10-Q

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10Q

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

For the quarterly period ended March 31, 2020

or

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

For the transition period from ________ to ________

Commission File Number: 000-21344

FIRST KEYSTONE CORPORATION

(Exact name of registrant as specified in its charter)

Pennsylvania	23-2249083
(State or other jurisdiction of	(I.R.S. Employer
incorporation or organization)	Identification No.)
111 West Front Street, Berwick, PA	18603
(Address of principal executive offices)	(Zip Code)

Registrant’s telephone number, including area code: (570) 752-3671

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, smaller reporting company, or an emerging growth company. See definitions of “large accelerated filer,” “accelerated filer,” “small reporting company,” and emerging growth company in Rule 12b-2 of the Exchange Act

Large accelerated filer	¨	Accelerated filer	x
Non-accelerated filer	¨	Smaller reporting company	x
Emerging growth company	¨

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 7(a)(2)(B) of the Exchange Act. ¨

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

Securities registered pursuant to Section 12(b) of the Act:

Title of each class	Trading symbol	Name of each exchange on which registered
Common stock	FKYS	OTC: Pink

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practical date:

Common Stock, $2 Par Value, 5,832,107 shares as of May 7, 2020.

PART I - FINANCIAL INFORMATION

Item 1. Financial Statements

FIRST KEYSTONE CORPORATION AND SUBSIDIARY

CONSOLIDATED BALANCE SHEETS

(Unaudited)

(Dollars in thousands, except share and per share data)

	March 31,			December 31,
	2020			2019
ASSETS
Cash and due from banks	$	7,785		$	10,251
Interest-bearing deposits in other banks		1,013			473
Total cash and cash equivalents		8,798			10,724
Time deposits with other banks		247			247
Debt securities available-for-sale, at fair value		283,663			277,928
Marketable equity securities, at fair value		1,394			1,933
Restricted investment in bank stocks, at cost		6,740			4,224
Loans		659,274			645,440
Loans held for sale		2,342			2,292
Allowance for loan losses		(7,179	)		(7,005	)
Net loans		654,437			640,727
Premises and equipment, net		19,244			19,387
Operating lease right-of-use assets		1,312			1,470
Accrued interest receivable		3,622			3,405
Cash surrender value of bank owned life insurance		23,737			23,583
Investments in low-income housing partnerships		1,737			1,828
Goodwill		19,133			19,133
Foreclosed assets held for resale		169			119
Other assets		2,974			2,518
TOTAL ASSETS	$	1,027,207		$	1,007,226
LIABILITIES
Deposits:
Non-interest bearing	$	153,029		$	134,648
Interest bearing		581,768			626,980
Total deposits		734,797			761,628
Short-term borrowings		106,379			54,663
Long-term borrowings		50,000			55,000
Operating lease liabilities		1,577			1,663
Accrued interest payable		550			606
Deferred income taxes		351			438
Other liabilities		3,403			4,476
TOTAL LIABILITIES		897,057			878,474
STOCKHOLDERS’ EQUITY
Preferred stock, par value $2.00 per share; authorized 1,000,000 shares as of March 31, 2020 and December 31, 2019;  issued 0 as of March 31, 2020 and December 31, 2019		―			―
Common stock, par value $2.00 per share; authorized 20,000,000 shares as of March 31, 2020 and December 31, 2019; issued 6,063,719 as of March 31, 2020 and 6,048,506 as of  December 31, 2019; outstanding 5,832,107 as of March 31, 2020 and 5,816,894 as of December 31, 2019		12,127			12,097
Surplus		38,645			38,365
Retained earnings		80,261			79,778
Accumulated other comprehensive income		4,826			4,221
Treasury stock, at cost, 231,612 shares as of March 31, 2020 and December 31, 2019		(5,709	)		(5,709	)
TOTAL STOCKHOLDERS’ EQUITY		130,150			128,752
TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY	$	1,027,207		$	1,007,226

See accompanying notes to consolidated financial statements.

2

FIRST KEYSTONE CORPORATION AND SUBSIDIARY

CONSOLIDATED STATEMENTS OF INCOME

THREE MONTHS ENDED MARCH 31, 2020 AND 2019

(Unaudited)

(Dollars in thousands, except per share data)
	2020			2019
Interest and fees on loans	$	7,758		$	7,074
Interest and dividend income on securities:
Taxable		1,276			1,218
Tax-exempt		630			1,018
Dividends		12			11
Dividend income on restricted investment in bank stocks		90			184
Interest on interest-bearing deposits in other banks		2			9
Total interest income		9,768			9,514
INTEREST EXPENSE
Interest on deposits		1,884			1,378
Interest on short-term borrowings		242			1,115
Interest on long-term borrowings		266			200
Total interest expense		2,392			2,693
Net interest income		7,376			6,821
Provision for loan losses		194			92
Net interest income after provision for loan losses		7,182			6,729
NON-INTEREST INCOME
Trust department		221			261
Service charges and fees		499			514
Bank owned life insurance income		154			155
ATM fees and debit card income		399			377
Gains on sales of mortgage loans		93			40
Net securities (losses) gains		(467	)		103
Other		84			57
Total non-interest income		983			1,507
NON-INTEREST EXPENSE
Salaries and employee benefits		3,219			3,132
Occupancy, net		518			464
Furniture and equipment		134			140
Computer expense		260			280
Professional services		242			270
Pennsylvania shares tax		224			192
FDIC insurance		—			65
ATM and debit card fees		209			211
Data processing fees		294			267
Foreclosed assets held for resale expense		9			38
Advertising		91			153
Other		715			643
Total non-interest expense		5,915			5,855
Income before income tax expense		2,250			2,381
Income tax expense		197			138
NET INCOME	$	2,053		$	2,243
PER SHARE DATA
Net income per share:
Basic	$	0.35		$	0.39
Diluted		0.35			0.39
Dividends per share		0.27			0.27

See accompanying notes to consolidated financial statements.

3

FIRST KEYSTONE CORPORATION AND SUBSIDIARY

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

THREE MONTHS ENDED MARCH 31, 2020 AND 2019

(Unaudited)

(Dollars in thousands)

	March 31,
	2020			2019
Net Income	$	2,053		$	2,243
Other comprehensive income:
Unrealized net holding gains on debt securities available-for-sale arising during the period, net of income taxes of $176 and $986, respectively		661			3,709
Less reclassification adjustment for net realized gains included in net income, net of income taxes of $(15) and $(18), respectively (a) (b)		(56	)		(67	)
Total other comprehensive income		605			3,642
Total Comprehensive Income	$	2,658		$	5,885

_______________________

(a) Gross amounts are included in net securities (losses) gains on the consolidated statements of income in non-interest income.

(b) Income tax amounts are included in income tax expense on the consolidated statements of income.

See accompanying notes to consolidated financial statements.

4

FIRST KEYSTONE CORPORATION AND SUBSIDIARY

CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY

THREE MONTHS ENDED MARCH 31, 2020 AND 2019

(Unaudited)

(Dollars in thousands, except per share data)

										Accumulated
										Other						Total
	Common Stock						Retained			Comprehensive			Treasury			Stockholders’
	Shares		Amount		Surplus		Earnings			Income			Stock			Equity
Balance at January 1, 2020		6,048,506	$	12,097	$	38,365	$	79,778		$	4,221		$	(5,709	)	$	128,752
Net Income								2,053									2,053
Other comprehensive income, net of taxes											605						605
Issuance of common stock under dividend reinvestment plan		15,213		30		280											310
Dividends - $0.27 per share								(1,570	)								(1,570	)
Balance at March 31, 2020		6,063,719	$	12,127	$	38,645	$	80,261		$	4,826		$	(5,709	)	$	130,150
Balance at January 1, 2019		5,996,322	$	11,993	$	37,255	$	75,798		$	(2,581	)	$	(5,709	)	$	116,756
Net Income								2,243									2,243
Other comprehensive income, net of taxes											3,642						3,642
Issuance of common stock under dividend reinvestment plan		12,312		24		254											278
Dividends - $0.27 per share								(1,557	)								(1,557	)
Balance at March 31, 2019		6,008,634	$	12,017	$	37,509	$	76,484		$	1,061		$	(5,709	)	$	121,362

See accompanying notes to consolidated financial statements.

5

FIRST KEYSTONE CORPORATION AND SUBSIDIARY

CONSOLIDATED STATEMENTS OF CASH FLOWS

THREE MONTHS ENDED MARCH 31, 2020 AND 2019

(Unaudited)

(Dollars in thousands)

	2020			2019
OPERATING ACTIVITIES
Net income	$	2,053		$	2,243
Adjustments to reconcile net income to net cash provided by operating activities:
Provision for loan losses		194			92
Depreciation and amortization		488			254
Net premium amortization on investment securities		498			733
Deferred income tax (benefit) expense		(247	)		62
Gains on sales of mortgage loans		(93	)		(40	)
Proceeds from sales of mortgage loans originated for resale		3,137			1,250
Originations of mortgage loans originated for resale		(3,100	)		(964	)
Net securities losses (gains)		467			(103	)
Net losses on sales of foreclosed real estate held for resale, including write-downs		—			20
(Increase) decrease in accrued interest receivable		(217	)		367
Earnings on investment in bank owned life insurance		(154	)		(155	)
Net losses on disposals of premises and equipment		—			4
Increase in other assets		(537	)		(1,860	)
Amortization of investment in real estate ventures		91			88
(Decrease) increase in accrued interest payable		(56	)		58
(Decrease) increase in other liabilities		(1,159	)		1,198
NET CASH PROVIDED BY OPERATING ACTIVITIES		1,365			3,247
INVESTING ACTIVITIES
Proceeds from sales of debt securities available-for-sale		11,182			32,374
Proceeds from maturities and redemptions of debt securities available-for-sale		15,324			4,520
Purchases of debt securities available-for-sale		(31,902	)		—
Net change in restricted investment in bank stocks		(2,516	)		1,173
Net increase in loans		(13,877	)		(11,891	)
Purchases of premises and equipment		(120	)		(234	)
Proceeds from sales of foreclosed assets held for resale		—			197
NET CASH (USED IN) PROVIDED BY INVESTING ACTIVITIES		(21,909	)		26,139
FINANCING ACTIVITIES
Net (decrease) increase in deposits		(26,831	)		25,867
Net increase (decrease) in short-term borrowings		51,716			(42,966	)
Repayment of long-term borrowings		(5,000	)		(10,000	)
Common stock issued		303			278
Dividends paid		(1,570	)		(1,557	)
NET CASH PROVIDED BY (USED IN) FINANCING ACTIVITIES		18,618			(28,378	)
(DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS		(1,926	)		1,008
CASH AND CASH EQUIVALENTS, BEGINNING		10,724			10,950
CASH AND CASH EQUIVALENTS, ENDING	$	8,798		$	11,958
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
Interest paid		2,448			2,635
Income taxes paid		(249	)		62
SUPPLEMENTAL DISCLOSURE OF NON-CASH ACTIVITIES
Loans transferred to foreclosed assets held for resale		50			—
Common stock subscription receivable		7			—
Right-of-use assets obtained in exchange for lease liabilities		—			1,465

See accompanying notes to consolidated financial statements.

6

FIRST KEYSTONE CORPORATION AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

NOTE 1 ― BASIS OF PRESENTATION, SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES AND SUBSEQUENT EVENTS

The consolidated financial statements include the accounts of First Keystone Corporation (the “Corporation”) and its wholly owned subsidiary First Keystone Community Bank (the “Bank”) (collectively the “Company”). All significant intercompany accounts and transactions have been eliminated.

The accompanying unaudited consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America (“U.S. GAAP”) for interim financial information. Accordingly, they do not include all of the information and footnotes required by U.S. GAAP for complete consolidated financial statements. In the opinion of management, all adjustments considered necessary for fair presentation have been included. Operating results for the three month period ended March 31, 2020, are not necessarily indicative of the results for the year ending December 31, 2020. For further information, refer to the consolidated financial statements and notes thereto included in First Keystone Corporation’s Annual Report on Form 10-K for the year ended December 31, 2019.

Subsequent Events

The Corporation has evaluated events and transactions occurring subsequent to the consolidated balance sheet date of March 31, 2020 for items that should potentially be recognized or disclosed in these consolidated financial statements. The evaluation was conducted through the date these consolidated financial statements were issued.

As a result of the spread of the COVID-19 coronavirus, economic uncertainties have arisen which are likely to negatively impact net interest income. The Corporation may experience difficulties collecting monthly payments on time from its borrowers, property values may decline, and certain types of loans may need to be extended or modified. The extent of the impact of COVID-19 on the Corporation’s operational and financial performance will depend on certain developments including the duration and spread of the outbreak and the impact on our customers, employees and vendors.

The Coronavirus Aid, Relief, and Economic Security Act ("CARES Act") was enacted on March 27, 2020 in the United States. The Corporation is approved by the U.S. Small Business Administration (“SBA”) to fund loans under the SBA’s Paycheck Protection Program (“PPP”) created as part of the CARES Act. To date, the Bank has received 456 applications for PPP loans for a combined total of $32,367,000. As of April 30, 2020, 432 PPP loan applications were approved, and 152 of the loans were funded for $16,010,000. The PPP loans have 1.00% interest rates, lender fees, and two-year terms. These forgivable loans funded by the Corporation are subject to the terms and conditions applicable to all loans made pursuant to the PPP as administered by the SBA under the CARES Act.

In addition, subsequent to March 31, 2020, there have been loan modification requests to defer principal and/or interest payments or modify interest rates in the wake of the COVID-19 pandemic. As of April 30, 2020, there have been 493 loan modifications approved across all loan segments, for customers with current loan balances of $181,704,000. At this time, there have been no material fluctuations in loan delinquencies because of COVID-19.

Other financial impact could occur, though such potential impact is unknown at this time.

7

NOTE 2 ― RECENT ACCOUNTING STANDARDS UPDATES (“ASU”)

Recently adopted ASUs:

In January 2017, the FASB issued ASU 2017-04, Intangibles – Goodwill and Other (Topic 350): Simplifying the Test for Goodwill Impairment. The ASU simplified the subsequent measurement of goodwill by eliminating Step 2 from the goodwill impairment test. Instead, under the amendments, an entity should perform its annual, or interim, goodwill impairment test by comparing the fair value with its carrying amount. Additionally, an entity should consider income tax effects from any tax-deductible goodwill on the carrying amount when measuring the goodwill impairment loss, if applicable. The update also eliminated the requirements for zero or negative carrying amount to perform a qualitative assessment and, if it fails that qualitative test, to perform Step 2 of the goodwill impairment test. The amendments are effective for public business entities for annual or any interim goodwill impairment tests in fiscal years beginning after December 15, 2019. The adoption of this update on January 1, 2020 did not have a material impact on the Corporation’s consolidated financial position or results of operations.

In August 2018, the FASB issued ASU 2018-13, Fair Value Measurement (Topic 820) – Disclosure Framework – Changes to Disclosure Requirements for Fair Value Measurement. The amendments in this Update removed required disclosures regarding: 1. The amount of and reasons for transfers between Level 1 and Level 2 of the fair value hierarchy, 2. The policy for timing of transfers between levels, 3. The valuation processes for Level 3 fair value measurements, and 4. The Update modified the disclosure requirements on fair value measurements in Topic 820: a) The changes in unrealized gains and losses for the period included in other comprehensive income for recurring Level 3 fair value measurements held at the end of the reporting period and b) The range and weighted average significant unobservable inputs used to develop Level 3 fair value measurements. For certain unobservable inputs, an entity may disclose other quantitative information (such as the median or arithmetic average) in lieu of the weighted average if the entity determines that other quantitative information would be a more reasonable and rational method to reflect the distribution of unobservable inputs used to develop Level 3 fair value measurements. The amendments in this Update are effective for all entities for fiscal years, and interim periods within those fiscal years beginning after December 15, 2019. The adoption of this update on January 1, 2020 did not have a material impact on the Corporation’s consolidated financial statements and related disclosures.

In March 2020, the FASB issued ASU 2020-04, Reference Rate Reform (Topic 848), which provides optional expedients and exceptions for applying U.S. GAAP to contracts, hedging relationships, and other transactions affected by the discontinuation of the London Interbank Offered Rate (“LIBOR”), or by another reference rate that is expected to be discontinued. The amendments are effective for all entities as of March 12, 2020 through December 31, 2022. The Corporation has evaluated the impact of the provisions of ASU 2020-04 on our financial condition, results of operations and cash flows, and determined that there is no material impact on the consolidated financial statements and related disclosures.

Pending ASUs:

In June 2016, the FASB issued ASU No. 2016-13, Financial Instruments-Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments. ASU No. 2016-13 requires financial assets measured at amortized cost to be presented at the net amount expected to be collected, through an allowance for credit losses that is deducted from the amortized cost basis. The measurement of expected credit losses is based on relevant information about past events, including historical experience, current conditions, and reasonable and supportable forecasts that affect the collectability of the reported amount. ASU No. 2016-13 is effective for annual periods and interim periods within those annual periods beginning after December 15, 2019. In November 2019, the FASB issued ASU 2019-10, Financial Instruments-Credit Losses (Topic 326), Derivatives and Hedging (Topic 815), and Leases (Topic 842), to delay the effective date for smaller reporting companies to fiscal years, and interim periods within those fiscal years, beginning after December 15, 2022. While the Corporation (a smaller reporting company) is currently evaluating the provisions of ASU 2016-13 to determine the potential impact of the new standard will have on the Corporation’s consolidated financial statements, it has taken steps to prepare for the implementation when it becomes effective, such as: forming an internal committee, gathering pertinent data, consulting with outside professionals, subscribing to a new software system, and running existing and new methodologies concurrently through the period of implementation.

8

NOTE 3 — SECURITIES

The Corporation classifies its securities as either “Held-to-Maturity” or “Available-for-Sale” at the time of purchase. Securities are accounted for on a trade date basis. Debt securities are classified as Held-to-Maturity when the Corporation has the ability and positive intent to hold the securities to maturity. Securities classified as Held-to-Maturity are carried at cost adjusted for amortization of premium and accretion of discount to maturity.

Debt securities not classified as Held-to-Maturity are included in the Available-for-Sale category and are carried at fair value. The amount of any unrealized gain or loss, net of the effect of deferred income taxes, is reported as accumulated other comprehensive income (loss) (AOCI) in the consolidated balance sheets and consolidated statements of changes in stockholders’ equity. Management’s decision to sell Available-for-Sale securities is based on changes in economic conditions, controlling the sources and applications of funds, terms, availability of and yield of alternative investments, interest rate risk and the need for liquidity.

Equity securities with readily determinable fair values are stated at fair value with realized and unrealized gains and losses reported in income. Equity securities without readily determinable fair values are recorded at cost less impairment, if any.

The cost of debt securities classified as Held-to-Maturity or Available-for-Sale is adjusted for amortization of premiums to the earliest call date and accretion of discounts to expected maturity. Such amortization and accretion, as well as interest and dividends, are included in interest and dividend income from investment securities. Realized gains and losses are included in net securities gains and losses. The cost of securities sold, redeemed or matured is based on the specific identification method.

The amortized cost, related estimated fair value, and unrealized gains and losses for debt securities classified as “Available-For-Sale” were as follows at March 31, 2020 and December 31, 2019:

	Debt Securities Available-for-Sale
(Dollars in thousands)			Gross		Gross
	Amortized		Unrealized		Unrealized			Fair
March 31, 2020:	Cost		Gains		Losses			Value
U.S. Treasury securities	$	—	$	—	$	—		$	—
Obligations of U.S. Government Corporations and Agencies:
Mortgage-backed		62,235		1,055		(785	)		62,505
Other		12,341		7		(119	)		12,229
Other mortgage backed debt securities		10,187		—		(824	)		9,363
Obligations of state and political subdivisions		131,424		9,052		(9	)		140,467
Asset backed securities		42,889		—		(2,123	)		40,766
Corporate debt securities		18,479		118		(264	)		18,333
Total	$	277,555	$	10,232	$	(4,124	)	$	283,663

	Debt Securities Available-for-Sale
(Dollars in thousands)			Gross		Gross
	Amortized		Unrealized		Unrealized			Fair
December 31, 2019:	Cost		Gains		Losses			Value
U.S. Treasury securities	$	2,852	$	3	$	―		$	2,855
Obligations of U.S. Government Corporations and Agencies:
Mortgage-backed		77,131		539		(387	)		77,283
Other		10,381		4		(88	)		10,297
Other mortgage backed securities		11,145		3		(10	)		11,138
Obligations of state and political subdivisions		114,934		5,490		(48	)		120,376
Asset backed securities		37,596		115		(175	)		37,536
Corporate debt securities		18,546		182		(285	)		18,443
Total	$	272,585	$	6,336	$	(993	)	$	277,928

Securities Available-for-Sale with an aggregate fair value of $183,713,000 at March 31, 2020 and $201,468,000 at December 31, 2019, were pledged to secure public funds, trust funds, securities sold under agreements to repurchase and the Federal Discount Window aggregating $128,721,000 at March 31, 2020 and $143,546,000 at December 31, 2019.

9

The amortized cost and estimated fair value of debt securities, by contractual maturity, are shown below at March 31, 2020. Expected maturities will differ from contractual maturities because borrowers may have the right to call or prepay obligations with or without call or prepayment penalties.

(Dollars in thousands)

	March 31, 2020
	Debt Securities Available-For-Sale
			U.S. Government		Other		Obligations
			Corporations &		Mortgage		of State		Asset		Corporate
	U.S. Treasury		Agencies		Backed Debt		& Political		Backed		Debt
	Securities		Obligations1		Securities1		Subdivisions		Securities		Securities
Within 1 Year:
Amortized cost	$	—	$	―	$	—	$	1,001	$	—	$	2,000
Fair value		—		―		—		1,011		—		1,968
1 - 5 Years:
Amortized cost		—		772		—		21,473		2,872		16,479
Fair value		—		788		—		22,070		2,737		16,365
5 - 10 Years:
Amortized cost		—		21,610		—		23,936		4,686		—
Fair value		—		21,337		—		25,293		4,462		—
After 10 Years:
Amortized cost		—		52,194		10,187		85,014		35,331		—
Fair value		—		52,609		9,363		92,093		33,567		—
Total:
Amortized cost	$	—	$	74,576	$	10,187	$	131,424	$	42,889	$	18,479
Fair value		—		74,734		9,363		140,467		40,766		18,333

______________________

¹Mortgage-backed securities are allocated for maturity reporting at their original maturity date.

There were no aggregate securities with a single issuer (excluding the U.S. Government and U.S. Government Agencies and Corporations) which exceeded ten percent of consolidated stockholders’ equity at March 31, 2020. The quality rating of the obligations of state and political subdivisions are generally investment grade, as rated by Moody’s, Standard and Poor’s or Fitch. The typical exceptions are local issues which are not rated, but are secured by the full faith and credit obligations of the communities that issued these securities.

Proceeds from sales of investments in Debt Securities Available-For-Sale for the three months ended March 31, 2020 and 2019 were $11,182,000 and $32,374,000, respectively. Gross gains realized on these sales were $176,000 and $187,000, respectively. Gross losses realized on these sales were $105,000 and $102,000, respectively. There were no impairment losses realized on Debt Securities Available-For-Sale during the three months ended March 31, 2020 or 2019.

At March 31, 2020 and December 31, 2019, the Corporation had $1,394,000 and $1,933,000, respectively, in equity securities recorded at fair value. The following is a summary of unrealized and realized gains and losses recognized in net income on equity securities during the three months ended March 31, 2020 and 2019:

10

(Dollars in thousands)

	Three months ended			Three months ended
	March 31, 2020			March 31, 2019
Net (losses) and gains recognized during the period on equity securities	$	(538	)	$	18
Less: Net gains and (losses) recognized during the period on equity securities sold during the period		—			—
Unrealized (losses) and gains recognized during the reporting period on equity securities still held at the reporting date	$	(538	)	$	18

There were no proceeds from sales of investments in Held-to-Maturity debt securities during the first three months of 2020 or 2019. Therefore, there were no gains or losses realized during these periods.

Management evaluates securities for other-than-temporary impairment (“OTTI”) at least on a quarterly basis, and more frequently when economic or market conditions warrant such an evaluation. Securities classified as Available-for-Sale or Held-to-Maturity are generally evaluated for OTTI under FASB ASC 320, Investments - Debt and Equity Securities. In determining OTTI under the FASB ASC 320 model, management considers many factors, including (1) the length of time and the extent to which the fair value has been less than cost, (2) the financial condition and near-term prospects of the issuer, (3) whether the market decline was affected by macroeconomic conditions, and (4) whether the entity has the intent to sell the debt security or more likely than not will be required to sell the debt security before its anticipated recovery. The assessment of whether an other-than-temporary decline exists involves a high degree of subjectivity and judgment and is based on the information available to management at a point in time.

When OTTI occurs on debt securities, the amount of the OTTI recognized in earnings depends on whether an entity intends to sell the security or more likely than not will be required to sell the security before recovery of its amortized cost basis less any current-period credit loss. If an entity intends to sell or more likely than not will be required to sell the security before recovery of its amortized cost basis less any current-period credit loss, the OTTI shall be recognized in earnings equal to the entire difference between the investment’s amortized cost basis and its fair value at the balance sheet date. If an entity does not intend to sell the security and it is not more likely than not that the entity will be required to sell the security before recovery of its amortized cost basis less any current-period loss, the OTTI shall be separated into the amount representing the credit loss and the amount related to all other factors. The amount of the total OTTI related to the credit loss is determined based on the present value of cash flows expected to be collected, and the realized loss is recognized as impairment charges on securities on the consolidated statements of income. The amount of the total OTTI related to the other factors shall be recognized in other comprehensive income (loss), net of applicable taxes. The previous amortized cost basis less the OTTI recognized in earnings becomes the new amortized cost basis of the investment.

The Corporation and its investment advisors monitor the entire portfolio monthly with particular attention given to securities in a continuous loss position of at least ten percent for over twelve months. Based on the factors described above, management did not consider any securities to be other-than-temporarily impaired at March 31, 2020 or December 31, 2019.

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The summary below shows the gross unrealized losses and fair value of the Corporation’s debt securities. Totals are aggregated by investment category where individual securities have been in a continuous loss position for less than 12 months or 12 months or more as of March 31, 2020 and December 31, 2019:

March 31, 2020

(Dollars in thousands)	Less Than 12 Months					12 Months or More					Total
	Fair		Unrealized			Fair		Unrealized			Fair		Unrealized
Available-for-Sale:	Value		Loss			Value		Loss			Value		Loss
U.S. Treasury securities	$	—	$	—		$	—	$	—		$	—	$	—
Obligations of U.S. Government
Corporations and Agencies:
Mortgage-backed		20,750		(466	)		7,747		(319	)		28,497		(785	)
Other		6,092		(64	)		4,396		(55	)		10,488		(119	)
Other mortgage backed debt securities		7,492		(824	)		—		—			7,492		(824	)
Obligations of state and political subdivisions		1,507		(9	)		—		—			1,507		(9	)
Asset backed securities		40,766		(2,123	)		—		—			40,766		(2,123	)
Corporate debt securities		4,041		(118	)		7,355		(146	)		11,396		(264	)
Total	$	80,648	$	(3,604	)	$	19,498	$	(520	)	$	100,146	$	(4,124	)

December 31, 2019

(Dollars in thousands)

	Less Than 12 Months					12 Months or More					Total
	Fair		Unrealized			Fair		Unrealized			Fair		Unrealized
Available-for-Sale:	Value		Loss			Value		Loss			Value		Loss
U.S. Treasury securities	$	―	$	―		$	—	$	—		$	―	$	―
Obligations of U.S. Government
Corporations and Agencies:
Mortgage-backed		39,085		(221	)		12,650		(166	)		51,735		(387	)
Other		4,382		(24	)		4,594		(64	)		8,976		(88	)
Other mortgage backed debt securities		4,056		(10	)		―		―			4,056		(10	)
Obligations of state and political subdivisions		1,993		(15	)		1,081		(33	)		3,074		(48	)
Asset backed securities		19,236		(175	)		—		—			19,236		(175	)
Corporate debt securities		3,484		(16	)		7,231		(269	)		10,715		(285	)
Total	$	72,236	$	(461	)	$	25,556	$	(532	)	$	97,792	$	(993	)

The Corporation invests in various forms of agency debt including mortgage-backed securities and callable debt. The mortgage-backed securities are issued by Federal Home Loan Mortgage Corporation (“FHLMC”), Federal National Mortgage Association (“FNMA”) or Government National Mortgage Association (“GNMA”). The municipal securities consist of general obligations and revenue bonds. The fair market value of the above securities is influenced by market interest rates, prepayment speeds on mortgage securities, bid-offer spreads in the market place and credit premiums for various types of agency debt. These factors change continuously and therefore the market value of these securities may be higher or lower than the Corporation’s carrying value at any measurement date. Management does not believe any of their 27 debt securities with a less than one year unrealized loss position, or any of their 13 debt securities with a one year or greater unrealized loss position as of March 31, 2020, represent an other-than-temporary impairment, as the unrealized losses relate principally to changes in interest rates subsequent to the acquisition of the specific securities. The Corporation expects to collect all principal and interest payments defined under the original terms as all contracted payments on securities in the portfolio are current as of March 31, 2020.

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NOTE 4 — LOANS AND ALLOWANCE FOR LOAN LOSSES

Loans

Net loans are stated at their outstanding recorded investment, net of deferred fees and costs, unearned income and the allowance for loan losses. Interest on loans is recognized as income over the term of each loan, generally, by the accrual method. Loan origination fees and certain direct loan origination costs have been deferred with the net amount amortized using the straight line method or the interest method over the contractual life of the related loans as an interest yield adjustment.

Residential mortgage loans held for sale are carried at the lower of cost or market on an aggregate basis determined by independent pricing from appropriate federal or state agency investors. These loans are sold without recourse. Loans held for sale amounted to $2,342,000 and $2,292,000 at March 31, 2020 and December 31, 2019, respectively.

As an addition to the commercial loans receivable portfolio, the Corporation may purchase the guaranteed portion of loans secured by the U.S. Government. The originating bank retains the unguaranteed portion of the loan. The loans are sponsored by one of the various government agencies including the U.S. Small Business Administration (SBA), United States Department of Agriculture (USDA), and the Farm Service Agency (FSA). Government Guaranteed Loans (“GGLs”) carry no credit risk due to an unconditional and irrevocable guarantee on all principal and accrued interest, which is supported by the full faith and credit of the U.S. Government. As of March 31, 2020, the Corporation’s balance of GGLs amounted to $6,059,000, compared to $6,150,000 at December 31, 2019.

The loans receivable portfolio is segmented into commercial, residential and consumer loans. Commercial loans consist of the following classes: Commercial and Industrial, and Commercial Real Estate.

Commercial and Industrial Lending

The Corporation originates commercial and industrial loans primarily to businesses located in its primary market area and surrounding areas. These loans are used for various business purposes, which include short-term loans and lines of credit to finance machinery and equipment, inventory and accounts receivable. Generally, the maximum term for loans extended on machinery and equipment is based on the projected useful life of such machinery and equipment. Most business lines of credit are written on demand and are reviewed annually.

Commercial and industrial loans are generally secured with short-term assets; however, in many cases, additional collateral such as real estate is provided as additional security for the loan. Loan-to-value maximum thresholds have been established by the Corporation and are specific to the type of collateral. Collateral values may be determined using invoices, inventory reports, accounts receivable aging reports, business financial statements, collateral appraisals, etc. Commercial and industrial loans are typically supported by personal guarantees of the borrower.

In underwriting commercial and industrial loans, an analysis is performed to evaluate the borrower's character and capacity to repay the loan, the adequacy of the borrower's capital and collateral, as well as the conditions affecting the borrower. Evaluation of the borrower’s past, present and future cash flows is also an important aspect of the Corporation's analysis of the borrower’s ability to repay.

Commercial and industrial loans generally present a higher level of risk than other types of loans due primarily to the effect of general economic conditions. Commercial and industrial loans are typically made on the basis of the borrower’s ability to make repayment from cash flows from the borrower’s primary business activities. As a result, the availability of funds for the repayment of commercial and industrial loans is dependent on the success of the business itself, which in turn, is likely to be dependent upon the general economic environment.

Commercial Real Estate Lending

The Corporation engages in commercial real estate lending in its primary market area and surrounding areas. The Corporation’s commercial real estate portfolio is secured primarily by commercial retail space, commercial office buildings, residential housing and hotels. Generally, commercial real estate loans have terms that do not exceed twenty years, have loan-to-value ratios of up to eighty percent of the value of the collateral property, and are typically supported by personal guarantees of the borrowers.

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In underwriting these loans, the Corporation performs a thorough analysis of the financial condition of the borrower, the borrower’s credit history, and the reliability and predictability of the cash flow generated by the property securing the loan. The value of the property is determined by either independent appraisers or internal evaluations by Bank officers.

Commercial real estate loans generally present a higher level of risk than residential real estate secured loans. Repayment of loans secured by commercial real estate is typically dependent upon the successful operation of the related real estate project and/or the effect of the general economic conditions on income producing properties.

Residential Real Estate Lending (Including Home Equity)

The Corporation’s residential real estate portfolio is comprised of one-to-four family residential mortgage loan originations, home equity term loans and home equity lines of credit. These loans are generated by the Corporation’s marketing efforts, its present customers, walk-in customers and referrals. These loans originate primarily within or with customers from the Corporation’s market area.

The Corporation’s one-to-four family residential mortgage originations are secured primarily by properties located in its primary market area and surrounding areas. The Corporation offers fixed-rate mortgage loans with terms up to a maximum of thirty years for both permanent structures and those under construction. Loans with terms of thirty years are normally held for sale and sold without recourse; most of the residential mortgages held in the Corporation’s residential real estate portfolio have maximum terms of twenty years. Generally, the majority of the Corporation’s residential mortgage loans originate with a loan-to-value of eighty percent or less, or those with primary mortgage insurance at ninety-five percent or less. Home equity term loans are secured by the borrower’s primary residence and typically have a maximum loan-to-value of eighty percent and a maximum term of fifteen years. In general, home equity lines of credit are secured by the borrower’s primary residence with a maximum loan-to-value of eighty percent and a maximum term of twenty years.

In underwriting one-to-four family residential mortgage loans, the Corporation evaluates the borrower’s ability to make monthly payments, the borrower’s repayment history and the value of the property securing the loan. The ability and willingness to repay is assessed based upon the borrower’s employment history, current financial conditions and credit background. A majority of the properties securing residential real estate loans made by the Corporation are appraised by independent appraisers. The Corporation generally requires mortgage loan borrowers to obtain an attorney’s title opinion or title insurance and fire and property insurance, including flood insurance, if applicable.

Residential mortgage loans, home equity term loans and home equity lines of credit generally present a lower level of risk than consumer loans because they are secured by the borrower’s primary residence. Risk is increased when the Corporation is in a subordinate position, especially to another lender, for the loan collateral.

Consumer Lending

The Corporation offers a variety of secured and unsecured consumer loans, including vehicle loans, stock loans and loans secured by financial institution deposits. These loans originate primarily within or with customers from the Corporation’s market area.

Consumer loan terms vary according to the type and value of collateral and creditworthiness of the borrower. In underwriting personal loans, a thorough analysis is performed regarding the borrower’s willingness and financial ability to repay the loan as agreed. The ability and willingness to repay is assessed based upon the borrower’s employment history, current financial condition and credit background.

Consumer loans may entail greater credit risk than residential real estate loans, particularly in the case of personal loans which are unsecured or are secured by rapidly depreciable assets, such as automobiles or recreational equipment. In such cases, repossessed collateral for a defaulted personal loan may not provide an adequate source of repayment of the outstanding loan balance as a result of the greater likelihood of damage, loss or depreciation. In addition, personal loan collections are dependent on the borrower’s continuing financial stability and therefore, are more likely to be affected by adverse personal circumstances. Furthermore, the application of various federal and state laws, including bankruptcy and insolvency laws, may limit the amount which can be recovered on such loans.

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Delinquent Loans

Generally, a loan is considered to be past-due when scheduled loan payments are in arrears 10 days or more. Delinquent notices are generated automatically when a loan is 10 or 15 days past-due, depending on loan type. Collection efforts continue on past-due loans that have not been brought current, when it is believed that some chance exists for improvement in the status of the loan. Past-due loans are continually evaluated with the determination for charge-off being made when no reasonable chance remains that the status of the loan can be improved.

Commercial and Industrial and Commercial Real Estate loans are charged off in whole or in part when they become sufficiently delinquent based upon the terms of the underlying loan contract and when a collateral deficiency exists. Because all or part of the contractual cash flows are not expected to be collected, the loan is considered to be impaired, and the Bank estimates the impairment based on its analysis of the cash flows or collateral estimated at fair value less cost to sell. Should a Government Guaranteed Loan default, demand is made to the originating bank for repurchase of the loan. If the originating bank does not repurchase the loan, demand for repurchase is then made to the appropriate government agency which has provided the guarantee for the loan.

Residential Real Estate and Consumer loans are charged off when they become sufficiently delinquent based upon the terms of the underlying loan contract and when the value of the underlying collateral is not sufficient to support the loan balance and a loss is expected. At that time, the amount of estimated collateral deficiency, if any, is charged off for loans secured by collateral, and all other loans are charged off in full. Loans with collateral are written down to the estimated fair value of the collateral less cost to sell.

Existing loans in which the borrower has declared bankruptcy are considered on a case by case basis to determine whether repayment is likely to occur (eg. reaffirmation by the borrower with demonstrated repayment ability). Otherwise, loans are charged off in full or written down to the estimated fair value of collateral less cost to sell.

Generally, a loan is classified as non-accrual and the accrual of interest on such a loan is discontinued when the contractual payment of principal or interest has become 90 days past due or management has serious doubts about further collectability of principal or interest, even though the loan may currently be performing. A loan may remain on accrual status if it is well secured (or supported by a strong guarantee) and in the process of collection. When a loan is placed on non-accrual status, unpaid interest credited to income in the current year is reversed and unpaid interest accrued in prior years is charged against interest income. Certain non-accrual loans may continue to perform; that is, payments are still being received. Generally, the payments are applied to principal. These loans remain under constant scrutiny, and if performance continues, interest income may be recorded on a cash basis based on management's judgment regarding the collectability of principal.

Allowance for Loan Losses

The allowance for loan losses is established through provisions for loan losses charged against income. Loans deemed to be uncollectible are charged against the allowance for loan losses and subsequent recoveries, if any, are credited to the allowance.

The allowance for loan losses is maintained at a level estimated by management to be adequate to absorb potential loan losses. Management’s periodic evaluation of the adequacy of the allowance for loan losses is based on the Corporation’s past loan loss experience, known and inherent risks in the portfolio, adverse situations that may affect the borrower’s ability to repay (including the timing of future payments), the estimated value of any underlying collateral, composition of the loan portfolio, current economic conditions, and other relevant factors. This evaluation is inherently subjective as it requires material estimates including the amounts and timing of future cash flows expected to be received on impaired loans that may be susceptible to significant change.

