Order
As of September 30, 2014:	Amount		Ratio			Amount		Ratio			Amount		Ratio
Total risk-based capital (to risk-weighted assets)
Consolidated	$	65,711		13.56	%	$	38,765		8.00	%	$	58,147		12.00	%
Bank		76,637		15.93			38,475		8.00			57,713		12.00
Tier I capital (to risk-weighted assets)
Consolidated		55,506		11.45			19,382		4.00			N/A		N/A
Bank		70,598		14.68			19,238		4.00			N/A		N/A
Tier I capital (to average assets)
Consolidated		55,506		7.08			31,345		4.00			70,527		9.00
Bank		70,598		9.03			31,289		4.00			70,400		9.00

(Dollars in thousands)						For Capital					Required by
	Actual					Adequacy Purposes					Consent Order
As of December 31, 2013:	Amount		Ratio			Amount		Ratio			Amount		Ratio
Total risk-based capital (to risk-weighted assets)
Consolidated	$	68,477		12.13	%	$	45,174		8.00	%	$	67,761		12.00	%
Bank		76,147		13.48			45,177		8.00			67,765		12.00
Tier I capital (to risk-weighted assets)
Consolidated		58,036		10.28			22,587		4.00			N/A		N/A
Bank		69,057		12.23			22,588		4.00			N/A		N/A
Tier I capital (to average assets)
Consolidated		58,036		6.68			34,737		4.00			78,158		9.00
Bank		69,057		7.96			34,706		4.00			78,088		9.00

XML

STOCK BASED COMPENSATION PLAN (Details Textual) (USD $)	9 Months Ended		12 Months Ended
	Sep. 30, 2014	Sep. 30, 2013	Dec. 31, 2012
Defined Benefit Plan Disclosure [Line Items]
Share-based Compensation Arrangement by Share-based Payment Award, Options, Grants in Period, Gross	5,000
Stock Issued During Period, Value, Restricted Stock Award, Net of Forfeitures	$ 0
Share-based Compensation Arrangement by Share-based Payment Award, Options, Exercises in Period, Intrinsic Value	25,000	364
Proceeds from Stock Options Exercised	22,000	410
Stock Option and Incentive Compensation Plan 2006 [Member]
Defined Benefit Plan Disclosure [Line Items]
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	52,840
Allocated Share-based Compensation Expense	443,000	113,000
Share-based Compensation Arrangement by Share-based Payment Award, Number of Additional Shares Authorized			220,000
Restricted Stock Granted and Incentive Compensation Plan 2006 [Member]
Defined Benefit Plan Disclosure [Line Items]
Common Stock, Voting Rights	50%
Allocated Share-based Compensation Expense	659,000	281,000
Employee Service Share-based Compensation, Nonvested Awards, Total Compensation Cost Not yet Recognized	135,000
Employee Service Share Based Compensation Nonvested Awards Total Compensation Cost Not Yet Recognized Period For Recognition 1	6 months
Restricted Stock [Member]
Defined Benefit Plan Disclosure [Line Items]
Share-based Compensation Arrangement by Share-based Payment Initial Award, Received by Non Employee Directors	8,310
Share-based Compensation Arrangement by Share-based Payment Award, Number of Shares Available for Grant	74,790
Stock Issued During Period, Value, Restricted Stock Award, Net of Forfeitures	$ 30,000

XML

LOANS (Details 8) (USD $) In Thousands, unless otherwise specified	Sep. 30, 2014	Dec. 31, 2013
Accounts, Notes, Loans and Financing Receivable [Line Items]
Class of loans	$ 436,225	$ 466,952
Not Rated [Member]
Accounts, Notes, Loans and Financing Receivable [Line Items]
Class of loans	158,385	161,746
Pass [Member]
Accounts, Notes, Loans and Financing Receivable [Line Items]
Class of loans	236,440	249,398
Criticized [Member]
Accounts, Notes, Loans and Financing Receivable [Line Items]
Class of loans	10,712	18,329
Substandard [Member]
Accounts, Notes, Loans and Financing Receivable [Line Items]
Class of loans	30,688	37,479
Doubtful [Member]
Accounts, Notes, Loans and Financing Receivable [Line Items]
Class of loans	0	0
Loss [Member]
Accounts, Notes, Loans and Financing Receivable [Line Items]
Class of loans	0	0
Commercial Loan [Member]
Accounts, Notes, Loans and Financing Receivable [Line Items]
Class of loans	24,496	20,621
Commercial Loan [Member] | Not Rated [Member]
Accounts, Notes, Loans and Financing Receivable [Line Items]
Class of loans	0	0
Commercial Loan [Member] | Pass [Member]
Accounts, Notes, Loans and Financing Receivable [Line Items]
Class of loans	23,522	19,289
Commercial Loan [Member] | Criticized [Member]
Accounts, Notes, Loans and Financing Receivable [Line Items]
Class of loans	461	470
Commercial Loan [Member] | Substandard [Member]
Accounts, Notes, Loans and Financing Receivable [Line Items]
Class of loans	513	862
Commercial Loan [Member] | Doubtful [Member]
Accounts, Notes, Loans and Financing Receivable [Line Items]
Class of loans	0	0
Commercial Loan [Member] | Loss [Member]
Accounts, Notes, Loans and Financing Receivable [Line Items]
Class of loans	0	0
Land Improvements [Member]
Accounts, Notes, Loans and Financing Receivable [Line Items]
Class of loans	14,057	20,476
Land Improvements [Member] | Not Rated [Member]
Accounts, Notes, Loans and Financing Receivable [Line Items]
Class of loans	0	0
Land Improvements [Member] | Pass [Member]
Accounts, Notes, Loans and Financing Receivable [Line Items]
Class of loans	12,065	15,484
Land Improvements [Member] | Criticized [Member]
Accounts, Notes, Loans and Financing Receivable [Line Items]
Class of loans	736	2,484
Land Improvements [Member] | Substandard [Member]
Accounts, Notes, Loans and Financing Receivable [Line Items]
Class of loans	1,256	2,508
Land Improvements [Member] | Doubtful [Member]
Accounts, Notes, Loans and Financing Receivable [Line Items]
Class of loans	0	0
Land Improvements [Member] | Loss [Member]
Accounts, Notes, Loans and Financing Receivable [Line Items]
Class of loans	0	0
Buildings Lot [Member]
Accounts, Notes, Loans and Financing Receivable [Line Items]
Class of loans	1,224	1,559
Buildings Lot [Member] | Not Rated [Member]
Accounts, Notes, Loans and Financing Receivable [Line Items]
Class of loans	0	0
Buildings Lot [Member] | Pass [Member]
Accounts, Notes, Loans and Financing Receivable [Line Items]
Class of loans	832	906
Buildings Lot [Member] | Criticized [Member]
Accounts, Notes, Loans and Financing Receivable [Line Items]
Class of loans	392	441
Buildings Lot [Member] | Substandard [Member]
Accounts, Notes, Loans and Financing Receivable [Line Items]
Class of loans	0	212
Buildings Lot [Member] | Doubtful [Member]
Accounts, Notes, Loans and Financing Receivable [Line Items]
Class of loans	0	0
Buildings Lot [Member] | Loss [Member]
Accounts, Notes, Loans and Financing Receivable [Line Items]
Class of loans	0	0
Commercial Real Estate Other Receivable [Member]
Accounts, Notes, Loans and Financing Receivable [Line Items]
Class of loans	233,296	257,901
Commercial Real Estate Other Receivable [Member] | Not Rated [Member]
Accounts, Notes, Loans and Financing Receivable [Line Items]
Class of loans	0	0
Commercial Real Estate Other Receivable [Member] | Pass [Member]
Accounts, Notes, Loans and Financing Receivable [Line Items]
Class of loans	200,021	213,719
Commercial Real Estate Other Receivable [Member] | Criticized [Member]
Accounts, Notes, Loans and Financing Receivable [Line Items]
Class of loans	7,525	13,920
Commercial Real Estate Other Receivable [Member] | Substandard [Member]
Accounts, Notes, Loans and Financing Receivable [Line Items]
Class of loans	25,750	30,262
Commercial Real Estate Other Receivable [Member] | Doubtful [Member]
Accounts, Notes, Loans and Financing Receivable [Line Items]
Class of loans	0	0
Commercial Real Estate Other Receivable [Member] | Loss [Member]
Accounts, Notes, Loans and Financing Receivable [Line Items]
Class of loans	0	0
Residential Mortgage [Member]
Accounts, Notes, Loans and Financing Receivable [Line Items]
Class of loans	98,856	99,344
Residential Mortgage [Member] | Not Rated [Member]
Accounts, Notes, Loans and Financing Receivable [Line Items]
Class of loans	94,613	95,351
Residential Mortgage [Member] | Pass [Member]
Accounts, Notes, Loans and Financing Receivable [Line Items]
Class of loans	0	0
Residential Mortgage [Member] | Criticized [Member]
Accounts, Notes, Loans and Financing Receivable [Line Items]
Class of loans	1,384	942
Residential Mortgage [Member] | Substandard [Member]
Accounts, Notes, Loans and Financing Receivable [Line Items]
Class of loans	2,859	3,051
Residential Mortgage [Member] | Doubtful [Member]
Accounts, Notes, Loans and Financing Receivable [Line Items]
Class of loans	0	0
Residential Mortgage [Member] | Loss [Member]
Accounts, Notes, Loans and Financing Receivable [Line Items]
Class of loans	0	0
Consumer and Home Equity [Member]
Accounts, Notes, Loans and Financing Receivable [Line Items]
Class of loans	51,319	54,010
Consumer and Home Equity [Member] | Not Rated [Member]
Accounts, Notes, Loans and Financing Receivable [Line Items]
Class of loans	50,847	53,407
Consumer and Home Equity [Member] | Pass [Member]
Accounts, Notes, Loans and Financing Receivable [Line Items]
Class of loans	0	0
Consumer and Home Equity [Member] | Criticized [Member]
Accounts, Notes, Loans and Financing Receivable [Line Items]
Class of loans	214	72
Consumer and Home Equity [Member] | Substandard [Member]
Accounts, Notes, Loans and Financing Receivable [Line Items]
Class of loans	258	531
Consumer and Home Equity [Member] | Doubtful [Member]
Accounts, Notes, Loans and Financing Receivable [Line Items]
Class of loans	0	0
Consumer and Home Equity [Member] | Loss [Member]
Accounts, Notes, Loans and Financing Receivable [Line Items]
Class of loans	0	0
Indirect Consumer [Member]
Accounts, Notes, Loans and Financing Receivable [Line Items]
Class of loans	12,977	13,041
Indirect Consumer [Member] | Not Rated [Member]
Accounts, Notes, Loans and Financing Receivable [Line Items]
Class of loans	12,925	12,988
Indirect Consumer [Member] | Pass [Member]
Accounts, Notes, Loans and Financing Receivable [Line Items]
Class of loans	0	0
Indirect Consumer [Member] | Criticized [Member]
Accounts, Notes, Loans and Financing Receivable [Line Items]
Class of loans	0	0
Indirect Consumer [Member] | Substandard [Member]
Accounts, Notes, Loans and Financing Receivable [Line Items]
Class of loans	52	53
Indirect Consumer [Member] | Doubtful [Member]
Accounts, Notes, Loans and Financing Receivable [Line Items]
Class of loans	0	0
Indirect Consumer [Member] | Loss [Member]
Accounts, Notes, Loans and Financing Receivable [Line Items]
Class of loans	$ 0	$ 0

XML

REGULATORY MATTERS (Details Textual) (USD $) In Millions, unless otherwise specified	12 Months Ended			9 Months Ended
	Dec. 31, 2013	Sep. 30, 2014	Jan. 01, 2011	Sep. 30, 2014 FDIC [Member]
Compliance with Regulatory Capital Requirements under Banking Regulations [Line Items]
Capital to Risk Weighted Assets		15.93%	12.00%
Tier One Risk Based Capital to Risk Weighted Assets		9.03%	9.00%
Capital Required for Capital Adequacy to Risk Weighted Assets		9.00%
Tier One Risk Based Capital Required for Capital Adequacy to Risk Weighted Assets		12.00%
Interest-bearing Domestic Deposit, Brokered	$ 27.3	$ 16.1
Increase Decrease Brokered Deposits	$ 11.2
Maximum Deposit Interest Rate				0.75%

XML

SECURITIES (Details) (USD $) In Thousands, unless otherwise specified	9 Months Ended	12 Months Ended
	Sep. 30, 2014	Dec. 31, 2013
Schedule of Available-for-sale Securities [Line Items]
Amortized Cost, Securities available-for-sale	$ 211,780	$ 277,292
Gross Unrealized Gains, Securities available-for-sale	753	562
Gross Unrealized Losses,Securities available-for-sale	(4,446)	(8,572)
Fair Value, Securities available-for-sale	208,087	269,282
Government-sponsored collateralized mortgage obligations [Member]
Schedule of Available-for-sale Securities [Line Items]
Amortized Cost, Securities available-for-sale	85,002	104,390
Gross Unrealized Gains, Securities available-for-sale	96	86
Gross Unrealized Losses,Securities available-for-sale	(2,135)	(3,660)
Fair Value, Securities available-for-sale	82,963	100,816
Government-sponsored mortgage-backed Residential [Member]
Schedule of Available-for-sale Securities [Line Items]
Amortized Cost, Securities available-for-sale	80,027	78,204
Gross Unrealized Gains, Securities available-for-sale	19	4
Gross Unrealized Losses,Securities available-for-sale	(1,783)	(3,884)
Fair Value, Securities available-for-sale	78,263	74,324
Asset backed-collateralized loan obligations [Member]
Schedule of Available-for-sale Securities [Line Items]
Amortized Cost, Securities available-for-sale	14,891	35,113
Gross Unrealized Gains, Securities available-for-sale	30	0
Gross Unrealized Losses,Securities available-for-sale	(456)	(635)
Fair Value, Securities available-for-sale	14,465	34,478
Corporate Bonds [Member]
Schedule of Available-for-sale Securities [Line Items]
Amortized Cost, Securities available-for-sale	12,186	43,818
Gross Unrealized Gains, Securities available-for-sale	159	208
Gross Unrealized Losses,Securities available-for-sale	(12)	(328)
Fair Value, Securities available-for-sale	12,333	43,698
State and Municipal [Member]
Schedule of Available-for-sale Securities [Line Items]
Amortized Cost, Securities available-for-sale	8,231	11,670
Gross Unrealized Gains, Securities available-for-sale	414	264
Gross Unrealized Losses,Securities available-for-sale	(7)	(11)
Fair Value, Securities available-for-sale	8,638	11,923
U.S. Government-sponsored entities and agencies [Member]
Schedule of Available-for-sale Securities [Line Items]
Amortized Cost, Securities available-for-sale	8,382
Gross Unrealized Gains, Securities available-for-sale	0
Gross Unrealized Losses,Securities available-for-sale	(53)
Fair Value, Securities available-for-sale	8,329
Commercial Mortgage Backed Securities [Member]
Schedule of Available-for-sale Securities [Line Items]
Amortized Cost, Securities available-for-sale	3,061	4,097
Gross Unrealized Gains, Securities available-for-sale	35	0
Gross Unrealized Losses,Securities available-for-sale	0	(54)
Fair Value, Securities available-for-sale	$ 3,096	$ 4,043

XML

BASIS OF PRESENTATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

9 Months Ended

Sep. 30, 2014

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 two wholly owned subsidiaries, First Service Corporation of Elizabethtown and Heritage Properties, 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 quarter and nine months ended September 30, 2014 are not necessarily indicative of the results that may occur for the year ending December 31, 2014. 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, 2013.

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 stockholders’ equity.

Recently Issued Accounting Pronouncement – In January 2014, the Financial Accounting Standards Board issued Accounting Standards Update No. 2014-01, Accounting for Investments in Qualified Affordable Housing Projects (ASU 2014-01). ASU 2014-01 permits reporting entities to make an accounting policy election to account for investments in qualified affordable housing projects using the proportional amortization method if certain conditions are met. Under the proportional amortization method, an entity amortizes the initial cost of the investment in proportion to the tax credits and other tax benefits received and recognizes the net investment performance in the income statement as a component of income tax expense. This new guidance also requires new disclosures for all investors in these projects. ASU 2014-01 is effective for interim and annual reporting periods beginning after December 15, 2014. Upon adoption, the guidance must be applied retrospectively to all periods presented. However, entities that use the effective yield method to account for investments in these projects before adoption may continue to do so for these pre-existing investments. The adoption of ASU 2014-01 is not expected to have a material impact on the consolidated financial statements.

In May 2014, the Financial Accounting Standards Board issued Accounting Standards Update No. 2014-09, Revenue From Contracts With Customers (ASU 2014-09). The core principle of the guidance is that an entity should recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods and services. ASU 2014-09 is effective for interim and annual periods beginning after December 15, 2016. Management is currently evaluating the impact of the adoption of ASU 2014-09 on the consolidated financial statements.

In August 2014, the Financial Accounting Standards Board issued Accounting Standards Update No. 2014-14, Receivables-Troubled Debt Restructurings by Creditors (Subtopic 310-40): Classification of Certain Government-Guaranteed Mortgage Loans upon Foreclosure (ASU 2014-14). The amendments in ASU 2014-14 require that a mortgage loan be derecognized and that a separate other receivable be recognized upon foreclosure if: a) the loan has a government guarantee that is not separable from the loan before foreclosure; b) at the time of foreclosure, the creditor has the intent to convey the real estate property to the guarantor and make a claim on the guarantee, and the creditor has the ability to recover under that claim; and c) at the time of foreclosure, any amount of the claim that is determined on the basis of the fair value of the real estate is fixed. The separate other receivable recognized upon foreclosure should be measured based on the amount of the loan balance (principal and interest) expected to be received from the guarantor. The amendments in ASU 2014-14 are effective for us beginning January 1, 2015 and are not expected to have a material impact on our financial statements.