The allowance consists of specific, general and unallocated components. The specific component relates to loans that are individually classified as impaired. Select loans are not aggregated for collective impairment evaluation, as such; all loans are subject to individual impairment evaluation should the facts and circumstances pertinent to a particular loan suggest that such evaluation is necessary. Factors considered by management in determining impairment include payment status and the probability of collecting scheduled principal and interest payments when due. Loans that experience insignificant payment delays and payment shortfalls generally are not classified as impaired. Management determines the significance of payment delays and payment shortfalls on a case-by-case basis, taking into consideration all of the circumstances surrounding the loan and the borrower, including the length of the delay, the reasons for the delay, the borrower’s prior payment record, and the amount of the shortfall in relation to the principal and interest owed. If a loan is impaired, a portion of the allowance may be allocated so that the loan is reported, net, at the present value of estimated future cash flows using the loan’s existing rate or at the fair value of collateral if repayment is expected solely from collateral. Troubled debt restructurings are separately identified for impairment disclosures and are measured at the present value of estimated future cash flows using the loan’s effective rate at inception. If a troubled debt restructuring is considered to be a collateral dependent loan, the loans may be reported, net, at the fair value of the collateral. For troubled debt restructurings that subsequently default, the Corporation determines the amount of reserve in accordance with the accounting policy for the allowance for loan losses.

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The general component covers all other loans not identified as impaired (aside from Government Guaranteed Loans, which do not require an allowance) and is based on historical losses and qualitative factors. The historical loss component of the allowance is determined by losses recognized by portfolio segment over a time period that management has determined represents the current credit cycle. Qualitative factors impacting each portfolio segment may include: delinquency trends, loan volume trends, Bank policy changes, management processes and oversight, economic trends (including change in consumer and business disposable incomes, unemployment and under-employment levels, and other conditions), concentrations by industry or product, internal and external loan review processes, collateral value and market conditions, and external factors including regulatory issues and competition.

Government Guaranteed Loans do not require an associated allowance for loan losses due to the underlying irrevocable and unconditional guarantee, which is supported by the full faith and credit of the U.S. Government. Should a GGL default, the loan will be repurchased by the originating bank or the appropriate government agency that has provided the guarantee for the loan.

The unallocated component of the allowance is maintained to cover uncertainties that could affect management’s estimate of probable losses. The unallocated component of the allowance reflects the margin of imprecision inherent in the underlying assumptions used in the methodologies for estimating specific and general losses in the portfolio.

A reserve for unfunded lending commitments is provided for possible credit losses on off-balance sheet credit exposures. The reserve for unfunded lending commitments represents management’s estimate of losses inherent in its unfunded loan commitments and, if necessary, is recorded in other liabilities on the consolidated balance sheets. As of March 31, 2020 and December 31, 2019, the amount of the reserve for unfunded lending commitments was $161,000 and $117,000, respectively.

The Corporation is subject to periodic examination by its federal and state examiners, and may be required by such regulators to recognize additions to the allowance for loan losses based on their assessment of credit information available to them at the time of their examinations.

A loan is considered impaired when, based on current information and events, it is probable that the Corporation will be unable to collect all amounts due according to the contractual terms of the original loan agreement. Under current accounting standards, the allowance for loan losses related to impaired loans is based on discounted cash flows using the loan’s effective interest rate at inception or the fair value of the collateral for certain collateral dependent loans.

From time to time, the Bank may agree to modify/restructure the contractual terms of a borrower’s loan. The restructuring of a loan is considered a “troubled debt restructuring” if both the following conditions are met: (i) the borrower is experiencing financial difficulties, and (ii) the Corporation has granted a concession. The most common concessions granted include one or more modifications to the terms of the debt, such as (a) a reduction in the interest rate for the remaining life of the debt, (b) an extension of the maturity date at an interest rate lower than the current market rate for new debt with similar risk, (c) a temporary period of interest-only payments, and (d) a reduction in the contractual payment amount for either a short period or remaining term of the loan. A less common concession is the forgiveness of a portion of the principal.

The determination of whether a borrower is experiencing financial difficulties takes into account not only the current financial condition of the borrower, but also the potential financial condition of the borrower were a concession not granted. Similarly, the determination of whether a concession has been granted is very subjective in nature. For example, simply extending the term of a loan at its original interest rate or even at a higher interest rate could be interpreted as a concession unless the borrower could readily obtain similar credit terms from a different lender.

Loans modified in a troubled debt restructuring are considered impaired and may or may not be placed on non-accrual status until the Corporation determines the future collection of principal and interest is reasonably assured, which generally requires that the borrower demonstrates a period of performance according to the restructured terms of six months. Any loan modifications made in response to the COVID-19 pandemic are not considered troubled debt restructurings as long as the criteria set forth in Section 4013 of the CARES Act are met.

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The Bank utilizes a risk grading matrix as a tool for managing credit risk in the loan portfolio and assigns an asset quality rating (risk grade) to all Commercial and Industrial, Commercial Real Estate, Residential Real Estate and Consumer borrowings. An asset quality rating is assigned using the guidance provided in the Corporation’s loan policy. Primary responsibility for assigning the asset quality rating rests with the credit department. The asset quality rating is validated periodically by both an internal and external loan review process.

The commercial loan grading system focuses on a borrower’s financial strength and performance, experience and depth of management, primary and secondary sources of repayment, the nature of the business and the outlook for the particular industry. Primary emphasis is placed on financial condition and trends. The grade also reflects current economic and industry conditions; as well as other variables such as liquidity, cash flow, revenue/earnings trends, management strengths or weaknesses, quality of financial information, and credit history.

The loan grading system for Residential Real Estate and Consumer loans focuses on the borrower’s credit score and credit history, debt-to-income ratio and income sources, collateral position and loan-to-value ratio.

Risk grade characteristics are as follows:

Risk Grade 1 – MINIMAL RISK through Risk Grade 6 – MANAGEMENT ATTENTION (Pass Grade Categories)

Risk is evaluated via examination of several attributes including but not limited to financial trends, strengths and weaknesses, likelihood of repayment when considering both cash flow and collateral, sources of repayment, leverage position, management expertise, and repayment history.

At the low-risk end of the rating scale, a risk grade of 1 – Minimal Risk is the grade reserved for loans with exceptional credit fundamentals and virtually no risk of default or loss. Loan grades then progress through escalating ratings of 2 through 6 based upon risk. Risk Grade 2 – Modest Risk are loans with sufficient cash flows; Risk Grade 3 – Average Risk are loans with key balance sheet ratios slightly above the borrower’s peers; Risk Grade 4 – Acceptable Risk are loans with key balance sheet ratios usually near the borrower’s peers, but one or more ratios may be higher; and Risk Grade 5 – Marginally Acceptable are loans with strained cash flow, increasing leverage and/or weakening markets. Risk Grade 6 – Management Attention are loans with weaknesses resulting from declining performance trends and the borrower’s cash flows may be temporarily strained. Loans in this category are performing according to terms, but present some type of potential concern.

Risk Grade 7 − SPECIAL MENTION (Non-Pass Category)

Generally, these loans are currently protected, but are “potentially weak.” They constitute an undue and unwarranted credit risk but not to the point of justifying a classification of substandard.

Assets in this category are protected but have potential weakness which may, if not checked or corrected, weaken the asset or inadequately protect the Corporation’s credit position at some future date. No loss of principal or interest is envisioned; however, they constitute an undue credit risk that may be minor but is unwarranted in light of the circumstances surrounding a specific asset. Risk is increasing beyond that at which the loan originally would have been granted. Historically, cash flows are inconsistent; financial trends show some deterioration. Liquidity and leverage are above industry averages. Financial information could be incomplete or inadequate. A Special Mention asset has potential weaknesses that deserve management’s close attention.

Risk Grade 8 − SUBSTANDARD (Non-Pass Category)

Generally, these assets are inadequately protected by the current sound worth and paying capacity of the obligor or of the collateral pledged, if any. Assets so classified must have “well-defined” weaknesses that jeopardize the full liquidation of the debt.

These loans are characterized by the distinct possibility that the Corporation will sustain some loss if the aggregate amount of substandard assets is not fully covered by the liquidation of the collateral used as security. Substandard loans have a high probability of payment default and require more intensive supervision by Corporation management.

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Risk Grade 9 − DOUBTFUL (Non-Pass Category)

Generally, loans graded doubtful have all the weaknesses inherent in a substandard loan with the added factor that the weaknesses are pronounced to a point whereby the basis of current information, conditions, and values, collection or liquidation in full is deemed to be highly improbable. The possibility of loss is extremely high, but because of certain important and reasonably specific pending factors that may work to strengthen the asset, its classification is deferred until, for example, a proposed merger, acquisition, liquidation procedure, capital injection, perfection of liens on additional collateral and/or refinancing plan is completed. Loans are graded doubtful if they contain weaknesses so serious that collection or liquidation in full is questionable.

The following table presents the classes of the loan portfolio summarized by risk rating as of March 31, 2020 and December 31, 2019:

	Commercial and
(Dollars in thousands)	Industrial				Commercial Real Estate
	March 31,		December 31,		March 31,		December 31,
	2020		2019		2020		2019
Grade:
1-6    Pass	$	85,418	$	84,999	$	399,740	$	382,510
7       Special Mention		—		2		—		944
8       Substandard		963		1,068		12,229		11,590
9       Doubtful		—		—		—		―
Add (deduct): Unearned discount and		—		—		—		―
Net deferred loan fees and costs		642		643		827		757
Total loans	$	87,023	$	86,712	$	412,796	$	395,801

	Residential Real Estate
	Including Home Equity						Consumer
	March 31,			December 31,			March 31,		December 31,
	2020			2019			2020		2019
Grade:
1-6   Pass	$	155,124		$	158,301		$	5,570	$	5,662
7      Special Mention		—			117			31		83
8      Substandard		1,089			1,048			8		35
9      Doubtful		—			—			—		―
Add (deduct): Unearned discount and		—			—			—		—
Net deferred loan fees and costs		(108	)		(116	)		83		89
Total loans	$	156,105		$	159,350		$	5,692	$	5,869

	Total Loans
	March 31,		December 31,
	2020		2019
Grade:
1-6   Pass	$	645,852	$	631,472
7      Special Mention		31		1,146
8      Substandard		14,289		13,741
9      Doubtful		—		—
Add (deduct): Unearned discount and		—		—
Net deferred loan fees and costs		1,444		1,373
Total loans	$	661,616	$	647,732

Commercial and Industrial and Commercial Real Estate include loans categorized as tax-free in the amounts of $17,117,000 and $1,966,000 at March 31, 2020 and $17,848,000 and $2,007,000 at December 31, 2019. Commercial and Industrial loans also included $6,059,000 and $6,150,000 of Government Guaranteed Loans as of March 31, 2020 and December 31, 2019, respectively. Loans held for sale amounted to $2,342,000 at March 31, 2020 and $2,292,000 at December 31, 2019.

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The activity in the allowance for loan losses, by loan class, is summarized below for the periods indicated.

(Dollars in thousands)	Commercial			Commercial		Residential
	and Industrial			Real Estate		Real Estate			Consumer			Unallocated			Total
As of and for the three month period ended March 31, 2020:
Allowance for Loan Losses:
Beginning balance	$	634		$	4,116	$	1,665		$	114		$	476		$	7,005
Charge-offs		(4	)		—		—			(16	)		—			(20	)
Recoveries		—			—		—			—			—			—
Provision		33			212		(22	)		15			(44	)		194
Ending Balance	$	663		$	4,328	$	1,643		$	113		$	432		$	7,179
Ending balance: individually evaluated for impairment	$	―		$	1	$	—		$	―		$	―		$	1
Ending balance: collectively evaluated for impairment	$	663		$	4,327	$	1,643		$	113		$	432		$	7,178
Loans Receivable:
Ending Balance	$	87,023		$	412,796	$	156,105		$	5,692		$	―		$	661,616
Ending balance: individually evaluated for impairment	$	1,077		$	11,510	$	1,109		$	―		$	―		$	13,696
Ending balance: collectively evaluated for impairment	$	85,946		$	401,286	$	154,996		$	5,692		$	―		$	647,920

(Dollars in thousands)	Commercial		Commercial			Residential
	and Industrial		Real Estate			Real Estate			Consumer			Unallocated			Total
As of and for the three month period ended March 31, 2019:
Allowance for Loan Losses:
Beginning balance	$	724	$	3,700		$	1,650		$	117		$	554		$	6,745
Charge-offs		—		(64	)		—			(15	)		—			(79	)
Recoveries		1		—			2			1			—			4
Provision		7		229			(11	)		7			(140	)		92
Ending Balance	$	732	$	3,865		$	1,641		$	110		$	414		$	6,762
Ending balance: individually evaluated for impairment	$	―	$	4		$	—		$	―		$	―		$	4
Ending balance: collectively evaluated for impairment	$	732	$	3,861		$	1,641		$	110		$	414		$	6,758
Loans Receivable:
Ending Balance	$	93,575	$	359,073		$	159,624		$	5,711		$	―		$	617,983
Ending balance: individually evaluated for impairment	$	1,116	$	15,557		$	491		$	―		$	―		$	17,164
Ending balance: collectively evaluated for impairment	$	92,459	$	343,516		$	159,133		$	5,711		$	―		$	600,819

19

(Dollars in thousands)	Commercial			Commercial			Residential
	and Industrial			Real Estate			Real Estate			Consumer			Unallocated			Total
As of and for the year ended
December 31, 2019
Allowance for Loan Losses:
Beginning balance	$	724		$	3,700		$	1,650		$	117		$	554		$	6,745
Charge-offs		―			(64	)		(69	)		(71	)		—			(204	)
Recoveries		6			―			2			6			—			14
Provision		(96	)		480			82			62			(78	)		450
Ending Balance	$	634		$	4,116		$	1,665		$	114		$	476		$	7,005
Ending balance: individually
evaluated for impairment	$	—		$	1		$	—		$	—		$	—		$	1
Ending balance: collectively
evaluated for impairment	$	634		$	4,115		$	1,665		$	114		$	476		$	7,004
Loans Receivable:
Ending Balance	$	86,712		$	395,801		$	159,350		$	5,869		$	—		$	647,732
Ending balance: individually
evaluated for impairment	$	1,084		$	11,158		$	712		$	—		$	—		$	12,954
Ending balance: collectively
evaluated for impairment	$	85,628		$	384,643		$	158,638		$	5,869		$	—		$	634,778

Of the $169,000 in foreclosed assets held for resale at March 31, 2020, $38,000 was represented by land, $50,000 was represented by residential real estate, and $81,000 was represented by commercial real estate. Of the $119,000 in foreclosed assets held for resale at December 31, 2019, $38,000 was represented by land and $81,000 was represented by commercial real estate. At March 31, 2020 and December 31, 2019, all foreclosed assets were held as the result of obtaining physical possession. Consumer mortgage loans secured by residential real estate for which the Bank has entered into formal foreclosure proceedings but for which physical possession of the property has yet to be obtained amounted to $996,000 at March 31, 2020 and $617,000 at December 31, 2019. These balances were not included in foreclosed assets held for resale at March 31, 2020 or December 31, 2019.

The outstanding recorded investment of TDRs as of March 31, 2020 and December 31, 2019 was $8,470,000 and $8,678,000, respectively. The decrease in TDRs at March 31, 2020 as compared to December 31, 2019 is mainly attributable to payments and payoffs on existing troubled debt restructurings that were completed during the first quarter of 2020. There were no unfunded commitments on TDRs at March 31, 2020 and December 31, 2019.

The following table presents the outstanding recorded investment of TDRs at the dates indicated:

(Dollars in thousands)	March 31,		December 31,
	2020		2019
Non-accrual TDRs	$	1,725	$	112
Accruing TDRs		6,745		8,566
Total	$	8,470	$	8,678

At March 31, 2020, nine Commercial Real Estate loans classified as TDRs with a combined recorded investment of $1,377,000 were not in compliance with the terms of their restructure, compared to March 31, 2019 when six Commercial Real Estate loans classified as TDRs with a combined recorded investment of $597,000 and one Commercial and Industrial loan classified as a TDR with a recorded investment of $5,000 were not in compliance with the terms of their restructure.

20

No loans were modified as TDRs within the twelve months preceding March 31, 2020. Of the loans that were modified as TDRs during the twelve months preceding March 31, 2019, two Commercial Real Estate Loans with a combined recorded investment of $113,000 experienced payment defaults during the three months ended Mach 31, 2019.

No loans were modified as TDRs during the three months ended March 31, 2020 and 2019.

On March 27, 2020, in response to the COVID-19 pandemic, the CARES Act was signed into law. Section 4013 of the CARES Act provides financial institutions the option to suspend requirements to categorize certain loan modifications as TDRs as long as specific criteria are met. To qualify, the loan modifications must be short-term (granted for temporary relief, ex. six months), made on a good-faith basis in response to the COVID-19 pandemic, and the contractual payments of the loan must have been paid current (less than 30 days past due prior to any relief) at the time a modification was implemented. While requests for modifications had been made, no modifications had been completed as part of this program as of March 31, 2020.

The recorded investment, unpaid principal balance, and the related allowance of the Corporation’s impaired loans are summarized below at March 31, 2020 and December 31, 2019.

(Dollars in thousands)	March 31, 2020						December 31, 2019
			Unpaid						Unpaid
	Recorded		Principal		Related		Recorded		Principal		Related
	Investment		Balance		Allowance		Investment		Balance		Allowance
With no related allowance recorded:
Commercial and Industrial	$	1,077	$	1,077	$	—	$	1,084	$	1,084	$	—
Commercial Real Estate		11,396		14,289		—		11,130		14,147		—
Residential Real Estate		1,089		1,174		—		712		822		—
With an allowance recorded:
Commercial and Industrial		—		—		—		—		—		—
Commercial Real Estate		114		114		1		28		28		1
Residential Real Estate		20		20		—		—		—		—
Total	$	13,696	$	16,674	$	1	$	12,954	$	16,081	$	1
Total consists of:
Commercial and Industrial	$	1,077	$	1,077	$	—	$	1,084	$	1,084	$	—
Commercial Real Estate	$	11,510	$	14,403	$	1	$	11,158	$	14,175	$	1
Residential Real Estate	$	1,109	$	1,194	$	—	$	712	$	822	$	—

______________________

At March 31, 2020 and December 31, 2019, $8,470,000 and $8,678,000 of loans classified as TDRs were included in impaired loans both with a total allocated allowance of $1,000, respectively. The recorded investment represents the loan balance reflected on the consolidated balance sheets net of any charge-offs. The unpaid balance is equal to the gross amount due on the loan.

21

The average recorded investment and interest income recognized for the Corporation’s impaired loans are summarized below for the three months ended March 31, 2020 and 2019.

(Dollars in thousands)	For the Three Months Ended				For the Three Months Ended
	March 31, 2020				March 31, 2019
	Average		Interest		Average		Interest
	Recorded		Income		Recorded		Income
	Investment		Recognized		Investment		Recognized
With no related allowance recorded:
Commercial and Industrial	$	1,079	$	6	$	1,122	$	14
Commercial Real Estate		11,131		76		15,574		150
Residential Real Estate		925		—		440		1
With an allowance recorded:
Commercial and Industrial		—		—		—		—
Commercial Real Estate		118		1		94		1
Residential Real Estate		21		1		—		―
Total	$	13,274	$	84	$	17,230	$	166
Total consists of:
Commercial and Industrial	$	1,079	$	6	$	1,122	$	14
Commercial Real Estate	$	11,249	$	77	$	15,668	$	151
Residential Real Estate	$	946	$	1	$	440	$	1

_____________________

Of the $84,000 and $166,000 in interest income recognized on impaired loans for the three months ended March 31, 2020 and 2019, respectively, $5,000 and $0 in interest income was recognized with respect to non-accrual loans.

Total non-performing assets (which includes loans receivable on non-accrual status, foreclosed assets held for resale and loans past-due 90 days or more and still accruing interest) as of March 31, 2020 and December 31, 2019 were as follows:

(Dollars in thousands)
	March 31,		December 31,
	2020		2019
Commercial and Industrial	$	768	$	—
Commercial Real Estate		5,094		3,697
Residential Real Estate		1,089		691
Total non-accrual loans		6,951		4,388
Foreclosed assets held for resale		169		119
Loans past-due 90 days or more and still accruing interest		579		100
Total non-performing assets	$	7,699	$	4,607

The following tables present the classes of the loan portfolio summarized by past-due status at March 31, 2020 and December 31, 2019:

(Dollars in thousands)													90 Days
													Or Greater
													Past Due
					90 Days				Current–				and Still
	30-59 Days		60-89 Days		or Greater		Total		29 Days		Total		Accruing
	Past Due		Past Due		Past Due		Past Due		Past Due		Loans		Interest
March 31, 2020:
Commercial and Industrial	$	698	$	380	$	91	$	1,169	$	85,854	$	87,023	$	92
Commercial Real Estate		2,942		301		4,935		8,178		404,618		412,796		487
Residential Real Estate		1,303		177		913		2,393		153,712		156,105		—
Consumer		20		5		—		25		5,667		5,692		—
Total	$	4,963	$	863	$	5,939	$	11,765	$	649,851	$	661,616	$	579

22

(Dollars in thousands)													90 Days
													Or Greater
													Past Due
					90 Days				Current–				and Still
	30-59 Days		60-89 Days		or Greater		Total		29 Days		Total		Accruing
	Past Due		Past Due		Past Due		Past Due		Past Due		Loans		Interest
December 31, 2019:
Commercial and Industrial	$	—	$	26	$	—	$	26	$	86,686	$	86,712	$	—
Commercial Real Estate		880		957		3,502		5,339		390,462		395,801		—
Residential Real Estate		1,118		506		613		2,237		157,113		159,350		100
Consumer		24		5		—		29		5,840		5,869		—
Total	$	2,022	$	1,494	$	4,115	$	7,631	$	640,101	$	647,732	$	100

At March 31, 2020 and December 31, 2019, commitments to lend additional funds with respect to impaired loans consisted of one irrevocable letter of credit totaling $1,249,000 that was associated with a loan to a developer of a residential sub-division.

NOTE 5 — DEPOSITS

Major classifications of deposits at March 31, 2020 and December 31, 2019 consisted of:

(Dollars in thousands)
	March 31,		December 31,
	2020		2019
Non-interest bearing demand	$	153,029	$	134,648
Interest bearing demand		211,598		218,847
Savings		173,769		173,069
Time certificates of deposits less than $250,000		176,383		210,916
Time certificates of deposits $250,000 or greater		18,639		23,006
Other time deposits		1,379		1,142
Total deposits	$	734,797	$	761,628

Total Deposits decreased $26,831,000 to $734,797,000 as of March 31, 2020 due to decreases in interest bearing, savings, and time deposits. The decrease in deposits was mainly due to the Corporation calling $40,000,000 worth of brokered CDs during the quarter ended March 31, 2020 due to the changing rate environment.

NOTE 6 — BORROWINGS

Short-Term Borrowings

Short-term borrowings include federal funds purchased, securities sold under agreements to repurchase, the Federal Discount Window, and Federal Home Loan Bank (“FHLB”) advances, which generally represent overnight or less than 30-day borrowings. Short-term borrowings and weighted–average interest rates at March 31, 2020 and December 31, 2019 are as follows:

(Dollars in thousands)	March 31, 2020					December 31, 2019
			Average					Average
	Amount		Rate			Amount		Rate
Federal funds purchased	$	—		—		$	—		2.01	%
Securities sold under agreements to repurchase		12,551		1.05	%		14,042		1.03	%
Federal Discount Window		—		—			—		2.92	%
Federal Home Loan Bank		93,828		1.64	%		40,621		2.59	%
Total	$	106,379		1.50	%	$	54,663		2.37	%

The increase in short-term borrowings is due to advances taken from the Federal Home Loan Bank, including a 21-day $50,000,000 term note, to fund decreased deposit balances resulting from the call of brokered CDs.

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Securities Sold Under Agreements to Repurchase (“Repurchase Agreements”)

The Corporation enters into agreements under which it sells securities subject to an obligation to repurchase the same or similar securities. Under these arrangements, the Corporation may transfer legal control over the assets but still retain effective control through an agreement that both entitles and obligates the Corporation to repurchase the assets.

As a result, these repurchase agreements are accounted for as collateralized financing agreements (i.e., secured borrowings) and not as a sale and subsequent repurchase of securities. The obligation to repurchase the securities is reflected as a liability on the Corporation’s consolidated balance sheets, while the securities underlying the repurchase agreements remain in the respective investment securities asset accounts. In other words, there is not offsetting or netting of the investment securities assets with the repurchase agreement liabilities. In addition, as the Corporation does not enter into reverse repurchase agreements, there is no such offsetting to be done with the repurchase agreements.

The right of setoff for a repurchase agreement resembles a secured borrowing, whereby the collateral would be used to settle the fair value of the repurchase agreement should the Corporation be in default (e.g., fails to make an interest payment to the counterparty). The collateral is held by a correspondent bank in the counterparty’s custodial account. The counterparty has the right to sell or repledge the investment securities.

The following table presents the short-term borrowings subject to an enforceable master netting arrangement or repurchase agreements as of March 31, 2020 and December 31, 2019.

(Dollars in thousands)

Gross

Net Amounts

Amounts

of Liabilities

Offset

Presented

Gross

in the

in the

Amounts of

Consolidated

Consolidated

Cash

Recognized

Balance

Balance

Financial

Collateral

Net

Liabilities

Sheet

Sheet

Instruments

Pledge

Amount

March 31, 2020

Repurchase agreements (a)

$

12,551

$

―

$

12,551

$

(12,551

)

$

―

$

―

December 31, 2019

Repurchase agreements (a)

$

14,042

$

―

$

14,042

$

(14,042

)

$

―

$

―

______________________

(a) As of March 31, 2020 and December 31, 2019, the fair value of securities pledged in connection with repurchase agreements was $21,779,000 and $22,413,000, respectively.

The following table presents the remaining contractual maturity of the master netting arrangement or repurchase agreements as of March 31, 2020:

(Dollars in thousands)	Remaining Contractual Maturity of the Agreements
	Overnight				Greater
	and		Up to		30 -90		than
March 31, 2020:	Continuous		30 days		Days		90 Days		Total
Repurchase agreements and repurchase-to-maturity transactions:
U.S. Treasury and/or agency securities	$	12,551	$	―	$	―	$	―	$	12,551
Total	$	12,551	$	―	$	―	$	―	$	12,551

Long-Term Borrowings

Long-term borrowings are comprised of advances from the FHLB. Under terms of a blanket agreement, collateral for the FHLB loans is certain qualifying assets of the Corporation’s banking subsidiary. The principal assets are certain real estate mortgages and investment securities.

24

NOTE 7 — COMMITMENTS AND CONTINGENCIES

In the normal course of business, there are various pending legal actions and proceedings that are not reflected in the consolidated financial statements. Management does not believe the outcome of these actions and proceedings will have a material effect on the consolidated financial position or results of operations of the Corporation.

The Bank currently leases three branch banking facilities and one parcel of land under operating leases. At March 31, 2020, right-of-use assets and lease liabilities were recorded related to these operating leases totaling $1,312,000 and $1,577,000, respectively. At December 31, 2019, right-of-use assets and lease liabilities stood at $1,470,000 and $1,663,000, respectively. Further options to extend or terminate the lease are not applicable for any of the four leases. No significant assumptions or judgements were made in determining whether a contract contained a lease or in the consideration of lease versus non-lease components. None of the leases contained an implicit rate; therefore, our incremental borrowing rate was used for each of the leases.

The Bank recognized total operating lease costs for the three months ended March 31, 2020 and March 31, 2019 of $111,000 and $48,000, respectively. Cash payments totaled $38,000 for the three months ended March 31, 2020 and 2019.

The following table displays the weighted-average term and discount rates for operating leases outstanding as of March 31, 2020 and December 31, 2019.

	March 31,			December 31,
	2020			2019
	Operating			Operating
Weighted-average term (years)		25.56			25.63
Weighted-average discount rate		3.86	%		3.85	%

A maturity analysis of operating lease liabilities and reconciliation of the undiscounted cash flows to the total operating lease liability is as follows:

(Dollars in thousands)	March 31,
	2020
Minimum lease payments due:
Within one year	$	139
After one but within two years		106
After two but within three years		75
After three but within four years		68
After four but within five years		68
After five years		2,309
Total undiscounted cash flows		2,765
Discount on cash flows		(1,188	)
Total lease liability	$	1,577

NOTE 8 — FINANCIAL INSTRUMENTS WITH OFF-BALANCE SHEET RISK AND CONCENTRATIONS OF CREDIT RISK

Financial Instruments with Off-Balance Sheet Risk

The Corporation is a party to financial instruments with off-balance sheet risk in the normal course of business to meet the financing needs of its customers. These financial instruments include commitments to extend credit and standby letters of credit. Those instruments involve, to varying degrees, elements of credit and interest rate risk in excess of the amount recognized in the consolidated balance sheets. The contract or notional amounts of those instruments reflect the extent of involvement the Corporation has in particular classes of financial instruments. The Corporation does not engage in trading activities with respect to any of its financial instruments with off-balance sheet risk.

The Corporation’s exposure to credit loss in the event of non-performance by the other party to the financial instrument for commitments to extend credit and standby letters of credit is represented by the contractual notional amount of those instruments.

25

The Corporation uses the same credit policies in making commitments and conditional obligations as it does for on-balance sheet instruments.

The Corporation may require collateral or other security to support financial instruments with off-balance sheet credit risk.

The contract or notional amounts at March 31, 2020 and December 31, 2019 were as follows:

(Dollars in thousands)

	March 31, 2020		December 31, 2019
Financial instruments whose contract amounts represent credit risk:
Commitments to extend credit	$	140,367	$	122,082
Financial standby letters of credit	$	335	$	335
Performance standby letters of credit	$	3,230	$	3,230

Commitments to extend credit are agreements to lend to a customer as long as there is no violation of any condition established in the contract. Commitments generally have fixed expiration dates or other termination clauses that may require payment of a fee. Since some of the commitments may expire without being drawn upon, the total commitment amounts do not necessarily represent future cash requirements. The Corporation evaluates each customer’s creditworthiness on a case-by-case basis. The amount of collateral obtained, if deemed necessary by the Corporation upon extension of credit, is based on management’s credit evaluation of the borrower. Collateral held varies but may include accounts receivable, inventory, property, plant and equipment, owner-occupied income-producing commercial properties, and residential real estate.

Standby letters of credit are conditional commitments issued by the Corporation to guarantee payment to a third party when a customer either fails to repay an obligation or fails to perform some non-financial obligation. The credit risk involved in issuing letters of credit is essentially the same as that involved in extending loan facilities to customers. The Corporation may hold collateral (similar to the items held as collateral for commitments to extend credit) to support standby letters of credit for which collateral is deemed necessary.

Financial Instruments with Concentrations of Credit Risk

The Corporation originates primarily commercial and residential real estate loans to customers in northeastern Pennsylvania. The ability of the majority of the Corporation’s customers to honor their contractual loan obligations is dependent on the economy and real estate market in this area. At March 31, 2020, the Corporation had $568,901,000 in loans secured by real estate, which represented 86.0% of total loans. The real estate loan portfolio is largely secured by lessors of residential buildings and dwellings, lessors of non-residential buildings, and lessors of hotels/motels. As of March 31, 2020 and December 31, 2019, management is of the opinion that there were no concentrations exceeding 10% of total loans with regard to loans to borrowers who were engaged in similar activities that were similarly impacted by economic or other conditions.

As all financial instruments are subject to some level of credit risk, the Corporation requires collateral and/or guarantees for all loans. Collateral may include, but is not limited to property, plant, and equipment, commercial and/or residential real estate property, land, and pledge of securities. In the event of a borrower’s default, the collateral supporting the loan may be seized in order to recoup losses associated with the loan. The Corporation also establishes an allowance for loan losses that constitutes the amount available to absorb losses within the loan portfolio that may exist due to deficiencies in collateral values.

NOTE 9 — FAIR VALUE MEASUREMENTS

Fair value measurement and disclosure guidance defines fair value as the price that would be received to sell the asset or transfer the liability in an orderly transaction (that is, not a forced liquidation or distressed sale) between market participants at the measurement date under current market conditions. This guidance provides additional information on determining when the volume and level of activity for the asset or liability has significantly decreased. The guidance also includes information on identifying circumstances when a transaction may not be considered orderly.

26

Fair value measurement and disclosure guidance provides a list of factors that a reporting entity should evaluate to determine whether there has been a significant decrease in the volume and level of activity for the asset or liability in relation to normal market activity for the asset or liability. When the reporting entity concludes there has been a significant decrease in the volume and level of activity for the asset or liability, further analysis of the information from that market is needed and significant adjustments to the related prices may be necessary to estimate fair value in accordance with the fair value measurement and disclosure guidance.

This guidance clarifies that when there has been a significant decrease in the volume and level of activity for the asset or liability, some transactions may not be orderly. In those situations, the entity must evaluate the weight of the evidence to determine whether the transaction is orderly. The guidance provides a list of circumstances that may indicate that a transaction is not orderly. A transaction price that is not associated with an orderly transaction is given little, if any, weight when estimating fair value.

Fair value is 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. Inputs to valuation techniques refer to the assumptions that market participants would use in pricing the asset or liability. Inputs may be observable, meaning those that reflect the assumptions market participants would use in pricing the asset or liability developed based on market data obtained from independent sources, or unobservable, meaning those that reflect the reporting entity’s own belief about the assumptions market participants would use in pricing the asset or liability based upon the best information available in the circumstances. Fair value measurement and disclosure guidance establishes a fair value hierarchy for valuation inputs that gives the highest priority to quoted prices in active markets for identical assets or liabilities and the lowest priority to unobservable inputs. The fair value hierarchy is as follows:

Level 1 Inputs: Unadjusted quoted prices in active markets that are accessible at the measurement date for identical, unrestricted assets or liabilities;

Level 2 Inputs: Quoted prices in markets that are not active, or inputs that are observable either directly or indirectly, for substantially the full term of the asset or liability;

Level 3 Inputs: Prices or valuation techniques that require inputs that are both significant to the fair value measurement and unobservable (i.e., supported by little or no market activity).

A description of the valuation methodologies used for instruments measured at fair value, as well as the general classification of such instruments pursuant to the valuation hierarchy, is set forth as follows.

Financial Assets Measured at Fair Value on a Recurring Basis

At March 31, 2020 and December 31, 2019, securities measured at fair value on a recurring basis and the valuation methods used are as follows:

(Dollars in thousands)

March 31, 2020	Level 1		Level 2		Level 3		Total
Debt Securities Available-for-Sale:
U.S. Treasury securities	$	—	$	—	$	—	$	—
Obligations of U.S. Government Corporations and Agencies:
Mortgage-backed		—		62,505		—		62,505
Other		—		12,229		—		12,229
Other mortgage backed debt securities		—		9,363		—		9,363
Obligations of state and political subdivisions		—		140,467		—		140,467
Asset backed securities		—		40,766		—		40,766
Corporate debt securities		—		18,333		—		18,333
Total debt securities available-for-sale		—		283,663		—		283,663
Marketable equity securities		1,394		—		—		1,394
Total recurring fair value measurements	$	1,394	$	283,663	$	—	$	285,057

27

(Dollars in thousands)

December 31, 2019	Level 1		Level 2		Level 3		Total
Debt Securities Available-for-Sale:
U.S. Treasury securities	$	—	$	2,855	$	—	$	2,855
Obligations of U.S. Government Corporations and Agencies:
Mortgaged-backed		—		77,283		—		77,283
Other		—		10,297		—		10,297
Other mortgage backed debt securities		—		11,138		—		11,138
Obligations of state and political subdivisions		—		120,376		—		120,376
Asset backed securities		—		37,536		—		37,536
Corporate debt securities		—		18,443		—		18,443
Total debt securities available-for-sale		—		277,928		—		277,928
Marketable equity securities		1,933		—		—		1,933
Total recurring fair value measurements	$	1,933	$	277,928	$	—	$	279,861

The estimated fair values of equity securities classified as Level 1 are derived from quoted market prices in active markets; these assets consist mainly of stocks held in other banks. The estimated fair values of all debt securities classified as Level 2 are obtained from nationally-recognized third-party pricing agencies. The estimated fair values are derived primarily from cash flow models, which include assumptions for interest rates, credit losses, and prepayment speeds. The significant inputs utilized in the cash flow models are based on market data obtained from sources independent of the Corporation (observable inputs), and are therefore classified as Level 2 within the fair value hierarchy. The Corporation does not have any Level 3 inputs for securities. There were no transfers between Level 1 and Level 2 during 2020 or 2019.

Financial Assets Measured at Fair Value on a Nonrecurring Basis

At March 31, 2020 and December 31, 2019, impaired loans measured at fair value on a nonrecurring basis are as follows:

(Dollars in thousands)

	Level 1		Level 2		Level 3		Total
Assets at March 31, 2020
Impaired loans:
Commercial Real Estate	$	―	$	―	$	6,287	$	6,287
Residential Real Estate		―		―		189		189
Total impaired loans	$	―	$	―	$	6,476	$	6,476

(Dollars in thousands)
	Level 1		Level 2		Level 3		Total
Assets at December 31, 2019
Impaired loans:
Commercial Real Estate	$	—	$	—	$	6,218	$	6,218
Residential Real Estate		—		—		221		221
Total impaired loans	$	—	$	—	$	6,439	$	6,439

These assets are included as Level 3 fair values, based upon the lowest level that is significant to the fair value measurements. The fair value consists of the impaired loan balances less the valuation allowance and/or charge-offs. There were no transfers between valuation levels in 2020 and 2019.

28

Nonfinancial Assets Measured at Fair Value on a Nonrecurring Basis

At March 31, 2020 and December 31, 2019, foreclosed assets held for resale measured at fair value on a nonrecurring basis are as follows:

(Dollars in thousands)
	Level 1		Level 2		Level 3		Total
Assets at March 31, 2020
Foreclosed assets held for resale:
Commercial Real Estate	$	―	$	―	$	81	$	81
Total foreclosed assets held for resale	$	―	$	―	$	81	$	81

(Dollars in thousands)
	Level 1		Level 2		Level 3		Total
Assets at December 31, 2019
Foreclosed assets held for resale:
Commercial Real Estate	$	—	$	—	$	81	$	81
Total foreclosed assets held for resale	$	—	$	—	$	81	$	81

These assets are included as Level 3 fair values, based upon the lowest level that is significant to the fair value measurements. There were no transfers between valuation levels in 2020 and 2019.

The following table presents additional quantitative information about assets measured at fair value on a nonrecurring basis and for which the Corporation has utilized Level 3 inputs to determine the fair value:

(Dollars in thousands)
	Quantitative Information about Level 3 Fair Value Measurements
	Fair Value					Weighted
March 31, 2020	Estimate		Valuation Technique	Unobservable Input	Range	Average
Impaired loans	$	3,366	Appraisal of collateral1,3	Appraisal adjustments2	(13%) – (77%)	(17%)
Impaired loans	$	3,110	Discounted cash flow	Discount rate	(5%) – (9%)	(7%)
Foreclosed assets held for resale	$	81	Appraisal of collateral1,3	Appraisal adjustments2	(35%) – (35%)	(35%)
December 31, 2019
Impaired loans	$	3,419	Appraisal of collateral1,3	Appraisal adjustments2	(10%) – (77%)	(17%)
Impaired loans	$	3,020	Discounted cash flow	Discount rate	(7%) – (8%)	(7%)
Foreclosed assets held for resale	$	81	Appraisal of collateral1,3	Appraisal adjustments2	(35%) – (35%)	(35%)

____________________

¹Fair value is generally determined through independent appraisals of the underlying collateral, as defined by Bank regulators.

²Appraisals may be adjusted downward by management for qualitative factors such as economic conditions and estimated liquidation expenses. The typical range of appraisal adjustments are presented as a percent of the appraisal value.

³Includes qualitative adjustments by management and estimated liquidation expenses.

29

Fair Value of Financial Instruments

(Dollars in thousands)
	Carrying		Fair Value Measurements at March 31, 2020
	Amount		Level 1		Level 2		Level 3		Total
FINANCIAL ASSETS:
Cash and due from banks	$	7,785	$	7,785	$	―	$	―	$	7,785
Interest-bearing deposits in other banks		1,013		—		1,013		—		1,013
Time deposits with other banks		247		—		251		—		251
Restricted investment in bank stocks		6,740		—		6,740		—		6,740
Net loans		654,437		—		—		681,960		681,960
Mortgage servicing rights		278		—		—		278		278
Accrued interest receivable		3,622		—		3,622		—		3,622
FINANCIAL LIABILITIES:
Demand, savings and other deposits		538,396		—		538,396		—		538,396
Time deposits		196,401		—		199,153		—		199,153
Short-term borrowings		106,379		—		106,310		—		106,310
Long-term borrowings		50,000		—		52,570		—		52,570
Accrued interest payable		550		—		550		—		550
OFF-BALANCE SHEET FINANCIAL
INSTRUMENTS		―		―		―		―		―

(Dollars in thousands)	Carrying		Fair Value Measurements at December 31, 2019
	Amount		Level 1		Level 2		Level 3		Total
FINANCIAL ASSETS:
Cash and due from banks	$	10,251	$	10,251	$	—	$	—	$	10,251
Interest-bearing deposits in other banks		473		—		473		—		473
Time deposits with other banks		247		—		250		—		250
Restricted investment in bank stocks		4,224		—		4,224		—		4,224
Net loans		640,727		—		—		655,301		655,301
Mortgage servicing rights		283		—		—		283		283
Accrued interest receivable		3,405		—		3,405		—		3,405
FINANCIAL LIABILITIES:
Demand, savings and other deposits		526,564		—		526,564		—		526,564
Time deposits		235,064		—		235,134		—		235,134
Short-term borrowings		54,663		—		54,655		—		54,655
Long-term borrowings		55,000		—		55,809		—		55,809
Accrued interest payable		606		—		606		—		606
OFF-BALANCE SHEET FINANCIAL
INSTRUMENTS		—		—		—		—		—

NOTE 10 — REVENUE RECOGNITION

In accordance with ASU 2014-09 Revenue from Contracts with Customers – Topic 606, and all subsequent ASUs that modified ASC 606, the main types of revenue contracts included in non-interest income within the consolidated statements of income are as follows:

30

Deposits related fees and service charges

Service charges and fees on deposits, which are included as liabilities in the consolidated balance sheets, consist of fees related to monthly fees for various retail and business checking accounts, automated teller machine (“ATM”) fees (charged for withdrawals by our deposit customers from other bank ATMs) and insufficient funds fees (“NSF”) (which are charged when customers overdraw their accounts beyond available funds). All deposit liabilities are considered to have one-day terms and therefore related fees are recognized in income at the time when the services are provided to the customers. The Corporation elected to adopt practical expedient related to incremental costs of obtaining deposit contracts. As such, any costs associated with acquiring the deposits, except for certificate of deposits (“CDs”) with maturities in excess of one year, are recognized as an expense within non-interest expense in the consolidated statements of income when incurred as the amortization period of the deposit liabilities that otherwise would have been recognized is one year or less.

Wealth/Asset/Trust Management Fees

Wealth management services are delivered to individuals, corporations and retirement funds located primarily within our geographic markets. The Trust Department of the Corporation conducts the wealth management operations, which provides a broad range of personal and corporate fiduciary services, including the administration of estates.

Assets held in a fiduciary capacity by the Trust Department are not assets of the Corporation and, therefore, are not included in our consolidated financial statements. Wealth management fees, which are contractually agreed with each customer, are earned each month and recognized on a cash basis based on average fair value of the trust assets under management. The services provided under such a contract are considered a single performance obligation under ASC 606 because they embody a series of distinct goods or services that are substantially the same and have the same pattern of transfer to the customer. Wealth management fees charged by the Trust Department follow a tiered structure based on the type and size of the assets under management. Wealth management fees are included within non-interest income in the consolidated statements of income. As of March 31, 2020 and December 31, 2019, the fair value of trust assets under management was $111,199,000 and $111,160,000, respectively. The costs of acquiring asset management customers are incremental and recognized within non-interest expense in the consolidated statements of income.

Interchange Fees and Surcharges

Interchange fees are related to the acceptance and settlement of debit card transactions, both point-of-sale and ATM, to cover operating costs and risks associated with the approval and settlement of the transactions. Interchange fees vary by type of transaction and each merchant sector. Net income recognized from interchange fees is included in non-interest income on the consolidated statements of income. A surcharge is assessed for use of the Corporation’s ATMs by non-customers. All interchange fees and surcharges are recognized as received on a daily basis for the prior business day’s transactions. All expenses related to the settlement of debit card transactions (both point-of-sale and ATM) are recognized on a monthly basis and included in non-interest expense on the consolidated statements of income.

NOTE 11 — EARNINGS PER SHARE

Basic earnings per share (“EPS”) is computed by dividing net income by the weighted average number of common shares outstanding for the period. Diluted EPS reflects the potential dilution that could occur if securities or other contracts to issue common stock were exercised or converted into common stock or resulted in the issuance of common stock that then shared in the earnings of the Corporation. At March 31, 2020 and 2019, there were no potential common shares outstanding. The following table sets forth the computation of basic and diluted earnings per share.

(In thousands, except earnings per share)	Three Months Ended
	March 31,
	2020		2019
Net income	$	2,053	$	2,243
Weighted-average common shares outstanding		5,817		5,765
Basic and diluted earnings per share	$	0.35	$	0.39

31

Item 2. First Keystone Corporation Management’s Discussion and Analysis of Financial Condition and Results of Operation

This quarterly report contains certain forward-looking statements, which are included pursuant to the “safeharbor” provisions of the Private Securities Litigation Reform Act of 1995, and reflect management’s beliefs and expectations based on information currently available. These forward-looking statements are inherently subject to significant risks and uncertainties, including changes in general economic and financial market conditions, the Corporation’s ability to effectively carry out its business plans and changes in regulatory or legislative requirements. Other factors that could cause or contribute to such differences are changes in competitive conditions, and pending or threatened litigation. Although management believes the expectations reflected in such forward-looking statements are reasonable, actual results may differ materially.

CRITICAL ACCOUNTING ESTIMATES

The Corporation has chosen accounting policies that it believes are appropriate to accurately and fairly report its operating results and financial position, and the Corporation applies those accounting policies in a consistent manner. The Significant Accounting Policies are summarized in Note 1 to the consolidated financial statements included in the 2019 Annual Report on Form 10-K. There have been no changes to the Critical Accounting Estimates since the Corporation filed its Annual Report on Form 10-K for the year ended December 31, 2019.

RESULTS OF OPERATIONS

Quarter ended March 31, 2020 compared to quarter ended March 31, 2019

First Keystone Corporation realized earnings for the first quarter of 2020 of $2,053,000, a decrease of $190,000, or 8.5% from the first quarter of 2019. The decrease in net income for the three months ended March 31, 2020 was primarily due to a decrease in net securities gains, offset by an increase in net interest income.

On a per share basis, for the three months ended March 31, 2020, net income was $0.35 versus $0.39 for the same three month period of 2019. Cash dividends amounted to $0.27 per share for the three months ended March 31, 2020 and 2019.

NET INTEREST INCOME

The major source of operating income for the Corporation is net interest income, defined as interest income less interest expense. In the three months ended March 31, 2020, interest income amounted to $9,768,000, an increase of $254,000 or 2.7% from the three months ended March 31, 2019, while interest expense amounted to $2,392,000 in the three months ended March 31, 2020, a decrease of $301,000 or 11.2% from the three months ended March 31, 2019. As a result, net interest income increased $555,000 or 8.1% to $7,376,000 from $6,821,000 for the same period in 2019.

The Corporation’s net interest margin for the three months ended March 31, 2020 was 3.28% compared to 3.15% for same period in 2019. The increase in net interest margin was primarily a result of an increase in yield on the loan portfolio.

PROVISION FOR LOAN LOSSES

The provision for loan losses for the three months ended March 31, 2020 and March 31, 2019 was $194,000 and $92,000, respectively. The increase in the provision for loan losses resulted from the Corporation’s analysis of the current loan portfolio, including historic losses, past-due trends, current economic conditions, loan portfolio growth, and other relevant factors. Charge-off and recovery activity in the allowance for loan losses resulted in net charge-offs of $20,000 and $75,000 for the three months ended March 31, 2020 and 2019, respectively. See Allowance for Loan Losses on page 36 for further discussion.

32

NON-INTEREST INCOME

Total non-interest income was $983,000 for the three months ended March 31, 2020, as compared to $1,507,000 for the same period in 2019, a decrease of $524,000, or 34.8%. The decrease was the result of a decrease in net securities (losses) gains due to the Corporation recording $538,000 in losses on held equity securities in the first quarter of 2020. Net securities gains decreased $570,000 to $(467,000) for the three months ended March 31, 2020 as compared to the three months ended March 31, 2019. Trust department income decreased $40,000 or 15.3% to $221,000 for the three months ended March 31, 2020 as compared to the same period in 2019. Service charges and fee income decreased $15,000 or 2.9%. ATM fees and debit card income increased $22,000 or 5.8% to $399,000 for the three months ended March 31, 2020. Gains on sales of mortgage loans increased $53,000 or 132.5% due to twice as many sold loans in the first quarter of 2020 as compared to 2019.

NON-INTEREST EXPENSE

Total non-interest expense was $5,915,000 for the three months ended March 31, 2020, as compared to $5,855,000 for the three months ended March 31, 2019. Non-interest expense increased $60,000 or 1.0%.

Expenses associated with employees (salaries and employee benefits) continue to be the largest category of non-interest expense. Salaries and benefits amounted to $3,219,000 or 54.4% of total non-interest expense for the three months ended March 31, 2020, as compared to $3,132,000 or 53.5% for the same three months of 2019. The increase was primarily due to performance salaries increases and an increase in commissions and referral fees associated with loan growth and retail non-deposit activity.

Net occupancy, furniture and equipment, and computer expense amounted to $912,000 for the three months ended March 31, 2020, an increase of $28,000 or 3.2%. Professional services decreased $28,000 or 10.4% to $242,000 as of March 31, 2020. The decrease was due to consent fees paid to the Corporation’s previous auditors for a review of the 2018 10K in the first quarter of 2019. Pennsylvania shares tax expense amounted to $224,000 for the three months ended March 31, 2020, an increase of $32,000 or 16.7% as compared to the same three months in 2019. The increase was the result of an increase in total equity.

FDIC insurance expense decreased $65,000 or 100.0% for the three months ended March 31, 2020. This decrease was due to small bank assessment credits received from the FDIC for the fourth quarter of 2019 effectively reducing the expense for the first quarter of 2020. FDIC insurance expense varies with changes in net asset size, risk ratings, and FDIC derived assessment rates. ATM and debit card fees expense amounted to $209,000 for the three months ended March 31, 2020, a decrease of $2,000 or 1.0% as compared to the same three months of 2019. Data processing expenses amounted to $294,000 for the three months ended March 31, 2020, an increase of $27,000 or 10.1% as compared to the first quarter of 2019. The increase was a result of annual contracted pricing increases from our main third-party data processor. Foreclosed assets held for resale expense decreased $29,000 in the first quarter of 2020. The decrease is the result of the Bank having fewer foreclosed properties in 2020. Advertising expense decreased $62,000 or 40.5% during the three months ended March 31, 2020. This decrease was due to a more aggressive advertising approach in early 2019, as the first quarter of 2020 saw less newspaper advertising, billboard advertising, digital and social media advertising and ad creation.

Other non-interest expense amounted to $715,000 for the three months ended March 31, 2020, an increase of $72,000 or 11.2% as compared to the three months ended March 31, 2019. The increase was due to an increase in the provision for unfunded commitments due to higher officer commitment balances requiring a reserve.

INCOME TAXES

Income tax expense amounted to $197,000 for the three months ended March 31, 2020, as compared to $138,000 for the three months ended March 31, 2019, an increase of $59,000. The effective total income tax rate was 8.8% for the first quarter of 2020 as compared to 5.8% for the first quarter of 2019. The increase in the effective tax rate was mainly due to a net decrease in tax-exempt income from investments in and loans to state and local units of government. The Corporation recognized $101,000 of tax credits from low-income housing partnerships in the first quarter of 2020.

33

FINANCIAL CONDITION

SUMMARY

Total assets increased to $1,027,207,000 as of March 31, 2020, an increase of $19,981,000 from year-end 2019. Total assets as of December 31, 2019 amounted to $1,007,226,000.

Total debt securities available-for-sale increased $5,735,000 or 2.1% to $283,663,000 as of March 31, 2020 from December 31, 2019.

Total loans increased $13,884,000 or 2.1% to $661,616,000 as of March 31, 2020 from December 31, 2019. Loan demand grew in the three months ended March 31, 2020 as the Bank has realized an increase in loan originations, primarily in the commercial real estate portfolio.

Total deposits decreased $26,831,000 or 3.5% to $734,797,000 as of March 31, 2020 from December 31, 2019. The decrease was mainly due to the call of $40,000,000 in brokered CDs.

The Corporation continues to maintain and manage its asset growth. The Corporation’s strong equity capital position provides an opportunity to further leverage its asset growth. Total borrowings increased in the first three months of 2020 by $46,716,000 to $156,379,000 from $109,663,000 as of December 31, 2019. Borrowings increased mainly due to decreased deposit balances and growth in the loan portfolio.

Total stockholders’ equity increased to $130,150,000 at March 31, 2020, an increase of $1,398,000 or 1.1% from December 31, 2019 due to an increase in accumulated other comprehensive income and retained earnings.

SEGMENT REPORTING

Currently, management measures the performance and allocates the resources of the Corporation as a single segment.

EARNING ASSETS

Earning assets are defined as those assets that produce interest income. By maintaining a healthy asset utilization rate, i.e., the volume of earning assets as a percentage of total assets, the Corporation maximizes income. The earning asset ratio (average interest earning assets divided by average total assets) equaled 92.8% at March 31, 2020 and 92.4% at March 31, 2019. This indicates that the management of earning assets is a priority and non-earning assets, primarily cash and due from banks, fixed assets and other assets, are maintained at minimal levels. The primary earning assets are loans and investment securities.

Our primary earning asset, total loans, increased to $661,616,000 as of March 31, 2020, up $13,884,000, or 2.1% since year-end 2019. The loan portfolio continues to be well diversified. Non-performing assets increased since year-end 2019, but overall asset quality has remained consistent. Total non-performing assets were $7,699,000 as of March 31, 2020, an increase of $3,092,000, or 67.1% from $4,607,000 reported in non-performing assets as of December 31, 2019. Total allowance for loan losses to total non-performing assets was 93.25% as of March 31, 2020 and 152.05% at December 31, 2019. The increase in non-performing assets during the first quarter of 2020 was mainly due to several loans that were moved to non-accrual status during the three months ended March 31, 2020. See the Non-Performing Assets section on Page 37 for more information.

In addition to loans, another primary earning asset is our overall investment portfolio, which increased in size from December 31, 2019 to March 31, 2020. Debt securities available-for-sale amounted to $283,663,000 as of March 31, 2020, an increase of $5,735,000 from year-end 2019.

Interest-bearing deposits in other banks increased as of March 31, 2020, to $1,013,000 from $473,000 at year-end 2019. Time deposits with other banks were $247,000 at March 31, 2020 and December 31, 2019.

34

LOANS

Total loans increased to $661,616,000 as of March 31, 2020 as compared to $647,732,000 as of December 31, 2019. The table on page 18 provides data relating to the composition of the Corporation’s loan portfolio on the dates indicated. Total loans increased by $13,884,000 or 2.1%.

Steady demand for borrowing by businesses accounted for the 2.1% increase in the loan portfolio from December 31, 2019 to March 31, 2020. The Commercial and Industrial portfolio increased $311,000 to $87,023,000 as of March 31, 2020, as compared to $86,712,000 at December 31, 2019. The increase in the Commercial and Industrial portfolio (which includes tax-free Commercial and Industrial loans) was attributed to new loan originations totaling $3,128,000 offset by a $687,000 decrease in utilization of existing Commercial and Industrial lines of credit and loan payoffs of $823,000, as well as regular principal payments and other typical fluctuations and activity in the Commercial and Industrial portfolio. The Commercial Real Estate portfolio (which includes tax-free Commercial Real Estate loans) increased $16,995,000 to $412,796,000 at March 31, 2020, as compared to $395,801,000 at December 31, 2019. The increase was mainly the result of $25,848,000 in new loan originations net against a $286,000 decrease in utilization of existing Commercial Real Estate lines of credit and $5,321,000 in loan payoffs, in addition to regular principal payments and other typical amortizations in the Commercial Real Estate portfolio. Residential Real Estate loans decreased $3,245,000 to $156,105,000 at March 31, 2020, as compared to $159,350,000 at December 31, 2019. The decrease was the result of $4,012,000 in new loan originations offset by a $150,000 decrease in utilization of existing Residential Real Estate (Home Equity) lines of credit, loan payoffs of $3,054,000, net loans sold of $1,338,000 and regular principal payments and other typical amortization in the Residential Real Estate portfolio. Net loans sold in the Residential Real Estate portfolio for the three months ended March 31, 2020 consisted of total loans sold during the three months ended March 31, 2020 of $3,044,000, offset with loans opened and sold in the same quarter during the first quarter of 2020 which amounted to $1,706,000. The Corporation continues to originate and sell certain long-term fixed rate residential mortgage loans which conform to secondary market requirements. The Corporation derives ongoing income from the servicing of mortgages sold in the secondary market. The Corporation continues its efforts to lend to creditworthy borrowers.

Management believes that the loan portfolio is well diversified. The total commercial portfolio was $499,819,000 at March 31, 2020. Of total loans, $412,796,000 or 62.4% were secured by commercial real estate, primarily lessors of residential buildings and dwellings and lessors of non-residential buildings. The Corporation continues to monitor these portfolios.

Overall, the portfolio risk profile as measured by loan grade is considered low risk, as $645,852,000 or 97.8% of gross loans are graded Pass; $31,000 or 0.1% are graded Special Mention; $14,289,000 or 2.1% are graded Substandard; and $0 are graded Doubtful. The rating is intended to represent the best assessment of risk available at a given point in time, based upon a review of the borrower’s financial statements, credit analysis, payment history with the Bank, credit history and lender knowledge of the borrower. See Note 4 — Loans and Allowance for Loan Losses for risk grading tables.

Overall, non-pass grades decreased to $14,320,000 at March 31, 2020, as compared to $14,887,000 at December 31, 2019. Commercial and Industrial non-pass grades decreased to $963,000 as of March 31, 2020 as compared to $1,070,000 as of December 31, 2019. Commercial Real Estate non-pass grades decreased to $12,229,000 as of March 31, 2020 as compared to $12,534,000 as of December 31, 2019. The Residential Real Estate and Consumer loan non-pass grades decreased to $1,128,000 as of March 31, 2020 as compared to $1,283,000 as of December 31, 2019.

The Corporation continues to internally underwrite each of its loans to comply with prescribed policies and approval levels established by its Board of Directors.

Total Loans

(Dollars in thousands)	March 31,		December 31,
	2020		2019
Commercial and Industrial	$	87,023	$	86,712
Commercial Real Estate		412,796		395,801
Residential Real Estate		156,105		159,350
Consumer		5,692		5,869
Total loans	$	661,616	$	647,732

35

ALLOWANCE FOR LOAN LOSSES

The allowance for loan losses constitutes the amount available to absorb losses within the loan portfolio. As of March 31, 2020, the allowance for loan losses was $7,179,000 as compared to $7,005,000 as of December 31, 2019. The allowance for loan losses is established through a provision for loan losses charged to expenses. Loans are charged against the allowance for possible loan losses when management believes that the collectability of the principal is unlikely. The risk characteristics of the loan portfolio are managed through various control processes, including credit evaluations of individual borrowers, periodic reviews, and diversification by industry. Risk is further mitigated through the application of lending procedures such as the holding of adequate collateral and the establishment of contractual guarantees.

Management performs a quarterly analysis to determine the adequacy of the allowance for loan losses. The methodology in determining adequacy incorporates specific and general allocations together with a risk/loss analysis on various segments of the portfolio according to an internal loan review process. This assessment results in an allocated allowance. Management maintains its loan review and loan classification standards consistent with those of its regulatory supervisory authority.

Management considers, based upon its methodology, that the allowance for loan losses is adequate to cover foreseeable future losses. However, there can be no assurance that the allowance for loan losses will be adequate to cover significant losses, if any, that might be incurred in the future. In response to the COVID-19 pandemic and its impact on the current economy, the qualitative factors across all loan segments were increased by two basis points for the first quarter of 2020.

The Analysis of Allowance for Loan Losses table contains an analysis of the allowance for loan losses indicating charge-offs and recoveries for the three months ended March 31, 2020 and 2019. For the three months ended March 31, 2020 and 2019, net charge-offs as a percentage of average loans was 0.003% and 0.012%, respectively. Net charge-offs amounted to $20,000 for the first three months of 2020 as compared to $75,000 for the first three months of 2019. The decrease in net charge-offs during the three months ended March 31, 2020 as compared to the three months ended March 31, 2019 is mainly due to one charge-off that was completed during the three months ended March 31, 2019 on a Commercial Real Estate loan to a landscaping company in the amount of $51,000.

For the first three months of 2020, the provision for loan losses was $194,000 as compared to $92,000 for the first three months of 2019. The provision, net of charge-offs and recoveries, resulted in the quarter end Allowance for Loan Losses of $7,179,000 of which 9.2% was attributed to the Commercial and Industrial component; 60.3% attributed to the Commercial Real Estate component; 22.9% attributed to the Residential Real Estate component; 1.6% attributed to the Consumer component; and 6.0% being the unallocated component (refer to the activity in Note 4 – Loans and Allowance for Loan Losses on page 13). The Corporation determined that the provision for loan losses made during the current quarter was sufficient to maintain the allowance for loan losses at a level necessary for the probable losses inherent in the loan portfolio as of March 31, 2020.

36

Analysis of Allowance for Loan Losses

(Dollars in thousands)	March 31,			March 31,
	2020			2019
Balance at beginning of the three month period	$	7,005		$	6,745
Charge-offs:
Commercial and Industrial		4			—
Commercial Real Estate		—			64
Residential Real Estate		—			—
Consumer		16			15
		20			79
Recoveries:
Commercial and Industrial		—			1
Commercial Real Estate		—			—
Residential Real Estate		—			2
Consumer		—			1
		—			4
Net charge-offs		20			75
Additions charged to operations		194			92
Balance at end of the three month period	$	7,179		$	6,762
Ratio of net charge-offs during the period to average loans outstanding during the period		0.003	%		0.012	%
Allowance for loan losses to average loans outstanding during the period		1.097	%		1.101	%

It is the policy of management and the Corporation’s Board of Directors to make a provision for both identified and unidentified losses inherent in its loan portfolio. A provision for loan losses is charged to operations based upon an evaluation of the potential losses in the loan portfolio. This evaluation takes into account such factors as portfolio concentrations, delinquency trends, trends of non-accrual and classified loans, economic conditions, and other relevant factors.

The loan review process, which is conducted quarterly, is an integral part of the Bank’s evaluation of the loan portfolio. A detailed quarterly analysis to determine the adequacy of the Corporation’s allowance for loan losses is reviewed by the Board of Directors.

With the Bank’s manageable level of net charge-offs and the additions to the reserve from the provision out of operations, the allowance for loan losses as a percentage of average loans amounted to 1.097% at March 31, 2020 and 1.101% at March 31, 2019.

NON-PERFORMING ASSETS

The table on page 40 details the Corporation’s non-performing assets and impaired loans as of the dates indicated. Generally, a loan is classified as non-accrual and the accrual of interest on such a loan is discontinued when the contractual payment of principal or interest has become 90 days past due or management has serious doubts about further collectability of principal or interest, even though the loan currently is performing. A loan may remain on accrual status if it is in the process of collection and is either guaranteed or well secured. When a loan is placed on non-accrual status, unpaid interest credited to income in the current year is reversed and unpaid interest accrued in prior years is charged against current period income. A modification of a loan constitutes a troubled debt restructuring (“TDR”) when a borrower is experiencing financial difficulty and the modification constitutes a concession that the Corporation would not otherwise consider. Modifications to loans classified as TDRs generally include reductions in contractual interest rates, principal deferments and extensions of maturity dates at a stated interest rate lower than the current market for a new loan with similar risk characteristics. While unusual, there may be instances of loan principal forgiveness. Any loan modifications made in response to the COVID-19 pandemic are not considered troubled debt restructurings as long as the criteria set forth in Section 4013 of the CARES Act are met. Foreclosed assets held for resale represent property acquired through foreclosure, or considered to be an in-substance foreclosure.

37

Total non-performing assets amounted to $7,699,000 as of March 31, 2020, as compared to $4,607,000 as of December 31, 2019. The economy, in particular, the political unrest both domestic and abroad, the looming presidential election, the various tariffs both imposed and threatened, the concerns and discussions of a potential recession, the recent rate cuts by the Fed, and the continued slowness in the housing industries in our market areas has had a direct effect on the Corporation’s non-performing assets. The Corporation is closely monitoring its Commercial Real Estate portfolio because of the current uncertain economic environment. Non-accrual loans totaled $6,951,000 as of March 31, 2020, as compared to $4,388,000 as of December 31, 2019. Foreclosed assets held for resale increased to $169,000 as of March 31, 2020, compared to $119,000 as of December 31, 2019. Loans past-due 90 days or more and still accruing interest amounted to $579,000 at March 31, 2020, as compared to $100,000 as of December 31, 2019. At March 31, 2020, loans past-due 90 days or more and still accruing interest consisted of two Commercial and Industrial loans and one Commercial Real Estate loan which were all well secured and in the process of collection.

The increase in non-accrual loans at March 31, 2020, as compared to December 31, 2019 is mainly due to the addition of several large loans/loan relationships to non-accrual status during the first quarter of 2020. Five loans to a plastic processing company focused on non-post-consumer recycling totaling $1,323,000 were moved to non-accrual status during the first quarter of 2020 due to strained liquidity and the borrower’s inability to make required payments, as the owner has ceased operations and is exploring options to liquidate the business. A loan in the amount of $846,000 to a golf course and catering venue was moved to non-accrual status during the first quarter of 2020 due to the borrower’s inability to make monthly payments due to cash flow challenges exacerbated by the seasonality of the industry. A residential mortgage in the amount of $356,000 to the owner of a manufacturing company was also moved to non-accrual status during the first quarter of 2020, as poor payment performance has led to foreclosure proceedings related to the associated property.

Non-performing assets to total loans was 1.16% at March 31, 2020 and 0.71% at December 31, 2019. Non-performing assets to total assets was 0.75% at March 31, 2020 and 0.46% at December 31, 2019. The allowance for loan losses to total non-performing assets was 93.25% as of March 31, 2020 as compared to 152.05% as of December 31, 2019. Additional detail can be found on page 40 in the Non-Performing Assets and Impaired Loans table and page 22 in the Non-Performing Assets table. Asset quality is a priority and the Corporation retains a full-time loan review officer to closely track and monitor overall loan quality, along with a full-time workout department to manage collection and liquidation efforts.

Potential problem loans are defined as performing substandard loans which are not deemed to be impaired. These loans have characteristics that cause management to have doubts regarding the ability of the borrower to perform under present loan repayment terms and which may result in reporting these loans as non-performing loans in the future. Potential problem loans amounted to $2,861,000 at March 31, 2020, compared to $4,074,000 at December 31, 2019.

Impaired loans were $13,696,000 at March 31, 2020 and $12,954,000 at December 31, 2019. The largest impaired loan relationship at March 31, 2020 consisted of a non-performing participation loan to a student housing holding company which was secured by commercial real estate. The Corporation’s share of the loan at March 31, 2020 was $3,176,000, net of $1,904,000 that had been charged off to date. The second largest impaired loan relationship at March 31, 2020 consisted of one performing loan to a student housing holding company, which was classified as a TDR. The loan was secured by commercial real estate and carried a balance of $2,977,000 as of March 31, 2020, net of $943,000 that had been charged off to date. The third largest impaired loan relationship at March 31, 2020 consisted of a substandard performing loan to a developer of a residential sub-division in the amount of $1,463,000, which was secured by commercial real estate and classified as a TDR.

The Corporation estimates impairment based on its analysis of the cash flows or collateral estimated at fair value less cost to sell. For collateral dependent loans, the estimated appraisal adjustments and cost to sell percentages are determined based on the market area in which the real estate securing the loan is located, among other factors, and therefore, can differ from one loan to another. Of the $13,696,000 in impaired loans at March 31, 2020, none were located outside of the Corporation’s primary market area.

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The outstanding recorded investment of loans categorized as TDRs was $8,470,000 as of March 31, 2020 as compared to $8,678,000 as of December 31, 2019. The decrease in TDRs at March 31, 2020 as compared to December 31, 2019 is mainly attributable to payments and payoffs on existing troubled debt restructurings that were completed during the first quarter of 2020. Of the twenty-six restructured loans at March 31, 2020, six loans are classified in the Commercial and Industrial portfolio, nineteen loans are classified in the Commercial Real Estate portfolio, and one loan is classified in the Residential Real Estate portfolio. At March 31, 2020, nine Commercial Real Estate loans classified as TDRs with a combined recorded investment of $1,377,000 were not in compliance with the terms of their restructure, compared to March 31, 2019 when six Commercial Real Estate loans classified as TDRs with a combined recorded investment of $597,000 and one Commercial and Industrial loan classified as a TDR with a recorded investment of $5,000 were not in compliance with the terms of their restructure. Troubled debt restructurings at March 31, 2020 consisted of eleven term modifications beyond the original stated term, three interest rate modifications, and eleven payment modifications. At March 31, 2020, there was also one troubled debt restructuring that experienced all three types of modifications—payment, rate, and term. TDRs are separately evaluated for payment disclosures, and if necessary, a specific allocation is established. There were specific allocations of $1,000 attributable to the TDRs at both March 31, 2020 and December 31, 2019, respectively. There were no unfunded commitments attributable to TDRs at March 31, 2020 and December 31, 2019.

No loans were modified as TDRs within the twelve months preceding March 31, 2020. Of the loans that were modified as TDRs during the twelve months preceding March 31, 2019, two Commercial Real Estate Loans with a combined recorded investment of $113,000 experienced payment defaults during the three months ended March 31, 2019.

The Corporation’s non-accrual loan valuation procedure for any loans greater than $250,000 requires an appraisal to be obtained and reviewed annually at year end. A quarterly collateral evaluation is performed which may include a site visit, property pictures and discussions with realtors and other similar business professionals to ascertain current values.

For non-accrual loans less than $250,000 upon classification and typically at year end, the Corporation completes a Certificate of Inspection, which includes the results of an onsite inspection, insured values, tax assessed values, recent sales comparisons and a review of the previous evaluations.

Improving loan quality is a priority. The Corporation actively works with borrowers to resolve credit problems and will continue its close monitoring efforts in 2020. Excluding the assets disclosed in the Non-Performing Assets and Impaired Loans tables on page 40 and the Troubled Debt Restructurings section in Note 4 — Loans and Allowance for Loan Losses, management is not aware of any information about borrowers’ possible credit problems which cause serious doubt as to their ability to comply with present loan repayment terms.

The economic climate is unclear at this time. The COVID-19 pandemic has caused much upheaval and uncertainty in the national and state economy. Experts at all levels are uncertain as to the intermediate or long term affects that may arise. Borrowers may experience difficulty, and the level of impaired loans and non-performing assets, charge-offs and delinquencies could rise and possibly require additional increases in the Corporation’s allowance for loan losses.

In addition, regulatory authorities, as an integral part of their examinations, periodically review the allowance for possible loan losses. They may require additions to allowances based upon their judgments about information available to them at the time of examination.

A concentration of credit exists when the total amount of loans to borrowers, who are engaged in similar activities that are similarly impacted by economic or other conditions, exceed 10% of total loans. As of March 31, 2020 and December 31, 2019, management is of the opinion that there were no loan concentrations exceeding 10% of total loans.

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Non-Performing Assets and Impaired Loans

(Dollars in thousands)	March 31,			December 31,
	2020			2019
Non-Performing Assets:
Non-accrual loans	$	6,951		$	4,388
Foreclosed assets held for resale		169			119
Loans past-due 90 days or more and still accruing interest		579			100
Total non-performing assets	$	7,699		$	4,607
Impaired Loans:
Non-accrual loans	$	6,951		$	4,388
Accruing TDRs		6,745			8,566
Total impaired loans		13,696			12,954
Allocated allowance for loan losses		(1	)		(1	)
Net investment in impaired loans	$	13,695		$	12,953
Impaired loans with a valuation allowance	$	134		$	28
Impaired loans without a valuation allowance		13,562			12,926
Total impaired loans	$	13,696		$	12,954
Allocated valuation allowance as a percent of impaired loans		0.01	%		0.01	%
Impaired loans to total loans		2.07	%		2.00	%
Non-performing assets to total loans		1.16	%		0.71	%
Non-performing assets to total assets		0.75	%		0.46	%
Allowance for loan losses to impaired loans		52.42	%		54.08	%
Allowance for loan losses to total non-performing assets		93.25	%		152.05	%

Real estate mortgages comprise 86.0% of the loan portfolio as of March 31, 2020, as compared to 85.7% as of December 31, 2019. Real estate mortgages consist of both residential and commercial real estate loans. The real estate loan portfolio is well diversified in terms of borrowers, collateral, interest rates, and maturities. Also, the residential real estate loan portfolio is largely comprised of fixed rate mortgages. The real estate loans are concentrated primarily in the Corporation’s market area and are subject to risks associated with the local economy. The commercial real estate loans typically reprice approximately every three to five years and are also concentrated in the Corporation’s market area. The Corporation’s loss exposure on its impaired loans continues to be mitigated by collateral positions on these loans. The allocated allowance for loan losses associated with impaired loans is generally computed based upon the related collateral value of the loans. The collateral values are determined by recent appraisals, but are generally discounted by management based on historical dispositions, changes in market conditions since the last valuation and management’s expertise and knowledge of the borrower and the borrower’s business.

DEPOSITS AND OTHER BORROWED FUNDS

Consumer and commercial retail deposits are attracted primarily by the Bank’s eighteen full service office locations, one loan production office and through its internet banking presence. The Bank offers a broad selection of deposit products and continually evaluates its interest rates and fees on deposit products. The Bank regularly reviews competing financial institutions’ interest rates, especially when establishing interest rates on certificates of deposit.

Total deposits decreased $26,831,000 to $734,797,000 as of March 31, 2020 as non-interest bearing deposits increased by $18,381,000 and interest bearing deposits decreased by $45,212,000 from year-end 2019. Total deposits decreased due to the Corporation calling $40,000,000 worth of brokered CDs during the quarter ended March 31, 2020 due to the changing rate environment. Total short-term and long-term borrowings increased to $156,379,000 as of March 31, 2020, from $109,663,000 at year-end 2019, an increase of $46,716,000 or 42.6%. The increase in total borrowings was the result of decreasing deposit balances and increases in the loan and securities portfolios.

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CAPITAL STRENGTH

Normal increases in capital are generated by net income, less dividends paid out. During the first three months of the year, net income less dividends paid increased capital by $483,000. Accumulated other comprehensive income (loss) derived from net unrealized gains on debt securities available-for-sale also impacts capital. At December 31, 2019 accumulated other comprehensive income was $4,221,000. Accumulated other comprehensive income stood at $4,826,000 at March 31, 2020, an increase of $605,000. Fluctuations in interest rates have regularly impacted the gain/loss position in the Bank’s investment portfolio, as well as its decision to sell securities at a gain or loss. In order to protect the Bank from market risk in the event of further interest rate increases, the Bank chose to sell a portion of its securities during the first three months of 2020 at an overall net gain of $71,000. The fluctuations from net unrealized gains on debt securities available-for-sale do not affect regulatory capital, as the Bank elected to opt-out of the inclusion of this item with the filing of the March 31, 2015 Call Report.

The Corporation held 231,612 shares of common stock as treasury stock at March 31, 2020 and December 31, 2019. This had an effect of reducing our total stockholders’ equity by $5,709,000 as of March 31, 2020 and December 31, 2019.

Total stockholders’ equity was $130,150,000 as of March 31, 2020, and $128,752,000 as of December 31, 2019.

At March 31, 2020 the Bank met the definition of a “well-capitalized” institution under the regulatory framework for prompt corrective action and the minimum capital requirements under Basel III. The following table presents the Bank’s capital ratios as of March 31, 2020 and December 31, 2019:

							To Be Well Capitalized
							Under Prompt
	March 31,			December 31,			Corrective Action
	2020			2019			Regulations
Tier 1 leverage ratio (to average assets)		9.54	%		9.42	%		5.00	%
Common Equity Tier 1 capital ratio (to risk-weighted assets)		13.24	%		13.50	%		6.50	%
Tier 1 risk-based capital ratio (to risk-weighted assets)		13.24	%		13.50	%		8.00	%
Total risk-based capital ratio		14.27	%		14.53	%		10.00	%

Under the final capital rules that became effective on January 1, 2015, there was a requirement for a common equity Tier 1 capital conservation buffer of 2.5% of risk-weighted assets which is in addition to the other minimum risk-based capital standards in the rule. Institutions that do not maintain this required capital buffer will become subject to progressively more stringent limitations on the percentage of earnings that can be paid out in dividends or used for stock repurchases and on the payment of discretionary bonuses to senior executive management. The capital buffer requirement was phased in over three years beginning in 2016. The capital buffer requirement effectively raises the minimum required common equity Tier 1 capital ratio to 7.0%, the Tier 1 capital ratio to 8.5%, and the total capital ratio to 10.5% on a fully phased-in basis as of January 1, 2019. As of March 31, 2020, the Bank meets all capital adequacy requirements under the Basel III Capital Rules on a fully phased-in basis.