XML

SECURITIES (Details 1) (USD $) In Thousands, unless otherwise specified	Sep. 30, 2014	Dec. 31, 2013
Schedule of Available-for-sale Securities [Line Items]
Amortized Cost Due after one year or less	$ 855
Amortized Cost Due after one year through five years	16,368
Amortized Cost Due after five years through ten years	5,789
Amortized Cost Due after ten years	5,787
Available For Sale Securities Amortized Cost	211,780	277,292
Fair Value Due after one year or less	856
Fair Value Due after one year through five years	16,485
Fair Value Due after five years through ten years	5,808
Fair Value Due after ten years	6,151
Fair Value Available for Sale	208,087	269,282
Government-sponsored collateralized mortgage obligations [Member]
Schedule of Available-for-sale Securities [Line Items]
Available For Sale Securities Amortized Cost	85,002	104,390
Fair Value Available for Sale	82,963	100,816
Government-sponsored mortgage-backed residential [Member]
Schedule of Available-for-sale Securities [Line Items]
Available For Sale Securities Amortized Cost	80,027
Fair Value Available for Sale	78,263
Asset backed-collateralized loan obligations [Member]
Schedule of Available-for-sale Securities [Line Items]
Available For Sale Securities Amortized Cost	14,891	35,113
Fair Value Available for Sale	14,465	34,478
Commercial Mortgage Backed Securities [Member]
Schedule of Available-for-sale Securities [Line Items]
Available For Sale Securities Amortized Cost	3,061	4,097
Fair Value Available for Sale	$ 3,096	$ 4,043

XML

LOANS (Details 4) (USD $) In Thousands, unless otherwise specified	Sep. 30, 2014	Dec. 31, 2013
Accounts, Notes, Loans and Financing Receivable [Line Items]
Restructured on Non-Accrual Status	$ 9,436	$ 1,310
Restructured on Accrual Status	10,914	18,963
Restructured Loans Past Due Over 90 Days Still Accruing	0	4,780
Loans Past Due Over 90 Days Still Accruing	2,017	2,226
Non-Accrual Excluding Restructured	4,917	9,096
Commercial Loan [Member]
Accounts, Notes, Loans and Financing Receivable [Line Items]
Restructured on Non-Accrual Status	0	0
Restructured on Accrual Status	154	178
Restructured Loans Past Due Over 90 Days Still Accruing	0	0
Loans Past Due Over 90 Days Still Accruing	0	0
Non-Accrual Excluding Restructured	362	421
Land Improvements [Member]
Accounts, Notes, Loans and Financing Receivable [Line Items]
Restructured on Non-Accrual Status	0	0
Restructured on Accrual Status	0	1,687
Restructured Loans Past Due Over 90 Days Still Accruing	0	0
Loans Past Due Over 90 Days Still Accruing	0	0
Non-Accrual Excluding Restructured	240	2,508
Building Lots [Member]
Accounts, Notes, Loans and Financing Receivable [Line Items]
Restructured on Non-Accrual Status	0	0
Restructured on Accrual Status	0	0
Restructured Loans Past Due Over 90 Days Still Accruing	0	0
Loans Past Due Over 90 Days Still Accruing	0	0
Non-Accrual Excluding Restructured	0	212
Commercial Real Estate Other Receivable [Member]
Accounts, Notes, Loans and Financing Receivable [Line Items]
Restructured on Non-Accrual Status	9,139	986
Restructured on Accrual Status	10,691	17,025
Restructured Loans Past Due Over 90 Days Still Accruing	0	4,780
Loans Past Due Over 90 Days Still Accruing	2,017	2,226
Non-Accrual Excluding Restructured	2,377	4,237
Residential Mortgage [Member]
Accounts, Notes, Loans and Financing Receivable [Line Items]
Restructured on Non-Accrual Status	297	301
Restructured on Accrual Status	0	0
Restructured Loans Past Due Over 90 Days Still Accruing	0	0
Loans Past Due Over 90 Days Still Accruing	0	0
Non-Accrual Excluding Restructured	1,809	1,532
Consumer and Home Equity [Member]
Accounts, Notes, Loans and Financing Receivable [Line Items]
Restructured on Non-Accrual Status	0	23
Restructured on Accrual Status	69	73
Restructured Loans Past Due Over 90 Days Still Accruing	0	0
Loans Past Due Over 90 Days Still Accruing	0	0
Non-Accrual Excluding Restructured	81	156
Indirect Consumer [Member]
Accounts, Notes, Loans and Financing Receivable [Line Items]
Restructured on Non-Accrual Status	0	0
Restructured on Accrual Status	0	0
Restructured Loans Past Due Over 90 Days Still Accruing	0	0
Loans Past Due Over 90 Days Still Accruing	0	0
Non-Accrual Excluding Restructured	$ 48	$ 30

XML

STOCK BASED COMPENSATION PLAN (Details) (USD $)	9 Months Ended
	Sep. 30, 2014
Assumptions:
Risk-free interest rate	2.86%
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)	$ 3.57

XML

Consolidated Balance Sheets (USD $) In Thousands, unless otherwise specified	Sep. 30, 2014	Dec. 31, 2013
ASSETS:
Cash and due from banks	$ 12,356	$ 13,476
Interest bearing deposits	44,620	52,512
Total cash and cash equivalents	56,976	65,988
Securities available-for-sale	208,087	269,282
Loans held for sale	847	470
Loans, net of unearned fees	436,186	466,862
Allowance for loan losses	(8,218)	(9,576)
Net loans	427,968	457,286
Federal Home Loan Bank stock	4,080	4,430
Cash surrender value of life insurance	10,696	10,428
Premises and equipment, net	22,989	23,773
Real estate owned:
Acquired through foreclosure, net of valuation allowance of $1,144 Sept (2014) and $581 Dec (2013)	9,507	11,657
Bank lots	1,446	1,469
Other repossessed assets	30	37
Accrued interest receivable	1,664	2,224
Accrued income taxes	3	2,907
Low-income housing investments	6,770	6,965
Other assets	1,829	1,701
TOTAL ASSETS	752,892	858,617
Deposits:
Non-interest bearing	85,654	78,480
Interest bearing	588,093	705,007
Total deposits	673,747	783,487
Advances from Federal Home Loan Bank	12,236	12,389
Subordinated debentures	18,000	18,000
Accrued interest payable	5,516	4,574
Accrued senior preferred dividend	4,707	3,380
Accounts payable and other liabilities	4,079	3,968
TOTAL LIABILITIES	718,285	825,798
Commitments and contingent liabilities	0	0
STOCKHOLDERS' EQUITY:
Serial preferred stock, $1 par value per share; authorized 5,000,000 shares; issued and outstanding, 20,000 shares with a liquidation preference of $24.7 million Sept (2014), and $23.4 million Dec (2013)	20,000	19,997
Common stock, $1 par value per share; authorized 35,000,000 shares; issued and outstanding, 5,150,356 shares Sept (2014), and 4,870,887 shares Dec (2013)	5,150	4,871
Additional paid-in capital	37,083	36,230
Accumulated deficit	(20,606)	(17,711)
Accumulated other comprehensive loss	(7,020)	(10,568)
TOTAL STOCKHOLDERS' EQUITY	34,607	32,819
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY	$ 752,892	$ 858,617

XML

LOANS (Details 9) (USD $) In Thousands, unless otherwise specified	Sep. 30, 2014	Dec. 31, 2013
Accounts, Notes, Loans and Financing Receivable [Line Items]
Performing	$ 436,225	$ 466,952
Restructured on Non-Accrual Status	9,436	1,310
Non-accrual	4,917	9,096
Residential Mortgage [Member]
Accounts, Notes, Loans and Financing Receivable [Line Items]
Performing	98,856	99,344
Restructured on Non-Accrual Status	297	301
Non-accrual	1,809	1,532
Residential Mortgage [Member] | Performing Financing Receivable [Member]
Accounts, Notes, Loans and Financing Receivable [Line Items]
Performing	96,750	97,511
Consumer and Home Equity [Member]
Accounts, Notes, Loans and Financing Receivable [Line Items]
Performing	51,319	54,010
Restructured on Non-Accrual Status	0	23
Non-accrual	81	156
Consumer and Home Equity [Member] | Performing Financing Receivable [Member]
Accounts, Notes, Loans and Financing Receivable [Line Items]
Performing	51,190	53,831
Indirect Consumer [Member]
Accounts, Notes, Loans and Financing Receivable [Line Items]
Performing	12,977	13,041
Restructured on Non-Accrual Status	0	0
Non-accrual	48	30
Indirect Consumer [Member] | Performing Financing Receivable [Member]
Accounts, Notes, Loans and Financing Receivable [Line Items]
Performing	$ 12,977	$ 13,011

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, 2013	$ 32,819		$ 19,997	$ 4,871	$ 36,230	$ (17,711)	$ (10,568)
Balance (in shares) at Dec. 31, 2013			20,000	4,870,887
Net loss	(1,565)		0	0	0	(1,565)	0
Stock issued for stock options exercised and employee benefit plans	42		0	17	25	0	0
Stock issued for stock options exercised and employee benefit plans (in shares)			0	16,756
Issuance of restricted shares	0		0	262	(262)	0	0
Issuance of restricted shares (in shares)			0	262,713
Stock-based compensation expense	1,090		0	0	1,090	0	0
Total other comprehensive income (loss)	3,548	[1]	0	0	0	0	3,548
Dividends on preferred stock	(1,327)		0	0	0	(1,327)	0
Accretion of preferred stock discount	0		3	0	0	(3)	0
Balance at Sep. 30, 2014	$ 34,607		$ 20,000	$ 5,150	$ 37,083	$ (20,606)	$ (7,020)
Balance (in shares) at Sep. 30, 2014			20,000	5,150,356

[1] All amounts are net of tax.

XML

FAIR VALUE (Details 2) (USD $) In Thousands, unless otherwise specified			9 Months Ended					9 Months Ended							9 Months Ended					9 Months Ended							9 Months Ended				9 Months Ended					9 Months Ended					9 Months Ended
	Sep. 30, 2014 Impaired Loans [Member] Land Improvements [Member]	Dec. 31, 2013 Impaired Loans [Member] Land Improvements [Member]	Sep. 30, 2014 Impaired Loans [Member] Land Improvements [Member] Sales Comparison Approach [Member]		Sep. 30, 2014 Impaired Loans [Member] Impaired Loans Other [Member]	Dec. 31, 2013 Impaired Loans [Member] Impaired Loans Other [Member]	Sep. 30, 2014 Impaired Loans [Member] Impaired Loans Other [Member] Income Approach Valuation Technique [Member]	Sep. 30, 2014 Impaired Loans [Member] Impaired Loans Other [Member] Income Approach Valuation Technique [Member] Maximum [Member]	Sep. 30, 2014 Impaired Loans [Member] Impaired Loans Other [Member] Income Approach Valuation Technique [Member] Minimum [Member]	Sep. 30, 2014 Impaired Loans [Member] Impaired Loans Other [Member] Income Approach Valuation Technique [Member] Weighted Average [Member]	Sep. 30, 2014 Impaired Loans [Member] Impaired Loans Other [Member] Sales Comparison Approach [Member]		Sep. 30, 2014 Impaired Loans [Member] Residential Mortgage [Member]	Dec. 31, 2013 Impaired Loans [Member] Residential Mortgage [Member]	Sep. 30, 2014 Impaired Loans [Member] Residential Mortgage [Member] Sales Comparison Approach [Member]		Dec. 31, 2013 Real Estate Acquired Through Foreclosure [Member]	Sep. 30, 2014 Real Estate Acquired Through Foreclosure [Member] Land Improvements [Member]	Dec. 31, 2013 Real Estate Acquired Through Foreclosure [Member] Land Improvements [Member]	Sep. 30, 2014 Real Estate Acquired Through Foreclosure [Member] Land Improvements [Member] Income Approach Valuation Technique [Member]		Sep. 30, 2014 Real Estate Acquired Through Foreclosure [Member] Land Improvements [Member] Sales Comparison Approach [Member]		Sep. 30, 2014 Real Estate Acquired Through Foreclosure [Member] Commercial Real Estate Other Receivable [Member]	Dec. 31, 2013 Real Estate Acquired Through Foreclosure [Member] Commercial Real Estate Other Receivable [Member]	Sep. 30, 2014 Real Estate Acquired Through Foreclosure [Member] Commercial Real Estate Other Receivable [Member] Income Approach Valuation Technique [Member]	Sep. 30, 2014 Real Estate Acquired Through Foreclosure [Member] Commercial Real Estate Other Receivable [Member] Income Approach Valuation Technique [Member] Maximum [Member]	Sep. 30, 2014 Real Estate Acquired Through Foreclosure [Member] Commercial Real Estate Other Receivable [Member] Income Approach Valuation Technique [Member] Minimum [Member]	Sep. 30, 2014 Real Estate Acquired Through Foreclosure [Member] Commercial Real Estate Other Receivable [Member] Income Approach Valuation Technique [Member] Weighted Average [Member]	Sep. 30, 2014 Real Estate Acquired Through Foreclosure [Member] Commercial Real Estate Other Receivable [Member] Sales Comparison Approach [Member]	Sep. 30, 2014 Real Estate Acquired Through Foreclosure [Member] Commercial Real Estate Other Receivable [Member] Sales Comparison Approach [Member] Maximum [Member]	Sep. 30, 2014 Real Estate Acquired Through Foreclosure [Member] Commercial Real Estate Other Receivable [Member] Sales Comparison Approach [Member] Minimum [Member]	Sep. 30, 2014 Real Estate Acquired Through Foreclosure [Member] Commercial Real Estate Other Receivable [Member] Sales Comparison Approach [Member] Weighted Average [Member]	Sep. 30, 2014 Real Estate Acquired Through Foreclosure [Member] Residential Mortgage [Member]	Sep. 30, 2014 Real Estate Acquired Through Foreclosure [Member] Residential Mortgage [Member] Sales Comparison Approach [Member]	Sep. 30, 2014 Real Estate Acquired Through Foreclosure [Member] Residential Mortgage [Member] Sales Comparison Approach [Member] Maximum [Member]	Sep. 30, 2014 Real Estate Acquired Through Foreclosure [Member] Residential Mortgage [Member] Sales Comparison Approach [Member] Minimum [Member]	Sep. 30, 2014 Real Estate Acquired Through Foreclosure [Member] Residential Mortgage [Member] Sales Comparison Approach [Member] Weighted Average [Member]	Sep. 30, 2014 Other Real Estate Owned [Member] Bank Lots [Member]	Dec. 31, 2013 Other Real Estate Owned [Member] Bank Lots [Member]	Sep. 30, 2014 Other Real Estate Owned [Member] Bank Lots [Member] Sales Comparison Approach [Member]
Fair Value, Balance Sheet Grouping, Financial Statement Captions [Line Items]
Assets, Fair Value Disclosure, Nonrecurring	$ 127	$ 625	$ 127		$ 8,553	$ 5,618	$ 8,240				$ 313		$ 43	$ 56	$ 43		$ 634	$ 475	$ 947	$ 461		$ 14		$ 1,574	$ 2,667	$ 968				$ 606				$ 404	$ 404				$ 769	$ 792	$ 769
Discount or capitalization rate								9.75%	8.50%	9.31%										27.00%	[1]						9.75%	9.40%	9.68%
Adjustment for differences between comparable sales			3.00%	[1]							17.00%	[1]			6.00%	[1]						0.00%	[1]								25.00%	20.00%	21.05%			8.00%	0.00%	3.86%			10.00%	[1]

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

XML

SECURITIES (Details Textual) (USD $)	9 Months Ended
	Sep. 30, 2014	Sep. 30, 2014 Collateralized Debt Obligations [Member]	Sep. 30, 2014 Federal Home Loan Bank Advances [Member]	Dec. 31, 2013 Federal Home Loan Bank Advances [Member]
Schedule of Available-for-sale Securities [Line Items]
Available-for-sale Securities Pledged as Collateral			$ 141,400,000	$ 185,800,000
Available-for-sale Securities, Short-term Investments, Amortized Cost		14,900,000	144,700,000	193,000,000
Unrealized Gain (Loss) on Securities	426,000
Gain (Loss) on Sale of Securities, Net, Total	$ 286,000

XML

CHANGES IN AND RECLASSIFICATIONS FROM ACCUMULATED OTHER COMPREHENSIVE INCOME (Details) (USD $) In Thousands, unless otherwise specified	3 Months Ended				9 Months Ended
	Sep. 30, 2014		Sep. 30, 2013		Sep. 30, 2014		Sep. 30, 2013
Available For Sale Securities In Accumulated Other Comprehensive Income Loss [Line Items]
Unrealized Gains and Losses on Available-for-Sale Securities, Beginning balance	$ (6,588)	[1]	$ (7,285)	[1]	$ (10,568)	[1]	$ 1,270	[1]
Other comprehensive income (loss) before reclassification	(419)	[1]	(1,438)	[1]	3,526	[1]	(9,766)	[1]
Amounts reclassified from accumulated other comprehensive income	(13)	[1]	(12)	[1]	22	[1]	(239)	[1]
Net other comprehensive income (loss)	(432)	[1]	(1,450)	[1]	3,548	[1]	(10,005)	[1]
Unrealized Gains and Losses on Available-for-Sale Securities, Ending balance	$ (7,020)	[1]	$ (8,735)	[1]	$ (7,020)	[1]	$ (8,735)	[1]

[1] All amounts are net of tax.