The Corporation’s capital ratios are not materially different than those of the Bank.

LIQUIDITY

The Corporation’s objective is to maintain adequate liquidity to meet funding needs at a reasonable cost and to provide contingency plans to meet unanticipated funding needs or a loss of funding sources, while minimizing interest rate risk. Adequate liquidity is needed to provide the funding requirements of depositors’ withdrawals, loan growth, and other operational needs.

Sources of liquidity are as follows:

· Growth in the core deposit base;

· Proceeds from sales or maturities of investment securities;

· Payments received on loans and mortgage-backed securities;

· Overnight correspondent bank borrowings on various credit lines, notes, etc., with various levels of capacity;

· Securities sold under agreements to repurchase; and

· Brokered CDs.

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At March 31, 2020, the Corporation had $367,482,000 in available borrowing capacity at FHLB (which takes into account FHLB long-term notes and FHLB short-term borrowings); the maximum borrowing capacity at ACBB was $15,000,000 and the maximum borrowing capacity of the Federal Discount Window was $5,743,000.

The Corporation enters into “Repurchase Agreements” in which it agrees to sell securities subject to an obligation to repurchase the same or similar securities. Because the agreement both entitles and obligates the Corporation to repurchase the assets, the Corporation may transfer legal control of the securities while still retaining effective control. As a result, the repurchase agreements are accounted for as collateralized financing agreements (secured borrowings) and act as an additional source of liquidity. Securities sold under agreements to repurchase were $12,551,000 at March 31, 2020.

Asset liquidity is provided by investment securities maturing in one year or less, other short-term investments, federal funds sold, and cash and due from banks. The liquidity is augmented by repayment of loans and cash flows from mortgage-backed and asset-backed securities. Liability liquidity is accomplished primarily by maintaining a core deposit base, acquired by attracting new deposits and retaining maturing deposits. Also, short-term borrowings provide funds to meet liquidity needs.

Net cash flows provided by operating activities were $1,365,000 and $3,247,000 at March 31, 2020 and 2019 respectively. Net income amounted to $2,053,000 for the three months ended March 31, 2020 and $2,243,000 for the three months ended March 31, 2019. During the three months ended March 31, 2020 and 2019, net premium amortization on investment securities amounted to $498,000 and $733,000, respectively. Proceeds (including gains) from sales of mortgage loans originated for resale exceeded cash utilized for originations of mortgage loans originated for resale by $37,000 and $286,000 for the three months ended March 31, 2020 and 2019, respectively. Net securities losses were $467,000 for the three months ended March 31, 2020, compared to net securities gains of $103,000 for the three months ended March 31, 2019. Other assets increased by $537,000 and $1,860,000 during the three months ended March 31, 2020 and 2019, respectively. Other liabilities decreased $1,159,000 during the three months ended March 31, 2020, compared to an increase of $1,198,000 during the three months ended March 31, 2019.

Investing activities used cash of $21,909,000 during the three months ended March 31, 2020 and provided cash of $26,139,000 during the three months ended March 31, 2019. Net activity in the available-for-sale securities portfolio (including proceeds from sale, maturities, and redemptions net against purchases) used cash of $5,396,000 during the three months ended March 31, 2020 and provided cash of $36,894,000 during the three months ended March 31, 2019. Net cash used to originate loans amounted to $13,877,000 and $11,891,000 during the three months ended March 31, 2020 and 2019, respectively.

Financing activities provided cash of $18,618,000 during the three months ended March 31, 2020 and used cash of $28,378,000 during the three months ended March 31, 2019. Deposits decreased by $26,831,000 during the three months ended March 31, 2020 and increased by $25,867,000 during the three months ended March 31, 2019. Short-term borrowings increased by $51,716,000 and decreased by $42,966,000 during the three months ended March 31, 2020 and 2019, respectively. Repayment of long-term borrowings amounted to $5,000,000 for the three months ended March 31, 2020 and $10,000,000 for the three months ended March 31, 2019. Dividends paid amounted to $1,570,000 and $1,557,000 during the three months ended March 31, 2020 and 2019, respectively.

Managing liquidity remains an important segment of asset/liability management. The overall liquidity position of the Corporation is maintained by an active asset/liability management committee. The Corporation believes that its core deposit base is stable even in periods of changing interest rates. Liquidity and funds management are governed by policies and are measured on a monthly basis. These measurements indicate that liquidity generally remains stable and exceeds the Corporation’s minimum defined levels of adequacy. Other than the trends of continued competitive pressures and volatile interest rates, there are no known demands, commitments, events or uncertainties that will result in, or that are reasonably likely to result in, liquidity increasing or decreasing in any material way. Given our financial strength, we expect to be able to maintain adequate liquidity as we manage through the current environment, utilizing current funding options and possibly utilizing new options, such as the Federal Reserve’s Paycheck Protection Program Liquidity Facility (“PPPLF”).

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MARKET RISK

Market risk is the risk of loss arising from adverse changes in the fair value of financial instruments due to changes in interest rates, exchange rates and equity prices. The Corporation’s market risk is composed primarily of interest rate risk. The Corporation’s interest rate risk results from timing differences in the repricing of assets, liabilities, off-balance sheet instruments, and changes in relationships between rate indices and the potential exercise of explicit or embedded options.

Increases in the level of interest rates also may adversely affect the fair value of the Corporation’s securities and other earning assets. Generally, the fair value of fixed-rate instruments fluctuates inversely with changes in interest rates. As a result, increases in interest rates could result in decreases in the fair value of the Corporation’s interest-earning assets, which could adversely affect the Corporation’s results of operations if sold, or, in the case of interest-earning assets classified as available-for-sale, the Corporation’s stockholders’ equity, if retained. Under FASB ASC 320-10, Investments – Debt Securities, changes in the unrealized gains and losses, net of taxes, on debt securities classified as available-for-sale are reflected in the Corporation’s stockholders’ equity. The Corporation does not own any trading assets.

Asset/Liability Management

The principal objective of asset/liability management is to manage the sensitivity of the net interest margin to potential movements in interest rates and to enhance profitability through returns from managed levels of interest rate risk. The Corporation actively manages the interest rate sensitivity of its assets and liabilities. Several techniques are used for measuring interest rate sensitivity. Interest rate risk arises from the mismatches in the repricing of assets and liabilities within a given time period, referred to as a rate sensitivity gap. If more assets than liabilities mature or reprice within the time frame, the Corporation is asset sensitive. This position would contribute positively to net interest income in a rising rate environment. Conversely, if more liabilities mature or reprice, the Corporation is liability sensitive. This position would contribute positively to net interest income in a falling rate environment. The Corporation’s cumulative gap at one year indicates the Corporation is liability sensitive at March 31, 2020.

Earnings at Risk

The Bank’s Asset/Liability Committee (“ALCO”) is responsible for reviewing the interest rate sensitivity position and establishing policies to monitor and limit exposure to interest rate risk. The guidelines established by ALCO are reviewed by the Corporation’s Board of Directors. The Corporation recognizes that more sophisticated tools exist for measuring the interest rate risk in the balance sheet beyond interest rate sensitivity gap. Although the Corporation continues to measure its interest rate sensitivity gap, the Corporation utilizes additional modeling for interest rate risk in the overall balance sheet. Earnings at risk and economic values at risk are analyzed.

Earnings simulation modeling addresses earnings at risk and net present value estimation addresses economic value at risk. While each of these interest rate risk measurements has limitations, taken together they represent a reasonably comprehensive view of the magnitude of interest rate risk to the Corporation.

Earnings Simulation Modeling

The Corporation’s net income is affected by changes in the level of interest rates. Net income is also subject to changes in the shape of the yield curve. For example, a flattening of the yield curve would result in a decline in earnings due to the compression of earning asset yields and increased liability rates, while a steepening would result in increased earnings as earning asset yields widen.

Earnings simulation modeling is the primary mechanism used in assessing the impact of changes in interest rates on net interest income. The model reflects management’s assumptions related to asset yields and rates paid on liabilities, deposit sensitivity, size and composition of the balance sheet. The assumptions are based on what management believes at that time to be the most likely interest rate environment. Earnings at risk is the change in net interest income from a base case scenario under various scenarios of rate shock increases and decreases in the interest rate earnings simulation model.

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The table below presents an analysis of the changes in net interest income and net present value of the balance sheet resulting from various increases or decreases in the level of interest rates, such as two percentage points (200 basis points) in the level of interest rates. The calculated estimates of change in net interest income and net present value of the balance sheet are compared to current limits approved by ALCO and the Board of Directors. The earnings simulation model projects net interest income would decrease 4.83%, 10.05% and 14.76% in the 100, 200 and 300 basis point increasing rate scenarios presented. In addition, the earnings simulation model projects net interest income would decrease 1.74% and 6.33% in the 100 and 200 basis point decreasing rate scenarios presented. All of these forecasts are within the Corporation’s one year policy guidelines.

The analysis and model used to quantify the sensitivity of net interest income becomes less reliable in a decreasing rate scenario given the current unprecedented low interest rate environment with federal funds trading in the 0 – 25 basis point range. Results of the decreasing basis point declining scenarios are affected by the fact that many of the Corporation’s interest-bearing liabilities are at rates below 1% and therefore likely may not decline 100 or more basis points. However, the Corporation’s interest-sensitive assets are able to decline by these amounts. For the three months ended March 31, 2020, the cost of interest-bearing liabilities averaged 1.30%, and the yield on interest-earning assets, on a fully taxable equivalent basis, averaged 4.30%.

Net Present Value Estimation

The net present value measures economic value at risk and is used for helping to determine levels of risk at a point in time present in the balance sheet that might not be taken into account in the earnings simulation model. The net present value of the balance sheet is defined as the discounted present value of asset cash flows minus the discounted present value of liability cash flows. At March 31, 2020, the 100 and 200 basis point immediate decreases in rates are estimated to affect net present value with decreases of 79.23% and 190.73%, respectively. Additionally, net present value is projected to increase 50.60%, 78.02%, and 89.72% in the 100, 200, and 300 basis point immediate increase scenarios, respectively. These scenarios presented are within the Corporation’s policy limits, aside from the 100 basis point immediate decrease scenario at (79.23)% vs. a policy limit of (20)% and the 200 basis point immediate decrease scenario at (190.73)% vs. a policy limit of (30.0)%.

The computation of the effects of hypothetical interest rate changes are based on many assumptions. They should not be relied upon solely as being indicative of actual results, since the computations do not account for actions management could undertake in response to changes in interest rates.

Effect of Change in Interest Rates

	Projected Change
Effect on Net Interest Income
1-Year Net Income Simulation Projection
+300 bp Shock vs. Stable Rate		(14.76	)%
+200 bp Shock vs. Stable Rate		(10.05	)%
+100 bp Shock vs. Stable Rate		(4.83	)%
Flat rate
-100 bp Shock vs. Stable Rate		(1.74	)%
-200 bp Shock vs. Stable Rate		(6.33	)%
Effect on Net Present Value of Balance Sheet
Static Net Present Value Change
+300 bp Shock vs. Stable Rate		89.72	%
+200 bp Shock vs. Stable Rate		78.02	%
+100 bp Shock vs. Stable Rate		50.60	%
Flat rate
-100 bp Shock vs. Stable Rate		(79.23	)%
-200 bp Shock vs. Stable Rate		(190.73	)%

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Item 3. Quantitative and Qualitative Disclosures about Market Risk

Information with respect to quantitative and qualitative disclosures about market risk is included in the information under Management’s Discussion and Analysis in Item 2.

Item 4. Controls and Procedures

a) Evaluation of Disclosure Controls and Procedures. First Keystone Corporation maintains disclosure controls and procedures (as defined in Rule 13a-15(e) under the Securities Exchange Act of 1934, as amended) designed to ensure that information required to be disclosed in the reports that the Corporation files or submits under the Securities Exchange Act of 1934 is recorded, processed, summarized and reported within the time periods specified in the rules and forms of the Securities and Exchange Commission. Based upon their evaluation of those disclosure controls and procedures performed as of the end of the period covered by this report, the Chief Executive Officer and Chief Financial Officer of the Corporation concluded that the Corporation’s disclosure controls and procedures were effective as of March 31, 2020.

b) Changes in internal control over financial reporting. There were no other changes in the Corporation’s internal control over financial reporting during the fiscal quarter ended March 31, 2020, that materially affected, or are reasonably likely to materially affect, the Corporation’s internal control over financial reporting.

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PART II - OTHER INFORMATION

Item 1. Legal Proceedings

Although the Corporation is subject to various claims and legal actions that occur from time to time in the ordinary course of business, the Corporation is not party to any pending legal proceedings that management believes could have a material adverse effect on its business, results of operations, financial condition or cash flows.

Item 1A. Risk Factors

The COVID-19 pandemic could have a material adverse effect on our ability to operate, results of operations, liquidity, and financial condition.

The World Health Organization has declared the COVID-19 outbreak a pandemic, and the virus continues to spread in areas where we operate. The COVID-19 pandemic and similar issues in the future could have a material adverse effect on our ability to operate, results of operations, liquidity, and financial condition. Several public health organizations have recommended, and some local governments have implemented, certain measures to slow and limit the transmission of the virus, including shelter in place and social distancing ordinances. Such preventive measures, or others we may voluntarily put in place, may have a material adverse effect on our business for an indefinite period, such as the limitation of hours at branch locations, decreased employee availability, disruptions to the businesses of our vendors, and others. Our customers may also face these and other challenges, which could lead to a disruption in demand for our services. Although these disruptions may continue to occur, the long-term economic impact and near-term financial impacts of the COVID-19 pandemic, including but not limited to, possible impairment and other charges, cannot be reliably quantified or estimated at this time due to the uncertainty of future developments.

Other than the item listed above, there have been no material changes to the risk factors disclosed in Item 1A “Risk Factors” in the Corporation’s Annual Report on Form 10-K for the year ended December 31, 2019.

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds

Period	(a) Total Number of Shares Purchased	(b) Average Price Paid per Share	(c) Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs	(d) Maximum Number of Shares that May Yet Be Purchased Under the Plans or Programs
January 1 — January 31, 2020	―	―	―	120,000
February 1 — February 29, 2020	―	―	―	120,000
March 1 — March 31, 2020	―	―	―	120,000
Total	―	―	―	120,000

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Item 3. Defaults Upon Senior Securities

None.

Item 4. Mine Safety Disclosures

Not applicable.

Item 5. Other Information

None.

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Item 6. Exhibits and Reports on Form 8-K

(a) Exhibits required by Item 601 Regulation S-K

Exhibit Number	Description of Exhibit
3i	Articles of Incorporation, as amended (Incorporated by reference to Exhibit 3(i) to the Registrant’s Report on Form 8-K dated August 28, 2018).

3ii By-Laws, as amended and restated (Incorporated by reference to Exhibit 3(ii) to the Registrant’s Report on Form 8-K dated August 28, 2018).

10.1(a) Supplemental Employee Retirement Plan – J. Gerald Bazewicz (Incorporated by reference to Exhibit 10 to Registrant’s Annual Report on Form 10-K for the year ended December 31, 2013).*

10.1(b) Supplemental Employee Retirement Plan – David R. Saracino (Incorporated by reference to Exhibit 10 to Registrant’s Annual Report on Form 10-K for the year ended December 31, 2013).*

10.1(d) Supplemental Employee Retirement Plan – Elaine Woodland (Incorporated by reference to Exhibit 10 to Registrant’s Annual Report on Form 10-K for the year ended December 31, 2013).*

10.2 Management Incentive Compensation Plan (Incorporated by reference to Exhibit 10 to Registrant’s Annual Report on Form 10-K for the year ended December 31, 2018).*

10.4 First Keystone Corporation 1998 Stock Incentive Plan (Incorporated by reference to Exhibit 10 to Registrant’s Report on Form 10-Q for the quarter ended September 30, 2006).*

14 First Keystone Corporation Directors and Senior Management Code of Ethics (Incorporated by reference to Exhibit 99.1 to Registrant’s Report on Form 8-K dated August 27, 2013).

31.1 Rule 13a-14(a)/15d-14(a) Certification of Chief Executive Officer.**

31.2 Rule 13a-14(a)/15d-14(a) Certification of Chief Financial Officer.**

32.1 Section 1350 Certification of Chief Executive Officer.**

32.2 Section 1350 Certification of Chief Financial Officer.**

101.INS XBRL Instance Document.**

101.SCH XBRL Taxonomy Extension Schema Document.**

101.CAL XBRL Taxonomy Extension Calculation Linkbase Document.**

101.DEF XBRL Taxonomy Extension Definition Linkbase Document.**

101.LAB XBRL Taxonomy Extension Label Linkbase Document.**

101.PRE XBRL Taxonomy Extension Presentation Linkbase Document.**

* Denotes a compensatory plan.

** Filed herewith.

The Corporation will provide a copy of any exhibit upon receipt of a written request for the particular exhibit or exhibits desired. All requests should be addressed to the Corporation’s principal executive offices.

48

FIRST KEYSTONE CORPORATION

SIGNATURES

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

	FIRST KEYSTONE CORPORATION
	Registrant
May 8, 2020	/s/ Elaine A. Woodland
	Elaine A. Woodland
	President and Chief Executive Officer
	(Principal Executive Officer)
May 8, 2020	/s/ Diane C.A. Rosler
	Diane C.A. Rosler
	Senior Vice President and Chief Financial Officer
	(Principal Financial Officer)

49

INDEX TO EXHIBITS

Exhibit	Description
3i	Articles of Incorporation, as amended (Incorporated by reference to Exhibit 3(i) to the Registrant’s Report on Form 8-K dated August 28, 2018).

3ii By-Laws, as amended and restated (Incorporated by reference to Exhibit 3(ii) to the Registrant’s Report on Form 8-K dated August 28, 2018).

10.1(a) Supplemental Employee Retirement Plan – J. Gerald Bazewicz (Incorporated by reference to Exhibit 10 to Registrant’s Annual Report on Form 10-K for the year ended December 31, 2013).*

10.1(b) Supplemental Employee Retirement Plan – David R. Saracino (Incorporated by reference to Exhibit 10 to Registrant’s Annual Report on Form 10-K for the year ended December 31, 2013).*

10.1(d) Supplemental Employee Retirement Plan – Elaine Woodland (Incorporated by reference to Exhibit 10 to Registrant’s Annual Report on Form 10-K for the year ended December 31, 2013).*

10.2 Management Incentive Compensation Plan (Incorporated by reference to Exhibit 10 to Registrant’s Annual Report on Form 10-K for the year ended December 31, 2018).*

10.4 First Keystone Corporation 1998 Stock Incentive Plan (Incorporated by reference to Exhibit 10 to Registrant’s Report on Form 10-Q for the quarter ended September 30, 2006).*

14 First Keystone Corporation Directors and Senior Management Code of Ethics (Incorporated by reference to Exhibit 99.1 to Registrant’s Report on Form 8-K dated August 27, 2013).

31.1 Rule 13a-14(a)/15d-14(a) Certification of Chief Executive Officer.**

31.2 Rule 13a-14(a)/15d-14(a) Certification of Chief Financial Officer.**

32.1 Section 1350 Certification of Chief Executive Officer.**

32.2 Section 1350 Certification of Chief Financial Officer.**

101.INS XBRL Instance Document.**

101.SCH XBRL Taxonomy Extension Schema Document.**

101.CAL XBRL Taxonomy Extension Calculation Linkbase Document.**

101.DEF XBRL Taxonomy Extension Definition Linkbase Document.**

101.LAB XBRL Taxonomy Extension Label Linkbase Document.**

101.PRE XBRL Taxonomy Extension Presentation Linkbase Document.**

* Denotes a compensatory plan.

** Filed herewith.

The Corporation will provide a copy of any exhibit upon receipt of a written request for the particular exhibit or exhibits desired. All requests should be addressed to the Corporation’s principal executive offices.

50

EX-31.1

EXHIBIT 31.1

FIRST KEYSTONE CORPORATION

CERTIFICATION

I, Elaine A. Woodland, certify that:

1. I have reviewed this quarterly report on Form 10-Q for the period ended March 31, 2020, of First Keystone Corporation;

2. Based on my knowledge, this 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 report;

3. Based on my knowledge, the financial statements, and other financial information included in this 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 report;

4. The registrant’s other certifying officer 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 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 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 the registrant’s board of directors (or persons performing the equivalent functions):

(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 information; 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.

/s/ Elaine A. Woodland

Elaine A. Woodland

President and Chief Executive Officer

Date: May 8, 2020

 

EX-31.2

EXHIBIT 31.2

FIRST KEYSTONE CORPORATION

CERTIFICATION

I, Diane C.A. Rosler, certify that:

1. I have reviewed this quarterly report on Form 10-Q for the period ended March 31, 2020, of First Keystone Corporation;

2. Based on my knowledge, this 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 report;

3. Based on my knowledge, the financial statements, and other financial information included in this 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 report;

4. The registrant’s other certifying officer 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 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 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 the registrant’s board of directors (or persons performing the equivalent functions):

(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 information; 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.

/s/ Diane C.A. Rosler

Diane C.A. Rosler

Senior Vice President and Chief Financial Officer

Date: May 8, 2020

EX-32.1

EXHIBIT 32.1

CERTIFICATION OF PRINCIPAL EXECUTIVE OFFICER

PURSUANT TO 18 U.S.C. SECTION 1350

AS ADOPTED PURSUANT TO

SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002

In connection with the Quarterly Report on Form 10-Q of First Keystone Corporation (the “Corporation”) for the period ended March 31, 2020, as filed with the Securities and Exchange Commission on the date hereof (the “Report”), I, Elaine A. Woodland, President and Chief Executive Officer, certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that to my knowledge:

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 Corporation as of and for the period covered by the Report.

/s/ Elaine A. Woodland

Elaine A. Woodland

President and Chief Executive Officer

May 8, 2020

The foregoing certification is being furnished solely pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (Section 1350 of Chapter 63 of Title 18 of the United States Code) and is not being filed as part of the report or as a separate disclosure document.

A signed original of this written statement required by Section 906 has been provided to First Keystone Corporation and will be retained by First Keystone Corporation and furnished to the Securities and Exchange Commission or its staff upon request.

EX-32.2

EXHIBIT 32.2

CERTIFICATION OF PRINCIPAL FINANCIAL OFFICER

PURSUANT TO 18 U.S.C. SECTION 1350

AS ADOPTED PURSUANT TO

SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002

In connection with the Quarterly Report on Form 10-Q of First Keystone Corporation (the “Corporation”) for the period ended March 31, 2020, as filed with the Securities and Exchange Commission on the date hereof (the “Report”), I, Diane C.A. Rosler, Chief Financial Officer, certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that to my knowledge:

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 Corporation as of and for the period covered by the Report.

/s/ Diane C.A. Rosler

Diane C.A. Rosler

Senior Vice President and
Chief Financial Officer

May 8, 2020

The foregoing certification is being furnished solely pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (Section 1350 of Chapter 63 of Title 18 of the United States Code) and is not being filed as part of the report or as a separate disclosure document.

A signed original of this written statement required by Section 906 has been provided to First Keystone Corporation and will be retained by First Keystone Corporation and furnished to the Securities and Exchange Commission or its staff upon request.

XML

LOANS AND ALLOWANCE FOR LOAN LOSSES

3 Months Ended

Mar. 31, 2020

LOANS AND ALLOWANCE FOR LOAN LOSSES

LOANS AND ALLOWANCE FOR LOAN LOSSES

NOTE 4 — LOANS AND ALLOWANCE FOR LOAN LOSSES

Loans

Net loans are stated at their outstanding recorded investment, net of deferred fees and costs, unearned income and the allowance for loan losses. Interest on loans is recognized as income over the term of each loan, generally, by the accrual method. Loan origination fees and certain direct loan origination costs have been deferred with the net amount amortized using the straight line method or the interest method over the contractual life of the related loans as an interest yield adjustment.

Residential mortgage loans held for sale are carried at the lower of cost or market on an aggregate basis determined by independent pricing from appropriate federal or state agency investors. These loans are sold without recourse. Loans held for sale amounted to $2,342,000 and $2,292,000 at March 31, 2020 and December 31, 2019, respectively.

As an addition to the commercial loans receivable portfolio, the Corporation may purchase the guaranteed portion of loans secured by the U.S. Government. The originating bank retains the unguaranteed portion of the loan. The loans are sponsored by one of the various government agencies including the U.S. Small Business Administration (SBA), United States Department of Agriculture (USDA), and the Farm Service Agency (FSA). Government Guaranteed Loans ("GGLs") carry no credit risk due to an unconditional and irrevocable guarantee on all principal and accrued interest, which is supported by the full faith and credit of the U.S. Government. As of March 31, 2020, the Corporation's balance of GGLs amounted to $6,059,000, compared to $6,150,000 at December 31, 2019.

The loans receivable portfolio is segmented into commercial, residential and consumer loans. Commercial loans consist of the following classes: Commercial and Industrial, and Commercial Real Estate.

Commercial and Industrial Lending

The Corporation originates commercial and industrial loans primarily to businesses located in its primary market area and surrounding areas. These loans are used for various business purposes, which include short-term loans and lines of credit to finance machinery and equipment, inventory and accounts receivable. Generally, the maximum term for loans extended on machinery and equipment is based on the projected useful life of such machinery and equipment. Most business lines of credit are written on demand and are reviewed annually.

Commercial and industrial loans are generally secured with short-term assets; however, in many cases, additional collateral such as real estate is provided as additional security for the loan. Loan-to-value maximum thresholds have been established by the Corporation and are specific to the type of collateral. Collateral values may be determined using invoices, inventory reports, accounts receivable aging reports, business financial statements, collateral appraisals, etc. Commercial and industrial loans are typically supported by personal guarantees of the borrower.

In underwriting commercial and industrial loans, an analysis is performed to evaluate the borrower’s character and capacity to repay the loan, the adequacy of the borrower’s capital and collateral, as well as the conditions affecting the borrower. Evaluation of the borrower’s past, present and future cash flows is also an important aspect of the Corporation’s analysis of the borrower’s ability to repay.

Commercial and industrial loans generally present a higher level of risk than other types of loans due primarily to the effect of general economic conditions. Commercial and industrial loans are typically made on the basis of the borrower’s ability to make repayment from cash flows from the borrower’s primary business activities. As a result, the availability of funds for the repayment of commercial and industrial loans is dependent on the success of the business itself, which in turn, is likely to be dependent upon the general economic environment.

Commercial Real Estate Lending

The Corporation engages in commercial real estate lending in its primary market area and surrounding areas. The Corporation’s commercial real estate portfolio is secured primarily by commercial retail space, commercial office buildings, residential housing and hotels. Generally, commercial real estate loans have terms that do not exceed twenty years, have loan-to-value ratios of up to eighty percent of the value of the collateral property, and are typically supported by personal guarantees of the borrowers.

In underwriting these loans, the Corporation performs a thorough analysis of the financial condition of the borrower, the borrower’s credit history, and the reliability and predictability of the cash flow generated by the property securing the loan. The value of the property is determined by either independent appraisers or internal evaluations by Bank officers.

Commercial real estate loans generally present a higher level of risk than residential real estate secured loans. Repayment of loans secured by commercial real estate is typically dependent upon the successful operation of the related real estate project and/or the effect of the general economic conditions on income producing properties.

Residential Real Estate Lending (Including Home Equity)

The Corporation’s residential real estate portfolio is comprised of one-to-four family residential mortgage loan originations, home equity term loans and home equity lines of credit. These loans are generated by the Corporation’s marketing efforts, its present customers, walk-in customers and referrals. These loans originate primarily within or with customers from the Corporation’s market area.

The Corporation’s one-to-four family residential mortgage originations are secured primarily by properties located in its primary market area and surrounding areas. The Corporation offers fixed-rate mortgage loans with terms up to a maximum of thirty years for both permanent structures and those under construction. Loans with terms of thirty years are normally held for sale and sold without recourse; most of the residential mortgages held in the Corporation’s residential real estate portfolio have maximum terms of twenty years. Generally, the majority of the Corporation’s residential mortgage loans originate with a loan-to-value of eighty percent or less, or those with primary mortgage insurance at ninety-five percent or less. Home equity term loans are secured by the borrower’s primary residence and typically have a maximum loan-to-value of eighty percent and a maximum term of fifteen years. In general, home equity lines of credit are secured by the borrower’s primary residence with a maximum loan-to-value of eighty percent and a maximum term of twenty years.

In underwriting one-to-four family residential mortgage loans, the Corporation evaluates the borrower’s ability to make monthly payments, the borrower’s repayment history and the value of the property securing the loan. The ability and willingness to repay is assessed based upon the borrower’s employment history, current financial conditions and credit background. A majority of the properties securing residential real estate loans made by the Corporation are appraised by independent appraisers. The Corporation generally requires mortgage loan borrowers to obtain an attorney’s title opinion or title insurance and fire and property insurance, including flood insurance, if applicable.

Residential mortgage loans, home equity term loans and home equity lines of credit generally present a lower level of risk than consumer loans because they are secured by the borrower’s primary residence. Risk is increased when the Corporation is in a subordinate position, especially to another lender, for the loan collateral.

Consumer Lending

The Corporation offers a variety of secured and unsecured consumer loans, including vehicle loans, stock loans and loans secured by financial institution deposits. These loans originate primarily within or with customers from the Corporation’s market area.

Consumer loan terms vary according to the type and value of collateral and creditworthiness of the borrower. In underwriting personal loans, a thorough analysis is performed regarding the borrower’s willingness and financial ability to repay the loan as agreed. The ability and willingness to repay is assessed based upon the borrower’s employment history, current financial condition and credit background.

Consumer loans may entail greater credit risk than residential real estate loans, particularly in the case of personal loans which are unsecured or are secured by rapidly depreciable assets, such as automobiles or recreational equipment. In such cases, repossessed collateral for a defaulted personal loan may not provide an adequate source of repayment of the outstanding loan balance as a result of the greater likelihood of damage, loss or depreciation. In addition, personal loan collections are dependent on the borrower’s continuing financial stability and therefore, are more likely to be affected by adverse personal circumstances. Furthermore, the application of various federal and state laws, including bankruptcy and insolvency laws, may limit the amount which can be recovered on such loans.

Delinquent Loans

Generally, a loan is considered to be past-due when scheduled loan payments are in arrears 10 days or more. Delinquent notices are generated automatically when a loan is 10 or 15 days past-due, depending on loan type. Collection efforts continue on past-due loans that have not been brought current, when it is believed that some chance exists for improvement in the status of the loan. Past-due loans are continually evaluated with the determination for charge-off being made when no reasonable chance remains that the status of the loan can be improved.

Commercial and Industrial and Commercial Real Estate loans are charged off in whole or in part when they become sufficiently delinquent based upon the terms of the underlying loan contract and when a collateral deficiency exists. Because all or part of the contractual cash flows are not expected to be collected, the loan is considered to be impaired, and the Bank estimates the impairment based on its analysis of the cash flows or collateral estimated at fair value less cost to sell. Should a Government Guaranteed Loan default, demand is made to the originating bank for repurchase of the loan. If the originating bank does not repurchase the loan, demand for repurchase is then made to the appropriate government agency which has provided the guarantee for the loan.

Residential Real Estate and Consumer loans are charged off when they become sufficiently delinquent based upon the terms of the underlying loan contract and when the value of the underlying collateral is not sufficient to support the loan balance and a loss is expected. At that time, the amount of estimated collateral deficiency, if any, is charged off for loans secured by collateral, and all other loans are charged off in full. Loans with collateral are written down to the estimated fair value of the collateral less cost to sell.

Existing loans in which the borrower has declared bankruptcy are considered on a case by case basis to determine whether repayment is likely to occur (eg. reaffirmation by the borrower with demonstrated repayment ability). Otherwise, loans are charged off in full or written down to the estimated fair value of collateral less cost to sell.

Generally, a loan is classified as non-accrual and the accrual of interest on such a loan is discontinued when the contractual payment of principal or interest has become 90 days past due or management has serious doubts about further collectability of principal or interest, even though the loan may currently be performing. A loan may remain on accrual status if it is well secured (or supported by a strong guarantee) and in the process of collection. When a loan is placed on non-accrual status, unpaid interest credited to income in the current year is reversed and unpaid interest accrued in prior years is charged against interest income. Certain non-accrual loans may continue to perform; that is, payments are still being received. Generally, the payments are applied to principal. These loans remain under constant scrutiny, and if performance continues, interest income may be recorded on a cash basis based on management's judgment regarding the collectability of principal.

Allowance for Loan Losses

The allowance for loan losses is established through provisions for loan losses charged against income. Loans deemed to be uncollectible are charged against the allowance for loan losses and subsequent recoveries, if any, are credited to the allowance.

The allowance for loan losses is maintained at a level estimated by management to be adequate to absorb potential loan losses. Management’s periodic evaluation of the adequacy of the allowance for loan losses is based on the Corporation’s past loan loss experience, known and inherent risks in the portfolio, adverse situations that may affect the borrower’s ability to repay (including the timing of future payments), the estimated value of any underlying collateral, composition of the loan portfolio, current economic conditions, and other relevant factors. This evaluation is inherently subjective as it requires material estimates including the amounts and timing of future cash flows expected to be received on impaired loans that may be susceptible to significant change.

The allowance consists of specific, general and unallocated components. The specific component relates to loans that are individually classified as impaired. Select loans are not aggregated for collective impairment evaluation, as such; all loans are subject to individual impairment evaluation should the facts and circumstances pertinent to a particular loan suggest that such evaluation is necessary. Factors considered by management in determining impairment include payment status and the probability of collecting scheduled principal and interest payments when due. Loans that experience insignificant payment delays and payment shortfalls generally are not classified as impaired. Management determines the significance of payment delays and payment shortfalls on a case-by-case basis, taking into consideration all of the circumstances surrounding the loan and the borrower, including the length of the delay, the reasons for the delay, the borrower’s prior payment record, and the amount of the shortfall in relation to the principal and interest owed. If a loan is impaired, a portion of the allowance may be allocated so that the loan is reported, net, at the present value of estimated future cash flows using the loan’s existing rate or at the fair value of collateral if repayment is expected solely from collateral. Troubled debt restructurings are separately identified for impairment disclosures and are measured at the present value of estimated future cash flows using the loan’s effective rate at inception. If a troubled debt restructuring is considered to be a collateral dependent loan, the loans may be reported, net, at the fair value of the collateral. For troubled debt restructurings that subsequently default, the Corporation determines the amount of reserve in accordance with the accounting policy for the allowance for loan losses.

The general component covers all other loans not identified as impaired (aside from Government Guaranteed Loans, which do not require an allowance) and is based on historical losses and qualitative factors. The historical loss component of the allowance is determined by losses recognized by portfolio segment over a time period that management has determined represents the current credit cycle. Qualitative factors impacting each portfolio segment may include: delinquency trends, loan volume trends, Bank policy changes, management processes and oversight, economic trends (including change in consumer and business disposable incomes, unemployment and under-employment levels, and other conditions), concentrations by industry or product, internal and external loan review processes, collateral value and market conditions, and external factors including regulatory issues and competition.

Government Guaranteed Loans do not require an associated allowance for loan losses due to the underlying irrevocable and unconditional guarantee, which is supported by the full faith and credit of the U.S. Government. Should a GGL default, the loan will be repurchased by the originating bank or the appropriate government agency that has provided the guarantee for the loan.

The unallocated component of the allowance is maintained to cover uncertainties that could affect management’s estimate of probable losses. The unallocated component of the allowance reflects the margin of imprecision inherent in the underlying assumptions used in the methodologies for estimating specific and general losses in the portfolio.

A reserve for unfunded lending commitments is provided for possible credit losses on off-balance sheet credit exposures. The reserve for unfunded lending commitments represents management’s estimate of losses inherent in its unfunded loan commitments and, if necessary, is recorded in other liabilities on the consolidated balance sheets. As of March 31, 2020 and December 31, 2019, the amount of the reserve for unfunded lending commitments was $161,000 and $117,000, respectively.

The Corporation is subject to periodic examination by its federal and state examiners, and may be required by such regulators to recognize additions to the allowance for loan losses based on their assessment of credit information available to them at the time of their examinations.

A loan is considered impaired when, based on current information and events, it is probable that the Corporation will be unable to collect all amounts due according to the contractual terms of the original loan agreement. Under current accounting standards, the allowance for loan losses related to impaired loans is based on discounted cash flows using the loan’s effective interest rate at inception or the fair value of the collateral for certain collateral dependent loans.

From time to time, the Bank may agree to modify/restructure the contractual terms of a borrower's loan. The restructuring of a loan is considered a “troubled debt restructuring” if both the following conditions are met: (i) the borrower is experiencing financial difficulties, and (ii) the Corporation has granted a concession. The most common concessions granted include one or more modifications to the terms of the debt, such as (a) a reduction in the interest rate for the remaining life of the debt, (b) an extension of the maturity date at an interest rate lower than the current market rate for new debt with similar risk, (c) a temporary period of interest-only payments, and (d) a reduction in the contractual payment amount for either a short period or remaining term of the loan. A less common concession is the forgiveness of a portion of the principal.

The determination of whether a borrower is experiencing financial difficulties takes into account not only the current financial condition of the borrower, but also the potential financial condition of the borrower were a concession not granted. Similarly, the determination of whether a concession has been granted is very subjective in nature. For example, simply extending the term of a loan at its original interest rate or even at a higher interest rate could be interpreted as a concession unless the borrower could readily obtain similar credit terms from a different lender.

Loans modified in a troubled debt restructuring are considered impaired and may or may not be placed on non-accrual status until the Corporation determines the future collection of principal and interest is reasonably assured, which generally requires that the borrower demonstrates a period of performance according to the restructured terms of six months. Any loan modifications made in response to the COVID-19 pandemic are not considered troubled debt restructurings as long as the criteria set forth in Section 4013 of the CARES Act are met.

The Bank utilizes a risk grading matrix as a tool for managing credit risk in the loan portfolio and assigns an asset quality rating (risk grade) to all Commercial and Industrial, Commercial Real Estate, Residential Real Estate and Consumer borrowings. An asset quality rating is assigned using the guidance provided in the Corporation’s loan policy. Primary responsibility for assigning the asset quality rating rests with the credit department. The asset quality rating is validated periodically by both an internal and external loan review process.

The commercial loan grading system focuses on a borrower’s financial strength and performance, experience and depth of management, primary and secondary sources of repayment, the nature of the business and the outlook for the particular industry. Primary emphasis is placed on financial condition and trends. The grade also reflects current economic and industry conditions; as well as other variables such as liquidity, cash flow, revenue/earnings trends, management strengths or weaknesses, quality of financial information, and credit history.

The loan grading system for Residential Real Estate and Consumer loans focuses on the borrower’s credit score and credit history, debt-to-income ratio and income sources, collateral position and loan-to-value ratio.

Risk grade characteristics are as follows:

Risk Grade 1 – MINIMAL RISK through Risk Grade 6 – MANAGEMENT ATTENTION (Pass Grade Categories)

Risk is evaluated via examination of several attributes including but not limited to financial trends, strengths and weaknesses, likelihood of repayment when considering both cash flow and collateral, sources of repayment, leverage position, management expertise, and repayment history.

At the low-risk end of the rating scale, a risk grade of 1 – Minimal Risk is the grade reserved for loans with exceptional credit fundamentals and virtually no risk of default or loss. Loan grades then progress through escalating ratings of 2 through 6 based upon risk. Risk Grade 2 – Modest Risk are loans with sufficient cash flows; Risk Grade 3 – Average Risk are loans with key balance sheet ratios slightly above the borrower’s peers; Risk Grade 4 – Acceptable Risk are loans with key balance sheet ratios usually near the borrower’s peers, but one or more ratios may be higher; and Risk Grade 5 – Marginally Acceptable are loans with strained cash flow, increasing leverage and/or weakening markets. Risk Grade 6 – Management Attention are loans with weaknesses resulting from declining performance trends and the borrower’s cash flows may be temporarily strained. Loans in this category are performing according to terms, but present some type of potential concern.

Risk Grade 7 − SPECIAL MENTION (Non-Pass Category)

Generally, these loans are currently protected, but are “potentially weak.” They constitute an undue and unwarranted credit risk but not to the point of justifying a classification of substandard.

Assets in this category are protected but have potential weakness which may, if not checked or corrected, weaken the asset or inadequately protect the Corporation’s credit position at some future date. No loss of principal or interest is envisioned; however, they constitute an undue credit risk that may be minor but is unwarranted in light of the circumstances surrounding a specific asset. Risk is increasing beyond that at which the loan originally would have been granted. Historically, cash flows are inconsistent; financial trends show some deterioration. Liquidity and leverage are above industry averages. Financial information could be incomplete or inadequate. A Special Mention asset has potential weaknesses that deserve management’s close attention.

Risk Grade 8 − SUBSTANDARD (Non-Pass Category)

Generally, these assets are inadequately protected by the current sound worth and paying capacity of the obligor or of the collateral pledged, if any. Assets so classified must have “well-defined” weaknesses that jeopardize the full liquidation of the debt.

These loans are characterized by the distinct possibility that the Corporation will sustain some loss if the aggregate amount of substandard assets is not fully covered by the liquidation of the collateral used as security. Substandard loans have a high probability of payment default and require more intensive supervision by Corporation management.

Risk Grade 9 − DOUBTFUL (Non-Pass Category)

Generally, loans graded doubtful have all the weaknesses inherent in a substandard loan with the added factor that the weaknesses are pronounced to a point whereby the basis of current information, conditions, and values, collection or liquidation in full is deemed to be highly improbable. The possibility of loss is extremely high, but because of certain important and reasonably specific pending factors that may work to strengthen the asset, its classification is deferred until, for example, a proposed merger, acquisition, liquidation procedure, capital injection, perfection of liens on additional collateral and/or refinancing plan is completed. Loans are graded doubtful if they contain weaknesses so serious that collection or liquidation in full is questionable.

The following table presents the classes of the loan portfolio summarized by risk rating as of March 31, 2020 and December 31, 2019:

	Commercial and
	Industrial				Commercial Real Estate
	March 31,		December 31,		March 31,		December 31,
(Dollars in thousands)	2020		2019		2020		2019
Grade:
1-6    Pass	$	85,418	$	84,999	$	399,740	$	382,510
7        Special Mention		—		2		—		944
8        Substandard		963		1,068		12,229		11,590
9        Doubtful		—		—		—		—
Add (deduct): Unearned discount and		—		—		—		—
Net deferred loan fees and costs		642		643		827		757
Total loans	$	87,023	$	86,712	$	412,796	$	395,801

	Residential Real Estate
	Including Home Equity				Consumer
	March 31,		December 31,		March 31,		December 31,
	2020		2019		2020		2019
Grade:
1-6    Pass	$	155,124	$	158,301	$	5,570	$	5,662
7        Special Mention		—		117		31		83
8        Substandard		1,089		1,048		8		35
9        Doubtful		—		—		—		—
Add (deduct): Unearned discount and		—		—		—		—
Net deferred loan fees and costs		(108)		(116)		83		89
Total loans	$	156,105	$	159,350	$	5,692	$	5,869

	Total Loans
	March 31,		December 31,
	2020		2019
Grade:
1-6     Pass	$	645,852	$	631,472
7         Special Mention		31		1,146
8         Substandard		14,289		13,741
9         Doubtful		—		—
Add (deduct): Unearned discount and		—		—
Net deferred loan fees and costs		1,444		1,373
Total loans	$	661,616	$	647,732

Commercial and Industrial and Commercial Real Estate include loans categorized as tax-free in the amounts of $17,117,000 and $1,966,000 at March 31, 2020 and $17,848,000 and  $2,007,000 at December 31, 2019. Commercial and Industrial loans also included $6,059,000 and $6,150,000 of Government Guaranteed Loans as of March 31, 2020 and December 31, 2019, respectively. Loans held for sale amounted to $2,342,000 at March 31, 2020 and $2,292,000 at December 31, 2019.

The activity in the allowance for loan losses, by loan class, is summarized below for the periods indicated.

	Commercial		Commercial		Residential
(Dollars in thousands)	and Industrial		Real Estate		Real Estate		Consumer		Unallocated		Total
As of and for the three month period ended March 31, 2020 :
Allowance for Loan Losses:
Beginning balance	$	634	$	4,116	$	1,665	$	114	$	476	$	7,005
Charge-offs		(4)		—		—		(16)		—		(20)
Recoveries		—		—		—		—		—		—
Provision		33		212		(22)		15		(44)		194
Ending Balance	$	663	$	4,328	$	1,643	$	113	$	432	$	7,179
Ending balance: individually evaluated for impairment	$	—	$	1	$	—	$	―	$	―	$	1
Ending balance: collectively evaluated for impairment	$	663	$	4,327	$	1,643	$	113	$	432	$	7,178
Loans Receivable:
Ending Balance	$	87,023	$	412,796	$	156,105	$	5,692	$	―	$	661,616
Ending balance: individually evaluated for impairment	$	1,077	$	11,510	$	1,109	$	—	$	—	$	13,696
Ending balance: collectively evaluated for impairment	$	85,946	$	401,286	$	154,996	$	5,692	$	—	$	647,920

	Commercial		Commercial		Residential
(Dollars in thousands)	and Industrial		Real Estate		Real Estate		Consumer		Unallocated		Total
As of and for the three month period ended March 31, 2019 :
Allowance for Loan Losses:
Beginning balance	$	724	$	3,700	$	1,650	$	117	$	554	$	6,745
Charge-offs		—		(64)		—		(15)		—		(79)
Recoveries		1		—		2		1		—		4
Provision		7		229		(11)		7		(140)		92
Ending Balance	$	732	$	3,865	$	1,641	$	110	$	414	$	6,762
Ending balance: individually evaluated for impairment	$	—	$	4	$	—	$	―	$	―	$	4
Ending balance: collectively evaluated for impairment	$	732	$	3,861	$	1,641	$	110	$	414	$	6,758
Loans Receivable:
Ending Balance	$	93,575	$	359,073	$	159,624	$	5,711	$	―	$	617,983
Ending balance: individually evaluated for impairment	$	1,116	$	15,557	$	491	$	—	$	—	$	17,164
Ending balance: collectively evaluated for impairment	$	92,459	$	343,516	$	159,133	$	5,711	$	—	$	600,819

	Commercial		Commercial		Residential
(Dollars in thousands)	and Industrial		Real Estate		Real Estate		Consumer		Unallocated		Total
As of and for the year ended December 31, 2019
Allowance for Loan Losses:
Beginning balance	$	724	$	3,700	$	1,650	$	117	$	554	$	6,745
Charge-offs		—		(64)		(69)		(71)		—		(204)
Recoveries		6		—		2		6		—		14
Provision		(96)		480		82		62		(78)		450
Ending Balance	$	634	$	4,116	$	1,665	$	114	$	476	$	7,005
Ending balance: individually evaluated for impairment	$	—	$	1	$	—	$	—	$	—	$	1
Ending balance: collectively evaluated for impairment	$	634	$	4,115	$	1,665	$	114	$	476	$	7,004
Loans Receivable:
Ending Balance	$	86,712	$	395,801	$	159,350	$	5,869	$	—	$	647,732
Ending balance: individually evaluated for impairment	$	1,084	$	11,158	$	712	$	—	$	—	$	12,954
Ending balance: collectively evaluated for impairment	$	85,628	$	384,643	$	158,638	$	5,869	$	—	$	634,778

Of the $169,000 in foreclosed assets held for resale at March 31, 2020, $38,000 was represented by land, $50,000 was represented by residential real estate, and $81,000 was represented by commercial real estate. Of the $119,000 in foreclosed assets held for resale at December 31, 2019, $38,000 was represented by land and $81,000 was represented by commercial real estate. At March 31, 2020 and December 31, 2019, all foreclosed assets were held as the result of obtaining physical possession. Consumer mortgage loans secured by residential real estate for which the Bank has entered into formal foreclosure proceedings but for which physical possession of the property has yet to be obtained amounted to $996,000 at March 31, 2020 and $617,000 at December 31, 2019. These balances were not included in foreclosed assets held for resale at March 31, 2020 or December 31, 2019.

The outstanding recorded investment of TDRs as of March 31, 2020 and December 31, 2019 was $8,470,000 and $8,678,000,  respectively.  The decrease in TDRs at March 31, 2020 as compared to December 31, 2019 is mainly attributable to payments and payoffs on existing troubled debt restructurings that were completed during the first quarter of 2020. There were no unfunded commitments on TDRs at March 31, 2020 and December 31, 2019.

The following table presents the outstanding recorded investment of TDRs at the dates indicated:

	March 31,		December 31,
(Dollars in thousands)	2020		2019
Non-accrual TDRs	$	1,725	$	112
Accruing TDRs		6,745		8,566
Total	$	8,470	$	8,678

At March 31, 2020, nine Commercial Real Estate loans classified as TDRs with a combined recorded investment of $1,377,000 were not in compliance with the terms of their restructure, compared to March 31, 2019 when six Commercial Real Estate loans classified as TDRs with a combined recorded investment of $597,000 and one Commercial and Industrial loan classified as a TDR with a recorded investment of $5,000 were not in compliance with the terms of their restructure.

No loans were modified as TDRs within the twelve months preceding March 31, 2020. Of the loans that were modified as TDRs during the twelve months preceding March 31, 2019, two Commercial Real Estate Loans with a combined recorded investment of $113,000 experienced payment defaults during the three months ended Mach 31, 2019.

No loans were modified as TDRs during the three months ended March 31, 2020 and 2019.

On March 27, 2020, in response to the COVID-19 pandemic, the CARES Act was signed into law. Section 4013 of the CARES Act provides financial institutions the option to suspend requirements to categorize certain loan modifications as TDRs as long as specific criteria are met. To qualify, the loan modifications must be short-term (granted for temporary relief, ex. six months), made on a good-faith basis in response to the COVID-19 pandemic, and the contractual payments of the loan must have been paid current (less than 30 days past due prior to any relief) at the time a modification was implemented. While requests for modifications had been made, no modifications had been completed as part of this program as of March 31, 2020.

The recorded investment, unpaid principal balance, and the related allowance of the Corporation’s impaired loans are summarized below at March 31, 2020 and December 31, 2019.

	March 31, 2020						December 31, 2019
			Unpaid						Unpaid
	Recorded		Principal		Related		Recorded		Principal		Related
(Dollars in thousands)	Investment		Balance		Allowance		Investment		Balance		Allowance
With no related allowance recorded:
Commercial and Industrial	$	1,077	$	1,077	$	—	$	1,084	$	1,084	$	—
Commercial Real Estate		11,396		14,289		—		11,130		14,147		—
Residential Real Estate		1,089		1,174		—		712		822		—
With an allowance recorded:
Commercial and Industrial		—		—		—		—		—		—
Commercial Real Estate		114		114		1		28		28		1
Residential Real Estate		20		20		—		—		—		—
Total	$	13,696	$	16,674	$	1	$	12,954	$	16,081	$	1
Total consists of:
Commercial and Industrial	$	1,077	$	1,077	$	—	$	1,084	$	1,084	$	—
Commercial Real Estate	$	11,510	$	14,403	$	1	$	11,158	$	14,175	$	1
Residential Real Estate	$	1,109	$	1,194	$	—	$	712	$	822	$	—

At March 31, 2020 and December 31, 2019, $8,470,000 and $8,678,000 of loans classified as TDRs were included in impaired loans both with a total allocated allowance of $1,000, respectively. The recorded investment represents the loan balance reflected on the consolidated balance sheets net of any charge-offs. The unpaid balance is equal to the gross amount due on the loan.

The average recorded investment and interest income recognized for the Corporation’s impaired loans are summarized below for the three months ended March 31, 2020 and 2019.

	For the Three Months Ended				For the Three Months Ended
	March 31, 2020				March 31, 2019
	Average		Interest		Average		Interest
	Recorded		Income		Recorded		Income
(Dollars in thousands)	Investment		Recognized		Investment		Recognized
With no related allowance recorded:
Commercial and Industrial	$	1,079	$	6	$	1,122	$	14
Commercial Real Estate		11,131		76		15,574		150
Residential Real Estate		925		—		440		1
With an allowance recorded:
Commercial and Industrial		—		—		—		—
Commercial Real Estate		118		1		94		1
Residential Real Estate		21		1		—		—
Total	$	13,274	$	84	$	17,230	$	166
Total consists of:
Commercial and Industrial	$	1,079	$	6	$	1,122	$	14
Commercial Real Estate	$	11,249	$	77	$	15,668	$	151
Residential Real Estate	$	946	$	1	$	440	$	1

Of the $84,000 and $166,000 in interest income recognized on impaired loans for the three months ended March 31, 2020 and 2019, respectively, $5,000 and $0 in interest income was recognized with respect to non-accrual loans.

Total non-performing assets (which includes loans receivable on non-accrual status, foreclosed assets held for resale and loans past-due 90 days or more and still accruing interest) as of March 31, 2020 and December 31, 2019 were as follows:

	March 31,		December 31,
(Dollars in thousands)	2020		2019
Commercial and Industrial	$	768	$	—
Commercial Real Estate		5,094		3,697
Residential Real Estate		1,089		691
Total non-accrual loans		6,951		4,388
Foreclosed assets held for resale		169		119
Loans past-due 90 days or more and still accruing interest		579		100
Total non-performing assets	$	7,699	$	4,607

The following tables present the classes of the loan portfolio summarized by past-due status at March 31, 2020 and December 31, 2019:

													90 Days
													Or Greater
													Past Due
					90 Days				Current–				and Still
	30‑59 Days		60‑89 Days		or Greater		Total		29 Days		Total		Accruing
(Dollars in thousands)	Past Due		Past Due		Past Due		Past Due		Past Due		Loans		Interest
March 31, 2020:
Commercial and Industrial	$	698	$	380	$	91	$	1,169	$	85,854	$	87,023	$	92
Commercial Real Estate		2,942		301		4,935		8,178		404,618		412,796		487
Residential Real Estate		1,303		177		913		2,393		153,712		156,105		—
Consumer		20		5		—		25		5,667		5,692		—
Total	$	4,963	$	863	$	5,939	$	11,765	$	649,851	$	661,616	$	579

													90 Days
													Or Greater
													Past Due
					90 Days				Current–				and Still
	30‑59 Days		60‑89 Days		or Greater		Total		29 Days		Total		Accruing
(Dollars in thousands)	Past Due		Past Due		Past Due		Past Due		Past Due		Loans		Interest
December 31, 2019:
Commercial and Industrial	$	—	$	26	$	—	$	26	$	86,686	$	86,712	$	—
Commercial Real Estate		880		957		3,502		5,339		390,462		395,801		—
Residential Real Estate		1,118		506		613		2,237		157,113		159,350		100
Consumer		24		5		—		29		5,840		5,869		—
Total	$	2,022	$	1,494	$	4,115	$	7,631	$	640,101	$	647,732	$	100

At March 31, 2020 and December 31, 2019, commitments to lend additional funds with respect to impaired loans consisted of one irrevocable letter of credit totaling $1,249,000 that was associated with a loan to a developer of a residential sub-division.

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FINANCIAL INSTRUMENTS WITH OFF-BALANCE SHEET RISK AND CONCENTRATIONS OF CREDIT RISK

3 Months Ended

Mar. 31, 2020

FINANCIAL INSTRUMENTS WITH OFF-BALANCE SHEET RISK AND CONCENTRATIONS OF CREDIT RISK

FINANCIAL INSTRUMENTS WITH OFF-BALANCE SHEET RISK AND CONCENTRATIONS OF CREDIT RISK

NOTE 8 — FINANCIAL INSTRUMENTS WITH OFF-BALANCE SHEET RISK AND CONCENTRATIONS OF CREDIT RISK

Financial Instruments with Off-Balance Sheet Risk

The Corporation is a party to financial instruments with off-balance sheet risk in the normal course of business to meet the financing needs of its customers. These financial instruments include commitments to extend credit and standby letters of credit. Those instruments involve, to varying degrees, elements of credit and interest rate risk in excess of the amount recognized in the consolidated balance sheets. The contract or notional amounts of those instruments reflect the extent of involvement the Corporation has in particular classes of financial instruments. The Corporation does not engage in trading activities with respect to any of its financial instruments with off-balance sheet risk.

The Corporation’s exposure to credit loss in the event of non-performance by the other party to the financial instrument for commitments to extend credit and standby letters of credit is represented by the contractual notional amount of those instruments.

The Corporation uses the same credit policies in making commitments and conditional obligations as it does for on-balance sheet instruments.

The Corporation may require collateral or other security to support financial instruments with off-balance sheet credit risk.

The contract or notional amounts at March  31, 2020 and December 31, 2019 were as follows:

(Dollars in thousands)	March 31, 2020		December 31, 2019
Financial instruments whose contract amounts represent credit risk:
Commitments to extend credit	$	140,367	$	122,082
Financial standby letters of credit	$	335	$	335
Performance standby letters of credit	$	3,230	$	3,230

Commitments to extend credit are agreements to lend to a customer as long as there is no violation of any condition established in the contract. Commitments generally have fixed expiration dates or other termination clauses that may require payment of a fee. Since some of the commitments may expire without being drawn upon, the total commitment amounts do not necessarily represent future cash requirements. The Corporation evaluates each customer’s creditworthiness on a case-by-case basis. The amount of collateral obtained, if deemed necessary by the Corporation upon extension of credit, is based on management’s credit evaluation of the borrower. Collateral held varies but may include accounts receivable, inventory, property, plant and equipment, owner-occupied income-producing commercial properties, and residential real estate.

Standby letters of credit are conditional commitments issued by the Corporation to guarantee payment to a third party when a customer either fails to repay an obligation or fails to perform some non-financial obligation. The credit risk involved in issuing letters of credit is essentially the same as that involved in extending loan facilities to customers. The Corporation may hold collateral (similar to the items held as collateral for commitments to extend credit) to support standby letters of credit for which collateral is deemed necessary.

Financial Instruments with Concentrations of Credit Risk

The Corporation originates primarily commercial and residential real estate loans to customers in northeastern Pennsylvania. The ability of the majority of the Corporation’s customers to honor their contractual loan obligations is dependent on the economy and real estate market in this area. At March 31, 2020, the Corporation had $568,901,000 in loans secured by real estate, which represented 86.0% of total loans. The real estate loan portfolio is largely secured by lessors of residential buildings and dwellings, lessors of non-residential buildings, and lessors of hotels/motels. As of March 31, 2020 and December 31, 2019, management is of the opinion that there were no concentrations exceeding 10% of total loans with regard to loans to borrowers who were engaged in similar activities that were similarly impacted by economic or other conditions.

As all financial instruments are subject to some level of credit risk, the Corporation requires collateral and/or guarantees for all loans. Collateral may include, but is not limited to property, plant, and equipment, commercial and/or residential real estate property, land, and pledge of securities. In the event of a borrower’s default, the collateral supporting the loan may be seized in order to recoup losses associated with the loan. The Corporation also establishes an allowance for loan losses that constitutes the amount available to absorb losses within the loan portfolio that may exist due to deficiencies in collateral values.

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SECURITIES - Additional Information (Details)	3 Months Ended
	Mar. 31, 2020 USD ($) item	Mar. 31, 2019 USD ($)	Dec. 31, 2019 USD ($)
Available-for-sale Securities Pledged as Collateral	$ 183,713,000		$ 201,468,000
Carrying Value Of Public Funds, Trust Funds, Securities Sold Under Agreements To Repurchase, FHLB Advances, And Other Balances	128,721,000		143,546,000
Proceeds from Sale of Debt Securities, Available-for-sale	11,182,000	$ 32,374,000
Impairment losses realized on available-for-sale debt securities	0	0
Accumulated Other Comprehensive Income (Loss), Net of Tax	4,826,000		4,221,000
Proceeds from Sale of Held-to-maturity Securities	0	0
Debt Securities, Held-to-maturity, Sold, Realized Gain (Loss)	0	0
Gain on debt securities	176,000	187,000
Loss on debt securities	$ 105,000	$ 102,000
Available For Sale Securities In Unrealized Loss Positions Qualitative Disclosure Number Of Positions Less Than Or Equal To One Year | item	27
Available For Sale Securities In Unrealized Loss Positions Qualitative Disclosure Number Of Positions Greater Than One Year | item	13
Marketable Equity Securities
Available-for-sale Securities	$ 1,394,000		$ 1,933,000

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SECURITIES - Amortized cost, related estimated fair value, and unrealized gains and losses (Details) - USD ($) $ in Thousands	Mar. 31, 2020		Dec. 31, 2019
Available-for-Sale Securities
Amortized Cost	$ 277,555		$ 272,585
Gross Unrealized Gains	10,232		6,336
Gross Unrealized Losses	(4,124)		(993)
Total	283,663		277,928
Other mortgage backed debt securities [Member]
Available-for-Sale Securities
Amortized Cost	10,187	[1]	11,145
Gross Unrealized Gains	0		3
Gross Unrealized Losses	(824)		(10)
Total	9,363	[1]	11,138
U.S. Treasury Securities [Member]
Available-for-Sale Securities
Amortized Cost	0		2,852
Gross Unrealized Gains	0		3
Gross Unrealized Losses	0		0
Total	0		2,855
Obligations of U.S. Government Corporations and Agencies Mortgage-backed [Member]
Available-for-Sale Securities
Amortized Cost	62,235		77,131
Gross Unrealized Gains	1,055		539
Gross Unrealized Losses	(785)		(387)
Total	62,505		77,283
Obligations of US Government Corporations and Agencies Other [Member]
Available-for-Sale Securities
Amortized Cost	12,341		10,381
Gross Unrealized Gains	7		4
Gross Unrealized Losses	(119)		(88)
Total	12,229		10,297
Obligations of state and political subdivisions [Member]
Available-for-Sale Securities
Amortized Cost	131,424		114,934
Gross Unrealized Gains	9,052		5,490
Gross Unrealized Losses	(9)		(48)
Total	140,467		120,376
Asset-backed Securities [Member]
Available-for-Sale Securities
Amortized Cost	42,889		37,596
Gross Unrealized Gains	0		115
Gross Unrealized Losses	(2,123)		(175)
Total	40,766		37,536
Corporate debt securities [Member]
Available-for-Sale Securities
Amortized Cost	18,479		18,546
Gross Unrealized Gains	118		182
Gross Unrealized Losses	(264)		(285)
Total	$ 18,333		$ 18,443

[1] 1Mortgage-backed securities are allocated for maturity reporting at their original maturity date.

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LOANS AND ALLOWANCE FOR LOAN LOSSES - Impaired loans (Details) - USD ($) $ in Thousands	3 Months Ended
	Mar. 31, 2020	Mar. 31, 2019	Dec. 31, 2019
Recorded Investment
Total	$ 13,696		$ 12,954
Unpaid Principal Balance
Total	16,674		16,081
Related Allowance
Total	1		1
Average Recorded Investment
Total	13,274	$ 17,230
Interest Income Recognized
Total	84	166
Commercial and Industrial [Member]
Recorded Investment
With no related allowance recorded	1,077		1,084
With an allowance recorded	0		0
Total	1,077		1,084
Unpaid Principal Balance
With no related allowance recorded	1,077		1,084
With an allowance recorded	0		0
Total	1,077		1,084
Related Allowance
With no related allowance recorded	0		0
With an allowance recorded	0		0
Total	0		0
Average Recorded Investment
With no related allowance recorded	1,079	1,122
With an allowance recorded	0	0
Total	1,079	1,122
Interest Income Recognized
With no related allowance recorded	6	14
With an allowance recorded	0	0
Total	6	14
Commercial Real Estate [Member]
Recorded Investment
With no related allowance recorded	11,396		11,130
With an allowance recorded	114		28
Total	11,510		11,158
Unpaid Principal Balance
With no related allowance recorded	14,289		14,147
With an allowance recorded	114		28
Total	14,403		14,175
Related Allowance
With no related allowance recorded	0		0
With an allowance recorded	1		1
Total	1		1
Average Recorded Investment
With no related allowance recorded	11,131	15,574
With an allowance recorded	118	94
Total	11,249	15,668
Interest Income Recognized
With no related allowance recorded	76	150
With an allowance recorded	1	1
Total	77	151
Residential Real Estate [Member]
Recorded Investment
With no related allowance recorded	1,089		712
With an allowance recorded	20		0
Total	1,109		712
Unpaid Principal Balance
With no related allowance recorded	1,174		822
With an allowance recorded	20		0
Total	1,194		822
Related Allowance
With no related allowance recorded	0		0
With an allowance recorded	0		0
Total	0		$ 0
Average Recorded Investment
With no related allowance recorded	925	440
With an allowance recorded	21	0
Total	946	440
Interest Income Recognized
With no related allowance recorded	0	1
With an allowance recorded	1	0
Total	$ 1	$ 1

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EARNINGS PER SHARE (Details) - USD ($) $ / shares in Units, shares in Thousands, $ in Thousands	3 Months Ended
	Mar. 31, 2020	Mar. 31, 2019
EARNINGS PER SHARE
Net income	$ 2,053	$ 2,243
Weighted-average common shares outstanding	5,817	5,765
Basic and diluted earnings per share	$ 0.35	$ 0.39

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CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (Parenthetical) - USD ($) $ in Thousands	3 Months Ended
	Mar. 31, 2020	Mar. 31, 2019
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
Other Comprehensive Income (Loss), Unrealized Holding Gain (Loss) on Securities Arising During Period, Tax	$ 176	$ 986
Other Comprehensive Income (Loss), Reclassification Adjustment from AOCI for Sale of Securities, Tax	$ (15)	$ (18)

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FINANCIAL INSTRUMENTS WITH OFF-BALANCE SHEET RISK AND CONCENTRATIONS OF CREDIT RISK (Details) - USD ($) $ in Thousands	Mar. 31, 2020	Dec. 31, 2019
Commitments to Extend Credit [Member]
Fair Value, Off-balance Sheet Risks, Disclosure Information [Line Items]
Concentration Risk, Credit Risk, Financial Instrument, Off-Balance Sheet Risk	$ 140,367	$ 122,082
Financial Standby Letter of Credit [Member]
Fair Value, Off-balance Sheet Risks, Disclosure Information [Line Items]
Concentration Risk, Credit Risk, Financial Instrument, Off-Balance Sheet Risk	335	335
Performance Standby Letters of Credit [Member]
Fair Value, Off-balance Sheet Risks, Disclosure Information [Line Items]
Concentration Risk, Credit Risk, Financial Instrument, Off-Balance Sheet Risk	$ 3,230	$ 3,230

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FAIR VALUE MEASUREMENTS - Nonfinancial assets measured at FV (Details) - Fair Value, Measurements, Nonrecurring [Member] - Foreclosed assets held for resale [Member] - USD ($) $ in Thousands	Mar. 31, 2020	Dec. 31, 2019
Fair Value Assets and Liabilities Measured on Recurring and Nonrecurring Basis [Line Items]
Assets, Fair Value Disclosure	$ 81	$ 81
Fair Value, Inputs, Level 1 [Member]
Fair Value Assets and Liabilities Measured on Recurring and Nonrecurring Basis [Line Items]
Assets, Fair Value Disclosure	0	0
Fair Value, Inputs, Level 2 [Member]
Fair Value Assets and Liabilities Measured on Recurring and Nonrecurring Basis [Line Items]
Assets, Fair Value Disclosure	0	0
Fair Value, Inputs, Level 3 [Member]
Fair Value Assets and Liabilities Measured on Recurring and Nonrecurring Basis [Line Items]
Assets, Fair Value Disclosure	81	81
Commercial Real Estate [Member]
Fair Value Assets and Liabilities Measured on Recurring and Nonrecurring Basis [Line Items]
Assets, Fair Value Disclosure	81	81
Commercial Real Estate [Member] | Fair Value, Inputs, Level 1 [Member]
Fair Value Assets and Liabilities Measured on Recurring and Nonrecurring Basis [Line Items]
Assets, Fair Value Disclosure	0	0
Commercial Real Estate [Member] | Fair Value, Inputs, Level 2 [Member]
Fair Value Assets and Liabilities Measured on Recurring and Nonrecurring Basis [Line Items]
Assets, Fair Value Disclosure	0	0
Commercial Real Estate [Member] | Fair Value, Inputs, Level 3 [Member]
Fair Value Assets and Liabilities Measured on Recurring and Nonrecurring Basis [Line Items]
Assets, Fair Value Disclosure	$ 81	$ 81

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CONSOLIDATED BALANCE SHEETS - USD ($) $ in Thousands	Mar. 31, 2020	Dec. 31, 2019
ASSETS
Cash and due from banks	$ 7,785	$ 10,251
Interest-bearing deposits in other banks	1,013	473
Total cash and cash equivalents	8,798	10,724
Time deposits with other banks	247	247
Debt securities available-for-sale, at fair value	283,663	277,928
Marketable equity securities, at fair value	1,394	1,933
Restricted investment in bank stocks, at cost	6,740	4,224
Loans	659,274	645,440
Loans held for sale	2,342	2,292
Allowance for loan losses	(7,179)	(7,005)
Net loans	654,437	640,727
Premises and equipment, net	19,244	19,387
Operating lease right-of-use assets	1,312	1,470
Accrued interest receivable	3,622	3,405
Cash surrender value of bank owned life insurance	23,737	23,583
Investments in low-income housing partnerships	1,737	1,828
Goodwill	19,133	19,133
Foreclosed assets held for resale	169	119
Other assets	2,974	2,518
TOTAL ASSETS	1,027,207	1,007,226
LIABILITIES
Non-interest bearing	153,029	134,648
Interest bearing	581,768	626,980
Total deposits	734,797	761,628
Short-term borrowings	106,379	54,663
Long-term borrowings	50,000	55,000
Operating lease liabilities	1,577	1,663
Accrued interest payable	550	606
Deferred income taxes	351	438
Other liabilities	3,403	4,476
TOTAL LIABILITIES	897,057	878,474
STOCKHOLDERS' EQUITY
Preferred stock, par value $2.00 per share; authorized 1,000,000 shares as of March 31, 2020 and December 31, 2019; issued 0 as of March 31, 2020 and December 31, 2019
Common stock, par value $2.00 per share; authorized 20,000,000 shares as of March 31, 2020 and December 31, 2019; issued 6,063,719 as of March 31, 2020 and 6,048,506 as of December 31, 2019; outstanding 5,832,107 as of March 31, 2020 and 5,816,894 as of December 31, 2019	12,127	12,097
Surplus	38,645	38,365
Retained earnings	80,261	79,778
Accumulated other comprehensive income	4,826	4,221
Treasury stock, at cost, 231,612 shares as of March 31, 2020 and December 31, 2019	(5,709)	(5,709)
TOTAL STOCKHOLDERS' EQUITY	130,150	128,752
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY	$ 1,027,207	$ 1,007,226

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BORROWINGS (Details) - USD ($) $ in Thousands	3 Months Ended	12 Months Ended
	Mar. 31, 2020	Dec. 31, 2019
Short-term Debt	$ 106,379	$ 54,663
Debt Instrument, Interest Rate During Period	1.50%	2.37%
Federal Funds Purchased [Member]
Short-term Debt	$ 0	$ 0
Debt Instrument, Interest Rate During Period	0.00%	2.01%
Securities Sold under Agreements to Repurchase [Member]
Short-term Debt	$ 12,551	$ 14,042
Debt Instrument, Interest Rate During Period	1.05%	1.03%
Federal Discount Window [Member]
Short-term Debt	$ 0	$ 0
Debt Instrument, Interest Rate During Period	0.00%	2.92%
Federal Home Loan Bank [Member]
Short-term Debt	$ 93,828	$ 40,621
Debt Instrument, Interest Rate During Period	1.64%	2.59%

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LOANS AND ALLOWANCE FOR LOAN LOSSES - Past due (Details) - USD ($) $ in Thousands	Mar. 31, 2020	Dec. 31, 2019	Mar. 31, 2019
Total Past Due	$ 11,765	$ 7,631
Current- 29 Days Past Due	649,851	640,101
Total Loans	661,616	647,732	$ 617,983
90 Days or Greater Past Due and Still Accruing Interest	579	100
Financing Receivables, 30 to 59 Days Past Due [Member]
Total Past Due	4,963	2,022
Financing Receivables, 60 to 89 Days Past Due [Member]
Total Past Due	863	1,494
Financing Receivables, Equal to Greater than 90 Days Past Due [Member]
Total Past Due	5,939	4,115
Commercial and Industrial [Member]
Total Past Due	1,169	26
Current- 29 Days Past Due	85,854	86,686
Total Loans	87,023	86,712	93,575
90 Days or Greater Past Due and Still Accruing Interest	92	0
Commercial and Industrial [Member] | Financing Receivables, 30 to 59 Days Past Due [Member]
Total Past Due	698	0
Commercial and Industrial [Member] | Financing Receivables, 60 to 89 Days Past Due [Member]
Total Past Due	380	26
Commercial and Industrial [Member] | Financing Receivables, Equal to Greater than 90 Days Past Due [Member]
Total Past Due	91	0
Commercial Real Estate [Member]
Total Past Due	8,178	5,339
Current- 29 Days Past Due	404,618	390,462
Total Loans	412,796	395,801	359,073
90 Days or Greater Past Due and Still Accruing Interest	487	0
Commercial Real Estate [Member] | Financing Receivables, 30 to 59 Days Past Due [Member]
Total Past Due	2,942	880
Commercial Real Estate [Member] | Financing Receivables, 60 to 89 Days Past Due [Member]
Total Past Due	301	957
Commercial Real Estate [Member] | Financing Receivables, Equal to Greater than 90 Days Past Due [Member]
Total Past Due	4,935	3,502
Residential Real Estate [Member]
Total Past Due	2,393	2,237
Current- 29 Days Past Due	153,712	157,113
Total Loans	156,105	159,350	159,624
90 Days or Greater Past Due and Still Accruing Interest	0	100
Residential Real Estate [Member] | Financing Receivables, 30 to 59 Days Past Due [Member]
Total Past Due	1,303	1,118
Residential Real Estate [Member] | Financing Receivables, 60 to 89 Days Past Due [Member]
Total Past Due	177	506
Residential Real Estate [Member] | Financing Receivables, Equal to Greater than 90 Days Past Due [Member]
Total Past Due	913	613
Consumer [Member]
Total Past Due	25	29
Current- 29 Days Past Due	5,667	5,840
Total Loans	5,692	5,869	$ 5,711
90 Days or Greater Past Due and Still Accruing Interest	0	0
Consumer [Member] | Financing Receivables, 30 to 59 Days Past Due [Member]
Total Past Due	20	24
Consumer [Member] | Financing Receivables, 60 to 89 Days Past Due [Member]
Total Past Due	5	5
Consumer [Member] | Financing Receivables, Equal to Greater than 90 Days Past Due [Member]
Total Past Due	$ 0	$ 0

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COMMITMENTS AND CONTINGENCIES - Weighted average term and discount rates (Details)	Mar. 31, 2020	Dec. 31, 2019
COMMITMENTS AND CONTINGENCIES
Weighted-average term (years)	25 years 6 months 22 days	25 years 7 months 17 days
Weighted-average discount rate	3.86%	3.85%

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BASIS OF PRESENTATION , SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES AND SUBSEQUENT EVENTS (Details) - Subsequent Event [Member]	Apr. 30, 2020 USD ($) loan
Subsequent Event [Line Items]
Number of application received	456
Total Funds Requested | $	$ 32,367,000
Loans for which payment relief has been requested | $	$ 181,704,000
Number of loans approved	432
Number of loans funded	152
Loan funded under paycheck protection program | $	$ 16,010,000
Interest rate	1.00%
Number of loan modification approved across loan segments under COVID- 19	493

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SECURITIES (Tables)

3 Months Ended

Mar. 31, 2020

SECURITIES

Schedule of amortized cost, related estimated fair value, and unrealized gains and losses for debt securities classified as "Available-For-Sale"

The amortized cost, related estimated fair value, and unrealized gains and losses for debt securities classified as “Available-For-Sale” were as follows at March 31, 2020 and December 31, 2019:

	Debt Securities Available-for-Sale
			Gross		Gross
	Amortized		Unrealized		Unrealized		Fair
(Dollars in thousands)	Cost		Gains		Losses		Value
March 31, 2020:
U.S. Treasury securities	$	—	$	—	$	—	$	—
Obligations of U.S. Government Corporations and Agencies:
Mortgage-backed		62,235		1,055		(785)		62,505
Other		12,341		7		(119)		12,229
Other mortgage backed debt securities		10,187		—		(824)		9,363
Obligations of state and political subdivisions		131,424		9,052		(9)		140,467
Asset backed securities		42,889		—		(2,123)		40,766
Corporate debt securities		18,479		118		(264)		18,333
Total	$	277,555	$	10,232	$	(4,124)	$	283,663

	Debt Securities Available-for-Sale
			Gross		Gross
	Amortized		Unrealized		Unrealized		Fair
(Dollars in thousands)	Cost		Gains		Losses		Value
December 31, 2019:
U.S. Treasury securities	$	2,852	$	3	$	—	$	2,855
Obligations of U.S. Government Corporations and Agencies:
Mortgage-backed		77,131		539		(387)		77,283
Other		10,381		4		(88)		10,297
Other mortgage backed securities		11,145		3		(10)		11,138
Obligations of state and political subdivisions		114,934		5,490		(48)		120,376
Asset backed securities		37,596		115		(175)		37,536
Corporate debt securities		18,546		182		(285)		18,443
Total	$	272,585	$	6,336	$	(993)	$	277,928

Schedule of amortized cost and estimated fair value of debt securities, by contractual maturity

The amortized cost and estimated fair value of debt securities, by contractual maturity, are shown below at March 31, 2020. Expected maturities will differ from contractual maturities because borrowers may have the right to call or prepay obligations with or without call or prepayment penalties.