XML

SECURITIES (Tables)

9 Months Ended

Sep. 30, 2014

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:
September 30, 2014:
Government-sponsored collateralized mortgage obligations	$	85,002	$	96	$	(2,135)	$	82,963
Government-sponsored mortgage-backed residential		80,027		19		(1,783)		78,263
Asset backed-collateralized loan obligations		14,891		30		(456)		14,465
Corporate bonds		12,186		159		(12)		12,333
State and municipal		8,231		414		(7)		8,638
U.S. Government-sponsored entities and agencies		8,382		-		(53)		8,329
Commercial mortgage backed		3,061		35		-		3,096
Total	$	211,780	$	753	$	(4,446)	$	208,087
Securities available-for-sale:
December 31, 2013:
Government-sponsored collateralized mortgage obligations	$	104,390	$	86	$	(3,660)	$	100,816
Government-sponsored mortgage-backed residential		78,204		4		(3,884)		74,324
Corporate bonds		43,818		208		(328)		43,698
Asset backed-collateralized loan obligations		35,113		-		(635)		34,478
State and municipal		11,670		264		(11)		11,923
Commercial mortgage backed		4,097		-		(54)		4,043
Total	$	277,292	$	562	$	(8,572)	$	269,282

Investments Classified by Contractual Maturity Date [Table Text Block]

The amortized cost and fair value of securities at September 30, 2014, 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	$	855	$	856
Due after one year through five years		16,368		16,485
Due after five years through ten years		5,789		5,808
Due after ten years		5,787		6,151
Investment securities with no single maturity date:
Government-sponsored collateralized mortgage obligations		85,002		82,963
Government-sponsored mortgage-backed residential		80,027		78,263
Asset backed-collateralized loan obligations		14,891		14,465
Commercial mortgage backed		3,061		3,096
	$	211,780	$	208,087

Available-for-sale Securities, Continuous Unrealized Loss Position, Fair Value [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				Nine Months Ended
	September 30,				September 30,
	2014		2013		2014		2013
(Dollars in thousands)
Proceeds from sales	$	620	$	24,295	$	73,701	$	125,351
Gross realized gains		13		235		545		1,078
Gross realized losses		-		223		567		839

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

Securities with unrealized losses at September 30, 2014 and December 31, 2013 aggregated by major security type and length of time in a continuous unrealized loss position are as follows:

September 30, 2014	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 collateralized mortgage obligations	$	21,206	$	(189)	$	50,828	$	(1,946)	$	72,034	$	(2,135)
Government-sponsored mortgage-backed residential		10,635		(89)		64,638		(1,694)		75,273		(1,783)
Asset backed-collateralized loan obligations		-		-		13,571		(456)		13,571		(456)
Corporate bonds		2,008		(12)		-		-		2,008		(12)
State and municipal		306		(1)		513		(6)		819		(7)
U.S. Government-sponsored entities and agencies		8,329		(53)		-		-		8,329		(53)
Total temporarily impaired	$	42,484	$	(344)	$	129,550	$	(4,102)	$	172,034	$	(4,446)

December 31, 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 collateralized mortgage obligations	$	59,168	$	(2,119)	$	20,560	$	(1,541)	$	79,728	$	(3,660)
Government-sponsored mortgage-backed residential		59,971		(2,864)		13,215		(1,020)		73,186		(3,884)
Corporate bonds		17,578		(328)		-		-		17,578		(328)
Asset backed-collateralized loan obligations		34,478		(635)		-		-		34,478		(635)
State and municipal		1,865		(11)		-		-		1,865		(11)
Commercial mortgage backed		4,043		(54)		-		-		4,043		(54)
Total temporarily impaired	$	177,103	$	(6,011)	$	33,775	$	(2,561)	$	210,878	$	(8,572)

XML

LOANS (Details) (USD $) In Thousands, unless otherwise specified	Sep. 30, 2014	Jun. 30, 2014	Dec. 31, 2013	Sep. 30, 2013	Jun. 30, 2013	Dec. 31, 2012
Accounts, Notes, Loans and Financing Receivable [Line Items]
Loans and Leases Receivable, Gross, Carrying Amount	$ 436,225		$ 466,952
Less:
Net deferred loan origination fees	(39)		(90)
Allowance for loan losses	(8,218)	(9,538)	(9,576)	(12,224)	(15,947)	(17,265)
Loans and Leases Receivable Adjustments Total	(8,257)		(9,666)
Net Loans	427,968		457,286
Commercial Real Estate Other Receivable [Member]
Accounts, Notes, Loans and Financing Receivable [Line Items]
Loans and Leases Receivable, Gross, Carrying Amount	233,296		257,901
Land Development [Member]
Accounts, Notes, Loans and Financing Receivable [Line Items]
Loans and Leases Receivable, Gross, Carrying Amount	14,057		20,476
Building Lots [Member]
Accounts, Notes, Loans and Financing Receivable [Line Items]
Loans and Leases Receivable, Gross, Carrying Amount	1,224		1,559
Residential mortgage [Member]
Accounts, Notes, Loans and Financing Receivable [Line Items]
Loans and Leases Receivable, Gross, Carrying Amount	98,856		99,344
Less:
Allowance for loan losses	(311)	(288)	(292)	(364)	(375)	(501)
Consumer and home equity [Member]
Accounts, Notes, Loans and Financing Receivable [Line Items]
Loans and Leases Receivable, Gross, Carrying Amount	51,319		54,010
Less:
Allowance for loan losses	(262)	(296)	(309)	(360)	(396)	(442)
Commercial [Member]
Accounts, Notes, Loans and Financing Receivable [Line Items]
Loans and Leases Receivable, Gross, Carrying Amount	24,496		20,621
Less:
Allowance for loan losses	(593)	(612)	(540)	(1,047)	(908)	(1,236)
Indirect consumer [Member]
Accounts, Notes, Loans and Financing Receivable [Line Items]
Loans and Leases Receivable, Gross, Carrying Amount	12,977		13,041
Less:
Allowance for loan losses	$ (76)	$ (54)	$ (77)	$ (202)	$ (214)	$ (271)

XML

REAL ESTATE ACQUIRED THROUGH FORECLOSURE (Tables)

9 Months Ended

Sep. 30, 2014

Real Estate [Abstract]

Schedule of Real Estate Properties [Table Text Block]

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

	September 30,		December 31,
(Dollars in thousands)	2014		2013
Beginning balance, January 1,	$	11,657	$	22,286
Additions		1,716		8,713
Net proceeds from sale of properties		(2,673)		(17,076)
Writedowns		(630)		(2,185)
Change in valuation allowance		(563)		(81)
Ending balance	$	9,507	$	11,657

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				Nine Months Ended
(Dollars in thousands)	September 30,				September 30,
	2014		2013		2014		2013
Beginning balance	$	1,039	$	721	$	581	$	500
Provision		105		365		563		1,957
Writedowns and loss on sale		-		(365)		-		(1,736)
Ending balance	$	1,144	$	721	$	1,144	$	721

XML

Consolidated Statements of Cash Flows (USD $) In Thousands, unless otherwise specified	9 Months Ended
	Sep. 30, 2014	Sep. 30, 2013
Operating Activities:
Net (loss)	$ (1,565)	$ 463
Adjustments to reconcile net income/(loss) to net cash provided by operating activities:
Credit for loan losses	(1,576)	(1,325)
Depreciation on premises and equipment	978	1,086
Change in real estate acquired through foreclosure valuation allowance	563	221
Loss on low-income housing investments	195	46
Net amortization (accretion) available-for-sale	1,241	5,394
Loss on sale of investments available-for-sale	567	839
Gain on sale of investments available-for-sale	(545)	(1,078)
Gain on sale of mortgage loans	(290)	(818)
Loss on sale of premises and equipment	0	70
Gain on sale of real estate acquired through foreclosure	(65)	(1,839)
Loss on sale of real estate acquired through foreclosure	5	372
Write-downs on real estate acquired through foreclosure	630	1,585
Origination of loans held for sale	(19,139)	(46,807)
Proceeds on sale of loans held for sale	19,052	50,444
Stock-based compensation expense	1,090	393
Changes in:
Cash surrender value of life insurance	(268)	(276)
Interest receivable	560	407
Other assets	(500)	(345)
Interest payable	942	1,016
Accrued income tax	2,904	21
Accounts payable and other liabilities	(658)	1,093
Net cash from operating activities	4,121	10,962
Investing Activities:
Sales of securities available-for-sale	73,701	125,351
Purchases of securities available-for-sale	(30,939)	(108,926)
Maturities of securities available-for-sale	21,487	32,363
Net change in loans	29,557	42,844
Redemption of Federal Home Loan Bank stock	350	375
Investment in low-income housing projects	0	(24)
Net purchases of premises and equipment	(171)	(537)
Sales of premises and equipment	0	522
Proceeds from sales of real estate acquired through foreclosure	2,733	15,350
Net cash from investing activities	96,718	107,318
Financing Activities
Net change in deposits	(109,740)	(175,742)
Advance from Federal Home Loan Bank	0	26,000
Repayments to Federal Home Loan Bank	(153)	(172)
Issuance of common stock for employee benefit plans and exercise of stock options	42	48
Net cash from financing activities	(109,851)	(149,866)
Increase (decrease) in cash and cash equivalents	(9,012)	(31,586)
Cash and cash equivalents, beginning of period	65,988	63,103
Cash and cash equivalents, end of period	56,976	31,517
Supplemental disclosures Cash Paid (Received) for:
Interest expense	3,271	5,536
Income taxes	(2,902)	(19)
Supplemental noncash disclosures:
Transfers from loans to real estate acquired through foreclosure and repossessed assets	1,800	2,369
Loans to facilitate sales of real estate owned and repossessed assets	463	125
Dividends accrued not paid on preferred stock	$ 1,090	$ 750

XML

Consolidated Balance Sheets (Parenthetical) (USD $)	Sep. 30, 2014	Dec. 31, 2013
Real Estate Owned, Valuation Allowance (in dollars)	$ 1,144,000	$ 581,000
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)	$ 24,700,000	$ 23,400,000
Common stock, par value (in dollars per share)	$ 1	$ 1
Common stock, shares authorized	35,000,000	35,000,000
Common stock, shares issued	5,150,356	4,870,887
Common stock, shares, outstanding	5,150,356	4,870,887

XML

SUBORDINATED DEBENTURES

9 Months Ended

Sep. 30, 2014

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 September 30, 2014, we have deferred a total of sixteen quarterly payments and these accrued but unpaid interest payments totaled $5.5 million.

XML

Document And Entity Information	9 Months Ended
	Sep. 30, 2014	Nov. 10, 2014
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		5,150,356
Document Type	10-Q
Amendment Flag	false
Document Period End Date	Sep. 30, 2014
Document Fiscal Period Focus	Q3
Document Fiscal Year Focus	2014

XML

PREFERRED STOCK

9 Months Ended

Sep. 30, 2014

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 paid cumulative dividends quarterly at a rate of 5% per year for the first five years and then reset to 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 September 30, 2014, we have deferred a total of sixteen quarterly payments and these accrued but unpaid dividends totaled $4.7 million.

The terms of the Senior Preferred Shares restrict our ability to repurchase shares and limit our payment of dividends on our common stock to the most recent quarterly amount we paid prior to October 14, 2008, which was $0.19 per share. These restrictions will remain in effect until the Senior Preferred Shares are fully retired. The restrictions imposed by the terms of the Senior Preferred Shares are in addition to the restrictions imposed by our Consent Order and formal agreement with bank regulatory agencies described in Note 2.

On April 29, 2013, Treasury sold our Senior Preferred Shares to six funds 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, at the current 9% annual rate, continues until our Senior Preferred Shares are fully retired.

XML

Consolidated Statements of Operations (USD $) In Thousands, except Share data, unless otherwise specified	3 Months Ended		9 Months Ended
	Sep. 30, 2014	Sep. 30, 2013	Sep. 30, 2014	Sep. 30, 2013
Interest Income:
Loans, including fees	$ 5,229	$ 6,308	$ 16,609	$ 19,729
Taxable securities	1,106	1,700	3,875	4,898
Tax exempt securities	31	53	95	185
Total interest income	6,366	8,061	20,579	24,812
Interest Expense:
Deposits	1,041	1,561	3,457	5,471
Federal Home Loan Bank advances	131	133	406	397
Subordinated debentures	195	340	787	1,022
Total interest expense	1,367	2,034	4,650	6,890
Net interest income	4,999	6,027	15,929	17,922
Credit for loan losses	(1,676)	(500)	(1,576)	(1,325)
Net interest income after credit for loan losses	6,675	6,527	17,505	19,247
Non-interest Income:
Customer service fees on deposit accounts	1,363	1,444	3,963	3,942
Gain on sale of mortgage loans	130	230	290	818
Gain on sale of investments	13	235	545	1,078
Loss on sale of investments	0	(223)	(567)	(839)
Loss on sale and write downs on real estate acquired through foreclosure	(134)	(365)	(635)	(1,957)
Gain on sale on real estate acquired through foreclosure	35	1,632	65	1,839
Other income	415	593	1,448	1,805
Total non-interest income	1,822	3,546	5,109	6,686
Non-interest Expense:
Employee compensation and benefits	3,217	3,955	10,952	11,505
Office occupancy expense and equipment	670	653	2,059	2,051
Outside services and data processing	1,021	900	2,938	2,704
FDIC insurance premiums	428	460	1,348	1,654
Real estate acquired through foreclosure expense	475	452	1,251	1,270
Loan expense	35	485	600	1,092
Legal and professional service fees	484	330	1,163	720
Other expense	1,462	1,370	4,635	4,472
Total non-interest expense	7,792	8,605	24,946	25,468
Income (loss) before income taxes	705	1,468	(2,332)	465
Income tax expense (benefit)	200	1	(767)	2
Net Income (Loss)	505	1,467	(1,565)	463
Less:
Dividends on preferred stock	(450)	(250)	(1,327)	(750)
Accretion on preferred stock	0	(14)	(3)	(41)
Net income (loss) attributable to common shareholders	$ 55	$ 1,203	$ (2,895)	$ (328)
Shares applicable to basic income (loss) per common share	5,074,191	4,860,115	4,974,906	4,816,538
Basic income (loss) per common share (in dollars per share)	$ 0.01	$ 0.25	$ (0.58)	$ (0.07)
Shares applicable to diluted income (loss) per common share (in shares)	5,176,337	4,905,542	4,974,906	4,816,538
Diluted income (loss) per common share (in dollars per share)	$ 0.01	$ 0.25	$ (0.58)	$ (0.07)
Cash dividends declared per common share (in dollars per share)	$ 0	$ 0	$ 0	$ 0

XML

REAL ESTATE ACQUIRED THROUGH FORECLOSURE

9 Months Ended

Sep. 30, 2014

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:

	September 30,		December 31,
(Dollars in thousands)	2014		2013
Beginning balance, January 1,	$	11,657	$	22,286
Additions		1,716		8,713
Net proceeds from sale of properties		(2,673)		(17,076)
Writedowns		(630)		(2,185)
Change in valuation allowance		(563)		(81)
Ending balance	$	9,507	$	11,657

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

	Three Months Ended				Nine Months Ended
(Dollars in thousands)	September 30,				September 30,
	2014		2013		2014		2013
Beginning balance	$	1,039	$	721	$	581	$	500
Provision		105		365		563		1,957
Writedowns and loss on sale		-		(365)		-		(1,736)
Ending balance	$	1,144	$	721	$	1,144	$	721

Real estate acquired through foreclosure expense which consists primarily of property management expenses and provision expense was $475,000 and $452,000 for the three months ended September 30, 2014 and 2013, and $1.3 million for both nine month periods ended September 30, 2014 and 2013.

XML

LOANS

9 Months Ended

Sep. 30, 2014

Receivables [Abstract]

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

4. LOANS

Loans are summarized as follows:

	September 30,		December 31,
(Dollars in thousands)	2014		2013
Commercial Real Estate:
Other	$	233,296	$	257,901
Land Development		14,057		20,476
Building Lots		1,224		1,559
Residential mortgage		98,856		99,344
Consumer and home equity		51,319		54,010
Commercial		24,496		20,621
Indirect consumer		12,977		13,041
		436,225		466,952
Less:
Net deferred loan origination fees		(39)		(90)
Allowance for loan losses		(8,218)		(9,576)
		(8,257)		(9,666)
Net Loans	$	427,968	$	457,286

The following tables present the activity in the allowance for loan losses by portfolio segment for the three and nine months ending September 30, 2014 and 2013:

Three Months Ended
September 30, 2014			Commercial		Residential		Consumer &		Indirect
	Commercial		Real Estate		Mortgage		Home Equity		Consumer		Total
(Dollars in thousands)
Allowance for loan losses:
Beginning Balance	$	612	$	8,288	$	288	$	296	$	54	$	9,538
Provision for loan losses		(51)		(1,569)		(41)		(43)		28		(1,676)
Charge-offs		-		(728)		(34)		(1)		(25)		(788)
Recoveries		32		985		98		10		19		1,144
Total ending allowance balance	$	593	$	6,976	$	311	$	262	$	76	$	8,218

Nine Months Ended
September 30, 2014			Commercial		Residential		Consumer &		Indirect
	Commercial		Real Estate		Mortgage		Home Equity		Consumer		Total
(Dollars in thousands)
Allowance for loan losses:
Beginning Balance	$	540	$	8,358	$	292	$	309	$	77	$	9,576
Provision for loan losses		(13)		(1,449)		(41)		(63)		(10)		(1,576)
Charge-offs		-		(1,030)		(53)		(25)		(69)		(1,177)
Recoveries		66		1,097		113		41		78		1,395
Total ending allowance balance	$	593	$	6,976	$	311	$	262	$	76	$	8,218

Three Months Ended
September 30, 2013			Commercial		Residential		Consumer &		Indirect
	Commercial		Real Estate		Mortgage		Home Equity		Consumer		Total
(Dollars in thousands)
Allowance for loan losses:
Beginning Balance	$	908	$	14,054	$	375	$	396	$	214	$	15,947
Provision for loan losses		177		(790)		49		67		(3)		(500)
Charge-offs		(48)		(3,076)		(73)		(111)		(45)		(3,353)
Recoveries		10		63		13		8		36		130
Total ending allowance balance	$	1,047	$	10,251	$	364	$	360	$	202	$	12,224

Nine Months Ended
September 30, 2013			Commercial		Residential		Consumer &		Indirect
	Commercial		Real Estate		Mortgage		Home Equity		Consumer		Total
(Dollars in thousands)
Allowance for loan losses:
Beginning Balance	$	1,236	$	14,815	$	501	$	442	$	271	$	17,265
Provision for loan losses		(95)		(1,175)		(81)		90		(64)		(1,325)
Charge-offs		(142)		(3,528)		(73)		(209)		(102)		(4,054)
Recoveries		48		139		17		37		97		338
Total ending allowance balance	$	1,047	$	10,251	$	364	$	360	$	202	$	12,224

We did not implement any significant 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 September 30, 2014 and 2013 and December 31, 2013:

September 30, 2014			Commercial		Residential		Consumer &		Indirect
	Commercial		Real Estate		Mortgage		Home Equity		Consumer		Total
(Dollars in thousands)
Allowance for loan losses:
Ending allowance balance attributable to loans:
Individually evaluated for impairment	$	113	$	1,949	$	1	$	-	$	-	$	2,063
Collectively evaluated for impairment		480		5,027		310		262		76		6,155
Total ending allowance balance	$	593	$	6,976	$	311	$	262	$	76	$	8,218
Loans:
Loans individually evaluated for impairment	$	516	$	23,750	$	2,859	$	308	$	-	$	27,433
Loans collectively evaluated for impairment		23,980		224,827		95,997		51,011		12,977		408,792
Total ending loans balance	$	24,496	$	248,577	$	98,856	$	51,319	$	12,977	$	436,225

December 31, 2013			Commercial		Residential		Consumer &		Indirect
	Commercial		Real Estate		Mortgage		Home Equity		Consumer		Total
(Dollars in thousands)
Allowance for loan losses:
Ending allowance balance attributable to loans:
Individually evaluated for impairment	$	148	$	2,603	$	3	$	32	$	-	$	2,786
Collectively evaluated for impairment		392		5,755		289		277		77		6,790
Total ending allowance balance	$	540	$	8,358	$	292	$	309	$	77	$	9,576
Loans:
Loans individually evaluated for impairment	$	803	$	32,911	$	3,051	$	546	$	-	$	37,311
Loans collectively evaluated for impairment		19,818		247,025		96,293		53,464		13,041		429,641
Total ending loans balance	$	20,621	$	279,936	$	99,344	$	54,010	$	13,041	$	466,952

September 30, 2013			Commercial		Residential		Consumer &		Indirect
	Commercial		Real Estate		Mortgage		Home Equity		Consumer		Total
(Dollars in thousands)
Allowance for loan losses:
Ending allowance balance attributable to loans:
Individually evaluated for impairment	$	197	$	3,550	$	68	$	51	$	-	$	3,866
Collectively evaluated for impairment		850		6,701		296		309		202		8,358
Total ending allowance balance	$	1,047	$	10,251	$	364	$	360	$	202	$	12,224
Loans:
Loans individually evaluated for impairment	$	1,353	$	40,629	$	3,015	$	620	$	-	$	45,617
Loans collectively evaluated for impairment		19,041		246,874		98,266		53,368		12,938		430,487
Total ending loans balance	$	20,394	$	287,503	$	101,281	$	53,988	$	12,938	$	476,104

The following tables’ present loans individually evaluated for impairment by class of loans as of September 30, 2014 and 2013 and December 31, 2013. 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 excludes accrued interest receivable and loan origination fees.

							Three Months Ended						Nine Months Ended
							September 30, 2014						September 30, 2014
September 30, 2014	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	$	607	$	403	$	-	$	407	$	2	$	2	$	441	$	7	$	7
Commercial Real Estate:
Land Development		1,950		1,000		-		1,163		6		6		1,438		23		23
Building Lots		-		-		-		106		-		-		159		-		-
Other		12,632		12,121		-		15,793		108		108		18,678		488		488
Residential Mortgage		3,011		2,815		-		2,642		11		11		2,817		45		45
Consumer and Home Equity		344		308		-		344		3		3		392		10		10
Indirect Consumer		-		-		-		-		-		-		-		-		-
With an allowance recorded:
Commercial		113		113		113		214		1		1		269		5		5
Commercial Real Estate:
Land Development		240		240		113		1,219		7		7		1,713		27		27
Building Lots		-		-		-		-		-		-		-		-		-
Other		10,389		10,389		1,836		8,644		59		59		7,860		205		205
Residential Mortgage		44		44		1		101		-		-		80		1		1
Consumer and Home Equity		-		-		-		11		-		-		39		1		1
Indirect Consumer		-		-		-		-		-		-		-		-		-
Total	$	29,330	$	27,433	$	2,063	$	30,644	$	197	$	197	$	33,886	$	812	$	812

December 31, 2013	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	$	679	$	475	$	-	$	747	$	21	$	21
Commercial Real Estate:
Land Development		2,014		1,989		-		2,898		139		139
Building Lots		477		212		-		212		-		-
Other		25,441		21,864		-		17,934		754		754
Residential Mortgage		3,119		2,992		-		2,368		63		63
Consumer and Home Equity		478		478		-		330		10		10
Indirect Consumer		-		-		-		-		-		-
With an allowance recorded:
Commercial		328		328		148		314		9		9
Commercial Real Estate:
Land Development		2,206		2,206		1,581		2,538		121		121
Building Lots		-		-		-		-		-		-
Other		6,640		6,640		1,022		16,512		694		694
Residential Mortgage		59		59		3		312		8		8
Consumer and Home Equity		68		68		32		229		7		7
Indirect Consumer		-		-		-		-		-		-
Total	$	41,509	$	37,311	$	2,786	$	44,394	$	1,826	$	1,826

							Three Months Ended						Nine Months Ended
							September 30, 2013						September 30, 2013
September 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	$	1,177	$	973	$	-	$	1,001	$	9	$	9	$	815	$	18	$	18
Commercial Real Estate:
Land Development		2,220		2,195		-		2,253		27		27		3,125		114		114
Building Lots		477		212		-		212		-		-		212		-		-
Other		25,475		20,048		-		14,964		161		161		14,042		444		444
Residential Mortgage		2,525		2,525		-		2,733		21		21		2,212		45		45
Consumer and Home Equity		357		357		-		376		3		3		293		6		6
Indirect Consumer		-		-		-		-		-		-		-		-		-
With an allowance recorded:
Commercial		380		380		197		283		2		2		310		7		7
Commercial Real Estate:
Land Development		2,206		2,206		1,015		2,568		31		31		2,621		95		95
Building Lots		-		-		-		-		-		-		-		-		-
Other		15,970		15,968		2,535		18,183		195		195		18,980		599		599
Residential Mortgage		514		490		68		484		4		4		375		8		8
Consumer and Home Equity		281		263		51		266		2		2		269		6		6
Indirect Consumer		-		-		-		-		-		-		-		-		-
Total	$	51,582	$	45,617	$	3,866	$	43,323	$	455	$	455	$	43,254	$	1,342	$	1,342

The following tables present the recorded investment in restructured, non-accrual and loans past due over 90 days still on accrual by class of loans as of September 30, 2014 and December 31, 2013.

					Restructured
					Loans Past Due		Loans Past Due
September 30, 2014					Over 90 Days		Over 90 Days		Non-Accrual
	Restructured on		Restructured on		Still		Still		Excluding
(Dollars in thousands)	Non-Accrual Status		Accrual Status		Accruing		Accruing		Restructured
Commercial	$	-	$	154	$	-	$	-	$	362
Commercial Real Estate:
Land Development		-		-		-		-		240
Building Lots		-		-		-		-		-
Other		9,139		10,691		-		2,017		2,377
Residential Mortgage		297		-		-		-		1,809
Consumer and Home Equity		-		69		-		-		81
Indirect Consumer		-		-		-		-		48
Total	$	9,436	$	10,914	$	-	$	2,017	$	4,917

					Restructured
					Loans Past Due		Loans Past Due
December 31, 2013					Over 90 Days		Over 90 Days		Non-Accrual
	Restructured on		Restructured on		Still		Still		Excluding
(Dollars in thousands)	Non-Accrual Status		Accrual Status		Accruing		Accruing		Restructured
Commercial	$	-	$	178	$	-	$	-	$	421
Commercial Real Estate:
Land Development		-		1,687		-		-		2,508
Building Lots		-		-		-		-		212
Other		986		17,025		4,780		2,226		4,237
Residential Mortgage		301		-		-		-		1,532
Consumer and Home Equity		23		73		-		-		156
Indirect Consumer		-		-		-		-		30
Total	$	1,310	$	18,963	$	4,780	$	2,226	$	9,096

The following tables present the aging of the unpaid principal in past due loans as of September 30, 2014 and December 31, 2013 by class of loans:

September 30, 2014	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	$	523	$	-	$	362	$	885	$	23,611	$	24,496
Commercial Real Estate:
Land Development		-		-		-		-		14,057		14,057
Building Lots		-		-		-		-		1,224		1,224
Other		3,419		271		13,533		17,223		216,073		233,296
Residential Mortgage		169		861		1,699		2,729		96,127		98,856
Consumer and Home Equity		544		76		79		699		50,620		51,319
Indirect Consumer		227		77		48		352		12,645		12,997
Total	$	4,882	$	1,285	$	15,721	$	21,888	$	414,357	$	436,245

December 31, 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	$	-	$	-	$	421	$	421	$	20,200	$	20,621
Commercial Real Estate:
Land Development		-		-		2,508		2,508		17,968		20,476
Building Lots		-		-		212		212		1,347		1,559
Other		5,250		6,213		11,236		22,699		235,202		257,901
Residential Mortgage		1,446		511		1,053		3,010		96,334		99,344
Consumer and Home Equity		430		23		117		570		53,440		54,010
Indirect Consumer		211		55		22		288		12,753		13,041
Total	$	7,337	$	6,802	$	15,569	$	29,708	$	437,244	$	466,952

Troubled Debt Restructurings:

We have allocated $1.8 million and $1.1 million of specific reserves to customers whose loan terms have been modified in troubled debt restructurings as of September 30, 2014 and December 31, 2013. 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 nine month periods ending September 30, 2014, no new loans were modified as troubled debt restructurings. Prior to the 2014 period, the terms of certain loans were modified as troubled debt restructurings and 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 table presents loans by class modified as troubled debt restructurings that occurred during the periods ending September 30, 2014 and 2013:

Three Months Ended

Three Months Ended

September 30, 2014

September 30, 2013

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

-

-

-

-

-

-

Building Lots

-

-

-

-

-

-

Other

-

-

-

-

-

-

Residential Mortgage

-

-

-

-

-

-

Consumer and Home Equity

-

-

-

-

-

-

Indirect Consumer

-

-

-

-

-

-

Total

-

$

-

$

-

-

$

-

$

-

	Nine Months Ended						Nine Months Ended
	September 30, 2014						September 30, 2013
			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		-		-		-		-		-		-
Building Lots		-		-		-		-		-		-
Other		-		-		-		5		3,512		3,512
Residential Mortgage		-		-		-		-		-		-
Consumer and Home Equity		-		-		-		2		74		74
Indirect Consumer		-		-		-		-		-		-
Total		-	$	-	$	-		7	$	3,586	$	3,586

The troubled debt restructurings described above increased the allowance for loan losses allocated to troubled debt restructurings by $0 for the three and nine months ended September 30, 2014. The troubled debt restructurings described above increased the allowance for loan losses allocated to troubled debt restructurings by $0 and $78,000 for the three and nine months ended September 30, 2013. Typically, these loans had allocated allowance prior to their formal modification. There were no charge-offs recorded on the troubled debt restructurings described above for the 2014 and 2013 periods.

The following table presents 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 September 30, 2014 and 2013:

	Three Months Ended			Three Months Ended
	September 30, 2014			September 30, 2013
	Number		Recorded	Number		Recorded
(Dollars in thousands)	of Loans		Investment	of Loans		Investment
Troubled Debt Restructurings:
Commercial	-	$	-	-	$	-
Commercial Real Estate:
Land Development	-		-	-		-
Building Lots	-		-	-		-
Other	-		-	-		-
Residential Mortgage	-		-	-		-
Consumer and Home Equity	-		-	-		-
Indirect Consumer	-		-	-		-
Total	-	$	-	-	$	-

	Nine Months Ended			Nine Months Ended
	September 30, 2014			September 30, 2013
	Number		Recorded	Number		Recorded
(Dollars in thousands)	of Loans		Investment	of Loans		Investment
Troubled Debt Restructurings:
Commercial	-	$	-	-	$	-
Commercial Real Estate:
Land Development	-		-	-		-
Building Lots	-		-	-		-
Other	1		790	-		-
Residential Mortgage	-		-	-		-
Consumer and Home Equity	-		-	-		-
Indirect Consumer	-		-	-		-
Total	1	$	790	-	$	-

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 $0 for the three and nine months ended September 30, 2014. The troubled debt restructurings described above resulted in charge-offs of $0 for the three and nine month periods ended September 30, 2014. We did not have any troubled debt restructurings for which there was a payment default within twelve months following the modification during the September 30, 2013 three and nine month periods.

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 September 30, 2014 and December 31, 2013, and based on the most recent analysis performed, the risk category of loans by class of loans was as follows:

September 30, 2014
(Dollars in thousands)	Not Rated		Pass		Criticized		Substandard		Doubtful		Loss		Total
Commercial	$	-	$	23,522	$	461	$	513	$	-	$	-	$	24,496
Commercial Real Estate:
Land Development		-		12,065		736		1,256		-		-		14,057
Building Lots		-		832		392		-		-		-		1,224
Other		-		200,021		7,525		25,750		-		-		233,296
Residential Mortgage		94,613		-		1,384		2,859		-		-		98,856
Consumer and Home Equity		50,847		-		214		258		-		-		51,319
Indirect Consumer		12,925		-		-		52		-		-		12,977
Total	$	158,385	$	236,440	$	10,712	$	30,688	$	-	$	-	$	436,225

December 31, 2013
(Dollars in thousands)	Not Rated		Pass		Criticized		Substandard		Doubtful		Loss		Total
Commercial	$	-	$	19,289	$	470	$	862	$	-	$	-	$	20,621
Commercial Real Estate:
Land Development		-		15,484		2,484		2,508		-		-		20,476
Building Lots		-		906		441		212		-		-		1,559
Other		-		213,719		13,920		30,262		-		-		257,901
Residential Mortgage		95,351		-		942		3,051		-		-		99,344
Consumer and Home Equity		53,407		-		72		531		-		-		54,010
Indirect Consumer		12,988		-		-		53		-		-		13,041
Total	$	161,746	$	249,398	$	18,329	$	37,479	$	-	$	-	$	466,952

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 September 30, 2014 and December 31, 2013:

September 30, 2014	Residential		Consumer &		Indirect
(Dollars in thousands)	Mortgage		Home Equity		Consumer
Performing	$	96,750	$	51,190	$	12,977
Restructured on non-accrual		297		-		-
Non-accrual		1,809		129		-
Total	$	98,856	$	51,319	$	12,977

December 31, 2013	Residential		Consumer &		Indirect
(Dollars in thousands)	Mortgage		Home Equity		Consumer
Performing	$	97,511	$	53,831	$	13,011
Restructured on non-accrual		301		23		-
Non-accrual		1,532		156		30
Total	$	99,344	$	54,010	$	13,041

XML

LOANS (Tables)

9 Months Ended

Sep. 30, 2014

Receivables [Abstract]

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

Loans are summarized as follows:

	September 30,		December 31,
(Dollars in thousands)	2014		2013
Commercial Real Estate:
Other	$	233,296	$	257,901
Land Development		14,057		20,476
Building Lots		1,224		1,559
Residential mortgage		98,856		99,344
Consumer and home equity		51,319		54,010
Commercial		24,496		20,621
Indirect consumer		12,977		13,041
		436,225		466,952
Less:
Net deferred loan origination fees		(39)		(90)
Allowance for loan losses		(8,218)		(9,576)
		(8,257)		(9,666)
Net Loans	$	427,968	$	457,286

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 three and nine months ending September 30, 2014 and 2013:

Three Months Ended
September 30, 2014			Commercial		Residential		Consumer &		Indirect
	Commercial		Real Estate		Mortgage		Home Equity		Consumer		Total
(Dollars in thousands)
Allowance for loan losses:
Beginning Balance	$	612	$	8,288	$	288	$	296	$	54	$	9,538
Provision for loan losses		(51)		(1,569)		(41)		(43)		28		(1,676)
Charge-offs		-		(728)		(34)		(1)		(25)		(788)
Recoveries		32		985		98		10		19		1,144
Total ending allowance balance	$	593	$	6,976	$	311	$	262	$	76	$	8,218

Nine Months Ended
September 30, 2014			Commercial		Residential		Consumer &		Indirect
	Commercial		Real Estate		Mortgage		Home Equity		Consumer		Total
(Dollars in thousands)
Allowance for loan losses:
Beginning Balance	$	540	$	8,358	$	292	$	309	$	77	$	9,576
Provision for loan losses		(13)		(1,449)		(41)		(63)		(10)		(1,576)
Charge-offs		-		(1,030)		(53)		(25)		(69)		(1,177)
Recoveries		66		1,097		113		41		78		1,395
Total ending allowance balance	$	593	$	6,976	$	311	$	262	$	76	$	8,218

Three Months Ended
September 30, 2013			Commercial		Residential		Consumer &		Indirect
	Commercial		Real Estate		Mortgage		Home Equity		Consumer		Total
(Dollars in thousands)
Allowance for loan losses:
Beginning Balance	$	908	$	14,054	$	375	$	396	$	214	$	15,947
Provision for loan losses		177		(790)		49		67		(3)		(500)
Charge-offs		(48)		(3,076)		(73)		(111)		(45)		(3,353)
Recoveries		10		63		13		8		36		130
Total ending allowance balance	$	1,047	$	10,251	$	364	$	360	$	202	$	12,224

Nine Months Ended
September 30, 2013			Commercial		Residential		Consumer &		Indirect
	Commercial		Real Estate		Mortgage		Home Equity		Consumer		Total
(Dollars in thousands)
Allowance for loan losses:
Beginning Balance	$	1,236	$	14,815	$	501	$	442	$	271	$	17,265
Provision for loan losses		(95)		(1,175)		(81)		90		(64)		(1,325)
Charge-offs		(142)		(3,528)		(73)		(209)		(102)		(4,054)
Recoveries		48		139		17		37		97		338
Total ending allowance balance	$	1,047	$	10,251	$	364	$	360	$	202	$	12,224

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 September 30, 2014 and 2013 and December 31, 2013:

September 30, 2014			Commercial		Residential		Consumer &		Indirect
	Commercial		Real Estate		Mortgage		Home Equity		Consumer		Total
(Dollars in thousands)
Allowance for loan losses:
Ending allowance balance attributable to loans:
Individually evaluated for impairment	$	113	$	1,949	$	1	$	-	$	-	$	2,063
Collectively evaluated for impairment		480		5,027		310		262		76		6,155
Total ending allowance balance	$	593	$	6,976	$	311	$	262	$	76	$	8,218
Loans:
Loans individually evaluated for impairment	$	516	$	23,750	$	2,859	$	308	$	-	$	27,433
Loans collectively evaluated for impairment		23,980		224,827		95,997		51,011		12,977		408,792
Total ending loans balance	$	24,496	$	248,577	$	98,856	$	51,319	$	12,977	$	436,225

December 31, 2013			Commercial		Residential		Consumer &		Indirect
	Commercial		Real Estate		Mortgage		Home Equity		Consumer		Total
(Dollars in thousands)
Allowance for loan losses:
Ending allowance balance attributable to loans:
Individually evaluated for impairment	$	148	$	2,603	$	3	$	32	$	-	$	2,786
Collectively evaluated for impairment		392		5,755		289		277		77		6,790
Total ending allowance balance	$	540	$	8,358	$	292	$	309	$	77	$	9,576
Loans:
Loans individually evaluated for impairment	$	803	$	32,911	$	3,051	$	546	$	-	$	37,311
Loans collectively evaluated for impairment		19,818		247,025		96,293		53,464		13,041		429,641
Total ending loans balance	$	20,621	$	279,936	$	99,344	$	54,010	$	13,041	$	466,952

September 30, 2013			Commercial		Residential		Consumer &		Indirect
	Commercial		Real Estate		Mortgage		Home Equity		Consumer		Total
(Dollars in thousands)
Allowance for loan losses:
Ending allowance balance attributable to loans:
Individually evaluated for impairment	$	197	$	3,550	$	68	$	51	$	-	$	3,866
Collectively evaluated for impairment		850		6,701		296		309		202		8,358
Total ending allowance balance	$	1,047	$	10,251	$	364	$	360	$	202	$	12,224
Loans:
Loans individually evaluated for impairment	$	1,353	$	40,629	$	3,015	$	620	$	-	$	45,617
Loans collectively evaluated for impairment		19,041		246,874		98,266		53,368		12,938		430,487
Total ending loans balance	$	20,394	$	287,503	$	101,281	$	53,988	$	12,938	$	476,104

Impaired Financing Receivables [Table Text Block]

The following tables’ present loans individually evaluated for impairment by class of loans as of September 30, 2014 and 2013 and December 31, 2013. 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 excludes accrued interest receivable and loan origination fees.