	March 31, 2020
	Debt Securities Available-For-Sale
			U.S. Government		Other		Obligations
			Corporations &		Mortgage		of State		Asset		Corporate
	U.S. Treasury		Agencies		Backed Debt		& Political		Backed		Debt
(Dollars in thousands)	Securities		Obligations1		Securities1		Subdivisions		Securities		Securities
Within 1 Year:
Amortized cost	$	—	$	—	$	—	$	1,001	$	—	$	2,000
Fair value		—		—		—		1,011		—		1,968
1 - 5 Years:
Amortized cost		—		772		—		21,473		2,872		16,479
Fair value		—		788		—		22,070		2,737		16,365
5 - 10 Years:
Amortized cost		—		21,610		—		23,936		4,686		—
Fair value		—		21,337		—		25,293		4,462		—
After 10 Years:
Amortized cost		—		52,194		10,187		85,014		35,331		—
Fair value		—		52,609		9,363		92,093		33,567		—
Total:
Amortized cost	$	—	$	74,576	$	10,187	$	131,424	$	42,889	$	18,479
Fair value		—		74,734		9,363		140,467		40,766		18,333

1Mortgage-backed securities are allocated for maturity reporting at their original maturity date.

Schedule of unrealized and realized gains and losses recognized in net income on equity securities

The following is a summary of unrealized and realized gains and losses recognized in net income on equity securities during the three months ended March 31, 2020 and 2019:

	Three months ended		Three months ended
(Dollars in thousands)	March 31, 2020		March 31, 2019
Net (losses) and  gains recognized during the period on equity securities	$	(538)	$	18
Less: Net gains and (losses) recognized during the period on equity securities sold during the period		—		—
Unrealized (losses) and gains recognized during the reporting period on equity securities still held at the reporting date	$	(538)	$	18

Schedule of gross unrealized losses and fair value of the corporation's debt securities

The summary below shows the gross unrealized losses and fair value of the Corporation’s debt securities. Totals are aggregated by investment category where individual securities have been in a continuous loss position for less than 12 months or 12 months or more as of March 31, 2020 and December 31, 2019:

March 31, 2020

	Less Than 12 Months				12 Months or More				Total
	Fair		Unrealized		Fair		Unrealized		Fair		Unrealized
(Dollars in thousands)	Value		Loss		Value		Loss		Value		Loss
Available-for-Sale:
U.S. Treasury securities	$	—	$	—	$	—	$	—	$	—	$	—
Obligations of U.S. Government Corporations and Agencies:
Mortgage-backed		20,750		(466)		7,747		(319)		28,497		(785)
Other		6,092		(64)		4,396		(55)		10,488		(119)
Other mortgage backed debt securities		7,492		(824)		—		—		7,492		(824)
Obligations of state and political subdivisions		1,507		(9)		—		—		1,507		(9)
Asset backed securities		40,766		(2,123)		—		—		40,766		(2,123)
Corporate debt securities		4,041		(118)		7,355		(146)		11,396		(264)
Total	$	80,648	$	(3,604)	$	19,498	$	(520)	$	100,146	$	(4,124)

December 31, 2019

	Less Than 12 Months				12 Months or More				Total
	Fair		Unrealized		Fair		Unrealized		Fair		Unrealized
(Dollars in thousands)	Value		Loss		Value		Loss		Value		Loss
Available-for-Sale:
U.S. Treasury securities	$	—	$	—	$	—	$	—	$	—	$	—
Obligations of U.S. Government Corporations and Agencies:
Mortgage-backed		39,085		(221)		12,650		(166)		51,735		(387)
Other		4,382		(24)		4,594		(64)		8,976		(88)
Other mortgage backed debt securities		4,056		(10)		—		—		4,056		(10)
Obligations of state and political subdivisions		1,993		(15)		1,081		(33)		3,074		(48)
Asset backed securities		19,236		(175)		—		—		19,236		(175)
Corporate debt securities		3,484		(16)		7,231		(269)		10,715		(285)
Total	$	72,236	$	(461)	$	25,556	$	(532)	$	97,792	$	(993)

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COMMITMENTS AND CONTINGENCIES (Tables)

3 Months Ended

Mar. 31, 2020

COMMITMENTS AND CONTINGENCIES

Schedule of weighted-average term and discount rates for operating leases

The following table displays the weighted-average term and discount rates for operating leases outstanding as of March 31, 2020 and December 31, 2019.

	March 31,		December 31,
	2020		2019
	Operating		Operating
Weighted-average term (years)	25.56		25.63
Weighted-average discount rate	3.86	%	3.85	%

Schedule of maturity analysis of operating lease liabilities and reconciliation of the undiscounted cash flows

A maturity analysis of operating lease liabilities and reconciliation of the undiscounted cash flows to the total operating lease liability is as follows: 

	March 31,
(Dollars in thousands)	2020
Minimum lease payments due:
Within one year	$	139
After one but within two years		106
After two but within three years		75
After three but within four years		68
After four but within five years		68
After five years		2,309
Total undiscounted cash flows		2,765
Discount on cash flows		(1,188)
Total lease liability	$	1,577

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COMMITMENTS AND CONTINGENCIES - Maturity analysis of operating lease liabilities (Details) - USD ($) $ in Thousands	Mar. 31, 2020	Dec. 31, 2019
COMMITMENTS AND CONTINGENCIES
Within one year	$ 139
After one but within two years	106
After two but within three years	75
After three but within four years	68
After four but within five years	68
After five years	2,309
Total undiscounted cash flows	2,765
Discount on cash flows	(1,188)
Total lease liability	$ 1,577	$ 1,663

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BORROWINGS - Repurchase agreements (Details) - USD ($) $ in Thousands		Mar. 31, 2020	Dec. 31, 2019
Repurchase agreements
Gross Amounts of Recognized Liabilities	[1]	$ 12,551	$ 14,042
Gross Amounts Offset in the Consolidated Balance Sheet	[1]	0	0
Net Amounts of Liabilities Presented in the Consolidated Balance Sheet	[1]	12,551	14,042
Financial Instruments	[1]	(12,551)	(14,042)
Cash Collateral Pledge	[1]	0	0
Net Amount	[1]	$ 0	$ 0

[1] As of March 31, 2020 and December 31, 2019, the fair value of securities pledged in connection with repurchase agreements was $21,779,000 and $22,413,000, respectively.

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LOANS AND ALLOWANCE FOR LOAN LOSSES - Additional Information (Details) - USD ($)	3 Months Ended		12 Months Ended
	Mar. 31, 2020	Mar. 31, 2019	Dec. 31, 2019
Loans Receivable Held-for-sale, Amount	$ 2,342,000		$ 2,292,000
Loan Payments, Delinquency Period, Beyond Which Loans are Considered Past Due	10 days
Loan Payments, Delinquency Period, at which time Delinquency Notice is Automatically Generated	10 or 15 days
Foreclosed Assets Held For Resale	$ 169,000		119,000
Foreclosed Assets Held for Resale Represented by Land	38,000		38,000
Foreclosed Assets Held for Resale Represented by Residential Real Estate	50,000
Foreclosed Assets Held for Resale Represented by Commercial Real Estate	81,000		81,000
Financing Receivable, Modifications, Recorded Investment	8,470,000		8,678,000
Financing Receivable, Modifications, Unfunded Commitments	0		0
Impaired Financing Receivable Related Allowance Attributable to TDR	1,000		$ 1,000
Impaired Financing Receivable, Interest Income, Accrual Method	84,000	$ 166,000
Impaired Financing Receivable Interest Income Non-accrual Method	$ 5,000	0
Loans Receivable Non Accrual Status, Minimum Days of past Due	90 days		90 days
Government Guaranteed Loans
Loans	$ 6,059,000		$ 6,150,000
Commercial Real Estate [Member]
Financing Receivable Modification Not In Compliance Of Terms	$ 1,377,000	597,000
Commercial Real Estate [Member] | Maximum [Member]
Term of loan offering	20 years
Maximum loan to value ratio	80
TDRs [Member] | Commercial Real Estate [Member]
Financing Receivable Modification Experienced Payment Defaults	$ 0	113,000
Commercial and Industrial [Member]
Tax free loans	17,117,000		17,848,000
Financing Receivable Modification Not In Compliance Of Terms		5,000
Impaired Financing Receivable, Interest Income, Accrual Method	6,000	14,000
Government Guaranteed Loans	6,059,000		6,150,000
Residential Real Estate [Member]
Consumer Mortgage Loans Secured by Residential Real Estate in Process of Foreclosure	996,000		617,000
Impaired Financing Receivable, Interest Income, Accrual Method	$ 1,000	1,000
Residential Real Estate [Member] | Home Equity Term Loans [Member] | Maximum [Member]
Term of loan offering	15 years
Maximum loan to value ratio	80
Residential Real Estate [Member] | Line of Credit [Member] | Maximum [Member]
Term of loan offering	20 years
Maximum loan to value ratio	80
Irrevocable Letter of credit [Member] | Loan to a Developer of a Residential Sub-Division [Member]
Loans and Leases Receivable, Impaired, Commitment to Lend	$ 1,249,000		1,249,000
Unfunded Loan Commitment [Member]
Reserve For Unfunded Lending Commitments	$ 161,000		117,000
Residential Mortgage [Member] | Originated For Resale [Member] | Maximum [Member]
Term of loan offering	30 years
Maximum loan to value ratio	80
Residential Mortgage [Member] | Held for Investment [Member] | Maximum [Member]
Term of loan offering	20 years
Maximum loan to value ratio	80
Residential Mortgage [Member] | Held for Investment [Member] | With Primary Mortgage Insurance [Member] | Maximum [Member]
Term of loan offering	20 years
Maximum loan to value ratio	95
Commercial Real Estate [Member]
Tax free loans	$ 1,966,000		$ 2,007,000
Impaired Financing Receivable, Interest Income, Accrual Method	$ 77,000	$ 151,000

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EARNINGS PER SHARE

3 Months Ended

Mar. 31, 2020

EARNINGS PER SHARE

EARNINGS PER SHARE

NOTE 11 — EARNINGS PER SHARE

Basic earnings per share (“EPS”) is computed by dividing net income by the weighted average number of common shares outstanding for the period. Diluted EPS reflects the potential dilution that could occur if securities or other contracts to issue common stock were exercised or converted into common stock or resulted in the issuance of common stock that then shared in the earnings of the Corporation. At March 31, 2020 and 2019, there were no potential common shares outstanding. The following table sets forth the computation of basic and diluted earnings per share.

	Three Months Ended
	March 31,
(In thousands, except earnings per share)	2020		2019
Net income	$	2,053	$	2,243
Weighted-average common shares outstanding		5,817		5,765
Basic and diluted  earnings per share	$	0.35	$	0.39

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BORROWINGS (Tables)

3 Months Ended

Mar. 31, 2020

BORROWINGS

Schedule of short-term borrowings and weighted-average interest rates

Short-term borrowings and weighted–average interest rates at March 31, 2020 and December 31, 2019 are as follows:

	March 31, 2020				December 31, 2019
			Average				Average
(Dollars in thousands)	Amount		Rate		Amount		Rate
Federal funds purchased	$	—	—		$	—	2.01	%
Securities sold under agreements to repurchase		12,551	1.05	%		14,042	1.03	%
Federal Discount Window		—	—			—	2.92	%
Federal Home Loan Bank		93,828	1.64	%		40,621	2.59	%
Total	$	106,379	1.50	%	$	54,663	2.37	%

Schedule of short-term borrowings subject to an enforceable master netting arrangement or repurchase agreements

The following table presents the short-term borrowings subject to an enforceable master netting arrangement or repurchase agreements as of March 31, 2020 and December 31, 2019.

			Gross		Net Amounts
			Amounts		of Liabilities
			Offset		Presented
	Gross		in the		in the
	Amounts of		Consolidated		Consolidated				Cash
	Recognized		Balance		Balance		Financial		Collateral		Net
(Dollars in thousands)	Liabilities		Sheet		Sheet		Instruments		Pledge		Amount
March 31, 2020
Repurchase agreements (a)	$	12,551	$	—	$	12,551	$	(12,551)	$	—	$	—
December 31, 2019
Repurchase agreements (a)	$	14,042	$	—	$	14,042	$	(14,042)	$	—	$	—

(a) As of March 31, 2020 and December 31, 2019, the fair value of securities pledged in connection with repurchase agreements was $21,779,000 and $22,413,000, respectively.

Schedule of the remaining contractual maturity of the master netting arrangement or repurchase agreements

The following table presents the remaining contractual maturity of the master netting arrangement or repurchase agreements as of March 31, 2020:

	Remaining Contractual Maturity of the Agreements
	Overnight						Greater
	and		Up to		30 -90		than
(Dollars in thousands)	Continuous		30 days		Days		90 Days		Total
March 31, 2020
Repurchase agreements and repurchase-to-maturity transactions:
U.S. Treasury and/or agency securities	$	12,551	$	—	$	—	$	—	$	12,551
Total	$	12,551	$	—	$	—	$	—	$	12,551

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EARNINGS PER SHARE (Tables)

3 Months Ended

Mar. 31, 2020

EARNINGS PER SHARE

Schedule of basic and diluted earnings per share

	Three Months Ended
	March 31,
(In thousands, except earnings per share)	2020		2019
Net income	$	2,053	$	2,243
Weighted-average common shares outstanding		5,817		5,765
Basic and diluted  earnings per share	$	0.35	$	0.39

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SECURITIES

3 Months Ended

Mar. 31, 2020

SECURITIES

SECURITIES

NOTE 3 — SECURITIES

The Corporation classifies its securities as either “Held-to-Maturity” or “Available-for-Sale” at the time of purchase. Securities are accounted for on a trade date basis. Debt securities are classified as Held-to-Maturity when the Corporation has the ability and positive intent to hold the securities to maturity. Securities classified as Held-to-Maturity are carried at cost adjusted for amortization of premium and accretion of discount to maturity.

Debt securities not classified as Held-to-Maturity are included in the Available-for-Sale category and are carried at fair value. The amount of any unrealized gain or loss, net of the effect of deferred income taxes, is reported as accumulated other comprehensive income (loss) (AOCI) in the consolidated balance sheets and consolidated statements of changes in stockholders’ equity. Management’s decision to sell Available-for-Sale securities is based on changes in economic conditions, controlling the sources and applications of funds, terms, availability of and yield of alternative investments, interest rate risk and the need for liquidity.

Equity securities with readily determinable fair values are stated at fair value with realized and unrealized gains and losses reported in income. Equity securities without readily determinable fair values are recorded at cost less impairment, if any.

The cost of debt securities classified as Held-to-Maturity or Available-for-Sale is adjusted for amortization of premiums to the earliest call date and accretion of discounts to expected maturity. Such amortization and accretion, as well as interest and dividends, are included in interest and dividend income from investment securities. Realized gains and losses are included in net securities gains and losses. The cost of securities sold, redeemed or matured is based on the specific identification method.

The amortized cost, related estimated fair value, and unrealized gains and losses for debt securities classified as “Available-For-Sale” were as follows at March 31, 2020 and December 31, 2019:

	Debt Securities Available-for-Sale
			Gross		Gross
	Amortized		Unrealized		Unrealized		Fair
(Dollars in thousands)	Cost		Gains		Losses		Value
March 31, 2020:
U.S. Treasury securities	$	—	$	—	$	—	$	—
Obligations of U.S. Government Corporations and Agencies:
Mortgage-backed		62,235		1,055		(785)		62,505
Other		12,341		7		(119)		12,229
Other mortgage backed debt securities		10,187		—		(824)		9,363
Obligations of state and political subdivisions		131,424		9,052		(9)		140,467
Asset backed securities		42,889		—		(2,123)		40,766
Corporate debt securities		18,479		118		(264)		18,333
Total	$	277,555	$	10,232	$	(4,124)	$	283,663

	Debt Securities Available-for-Sale
			Gross		Gross
	Amortized		Unrealized		Unrealized		Fair
(Dollars in thousands)	Cost		Gains		Losses		Value
December 31, 2019:
U.S. Treasury securities	$	2,852	$	3	$	—	$	2,855
Obligations of U.S. Government Corporations and Agencies:
Mortgage-backed		77,131		539		(387)		77,283
Other		10,381		4		(88)		10,297
Other mortgage backed securities		11,145		3		(10)		11,138
Obligations of state and political subdivisions		114,934		5,490		(48)		120,376
Asset backed securities		37,596		115		(175)		37,536
Corporate debt securities		18,546		182		(285)		18,443
Total	$	272,585	$	6,336	$	(993)	$	277,928

Securities Available-for-Sale with an aggregate fair value of $183,713,000 at March 31, 2020 and $201,468,000 at December 31, 2019, were pledged to secure public funds, trust funds, securities sold under agreements to repurchase and the Federal Discount Window aggregating $128,721,000 at March 31, 2020 and $143,546,000 at December 31, 2019.

The amortized cost and estimated fair value of debt securities, by contractual maturity, are shown below at March 31, 2020. Expected maturities will differ from contractual maturities because borrowers may have the right to call or prepay obligations with or without call or prepayment penalties.

	March 31, 2020
	Debt Securities Available-For-Sale
			U.S. Government		Other		Obligations
			Corporations &		Mortgage		of State		Asset		Corporate
	U.S. Treasury		Agencies		Backed Debt		& Political		Backed		Debt
(Dollars in thousands)	Securities		Obligations1		Securities1		Subdivisions		Securities		Securities
Within 1 Year:
Amortized cost	$	—	$	—	$	—	$	1,001	$	—	$	2,000
Fair value		—		—		—		1,011		—		1,968
1 - 5 Years:
Amortized cost		—		772		—		21,473		2,872		16,479
Fair value		—		788		—		22,070		2,737		16,365
5 - 10 Years:
Amortized cost		—		21,610		—		23,936		4,686		—
Fair value		—		21,337		—		25,293		4,462		—
After 10 Years:
Amortized cost		—		52,194		10,187		85,014		35,331		—
Fair value		—		52,609		9,363		92,093		33,567		—
Total:
Amortized cost	$	—	$	74,576	$	10,187	$	131,424	$	42,889	$	18,479
Fair value		—		74,734		9,363		140,467		40,766		18,333

1Mortgage-backed securities are allocated for maturity reporting at their original maturity date.

There were no aggregate securities with a single issuer (excluding the U.S. Government and U.S. Government Agencies and Corporations) which exceeded ten percent of consolidated stockholders’ equity at March 31, 2020. The quality rating of the obligations of state and political subdivisions are generally investment grade, as rated by Moody’s, Standard and Poor’s or Fitch. The typical exceptions are local issues which are not rated, but are secured by the full faith and credit obligations of the communities that issued these securities.

Proceeds from sales of investments in Debt Securities Available-For-Sale for the three months ended March 31, 2020 and 2019 were $11,182,000 and $32,374,000, respectively. Gross gains realized on these sales were $176,000 and $187,000, respectively. Gross losses realized on these sales were $105,000 and $102,000, respectively. There were no impairment losses realized on Debt Securities Available-For-Sale during the three months ended March 31, 2020 or 2019.

At March 31, 2020 and December 31, 2019, the Corporation had $1,394,000 and $1,933,000, respectively, in equity securities recorded at fair value. The following is a summary of unrealized and realized gains and losses recognized in net income on equity securities during the three months ended March 31, 2020 and 2019:

	Three months ended		Three months ended
(Dollars in thousands)	March 31, 2020		March 31, 2019
Net (losses) and  gains recognized during the period on equity securities	$	(538)	$	18
Less: Net gains and (losses) recognized during the period on equity securities sold during the period		—		—
Unrealized (losses) and gains recognized during the reporting period on equity securities still held at the reporting date	$	(538)	$	18

There were no proceeds from sales of investments in Held-to-Maturity debt securities during the first three months of 2020 or 2019. Therefore, there were no gains or losses realized during these periods.

Management evaluates securities for other-than-temporary impairment (“OTTI”) at least on a quarterly basis, and more frequently when economic or market conditions warrant such an evaluation. Securities classified as Available-for-Sale or Held-to-Maturity are generally evaluated for OTTI under FASB ASC 320, Investments - Debt and Equity Securities. In determining OTTI under the FASB ASC 320 model, management considers many factors, including (1) the length of time and the extent to which the fair value has been less than cost, (2) the financial condition and near-term prospects of the issuer, (3) whether the market decline was affected by macroeconomic conditions, and (4) whether the entity has the intent to sell the debt security or more likely than not will be required to sell the debt security before its anticipated recovery. The assessment of whether an other-than-temporary decline exists involves a high degree of subjectivity and judgment and is based on the information available to management at a point in time.

When OTTI occurs on debt securities, the amount of the OTTI recognized in earnings depends on whether an entity intends to sell the security or more likely than not will be required to sell the security before recovery of its amortized cost basis less any current-period credit loss. If an entity intends to sell or more likely than not will be required to sell the security before recovery of its amortized cost basis less any current-period credit loss, the OTTI shall be recognized in earnings equal to the entire difference between the investment’s amortized cost basis and its fair value at the balance sheet date. If an entity does not intend to sell the security and it is not more likely than not that the entity will be required to sell the security before recovery of its amortized cost basis less any current-period loss, the OTTI shall be separated into the amount representing the credit loss and the amount related to all other factors. The amount of the total OTTI related to the credit loss is determined based on the present value of cash flows expected to be collected, and the realized loss is recognized as impairment charges on securities on the consolidated statements of income. The amount of the total OTTI related to the other factors shall be recognized in other comprehensive income (loss), net of applicable taxes. The previous amortized cost basis less the OTTI recognized in earnings becomes the new amortized cost basis of the investment.

The Corporation and its investment advisors monitor the entire portfolio monthly with particular attention given to securities in a continuous loss position of at least ten percent for over twelve months. Based on the factors described above, management did not consider any securities to be other-than-temporarily impaired at March 31, 2020 or December 31, 2019.

The summary below shows the gross unrealized losses and fair value of the Corporation’s debt securities. Totals are aggregated by investment category where individual securities have been in a continuous loss position for less than 12 months or 12 months or more as of March 31, 2020 and December 31, 2019:

March 31, 2020

	Less Than 12 Months				12 Months or More				Total
	Fair		Unrealized		Fair		Unrealized		Fair		Unrealized
(Dollars in thousands)	Value		Loss		Value		Loss		Value		Loss
Available-for-Sale:
U.S. Treasury securities	$	—	$	—	$	—	$	—	$	—	$	—
Obligations of U.S. Government Corporations and Agencies:
Mortgage-backed		20,750		(466)		7,747		(319)		28,497		(785)
Other		6,092		(64)		4,396		(55)		10,488		(119)
Other mortgage backed debt securities		7,492		(824)		—		—		7,492		(824)
Obligations of state and political subdivisions		1,507		(9)		—		—		1,507		(9)
Asset backed securities		40,766		(2,123)		—		—		40,766		(2,123)
Corporate debt securities		4,041		(118)		7,355		(146)		11,396		(264)
Total	$	80,648	$	(3,604)	$	19,498	$	(520)	$	100,146	$	(4,124)

December 31, 2019

	Less Than 12 Months				12 Months or More				Total
	Fair		Unrealized		Fair		Unrealized		Fair		Unrealized
(Dollars in thousands)	Value		Loss		Value		Loss		Value		Loss
Available-for-Sale:
U.S. Treasury securities	$	—	$	—	$	—	$	—	$	—	$	—
Obligations of U.S. Government Corporations and Agencies:
Mortgage-backed		39,085		(221)		12,650		(166)		51,735		(387)
Other		4,382		(24)		4,594		(64)		8,976		(88)
Other mortgage backed debt securities		4,056		(10)		—		—		4,056		(10)
Obligations of state and political subdivisions		1,993		(15)		1,081		(33)		3,074		(48)
Asset backed securities		19,236		(175)		—		—		19,236		(175)
Corporate debt securities		3,484		(16)		7,231		(269)		10,715		(285)
Total	$	72,236	$	(461)	$	25,556	$	(532)	$	97,792	$	(993)

The Corporation invests in various forms of agency debt including mortgage-backed securities and callable debt. The mortgage-backed securities are issued by Federal Home Loan Mortgage Corporation (“FHLMC”), Federal National Mortgage Association (“FNMA”) or Government National Mortgage Association (“GNMA”). The municipal securities consist of general obligations and revenue bonds. The fair market value of the above securities is influenced by market interest rates, prepayment speeds on mortgage securities, bid-offer spreads in the market place and credit premiums for various types of agency debt. These factors change continuously and therefore the market value of these securities may be higher or lower than the Corporation’s carrying value at any measurement date. Management does not believe any of their 27 debt securities with a less than one year unrealized loss position, or any of their 13 debt securities with a one year or greater unrealized loss position as of March 31, 2020, represent an other-than-temporary impairment, as the unrealized losses relate principally to changes in interest rates subsequent to the acquisition of the specific securities. The Corporation expects to collect all principal and interest payments defined under the original terms as all contracted payments on securities in the portfolio are current as of March 31, 2020.

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COMMITMENTS AND CONTINGENCIES

3 Months Ended

Mar. 31, 2020

COMMITMENTS AND CONTINGENCIES

COMMITMENTS AND CONTINGENCIES

NOTE 7 — COMMITMENTS AND CONTINGENCIES

In the normal course of business, there are various pending legal actions and proceedings that are not reflected in the consolidated financial statements. Management does not believe the outcome of these actions and proceedings will have a material effect on the consolidated financial position or results of operations of the Corporation.

The Bank currently leases three branch banking facilities and one parcel of land under operating leases. At March 31, 2020, right-of-use assets and lease liabilities were recorded related to these operating leases totaling $1,312,000 and $1,577,000, respectively. At December 31, 2019, right-of-use assets and lease liabilities stood at $1,470,000 and $1,663,000, respectively. Further options to extend or terminate the lease are not applicable for any of the four leases. No significant assumptions or judgements were made in determining whether a contract contained a lease or in the consideration of lease versus non-lease components. None of the leases contained an implicit rate; therefore, our incremental borrowing rate was used for each of the leases.

The Bank recognized total operating lease costs for the three months ended March 31, 2020 and March 31, 2019 of $111,000 and $48,000, respectively. Cash payments totaled $38,000 for the three months ended March 31, 2020 and 2019.

The following table displays the weighted-average term and discount rates for operating leases outstanding as of March 31, 2020 and December 31, 2019.

	March 31,		December 31,
	2020		2019
	Operating		Operating
Weighted-average term (years)	25.56		25.63
Weighted-average discount rate	3.86	%	3.85	%

A maturity analysis of operating lease liabilities and reconciliation of the undiscounted cash flows to the total operating lease liability is as follows: 

	March 31,
(Dollars in thousands)	2020
Minimum lease payments due:
Within one year	$	139
After one but within two years		106
After two but within three years		75
After three but within four years		68
After four but within five years		68
After five years		2,309
Total undiscounted cash flows		2,765
Discount on cash flows		(1,188)
Total lease liability	$	1,577

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LOANS AND ALLOWANCE FOR LOAN LOSSES - Non-performing assets (Details) - USD ($) $ in Thousands	Mar. 31, 2020	Dec. 31, 2019
Total non-accrual loans	$ 6,951	$ 4,388
Foreclosed assets held for resale	169	119
Loans past-due 90 days or more and still accruing interest	579	100
Total non-performing assets	7,699	4,607
Commercial and Industrial [Member]
Total non-accrual loans	768	0
Loans past-due 90 days or more and still accruing interest	92	0
Commercial Real Estate [Member]
Total non-accrual loans	5,094	3,697
Loans past-due 90 days or more and still accruing interest	487	0
Residential Real Estate [Member]
Total non-accrual loans	1,089	691
Loans past-due 90 days or more and still accruing interest	$ 0	$ 100

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LOANS AND ALLOWANCE FOR LOAN LOSSES (Details) - USD ($) $ in Thousands	Mar. 31, 2020	Dec. 31, 2019	Mar. 31, 2019
Financing Receivable, Recorded Investment [Line Items]
Add (deduct): Unearned discount	$ 0	$ 0
Net deferred loan fees and costs	1,444	1,373
Total loans	661,616	647,732	$ 617,983
Pass [Member]
Financing Receivable, Recorded Investment [Line Items]
Loans	645,852	631,472
Special Mention [Member]
Financing Receivable, Recorded Investment [Line Items]
Loans	31	1,146
Substandard [Member]
Financing Receivable, Recorded Investment [Line Items]
Loans	14,289	13,741
Doubtful [Member]
Financing Receivable, Recorded Investment [Line Items]
Loans	0	0
Commercial and Industrial [Member]
Financing Receivable, Recorded Investment [Line Items]
Add (deduct): Unearned discount	0	0
Net deferred loan fees and costs	642	643
Total loans	87,023	86,712	93,575
Commercial and Industrial [Member] | Pass [Member]
Financing Receivable, Recorded Investment [Line Items]
Loans	85,418	84,999
Commercial and Industrial [Member] | Special Mention [Member]
Financing Receivable, Recorded Investment [Line Items]
Loans	0	2
Commercial and Industrial [Member] | Substandard [Member]
Financing Receivable, Recorded Investment [Line Items]
Loans	963	1,068
Commercial and Industrial [Member] | Doubtful [Member]
Financing Receivable, Recorded Investment [Line Items]
Loans	0	0
Commercial Real Estate [Member]
Financing Receivable, Recorded Investment [Line Items]
Add (deduct): Unearned discount	0	0
Net deferred loan fees and costs	827	757
Total loans	412,796	395,801	359,073
Commercial Real Estate [Member] | Pass [Member]
Financing Receivable, Recorded Investment [Line Items]
Loans	399,740	382,510
Commercial Real Estate [Member] | Special Mention [Member]
Financing Receivable, Recorded Investment [Line Items]
Loans	0	944
Commercial Real Estate [Member] | Substandard [Member]
Financing Receivable, Recorded Investment [Line Items]
Loans	12,229	11,590
Commercial Real Estate [Member] | Doubtful [Member]
Financing Receivable, Recorded Investment [Line Items]
Loans	0	0
Residential Real Estate [Member]
Financing Receivable, Recorded Investment [Line Items]
Add (deduct): Unearned discount	0	0
Net deferred loan fees and costs	(108)	(116)
Total loans	156,105	159,350	159,624
Residential Real Estate [Member] | Pass [Member]
Financing Receivable, Recorded Investment [Line Items]
Loans	155,124	158,301
Residential Real Estate [Member] | Special Mention [Member]
Financing Receivable, Recorded Investment [Line Items]
Loans	0	117
Residential Real Estate [Member] | Substandard [Member]
Financing Receivable, Recorded Investment [Line Items]
Loans	1,089	1,048
Residential Real Estate [Member] | Doubtful [Member]
Financing Receivable, Recorded Investment [Line Items]
Loans	0	0
Consumer [Member]
Financing Receivable, Recorded Investment [Line Items]
Add (deduct): Unearned discount	0	0
Net deferred loan fees and costs	83	89
Total loans	5,692	5,869	$ 5,711
Consumer [Member] | Pass [Member]
Financing Receivable, Recorded Investment [Line Items]
Loans	5,570	5,662
Consumer [Member] | Special Mention [Member]
Financing Receivable, Recorded Investment [Line Items]
Loans	31	83
Consumer [Member] | Substandard [Member]
Financing Receivable, Recorded Investment [Line Items]
Loans	8	35
Consumer [Member] | Doubtful [Member]
Financing Receivable, Recorded Investment [Line Items]
Loans	$ 0	$ 0

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SECURITIES - Amortized cost and fair value of debt securities (Details) 10Q - USD ($) $ in Thousands		Mar. 31, 2020		Dec. 31, 2019
Available-For-Sale - Amortized cost
Total		$ 277,555		$ 272,585
Available-For-Sale - Estimated fair value
Total		283,663		277,928
Other mortgage backed debt securities [Member]
Available-For-Sale - Amortized cost
Within 1 Year	[1]	0
1 - 5 Years	[1]	0
5 - 10 Years	[1]	0
After 10 Years	[1]	10,187
Total		10,187	[1]	11,145
Available-For-Sale - Estimated fair value
Within 1 Year	[1]	0
1 - 5 Years	[1]	0
5 - 10 Years	[1]	0
After 10 Years	[1]	9,363
Total		9,363	[1]	11,138
U.S. Treasury Securities [Member]
Available-For-Sale - Amortized cost
Within 1 Year		0
1 - 5 Years		0
5 - 10 Years		0
After 10 Years		0
Total		0		2,852
Available-For-Sale - Estimated fair value
Within 1 Year		0
1 - 5 Years		0
5 - 10 Years		0
After 10 Years		0
Total		0		2,855
US Government Corporations & Agencies Obligations [Member]
Available-For-Sale - Amortized cost
Within 1 Year	[1]	0
1 - 5 Years	[1]	772
5 - 10 Years	[1]	21,610
After 10 Years	[1]	52,194
Total	[1]	74,576
Available-For-Sale - Estimated fair value
Within 1 Year	[1]	0
1 - 5 Years	[1]	788
5 - 10 Years	[1]	21,337
After 10 Years	[1]	52,609
Total	[1]	74,734
Obligations of state and political subdivisions [Member]
Available-For-Sale - Amortized cost
Within 1 Year		1,001
1 - 5 Years		21,473
5 - 10 Years		23,936
After 10 Years		85,014
Total		131,424		114,934
Available-For-Sale - Estimated fair value
Within 1 Year		1,011
1 - 5 Years		22,070
5 - 10 Years		25,293
After 10 Years		92,093
Total		140,467		120,376
Asset-backed Securities [Member]
Available-For-Sale - Amortized cost
Within 1 Year		0
1 - 5 Years		2,872
5 - 10 Years		4,686
After 10 Years		35,331
Total		42,889		37,596
Available-For-Sale - Estimated fair value
Within 1 Year		0
1 - 5 Years		2,737
5 - 10 Years		4,462
After 10 Years		33,567
Total		40,766		37,536
Corporate debt securities [Member]
Available-For-Sale - Amortized cost
Within 1 Year		2,000
1 - 5 Years		16,479
5 - 10 Years		0
After 10 Years		0
Total		18,479		18,546
Available-For-Sale - Estimated fair value
Within 1 Year		1,968
1 - 5 Years		16,365
5 - 10 Years		0
After 10 Years		0
Total		$ 18,333		$ 18,443

[1] 1Mortgage-backed securities are allocated for maturity reporting at their original maturity date.

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CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY - USD ($) $ in Thousands	Common Stock	Surplus	Retained Earnings	Accumulated Other Comprehensive Income (Loss)	Treasury Stock	Total
Balance at Dec. 31, 2018	$ 11,993	$ 37,255	$ 75,798	$ (2,581)	$ (5,709)	$ 116,756
Balance (in shares) at Dec. 31, 2018	5,996,322
Net Income	$ 0	0	2,243	0	0	2,243
Other comprehensive income, net of taxes	0	0	0	3,642	0	3,642
Issuance of common stock under dividend reinvestment plan	$ 24	254	0	0	0	278
Issuance of common stock under dividend reinvestment plan (in shares)	12,312
Dividends - $0.27 per share	$ 0	0	(1,557)	0	0	(1,557)
Balance at Mar. 31, 2019	$ 12,017	37,509	76,484	1,061	(5,709)	121,362
Balance (in shares) at Mar. 31, 2019	6,008,634
Balance at Dec. 31, 2018	$ 11,993	37,255	75,798	(2,581)	(5,709)	116,756
Balance (in shares) at Dec. 31, 2018	5,996,322
Net Income	$ 0	0	2,053	0	0	2,053
Balance at Dec. 31, 2019	$ 12,097	38,365	79,778	4,221	(5,709)	128,752
Balance (in shares) at Dec. 31, 2019	6,048,506
Net Income						2,053
Other comprehensive income, net of taxes	$ 0	0	0	605	0	605
Issuance of common stock under dividend reinvestment plan	$ 30	280	0	0	0	310
Issuance of common stock under dividend reinvestment plan (in shares)	15,213
Dividends - $0.27 per share	$ 0	0	(1,570)	0	0	(1,570)
Balance at Mar. 31, 2020	$ 12,127	$ 38,645	$ 80,261	$ 4,826	$ (5,709)	$ 130,150
Balance (in shares) at Mar. 31, 2020	6,063,719

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COMMITMENTS AND CONTINGENCIES - Additional Information (Details)	3 Months Ended
	Mar. 31, 2020 USD ($) lease	Mar. 31, 2019 USD ($)	Dec. 31, 2019 USD ($)
Lessee, Lease, Description [Line Items]
Operating Lease, Right-of-Use Asset	$ 1,312,000		$ 1,470,000
Operating Lease, Liability	1,577,000		$ 1,663,000
Operating Lease, Cost	111,000	$ 48,000
Operating Lease, Payments	$ 38,000	$ 38,000
Banking Facilities [Member]
Lessee, Lease, Description [Line Items]
Number of Operating Leases | lease	3
Land [Member]
Lessee, Lease, Description [Line Items]
Number of Operating Leases | lease	1

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FAIR VALUE MEASUREMENTS - Impaired loans measured at FV (Details) - Fair Value, Measurements, Nonrecurring [Member] - USD ($) $ in Thousands	Mar. 31, 2020	Dec. 31, 2019
Fair Value, Assets and Liabilities Measured on Recurring and Nonrecurring Basis [Line Items]
Impaired loans	$ 6,476	$ 6,439
Fair Value, Inputs, Level 1 [Member]
Fair Value, Assets and Liabilities Measured on Recurring and Nonrecurring Basis [Line Items]
Impaired loans	0	0
Fair Value, Inputs, Level 2 [Member]
Fair Value, Assets and Liabilities Measured on Recurring and Nonrecurring Basis [Line Items]
Impaired loans	0	0
Fair Value, Inputs, Level 3 [Member]
Fair Value, Assets and Liabilities Measured on Recurring and Nonrecurring Basis [Line Items]
Impaired loans	6,476	6,439
Commercial Real Estate [Member]
Fair Value, Assets and Liabilities Measured on Recurring and Nonrecurring Basis [Line Items]
Impaired loans	6,287	6,218
Commercial Real Estate [Member] | Fair Value, Inputs, Level 1 [Member]
Fair Value, Assets and Liabilities Measured on Recurring and Nonrecurring Basis [Line Items]
Impaired loans	0	0
Commercial Real Estate [Member] | Fair Value, Inputs, Level 2 [Member]
Fair Value, Assets and Liabilities Measured on Recurring and Nonrecurring Basis [Line Items]
Impaired loans	0	0
Commercial Real Estate [Member] | Fair Value, Inputs, Level 3 [Member]
Fair Value, Assets and Liabilities Measured on Recurring and Nonrecurring Basis [Line Items]
Impaired loans	6,287	6,218
Residential Real Estate [Member]
Fair Value, Assets and Liabilities Measured on Recurring and Nonrecurring Basis [Line Items]
Impaired loans	189	221
Residential Real Estate [Member] | Fair Value, Inputs, Level 1 [Member]
Fair Value, Assets and Liabilities Measured on Recurring and Nonrecurring Basis [Line Items]
Impaired loans	0	0
Residential Real Estate [Member] | Fair Value, Inputs, Level 2 [Member]
Fair Value, Assets and Liabilities Measured on Recurring and Nonrecurring Basis [Line Items]
Impaired loans	0	0
Residential Real Estate [Member] | Fair Value, Inputs, Level 3 [Member]
Fair Value, Assets and Liabilities Measured on Recurring and Nonrecurring Basis [Line Items]
Impaired loans	$ 189	$ 221

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CONSOLIDATED BALANCE SHEETS (Parenthetical) - $ / shares	Mar. 31, 2020	Dec. 31, 2019
CONSOLIDATED BALANCE SHEETS
Preferred stock, par value (in dollars per share)	$ 2.00	$ 2.00
Preferred stock, shares authorized	1,000,000	1,000,000
Preferred stock, shares issued	0	0
Common stock, par value (in dollars per share)	$ 2.00	$ 2.00
Common stock, shares authorized	20,000,000	20,000,000
Common stock, shares issued	6,063,719	6,048,506
Common stock, shares outstanding	5,832,107	5,816,894
Treasury stock, shares	231,612	231,612

XML

REVENUE RECOGNITION (Details) - USD ($)	Mar. 31, 2020	Dec. 31, 2019
REVENUE RECOGNITION
Trust Assets, Fair Value Disclosure	$ 111,199,000	$ 111,160,000

XML

BORROWINGS - Additional Information (Details) - USD ($)	3 Months Ended
	Mar. 31, 2020	Dec. 31, 2019
Short-term Debt [Line Items]
Fair value of securities pledged	$ 21,779,000	$ 22,413,000
Maximum [Member]
Short-term Debt [Line Items]
Federal funds purchased, securities sold under agreements to repurchase and Federal Home Loan Bank advances, maturity	30 days

XML

DEPOSITS - Additional Information (Details) - USD ($)	3 Months Ended
	Mar. 31, 2020	Mar. 31, 2019	Dec. 31, 2019
DEPOSITS [Line Items]
Increase (Decrease) in Deposits	$ (26,831,000)	$ 25,867,000
Deposits	734,797,000		$ 761,628,000
Brokered CD's
DEPOSITS [Line Items]
Increase (Decrease) in Deposits	40,000,000
Deposits [Member]
DEPOSITS [Line Items]
Increase (Decrease) in Deposits	$ 50,000,000

XML

LOANS AND ALLOWANCE FOR LOAN LOSSES (Tables)

3 Months Ended

Mar. 31, 2020

LOANS AND ALLOWANCE FOR LOAN LOSSES

Schedule of classes of the loan portfolio summarized by risk rating

The following table presents the classes of the loan portfolio summarized by risk rating as of March 31, 2020 and December 31, 2019:

	Commercial and
	Industrial				Commercial Real Estate
	March 31,		December 31,		March 31,		December 31,
(Dollars in thousands)	2020		2019		2020		2019
Grade:
1-6    Pass	$	85,418	$	84,999	$	399,740	$	382,510
7        Special Mention		—		2		—		944
8        Substandard		963		1,068		12,229		11,590
9        Doubtful		—		—		—		—
Add (deduct): Unearned discount and		—		—		—		—
Net deferred loan fees and costs		642		643		827		757
Total loans	$	87,023	$	86,712	$	412,796	$	395,801

	Residential Real Estate
	Including Home Equity				Consumer
	March 31,		December 31,		March 31,		December 31,
	2020		2019		2020		2019
Grade:
1-6    Pass	$	155,124	$	158,301	$	5,570	$	5,662
7        Special Mention		—		117		31		83
8        Substandard		1,089		1,048		8		35
9        Doubtful		—		—		—		—
Add (deduct): Unearned discount and		—		—		—		—
Net deferred loan fees and costs		(108)		(116)		83		89
Total loans	$	156,105	$	159,350	$	5,692	$	5,869

	Total Loans
	March 31,		December 31,
	2020		2019
Grade:
1-6     Pass	$	645,852	$	631,472
7         Special Mention		31		1,146
8         Substandard		14,289		13,741
9         Doubtful		—		—
Add (deduct): Unearned discount and		—		—
Net deferred loan fees and costs		1,444		1,373
Total loans	$	661,616	$	647,732

Schedule of the allowance for loan losses, by loan class

The activity in the allowance for loan losses, by loan class, is summarized below for the periods indicated.