							Three Months Ended						Nine Months Ended
							September 30, 2014						September 30, 2014
September 30, 2014	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	$	607	$	403	$	-	$	407	$	2	$	2	$	441	$	7	$	7
Commercial Real Estate:
Land Development		1,950		1,000		-		1,163		6		6		1,438		23		23
Building Lots		-		-		-		106		-		-		159		-		-
Other		12,632		12,121		-		15,793		108		108		18,678		488		488
Residential Mortgage		3,011		2,815		-		2,642		11		11		2,817		45		45
Consumer and Home Equity		344		308		-		344		3		3		392		10		10
Indirect Consumer		-		-		-		-		-		-		-		-		-
With an allowance recorded:
Commercial		113		113		113		214		1		1		269		5		5
Commercial Real Estate:
Land Development		240		240		113		1,219		7		7		1,713		27		27
Building Lots		-		-		-		-		-		-		-		-		-
Other		10,389		10,389		1,836		8,644		59		59		7,860		205		205
Residential Mortgage		44		44		1		101		-		-		80		1		1
Consumer and Home Equity		-		-		-		11		-		-		39		1		1
Indirect Consumer		-		-		-		-		-		-		-		-		-
Total	$	29,330	$	27,433	$	2,063	$	30,644	$	197	$	197	$	33,886	$	812	$	812

December 31, 2013	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	$	679	$	475	$	-	$	747	$	21	$	21
Commercial Real Estate:
Land Development		2,014		1,989		-		2,898		139		139
Building Lots		477		212		-		212		-		-
Other		25,441		21,864		-		17,934		754		754
Residential Mortgage		3,119		2,992		-		2,368		63		63
Consumer and Home Equity		478		478		-		330		10		10
Indirect Consumer		-		-		-		-		-		-
With an allowance recorded:
Commercial		328		328		148		314		9		9
Commercial Real Estate:
Land Development		2,206		2,206		1,581		2,538		121		121
Building Lots		-		-		-		-		-		-
Other		6,640		6,640		1,022		16,512		694		694
Residential Mortgage		59		59		3		312		8		8
Consumer and Home Equity		68		68		32		229		7		7
Indirect Consumer		-		-		-		-		-		-
Total	$	41,509	$	37,311	$	2,786	$	44,394	$	1,826	$	1,826

							Three Months Ended						Nine Months Ended
							September 30, 2013						September 30, 2013
September 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	$	1,177	$	973	$	-	$	1,001	$	9	$	9	$	815	$	18	$	18
Commercial Real Estate:
Land Development		2,220		2,195		-		2,253		27		27		3,125		114		114
Building Lots		477		212		-		212		-		-		212		-		-
Other		25,475		20,048		-		14,964		161		161		14,042		444		444
Residential Mortgage		2,525		2,525		-		2,733		21		21		2,212		45		45
Consumer and Home Equity		357		357		-		376		3		3		293		6		6
Indirect Consumer		-		-		-		-		-		-		-		-		-
With an allowance recorded:
Commercial		380		380		197		283		2		2		310		7		7
Commercial Real Estate:
Land Development		2,206		2,206		1,015		2,568		31		31		2,621		95		95
Building Lots		-		-		-		-		-		-		-		-		-
Other		15,970		15,968		2,535		18,183		195		195		18,980		599		599
Residential Mortgage		514		490		68		484		4		4		375		8		8
Consumer and Home Equity		281		263		51		266		2		2		269		6		6
Indirect Consumer		-		-		-		-		-		-		-		-		-
Total	$	51,582	$	45,617	$	3,866	$	43,323	$	455	$	455	$	43,254	$	1,342	$	1,342

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

The following tables present the recorded investment in restructured, non-accrual and loans past due over 90 days still on accrual by class of loans as of September 30, 2014 and December 31, 2013.

					Restructured
					Loans Past Due		Loans Past Due
September 30, 2014					Over 90 Days		Over 90 Days		Non-Accrual
	Restructured on		Restructured on		Still		Still		Excluding
(Dollars in thousands)	Non-Accrual Status		Accrual Status		Accruing		Accruing		Restructured
Commercial	$	-	$	154	$	-	$	-	$	362
Commercial Real Estate:
Land Development		-		-		-		-		240
Building Lots		-		-		-		-		-
Other		9,139		10,691		-		2,017		2,377
Residential Mortgage		297		-		-		-		1,809
Consumer and Home Equity		-		69		-		-		81
Indirect Consumer		-		-		-		-		48
Total	$	9,436	$	10,914	$	-	$	2,017	$	4,917

					Restructured
					Loans Past Due		Loans Past Due
December 31, 2013					Over 90 Days		Over 90 Days		Non-Accrual
	Restructured on		Restructured on		Still		Still		Excluding
(Dollars in thousands)	Non-Accrual Status		Accrual Status		Accruing		Accruing		Restructured
Commercial	$	-	$	178	$	-	$	-	$	421
Commercial Real Estate:
Land Development		-		1,687		-		-		2,508
Building Lots		-		-		-		-		212
Other		986		17,025		4,780		2,226		4,237
Residential Mortgage		301		-		-		-		1,532
Consumer and Home Equity		23		73		-		-		156
Indirect Consumer		-		-		-		-		30
Total	$	1,310	$	18,963	$	4,780	$	2,226	$	9,096

Past Due Financing Receivables [Table Text Block]

The following tables present the aging of the unpaid principal in past due loans as of September 30, 2014 and December 31, 2013 by class of loans:

September 30, 2014	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	$	523	$	-	$	362	$	885	$	23,611	$	24,496
Commercial Real Estate:
Land Development		-		-		-		-		14,057		14,057
Building Lots		-		-		-		-		1,224		1,224
Other		3,419		271		13,533		17,223		216,073		233,296
Residential Mortgage		169		861		1,699		2,729		96,127		98,856
Consumer and Home Equity		544		76		79		699		50,620		51,319
Indirect Consumer		227		77		48		352		12,645		12,997
Total	$	4,882	$	1,285	$	15,721	$	21,888	$	414,357	$	436,245

December 31, 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	$	-	$	-	$	421	$	421	$	20,200	$	20,621
Commercial Real Estate:
Land Development		-		-		2,508		2,508		17,968		20,476
Building Lots		-		-		212		212		1,347		1,559
Other		5,250		6,213		11,236		22,699		235,202		257,901
Residential Mortgage		1,446		511		1,053		3,010		96,334		99,344
Consumer and Home Equity		430		23		117		570		53,440		54,010
Indirect Consumer		211		55		22		288		12,753		13,041
Total	$	7,337	$	6,802	$	15,569	$	29,708	$	437,244	$	466,952

Troubled Debt Restructurings on Financing Receivables [Table Text Block]

The following table presents loans by class modified as troubled debt restructurings that occurred during the periods ending September 30, 2014 and 2013:

Three Months Ended

Three Months Ended

September 30, 2014

September 30, 2013

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

-

-

-

-

-

-

Building Lots

-

-

-

-

-

-

Other

-

-

-

-

-

-

Residential Mortgage

-

-

-

-

-

-

Consumer and Home Equity

-

-

-

-

-

-

Indirect Consumer

-

-

-

-

-

-

Total

-

$

-

$

-

-

$

-

$

-

	Nine Months Ended						Nine Months Ended
	September 30, 2014						September 30, 2013
			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		-		-		-		-		-		-
Building Lots		-		-		-		-		-		-
Other		-		-		-		5		3,512		3,512
Residential Mortgage		-		-		-		-		-		-
Consumer and Home Equity		-		-		-		2		74		74
Indirect Consumer		-		-		-		-		-		-
Total		-	$	-	$	-		7	$	3,586	$	3,586

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

The following table presents 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 September 30, 2014 and 2013:

	Three Months Ended			Three Months Ended
	September 30, 2014			September 30, 2013
	Number		Recorded	Number		Recorded
(Dollars in thousands)	of Loans		Investment	of Loans		Investment
Troubled Debt Restructurings:
Commercial	-	$	-	-	$	-
Commercial Real Estate:
Land Development	-		-	-		-
Building Lots	-		-	-		-
Other	-		-	-		-
Residential Mortgage	-		-	-		-
Consumer and Home Equity	-		-	-		-
Indirect Consumer	-		-	-		-
Total	-	$	-	-	$	-

	Nine Months Ended			Nine Months Ended
	September 30, 2014			September 30, 2013
	Number		Recorded	Number		Recorded
(Dollars in thousands)	of Loans		Investment	of Loans		Investment
Troubled Debt Restructurings:
Commercial	-	$	-	-	$	-
Commercial Real Estate:
Land Development	-		-	-		-
Building Lots	-		-	-		-
Other	1		790	-		-
Residential Mortgage	-		-	-		-
Consumer and Home Equity	-		-	-		-
Indirect Consumer	-		-	-		-
Total	1	$	790	-	$	-

Financing Receivable Credit Quality Indicators [Table Text Block]

As of September 30, 2014 and December 31, 2013, and based on the most recent analysis performed, the risk category of loans by class of loans was as follows:

September 30, 2014
(Dollars in thousands)	Not Rated		Pass		Criticized		Substandard		Doubtful		Loss		Total
Commercial	$	-	$	23,522	$	461	$	513	$	-	$	-	$	24,496
Commercial Real Estate:
Land Development		-		12,065		736		1,256		-		-		14,057
Building Lots		-		832		392		-		-		-		1,224
Other		-		200,021		7,525		25,750		-		-		233,296
Residential Mortgage		94,613		-		1,384		2,859		-		-		98,856
Consumer and Home Equity		50,847		-		214		258		-		-		51,319
Indirect Consumer		12,925		-		-		52		-		-		12,977
Total	$	158,385	$	236,440	$	10,712	$	30,688	$	-	$	-	$	436,225

December 31, 2013
(Dollars in thousands)	Not Rated		Pass		Criticized		Substandard		Doubtful		Loss		Total
Commercial	$	-	$	19,289	$	470	$	862	$	-	$	-	$	20,621
Commercial Real Estate:
Land Development		-		15,484		2,484		2,508		-		-		20,476
Building Lots		-		906		441		212		-		-		1,559
Other		-		213,719		13,920		30,262		-		-		257,901
Residential Mortgage		95,351		-		942		3,051		-		-		99,344
Consumer and Home Equity		53,407		-		72		531		-		-		54,010
Indirect Consumer		12,988		-		-		53		-		-		13,041
Total	$	161,746	$	249,398	$	18,329	$	37,479	$	-	$	-	$	466,952

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 September 30, 2014 and December 31, 2013:

September 30, 2014	Residential		Consumer &		Indirect
(Dollars in thousands)	Mortgage		Home Equity		Consumer
Performing	$	96,750	$	51,190	$	12,977
Restructured on non-accrual		297		-		-
Non-accrual		1,809		129		-
Total	$	98,856	$	51,319	$	12,977

December 31, 2013	Residential		Consumer &		Indirect
(Dollars in thousands)	Mortgage		Home Equity		Consumer
Performing	$	97,511	$	53,831	$	13,011
Restructured on non-accrual		301		23		-
Non-accrual		1,532		156		30
Total	$	99,344	$	54,010	$	13,041

XML

STOCKHOLDERS' EQUITY

9 Months Ended

Sep. 30, 2014

Equity [Abstract]

Stockholders' Equity Note Disclosure [Text Block]

12. STOCKHOLDERS’ EQUITY

(a) 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					Required by
	Actual					Adequacy Purposes					Consent Order
As of September 30, 2014:	Amount		Ratio			Amount		Ratio			Amount		Ratio
Total risk-based capital (to risk-weighted assets)
Consolidated	$	65,711		13.56	%	$	38,765		8.00	%	$	58,147		12.00	%
Bank		76,637		15.93			38,475		8.00			57,713		12.00
Tier I capital (to risk-weighted assets)
Consolidated		55,506		11.45			19,382		4.00			N/A		N/A
Bank		70,598		14.68			19,238		4.00			N/A		N/A
Tier I capital (to average assets)
Consolidated		55,506		7.08			31,345		4.00			70,527		9.00
Bank		70,598		9.03			31,289		4.00			70,400		9.00

(Dollars in thousands)						For Capital					Required by
	Actual					Adequacy Purposes					Consent Order
As of December 31, 2013:	Amount		Ratio			Amount		Ratio			Amount		Ratio
Total risk-based capital (to risk-weighted assets)
Consolidated	$	68,477		12.13	%	$	45,174		8.00	%	$	67,761		12.00	%
Bank		76,147		13.48			45,177		8.00			67,765		12.00
Tier I capital (to risk-weighted assets)
Consolidated		58,036		10.28			22,587		4.00			N/A		N/A
Bank		69,057		12.23			22,588		4.00			N/A		N/A
Tier I capital (to average assets)
Consolidated		58,036		6.68			34,737		4.00			78,158		9.00
Bank		69,057		7.96			34,706		4.00			78,088		9.00

XML

STOCK BASED COMPENSATION PLAN

9 Months Ended

Sep. 30, 2014

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 September 30, 2014, options and restricted stock available for future grant under the 2006 Plan totaled 52,840. 

Under the terms of our 2006 Plan, all outstanding options to purchase shares of our common stock that were not already exercisable become exercisable and the transfer restrictions on restricted stock lapse in the event of a change of control. The events constituting a change of control under the 2006 Plan include, among other things:

⋅ shareholders approve a definitive agreement to merge us with or into another company (except if our voting securities outstanding immediately prior to the transaction continue to represent more than 50% of the combined voting power of the voting securities of the surviving entity outstanding immediately after the transaction) or to sell or otherwise transfer all or substantially all of the company’s assets or to adopt a plan of liquidation; or

⋅ we enter into an agreement, the consummation of which would result in the occurrence of a change of control.

Accordingly, all outstanding options to purchase shares of our common stock that were not already exercisable became exercisable on April 21, 2014, when we entered into the Share Exchange Agreement with Community Bank Shares of Indiana, Inc. Likewise, the transfer restrictions on the shares of our restricted stock then outstanding terminated on that date. In addition, the transfer restrictions on the shares of restricted stock issued to our non-employee directors on May 21, 2014 will terminate if and when our shareholders approve the Share Exchange Agreement at a special meeting of shareholders expected to be held before the end of 2014.

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 nine months ended September 30, 2014 and the resulting estimated weighted average fair value per share is presented below.

	September 30,
	2014
Assumptions:
Risk-free interest rate		2.86	%
Expected dividend yield		-	%
Expected life (years)		10
Expected common stock market price volatility		64	%
Estimated fair value per share	$	3.57

A summary of option activity under the 2006 Plan for the period ended September 30, 2014 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	376,300	$	3.13
Granted during period	5,000		4.90
Forfeited during period	(16,500)		3.61
Exercised during period	(12,500)		1.72
Outstanding, end of period	352,300	$	3.18	7.5	$	362
Eligible for exercise at period end	352,300	$	3.18	7.5	$	362

The total intrinsic value of options exercised during the nine month periods ended September 30, 2014 and 2013 was $25,000 and $364, respectively. The total cash received from options exercised during the nine month periods ended September 30, 2014 and 2013 was $22,000 and $410, respectively. There was no tax benefit recognized from the option exercises as they are considered incentive stock options.

Compensation cost related to options granted under the 2006 Plan that was charged against earnings for the nine month periods ended September 30, 2014 and 2013 was $443,000 and $113,000. As of September 30, 2014 all previously unrecognized compensation cost related to non-vested share-based compensation arrangements granted under the 2006 Plan has been recognized. 

Restricted Stock – Our 2012 Non-Employee Director Equity Compensation 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 220,000 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 21, 2014, the Company awarded each of its nine non-employee directors  8,310 restricted shares, or 74,790 shares in total, that vest at the close of business on the day immediately preceding the date of the 2015 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 before the date of vesting. 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 nine months ended September 30, 2014 is presented below:

		Weighted
		Average
	Non-vested	Grant Date
	Shares	Fair Value
Outstanding, beginning of period	63,497	$	3.81
Granted	138,090		4.21
Forfeited	(1,000)		4.91
Vested	(125,797)		4.35
Outstanding, end of period	74,790	$	3.61

Compensation cost related to restricted stock granted under the 2006 Plan that was charged against earnings for the nine month periods ended September 30, 2014 and 2013 was $659,000 and $281,000, respectively. As of September 30, 2014 there was $135,000 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 .50 years.