	Commercial		Commercial		Residential
(Dollars in thousands)	and Industrial		Real Estate		Real Estate		Consumer		Unallocated		Total
As of and for the three month period ended March 31, 2020 :
Allowance for Loan Losses:
Beginning balance	$	634	$	4,116	$	1,665	$	114	$	476	$	7,005
Charge-offs		(4)		—		—		(16)		—		(20)
Recoveries		—		—		—		—		—		—
Provision		33		212		(22)		15		(44)		194
Ending Balance	$	663	$	4,328	$	1,643	$	113	$	432	$	7,179
Ending balance: individually evaluated for impairment	$	—	$	1	$	—	$	―	$	―	$	1
Ending balance: collectively evaluated for impairment	$	663	$	4,327	$	1,643	$	113	$	432	$	7,178
Loans Receivable:
Ending Balance	$	87,023	$	412,796	$	156,105	$	5,692	$	―	$	661,616
Ending balance: individually evaluated for impairment	$	1,077	$	11,510	$	1,109	$	—	$	—	$	13,696
Ending balance: collectively evaluated for impairment	$	85,946	$	401,286	$	154,996	$	5,692	$	—	$	647,920

	Commercial		Commercial		Residential
(Dollars in thousands)	and Industrial		Real Estate		Real Estate		Consumer		Unallocated		Total
As of and for the three month period ended March 31, 2019 :
Allowance for Loan Losses:
Beginning balance	$	724	$	3,700	$	1,650	$	117	$	554	$	6,745
Charge-offs		—		(64)		—		(15)		—		(79)
Recoveries		1		—		2		1		—		4
Provision		7		229		(11)		7		(140)		92
Ending Balance	$	732	$	3,865	$	1,641	$	110	$	414	$	6,762
Ending balance: individually evaluated for impairment	$	—	$	4	$	—	$	―	$	―	$	4
Ending balance: collectively evaluated for impairment	$	732	$	3,861	$	1,641	$	110	$	414	$	6,758
Loans Receivable:
Ending Balance	$	93,575	$	359,073	$	159,624	$	5,711	$	―	$	617,983
Ending balance: individually evaluated for impairment	$	1,116	$	15,557	$	491	$	—	$	—	$	17,164
Ending balance: collectively evaluated for impairment	$	92,459	$	343,516	$	159,133	$	5,711	$	—	$	600,819

	Commercial		Commercial		Residential
(Dollars in thousands)	and Industrial		Real Estate		Real Estate		Consumer		Unallocated		Total
As of and for the year ended December 31, 2019
Allowance for Loan Losses:
Beginning balance	$	724	$	3,700	$	1,650	$	117	$	554	$	6,745
Charge-offs		—		(64)		(69)		(71)		—		(204)
Recoveries		6		—		2		6		—		14
Provision		(96)		480		82		62		(78)		450
Ending Balance	$	634	$	4,116	$	1,665	$	114	$	476	$	7,005
Ending balance: individually evaluated for impairment	$	—	$	1	$	—	$	—	$	—	$	1
Ending balance: collectively evaluated for impairment	$	634	$	4,115	$	1,665	$	114	$	476	$	7,004
Loans Receivable:
Ending Balance	$	86,712	$	395,801	$	159,350	$	5,869	$	—	$	647,732
Ending balance: individually evaluated for impairment	$	1,084	$	11,158	$	712	$	—	$	—	$	12,954
Ending balance: collectively evaluated for impairment	$	85,628	$	384,643	$	158,638	$	5,869	$	—	$	634,778

Schedule of the outstanding recorded investment of TDRs

The following table presents the outstanding recorded investment of TDRs at the dates indicated:

	March 31,		December 31,
(Dollars in thousands)	2020		2019
Non-accrual TDRs	$	1,725	$	112
Accruing TDRs		6,745		8,566
Total	$	8,470	$	8,678

Schedule of recorded investment, unpaid principal balance, related allowance, average recorded investment, and interest income recognized with respect to the Corporation's impaired loans

The recorded investment, unpaid principal balance, and the related allowance of the Corporation’s impaired loans are summarized below at March 31, 2020 and December 31, 2019.

	March 31, 2020						December 31, 2019
			Unpaid						Unpaid
	Recorded		Principal		Related		Recorded		Principal		Related
(Dollars in thousands)	Investment		Balance		Allowance		Investment		Balance		Allowance
With no related allowance recorded:
Commercial and Industrial	$	1,077	$	1,077	$	—	$	1,084	$	1,084	$	—
Commercial Real Estate		11,396		14,289		—		11,130		14,147		—
Residential Real Estate		1,089		1,174		—		712		822		—
With an allowance recorded:
Commercial and Industrial		—		—		—		—		—		—
Commercial Real Estate		114		114		1		28		28		1
Residential Real Estate		20		20		—		—		—		—
Total	$	13,696	$	16,674	$	1	$	12,954	$	16,081	$	1
Total consists of:
Commercial and Industrial	$	1,077	$	1,077	$	—	$	1,084	$	1,084	$	—
Commercial Real Estate	$	11,510	$	14,403	$	1	$	11,158	$	14,175	$	1
Residential Real Estate	$	1,109	$	1,194	$	—	$	712	$	822	$	—

At March 31, 2020 and December 31, 2019, $8,470,000 and $8,678,000 of loans classified as TDRs were included in impaired loans both with a total allocated allowance of $1,000, respectively. The recorded investment represents the loan balance reflected on the consolidated balance sheets net of any charge-offs. The unpaid balance is equal to the gross amount due on the loan.

The average recorded investment and interest income recognized for the Corporation’s impaired loans are summarized below for the three months ended March 31, 2020 and 2019.

	For the Three Months Ended				For the Three Months Ended
	March 31, 2020				March 31, 2019
	Average		Interest		Average		Interest
	Recorded		Income		Recorded		Income
(Dollars in thousands)	Investment		Recognized		Investment		Recognized
With no related allowance recorded:
Commercial and Industrial	$	1,079	$	6	$	1,122	$	14
Commercial Real Estate		11,131		76		15,574		150
Residential Real Estate		925		—		440		1
With an allowance recorded:
Commercial and Industrial		—		—		—		—
Commercial Real Estate		118		1		94		1
Residential Real Estate		21		1		—		—
Total	$	13,274	$	84	$	17,230	$	166
Total consists of:
Commercial and Industrial	$	1,079	$	6	$	1,122	$	14
Commercial Real Estate	$	11,249	$	77	$	15,668	$	151
Residential Real Estate	$	946	$	1	$	440	$	1

Of the $84,000 and $166,000 in interest income recognized on impaired loans for the three months ended March 31, 2020 and 2019, respectively, $5,000 and $0 in interest income was recognized with respect to non-accrual loans.

Schedule of total non-performing assets

Total non-performing assets (which includes loans receivable on non-accrual status, foreclosed assets held for resale and loans past-due 90 days or more and still accruing interest) as of March 31, 2020 and December 31, 2019 were as follows:

	March 31,		December 31,
(Dollars in thousands)	2020		2019
Commercial and Industrial	$	768	$	—
Commercial Real Estate		5,094		3,697
Residential Real Estate		1,089		691
Total non-accrual loans		6,951		4,388
Foreclosed assets held for resale		169		119
Loans past-due 90 days or more and still accruing interest		579		100
Total non-performing assets	$	7,699	$	4,607

Schedule of classes of the loan portfolio by past-due status

The following tables present the classes of the loan portfolio summarized by past-due status at March 31, 2020 and December 31, 2019:

													90 Days
													Or Greater
													Past Due
					90 Days				Current–				and Still
	30‑59 Days		60‑89 Days		or Greater		Total		29 Days		Total		Accruing
(Dollars in thousands)	Past Due		Past Due		Past Due		Past Due		Past Due		Loans		Interest
March 31, 2020:
Commercial and Industrial	$	698	$	380	$	91	$	1,169	$	85,854	$	87,023	$	92
Commercial Real Estate		2,942		301		4,935		8,178		404,618		412,796		487
Residential Real Estate		1,303		177		913		2,393		153,712		156,105		—
Consumer		20		5		—		25		5,667		5,692		—
Total	$	4,963	$	863	$	5,939	$	11,765	$	649,851	$	661,616	$	579

													90 Days
													Or Greater
													Past Due
					90 Days				Current–				and Still
	30‑59 Days		60‑89 Days		or Greater		Total		29 Days		Total		Accruing
(Dollars in thousands)	Past Due		Past Due		Past Due		Past Due		Past Due		Loans		Interest
December 31, 2019:
Commercial and Industrial	$	—	$	26	$	—	$	26	$	86,686	$	86,712	$	—
Commercial Real Estate		880		957		3,502		5,339		390,462		395,801		—
Residential Real Estate		1,118		506		613		2,237		157,113		159,350		100
Consumer		24		5		—		29		5,840		5,869		—
Total	$	2,022	$	1,494	$	4,115	$	7,631	$	640,101	$	647,732	$	100

XML

FINANCIAL INSTRUMENTS WITH OFF-BALANCE SHEET RISK AND CONCENTRATIONS OF CREDIT RISK (Tables)

3 Months Ended

Mar. 31, 2020

FINANCIAL INSTRUMENTS WITH OFF-BALANCE SHEET RISK AND CONCENTRATIONS OF CREDIT RISK

Schedule of Financial instruments whose contract amounts representing credit risk

The contract or notional amounts at March  31, 2020 and December 31, 2019 were as follows:

(Dollars in thousands)	March 31, 2020		December 31, 2019
Financial instruments whose contract amounts represent credit risk:
Commitments to extend credit	$	140,367	$	122,082
Financial standby letters of credit	$	335	$	335
Performance standby letters of credit	$	3,230	$	3,230

XML

LOANS AND ALLOWANCE FOR LOAN LOSSES - Outstanding recorded investment of TDRs (Details) - USD ($) $ in Thousands	Mar. 31, 2020	Dec. 31, 2019
Financing Receivable, Modifications, Recorded Investment	$ 8,470	$ 8,678
Non-accrual TDRs [Member]
Financing Receivable, Modifications, Recorded Investment	1,725	112
Accruing TDRs [Member]
Financing Receivable, Modifications, Recorded Investment	$ 6,745	$ 8,566

XML

SECURITIES - Continuous unrealized loss position (Details) - USD ($) $ in Thousands	Mar. 31, 2020	Dec. 31, 2019
Less Than 12 Months
Fair Value	$ 80,648	$ 72,236
Unrealized Loss	(3,604)	(461)
12 Months or More
Fair Value	19,498	25,556
Unrealized Loss	(520)	(532)
Total
Fair Value	100,146	97,792
Unrealized Loss	(4,124)	(993)
Other mortgage backed debt securities [Member]
Less Than 12 Months
Fair Value	7,492	4,056
Unrealized Loss	(824)	(10)
12 Months or More
Fair Value	0	0
Unrealized Loss	0	0
Total
Fair Value	7,492	4,056
Unrealized Loss	(824)	(10)
U.S. Treasury Securities [Member]
Less Than 12 Months
Fair Value	0	0
Unrealized Loss	0	0
12 Months or More
Fair Value	0	0
Unrealized Loss	0	0
Total
Fair Value	0	0
Unrealized Loss	0	0
Obligations of U.S. Government Corporations and Agencies Mortgage-backed [Member]
Less Than 12 Months
Fair Value	20,750	39,085
Unrealized Loss	(466)	(221)
12 Months or More
Fair Value	7,747	12,650
Unrealized Loss	(319)	(166)
Total
Fair Value	28,497	51,735
Unrealized Loss	(785)	(387)
Other Obligations of U.S. Government Corporations and Agencies [Member]
Less Than 12 Months
Fair Value	6,092	4,382
Unrealized Loss	(64)	(24)
12 Months or More
Fair Value	4,396	4,594
Unrealized Loss	(55)	(64)
Total
Fair Value	10,488	8,976
Unrealized Loss	(119)	(88)
Obligations of state and political subdivisions [Member]
Less Than 12 Months
Fair Value	1,507	1,993
Unrealized Loss	(9)	(15)
12 Months or More
Fair Value	0	1,081
Unrealized Loss	0	(33)
Total
Fair Value	1,507	3,074
Unrealized Loss	(9)	(48)
Asset-backed Securities [Member]
Less Than 12 Months
Fair Value	40,766	19,236
Unrealized Loss	(2,123)	(175)
12 Months or More
Fair Value	0	0
Unrealized Loss	0	0
Total
Fair Value	40,766	19,236
Unrealized Loss	(2,123)	(175)
Corporate debt securities [Member]
Less Than 12 Months
Fair Value	4,041	3,484
Unrealized Loss	(118)	(16)
12 Months or More
Fair Value	7,355	7,231
Unrealized Loss	(146)	(269)
Total
Fair Value	11,396	10,715
Unrealized Loss	$ (264)	$ (285)

XML

FAIR VALUE MEASUREMENTS

3 Months Ended

Mar. 31, 2020

FAIR VALUE MEASUREMENTS

FAIR VALUE MEASUREMENTS

NOTE 9 — FAIR VALUE MEASUREMENTS

Fair value measurement and disclosure guidance defines fair value as the price that would be received to sell the asset or transfer the liability in an orderly transaction (that is, not a forced liquidation or distressed sale) between market participants at the measurement date under current market conditions. This guidance provides additional information on determining when the volume and level of activity for the asset or liability has significantly decreased. The guidance also includes information on identifying circumstances when a transaction may not be considered orderly.

Fair value measurement and disclosure guidance provides a list of factors that a reporting entity should evaluate to determine whether there has been a significant decrease in the volume and level of activity for the asset or liability in relation to normal market activity for the asset or liability. When the reporting entity concludes there has been a significant decrease in the volume and level of activity for the asset or liability, further analysis of the information from that market is needed and significant adjustments to the related prices may be necessary to estimate fair value in accordance with the fair value measurement and disclosure guidance.

This guidance clarifies that when there has been a significant decrease in the volume and level of activity for the asset or liability, some transactions may not be orderly. In those situations, the entity must evaluate the weight of the evidence to determine whether the transaction is orderly. The guidance provides a list of circumstances that may indicate that a transaction is not orderly. A transaction price that is not associated with an orderly transaction is given little, if any, weight when estimating fair value.

Fair value is 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. Inputs to valuation techniques refer to the assumptions that market participants would use in pricing the asset or liability. Inputs may be observable, meaning those that reflect the assumptions market participants would use in pricing the asset or liability developed based on market data obtained from independent sources, or unobservable, meaning those that reflect the reporting entity’s own belief about the assumptions market participants would use in pricing the asset or liability based upon the best information available in the circumstances. Fair value measurement and disclosure guidance establishes a fair value hierarchy for valuation inputs that gives the highest priority to quoted prices in active markets for identical assets or liabilities and the lowest priority to unobservable inputs. The fair value hierarchy is as follows:

Level 1 Inputs:     Unadjusted quoted prices in active markets that are accessible at the measurement date for identical, unrestricted assets or liabilities;

Level 2 Inputs:     Quoted prices in markets that are not active, or inputs that are observable either directly or indirectly, for substantially the full term of the asset or liability;

Level 3 Inputs:     Prices or valuation techniques that require inputs that are both significant to the fair value measurement and unobservable (i.e., supported by little or no market activity).

A description of the valuation methodologies used for instruments measured at fair value, as well as the general classification of such instruments pursuant to the valuation hierarchy, is set forth as follows.

Financial Assets Measured at Fair Value on a Recurring Basis

At March  31, 2020 and December 31, 2019, securities measured at fair value on a recurring basis and the valuation methods used are as follows:

(Dollars in thousands)	Level 1		Level 2		Level 3		Total
March 31, 2020
Debt Securities Available-for-Sale:
U.S. Treasury securities	$	—	$	—	$	—	$	—
Obligations of U.S. Government Corporations and Agencies:
Mortgage-backed		—		62,505		—		62,505
Other		—		12,229		—		12,229
Other mortgage backed debt securities		—		9,363		—		9,363
Obligations of state and political subdivisions		—		140,467		—		140,467
Asset backed securities		—		40,766		—		40,766
Corporate debt securities		—		18,333		—		18,333
Total debt securities available-for-sale		—		283,663		—		283,663
Marketable equity securities		1,394		—		—		1,394
Total recurring fair value measurements	$	1,394	$	283,663	$	—	$	285,057

(Dollars in thousands)	Level 1		Level 2		Level 3		Total
December 31, 2019
Debt Securities Available-for-Sale  :
U.S. Treasury securities	$	—	$	2,855	$	—	$	2,855
Obligations of U.S. Government Corporations and Agencies:
Mortgaged-backed		—		77,283		—		77,283
Other		—		10,297		—		10,297
Other mortgage backed debt securities		—		11,138		—		11,138
Obligations of state and political subdivisions		—		120,376		—		120,376
Asset backed securities		—		37,536		—		37,536
Corporate debt securities		—		18,443		—		18,443
Total debt securities available-for-sale		—		277,928		—		277,928
Marketable equity securities		1,933		—		—		1,933
Total recurring fair value measurements	$	1,933	$	277,928	$	—	$	279,861

The estimated fair values of equity securities classified as Level 1 are derived from quoted market prices in active markets; these assets consist mainly of stocks held in other banks. The estimated fair values of all debt securities classified as Level 2 are obtained from nationally-recognized third-party pricing agencies. The estimated fair values are derived primarily from cash flow models, which include assumptions for interest rates, credit losses, and prepayment speeds. The significant inputs utilized in the cash flow models are based on market data obtained from sources independent of the Corporation (observable inputs), and are therefore classified as Level 2 within the fair value hierarchy. The Corporation does not have any Level 3 inputs for securities. There were no transfers between Level 1 and Level 2 during 2020 or 2019.

Financial Assets Measured at Fair Value on a Nonrecurring Basis

At March 31, 2020 and December 31, 2019, impaired loans measured at fair value on a nonrecurring basis are as follows:

(Dollars in thousands)	Level 1		Level 2		Level 3		Total
Assets at  March 31, 2020
Impaired loans:
Commercial Real Estate	$	—	$	—	$	6,287	$	6,287
Residential Real Estate		—		—		189		189
Total impaired loans	$	—	$	—	$	6,476	$	6,476

(Dollars in thousands)	Level 1		Level 2		Level 3		Total
Assets at December 31, 2019
Impaired loans:
Commercial Real Estate	$	—	$	—	$	6,218	$	6,218
Residential Real Estate		—		—		221		221
Total impaired loans	$	—	$	—	$	6,439	$	6,439

These assets are included as Level 3 fair values, based upon the lowest level that is significant to the fair value measurements. The fair value consists of the impaired loan balances less the valuation allowance and/or charge-offs. There were no transfers between valuation levels in 2020 and 2019.

Nonfinancial Assets Measured at Fair Value on a Nonrecurring Basis

At March  31, 2020 and December 31, 2019, foreclosed assets held for resale measured at fair value on a nonrecurring basis are as follows:

(Dollars in thousands)	Level 1		Level 2		Level 3		Total
Assets at March 31, 2020
Foreclosed assets held for resale:
Commercial Real Estate	$	—	$	—	$	81	$	81
Total foreclosed assets held for resale	$	—	$	—	$	81	$	81

(Dollars in thousands)	Level 1		Level 2		Level 3		Total
Assets at December 31, 2019
Foreclosed assets held for resale:
Commercial Real Estate	$	—	$	—	$	81	$	81
Total foreclosed assets held for resale	$	—	$	—	$	81	$	81

These assets are included as Level 3 fair values, based upon the lowest level that is significant to the fair value measurements. There were no transfers between valuation levels in 2020 and 2019.

The following table presents additional quantitative information about assets measured at fair value on a nonrecurring basis and for which the Corporation has utilized Level 3 inputs to determine the fair value:

	Quantitative Information about Level 3 Fair Value Measurements
	Fair Value					Weighted
(Dollars in thousands)	Estimate		Valuation Technique	Unobservable Input	Range	Average
March 31 2020
Impaired loans	$	3,366	Appraisal of collateral1,3	Appraisal adjustments2	(13%) – (77%)	(17%)
Impaired loans	$	3,110	Discounted cash flow	Discount rate	(5%) – (9%)	(7%)
Foreclosed assets held for resale	$	81	Appraisal of collateral1,3	Appraisal adjustments2	(35%) – (35%)	(35%)
December 31, 2019
Impaired loans	$	3,419	Appraisal of collateral1,3	Appraisal adjustments2	(10%) – (77%)	(17%)
Impaired loans	$	3,020	Discounted cash flow	Discount rate	(7%) – (8%)	(7%)
Foreclosed assets held for resale	$	81	Appraisal of collateral1,3	Appraisal adjustments2	(35%) – (35%)	(35%)

1Fair value is generally determined through independent appraisals of the underlying collateral, as defined by Bank regulators.

2Appraisals may be adjusted downward by management for qualitative factors such as economic conditions and estimated liquidation expenses. The typical range of appraisal adjustments are presented as a percent of the appraisal value.

3Includes qualitative adjustments by management and estimated liquidation expenses.

Fair Value of Financial Instruments

	Carrying		Fair Value Measurements at March 31, 2020
(Dollars in thousands)	Amount		Level 1		Level 2		Level 3		Total
FINANCIAL ASSETS:
Cash and due from banks	$	7,785	$	7,785	$	—	$	—	$	7,785
Interest-bearing deposits in other banks		1,013		—		1,013		—		1,013
Time deposits with other banks		247		—		251		—		251
Restricted investment in bank stocks		6,740		—		6,740		—		6,740
Net loans		654,437		—		—		681,960		681,960
Mortgage servicing rights		278		—		—		278		278
Accrued interest receivable		3,622		—		3,622		—		3,622
FINANCIAL LIABILITIES:
Demand, savings and other deposits		538,396		—		538,396		—		538,396
Time deposits		196,401		—		199,153		—		199,153
Short-term borrowings		106,379		—		106,310		—		106,310
Long-term borrowings		50,000		—		52,570		—		52,570
Accrued interest payable		550		—		550		—		550
OFF-BALANCE SHEET FINANCIAL INSTRUMENTS		—		—		—		—		—

	Carrying		Fair Value Measurements at December 31, 2019
(Dollars in thousands)	Amount		Level 1		Level 2		Level 3		Total
FINANCIAL ASSETS:
Cash and due from banks	$	10,251	$	10,251	$	—	$	—	$	10,251
Interest-bearing deposits in other banks		473		—		473		—		473
Time deposits with other banks		247		—		250		—		250
Restricted investment in bank stocks		4,224		—		4,224		—		4,224
Net loans		640,727		—		—		655,301		655,301
Mortgage servicing rights		283		—		—		283		283
Accrued interest receivable		3,405		—		3,405		—		3,405
FINANCIAL LIABILITIES:
Demand, savings and other deposits		526,564		—		526,564		—		526,564
Time deposits		235,064		—		235,134		—		235,134
Short-term borrowings		54,663		—		54,655		—		54,655
Long-term borrowings		55,000		—		55,809		—		55,809
Accrued interest payable		606		—		606		—		606
OFF-BALANCE SHEET FINANCIAL INSTRUMENTS		—		—		—		—		—

XML

BASIS OF PRESENTATION , SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES AND SUBSEQUENT EVENTS

3 Months Ended

Mar. 31, 2020

BASIS OF PRESENTATION , SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES AND SUBSEQUENT EVENTS

BASIS OF PRESENTATION , SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES AND SUBSEQUENT EVENTS

NOTE 1 ― BASIS OF PRESENTATION , SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES AND SUBSEQUENT EVENTS

The consolidated financial statements include the accounts of First Keystone Corporation (the “Corporation”) and its wholly owned subsidiary First Keystone Community Bank (the “Bank”) (collectively the “Company”). All significant intercompany accounts and transactions have been eliminated.

The accompanying unaudited consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America (“U.S. GAAP”) for interim financial information. Accordingly, they do not include all of the information and footnotes required by U.S. GAAP for complete consolidated financial statements. In the opinion of management, all adjustments considered necessary for fair presentation have been included. Operating results for the three month period ended March 31, 2020, are not necessarily indicative of the results for the year ending December 31, 2020. For further information, refer to the consolidated financial statements and notes thereto included in First Keystone Corporation’s Annual Report on Form 10‑K for the year ended December 31, 2019.

Subsequent Events

The Corporation has evaluated events and transactions occurring subsequent to the consolidated balance sheet date of March 31, 2020 for items that should potentially be recognized or disclosed in these consolidated financial statements. The evaluation was conducted through the date these consolidated financial statements were issued.

As a result of the spread of the COVID-19 coronavirus, economic uncertainties have arisen which are likely to negatively impact net interest income. The Corporation may experience difficulties collecting monthly payments on time from its borrowers, property values may decline, and certain types of loans may need to be extended or modified. The extent of the impact of COVID-19 on the Corporation’s operational and financial performance will depend on certain developments including the duration and spread of the outbreak and the impact on our customers, employees and vendors. 

The Coronavirus Aid, Relief, and Economic Security Act ("CARES Act") was enacted on March 27, 2020 in the United States. The Corporation is approved by the U.S. Small Business Administration (“SBA”) to fund loans under the SBA’s Paycheck Protection Program (“PPP”) created as part of the CARES Act. To date, the Bank has received 456 applications for PPP loans for a combined total of $32,367,000. As of April 30, 2020, 432 PPP loan applications were approved, and 152 of the loans were funded for $16,010,000. The PPP loans have 1.00% interest rates, lender fees, and two-year terms.  These forgivable loans funded by the Corporation are subject to the terms and conditions applicable to all loans made pursuant to the PPP as administered by the SBA under the CARES Act.

In addition, subsequent to March 31, 2020, there have been loan modification requests to defer principal and/or interest payments or modify interest rates in the wake of the COVID-19 pandemic. As of April 30, 2020, there have been 493 loan modifications approved across all loan segments, for customers with current loan balances of $181,704,000. At this time, there have been no material fluctuations in loan delinquencies because of COVID-19.

Other financial impact could occur, though such potential impact is unknown at this time.

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DEPOSITS

3 Months Ended

Mar. 31, 2020

DEPOSITS

DEPOSITS

NOTE 5 — DEPOSITS

Major classifications of deposits at March 31, 2020 and December 31, 2019 consisted of:

	March 31,		December 31,
(Dollars in thousands)	2020		2019
Non-interest bearing demand	$	153,029	$	134,648
Interest bearing demand		211,598		218,847
Savings		173,769		173,069
Time certificates of deposits less than $250,000		176,383		210,916
Time certificates of deposits $250,000 or greater		18,639		23,006
Other time deposits		1,379		1,142
Total deposits	$	734,797	$	761,628

Total Deposits decreased $26,831,000 to $734,797,000 as of March 31, 2020 due to decreases in interest bearing, savings, and time deposits. The decrease in deposits was mainly due to the Corporation calling $40,000,000 worth of brokered CDs during the quarter ended March 31, 2020 due to the changing rate environment.

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CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME - USD ($) $ in Thousands		3 Months Ended
		Mar. 31, 2020	Mar. 31, 2019
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
Net Income		$ 2,053	$ 2,243
Other comprehensive income :
Unrealized net holding gains (losses) on debt securities available-for-sale arising during the period, net of income taxes		661	3,709
Less reclassification adjustment for net gains included in net income, net of income taxes	[1]	(56)	(67)
Total other comprehensive income (loss)		605	3,642
Total Comprehensive Income		$ 2,658	$ 5,885

[1] Gross amounts are included in net securities (losses) gains on the consolidated statements of income in non-interest income.Income tax amounts are included in income tax expense on the consolidated statements of income.

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FINANCIAL INSTRUMENTS WITH OFF-BALANCE SHEET RISK AND CONCENTRATIONS OF CREDIT RISK - Additional Information (Details) - Credit Concentration Risk [Member] - USD ($)	3 Months Ended	12 Months Ended
	Mar. 31, 2020	Dec. 31, 2019
Fair Value, Off-balance Sheet Risks, Disclosure Information [Line Items]
Loans Receivable, Secure by Commercial and Residential Real Estate	$ 568,901,000
Loans Receivable, Percentage of Loans Secure by Commercial and Residential Real Estate	86.00%
Concentration Risk, Percentage	10.00%	10.00%

XML

FAIR VALUE MEASUREMENTS - Quantitative information about Level 3 FV measurements (Details) - Fair Value, Inputs, Level 3 [Member] - USD ($) $ in Thousands		3 Months Ended	12 Months Ended
		Mar. 31, 2020	Dec. 31, 2019
Impaired Loans Receivable [Member] | Appraisal of Collateral [Member]
Fair Value Inputs, Assets, Quantitative Information [Line Items]
Fair Value Estimate		$ 3,366	$ 3,419
Valuation Technique	[1],[2]	Appraisal of collateral	Appraisal of collateral
Unobservable Input	[3]	Appraisal adjustments	Appraisal adjustments
Impaired Loans Receivable [Member] | Minimum [Member] | Appraisal of Collateral [Member]
Fair Value Inputs, Assets, Quantitative Information [Line Items]
Fair Value Inputs, Comparability Adjustments		(13.00%)	(10.00%)
Impaired Loans Receivable [Member] | Maximum [Member] | Appraisal of Collateral [Member]
Fair Value Inputs, Assets, Quantitative Information [Line Items]
Fair Value Inputs, Comparability Adjustments		(77.00%)	(77.00%)
Impaired Loans Receivable [Member] | Weighted Average [Member] | Appraisal of Collateral [Member]
Fair Value Inputs, Assets, Quantitative Information [Line Items]
Fair Value Inputs, Comparability Adjustments		(17.00%)	(17.00%)
Impaired Loans Receivable, Discounted Cash Flow [Member]
Fair Value Inputs, Assets, Quantitative Information [Line Items]
Fair Value Estimate		$ 3,110	$ 3,020
Valuation Technique		Discounted cash flow	Discounted cash flow
Unobservable Input		Discount rate	Discount rate
Impaired Loans Receivable, Discounted Cash Flow [Member] | Minimum [Member]
Fair Value Inputs, Assets, Quantitative Information [Line Items]
Fair Value Inputs, Comparability Adjustments		(5.00%)	(7.00%)
Impaired Loans Receivable, Discounted Cash Flow [Member] | Maximum [Member]
Fair Value Inputs, Assets, Quantitative Information [Line Items]
Fair Value Inputs, Comparability Adjustments		(9.00%)	(8.00%)
Impaired Loans Receivable, Discounted Cash Flow [Member] | Weighted Average [Member]
Fair Value Inputs, Assets, Quantitative Information [Line Items]
Fair Value Inputs, Comparability Adjustments		(7.00%)	(7.00%)
Foreclosed assets held for resale [Member] | Appraisal of Collateral [Member]
Fair Value Inputs, Assets, Quantitative Information [Line Items]
Fair Value Estimate		$ 81	$ 81
Valuation Technique	[1],[2]	Appraisal of collateral	Appraisal of collateral
Unobservable Input	[3]	Appraisal adjustments	Appraisal adjustments
Foreclosed assets held for resale [Member] | Minimum [Member] | Appraisal of Collateral [Member]
Fair Value Inputs, Assets, Quantitative Information [Line Items]
Fair Value Inputs, Comparability Adjustments		(35.00%)	(35.00%)
Foreclosed assets held for resale [Member] | Maximum [Member] | Appraisal of Collateral [Member]
Fair Value Inputs, Assets, Quantitative Information [Line Items]
Fair Value Inputs, Comparability Adjustments		(35.00%)	(35.00%)
Foreclosed assets held for resale [Member] | Weighted Average [Member] | Appraisal of Collateral [Member]
Fair Value Inputs, Assets, Quantitative Information [Line Items]
Fair Value Inputs, Comparability Adjustments		(35.00%)	(35.00%)

[1] Fair value is generally determined through independent appraisals of the underlying collateral, as defined by Bank regulators.

[2] Includes qualitative adjustments by management and estimated liquidation expenses.

[3] Appraisals may be adjusted downward by management for qualitative factors such as economic conditions and estimated liquidation expenses. The typical range of appraisal adjustments are presented as a percent of the appraisal value.