XML

FAIR VALUE (Details 3) (USD $) In Thousands, unless otherwise specified	Sep. 30, 2014	Dec. 31, 2013	Sep. 30, 2013	Dec. 31, 2012
Financial assets:
Cash and due from banks, Carrying Value	$ 56,976	$ 65,988	$ 31,517	$ 63,103
Mortgage loans held for sale, Carrying Value	847	470
Loans, net, Carrying Value	419,245	450,771
Accrued interest receivable, Carrying Value	1,664	2,224
FHLB stock, Carrying Value	4,080	4,430
Cash and due from banks, Fair Value	56,976	65,988
Mortgage loans held for sale, Fair Value	860	478
Loans, net, Fair Value	418,989	453,592
Accrued interest receivable, Fair Value	1,664	2,224
Financial liabilities:
Deposits, Carrying Value	673,747	783,487
Advances from Federal Home Loan Bank, Carrying Value	12,236	12,389
Subordinated debentures, Carrying Value	18,000	18,000
Accrued interest payable, Carrying Value	5,516	4,574
Deposits, Fair Value	675,867	788,230
Advances from Federal Home Loan Bank, Fair Value	12,709	13,315
Subordinated debentures, Fair Value	13,598	13,038
Accrued interest payable, Fair Value	5,516	4,485
Fair Value, Inputs, Level 1 [Member]
Financial assets:
Cash and due from banks, Fair Value	6,545	6,596
Mortgage loans held for sale, Fair Value	0	0
Loans, net, Fair Value	0	0
Accrued interest receivable, Fair Value	0	0
Financial liabilities:
Deposits, Fair Value	0	0
Advances from Federal Home Loan Bank, Fair Value	0	0
Subordinated debentures, Fair Value	0	0
Accrued interest payable, Fair Value	0	0
Fair Value, Inputs, Level 2 [Member]
Financial assets:
Cash and due from banks, Fair Value	50,431	59,392
Mortgage loans held for sale, Fair Value	860	478
Loans, net, Fair Value	0	0
Accrued interest receivable, Fair Value	707	1,136
Financial liabilities:
Deposits, Fair Value	675,867	788,230
Advances from Federal Home Loan Bank, Fair Value	12,709	13,315
Subordinated debentures, Fair Value	0	0
Accrued interest payable, Fair Value	5,516	4,485
Fair Value, Inputs, Level 3 [Member]
Financial assets:
Cash and due from banks, Fair Value	0	0
Mortgage loans held for sale, Fair Value	0	0
Loans, net, Fair Value	418,989	453,592
Accrued interest receivable, Fair Value	957	1,088
Financial liabilities:
Deposits, Fair Value	0	0
Advances from Federal Home Loan Bank, Fair Value	0	0
Subordinated debentures, Fair Value	13,598	13,038
Accrued interest payable, Fair Value	$ 0	$ 0

XML

INCOME TAXES

9 Months Ended

Sep. 30, 2014

Income Tax Disclosure [Abstract]

Income Tax Disclosure [Text Block]

6. INCOME TAXES

The calculation for the income tax provision or benefit generally does not consider the tax effects of changes in other comprehensive income, or OCI, which is a component of stockholders’ equity on the balance sheet.  However, an exception is provided in certain circumstances, such as when there is a full valuation allowance against net deferred tax assets, there is a loss from continuing operations and income in other components of the financial statements.  In such a case, pre-tax income from other categories, such as changes in OCI, must be considered in determining a tax benefit to be allocated to the loss from continuing operations.  Income tax expense of $200,000 and an income tax benefit of $767,000 were recorded for the quarter and nine month period ended September 30, 2014 compared to income tax expense of $1,000 and $2,000 recorded for the quarter and nine month 2013 periods.

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 full valuation allowance, we considered various factors including our five year cumulative loss position, the level of our non-performing assets, our inability to meet our forecasted levels of assets and full year operating results in 2013, 2012 and 2011 and the degree of our compliance with the capital requirements of our Consent Order. These factors represent the most significant negative evidence that we considered in concluding that a valuation allowance was necessary at September 30, 2014 and December 31, 2013. 

XML

EARNINGS (LOSS) PER SHARE

9 Months Ended

Sep. 30, 2014

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				Nine Months Ended
(Amounts in thousands,	September 30,				September 30,
except per share data)	2014		2013		2014		2013
Basic:
Net income/(loss)	$	505	$	1,467	$	(1,565)	$	463
Less:
Preferred stock dividends		(450)		(250)		(1,327)		(750)
Accretion on preferred stock discount		-		(14)		(3)		(41)
Net income (loss) available to common shareholders	$	55	$	1,203	$	(2,895)	$	(328)
Weighted average common shares		5,074		4,860		4,975		4,816
Diluted:
Weighted average common shares		5,074		4,860		4,975		4,816
Dilutive effect of stock options and warrants		102		45		-		-
Weighted average common and incremental shares		5,176		4,905		4,975		4,816
Earnings (Loss) Per Common Share:
Basic	$	0.01	$	0.25	$	(0.58)	$	(0.07)
Diluted	$	0.01	$	0.25	$	(0.58)	$	(0.07)

Since the Corporation is reporting a net loss available to common shareholders for the nine month 2014 and 2013 periods, no stock options or warrants were evaluated for dilutive purposes. Stock options for 83,500 and 238,000 shares of common stock were not included in the three month September 30, 2014 and 2013 computations of diluted earnings per share because their impact was anti-dilutive. The common stock warrant for 215,983 shares was not included in the three month September 30, 2014 and 2013 computations of diluted earnings per share because its impact was also anti-dilutive.

XML

FAIR VALUE

9 Months Ended

Sep. 30, 2014

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: The fair values of some corporate bonds are determined by obtaining quoted prices on nationally recognized securities exchanges (Level 1 inputs). 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 and bank lots held for sale 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
	September 30,		Identical Assets		Observable Inputs		Unobservable Inputs
(Dollars in thousands)	2014		(Level 1)		(Level 2)		(Level 3)
Assets:
Government-sponsored collateralized mortgage obligations	$	82,963	$	-	$	82,963	$	-
Government-sponsored mortgage-backed residential		78,263		-		78,263		-
Asset backed-collateralized loan obligations		14,465		-		14,465		-
Corporate bonds		12,333		2,782		9,551		-
State and municipal		8,638		-		8,638		-
U.S. Government-sponsored entities and agencies		8,329		-		8,329		-
Commercial mortgage backed		3,096		-		3,096		-
Total	$	208,087	$	2,782	$	205,305	$	-

			Quoted Prices in
			Active Markets for		Significant Other		Significant
	December 31,		Identical Assets		Observable Inputs		Unobservable Inputs
(Dollars in thousands)	2013		(Level 1)		(Level 2)		(Level 3)
Assets:
Government-sponsored collateralized mortgage obligations	$	100,816	$	-	$	100,816	$	-
Government-sponsored mortgage-backed residential		74,324		-		74,324		-
Corporate bonds		43,698		10,768		32,930		-
Asset backed-collateralized loan obligations		34,478		-		34,478		-
State and municipal		11,923		-		11,923		-
Commercial mortgage backed		4,043		-		4,043		-
Total	$	269,282	$	10,768	$	258,514	$	-

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

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
	September 30,		Identical Assets		Observable Inputs		Unobservable Inputs
(Dollars in thousands)	2014		(Level 1)		(Level 2)		(Level 3)
Assets:
Impaired loans:
Commercial Real Estate:
Land Development	$	127	$	-	$	-	$	127
Other		8,553		-		-		8,553
Residential Mortgage		43		-		-		43
Real estate acquired through foreclosure:
Commercial Real Estate:
Land Development		475		-		-		475
Other		1,574		-		-		1,574
Residential Mortgage		404		-		-		404
Other real estate owned:
Bank Lots		769		-		-		769

			Quoted Prices in
			Active Markets for		Significant Other		Significant
	December 31,		Identical Assets		Observable Inputs		Unobservable Inputs
(Dollars in thousands)	2013		(Level 1)		(Level 2)		(Level 3)
Assets:
Impaired loans:
Commercial Real Estate:
Land Development	$	625	$	-	$	-	$	625
Other		5,618		-		-		5,618
Residential Mortgage		56		-		-		56
Consumer and Home Equity		36		-		-		36
Real estate acquired through foreclosure:
Commercial Real Estate:
Land Development		947		-		-		947
Other		2,667		-		-		2,667
Residential Mortgage		634		-		-		634
Other real estate owned:
Bank Lots		792		-		-		792

Impaired loans, which are measured for impairment using the fair value of the collateral for collateral dependent loans, had a carrying amount of $10.8 million, with a valuation allowance of $2.1 million, resulting in a reversal of provision for loan losses of $1.2 million and $796,000 for the quarter and nine months ended September 30 2014. Impaired loans, which are measured for impairment using the fair value of the collateral for collateral dependent loans, had a carrying amount of $19.3 million, with a valuation allowance of $3.9 million, resulting in an additional provision for loan losses of $32,000 and a reversal of provision for loan losses of $310,000 for the quarter and nine months ended September 30, 2013.

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 $236,000 and $1.2 million were made to real estate owned during the quarter and nine months ended September 30, 2014. Fair value adjustments of $300,000 and $1.8 million were made to real estate owned during the quarter and nine months ended September 30, 2013.

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 September 30, 2014.

 

	Fair		Valuation	Unobservable	Range (Weighted
(Dollars in thousands)	Value		Technique(s)	Input(s)	Average)
Impaired loans:
Commercial Real Estate:
Land Development		127	Sales comparison approach	Adjustment for differences between comparable sales	3.00% (1)
Other		8,240	Income approach	Discount or capitalization rate	8.50%-9.75% (9.31%)
		313	Sales comparison approach	Adjustment for differences between comparable sales	17.00% (1)
Residential Mortgage		43	Sales comparison approach	Adjustment for differences between comparable sales	6.00% (1)
Real estate acquired through foreclosure:
Commercial Real Estate:
Land Development		461	Income approach	Discount or capitalization rate	27.00% (1)
		14	Sales comparison approach	Adjustment for differences between comparable sales	0.00% (1)
Other		968	Income approach	Discount or capitalization rate	9.40%-9.75% (9.68%)
		606	Sales comparison approach	Adjustment for differences between comparable sales	20.00%-25.00% (21.05%)
Residential Mortgage		404	Sales comparison approach	Adjustment for differences between comparable sales	0.00%-8.00% (3.86%)
Real estate owned:
Bank Lots		769	Sales comparison approach	Adjustment for differences between comparable sales	10.00% (1)

(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:

			September 30, 2014
(Dollars in thousands)	Carrying		Fair Value Measurements
	Value		Total		Level 1		Level 2		Level 3
Financial assets:
Cash and due from banks	$	56,976	$	56,976	$	6,545	$	50,431	$	-
Mortgage loans held for sale		847		860		-		860		-
Loans, net		419,245		418,989		-		-		418,989
Accrued interest receivable		1,664		1,664		-		707		957
FHLB stock		4,080		N/A		N/A		N/A		N/A
Financial liabilities:
Deposits		673,747		675,867		-		675,867		-
Advances from Federal Home Loan Bank		12,236		12,709		-		12,709		-
Subordinated debentures		18,000		13,598		-		-		13,598
Accrued interest payable		5,516		5,516		-		5,516		-

			December 31, 2013
(Dollars in thousands)	Carrying		Fair Value Measurements
	Value		Total		Level 1		Level 2		Level 3
Financial assets:
Cash and due from banks	$	65,988	$	65,988	$	6,596	$	59,392	$	-
Mortgage loans held for sale		470		478		-		478		-
Loans, net		450,771		453,592		-		-		453,592
Accrued interest receivable		2,224		2,224		-		1,136		1,088
FHLB stock		4,430		N/A		N/A		N/A		N/A
Financial liabilities:
Deposits		783,487		788,230		-		788,230		-
Advances from Federal Home Loan Bank		12,389		13,315		-		13,315		-
Subordinated debentures		18,000		13,038		-		-		13,038
Accrued interest payable		4,485		4,485		-		4,485		-

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.

XML

STOCKHOLDERS' EQUITY (Details) (USD $) In Thousands, unless otherwise specified	Sep. 30, 2014	Jan. 01, 2011	Sep. 30, 2014 Consolidated [Member]	Sep. 30, 2013 Consolidated [Member]	Sep. 30, 2014 Bank [Member]	Sep. 30, 2013 Bank [Member]
Compliance with Regulatory Capital Requirements under Banking Regulations [Line Items]
Total risk-based capital (to risk- weighted assets), Actual Amount			$ 65,711	$ 68,477	$ 76,637	$ 76,147
Total risk-based capital (to risk- weighted assets), Actual Ratio	15.93%	12.00%	13.56%	12.13%	15.93%	13.48%
Total risk-based capital (to risk- weighted assets) For Capital Adequacy Purposes Amount			38,765	45,174	38,475	45,177
Total risk-based capital (to risk- weighted assets) For Capital Adequacy Purposes Ratio	9.00%		8.00%	8.00%	8.00%	8.00%
Total risk-based capital (to risk-weighted assets) Required by Consent Order Amount			58,147	67,761	57,713	67,765
Total risk-based capital (to risk-weighted assets) Required by Consent Order Ratio			12.00%	12.00%	12.00%	12.00%
Tier I capital (to risk-weighted assets) Actual Amount			55,506	58,036	70,598	69,057
Tier I capital (to risk-weighted assets) Actual Ratio	9.03%	9.00%	11.45%	10.28%	14.68%	12.23%
Tier I capital (to risk-weighted assets) For Capital Adequacy Purposes Amount			19,382	22,587	19,238	22,588
Tier I capital (to risk-weighted assets) For Capital Adequacy Purposes Ratio	12.00%		4.00%	4.00%	4.00%	4.00%
Tier I capital (to average assets) Actual Amount			55,506	58,036	70,598	69,057
Tier I capital (to average assets) Actual Ratio			7.08%	6.68%	9.03%	7.96%
Tier I capital (to average assets) For Capital Adequacy Purposes Amount			31,345	34,737	31,289	34,706
Tier I capital (to average assets) For Capital Adequacy Purposes Ratio			4.00%	4.00%	4.00%	4.00%
Tier I capital (to average assets) Required by Consent Order Amount			$ 70,527	$ 78,158	$ 70,400	$ 78,088
Tier I capital (to average assets) Required by Consent Order Ratio			9.00%	9.00%	9.00%	9.00%

XML

CHANGES IN AND RECLASSIFICATIONS FROM ACCUMULATED OTHER COMPREHENSIVE INCOME (Details 1) (USD $) In Thousands, unless otherwise specified	3 Months Ended				9 Months Ended
	Sep. 30, 2014		Sep. 30, 2013		Sep. 30, 2014		Sep. 30, 2013
Changes In And Reclassifications From Accumulated Other Comprehensive Income [Line Items]
Unrealized gains and losses on available-for-sale securities, Gain on sales of investments	$ 13		$ 235		$ 545		$ 1,078
Unrealized gains and losses on available-for-sale securities, Loss on sale of investments	0		(223)		(567)		(839)
Unrealized gains and losses on available-for-sale securities, Total before tax	13		12		(22)		239
Unrealized gains and losses on available-for-sale securities, Income taxes/(benefits)	0		0		0		0
Total amount reclassified, Net income (loss)	$ 13	[1]	$ 12	[1]	$ (22)	[1]	$ 239	[1]

[1] All amounts are net of tax.

XML

PREFERRED STOCK (Details Textual) (USD $)	1 Months Ended		9 Months Ended				1 Months Ended	3 Months Ended		1 Months Ended
	Apr. 29, 2013	Oct. 14, 2008	Sep. 30, 2014	Dec. 31, 2013	Jan. 09, 2009	Dec. 08, 2008	Dec. 08, 2008 Warrant [Member]	Sep. 30, 2014 Warrant [Member]	Sep. 30, 2013 Warrant [Member]	Dec. 08, 2008 Warrant [Member] US Treasury [Member]
Preferred Stock [Line Items]
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			138,090					215,983	215,983	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			$ 4.21							$ 13.89
Percentage of Aggregate Amount of Preferred Stock Value										15.00%
Preferred Stock, Value, Issued			$ 20,000,000	$ 19,997,000						$ 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						4,700,000
Preferred Stock, Dividends Per Share, Declared		$ 0.19
Preferred Stock, Value, Outstanding	$ 20,000,000
Preferred Stock, Dividend Rate, Percentage	9.00%

XML

SECURITIES (Details 3) (USD $) In Thousands, unless otherwise specified	9 Months Ended	12 Months Ended
	Sep. 30, 2014	Dec. 31, 2013
Schedule of Available-for-sale Securities [Line Items]
Fair Value, Less than 12 Months	$ 42,484	$ 177,103
Unrealized Loss, Less than 12 Months	(344)	(6,011)
Fair Value, 12 Months or More	129,550	33,775
Unrealized Loss, 12 Months or More	(4,102)	(2,561)
Fair Value, Total	172,034	210,878
Unrealized Loss, Total	(4,446)	(8,572)
Government-sponsored collateralized mortgage obligations [Member]
Schedule of Available-for-sale Securities [Line Items]
Fair Value, Less than 12 Months	21,206	59,168
Unrealized Loss, Less than 12 Months	(189)	(2,119)
Fair Value, 12 Months or More	50,828	20,560
Unrealized Loss, 12 Months or More	(1,946)	(1,541)
Fair Value, Total	72,034	79,728
Unrealized Loss, Total	(2,135)	(3,660)
Government-sponsored mortgage-backed Residential [Member]
Schedule of Available-for-sale Securities [Line Items]
Fair Value, Less than 12 Months	10,635	59,971
Unrealized Loss, Less than 12 Months	(89)	(2,864)
Fair Value, 12 Months or More	64,638	13,215
Unrealized Loss, 12 Months or More	(1,694)	(1,020)
Fair Value, Total	75,273	73,186
Unrealized Loss, Total	(1,783)	(3,884)
Asset backed-collateralized loan obligations [Member]
Schedule of Available-for-sale Securities [Line Items]
Fair Value, Less than 12 Months	0	34,478
Unrealized Loss, Less than 12 Months	0	(635)
Fair Value, 12 Months or More	13,571	0
Unrealized Loss, 12 Months or More	(456)	0
Fair Value, Total	13,571	34,478
Unrealized Loss, Total	(456)	(635)
Corporate Bonds [Member]
Schedule of Available-for-sale Securities [Line Items]
Fair Value, Less than 12 Months	2,008	17,578
Unrealized Loss, Less than 12 Months	(12)	(328)
Fair Value, 12 Months or More	0	0
Unrealized Loss, 12 Months or More	0	0
Fair Value, Total	2,008	17,578
Unrealized Loss, Total	(12)	(328)
State and Municipal [Member]
Schedule of Available-for-sale Securities [Line Items]
Fair Value, Less than 12 Months	306	1,865
Unrealized Loss, Less than 12 Months	(1)	(11)
Fair Value, 12 Months or More	513	0
Unrealized Loss, 12 Months or More	(6)	0
Fair Value, Total	819	1,865
Unrealized Loss, Total	(7)	(11)
U.S. Government-sponsored entities and agencies [Member]
Schedule of Available-for-sale Securities [Line Items]
Fair Value, Less than 12 Months	8,329
Unrealized Loss, Less than 12 Months	(53)
Fair Value, 12 Months or More	0
Unrealized Loss, 12 Months or More	0
Fair Value, Total	8,329
Unrealized Loss, Total	(53)
Commercial Mortgage Backed Securities [Member]
Schedule of Available-for-sale Securities [Line Items]
Fair Value, Less than 12 Months		4,043
Unrealized Loss, Less than 12 Months		(54)
Fair Value, 12 Months or More		0
Unrealized Loss, 12 Months or More		0
Fair Value, Total		4,043
Unrealized Loss, Total		$ (54)

XML

EARNINGS (LOSS) PER SHARE (Details) (USD $) In Thousands, except Share data, unless otherwise specified	3 Months Ended		9 Months Ended
	Sep. 30, 2014	Sep. 30, 2013	Sep. 30, 2014	Sep. 30, 2013
Basic:
Net income/(loss)	$ 505	$ 1,467	$ (1,565)	$ 463
Less:
Preferred stock dividends	(450)	(250)	(1,327)	(750)
Accretion on preferred stock discount	0	(14)	(3)	(41)
Net income (loss) attributable to common shareholders	$ 55	$ 1,203	$ (2,895)	$ (328)
Weighted average common shares (in shares)	5,074,191	4,860,115	4,974,906	4,816,538
Diluted:
Weighted average common shares (in shares)	5,074,191	4,860,115	4,974,906	4,816,538
Dilutive effect of stock options and warrants (in shares)	102,000	45,000	0	0
Weighted average common and incremental shares (in shares)	5,176,337	4,905,542	4,974,906	4,816,538
Earnings (Loss) Per Common Share:
Basic (in dollars per share)	$ 0.01	$ 0.25	$ (0.58)	$ (0.07)
Diluted (in dollars per share)	$ 0.01	$ 0.25	$ (0.58)	$ (0.07)

XML

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

9 Months Ended

Sep. 30, 2014

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 two wholly owned subsidiaries, First Service Corporation of Elizabethtown and Heritage Properties, 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 quarter and nine months ended September 30, 2014 are not necessarily indicative of the results that may occur for the year ending December 31, 2014. 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, 2013.

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 stockholders’ equity.

New Accounting Pronouncements, Policy [Policy Text Block]

Recently Issued Accounting Pronouncement – In January 2014, the Financial Accounting Standards Board issued Accounting Standards Update No. 2014-01, Accounting for Investments in Qualified Affordable Housing Projects (ASU 2014-01). ASU 2014-01 permits reporting entities to make an accounting policy election to account for investments in qualified affordable housing projects using the proportional amortization method if certain conditions are met. Under the proportional amortization method, an entity amortizes the initial cost of the investment in proportion to the tax credits and other tax benefits received and recognizes the net investment performance in the income statement as a component of income tax expense. This new guidance also requires new disclosures for all investors in these projects. ASU 2014-01 is effective for interim and annual reporting periods beginning after December 15, 2014. Upon adoption, the guidance must be applied retrospectively to all periods presented. However, entities that use the effective yield method to account for investments in these projects before adoption may continue to do so for these pre-existing investments. The adoption of ASU 2014-01 is not expected to have a material impact on the consolidated financial statements.

In May 2014, the Financial Accounting Standards Board issued Accounting Standards Update No. 2014-09, Revenue From Contracts With Customers (ASU 2014-09). The core principle of the guidance is that an entity should recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods and services. ASU 2014-09 is effective for interim and annual periods beginning after December 15, 2016. Management is currently evaluating the impact of the adoption of ASU 2014-09 on the consolidated financial statements.

In August 2014, the Financial Accounting Standards Board issued Accounting Standards Update No. 2014-14, Receivables-Troubled Debt Restructurings by Creditors (Subtopic 310-40): Classification of Certain Government-Guaranteed Mortgage Loans upon Foreclosure (ASU 2014-14). The amendments in ASU 2014-14 require that a mortgage loan be derecognized and that a separate other receivable be recognized upon foreclosure if: a) the loan has a government guarantee that is not separable from the loan before foreclosure; b) at the time of foreclosure, the creditor has the intent to convey the real estate property to the guarantor and make a claim on the guarantee, and the creditor has the ability to recover under that claim; and c) at the time of foreclosure, any amount of the claim that is determined on the basis of the fair value of the real estate is fixed. The separate other receivable recognized upon foreclosure should be measured based on the amount of the loan balance (principal and interest) expected to be received from the guarantor. The amendments in ASU 2014-14 are effective for us beginning January 1, 2015 and are not expected to have a material impact on our financial statements.

XML

STOCK BASED COMPENSATION PLAN (Tables)

9 Months Ended

Sep. 30, 2014

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 nine months ended September 30, 2014 and the resulting estimated weighted average fair value per share is presented below.

	September 30,
	2014
Assumptions:
Risk-free interest rate		2.86	%
Expected dividend yield		-	%
Expected life (years)		10
Expected common stock market price volatility		64	%
Estimated fair value per share	$	3.57

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 September 30, 2014 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	376,300	$	3.13
Granted during period	5,000		4.90
Forfeited during period	(16,500)		3.61
Exercised during period	(12,500)		1.72
Outstanding, end of period	352,300	$	3.18	7.5	$	362
Eligible for exercise at period end	352,300	$	3.18	7.5	$	362

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

A summary of changes in our non-vested restricted shares for the nine months ended September 30, 2014 is presented below:

		Weighted
		Average
	Non-vested	Grant Date
	Shares	Fair Value
Outstanding, beginning of period	63,497	$	3.81
Granted	138,090		4.21
Forfeited	(1,000)		4.91
Vested	(125,797)		4.35
Outstanding, end of period	74,790	$	3.61

XML

REAL ESTATE ACQUIRED THROUGH FORECLOSURE (Details Textual) (USD $) In Thousands, unless otherwise specified	3 Months Ended		9 Months Ended
	Sep. 30, 2014	Sep. 30, 2013	Sep. 30, 2014	Sep. 30, 2013
REAL ESTATE ACQUIRED THROUGH FORECLOSURE [Line Items]
Property Management Costs	$ 475	$ 452	$ 1,300	$ 1,300

XML

LOANS (Details 5) (USD $) In Thousands, unless otherwise specified	Sep. 30, 2014	Dec. 31, 2013
Accounts, Notes, Loans and Financing Receivable [Line Items]
Financing Receivable, Recorded Investment, 30 to 59 Days Past Due	$ 4,882	$ 7,337
Financing Receivable, Recorded Investment, 60 to 89 Days Past Due	1,285	6,802
Financing Receivable, Recorded Investment, Greater than 90 Days Past Due	15,721	15,569
Financing Receivable, Recorded Investment, Total Past Due	21,888	29,708
Financing Receivable, Recorded Investment, Loans Not Past Due	414,357	437,244
Loans and Leases Receivable, Gross, Carrying Amount	436,225	466,952
Commercial Loan [Member]
Accounts, Notes, Loans and Financing Receivable [Line Items]
Financing Receivable, Recorded Investment, 30 to 59 Days Past Due	523	0
Financing Receivable, Recorded Investment, 60 to 89 Days Past Due	0	0
Financing Receivable, Recorded Investment, Greater than 90 Days Past Due	362	421
Financing Receivable, Recorded Investment, Total Past Due	885	421
Financing Receivable, Recorded Investment, Loans Not Past Due	23,611	20,200
Loans and Leases Receivable, Gross, Carrying Amount	24,496	20,621
Land Improvements [Member]
Accounts, Notes, Loans and Financing Receivable [Line Items]
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, Greater than 90 Days Past Due	0	2,508
Financing Receivable, Recorded Investment, Total Past Due	0	2,508
Financing Receivable, Recorded Investment, Loans Not Past Due	14,057	17,968
Loans and Leases Receivable, Gross, Carrying Amount	14,057	20,476
Buildings Lot [Member]
Accounts, Notes, Loans and Financing Receivable [Line Items]
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, Greater than 90 Days Past Due	0	212
Financing Receivable, Recorded Investment, Total Past Due	0	212
Financing Receivable, Recorded Investment, Loans Not Past Due	1,224	1,347
Loans and Leases Receivable, Gross, Carrying Amount	1,224	1,559
Commercial Real Estate Other Receivable [Member]
Accounts, Notes, Loans and Financing Receivable [Line Items]
Financing Receivable, Recorded Investment, 30 to 59 Days Past Due	3,419	5,250
Financing Receivable, Recorded Investment, 60 to 89 Days Past Due	271	6,213
Financing Receivable, Recorded Investment, Greater than 90 Days Past Due	13,533	11,236
Financing Receivable, Recorded Investment, Total Past Due	17,223	22,699
Financing Receivable, Recorded Investment, Loans Not Past Due	216,073	235,202
Loans and Leases Receivable, Gross, Carrying Amount	233,296	257,901
Residential Mortgage [Member]
Accounts, Notes, Loans and Financing Receivable [Line Items]
Financing Receivable, Recorded Investment, 30 to 59 Days Past Due	169	1,446
Financing Receivable, Recorded Investment, 60 to 89 Days Past Due	861	511
Financing Receivable, Recorded Investment, Greater than 90 Days Past Due	1,699	1,053
Financing Receivable, Recorded Investment, Total Past Due	2,729	3,010
Financing Receivable, Recorded Investment, Loans Not Past Due	96,127	96,334
Loans and Leases Receivable, Gross, Carrying Amount	98,856	99,344
Consumer and Home Equity [Member]
Accounts, Notes, Loans and Financing Receivable [Line Items]
Financing Receivable, Recorded Investment, 30 to 59 Days Past Due	544	430
Financing Receivable, Recorded Investment, 60 to 89 Days Past Due	76	23
Financing Receivable, Recorded Investment, Greater than 90 Days Past Due	79	117
Financing Receivable, Recorded Investment, Total Past Due	699	570
Financing Receivable, Recorded Investment, Loans Not Past Due	50,620	53,440
Loans and Leases Receivable, Gross, Carrying Amount	51,319	54,010
Indirect Consumer [Member]
Accounts, Notes, Loans and Financing Receivable [Line Items]
Financing Receivable, Recorded Investment, 30 to 59 Days Past Due	227	211
Financing Receivable, Recorded Investment, 60 to 89 Days Past Due	77	55
Financing Receivable, Recorded Investment, Greater than 90 Days Past Due	48	22
Financing Receivable, Recorded Investment, Total Past Due	352	288
Financing Receivable, Recorded Investment, Loans Not Past Due	12,645	12,753
Loans and Leases Receivable, Gross, Carrying Amount	$ 12,977	$ 13,041

XML

Consolidated Statements of Comprehensive Income/(Loss) (USD $) In Thousands, unless otherwise specified	3 Months Ended		9 Months Ended
	Sep. 30, 2014	Sep. 30, 2013	Sep. 30, 2014	Sep. 30, 2013
Net Income/(Loss)	$ 505	$ 1,467	$ (1,565)	$ 463
Other comprehensive income (loss):
Change in unrealized gain (loss) on securities available-for-sale	(618)	(1,438)	4,295	(9,766)
Reclassification of realized amount on securities available-for-sale losses (gains)	(13)	(12)	22	(239)
Net unrealized gain (loss) recognized in comprehensive income	(631)	(1,450)	4,317	(10,005)
Tax effect	199	0	(769)	0
Total other comphrehensive income (loss)	(432)	(1,450)	3,548	(10,005)
Comprehensive Income/(Loss)	$ 73	$ 17	$ 1,983	$ (9,542)

XML

SECURITIES

9 Months Ended

Sep. 30, 2014

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:
September 30, 2014:
Government-sponsored collateralized mortgage obligations	$	85,002	$	96	$	(2,135)	$	82,963
Government-sponsored mortgage-backed residential		80,027		19		(1,783)		78,263
Asset backed-collateralized loan obligations		14,891		30		(456)		14,465
Corporate bonds		12,186		159		(12)		12,333
State and municipal		8,231		414		(7)		8,638
U.S. Government-sponsored entities and agencies		8,382		-		(53)		8,329
Commercial mortgage backed		3,061		35		-		3,096
Total	$	211,780	$	753	$	(4,446)	$	208,087
Securities available-for-sale:
December 31, 2013:
Government-sponsored collateralized mortgage obligations	$	104,390	$	86	$	(3,660)	$	100,816
Government-sponsored mortgage-backed residential		78,204		4		(3,884)		74,324
Corporate bonds		43,818		208		(328)		43,698
Asset backed-collateralized loan obligations		35,113		-		(635)		34,478
State and municipal		11,670		264		(11)		11,923
Commercial mortgage backed		4,097		-		(54)		4,043
Total	$	277,292	$	562	$	(8,572)	$	269,282

The amortized cost and fair value of securities at September 30, 2014, 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	$	855	$	856
Due after one year through five years		16,368		16,485
Due after five years through ten years		5,789		5,808
Due after ten years		5,787		6,151
Investment securities with no single maturity date:
Government-sponsored collateralized mortgage obligations		85,002		82,963
Government-sponsored mortgage-backed residential		80,027		78,263
Asset backed-collateralized loan obligations		14,891		14,465
Commercial mortgage backed		3,061		3,096
	$	211,780	$	208,087

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				Nine Months Ended
	September 30,				September 30,
	2014		2013		2014		2013
(Dollars in thousands)
Proceeds from sales	$	620	$	24,295	$	73,701	$	125,351
Gross realized gains		13		235		545		1,078
Gross realized losses		-		223		567		839

Investment securities pledged to secure public deposits and Federal Home Loan Bank (FHLB) advances had an amortized cost of $144.7 million and fair value of $141.4 million at September 30, 2014 and a $193.0 million amortized cost and fair value of $185.8 million at December 31, 2013.

Securities with unrealized losses at September 30, 2014 and December 31, 2013 aggregated by major security type and length of time in a continuous unrealized loss position are as follows:

September 30, 2014	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 collateralized mortgage obligations	$	21,206	$	(189)	$	50,828	$	(1,946)	$	72,034	$	(2,135)
Government-sponsored mortgage-backed residential		10,635		(89)		64,638		(1,694)		75,273		(1,783)
Asset backed-collateralized loan obligations		-		-		13,571		(456)		13,571		(456)
Corporate bonds		2,008		(12)		-		-		2,008		(12)
State and municipal		306		(1)		513		(6)		819		(7)
U.S. Government-sponsored entities and agencies		8,329		(53)		-		-		8,329		(53)
Total temporarily impaired	$	42,484	$	(344)	$	129,550	$	(4,102)	$	172,034	$	(4,446)

December 31, 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 collateralized mortgage obligations	$	59,168	$	(2,119)	$	20,560	$	(1,541)	$	79,728	$	(3,660)
Government-sponsored mortgage-backed residential		59,971		(2,864)		13,215		(1,020)		73,186		(3,884)
Corporate bonds		17,578		(328)		-		-		17,578		(328)
Asset backed-collateralized loan obligations		34,478		(635)		-		-		34,478		(635)
State and municipal		1,865		(11)		-		-		1,865		(11)
Commercial mortgage backed		4,043		(54)		-		-		4,043		(54)
Total temporarily impaired	$	177,103	$	(6,011)	$	33,775	$	(2,561)	$	210,878	$	(8,572)

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.

In conducting this assessment, the Bank evaluates a number of factors including, but not limited to:

⋅ The length of time and the extent to which fair value has been less than the amortized cost basis;

⋅ The Bank’s intent to hold until maturity or sell the debt security prior to maturity;

⋅ An analysis of whether it is more likely than not that the Bank will be required to sell the debt security before its anticipated recovery;

⋅ Adverse conditions specifically related to the security, an industry, or a geographic area;

⋅ The historical and implied volatility of the fair value of the security;

⋅ The payment structure of the security and the likelihood of the issuer being able to make payments;

⋅ Failure of the issuer to make scheduled interest or principal payments;

⋅ Any rating changes by a rating agency; and

⋅ Recoveries or additional decline in fair value subsequent to the balance sheet date.

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. Mortgage backed securities held in our investment portfolio were issued by U.S. government-sponsored entities and agencies, primarily Freddie Mac (“FHLMC”) and Fannie Mae (“FNMA”), institutions that the government has affirmed its commitment to support. Because the decline in market value on our investment securities 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 September 30, 2014.

At September 30, 2014, we owned five collateralized loan obligation (“CLO”) securities subject to the Volcker Rule, with an amortized cost of $14.9 million and a net unrealized loss of $426,000. Absent changes to the Volcker Rule, we would be required to dispose of these securities before July 2017. We believe the unrealized loss reflected results not from credit risk but from interest rate changes and to the uncertainty created by the Volcker Rule. In the first quarter of 2014, we sold four of our CLOs and in the second quarter of 2014 we recorded partial sales on three of our CLOs to confirm their marketability and evaluate our assessment about their market values. We recorded a loss of $286,000 on these sales.