XML

Document And Entity Information - shares	3 Months Ended
	Mar. 31, 2020	May 07, 2020
Document And Entity Information
Document Type	10-Q
Amendment Flag	false
Document Period End Date	Mar. 31, 2020
Document Fiscal Year Focus	2020
Document Fiscal Period Focus	Q1
Entity Registrant Name	FIRST KEYSTONE CORP
Entity Central Index Key	0000737875
Current Fiscal Year End Date	--12-31
Entity Current Reporting Status	Yes
Entity Interactive Data Current	Yes
Entity Filer Category	Accelerated Filer
Trading Symbol	FKYS
Entity Common Stock, Shares Outstanding		5,832,107
Entity Shell Company	false
Entity Emerging Growth Company	false
Entity Small Business	true

XML

CONSOLIDATED STATEMENTS OF CASH FLOWS - USD ($) $ in Thousands	3 Months Ended
	Mar. 31, 2020	Mar. 31, 2019
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income	$ 2,053	$ 2,243
Adjustments to reconcile net income to net cash provided by operating activities:
Provision for loan losses	194	92
Depreciation and amortization	488	254
Net premium amortization on securities	498	733
Deferred income tax (benefit) expense	(247)	62
Gains on sales of mortgage loans	(93)	(40)
Proceeds from sales of mortgage loans originated for resale	3,137	1,250
Originations of mortgage loans originated for resale	(3,100)	(964)
Net securities losses (gains)	467	(103)
Net losses on sales of foreclosed real estate held for resale, including write-downs	0	20
(Increase) decrease in accrued interest receivable	(217)	367
Earnings on investment in bank owned life insurance	(154)	(155)
Net losses on disposals of premises and equipment	0	4
Increase in other assets	(537)	(1,860)
Amortization of investment in real estate ventures	91	88
(Decrease) increase in accrued interest payable	(56)	58
(Decrease) increase in other liabilities	(1,159)	1,198
NET CASH PROVIDED BY OPERATING ACTIVITIES	1,365	3,247
INVESTING ACTIVITIES
Proceeds from sales of debt securities available-for-sale	11,182	32,374
Proceeds from maturities and redemptions of debt securities available-for-sale	15,324	4,520
Purchases of debt securities available-for-sale	(31,902)	0
Net change in restricted investment in bank stocks	(2,516)	1,173
Net increase in loans	(13,877)	(11,891)
Purchases of premises and equipment	(120)	(234)
Proceeds from sales of foreclosed assets held for resale	0	197
NET CASH (USED IN) PROVIDED BY INVESTING ACTIVITIES	(21,909)	26,139
FINANCING ACTIVITIES
Net (decrease) increase in deposits	(26,831)	25,867
Net increase (decrease) in short-term borrowings	51,716	(42,966)
Repayment of long-term borrowings	(5,000)	(10,000)
Common stock issued	303	278
Dividends paid	(1,570)	(1,557)
NET CASH PROVIDED BY (USED IN) FINANCING ACTIVITIES	18,618	(28,378)
(DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS	(1,926)	1,008
CASH AND CASH EQUIVALENTS, BEGINNING	10,724	10,950
CASH AND CASH EQUIVALENTS, ENDING	8,798	11,958
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
Interest paid	2,448	2,635
Income taxes paid	(249)	62
SUPPLEMENTAL DISCLOSURE OF NON-CASH ACTIVITIES
Loans transferred to foreclosed assets held for resale	50	0
Common stock subscription receivable	7	0
Right-of-use assets obtained in exchange for lease liabilities	$ 0	$ 1,465

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LOANS AND ALLOWANCE FOR LOAN LOSSES - Activity in allowance for loan losses (Details) - USD ($) $ in Thousands	3 Months Ended		12 Months Ended
	Mar. 31, 2020	Mar. 31, 2019	Dec. 31, 2019
Beginning balance	$ 7,005	$ 6,745	$ 6,745
Charge-offs	(20)	(79)	(204)
Recoveries	0	4	14
Provision	194	92	450
Ending Balance	7,179	6,762	7,005
Ending balance: individually evaluated for impairment	1	4	1
Ending balance: collectively evaluated for impairment	7,178	6,758	7,004
Ending Balance	661,616	617,983	647,732
Ending balance: individually evaluated for impairment	13,696	17,164	12,954
Ending balance: collectively evaluated for impairment	647,920	600,819	634,778
Commercial and Industrial [Member]
Beginning balance	634	724	724
Charge-offs	(4)	0	0
Recoveries	0	1	6
Provision	33	7	(96)
Ending Balance	663	732	634
Ending balance: individually evaluated for impairment	0	0	0
Ending balance: collectively evaluated for impairment	663	732	634
Ending Balance	87,023	93,575	86,712
Ending balance: individually evaluated for impairment	1,077	1,116	1,084
Ending balance: collectively evaluated for impairment	85,946	92,459	85,628
Commercial Real Estate [Member]
Beginning balance	4,116	3,700	3,700
Charge-offs	0	(64)	(64)
Recoveries	0	0	0
Provision	212	229	480
Ending Balance	4,328	3,865	4,116
Ending balance: individually evaluated for impairment	1	4	1
Ending balance: collectively evaluated for impairment	4,327	3,861	4,115
Ending Balance	412,796	359,073	395,801
Ending balance: individually evaluated for impairment	11,510	15,557	11,158
Ending balance: collectively evaluated for impairment	401,286	343,516	384,643
Residential Real Estate [Member]
Beginning balance	1,665	1,650	1,650
Charge-offs	0	0	(69)
Recoveries	0	2	2
Provision	(22)	(11)	82
Ending Balance	1,643	1,641	1,665
Ending balance: individually evaluated for impairment	0	0	0
Ending balance: collectively evaluated for impairment	1,643	1,641	1,665
Ending Balance	156,105	159,624	159,350
Ending balance: individually evaluated for impairment	1,109	491	712
Ending balance: collectively evaluated for impairment	154,996	159,133	158,638
Consumer [Member]
Beginning balance	114	117	117
Charge-offs	(16)	(15)	(71)
Recoveries	0	1	6
Provision	15	7	62
Ending Balance	113	110	114
Ending balance: individually evaluated for impairment	0	0	0
Ending balance: collectively evaluated for impairment	113	110	114
Ending Balance	5,692	5,711	5,869
Ending balance: individually evaluated for impairment	0	0	0
Ending balance: collectively evaluated for impairment	5,692	5,711	5,869
Unallocated Financing Receivables [Member]
Beginning balance	476	554	554
Charge-offs	0	0	0
Recoveries	0	0	0
Provision	(44)	(140)	(78)
Ending Balance	432	414	476
Ending balance: individually evaluated for impairment	0	0	0
Ending balance: collectively evaluated for impairment	432	414	476
Ending Balance	0	0	0
Ending balance: individually evaluated for impairment	0	0	0
Ending balance: collectively evaluated for impairment	$ 0	$ 0	$ 0

XML

SECURITIES - Unrealized and realized gains (losses) (Details) - Available-for-sale Securities [Member] - Marketable Equity Securities - USD ($) $ in Thousands	3 Months Ended
	Mar. 31, 2020	Mar. 31, 2019
Net (losses) and gains recognized during the period on equity securities	$ (538)	$ 18
Less: Net gains and (losses) recognized during the period on equity securities sold during the period	0	0
Unrealized (losses) and gains recognized during the reporting period on equity securities still held at the reporting date	$ (538)	$ 18

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RECENT ACCOUNTING STANDARDS UPDATES ("ASU")

3 Months Ended

Mar. 31, 2020

RECENT ACCOUNTING STANDARDS UPDATES ("ASU")

RECENT ACCOUNTING STANDARDS UPDATES ("ASU")

NOTE 2 ― RECENT ACCOUNTING STANDARDS UPDATES (“ASU”)

Recently adopted ASUs:

In January 2017, the FASB issued ASU 2017-04, Intangibles – Goodwill and Other (Topic 350):  Simplifying the Test for Goodwill Impairment. The ASU simplified the subsequent measurement of goodwill by eliminating Step 2 from the goodwill impairment test. Instead, under the amendments, an entity should perform its annual, or interim, goodwill impairment test by comparing the fair value with its carrying amount.  Additionally, an entity should consider income tax effects from any tax-deductible goodwill on the carrying amount when measuring the goodwill impairment loss, if applicable. The update also eliminated the requirements for zero or negative carrying amount to perform a qualitative assessment and, if it fails that qualitative test, to perform Step 2 of the goodwill impairment test.  The amendments are effective for public business entities for annual or any interim goodwill impairment tests in fiscal years beginning after December 15, 2019. The adoption of this update on January 1, 2020 did not have a material impact on the Corporation’s consolidated financial position or results of operations.

In August 2018, the FASB issued ASU 2018-13, Fair Value Measurement (Topic 820) – Disclosure Framework – Changes to Disclosure Requirements for Fair Value Measurement.  The amendments in this Update removed required disclosures regarding: 1. The amount of and reasons for transfers between Level 1 and Level 2 of the fair value hierarchy, 2. The policy for timing of transfers between levels, 3. The valuation processes for Level 3 fair value measurements, and 4. The Update modified the disclosure requirements on fair value measurements in Topic 820: a) The changes in unrealized gains and losses for the period included in other comprehensive income for recurring Level 3 fair value measurements held at the end of the reporting period and b) The range and weighted average significant unobservable inputs used to develop Level 3 fair value measurements.  For certain unobservable inputs, an entity may disclose other quantitative information (such as the median or arithmetic average) in lieu of the weighted average if the entity determines that other quantitative information would be a more reasonable and rational method to reflect the distribution of unobservable inputs used to develop Level 3 fair value measurements. The amendments in this Update are effective for all entities for fiscal years, and interim periods within those fiscal years beginning after December 15, 2019. The adoption of this update on January 1, 2020 did not have a material impact on the Corporation's consolidated financial statements and related disclosures.

In March 2020, the FASB issued ASU 2020-04, Reference Rate Reform (Topic 848), which provides optional expedients and exceptions for applying U.S. GAAP to contracts, hedging relationships, and other transactions affected by the discontinuation of the London Interbank Offered Rate ("LIBOR"), or by another reference rate that is expected to be discontinued. The amendments are effective for all entities as of March 12, 2020 through December 31, 2022. The Corporation has evaluated the impact of the provisions of ASU 2020-04 on our financial condition, results of operations and cash flows, and determined that there is no material impact on the consolidated financial statements and related disclosures.

Pending ASUs:

In June 2016, the FASB issued ASU No. 2016-13, Financial Instruments-Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments. ASU No. 2016-13 requires financial assets measured at amortized cost to be presented at the net amount expected to be collected, through an allowance for credit losses that is deducted from the amortized cost basis. The measurement of expected credit losses is based on relevant information about past events, including historical experience, current conditions, and reasonable and supportable forecasts that affect the collectability of the reported amount. ASU No. 2016-13 is effective for annual periods and interim periods within those annual periods beginning after December 15, 2019. In November 2019, the FASB issued ASU 2019-10, Financial Instruments-Credit Losses (Topic 326), Derivatives and Hedging (Topic 815), and Leases (Topic 842), to delay the effective date for smaller reporting companies to fiscal years, and interim periods within those fiscal years, beginning after December 15, 2022. While the Corporation (a smaller reporting company) is currently evaluating the provisions of ASU 2016-13 to determine the potential impact of the new standard will have on the Corporation's consolidated financial statements, it has taken steps to prepare for the implementation when it becomes effective, such as: forming an internal committee, gathering pertinent data, consulting with outside professionals, subscribing to a new software system, and running existing and new methodologies concurrently through the period of implementation.

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BORROWINGS

3 Months Ended

Mar. 31, 2020

BORROWINGS

BORROWINGS

NOTE 6 — BORROWINGS

Short-Term Borrowings

Short-term borrowings include federal funds purchased, securities sold under agreements to repurchase, the Federal Discount Window, and Federal Home Loan Bank (“FHLB”) advances, which generally represent overnight or less than 30‑day borrowings. Short-term borrowings and weighted–average interest rates at March 31, 2020 and December 31, 2019 are as follows:

	March 31, 2020				December 31, 2019
			Average				Average
(Dollars in thousands)	Amount		Rate		Amount		Rate
Federal funds purchased	$	—	—		$	—	2.01	%
Securities sold under agreements to repurchase		12,551	1.05	%		14,042	1.03	%
Federal Discount Window		—	—			—	2.92	%
Federal Home Loan Bank		93,828	1.64	%		40,621	2.59	%
Total	$	106,379	1.50	%	$	54,663	2.37	%

The increase in short-term borrowings is due to advances taken from the Federal Home Loan Bank, including a 21-day $50,000,000 term note, to fund decreased deposit balances resulting from the call of brokered CDs.

Securities Sold Under Agreements to Repurchase (“Repurchase Agreements”)

The Corporation enters into agreements under which it sells securities subject to an obligation to repurchase the same or similar securities. Under these arrangements, the Corporation may transfer legal control over the assets but still retain effective control through an agreement that both entitles and obligates the Corporation to repurchase the assets.

As a result, these repurchase agreements are accounted for as collateralized financing agreements (i.e., secured borrowings) and not as a sale and subsequent repurchase of securities. The obligation to repurchase the securities is reflected as a liability on the Corporation’s consolidated balance sheets, while the securities underlying the repurchase agreements remain in the respective investment securities asset accounts. In other words, there is not offsetting or netting of the investment securities assets with the repurchase agreement liabilities. In addition, as the Corporation does not enter into reverse repurchase agreements, there is no such offsetting to be done with the repurchase agreements.

The right of setoff for a repurchase agreement resembles a secured borrowing, whereby the collateral would be used to settle the fair value of the repurchase agreement should the Corporation be in default (e.g., fails to make an interest payment to the counterparty). The collateral is held by a correspondent bank in the counterparty’s custodial account. The counterparty has the right to sell or repledge the investment securities.

The following table presents the short-term borrowings subject to an enforceable master netting arrangement or repurchase agreements as of March 31, 2020 and December 31, 2019.

			Gross		Net Amounts
			Amounts		of Liabilities
			Offset		Presented
	Gross		in the		in the
	Amounts of		Consolidated		Consolidated				Cash
	Recognized		Balance		Balance		Financial		Collateral		Net
(Dollars in thousands)	Liabilities		Sheet		Sheet		Instruments		Pledge		Amount
March 31, 2020
Repurchase agreements (a)	$	12,551	$	—	$	12,551	$	(12,551)	$	—	$	—
December 31, 2019
Repurchase agreements (a)	$	14,042	$	—	$	14,042	$	(14,042)	$	—	$	—

(a) As of March 31, 2020 and December 31, 2019, the fair value of securities pledged in connection with repurchase agreements was $21,779,000 and $22,413,000, respectively.

The following table presents the remaining contractual maturity of the master netting arrangement or repurchase agreements as of March 31, 2020:

	Remaining Contractual Maturity of the Agreements
	Overnight						Greater
	and		Up to		30 -90		than
(Dollars in thousands)	Continuous		30 days		Days		90 Days		Total
March 31, 2020
Repurchase agreements and repurchase-to-maturity transactions:
U.S. Treasury and/or agency securities	$	12,551	$	—	$	—	$	—	$	12,551
Total	$	12,551	$	—	$	—	$	—	$	12,551

Long-Term Borrowings

Long-term borrowings are comprised of advances from the FHLB. Under terms of a blanket agreement, collateral for the FHLB loans is certain qualifying assets of the Corporation’s banking subsidiary. The principal assets are certain real estate mortgages and investment securities.

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REVENUE RECOGNITION

3 Months Ended

Mar. 31, 2020

REVENUE RECOGNITION

REVENUE RECOGNITION

NOTE 10 — REVENUE RECOGNITION

In accordance with ASU 2014-09 Revenue from Contracts with Customers – Topic 606, and all subsequent ASUs that modified ASC 606, the main types of revenue contracts included in non-interest income within the consolidated statements of income are as follows:

Deposits related fees and service charges

Service charges and fees on deposits, which are included as liabilities in the consolidated balance sheets, consist of fees related to monthly fees for various retail and business checking accounts, automated teller machine (“ATM”) fees (charged for withdrawals by our deposit customers from other bank ATMs) and insufficient funds fees (“NSF”) (which are charged when customers overdraw their accounts beyond available funds). All deposit liabilities are considered to have one-day terms and therefore related fees are recognized in income at the time when the services are provided to the customers. The Corporation elected to adopt practical expedient related to incremental costs of obtaining deposit contracts. As such, any costs associated with acquiring the deposits, except for certificate of deposits (“CDs”) with maturities in excess of one year, are recognized as an expense within non-interest expense in the consolidated statements of income when incurred as the amortization period of the deposit liabilities that otherwise would have been recognized is one year or less.

Wealth/Asset/Trust Management Fees

Wealth management services are delivered to individuals, corporations and retirement funds located primarily within our geographic markets. The Trust Department of the Corporation conducts the wealth management operations, which provides a broad range of personal and corporate fiduciary services, including the administration of estates.

Assets held in a fiduciary capacity by the Trust Department are not assets of the Corporation and, therefore, are not included in our consolidated financial statements. Wealth management fees, which are contractually agreed with each customer, are earned each month and recognized on a cash basis based on average fair value of the trust assets under management. The services provided under such a contract are considered a single performance obligation under ASC 606 because they embody a series of distinct goods or services that are substantially the same and have the same pattern of transfer to the customer. Wealth management fees charged by the Trust Department follow a tiered structure based on the type and size of the assets under management. Wealth management fees are included within non-interest income in the consolidated statements of income. As of March  31, 2020 and December 31, 2019, the fair value of trust assets under management was $111,199,000 and $111,160,000, respectively. The costs of acquiring asset management customers are incremental and recognized within non-interest expense in the consolidated statements of income.

Interchange Fees and Surcharges

Interchange fees are related to the acceptance and settlement of debit card transactions, both point-of-sale and ATM, to cover operating costs and risks associated with the approval and settlement of the transactions. Interchange fees vary by type of transaction and each merchant sector. Net income recognized from interchange fees is included in non-interest income on the consolidated statements of income. A surcharge is assessed for use of the Corporation’s ATMs by non-customers. All interchange fees and surcharges are recognized as received on a daily basis for the prior business day’s transactions. All expenses related to the settlement of debit card transactions (both point-of-sale and ATM) are recognized on a monthly basis and included in non-interest expense on the consolidated statements of income.

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CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY (Parenthetical) - $ / shares	3 Months Ended
	Mar. 31, 2020	Mar. 31, 2019
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
Cash dividends, per share	$ 0.27	$ 0.27

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CONSOLIDATED STATEMENTS OF INCOME - USD ($) $ in Thousands	3 Months Ended
	Mar. 31, 2020	Mar. 31, 2019
INTEREST INCOME
Interest and fees on loans	$ 7,758	$ 7,074
Interest and dividend income on securities:
Taxable	1,276	1,218
Tax-exempt	630	1,018
Dividends	12	11
Dividend income on restricted investment in bank stocks	90	184
Interest on interest-bearing deposits in other banks	2	9
Total interest income	9,768	9,514
INTEREST EXPENSE
Interest on deposits	1,884	1,378
Interest on short-term borrowings	242	1,115
Interest on long-term borrowings	266	200
Total interest expense	2,392	2,693
Net interest income	7,376	6,821
Provision for loan losses	194	92
Net interest income after provision for loan losses	7,182	6,729
NON-INTEREST INCOME
Trust department	221	261
Service charges and fees	499	514
Bank owned life insurance income	154	155
ATM fees and debit card income	399	377
Gains on sales of mortgage loans	93	40
Net securities (losses) gains	(467)	103
Other	84	57
Total non-interest income	983	1,507
NON-INTEREST EXPENSE
Salaries and employee benefits	3,219	3,132
Occupancy, net	518	464
Furniture and equipment	134	140
Computer expense	260	280
Professional services	242	270
Pennsylvania shares tax	224	192
FDIC insurance	0	65
ATM and debit card fees	209	211
Data processing fees	294	267
Foreclosed assets held for resale expense	9	38
Advertising	91	153
Other	715	643
Total non-interest expense	5,915	5,855
Income before income tax expense	2,250	2,381
Income tax expense	197	138
NET INCOME	$ 2,053	$ 2,243
Net income per share:
Basic	$ 0.35	$ 0.39
Diluted	0.35	0.39
Dividends per share	$ 0.27	$ 0.27

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FAIR VALUE MEASUREMENTS (Details) - USD ($) $ in Thousands	Mar. 31, 2020	Dec. 31, 2019
Available-for-Sale Securities:
Debt Securities Available-for-Sale:	$ 283,663	$ 277,928
Marketable equity securities	1,394	1,933
Asset-backed Securities [Member]
Available-for-Sale Securities:
Debt Securities Available-for-Sale:	40,766	37,536
Corporate debt securities [Member]
Available-for-Sale Securities:
Debt Securities Available-for-Sale:	18,333	18,443
Fair Value, Measurements, Recurring [Member]
Available-for-Sale Securities:
Debt Securities Available-for-Sale:	283,663	277,928
Total recurring fair value measurements	285,057	279,861
Fair Value, Measurements, Recurring [Member] | Fair Value, Inputs, Level 1 [Member]
Available-for-Sale Securities:
Debt Securities Available-for-Sale:	0	0
Total recurring fair value measurements	1,394	1,933
Fair Value, Measurements, Recurring [Member] | Fair Value, Inputs, Level 2 [Member]
Available-for-Sale Securities:
Debt Securities Available-for-Sale:	283,663	277,928
Total recurring fair value measurements	283,663	277,928
Fair Value, Measurements, Recurring [Member] | Fair Value, Inputs, Level 3 [Member]
Available-for-Sale Securities:
Debt Securities Available-for-Sale:	0	0
Total recurring fair value measurements	0	0
Fair Value, Measurements, Recurring [Member] | U.S. Treasury Securities [Member]
Available-for-Sale Securities:
Debt Securities Available-for-Sale:	0	2,855
Fair Value, Measurements, Recurring [Member] | U.S. Treasury Securities [Member] | Fair Value, Inputs, Level 1 [Member]
Available-for-Sale Securities:
Debt Securities Available-for-Sale:	0	0
Fair Value, Measurements, Recurring [Member] | U.S. Treasury Securities [Member] | Fair Value, Inputs, Level 2 [Member]
Available-for-Sale Securities:
Debt Securities Available-for-Sale:	0	2,855
Fair Value, Measurements, Recurring [Member] | U.S. Treasury Securities [Member] | Fair Value, Inputs, Level 3 [Member]
Available-for-Sale Securities:
Debt Securities Available-for-Sale:	0	0
Fair Value, Measurements, Recurring [Member] | Mortgage Backed Obligations Of US Government Corporations And Agencies [Member]
Available-for-Sale Securities:
Debt Securities Available-for-Sale:	62,505	77,283
Fair Value, Measurements, Recurring [Member] | Mortgage Backed Obligations Of US Government Corporations And Agencies [Member] | Fair Value, Inputs, Level 1 [Member]
Available-for-Sale Securities:
Debt Securities Available-for-Sale:	0	0
Fair Value, Measurements, Recurring [Member] | Mortgage Backed Obligations Of US Government Corporations And Agencies [Member] | Fair Value, Inputs, Level 2 [Member]
Available-for-Sale Securities:
Debt Securities Available-for-Sale:	62,505	77,283
Fair Value, Measurements, Recurring [Member] | Mortgage Backed Obligations Of US Government Corporations And Agencies [Member] | Fair Value, Inputs, Level 3 [Member]
Available-for-Sale Securities:
Debt Securities Available-for-Sale:	0	0
Fair Value, Measurements, Recurring [Member] | Other Obligations of U.S. Government Corporations and Agencies [Member]
Available-for-Sale Securities:
Debt Securities Available-for-Sale:	12,229	10,297
Fair Value, Measurements, Recurring [Member] | Other Obligations of U.S. Government Corporations and Agencies [Member] | Fair Value, Inputs, Level 1 [Member]
Available-for-Sale Securities:
Debt Securities Available-for-Sale:	0	0
Fair Value, Measurements, Recurring [Member] | Other Obligations of U.S. Government Corporations and Agencies [Member] | Fair Value, Inputs, Level 2 [Member]
Available-for-Sale Securities:
Debt Securities Available-for-Sale:	12,229	10,297
Fair Value, Measurements, Recurring [Member] | Other Obligations of U.S. Government Corporations and Agencies [Member] | Fair Value, Inputs, Level 3 [Member]
Available-for-Sale Securities:
Debt Securities Available-for-Sale:	0	0
Fair Value, Measurements, Recurring [Member] | Other mortgage backed debt securities [Member]
Available-for-Sale Securities:
Debt Securities Available-for-Sale:	9,363	11,138
Fair Value, Measurements, Recurring [Member] | Other mortgage backed debt securities [Member] | Fair Value, Inputs, Level 1 [Member]
Available-for-Sale Securities:
Debt Securities Available-for-Sale:	0	0
Fair Value, Measurements, Recurring [Member] | Other mortgage backed debt securities [Member] | Fair Value, Inputs, Level 2 [Member]
Available-for-Sale Securities:
Debt Securities Available-for-Sale:	9,363	11,138
Fair Value, Measurements, Recurring [Member] | Other mortgage backed debt securities [Member] | Fair Value, Inputs, Level 3 [Member]
Available-for-Sale Securities:
Debt Securities Available-for-Sale:	0	0
Fair Value, Measurements, Recurring [Member] | Obligations of state and political subdivisions [Member]
Available-for-Sale Securities:
Debt Securities Available-for-Sale:	140,467	120,376
Fair Value, Measurements, Recurring [Member] | Obligations of state and political subdivisions [Member] | Fair Value, Inputs, Level 1 [Member]
Available-for-Sale Securities:
Debt Securities Available-for-Sale:	0	0
Fair Value, Measurements, Recurring [Member] | Obligations of state and political subdivisions [Member] | Fair Value, Inputs, Level 2 [Member]
Available-for-Sale Securities:
Debt Securities Available-for-Sale:	140,467	120,376
Fair Value, Measurements, Recurring [Member] | Obligations of state and political subdivisions [Member] | Fair Value, Inputs, Level 3 [Member]
Available-for-Sale Securities:
Debt Securities Available-for-Sale:	0	0
Fair Value, Measurements, Recurring [Member] | Asset-backed Securities [Member]
Available-for-Sale Securities:
Debt Securities Available-for-Sale:	40,766	37,536
Fair Value, Measurements, Recurring [Member] | Asset-backed Securities [Member] | Fair Value, Inputs, Level 1 [Member]
Available-for-Sale Securities:
Debt Securities Available-for-Sale:	0	0
Fair Value, Measurements, Recurring [Member] | Asset-backed Securities [Member] | Fair Value, Inputs, Level 2 [Member]
Available-for-Sale Securities:
Debt Securities Available-for-Sale:	40,766	37,536
Fair Value, Measurements, Recurring [Member] | Asset-backed Securities [Member] | Fair Value, Inputs, Level 3 [Member]
Available-for-Sale Securities:
Debt Securities Available-for-Sale:	0	0
Fair Value, Measurements, Recurring [Member] | Corporate debt securities [Member]
Available-for-Sale Securities:
Debt Securities Available-for-Sale:	18,333	18,443
Fair Value, Measurements, Recurring [Member] | Corporate debt securities [Member] | Fair Value, Inputs, Level 1 [Member]
Available-for-Sale Securities:
Debt Securities Available-for-Sale:	0	0
Fair Value, Measurements, Recurring [Member] | Corporate debt securities [Member] | Fair Value, Inputs, Level 2 [Member]
Available-for-Sale Securities:
Debt Securities Available-for-Sale:	18,333	18,443
Fair Value, Measurements, Recurring [Member] | Corporate debt securities [Member] | Fair Value, Inputs, Level 3 [Member]
Available-for-Sale Securities:
Debt Securities Available-for-Sale:	0	0
Fair Value, Measurements, Recurring [Member] | Marketable Equity Securities
Available-for-Sale Securities:
Marketable equity securities	1,394	1,933
Fair Value, Measurements, Recurring [Member] | Marketable Equity Securities | Fair Value, Inputs, Level 1 [Member]
Available-for-Sale Securities:
Marketable equity securities	1,394	1,933
Fair Value, Measurements, Recurring [Member] | Marketable Equity Securities | Fair Value, Inputs, Level 2 [Member]
Available-for-Sale Securities:
Marketable equity securities	0	0
Fair Value, Measurements, Recurring [Member] | Marketable Equity Securities | Fair Value, Inputs, Level 3 [Member]
Available-for-Sale Securities:
Marketable equity securities	$ 0	$ 0

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FAIR VALUE MEASUREMENTS - FV of Financial instruments (Details) - USD ($) $ in Thousands	3 Months Ended	12 Months Ended
	Mar. 31, 2020	Dec. 31, 2019
FINANCIAL ASSETS: (Carrying Amount)
Cash and due from banks	$ 7,785	$ 10,251
Interest-bearing deposits in other banks	1,013	473
Time deposits with other banks	247	247
Restricted investment in bank stocks, at cost	6,740	4,224
Net loans	654,437	640,727
Mortgage servicing rights	278	283
Accrued interest receivable	3,622	3,405
FINANCIAL LIABILITIES: (Carrying Amount)
Demand, savings and other deposits	538,396	526,564
Time deposits	196,401	235,064
Short-term borrowings	106,379	54,663
Long-term borrowings	50,000	55,000
Accrued interest payable	550	606
OFF-BALANCE SHEET FINANCIAL INSTRUMENTS (Carrying Amount)	0	0
FINANCIAL ASSETS: (Fair Value)
Cash and due from banks	7,785	10,251
Interest-bearing deposits in other banks	1,013	473
Time deposits with other banks	251	250
Restricted investment in bank stocks	6,740	4,224
Net loans	681,960	655,301
Mortgage servicing rights	278	283
Accrued interest receivable	3,622	3,405
FINANCIAL LIABILITIES: (Fair Value)
Demand, savings and other deposits	538,396	526,564
Time deposits	199,153	235,134
Short-term borrowings	106,310	54,655
Long-term borrowings	52,570	55,809
Accrued interest payable	550	606
OFF-BALANCE SHEET FINANCIAL INSTRUMENTS (Fair Value)	0	0
Fair Value, Inputs, Level 1 [Member]
FINANCIAL ASSETS: (Fair Value)
Cash and due from banks	7,785	10,251
Interest-bearing deposits in other banks	0	0
Time deposits with other banks	0	0
Restricted investment in bank stocks	0	0
Net loans	0	0
Mortgage servicing rights	0	0
Accrued interest receivable	0	0
FINANCIAL LIABILITIES: (Fair Value)
Demand, savings and other deposits	0	0
Time deposits	0	0
Short-term borrowings	0	0
Long-term borrowings	0	0
Accrued interest payable	0	0
OFF-BALANCE SHEET FINANCIAL INSTRUMENTS (Fair Value)	0	0
Fair Value, Inputs, Level 2 [Member]
FINANCIAL ASSETS: (Fair Value)
Cash and due from banks	0	0
Interest-bearing deposits in other banks	1,013	473
Time deposits with other banks	251	250
Restricted investment in bank stocks	6,740	4,224
Net loans	0	0
Mortgage servicing rights	0	0
Accrued interest receivable	3,622	3,405
FINANCIAL LIABILITIES: (Fair Value)
Demand, savings and other deposits	538,396	526,564
Time deposits	199,153	235,134
Short-term borrowings	106,310	54,655
Long-term borrowings	52,570	55,809
Accrued interest payable	550	606
OFF-BALANCE SHEET FINANCIAL INSTRUMENTS (Fair Value)	0	0
Fair Value, Inputs, Level 3 [Member]
FINANCIAL ASSETS: (Fair Value)
Cash and due from banks	0	0
Interest-bearing deposits in other banks	0	0
Time deposits with other banks	0	0
Restricted investment in bank stocks	0	0
Net loans	681,960	655,301
Mortgage servicing rights	278	283
Accrued interest receivable	0	0
FINANCIAL LIABILITIES: (Fair Value)
Demand, savings and other deposits	0	0
Time deposits	0	0
Short-term borrowings	0	0
Long-term borrowings	0	0
Accrued interest payable	0	0
OFF-BALANCE SHEET FINANCIAL INSTRUMENTS (Fair Value)	$ 0	$ 0

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BORROWINGS - Remaining contractual maturity of the repurchase agreements (Details) $ in Thousands	Mar. 31, 2020 USD ($)
Repurchase agreements and repurchase-to-maturity transactions:
Remaining Contractual Maturity of the Agreements	$ 12,551
U.S. Treasury Securities [Member]
Repurchase agreements and repurchase-to-maturity transactions:
Remaining Contractual Maturity of the Agreements	12,551
Overnight and Continuous [Member]
Repurchase agreements and repurchase-to-maturity transactions:
Remaining Contractual Maturity of the Agreements	12,551
Overnight and Continuous [Member] | U.S. Treasury Securities [Member]
Repurchase agreements and repurchase-to-maturity transactions:
Remaining Contractual Maturity of the Agreements	12,551
Upto 30 Days [Member]
Repurchase agreements and repurchase-to-maturity transactions:
Remaining Contractual Maturity of the Agreements	0
Upto 30 Days [Member] | U.S. Treasury Securities [Member]
Repurchase agreements and repurchase-to-maturity transactions:
Remaining Contractual Maturity of the Agreements	0
30 to 90 Days [Member]
Repurchase agreements and repurchase-to-maturity transactions:
Remaining Contractual Maturity of the Agreements	0
30 to 90 Days [Member] | U.S. Treasury Securities [Member]
Repurchase agreements and repurchase-to-maturity transactions:
Remaining Contractual Maturity of the Agreements	0
Greater than 90 Days [Member]
Repurchase agreements and repurchase-to-maturity transactions:
Remaining Contractual Maturity of the Agreements	0
Greater than 90 Days [Member] | U.S. Treasury Securities [Member]
Repurchase agreements and repurchase-to-maturity transactions:
Remaining Contractual Maturity of the Agreements	$ 0

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DEPOSITS (Details) - USD ($) $ in Thousands	Mar. 31, 2020	Dec. 31, 2019
DEPOSITS
Non-interest bearing demand	$ 153,029	$ 134,648
Interest bearing demand	211,598	218,847
Savings	173,769	173,069
Time certificates of deposits less than $250,000	176,383	210,916
Time certificates of deposits $250,000 or greater	18,639	23,006
Other time deposits	1,379	1,142
Total deposits	$ 734,797	$ 761,628

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DEPOSITS (Tables)

3 Months Ended

Mar. 31, 2020

DEPOSITS

Schedule of major classifications of deposits

Major classifications of deposits at March 31, 2020 and December 31, 2019 consisted of:

	March 31,		December 31,
(Dollars in thousands)	2020		2019
Non-interest bearing demand	$	153,029	$	134,648
Interest bearing demand		211,598		218,847
Savings		173,769		173,069
Time certificates of deposits less than $250,000		176,383		210,916
Time certificates of deposits $250,000 or greater		18,639		23,006
Other time deposits		1,379		1,142
Total deposits	$	734,797	$	761,628

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FAIR VALUE MEASUREMENTS (Tables)

3 Months Ended

Mar. 31, 2020

FAIR VALUE MEASUREMENTS

Schedule of securities measured at fair value on a recurring basis

At March  31, 2020 and December 31, 2019, securities measured at fair value on a recurring basis and the valuation methods used are as follows:

(Dollars in thousands)	Level 1		Level 2		Level 3		Total
March 31, 2020
Debt Securities Available-for-Sale:
U.S. Treasury securities	$	—	$	—	$	—	$	—
Obligations of U.S. Government Corporations and Agencies:
Mortgage-backed		—		62,505		—		62,505
Other		—		12,229		—		12,229
Other mortgage backed debt securities		—		9,363		—		9,363
Obligations of state and political subdivisions		—		140,467		—		140,467
Asset backed securities		—		40,766		—		40,766
Corporate debt securities		—		18,333		—		18,333
Total debt securities available-for-sale		—		283,663		—		283,663
Marketable equity securities		1,394		—		—		1,394
Total recurring fair value measurements	$	1,394	$	283,663	$	—	$	285,057

(Dollars in thousands)	Level 1		Level 2		Level 3		Total
December 31, 2019
Debt Securities Available-for-Sale  :
U.S. Treasury securities	$	—	$	2,855	$	—	$	2,855
Obligations of U.S. Government Corporations and Agencies:
Mortgaged-backed		—		77,283		—		77,283
Other		—		10,297		—		10,297
Other mortgage backed debt securities		—		11,138		—		11,138
Obligations of state and political subdivisions		—		120,376		—		120,376
Asset backed securities		—		37,536		—		37,536
Corporate debt securities		—		18,443		—		18,443
Total debt securities available-for-sale		—		277,928		—		277,928
Marketable equity securities		1,933		—		—		1,933
Total recurring fair value measurements	$	1,933	$	277,928	$	—	$	279,861

Schedule of impaired loans measured at fair value on a nonrecurring basis

At March 31, 2020 and December 31, 2019, impaired loans measured at fair value on a nonrecurring basis are as follows:

(Dollars in thousands)	Level 1		Level 2		Level 3		Total
Assets at  March 31, 2020
Impaired loans:
Commercial Real Estate	$	—	$	—	$	6,287	$	6,287
Residential Real Estate		—		—		189		189
Total impaired loans	$	—	$	—	$	6,476	$	6,476

(Dollars in thousands)	Level 1		Level 2		Level 3		Total
Assets at December 31, 2019
Impaired loans:
Commercial Real Estate	$	—	$	—	$	6,218	$	6,218
Residential Real Estate		—		—		221		221
Total impaired loans	$	—	$	—	$	6,439	$	6,439

Schedule of foreclosed assets held for resale measured at fair value on a nonrecurring basis

At March  31, 2020 and December 31, 2019, foreclosed assets held for resale measured at fair value on a nonrecurring basis are as follows:

(Dollars in thousands)	Level 1		Level 2		Level 3		Total
Assets at March 31, 2020
Foreclosed assets held for resale:
Commercial Real Estate	$	—	$	—	$	81	$	81
Total foreclosed assets held for resale	$	—	$	—	$	81	$	81

(Dollars in thousands)	Level 1		Level 2		Level 3		Total
Assets at December 31, 2019
Foreclosed assets held for resale:
Commercial Real Estate	$	—	$	—	$	81	$	81
Total foreclosed assets held for resale	$	—	$	—	$	81	$	81

Schedule of fair value measurement inputs and valuation techniques

The following table presents additional quantitative information about assets measured at fair value on a nonrecurring basis and for which the Corporation has utilized Level 3 inputs to determine the fair value:

	Quantitative Information about Level 3 Fair Value Measurements
	Fair Value					Weighted
(Dollars in thousands)	Estimate		Valuation Technique	Unobservable Input	Range	Average
March 31 2020
Impaired loans	$	3,366	Appraisal of collateral1,3	Appraisal adjustments2	(13%) – (77%)	(17%)
Impaired loans	$	3,110	Discounted cash flow	Discount rate	(5%) – (9%)	(7%)
Foreclosed assets held for resale	$	81	Appraisal of collateral1,3	Appraisal adjustments2	(35%) – (35%)	(35%)
December 31, 2019
Impaired loans	$	3,419	Appraisal of collateral1,3	Appraisal adjustments2	(10%) – (77%)	(17%)
Impaired loans	$	3,020	Discounted cash flow	Discount rate	(7%) – (8%)	(7%)
Foreclosed assets held for resale	$	81	Appraisal of collateral1,3	Appraisal adjustments2	(35%) – (35%)	(35%)

1Fair value is generally determined through independent appraisals of the underlying collateral, as defined by Bank regulators.

2Appraisals may be adjusted downward by management for qualitative factors such as economic conditions and estimated liquidation expenses. The typical range of appraisal adjustments are presented as a percent of the appraisal value.

3Includes qualitative adjustments by management and estimated liquidation expenses.

Fair Value of Financial Instruments

Schedule of fair value of financial instruments, including financial assets and financial liabilities

	Carrying		Fair Value Measurements at March 31, 2020
(Dollars in thousands)	Amount		Level 1		Level 2		Level 3		Total
FINANCIAL ASSETS:
Cash and due from banks	$	7,785	$	7,785	$	—	$	—	$	7,785
Interest-bearing deposits in other banks		1,013		—		1,013		—		1,013
Time deposits with other banks		247		—		251		—		251
Restricted investment in bank stocks		6,740		—		6,740		—		6,740
Net loans		654,437		—		—		681,960		681,960
Mortgage servicing rights		278		—		—		278		278
Accrued interest receivable		3,622		—		3,622		—		3,622
FINANCIAL LIABILITIES:
Demand, savings and other deposits		538,396		—		538,396		—		538,396
Time deposits		196,401		—		199,153		—		199,153
Short-term borrowings		106,379		—		106,310		—		106,310
Long-term borrowings		50,000		—		52,570		—		52,570
Accrued interest payable		550		—		550		—		550
OFF-BALANCE SHEET FINANCIAL INSTRUMENTS		—		—		—		—		—

	Carrying		Fair Value Measurements at December 31, 2019
(Dollars in thousands)	Amount		Level 1		Level 2		Level 3		Total
FINANCIAL ASSETS:
Cash and due from banks	$	10,251	$	10,251	$	—	$	—	$	10,251
Interest-bearing deposits in other banks		473		—		473		—		473
Time deposits with other banks		247		—		250		—		250
Restricted investment in bank stocks		4,224		—		4,224		—		4,224
Net loans		640,727		—		—		655,301		655,301
Mortgage servicing rights		283		—		—		283		283
Accrued interest receivable		3,405		—		3,405		—		3,405
FINANCIAL LIABILITIES:
Demand, savings and other deposits		526,564		—		526,564		—		526,564
Time deposits		235,064		—		235,134		—		235,134
Short-term borrowings		54,663		—		54,655		—		54,655
Long-term borrowings		55,000		—		55,809		—		55,809
Accrued interest payable		606		—		606		—		606
OFF-BALANCE SHEET FINANCIAL INSTRUMENTS		—		—		—		—		—