XML

FAIR VALUE (Details 1) (USD $) In Thousands, unless otherwise specified	Sep. 30, 2014	Dec. 31, 2013
Impaired Loans [Member] | Land Improvements [Member]
Fair Value, Balance Sheet Grouping, Financial Statement Captions [Line Items]
Assets, Fair Value Disclosure, Nonrecurring	$ 127	$ 625
Impaired Loans [Member] | Land Improvements [Member] | Fair Value, Inputs, Level 1 [Member]
Fair Value, Balance Sheet Grouping, Financial Statement Captions [Line Items]
Assets, Fair Value Disclosure, Nonrecurring	0	0
Impaired Loans [Member] | Land Improvements [Member] | Fair Value, Inputs, Level 2 [Member]
Fair Value, Balance Sheet Grouping, Financial Statement Captions [Line Items]
Assets, Fair Value Disclosure, Nonrecurring	0	0
Impaired Loans [Member] | Land Improvements [Member] | Fair Value, Inputs, Level 3 [Member]
Fair Value, Balance Sheet Grouping, Financial Statement Captions [Line Items]
Assets, Fair Value Disclosure, Nonrecurring	127	625
Impaired Loans [Member] | Impaired Loans Other [Member]
Fair Value, Balance Sheet Grouping, Financial Statement Captions [Line Items]
Assets, Fair Value Disclosure, Nonrecurring	8,553	5,618
Impaired Loans [Member] | Impaired Loans Other [Member] | Fair Value, Inputs, Level 1 [Member]
Fair Value, Balance Sheet Grouping, Financial Statement Captions [Line Items]
Assets, Fair Value Disclosure, Nonrecurring	0	0
Impaired Loans [Member] | Impaired Loans Other [Member] | Fair Value, Inputs, Level 2 [Member]
Fair Value, Balance Sheet Grouping, Financial Statement Captions [Line Items]
Assets, Fair Value Disclosure, Nonrecurring	0	0
Impaired Loans [Member] | Impaired Loans Other [Member] | Fair Value, Inputs, Level 3 [Member]
Fair Value, Balance Sheet Grouping, Financial Statement Captions [Line Items]
Assets, Fair Value Disclosure, Nonrecurring	8,553	5,618
Impaired Loans [Member] | Residential Mortgage [Member]
Fair Value, Balance Sheet Grouping, Financial Statement Captions [Line Items]
Assets, Fair Value Disclosure, Nonrecurring	43	56
Impaired Loans [Member] | Residential Mortgage [Member] | Fair Value, Inputs, Level 1 [Member]
Fair Value, Balance Sheet Grouping, Financial Statement Captions [Line Items]
Assets, Fair Value Disclosure, Nonrecurring	0	0
Impaired Loans [Member] | Residential Mortgage [Member] | Fair Value, Inputs, Level 2 [Member]
Fair Value, Balance Sheet Grouping, Financial Statement Captions [Line Items]
Assets, Fair Value Disclosure, Nonrecurring	0	0
Impaired Loans [Member] | Residential Mortgage [Member] | Fair Value, Inputs, Level 3 [Member]
Fair Value, Balance Sheet Grouping, Financial Statement Captions [Line Items]
Assets, Fair Value Disclosure, Nonrecurring	43	56
Impaired Loans [Member] | Consumer and Home Equity [Member]
Fair Value, Balance Sheet Grouping, Financial Statement Captions [Line Items]
Assets, Fair Value Disclosure, Nonrecurring		36
Impaired Loans [Member] | Consumer and Home Equity [Member] | Fair Value, Inputs, Level 1 [Member]
Fair Value, Balance Sheet Grouping, Financial Statement Captions [Line Items]
Assets, Fair Value Disclosure, Nonrecurring		0
Impaired Loans [Member] | Consumer and Home Equity [Member] | Fair Value, Inputs, Level 2 [Member]
Fair Value, Balance Sheet Grouping, Financial Statement Captions [Line Items]
Assets, Fair Value Disclosure, Nonrecurring		0
Impaired Loans [Member] | Consumer and Home Equity [Member] | Fair Value, Inputs, Level 3 [Member]
Fair Value, Balance Sheet Grouping, Financial Statement Captions [Line Items]
Assets, Fair Value Disclosure, Nonrecurring		36
Real Estate Acquired through Foreclosure [Member]
Fair Value, Balance Sheet Grouping, Financial Statement Captions [Line Items]
Assets, Fair Value Disclosure, Nonrecurring		634
Real Estate Acquired through Foreclosure [Member] | Fair Value, Inputs, Level 1 [Member]
Fair Value, Balance Sheet Grouping, Financial Statement Captions [Line Items]
Assets, Fair Value Disclosure, Nonrecurring		0
Real Estate Acquired through Foreclosure [Member] | Fair Value, Inputs, Level 2 [Member]
Fair Value, Balance Sheet Grouping, Financial Statement Captions [Line Items]
Assets, Fair Value Disclosure, Nonrecurring		0
Real Estate Acquired through Foreclosure [Member] | Fair Value, Inputs, Level 3 [Member]
Fair Value, Balance Sheet Grouping, Financial Statement Captions [Line Items]
Assets, Fair Value Disclosure, Nonrecurring		634
Real Estate Acquired through Foreclosure [Member] | Land Improvements [Member]
Fair Value, Balance Sheet Grouping, Financial Statement Captions [Line Items]
Assets, Fair Value Disclosure, Nonrecurring	475	947
Real Estate Acquired through Foreclosure [Member] | Land Improvements [Member] | Fair Value, Inputs, Level 1 [Member]
Fair Value, Balance Sheet Grouping, Financial Statement Captions [Line Items]
Assets, Fair Value Disclosure, Nonrecurring	0	0
Real Estate Acquired through Foreclosure [Member] | Land Improvements [Member] | Fair Value, Inputs, Level 2 [Member]
Fair Value, Balance Sheet Grouping, Financial Statement Captions [Line Items]
Assets, Fair Value Disclosure, Nonrecurring	0	0
Real Estate Acquired through Foreclosure [Member] | Land Improvements [Member] | Fair Value, Inputs, Level 3 [Member]
Fair Value, Balance Sheet Grouping, Financial Statement Captions [Line Items]
Assets, Fair Value Disclosure, Nonrecurring	475	947
Real Estate Acquired through Foreclosure [Member] | Residential Mortgage [Member]
Fair Value, Balance Sheet Grouping, Financial Statement Captions [Line Items]
Assets, Fair Value Disclosure, Nonrecurring	404
Real Estate Acquired through Foreclosure [Member] | Residential Mortgage [Member] | Fair Value, Inputs, Level 1 [Member]
Fair Value, Balance Sheet Grouping, Financial Statement Captions [Line Items]
Assets, Fair Value Disclosure, Nonrecurring	0
Real Estate Acquired through Foreclosure [Member] | Residential Mortgage [Member] | Fair Value, Inputs, Level 2 [Member]
Fair Value, Balance Sheet Grouping, Financial Statement Captions [Line Items]
Assets, Fair Value Disclosure, Nonrecurring	0
Real Estate Acquired through Foreclosure [Member] | Residential Mortgage [Member] | Fair Value, Inputs, Level 3 [Member]
Fair Value, Balance Sheet Grouping, Financial Statement Captions [Line Items]
Assets, Fair Value Disclosure, Nonrecurring	404
Real Estate Acquired through Foreclosure [Member] | Commercial Real Estate Other Receivable [Member]
Fair Value, Balance Sheet Grouping, Financial Statement Captions [Line Items]
Assets, Fair Value Disclosure, Nonrecurring	1,574	2,667
Real Estate Acquired through Foreclosure [Member] | Commercial Real Estate Other Receivable [Member] | Fair Value, Inputs, Level 1 [Member]
Fair Value, Balance Sheet Grouping, Financial Statement Captions [Line Items]
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]
Fair Value, Balance Sheet Grouping, Financial Statement Captions [Line Items]
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]
Fair Value, Balance Sheet Grouping, Financial Statement Captions [Line Items]
Assets, Fair Value Disclosure, Nonrecurring	1,574	2,667
Other Real Estate Owned [Member] | Bank Lots [Member]
Fair Value, Balance Sheet Grouping, Financial Statement Captions [Line Items]
Assets, Fair Value Disclosure, Nonrecurring	769	792
Other Real Estate Owned [Member] | Bank Lots [Member] | Fair Value, Inputs, Level 1 [Member]
Fair Value, Balance Sheet Grouping, Financial Statement Captions [Line Items]
Assets, Fair Value Disclosure, Nonrecurring	0	0
Other Real Estate Owned [Member] | Bank Lots [Member] | Fair Value, Inputs, Level 2 [Member]
Fair Value, Balance Sheet Grouping, Financial Statement Captions [Line Items]
Assets, Fair Value Disclosure, Nonrecurring	0	0
Other Real Estate Owned [Member] | Bank Lots [Member] | Fair Value, Inputs, Level 3 [Member]
Fair Value, Balance Sheet Grouping, Financial Statement Captions [Line Items]
Assets, Fair Value Disclosure, Nonrecurring	$ 769	$ 792

XML

FAIR VALUE (Tables)

9 Months Ended

Sep. 30, 2014

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
	September 30,		Identical Assets		Observable Inputs		Unobservable Inputs
(Dollars in thousands)	2014		(Level 1)		(Level 2)		(Level 3)
Assets:
Government-sponsored collateralized mortgage obligations	$	82,963	$	-	$	82,963	$	-
Government-sponsored mortgage-backed residential		78,263		-		78,263		-
Asset backed-collateralized loan obligations		14,465		-		14,465		-
Corporate bonds		12,333		2,782		9,551		-
State and municipal		8,638		-		8,638		-
U.S. Government-sponsored entities and agencies		8,329		-		8,329		-
Commercial mortgage backed		3,096		-		3,096		-
Total	$	208,087	$	2,782	$	205,305	$	-

			Quoted Prices in
			Active Markets for		Significant Other		Significant
	December 31,		Identical Assets		Observable Inputs		Unobservable Inputs
(Dollars in thousands)	2013		(Level 1)		(Level 2)		(Level 3)
Assets:
Government-sponsored collateralized mortgage obligations	$	100,816	$	-	$	100,816	$	-
Government-sponsored mortgage-backed residential		74,324		-		74,324		-
Corporate bonds		43,698		10,768		32,930		-
Asset backed-collateralized loan obligations		34,478		-		34,478		-
State and municipal		11,923		-		11,923		-
Commercial mortgage backed		4,043		-		4,043		-
Total	$	269,282	$	10,768	$	258,514	$	-

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
	September 30,		Identical Assets		Observable Inputs		Unobservable Inputs
(Dollars in thousands)	2014		(Level 1)		(Level 2)		(Level 3)
Assets:
Impaired loans:
Commercial Real Estate:
Land Development	$	127	$	-	$	-	$	127
Other		8,553		-		-		8,553
Residential Mortgage		43		-		-		43
Real estate acquired through foreclosure:
Commercial Real Estate:
Land Development		475		-		-		475
Other		1,574		-		-		1,574
Residential Mortgage		404		-		-		404
Other real estate owned:
Bank Lots		769		-		-		769

			Quoted Prices in
			Active Markets for		Significant Other		Significant
	December 31,		Identical Assets		Observable Inputs		Unobservable Inputs
(Dollars in thousands)	2013		(Level 1)		(Level 2)		(Level 3)
Assets:
Impaired loans:
Commercial Real Estate:
Land Development	$	625	$	-	$	-	$	625
Other		5,618		-		-		5,618
Residential Mortgage		56		-		-		56
Consumer and Home Equity		36		-		-		36
Real estate acquired through foreclosure:
Commercial Real Estate:
Land Development		947		-		-		947
Other		2,667		-		-		2,667
Residential Mortgage		634		-		-		634
Other real estate owned:
Bank Lots		792		-		-		792

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 September 30, 2014.

 

	Fair		Valuation	Unobservable	Range (Weighted
(Dollars in thousands)	Value		Technique(s)	Input(s)	Average)
Impaired loans:
Commercial Real Estate:
Land Development		127	Sales comparison approach	Adjustment for differences between comparable sales	3.00% (1)
Other		8,240	Income approach	Discount or capitalization rate	8.50%-9.75% (9.31%)
		313	Sales comparison approach	Adjustment for differences between comparable sales	17.00% (1)
Residential Mortgage		43	Sales comparison approach	Adjustment for differences between comparable sales	6.00% (1)
Real estate acquired through foreclosure:
Commercial Real Estate:
Land Development		461	Income approach	Discount or capitalization rate	27.00% (1)
		14	Sales comparison approach	Adjustment for differences between comparable sales	0.00% (1)
Other		968	Income approach	Discount or capitalization rate	9.40%-9.75% (9.68%)
		606	Sales comparison approach	Adjustment for differences between comparable sales	20.00%-25.00% (21.05%)
Residential Mortgage		404	Sales comparison approach	Adjustment for differences between comparable sales	0.00%-8.00% (3.86%)
Real estate owned:
Bank Lots		769	Sales comparison approach	Adjustment for differences between comparable sales	10.00% (1)

(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:

			September 30, 2014
(Dollars in thousands)	Carrying		Fair Value Measurements
	Value		Total		Level 1		Level 2		Level 3
Financial assets:
Cash and due from banks	$	56,976	$	56,976	$	6,545	$	50,431	$	-
Mortgage loans held for sale		847		860		-		860		-
Loans, net		419,245		418,989		-		-		418,989
Accrued interest receivable		1,664		1,664		-		707		957
FHLB stock		4,080		N/A		N/A		N/A		N/A
Financial liabilities:
Deposits		673,747		675,867		-		675,867		-
Advances from Federal Home Loan Bank		12,236		12,709		-		12,709		-
Subordinated debentures		18,000		13,598		-		-		13,598
Accrued interest payable		5,516		5,516		-		5,516		-

			December 31, 2013
(Dollars in thousands)	Carrying		Fair Value Measurements
	Value		Total		Level 1		Level 2		Level 3
Financial assets:
Cash and due from banks	$	65,988	$	65,988	$	6,596	$	59,392	$	-
Mortgage loans held for sale		470		478		-		478		-
Loans, net		450,771		453,592		-		-		453,592
Accrued interest receivable		2,224		2,224		-		1,136		1,088
FHLB stock		4,430		N/A		N/A		N/A		N/A
Financial liabilities:
Deposits		783,487		788,230		-		788,230		-
Advances from Federal Home Loan Bank		12,389		13,315		-		13,315		-
Subordinated debentures		18,000		13,038		-		-		13,038
Accrued interest payable		4,485		4,485		-		4,485		-

XML

LOANS (Details 2) (USD $) In Thousands, unless otherwise specified	Sep. 30, 2014	Jun. 30, 2014	Dec. 31, 2013	Sep. 30, 2013	Jun. 30, 2013	Dec. 31, 2012
Accounts, Notes, Loans and Financing Receivable [Line Items]
Individually evaluated for impairment	$ 2,063		$ 2,786	$ 3,866
Collectively evaluated for impairment	6,155		6,790	8,358
Total ending allowance balance	8,218	9,538	9,576	12,224	15,947	17,265
Loans individually evaluated for impairment	27,433		37,311	45,617
Loans collectively evaluated for impairment	408,792		429,641	430,487
Total ending loans balance	436,225		466,952	476,104
Commercial Loan [Member]
Accounts, Notes, Loans and Financing Receivable [Line Items]
Individually evaluated for impairment	113		148	197
Collectively evaluated for impairment	480		392	850
Total ending allowance balance	593	612	540	1,047	908	1,236
Loans individually evaluated for impairment	516		803	1,353
Loans collectively evaluated for impairment	23,980		19,818	19,041
Total ending loans balance	24,496		20,621	20,394
Commercial Real Estate [Member]
Accounts, Notes, Loans and Financing Receivable [Line Items]
Individually evaluated for impairment	1,949		2,603	3,550
Collectively evaluated for impairment	5,027		5,755	6,701
Total ending allowance balance	6,976	8,288	8,358	10,251	14,054	14,815
Loans individually evaluated for impairment	23,750		32,911	40,629
Loans collectively evaluated for impairment	224,827		247,025	246,874
Total ending loans balance	248,577		279,936	287,503
Residential Mortgage [Member]
Accounts, Notes, Loans and Financing Receivable [Line Items]
Individually evaluated for impairment	1		3	68
Collectively evaluated for impairment	310		289	296
Total ending allowance balance	311	288	292	364	375	501
Loans individually evaluated for impairment	2,859		3,051	3,015
Loans collectively evaluated for impairment	95,997		96,293	98,266
Total ending loans balance	98,856		99,344	101,281
Consumer and Home Equity[Member]
Accounts, Notes, Loans and Financing Receivable [Line Items]
Individually evaluated for impairment	0		32	51
Collectively evaluated for impairment	262		277	309
Total ending allowance balance	262	296	309	360	396	442
Loans individually evaluated for impairment	308		546	620
Loans collectively evaluated for impairment	51,011		53,464	53,368
Total ending loans balance	51,319		54,010	53,988
Indirect Consumer [Member]
Accounts, Notes, Loans and Financing Receivable [Line Items]
Individually evaluated for impairment	0		0	0
Collectively evaluated for impairment	76		77	202
Total ending allowance balance	76	54	77	202	214	271
Loans individually evaluated for impairment	0		0	0
Loans collectively evaluated for impairment	12,977		13,041	12,938
Total ending loans balance	$ 12,977		$ 13,041	$ 12,938

XML

CHANGES IN AND RECLASSIFICATIONS FROM ACCUMULATED OTHER COMPREHENSIVE INCOME

9 Months Ended

Sep. 30, 2014

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 September 30,
	Unrealized Gains and Losses on
	Available-for-Sale Securities (1)
	2014		2013
	(Dollars in thousands)
Beginning balance	$	(6,588)	$	(7,285)
Other comprehensive income (loss) before reclassification		(419)		(1,438)
Amounts reclassified from accumulated other comprehensive income		(13)		(12)
Net other comprehensive income (loss)		(432)		(1,450)
Ending balance	$	(7,020)	$	(8,735)

(1) All amounts are net of tax.

	Nine Months Ended September 30,
	Unrealized Gains and Losses on
	Available-for-Sale Securities (1)
	2014		2013
	(Dollars in thousands)
Beginning balance	$	(10,568)	$	1,270
Other comprehensive income (loss) before reclassification		3,526		(9,766)
Amounts reclassified from accumulated other comprehensive income		22		(239)
Net other comprehensive income (loss)		3,548		(10,005)
Ending balance	$	(7,020)	$	(8,735)

(1) All amounts are net of tax.

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

Three months ended September 30, 2014

(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	$	13	Gain on sale of investments
		-	Loss on sale of investments
		13	Total before tax
		-	Income taxes/(benefits)
Total amount reclassified	$	13	Net income (loss)

Three months ended September 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	$	235	Gain on sale of investments
		(223)	Loss on sale of investments
		12	Total before tax
		-	Income taxes/(benefits)
Total amount reclassified	$	12	Net income (loss)

Nine months ended September 30, 2014

(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	$	545	Gain on sale of investments
		(567)	Loss on sale of investments
		(22)	Total before tax
		-	Income taxes/(benefits)
Total amount reclassified	$	(22)	Net income (loss)

Nine months ended September 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	$	1,078	Gain on sale of investments
		(839)	Loss on sale of investments
		239	Total before tax
		-	Income taxes/(benefits)
Total amount reclassified	$	239	Net income (loss)